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.

Is Your Lack of “MQ” Costing You Money ?

Image by I like via Flickr

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

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?


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

Dear Dad

Senate Passes Insurance Industry Aid Bill
Image by Mike Licht, NotionsCapital.com via Flickr

I’m too young for Medicare and too old for broads to care.  – Broderick Crawford


I got your messages about healthcare reform and your concerns over the future of Medicare. Sorry I did not call you back.  A gigantic tree fell on our entire town during a recent Nor’easter and our local utility, Connecticut Light and Power lost power.  They kept waiting for someone to come turn on their lights.  About four days into the blackout, a middle manager asked, ” isn’t that supposed to be our job?” Within 24 hours, the trucks were rolling.  More about utilities and Cablevision later….

A quick answer to your most urgent question:  I have read the Patient Protection and Affordable Care Act – (all 2400 double spaced pages )  and there is no “Zhivago” clause that will require you to house an entire family of illegal immigrants in the first floor of your home. I think that was a rumor started by Rush Limbaugh or someone else on Oxycontin.

How could Congress pass sweeping legislation at a time when we are supposed to be entering the age of austerity? How did this happen, you ask ? Politics has trumped policy.  This is more about claiming the moral and legislative high ground than it is about tough love change.  Yet, don’t panic. This reform is just the beginning and it will usher in a new universe borne out of intended and unintended consequences.  It may actually save some lives and eliminate some practices that have lead to massive inequity and imbalance in the system. Like it or not, reform has become the raison d’etri of this administration and Congress.

We all agree the healthcare system is broken.  Just ask all the men who now have glowing prostates from irradiation treatment.  One day they are being told their PSA counts are high and that they should count their lucky stars that it was detected early.  The next day, the test’s founder Dr Richard Ablin MD criticizes that 30 million men undergo PSA testing at a cost of $30 Billion and “the test is hardly more effective than a coin toss.”  He goes on to lament, ” I’ve been trying to make clear for many years now that P.S.A. testing can’t detect prostate cancer and, more important, it can’t distinguish between the two types of prostate cancer – one highly invasive and the other unlikely to spread.”  Given the risks for impotence and incontinence, just thinking about it makes me need to go to the bathroom.

Now, where was I ?  Oh, yes, Barak Obama actually started his 2008 Presidential campaign talking about healthcare reform not health insurer reform. He was talking policy and that captured the imagination of industry insiders who felt someone finally understood that you cannot fix the problem of covering more Americans without attacking some of the underlying cost drivers – fraud, oversupply, consumer demand, chronic disease, lack of primary care providers and cost shifting to the private sector by Medicare and Medicaid. And the waste ! Heck, my cardiologist has a toy drawer with Philippe Patek watches. And he is “in network”. Reform looked like it might have some bi-partisan legs.

Yet, the Republicans wanted no part of Obamacare.  It was not as if they had an actual comprehensive plan themselves.  They intuitively understood that if The President’s reform actually succeeded, the GOP would probably not be back in charge of Congress until the Knicks had made it to the NBA Finals. GOP Minority leader John Boehner was heard to remark, “Damn it, if we are going to further sell our souls to the Chinese, I would prefer to do it with tax cuts.” The House Democrats preferred to mortgage our kid’s futures by launching a healthcare plan that expanded coverage but avoided the harder conversation about cutting costs. The President initially kept away from the partisan food fight, choosing instead to sit outside Congress smoking a cigarette with Michigan’s 15th district representative John Dingell who would amuse him with stories about the good old days when Dingell was a freshman legislator under US Grant.  The fact that Dingell kept calling the President “Osama” did not bother him.  The fact that Dingell was not wearing trousers did.

On December 24th, the Senate passed a more conservative version of reform aided by flinty Republican Olympia Snowe. There were concerns from liberal Dems that the Senate bill did not go far enough. It did not include a public option, free diet soft drinks in the Senate kitchen, or a cosmetic surgery tax that would generate an estimated $ 50B but could cause California to lose it buoyancy and sink into the ocean.

Somewhere along the way, an ex-male model Republican named Scott Brown got elected Senator in Massachusetts replacing recently deceased Ted Kennedy (Ted did not look very good in swim trunks and in fact,  learned to swim much later in life).  With the new GOP underwear model, the Senate Democrats lost their precious 60th vote that had given them a super majority capable of defeating any GOP filibuster attempts.  Healthcare and other grand legislative ambitions were suddenly on life support.

The White House quickly abandoned health policy for health politics.  An angry populism was swelling among overweight and jobless Americans and it needed a flint and steel to ignite.  The steel would be the obscenity of 45M uninsured in America.  The flint must be a universally loathed symbol of bold-faced greed and social indifference.  No, we are no talking about AIG.  We are talking about – the health insurance companies.  The troika of President, Pelosi and Reid proceeded to tear a page from the Lenin and Trotsky polemics playbook.  In a brilliant audible, the President understood that to unify a people, you must create a common enemy.

Over a period of months and with the help of his brass knuckled Windy City capo, Rahm Emanuel, the President launched an amazingly effective push to galvanize Congress and the American people around tackling healthcare in two phases.  The first phase would be expanding access to all Americans and convincing them that we could pay for it with a series of stakeholder taxes and financial cuts that would not impact seniors, consumers, or increase the overall public debt.  At one point, he even promised free Cialis to anyone who was experiencing impotence induced fiscal anxiety.  Phase one would seek to curtail the nasty practices of those greedy, soulless insurers.  Many of those who agreed with the President ironically owned health insurer stocks in their retirement portfolios but were angry at the poor returns. The goal would be to punish insurers making them less profitable and turning them into happy, hamstrung utilities – just like Connecticut Light & Power.

Phase two would require the uglier duties of trying to cut costs.  This is the political equivalent of french kissing a cannibal – risky business.  This must involve Medicare fee cuts, reimbursement reforms, taxes on junk foods, raising taxes on individuals, means testing to determine relative costs of entitlements, regulating the necessity of medical services to ensure markets are not saturated – – all of which would antagonize powerful stakeholder groups and probably upset the balance of Congress at midterm elections. The mantra became “Get everyone under the tent”  (and then if costs get really out of control, we can always declare marshal law).”

The strategy would require forcing the House democrats to accept the Senate version of health reform passed as of December 24th, Dems could then pass a second bill that would give the House Democrats a chance at reincorporating certain elements of their original legislation. Ultra liberal and blue dog democrats were wary.  After all, it was a mid-term election year. They were not sure they could walk the plank for the party, risking their own reelection for the sake of voting against the wishes of the voters back home.  Meanwhile the GOP grumbled in the corner about “clean sheets of paper” and “starting over”.  The GOP tendered a late proposal to cover 3M out of 45M uninsured.  This number just happened to coincide with the number of uninsured Republicans.  Sarah Palin even started a rumor that global warming was being caused by excessive methane release from overweight Americans.  She suggested a “gas tax” that would charge $100 for every pound a person is over their senior year of high school weight.

The President needed to start “persuading” swing voters in the House.  He knew the original House legislation passed with only a five vote margin.  No one was sure how many of those Democratic “no” votes were genuine or whether a few blue dogs were given permission by the Democratic caucus to vote “ no” to manage the optics that they were standing up to the party. Would they take a bullet for the team ?  There were too many eyes on the legislation to pay people off in Louisiana and Nebraska pork. So, how did so many arms get twisted to push the ball into the red end zone ?

I have my own theory. Take my own representative, freshman blue dog Jim Himes representing Connecticut’s 4th district.  Jim voted “yes” for the House health reform package claiming that perfection was the enemy of progress.  He registered some concerns about the absence of cost containment provisions.  But I think the pressure got to him.  Put yourself in his shoes.  You’re new and don’t know anyone.  It’s like a big dinner party where everyone knows everyone else. Suddenly the days where you were the master of the universe playing paddle at Stanwich Country Club seem a lifetime away.

It started when Nancy Pelosi started staring at Jim in session.  As a freshman senator, he did not know that Ms Pelosi had not actually blinked in 12 years due to excessive botox treatments.  This unnerved him.  Harry Reid called Jim to encourage him to do “the right thing.”  The fact that Reid thought Himes was the Senator from Connecticut and kept calling him Chris is another matter. However, one chilly afternoon, Jim felt four cold fingers on his shoulder as Rahm took him under his wing and invited him for a beer at the White House.  It was here that the President assured him that he understood that as a blue dog, Jim’s constituents needed to see costs brought under control.

Freshman Jim was probably star struck by this point but unconvinced.  The President went for the jugular, “ You know, Jim, I am sure most voters do not remember that you made your fortune at Goldman, “ He paused  “ It would be a shame if in the primary, your own challenger made hay out of that fact.   I mean, I am sure that you and many others at Goldman were just smart guys doing your jobs.  But hey, the American people don’t know that.” Jim was getting the drift.  Just then Rep. Dingell shuffles in without his trousers and Rep. Eric Massa from New York jumps out of a closet and tries to tickle Jim.  The President realized two things – Jim was now very confused and he was not ticklish.  Jim asked one of his 12-year-old aides to do a straw poll back home and was told people were more concerned about daylight savings time than the affordability of the health reform bill.  It would be easier to risk reelection than to cross the party caucus.  Besides, the president promised that if he voted yes, that creepy NY tickle monster who invited him to move in with him and his five aides would be “taken care of.”

The House ratified the Senate bill and then immediately passed the sidecar bill which amended the Senate version.  The Senate used Budget Reconciliation to pass the House version and voila!, you’ve got the Patient Protection and Affordable Care Act.

The President will sign the companion House bill this week.  Nancy will be grinning.  Joe Biden will probably say the ” f” word again and alot of legislators will be grinning in the Rose Garden, including Mr Himes Goes to Washington.

The least our Freshman legislator could have done was to hold out a little longer like Mary Landreaux or Ben Nelson and get a few goodies for his vote.  I mean a “yea” vote ought to be worth getting Connecticut some money to offset our $ 3.2B budget deficit that will only grow with expanded Medicaid obligations. Perhaps we could get a few more cell towers, bigger public beaches, rerouted La Guardia air traffic or vouchers for purchasing electricity from out of state utilities. And Holy George Hamilton, Jim, repeal the tanning bed tax!

Dad, sorry to be so flip about something so important.   It is just hard to take Congress or the Vatican serious these days. More shall be revealed.   This reform pie is basically baked and I leave it to you to determine whether you find it palatable. I know you are worried about $500B in Medicare cuts.  If we are not careful Medicare will become like a Diner’s Club card with few establishments willing to accept it. Stay tuned.  My guess this is just the first two hours in an epic mini-series where America has to learn a tough lesson about the difference between expanding coverage and lowering costs.

I will keep you posted.  But remember, if anyone knocks on your front door claiming that native Californians now have imminent domain over your property, call the police.

It’s not part of health reform.

