Is The Price Right? – An Early Look Into H.R 2300 – One Proposal for GOP Replace and Reform

This overview is a very early attempt to get you up to speed on the areas of health reform that are likely to emerge from the confirmation process of Rep Tom Price. There’s a temptation to dismiss everything being discussed as rhetoric or too early in the regulatory process. However, there are key themes and elements that will impact employer-sponsored healthcare that are likely to survive. In addition, other market trends are unlikely to change and as a result, require our continued vigilance and strategic discussion. In other words, the cavalry has not arrived in our battle with rising costs.

Tom Price’s Empowering Patients First Act (H.R. 2300) is of particular interest. It is unlikely to be accepted as a “replacement” bill but it offers keen insights into the GOP mindset guiding the notion of “repeal and replace”. It is likely if any legislation is approved, it would take years to completely implement and not unlike the ACA, reform could be whipsawed by another sudden political shift. Given the profile of the 2018 mid-term elections, its unlikely the GOP grip on the WH and Congress will change – at least until 2020 – more than enough time to drive a new legislative solution.

H.R. 2300 is important because its the only GOP-authored proposal that incorporates many elements of a “repeal” plan; and, despite the partisan acrimony of today’s confirmation interviews, Price is likely to gain confirmation and guide Health & Human Services and those charged with setting policy for commercial insurance, Medicare and Medicaid.

It’s impossible to summarize H.R. 2300 in one page but we wanted to underline and key talking points for you should you get cornered by anyone requesting a point of view on what employers should expect over the next four years. With the help of a recent Kaiser Foundation white paper, we want to offer an opinion. Clearly, it’s going to be a challenge to confidently predict whether the new administration will/can meet its promises. Yet, we are taking the liberty of staring deeper into the crystal ball and offering some insights. In no particular order:

H.R. 2300 Key Elements: Repeal ACA entirely, including individual and employer mandates, private insurance rules, standards for minimum benefits and maximum cost sharing, and premium and cost sharing subsidies. Provide refundable tax credits of $900 to $3,000 based on age to individuals to purchase insurance in the individual market. Require insurers to offer portability protections for people who maintain continuous coverage. Pre-existing condition exclusions and rate surcharges based on health status can otherwise apply. Implement state high-risk pools with federal grant support for three years. Establish Association Health Plans and Individual Membership Associations through which employers and individuals can purchase coverage. Permit sale of insurance across state lines.

Encourage use of Health Savings Accounts. Cap the tax exclusion for employer-provided health benefits and permit employers to contribute toward workers’ premiums for non-group health policies. Permit enrollees of public programs, and employer-sponsored group health plans to opt out of coverage in favor of private non-group insurance with tax credit subsidy. Repeal Medicaid expansion. Repeal Medicare benefit enhancements, savings provisions, and premium for higher-income beneficiaries, taxes on high earnings, and quality, payment and delivery system provisions. Eliminate certain constraints on private contracts between physicians and Medicare beneficiaries and the amount that can be charged for services. Individual mandate no requirement for individuals to have coverage

Commentary: This legislation is about establishing universal “access” to the individual market and to create a robust range of products whose coverage and cost will vary dramatically – well beyond the percentage of AGI and actuarial values mandated by the ACA. The creation of tax credits and vouchers to purchase in the individual market and guarantee issue based on coverage continuity could create opportunities for employers to offer financial incentives for employees to opt into coverage pools other than those of the employer. H.R. 2300 relies on financing much of the legislation through a cap on the taxation of benefits

Premium subsidies to individuals – Provide a refundable, flat, tax credit for the purchase of health insurance in the individual market ($900 per child, $1,200 age 18-34, $2,100 age 35-49, $3,000 age 50 and over; indexed by CPI.) Tax credit can be applied to any individual health insurance policy sold by a licensed insurer, including short-term policies, but not excepted benefits (e.g., insurance only for specific disease); excess credit can be contributed to HSA. Permit individuals eligible for other health benefit programs to receive a tax credit instead of coverage through the program. Repeal ACA cost sharing subsidies.

Commentary: It’s likely the number of those insured under reform will reduce if the government moves toward less generous tax credits as well as grants Medicaid block grants to states to manage those expenditures as they see fit. The increasing of uninsured and a greater emphasis on high deductible plans could lead to higher incidents of bad debt and increases in unreimbursed care.

Benefits Design/Reporting – Repeal ACA essential health benefit standards, preventive health benefit standards, mental health parity requirements for individual market and small group market policies. Repeal ACA prohibition on lifetime and annual limits. Repeal ACA limits on annual out-of-pocket cost sharing. State flexibility to mandate benefits; state benefit laws preempted for policies sold through associations, or by insurers selling across state lines. Proposed Price bill/legislation is silent on self-insurance exemption for larger self-insured employers.

Small employers can buy coverage through association health plans (AHPs). For fully insured small group AHPs, state rating laws and mandated benefits are preempted. Self-insured AHPs permitted; for federally certified self-funded associations with membership of at least 1,000, State regulation is preempted. Maintain dependent coverage to age 26. Repeal ACA minimum loss ratio standards, rebate requirements for insurers with claims expenses less than 80% of premium revenue (85% for large group policies). Repeal ACA right to independent external appeal of denied claims. Repeal ACA transparency standards, including requirement to offer standardized, simple summary of benefits and coverage, and requirement to report periodic data on denied claims and other insurance practices.

Commentary: Insurers are likely to benefit from specific changes although Price has historically been at odds with insurers – particularly in areas where insurers attempt to intervene between a treating physician and a patient. Employer reporting requirements should be simplified and the most cumbersome elements of the ACA are likely to be eliminated.

Employer requirements and provision – No requirement for large employers to provide health benefits that meet minimum value and affordability standards; repeal prohibition of excessive waiting periods. Cap annual tax exclusion for employer-sponsored benefits at $8,000 for self-only/$20,000 for family coverage, indexed annually to CPI. Require employers that sponsor group health plans to offer employees an equivalent defined contribution for the purchase of health insurance in the individual market. Permit employers to automatically enroll individuals in the lowest cost group health plan as long as they can opt out of coverage. Wellness incentives up to 50% of cost of group health plan permitted. Encourage use of Health Savings Accounts (HSAs) with one-time refundable tax credit of $1,000. Also raise annual tax-free contribution limit to $5,500; Allow tax-free transfer of HSA balances at death to any beneficiary. Repeal ACA prohibition on pre-existing condition exclusions. For people with at least 18 months of continuous prior coverage, no pre-existing condition exclusion period can be applied. For people with less than 18 months of continuous prior coverage, exclusion periods up to 18 months are permitted, but must be reduced by prior continuous coverage.

Commentary: Capping the annual exclusion for health benefits at $8k/$20k is credible foreshadowing that the taxation of benefits is on the horizon. Those that breathed a sigh of relief that delay and subsequent change of POTUS meant the defeat of the Cadillac tax, must be prepared to review the value of their plans. Taxation could set in motion a mass migration toward high deductible plans. Offering an equivalent defined contribution to employees to purchase on the individual market could give rise to associations and individual purchasing groups competing with or attracting employees into alternative purchasing groups. The emphasis on defined contribution could further accelerate the move toward private exchanges.

Health system performance- Health care professionals engaged in negotiations with private insurers and health plans over contract terms are exempt from federal antitrust laws. Create a health plan and provider portal website to provide standardized information on health insurance plans and provider price and quality data. Provide states with funding to implement the standardized health plan and provider portal website.

Commentary: Doctors can now organize purchasing cooperatives and in doing so likely to drive up unit cost through more collective bargaining with insurers.

Tax revenues – Repeal ACA tax changes, including the individual and large employer mandate tax penalties, Medicare Health Insurance (HI) tax increases on high earnings, Cadillac tax on high-cost employer-sponsored group health plans, and taxes on health insurers, pharmaceutical manufacturers, and medical devices

Commentary: Revenue increases from new cap on tax exclusion for employer-sponsored group health benefits

Source of policy insights on H.R.2300: The Henry J. Kaiser Family Foundation http://kff.org/health-reform/issue-brief/proposals-to-replace-the-affordable-care-act/

A Nightmare on Elm Street

images“You think healthcare is expensive now? Wait until it is for free…” PJ O’Rourke

In early 2011, The Boston Globe shared the findings of a 20-page report from the Boston Foundation and Massachusetts Taxpayers Foundation, a report that somberly concluded that cities and towns must substantially increase the amounts their employees are required to pay in out-of-pocket expenses for services and to significantly increase their deductibles. Jeffrey D. Nutting,  Franklin, MA. town manager, complained his town was still facing costs that wildly outpaced declining tax revenues or even the CPI. “Every dollar we spend on health care insurance is a dollar we don’t spend on jobs,’’ he said. “This is all about saving jobs. When insurance costs go up I have cut police, firefighters, or teachers.’’

Nutting said about 10 percent of the town’s $88 million budget now goes to health care costs, and he was facing a double-digit increase for next year. That was 2011.

In 2014, the healthcare conundrum is worsening. Despite the passage of the Affordable Care Act, the gross per capita cost to provide health benefits for public employees is averaging as much as $20,000 per worker. This is almost twice the national figure for most commercial health plans – eclipsing by a decent margin private sector, bargained plans. The mounting evidence is irrefutable – low co-pay plans with maximum amounts of reimbursement do little to improve member health or mitigate chronic illness — and often times lead to overconsumption of services, poor consumerism and limited accountability for personal responsibility around healthcare.

While the private sector has been busy cutting benefits, implementing high deductible plans, health savings accounts, cost sharing, mandatory bio-metric testing and plans designed to promote better consumerism, towns and their employees are still bickering over changing a $10 drug co-pay to a $15.

In the months ahead, we will hear more about a little known provision within the Affordable Care Act (ACA) called “The Cadillac Tax”. After overcoming rare joint opposition from unions and business, the ACA included a provision to impose a 40% excise tax on employers ( public and private) for any benefit plans offered to workers that exceed $10,200 per individual and $27,500 per family. It’s estimated that in 2018, a large percentage of the bargained plans offered to employees of cities and counties will exceed this allowable limit and trigger the tax on excess amounts. Many cities and counties eclipse this threshold today – four years ahead of the tax. The $3.2M question? ( I’m just taking a wild stab at $4,000 excise tax per public employee for a town of 800 workers ) — Are our public officials making provisions to deal with this now or are they tearing a page out of Washington’s self preservation playbook preferring to wait until the crisis is imminent before declaring fiscal martial law.

Its estimated in a recent survey by Consultant Towers Watson that by 2023, 82% of all plans, public and private, will be impacted by the Cadillac Tax – which makes the term “Cadillac Tax” a misnomer. It is really a stealthy first step toward capping or eliminating the last of the two sacred cows of tax exemption – the mortgage interest deduction on your home and the deductibility of employer-provided employee benefits. In the private sector, employers are sobering to this future liability and are planning to either explicitly reduce the cost of their plans, pass on the tax to their employees or simply give employees a stipend of taxable dollars and encourage them to purchase coverage through a public or private insurance exchange.

For communities across the US, the issues stand to become highly polarizing. Many town Board of Education and Town Employee Plans are not integrated, still clinging to generous plan designs that offer first dollar coverage with limited co-insurance and out-of-pocket costs and having not embraced the notion of consumer or personal health accountability.

Workers rightfully argue that the cost of healthcare represents a significant economic threat and these benefits insulate them from financial risk. The question is whether such rich plans result in healthier workers or actually drive costs higher by eliminating incentives to be good consumers or take personal responsibility for one’s health? The belief that having comprehensive, low cost benefits insures good health is belied by the consistently high levels of chronic illness and gaps in care that arise in many populations — conditions that arise out of poor lifestyle choices and from those who do not actively manage their chronic conditions. Aside from being poor consumers on the behalf of plan spsonsors, people covered under rich benefit plans do not have incentives to change.  Change in health lifestyles typically comes from one of two areas: a pain in one’s chest or a pain in one’s pocketbook.  Employers are recognizing the need for a bi-lateral social contract for personal health with employees and are requiring more from participants.  Bargained plans have historically been opposed to any revisions or Big Brother oversight from taxpayers. As for public officials caught in the middle, the debate is a“ third rail” issue – “You touch it and you die!” It is proverbial line of death.

With the 2010 passage of the ACA, Congress heard from public employees that they needed time to renegotiate the terms of their collective bargaining agreements to determine who would absorb any potential tax penalty. Congress delayed implementation of the law until January 1, 2018. In the interim, there is very little evidence that any public officials are actively moving to discuss the potential for a 40% excise tax on as much as 40% of their benefits costs. The quickest road to being voted out of office is to wait until 2018 and attempt to sell taxpayers on the need to finance a 40% tax that could have been averted by planning and negotiation. The Cadillac Tax will pit tax payers and public workers against one another unnecessarily if leaders don’t act now to project the real costs, monetize these differences and renegotiate in good faith adjustments to wages to make up for inevitable reductions in benefits that will get plans more in line with costs – costs that will rise at twice the rate of private plans if left with rich, low co-pay plans and limited out-of-pocket costs.

In defense of many public workers, public officials for years have often negotiated extensions of rich benefits for retirement or medical benefits in lieu of wage increases. Workers were essentially trading modest cost of living wage adjustments for critical security — the promise of generous medical and retirement benefits. Public officials were obligating future generations of taxpayers to the net present value (NPV) of an obligation that they would not be accountable for – and might actually be a benefit from as a retiree. Workers were smart in understanding that annual medical inflation is multiples of the CPI and that guarantees on limited cost sharing and low out-of-pocket costs for healthcare were worth more than modest wage adjustments. The public officials appeared fiscally conservative to their constituents for balancing budgets while presiding over dramatic unfunded NPV increases in medical and pension liabilities. 2018 is the year of reckoning. Once US plans calculate the potential excise tax, most will conclude that the additional taxes are simply unacceptable.

A recent article in the Washington Post cited the Government Accountability Office warning that “health-care spending represents the single greatest threat to state and local government long-term fiscal health. In 2014, the GAO expects local government spending on health care to stand at 4.1 percent of the country’s gross domestic product; by 2060, that number is expected to jump to 7.2 percent.” The article goes on to share that by mid-century, a whopping 50% of local tax dollars would need to go to financing healthcare.

Most Americans don’t understand the elements of the Affordable Care Act and tend to judge the legislation on very philosophical or personal experiences. If you have directly or indirectly benefited from the legislation – possibly due to a dependent or loved one previously unable to secure affordable coverage to a pre-existing condition, it’s a god send. Perhaps you were uninsured and now have coverage provided through an exchange at a cost proportionate to your ability to pay, you may be quick to defend the merits of the law. You may be opposed – confused by the Congressional Budget Office’s math which suggested the law would cut the deficit, costing $800B over ten years but offset by $940B in taxes, fees and penalties. A big part of the $940B is expected revenues raised by the Cadillac Tax. As with any corporate tax, these costs inevitable find their way to consumers. As it relates to the public sector, it remains to be seen how we choose to handle the bill.

One thing for sure, the tab for the party is coming due. The big question, is who is going to pay and do our local and state officials have the right stuff to facilitate a balanced dialogue with our valued public employees over how we are going to work together to absorb this tidal wave of taxation.

Michael Turpin is a part-time columnist, speaker and a thirty-three year veteran of healthcare – having served both as regional CEO of a major insurer and as an executive advising employers on healthcare design and financing.

ACA 101: Hammers. Nails and An Employer’s Search for Objective Advice

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In ancient Athens, the philosopher Diogenes wandered the daylight markets holding a lantern, looking for what he termed, “an honest man.” It seems since the dawn of the consumer economy that customers and buyers have traded most heavily on a single currency – trust. Three millennia later, our financial system still hinges on the basic premise that the game is not rigged and any trusted intermediary is defined by a practitioner who puts his client’s interests ahead of his own.

Anyone responsible for procurement of healthcare may feel like a modern-day Diogenes as they wander an increasingly complex market in search of transparent partners and aligned interests. The art of managing medical costs will continue to be a zero-sum game where higher profit margins are achieved at the expense of uninformed purchasers. It’s often in the shadowed areas of rules-based regulation and in between the fine print of complex financial arrangements that higher profits are made. Are employers too disengaged and outmatched to manage their healthcare expenditures? Are the myriad intermediaries that serve as their sentinels, administrators and care managers benefiting or getting hurt by our current system’s lack of transparency and its deficit of information?

Who’s to Blame for the Failure to Rein In Healthcare Costs?

