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

High Stakes Health Reform – Employers: In or Out?

poker

It’s high noon for private healthcare. Over the last decade, large, medium and small employers that procure and manage over $1T of private healthcare spend for an estimated 180M Americans have been engaged in an expensive game of Texas Hold ‘Em – – wagering with and against a continuum of stakeholders that all seem to possess more powerful hands. As providers consolidate, insurers retrench and the government wrestles with obligations of an uncontrolled fee for service Medicare, the costs of staying at the final table are taking its toll.

To many veteran observers, it appears that employers may be on the brink of folding their cards. As finance and HR professionals consider the table stakes and costs to remain in the game, the Affordable Care Act (ACA) has suddenly provided a potential golden opportunity to step away from a fifty year obligation without incurring onerous near term financial consequences.

As individuals and small business have continued to lapse into the ranks of the uninsured, those small and mid-sized businesses choosing to continue to offer health insurance are coming to the realization that the Affordable Care Act will not result in the moderating of double digit medical trends. In the near term, some contend costs will continue to rise by much as 25-40% before the launch of 2014’s guarantee issue health exchanges.

Larger employers are already cynical to whether reform will actually work for them or against them. Bigger firms and collectively bargained plans are beginning to understand that if small and mid-sized employers drop out of offering private healthcare, the decline of employer plans will leave them as the sole remaining source for private insurance cost shifting. As the cards are turned, the outcomes are far from certain – – and as we have come to discover, business hates uncertainty.

A skilled poker player can recognize the ”tells” of players attempting to buy time or bluff in hopes of seeing another turn of the ACA river card. One can almost hear the private sector thinking: “Do I drop my insurance and pay a penalty that is considerably less than my current financial obligations to provide care?” “Do I keep providing coverage and hope that public policy changes drive improved quality and price controls that will get my costs under control?” “What if the GOP wins in 2012?” “What if Obama gets reelected?” Do I really think the $ 2000 penalty for failure to cover my employees will stay at $2,000 if costs skyrocket?” ”Do I wait and see what others at the table do not wanting to be the first to fold?” “How in the hell did I get into this game in the first place?”

It’s even odds at best when predicting how employers are likely to respond to ACA. What was once considered unthinkable – severing the social contract of providing healthcare to one’s employees – is now not only under serious consideration, but is enabled by a series of intended and unintended consequences resulting from the passage of health reform. Consider some of the emerging fact patterns:

 1) The Social Contract of Healthcare Has Changed under ACA– The Affordable Care Act has mandated that insurance offered through exchanges is “guarantee issue” – eliminating the potential for anyone with a pre-existing condition to be denied coverage or be “rated up” for health status. Historically, employers have worked hard to honor the implied social contract that employer sponsored benefits forged with their employees – – a contract that ensured that an individual would be offered guarantee issue coverage as part of a group purchasing arrangement.

The value of guarantee issue employee coverage coupled with the favorable tax treatment of sponsored benefits has maintained a private sector incentive to use healthcare as a tool to attract and retain employees. Employers are stepping back from this assumption as they consider costs, possible changes in tax treatment and the safety net of exchanges. Some may no longer feel the intrinsic value of offering coverage is worth the potential risk of continuing to provide it – particularly if escalating premiums and public to private cost shifting threaten to further erode earnings.

2) The Culture of American Business Has Changed – It seems less and less relevant whether a business is public or private. The nature of the US workforce and the firms that employ them have changed since the grey flannel days of the career employee. Public firms live quarter to quarter and an increasing number of private firms are either owned or operated by those seeking greater returns on private equity. Businesses are struggling to balance a desire to create long-term value and the very real pressures of an uncertain domestic and global economy.

The notion of investing in employee health improvement plans that may not fully yield returns for two to three years is an unattractive proposition for financial professionals dealing with the need for more immediate financial synergies. The burden of healthcare is weighing on employers and they are doing the math. If penalties for dropping coverage create an opportunity to arbitrage the cost of healthcare, firms could see a net windfall of as much $ 2,000 – $5,000 per employee. This savings expressed as additional earnings per share or as a multiple of earnings is too attractive to not consider as employers push for cost savings and higher EBITDA. As the average American now works for eight different employers over the course of one’s professional life, traditional incentives to create longer term employment such as defined benefit pension, plans, retiree medical and rich employee benefit plans are disappearing – – unless explicitly negotiated as part of a collective bargaining agreement. Employers are asking the difficult question– “would employees rather have a job or healthcare?”