Healthcare 2015

Healthcare 2015

This gets back to the fundamental lesson of political survival that Bill Clinton taught me, which is if you make it about the American people’s lives instead of your life, you’re going to be okay. Paul Begala

It’s March, 2015.  Healthcare reform has now been active for over five years with the majority of reforms kicking in as of january 1, 2014. Several amendments have been proposed and passed in the interim period including the All-Payer Act normalizing reimbursement rates for hospitals between Medicare, Medicaid and private insurance.

The American Family Practice Reimbursement Act promulgated minimum reimbursement levels for primary care providers acting as part of accountable care organizations and included a package of incentives for medical graduates and nurse practitioners to practice primary care.  A particular emphasis was paid to establishing federally qualified health centers in urban and rural areas where Medicaid statistics reveal high rates of chronic illness and minimal levels of compliance with requisite preventive care to arrest the erosion of chronically unstable patients into catastrophic illness.

A final legislative action – passed in December 2014, increased the individual mandate penalty for failure to purchase healthcare to be equal to the average of the lowest cost plans within state health exchanges.  The amendment was borne out of actuarial forecasts that health exchange healthcare plans were experiencing adverse selection – with younger, healthier workers choosing to pay the de minimus annual penalty of $ 695 in lieu of purchasing coverage whose costs exceeded this amount.

Healthcare costs continue to rise but are projected to moderate with Medicare forecasting its lowest trend in five years.  Private healthcare trend has moderated substantially for small business and individuals but it still plagued by rising expenses as employers resist adopting more aggressive lifestyle based population health management plans.

After hitting a high water mark for overall medical trends in 2012, hospital trends are forecasted to be increasing only 4%, specialty moderating to 3%, prescription drug costs are still hovering at 10% and are a source of great debate among those in Congress who are arguing for more efficacy and value based reimbursement.  Primary care costs have risen sharply but have been more than offset by less inpatient and specialty services consumption.

As we glance across the field of stakeholders, we can see how each is faring in a brave new world that is emphasizing prevention and consumer engagement.

Insurers – Insurers have ceded higher profit margins realized in the individual, Medicare Advantage and small group business as a result of the gradual reduction of their 14% Medicare subsidy and their participation in profit margin controlled health exchanges.  Insurer market share has increased overall but is more distributed as all payer reimbursement legislation removed barriers to entry for new consumer focused insurers to enter the marketplace. Insurers have shifted from opaque and complex provider contracting to focus on consumer activation, public health improvement and patient advocacy and satisfaction.

Insurers are now better branded and enjoy a more trusted role as a healthcare system ombudsman.  Aetna’s purchase of Athena Health and United’s acquistion of Web MD and Revolution Health demonstrate the commitment that insurers are making as the invest in health information technology and consumer/provider data management services.  Carriers are striving to drive value to be considered worthy of margins beyond utilities.  A key strategy has been the hiring and engagement of  B2C business professionals solving for the compromises that have frustrated consumers for years.

Insurers have worked with CMS to aggregate clinical data on quality and efficiency of doctors and hospitals to create a credible, non-partisan consumer report to help patients make more informed choices of providers. High performance networks have become the norm to ensure optimal value over an entire episode of care.   Primary care reimbursement has increased over 30% for family practice providers as insurer medical home and population health improvement incentive programs reimburse family practice providers to keep patients well or stable when chronically ill. Insurers have become better community stewards recognizing that healthcare is local.

Brokers/Consultants/Agents – Total transparency marks the year 2015 as broker, agents and consultants remuneration is shared with all employers. As small group purchasing consortia reduce administrative costs, brokers and agents consolidate creating four dominant brokerage and consulting firms representing employers as they structure their benefit programs.   Consolidation is a prerequisite to affording the resources necessary to add value to employers.

Insurance brokerage and consulting becomes less about relationship management, and annual marketing of insurance and more about serving clients as an extension to their Human Resources and benefits department. Many brokers and agents have failed to justify their role as an intermediary that impacts medical trend and have disappeared.  Those that have survived are distinguished less by the marketing of insurance and more by harnessing clinical, underwriting, administrative, compliance and population health management programs to advise small, medium and large employers on how to best manage and finance healthcare risk.

Hospitals – our most expensive delivery systems have endured substantial turmoil and change as all payer legislation and market forces have pushed facilities to focus heavily on outcomes and value. Hospitals have accepted  value-based healthcare and risk transfer through global case rates – helping actively manage the assembly line of care to patients being delivered by multiple providers within the inpatient setting.

Intensity of services have declined as well as inpatient days. Survivor hospitals have invested in outpatient treatment centers and now triage patients through a more coordinated disease management process.  Tied to accountable care organizations, hospitals remain integral partners but are less likely to be the first point of entry into the health system for critically ill patients. Waiting times increase in some markets as occupancy increases.  A private, non network of concierge hospitals begins backed by private equity firms expecting demand for private elective surgery to increase. Consumers continue to consider non US centers of excellence for elective procedures using medical tourism benefit plans that supplement traditional hospital coverage.

Big is no longer necessarily better. Outcomes are marketed over capabilities. It has been a turbulent time for the SEIU 1199 health workers union as hospital closures and restructuring resulting from reimbursement reforms linked to quality and efficiency have reduced oversaturation of services in certain markets.

Those hospitals once perceived to be most at risk due to their dependence on Medicare and Medicaid reimbursement have become models for business transformation as bigger systems struggle to change.   Total transparency of costs of services and clinical outcomes have become the norm.

A controversial but equally effective decision to regulate rates for certain types of admissions at academic medical centers ( teaching hospitals ) has also better aligned disparities in charges where improved clinical outcomes could not be proven.

Specialists – Specialists have reluctantly yielded to a brave new world of reduced reimbursement, consolidation and the first decline in new practice growth as medical graduates redirect back to family medicine. For the first time in 2015, family practice rates of graduation gain on pathology, radiology and anesthesiology from historic lows of 2% in 2009.

Specialty remuneration is now more closely managed as medical home plans reassert control of care, pre-empting self-referrals and overtreatment more characteristic of the early 2000s.  The expanded role of nurse practitioners and physician assistant further narrows the scope of specialists as basic care and triage for routine conditions returns to a medical home setting. Tension has increased between specialists and family practice only now the resentment has been reversed.  Specialists portend a huge capacity problem as Americans live longer with chronic illness and fewer providers are available to treat them.

Government – Federal and state agencies have made modest strides to controlling the  cost of existing entitlement through clinical and medical management services, not just through serial underpayment.  With improved oversight Medicare and Medicaid, States and the Federal government has successfully clawed back up to $35B a year in fraud and waste.  The additional savings coupled with higher payroll taxes for higher wage earners, global case rates for hospitals, effective disease management and fee cuts aimed at overtreatment has helped finance subsidies for the expansion of primary care.  Government will enforce Certificates of need  and moderate the medical device and specialty care arms race of medical device purchases and redundant care delivery.

States have redirected additional saving to increase Medicaid reimbursement rates improving the circle of providers willing to accept expanded roles of Medicaid based patients for treatment.  As more patients find a medical home and are stabilized, emergency visits reduce and incidence of preventible catastrophic illness improve.  States have adopted interest free medical school loans to students electing to practice primary care as part of the companion legislation in The  American Family Practice Reinvestment Act.

The government finally amends its weak individual mandate penalties and ties the minimum tax to the cost of the lowest price market option so that no incentive exists for individuals to game the system.  States are still struggling with obligations for retiree healthcare – specifically long term care obligations that were not addressed in prior health reform legislation.

Skilled nursing is costing states as much as $80,000 per participant.  State budgets comprised primarily of education and healthcare spending continue to look to the federal government to increase subsidies to cover sun-setting Medicaid support and increased cost of labor as unions have turned their focus to increasing wages to offset expected taxes on cadillac plans designs.

The $ 40B of investments appropriated during the 2009 fiscal stimulus package in health information technology and physician and hospital practice transformation has paid huge dividends in coordination of care and the reduction of waste. After digesting CMS and ONC regulations on ‘Meaningful Use’ and standards for the Electronic Health Record Incentive, an impressive 65% of medical records are maintained by providers and hospitals with outliers paying penalties of reduced reimbursement for failure to comply with 2011 HIT regulations.  While 15% short of the legislated goal of 80%, the information technology transformation has drawn the US closer to other industrialized nations for digital medicine and is hailed as an unmitigated success by the White House.

Government has finally struck middle ground with the all powerful plaintiff’s lobby to modify medical liability law focusing on practical changes designed to reduce the frequency and size of medical liability awards.  Particular attention has been paid to creating tighter controls over punitive damage claims when physicians have followed proven clinical best practices in the treatment of care.

Health tribunals and caps on punitive damages have become mandatory for plaintiff complaints where providers have been proven to follow evidence based guidelines.  Liability premiums have fallen 40%. The additional insulation from risk affords doctors greater confidence in avoiding expensive overtreatment and reduces clinical variability which results in billions in unnecessary care each year.

Congress has promulgated all payer reimbursement reform blending rates paid for Medicare, Medicaid and private insurance.  The National Reimbursement Parity Act was initially met with huge resistance from traditional fee for service hospitals but has helped eliminate cost shifting, create a more unified public/private focus on clinical outcomes, reduced variability of care, encouraged population health management and reduced barriers to entry for new insurers to compete for individual and small business.

The projected net present value of the Medicare deficit has been moderated by this reimbursement legislation and the projected savings has extended the life of the Medicare trust as well as bent the medical inflation cost curve.   US debt standing has improved which in turn, has reduced yields on treasuries – improving credit availability for many businesses, especially those restructuring old debt covenants forged during the tighter times of the 2011-2012 credit crunch. The dollar is slowly strengthening.

Consumers – Medicare recipients now accept medical home models as a necessary access point to the healthcare system. Focus is on personal responsibility and the elimination of barriers to care  (reversing  years of peanut butter spread increased co-pays and deductibles that characterized employer sponsored care in the late 90s and early 2000s).

Employers and providers now understand that they must engage consumers to keep healthy.  Consumers participate in health plans that can offer up to a 50% “incentive ” to participate and comply with expectations for regular care and maintenance. Electronic Medical records allow providers to better manage the treatment of patients with co-morbidities such as diabetes, cardiovascular disease and chronic pulmonary complications.

Compliance with tests such as A1-C tests for blood sugar are being embedded and monitored.  Home healthcare is delivered through accountable care organizations and federally qualified family practice centers that seek to reach underserved, high risk populations using telemedicine and nurse practioners whose roles have been broadly expanded in family practice.

Patients have slowly been socialized to routine compliance calls from nurse practitioners and physicians urging them to follow up with tests, maintenance drugs and check ups.  Patients understand their physicians will be rewarded for health maintenance and catastrophic cost risk mitigation restoring trust in reimbursement incentives and payers.