In his recent column “Yes, Employers Are To Blame for Our High Medical Prices,” Princeton political economist Uwe Reinhardt controversially lays partial blame for the healthcare cost crisis at the feet of employers. Reinhardt suggests that some employers have been passive, uninformed and in some cases, unable to muster the internal energy to get their own leadership teams to commit time to becoming more informed purchasers of health services. Where corporate procurement might realize aggressive discounts from vendors, healthcare has remained outsourced to insurers who have been largely unsuccessful in controlling rising costs and conflicts of interest.

Poor procurement arises out of a failure to act properly – to be informed, to be prepared and to ask the right questions. Some critics of our broken system complain that employers are simply getting poor advice from consultants, agents and brokers who often move at the speed of disruption-averse clients. Some point to government for public-to-private cost-shifting, poorly conceived legislation, and poor regulatory oversight over an industry that has witnessed the rapid consolidation of hospitals and insurers into an oligopoly of control that is difficult to deconstruct.

As the next phases of reform plays out across public and commercial markets, unintended consequences, odd alliances and new conflicts of interest will arise out of the ground fog of purchasing choices. Employers without a firm grasp of the key elements of healthcare cost-management are likely to fall prey to flavor-of-the-month stop gap solutions or Trojan Horse cost-shifting schemes that may control employer costs but will do little to ameliorate underlying negative trends.

Will Self-Centered Fear Reveal the Worst of the Industry?

Healthcare industry stakeholders are scrambling to remain relevant as the locomotive of Obamacare leaves the station. Players once considered essential stewards and stations along the tracks to controlling healthcare costs are worried that they may soon be bypassed. Disintermediation is weighing heavily on anyone who sits in between those that deliver care and those who consume it. The national vision seems clear: universally affordable health coverage leading to lower costs for both the private and public sectors. And while we are at it, let’s toss in a free flat-screen TV.

Employers are naturally cynical to the legislative complexities of the ACA and are having a tough time trying to figure out how to use the momentum of health care reform to make changes that will insulate them from future cost increases. But, it’s hard to know which direction to go – especially when opinions diverge around the likelihood that market-based reforms can lead to sustained low single-digit medical trend. It’s getting hard to know whose opinion to believe, and worse yet, what is motivating their point of view.

The anxiety around disintermediation is causing many stakeholders to explore how to move up and down the services value chain in an effort to carve out a permanent role as a participant in the new age of healthcare delivery. In doing so, many firms are discovering inherent channel conflicts and developing facilities that may cannibalize their own existing business models to survive the digital transformation of an analog industry.

If we believe that any 2.0 version of a solution should be better, faster and cheaper, we should be excited about the changes that lay ahead. The challenge for employers will be to see through to the institutional incentives that are causing many players to pivot into new business models – consultants selling products, hospitals selling insurance, insurance companies becoming providers, and employees being asked to become consumers. Just how muddy is the water getting? Consider the following positions.

Hospitals

As inpatient admissions continue to decline and larger healthcare systems find themselves burdened with brick-and-mortar overhead and high unit costs, there is pressure to continue to pivot into integrated health delivery and higher volumes of ambulatory and outpatient services. So far, so good.

With healthcare reform, these same hospitals are being encouraged to form risk-bearing Accountable Care Organizations (ACO) to help manage population health of retirees and share in the subsequent savings that could be achieved by focusing on value instead of volume. It seems an easy jump to turn an ACO into a commercial venture offering employers the ability to contract directly with the large hospital system as their medical home – essentially becoming an HMO, bearing risk for the health of its members. Incentives change from treating illness to keeping people healthy. The big problem is most of the hospital systems putting their toe in the water of these risk arrangements are also the most expensive hospitals in any PPO network.

Will these hospitals be able to achieve competitive unit cost and low year-on-year trend increases, or will they simply reduce some cost by disintermediating insurers but continue to charge higher costs for services? Once risk shifts to integrated healthcare delivery systems, expect more liability arising out of alleged conflicts of interest and rationing of care.

Insurers

Many argue that insurers, not unlike banks, have become highly risk averse and are rapidly moving toward a new role as health service and technology infrastructure providers. Most insurers have failed to become trusted consumer brands. Much of this distrust is arguably deserved given their historic insensitivities to customer service and business practices that left purchasers unable to decipher the complex and seemingly arbitrary calculus of pricing and claims payment policies. Most small and mid-sized employer renewals have become frustrating annual rites of passage.

Truth be told, most fully insured employers are beginning to understand that healthcare is like a Las Vegas casino – if you play long enough, the House always wins. The deck is further stacked against business as employers are often scared away from more efficient financing methods like self-insurance to fully insured, bundled programs where all health services are provided through a single insurer including RX, behavioral health, chiropractic and radiology. Bundling affords insurers ample pricing mobility to move required margins across a range of services to achieve their profit targets. While there is nothing illegal with these business practices, it does give rise to healthy cynicism regarding the industry’s commitment to achieve affordable care over personal profit. As one healthcare executive commented, “Look, our job is to hide the Easter eggs and your job (as an advisor) is to find them.”

Public managed care stocks are enjoying 52-week highs as Wall Street clearly sees no signs of near-term pricing pressure. Optically, the new insurer business model, which is now expanding into Medicaid and Medicare, gives the appearance that insurance firms are operating at lower margins while their health service subsidiaries report record growth and profit. It’s hard to trust a vendor who is both serving clients as claim payer and providing services through a subsidiary for undisclosed transfer pricing. This practice will give rise to conflicts of interest as payers pivot into providing care.

Consultants

Large consulting firms have long-since laid claim to the high ground of objective employer advocacy. As retiree medical and RX costs began to balloon in the late 2000’s, consulting firms saw value in carving out elements of these costs from insurers — creating owned and managed facilities to purchase drugs and offer defined contribution retiree exchanges. A rush of mergers and consolidations introduced additional services to traditional Human Resource and Employee Benefits consultants offering outsourced administration and defined contribution exchanges for active employees. The success of these first-generation facilities led to higher margin annualized revenue streams and a pressure to expand proprietary product solutions into a culture that had historically been agnostic to solutions and vendors.

As employers express interest in exchanges and alternative delivery models, consulting firms see an opportunity to leverage their trusted relationships to steer clients to owned and operated facilities. While clearly believing their owned solutions offer a better mousetrap, the fee for service consulting community is now confronted with a business model conundrum. Do we create products and proprietary facilities to meet the profitable and growing demand for administration and service platforms? If so, will our own consultants consent to steering our customers to our own facilities?

To add additional pressure, Wall Street has rewarded public consulting firms and defined contribution/benefits administration companies with generous valuation uplifts – increases in market cap well ahead of actual enrollment, creating internal pressure to promote exchange participation to deliver on analyst expectations. Certain analysts are convinced that the majority of large employers will convert to exchange-based purchasing in the next decade and in doing so, they are seeking to invest in firms that seem positioned for these future purchasing trends.

The administrative services that accompany many proprietary online enrollment platforms will benefit exchange managers, creating almost captive relationships as employers see higher frictional costs moving from one exchange to another. Employers may essentially be stuck paying annual administration and commissions as part of an exchange-based relationship. Where a consultant should play the role of trusted advisor to help choose the exchange that is best for their client, firms will now be pushing their people to endorse their own exchanges, and in some cases, promote financing arrangements that defy decades of empirical data — in particular those exchanges that are encouraging employers to convert from self-insurance back to fully insured financing as a means to promote purer competition between carriers. Befuddled HR professionals are increasingly torn between long-term institutional relationships and a nagging suspicion that their consultant is now promoting a model out of self-interest. Now armed with hammers, it appears that every client is beginning to go look like a nail.

Brokers/Agents

Brokers and agents have long enjoyed a too-cozy rapport with their HR and Benefits counterparts in small and mid-cap America. In the world of middle-market brokerage, generalists are often advising generalists and relationships routinely trump fiduciary accountability. Brokers leverage relationship-based trust and are often heavily influenced by how they are remunerated. Some brokers prefer fully insured plans as administrative costs, taxes, fees and commissions are commingled and not as visible to a cursory review of costs. One could argue that commissions by their very nature create conflict of interest. The continued practice of volume and contingent-based bonus payments also clouds the broker’s ability to claim total objectivity.

Most relationship-based employers do not question or understand their broker’s remuneration arrangement or in some cases, may knowingly pay higher commissions to their broker so the broker might serve as an outsourced benefits staff – using headcount that HR could never successfully justify internally because of finance and staffing controls.

Healthcare 2.0 will be characterized by data – lots of data and an increased dependence on compliance and technical resources that will shake the traditional transactional broker profit model to its core. Informed clients will desire transparency and accountability for all services, and judge value based on a numerator of outcomes divided by a denominator of cost of services. Brokers will need to be able to demonstrate actionable interventions, improve clinical trends, assist with optimal financing arrangements (including actuarial support for plan value-setting and financial forecasting), provide strong communications and HR support for concierge and employee engagement tools, and understand healthcare economics expertise to hold insurers accountable for achieving network discounts while limiting hidden margins and fees. Transactional placement skills will be table stakes as the 2.0 broker reinvents themselves as a solutions provider with no embedded conflicts of interest. The big question remains: Is it possible for the broker’s goals to align completely with the client’s goals?

Human Resources

A Human Resources manager facetiously shared with me, “I got into the business because I really liked people and I hated math. I now spend my days with a calculator trying manage a massive human capital spend and I don’t really like people.” If you watch where most HR and Benefits Managers’ feet go, it is not in the direction of disruption and greater intervention into the personal and consumer healthcare habits of employees. America’s C Suite has been surprisingly unwilling to spend the time with HR to understand the root causes of their healthcare costs and instead condones what is now a regular and unimaginative annual cost-containment exercise of cutting benefits and increasing contributions as a means to achieve a workable healthcare renewal price point.

While Professor Reinhart’s gentle rebuke of HR may have been a bit undeserved, it is not completely without merit. Structure has long since trumped strategy in employer healthcare plan management. A good renewal sees very little changing, when in fact, change must occur if behavior is going to change. “Disruption” is a broad, amorphous HR term used to describe anything that creates additional work in the form of employee complaints and additional distractions from the job of doing one’s job. To avoid the steeper slopes of the healthcare cost-containment mountain, those charged with overseeing Human Capital have travelled the easier, well-trod trails of cost-shifting, resulting in the erosion of take-home pay.

Given that 90% or more of America’s HR and Benefits professionals are responsible for healthcare but are not rewarded for delivering low, single-digit medical trend, it’s no wonder that their focus is on where they do get rewarded – limiting noise, smoothing feathers and keeping the planes and trains of human capital running on time.

One HR Manager related, “It’s hard to get management to focus on the complexities of healthcare spend. They want to see the year-over-year costs and whether their doctor is still in the PPO network. They don’t have the attention span or interest in tackling all these issues.” Sound familiar?

So Who Can An Employer Trust?

Trust and transparency must be the currency that anchors the employee benefits marketplace of tomorrow. No one in a corporate HR and Benefits role can afford to be seen as a friend and not be seen as a fiduciary. Stakeholders – insurers, consultants, brokers, providers – are all scrambling to preserve their roles as trusted B2B advisors while nervously anticipating a growing consumer market. While public exchanges limp along and blue states and red states fight over the notion that reform is succeeding, employers will be on their own for the foreseeable future – forced to revisit their vision, strategy and structure for healthcare and benefits. In the end, it’s all about aligning incentives. If a CEO tells his/her HR team that 2015 bonuses hinge on managing medical costs to a 3% trend or less – without raising contributions or reducing benefits – one wonders whether friends will become overnight fiduciaries.

In the months and years ahead, employers will find themselves wandering among the tall trees of monolithic insurers and a dizzying new roster of online and consumer engagement tools. It will be all about alignment of interests and holding people accountable for results – not bedside manner. Purchasing will require a lot of homework, faith and a strong sense of the corporate values of the partners you choose to help you shape your plans.

If ever there was a time for honest, unfiltered advice, it’s now. The search is on for affordable healthcare and for stakeholders who are beholding only to their client’s interests to get costs under control

The T-Rex Takes on Healthcare Reform

images “Americans have always been able to handle austerity and even adversity. Prosperity is what is doing us in.” James Reston

His emails arrive at night and land like scud missiles. He is an Old Testament retired CEO who is appalled at the state of America and as a thirty year healthcare system veteran and dutiful son,  I am expected to interpret the complicated tea leaves of the Affordable Care Act ( ACA) and warn him if Armageddon (any form of change) is imminent. He needs three hours notice to hide his coin collection.

Today, his instant messaging is in large case font; He has forwarded an email that was forwarded to him from a friend of a friend of a friend – all retirees convinced that our current President is an operative for a hostile foreign government.  I have to give high scores to his email chain author for his/her detail, veracity and creativity.  Many of the stories are purportedly authored by retired Generals, Navy Seals, and in one case, a dead President.

I often scroll down these emails to see if I can find its genesis and author – perhaps it is Karl Rove or someone incarcerated for white-collar crime.  The email offers me “the truth about Benghazi” or a grainy photo of the President giving out nuclear codes to Al Qaeda operatives behind a District of Columbia Stop & Shop.  I am not always inclined to believe these missives but I love my Dad and his loyal concern for America.  At 83, his draconian solutions are not always politically feasible and carry a decent chance of arrest if one actually tried to act on them. However, he has a 160 IQ and understands economics.

With my status as a registered Independent voter, I remain a point of frustration to my father – a lost sheep naively wandering in a forest of good intentions not understanding how close I am to the wolves of Socialism.  As an ex-CEO who made many freshman mistakes, I am a tad more sympathetic to anyone dumb enough to want to run America, Inc.  To assume the role of CEO for a company that is losing $1T a year, sitting on $17T in debt, massive underfunded retirement liabilities, a dysfunctional board of directors, angry, bargained employees and a confidence rating of less than 35% – is a job that only a masochist or megalomaniac might aspire.  And even someone as naively altruistic as moi would not have chosen to take on US healthcare as my signature legacy.  There is a reason why it has been viewed as the third rail of American politics – “you touch it, you die.”

My father and his friends have a huge stake in the future of healthcare as their day is spent inventorying each creaking part of their own frail physiology, wading through a confusion of doctor appointments, specialists and endless prescriptions. He is now messaging me wanting to understand how the inept roll-out of Healthcare.gov will impact the future of Medicare.  The email message appeared with a large “ping” as it thumped into my in-box.

“FWD: FWD: FWD: FWD: MICHAEL, IF THIS IS TRUE WE ARE ALL IN DEEP (You fill in your favorite noun)”

The note went on to ask if his Medicare policy and supplement might be cancelled as so many individual policies had in the last month.

“OBAMA SAID PEOPLE COULD KEEP THEIR POLICIES”

After two strokes, caring for my Mom with Parkinson’s and a bout with prostate cancer, he is a grizzled veteran of the system but he still does not understand it. He wanted to know why millions of policies were cancelled and now being rewritten at higher premiums.  In some cases, single men were seeing their lower cost ala carte policies replaced with higher cost coverage that included such essential benefits as maternity coverage.  Other than male sea horses, it would be hard to find someone who purchased a bare bones policy with eyes wide open willing to support a new plan that would cause their premiums, in some instances, to double.

I wrote back with earnest detail.

“Got your IM.  The botched roll-out won’t impact Medicare.  There are no provisions in ACA to modify Medicare benefits although at some point, the government will begin to change how they pay doctors for the services to try to slow spending and improve quality.  The public exchanges you are reading about are being created in every state in the US to cover the uninsured and subsidy eligible Americans.  Where a state has refused/declined to create their own exchange, the federal government is stepping in with their portal, Healthcare.gov. It’s been a disaster as the technology has not worked.  In addition, the government got an even bigger black eye because Obama promised people they could keep their policies but did not realize his own legislation would force insurers to cancel, rewrite and charge higher premiums for his new and improved minimum levels of coverage.  His announcement to delay the policy cancellations for a year will create huge problems for insurers and put them once again in the position of being bad guys if they decide they don’t want to reinstate policies they have eliminated.  It’s a huge mess!”

“A CLUSTER IF YOU ASK ME. WONT ONLY SICK PEOPLE JOIN THE EXCHANGES?”

