Black Hats and CAD Stents

 

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

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

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

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

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

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

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

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

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

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

 

Is Your Lack of “MQ” Costing You Money ?

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

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

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

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

Consider the following as you gauge your own MQ:

1. A Value based plan design:

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

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

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

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

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

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

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

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

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

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

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

a) Obese/Overweight                               1. 21%

b) Smoking                                                  2. 66%

c) Sedentary Lifestyle/No Exercise       3. 29%

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

e) High Blood Pressure                            5. 33%

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

a) 2%

b) 5%

c) 10%

d) 20%

e) No difference

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

a) Medicare                                  1. 126%

b) Commercial Insurance        2. 250%

c) Uninsured Consumer           3. 67%

d) Medicaid                                  4. 84%

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

a) Facilities – Inpatient & Outpatient                            1. 50%

b) Physicians (Primary Care)                                          2. 12%

c) Prescription Drug                                                           3. 23%

d) Physician (Specialists)                                                 4. 15%

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

a) 15%

b) 300%

c) 75%

d) 1000%

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

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

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

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

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

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

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

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

a) 80%

b) 85%

c) 75%

d) 90%

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

(See Answer Key for scores)

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

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

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

Answer key and explanation:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Case for Self Insuring Small Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The War Between The States

US House of Representatives Voting Map for HR3962
Image via Wikipedia

Christmas is the time when kids tell Santa what they want and adults pay for it.  Deficits are when adults tell government what they want and their kids pay for it.  ~Richard Lamm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Day After Tomorrow – Human Resources and Surviving Health Reform

Medicare and Medicaid as % GDP
Image via Wikipedia

As the first snowflakes of change fall on the eve of health reform, HR professionals may soon wake up to an entirely transformed healthcare delivery landscape.  The Patient Protection and Affordable Care Act (PPACA) clearly will impact every stakeholder that currently delivers or supplies healthcare in the United States.

While the structural, financial, behavioral and market-based consequences of this sweeping storm of legislation will occur unevenly and are not fully predictable, this first round of healthcare legislation is designed to aggressively regulate and rein in insurance market practices that have been depicted as a major factor in our “crisis of affordability” and to expand coverage to an estimated 30 million uninsured.  However, fewer than 30 percent of employers polled in a recent National Business Group on Health survey believe reform will reduce administrative or claims costs.

Yet, it is unlikely that reform will be repealed.  For all its imperfections, PPACA is the first in a series of storm systems that will move across the vast steppe of healthcare  over the next decade resulting in a radically different system.  Whether reform concludes with a single payer system or emerges as a more efficient public-private partnership characterized by clinical quality and accountability remains obscured by the low clouds and shifting winds of political will.  One thing is certain during these first phases – inaction and lack of planning will cost employers dearly.

As the U.S. government struggles to rein in an estimated $38 trillion in unfunded Medicare obligations, the private sector and commercial insurance will feel the weight of the government’s efforts to reduce costs and impact our $12T of public debt.  HR professionals will have to act thoughtfully to insulate their plans from the inflationary effects of regulatory mandates and cost-shifting.

So while many HR professionals are getting hit from all angles – finding it difficult to  continue to transfer rising costs to employees, unwilling to absorb double-digit trends, under-staffed to intervene in the health of their populations and uninspired to assume the role of market catalyst to eliminate the perverse incentives that reward treatment of chronic illness rather than its prevention – they must forge ahead to address the intended and unintended impacts on the estimated 180 million Americans covered under their employer-sponsored healthcare plans.

To prevail over the elements, one must have a map and a flexible plan.  It also helps to have a qualified guide.  Consider the following as you brace for the “new normal.”