72% of Americans in 2015 are now accessing healthcare through a primary care provider and employers are seeing a steady reduction in ER visits for routine non-emergency treatment that characterized the early years of health reform where newly insured accessed care through hospitals due to an absence of primary care. Individuals now check their biometric health indicators through work site and public kiosks, health clubs and primary care provider offices to measure progress on key health management indicators.  Reductions in heath risks are rewarded with higher subsidies for individuals and lower costs of contributions to employer based plans.

Consumers are encouraged to engage in end of life care discussions with providers who are graduating medical schools with a greater focus on life quality versus life extension.  The hospice and alternative home healthcare industries have expanded to accommodate a new set of incentives designed to give patients greater control and dignity through the process of coping with catastrophic illness.

With healthcare guaranteed, job mobility increases as job lock due to healthcare is eliminated.  Small businesses develop in myriad industries and the economy begins to see a new generation of cottage industry workers evolve out of a model that offered the best protection for employees covered under employer sponsored plans.

Employers – Perhaps the most engaged stakeholders, mid-sized and larger employers have now accepted their reluctant role as the catalyst for market reforms. In striving for low single digit medical trends, employers have finally elected focused on population health improvement, compliance, value based plan designs, medical home, specialty services for key chronic illnesses such as diabetes, cardiovascular disease and orthopedic care.

Partnering with CMS and private insurers, employers have taken a front seat as the market force advocating the adoption of gate keeper, medical home models and high performance networks to reduce, streamline and rebalance secondary and tertiary care in America.  The C-Suite has finally realized that healthcare can be managed similar to workers compensation with loss control programs designed to eliminate, reduce and manage health risks in their population.  Improved productivity, lower medical and controlled workers compensation costs through a healthier workforce begin to roll into employer’s operating income helping improve  GDP.  States compete for businesses through tax incentives and by advocating a healthier worker population.

Pharmacy – Big Pharmacy and intermediaries such as Pharmaceutical Benefit Management firms have slowly seen margins squeezed. $ 4 generics through Walgreens, CVS, Walmart and others have narrowed margins considerably.  Specialty drug costs have been finally identified as a source of low value, high inflation expense and are being held to a higher standard based on value based efficacy.   A new piece of bi-partisan legislation, The RX Reimbursement and Parity Act will strive to normalize CMS and private insurance RX reimbursement and develop a common formulary for brand and generic average wholesale pricing.

Providers will no longer be able to buy drugs wholesale and sell them at as much as a 50% retail mark-up to patients as was the practice of oncologists in 2012.  There will be a slow push to close the gap between US retail pricing and non US wholesale pricing – mitigating the artificial subsidy that US healthcare patients finance for other countries consumption of US drug products. Legislators with large concentrations of bio-pharma industry are wary of this level of intrusion in the bio-tech markets.

Patent protection is now prioritized by social need and based on evidence of impact. Pharma salesforces have been pruned substantially to partially offset margin declines as physician decision support tools ushered in by a new generation of electronic medical records and health information technology has transformed doctors offices and better coordinated on and off label use of medications.

A False Positive ?

As we stare into our crystal ball, we wonder whether this vision is but a dream or a potential reality borne out of a confluence of public policy and market forces. In a free market economy, balanced symbiosis can be accomplished through a variety of careful interventions.  When ecosystems become wildly imbalanced, calculated adjustments are necessary to restore equity and efficiency.

2015 is about balancing public and private responsibilities. There are no victims or villains in this discussion. The conversation needs to shift back from politics to policy. Everyone has their fingerprints on the problem and can contribute to its solution. We need to excuse from the discussion those who choose to remain too committed to the status quo and those whose angry populism has compelled them to advocate massive public policy interventions without understanding the downstream impacts on quality and our economy.

It is unlikely that we there will be only one winner. In this fight for the future, we all win or lose together.

Stay tuned.

A False Summit?

A False Summit?

While a divided Congress met at the Blair House to attempt to reconcile differences, America hunkers down , chilled by cold economic winds and unnerved by the gathering storm brought on by fiscal shortfalls and unsustainable deficits.  As our elected officials argued over a way forward, it was obvious that there would not be enough common ground found to chart a coherent course that improves access, reduces medical trend and moderates ballooning federal and state deficits driven by increasing obligations to existing entitlements through Medicare and Medicaid.

In between stumping and finger pointing, inconvenient truths tumbled like falling rocks on the heads of policymakers locked in the heated debate over whether to begin reforming healthcare by expanding access to 30M Americans or by addressing the underlying cost drivers of a system that all unanimously agree needs fixing.  While Kent Conrad ( D-ND), and Paul Ryan ( R-W ) came across as lucid scouts describing the decades deep crevasses of entitlement deficits and the imprecise orienteering of CBO accounting, other Congressional exemplars reinforced our belief that they were simply no longer fit to lead a next generation of climbers eager to move up the mountain.

The sad truth is we face a formidable obstacle in healthcare reform.  It is a Darwinian wilderness where the strong survive and individuals are unevenly protected.  It is a foreign land where neophyte consumers believe that “quality care” is getting unrestricted access to all the services that they believe they need for as low an out of pocket cost as possible. A diverse ecosystem of for profit and non profit stakeholders seek to accommodate this insatiable expectation and in doing so, assert that they create great value through the services they provide.  It seems no one believes they are part of the problem. Yet, people continue to die from exposure.  We fail to rope in the most vulnerable among us and have sadly become more indifferent to their personal tragedies.

We are in desperate need of reform but experiments such as Massachusetts that seek only to expand access to the uninsured  have taught us that the summit of universal coverage cannot be conquered without an underpinning of affordability.  They will end in financial disaster. The ropes that safely bind us to a fiscally sustainable path must be anchored by employer based insurance and woven with universal reforms in reimbursement, Medicare/Medicaid, access, consumerism and stakeholder engagement. The entire process must be reinforced with chronic disease management,  transparency and balanced regulation of the small and individual insurance markets.

Enormous time has been spent vilifying insurers, as if to convince us that aggressive oversight of payers can somehow fix our healthcare system.  Singling out a particular stakeholder as the primary barrier to our goals of quality, access and affordability is the reckless equivalent of telling an obese person that they can lose all the weight require simply if they just stop eating bread.  The mountain’s crest offers no easy access. The route is marked by tombstones of idealistic reformers who fell short of their objectives.  Stakeholders must recognize that we are all part of the problem but we do possess a map that can safely lead us to the top.   Ironically, many of the legislators attending the Blair House summit actually helped contributed to the treacherous conditions in which we now find ourselves – as we consider a future where public and private healthcare expenditures exceed an insurmountable 20% of our GDP.

In considering the rhetoric and reality of our circumstances, we must understand why the current House, Senate, GOP and Presidential proposals are false summits for conquering our current healthcare crisis.   Congressional leaders, desperate for re-election, will simply not commit to an honest discussion of the risks and realities of fixing healthcare. To conquer the mountain of public and private healthcare spending we must belay our way with:

1)   Reimbursement reform – 30M uninsured people will be entering a healthcare system that is graduating less than 2% of its medical school graduates as primary care doctors. This means no care coordinator to assist those who have historically accessed medicine through the most expensive setting in America -the emergency room.  Massachusetts as the first state to adopt universal coverage and individual mandates has discovered in their first years of universal coverage that ER visits are increasing by 8%-10% as individuals – now covered – default into old patterns of access.  The rural and urban family practice physician is disappearing as a disproportionate amount of federal, state and private sector reimbursement is going toward specialists and facility care and their treatment of chronic illness – – instead of its prevention. We must restore the role of the primary care provider as the control point and care coordinator for a first generation of consumers committed to health improvement. Reform should focus on higher reimbursement and educational incentives to study and practice primary care.

2)   Medicare and Medicaid reform – If the US government were an insurer, it would have been seized years ago by regulators for serial underfunding of present value obligations.  To propose $500B of physician fee cuts while promising seniors no benefit cuts and an expansion of the presently unfunded Medicare part D prescription drug program is irresponsible.  To even qualify to expand its role in covering more Americans, Medicare and Medicaid need to address an estimated $ 100B  in annual fraud, abuse and overtreatment.  The current programs achieve “ affordability” by rationing reimbursement to doctors.  Another 21% in fee cuts will only reduce the number of doctors willing to accept payment from the federal government. The ethical and moral no man’s land surrounding end of life care in America make funding the last six months of life in the US, more expensive than five decades of life preceding them.

3)   Access Reform – Consumers must accept and be willing to enter into medical home/gatekeeper delivery systems where primary care providers coordinate care and authorize access to specialty and tertiary care services.  Over 110M Americans access the healthcare system through the emergency room each year.  More than half of these individuals are insured but not under the care and control of a primary care provider.  Self-referrals and self diagnosis is leading to overtreatment of insured individuals – consuming, according to Overtreated,authored by Shannon Brownlee, as much as $700B each year that might otherwise be available to finance care for the uninsured and the underinsured.

4)   Consumer Reform – With 60M Americans overweight and slowly descending into lifestyle based chronic and catastrophic illnesses, we are not requiring those who might be eligible for expanded coverage to engage in healthier lifestyles.  Asymptomatically ill and chronically unstable individuals are more likely to incur catastrophic claims.  5% of Americans treated in Medicare and private insurance consume 50% of all services.  Subsidies and minimally credible coverage mandated for the uninsured should include plan designs that require biometric testing, lifestyle coaching, and compliance rewards for managing chronic conditions. Consumers must be limited in their ability to sue a treating physician if that doctor has followed evidence based medicine guidelines for treatment.

5)    Stakeholder Reform – There are myriad opaque pricing and payment practices that plague the $ 2.2T healthcare system.  Transparency of services should not just extend to insurers but to brokers, agents, hospitals, pharmaceutical benefit management, specialty and other third parties who play a role in the healthcare delivery chain.  Affordability must focus on demanding value for payment.  You cannot improve what you cannot measure.  Consumers, employers and government are often ignorant to cost shifting, clinical variability, hidden remuneration and perverse incentives that threaten to compromise the objective treatment, advice and service support that must characterize a world class system.

The Blair House healthcare gathering reinforces our notion that Congress understands the logistical complexities of fixing healthcare but in its failure to find common ground, it was merely a false summit.  While our public policy guides argue on the best way forward, we lose confidence that neither group is actually carrying the essentials necessary for quality care to survive. The prevailing sentiment among Democrats is to follow the uncertain fiscal direction of Massachusetts choosing a less intimidating path of achieving universal access before tackling the more jagged and dangerous step of affordability reform.  The GOP has counseled a conservative route to the top – opting for an incremental and sluggish pace with no clear timeline to ultimately conquer the peak.

It remains to be seen whether Congress and the American people will fatigue before conquering healthcare.  For 180M Americans covered by employer-sponsored healthcare, the fear of leaving their base into the unknown thin air of change creates doubt and concern.  For 45M uninsured, the prospect of climbing higher seems a worthwhile alternative to their current circumstances.

