“Americans have always been able to handle austerity and even adversity. Prosperity is what is doing us in.” James Reston
His emails arrive at night and land like scud missiles. He is an Old Testament retired CEO who is appalled at the state of America and as a thirty year healthcare system veteran and dutiful son, I am expected to interpret the complicated tea leaves of the Affordable Care Act ( ACA) and warn him if Armageddon (any form of change) is imminent. He needs three hours notice to hide his coin collection.
Today, his instant messaging is in large case font; He has forwarded an email that was forwarded to him from a friend of a friend of a friend – all retirees convinced that our current President is an operative for a hostile foreign government. I have to give high scores to his email chain author for his/her detail, veracity and creativity. Many of the stories are purportedly authored by retired Generals, Navy Seals, and in one case, a dead President.
I often scroll down these emails to see if I can find its genesis and author – perhaps it is Karl Rove or someone incarcerated for white-collar crime. The email offers me “the truth about Benghazi” or a grainy photo of the President giving out nuclear codes to Al Qaeda operatives behind a District of Columbia Stop & Shop. I am not always inclined to believe these missives but I love my Dad and his loyal concern for America. At 83, his draconian solutions are not always politically feasible and carry a decent chance of arrest if one actually tried to act on them. However, he has a 160 IQ and understands economics.
With my status as a registered Independent voter, I remain a point of frustration to my father – a lost sheep naively wandering in a forest of good intentions not understanding how close I am to the wolves of Socialism. As an ex-CEO who made many freshman mistakes, I am a tad more sympathetic to anyone dumb enough to want to run America, Inc. To assume the role of CEO for a company that is losing $1T a year, sitting on $17T in debt, massive underfunded retirement liabilities, a dysfunctional board of directors, angry, bargained employees and a confidence rating of less than 35% – is a job that only a masochist or megalomaniac might aspire. And even someone as naively altruistic as moi would not have chosen to take on US healthcare as my signature legacy. There is a reason why it has been viewed as the third rail of American politics – “you touch it, you die.”
My father and his friends have a huge stake in the future of healthcare as their day is spent inventorying each creaking part of their own frail physiology, wading through a confusion of doctor appointments, specialists and endless prescriptions. He is now messaging me wanting to understand how the inept roll-out of Healthcare.gov will impact the future of Medicare. The email message appeared with a large “ping” as it thumped into my in-box.
“FWD: FWD: FWD: FWD: MICHAEL, IF THIS IS TRUE WE ARE ALL IN DEEP (You fill in your favorite noun)”
The note went on to ask if his Medicare policy and supplement might be cancelled as so many individual policies had in the last month.
“OBAMA SAID PEOPLE COULD KEEP THEIR POLICIES”
After two strokes, caring for my Mom with Parkinson’s and a bout with prostate cancer, he is a grizzled veteran of the system but he still does not understand it. He wanted to know why millions of policies were cancelled and now being rewritten at higher premiums. In some cases, single men were seeing their lower cost ala carte policies replaced with higher cost coverage that included such essential benefits as maternity coverage. Other than male sea horses, it would be hard to find someone who purchased a bare bones policy with eyes wide open willing to support a new plan that would cause their premiums, in some instances, to double.
I wrote back with earnest detail.
“Got your IM. The botched roll-out won’t impact Medicare. There are no provisions in ACA to modify Medicare benefits although at some point, the government will begin to change how they pay doctors for the services to try to slow spending and improve quality. The public exchanges you are reading about are being created in every state in the US to cover the uninsured and subsidy eligible Americans. Where a state has refused/declined to create their own exchange, the federal government is stepping in with their portal, Healthcare.gov. It’s been a disaster as the technology has not worked. In addition, the government got an even bigger black eye because Obama promised people they could keep their policies but did not realize his own legislation would force insurers to cancel, rewrite and charge higher premiums for his new and improved minimum levels of coverage. His announcement to delay the policy cancellations for a year will create huge problems for insurers and put them once again in the position of being bad guys if they decide they don’t want to reinstate policies they have eliminated. It’s a huge mess!”