“Yeah. The first few years you will see only those who had no coverage and those who were overpaying for policies due to age or health status will benefit by purchasing through community rated public exchanges.  Yet, community rating only works if young people join and don’t use the benefits. The problem is the penalty for not purchasing insurance is only $95 a year in 2014 and the cost to buy a bronze level plan (the lowest cost policy approved by ACA) could cost up to $300 a month. 50% of the uninsured are under 30 years old and think they are invincible.  My guess is they won’t join the pools initially and the public exchanges will have to be subsidized by the reinsurance taxes. The government expected some of this and will assess employers a reinsurance fee as of January 1st to create a fund to reimburse insurers who end up losing money on the expected adverse selection.  The taxes last only until 2016.  It will prop up the exchanges for two years possibly giving exchanges the ability to argue they are working. Once the reinsurance fees run out, public exchange loss ratios will deteriorate and costs will increase.”

”IS IT A COINCIDENCE THAT THE EXCHANGE GETS PROPPED UNTIL HILLARY GETS ELECTED IN 2016?  I NEED TO THROW UP.”

“Seems suspiciously well-timed.”

“THEN THE DO-GOODERS RAID THE PUBLIC COFFERS TO SUPPORT THE FAILED PUBLIC POOLS? LENIN WOULD BE PROUD!”

“Careful, remember you are also benefiting from this messed up system.  You and Mom are enrolled in a nationalized healthcare plan called Medicare whose cost is being subsidized by future generations.  You love the coverage because you can go to any doctor you want.  You have more specialists than Imelda Marcos had shoes and no primary care doctor calling the shots.  Your kitchen looks like something out the TV show Breaking Bad with scales, baggies, pill sorters and enough drugs to medicate all the animals in the LA zoo.

Your Medicare contributions bear no relationship to the true cost of the benefits you will receive in your lifetime. CMS still collects premiums under actuarial assumptions that expect retirees to live to age 68.   We now are living into our 90’s.  Medicare is $50T underfunded. We only have two workers for every retiree versus 6:1 when we started in 1964. Medicare makes the cost of Obamacare look like a dime store candy.  Between our sovereign debt and Medicare, we are witnessing the greatest intergenerational wealth transfer in the history of the country.”

“ALL ENTITLEMENTS ARE PONZI SCHEMES. THE ROAD TO SERFDOM IS PAVED WITH DEBT.  IT’S TIME FOR TOUGH CHOICES.  NEXT, NANCY PELOSI WILL BE PROPOSING TO MOVE ILLEGAL IMMIGRANTS INTO OUR HOMES.”

“Well, Dr. Zhivago, at least the stock market is up.”

“I’M IN T-BILLS AND BONDS. I DON’T TRUST WALL STREET”. There is a pause. I can almost hear the television blasting in the background as he cranes to hear someone yelling at him from downstairs.

“YOUR MOM WANTS TO WATCH SOME MOVIE I’VE SEEN BUT CAN’T REMEMBER.  A DIVIDEND OF OLD AGE.”

“Glad you feel better.”

“GET OFF YOUR BUTT AND DO SOMETHING.”

“Love ya.”

“You too.”

I realized he had sent me his final message in lower case font. I typed my next email in upper case.

I was now fired up.

Black Hats and CAD Stents

 

Top 10 Catholic Health Care Systems
Top 10 Catholic Health Care Systems (Photo credit: Wikipedia)

When Steve Brill released his recent Time magazine article, Bitter Pill – Why Medical Bills Are Killing Us,, it was an overdue chapter in a critical primer to educate the American public on the perverse incentives plunging our healthcare system and our nation into dysfunction and debt.  The Time piece was the first major media effort in some time to shine a light on the factors beyond the insurance industry that contribute to costs that now eclipse 16% of our GDP. 

Brill’s article clearly touched a clear nerve as the American Hospital Association immediately issued a multiple page press release refuting many of the writer’s observations and complaining that billing practices were an outgrowth of a cat’s cradle of cost shifting and an increasingly Darwinian landscape where only the best equipped, resourced and positioned hospitals will survive. 

Yet, Brill’s facts are hard to refute.  Many not for profit hospitals are paying seven figure executive salaries and posting double digit margins achieved through complex and imbalanced billing practices that rival Egyptian hieroglyphics.  Time’s expose demystifies the complicated calculus of hospital billing and alleges that the system of billing and reimbursement is hopelessly broken leaving the most vulnerable of victims in its wake – those earning too much to qualify for Medicaid but earning far too little to afford coverage.  The stories are gut wrenching and identify a range of misaligned financial and care motives across high margin practices such as oncology, imaging, lab, emergency and pharmacy services. The findings also tie to a June 2009 Harvard study that found that 50% of all US bankruptcies were directly related to medical bills and/or illness.

When I crossed the proverbial River Styx from healthcare consultant to regional CEO of a health plan, I was plunged into a bitter and high stakes battle with large hospital systems demanding and often getting double digit unit cost increases. The result was a zero sum game where in my resolve to try to control double digit trend, I would attempt to extract steeper discounts from smaller providers and community based hospitals – ironically providers who offered lower unit costs and similar quality than bigger systems.  However, consumers demanded big name brands. The daisy chain of cost shifting punished weaker players and slowly drove primary care and small hospitals to the edge of extinction.  Meanwhile, the uninsured paid the most for healthcare – often paying 200%-400% more for care in healthcare’s most expensive setting, the hospital emergency room.

In 2007, I watched two regional hospitals engaged in an arms race for membership through aggressive marketing and sub-specialty expansion. When the hospitals both sought to expand their cardiology programs, the practice of inserting post angioplasty stents increased by 300%.  While the risk of stents outweighed the benefits for certain patients with (CAD) coronary artery disease, cardiac interventionalists routinely placed stents in their patients, not because patients always needed them but rather because they could earn more money. It’s a familiar story: The doctor tells the patient they need a procedure. The patient, fearful and accustomed to the notion that more health care must be better, consents.  To the degree, any payer attempts to disallow a recommended procedure as unnecessary, the payer is accused of bureaucratic meddling or worse, jeopardizing the quality of care for the sake of operating profits.  Years later, we are finally beginning to understand that whoever regulates costs, access and necessity of treatment in the healthcare system – be it a payer or a governmental agency, is automatically fitted with a black hat and labeled the villain.

The Time’s article focusing on certain hospital billing practices are a subset of a nationwide game of cat and mouse as facilities seek to balance highly variable reimbursement from Medicaid, Medicare and commercial insurance.  The fight over the true cost of care is often invisible to those footing the bill – employers.  Many employers have no line of sight into the thorny negotiations between hospitals and their insurer.  To make matters worse, if a large healthcare system threatens to drop out of an insurer’s PPO network, employers often urge their carrier to resolve its contract differences with the hospital to limit disruption for employees.  The insurer, concerned over losing membership if the PPO network loses a flagship provider, quietly caves and the cost of inpatient healthcare trends continue to rise. To make matters worse, employers have consistently resisted implementing narrower PPO networks that might otherwise force billing outliers back toward the mean costs of delivering care. It seems employers want to fly first class but only pay for coach.

The insurance industry has committed its share of financial and public relations misdemeanors during the two decade run up of healthcare costs. Yet, insurers were uniquely singled out during the recent debate leading up to the Affordable Care Act.  Politically, the black hat payers were easier targets than other stakeholders who have abetted the demise of our system: consumers with unrealistic expectations, doctors using malpractice avoidance as air cover to oversubscribe services, drug companies and PBMs engaged in intricate and difficult to understand pricing practices, employers who have remained parochial and disruption averse, the food and agricultural industries for practices that promote products that adversely impact public health, the government for its serial under-reimbursement of providers through Medicaid and Medicare and a range of stakeholders who ineffectively advise and assist the industry in its quest for an optimal balance between quality and affordability.

Steven Brill’s thoughtful rendering is an inch wide and a mile deep as it illuminates the need for hospital payment reform.  However, he stops too soon in his expose, refraining from identifying the other accomplices that drive these billing behaviors — including a Medicare and Medicaid system that enjoys low administrative costs but presides over an estimated annual $100B waste and fraud problem arising out of unmanaged fee for service care.  Medicare is beloved by seniors partially due to the simple fact that it does not manage care.  What Brill also misses is the private sector’s apathy in aggressively punishing high outlier unit costs charges by taking on some of our most sacred players – large teaching hospitals and system oligopolies that now dominate many regional landscapes.  As consultants, we have failed to convince employers of the merits of eliminating open access PPOs, increasing consumer directed health plans, using scheduled reimbursements for elective surgeries and enforcing a bi-lateral social contract around good health by requiring workers to see a primary care doctor and receive age and gender appropriate testing to better manage health status.

As with any stakeholder that feels singled out, the AHA response to the Time’s article was swift and predictable.  I’m sympathetic. Laying our affordability crisis at the feet of any one group misses the entire point of our issues in the US. However, the need for reimbursement reform and billing simplification is irrefutable.  Our system is in crisis. The question remains: will we move towards a delivery model that allows market based reforms and affords consumers a greater role in driving quality and cost effective delivery or will we wake up in a decade to a single payer that rations access and peanut butter spreads reimbursement.  One could argue our entire healthcare system can be best summed up by the average US hospital bill – opaque, misunderstood and bearing little relationship to true cost of the services.

 

An interview with AM Best

 

Woody Allen
Woody Allen (Photo credit: Alan Light)

 

An interview with AM Best

A recent interview on reform between yours truly on AM Best.  Will brokers survive the shifting landscape of healthcare reform?  Will the Supreme Court throw out the individual mandate?  Will insurance companies pay rebates in loose change?  Inquiring minds want to know!

By the way, who said TV does not add twenty pounds to you!  Where is that skinny kid I grew up with ?

Much Ado About Broccoli: The Constitution, Healthcare Reform and A Generation of Entitled Employees

The United States Supreme Court, the highest c...
The United States Supreme Court, the highest court in the United States, in 2009. Top row (left to right): Associate Justice Samuel A. Alito, Associate Justice Ruth Bader Ginsburg, Associate Justice Stephen G. Breyer, and Associate Justice Sonia Sotomayor. Bottom row (left to right): Associate Justice Anthony M. Kennedy, Associate Justice John Paul Stevens, Chief Justice John G. Roberts, Associate Justice Antonin G. Scalia, and Associate Justice Clarence Thomas. (Photo credit: Wikipedia)

As the Supreme Court debates the boundaries of government’s role in mandating the purchase of insurance, the discussion continues on whether the public or private sector is best positioned to drive market reforms necessary to meet our goals of lower costs and higher quality. As the son of a Phi Beta Kappa neo con who believes government should be the size of a sand gnat and as the husband to a British citizen who loves national healthcare and was born through a midwife, I often find myself lost in a political no man’s land with volleys being exchanged from the right and left.  To complicate Thanksgiving dinner further, thirty years of healthcare consulting, including a three-year stint in Europe, hospitalization for pneumonia in the NHS and a tour of duty as a senior executive for a national insurer has left me with my own conflicted convictions about  how we might fix our broken system.

On the eve of the Supreme Court determining the fate of PPACA, strong opinions are in full bloom like cherry blossoms along the Mall.  In his particularly sharp remarks to government attorneys, Justice Kennedy, considered a swing vote by many, cautioned that Congressional intervention to mandate citizens the “duty ( to buy coverage) to act “ was a slippery slope that sets dangerous precedent and impinges on individual rights. Justice Roberts added, “And here the government is saying that the Federal Government has a duty to tell the individual citizen that it must act … That changes the relationship of the Federal Government to the individual in the very fundamental way.”

Justice Scalia was quick to wade in after Justice Roberts questioning, ” what would be next in the role of the government dictating to its citizens ( if the mandate were to be upheld). “I will tell you the next something else (we will next tell Americans to do) is exercise, because we know that lack exercise contributes to illness.” It seems that this debate is indeed creating odd bedfellows as civil liberties advocates are joining conservatives in warning that the next thing the government will be telling people is that they cannot drink sugary soft drinks or that they have to eat broccoli.  It is hard to find a time when a conservative Justice and the ACLU share a common opinion about anything.

Private Versus Public – Who can Enforce Behavior? 

If legislators and American business want to reduce the cost of healthcare and engage an entire generation of entitled Americans, the practical answer to Justice Scalia’s rhetorical question is “Yes. Justice Scalia. We must mandate personal responsibility for healthier lifestyles.”

Most Constitutional and human rights advocates would agree that the government’s regulation of the “commerce of healthcare” can become a snare that can tangle any government’s legislative foot in a cat’s cradle of complications.  The need to legislate behavior in an effort to help reduce costs is simply a lap too far.  A government dedicated to reducing costs while preserving quality and competition would need to adopt practices currently employed and bearing fruit in the private sector to moderate medical trend and improve affordability.  The reality is many of these efforts – biometric testing, health risk assessments, population based plan designs, value based reimbursements – require a more prescriptive level of engagement by employees.  While the programs are strictly voluntary, it is clear that the cost of declining to engage in health improvement will begin to create a substantial cost sharing gap between those who participate and those who do not.

How Public And Private Payers Seek To Control Costs Fundamentally Varies

Medicaid and Medicare recipients are largely unmanaged.  Patients are free to access any provider who is willing to accept reimbursement and are generally not consistently under the care and coordination of a primary care provider. Fraud, overtreatment and instability among the chronically ill has led to extraordinary spending in public healthcare.  Unengaged and vulnerable patients freely access a system that has found it difficult to close gaps in care, manage compliance or offer visibility on the where to receive the most efficient care.

In the private sector, larger employers have begun to achieve lower per capita health care costs and market reforms by implementing programs designed to impact the unit cost of healthcare and the consumption of services. In the face of the recent recession, the private sector moved rapidly to de-leverage, right-sizing balance sheets and returning to profitability.  Larger firms have concluded that providing healthcare is neither a right nor a privilege but a benefit — an essential tool to attract and retain personnel.  In providing this benefit, there is an assumed  bilateral contract where each party takes responsibility for their role in health and healthcare.

Employers have done a poor job of enumerating expectations around personal health as many feel the idea of employment based health improvement reeks of Orwellian oversight.  Additionally, wellness and health management only works where there is a culture of trust and communications — two commodities often in short supply in a business environment often reducing staff, freezing pay and struggling to achieve year over year earnings growth.  Yet, firms have proven through the harmonic convergence of culture, communications and mutual accountability that medical trends can be reduced through health improvement.

The debate between public and private insurance inevitably breaks down when discussing how to best control costs.  A single payer system relies primarily on global budgets, rationed access and reimbursement based on a complex clinical and financial calculus that balances medical necessity and cost. Inevitably, the specter raised is whether restricted access to quality care suffers when rationed reimbursement is peanut butter spread across all providers who often have highly variable outcomes.  While every physician claims to have graduated first in their class, we know that some providers charge multiples of other providers but cannot clinically prove that their outcomes are significantly more favorable across a similar population.  The private sector has figured out that open access PPOs that promise 90% reimbursement for any in-network provider is contributing to the very problem they are trying to solve – paying for quality outcomes, not for units of care.

There is a case to be made that market based reforms can and would do a better job of preserving quality by reducing not only unit cost prices but also reducing consumption of services and preserving quality. The question remains whether the private sector has the will to convert an entire generation of reluctant and at times, recalcitrant employees who see open access, non managed healthcare as an entitlement.  Employers are now deciding whether they would prefer to take on the thankless task of redirecting employees and their dependents to narrower and more prescriptive primary care based networks or whether to drop coverage and abdicate the role of population health management to the government.

Several Supreme Court justices have already indicated that they do not believe government should play a broader role in regulating the “commerce” of healthcare. The question remains whether employers have the will and the skill to drive this process. Consider five reasons why the private sector needs to work harder to preserve employer based healthcare on the behalf of 180M working Americans.  In doing so, employers could end up preserving a system that rewards higher quality care and achieves lower cost without imposing universal reimbursement rationing.

1.     The Government Can’t Enforce Health Engagement.  Many Employers Won’t. There is a difference. – 50% of all private sector claims are driven by less than 10% of an employer’s population.  We know in many instances, these individuals develop chronic illnesses borne out of poor lifestyle choices.  The issues are difficult to solve for and are complicated by socio-economic issues such as lack of access to primary care, lack of access to healthier diet alternatives and a lack of education about the consequences of poor lifestyle choices.

Medicare and Medicaid do not have the means nor the ability to drive lifestyle based incentive plans or more prescriptively direct care for their recipients.  Less than 15% of Medicare is managed and those recipients are covered under Medicare Advantage plans that are driven by commercial insurers.  For Medicare to make advances, it would need to partner more closely with the very constituency that it vilified in an effort to get reform passed – managed care companies.  Meanwhile states are turning to managed care to help mitigate costs and improve care quality.  Medicaid costs are ballooning and without the ability to improve public health, better dictate access points, close gaps in care and manage the intensity of services being rendered while a patient is in the medical system, the public sector can only ration cost as a means of achieving cost management.