The risk of getting to the top too rapidly is fiscal edema and a Darwinian rationing as we realize that we have finite resources.  If we move to slow, additional fellow climbers may perish from inaction.  One thing is for certain.  Storm clouds are gathering and conditions are deteriorating. We are in the “death zone”.  We have to go up or go down.

We simply cannot remain here.

Survivor 2015 – PPACA Island

A recreation of the logo for the first America...
Image via Wikipedia

Survivor 2015

“In the long history of humankind (and animal kind, too) those who learned to collaborate and improvise most effectively have prevailed”  Charles Darwin

As the legislative reform volcano rumbles and angrily spews magma into the Washington night, nervous industry stakeholders competing for survival on this unstable island of American healthcare are still betting that the seismic activity is merely a false eruption.

Survivor contestants are using every possible means to ensure they are not voted off the island.  The stakeholders are a veritable who’s who of personalities – the powerful, the wealthy, the prima donnas, the tough love advocates, the national health zealots, the well-intended academics, the bellicose politicians, the under-employed, the overweight, and the disenfranchised. It remains to be seen whether Congress, market forces or the American people will be the ultimate judge of who stays and who goes.

If the contestants cannot change in the next five years, 2015 will find them staring at a terrifying wall of regulation and governmental intervention that will be more destructive than the changes from the 2010 proposed legislation.

The island has finite resources struggling to accommodate infinite demand.  Do these players have the emotional intelligence to change or are they too addicted to their way of life to yield to the need for transformation. Time is running out. As we handicap the winners and losers in the 2015, here’s what each group needs to do to remain on the island:

Insurers – In the brave new world, insurers will have to cede higher profit margins realized in the individual and small group business resulting from a formation of purchasing pools and guarantee issue coverage. Insurers must transform from B2B businesses to B2C business solving for the compromises that have frustrated consumers for years. Insurers need to aggregate clinical data on quality and efficiency of doctors in partnership with government to create a credible, non-partisan consumer reports to help patients make more informed choices of providers. High performance networks must become the norm to ensure optimal value over an entire episode of care.   Primary care reimbursement must increase over 30% for family practice providers as medical home and population health rewards based programs reimburse providers to keep patients well or stable when chronically ill. Insurers must become community stewards helping finance primary care into urban and rural ” hot zones “serving “at risk” populations in underserved communities.

Brokers/Consultants/Agents – Total transparency must mark the year 2015 as broker, agents and consultants remuneration is shared with all employers. Brokers and consultants must justify their role as an intermediary – less by marketing insurance and more by harnessing clinical, underwriting, administrative, compliance and population health management programs to advise small, medium and large employers on how to best manage and finance healthcare risk.

Hospitals – our most expensive delivery systems must yield to a new reality where chronic disease prevention spending exceeds spending on the inpatient treatment of chronic illness. Hospitals must accept value-based healthcare and accept risk through global case rates, helping actively manage the assembly line of care to patients being treated inpatient.  Intensity of services must decline over the next four years as well as inpatient days. Survivor hospitals sober to the reality that big is not necessarily better. There is focus on better managing the delivery of services to Medicare and Medicaid patients and total transparency of costs of services and clinical outcomes.

Specialists – specialists must yield to a brave new world of reduced reimbursement, consolidation and the first decline in practice growth as medical graduates begin to select family practice. Remuneration must be more closely managed as medical home plans reassert control of care, pre-empting self-referrals and overtreatment more characteristic of the early 2000s.

Government – Federal and state agencies must demonstrate they can manage cost through clinical and medical management services, not just through serial underpayment.  With improved oversight Medicare and Medicaid can claw back up to $100B a year in fraud.  The additional funds coupled with higher payroll taxes for higher wage earners, global case rates for hospitals, disease management and fee cuts aimed at overtreatment for of life evidence based medicine will help finance subsidies for the expansion of Medicaid and broader coverage for the most vulnerable of the estimated 45M uninsured. Government must enforce Certificates of need are reinstituted and moderate the hospital arms race of medical device purchases and redundant care delivery.

Congress must consider a controversial decision to promulgate a single reimbursement between Medicare and private insurance which can eliminate cost shifting and create a more unified public/private focus on clinical outcomes, reduced variability of care and population health management. The projected net present value of the Medicare deficit can been pared by responsible oversight impacting US debt standing and strengthening the dollar. State and Federal government should focus on interest free medical school loans to students electing to practice primary care as part of an American Family Practice Reinvestment Act.

Consumers – Medicare recipients must accept medical home models as an access point to the healthcare system. Focus will be on personal responsibility and the waiver of cost barriers (e.g. Co-pays and deductibles) for services required to keep the chronically ill stable. Consumers must comply with expectations for regular care and maintenance. Patients must become increasingly comfortable with compliance calls from physicians urging them to stay follow up with tests, maintenance drugs and check ups.  Patients must understand physicians will be rewarded for health maintenance and catastrophic cost risk mitigation. 80% of Americans in 2015 must access healthcare through a primary care provider and reduce ER visit for routine non-emergency treatment. Individuals must routinely check their biometric health indicators through work site based providers, kiosks, health clubs and provider offices to measure progress on key health management indicators.

Employers – Perhaps the most engaged stakeholders, employers must accept their reluctant role as the catalyst for market reforms. In striving for low single digit medical trends, employers must focus on population health improvement, compliance, value based plan designs, medical home, specialty services for key chronic illnesses such as diabetes, cardiovascular disease and orthopedic care. Partnering with CMS and private insurers, employers can take a front seat as the market force through the adoption of gate keeper, medical home models and high performance networks, to reduce, streamline and rebalance the secondary and tertiary care in America.

Pharmacy – Pharma and their intermediary partners, PBM’s must be required to disclose 100% of all rebates and to provide clarity around opaque pricing schemes. Decision support tools introduced through increased HIT and EMR  useage has elevated physician awareness around contradictions and the inconsistent outcomes surrounding certain specialty drugs.  Consolidation among pharmacy purchasers – state, federal, consortias and pharmacuetical benefit managers has eaten into industry margins.  Improved consumer adherance to chronic illness medication as a result of broader medical home oversight, digital consumer compliance tools and incentives has driven higher use of generics and reduced trends.  In this part of the island, only the large and strong survive.

Who Will Win? – As we watch Survivor 2015 unfold, we wonder whether the reality show of American Healthcare is a fair competition or rigged to the benefit of a few stakeholders.

In a free market economy, optimal balance is achieved differently in different segments of our economy.  The fewer the players and the closer one inches toward oligopoly or monopoly, the more important effective regulation is to allow for innovation while limiting abuses and excessive profit taking that disproportionately benefits too few while disenfranchising too many. However, Survivor 2015 must require personal responsibilities. There are no victims – only those who choose to be too self interested or too quick to default into angry populism that deflects from the real issues.

On this island, everyone needs to change. However, it is unlikely that we can have only one winner. In this fight for the future, we all win or lose. Stay tuned.

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.

Confessions of A Blue Dog Insurance Gunfighter

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A Short History of Medicine

2000 BC — “Here, eat this root.”

1000 BC — “That root is heathen, say this prayer.”

1850 AD — “That prayer is superstition, drink this potion.”

1940 AD — “That potion is snake oil, swallow this pill.”

1985 AD — “That pill is ineffective, take this antibiotic.”

2000 AD — “That antibiotic is artificial. Here, eat this root.”

— Author Unknown

As the bar room brawl escalates in Washington, I cannot help feeling like I am watching a B Western. Reform is a stagecoach whose driver has been shot and is slumping unconscious in his seat. The horses are racing uncontrollably, dragging the reins on the dusty ground. Inside the carriage, people are screaming, fighting and yelling for help. Suddenly, the hero appears — crawling from the window and almost falling twice as he strains to shimmy across the unstable hitching to grab the reins. Will he succeed? Will the occupants be saved or will the entire coach hurdle over the cliff to certain destruction?

I have seen the movie many times and it always excites me as the hero tries to rescue the runaway stagecoach. However, invariably he falls under the wheels, or is hit by friendly fire — perhaps from the gun of some passenger named Harry or Louise who honestly believed he was going to get them killed, or maybe he is winged by an arrow launched by myriad indigenous, hostile stakeholders who resent the intrusion of yet another idealistic pilgrim into a land too vast and tribal to ever be tamed.

Let’s face it, reforming health care is as complex as the diseases medicine seeks to cure. Both sides of the aisle have a legitimate axe to grind and they are whetting their Bowie knives on the whirling debate about how we fix a system that is in desperate need of change. However, when you politicize change, you force rank priorities not in terms of what might have the greatest financial and social impact but by changes that would be most palatable to your constituency — even when you know, deep down, that those who elected you are part of the problem. In the end, a politician seeks to burn the least amount of political capital necessary — with constituents or their own party depending on who you feel is more important to your ultimate reelection. You try to rally people around a common enemy. You forge treaties and then you break them. You marginalize those who ask the tough questions. Perfection is the enemy of progress, you say. Perhaps this is why someone once said, “Politicians are like diapers, they need to be changed regularly and for the same reason.”

The landscape for this drama is stark and filled with shades of gray. If the United States was a corporation, it would be broke and the treasuries that finance its debt would be low-grade junk bonds — I mean “bottom of the barrel, make a sub-prime security look like a AAA asset,” junk. The United States will post a public debt of $ 7.7 trillion in 2009 and incur another $ 1.7 trillion deficit from increased spending and reduced income from a contracting economy. The deficit is slated by the CBO to swell to $ 11.5 trillion in 2014 — without expanding health care. In 2017, Social Security outflows exceed income coming into FICA (translation: We are broke). In 2018, Medicare trust assets are exhausted (translation: We are broke). While the generation that preceded us has been labeled the “Greatest Generation,” we may very well be named the “Profligate Generation.” We do not seem to be able to make the tough decisions about balancing budgets, reigning in spending and attacking the root causes of many of the costs that are slowly eroding the foundation of our economic viability.

Just as the automotive and airline industries are being crushed under retiree and pension obligations, the federal government, states and municipalities are panicking under swelling deficits and the prospects of raising taxes to finance health and pension funding shortfalls at a time when a fragile economic recovery would advise otherwise. Most state’s budgets earmark at least 60 percent of their annual spend for just two items — education and health care including obligations to provide medical coverage for retirees. So, all agree health care is a problem, but to the average pilgrim walking down Main Street — there’s so much noise and rhetoric, its hard to know what’s causing the problem and how we fix it.

Here’s one 25-year vet’s take on the problem — Health care reform must happen. The question is how do we fix it, who pays, who sacrifices and how do you achieve this without killing innovation and quality? The most efficacious cures to taming this wild mare of medical trend are too politically volatile for many in Congress who desperately want to be reelected.

