The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences. Stephen Dubner and Steven Levitt, Freakonomics
I hear it restlessly moving off in the distance, the way spring struggles and finally gains momentum through the mud season. It hesitates, sending subtle harbingers of change in the form of a warm wind or the scent of new growth. The public option is stirring like a new shoot poking out of the decay of an old stump. With it, a next stage of reform is already forming even as Managed Care 2.0 struggles to gasp its first few breaths.
It is strange to be speaking of the next stage of reform years before the majority of Managed Care 2.0 regulations are due to take effect. However, in the land of unintended consequences, no one can predict with certainty how healthcare is likely to evolve. We do know that no one from the political middle, left or right is convinced that this first iteration of health reform will result into a system characterized by affordable, high quality care. Managed Care 2.0 is merely a brief stage in the metamorphosis of the last private healthcare system in the industrialized world.
Some believe that the US’ best chance to salvage its mounting public debt, socioeconomic polarity and physical vitality is to eventually yield to a single payer system that can ensure coverage all of our citizens. In that brave new world, those capable of opting out into private care, could do so on their own dime and on an after tax basis. Critics of single payer argue that an entitlement of this magnitude only stands to propel the nation toward record deficits, hyperinflation and economic ruin. The very thing that has made the US great, conservatives argue, is its ability to avoid safety net entitlements that eventually become hammocks. One thing is for certain: Reform in its current form will do little to alter the supply side of the business.
Change is a scary proposition for 180M Americans who believe the devil they know (employer based private coverage) is preferred to a government run system. Seniors are doing the math and wondering if Medicare will default on their watch. More than 50% of these same seniors, when polled, shared they do not want a government run healthcare system – even though Medicare is a government run system. People are confused, angry and wary. To attack the real crisis of affordability at this time is an even scarier proposition for politicians who want to be reelected. Yet, The Patient Protection and Affordable Care Act is now law and despite its obvious flaws and potential for unintended consequences, it is unlikely to be repealed or deconstructed. For better or worse, it is the foundation for Managed Care 2.0.
The building blocks of the Patient Protection and Affordable Care Act are insurance market and access reforms — legislation that has little to do with moderating rising medical costs. It’s not that those that conceived the legislation did not understand or consider more draconian steps toward achieving affordability. However, no on wants to break that news to the American people. It would be too scary a bedtime story for adolescent, recession sick America to hear about a future where tough decisions will need to be made about who gets how much care. The story would not have clear heroes and villains but be cast in an ambiguous gray world of ethical and moral dilemmas — do we reduce reimbursement to our revered doctors and hospitals? How can we assure that our best and brightest continue to practice medicine? Do we cut Medicare? Will venture capital, public and private equity flee out of healthcare profoundly effecting research and development? How do we tackle the march towards chronic illness of Americans who are obese and unable to take personal responsibility for their health? Should we ask all Americans for a durable power of attorney so we have the ability to make the hard choices about end of life care?
Is Massachusetts a Mature Version of Managed Care 2.0 ?
The next chapter of the managed care story is being read aloud in Massachusetts. Already having achieved universal coverage through reform, the Bay State is seeing costs in its merged individual and small group pool continue to surge. In an election year game of cat and mouse, Governor Deval Patrick is restricting non profit insurers to live with rate increases well below those required to cover the costs of ever increasing medical utilization. When Massachusetts passed reform, it covered all individuals but simply did not confront the underlying factors contributing to rising costs. Before you shout, “Those damn insurers,” remember that 95% of Mass’ insurers are not for profit.
To add insult to injury, the Massachusetts legislature has recently proposed a bill that would require any physician seeking to be lisenced in the Bay State to accept Medicare and Medicaid reimbursement levels. It may be time for Kaiser to move into Massachusetts as the alternative employer of choice to the state.
Most new Massachusetts insureds can’t find a primary care doctor as too few are left after years of under reimbursement. This leaves our newly insureds — many of whom are chronically ill and require coordinated care — to access the system through the least efficient point of entry, the emergency room. The state’s not for profit insurers are in a profound pickle. They have statutory reserves that will soon be depleted if they cannot raise rates. However, it is an election year and the governor is using an age old lever, price controls, to buy time, point fingers and escalate the debate. If this were allowed to play out, the insurers would be unable to meet legal reserve requirements within 24 months and be out of business in the state — leaving the need for a single payer to assume responsibility.
Why is There Not More Competition Between Health Plans?
Where are the competitors you ask? When insurers are raising rates 20%-40% for small business, why are there no new entrants to steal market share as is often the case in other industries primed by a free market pump. Simply put, the barriers to entry are too high for new entrants. The economics of provider contracting (which drive 80% or more of a payer’s costs) are such that a payer has to have membership to get the best economics from a provider.