2.     Employers can design plans to reward engagement and health improvement – Employers are now committing resources to population health management – – conducting biometric tests, requiring health risk assessments, implementing rewards based plan designs that offer lower costs and richer benefits for engaged employees.  The result has been behavioral shifts that are fundamentally changing the way employees access care.  The combination of better tools to understand the variability of provider costs for similar procedures, education, rewards and disincentives have all combined to lower trends for many employers committed to driving loss control for healthcare.  The challenge for employers is true engagement requires time and resources.

3.     The Brokerage Community Has Done a Mediocre Job in Managing and Resourcing Health Improvement for Employers.  If you subscribe to the maxim that there are no bad students, only bad teachers, the sluggish move toward population health management, self insurance and aggressive loss management programs has as much to do with the limited intellect and resources of those advising employers as it does the employer themselves.  In the new normal, brokers must become advisors and have access to actionable data analytics, clinical resources, underwriting and actuarial services to more effectively forecast and show a return on investment for health.  The golden age of low transparency, limited access to claims experience, opaque premium and embedded broker remuneration is ending and giving way to an era of accountability where advisors will be paid for value and less for bedside manner and low value administrative support services.

4.     The Key To Quality is Reducing Higher Health Costs that Do Not Correlate to Better Outcomes – Employers have a lot of ground to make up.  After rebelling against HMO plans that had achieved close to zero trend in the mid-1990s but achieved it primarily by focusing on aggressive medical management and redirecting patient’s to lowest unit cost providers, employers demanded a more laissez faire system of access and oversight for employees. Choice and minimal third party intervention was the mantra which resulted in happier employees and annualized trends that swelled like waistlines to over 14%. As premiums soared, insurers and broker remuneration increased.

Over the last two decades, many employers have gravitated to larger, open access PPO networks that offer a wide range of provider choices for employees and also highly variable charges for similar procedures.  To complicate the need for consumer engagement, these variable charges are normally reimbursed at the same co-insurance or co-pay level – as long as they are incurred in network.  Often, the most expensive providers are perceived to be the best.  Employers must commit to narrowing networks and measuring quality based on outcomes over an entire episode of care.

The public sector equally rations reimbursement across all providers irrespective of outcomes or unit cost, shifting the burden to find a quality doctor to the patient.  The ability to reward quality with higher reimbursement while forcing greater transparency in outcomes and costs to better understand who is actually delivering the best care can only be achieved through extensive analytics and an employer’s willingness to begin to reward utility of better providers. While CMS has committed to pilot programs to begin to drive this migration to quality, the private sector has the ability to move more rapidly – but only if employers are willing to tolerate the disruption that this may visit on employees who prefer the status quo.

5. Rationed public reimbursement leads to cost shifting which undermines provider quality and accelerates lack of affordability in private healthcare.  Peanut butter spread reimbursement rewards mediocrity and creates the incentive to drive a higher volume of services to make up for rationed reimbursement.  As doctors and hospitals receive less from state and federal reimbursement, they will naturally attempt to shift these wholesale arrangements to retail commercial customers.  As medical trends spike in commercial health insurance, premiums become increasingly unaffordable with more employers choosing to drop coverage.  Private employers already pay an estimated $1.22 for every dollar of healthcare to compensate providers for public sector underreimbursement. The cycle eventually leads us to more employers dropping coverage and a larger and larger population of uninsured workers.  With 50M uninsured,  a call has rung across the land for public policy intervention to solve for the crisis of affordability and access.  Not unlike Dorothy in the Wizard of Oz, employers have always had the ability to reduce costs but have chosen to pass on cost increases and reduce benefits instead of tackling the more difficult and disruptive process of driving payment reforms and behavioral change.

It’s Now or Never– While CMS is attempting to change reimbursement methodologies to reward higher quality outcomes and to penalize poor management of services such as infection and readmission rates, the private sector still holds the trump card being able to drive more onerous consequences for poor medical delivery.  Determining medical necessity and driving reimbursement reform is tricky business and often disintegrates into political food fights as evidenced by contracting disputes that often arise between payers and providers.

When it comes to refusing to cover certain procedures or penalizing outlier behavior, commercial insurers find it increasingly more politically expedient to wait for CMS to change policy on Medicare reimbursement to provide air cover for their own policy changes. Historically, it has been in vogue for employers to blame insurers for certain reimbursement practices rather than take responsibility that payers are merely administering the employer’s plan document.  Employers need to own their medical spend and they need to reinforce with their employees the bi-lateral agreement that comes with financing care.  In the face of mounting pressure to reward engagement in the workplace, consumer advocates are now complaining that employers are becoming increasingly too prescriptive about population health management. Personally, I support the view of Steve Sperling of Hewitt who recently retorted to criticisms about employer driven health incentives, “House money, house rules.”

The healthcare system is changing as we debate the need for change.  The tectonic plates of hospital and provider delivery are shifting causing great upheaval and alterations in the strategies of large systems, community based hospitals and across a range of stakeholders.  According to a recent Credit Suisse report,  the US still ranks at 150% of the unit cost of services and a full 60% higher than other industrialized nations for overtreatment/consumption of services.  While we can boast higher cancer survival rates and a system of R&D that props up the innovation occurring across the globe, we are not getting enough value for our spend.  It is unsustainable. The Supreme Court now has the dubious honor of killing or upholding PPACA.  Irrespective of the outcome, private employers are our best chance to help fix the problem.

Given the nature of politics and the nature of human behavior in healthcare, it’s my belief that government can fix the cost problem rather quickly but would likely throw the babies of quality and public health improvement out with the notion of private reimbursement.  The private sector has the green light to drive market based reforms that can reduce pricing variability, reward quality and improve public health.  However, it’s a tall order at a time when companies are seeking to reduce administrative costs, are focused on the business of the their business and are lacking the will to burn social capital with workers by playing Big Brother when it comes to health improvement.

In one scenario, the government may want to reduce healthcare spending but really, at the end of the day, the Supreme Court is saying “you can’t. ” In the other case, employers have a golden opportunity to step up and start demanding value for their spend and force greater transparency and conformity around health improvement.  But up until now, they won’t.

Be Careful What You Wish For – Part II – Repealing Reform

The U.S. Supreme Court in 1925. Taft is seated...
The U.S. Supreme Court in 1925. Taft is seated in the bottom row, middle. (Photo credit: Wikipedia)

 

             As the Supreme Court considers the testimony presented at the recent hearings over the constitutionality of certain provisions of the Patient Protection and Accountable Care Act, the debate continues to escalate over the role that individuals, business and the government should play in the “commerce of health care.”

Most industry experts agree that PPACA is first about insurance reform and the expansion of coverage to some 30m Americans; yet,  detractors have criticized the legislation for failing to incorporate any elements that would serve as a catalyst for reducing costs, improving quality and restructuring a misaligned system that has been paid to treat illness rather than prevent it.

In the last two years, hundreds of millions of private and public dollars have been invested as stakeholders adjust to an uncertain but radically changing delivery system.  States are in various stages of constructing purchasing exchanges.  Physicians and specialists are choosing to consolidate, often with hospitals leading the process to create integrated delivery systems and restore the role of coordinated care through Patient Centered Medical Homes and Accountable Care Organizations.  Employers are waiting and watching — seeking greater regulatory clarity while slowly complying with a chronological time-line of new rules and expanded coverage requirements.

Municipal, state and national budget deficits continue to loom large. As Europe battles over mounting sovereign debt and the suffocating burden of  generous public pension and healthcare entitlements,  flash points are erupting across the USA as municipal, government and collectively bargained workers brace to defend retiree benefits in the face of legislative efforts to more aggressively reduce public spending. The Federal government is at a tipping point. Facing a $38T net present deficit in its funding for Medicare and $15T of public debt, PPACA was scored by the CBO as reducing $140B of public debt by 2020.  To achieve this, the government needed to drive $940B of taxes, assessments and spending cuts and fall within estimates of the number of newly insureds likely to qualify for Federal subsidies offered through public exchanges.  The promise of PPACA was to reduce the deficit, not further contribute to it.

With $3T of annual spending and an estimated $2T in tax revenues, Congress continues to renege on promises to reduce public spending.  It has committed to reducing Medicare reimbursements to hospitals and doctors but so far, seems to lack the will to enact the legislation passed as part of prior balanced budget amendments and PPACA.  Almost immediately following the passage of PPACA, an estimated $20B in annual cuts to Medicare was delayed by Congress.  The pressure to follow through with cuts was overridden by the Congressional fear that providers would begin to turn away from Medicare recipients – as they have for years with Medicaid members– citing that reimbursement is too inadequate to cover the true cost of services.  A prescription for remedying reimbursement inequities  known as “the Doc Fix” has been under consideration for some time but so far, the legislation has been continually kicked down the road and is now due to fall firmly in the lap of the next administration.   

Some economists estimate that the delay in implementing Medicare cuts along with other flaws in cost projections all but ensure that PPACA will increase the public debt, not reduce it – placing further pressure on Congress to either raise taxes or moderate spending to balance the budget. Yet, for all its flaws, PPACA is a necessary albeit wobbly baby step toward addressing the complex and broken public and private systems of healthcare in the US.

Advocates for repeal and replace legislation have grudgingly admitted to the need for health and insurance reform but so far have not offered viable solutions that could address the swelling ranks of the uninsured or solve for the inflationary effects of consumer demand and an aging, chronically ill America.   Universally, most pundits and experts feel PPACA was a single stitch attempt to suture a deeper and wider wound.  Most understood  that rising costs, increasing public debt and the potential dumping of insurance by low margin, low wage employers  would force companion legislation  that would pivot the focus of reform from “regulation and expansion of coverage” to “improving health care quality and affordability”.

With the potential for core elements of the bill (individual mandate, community rating and guarantee issue) to be declared unconstitutional, employers are left wondering if this development is a favorable or ill shift in the legislative winds. Ironically, repeal of reform may cause more problems.  Many feel that deconstruction of the law could create greater chaos across a 50 state insurance market where each legislature would be compelled to retreat from, maintain or advance insurance reforms.  This means trouble for America’s insurers who fought to help craft the elements of PPACA which effectively preserved the role of private payers to help drive reforms in the health care system. Minimum Loss Ratio limits and other regulatory controls were imposed with an understanding from payers that lower profit margins might be offset by a larger influx of newly insured Americans.  Without an insurance mandate, insurers would be less enthusiastic about guaranteeing coverage and engaging in less flexible pricing through community rated pools. 

However, insurers and employers are already wary of a state by state cat’s cradle of regulatory and coverage mandates that increase cost and in some cases, reduce competition through artificial price and profit controls.  In the event of a post reform collapse, employers will need to look even harder at the legislative efforts of states as they seek to mandate and managing health care.  Per capita costs to insure workers up to minimal levels of benefits could vary dramatically as states adopt myriad versions of mandated care and cost sharing.  Employers would most likely seek to avoid higher costs associated with mandates by self insuring and in doing so, deflect costly coverage increases as well as reduce revenues paid to the state by avoiding premium taxes.

The US is in between a rock and a hard place.  To repeal PPACA will mean restarting a legislative process at a time when Congress has failed to demonstrate any ability to collaborate to address complex issues that threaten our economic futures.  Most recognize that we must begin to address our public debt but it calls for austerity and measures that could slow our economic recovery and further enrage a public that is already distrusting of business and government. Managing the obligations and expectations of citizens around health care puts private sector management and elected public officials in unenviable positions. 

Both sides prefer to be seen as part of the solution, yet only one side relies on public opinion to keep their jobs.   The private sector has the capacity to move rapidly to drive market based reforms. Up to this point, employers have been slow to assume their role as a payer controlling over $1T in spend on the behalf of 180m Americans.  In many instances, employers abdicate the responsibility of tougher decisions around medical necessity and consumer engagement to insurers who up to this point, have benefited from rising costs.  While they have suffered public relation hits from the Obama administration as the goverment sought to vilify private payers, they have managed to retain their role as the primary service platform to administer and manage care.  The only real risk to insurers is disintermediation as a result of a single payer or repeal of reform resulting in radical regulatory models arising out of more activist states like New York and California.  Employers must understand who works for whom and demand information on claims, population risk profiles and solutions guranteed to drive single digit medical trends.  Until employers demand these solutions, the private sector will fail to punch its weight in the healthcare market.

It comes down to skill and will.  As a society, we seem to be lacking the will to deal with a generation of citizens whose desire for immediate access and rapid resolution are at odds with the fundamental changes required to fix the problem.  It is no longer a question of should employers seize the reins and drive market based reforms, but a question of do they have the will to take the lead.  The government has limited ability to impose all the elements of health care management required to drive affordability and guaranteed access for all.  To generate the necessary savings required to finance an expansion of coverage and guarantee basic essential benefits, we will need to pull every lever — consumer engagement, population health improvement,  the restoration of primary care based models, precertification, transparency to reward quality and marginalize outlier stakeholders and personal responsibility for health.  It will mean disruption.  However, as companies seek to grow earnings in a time of difficult organic growth, one has to consider what is more disruptive: firing employees or restructuring health plans to drive lower cost and a healthier workforce.

If reform is repealed or radically altered in June, it will not be business as usual.  The question will be whether business will revert to the usual behaviors or whether it will assert itself to reduce costs and in doing so, potentially save the best parts of our healthcare system.

The Stages of Death and Dying, Employers and Health Reform

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“Change, before you have to…” Jack Welch

We live in a society that loathes uncertainty – particularly the unintended consequences that sometimes result from a catastrophic event or in the case of PPACA, landmark legislation. Wall Street and the private sector crave predictability and find it difficult in uncertain times to coax capital off the sidelines when the overhang of legislation or geopolitical unrest creates the potential for greater risk. Despite our best energies around forecasting and planning, some consequences, particularly unintended ones – only reveal themselves in time.

In the last decade, employers have endured an inflationary period of rising healthcare costs brought on by a host of social, political, economic and organizational failures.  There was and remains great anticipation and trepidation as Congress continues to contour the new rules of the road for this next generation’s healthcare system. Optimists believe that reform is both a way forward and a way out of a mounting public debt crisis and a bypass for an economy whose arteries are clogged by the high cost of medical waste, fraud and abuse.  Cynics argue reform is merely a Trojan Horse measure that offers an open invitation for employers to drop coverage and for commercial insurers to “hang themselves with their own rope” as costs continue to spiral out of control — leading to an inevitable government takeover of healthcare.

Meanwhile, leading economic indicators are flashing crimson warning signs as recent stop-gap stimulus wears off and long overdue private/public sector deleveraging results in reduced corporate hiring, lower consumer confidence and increased rates of savings.  The symptoms of a prolonged economic malaise can be felt in unemployment stubbornly lingering around 9.2% and a stagnating US economy that is struggling to come to grips with the rising cost of entitlement programs.  Across the Atlantic, the Euro-Zone is teetering as Italy and Spain (which represent more credit exposure than Greece, Portugal and Ireland combined) stumble toward default.  Despite these substantial head winds, US healthcare reform is forging ahead – – right into the teeth of the storm.

Closer to home, states have begun to debate and propose legislative amendments to their own versions of reform as they attempt to reconcile a declining tax base with the soaring obligations of Medicaid and collectively bargained pension and long term care.  Should Congress finally agree to allow an estimated 28% of fee reductions in Medicare provider reimbursement to become law, the private sector could see as much as a 400bps increase in core medical trends resulting from cost shifting – pushing trends back into the mid-teens. Hospital systems, providers and healthcare agencies are bracing for cuts and potentially looking to the private sector as a source for more dollars.  All of this is building at a time when certain industries are nearing a “point of failure” – – an inflection point where healthcare spend as a percentage of revenues and operating profit will either consume earnings or completely erode employee take home pay.

Many are looking ahead to 2012 as a “burning bush” year – a seminal presidential and Congressional election where political results will help clarify the direction of reform – pivoting toward the reinforcement of employer sponsored healthcare as catalyst for market based reforms or merely a cementing of the incentives that seem to encourage the deconstruction of employer based coverage.  With 33 Democratic Senate seats up for reelection and 10 GOP spots up for grabs, the entire composition of our government could change – or perhaps not.  In the interim, the fiscal year 2012 will continue to show 44 states projecting budget deficits totaling $ 112B.