50 million Americans have no coverage and when an uninsured or under-insured person falls through the looking glass of our current health system, the patient ends up having to pay full retail for health care – often resulting in a financial crisis or worse, personal bankruptcy. The government’s obligations for financing health care are skyrocketing and contributing to the growing public debt. Individuals and small business cannot buy affordable insurance because insurers work hard to avoid risks that might actually pollute their loss ratios. Regulation does not make provisions for the millions that are impacted by insurer underwriting practices. Many believe that medicine cannot be for profit as the manner in which providers get reimbursed creates perverse incentives and alters the way medicine is delivered. At the heart of this debate is how big a role should government play in refereeing this brawl. And since it has such a huge stake in the fight, can the government be impartial or will Congress and the Obama administration end up being revealed as a hanging judge for the insurance industry? As one pundit remarked, “this is a battle for the soul of medicine.”

Here are some additional inconvenient facts that complicate the debate right now in health care:

• Neither society’s nor the government’s houses are in order — Medicare and Medicaid spend more than 25 percent of it’s annual $ 1 trillion cost on the last six months of life. In many instances, these services do not improve length or quality of the patient’s life. Uh oh, this is where we start talking about death panels, right? No, but we need to decide who makes the call on what services are provided to our loved ones in these circumstances. Since most individuals are likely to face end-of-life care issues while on Medicare, the government makes that call on what they will and will not cover already.

The Centers for Medicaid and Medicare Services (CMS) now clearly see that they are not getting value for their health care spend in this critical area of end-of-life care. However, just raising the issue is tantamount to committing political suicide. There is no doubt as costs increase the government will have to reduce Medicare benefits or become more stringent on how it will reimburse providers for services. Whether you choose to offer America a public option or not, this is an economic fact of life. Yet, no politician will admit to this downstream reality.

So, why not require everyone to have a durable power of attorney and end of life counseling given that today’s end of life care is a complex algorithm of quality, time, cost and consumption of a limited pool of dollars? It all sounds fine, right up until the point that it is you or your loved one, and then all bets are off. This is where under-60 demographic says, “Pull the plug, pull the plug” and the over-60 crowd responds, “Ask not for whom the next plug is pulled, it will be pulled for you.”

• For-profit insurance creates conflicts but so does big government — Medicare and Medicaid averaged a mere 5 percent of cost for administration and this is being trumpeted as a much lower cost compared to the 15 to 30 percent insurers charge for administration. This statistic disguises a simple truth — 5 percent gets you little oversight, no evidence-based medicine guidelines or strong controls around fraud and abuse. As a result, as much as an additional 10 percent of total public spending, or $100 billion, annually is attributable to rampant fraud, waste and abuse in public health programs. This total cost of 15 percent actually exceeds the average cost of administration for commercial insurers (around 12 to 14 percent according to consultant Deloitte) because they utilize much stronger controls to manage fraud and waste.

The big problem is what insurers do with their savings — they keep them as profit and do not return them to policyholders in the form of lower premiums. Each year’s premiums are a new base line for next year’s increases. However, these are for-profit companies and the last time most of us checked, profit motive drives free market capital formation, investment and innovation. Proposals that call for taxation of insurers may see insurers merely passing these costs on to policyholders.

• Medicare and Medicaid keep costs down by cost shifting to the private sector — Medicare and state-funded Medicaid save money primarily by under-reimbursing providers and hospitals with the exception of primary care doctors who are actually paid less by private payers. Doctors and health systems who are underpaid by Medicaid and Medicare, cost shift to private insurance plans which contributes to higher medical inflation in private plans than Medicare.

• Private insurance must be regulated and managed in the individual and small group markets — Private insurers make a large percentage of their profit on small group and individual insurance. This is where underwriting practices are most opaque and likely to lead to medical underwriting where individuals and small groups are denied coverage or charged astronomical premiums as for-profit ( and non profit ) companies naturally rely on risk analysis to achieve profitable books of business. Greater regulation of individual and small group pricing, minimum loss ratios and community rating to ensure guarantee issue for all applicants can solve a large percentage of the issues surrounding insurance affordability and access. Insurers may not like individual and small group reforms but they are expecting it. Fix this one piece and you fix a massive hole in the coverage safety net. You do not need a public option to keep insurers honest, you need effective regulation – something that does not exist today. .

• Co-op or co-opt? — Forming insurance purchasing co-operatives for individuals and small business to buy affordable healthcare sounds great. However, the devil is in the detail. For some politicians, co-ops must be established to compete with private insurance. For a minority of Congress, co-ops would take the form of non-profit purchasing consortia that individuals and small business can join to more transparently choose between private plans.  Both sides lack details over how co-ops would actually reduce costs — other than offering the modest savings inherent to a non profit. Unless these purchasing groups are adequately regulated, any start-up co-op will either be disadvantaged to commercial insurers or financed by tax payer dollars to slowly erode private care.  .

A start-up co-op cannot force hospitals and doctors to offer them better rates than private insurance unless they have the ability to use Medicare’s fee schedule as the basis for setting reimbursement. Traditional barriers to entry for new insurers can be high because hospitals and doctors grudgingly discount rates based on how many members the insurer represents. The more members you have, the steeper the discounts. If a cooperative has no members, it will not initially be able to offer premiums lower than private insurers and will either write only the worst risks that insurers do not want, or underwrite new clients, but at a large loss. It is unclear who would finance this large front end loss but the odds are, many taxpayers would not want to underwrite the losses of a public plan attempting to displace their private insurance..

However, if a co-op is allowed to only reimburse at Medicare levels, the co-op’s lower administrative costs, non-profit status and lower provider reimbursement schedule will offer a more competitive alternative to private insurance. The co-op would begin crowd out private insurers as doctors cost shift higher charges to private insurers – who must pay more than Medicare and must negotiate these reimbursements annually. Employers, seeing their private insurance costs rising at a higher rate than co-ops will drop employer based plans — sending all their employees into the cooperative which in effect, becomes a single choice, public option. When the doctors, specialists and hospitals are no longer reimbursed at rates above Medicare because there is now only a single payer, quality and access will decline while rationing and restructuring of health care will accelerate.

• Disease and apathy are bigger problems — The top 10 private insurers made $12 billion in profit in 2008 and all insurers posted earning amounting to close to $30B. This compares favorably to $1 trillion in health-care costs incurred over the last decade by obesity related illness, $100 billion of annual smoking related illnesses and $ 50 billion for the cost of defensive medicine. The  Senate Finance proposal is supporting a $6 billion tax on insurers. How can you tax 25% percent of insurer profits and not expect that these levies will be shifted to policyholders?

The real litmus test for anyone (government or private payers) who wants to remain a stakeholder in our health-care delivery system should be their ability to demonstrate how they are best positioned to incent health improvement, reduce the rate of disease and restructure the incentives that currently drive huge clinical and quality variability, waste and over-treatment.

The problem with government playing the role of referee is politics. Politicians do not have the will to tell America to put down the Krispy Kremes and get on the treadmill. In the President’s recent speech, he mentioned insurance reform more than 20 times. He never mentioned obesity, personal responsibility, the cost of smoking, the cost of absenteeism or the state of America’s public health. Of the 60 million Americans with obesity related risk, more than two-thirds are covered by commercial insurance. Meanwhile, employers have been tip-toeing around the issue of wellness for years with very few committing to plan designs that measure key biometric factors like cholesterol and weight and then actively work to create programs to mitigate these risks in their workforce. We must usher in a new era of health management, but many can’t or won’t because they’re afraid of offending their employees, or getting sued for violating the Americans with Disabilities Act for playing big brother.

• Reimbursement reforms are the biggest single factor absent from this debate. We need to level the playing field between all payers — standardizing reimbursement for services and then focus on using data to reward, recognize and convey to consumers those providers who deliver quality and efficient care. We must eliminate public to private cost shifting and increase reimbursement to primary care doctors to manage the well, at-risk and chronically ill and their conditions. If you want to reduce costs, someone will need to get paid less and that means dollars need to be rerouted from specialty care to primary care. We should focus on slowing the conveyor belt of people who at one point were healthy and through lifestyle choices became chronic, and ultimately, catastrophically, ill. This can only be accomplished by changing incentives that currently reward treatment of disease to rewarding better health outcomes and promoting prevention at home, in schools and in the workplace.

In a period of great social and societal turmoil that calls for tough decisions to ensure our economic and personal survival, we need to be honest with Americans and share the facts: we can restore Medicare and healthcare to viability only four ways: 1) managing access to services – some call this rationing  2) reducing reimbursement to providers, 3) reducing the administration costs of the delivery itself 4) attempting to control the rate of chronic disease in America so those coming on to Medicare do not consume a disproportionate amount of services as they become eligible for the coverage.  Any reform solution will set in motion changes that will utilize each of these four paths to cross the high peaks of our mounting costs.  The question is which path offer politicians the least resistance versus which path leads to our long-term ability to control costs.

Any legislative change must impact all the stakeholders in healthcare.  In the Old West, a wanted poster would depict culprits and their confederates guilty of crimes.  If our health crisis were pronounced a transgression against society, this Dirty Dozen could be charged with major or misdemeanor lawlessness:

Consumers – 60M Americans possess a body mass over 30 (the average US male’s waist is 38”). We have bad lifestyles that lead to overconsumption of health services, unrealistic expectations, poor consumerism and litigiousness when we don’t get our way or have a bad outcome.

Insurers – Insurers engage in opaque business practices that are not understood by policyholders or regulators.  How one makes money in healthcare does not seem to be as important as how much one makes.  This mindset creates massive image problems.  Insurers have failed to help solve for the uninsured and have engaged in excessive profit taking in certain geographic markets and in the individual, small group insurance, Medicaid and Medicare segments.  Insurer reimbursement practices have contributed to driving community hospitals and primary care into near extinction.

Employers – Have been inconsistent stewards of their medical spend, with Human Resources focusing on limiting disruption to employees rather than driving tough love with at risk employees.  Very few C Suite executives take the time to truly engage in health management and instead look at insurance as a commodity instead of a program worthy of risk management.

Brokers/Agents – these intermediaries function as a highly fractured distribution system of less sophisticated players. Insurers loathe broker consolidation and enjoy the multiplicity of distributors as no player has enough clout to change insurer business practices.

Government – The federal government and states serially cost shift to the private sector through reduced reimbursement to providers. Politicians pander to the public instead of educating.

Regulators – Many are politically motivated, including state insurance commissioners who often see these roles as a springboard to Congress, Attorney General or a gubernatorial run. Career regulators are under-resourced and often under-educated to the complex,  well resourced insurers they are regulating.  Given the paucity of resources, regulators focus on high visibility issues ( those that will draw headlines ) versus high impact, complicated reforms.  Most regulators are years behind in regulatory audits.