“A CLUSTER IF YOU ASK ME. WONT ONLY SICK PEOPLE JOIN THE EXCHANGES?”
“Yeah. The first few years you will see only those who had no coverage and those who were overpaying for policies due to age or health status will benefit by purchasing through community rated public exchanges. Yet, community rating only works if young people join and don’t use the benefits. The problem is the penalty for not purchasing insurance is only $95 a year in 2014 and the cost to buy a bronze level plan (the lowest cost policy approved by ACA) could cost up to $300 a month. 50% of the uninsured are under 30 years old and think they are invincible. My guess is they won’t join the pools initially and the public exchanges will have to be subsidized by the reinsurance taxes. The government expected some of this and will assess employers a reinsurance fee as of January 1st to create a fund to reimburse insurers who end up losing money on the expected adverse selection. The taxes last only until 2016. It will prop up the exchanges for two years possibly giving exchanges the ability to argue they are working. Once the reinsurance fees run out, public exchange loss ratios will deteriorate and costs will increase.”
”IS IT A COINCIDENCE THAT THE EXCHANGE GETS PROPPED UNTIL HILLARY GETS ELECTED IN 2016? I NEED TO THROW UP.”
“Seems suspiciously well-timed.”
“THEN THE DO-GOODERS RAID THE PUBLIC COFFERS TO SUPPORT THE FAILED PUBLIC POOLS? LENIN WOULD BE PROUD!”
“Careful, remember you are also benefiting from this messed up system. You and Mom are enrolled in a nationalized healthcare plan called Medicare whose cost is being subsidized by future generations. You love the coverage because you can go to any doctor you want. You have more specialists than Imelda Marcos had shoes and no primary care doctor calling the shots. Your kitchen looks like something out the TV show Breaking Bad with scales, baggies, pill sorters and enough drugs to medicate all the animals in the LA zoo.
Your Medicare contributions bear no relationship to the true cost of the benefits you will receive in your lifetime. CMS still collects premiums under actuarial assumptions that expect retirees to live to age 68. We now are living into our 90’s. Medicare is $50T underfunded. We only have two workers for every retiree versus 6:1 when we started in 1964. Medicare makes the cost of Obamacare look like a dime store candy. Between our sovereign debt and Medicare, we are witnessing the greatest intergenerational wealth transfer in the history of the country.”
“ALL ENTITLEMENTS ARE PONZI SCHEMES. THE ROAD TO SERFDOM IS PAVED WITH DEBT. IT’S TIME FOR TOUGH CHOICES. NEXT, NANCY PELOSI WILL BE PROPOSING TO MOVE ILLEGAL IMMIGRANTS INTO OUR HOMES.”
“Well, Dr. Zhivago, at least the stock market is up.”
“I’M IN T-BILLS AND BONDS. I DON’T TRUST WALL STREET”. There is a pause. I can almost hear the television blasting in the background as he cranes to hear someone yelling at him from downstairs.
“YOUR MOM WANTS TO WATCH SOME MOVIE I’VE SEEN BUT CAN’T REMEMBER. A DIVIDEND OF OLD AGE.”
“Glad you feel better.”
“GET OFF YOUR BUTT AND DO SOMETHING.”
I realized he had sent me his final message in lower case font. I typed my next email in upper case.
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.
The front door slams and a man with graying hair looks up from his book over rimmed glasses as he sits in an adjacent room. A young woman in her early twenties drops a duffel bag on the wood floor of a well-lit foyer.
Father: You’re home! How’s grad school?
(The girl looks irritated and says nothing)
Father: What’s wrong, baby?
Daughter: (The girl hesitates and then holds her hand out in front of him) Okay. Hand it over!
Father: What are you talking about?
Daughter: The credit card. You and your kick-the-can-down-the-road generation have bankrupted my future. (The girl drops a NY Times on the coffee table and becomes sarcastic) It says in here that the Fiscal Cliff has been averted. Ha! They might as well have announced that the Easter bunny is real. I just finished Michael Lewis’ Boomerang and Strauss and Howe’s The Fourth Turning and I’m depressed.