A recent controversial McKinsey study forecasted that as many as 30% of employers or 54m individuals covered under private healthcare would be “dumped” into public exchanges as of 2014.  This number is in sharp contrast to the 12.6mm assumed by the CBO (approximately 7% of 180mm privately covered individuals.)  The influx of 41.4mm unbudgeted insureds – all eligible for federal subsidies of as much as $5,000 – would upend the initial CBO estimate of $ 140B deficit reduction over 10 years and result in an increase in public debt in just six short years.  The ensuing debt arising out of PPACA over the periods 2020 to 2030 could easily eclipse $ 1T of additional public debt.

Any economist can confirm that all unsustainable trends eventually end.  Rising premiums, public to private cost shifting, perverse and unaligned incentives for care, rationing and a host of other stop-gap issues are all doomed to be replaced by a system that either drives efficiency through market reform or through the single payer procurement of healthcare.  It will take at least five more years and three election cycles for this marine layer of debate to lift.  Unlike 1996, there is graveyard silence arising from the private sector.  Employers seem to be stuck in one of the several stages – – often attributable to the dead and dying.

Denial — “This can’t be happening, not to me.” One could argue that this generation of business leaders has drawn the short straw when confronting the decisions we will need to make to keep our businesses viable in a period of sustained high unemployment and economic stagnation.  Many larger employers are nervous regarding reform but somehow feel that reform is more likely to happen to other people – smaller employers and the individual marketplace.

These firms do not want to believe that the myriad unintended consequences associated with reform could impact their bottom line. Denial has been a principle ingredient and willing accomplice to healthcare cost inflation in the last decade.  For many employers, the inability to confront the fact that many of their own business practices – insistence on open access PPO plans, less medical oversight and utilization review, limited appetite for employee disruption, inability to dedicate the time or resources to assess the health risks embedded within their own population of employees – – has them resigned them to a cycle where premiums are increasing faster than wages and corporate earnings. While costs continue to rise, many employers have simply focused on stop-gap year over year cost shifting.  Others prefer to abdicate to commercial insurers who have failed to drive affordability and improved access. It comes down to believing you can make a difference and a willingness to confront the hard choices – choices that could fundamentally drive market-based reforms.

Anger — Many find themselves simmering with resentment, hunting for villains whose feet they would seek to lay all blame: “It’s those damn insurance companies!” “It’s that Socialist in the White House!”” It’s the failure of regulators to do their job in managing the complexities of the healthcare delivery system. “It’s the big hospitals!” “It’s the drug companies!” It’s the rich and their lack of empathy” “It’s the poor and their lack of personal responsibility” The list of culprits could fill a thousand postal office walls.

A polarized Congress, pariah hungry media and a workforce unwilling to understand that access does not equal quality means that change cannot happen without some noses getting out of joint.  Yet, we understand clearly that if we want to reduce our exposure to the coming storm of public to private cost shifting, we must engage and move on from our own anger.  As 35m additional Baby Boomers increase the double the ranks of Medicare to 70mm by 2030, total health spending will near 30% of the GDP and Medicare costs are expected to eclipse $ 32,000 per enrollee up from $12,000 in 2010.  Facing the magnitude of these suffocating entitlement costs, we will either embrace private sector, market-based reforms that fundamentally realign the current delivery system or we will default into a more regulated, lowest common denominator system that will rely on rationed access and reimbursement as a means of controlling cost.

Bargaining —”I’ll do anything for a few more years.” The third stage involves the hope for postponement.   The lion’s share of stakeholders in healthcare can be found milling in this no man’s land of indecision.  While hope is not a strategy, a surprising number of firms are clinging to the dream of “repeal and replace” legislation. Others are merely expecting Washington to do what it does best – prolong debate and delay implementation long enough to afford them enough altitude to pass the problem on to someone else. The tea leaves do not look promising for fundamental legislative intervention that would disrupt the momentum of reform.  Repeal is unlikely. Employers must understand that 2014 will require certain decisions.  Fundamentally employers will have one of four choices:

Take the Money And Run – Do I drop coverage, pay the penalties associated with moving employees into the public exchange and pocket the difference?

Drop Them But Ensure A Safe Landing – Do I drop coverage, grossing all employees up to my current level of subsidization so all might afford coverage in the public exchanges?

Create a Consumer Plan of Your Own – Do I move to a private exchange or defined contribution approach to financing my medical benefits to cap expenditures but remain involved as a sponsor of my benefit programs?

Control Your Own Destiny – Do I continue to offer group based private insurance believing that employer sponsored health coverage is more likely to experience lower trends if properly managed and that medical coverage remains a fundamental part of my company’s ability to attract and retain employees.

Depression — “What’s the point?” The problems we face as a nation and in business can feel overwhelming.  We have the misfortune of having to confront $38T in underfunded Medicare liabilities, $ 14T in public debt, and a potential double dip economic recession arising out of any number of black swan events – – credit defaults abroad, domestic hyper-inflation or a slowing of Chinese GDP.  It seems inevitable that we must head into a period of profound austerity.  Facing the potential of sustained uncertainty can burden any decision maker to the point of inaction.  While some period of reflection is healthy to any organization, people must take a position, plan around the certainty of change, grieve over the passing of an epoch and move forward with a renewed conviction to address the challenges that lay ahead.

Corporate depression may manifest itself in a lack of willingness to engage in the discussions or conduct financial modeling required to understand what scenarios will best benefit your organization.  It is a strange period where we express grief knowing that the traditional employer/employee social contract has changed forever in a hot, crowded, global marketplace.

The sense of urgency to explore alternatives to traditional employer sponsored coverage will led by retail, agriculture and hospitality while professional services, technology and collectively bargained public sector plans may feel more obligated to remain on a course of employer sponsored coverage.  Planning prior to 2014 is essential to be position a firm to react to opportunities that may present themselves.  Should a key industry competitor choose to discontinue coverage and use operating overhead reductions to drive down prices, what will you do?  Many have promised to not be first but not be third in line to change.

Acceptance — “I can’t fight it, so I better prepare for the inevitable.”  2014 will mark the beginning of a movement toward or away from employer-sponsored healthcare.  It is more likely that most will be carefully weighing election results, the first two years of public exchange performance and the actions of their competitors to determine a course forward.

2014 is forcing discussions over the will of the private sector to drive market-based reforms, and the review of decades-old beliefs regarding direct and indirect compensation plans.  Employers that have navigated these phases of change and are now aggressively accepting the new normal of healthcare and will most likely end up as self insured, in touch and aware of their own population risks, directing patients to primary care based system that reward providers based on quality and efficiency and are committed to driving healthier behaviors and personal compliance with to reduce chronic illness.  Employers will realize returns on these efforts as aggressively managed plans will likely experience lower single digit medical trends.  These firms will be reticent to abdicate management of healthcare costs to a public exchange but instead focus on educating and activating their workforce to the personal and corporate dividends of change.

Some employers may convert to defined contribution plan designs such as cafeteria plans to allow for a more diversified workforce to allocate finite dollars to purchase coverage that make most sense for their unique needs.  Health benefits may become part of an overall defined contribution approach to retirement and benefit planning – affording each employee to allocate their dollars to their circumstances and in doing so, accept their circumstances more freely because they have choice in where they spend their dollars.

Reform is a process and like many of the vagaries in life, every person and each business will react differently to the stimulus of change.  Every problem is a disguised opportunity and with it, comes the added dividend of using change as a catalyst for reassessing your strategies to attract and retain employees. It’s about making decisions by commission rather than omission.  And, the sooner an employer navigates these stages of change, the more likely it is that healthcare reform will happen for them – instead of happening to them.

The Great Wellness Revolt of 2011

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The scene opens with a fit, thirty-something man running down the hallway of an office building.  His white shirt is stained on right side by what appears to be orange juice. He frantically looks behind him to see if anyone is following him and knocks over a female colleague – spraying papers into the air.  He spins, tumbles, hesitates and then runs through a door marked, “ Human Resources – Compensation and Benefits”

He bursts into an inner office where a 50ish woman is on the phone – laughing.  She frowns glancing at him as he shuts the door and peers between her Levolor blinds.

Carol: (Covering the phone) What the hell are you doing, Johnson ?  Aren’t you supposed to be downstairs conducting the annual benefit enrollment meetings?

Johnson (Terrified, turning to show his stained shirt) : Are they coming?  Did you see anyone?  Those five women – you know the ones who go walking every day at lunch – one of them threw an orange at me right in the middle of my presentation.

Carol: (Swivels in her chair, turning her back on Johnson and is about to speak into the phone when she sees all her phone console lines blinking at once. Her cell phone begins to vibrate in her purse. She speaks into the phone)

Tim, let me get back to you.  Something seems to be going on here at Corporate. (she hangs up and let’s her phone start to ring. )

Cindy grab those calls will you?  (she glances at her cell and sees it is her West Coast HR representative. She holds up her hand to Johnson who is about to say something) Shhh! I have to take this cell call. (She answers the cell)

Phil, I hope this can wait.  I have a …..

( She listens intently as a barely audible voice is whispering on the other line )

Phil, I can barely hear you.  (frowning again) You’re where?  The women’s bathroom – – in a stall?  Phil, I don’t need to tell you that.  What?  Who is after you?  Well, did you call security?  What do you mean, the elevator is not working? The security guard says it’s too far to climb eight flights of stairs?

(She listens and stands up.  She looks out her front window and notices that several employees in suits are doing push ups and jumping jacks in the parking lot.  There are signs being removed from the back of a truck that read, “ Lower Your Cholesterol, Lower My Cost for Health Insurance”, “ That Donut You’re Eating Just Cost Me $50.00”, and “Cut Your Risk Factors, Not My Benefits.”

What the hell is going on?   What?  No Phil, I was not talking to you.  What happened? At your enrollment meeting? Flesh mob? Flash Mob? What did you….Vending machines?  A glasscutter?….Only the candy bars and chips? Apples?  How the hell did someone smuggle 500 apples into the office without us seeing them? Every desk? What?  ‘An apple a day, keeps your colon okay?” Who the hell wrote that?

A flustered secretary opens the door and Johnson hides under her desk with his butt sticking out of the narrow opening.  Carol looks down and barks.

Johnson, for God’s sake get out from underneath that desk.  Cindy, WHAT IS IT? “

Cindy (talking very quickly): Every HR representative is calling from the field.  Apparently, during the open enrollment session this morning, there was a coordinated protest over our raising premiums and decreasing benefits. Several people removed their business suits and were wearing workout clothes.  They started exercising and chanting inappropriate slogans about how this company does not care about employee healthcare.  Someone turned over all the vending machines in St Louis.  A group of CSRs in Dayton who conduct Zumba classes every day at noon have demanded that we do biometric testing on all the people working in the call center.  They seem to have somehow figured out that all of our big medical claims came from several people who have not seen the doctor in years.”

Carol looks out the window and sees an overweight security guard trying to take a sign away from a younger, much thinner man in a track-suit.  The young man is taunting the guard and running just ahead of him until the guard stops and places both hands on his knees and throws up.

Carol (talking to herself): This is getting out of hand. Ok, has anyone been hurt?

Johnson ( muffled, still under the desk ): I told you that this was a problem.  I told you.  Just look at Safeway.  They found that 66% of their diabetics were not compliant with their own treatment regimens. They cut premiums for people who engage. raising premiums for people who refuse to make lifestyle changes. Driving employee engagement.  Remember that note I brought you that someone had left next to all those cookies in the lunchroom? It was a warning from this, whatever they call themselves – wellness terrorist group.  It said, “If your LDL is over 130, don’t even think about it.” Remember, you thought it was some kind of a joke?  Well, what about the sticky note on Larry’s (the CFO’s) door: “Dear Larry, ever thought about the relationship between a lap band operation and operating income?”  Think about it, Ms. Whiffler. It all makes sense. This is a wellness rebellion!

Carol: (disgusted) Get a hold of yourself, Johnson.  This is not the Russian Revolution.  It’s a coup of those exercise nuts we see running and walking every day.  They are trying to get us to spend a lot of time and energy on something that can’t be proven to show an adequate return on investment.  I mean have you seen the call center staff in New Hampshire? Do you really think we are going to change these people’s lifestyles and get them to stop smoking and overeating? Have you ever seen what happens when we put any free food in that lunch room?  I mean I could put dog dirt on that table and if it said ”free”, someone would eat it.

(Carol suddenly remembers the king-sized Butterfinger bar she has in her desk drawer. She sighs and thinks: what I would not give to eat that baby and take a nap. The phone rings.  Cindy looks at the console.  She glances up)

Cindy: It’s Mr. Lawson on line one (the Chief Financial Officer )

Carol: Ok, nobody panic. (looks at Johnson and hisses ) and no more talk about fitness mutinies and exercise insurrections. (Picks up the phone and composes herself) Hi, Larry.  What can I do for you?  (A loud voice penetrates the entire office out of the handset) What? Oh my. Well, yes, I….No, I did not know someone left that note on your door until a few days ago.  What?  What did this one say? (she stops and tries to suppress a smile) A manatee? Oh, yes, now I remember – the large, endangered mammals in Florida?…..No, I do not think they were threatening you by choosing to compare you to an endangered species…..Absolutely, we will fire the person on sight if we can find them. Yes, yes, ok…I will circle back to you in a few hours.  We seem to have some issues with the employees around the benefit plan cuts and premium increases.  (more yelling)

Yes, I think they understand we have a new private equity owner who expects us to improve earnings. Yes, better cutting benefits and increasing contributions than reducing the workforce.  No, I don’t think they know how thankless our jobs are. (She glances at Johnson who has now emerged from under the desk. He is rolling his eyes and sticking his finger down his throat and pretending to gag. She gives him a sharp disapproving look. ) Yes, yes, right away.

Johnson: You know he could stand to lose about 50 lbs. I bet he thinks BMI is a kind of foreign car and that a Statin is a Borough of Manhattan. He’s the one who stopped us from reducing the PPO network and implementing some of those changes that would have redirected people to lower cost, higher quality hospitals – all because his doctor was not in the narrower network.

Carol looks out the window.  Over 50 people are engaged in an impromptu Zumba class.  Three overweight security guards are seated watching them in a golf cart.  One is drinking a Coke and smoking.

Carol: Well, he is the boss.

Johnson: Yes, a boss that dropped on our heads like a 300 lb wrecking ball.

Well, boss, what are you proposing we tell everybody around the country?   We have HR reps hiding in bathrooms. The “Fitness Taliban” in control of a half a dozen offices. I can count the lawsuits now from our overweight employees claiming a hostile work environment. (Imitating Keifer Sutherland’s character Jack Bauer  in “24” ) Well, Madam President, what is our next move? Your team is awaiting further instructions.

( Silence. Johnson continues) You know, if we had just dug in our trainers around biometric testing, penalties for smoking, incentives for wellness and compliance based rewards to make sure people adhere to their chronic illness medications, we could have prevented this mutiny.

Carol: (Irritated) Quit using that word.  Who the hell is going to do all this testing and keeping track? You?  Me? We just fired four HR reps. We have cut our budget and we now have the lowest ratio of HR/Benefits staff to employees in our industry.  The sad truth is, Johnson, it’s easier to pay the increased costs and then pass them on to all employees then try to get them to change.  We are in the business of selling HR and payroll administration systems, not the business of trying to get someone’s spouse from eating Oreos.

Johnson: Well, I’m telling you that our costs have increased 50% in the last three years and we have passed on 80% of those increases to our people.  Wages have increased by about 12% in that same period.  My guess is most people’s take home pay has been consumed by our new high deductible plans, increased cost sharing and new drug plan formulary.  They are pissed off.

Carol: So, what do you propose, Mr Bleeding Heart?

Johnson: Actually, my heart is in great shape. Cholesterol? 145.  Triglycerides? 110. Fasting glucose ? Less than 80. I run three days a week and I have given up dairy. Cherie (his girlfriend ) has just turned vegan.

Carol: ( Rolling her eyes) You sound like one of those P90X terrorists.

Johnson: Well, if the shoe doesn’t fit, then you can’t wear it. Look, I say, we immediately circle back to all employees and tell them that we have heard them.  We can easily launch a voluntary biometric plan for our renewal and offer to hold premiums flat for those who participate.  For those who choose to not get tested, they will pay the increased cost of coverage.

We can get our insurer to pay for the testing and use the penalties to offset the partial costs of the increase.  We then meet with Larry and Ron (the CEO) and show them a five-year pro forma of our current medical trends and the impact of us reducing medical trends by 3% each year. Those guys understand profits.  Every dollar saved times a 10X multiple is money in their pocket when we go public.