Unions –Most bargained groups are rabidly protective of rich benefits and pension plans which feature limited or no incentives for participants to be good consumers of healthcare dollars or engage in healthy lifestyles. The problem is not the benefits, which one could argue were negotiated in lieu of wage increases.  It is the unwillingness of the unions to force their members to be more responsible consumers

Malpractice Plaintiff’s Councils – Medical liability has driven massive overconsumption of services and puts self-prescribing patients in the driver’s seat. Attorneys generally oppose torte reforms such as punitive damage caps that would lower the cost of liability for doctors and reduce defensive medicine costs.  The sentinel effect of lawsuits has not proven to reduce the variability of care delivered by doctors.  Some would argue, it has made the problem worse.

Specialists – (Pathology, anesthesiology, oncology etc.)  We love, trust and self refer ourselves to specialists at an alarming rate.  In doing so, we do not understand the referral and provider payment practices that we bypass and set in motion.  A disproportionate amount of dollars goes to specialty care in Medicare, Medicaid and private insurance limiting money available to reward and incent primary care.  Medical graduates in family medicine are down 70% while up over 50% going into specialties that promise higher rates of reimbursement – at the very time that we need more primary care providers to work with us to improve our day to day health.  Our system has been set up to treat our chronic illness, not cure it.

Hospital systems – As hospitals consolidate, big systems exert massive leverage on insurers driving higher costs.  There is an arms race mind set between competing systems driving investment in specialty services. Big health systems overshadow community based hospitals that may have equally effective outcomes at a much lower cost.  With union and community pressure agitating against any hospital closure – even those that are deep in the red, we have an over-supply of services that get passed back to patients in the form of greater intensity of services during hospital stays and higher retail charges. Ken Raske, head of the NY Greater Hospital Association –makes $ 1.2M a year as the bellicose advocate for major hospitals.  Dennis Rivera is one of the more influential political figures in Washington as the head SEIU 1199 – the United Healthcare Workers.

Pharmaceutical Industry – The pharma industry has done a masterful job redefining the definition of chronic illness to include millions more Americans with conditions like restless leg syndrome, BPH and situational anger disorder.  The industry is still a muddy puddle in its rebating practices and its interactions with pharmaceutical benefit managers (PBM) who purchase drugs wholesale and resell the same drugs at varying retail prices to groups based on purchasing size.  Have not totally embraced the use of generics to supplant name brand drugs and have often acted to protect brand names at higher costs. US patients still pay retail for drugs and in doing so, finance 100% of drug R&D while pharma charges the rest of the world wholesale for the same drugs.

Food Industry – Protected by a powerful lobby an Congressional subsidies, the agricultural and food processing industries have been busy getting us hooked on high fructose, processed food, sugar and high caffeine content sodas.  In 2004 – candy, restaurant, food and beverage ads of $ 11.26B dwarfed health eating advertising expenditures of $ 9.55M.  Ineffective food labeling, financial dependency of our schools on royalties from vending machine sales, expanding portions in restaurants and fast food, aggressive lobbying to minimize explicit communications on food content and risks – all contribute to a an obesity epidemic that has only one state in the US (Colorado) having a prevalence of obesity less than 20%.

Marshal Mad Max To The Rescue? –  There have been five different Congressional health reform bills proposed to corral and tame healthcare’s rising expenses – three bills in the House of Representatives (referred to as the Tri-committee bills) and two bills in the Senate ( Senate Finance and Health, Labor, Pensions and Education [HELP] committee) .  The challenge for many insiders watching reform gain steam is that taxes and legislation proposed to impact costs do not evenly impact those who drive them.

The House will consolidate their bills and pass a single integrated bill with a simple majority of 218 votes.  Nancy Pelosi has all but guaranteed these votes.  The Senate is more complex – requiring 60 votes to close debate to even allow for a vote.  Without 60 votes, a filibuster can wreck legislation.  Recently deceased (D-MA) Senator Ted Kennedy was vote number 60.  This is why the Massachusetts legislature revoked a longstanding rule to wait five months after the death of a senator vacates an open position.  In Massachusetts, the replacement senator, Senator Paul Kirk, was sworn in on September 26th.   The Senate now believes it has the requisite 60 votes unless any Blue Dog democrats get cold feet.

Republicans have really failed to offer any substantive alternative health reform plan.  There are amendment suggestions but it appears that the various bills – all tendered by Democratic leadership will be the framework for reform.

The Senate Finance Committee under Max Baucus (D- MT) has tendered a bill that is the most closely aligned with President Obama’s vision for reform.  Actually, no Republican on the Senate health subcommittee approved Baucus’ bill.  At 2:15am on Friday October 2nd, 564 requests for amendment had been melded into 130 and resolved with a final Senate Finance version of the Baucus bill voted on this week.  Key firefights last week included a bi-partisan defeat of two proposals for a public option and a controversial reduction of the penalty for individuals who do not choose to comply with an individual mandate to buy insurance. This weakened provision means that some people are more likely to wait to buy guaranteed insurance until they have a medical event.  The new law would require insurers to take all applicants and could give rise, as it has in Massachusetts, to adverse selection as the healthy uninsured may only buy coverage when they have a medical event and choose to pay a nominal penalty. It is the equivalent to mandating the purchase of property insurance but only mildly penalizing people if they wait to buy coverage until after their house is on fire.

Additional unresolved land disputes include whether employers should be mandated to offer insurance, whether the bill’s cost is further inflated to boost subsidies for low income individuals facing individual mandate penalties and fees imposed on insurers, expensive insurance plans, pharma and medical device manufacturers – – all taxes presumed to be passed on to consumers either directly or indirectly leading to higher costs.  The price tag for the bill as it heads into session mark-up remains around $ 900B.

Unfortunately, Marshal Baucus has to once again wander up a hostile street and try to forge a single Senate bill with the left leaning 1000 page Senate HELP version that still includes a public option.  Some pundits theorize that many senators are holding their fire until they can see the whites of the Marshal’s eyes – – during backrooms committee mark-up sessions.  Marshal Max is tough but it’s hard to know who is friend or foe.

Should the Senate not field a majority, they can conjure up a special procedural rule created in 1974 known as Budget Reconciliation. Reconciliation was created to facilitate the advance of contentious legislation that might otherwise be defeated by filibuster. Originally designed for legislation thought too radioactive to survive normal partisan politics (e.g. deficit reduction initiatives), the process was modified in 1996 to apply to any legislation – even if it increases the deficit.  It requires a simple majority of 51 votes to pass.  Senator Robert Byrd, (D- WV), a long-time defender of process and order in the Senate, proposed a litmus test for how and what items can survive the trap door process.  The procedural litmus tests, known as the Byrd Rules, determine whether items proposed in reconciliation are “extraneous”.  Many of the provisions in the Baucus health bill would not be considered extraneous if they could be proven to reduce costs – even if these changes radically altered our delivery system increasing taxes and crowding out existing stakeholders.

The Baucus bill is a good start in addressing the need for insurance reform but fails to address many of the other stakeholder’s who are contributing to medical inflation today.  Baucus and Congress have clearly targeted insurers as a primary focal point for reform proposing a tax of $ 6.8B that would most likely be passed on to policyholders.  The bill imposes control over how much premium load insurers can charge for age, sex and status such as smoking.

The bill has included the creation of non-profit co-ops to compete with private insurance but it is unclear how they could compete without incurring massive losses that would be offset by taxpayer dollars as “ start-up costs”.  There is an establishment of state insurance exchanges (Small Business Health Options Programs aka SHOP)  where individuals and employers up to 50 or 100 employees can access regulated insurance programs designed to offer affordable private solutions.  Insurance commissioners will be instructed by Health and Human Services to set up catastrophic coverage risk pools to cover certain high cost individual claims, design a common set of benefit pan designs that may become open to interstate competition and oversee the creation of non profit co-ops.

The big debate is over the inclusion of a public option that would essentially offer a Medicare like program to all uninsured, under insured and employees of employers who may not want to be covered under employer sponsored insurance.  There is great debate whether an expanded government plan with lower administrative costs would create healthy competition for insurers or begin a massive retreat of employers from offering insurance.  Most employers would prefer shifting the burden of escalating health costs and the tricky moral hazard of trying to manage lifestyles to taxpayers and the government.

While primary care doctors might see a near term reimbursement improvement under reform, most physicians would see a slow and steady erosion of reimbursement as the Federal government inevitably cuts payments to try to balance a Medicare Trust that is already out of money.  Medicare physician cuts of 21% are proposed to begin of 2011. It is simply not realistic to offer expanded Medicare benefits like additional prescription drug coverage at a time when there is not enough money to finance the existing benefits.

The Baucus blll calls for a tax on America’s richest benefit plans (those averaging over $ 8,000 per person and $ 21,000 per family.  Many of these plans are union benefits in towns, municipalities and governments. An Amendment was approved to offer a higher allowable taxable cost for retirees and those working in “high risk” jobs.  (aren’t all our jobs high risk these days?).  Baucus does not offer the public option but does establish subsidized non-profit cooperatives that would compete with private insurers. Congress would also impose controls on how insurers could underwrite programs offered within the insurance exchanges to reduce the slope of premium differentials that insurers charge to “ cherry pick” younger and healthier risks.  Younger insureds will pay higher premiums while older Americans may pay less.

Unless Congress gets medical trend under control, we will all have benefits costs that exceed these caps by 2016.  The proposed benefits tax cap will rise with the CPI.  Our benefits costs will rise with medical inflation (averaging 4 times the rate of CPI).  The Congressional Budget Office (CBO) estimates significant revenues raised by the tax cap in future years suggesting that they do not believe that this legislation does not to bend medical trend to become more in line with CPI.

Do not misconstrue this barroom brawl as wasted energy.  A version of health reform will pass and most likely before Christmas.  In 1994, Clinton’s health legislation failed because he chose the craft the legislation behind closed doors and then sprang it on a wary and uninformed Congress.  He also did not have an ally in Senator Moynihan, Chairman of the Senate Finance Committee.  In 2009, President Obama challenged Congress to divine a blue print which he in turn, would help contour and help through the bitter process of a final mark-up.  He also has an ally in a very effective Senate Finance Chair in Marshal Max.

This high noon show down is not over and my guess is a few good guys and bad guys may still get killer or wounded before the shooting stops.  You’ll have to judge the ending for yourself and prepare for a sequel once the 2010 mid-term elections are upon us.

Judge Harry Reid is now in session –  As Senate Majority Leader, Reid must merge Marshal Max Baucus bill with the Senate HELP committee bill to bring a single piece of legislation to the divided townspeople of Senate, USA to ratify.  Meanwhile, just over the border the House of Representatives is busy crafting their single bill that will be merged with the final Senate bill.  All four bill are more liberal than Baucus and include the controversial “ public option”. My guess is President Obama will work hard to help protect the more bi-partisan Baucus bill which means more fighting could lay ahead if the Democratic Caucus will not back off their insistence on the inclusion of a public option in any final bill.  Some old timers believe the public option is really a stalking horse for the Democrats and it will be yielded but only after concessions that may threaten the President’s goal of a deficit neutral solution.