3) Small and Mid-Sized Employers Don’t Manage Healthcare As A Business Risk – Employers have spent too much time looking at healthcare as an expense and not as a business risk. Any effective risk management process first focuses on identifying all the factors driving losses. As data reveals unique risk patterns, the risk manager seeks ways to eliminate or mitigate risk, models scenarios for retaining risk and assesses the most cost-effective way to finance their risk. Ultimately, risk transfer in the form of insurance is the last step an employer employs. The more risk an employer retains, the more they seem to understand the correlation between loss control and loss ratios.

Too often, health insurance is managed as an annual marketing (risk transfer) exercise with little time dedicated to the initial steps designed to diagnose and reduce underlying cost drivers. Since 80% of all group healthcare expenses arise from medical claims and at least 60% of these claims are related to modifiable health risks, one would think employers would see the value in employing more resources to impact and understand these major costs. It seems many firms lack the will, resources or energy to intervene in employee and dependent health and lifestyle. The consequences of this failure to intervene are self-evident in the escalating rates of obesity, lack of compliance with basic preventive health programs and a rising rate of chronic illness among the working employed.

4) Human Resource Generalists Often Lack The Resources and C Suite Support To Tackle Tough Change – HR is being asked to more than ever – with fewer resources. Ratios of HR professionals to staff have steadily declined in the last decade while the costs of managing human capital have soared. The historical inclusion of employee benefits and healthcare as part of their universe of HR responsibilities reveals the best and worst in firms. For many public and private employers, healthcare and employee benefits are secondary skill sets to HR generalists who are focused on a range of business and human capital issues.

In these difficult economic times, HR is often focused on limiting disruption to employees – – ensuring broad open access networks, limited medical management oversight and minimal hassle. The system that has resulted is one whose incentives are perversely built around treating chronic illness and not preventing it. HR teams are understaffed and often unable to build the infrastructure required to assess, mitigate and manage employee population health risks. The added burden of regulations such as HIPAA and ADA have spooked employers from wanting to be too prescriptive with employees over lifestyles and chronic conditions that may be borne out of a personal failure to manage health. The C Suite has expressed anger at increases but has generally been unengaged – electing to intervene in the eleventh hour of renewals instead of actively managing and supporting the internal efforts required to rein in their second largest cost beyond payroll. Firms that have shown HR and the C Suite engagement are posting as much as 10% lower annual medical trends according to a recent National Business Group on Health survey.

5) The GOP has not offered a coherent alternative to ACA where employer sponsored benefits would serve as a linchpin to market reforms – It seems clear to most industry insiders that if ACA is left to its current design – replete with its incentives to drop coverage, increase essential benefits, and avoid focus on personal health improvement – it will begin to unravel employer based healthcare. Providers have long since contended that private healthcare has subsidized public care as government cost shifts in an effort to reduce its growing burdens of Medicaid and Medicare.

Without private insurance as a counter balance and reimbursement incubator for more aggressive market based solutions, the current trajectory seems to be pointing us towards a single payer system. As larger numbers of consumers are pushed to purchase through exchanges dominated by a limited number of private commercial insurers, escalating costs and lack of choice may cause consumers to call for a more affordable “public” option beyond private insurance. Some feel the architects of ACA specifically designed the legislation to set these wheels in motion. The GOP has not seemingly connected the dots to articulate to the American people why the private sector should serve as the catalyst for market reforms. Many feel a single payer system within the US is necessary and inevitable given our infinite demands and finite resources. Others argue, the private sector has never really legislatively enabled to fulfill its role as a market force.

A political opportunity exists for an employer advocate to emerge in Washington – offering a blueprint that anchors employer sponsored plans, unleashes true market forces capable of forcing rationalization of oversupply, reducing variability in outcomes, restoring the role of the primary care provider, improving quality and enabling universal transparency.