Father: Haven’t got to those books yet. Since November, I have turned to Merlot and escapism. I’m reading a bestseller about the 16th century. (Pointing to the newspaper, smirking) Cheer up! The Paper reports that the fiscal cliff is a bunny hill and Paul Krugman says spending our way out of the deficit is the only path back to prosperity. I hear Barney Frank may come out of retirement.
Daughter (looking incredulous): Are you kidding me? They only agreed to delay the debt ceiling discussion for 60 more days. Then they are going to ask Congress to raise my credit card limit. Even if the president got all the taxes he wanted, he’d have raised what, $80B of revenues? Where’s the other $15.92 Trillion going to come from? Government made a bunch of promises back in the 1960s in the form of Medicare that they no longer can keep. We’ve known it for a while, but we are hiding it like Enron. If the US government was a public company, the executives would be in jail for accounting fraud and the country would be in receivership. In the real world, you don’t pay as you go! There is bi-partisan dishonesty about the budgets and how dire our situation is. There is a deficit, all right. It’s a deficit of honesty, vision and courage in our public officials and it’s a deficit of public willingness to accept responsibility for managing a problem that has landed in their laps. Winter has arrived and you jerks keep spending the next few generations’ money to avoid a few cold nights.”
Father: It’s not us. It’s that damn Obama. He has created more debt in the last four years than all the Presidents that preceded him. He passed socialized medicine and now he wants to raid Medicare to pay for it. He’s added at least $7B of public debt and he wants to raise the debt ceiling and spend more money. He’s never worked a day in the private sector and can’t balance a lemonade stand.
Daughter: Dad, get real. The guy inherited a nightmare and a constituency that can’t face reality. This is about facing the fact that our healthcare system is broken and literally sinking the country. At some point, no one will lend you money. Congress and the White House have never shown fiscal discipline. We have recorded a budget surplus just five times in the last fifty years. Four of the surplus years came together from 1998-2001, President Bill Clinton’s last three years in office, and President George W. Bush’s first year in office. By the way, our publicly stated debt counts only current cash obligations. The real debt we are facing is more like $75 trillion dollars because we’re not adding in $45T in underfunding for Medicare. Every politician knows this but it is a radioactive secret. Both sides keep up their “Medi-Scare” rhetoric because they want support from retirees who fear they will lose benefits. Face it, Medicare is the biggest single drain on our budget and we have to deal with it.
Father (getting mad): There’s no damn way I’m going to let them raid Medicare to pay for nationalized Obamacare.
Daughter (smiling condescendingly): Dad, Medicare is unmanaged, fee for service, nationalized healthcare. The government controls Medicare costs by rationing reimbursement to doctors and cost shifting to the private sector. It’s the greatest generational rip-off from young to old in the history of the country. Medicare was established when there were 16 workers for every retiree and the average life expectancy was age 68. In 2030, we will have only two workers for every retiree and will have 80 million retirees, four times as many as today. The math does not work. Social Security is not the problem. We have to cut Medicare and make some tough decisions about how we deliver care in the last few months of life.
Father ( getting angry): Oh, now you want to euthanize me and your mother? This is not about Medicare. It’s about a socialist President who wants to redistribute wealth. We need to elect some fiscal conservatives. The Dems won’t make tough decisions. They are give-away artists who pander to Unions, illegal immigrants and anyone who feels they have gotten a raw deal. The GOP needs to win back the White House.
Daughter: Dad, don’t hold your breath. Try running on a platform of fiscal austerity when the new majority is being told that there was a big party from 1998-2008 that they did not attend but that they must now pay for. The demographics in America are changing and a large enough percentage of the GOP’s base has seen their standard of living decline that they have begun to identify with moderate Democrats joining an increasingly heterogeneous group of pro-Democratic voters. The GOP has not been able to convince non-Caucasian voters that they would benefit under their leadership.
Father: Jesus, you’re depressing. Do you have any good news to share?
Daughter: I’m taking Mandarin and I have a summer internship with an Indian microfinance firm that is trying to expand into China and Africa.
Father (trying to appear encouraged): Well, that’s great. Although it sounds like you are going to have a hard time finding a good cheese burger. (Looking bemused) My kid’s going to have to immigrate to another country to find a decent management job.
Daughter (hugging her father and laughing): Not necessarily. We just have to show the resolve to confront healthcare spending and the weight of our entitlement obligations. If we do that, we can be competitive as a country. The way I see it, we have four choices: default on our debt, raise taxes that only delay the day of reckoning and slow down our economy, create a centralized rationing regime in the form of a single payer healthcare system or migrate to a defined contribution premium support model where people receive help buying public or private insurance. I don’t think we want number one or two. So that leaves three or four. We’ve got to get honest – fast and (looking stern at her father), we have to cut up your credit cards.
Father (grabbing his daughter’s bag): How in the hell did you get so smart?
Daughter (smiling and putting her arm around her father): Four years of economics. I have your ear for BS and Mom’s ability to balance a checkbook.
Father (nudging daughter with shoulder): So, you going to tell me who you voted for in the elections?
Daughter (grinning): Ron Paul, I wrote in
Father (making a face) : That was a wasted vote
Daughter (pretending to look offended): Hey, last time I checked, this was still a Democracy.
As the Supreme Court considers the testimony presented at the recent hearings over the constitutionality of certain provisions of the Patient Protection and Accountable Care Act, the debate continues to escalate over the role that individuals, business and the government should play in the “commerce of health care.”
Most industry experts agree that PPACA is first about insurance reform and the expansion of coverage to some 30m Americans; yet, detractors have criticized the legislation for failing to incorporate any elements that would serve as a catalyst for reducing costs, improving quality and restructuring a misaligned system that has been paid to treat illness rather than prevent it.
In the last two years, hundreds of millions of private and public dollars have been invested as stakeholders adjust to an uncertain but radically changing delivery system. States are in various stages of constructing purchasing exchanges. Physicians and specialists are choosing to consolidate, often with hospitals leading the process to create integrated delivery systems and restore the role of coordinated care through Patient Centered Medical Homes and Accountable Care Organizations. Employers are waiting and watching — seeking greater regulatory clarity while slowly complying with a chronological time-line of new rules and expanded coverage requirements.
Municipal, state and national budget deficits continue to loom large. As Europe battles over mounting sovereign debt and the suffocating burden of generous public pension and healthcare entitlements, flash points are erupting across the USA as municipal, government and collectively bargained workers brace to defend retiree benefits in the face of legislative efforts to more aggressively reduce public spending. The Federal government is at a tipping point. Facing a $38T net present deficit in its funding for Medicare and $15T of public debt, PPACA was scored by the CBO as reducing $140B of public debt by 2020. To achieve this, the government needed to drive $940B of taxes, assessments and spending cuts and fall within estimates of the number of newly insureds likely to qualify for Federal subsidies offered through public exchanges. The promise of PPACA was to reduce the deficit, not further contribute to it.
With $3T of annual spending and an estimated $2T in tax revenues, Congress continues to renege on promises to reduce public spending. It has committed to reducing Medicare reimbursements to hospitals and doctors but so far, seems to lack the will to enact the legislation passed as part of prior balanced budget amendments and PPACA. Almost immediately following the passage of PPACA, an estimated $20B in annual cuts to Medicare was delayed by Congress. The pressure to follow through with cuts was overridden by the Congressional fear that providers would begin to turn away from Medicare recipients – as they have for years with Medicaid members– citing that reimbursement is too inadequate to cover the true cost of services. A prescription for remedying reimbursement inequities known as “the Doc Fix” has been under consideration for some time but so far, the legislation has been continually kicked down the road and is now due to fall firmly in the lap of the next administration.
Some economists estimate that the delay in implementing Medicare cuts along with other flaws in cost projections all but ensure that PPACA will increase the public debt, not reduce it – placing further pressure on Congress to either raise taxes or moderate spending to balance the budget. Yet, for all its flaws, PPACA is a necessary albeit wobbly baby step toward addressing the complex and broken public and private systems of healthcare in the US.
Advocates for repeal and replace legislation have grudgingly admitted to the need for health and insurance reform but so far have not offered viable solutions that could address the swelling ranks of the uninsured or solve for the inflationary effects of consumer demand and an aging, chronically ill America. Universally, most pundits and experts feel PPACA was a single stitch attempt to suture a deeper and wider wound. Most understood that rising costs, increasing public debt and the potential dumping of insurance by low margin, low wage employers would force companion legislation that would pivot the focus of reform from “regulation and expansion of coverage” to “improving health care quality and affordability”.
With the potential for core elements of the bill (individual mandate, community rating and guarantee issue) to be declared unconstitutional, employers are left wondering if this development is a favorable or ill shift in the legislative winds. Ironically, repeal of reform may cause more problems. Many feel that deconstruction of the law could create greater chaos across a 50 state insurance market where each legislature would be compelled to retreat from, maintain or advance insurance reforms. This means trouble for America’s insurers who fought to help craft the elements of PPACA which effectively preserved the role of private payers to help drive reforms in the health care system. Minimum Loss Ratio limits and other regulatory controls were imposed with an understanding from payers that lower profit margins might be offset by a larger influx of newly insured Americans. Without an insurance mandate, insurers would be less enthusiastic about guaranteeing coverage and engaging in less flexible pricing through community rated pools.
However, insurers and employers are already wary of a state by state cat’s cradle of regulatory and coverage mandates that increase cost and in some cases, reduce competition through artificial price and profit controls. In the event of a post reform collapse, employers will need to look even harder at the legislative efforts of states as they seek to mandate and managing health care. Per capita costs to insure workers up to minimal levels of benefits could vary dramatically as states adopt myriad versions of mandated care and cost sharing. Employers would most likely seek to avoid higher costs associated with mandates by self insuring and in doing so, deflect costly coverage increases as well as reduce revenues paid to the state by avoiding premium taxes.
The US is in between a rock and a hard place. To repeal PPACA will mean restarting a legislative process at a time when Congress has failed to demonstrate any ability to collaborate to address complex issues that threaten our economic futures. Most recognize that we must begin to address our public debt but it calls for austerity and measures that could slow our economic recovery and further enrage a public that is already distrusting of business and government. Managing the obligations and expectations of citizens around health care puts private sector management and elected public officials in unenviable positions.
Both sides prefer to be seen as part of the solution, yet only one side relies on public opinion to keep their jobs. The private sector has the capacity to move rapidly to drive market based reforms. Up to this point, employers have been slow to assume their role as a payer controlling over $1T in spend on the behalf of 180m Americans. In many instances, employers abdicate the responsibility of tougher decisions around medical necessity and consumer engagement to insurers who up to this point, have benefited from rising costs. While they have suffered public relation hits from the Obama administration as the goverment sought to vilify private payers, they have managed to retain their role as the primary service platform to administer and manage care. The only real risk to insurers is disintermediation as a result of a single payer or repeal of reform resulting in radical regulatory models arising out of more activist states like New York and California. Employers must understand who works for whom and demand information on claims, population risk profiles and solutions guranteed to drive single digit medical trends. Until employers demand these solutions, the private sector will fail to punch its weight in the healthcare market.
It comes down to skill and will. As a society, we seem to be lacking the will to deal with a generation of citizens whose desire for immediate access and rapid resolution are at odds with the fundamental changes required to fix the problem. It is no longer a question of should employers seize the reins and drive market based reforms, but a question of do they have the will to take the lead. The government has limited ability to impose all the elements of health care management required to drive affordability and guaranteed access for all. To generate the necessary savings required to finance an expansion of coverage and guarantee basic essential benefits, we will need to pull every lever — consumer engagement, population health improvement, the restoration of primary care based models, precertification, transparency to reward quality and marginalize outlier stakeholders and personal responsibility for health. It will mean disruption. However, as companies seek to grow earnings in a time of difficult organic growth, one has to consider what is more disruptive: firing employees or restructuring health plans to drive lower cost and a healthier workforce.
If reform is repealed or radically altered in June, it will not be business as usual. The question will be whether business will revert to the usual behaviors or whether it will assert itself to reduce costs and in doing so, potentially save the best parts of our healthcare system.
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.
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.