The race for rapid resolution is on.  If the governor’s seats in New Jersey and Virginia fall to Republicans, the swing will frighten blue dogs under the front porch and force the Senate into Reconciliation as 60 votes will not be found. Some Democratic leaders may already sense this and are working to get the wheels greased to jam reform through Reconciliation – while on the outside still appearing confident that 60 votes are possible

The question that inevitably keeps coming up is what is missing from the health reform legislation and are we bringing the right people to justice as Marshal Max drives his legislation through Congress.  The sad fact is this legislation does reform insurance markets but falls well short of reforming the healthcare system.  Since insurance is by and large, a system of financing care, we will see lower insurer profits, streamlined and lower cost of administration but we will not see the primary culprits responsible for rising costs receive much more than a wrist slap.  If Marshal Max deputized me, I would :

1) Push Consumers to take more responsibility and design any public or regulated plans to require biometric testing (annual paid physicals testing five risk factors – smoking, glucose, cholesterol, weight and body fat), offer wellness incentives to business and employees, incorporate chronic care management and expand federally qualified primary care health centers into high risk, underserved communities to stabilize high risk populations – Baucus plan response : weak to non existent

2) Global case rates for hospitals – Pay a single payment for an entire episode of care and transfer the risk to the institution to manage the outcome. Hospitals need to be more at risk for the total amount of care delivered.  Infections and readmissions due to errors, mistakes or secondary infections must be covered under the total rate paid – Baucus plan response: Medium.  Focus is on hospital fee cuts but Medicare is moving toward case rate reimbursement.  Private insurance will draft behind Medicare.

3) Medical Home – Any new coverage extended to the uninsured or those choosing a public option must be delivered via a primary care, gate keeper network that gets paid for improving its population’s overall health status.  No more self-referrals to specialists.  Everyone must use a primary care doctor as their medical home – Baucus plan response:  Medium.  Medicare and the private insurer community are already piloting models for potential expansion into covered populations.

4) Wellness – Legislate a Healthy Workplace Act and create tax incentives for all employers to offer screening, biometric testing and health coaching.  Ensure that the Americans With Disabilities Act is not used by plaintiff’s attorneys to penalize employers for creating pan designs that shift cost to less healthy, noncompliant employees and their dependents. Baucus plan response: Weak.  Some health incentives but separate legislation is working its way through Congress.  The issue is around giving employers more cover fire from liability if they actively engage in managing employee health and well-being.

5) Individual and small group reform – Reform insurer pricing practices and put a cap on all profits and administrative costs at no more than 82%-85% of premium for the under 100 employee market.  Mandate the release of claims experience from insurers to all employers over 100 with a clear understanding that it does not violate HIPPA regulations. ( This has already been done in Texas ) Mandate all individuals to purchase insurance and have the cost of non-compliance indexed to the cost of the cheapest plan offered through the state’s insurance exchange.  Offer tax credits for those up to 300% of the poverty level to ensure people have subsidies to purchase coverage.  Baucus plan response: weak.  Politicians have rolled over and reduced the penalty for those choosing not to sign up for mandatory insurance.  The cost not to join is far less than the cost of insurance creating the real possibility (we have seen this in Massachusetts) where healthy people will wait to get sick before joining insurance plans.  Insurers, by law, will need to take all comers.  Expect insurers to dramatically increase the cost of individual insurance or exit the market entirely if the individual mandate is not strengthened.

6) Public option only for uninsured – If you offer a public option, offer it for only those who currently have no coverage and place then in a plan that requires medical home, wellness and compliance testing to manage chronic conditions and health coaching.   Do not load the basic public option with rich benefits that will drive up utilization and medical trend. Baucus plan response: uncertain.  Some states like Connecticut are trying to embrace designs intended to reduce medical trend.  Others like Massachusetts are enriching public benefits and mandating higher reimbursement levels.  Massachusetts now covers 98% of all its citizens and has by far, the most expensive healthcare costs in the US.  If affordability is the goal of reform, Massachusetts gets an F.  Federal reforms seem to be racing down that same slippery slope.

7) Employer penalty for dropping coverage – Employers should be penalized at a level greater than the lowest cost public option to avoid the rapid erosion of employer sponsored care.  Our goal is to keep a balance between employer sponsored and government sponsored plans. Baucus plan response: weak.  Some in Congress want employers to drop coverage so we default into a single payer plan.  Estimates of those employers who would drop insurance if a public plan was offered vary dramatically from 5% of employers to over 70%.  If your employer drops coverage because they see a cheaper opportunity to shift your costs to a public option, the promise that “ you can keep your own coverage if you like it” would not hold true.  For 160M Americans, it is their employer who decides to offer coverage.

8) Reimbursement and malpractice reform – Harmonize Medicare and private insurance reimbursement schedules achieving one reimbursement methodology that rewards higher quality performance and widely distinguishes between those who achieve good outcomes and manage health of the population and those providers who do not.  Offer medical malpractice protection to those doctors who adhere to evidence based medicine making it difficult to sue for malpractice when clinical guidelines are followed.  Baucus plan response: Dead on arrival.

9) Consumption tax on junk food ( VAT for FAT ) Baucus plan response: Silent and unfortunate.  The food industry is getting away as an accessory to the crime of obesity in America.

10) Tax the richest benefit plans at the employee, not insurer level – any individuals receiving benefits that exceed the annual cap will lose their deductibility for benefits above the level of approved cost.  This precludes insurers from cost shifting and acknowledges that insurers having been already subjected to profit caps on their small group, individual, Medicaid and Medicare plans. Baucus plan response: weak and getting weaker as concession are made to unions to exempt them from the taxes that would hit rich collectively bargained plans first and hardest.

11) Means test for Medicare – If we want to keep our Medicare benefits, we will have to pay for them.  Until reforms actually reduce the number of practices that drive waste and fraud in the system, Medicare will continue to devour a large portion of public spending.  Baucus plan response: Silent. Means testing – the increasing of the pro rata taxation to retired Americans who receive higher retirement income – is inevitable.  It is inevitable in this administration that this is coming.

Any final bill will suffer withering attacks from both sides of the aisle.  There is a great sense of urgency in Congress to push reform through before the 2010 mid-term elections potentially restore party balance to the House and Senate and fiscal conservatives regain control of the spending that has increased our pubic debt to an estimated $ 9T in 2009.

The wild west of healthcare remains an untamed landscape where the strong survive and justice does not always prevail.  There are hangings, bank robberies, land grabs, gunslingers, crafty lawyers, rigged decks, carpetbaggers, untamed regions and innocent pilgrims lost forever in the wilderness of bureaucracy.  There are triumphs, tragedies, heroes and villains. However, there is a new sheriff and posse in town and a disgruntled mob is gathering by the courthouse.  They are building a gallows and ready to string up the culprits.  The insurance industry sits in the county jail hoping for a fair trial while other offending parties are out on bail or roaming free.

The problem is trying to identify the real culprit.  The solution is neither as dire as the dime store depictions of the hard right with their catastrophic warnings of death panels and wholesale rationing nor is it as simple as expanding care for all and finding the money to do it by keeping “insurers honest”.  Whoever drives this change must be challenged to offset needed access to the uninsured with legitimate, difficult dollar for dollar reductions in cost. We cannot allow any plan to pass through Congress that takes out a second mortgage on our children’s fiscal future.

The taming of healthcare is like the domestication of the real west – sacrifices need to be made by people who understand that the integrity of a generation is defined by how much better we leave the world for the generation that comes after it.  We want our children to have a chance to meet or exceed our standard of living.

At this rate, unless we all own the problem and quit defaulting into fear based sound bites or idealistic nonsense that cannot be supported with hard dollars, we could end up in a fiscal Little Big Horn. We must push our legislators to move thoughtfully to adopt reforms that impact all the various stakeholders or this may become a Greek tragedy where we suddenly realized we lynched the wrong guy, let many accomplices off with little or no consequence and corrupted the future we were purportedly trying to protect.

Harry and Louise Go To Washington

Harry & Louise Go To Washington

By Michael Turpin


As academics, reformers and political action committees swarm to Washington like springtime midges eager to help contour imminent health care reform legislation, change is clearly in the wind.  The mood inside the Beltway is infinitely different than in 1993 when a Republican controlled Congress, partisan stakeholders, employers and two iconic middle class consumers named Harry and Louise coalesced to defeat Hillary Clinton’s complex prescription for reforming runaway costs and inefficient delivery.  Unfortunately, once the threat was ameliorated, stakeholders fell back into old patterns and failed to offer more enlightened solutions to moderate the rising costs of healthcare in the US.

In May, 2009 the private sector is unusually silent.  Harry & Louise, have just lost 40% of their net worth in the recent financial markets meltdown.  Harry lost his job in January and is worried about being able to afford healthcare coverage.  Being 55, he would love to not go back into sales but take that teaching job. He and Louise are waiting to see what the government might propose to help relieve their financial burdens and growing concerns over healthcare once Harry’s subsidized COBRA coverage runs out.

Harry has read the statistics.  He knows that employers who purchase care on the behalf of some 177M workers appear to be at their wits end and seem to be pondering whether now is the time to transfer the risk of a generation of overweight, soon to be chronically ill Americans to the government.  Louise has a friend who is a pediatrician and has heard that doctors are torn between two evils – insurers that have serially reduced their reimbursement and smothered them with bureaucracy and a government run system of reimbursement that serially underpays for services. Harry and Louise voted for the new administration and they are hoping these proposed changes will be good for them. However, they get fatigued with all the discussion and don’t seem to have the stamina to question too deeply the long range cost impact for tax payers to extend universal coverage to an additional 45.7M Americans. It seems this time around, everyone is ready for change. 

The statistics on the uninsured tell a diverse story of healthcare in America.  Of the 45.7M uninsured, 12.1M are eligible for government sponsored children’s health insurance ( SCHIP) or Medicaid but are not enrolled. 17.6M earn $ 50k or more in earnings.  9.7M are non citizens and 7.9M are college aged adults. Each group represents a different pool of risk for a new and broadened US universal access plan.  Health reform is not just about achieving 100% access for Americans, it is also about achieving affordability so we can support the cost of high quality care for all citizens.  This means driving out an estimated $900M in waste caused by preventable illness due to lifestyles, clinical variability in healthcare delivery due to defensive medicine and inconsistent adherence to evidence based best practices for treatment, and inefficiency/lack of coordination across a predominately manually administered delivery system.

Having worked as a healthcare consultant in the US and in Europe and having laid with pneumonia on a gurney in the hallway of a socialized healthcare system, I felt the need to reach out to Harry and Louise and offer some perspective on a US healthcare platform that we all agree needs to be reformed: 

1) This is a Global Issue – Every nationalized system is straining under rising healthcare costs and is achieving affordability primarily through rationing services.  In each market, there is a rapidly growing consumer financed, alternative private care market that features concierge medicine and medical tourism (E.g. Canadians coming to US, French going to India, Arabs coming to France.)  As we move toward universal coverage and the possibility of backing into a single payer system in the process, we need to understand that many systems we are seeking to emulate are experiencing rapidly expanding privatization paid for by those who can afford to go outside of struggling government run healthcare programs.   We are in a sense, passing one another in the hospital hallway. 

2) Can Government Handle Being The Bad Guy?  -Where there is national health, the government is now the payer.  Instead of a for profit or nonprofit insurer denying coverage due to lack of clear medical necessity or the absence of clinical justification, the government now gets to wear the black hat.  During my most recent trip to the UK, a 30-year-old cancer patient was suing the NHS for denying a cancer therapy that was very expensive and not likely to change his prognosis.  His oncologist was obviously throwing everything he could at the disease but the poor cost/benefit of the specialty drug forced the government to deny the estimated $35,000-a-year treatment.  

3) I’ll have the Reformed Torte, please! – There are major differences in medical liability law in Europe.  Defensive medicine – that serves both as a shield to avoid allegations of malpractice and as a curtain to obscure overtreatment – is non-existent abroad. There are fewer MRIs, CT Scans, and multiple office visits delivered each year because physicians do not over treat as a means to avoid litigation or to enhance income due to reduced reimbursement.  Medical malpractice tort costs exceeded $ 30B in 2007 – a cost that eclipsed the profits of the ten largest commercial insurers by over 2 ½ times. 

4) Talent Drain – The per capita multiple of salary for physicians in the US is 8.5 times the average worker’s pay. This is down from over 10 times which attributes to the heartburn expressed by doctors as they watch their overall wages declining. In Europe, that per capita salary delta is less than 2.5 times.  Simply put, doctors make a lot less in nationalized systems.

A good example is the UK where the government has reduced pay for local family practice practitioners and nurses creating shortages that have been filled by foreign trained physicians immigrating to the UK seeking higher levels of reimbursement than their home countries.  As doctors leave home countries seeking better salaries, the talent drain is creating medical and public health crises in more vulnerable countries often exacerbating difficult public health problems at home.

Physician migration is beginning to happen in the US.  For example, in states like Rhode Island, family practice MDs see lower levels of reimbursement than in Massachusetts and as a result, move across state lines to practice the same medicine for higher reimbursement. The drain of physicians is even more acute in New York where rural counties with larger populations of Medicare and Medicaid beneficiaries are losing doctors to Metropolitan New York because there are more privately insured patients to treat.  It does not pay much to be a primary care doctor anymore.  It does not pay at all to be a primary care doctor paid by the government. 

5) Innovation Erosion – The US finances much of the medical device and biotech innovation that drives improvement in medical quality and treatment.  Insurers, despite their public relations problems and opaque business practices, do contribute to improving consumer information systems and provide needed sentinel controls to limit fraud and abuse.  The US health system also attracts capital – – investment that drives innovation, process improvements, competition and new therapies that are plagiarized around the world – often at much lower costs.  New drugs that are financed and sold at expensive retail prices in the US are offered wholesale in other countries where nationalized purchasing depress the profit making power of the bio tech or pharmaceutical company that developed the drug. 

If the US is slowly transformed through government purchasing into a single national purchaser, the velocity in which capital will flee the healthcare sector to seek better returns will be unprecedented. Overall medical spend as a percentage of GDP will surely subside but innovation will slow and investment will be redirected like the proverbial baby with the bath water into new areas where capital will get an adequate return. 

6) Public Plan Crowd Out – Expanding government run public health plan options will accelerate the transformation of the US to a single payer system.  As the Federal government adds 45.7 million plus uninsureds to some type of expanded Medicaid or Medicare (CMS) program, privately financed healthcare through employers will bear more cost shifting from doctors and hospitals.  CMS does not negotiate provider reimbursement, it promulgates it.  If a hospital knows its costs are increasing 8% and it has received a 2% cut from the government – which represents 60% of the hospital’s reimbursement – the hospital must get in excess of a 25% increase from its private payers to make its 8% budget.  If the private payers balk at such a rich price increase, the hospital threatens to drop out of the insurer’s network.  

Enter the employer who purchases the private coverage from the insurer.  The employer immediately gets skittish at the idea of losing a hospital from their broad PPO network and admonishes the insurer to resolve their dispute with the hospital.  Unwittingly, the employer is perpetuating the problem of cost shifting and will end up inflating their own cost of care. The insurer pays the hefty 25% increase and voila, you have medical trends in excess of 10% for private payer care. Meanwhile the government is applauding its 2% across the board cost reductions and urging more employers to join their public plan because of its affordability.  Eventually, the government controls the entire system and there is no one left to shift cost of rising care to except taxpayers and providers by limiting reimbursement.

7) Are We Avoiding the Tougher Conversation?- The third rail of health reform is affordability – you touch it as a politician and you die.  Access is a safe and popular term right now in the health reform debate.  Who does not want to see every American given access to healthcare?  However, the challenge is the failure of policymakers to understand that affordability is a zero sum game.  With the net present value of our current Medicare obligations already estimated to be underfunded by some $ 8 Trillion dollars, the additional cost of expanding this coverage to 45.7 million additional Americans seems untenable without corresponding cuts to offset the current and future costs of care.  To save $ 900B in documented overtreatment and waste, someone will have to get paid less money.

There is tremendous rhetoric around the cost of administration in healthcare.  The combined profits of the ten largest commercial insurers added up to $ 12.9B in 2007.  On the other end of the spectrum, the estimated cost of obesity, according to the Forum for Health Economics and Policy, over the last 25 years has been $ 1.1 Trillion.  The cost of smoking was estimated by Health and Human services to be $ 157B each year. The cost of fraud is estimated at $ 100B by the Center for Medicare and Medicaid Services. 

While reform must absolutely change stakeholder practices and insist on total transparency of all administrative expenses not attributable to actual claims, ( PWC estimates this number to be 13% of every dollar while anecdotally, we often hear numbers as high as 30% ), the real opportunity for changing the system is changing people.

Regulation should focus less on price controls and more on population risk management – medical management, personal health improvement, rationalizing redundant and inefficient delivery systems and returning patients to a primary care based model where physicians are incented to keep patients healthy. In Japan, government officials have gotten serious about the public’s obligation to contribute to lower costs of care. Ideas have included considerations that would be viewed as outrageous in the US such as a surcharge tax for overweight individuals – as these consumers are more likely to develop costly and avoidable chronic illnesses that will consume more services from the national system.

8)  Achieving Zero Trend – Zero medical trend can be achieved, according to Dr Dee Eddington of the University of Michigan, through risk management not through cost shifting or rationing. The current debate on healthcare reform is unfortunately happening among too few of the stakeholders and as we speak, compromises are being forged that seem to be less about lowering medical trend and more about limiting or eliminating the role of those who add administrative expense to the system.  

Pundits point to the Massachusetts “Connector” as a shining example of how a state government has created efficient purchasing of individual and small group coverage for the uninsured of Massachusetts.  A closer look reveals a different story – looming deficits, forced expansion of the  program to mandate the participation of small employers in with individuals creating a greater spread of risk, and disproportionate cost shift to small employers.  Perhaps the most troubling is a menu of benefits so rich ( much richer than most private plans ) that it will surely drive medical trends in double digits for the foreseeable future.  It is less than two years old and is already being seriously examined as a ” solution” for individual and small group insurance purchasing.  

True affordability creates winners and losers and that’s not always good for politics. You could convert the top ten insurers to non-profit status and save a mere $ 12B a year compared to attacking obesity, one of the root causes of medical inflation that has inflated our costs of care by hundreds of billions of dollars in the last decade.  

There are certainly egregious examples of 30% administrative costs for every insurance dollar spent.  However, these statistics are often isolated and misleading as these expenses are often incurred by individual and small group plans that have higher distribution, pooling and risk charges. Individual and small group insurance is in need of reform – reforms that require guarantee issue coverage, mandates for insurance and aggregated purchasing to achieve the same administrative savings that larger employers enjoy. Insurers do make a disproportionate amount of profit on small groups and individuals. Insurers will make less money on their commercial products when they no longer can shift risk to smaller employers and individuals.  Most large employers pay less than 10% for administrative services.  The average margin on all commercial insurance is less than 6%. They, like many others, will have to clearly justify the value they bring to managing the consumer through a complex healthcare system. 


9) Rationalize or Ration? – Affordability is an unpopular discussion.  To achieve affordable care, one must be prepared to make some tough decisions.  You must either begin to rationalize the excessive and uneven care provided in the US or ration it.   Rationalizing means taking on difficult decisions around which hospitals stay open and which hospitals close.  It means enduring withering attacks from hospital worker unions in underperforming or redundant facilities.  It means demanding accountability from consumers to take responsibility for their health and encouraging plan designs that shift cost to those who refuse to be complaint.  It means questioning profit taking by players in the system that are not clearly adding value to the distribution chain but merely living off it.  It is demanding total transparency in any opaque area of healthcare delivery.  Where there is less visibility, there is more room for abuse.


Rationalizing care means making tough decisions about redundancy of services – reducing the number of MRI and CT scanning machines within a geographic area, balancing the excess supply in markets where too many hospitals compete to cover too small a population. And, it means having a difficult ethical debate around end of life care.

True reform and long-range medical trend management is painful for a generation of Americans who believe the unencumbered healthcare is an entitlement.  Countries with aging and declining populations are bracing for surging medical and pension obligations.  As the US seeks to offer expanded access, other countries are seeking to control it and to forge a more reciprocal public covenant with its citizens. Everybody wants something for nothing and no one wants to change.  True political courage is leading the discussion first around affordability.  So far, the policymakers seem reticent to hold accountable those most likely to be impacted – consumers, hospitals, doctors, unions, medical device manufacturers, biotech, and pharmaceutical companies.   It is almost easier to first expand care, and then knowingly descend into the inevitable crisis of underfunding where Congress can then legislate draconian measures.


10. Stopping the Conveyor Belt – A nationalized system does nothing to slow the conveyor belt that moves “at risk” patients toward becoming tomorrow’s chronic, acute and catastrophically ill. Medical trends will continue unchecked and will only be marginally impacted by bulk government purchasing and price controls.  Over time, our best and brightest will no longer seek medicine as a career and with that shift, quality will erode along with capital investment.  As costs inevitably go up, rationing increases, and a two-tier system emerges like a toadstool on the heap of government bureaucracy and regulation.


There is no doubt that we need change to our system.  However, the question is whether reform will be driven by a Trojan Horse – universal access supported by an expanded public plan to compete with private employer sponsored care or a tougher discussion with all stakeholders – including unhealthy consumers – about the cost drivers and the need for everyone to change.

Will Harry and Louise wake up and smell the coffee?  Will Harry lose that 20 lbs he put on while sitting around the house watching the Food Channel when he was supposed to be looking for a new job? Will Louise end up on a hallway gurney in a two tiered American health system? Stay tuned.