6) ACA May Incent Employers to Dump Coverage – ACA offers employers a lower healthcare exit cost by pegging incentives to drop coverage well below the true actuarial cost of healthcare. A large percentage of industries will have workers eligible for generous federal subsidies (400% of the FPL). Many will quickly see the logic of dumping coverage and in doing so, immediate improve struggling margins.

Other employers will be hesitant to play first mover but will gratefully follow a competitor who may choose to dump coverage. CBO estimates for coverage dumping are extremely low in the first years of exchanges. The cost estimates of ACA also fail to identify the rising costs of federal subsidies if more workers buy through exchanges. The only real impediment to dumping healthcare is business’ distrust that the current penalty for dropping coverage will remain at $ 2,000. Many believe that future CBO estimates and GAO studies will reveal the need to adjust employer penalties to track with rising medical inflation. Today’s $ 2,000 penalty could morph into tomorrow’s $6,000 cost per exchange covered insured. Burdened by this knowledge, employers are justifiably cynical toward a government that remains $ 38T underfunded in its existing Medicare obligations.

7) Few Employers Seem Willing To Play The Role of Market Force – ACA passed with significantly less resistance from business than the united private sector front thrown against Hillary Care in 1994. In the 16 years since Clinton health reform was defeated, retiree and existing employee medical obligations have swelled along with the average costs of collectively bargained public plans. There is an increasingly emotionless calculus being discussed in private and public board rooms of America.

Do we want to be burdened with trying to save private healthcare? Who should fix it – employers or taxpayers? The omission of business leadership actively arguing in defense of its role to assume the role of market force for change suggests that employers are quietly preparing to get out from underneath their obligations if an opportunity presents itself.

8) Employers Don’t Believe Government Can Fix Fee For Service Medicare – Employers understand healthcare is a zero sum game. As government rations reimbursement to doctors – underpaying for services in Medicare and Medicaid, the private sector is overcharged to compensate for the payment inequities. Most employers are skeptical of the government’s ability to reign in fee for service Medicare obligations leaving one logical path – – Medicare hospital and provider fee cuts getting shifted to the private sector. This only escalates the rising healthcare cost burden – forcing employers to artificially shoulder CMS’s inability to medically manage fee for service Medicare utilization.

Most economists agree that unless we fix a fee for service Medicare, the current entitlements will sink our economy. Employers do not sense that government has the will nor the acumen to tackle their own third rail of entitlements and in doing so, many employers prefer tax payers shoulder the burden of the fix, not shareholders.

9) Smaller and Mid-Sized Employers Are Trapped in One-Size-Fits-All Pools – Individuals and small business have been the initial focus of reform. Historically, most individual and small insurance programs have been fully insured and pooled with groups of a similar size to create an adequate spread of risk to actuarially predict future costs and to minimize premium volatility due to catastrophic losses.

Most small employers have been stuck in a cycle of double-digit increases as costs of care rise and insurers aggressively manage loss ratios across their entire insured pools to protect profits. A small employer often has no access to their own claims information and as such, sees little value in adopting more disruptive plan designs that might improve their own workforce health status. In the final analysis, an engaged smaller employer ends up being blended with less engaged employers and has little ability to impact their own premium increases. As a result, small employers have become conditioned as commodity buyers of insurance and regard efforts to control losses through workforce engagement as a waste of time. Over the last ten years, insurers have benefited by laws that have precluded smaller employers aggregating purchasing power outside of these carrier pools.

Regulations that restrict the formation of multiple employer welfare associations (MEWAs) have limited smaller employers’ ability to establish “ safety groups” of like-minded employers willing to engage in more aggressive designs focused on reducing trend. The myth that self insurance is inappropriate for smaller employers and the nature of commercial insurance –which often steers employers back to insured arrangements, gives small employers few options. The passage of ACA will create similar insured pools in exchanges essentially replicating existing carrier pooling methodologies that have proven ineffective in controlling medical inflation. With the introduction of minimum loss ratio requirements and tighter community rated pricing, profits will be smaller but costs will continue to rise.

10) Unions Plans Have Not Shown A Willingness to Entertain Designs That Could Protect Their Own Long Term Financial Viability – Collectively bargained plans are some of the richest benefit designs in the US. Unfortunately, the most well insured people are often our most over treated, not our healthiest. One might even argue that the absence of incentives to become better consumers conspires to keep collectively bargained plans the most expensive and inflationary programs in the market.