  • Think Twice When Someone Suggests Dumping Health Coverage – Many smaller and razor-thin margin employers will be tempted to drop medical coverage and pay the $2,000 per full-time employee penalty – essentially releasing employees to buy guarantee-issue coverage through health exchanges, which will be available in 2014.  Aside from impacting employers’ ability to attract and retain employees (consider how many of your employees will fall into the class of individuals eligible for federal subsidies), the assumption that the $2,000 will remain the baseline assessment per employee for those choosing to not offer coverage is a dangerous variable.  While it is clear that PPACA as it is currently constructed creates obvious incentives for employers to drop coverage and allow those eligible for federal subsidies to purchase through exchanges, it is unclear how the government can continue to subsidize proportionate contributions on behalf of those buying through exchanges when costs start to inevitably rise.  The General Accounting Office ( GAO) has already forecasted an increase of almost $500B in cost due to rising costs of subsidies as medical costs trend upwards. The forecasted CBO savings of $140B versus the GAO’s estimates of a $500B increase in costs have yet to be reconciled. Whether the $2,000 penalty was intentionally set low to entice employers to drop sponsored coverage and move America one step closer to a national system, or whether someone from the CBO missed a decimal, we expect the employer penalty for dropping coverage to increase as costs rise.  Employers should be certain to model their own costs to subsidize minimum levels of coverage today against an uncertain future of variable taxes that will only increase to fund coverage subsidies.
  • Pay attention to Section 105(h) now. – Many employers may be unaware that self-funded plans that discriminate in favor of highly compensated employees must comply with Code Section 105(h) non-discrimination rules.  As of the first plan year following September 23, 2010, these rules now will apply to non-grandfathered, fully insured plans.  Insurers may choose to exercise their right to either load rates for potential adverse selection or decline to quote because employers have failed to meet minimum participation percentages.  Section 105(h) testing is critical for industries, such retail, hospitality and energy that historically have excluded various classes of rank-and-file employees or provided better contributions and/or benefits to their top-paid groups. Penalties for not complying with the new regulations are $100 per day per employee.
  • Understand the sources of cost shifting pressure – As Congress and state governments wrestle with Medicare and Medicaid reimbursements and begin to focus on fraud, over-treatment and accountability for clinical outcomes, providers will feel the increasing pinch of reimbursement reform and will pivot in the direction of trying to shift costs to commercial insurance.  Physician hospital organizations (PHOs) and other integrated healthcare delivery systems – where health systems operate primary care, specialty and inpatient care – are accelerating – giving more clout to providers in contract negotiations and increasing commercial insurance unit costs, potentially exacerbating already conservative insurer claim trend assumptions.  HR professionals will need to better track employee utilization patterns for in-patient facilities especially in  high-use urban and rural commercial hospitals that also derive a large percentage of their revenues from Medicare. If a hospital derives 60% of its revenues from government reimbursement and 40% from commercial insurance, proposed fee cuts will impact facility revenues and create pressure to cost shift to private insurance.  An understanding of hospital utilization and consideration of tiered networks can help insulate your plans and drive lower costs.
  • Don’t be intimidated by self-insurance – Many employers underestimate the advantages of self-insurance and overestimate its complexity and risk.  But, in a post reform world, firms with more than 200 employees should give serious consideration to partial or total self-funding.  Aside from the total transparency of commissions, fees, administrative expenses and pooling charges, employers own their own data. The sooner employers get comfortable with self-insurance as a risk financing strategy, the sooner HR professionals can construct loss control programs that can mitigate claims costs. By self-funding, employers may better manage their population’s health risk; may avoid a myriad of state-based mandates legislated to fund potential shortfalls should local exchanges prove inadequate to contain costs; and may increase flexibility with respect to plan design. Be certain to understand the economics of your self insured arrangement.  A cheap third party administrator with weaker provider discounts and limited medical management capabilities ultimately costs you much more than services provided by a national insurer with better discounts.  In other cases, insurers may have more than one PPO network and assign the less aggressive discounts to their self funded TPA based clients.  Make sure you press for the best possible discounts.
  • Forget Wellness – Think Risk Management. – Wellness has become a broad-brush term to describe any sponsored effort at health improvement. Forget wellness. Population risk management (PRM) is the operative term to describe a process of understanding embedded health risks and structuring plan designs to remove barriers to care and keep people healthy. PRM requires access to clinical data, cultural engagement and designs that have consequences for employees who do not engage. If employers do not understand the risk within their workforces, it is impossible to improve results or be confident that plan changes will drive a desired result.  For example, more than 50 percent of claims arise out of modifiable risk factors and as few as five percent of employees drive 50 percent of claims.  The great news is PPACA actually increases employers’ ability to charge up to 30 percent more in premium for individuals who do not actively get and stay healthy.  Also, employers that establish comprehensive workplace wellness programs and (1) employ less than 100 employees who work 25 hours or more per week and (2) do not provide a workplace wellness program as of March 23, 2010 can take advantage of available government grants.
  • You are the “market forces” everyone keeps talking about and you need to use this power to influence on-going reform. – Employers purchase healthcare for more than 180 million Americans – about 60% percent of all individuals who have healthcare coverage, but ironically feel less empowered, informed or in control of their spending or their employees’ behavior as they access the system.  HR professionals must become activists for public health improvement and change – promoting healthy behaviors, transparency and accountability while putting an end to public-to-private cost shifting, overtreatment, fraud, abuse and clinical variability. Congress will only listen to employers because the other stakeholders have a perceived conflict of interest in how health reform is ultimately resolved.  Employers must build up the courage and resolve to begin to reshape the local, regional and national delivery models that result in overtreatment and lack of accountability for poor outcomes.

