Friday, June 29, 2007

CBO Issues a Major Report on Medicare Advantage Plans--Pours More Fuel on the Private Fee For Service Fire

Yesterday, the Congressional Budget Office (CBO) issued a very comprehensive report on Medicare Advantage plans.

I found the following to be an especially important finding:

"In 2007, CBO estimates the average payments to such plans [MA] is 12% above traditional FFS costs. The difference is larger for private fee-for-service plans: According to estimates by the Medicare Payment Advisory Commission (MedPAC), the payments to those plans in 2006 averaged 19% above FFS costs. Of that difference, 10 percentage points' worth went to beneficiaries in the form of extra rebates. In contrast, payments to HMOs averaged 10 percent above FFS costs, MedPAC estimates. On average, HMOs offered extra benefits and rebates equal to 13% of FFS costs; those additional benefits and rebates reflected the difference between the benchmark (which averaged 10 percent above FFS costs) and the plans bids (which averaged 3% below FFS costs).

This report is very damaging for the Private Fee For Service Medicare product, BUT, it does a lot to make the core HMO Medicare Advantage product look better.

As I have said before, I believe the best chance the industry has in defending Medicare Advantage is to defend it as a multi-year experiment to determine if the private sector can better manage Medicare costs. By affirming that Medicare HMO plans have bid 97% of the cost of traditional Medicare, I will suggest this report helps that argument.

Even though the HMO plans gave the seniors 13 points back in higher benefits, it is clear in this report that these extra payments are not something the Medicare program can afford long-term. Therefore, I will suggest, the best way to defend these payments is as the transitionary scheme they were always intended to be.

However, this report just pours more gasoline on the Private Fee For Service (PFFS) fire--they got 19% more and gave back 10% to seniors. That looks pretty bad.

I continue to believe that the HMO industry needs to cut Private Fee For Service loose--especially in light of all of the marketing abuses being reported. If it does not, it will put in jeopardy defending this very important experiment to prove the private market has a place in the long-term solution for Medicare's funding problems.

MedPAC has suggested freezing Private Fee For Service payments. That may be the best deal for the HMO industry to take.

The debate over what to do with Medicare Advantage payments continues in the Senate Finance Committee where the State Children's Health Insurance Plan (S-CHIP) reauthorization debate continues. That debate is more bogged down over just how big to make S-CHIP right now than how to pay for it. That discussion is a day-to-day process with no decisions yet.

Tuesday, June 26, 2007

"Mid-Atlantic Convergence"--The European Government-Run Health Care Systems Are Coming Our Way!

One of the themes I have often heard in international meetings on the topic of health insurance is the term, "Mid-Atlantic Convergence."

That is, our system may be gravitating to look more like those in Europe and theirs maybe moving more toward ours.

One of the people I often see at these meetings is Bill Boyles, publisher of Health Market Survey and Consumer-Driven Care.

Today, I have asked Bill to weigh in with his observations on the ongoing evolution in Europe and in other systems:

Worldwide Expansion Of Private Insurance, Not Single-Payer
by Bill Boyles

I have been studying the private health insurance (PHI) markets worldwide for about two years in preparation for a new publication I am doing on the subject. My original assumption, based on conventional wisdom in the U.S., was that PHI is declining worldwide due to unaffordable costs. What I found out is actually happening is instructive for those calling for government control.

I never really worry any more when I read about Sicko or the Massachusetts single-payer crowd. As I look around the world it is obvious that dozens of countries have come to the conclusion – independently – that private health insurance beats a public utility model.

Out of approximately 100 organized health systems worldwide, I have not yet come across a single one that is moving to a public-utility model or an all-public financing system. China is a good example: it is now debating which way to go because it has tremendous needs in a rural population but clearly prefers a private insurance system in it’s newly-prosperous cities. While this is being debate, private insurance is growing anyway by millions of members every year.

Private health insurance is fantastic for economic growth. It creates national wealth by building an infrastructure of hospitals, physicians, labs, and technology, boosting GDP and per capita income across the board and generating tax receipts and foreign trade.

This is really the lesson here: private insurance is a great economic stimulant – and in the case of the U.S. system this is too much of a good thing. We need to scale back the entire system because it is overcapitalized and bloated, unlike a new PHI system in China or India.

What is happening is that countries with private health insurance systems like most western European countries are moving to adopt U.S. private insurance management techniques like pay-for-performance, DRGs, price transparency, and even cost-sharing. The overriding goal is clear: they want to retain their universal coverage by keeping private insurance affordable.

Meanwhile, in dozens of emerging economies from Eastern and Central Europe to Latin America to Asia there is a rise in per capita income – driving demand for private health insurance. We estimate that there will be an increase in PHI worldwide enrollment of greater than 100 million covered lives in just the next five years. Meanwhile, Columbia and a dozen other countries have in just the past year converted their public-utility model health financing systems into private insurance markets with more announcements each week (I keep a list).

The U.K. is often cited as an example of where the U.S. does not want to go. I have news for all you critics: the U.K. is moving rapidly in our direction. I was shocked to learn that there will be no more waiting lists by mid-2008 following a major infusion of government funds combined with expansion of the private sector, resulting in a recent estimate of 11% of all encounters to private practice and a growth in private insurance (held by 40% of all U.K. workers).

The real question across the world health systems for the future is the balance between PHI and public funding of programs for the low-income population, seniors, and high-risk cases. If that sounds familiar it’s because that is exactly how the U.S. structures its approach, and represents a good starting point for emerging health systems looking for the right balance.

Monday, June 25, 2007

The Cost to Administer Medicare Versus the Cost to Administer Private Health Plans--The Difference Isn't Anything Close to 25%

Those that favor a single-payer government-run health care system have been reenergized by the Michael Moore movie, "Sicko."

One of their contentions I keep hearing is that we could save 25% by getting rid of private health insurance plans and creating one big government-run plan. They point to Medicare's expense factor of 2.9% as evidence.

The private health insurance plans have much higher expense factors.

But, like so many things in health care, it isn't so simple--or simplistic as I keep saying about this movie.

There are a number of other considerations:
  • Medicare's capital costs - Medicare benefits are paid from payroll taxes and general revenues. Medicare has done its share to run-up the federal debt in its 40 years. In 2004, Medicare costs comprised about 12% of federal non-interest spending. Using that factor to represent Medicare's portion of government operations, Medicare's share of government debt service costs would have been $19 billion in 2004. Adding this cost would have boosted Medicare's administrative costs to just under 10%.
  • Medicare pays health care claims for seniors which tend to cost a lot more than the average claim cost for a younger person thereby distorting any comparison between under-age-65 costs and those over age-65. For example, Humana reported its first quarter 2007 medical cost ratio to be 89.3% for its senior business. That is a lot closer to the Medicare expense ratio than I would expect most favoring a single-payer system would think.
  • Medicare generally uses payment strategies to control costs (it just cuts payments). While it is starting to do things like disease management, that is a very small part of what it does to control costs. If Medicare had the whole system, it wouldn't benefit from the spill-over impact of private sector programs to control waste and would have to build and operate its own on a much broader scale. That would run its cost ratio up considerably.
Now, let's look at private sector health insurance plan costs.

The first quarter 2007 earning's reports from the HMOs included the following:
  • United Health reported a medical cost ratio of 82.7%--which means 17.3% was spent on expenses, taxes, and profit for all of its businesses including commercial, Medicare, and Medicaid.
  • Wellpoint's medical cost ratio was 83.1% in the first quarter of 2007 for all of its health care businesses--commercial and government. That leaves 16.9% for expenses, taxes, and profit.
But wait, what is the one thing health plans pay that Medicare doesn't pay? Taxes!

Wellpoint and United each paid taxes equal to about 3% of their revenue in the first quarter of 2007 (that's 3% of revenue not profit).

So, Medicare's real expense ratio is a lot closer to 10% than 3%.

The big HMOs have expense, tax, and profit ratios of about 17%. But, take 3 points from that because it was income taxes paid to the government--meaning their net cost is around 14%. Apples to apples, Humana paid out 89.3% of its senior revenue on benefits leaving 10.7% of expenses, taxes, and profits. Give them credit for taxes and who's out front now?

But what about that poor doctor's office today having to administer so many plans adding lots of expenses. True, one government plan would be a lot easier. But how much easier? You might have only one plan if the government took over but you would still have the same number of patients all with their unique needs and problems. And, would Medicare just be able to write checks if it were the only payer? Not likely. Medicare would be in the managed care business with all its bureaucracy before too long.

Maybe the private sector does cost more but could we please knock off this, "It costs 25% more" junk science.

The single-payer folks would do well to read more than the headline in an HMO earnings report.

A public/private system like ours will cost more than a single government-run system. But the difference in expenses is not so great that it should preclude our consideration for the advantages of private options.

"AMA Takes on Retail Clinics"--Oh Come On!

That was the headline in today's Chicago Tribune.

The American Medical Association (AMA) is having their annual meeting in Chicago and is considering opposing the opening of in-store health care clinics in places like Wal-Mart and Walgreen drug stores.

The docs are arguing that this new phenomenon in health care, that would give consumers a low-cost and quick access to very basic medical care, poses a danger to patient safety because the AMA says they will be staffed by advanced-degree nurses and physicians' assistants.

Does the AMA really believe these things would do more than basic care and referral? I am sure they don't.

But I'll bet they are sure that this efficient, convenient, and low cost alternative to waiting two hours for an urgent care appointment in your doctors office will take some easy money out of their pockets.

The full story in today's Chicago Tribune.

A Canadian-Style Health Care System--How Would We Get From Here to There?

The movie "Sicko" inevitably gets us talking about making over America's health care system into one that would resemble the single-payer government-run systems like those in Canada, Britain, France--or now even Cuba!

I find the proposal a simplistic one.

Having spent so much time in Europe and Canada working with health care policymakers and major stakeholders there, let me first tell you I have a great respect for where they are. Their systems (well maybe except Cuba) work very well for them. In fact, I have lived in Toronto and carried an OHIP card and the system worked pretty well for our family.

If the U.S. had made Medicare universal for all of our citizens in 1965, as Canada did for its people, my sense is that we'd have a very different system in the U.S. but one that worked and was far more affordable because we would have made the transition when the system was a whole lot less expensive, complex, and addicted to perverse incentives. We would also have a lot less medical technology and knowledge throughout the world today. We probably wouldn't know what we were missing.

In 1965, the U.S. likely (and unwittingly) traded universal and much more affordable care for a system that has subsidized a disproportionate amount of the rest of the world's health care breakthroughs during the last 40 years.

But that is all a hypothetical discussion.

A big problem I have with those who now advocate moving to a single-payer system is how really poorly thought-out their proposal is. Proponents seem to presume that you can get from Point A to Point B in one easy move.

The problem is that since 1965 those who operate in the the U.S. health care system have become something akin to drug addicts--they are addicted to all the incentives we have--good, bad, and perverse.

The huge question now is how do you get the health care players cured of these incentive addictions and onto an efficient course.

Today, the U.S. health care system is like three big rigs on the highway, one each representing patient, provider, and payer expectations, nose to nose traveling down the interstate, their speed out of control at 80 mph, with no effective traffic cop keeping them under control. On a date certain, we make it all look like Canada. The result would be tantamount to all of those big rigs simultaneously having to lock-up the breaks because they would have to slow so dramatically.

You can’t just jam on the breaks and pretend the system can be quickly remade. It’s going to be a whole lot more complex than that.

Instead of hearing from single-payer advocates that this is the system we should adopt (and all of our problems will magically go away on a date certain), I'd like to see them give us a plan for how we will actually transform the health care system to one that is entirely under a government framework of controls.

How will doctors and hospitals respond to much lower payments ? The biggest difference between the U.S. and Canada/the EU is the health care provider prices?

How will we drive the existing excess health care infrastructure down to a sustainable level?

How will the politicians deal with patient expectations that are today open-ended and will have to be much more aggressively managed?

If the government runs it, it is by definition a political health care system. Do you think some of the most powerful political constituencies in the U.S. (doctors, hospitals, drug companies) are just going to sit idly by and magically behave themselves? How will a political system suddenly kick in and do what it can't do today--not be dominated by these powerful interests? Which politician is going to say "no" to the patient/voter?

Don't just give me the simplistic, "It's all in the expense overhead." Ya, but expense savings are one-time. The much bigger problem is the underlying and fundamental growth in health care costs. That's the big one and it relates to the above questions.

Tell me what the transition plan looks like and be realistic about how you get there.

Tell me how you politicize the entire U.S. health care system and the stakeholders just go along selflessly taking far less--perhaps humming the "Internationale."

You might want to go out on the Interstate this afternoon, get the car up to 80 in heavy traffic, and slam on the brakes--that would be good practice for what you are proposing.

A Review of the Movie "Sicko"--Michael Moore Blew It!

The Cost to Administer Medicare Versus the Cost to Administer Private Health Plans--The Difference Isn't Anything Close to 25%

There is a Health Care Reform Plan That Doesn't Duck the Big Issues--and More Than 100 Heavyweight Stakeholders Support It!

A Review of the Movie "Sicko"--Michael Moore Blew It!

Michael Moore's new movie, "Sicko," was supposed to be this great argument for a "single payer" government-run health care system.

It turned out to be exactly the opposite because Moore overplayed his hand and did his argument more damage than good.

The first half of the movie would have had anyone mad at the system--and for good reasons. It's real easy to find lots of examples of market stupidity in the way health care is delivered and he found some doozies.

It's also easy to find some examples of government-run stupidity in health care and he conveniently avoided those.

He highlights a case of our system denying a husband and father an end-of-life bone marrow transplant--denied not by a big insurance company but local plan trustees. He forgets to tell us that kind of end-of-life spending would never even be considered in Canada, Britain, or France. He doesn't think the U.S government-run Medicare system denies coverage?

He highlights the British system but never mentions that 12.5% of Brits have opted out of it and into private health insurance--most through employer provided benefits for the higher paid.

In politics, the battle is always over the middle. Those on the left will always be on the left. Those on the right will always be on the right. National elections, and national issues, are always decided by those folks who occupy the middle. They were the ones who elected Ronald Reagan and those same people elected Bill Clinton.

They will also be the ones that finally make health care reform a political imperative.

Michael Moore's adept movie making likely had those middle folks real mad at the largely market-based U.S health care system--for about the first hour.

Then, I think he lost them as they laughed at the foolishness of the French health care system and the notion that we had something to learn from Cuba.

Instead of going for the close he got off on a far left tangent highlighting a guy who left America and went home to France to get Cancer treatment. So far, a good argument for the French system. But then, when the treatments had ended, he showed the guy going to his doctor to get a prescription for three months off at full pay so he could go hang-out on the Riviera. He bragged about the French system's willingness to send a maid over to do the laundry for a new mother. All apparently common under the French system.

Later he went to Cuba and argued that their system, which he says spends less than $300 per citizen per year on health care and he says rates below ours, is a health care model for us to learn from. Arguing that a country, whose citizens risk their lives to get to Key West and which confiscates private property to function, is a model for us to learn from isn't a theme likely to play well with "Joe and Mary Middle America."

It's no surprise that the leading Democratic presidential candidates are not interested in getting too close to this thing.

But "Sicko" will help the Democrats.

In the end, Michael Moore is so far out on the extreme left that what he does accomplish is to make Hillary Clinton, Barack Obama, and John Edwards look like middle of the road health care reformers with their incremental health reform plans.

That's why I won't be surprised when Hollywood puts "Sicko" on network television in the days just before the 2008 presidential election.

My earlier post on "Sicko": "Sicko"--Hate it All You Like But Don't Ignore It! The Best Response is to Satisfy the Customer!

My earlier post on dumb things insurance companies do to unnecessarily make their customers mad: California Fines Wellpoint $1 Million for "Unfairly" Rescinding Health Insurance Polices--Was Wellpoint Fair or Not?

Friday, June 22, 2007

Will Medicare Advantage Payments Be Cut as Soon as 2008?

That's the question a poster asked today and it has been an issue on my mind. So I will address it here.

First, CMS has already started the rate setting process for 2008 and will have it finalized by early September. While the Congress makes the rules and can do anything it wants, it would be very difficult to change the 2008 deal with the private sector after early September.

The only way we would get a 2008 cut is if the Congress reauthorized S-CHIP and used private Medicare Advantage cuts to fund the cost of that program. Under the Democratic rules, the Congress will have to come up with either new taxes or budget cuts to offset any spending on S-CHIP.

Since S-CHIP has to be reauthorized by September 30th, you can see the possibility of a Medicare Advantage cut taking place before the 2008 Medicare Advantage rates are finalized.

Most in the Congress--Democrats and Republicans--would like to use an increase in the tobacco tax as the means to fund S-CHIP reauthorization. The reauthorization process is going to begin in the Senate and move to the House. The Senate Finance Committee wants to take the issue up in the next couple of weeks.

Republican Senate Majority Leader, Mitch McConnell, all but conceded the votes are there to do it with a tobacco tax increase in comments he made this week.

There is more interest in cutting Medicare Advantage to pay for S-CHIP in the House.

S-CHIP reauthorization
will eventually get done but it won't be any kind of slam-dunk. The hang-up will be in the details. The Bush administration, and most conservatives, are upset that states have gone beyond the original intent and gone on to cover children in families making up to 350% of poverty and also covering adults. There will be a lot of arm wrestling around just what the new rules will be. Ironically, the Bush administration is still approving state exemptions to cover these "extra" people just as they complain about state action (on May 30th for Wisconsin, for example).

Also, if Democrats were to pass an S-CHIP reauthorizaton bill it will be a standalone bill. That would be subject to a Bush veto. You will recall that I have pointed out that the place Medicare Advantage payments are most at risk is in the year-end "omnibus" budget bill. That is usually loaded up with dozens of big items and is the sort of thing that would be very difficult for the President to veto.

Democrats need lots of money at year-end to counter the automatic 10% Medicare physician fee cut and to offset come possible hospital and other provider cuts. The Medicare Advantage cuts are the logical source for this money.

So, after all that background here's where I see things:
  1. In the end, it will be better for the Dems to leave the Medicare Advantage payments alone and fund S-CHIP with only a tobacco tax.
  2. Their best shot at getting hold of the Medicare Advantage money is in the final omnibus budget bill (at the end of the 2007 session) that is almost entirely controlled by the key House and Senate committee chairs (most of which hate Medicare Advantage). That bill will be far more insulated from Republican meddling and a Bush veto because it will be larded-up with lots of things Congressional Republicans and Bush will want.
  3. If Medicare Advantage is cut in the final omnibus bill--and I think it will be--then the first impact on the program will be in 2009--the Congress will reach forward for those cuts and bring some of them back into their multi-year calculation.
  4. Now here's my caveat--anyone interested in this issue needs to watch the S-CHIP bill's progress very closely. What is troubling to me is how poorly worked out the S-CHIP reauthorization outline is. The people in the middle of all of this really don't know how they are going to get it done yet.
When the day is done, I believe Medicare Advantage cuts will come in the year-end omnibus bill. I also think the recent MedPAC recommendations offer a reasonable template for how that will happen.

Thursday, June 21, 2007

Commercial Health Care Cost Trend—Finally Hitting Bottom?

Commercia health insurance cost trend peaked in 2003 when costs hit 13.9%. On the same basis, health care cost trend fell to 7.7% in 2006 (Source: Kaiser Family Foundation Survey).

Will medical cost trend keep falling in 2007 or are we near the bottom?

The health insurance business tends to benefit from falling trend rates. Employers and benefit consultants tend to look backward when health care coverage is renewed each year. If an employer saw a 13.9% increase in its medical costs during the prior year, the buyer tends to accept a renewal rate at that level for the upcoming year. If something less than the higher increase in costs occurs in the subsequent year (it actually fell from 13.9% to 11.2% from 2003 to 2004) the health plan not only makes its normal pricing margins but scores a windfall profit as it benefits from the further drop the next year.

I have referred to this phenomenon in the past as the trend windfall.

The managed care industry has reported robust growth and profits these past few years in part because high (if not also falling) trend rates have provided automatic premium growth. The large incremental drops in trend have also benefited health plans with these windfall profit margins. As a result, the health insurance industry has had the fantastic combination of good revenue growth and widening margins during these years.

This is all great—until we inevitably hit the bottom and the windfall profits go away.

It can get even worse if we subsequently get an increase in medical cost trend and we can’t even make basic pricing margins. In an increasing trend scenario, a profit shortfall can occur as buyers tend to demand increases at last year’s lower trend thereby creating a margin shortfall in the subsequent year.

So, it is important to know when medical cost trend hits bottom. It is even more important to know when trend begins to edge up. Both are generally believed to be inevitable in an industry with a long history of “a pricing cycle.”

That’s why the quarterly earnings reports from the publicly traded health plans contain information that is critical to understanding where the market is in its pricing cycle. Having said that, all of the information is still only retrospective.

Looking at past earnings reports, it is clear to us that trend had still been dropping and windfall profits accruing in the third quarter of 2006. Comments in the third quarter earnings reports such as “favorable claim development” and “lower sequential medical ratios on a constant basis” generally reaffirmed that results still reflected some overpricing—and trend windfall.

Some players were even bolder—bragging on all of the excess pricing profits. This comment was typical: “Commercial premium yield…exceeded total cost trend…resulting in an increase in underwriting margin.”

Just about everyone reported lower sequential medical cost ratios in the third quarter. Commercial medical results just couldn’t have been better in the third quarter of 2006.

By the fourth quarter of 2006, results still looked quite strong but there were some indications that maybe the easy money was drying up.

Health plans began to report less favorable claim development from prior periods (an indication of whether pricing was more favorable than actual costs in prior quarters) as well as benefits ratios that looked to be flat or were even increasing slightly.

However, results were mixed and not at all clear at year-end.

When the pricing cycle (and the actual trend levels) hit a plateau, one would expect mixed results at first. Different companies price in different ways and, for any number of operational and internal reasons, tend to see the same things months apart. Mixed results at this point in the pricing cycle could be compared to the results sort of bouncing off the bottom as we finally hit the low point in trend.

So, by the end of 2006 there was some reason to believe the fall in trend was coming to an end and with it the windfall profits. But there was no certainty in the data.

Predicting the health insurance pricing cycle is a lot like economists telling us just when we entered a recession. Current data only leads to suspicions. Economists are only able to tell us when we actually entered the recession—or came out of one—many quarters later when the data is finally clear.

That takes us to the first quarter 2007 results.

The results were still mixed. While there appeared to be consistency among most players, there also continued to be some major outliers.

First quarter 2007 commercial health insurance results:
  • United Health estimated that its full year 2007 commercial medical cost ratio would be 80 basis points higher for 2007 than it was in all of 2006 and talked about a “sustained increase in utilization” of about 30 basis points.
  • United estimated a 7.5% commercial trend for 2007—plus or minus 50 basis points.
  • Wellpoint reported that its benefit ratio declined slightly but notably reported that prior period development was negative indicating pricing might have actually been slightly inadequate.
  • Wellpoint projected a 2007 medical pricing trend of 8%.
  • Aetna reported its commercial medical expense ratio edged up very slightly to 79.6%, from 79.4% in the same quarter a year earlier.
  • But Coventry reported that its medical cost ratio improved 50 basis points over the same period a year ago and reported that its premium increased 5.6% in the first quarter while its claim costs increased 4.8%––indicating improving margins.
  • Humana also reported improving commercial results including a medical cost ratio 70 basis points lower than the same quarter a year ago and Humana projected 2007 commercial trend in the 4.5% to 5.5% range. Interestingly, while having a much lower trend rate than its big competitors, Humana also reported flat enrollment. With those kinds of commercial pricing trend rates, why isn’t Humana growing?
So, it’s still a mixed bag with the very largest players reporting either flat or accelerating costs and two of the smaller but major players saying costs are still coming in at very low medical cost trend levels.

Different blocks of business will see things at different times making these kinds of differences more the norm than the exception.

Have Humana and Coventry learned how to manage health care costs better than United, Wellpoint, and Aetna? That would be a stretch.

More likely these differences have more to do with timing and benefit changes than anything else.

We won’t know just when, or if, trend hits bottom, when or if it began to rise, and the impact all of this had on earnings results until many quarters after it all actually happened.

But, my sense is that we are now bouncing around that bottom.

Perhaps the best news is that there is no evidence that health care costs are increasing from current trend levels in any measurable way.

That could change if the Democrats cut Medicare provider payments later this year. Cuts in doctor and hospital payments—and even lower Medicare HMO payments to providers because of Medicare Advantage payment cuts—could ignite a new round in provider price increases and resulting higher medical cost trend increases.

Second quarter health plan earnings reports will tell us more.

Wednesday, June 20, 2007

Leading Democratic Presidential Candidates Comment on Health Care This Week

Joe Paduda, over at Managed Care Matters, is attending the "Take Back America" conference in DC this week. Joe has been posting a review on his site of each of the Democratic candidates comments on health care.

Comments include a review of Clinton, Edwards, Obama, and Richardson.

Cavalcade of Risk #28 is Up

Julie Ferguson, of Workers Comp Insider, hosts this week's "Cavalcade of Risk."

This edition includes a couple of dozen of the best recent blog posts on the issue of managing risk.

Senator Max Baucus Is Crucial to the Health Insurance Industry's Continued Medicare Advantage Funding--But How Sympathetic Is He?

Everyone knows that House Ways and Means Subcommittee Chair Pete Stark is the Medicare Advantage program's biggest high-powered Congressional critic.

The view of Medicare Advantage health plan payments, particularly for the controversial Private Fee For Service (PFFS) program, is more moderate in the Senate. Undoubtedly, the House Democrats will be more aggressive in the cuts they want than will Senators.

The lynch-pin in the health plan industry's hopes to maintain the payments will be Senate Finance Chair Max Baucus. He had an important role in enacting the Medicare Modernization Act of 2003, which included Part D and the rejuvenated Medicare Advantage program, in the first place. With his good friend, and now Ranking Republican on the Finance Committee, Senator Chuck Grassley, he was crucial in getting the rural areas better payments and attracting the private Medicare plans to places like their home states of Montana and Iowa.

As the powerful Senate Finance chair from a rural state that is benefiting from the program, where Baucus comes out on this issue of Medicare Advantage (and PFFS) payments is likely going to be the place the whole Congress comes out on it. The cuts will be no more then he will go along with and they will be as big as he will want them to be.

At the heart of this debate is whether Medicare Advantage plans will be cut to fund other Democratic priorities such as S-CHIP and to offset upcoming Medicare physician fee cuts.

So, Baucus' comments on the issue and spending priorities are important:

February 9, 2006 Senate Finance Committee Hearing:
"On the issue of Medicare generally, the administration's priorities are again misdirected. For example, the administration would reduce payments to Medicare hospitals, home health care, and nursing home payments...and yet the same budget would maintain current overpayments to Medicare managed care--Medicare Advantage plans...I do not understand the administration's rationale for overpaying private Medicare plans while proposing cuts for other Medicare providers."

February 7, 2007 Baucus News Release from the Senate Finance Committee:
"If you are going to cut fee-for-service [the traditional government-run Medicare program], why not cut Medicare Advantage. That's where the experts say the fat is. I've seen many, many analysts say [Medicare Advantage plans] get more than they need. I've not seen any say they do not."

June 18, 2007, regarding the recent moratorium on new Private Fee For Service sales, Senator Baucus said:
"I applaud plans for volunteering a suspension. I'd like to see CMS spend less time promoting private coverage and more time figuring out how to regulate the actions of insurers who sell directly to seniors."

With friends like these...

Recent post: MedPAC Recommends a Reasonable Road Map For Reducing Private Medicare Advantage Payments--Plan Would Equalize Payments Over a Five-Year Period

Tuesday, June 19, 2007

"Sicko"--Hate it All You Like But Don't Ignore It! The Best Response is to Satisfy the Customer!

Michael Moore's harsh critique, make that condemnation, of the health insurance industry is going to be hard to watch for those who have spent their careers in the business.

The worst thing we can do is to rationalize it away as just another "single payer's" prescription for socialized health care.

Thirty years ago, I was taught by the insurance company I worked for that the way to be profitable was to satisfy your customers' needs. Satisfy the customer and you'll have plenty of business which will lead to a better top and bottom line. Somewhere along the line, much of it when Wall Street moved in, we lost that focus. The focus became almost entirely bottom line, earnings growth, and share price--in that order.

Those objectives are just fine--as long as they come after you have satisfied the customer.

Look at some of the most profitable companies in the world--Toyota, Apple, and the like--and you will also see some of the happiest customers.

Health plan managers that have satisfied Wall Street have taken an incredible amount of money out of this industry in recent years for themselves. But what have they done for the customer--and the next generation in this business coming up through the ranks?

Hatchet job or not, take "Sicko" for the big warning signal it is.

The private health insurance industry is under assault, and was long before "Sicko," and we don't have long to make it work the way it needs to.

Satisfy the customer and you will have satisfied every person who went to see that movie--that's the best response to Michael Moore.

It's no coincidence that those health plans with top scores in surveys like the JD Power customer satisfaction index weren't the ones who got trashed in "Sicko."

Oh, that insurance company that taught me to put the customer first thirty years ago; they later demutualized, went public, made tons of money for management, and even later paid tens of millions of dollars in settlements with state regulators over claim paying practices.

Biggest Employers Propose Their Own Health Care Reform Plan––Moving Toward Individual-Based Benefits

The ERISA Industry Committee (ERIC) has proposed a far-reaching reform of not only the health insurance system but the employer-provided retirement system as well.

They call for the movement of these important benefit plans from the workplace to individual ownership and responsibility.

The group represents many of America's largest employers and covers 30 million people in their benefit plans.

They have called their proposal a "New Benefit Platform For Life Security."

Their plan would require a fundamental reform of the U.S. health and retirement systems.

On health care, the ERIC plan is a hybrid of many of the ideas offered by both Republicans and Democrats.

Generally, the ERISA Industry Committee (ERIC) is proposing a defined contribution benefit funding strategy. That is, instead of funding a certain package of benefits no matter what they cost (defined benefit strategy), this plan would give employers the option to move the administration and costs of benefit plans outside the employer. As a result, the employer could fund the plans at any level they choose--not necessarily at the cost health care or retirement costs increase.

A defined contribution strategy would enable the employer to move these benefits off their books (at least for future costs). Employers would have the option of deciding just how much they would pay the employee to buy those benefits from the Benefit Administrator by defining a contribution. This could well mean that the employer would increase the contribution at something more like the wage rate (now about 3%) in future years then the historically higher health care growth rate (now about 7.5%), for example.

The result would be a disengagement by the American employer from these escalating benefit costs and their having a benefit cost structure more like their global competitors where health care costs are much lower.

The plan details:
  • Life Security” provides a new benefit platform based on an individual, instead of the traditional employer, model.
  • Life Security” would be a simplified benefit (health and retirement) structure provided by a new kind of benefit administrators competing on cost and quality.
  • This is a proposal to reform the health care and retirement system on a nationwide basis--current state regulation would be preempted.
  • The proposal assumes universal health care and an individual mandate requirement to obtain health coverage.
  • Universal coverage would enable the health plans to be community rated and able to guarantee insurability to consumers.
  • Employers could still offer traditional health coverage and the plan would not affect public health plans such as Medicaid and Medicare.
  • The key point is that employers could shed internally run benefit plans, craft a defined contribution program (that sets a limit on what the employer will pay), and set up an independent benefit structure outside the employer for all benefit plans.
  • “The new Benefit Platform provides an alternative means to provide benefits that assures choice and guarantees access.”
  • The Benefit Administrator would be a “trusted intermediary with significant expertise in designing, delivering, and managing retirement and short-term savings benefits, and health plans.”
  • Benefit Administrators would come from the ranks of banks, mutual fund companies, health plans, and new entrants.
  • Uniform service areas would be established with at least two new Benefit Administrators in each and regulated at the federal level.
  • The proposal leans heavily on Republican ideas––individual choice, defined contributions, and disengagement from the employer market.
  • But this plan also embraces Democratic ideas like a national benefit platform and an individual mandate.
It will take a major political willingness to implement almost radical reform to legislate the ERIC plan into place––which is currently not present.

This proposal's importance is that there are elements in this proposal that compare favorably to both Democratic and Republican plans, thereby creating some level of common interest with this powerful group for whomever wins the next election as they go on to craft a health reform program.

In effect, the ERIC plan is a hybrid of both Democratic and Republican health reform proposals.

These ideas will be a part of the post-2008 election health reform discussion because of the importance of these employers in the health care system.

It will be particularly difficult for policymakers to allow employers to transfer their future long-term health and retirement funding obligations onto such a system without the federal government willing to pick up much of the costs the employers are walking away from.

While the ERIC authors would probably argue their market reforms will go a long way toward getting costs under control, that assumption will not be generally shared among most people--including those who would lose their benefit guarantees.

No health reform proposal can be any kind of policy solution without an answer to the big question: How will we end up with a system people can afford to participate in?

The fundamental problem with this proposal is that it only solves the employer cost problem. It won't go anywhere without an answer to what it will do to solve the health care (and retirement) cost problem for the rest of us.

Monday, June 18, 2007

MedPAC Recommends a Reasonable Road Map For Reducing Private Medicare Advantage Payments--Plan Would Equalize Payments Over a Five-Year Period

The Medicare Payment Advisory Commission (MedPAC), the Congressional advisory group on Medicare payment issues, has sent a report to Congress recommending that the Congress structure future private Medicare plan payments in a way that eventually equalizes private plan and public plan costs.

MedPAC said in its report that current Medicare Advantage reimbursement does not promote increased efficiency in health care delivery and outcomes because the private plan payments are much higher than those in the traditional government-run Medicare plan. They also said that, "PFFS [Private Fee For Service] plans are providing extra benefits because of the higher payment rates, not because of greater efficiency."

MedPAC pointed out that private Medicare payments averaged 116% of the expected traditional Medicare plan's payments in 2006.

MedPAC is calling for the creation of "blended rates" to determine Medicare Advantage plan payments and a five-year transition toward equalized payments between private plans and the public Medicare plan. In the first year, the plans would get a payment composed of 80% of the higher rates and 20% based upon the traditional plan's expenditures. In the second year, 60%/40%, the third year 40%/60%, the fourth year 20%/80%, and by the fifth year the payments between private plans and the traditional Medicare plan would be equalized.

As for the controversial Private Fee For Service (PFFS) program, MedPAC recommends simply freezing these payments at current levels until the traditional Medicare plan's expenditures catch-up to the PFFS program. PFFS was never supposed to be more than a transition plan anyway.

They also called for using competitive bidding to set the future Medicare Advantage benchmark based on average bids--much like Part D is operated and like the Medicare Modernization Act of 2003 authors saw the private Medicare program eventually working.

Last week, I called for a transition program similar to this: You Can't Have the Medicare Advantage Private Fee-For-Service Training Wheels Forever

I think MedPACs proposals are better. MedPAC has created a reasonable way to transition the private Medicare industry's business off the training wheels and onto a sustainable business model.

MedPAC has also shown the Congress a five-year plan to begin taking back some of these extra payments in an orderly way so they can be used for other priorities--like S-CHIP and fixing the Medicare doctor fee cut problem.

In the end, the private Medicare Advantage programs, including Private Fee For Service, have to be able to demonstrate that they can provide care more effectively and efficiently then can the government-run system.

If the private plans cannot provide a better (cost and quality) health care insurance program, why continue them?

The people in our industry who have confidence in what they do for a living will take this deal!!!!!

Wall Street Comes to Washington--A Fascinating Discussion Between Wall Street Analysts and the Washington Health Policy Community

Paul Ginsburg, of the Center for Studying Health System Change, has been hosting a conference for 12 years where he brings some of the leading Wall Street analysts following the health care sector to Washington and puts them in a room with 400 Washington health policy people.

The interchange, and the different perspectives, between the Wall Streeters and the Washington policy people is fascinating.

He conducts one panel focused on the health plan sector and another on the hospital, physician, and pharmaceutical side. Each panel lasts 90 minutes. I participated on the health plan panel--as I have done for a number of years.

Health plan panel topics included Medicare Advantage (including fee for service), Part D, commercial health plan profitability and cost trend, the renewed interest in wellness programs, consumer-driven care, and other current topics.

The provider panel topics included underlying health care cost trend drivers, hospital pricing, hospital competitive strategies, consolidation, and IT.

The Kaiser Family Foundation has the conference available on webcast. You can look at the panels separately.

Friday, June 15, 2007

Industry Trade Association Pledges to Halt Medicare Fee For Service Marketing Until Sales Abuses Are Cleaned Up--But Forgot to Mention One Thing

This from the June 15 AHP health insurance trade association news release:

"Taking a major step to give Medicare beneficiaries peace of mind, today seven of our member companies are making a pledge to voluntarily stop marketing non-group Medicare Advantage Private Fee For Service plans and to strengthen consumer protections by implementing now the Centers for Medicare and Medicaid Services (CMS) 2008 marketing enhancements ahead of schedule."

The industry says they expect to open things up again "well prior to the launch of 2008 marketing efforts."


With state insurance regulators and state attorneys general giving Congress lists of sales abuses from at least 39 states that include such things as the enrollment of dead or mentally impaired seniors, the impersonation of Medicare officials, and the use of personal information stolen from federal records, it's the responsible thing to do. It also wasn't lost on the industry when, in a Congressional hearing, the industry was told in no uncertain terms to deal with the bad guys and CMS showed little patience on the matter, to boot.

However, in making this bold and magnanimous move the trade association neglected to tell the reporters one little thing in their self-congratulatory news conference.

They weren't going to sell much new business this summer anyway.

You see, unless a senior is just turning age 65 (or uses the convoluted "limited open enrollment period" that requires splitting drug coverage out of the private Medicare plan), they can't sign up for a different Medicare plan, like Private Fee For Service, at any time other than the open enrollment period between November 15th and December 31st.

Nice PR though.

Reuters News Story With Analysis of Impact on New Sales: Medicare pause seen causing insurers little pain

You Can't Have the Medicare Advantage Private Fee-For-Service Training Wheels Forever

Actually, my point was that the industry's arguments to preserve private fee-for-service payments amounted to an appeal to preserve corporate welfare, not that the original PFFS program is corporate welfare, but I'll accept the gist of this story:


Consultant Favors Cuts to Medicare Plans
Thursday June 14, 3:06 pm ET

By Matthew Perrone, AP Business Writer

Consultant Says Congress Should Limit Payments to Some Private Medicare Providers

WASHINGTON (AP) -- A health policy consultant said Thursday a popular Medicare health plan run by private companies amounts to "corporate welfare," and should be scaled back by Congress.

Robert Laszewski, president of Health Policy and Strategy Associates, said Congress should limit how long health insurers like Humana Inc. and WellCare Inc. can operate health plans in rural parts of the country that cost more than government-run plans.

Medicare is the government-run health benefit that covers 43 million seniors. Roughly 20 percent of those seniors receive their benefits through privately run Medicare Advantage plans.

In recent months some members of Congress have suggested cutting payments to a type of Medicare Advantage plan called private-fee-for-service, which costs the government about 19 percent more than traditional Medicare. Private-fee-for-service plans do not have the cost containment features that are characteristic of most other privately-run health care plans.

America's Health Insurance Plans, an industry trade group, says companies pass those larger payments on to seniors in the form of lower out-of-pocket expenses and extra benefits, such as dental and eye care.

But Laszewski, whose group consults with insurers, hospitals and physicians, told an audience of health care analysts and executives that this argument misses the point. The government brought private companies into Medicare to lower costs, Laszewski said, not to increase them.

Laszewski said Congress should limit how many years a company can operate under the private-fee-for-service model before transitioning to a model that is better at managing expenses, such as an HMO.

"We're going to expect that at the end of four or five years you're not going to be on the private fee-for-service training wheels anymore," and will have moved to a model that costs less than traditional Medicare, Laszewski said.

"Because if you can't manage costs for less than the traditional Medicare plan, then why are we doing this?

Wall Street Journal Sends Shockwaves Through the Health Insurance Markets With the Headline "Health Savings Plans Start to Falter"

It's the kind of headline I would have expected to see in the New York Times instead of the Wall Street Journal but there it was in Tuesday's edition.

Vanessa Fuhrmans' article seems to have unleashed some pent-up frustration in the health benefits market on the subject of health savings accounts (HSAs) specifically and consumer-driven care generally. It is as if it represents a turning point for how health savings accounts (HSAs) and consumer-driven care are going to be seen by the benefits market from this point forward.

The article points out that HSA growth may have stalled--the number of workers enrolled in HSAs through work grew only slightly, from 2.4 million in 2005 to 2.7 million in 2006. When employees had a choice of plan type, only 19% picked an HSA. The surveys also show low satisfaction rates for these plans. The managing director of Towers Perrin's health care practice: "If I were a product manager in any other industry and saw the scores this low in customer satisfaction and understanding, I'd be thinking of pulling that product from the shelves and retooling it."

Just to get my own bias on this issue out in the open, I have never believed that consumer-driven health care was any kind of silver bullet for solving America's health care problems. That said, I don't see much harm in making these plans available--particularly to consumers who can afford the extra financial risks they can create. These plans enjoy better consumer acceptance in the individual health market--particularly among higher paid consumers because they are a fantastic tax preference and a great way to fund the high deductible plans this higher-earning market tends to want anyway.

But HSAs as a health policy tool to fix the American health care system? Give me a break.

Consumer-driven care is a concept built on a free market foundation. And that foundation is turning out to be one that is pretty weak.
  • First, for people to act in an efficient way, they have to have information. They have to know their options and be able to assess the options. The medical directors of the leading health plans can hardly manage care optimally. How did we ever expect regular folks to figure it out. The information just doesn't exist--beyond some marketing brochures.
  • Second, the consumer-driven movement assumed that patients would want to take more control of their health care challenges if there was a financial incentive for them to do it. We are finding that the opposite is true. The health care delivery system is a hugely complex tangle and consumers are more interested in finding providers and/or insurers they can trust to guide them through it than thinking this needs to be their preoccupation. Ask anyone who has had a serious illness, or managed one for a close relative, and they will recount one nightmare after another about trying to get the best care and their frustration in trying to untangle bills and insurance documents. Who would actually want to do this?
  • Third, and you have all heard this a million times but we have to keep it on the list, 75% of all health care costs are incurred by the 15% sickest people. Look at all the consumer-driven financial incentives and you will find they are first-dollar oriented. Those people with all the high health care claims, and most of the costs, blow through those corridors very quickly and into full-pay areas where they no longer have financial incentives to better manage care--if they wanted to and could.
More information, price transparency, incentives to be better health care consumers, are all great ideas. Clearly, these concepts are responsible for the much better take-up rate for generic drugs and the huge savings there. The $5 co-pay and $100 deductible were around way too long. But the consumer's ability to be buy serious health care like he would buy a set of tires was a silly idea in the first place. This idea was pushed by the same "geniuses" who today write books about how we will save the U.S. health care system with new technology as the next "silver-bullet." All true to some extent but far more a sign of just how naive they are about the down-to-earth challenges we face.

We are at an interesting place in the national health policy debate.

One Democrat after another--so far Obama and Edwards--is proposing comprehensive health reform built around the Massachusetts health reform plan. That plan now has its challenges in getting off the ground and proving-out its proponents' ideas.

On the Republican side, we already have two candidates--Giuliani and McCain--who have said they want to work toward a more market-driven health care system with the consumer-driven concepts and HSAs at its core. But now even the Wall Street Journal is challenging the bottom line in that health care philosophy.

We have two big competing health reform ideas--one Democratic and one Republican--facing off in the upcoming national election just as real life results from both of these models are becoming available.

The candidates had better be careful to connect their rhetoric to the reality.

Thursday, June 14, 2007

Can We Control Health Care Costs Without Universal Coverage?

My good friend, Joe Paduda, over at his blog, "Managed Care Matters" has responded to my recent post: The Mandate Myth--Health Reform Plans Don't Have to Mandate Coverage to Work But They Do Have Be Affordable.

Joe has made the point that it might be important to mandate coverage in order to prevent cost shifting. He is pointing out that unless we mandate that everyone is in the health care insurance pool we will have some people refuse to pay their fair share. That would result in their getting a free ride and the rest of us having to pay higher prices to offset the uncompensated care many of these people would receive.

In my post, I made the point that there are a number of examples of very successful health plans getting a sufficient cross section of risk even though their participation is completely voluntary. Most self-insured employer plans, for example.

Joe raises a very different, but related, point having to do with equity and every single citizen paying their fair share to get the system to its most efficient level.

A health care system with absolutely every person in the pool will be cheaper than one where maybe 10% of the people are looking for a free ride. But, even with 10% of the people on the outside, an insurance system will have an adequate spread of risk to be viable. In fact, the old underwriting rule is that you need 75% of those eligible to get a workable spread of risk.

In today's health care debate, there are those who believe everyone should be required to be in the health insurance pool and there are those who believe in the principle of individual responsibility and choice. John Edwards has proposed an individual mandate and Barack Obama has not, for example. Most Republicans strongly believe that choice, including the freedom not to choose, is very important to any future health care system.

My only point is that an insurance system can work under either principle--a mandate or no mandate. Joe takes it a step further raising the equity issue--a valid point.

I will leave you with three conclusions:
  • While a mandate leading to 100% participation will make the system lower in cost, a voluntary system that attracts almost everyone with affordable health care costs will come very close to achieving the same premium levels. We have learned this over and over in the benefits business through the years.
  • I don't want to see us fail to agree on how to reform the system over the mandate issue.
  • The much bigger issue is affordability. The relatively insignificant incremental improvement in cost from going from covering 90% of the people to covering 100% via a mandate is small compared to the other things driving health care costs so high in the first place.
As Massachusetts is learning, whether to mandate or not is a moot issue if you can't get the cost of health insurance down to something the consumer can afford.

Latest "Health Wonk Review" is Up

David Williams is hosting the latest edition of Health Wonk Review over at his site, "Health Business Blog."

It is the bi-weekly compendium of some of the best posts in the health blog world!

Wednesday, June 13, 2007

Why Does Health Insurance Cost So Much in New England?

I guess the easy answer is because health care itself costs so much in New England.

As I travel around the country, I continue to hear that plan sponsors and insurers are all frustrated by the comparatively high health care (and insurance) costs in New England. For example, according to CMS, health care spending for Massachusetts residents exceed the national average by more than $1,500, or 33% in 2004.

So, it is no surprise that health insurance costs more in Massachusetts--a 2006 health insurance industry survey found that the cost of small employer health insurance was 26% higher in Massachusetts than in the rest of the country.

A more in-depth discussion of why health care costs are so much higher in New England has been offered by one of the leading health plans in the region--Harvard Pilgrim.

They have created a “white paper”and have made it available. It might be expected that a health plan would provide a self-serving explanation of their market but I think they have given us a lot of useful and “down the middle” information.

They have also provided a list of the most commonly used "tools" for managing health care costs and quality.

There are regional differences in our health care system but all parts of the country suffer with the same challenges to one degree or another. Wherever you live, this is a good primer on why costs are as high as they are and what plan managers are doing about it.

I recommend it.

You can find it on their website.

About a third of the way down this webpage you will see, “High Cost of Health Care White Paper.” Click on that and the PDF will download.

Tuesday, June 12, 2007

McCain to Propose a Health Care Reform Plan--Both Democrats and Republicans Becoming Predictable on Health Care

Republican presidential candidate Senator John McCain said this weekend that he is working on a health care reform proposal. He gave no time for its release but did mention a number of components:
  • His plan will not include tax increases.
  • It will not include any coverage mandates--presumably individual or employer mandates.
  • He would make greater use of health care information technology.
  • It will expand on the current State Children's Health Insurance Program (S-CHIP).
  • It will include greater emphasis on individual responsibility and will include the use of health savings accounts (HSAs).
  • It will include medical malpractice reform.
While short on details at this early stage, McCain's health reform plan would appear to follow the usual conservative Republican philosophy of more individual responsibility and the use of market forces.

It would also appear that McCain's proposal will be very similar to the preliminary information we have seen on Rudy Giuliani's forthcoming health care reform proposal.

Both the leading Democratic and Republican presidential candidates appear to be falling in line along predictable policy outlines.

Generally, Democrats are emphasizing more comprehensive and expensive plans that look a lot like the recently enacted Massachusetts plan--with costly expansions of existing public and private plans and requirements that individuals and/or employers pay for coverage. Many Democrats see the bigger health insurance pools, like employer plans and traditional Medicare, as the best way to deliver affordable and comprehensive benefits.

Republicans, on the other hand, generally favor more individual responsibility, a more transparent market, and a movement away from the traditional, and generous, employer-provided health care that many Republicans believe have helped push health care costs higher. Many conservative Republicans believe employer plans have insulated consumers so much that the usual market forces have been lost in health care and that the private markets should also be brought to bear to bring Medicare and Medicaid costs under control.

During the primary season at least, health care doesn't look to be a deciding issue. Simply, the leading Democrats all look to have similar health care proposals--no real opportunity to differentiate candidates there. Now, it appears that at least two of the leading Republicans--McCain and Giuliani--will also have indistinguishable health care proposals.

However, Republican presidential candidate Mitt Romney has yet to tell us what his health care platform will look like. Romney is presenting himself as a conservative Republican but, as the recent Governor of Massachusetts, has signed the Massachusetts health reform law that has become the baseline for the leading Democratic candidates' health care reform proposals.

Now what will Romney do? Will he move in the direction of the Democratic Massachusetts-like proposals or will he move away from his own legacy and away from Massachusetts? I wouldn't bet on this self-described conservative offering anything like the Massachusetts-style plans we have seen the Democrats propose.

Presuming no surprises from Romney, there will be little on health care to differentiate the front-runners in either party from their leading rivals during the primary season.

But, come the general election, there will likely be a clear choice on health care. From what we have seen so far, Clinton, Edwards, and Obama all have proposals dramatically different than what we will see from McCain and Giuliani--and likely Romney.

Come November on health care, the choice will likely be very clear.

Monday, June 11, 2007

The Mandate Myth--Health Reform Plans Don't Have to Mandate Coverage to Work But They Do Have Be Affordable

As the presidential candidates, Republican and Democratic, begin to come forward with their health reform plans, a side debate is heating up about whether any meaningful health care reform plan has to have a mandate, individual or employer.

The reasoning goes that for health care reform to work we need to get about everyone in the pool--both in order to solve the uninsured problem and to be able to adequately spread the cost of health insurance across as many people as possible.

We do need to spread the cost of insurance over a big pool to get the best cost structure--a pool that isn't just populated by the old and sick and therefore one that costs a lot.

However, the notion that we have to either mandate that all individuals buy coverage--or that all employers provide it--is a myth.

Today, there are a number of health insurance pools that are large enough to provide an optimal spread of risk. Each of these pools is voluntary--not mandatory:
  • Most employer plans. No employer requires all employees to join their health plan. All employer health plans are voluntary. Yet employer after employer--many self-insured with just a few hundred participants--have very efficient programs.
  • The Part D Medicare drug benefit. The plan is voluntary and enough people have signed up to make it workable.
  • Part B of Medicare. The portion of Medicare that covers physician and other non-hospital costs is voluntary and almost all seniors sign up for it.
Each of these voluntary health insurance plans works quite well without any individual mandate.

However, each of these plans is affordable. Employers typically pay at least 75% of the costs for their employees. The government pays 75% of Medicare Part D and Part B costs.

So, it's simple.

The problem is not making people buy coverage--the problem is making health insurance coverage affordable. Massachusetts learned that this year when they first tried to mandate that all citizens buy health insurance but had to back-off because they couldn't produce a health insurance plan that everyone could afford.

If you make health care affordable enough people will come to adequately populate the insurance pool.

The challenge is not to force people to buy health insurance. The challenge is making it affordable so they can.

Many are now focusing on whether or not Barack Obama, John Edwards, Hillary Clinton, Rudy Giuliani, or any of the rest, have a mandate in their health reform plans.


What we need to focus on is how are they going to make health care affordable.

It's the costs, stupid!

Related posts:
Giuliani Set to Announce a Health Care Proposal--But He Has to Make it Affordable for Everyone

Deja Vu in Massachusetts--We've Been Down this Road Before--The Massachusetts Health Care Plan and Health Care Costs

It's the Cost of Health Care Stupid!!!

Thursday, June 7, 2007

Giuliani Set to Announce a Health Care Proposal--But He Has to Make it Affordable for Everyone

Republican presidential candidate Rudy Giuliani is set to announce a new health plan this summer that would provide incentives to shift private health insurance from the employer group model to the individual health insurance model, according to an article in Thursday's Wall Street Journal.

Details are sketchy. We understand that it would still allow the traditional employer plans to continue, it would provide the same tax benefits to individuals as employees get, and it would allow consumers to cross state lines to find the best coverage.

Such an individual-based proposal would be consistent with Giuliani's prior comments on health care reform where he rejected the comprehensive health care proposals suggested by the leading Democratic candidates to greatly expand on existing public and private employer-based plans. He has called those proposals "socialized medicine."

Giuliani is quoted as saying, "What I would do is change the whole model that we have for health insurance in this country. The problem with our health insurance is it's government and employer dominated. People don't make individual choices."

Giuliani has also endorsed the President's "State of the Union" health care proposal that would end the tax preference on employer-provided health insurance and replace it with a standard tax exemption for all those who have a health insurance policy--individual or employer. He is also a big supporter of health savings accounts (HSAs).

The WSJ report says that he does not favor an individual mandate.

In its current form, the individual health insurance market makes heavy use of age rating and medical underwriting in order for insurance companies to protect themselves from "anti-selection." That is, people waiting until they get sick to sign up or having a disproportionate number of older and sicker people buying the coverage.

To make an individual health insurance market model work insurers have to get a good cross-section of risk. For that to happen it generally takes 75% of those eligible for the coverage to sign-up.

We have a number of existing health insurance markets where insurers get a good cross section of risk--where "anti-selection" is not an issue--and where there is no mandate to participate:
  • Employer plans - People don't have to participate in their employer's plan but generally do because the employer pays for most if its costs.
  • Medicare Part D - Seniors don't have to participate but since the feds pay for 75% of its cost, most do.
  • Medicare Part B - Since the feds pay for 75% of Part B costs, almost all seniors participate.
In all of these cases, participants pay the same rate no matter how old they are and don't have to pass a medical underwriting process, or have any other coverage penalty, so long as they sign-up when the coverage is first offered.

So, an individual health insurance model can work. However, it is clear that for it to work people have to be offered coverage they can afford.

With the average cost of family health insurance now almost $12,000 per year, middle- and lower-income people are going to need lots of assistance in order to be able to join. The experience from existing employer plans, Part D, and Part B tell us that someone has to pay at least 75% of the cost for the coverage to be affordable and attractive.

Making individual health insurance tax preferenced isn't going to help a lot of people who are in lower income brackets and don't pay a lot of taxes. HSAs may cost a little bit less but not enough to make them affordable for these same people without a lot of premium assistance.

And, how many middle-class people could afford to pay $10,000 or $12,000 in health insurance costs even if they had a tax benefit worth maybe a quarter or a third of that?

Coverage has to be affordable for everyone in order to:
  • Get enough people to sign-up to make the insurance market viable.
  • Make it possible for everyone to get coverage--to solve the uninsured problem.
So, Mr. Giuliani's individual market model can work. It can even work without an individual mandate.

But it can't work unless coverage is affordable.

That is the big challenge his proposal will have to address.

He may have to end up offering one of those big expensive government health care plans for that to happen!


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