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 ?
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.