In many US markets that are dominated by a handful of players, the cost of building market share to achieve similar economics to the market’s largest competitor is too high — particularly for a public company. You essentially can only enter a new market by purchasing a competitor – – which is expensive and carries enormous execution risk for the capital being employed.
For example, trying to unseat a deeply entrenched Blues plan with 70% market share and most favored nation pricing deals with hospitals, is an almost impossible feat for any new payer. No insurer has the financial will to enter a new market against a giant competitor that controls as much as 50% of the individual and small group market — a market where margins are largest. A further complication arises if that entrenched competitor is a non profit sitting on huge reserves and you are a for profit company expected to show earnings improvement quarter over quarter. No shareholder or private equity owner has the patience to wait out the price war that you would inevitably engage to take market share.
So, who can compete with a large competitor squatting like a toad with a disproportionate amount of market share? United Healthcare? Aetna? Harvard Pilgrim? Kaiser? Bzzzzzzz! Sorry, wrong answer. It is the government.
Ah yes, the dreaded public option defined by some as “Medicare Lite,” ” Obamacare” or ” Death Panels for Granny”. Over time, it would represent a basic package of essential services consistent with so many other nationalized plans across the world. Many believe that a public option is really the only viable way to create competition within markets where competition does not exist. Other see it as a Trojan Horse leading to unfair competition where taxpayer dollars are used to subsidize the cannibalization of private care by a public plan. The goal: single payer, socialized medicine. So who’s right ?
Why Not Introduce the Public Option In Markets With No Competition?
Here’s the dilemma: If a public option were to be created, its reimbursement would likely be linked to Medicare. If a larger percentage of insureds reimburse doctors and hospitals at Medicare levels, providers would revolt contending that public option reimbursement is inadequate to cover the true costs of care. Critics argue of rationed provider reimbursement note that US providers make 8.5 times the average salary of a worker in the US and only 2 times the average salary in other Western countries. Our best and brightest seek medicine and in doing so, deliver some of the best care in the world. ” If I get cancer” asserts one anti-reformer, ” I want to be treated in the US where I have the highest probability for survival.” Naysayers argue that our outcomes are actually worse than other industrialized countries whose reimbursement systems have created systems that are characterized by primary care and smaller secondary and tertiary care systems. “The US is the diametric opposite”, contends one critic, ” we lag many nations in critical public health indicators. In the US, the insured live longer. Outside the US, everyone lives longer – not just those who can afford healthcare.”
Doctors have long contended that like it or not, their ability to cost shift to private healthcare enables a less than optimal equilibrium that holds our broken system together. With a public option tied to Medicare, doctors would find a larger percentage of their patients policies reimbursing at lower levels. This would be abetted by the fact that insurers would be losing market share to a lower priced public option alternative. As public companies they would have to continue to lower premiums to keep pace with a public option that has better economics or lose market share — either way suffering an operating profit death by a thousand cuts. Supporters for the public option view this economic transformation as an inevitability of eliminating waste, inequity and over-treatment. The dollars are there, many contend, they just need to be redistributed.
The reimbursement differences between Medicaid, Medicare and private insurance are real and pronounced. We know in New Jersey for example, there are three levels of hospital pricing reflected in state regulations. More than 500% of the federal poverty level (FPL) is considered retail charges. Between 300% and 500% of the FPL can be charged at 115% of Medicare and below 300% of FPL is charged at the state Medicaid fee for service rate. The range of costs that can be charged to uninsured individuals vary dramatically. For example, the charges for back surgery for a 500%+ FPL patient range from $185,000 to a startling low of $13,000. The reimbursement for an under 300% Medicaid patient averages around $5,800. How one is allowed to reimburse hospitals and doctors determines much of their fate as a payer.
Should the government introduce a single payer, it would reimburse providers at lower levels than private insurance which would allow it to capture market share through lower costs resulting in lower premiums. In 2014, consumers concerned about the rising cost of care delivered through newly formed state insurance exchanges, would seek the lowest price plan. If that choice was a public option, many would be likely to try it on for size. So far, so good?
There is a scenario where a large percentage of those currently privately insured move from an exchange plan to a public option exchange alternative. The more participants that join the public pool, the greater the purchasing power the government can wield in negotiating fee increases to providers. As the economic advantage between a public option and private insurance widens, private insurers start to withdraw from markets.