Couple this with a captive, aging workforce that is descending into chronic illness and one can see how employers and local governments could be very tempted to shift this population risk to a public option pool where risks can be more adequately spread across other employers and/or taxpayers. Many municipal and collectively bargained plans are likely to exceed the federal maximum allowable cost thresholds triggering a “Cadillac” tax in 2018 – incurring an excise tax of 40% for plan costs that exceed $10,200 per individual and $ 22,500 per family. The current trajectory of most bargained plans has them eclipsing these exorbitant tax triggers well before 2018. Unions have historically been reticent to adopt more innovative designs that spur their members to change the way they access the healthcare system. These solutions include participating in premium networks that reimburse medical providers based on value – – directing at risk and chronically ill patients to proven centers of excellence, reestablishing primary care gate keepers and creating incentives for employee health engagement that shifts costs to those who are not compliant with choose health compliance guidelines.

In the next two years, the stakes will only climb in the cat and mouse game of healthcare. Those who advocate private sector market reforms are hoping the symptoms of rising employer resignation are temporary and motivated by a changing political and economic climate. Most believe business can play a vital role in reshaping healthcare delivery by demanding transparency, outcomes based reimbursement, personal responsibility, employee engagement and public policy changes that force market reform and better competition.

Changes should include – – all payer legislation to increase the field of competing payers, disclosure laws like Texas HB 2015 which requires insurers to release claims data for employers as small as 100 lives. Without data, smaller private sector employers are unable to focus on their true underlying cost drivers – the state of employee/dependent health and the incentives that do not exist to promote effective prevention.

Most business leaders seem to favor the notion of smaller government, reduced public spending, effective regulation and market based reform. Healthcare is emotionally charged. It impacts every voter and as such, politicians shy away from the difficult decisions around changing behavior. The real question for the private sector is whether it is willing to step up and assume its role as a catalyst for change or whether we have passed a critical tipping point as a society where our near term profit focus and increasing agnosticism to how we achieve those profits sets in motion an irreversible change that dismantles the last predominantly private system left in the industrialized world.

By playing the right cards, employers may still be able to preserve the best parts of private healthcare and begin to lead a process reelection hungry politicians do not have the will to take on. In winning this poker game of private healthcare, business can redirect government to follow its lead and focus on fixing fee for service Medicare and Medicaid.

America needs its businesses to remain in the healthcare game. The question remains unanswered whether employers will rise to the call – – or fold their hand.

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

Stalking the Public Option

Health care systems and single payer
Health care systems and single payer (Photo credit: Wikipedia)

The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences. Stephen Dubner and Steven Levitt, Freakonomics

I hear it restlessly moving off in the distance, the way spring struggles and finally gains momentum through the mud season.  It hesitates, sending subtle harbingers of change in the form of a warm wind or the scent of new growth.  The public option is stirring like a new shoot poking out of the decay of an old stump. With it, a next stage of reform is already forming even as Managed Care 2.0 struggles to gasp its first few breaths.

It is strange to be speaking of the next stage of reform years before the majority of Managed Care 2.0 regulations are due to take effect.  However, in the land of unintended consequences, no one can predict with certainty how healthcare is likely to evolve.  We do know that no one from the political middle, left or right is convinced that this first iteration of health reform will result into a system characterized by affordable, high quality care.  Managed Care 2.0 is merely a brief stage in the metamorphosis of the last private healthcare system in the industrialized world.

Some believe that the US’ best chance to salvage its mounting public debt, socioeconomic polarity and physical vitality is to eventually yield to a single payer system that can ensure coverage all of our citizens.  In that brave new world, those capable of opting out into private care, could do so on their own dime and on an after tax basis. Critics of single payer argue that an entitlement of this magnitude only stands to propel the nation toward record deficits, hyperinflation and economic ruin. The very thing that has made the US great, conservatives argue,  is its ability to avoid safety net entitlements that eventually become hammocks. One thing is for certain: Reform in its current form will do little to alter the supply side of the business.

Change is a scary proposition for 180M Americans who believe the devil they know (employer based private coverage) is preferred to a government run system. Seniors are doing the math and wondering if Medicare will default on their watch. More than 50% of these same seniors, when polled, shared they do not want a government run healthcare system – even though Medicare is a government run system.  People are confused, angry and wary.  To attack the real crisis of affordability at this time is an even scarier proposition for politicians who want to be reelected. Yet, The Patient Protection and Affordable Care Act is now law and despite its obvious flaws and potential for unintended consequences, it is unlikely to be repealed or deconstructed.  For better or worse, it is the foundation for Managed Care 2.0.

The building blocks of the Patient Protection and Affordable Care Act are insurance market and access reforms — legislation that has little to do with moderating rising medical costs.  It’s not that those that conceived the legislation did not understand or consider more draconian steps toward achieving affordability.  However, no on wants to break that news to the American people. It would be too scary a bedtime story for adolescent, recession sick America to hear about a future where tough decisions will need to be made about who gets how much care.  The story would not have clear heroes and villains but be cast in an ambiguous gray world of ethical and moral dilemmas — do we reduce reimbursement to our revered doctors and hospitals? How can we assure that our best and brightest continue to practice medicine?  Do we cut Medicare? Will venture capital, public and private equity flee out of healthcare profoundly effecting research and development?  How do we tackle the march towards chronic illness of Americans who are obese and unable to take personal responsibility for their health? Should we ask all Americans for a durable power of attorney so we have the ability to make the hard choices about end of life care?

Is Massachusetts a Mature Version of Managed Care 2.0 ?

The next chapter of the managed care story is being read aloud in Massachusetts. Already having achieved universal coverage through reform, the Bay State is seeing costs in its merged individual and small group pool continue to surge. In an election year game of cat and mouse, Governor Deval Patrick is restricting non profit insurers to live with rate increases well below those required to cover the costs of ever increasing medical utilization.  When Massachusetts passed reform, it covered all individuals but simply did not confront the underlying factors contributing to rising costs.  Before you shout, “Those damn insurers,” remember that 95% of Mass’ insurers are not for profit.

To add insult to injury, the Massachusetts legislature has recently proposed a bill that would require any physician seeking to be lisenced in the Bay State to accept Medicare and Medicaid reimbursement levels.  It may be time for Kaiser to move into Massachusetts as the alternative employer of choice to the state.

Most new Massachusetts insureds can’t find a primary care doctor as too few are left after years of under reimbursement. This leaves our newly insureds — many of whom are chronically ill and require coordinated care — to access the system through the least efficient point of entry, the emergency room.  The state’s not for profit insurers are in a profound pickle.  They have statutory reserves that will soon be depleted if they cannot raise rates.  However, it is an election year and the governor is using an age old lever, price controls, to buy time, point fingers and escalate the debate.  If this were allowed to play out, the insurers would be unable to meet legal reserve requirements within 24 months and be out of business in the state — leaving the need for a single payer to assume responsibility.

Why is There Not More Competition Between Health Plans?

Where are the competitors you ask?  When insurers are raising rates 20%-40% for small business, why are there no new entrants to steal market share as is often the case in other industries primed by a free market pump.  Simply put, the barriers to entry are too high for new entrants.  The economics of provider contracting (which drive 80% or more of a payer’s costs) are such that a payer has to have membership to get the best economics from a provider.

In many US markets that are dominated by a handful of players, the cost of building market share to achieve similar economics to the market’s largest competitor is too high — particularly for a public company.  You essentially can only enter a new market by purchasing a competitor – – which is expensive and carries enormous execution risk for the capital being employed.

For example,  trying to unseat a deeply entrenched Blues plan with 70% market share and most favored nation pricing deals with hospitals, is an almost impossible feat for any new payer.  No insurer has the financial will to enter a new market against a giant competitor that controls as much as 50% of the individual and small group market — a market where margins are largest.   A further complication arises if that entrenched competitor is a non profit sitting on huge reserves and you are a for profit company expected to show earnings improvement quarter over quarter. No shareholder or private equity owner has the patience to wait out the price war that you would inevitably engage to take market share.