We pay over $ 15mm in claims.  The savings of a lower compounded medical trend, reduced catastrophic claims, improved productivity and morale will more than make up for the “hassle factor.” Quite frankly, those that consider healthy living an imposition are probably the same ones back at their desks today eating Krispy Kremes while the healthy employees are protesting. If we can just find people who are sick and don’t know it and stabilize those that are chronically ill by reducing financial, physical or mental barriers to care, we would be a great shape. (He smiles) No pun intended.

Think about how we nickel and dime our people on travel and other administrative costs, yet we completely ignore these rising costs because we find it easier and less “disruptive” just pass to them on to the employees.  Well, guess what?  They are telling us, enough is enough.  We have to do something different and be more responsible.  You cannot engage employees if your management is not engaged.

Carol: (looking out the window.  One of the security guards has joined the Zumba class while the other two have left the parking lot on foot leaving the golf cart behind) Okay, call all the reps and let’s have an emergency follow-up meeting this afternoon.  Dust off that proposal from the insurer and our broker and let’s put some numbers around it.

Johnson smiles approvingly and leaves her office.  She shuts the door and falls back into her chair.  A button pops off her blouse and she shakes her head, feeling sorry for herself.  She remembers the Butterfinger and opens the drawer.  She glances at it and then picks it up.  She stands and goes to the window. She tears open the wrapper.

She turns and decisively walks out to her secretary’s desk.  She drops the candy bar in the waste can.

Cindy, hold my calls. I’m going outside to do some Zumba.

Is Your Lack of “MQ” Costing You Money ?

Dunce
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As health reform continues to play out across state legislatures and within Washington, employers continue to wrestle with rising costs and the corrosive effects of skyrocketing medical trends. It’s clear that there is enormous variability among employers in their confidence and abilities to identify, mitigate and manage the complexities of the employer sponsored healthcare delivery system.

Many industry pricing and billing practices are opaque. Employers are not always getting good advice and often have to entrust the management and control of employee benefit plans to generalists who do not have the time, resources or ability to engage in managing a corporate expense that has eclipsed a composite average of $11,000 per covered employee.

If employer sponsored healthcare is going to survive to drive market based changes that cut fraud, waste and insist on personal health improvement, corporate decision makers must improve their Medical Quotient (MQ). While larger employers such as Safeway have begun to reap the dividends of lower costs by driving employee health improvement and employee engagement through prevention and chronic illness management, small and mid-sized businesses are increasingly getting failing scores for understanding and managing their own cost drivers.

Success in managing medical costs begins with understanding one’s own MQ and committing to improve it against a rapidly changing market that is exceeding the rate of change of many HR and financial professionals. Jack Welch once commented, “When the rate of change outside an organization exceeds the rate of change within, the end is near.” While ignorance can be bliss, it is an expensive consequence in employer sponsored healthcare. Can HR generalists and less engaged CFOs and CEOs finally grab the horns of their own population health costs and drive toward a healthier tomorrow?

Consider the following as you gauge your own MQ:

1. A Value based plan design:

a) indexes an employee’s maximum out-of-pocket to their gross earnings

b) limits co-pays and out-of-pocket costs for drugs and specific treatment therapies to facilitate chronic condition compliance

c) offers multiple plan design options based on an employee’s gross earnings

d) waives all cost sharing for all benefits to remove barriers to care

e) establishes a fixed fee amount that an employee must pay for every service rendered under a health plan to promote consumerism

2. The American’s With Disabilities Act (ADA) and the Health Insurance Portability and Accountability Act (HIPAA) preclude an employer from:

a) collecting and evaluating (through Human Resources) claims data on each employee and then setting contribution penalties based on chronic conditions

b) collecting and evaluating (through a Third Party) claims data on each employee and then setting contribution incentives based on prevalence of risk factors and compliance with wellness program engagement

c) relegating smokers to a less comprehensive plan design if they refuse to engage in smoking cessation

d) charging up to 30% contribution differentials to those employees or spouse who do not participate in a health risk assessment, biometric testing or general wellness program

3. Match the following percentage of modifiable risks per 100 workers in an employer population:

a) Obese/Overweight                               1. 21%

b) Smoking                                                  2. 66%

c) Sedentary Lifestyle/No Exercise       3. 29%

d) Stress/Anxiety/Mental Health         4. 39%

e) High Blood Pressure                            5. 33%

4. What did a recent National Business Group on Health survey calculate as the additional percentage of cost increases that unengaged employers are likely to pay for healthcare versus employers who have committed to managing population risk and employee engagement:

a) 2%

b) 5%

c) 10%

d) 20%

e) No difference

5. Match the average percentage of retail charges for medical care that is generally charged by physicians and reimbursed based on the plan payer:

a) Medicare                                  1. 126%

b) Commercial Insurance        2. 250%

c) Uninsured Consumer           3. 67%

d) Medicaid                                  4. 84%

6. Match the percentage of your claims dollar attributable to its corresponding category of costs:

a) Facilities – Inpatient & Outpatient                            1. 50%

b) Physicians (Primary Care)                                          2. 12%

c) Prescription Drug                                                           3. 23%

d) Physician (Specialists)                                                 4. 15%

7. According to Compass Consumer Solutions, contracted rates for services can vary by as much as what % within the same approved PPO network?

a) 15%

b) 300%

c) 75%

d) 1000%

e) No variation – all contracted rates are consistent between providers

8. In 2014, health insurance exchanges will offer the following:

a) community rated plans that allow for preferred pricing if employers achieve health improvement and lower utilization

b) federal subsidies for all employees who choose to purchase through the exchange

c) access to the Federal Employee Benefit Plan to take advantage of government employee purchasing economics

d) bronze, silver and gold coverage options for consumers and employers under 50 employees seeking to purchase pooled, insured coverage

e) tax credits for employers who choose to drop coverage and subsidize coverage for all employees purchasing through the exchange

9. Under new health reform legislation, an insured employer of 50 or more employees’ individual loss ratio ( claims as a percentage of total premium ) cannot be less than:

a) 80%

b) 85%

c) 75%

d) 90%

e) Loss ratio rules do not apply to each employer, only across insurer books of business by license and by state

(See Answer Key for scores)

A higher MQ means a lower cost – As you tally your scores and ponder the range of questions and answers, understand that a lower MQ is costing you money. If you are relying on a broker or advisor who does not help you understand the increasing complexities of insurer underwriting, network economics and provider contracting, you are not getting full benefit for your advisory spend. It’s not enough to delegate the role of managing plans to a third-party.  A high will, but low skill brokerage relationship may have you permanently stuck in remedial Health 101 with no hope of graduating to lower costs.

Employers need to understand an increasingly complex landscape and be capable of deconstructing their healthcare spend.  Ignorance literally is costing you money. A higher MQ requires knowledge of: every insurer’s product plan design options, population health management programs, utilization data analytics options, predictive modeling tools that can forecast future utilization trends, options to identify high risk and at risk insureds through biometric testing, clinical outreach programs intended to stimulate engagement, state and federal legislative trends and more cost effective risk financing options such as self insurance. If you have a low MQ, the odds are you are probably paying too much for your risk transfer (insurance) and not enough time on understanding your claims.

The good news is that a low MQ is treatable and that sophisticated solutions are no longer the exclusive domain of the larger employer. In an industry crowded with advisors, there are no bad students, only bad teachers. A good teacher pushes their student out of their comfort zone.  In healthcare, a strong advisor forces an employer to understand the difference between change and disruption. For most mid-sized employers, the MQ resources required to properly understand and manage costs do not have to exist within your own organization. They can reside with other knowledge workers – your insurer, your broker/consultant, and third-party vendors who specialize in managing health risk. However, each year, your own understanding of your costs and the industry should be improving. In the end, the investment you make to understand your own corporate health will be paid back through the significant dividends of lower average medical costs and a greater sense of control in a turbulent market.

Answer key and explanation:

1. b Value based designs are intended to improve compliance for at risk and chronically ill employees to ensure stability in those populations and prevent higher rates of catastrophic illness arising out of unstable conditions. A Safeway study revealed a staggering 55% of diagnosed diabetic employees not complying with recommended courses of treatment. Value based designs eliminate financial barriers to care for specific conditions and help remove excuses for chronically ill to remain compliant.

2. a Contrary to those who might use ADA and HIPAA as a reason to not engage in wellness, the legislation affords employers more than enough latitude to gather biometric data through a third party ( you cannot do it yourself ),  warehouse aggregated population data through a third-party vendor and evaluate health risk profiles and trends to better understand how to impact your population’s health. You can target smoking cessation, obesity, and a range of lifestyle based behaviors that can give rise to catastrophic or acute episodic claims. This data coupled with additional information gathered through claims reviews and health risk assessments can aid any employer in better structuring incentives for employees to improve health status.

3. a2, b1, c4, d5, e3 Most employers have no line of sight on the risks that exist within their specific population. Many of these risks arise out of modifiable behaviors. An alarming number of catastrophic claimants had not filed a claim in the preceding 24 months prior leading up to their event suggesting that they were not under a physician’s care, not compliant with basic preventive services and/or asymptomatically ill but had not seen a physician in the prior 24 months. An alarming 40% of men over 40 years of age have not seen a primary care provider in the last 24 months.

4. c In 2010, medical trend increases for engaged employers tracked a full 10% less than those of their less committed peers. To put this in perspective, calculate your total medical spend in 2010 for claims and administrative expenses. Now reduce that by 10%. Is this 10% dollar savings worth it to you to begin the process of improving your MQ?

5. a4, b1, c2, d3 As government begins to cut back reimbursements for Medicare and Medicaid, cost shifting to the uninsured and commercial insurance will accelerate. Once the uninsured are covered under PPACA in 2014, employers over 50 lives will be vulnerable to cost shifting and will need to understand the implications of this commercial pricing shift to avoid subsidizing the major shifts in healthcare reimbursement

6. a1, b2, c4, d3 Employers need to understand where services are being delivered to employees. A simple access shift such as reducing emergency room visits, expanding the use of primary care providers, using soft steerage techniques to guide employees to lower cost, equal quality outpatient care centers can save as much as 15% of one’s medical spend. This savings could be equivalent to the entire administrative spend an employer may make in a year! Loss control and financial management begin with understanding where care is most cost effectively delivered and creating incentives to access the system through these points of entry.

7. b Most employers do not realize the difference in pricing for the same procedures within their own preferred provider network. There is a significant cost an employer bears by insisting on the broadest networks and open access PPOs. Insurer negotiated fee for service discounts do not eliminate the significant variability in charges from one hospital or provider to another. Employers must possess better consumer engagement tools and create financial incentives for people to choose higher quality, lower cost providers or you will end up paying dearly for the cost of your ignorance.

8. d Sadly, health insurance exchanges will not offer significant flexibility or reduced premiums to employers over 50 employees in 2014. In many states, exchanges will not even be available until 2017 for larger employers. The exchanges will be required to engage tight community rating rules limiting the benefits an engaged employer might receive over a less healthy employer. Additionally, a surge in previously uninsured participants covered under expanded Medicaid coverage could lead to a less than desirable risk pool as chronically ill individuals, now covered under Medicaid, seek care through emergency rooms – unable to find providers willing to accept Medicaid.

Regulators will work to control proposed insurer increases with price controls on renewals but these will only serve as stop-gap measures. Employers with over 50 covered insureds need to understand reform was designed to expand coverage for the uninsured and to facilitate aggregated purchasing for individuals and small employers. As insurers lose the ability to make higher margins on smaller business, costs will move to insured employers over 50 lives who will continue to procure healthcare outside exchanges.

9. e Minimum Loss Ratios will be calculated by each insurer – by license and by line of business in each state. Employers may still experience low loss ratios but be underwritten in such a manner that they may receive higher rate increases. Pooled insurance will continue to cost shift from bad risks to good risks. This will drive smaller employers to begin to consider self funding risks to avoid state mandates, premium taxes, insured pooled underwriting cost shifting and limited line of sight on one’s own claims experience.

17-20 points – Valedictorian – You understand the issues. You should be achieving low, single digit trends

14-17 points – Honors – You know what you don’t know. Now do something about it

10-14 points – Passing – You still have a lot to learn. Ask for help.

< 10 Points – Remedial  – You may need to repeat another year of high increases

A Case for Self Insuring Small Business

Health care systems
Image via Wikipedia

During the course of 2009, two distinct trend lines crossed. For the first time ever, more employers under 50 employees were not offering medical insurance to employees than those who continued to provide employer sponsored healthcare. It was an inflection point where the majority of smaller employers – those who make up close to 96% of the number of commercial businesses in the US –  could no longer afford to offer healthcare.

Unfortunately, achieving affordability is often a zero sum game and the current system often fails the weakest and most disenfranchised of its stakeholders.  While the burden of spiraling healthcare costs has effected virtually every employer, the weight of cost increases has been borne disproportionately by individuals and smaller employers (1-250 employees).  The opaque science of risk pooling, cost shifting and risk selection has as much to do with unacceptable increases as  poor consumerism, over treatment and inefficiency. As we march toward insurance exchanges and pooled purchasing for employers in 2014, we will continue to witness a game of pass the parcel leaving smaller employers holding the bag.

Healthcare cost shifting begins at the highest levels with federal and state governments routinely cost shifting to the private sector by serially under-reimbursing specialists and hospitals for the cost of their services. Doctors and hospitals, in turn, shift cost to the private sector charging higher fees for services to make up for underfunded Medicare and Medicaid rates. Health systems have consolidated along with multi-specialty medical groups gaining critical bargaining power that results in higher contracted rate increases negotiated with insurers.  Insurers, attempting to keep rising medical trends down, must exact concessions from less well leveraged providers such as community based hospitals and primary care doctors. The result is an Darwinian landscape where only the large survive.

As core medical trends hover between 7%-8%, private insurance book of business increases have climbed into and remain in double digits. Larger employers remain more immune from peanut butter spread book of business trends due to their own unique claim credibility and in many instances, due to the simple act of self insurance.  Lack of size and actuarial credibility leaves smaller employers and individuals to be underwritten within pools of risk — pools that continue to pass on the rising costs of care at an alarming rate.  To add insult to injury, as states and the Federal government become increasingly larger medical payers (already representing over 50% of all medical spend in the US), cost shifting will only accelerate in the private sector resulting in higher medical trends impacting smaller employer pools.

Larger Employers Don’t Bear As Much Burden for Medical Cost Shifting – Larger self-insured employers are less affected by hidden risk charges, expense loads and administrative cost shifting that often occurs in pooled underwriting arrangements. Larger firms enjoy a greater spread of risk across their employees. Self insurance brings greater transparency to employers around administration and claims costs. Given that self insured employers are bearing much of their own risk, a self-funding generates less risk transfer and as a result, much lower gross profit for an insurer than a fully insured customer. Unfortunately, when risk is transferred, the elements of pricing become more opaque. It is not uncommon for insurers to build margin and other conservative factors into the rates tendered to smaller insured clients.  Individuals and smaller clients do not merit the actuarial credibility to be rated on their own claims experience. Cost shifting across each risk within a pool is an accepted practice in pricing risk. It reduces dramatic swings in pricing and is fundamental to profitable risk pooling.

Smaller employers, by definition, do not have enough medical claims predictability to be rated entirely on their own merits. In order to spread risk across a statistically valid sampling of employers, insurers pool employers across a large “block” of risk. Better performing risks subsidize worse performing risks – moderating overall increases for the entire pool. Problems arise when there is little visibility for an employer into how his/her renewal was developed and into the significant variance that can sometimes occur between the insurer’s initial renewal request and the final negotiated rate. Some argue that much of the difference is due to the rigor of the broker or client’s negotiation and the competitive pressure from the marketplace. However, the frustrating reality is the actual rate that is necessary to properly underwrite the risk, the rate the client ends up paying and the individual profitability by account varies dramatically.  Over the last decade, smaller employers have absorbed a disproportionate percentage of rising healthcare cost increases. As medical trends haven risen, fully insured risk pools have been quick to allocate these cost increases across their block of members – similar to the way a utility might pass along the rising cost of oil to its consumers.