Much of healthcare cost control is achieved through provider reimbursement contracting but it only goes so far. As physician and hospital reimbursement decreases, fewer individuals stay in or enter medicine leading to reduced capacity. Access to care becomes an issue resulting in a delivery system that is anchored by rationing and triage. This transformation toward rationing access is inevitable in any system where there are limited resources and infinite demand. Many economists and health policy experts would argue that our current course is untenable and that managing healthcare within a finite annual appropriation is not a bad thing. Affordability is, after all, a zero sum game.
Can The Public Option Compete Without Medicare Reimbursement?
If a public option is introduced but not allowed to index reimbursement to Medicare could it survive ? Certainly a public option not anchored by Medicare rates of reimbursement would experience the same challenges that any insurer experiences when trying to enter a new market. A public option may have initial advantages due to lower administrative costs and non profit status but as a level playing field competitor, it requires additional infrastructure to pay claims and administer clinical, fraud and utilization management programs to control cost. Hospitals and providers would be reluctant to give a new public option better economics than private plans for several reasons — the knowledge that a stronger public option means reduced reimbursement over time, the awareness that any government plan allows less of an ability to negotiate rates and the recognition that a public option without members has no real purchasing power. Like credit, one has to have it to get it. Competitive contracting economics come with leverage. Leverage is membership. The more members you have, the better the rates you can negotiate. No members, no competitive contracts.
Fear not, the public option has the advantage of using tax payer dollars to initially price premiums at a loss (charges for care will exceed premiums received ) until the it takes on enough membership to be self sustaining. Initially insurers would try to cherry pick against the upstart public competitor, running off poorer risks to the public option. However, the deep pockets of a public option funded by tax payer dollars can outlast any private plan. The balance in the market shifts and the public option gains equal or better financial footing than its for profit foes. The twilight of private insurance is at hand in a 2.0 world.
Some question whether a public option can delivery similar clinical and utilization management as private plans to ensure cost effective delivery of care and limited abuses by providers trying to make up in quantity those dollars that they are losing in reimbursement. After all, unit cost discounts can only go so far. The holy grail of medicine is managing care in a more integrated fashion, eliminating unnecessary treatments and keeping people healthy — none of which get rewarded through today’s treat vs. prevent chronic illness reimbursement system.
History suggests Medicare and Medicaid have not been nearly as diligent as private insurers in fraud, medical management and waste prevention. In fact, while government run plans have an administrative cost that is one-third of private for profit insurers, fraud and abuse represent an additional 10% or $$100B per year. The savings achieved through razor-thin administration are bleeding out through the thousand cuts caused by laissez faire medical management. It’s a fair question to ask whether a single payer would really be able to manage care and outcomes or just manage access and reimbursement.
Insurers understand that Managed Care 2.0 is just that — a next stage in an irreversible process of transformation. Their greatest fear did not immediately occur – the establishment of a federal rate authority administered by Health and Human Services. However, if minimum loss ratio thresholds prove inadequate to contain costs ( and they will prove inadequate ), we are likely to see the two headed beast appear where we are asked to pick our poison — rate controls or a public option. Prior approval of rates are already embedded in 50% of US markets. Rate debate is happening as we see Massachusetts and others grapple with little imagination around the reality that access without affordability is like a flashlight without batteries — it doesn’t work.
My guess is by the time health exchanges are established for individuals and small employers in 2014, costs will have risen another 40%. The government will realize that $500B of Medicare cuts to finance access for new insureds did nothing to reduce its $38T unfunded liabilities. Medicare will continue to hurtle towards insolvency until the real cost containment legislation is passed.
The average cost for private insurance will increase with mandated coverage minimums and guarantee issue, non cancelable coverage. An individual above 400% of the poverty line will find it hard to afford coverage and may spend a large percentage of their discretionary income on health insurance. Larger employers are likely to pull up the drawbridge and begin to slowly cut coverage. Mid-sized and smaller business will do the simple calculus around whether they keep or drop insurance. No one will want to be the first guy to drop coverage but no one wants to be the last guy who pays for the $15,000 aspirin as cost shifting hits its high water mark. A public option could provide the air cover employers need to slowly step away from employer sponsored coverage.
The middle class will take it on the chin as they always do. At this point, we will rally around the cry for affordability. The pitchforks and torches will once again appear and we will look for a common enemy. And out of the woods, crashing across the growing chasm of cost will fall the public option. It will be hailed as the panacea for competition and sentinel control over for profit players. It will usher in a new era and it may very well set in motion the next phase of Managed Care 2.0 – – an era characterized by the death of private insurance.
Depending on where you sit, you will either be dancing around the bonfire or burning someone in effigy. One thing is certain, more change is coming.