So, who can compete with a large competitor squatting like a toad with a disproportionate amount of market share? United Healthcare?  Aetna? Harvard Pilgrim?  Kaiser? Bzzzzzzz!  Sorry, wrong answer.  It is the government.

Ah yes, the dreaded public option defined by some as “Medicare Lite,” ” Obamacare” or ” Death Panels for Granny”.  Over time, it would represent a basic package of essential services consistent with so many other nationalized plans across the world.  Many believe that a public option is really the only viable way to create competition within markets where competition does not exist.  Other see it as a Trojan Horse leading to unfair competition where taxpayer dollars are used to subsidize the cannibalization of private care by a public plan.  The goal: single payer, socialized medicine.  So who’s right ?

Why Not Introduce the Public Option In Markets With No Competition?

Here’s the dilemma: If a public option were to be created, its reimbursement would likely be linked to Medicare. If a larger percentage of insureds reimburse doctors and hospitals at Medicare levels, providers would revolt contending that public option reimbursement is inadequate to cover the true costs of care. Critics argue of rationed provider reimbursement note that US providers make 8.5 times the average salary of a worker in the US and only 2 times the average salary in other Western countries.  Our best and brightest seek medicine and in doing so, deliver some of the best care in the world. ” If I get cancer” asserts one anti-reformer, ” I want to be treated in the US where I have the highest probability for survival.” Naysayers argue that our outcomes are actually worse than other industrialized countries whose reimbursement systems have created systems that are characterized by primary care and smaller secondary and tertiary care systems.  “The US is the diametric opposite”, contends one critic, ” we lag many nations in critical public health indicators. In the US, the insured live longer.  Outside the US,  everyone lives longer – not just those who can afford healthcare.”

Doctors have long contended that like it or not, their ability to cost shift to private healthcare enables a less than optimal equilibrium that holds our broken system together. With a public option tied to Medicare, doctors would find a larger percentage of their patients policies reimbursing at lower levels.  This would be abetted by the fact that insurers would be losing market share to a lower priced public option alternative.  As public companies  they would have to continue to lower premiums to keep pace with a public option that has better economics or lose market share — either way suffering an operating profit death by a thousand cuts. Supporters for the public option view this economic transformation as an inevitability of eliminating waste, inequity and over-treatment.  The dollars are there, many contend, they just need to be redistributed.

The reimbursement differences between Medicaid, Medicare and private insurance are real and pronounced. We know in New Jersey for example, there are three levels of hospital pricing reflected in state regulations.  More than 500% of the federal poverty level (FPL) is considered retail charges.  Between 300% and 500% of the FPL can be charged at 115% of Medicare and below 300% of FPL is charged at the state Medicaid fee for service rate.  The range of costs that can be charged to uninsured individuals vary dramatically.  For example, the charges for back surgery for a 500%+ FPL patient range from $185,000 to a startling low of $13,000.  The reimbursement for an under 300% Medicaid patient averages around $5,800.  How one is allowed to reimburse hospitals and doctors determines much of their fate as a payer.

Should the government introduce a single payer, it would reimburse providers at lower levels than private insurance which would allow it to capture market share through lower costs resulting in lower premiums.  In 2014, consumers concerned about the rising cost of care delivered through newly formed state insurance exchanges, would seek the lowest price plan.  If that choice was a public option, many would be likely to try it on for size.  So far, so good?

There is a scenario where a large percentage of those currently privately insured move from an exchange plan to a public option exchange alternative. The more participants that join the public pool, the greater the purchasing power the government can wield in negotiating fee increases to providers.  As the economic advantage between a public option and private insurance widens, private insurers start to withdraw from markets.

Much of healthcare cost control is achieved through provider reimbursement contracting but it only goes so far.  As physician and hospital reimbursement decreases, fewer individuals stay in or enter medicine leading to reduced capacity.  Access to care becomes an issue resulting in a delivery system that is anchored by rationing and triage.  This transformation toward rationing access is inevitable in any system where there are limited resources and infinite demand. Many economists and health policy experts would argue that our current course is untenable and that managing healthcare within a finite annual appropriation is not a bad thing.  Affordability is, after all, a zero sum game.

Can The Public Option Compete Without Medicare Reimbursement?

If a public option is introduced but not allowed to index reimbursement to Medicare could it survive ? Certainly a public option not anchored by Medicare rates of reimbursement would experience the same challenges that any insurer experiences when trying to enter a new market.  A public option may have initial advantages due to lower administrative costs and non profit status but as a level playing field competitor, it requires additional infrastructure to pay claims and administer clinical, fraud and utilization management programs to control cost. Hospitals and providers would be reluctant to give a new public option better economics than private plans for several reasons — the knowledge that a stronger public option means reduced reimbursement over time, the awareness that any government plan allows less of an ability to negotiate rates and the recognition that a public option without members has no real purchasing power.  Like credit, one has to have it to get it. Competitive contracting economics come with leverage. Leverage is membership.  The more members you have, the better the rates you can negotiate.  No members, no competitive contracts.

Fear not, the public option has the advantage of using tax payer dollars to initially price premiums at a loss (charges for care will exceed premiums received ) until the it takes on enough membership to be self sustaining.  Initially insurers would try to cherry pick against the upstart public competitor, running off poorer risks to the public option.  However, the deep pockets of a public option funded by tax payer dollars can outlast any private plan.  The balance in the market shifts and the public option gains equal or better financial footing than its for profit foes. The twilight of private insurance is at hand in a 2.0 world.

Some question whether a public option can delivery similar clinical and utilization management as private plans to ensure cost effective delivery of care and limited abuses by providers trying to make up in quantity those dollars that they are losing in reimbursement. After all, unit cost discounts can only go so far.  The holy grail of medicine is managing care in a more integrated fashion, eliminating unnecessary treatments and keeping people healthy — none of which get rewarded through today’s treat vs. prevent chronic illness reimbursement system.

History suggests Medicare and Medicaid have not been nearly as diligent as private insurers in fraud, medical management and waste prevention.  In fact, while government run plans have an administrative cost that is one-third of private for profit insurers, fraud and abuse represent an additional 10% or $$100B per year. The savings achieved through razor-thin administration are bleeding out through the thousand cuts caused by laissez faire medical management. It’s a fair question to ask whether a single payer would really be able to manage care and outcomes or just manage access and reimbursement.

What Next?

Insurers understand that Managed Care 2.0 is just that — a next stage in an irreversible process of transformation.  Their greatest fear did not immediately occur – the establishment of a federal rate authority administered by Health and Human Services.  However, if minimum loss ratio thresholds prove inadequate to contain costs ( and they will prove inadequate ), we are likely to see the two headed beast appear where we are asked to pick our poison — rate controls or a public option. Prior approval of rates are already embedded in 50% of US markets.  Rate debate is happening as we see Massachusetts and others grapple with little imagination around the reality that access without affordability is like a flashlight without batteries — it doesn’t work.

My guess is by the time health exchanges are established for individuals and small employers in 2014, costs will have risen another 40%.  The government will realize that $500B of Medicare cuts to finance access for new insureds did nothing to reduce its $38T unfunded liabilities. Medicare will continue to hurtle towards insolvency until the real cost containment legislation is passed.

The average cost for private insurance will increase with mandated coverage minimums and guarantee issue, non cancelable coverage. An individual above 400% of the poverty line will find it hard to afford coverage and may spend a large percentage of their discretionary income on health insurance.  Larger employers are likely to pull up the drawbridge and begin to slowly cut coverage.  Mid-sized and smaller business will do the simple calculus around whether they keep or drop insurance. No one will want to be the first guy to drop coverage but no one wants to be the last guy who pays for the $15,000 aspirin as cost shifting hits its high water mark. A public option could provide the air cover employers need to slowly step away from employer sponsored coverage.

The middle class will take it on the chin as they always do.  At this point, we will rally around the cry for affordability.  The pitchforks and torches will once again appear and we will look for a common enemy.  And out of the woods, crashing across the growing chasm of cost will fall the public option.  It will be hailed as the panacea for competition and sentinel control over for profit players.  It will usher in a new era and it may very well set in motion the next phase of Managed Care 2.0 – – an era characterized by the death of private insurance.

Depending on where you sit, you will either be dancing around the bonfire or burning someone in effigy.  One thing is certain, more change is coming.