The Affordable Care Act May Create Greater Inequities Around Small Employer Risk Sharing – Under health reform, insurers choosing to participate in regulated exchanges will be required to adhere to stringent community rating underwriting practices that will limit their ability to distinguish and price between employers representing better risks and those representing poorer population health risk. An employer who commits to driving healthier lifestyles among employees and generates lower claims experience will be subjected to the same narrow underwriting criteria as an employer with a less healthy workforce. This inability for insurers to properly reward employers for driving consumer engagement and health management among employees will drive many smaller employers to weigh the limited benefit of engaging their employees in wellness versus the disruption and distraction of attempting to promote health improvement.

Some argue these regulatory changes will homogenize pricing and create a better spread of risk for groups under 50 lives. With the individual and under 50 market having historically been the most profitable commercial segment  for many employers, some pundits contend that the ACA will limit profit taking and maximize small employer purchasing power.  Detractors believe that the diametric opposite will happen when exchanges initially are populated by previously uninsured and higher risk, small employer groups.  In either scenario, insurer profits will be squeezed in the under 50 life market segments. Insurers will have to look ” up market” to maximize profitability within their 50+ block of insured, manually rated clients.

For groups over 50 lives, insurers will be afforded more flexibility to manage pooled risks but they will be confined to a maximum of 15% of profit and administration charges. The level of precision and attention insurers must pay to underwriting their 50+ life block of insured business will determine much of their success or failure.  Price this business too conservatively and you risk losing members or having to refund rebates to customers.  Price to aggressively and you risk creating a political hot potato when asking a regulator to approve a politically undesirable double-digit increase. The optics of pricing will become very important to insurers and will become less flexible for employers to negotiate.

Pooled small group underwriting already creates inequities. As underwriters price their overall block of insured business to achieve a targeted yield (increases necessary to cover rising healthcare costs), there is typically more latitude afforded to larger insured employers whose claims experience is statistically credible. Most underwriters would argue that only cases with at least 1000 participants merits 100% claims credibility. The reality is there is discretion in small case underwriting.  Underwriters have the latitude to lend more or less credibility to certain cases if it allows them to renew a desired piece of business.

While ACA Caps Insurer Margins, It Reduces the Incentives to Control Costs – The minimum loss ratios mandated by Congress will cap potential profit taking on individual and small group coverage but it will also reward those whose clients have richer, inlfationary plan designs and higher per employee per month (pepm) costs. The maximum administration and risk percentage an insurer may realize for its larger case book of business is 15%. Thus, the greater the insured’s premium cost for a given level of benefits, the larger the actual profit dollars of operating income for the insurer. Insurers have already begun to fight over the benefit plans of certain white-collar and collectively bargained industries who have proven more willing to pay for rich plan designs – – investment banks, hedge funds, high-tech, professional services and bloated municipality and bargained plans.

Ironically, lower insured pepm plans may actually experience less underwriting flexibility as insurers seek to balance their book of 85% loss ratio employers to the highest premium plans. The only incentive to insurers confined to limited profits under ACA’s 85% MLR legislation is the specter of a public option being introduced to compete with private plans that cannot rein in costs. While most pundits seem to agree that a public option would not solve our affordability crisis, it could use taxpayer dollars and rationed provider reimbursement to offer lower cost alternatives – further eroding the private marketplace and leading to a tipping point towards single payer coverage.

As of 2011, small group increases are averaging 11 – 13% medical trends and average overall increases in excess of 20%. Insured employers under 250 employees are essentially trapped in these risk pools and it may only get worse in 2014 as community rating and the uninsured are mixed into the stew of risk.

It’s Time To Self Insure Small Business –  It is rare that an employer under 100 employees can access its paid claims experience. Insurers provide little to no actionable data for smaller employers and defend  the lack of disclosure arguing that small group claims can be easily deconstructed to identify actual employees which can be a violation of privacy rights. When claims data is released to smaller employers, it is often released as “incurred” claims which include conservative assumptions on reserves – – the future costs of claims incurred but not yet reported.

In other cases when pressured for claims data, insurers counter requests with concerns that if they release data and a competitor does not, the competing insurer can cherry-pick better risks. With the exception of Texas, where House Bill 2015 requires the release of claims experience to employers down to as firms as small as two employees, small employers have little line of sight into claims and therefore little motivation to view insurance as anything other than a commodity to be shopped every year.

Insured group pricing is often calculated months in advance. It is an imprecise alchemy where uncertainty around a myriad of factors — future medical costs due to utilization trends, hospital and provider contract renewals, H1N1, Medicare reimbursement changes and pending or recently passed regulations – – can all prompt an underwriter to build margin into rates. Insured premium pools tend to be loaded with risk charges and margin to reduce the potential that the insurer will price premiums below their cost.

In situations where insurers need to expand margins or increase profits, the path of least resistance has historically been to build margin into insured pricing. In risking increasing rates above what the competitive market might bear, carriers rely on agent loyalty campaigns, customer apathy, the hassle of changing carriers and/or their own superior cost position above competitors to allow for margin expansion. If an insurer loses members to more competitive pricing, the remaining clients may more than cover the lost margin with their higher premiums. While it is a tricky endeavor, an insurer has to weigh the risk/reward of asking for more premium than the risk may actually require. If the insurer is too conservative in pricing, competitors will seek to steal market share. If the insurer gains market share by pricing to a lower margin point, profit percentages are diluted and Wall Street punishes the carrier for being ” undisciplined ” around pricing.

Larger employers understand that medical claims drive costs. Employers with over 100 employees are increasingly entertaining alternative financing arrangements such as minimum premium and self insurance to cut the risk premiums they pay to insurers. Generally, a self-funded program generates one-third the profit dollars of an insured health program. In doing so, an employer assumes more risk. However, that risk can be capped based on the client’s risk tolerance. As a self insured employer begins to make a connection between their own population’s health, wellness and healthcare claims, they begin to focus on higher value activities — holding vendors more accountable for managing costs.

Administration costs are generally higher in fully insured health plans – as much as 20+%. These administration costs include risk and pooling charges, administration, broker commissions, clinical programs, taxes and other administration. Insured claims costs include the cost of state mandated benefits which can add 8%-10% to premiums. As premiums rise, insured health plan administration charges often rise proportionately. Self insurance avoids state premium taxes, allows you to exclude state mandated benefits and reduces risk and profit charges. Self funding has been generally ignored by brokers and agents who do not understand alternative funding and who do not like the increased transparency of per employee per month administrative fees versus embedded commissions.

With the exception of CIGNA that uses the Great West chassis as a platform for small employer self funding, most insurers have not been eager to offer self funded products that essentially cannibalize their more profitable insured pools. If this is ever going to change, smaller employers must come to understand that they are paying a very high price for transfer of risk and given the fact that costs continue to increase, there is justifiable concern about whether employers are getting value for their insured arrangements.

This frustrating cycle of pooled increases and a limited sense of control over one’s destiny is driving smaller employers – – some as low as 50 employees to give serious consideration to self insurance. With average composite costs per employee now eclipsing $11,10o, a 110 employee company is paying over $1mm a year for healthcare.  For firms operating on slender margins, a 10% compounded annual increase in pooled insurance costs will consume operating profits in just a few years.  Liberating oneself from the rigidly predictable cycle of double-digit pooled increases is only the first step toward regaining control over healthcare costs.

What Next?  – Self insurance is not a panacea for rising healthcare costs.  Simply by changing the mechanism to finance your risk will not allay underlying issues around chronic illness and problems endemic in a workforce.  However, it is the first step toward focusing on the real problem – – the cost of healthcare delivery. Once self funded, the insurer can be seen more as a partner in managing your loss costs and can more credibly position themself on the client’s side of the table. With the barriers to entry being so high in healthcare, the only player large enough to compete with insurers is the Federal government. Most recognize that a Federal government that presides over Medicare with its serial under reimbursement of doctors, excessive fraud, abuse and deficits is today hardly qualified to supplant commercial plans. The key is changing the nature of commercial insurer cost-plus, pooled pricing. When it comes to small group insurance, one could argue that the managed care industry is failing to manage care.

It is time to consider new risk bearing models that moderate profit taking and reduce cost shifting between customer segments and deliver total transparency around all administrative costs and claims experience. In addition to encouraging market based small employer self insurance solutions, we should:

1) Allow for creation of multiple employer welfare association risk pools that offer smaller employers insured and self insured purchasing leverage coupled with a defined, highly focused plan designs that drive health improvement, wellness, chronic illness screening and coaching. Instead of granting rebates, create reserve mechanisms to invest any dividends resulting from a better than target 85% loss ratio into a premium stabilization fund to offset future increases for pool participants. Require a two-year participation in the pool to prevent adverse selection.

2) Require transparency for all claim and non-claim related expenses. This includes claims administration, clinical programs, brokers commissions, taxes, fees and any other non-medical claim related costs. Insurers should be allowed to include in the claim expense calculation those programs proven to drive savings. Insurers should also disclose any costs charged to the claims loss ratio that originate from an entity owned by that insurer. As insurers migrate into health services, employers must understand if insurer costs are being included as an administrative cost and as a claim cost. Regulators must approve any administrative program included as a claims expense to make sure it is a competitively priced, proven cost mitigation program.

3) Mandate the release of claims experience for all employers down to 50 employees. Do not hide behind HIPAA as a means of preventing the release of claim data. This is a red herring.

4) Create a small group self-insured solution with a maximum liability limit of 105% of expected claims. Retention expenses might run higher than traditional self insurance but it would offer greater flexibility and a line of sight on claims cost. Consider state-run self insurance stop-loss pools offering smaller employers dividend eligible non-profit pooling.

We should not wait for Congress.  States and the private sector have the means to improve imperfect reform to achieve smaller employer affordability goals. If we cannot successfully rein in these expenses, smaller employers will accelerate dumping coverage and in doing so, shift the burden of healthcare subsidization to the Federal government, exchanges, the states that manage them, and ultimately taxpayers.

The private sector has the skill to drive many of the changes necessary to fix gaps in care, improve consumer engagement, realign incentives and drive affordable options.  The question remains whether employers have the will to take the lead in driving reform.  Should smaller employers choose to self insure, they will quickly shift from commodity buyers to value buyers and in doing so, join the ranks of those who fundamentally believe that the only real means of preserving quality and achieving affordability is market based reform.

Be Careful What You Wish For America – The Debate Over Minimum Essential Benefits

President Barack Obama's signature on the heal...
President Barack Obama's signature on the health insurance reform bill at the White House, March 23, 2010. The President signed the bill with 22 different pens. (Photo credit: Wikipedia)

The Affordable Care Act is officially under construction.  The framework for the minimum mandatory levels of benefits offered through state exchanges is now being researched and will soon be ready for prime time debate.

The Institute of Medicine, a non-partisan research group, has been retained by Health and Human Services to conduct public and private planning sessions to help shape final recommendations on what standard levels of benefits should be required as a “floor” for all health plans.

The queue of industry and special interest groups increases daily as stakeholders wade in to offer personal perspectives on why certain levels of benefits should be considered as “essential”. The stories will be heart wrenching as individuals plead for broader coverage terms and looser definitions of medical necessity to cover a range of therapies treating orphaned or difficult conditions that do not neatly fit into today’s definitions of coverage.  The unfortunate fact also remains that the average consumer expects “essential coverage” to be synonymous with open access, comprehensive coverage, minimal out-of-pocket cost sharing and an affordable price tag.  In effect, everyone wants a Cadillac when the nation can barely afford a Corolla.

As the IOM solicits perspectives from a range of medical, academic, public and private stakeholders, it is gaining valuable insights into the opportunities and land mines associated with attempting to define a basic level of benefits that can guarantee affordable, sustainable and high quality healthcare.  Those states that have already walked the path of attempting to define mandatory benefits are perhaps the best leading indicators of the intended and unintended consequences of setting benefits levels too high or at more minimal levels.  States such as Maryland, Massachusetts and Utah have struggled and led efforts to set up universal and affordable benefits anchored by standard benefits and medical necessity protocols.  In determining what should be covered by commercial insurance and Medicaid, these and other states can offer valuable lessons to legislators seeking to establish the boundaries of the coverage requirements under ACA.

As the IOM and subsequently HHS consider the flood of opinions from stakeholders, a few unenviable considerations loom large:

Essential benefits will dramatically impact the future level of benefits many employers choose to offer.  Essential benefit levels will determine whether employers continue to offer healthcare and/or what benefits are no longer subsidized. Many believe that if HHS establishes a “national” level of essential benefits, it will become the floor as well as the “mean” to which many employers will gravitate their current medical coverage levels.

A national essential benefit design that establishes lean levels of benefits will prompt some states to consider mandating levels of benefits above and beyond those required in a national essential benefits design. A national design that is too rich could accelerate the budget crisis in states as more employers drop coverage sending employees into exchanges and expanded Medicaid pools increasing the financial burdens already crushing state coffers.

States will naturally argue for the flexibility to administer their own versions of essential benefits, largely because of fear over escalating obligations under Medicaid, legacy coverage and provider issues, the recognition that healthcare is local and that there is no such thing as a “one size fits all” plan.  Legacy budget deficits, the unique nature of each state’s demographics and healthcare delivery systems (single hospital towns vs. large healthcare systems, urban vs. rural care ) and the political mood of its constituents will figure heavily in determining the appetite of each state to advocate a richer or leaner level of mandated essential benefits

While fiscal hawks fear an essential benefit plan that is too comprehensive and therefore too expensive, there is the potential that more pragmatic designs could prevail leading to an essential benefits plan that is less expensive and better designed than many current plans in the market.  Plans anchored by primary care based gatekeepers, value based plan designs, effective cost sharing to promote personal responsibility and consumerism, and network tiering to ensure plans only reimburse at the highest level those providers that practice efficient, high quality care – are likely to run at significantly lower medical trends and in doing so, be able to support lower premiums over a longer period of time.

Change Behavior or Ration Access – Nationalized, single payer health plans offer rich preventive and catastrophic care but suffer the reputation of rationed access issues when delivering elective or non-emergency care. In a political environment where there is often no will to change the underlying behaviors of those utilizing the healthcare system, the only way to control the costs that arise out of unlimited demand and finite resources is to ration access and reimbursement.

CMS may soon be dealing with similar issues if delayed Medicare cuts are ratified by the 112th Congress. Medicare and Medicaid recipients may find themselves with rich benefits but fewer providers willing to accept reduced levels of reimbursement as payment for services. If the provider does accept coverage, the coverage will undoubtedly carry longer waiting times. Providers will either limit the number of recipients they treat or continue down the path of the “triage” encounter as they attempt to make up in volume what they are losing in unit cost.

It is important to note that access does not equal quality.  Yet, many Americans currently believe access is synonymous to quality. In a two tiered public/private system, access is as much a privilege as it is a right. The single payer country determines the pace of one’s access based on medical necessity. The ability to pay for the right to opt into private alternative delivery is the only way of bypassing a payer’s medical necessity and access protocols. While many argue that today’s current for profit system already functions in this capacity, the majority of medical necessity issues arise out of insured individual and small business coverage issues where there is no purchasing leverage and scarce clinical data to support broader coverage.  Individuals working at larger, self insured organizations generally do not have these issues as employers act as plan fiduciaries and have the ability to make the final decisions on medical necessity and reimbursement.

Larger Employers Still Offer The Best Coverage and Most Balanced Cost Sharing – In the last ten years, employee out-of-pocket health cost sharing has risen 149% while wages have only risen 37%. According to a recent Towers Watson survey, the composite cost of healthcare per worker was $ 10,212 in 2010. The average cost sharing contribution per employee was $2,292. The average American worker makes $ 40,000 a year.  The total composite cost of health care per worker as a percentage of salary is 25%.  Employees currently share approximately 22% of coverage cost but only 5.5% of the total cost of this coverage as a percentage of their own gross earnings.

These numbers do not tell a complete story.  Cost sharing is greater among individuals working for smaller organizations as most small employers tend to subsidize less coverage and have less flexibility to affordably purchase more generous plans.  In addition, the average median wage for individuals working for employers of fewer than 50 employees lags those working for larger employers.  The crisis of affordability has been most acute among those who can least afford it.

At the same time as small employers are dropping coverage or fatiguing under its costs, as many as 75% of employees in a recent PWC survey, said that they would prefer to be paid salary in lieu of benefits – opting to purchase healthcare as individuals through newly established exchanges.  It is interesting to note in this PWC study that many of these same employees grossly overestimated what they believed their coverage was worth in additional salary. The question remains for many employers and for those watching healthcare reform develop – can affordable and sustainable essential benefits be established that can incent smaller employers to maintain and even potentially, rejoin those offering coverage?