As we look out the window, the full force of reform is still swirling somewhere off in the distance.  As business hunkers down and adopts PPACA legislation, the question for many in HR is simply – will reform happen for me or to me?

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

Getting Over The New Normal

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Getting Over The New Normal

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Charles Darwin

In her 1969 Book, On Death and Dying, Dr Elisabeth Kübler-Ross describes the five stages of grief.  Over a 27 year career marked by mergers, acquisitions, and perpetual change, I have come to accept these five stages as necessary rites of passage that humans must endure as they navigate the inevitable shoals of change. It seems we all must endure denial, anger, bargaining and depression before we finally break through to acceptance.

While we all intellectually agree that our healthcare system is broken and is in profound need of change, most preferred that all the heavy lifting required to reduce healthcare costs as a percentage of US GDP, occurred on someone else’s watch.  As Woody Allen once quipped, “ I don’t mind dying.  I just don’t want to be there when it happens.”

We know that chronic illness, escalating costs, opaque and uneven reimbursement practices, and a $ 38 Trillion unfunded Medicare obligation would eventually bring the nation to its knees.  However, it suddenly felt like the confederacy of agents, brokers, and consultants were passengers on a bus with no breaks that was careening toward a cliff of profound change.  And then it actually happened: health reform.  Prognosis: Uncertain.

Denial – Most brokers and agents objectively looked at reform as a flawed proposition as it failed to address fundamental cost drivers that were clearly contributing to unsustainable healthcare costs.  Brokers were witnessing 20%+ increases for small business, a limited marketplace of insurers, huge barriers to entry for competing health plans and a supply side of providers that were up in arms over serial under reimbursement from the government and a Darwinian reimbursement environment where only the strong could survive.  Our employer clients were angry with increases, predisposed to market their insurance each year to a limited field of insurers, consumed with avoiding disruption and content to cost shift to employees through higher deductibles and co-pays.  It seemed no one was willing to touch the third rail of healthcare – affordability.

High performance networks, promotion of primary care, an emphasis on personal accountability for health improvement and value based plan designs seemed too complex, cumbersome and indecipherable for many small, mid-sized and larger employers who felt they little capital left with employees to impose additional changes.  This reticence to be early adopters of critical cost management programs and the nature of fully insured pooling by carriers for smaller employers, conditioned employers to consider health insurance a commodity. Most brokers happily moved at the speed of their reluctant clients and remained in step with their insurance partners.  Instead of focusing on risk identification, and mitigation, the industry focused on risk transfer, a generation of brokers and agents built wealth but did not seem willing to risk provoking clients out of their own death spiral.  An entire industry was in denial.

Anger – As the Obama administration shifted its strategy from health reform to insurance reform, denial turned to anger as the industry found itself in the vortex of a poison populism. As insurers were pilloried for for-profit practices, and other third party players were painted as parasites draining the system of its sustainability, brokers felt their blood pressure rise.

The seeming hypocrisy of underfunded Medicare obligations, deficit financing by states facing billions in debt, a generation of consumers on the slippery slope toward chronic illness, employers overwhelmed and averse to change and an opaque and increasingly inflexible oligopoly of insurers – – led brokers to feel victimized and marginalized in the debate.

On the other side of the aisle, legitimate questions arose around broker value as critics witnessed commissions that rose with medical premiums and a lack of transparency on base and contingent compensation.  There was difficulty in determining value for services that did not seem to bend the medical trend curve, and seeming relationships of mutual convenience between insurers and brokers that created potential for conflict of interest.

When reform recently passed, brokers gazed across a horizon line of regulations and did not like what they saw.  Brokers recognized legislation as the first step in addressing fundamental flaws in the system but understood clearly that the Patient Protection and Affordable Care Act was uniquely focused on access and insurance market reforms.  It would not materially change the trend line impacting private employers – – in fact, it could very well make it worse in the near term.  Insurers driven by demands as public companies and possessing fewer levers to pull to impact rising medical loss ratios had become less flexible and defensive.

Brokers also recognized incentives in the new legislation that could accelerate the erosion of employer sponsored healthcare as costs would inevitably rise from increased adverse selection, government cost shifting, a new vouchers system allowing individual opt outs and less onerous penalties that could create tempting incentives for employers to drop coverage.

Questions are now being asked: Will the minimum loss ratio calculation pressure carrier’s retentions to where they will begin to unilaterally cut commissions?  Will insurance companies attempt to disintermediate us? Am I prepared to defend my remuneration in the brave new world of transparency? If I convert my larger clients to fee based remuneration will my margins be severely impacted?

Will my lack of size or premium with insurers make me less relevant and more susceptible to unilateral actions? Do I possess the resources necessary to compete in a world where impacting claims costs will be more relevant than entertaining, shopping insurance and adjusting plan design options? Will state connectors attempt to supplant my role as an advisor?

As costs increase in the near term from mandated plan design changes, underwriting restrictions, Medicare cuts and minimum loss ratios, will companion legislation not be far behind that establishes a state or federal rate authority to artificially control prices? Judging from the insanity in Massachusetts – a market exclusively managed by non-profit insurers, universal coverage has led to an affordability crisis and the most expensive healthcare in the US.  Are we headed over this same cliff?  Will a public option reemerge if we cannot reduce barriers to entry for new players to offer employers more choice? Am I going to end up living in a card board box ?

Bargaining and Depression– Career professionals are already beginning to rationalize.  “ We have until 2014 and many of the impacts will not be felt until 2018 and beyond. “  Others whistle in the dark, “ I just need to make it until my kids graduate college.”  This period of bargaining is a mental feint to prolong change as long as one can to avoid the pain of conforming to a new normal.

Some brokers may just sit down in the middle of the road resigned to a belief that if the insurers do not get them in the form of reduced compensation that employer sponsored healthcare will slowly erode and an increasingly crowded and qualified mid-sized and larger employer brokerage and consulting market will leave them little if any role to play.

Some are taking these changes very personally.  These brokers are becoming lightening rods in their local markets and catalysts elevating the discussion and debate about what next needs to happen to achieve access AND affordability.

They have accepted the axiom that any unsustainable trend eventually ends and that it has now happened on their watch.  Attention is focusing on how they can become focal points for local, regional and national change, They recognize they are not bystanders and third wheels but they are key influencers and the nexus between the supply and delivery sides of the business.  They recognize that they must write the next chapter of health reform and not merely be waiting to read each subsequent installment. Their grief has been brief, their anger channeled, their bargaining and depression endured and their entire focus now is on shaping the next stages of change.

Acceptance – Eleanor Roosevelt once said, “each person has a choice to either light a candle or curse the dark.”  The best and brightest in the brokerage community understand that to broker is to consult and to consult effectively, one must enjoy a trusted relationship with a client.  Any practice that erodes that trusted role should be avoided – especially if it is a legacy practice of an industry did not do a good job in changing our opaque and disconnected third party payer system.

Transparency creates enormous opportunity to delineate value.  If value is defined as “outcomes divided by cost”, the successful post reform broker will delineate their services, the outcomes they hope to achieve and the costs of the services they will provide.  Historically, many commission-based clients did not always know broker remuneration, did not employ service contracts and judged a good outcome as the absence of service disruption.  The world has changed.

Consolidation will create odd bedfellows and strange alliances.  However, in the brave new world, advisors must drive value across an entire employer organization.  While insurers will be struggling to dispel the notion that they are not worthy of margins beyond those of a utility, brokers will need to convey value and if they cannot achieve the critical mass and resources required to compete, they will lose business.

The pressure to create competition and choice may help lower barriers to entry in markets and create new competitors to traditional carriers.  More choice for employers requires more advisors to assist them in navigating through the minefields of competing carrier practices.  As companion legislation continues to evolve, the need to serve clients as a legal and compliance interpreter will be essential.  Merely copying new laws and emailing complex regulatory language to customers will weed out lower performers.  Clients want to know: How and when does this effect me?  What should I be thinking about?

Clients will require help in attacking the last frontier of healthcare – employee health and well-being.  The desert of good intentions is littered with the skeletons of ineffective wellness plans that merely nudged individuals toward healthy lifestyles.  True risk mitigation will require leveraging every aspect of the law to intervene to improve public health.  The best and brightest will recognize that a healthy worker is less likely to file a workers compensation claim.  A healthy worker will miss fewer days reducing absenteeism and costs associated with replacement workers. Population Health management will become as standard as loss control for property and workers compensation programs.  It is motivating to think that by structuring a preventive care plan properly, we can detect asymptomatic illness and significantly reduce the rate of lifestyle based chronic illness.

A Brand New Day: Health reform is not terminal.  However, it will require everyone to change.  We are entering a strange, new universe forged out of intended and unintended consequences.  However reform is also a relief because it is the beginning of a process (however unsavory) to arrest an unsustainable trend.  As citizens, free market capitalists and parents, we do not want to leave our children holding the bag with record deficits and massive public debt.  We always knew the process of taming entitlements and changing a dysfunctional third party payer system would be messy.  As most in Congress lack the political will to take on affordability, it will fall to us.

Regardless of the twists and turns in these first few chapters of what will most certainly be a Dickensonian saga, there will always be a role for smart, motivated, transparent and intellectually curious brokers and consultants.  The sooner each of us concludes our stages of grieving and gets on with accepting the new normal, the better chance we have to lock arms and demonstrate that we can be highly influential in a creating a better and more efficient healthcare system for tomorrow.

Survivor 2015 – PPACA Island

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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.

Cat’s Cradle – Untangling the US Healthcare system

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Should H.R. Stand for Health Reform?

Should H.R. Stand for Health Reform?

By Michael Turpin

There is a story of Winston Churchill addressing an exhausted and beleaguered group of young RAF pilots during the height of the Battle of Britain.  As he surveyed the demoralized men who had logged so many combat hours and had witnessed friends die in battle against a superior Luftwaffe, he stood silent and allowed a heavy pregnant pause to fill the air.  Churchill turned to the pilots and posed just two questions:

“If not you, than who?  If not now, then when? “

The primary purchasers of healthcare for over 180 million Americans are human resource and benefits professionals. The job description for most HR and Benefit professionals is managing human capital.  These increasingly difficult jobs strive to achieve a harmonic convergence of employee attraction, retention and development that leads to growth in revenues and profit.  Yet, when faced with increasingly inflationary healthcare costs and fewer choices to mitigate them, employers are increasingly taking the path of least resistance – passing on rising costs to plan participants rather than confronting more deeply embedded drivers such as poor lifestyles, lack of consumerism and a reluctance of stakeholders to be held accountable.  It’s time we grab our national health crisis by the folds of its own fat and force fundamental change. It is going to ultimately fall to human resource, benefit and other business leaders to deliver some tough messages to stakeholders who have failed to solve this crisis.

As we follow the healthcare reform debate in Congress, the silence from many employers has been deafening. The genesis of true market-based reform can only occur at the level of the employer. HR and benefits leaders must exert a level of influence over the debate. As we enter this era of tough love and economic survival, it’s time for those who are most experienced to speak up.  HR and benefits managers should consider the following eight steps as a means of seizing the high ground in driving market reforms in healthcare.

1)    Advocate “loss control for healthcare” – Most smaller and mid-sized employers feel they have little leverage or control over their healthcare costs.  Ironically, these same individuals are active and aggressive in managing the costs of occupational health through workers compensation loss control programs.  If clinical industry benchmarking data indicates that 6% of a workforce is normally diabetic and your claim data suggests less than a 2% incidence of diabetes within your claims, you may want to focus on determining whether you have a higher rate of undiagnosed illness using health risk assessments and predictive modeling instead of blindly assuming that your loss experience is tracking more favorably than industry norms.  You must design value based plans that remove barriers to care and encourage prevention. It is time we develop strategies to drive non-occupational health management as a course of business.  Call it “wellness”, “productivity improvement” or “presenteeism” – it is all about improving the health of our employees and their families.  The days of fencing with finance over the return on investment of a healthy workforce must be replaced by a corporate commitment to improve workplace health.

2)    Have an opinion – Too many HR and benefit industry professionals do not express their opinions about what needs to change.  Get involved in industry associations.  A friend who runs a major employer coalition in a large US city confided to me how difficult it was to get HR and benefit professionals to participate in roundtable discussions with insurers, hospitals and other key stakeholders.  Call it apathy or a lack of bandwidth. The absence of employers (particularly hard hit mid-sized and smaller employers) voicing strong opinions about how the next iteration of healthcare should evolve in each market creates a void that may soon be filled by politicians and academics who have a less pragmatic understanding of the irreversible downstream consequences of radical reform.

3)    Insist that double digit trend increases are unacceptable – For insurers to continue to deliver core trends in excess of 8% and fully loaded trends well into double digits indicates that payers have not delivered on promises to offer lifestyle changing medical, disease management and claims management impacts. Insurance company underwriting and trend setting practices are an opaque alchemy.  Any vendor who purports to offer health plan management services should have their remuneration tied to managing your medical trend.  In the final analysis, trend drives cost.   If the best that the for profit and not for profit healthcare industry can offer is double digit increases, it deserves to be replaced by an alternative system.

4)    Force the C Suite to get help amplify your message– Senior management, finance and HR must work in partnership to assess risks, seek to eliminate and/or mitigate them, determine which risks should be retained through self insurance and which should be defrayed through risk transfer.  The days of treating insurance renewals like the purchase of a car – “If they get to 10%, tell them we will renew.  Otherwise, put it out to bid” – must be replaced with a more thoughtful year long discussion on claim cost drivers and ideas to mitigate near term and longer range claim costs.  Benefits are an investment, not a commodity.

5)    Understand cost shifting is not cost containment – Managing healthcare expenditures does not mean merely cost shifting increases to employees.  It means engaging and communicating with employees around cost drivers, lifestyle obligations and plan changes that are designed to improve health. Many employers opt for open access networks allowing employees the ability to bypass primary care in favor of more expensive specialty care self-referrals.  These paternalistic designs limit disruption but drive higher medical inflation which in turn, requires more cost shifting to employees. With new claims and episode of care data helping to designate providers who deliver higher quality and lower cost outcomes, we can design a new healthcare system around superior providers and higher quality outcomes.  We can focus on rewarding primary care providers for keeping people healthy instead of bankrupting our system around a legion of medical specialties that are exponentially growing to serve the needs of tomorrow’s chronically and catastrophically ill.

6)    Develop a plan – When was the last time your broker or consultant sat down with you during your budget cycle and helped develop your cost assumptions for the coming fiscal year?  Every 100bps of medical trend saved translates into dollars contributed to earnings, shareholder value or private equity owner returns.  HR and Benefits can been seen in a much more strategic light when a plan is developed and followed – particularly one that drives so much annual cost and increases disproportionately to all other corporate costs each year.

7)    Participate in provider negotiations – Insurers are often maligned for their business practices.  While health plans are clearly focused on shareholders and profits, they are critical partners to managing medical trend.  Most insurers privately confide their lack of confidence that employers will support them if they get into a major fee dispute with a large hospital system or medical group. Larger hospital systems are banking on the fact that employers will not tolerate the noise from employees resulting from the loss of a major healthcare system from their network.  This lack of solidarity forces the insurer to agree to pay larger fee increases in contract negotiations – leading to higher medical trends for the employer.

8)    Calculate broker value as outcomes divided by cost -.  There are 28,000 consultants, brokers, financial advisers and agents delivering advice on healthcare to employers across the US.  Like any industry, there is wide variability among intermediaries.  Many of these middlemen are reactive, focusing on annual plan marketing, issue resolution and administrative support services for HR. In the end, the calculus of determining service value should be outcomes divided by cost.  If you cannot measure outcomes (e.g. year over year trend mitigation, claims and vendor performance management) and you do not know what your broker or consultant charges, it is impossible to determine the value of services.

The greatest single asset we possess in American business is our workforce.  HR and benefits are the ombudsmen and advocates for these human resources and must use benefit plans as levers to drive productivity and process improvement.  Sounds like a big responsibility?  It is.  While HR and benefit leadership may seem thankless in these dark days of recession, rising medical costs, declining profits and layoffs, it can be a highly rewarding platform for those capable of elevating themselves to the role of business leader – helping ensure the personal health of employees, their families and ultimately their company.