As many as 70% of Americans earn less than 400% of the Federal Poverty level – the current cut off for ACA offering pro rata subsidies to purchase healthcare through exchanges. If essential benefits begin to eclipse those benefits currently offered by employers and subsidies net a savings to consumers, we may witness a larger migration of employees and their employers out of employer sponsored plans. It then falls to the Congressional Budget Office to recalculate whether the larger base of exchange participants and subsidy recipients has turned a modeled $ 140B reduction in public spending into a massive drag on the national deficit.

A more basic level of affordable essential benefits could induce employers back into the market as well as usher in a return to defined contribution style cafeteria plans – An essential benefits plan anchored by 100% coverage for primary care, shared responsibility through a health savings account, tiered networks, centers of excellence for chronic care, primary care delivered through medical homes and/or gatekeepers and compliance incentives could achieve cost savings while offering coverage  greater than bare-boned mini-med coverage.

A lower level of mandated essential benefits could also prompt employers to reduce richer coverage to a new, more affordable common denominator.   In aligning their benefit plans to a national norm, employers could adopt a defined contribution benefits approach – choosing to fund up to the level of benefits required by law and then grossing up individuals’ salaries one time to afford them the opportunity to spend dollars as they see fit e.g. greater take home pay, purchasing of voluntary benefits, upgrading to more generous medical designs etc.

Better Coverage Does Not Translate To Better Health – Coverage and consumer advocates will be pushing for expansion of coverage definitions to include diseases and medical conditions that have historically been excluded from private insurance.  The definition of medical necessity will be debated as advocates argue that comprehensive coverage will translate into improved public health. One has only to look at financially distressed municipal and collectively bargained plans that offer rich, first dollar coverage combined with broad open access networks to see that better coverage does not translate to better health.

To define and mandate essential coverage is to walk a mine field of ethical, moral and social issues. Some therapies may not necessarily improve the status of one’s health condition but may prevent it from becoming worse.  The unenviable task of establishing a process for determining medical necessity is the first step toward the difficult process adopted by other countries who have wrestled with the cost/benefit of determining what gets covered and what does not.

The UK’s National Institute of Clinical Excellence which determines medical necessity and establishes the basis for reimbursement of certain therapies is often maligned for the difficult choices it makes regarding palliative care and determinations surrounding when and how it may pay for experimental therapies. This is the unenviable role of any payer. Whether it is government making the call or a for profit insurer, any thing that falls to the unreimbursed side of the ledger will be viewed as a diminishing coverage and ultimately public health.

Now is a time for austerity – The dangers of creating unsustainably rich benefits plans are real. Not unlike Medicare, a rich essential benefit plan that drives higher medical trends will contribute to rather than reduce the public debt. If employers choose to drop coverage and more consumers receive federally subsidized coverage, the market will reach a tipping point where federal expenditures for healthcare outstrip the government’s ability to pay.

Aside from raising taxes and increasing assessments for failure to cover employees, the government will want to pressure the provider side of the market to reduce the costs of its services.  If the private insurer market can not reign in the costs of a rich essential benefit design (and they will not), there is a strong possibility that there will be a renewed call for a public option.  Once enough individuals join a cheaper, taxpayer subsidized public option, the public option payer will begin to ration reimbursement to providers as CMS has done with Medicare.  While single payer advocates argue that doctors and hospitals would have no choice but to accept reduced single payer reimbursement, most industry professionals argue that price controls as a means of controlling costs will lead to diminished quality and reduced investment in innovation. This is happening today under Medicare and Medicaid.

The table is being set for another food fight around health reform.  As healthcare impacts every American, we can expect 300 mm opinions on what “essential benefits” should cover.  It is a critical argument at a historic time for our country.  Without introducing fiscal restraint and evidence based medicine into this debate over essential benefits, we may end up with a rich and totally unsustainable level of healthcare.  As a nation we are already suffering from the palpitations of fiscal heart disease and the obesity of public debt. Offering too generous essential benefits could very well induce a budget coronary from which it will be hard to recover.

Be careful what you wish for, America. You may get it.

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz

The War Between The States

US House of Representatives Voting Map for HR3962
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Christmas is the time when kids tell Santa what they want and adults pay for it.  Deficits are when adults tell government what they want and their kids pay for it.  ~Richard Lamm

The day after a mid-term tidal wave of anti-incumbency sentiment swept through Congress resulting in the GOP reclaiming a controlling majority in the House and closer parity in the Senate, a seemingly contrite President Obama took personal responsibility for his party’s dismal showing at the polls. In a carefully worded conciliatory message, the President shared that, “the American people have made it very clear that they want Congress to work together and focus their entire energies on fixing the economy.”

Newly minted House Majority leader, John Boehner, subsequently reconfirmed that the GOP would not rest until Congress had reined in government spending.  This would be partly achieved by deconstructing the highly unpopular and “flawed” Patient Protection and Affordable Care Act – a “misguided” piece of legislation that would actually increase costs for employers thereby reducing the nation’s ability to jump-start an economy that relies on job creation and consumer spending. In Boehner’s mind, government is not unlike the average American, overweight – it’s budget deficits bloated by the cost of financial bailouts, Keynesian stimulus spending and failure to discuss the growing burden of fee for service Medicare.

The President’s failure to acknowledge healthcare reform in his speech was interpreted by many as deliberate and only served to cement the perception that in Washington, it will impossible to have constructive dialogue around the imperfections and potential unintended consequences of PPACA. The White House’s resolve to defend its hard-fought healthcare legislation is likely to extend the polarizing partisanship that has come to characterize Congress. The impasse may very well spark a two-year period of bruising, bellicose finger-pointing over how to fix rising healthcare costs.

The absence of a veto proof majority leaves the GOP in a position of holding high-profile hearings and tendering symbolic legislation designed to expose PPACA’s limitations and its failure to address the core problem – medical inflation and its principal drivers.  The Obama administration and a Democratic Caucus will work to redirect legislative attention to the economy while working to protect the core elements of their health legislation – expanded and subsidized access for some 30M Americans, tighter regulation of insurance coverage and underwriting and an ambitious expansion of the role of Health & Human Services as a national oversight agency.  It seems that “reforming” reform may end up unlikely inside the Beltway setting the stage for regulatory skirmishes across state legislatures. We may very well look back on this period leading up to the 2012 Presidential elections as “The War Between The States”.

Healthcare civil war will result in intense competition for dollars.  Internecine fighting will flare across all lines – – between primary care physicians and specialists, community and teaching hospitals, brokers and insurers, employees and employers, as well as state and Federal regulators. Every stakeholder believes they are part of the solution, adding integral value to healthcare delivery.  Meanwhile consumers cling to the notion that the best healthcare is rich benefits delivered through open access networks where no administrative obstacle gets in between the consumer and the care they believe they need. The question becomes who is fit to referee and regulate this highly radioactive food fight.

PPACA MLR Regs May Reduce Competition – Recently promulgated Minimum Loss Ratio (MLR) legislation will spark a fundamental shift for insurers as they are forced to underwrite locally and account for profits exclusively by license and by state.  In higher loss ratio markets, insurers will need to price to their true cost of risk creating the potential for market volatility. In the past, regional and national insurers routinely redirected profits from lower loss ratio markets to subsidize higher MLR markets. This was particularly true when carriers were entering expansion markets in an attempt to create more competition.  New markets generally meant poorer medical economics for insurers who did not have enough membership to negotiate favorable terms with providers. This led to premiums priced to higher loss ratios and lower profit in an effort to gain market share and increase competition.

With final MLR regulations imminent, competition in certain markets may diminish as smaller market share insurers no longer have the patience or economic staying power to build membership.  If the threat of high loss ratios persisting in markets where rate increases cannot be approved, an insurer may attempt to withdraw from less profitable lines of business or a particular geographic market prompting a rebuke from a local insurance commissioner or HHS.  Insurers will now be constantly weighing the cost/benefit of a public fight that may taint their ability to do business in an entire state.

A New Type of Non Profit Insurer ? – In the Midwest, a different battle is brewing as Health Care Service Corporation (HCSC), the powerful Illinois based non-profit Blue, is drawing criticism from consumer groups over its $6B war chest funded by accumulated reserves – reserves that some claim are well above the necessary statutory limits and should be used to reduce premium increases.  Within historical market cycles, non-profit insurers and their reserves have played an important role in moderating medical costs as a non-profit can spend down excess reserves and in doing so, initiate a competitive pricing cycle that squeezes for profit competitors in select markets. Wall Street analysts closely follow insurer pricing cycles often portending lower managed care industry profits when non-profit insurer reserves reach too high a multiple of required reserves.

As hospitals and doctor groups consolidate and the supply side of healthcare repositions in the face of inevitable changes to reimbursement, non profits are recognizing that size and bargaining power matters. In a departure from normal excess reserve driven pricing, HCSC is building reserves, perhaps out of conservatism over an uncertain future or because they are looking for an opportunity to acquire another non-profit.

Should HCSC use excess reserves – essentially profits accumulated in four states – to potentially acquire a non-profit in another state, some regulators and consumer groups may argue that these reserves should be rebated to policyholders.  When a non-profit chooses more conservative reserving,  they give for profit competitors a potential pass from the pressure of having to moderate premiums.  Non-profits play a vital role but are not without their perceived warts. While clear exceptions exist in many markets, criticism of non-profit insurers is often leveled at their utility-like behavior – – limited innovation, bureaucratic insensitivity to customer service and waste.   As these non-profits become tougher and more formidable, they will begin to emulate certain for profit behaviors intensifying the debate in state legislatures over the nature of for profit and not-for-profit insurance.

Some states may condone non profit excess reserving practices – especially if there is a plan for non-profit to for-profit conversion. In these cases, a trust is established to convert the non-profit’s reserves to state control, presumably to be used to impact areas regarding public health.  Given that 80% of every state’s budget is dedicated to either “education, incarceration or medication”, a non-profit conversion can be a boon for a cash strapped state.   Losing a non-profit local insurer to for profit status is hard to explain to consumer advocates pushing for more competition among insurers but easier to ensure reelection by using one time windfalls to finance staggering state budgets.

Medicare Cost Shifting – As reform imposes restrictions on insurer loss ratios, it is also poised to shift more costs to the private sector through Medicare fee cuts – cuts that are expected to generate $ 350B of the estimated $940B of revenues required to cover the $800B price tag of PPACA. Congress, nervous over mounting evidence that added underfunding of Medicare reimbursement would only reduce access to medical services for seniors, has chosen to further delay these cuts in legislation.  The stop-gap delay on cuts known as “Doc-Fix” will challenge the upcoming lame duck session of Congress.  The moratorium on cuts expires in November, 2010, leaving the newly comprised Congress to wrestle with the highly unpopular consequences of further cutting Medicare.  Given that fee for service Medicare costs continue to spiral out of control, each month that Congress fails to pass these fee cuts reduces revenues earmarked to offset the costs of reform – – potentially turning PPACA from a bill that sought to reduce the public debt by $ 140B to a bill that would further increase our national debt by as much as $ 300B.

Regulatory Debates Over Premiums for Indivduals and Small Business– Healthcare civil war will further inflame as public spending in Medicare and Medicaid reimbursements are reduced – causing providers to cease accepting patients, ration access and/or cost shift more to commercial insurance. Medicaid already reimburses providers less than 70% of retail costs of care followed by 80-85% by Medicare. Commercial insurance picks up this cost shift currently paying $1.25 for similar services with the most disturbing costs of $2.50 being charged to any uninsured patient uncovered by public or private care. With the new public spending cuts, commercial and uninsured care costs are likely to rise higher. Some insurers estimate unit costs likely to increase to as much as $1.40.

As rising unit costs result in higher medical loss ratios, insurers will raise rates – prompting more state conflicts with regulators seeking to manage the optics of rising insurance premiums for individual and small business. New MLR regulations will require extraordinary underwriting precision as conservative pricing will result in lost market share or the potential for large premium rebates while under-pricing premium will result in the need to raise rates higher and in doing so, risk high-profile battles with regulators as they weigh the political optics of allowing proposed increases. In at least half of US healthcare markets, states have prior approval rate authority allowing them to effectively prevent insurers from collecting premiums required to cover loss ratios in excess of the newly mandated 80 or 85% loss ratio limit. History has taught us that price controls are effective political but ineffective economic levers to address underlying cost inflation.

The first shots of the rate adequacy debate have already been fired in California, Colorado, Maine and Massachusetts — all markets who represent a perfect storm of rising medical costs, budget deficits and a firebrand belief that insurers should be highly regulated, non profit utilities. The result has been a rising war of words over the right balance between rate regulation and historical profit margins of insurers.

The seeds of civil war were buidling for a decade prior to the passage of reform. Some industry observers attribute the ill-timed efforts of Wellpoint California to collect a requested 39% increase on its individual lines of business as the spark that rekindled Federal reform.  While the loss ratios in their Individual Medical line of business had clearly deteriorated as a result of declining economy and a loss of healthier membership, Anthem/Wellpoint failed to think across its entire book of business – an insured multi-line block where small group, Medicare Advantage and other lines of business were all generating profits.  The failure to correctly understand the enterprise risk of raising rates – despite their actuarial justification, cost Wellpoint/Anthem and the insurance industry dearly as calls for reform rekindled across the US.  Wellpoint has subsequently resubmitted lower requested rates, accepted higher loss ratios in its individual line of business and taken a hit to earnings.

A Social Contract with States – The for profit insurer conundrum is clear. Providing health insurance carries with it an implied covenant within every market in which an insurer does business.  This social contract suggests that insurers and other for profit stakeholders must be actively demonstrating community stewardship, andthat they are improving the health system, not merely benefiting by its dysfunction. Responsible stewardship is also in the eyes of the beholder – – in this case, regulators, politicians, pundits, consumers, and a range of stakeholders. In the upcoming battles that will wage within each state, it will become increasingly relevant in the court of public opinion that how one makes money in healthcare is as relevant to policymakers as to how much one makes.

A low pressure system is already building over New York, California, Rhode Island, Massachusetts and other blue states as they begin to re-assert their regulatory authority to support federal oversight of healthcare.  Red and blue politics now matters as states will be either guided by an ethos of  “healthcare is a public/private partnership anchored by employer based healthcare and consumer market forces that drive quality and efficiency” or a mindset that “healthcare is in need of radical reform – reform that begins with PPACA and most likely ends with a single payer system acting as the catalyst to drive the least politically palatable phase of healthcare — rationing of resources.”

A Ray of Sunshine ? – There may prove to be a silver lining if certain states become incubators for successful alternative models of delivery. States quick to embrace medical home models that  expand the role of primary care providers may make faster strides to control readmission rates, formulary compliance and emergency room overtreatment.  Additional local regulatory reforms could include all payer reimbursement reform which levels in-patient reimbursement among all payers. There is a need for expanded malpractice reform and a tolerance of compliance based designs that hold those seeking access to subsidized care accountable for greater personal health engagement.

The battles will wage up to the 2012 Presidential elections – – a vote that could very well determine the future of healthcare in America. A Democratic administration is likely to cement basic reforms into place and further placing near term faith in expanded access highly regulated insurance exchanges, rate regulation and the potential trigger of a public option if private plans are unsuccessful in taming medical inflation.  A 2012 GOP win would likely mean revocation of individual mandates, a scaling back of the role of exchanges, greater incentives to preserve employer sponsored healthcare and a focused but modest expansion of Medicaid to cover those most in need of a core level of coverage. The GOP and Democrats alike face a common challenge of tackling soaring fee for service Medicare costs and the eventual need to reshape a healthcare delivery system that is rewarded for treating chronic illness not preventing it.

Most states will be agnostic to the presidential elections, choosing to continue to pass regulations if they feel reforms are falling short of dealing with local access and affordability issues. Only larger employers in self insured health arrangements will avoid the crazy quilt of shifting multi-state regulations.

Robert E Lee once remarked, “it is good that war is so horrible, ‘lest men grow to love it.”  As with war, the politics of reform is a zero sum game.  Achieving savings means someone in the healthcare delivery system makes less money.  The war over healthcare reform will not be popular nor easily understood. Every American will be impacted. Fear and misinformation will rain over the battle field like propaganda. Yet, if we could agree on a guiding vision – improvement of public health, personal responsibility, elimination of fraud and abuse, torte reform, the digitalization of the US healthcare delivery system, the preservation of our best and brightest providers and a system built on incentives to reward quality based on episodes of care, perhaps we may achieve a public/private détente where we focus less on vilifying and more on healing a system, it’s consumers and our unsustainable appetites.

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz