Private Health Insurance Exchanges––Will They Save Money? Will the Idea Grow?

Private health insurance exchanges will save employers money but not make health insurance cheaper.

Because private health insurance will save employers money, they will grow.

Will Private Insurance Exchanges Reduce Health Insurance Costs?

There's lots of buzz these days about private insurance exchanges. The idea is to give employees more choice in purchasing their own individual coverage from a big menu of insurance companies and plan alternatives, and as a result, create more robust competition and thereby help control costs.

But I think private insurance exchanges will have just the opposite effect on the price of large employer health insurance plans.

I Hope Trustmark Tells HHS to Go Pound Sand

Today, the Department of Health and Human Services announced that, "Trustmark Life Insurance Company has proposed unreasonable health insurance premium increases in five states—Alabama, Arizona, Pennsylvania, Virginia, and Wyoming. The excessive rate hikes would affect nearly 10,000 residents across these five states."

The HHS statement continued, "In these five states, Trustmark has raised rates by 13 percent. For small businesses in Alabama and Arizona, when combined with other rate hikes made over the last 12 months, rates have increased by 27.2 percent and 18.1 percent, respectively. These increases were reviewed by independent experts to determine whether they are reasonable. In this case, HHS determined that the rate increases were unreasonable because the insurer would be spending a low percent of premium dollars on actual medical care and quality improvements, and because the justifications were based on unreasonable assumptions."

I hope Trustmark tells HHS to go pound sand.

Here inside the Beltway, there is this assumption that the health insurance market is not competitive and health insurance consumers--in this case small employers--are helpless without the federal government. From the HHS statement: "Before the Affordable Care Act, consumers were in the dark about their health insurance premiums because there was no nationwide transparency or accountability."

Baloney.

We can all have a vigorous debate about just how well the health insurance market has worked to control health insurance costs and readers of this blog know I haven't exactly been an insurance industry apologist on that score.

But anybody who thinks there is no "transparency" or no "accountability" in the small group market has never been there.

Small group carriers regularly see 30% of their block "churn" in a given year as they lose business to competitors. It is not unheard of for an entire block to turn over every few years. There are tens of thousands of health insurance agents and brokers tripping over each other out in the market--their trade association claims 100,000 members. If the incumbent agent isn't continually "check bidding" for his customers that agent can be sure lots of his competitors will be knocking on that client's door with lower rate quotes.

There is no market in America any more competitive than the small group health insurance market. Does competition work to control costs? That's another story. But a lack of competition is not what ails the small group health insurance market.

I have no idea whether Trustmark's rate increases are reasonable or not, or whether they made mistakes in calculating them. I am certain they know they will lose lots of business if these increases are not competitive.

Is a 27% rate increase justifiable at a time when health insurance cost trend is at historic lows? I don't know--it depends where the rates started. My point is that knowing a carrier's rate increase percentage tells you nothing about whether that rate is reasonable or not. It is the absolute rate that matters. Maybe Trustmark erred in setting these rates in the first place and is now playing catch-up.

What matters to a health insurance buyer is not the rate increase or even the medical loss ratio, what matters is the price--which insurer has the lowest price for the same benefits.

Who will know whether the final price is reasonable or not? The small group customer who, upon getting a 27% rate increase, will demand the business go out to bid--presuming the agent hasn't already done that. It the rate is not competitive, the business will very quickly be moved to another insurer where it is.

This rate increase action by HHS is just political grandstanding as the Obama administration tries to sell a still unpopular law.

But it is dangerous grandstanding.

Let me tell you something you may find counterintuitive about the small group and individual health insurance markets. It is the little and often "inefficient" carrier that keeps the big guys honest. These guys often come in and out of markets necessarily undercutting the dominant players' rate base to get a foothold in the market. And, by the way, Trustmark is a mutual company owned by its policyholders. The big guys would like nothing more than to get rid of these little "pests" that upset the market order. And, HHS appears to be doing its best to comply.

This rate oversight action by HHS amounts to nothing more than the jumbo insurance company full employment act. If HHS thinks an oligopoly in the health insurance market, where only a very few big guys dominate the market, is the way to create competition, they are well on their way.

Unless Trustmark, and the little guys like them, just tell HHS to go pound sand.

Inconvenient Facts for Both Republicans and Democrats—Neither Side’s Health Care Proposals Are Supported By Past Performance

I call your attention to Ezra Klein’s column in the Washington Post this morning.

In it he cites data that has been out there for a long time but Ezra puts some perspective on it that never occurred to me before.

Examining the Kaiser Family Foundation brief, “Health Care Spending in the United States and Selected OECD Countries” he points out, “Our government spends more [as a percentage of GDP] on health care than the governments of Japan, Australia, Norway, the United Kingdom, Spain, Italy, Canada, or Switzerland.”

The data would seem to indicate that even our single payer government-run American health care programs, Medicare and Medicaid, cost way more than similar health plans in these nations.

The argument is often made that we should adopt a single payer—or perhaps a “public option”—health plan in the United States in order to control costs and cover everyone. But it would appear that even those programs in America are way too expensive when compared to similar programs in other industrialized nations.

As for the Republican market-based approach, Klein also points out that those programs have been ineffective at cost control. House Republican Paul Ryan often cites the Medicare Part D drug benefit as proof his proposals to privatize Medicare would work better than what we have. But as Klein points out, Part D premiums have risen 57% since 2006 and the program is on track to see nearly 10% growth in annual costs over the next decade.

And, the existing private Medicare Advantage program “ended up costing about 120% of what Medicare costs.” That’s a new data point for me. However, I do know that Medicare Advantage insurers in recent years have been paid at least 13% more than traditional Medicare.

My takeaway from all of this is that neither side has the answer to bringing America’s health care costs under control.

Liberals think that a single payer, or at least a “public option,” is the best hope and point to Europe and Canada as proof of that. But, as a percentage of GDP, the cost of our already government run health care plans rivals many of those nations' entire government spending on health care.

Republicans argue we need to move entirely toward market-based solutions. But with two big market-based Medicare programs already operating, neither Part D nor Medicare Advantage has come close to demonstrating affordable cost growth.

But both Republicans and Democrats do have something in common—each is offering supposedly painless solutions. For the liberals, just put the government in charge and we will magically have affordable health care for everyone. For the conservatives, just put the market in charge and we will have a solution.

Painless solutions might be politically attractive, but the data indicates they will not get the job done.

Recent post: What It Will Take to Bring America’s Health Care Costs Under Control––We Have to Change the Game

Small Business Health Insurance Coverage: A Sobering Report From the Trenches

One of the things I enjoy the most about my travels across the country is meeting benefits brokers and health plan sales reps--they have the best feel for the real market and what their customers and their employees are up against.

This very sobering and, from what I independently hear, accurate report about the small group health insurance market comes courtesy of Brian Klepper. Please note the impact consumer driven plans are having.

Small Business Coverage: A Report From the Trenches
by BRIAN KLEPPER

John Sinibaldi, a well-respected health insurance agent in St. Petersburg, FL , has become prominent in Florida's broker community because he not only counsels and services a large book of small business clients, but because he also studiously tracks the macro trends that impact coverage for this population. And he's active in the state's regulatory and legislative activities.

The other day I dropped him Jane Sarasohn-Kahn's post that reported on International Foundation of Employee Benefit Plans' survey showing that most employers still want to be involved with health care. John responded with a long description of what the small employers he works with are up against. Its an illuminating, damning piece. I asked him whether I could post it, and he graciously agreed.

Often the discussions on sites like this are dominated by people who understand health care's problems deeply but abstractly. For John and his employers, buying health care is a stark, concrete problem that boils down to cutting care arrangements that are affordable for the employers and employees. As he describes it, it's an increasingly impossible task.

John notes that only 36% of Florida's small businesses - defined in the health insurance market as employers with 2-50 employees - now offer coverage. This is significant, since 95% of Florida businesses are small. Nationally, about one-third of all employees work for firms with fewer than 100 employees.

The increasing pressure on small business may explain why, as I pointed out the other day, even the arch-conservative National Federation of Independent Business (NFIB) recently co-sponsored a reprise of the Harry & Louise health care reform ads, this time advocating for, rather than against, universal health care. Last time, they were part of the coalition that killed the Clinton's reform effort.

And finally, Mr. Sinibaldi's message should drive home a key point, echoed by Shannon Brownlee and Zeke Emanuel in the Washington Post over the weekend and Bob Laszewski's post yesterday. To be successful, the expansive health care reform discussions that typically dominate in DC MUST go beyond the Massachusetts and California reform efforts. Approaches that can address waste and cost are just as important as those relating to universal coverage. Otherwise the resulting solutions will continue to be out of reach to a sizable portion of the American people, and the underlying driver of the crisis, out-of-control cost, will remain untouched.

Here's John's letter.

I've got news for the folks doing the IFEBP survey: Smaller businesses, especially those defined as true small businesses (2-50 FT employees), are strapped beyond belief when it comes to paying ever-higher premiums for health care. The survey's results are NOT indicative of what is happening in the small group market (much like the Kaiser Family Foundation's (KFF) annual survey on total premium and the portions shared by employees, which always makes me laugh. The employees at my businesses would kill to have the low percentage of total premium passed on to them that is reported in the KFF survey).

Across the board, the 100+ businesses I represent, all of them 2-50 full time employees, have received increases between 13%-75% this year. The average has been around 20-24%. That's on top of 15+% average increases last year, 15+% increases the year before, and the year before that.

Some of those increases have been mitigated by moving to High Deductible Health Plans (HDHP), but we didn't get premium savings by doing so, we only leveled premiums for a year or so. Now, the underlying increases are causing the HDHPs to rise just as fast (and maybe even faster; more on that in a minute), so employers are moving toward ever bigger deductibles.

Just five years ago, average deductibles for my employers who had deductibles (many were still on straight copay HMOs) were in the $500-$1000 per covered member range.

Now, I have only a handful of employers still on HMOs, and they have huge co-pays, like $1,500 inpatient hospital co-pays or large deductibles just like the more traditional insurance plans. Most deductibles range from $2,000 per covered member to as much as $10,000 for a cumulative family deductible. And many of those are HDHPs, with no benefit for covered sickness or injury or prescription benefits, until the deductible is met. Even with these plans, premiums are simply too high for many low-wage and middle-income folks to pay.

Most of my small businesses have been frightened to death by the health care industry's warnings against governmental intervention. The most common remark I receive is "I don't want government involved in my health care!" However, the second most common remark I am receiving now is "I don't know how much longer I can pay for this. Frankly, the government can't do any worse."

I have an unremarkable quote in a November 17 WSJ article - "Now the insurers are catching up." - on the coverage problems facing small business. What I meant to convey to Ms. Fuhrmans, the reporter, was that the premise that Consumer Directed Health Care would give consumers more skin in the game and slow the rise in health care costs was, and remains, a myth.

I represent the two businesses profiled in the article. Their experiences are not anomalies in the small group market. Rather, they are indicative of the dramatic health insurance changes that have affected small businesses. Just five years ago, one of the businesses had a very traditional PPO product, with low copays, low out-of-pocket expenses for major medical claims, and low-cost prescription drugs. The other employer also had relatively affordable costs, both for themselves and their employees. More importantly, both businesses felt that, while expensive, the costs to them and their employees was not egregious.

Fast forward to today. Both businesses feel that they're being hosed on their health care costs. They don't care what is behind the cost increases. It also makes no difference which carriers are involved, as all struggle with rising costs and ultimately pass those costs on to employers and their employees. The employers only know that the current rate of increase (for premiums, for payroll deductions for the employees' portions, and for out-of-pocket expenses at time of claim) is simply unsustainable.

Unsustainable. Think about it. Only some 36% of small businesses in Florida still offer coverage - this is far less than the national average of 52% - and that number continues to plummet.

So an increasing percentage of small businesses now feel that governmental intervention of ANY kind is preferable to the present untenable situation. In the small group marketplace, the pinch has been here for a long time, and has turned into a hard squeeze. Soon, it will squeeze the life out of the markets - at which point the small group market will implode.

At this point, the current system only works for affluent employers, who can still pay the exorbitant premiums but who don't pass the bulk of that cost along to their employees. It also still works for businesses with high-income employees who can absorb the cost. That typically means larger businesses; institutional purchasers like local, state and federal government organizations. It works for purchasers with enough capital and revenue to offset the bulk of the costs, whose employees haven't yet felt the "pinch" of high health care costs.

An interesting and often overlooked sidenote is that, in almost all surveys of employee satisfaction, employees of larger employers and those employers that pick up the bulk of the premium are typically more satisfied with the current system than employees in small businesses, which are often not included in such surveys.

Finally, the most popular plans I now sell to small businesses? A flat $5,000 individual/$10,000 family deductible HDHP (no carrier responsibility for anything other than pure preventive until the deductibles have been met). A similar $1,500/$3,000 HDHP is also popular. I very rarely sell more traditional PPO co-pay plans, since the businesses I represent (mostly light industry and service) can't afford them.

Underwriting Cycle or Medical Trend Rate Cycle?

Analysts trying to predict the future of the health plan business who are looking for an underwriting cycle will miss the real turns in the market.

Recent health plan earnings issues have once again raised the question, do we still have an underwriting cycle, and are we entering one?

In my mind, anyone trying to understand the profitability of the health plan business who concentrates on whether or not there is an underwriting cycle underway misses the larger picture.

In the modern health plan era—a time of unprecedented consolidation, financial controls, focused capacity, and prospective provider contracts—I don’t see as much an underwriting cycle as I do a medical trend cycle.

The chart above details the increases in health insurance premiums compared to worker earnings and overall inflation and comes from the Kaiser Family Foundation Survey of Employer-Sponsored Health Benefit Plans from 1988 to 2007.

To me, the most recent 15 years of this 20-year view of health insurance premium increases demonstrates more a health care cost trend cycle than an underwriting cycle.

In the 1970s and 1980s, we clearly had underwriting cycles. (I have the scars to prove it!). But that era was far different from the current one. The health insurance business had a relatively low barrier to enter and lots of marginal players did--often fueled by readily available underwriting capacity from life insurance companies looking to diversify and excess reinsurance capacity--often from offshore. A TPA could quickly enter the business backed by lots of reinsurance capacity and distort local markets in both the small and large case market, for example. That sort of thing is far less common now with the health reinsurance capacity players more often being large and more sophisticated domestic players.

Today we have a consolidated health insurance business dominated by the "adults." While they make mistakes they do not intentionally go on business buying sprees.

I recently attended a Blues sales conference. Often, we hear that there are local non-profit Blues plans out there buying business. I have yet to find one. What I heard at that conference is that this market is just like the markets of recent years--there is always someone who will bid a lower price but that level of competition has always been there. If there is a change today it is that there are so many specialty vendors--disease management, PBM, wellness, trying to pick-off parts of a program.

Saying someone is out there buying business has become too common an excuse for publicly traded plans that would like to deflect attention away from internal problems of their own whether they be customer service or pricing mistakes. I'd like to see some of these "victims" name some names.

One big plan in particular has been claiming their business retention problem can be blamed on the underwriting cycle but that they are so disciplined they refuse to chase lower rates when in fact it is that their service has gone to the dogs and they are creating their own issues business retention issues.

Are there still capacity issues impacting pricing? Yes. But to nowhere near the level we saw them 15 years ago.

The health insurance trend cycle has a lot more to do with whether payers and providers are in equilibrium—whether both sides are getting what they need to make their profit goals—than it does the vagaries of health plan pricing.

Looking back to the 1990s, health care trend fell to near zero not because the health insurance industry figured out how to fundamentally manage health care but because health plans were able to get the upper hand on providers. You might recall physician fee schedules as low as 75% of the Medicare schedule in the late 1990s.

Providers pushed into the corner, reacted. We had the patients’ rights rebellion that might have been better termed the provider rights rebellion. Doctors and hospitals pushed back, employers didn’t back the health plans up, health plans backed down, the lid came off, and medical trend skyrocketed to 13.9% in 2003 as the providers began to catch-up for years of underpayments.

Once things began to build in the providers favor toward equilibrium between payers and providers (beginning in 2003) the medical trend rate began to decelerate. As trend decelerated, profitability was a lot easier for the health plans as they benefited from a trend windfall that covered up a lot of operational “warts.”

Now that we have hit a health care trend bottom, health plan earnings growth has slowed (or even reversed) and the operational warts—the usually small things that get missed when profits are growing at a great clip—begin to show themselves.

It has been a combination of these relatively minor things that Wall Street overreacted to in recent months as health plan stock prices fell on revised earnings guidance. Wall Street’s problem is that it became addicted to the notion that health plans could always report 15% growth and 15% earnings gains.

In terms of real growth, the commercial market has been flat for years.

But the 2003-2007 period was unique. Even though the commercial market was flat, the privatization of Medicare created an enormous growth engine in its place. Now, the low hanging fruit from that new market is gone and Medicare growth looks to be normalizing.

With last week's Senate vote killing private fee-for-service plans by 2011, it is also clear that the tide has shifted in Washington for private Medicare. The next few years will undoubtedly see the payments between private and public Medicare equalized.

During the 2003-2007 period, earnings growth was robust as health care trend decelerated resulting in the extra windfall earnings as plans regularly sold renewal rates closer to the prior year’s trend rate than the prospective trend rate. In addition, the plans benefited from attractive margins on the new Medicare opportunities.

So are we now entering a new underwriting cycle where health plan earnings suffer because of chronic self-imposed health plan underpricing?

No. Throughout my market travels I find no evidence that health plans are deliberately, or even unintentionally, underpricing one another on a consistent basis to gain market share. Such claims from health plan executives lately trying to explain their own earnings problems just don’t pan out.

We are at the end of one phase in the medical cost trend cycle, as the deceleration ends, and entering another phase, as trend is in the early stages of accelerating again. When this happens, health plans face an earnings head wind instead of the nice tail wind they benefited from in the 2003-2007 period.

Analysts trying to predict the future looking for an underwriting cycle that doesn't exist will miss the real turns in the market.

Health care trend just can’t go any lower given the current environment. In the wake of providers getting their catch-up pricing, starting in 2003, and needing progressively less in subsequent years as they completed the catch-up, we had a four-year health care trend “soft landing,” or trend deceleration, that ended in 2007.

Now, the pressure on health care trend has at least a slight upward bias driven this year by a bigger than typical flu season and an uptick in catastrophic claims largely driven in part by more claims for things like serious infections and premature infants.

For medical cost trend to take off in a big way, two are things necessary—higher inflation pressuring providers and/or provider cost shifting driven by government underpayments—haven’t asserted themselves, at least not yet.

People who wonder if there is still any such thing as the underwriting cycle are asking the wrong question.

For at least the last 15 years we haven’t had so much an underwriting cycle, we’ve more had a medical cost trend cycle.

An underwriting cycle is when the health insurance industry cuts its own throat with self-imposed under pricing. In this consolidated and more sophisticated financial environment for the business, little if any of this has gone on—at lease intentionally.

The medical cost underwriting cycle we are now living with has more to do with whether or not payers and providers are in equilibrium—each getting what they need to get to make their own internal profit objectives.

Today, we are as close to that uneasy balance or equilibrium between payers and providers as we ever are. But after four years of trend deceleration and inflation heating up and government looking to make cuts to the entitlement programs, that equilibrium isn’t likely to last long.

We just hit the bottom after coming down the trend curve. The soft landing phase we’ve been going through since 2003 has been the good side—maybe the best period in the history of the health insurance business.

The tail wind is gone and the headwind is growing!

Video of a discussion I had last week with Wall Street analysts discussing the current health plan environment: "Wall Street Comes to Washington"

"Wall Street Comes to Washington"

The event I look forward to every year is "Wall Street Comes to Washington," Paul Ginsburg's (Center for Studying Health System Change) annual merging of Wall Street and policymakers in a lively discussion of health care from both perspectives.

The last few years I have gotten to participate on the health insurance market panel. The session also had a panel concentrating on hospital, physician, and pharmaceutical trends.

Other panelists include leading health care analysts from Morgan Stanley, Goldman Sachs, Lehman Brothers, and Dreyfus. It's sort of an east meets west discussion of the health care system. The prognosis for earnings, bringing costs under control, the latest fads in health care, and prospects for reform are all discussed.

You can see both a transcript and video of the meeting on the Kaiser Family Foundation site.

What Do We Need to Do to Fix the Medicare Physician Payment Problem?

Whenever the subject of Medicare physician fee payments comes up on this blog, the reaction from physicians, particularly primary care docs, is predictable: "You can't cut us, we haven't had a Medicare raise in years, we are already dramatically underpaid, and if Medicare cuts our payments we are going to stop taking Medicare patients."

There is no doubt that doctors have a point--particularly the primary care folks. A huge problem is that the payment balance between primary care and specialty care has gotten way out of whack as both private and public payers have tended to lump the two categories of physicians together. This has been going on for so long that it is also leading to a growing shortage of primary care physicians.

There is also no doubt that Medicare is financially unsustainable on its present track and that applies to all categories of health plans--public and private.

The Sustainable Growth Rate (SGR) formula is obviously not working--just the fact that the Congress keeps overriding it speaks for itself. But in concept, it did have a legitimate objective.

Congress created the SGR in 1997 as it became clear Medicare costs could not be sustained. The idea was to set an "affordable" physician cost trend and when real costs exceeded that level Medicare would compensate for it by cutting future fees.

The SGR message to doctors was simple: If you spend too much the Medicare program will compensate by cutting your fees in the future to balance things out. The objective was to give physicians a reason to control their costs.

As we now know, the Congress did a "never mind" every time a cut was required under the formula.

Maybe the SGR was too broadly targeted. Maybe the target should haven been broken down with a focus on primary versus specialty, or even by each specialty. Maybe it was an unrealistic idea in the first place. Maybe the fact that it was never enforced spoiled its intent. Maybe it was unrealistic to think the docs really had any control in the first place. Maybe we should just give the docs a blank check.

What is happening to Medicare and physicians also can't be seen in a narrow context--the same issues plague Medicaid, SCHIP, and the commercial market. Costs for hospitals, drugs, durable medical equipment, and everything else is also on the same unsustainable track.

But to all the physicians who post on this blog with the general message "you can't cut us," there may be a lot of truth to that but of course it's a lot more complicated than that. Medicare--and every other program--is simply unsustainable in its current form.

While it is true that everyone else in the system carries guilt--like insurance company overhead, cost insensitive patients, drug company behavior, and on and on, pointing the finger at the other guy doesn't count for the sake of this conversation--those are all legitimate issues but also provide a pass for physicians not dealing with their own issues here.

So, what is the answer?

"If you touch me I will abandon my senior patients," is not an answer. That's just a threat--and an unrealistic one at that. Even with a deal this month to defer the cuts, the SGR already has an automatic 21% cut set to occur on January 1, 2010--the problem is literally growing at an exponential rate. Stalemate on all of this just means physicians have to live with the current mess indefinitely.

Where does the physician payment problem go from here?

This month's fight over Medicare physician fees: Run For the Hills, the Doctors Are Coming, the Doctors Are Coming!!!!

Earlier post: There Won't Be Any Health Care Reform Without Physician Payment Reform and There Won't Be Any Physician Payment Reform Unless the Docs Lead The Way

Coventry Health--Another Reminder That This Isn't an Easy Business

Here are some comments from a first quarter earnings call Coventry management would sure like to take back.

Yesterday, Coventry reported that its Medicare private fee-for-service business will miss its second quarter medical cost ratio projections by more than 300 basis points and that it will miss its prior second quarter estimates for its commercial medial cost ratio by a whopping 200 basis points.

Today, Aetna and Humana reaffirmed their prior earnings guidance leading people to conclude the sheer size of the Coventry earnings problem is largely internal.

What really troubles me about the Coventry announcement is that:

• Their private fee-for-service (PFFS) problem should have been obvious to to their actuaries since Coventry had apparently not issued ID cards to new PFFS customers and claims weren't coming in as they should have been. The PFFS data had to be too good to be true and that should have been obvious.
• Their explanation for seeing their commercial trend jump by 200 bps is inadequate. They said they are seeing an increase in large claims and hospital claims generally. That is true of other health plans but not to anywhere near the same degree as Coventry. It is not clear to me that Coventry has really gotten to the bottom of all of this.

CEO Remarks from the transcript of Coventry Health's first quarter conference call on April 25, 2008:

We've said for the last three years that the core operating growth rate in a purely commercial business was not as high as some were suggesting. We took some flak for that. But more recently, the reality of that seems to have become more evident. But that is away different from an underwriting cycle. Underwriting cycles are also not caused by variations in medical cost trends. Variations in medical cost trends generally do not happen quickly and given the progress in analytics within the industry, will be pretty closely anticipated in pricing. That doesn't suggest we will never make a mistake and miss it a little, but that's far from an underwriting cycle.

Underwriting cycles are caused solely by lack of pricing discipline, either consciously, which I actually think is less common, or unconsciously, through lack of financial control. This isn't a new topic either. We've been, for many years, answering the question of whether there's an underwriting cycle. We've cited a consolidation in the industry, growth of for-profit blues, improved analytics and so on and on and on. Those reasons are as valid and real today as they have been for the last five years. It makes no economic sense to chase market share at the expense of pricing discipline.

I'm reasonably confident that that's understood across the industry, but I'm absolutely certain that it's understood at Coventry. So don't look for the operating margins of our commercial operations to fall off the table. They won't. If we have to shrink a little, which we don't think we will do, but we will, we will not sacrifice margin at the expense of market share, and that is the only thing that causes an underwriting cycle.

From the CFO on the same call:

At the risk of sounding like a broken record, I want to reiterate our views on commercial trend in pricing as well. We continue to see no evidence of an overall acceleration of cost trend in 2008 versus 2007. Our outlook remains that trend will be stable in 2008 versus 2007, in the neighborhood of 7.5%. Over a long period of time, we have exhibited an attention to detail and an unwavering discipline in the pricing arena, and to no surprise, this will not be changing. We remain firmly committed to having our commercial price increases at least equal to medical cost trends. The competitive environment is, as always, a very competitive arena. Growth is not easy to come by, but despite isolated local market skirmishes, it is still a rational environment where those that have a low-cost structure, those that are disciplined, those that are close to the details and fundamentals of the business, will succeed over the long haul.

Less than two months later Coventry is reporting 9% commercial trend.

I guess the moral of the story is that you never want to get cocky in this business.

Wall Street Continues to Be Disappointed in Managed Care--Just Where Did They Think It Was Headed in the First Place?

United Health's earnings and revenue grew by 7% this quarter year over year and the stock fell by almost 10% yesterday.

I'd hate to see them really screw up.

United is the first to admit that they have some service and persistency issues but the fundamentals of their business continue on track.

Wellpoint followed with another disappointing report today.

Wall Street finally seems to be figuring out that the health insurance business is, and has been for years, on a long walk off a short pier. What's sustainable about a business whose costs have continually exploded at 2-3 times the growth rate of the rest of the economy or the wage rate? Just where did Wall Street think this business was headed all those years the sector has been the darling of Wall Street?

Perhaps most telling was the recent comment by one analyst in the Wall Street Journal, "What we're seeing is a market that's gotten so mature and beyond its customer that people can literally no longer afford to buy the product," said Sheryl Skolnick, an analyst with CRT Capital Group. "The number of uninsured is growing faster than any player in the game, and it's getting bigger at the expense of the Uniteds, the WellPoints."

Ya, and it was five years ago.

Allow me to let you in on another gem Ms. Skolnick--and the other health care analysts out there: Pet Stark is getting ready to slash those fat private Medicare payments and either a Democratic president or one of the only Republican Senators to vote against the whole thing in the first place isn't going to veto it the next time around (that would be any nano second past noon on January 20, 2009). And, that's after the growth in these private Medicare products has already started to level off.

We are way past the time the really smart people on Wall Street (that would be all of you) needed to start asking just what the future of this business is. If the answer you get is that the future of managed care is just to ride an unsustainable health care cost trend rate many more years into the future you might just want to dig a little deeper this time.

Related posts:
Health Plan Stock Prices Hard Hit Recently--Then There is John McCain

Today's HMO Carnage on Wall Street

Health Plan Stock Prices Hard Hit Recently--Then There is John McCain

The recent hit HMO stocks have taken in the market has come because Wall Street has the jitters over revised earnings outlooks. Many health plan stocks have fallen by 50% in recent weeks.

The Street is right to worry that the health plans are going to have difficulty pumping out more of the great and predictable earnings we've seen from them in recent years. But they also continue to miss a very large political risk that still looms as the Congress looks to trim private Medicare payments.

Health plan profit expectations are going to be harder to make in the next few quarters. The health care trend rate has stopped its five-year deceleration and the easy days are over. Now, a health plan has to hit its numbers on the head without the help of falling trend rates and the good things that result like "positive reserve development."

Wellpoint upset the market when it said it missed its health care cost trend assumptions by half a percentage point--that's little more than the margin for error in this business. I've missed it by multiples of that! Management reports that the fundamentals in the Wellpoint businesses continue to be strong even if the business is getting harder.

Universal American and Humana announced they miscalculated on their Part D pricing--Universal American because of mistakes in a health plan they later acquired and Humana because they once again blew their anti-selection assumptions. The other parts of the business for these companies--they tell us--continue to perform as expected.

We are at a point in the underwriting cycle where profit windfalls from a five year deceleration in the medical trend rate are gone. Growth in Medicare Advantage and Part D plans are both slowing as the low hanging fruit in those markets are gone. A slowing economy makes growth in the commercial health insurance market all but impossible unless you steal someone else's business.

So, the easy money days are over. But the wheels are not coming off. Margins continue to be at historically high levels.

If medical cost trend picks up the business will get even tougher. Two things would cause that to happen--an increase in underlying health care price inflation and/or cuts in Medicare and Medicaid payments to providers that force them to shift costs to the private sector. Cost shifting can assert itself both in higher prices and higher utilization. Both may be on the way, but neither has happened yet.

So, the health plan business is at a point where there is neither any profit windfall from decelerating health care cost trends nor is there a real pick-up in costs. The current environment isn't helping or hurting health plan results much--but we are at a place where a health plan has to hit its marks perfectly to come in on expected results.

So, the recent HMO sell-off was probably overdone--but with the easy results past us not entirely wrong.

But on top of legitimate earnings concerns there is still a pretty big political risk the stock market seems to be ignoring. That is the risk that payments to private Medicare plans--particularly Private Fee-For-Service plans--will be cut in the next year.

A recent article in Forbes.com by David Whelan has it about right. He points out that the health plans have made a lot of money on private Medicare and that is their real risk these days.

As David points out, Clinton and Obama would waste little time trying to kill private Medicare--and would have plenty of allies in a presumably Democratic Congress.

The only reason the Congressional Democrats haven't clipped that program's wings so far is that President Bush would veto any attempt. But this President is out of a job on January 20, 2009. Bush hopes John McCain will succeed him.

Will John McCain defend the terrific private payments the 2003 Medicare Act has given the health plans?

Well, McCain was one of the only Republicans to vote against the private Medicare legislation calling it a big boondoggle.

United, Wellpoint, and Aetna have only a single digit percentage of their profits tied up in the private Medicare Advantage business. Good for them.

Humana and Universal American have a whole lot more--Humana about half it its profits.

Humana and Universal American have both lost about half of their market cap in recent weeks because of earnings worries in the wake of disappointing news from both. But what about the political risk they are taking?

Doesn't look like John McCain has the same attachment to the 2003 Medicare Act George Bush has had.

Today's HMO Carnage on Wall Street

Maybe times have been just too good for so long that people have forgotten just what a challenging business this can be.

After easy profits for the industry during a multi-year period when trend rates fell, today Wellpoint let us know nothing can be taken for granted.

When the trend rate is steadily falling a monkey can make money. If an employer sees their claims go up by 9% the year before, it's pretty easy to sell them a 9% rate increase even though actual trend maybe 8%--thereby creating a one point windfall. That had been the case for five years--up until 2007. That's why earnings reports at Wellpoint, and other HMOs, had been full of comments referring to their being able to renew business at levels higher than actual claim costs and to be able to take down even more profits from "favorable development" in prior periods.

The last year or so, we have hit a sort of health care trend bottom. Trend hasn't been rising but it hasn't been falling either. Unlike the prior years, you actually have to hit your numbers. The result has been medical cost ratios (adjusted for business mix) by all of the companies that have been clustered close together varying by no more than the usual margin for error in pricing.

With a small margin for error, missing your numbers can cause problems--especially when analysts watch every nuance and don't like to be embarrassed when you miss that margin for error as Wellpoint said today it is going to do. The analysts aren't about to tell investors they don't really understand this business and its risks so they end up putting all the blame on management and the punishment is, and will be, harsh.

The analysts were surprised to today.

Anyone who has been in this business for a while was not surprised.

The wheels are not coming off and fixing this type of problem is really pretty easy. Management can clearly see the pricing errors and respond over the next renewal cycle. In 18 months, someone at Wellpoint will be the new darling of Wall Street for turning it around. (The easiest job in this business is inheriting an operation already in the dumpster--the hardest job is keeping it out of one.)

Welcome to the health insurance business at a time when you can't count on windfalls!

A Slowing Economy--What Impact Will It Have On The Health Care Sector?

Health care is considered a business that tends to be resistant to economic downturns. Brian Klepper returns with a post asking just what the impact of a slowing economy will have on the health care sector. He specifically points to changes in real wages and home prices.

Health Care and The Gathering Storm
by Brian Klepper

Here are two very interesting and frightening charts that my good friend Warren Brennan, the CEO of SMA Informatics in Richmond, passed along recently, with this question, aimed at the CFOs of hospitals and other health care organizations:

What do these mean for hospital bad debt and for the health care sector's future financial performance?

Here's the text from Warren that accompanied the chart on wages:

This chart, from the NYT, shows annual growth in real wages. What that means is that workers today are earning significantly less, in real terms, than they were a year ago: their January 2008 earnings were down 19 cents per hour or $8.31 per week from January 2007.

The chart doesn't mention the main reason for the fall: unusually high inflation. Since inflation is running at a 4% clip right now, you'd need wages to be rising at the same rate in nominal terms just to stay at zero on this chart. If food and energy prices stop rising at some point, real wages will start looking much healthier.

On the other hand, however, it's clear that for most of the past year weekly wages have been lagging hourly wages. That's not good news at all: it shows that the workweek is shortening for most workers. Slower increases in food and energy prices aren't going to help on that front.

And here's an excerpt of text that came with the second chart on home prices:

The S&P/Case-Shiller Home Price Indices show a 9.8 percent year-over-year decline for the 10-City Composite Index, the steepest decline on record.

Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates. Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.

Health care has ridden a very long wave of prosperity that appears to now be in jeopardy. Combined with an explosion in information technology, transparency and decision support, the coming turmoil should force health care organizations to become far more interested in efficiency and competitiveness.

One lesson is clear: Companies that economically reduce both financial and health risk will be winners.

The Lifetime Benefits Cap on Health Insurance Policies Often Needs Updating

In today's Washington Post, Chris Lee has a story about lifetime maximums in health insurance policies. Sometimes, these caps are as little as $1 million--particularly for individual health insurance polices.

As health care policy goes, this is not a widespread issue. The number of people who incur medical costs over $1 million or $2 million is quite small and most health insurance coverage is at much higher levels.

But with health care costs doubling since 2000, a few health insurers have increased prices but they have not necessarily increased their standard lifetime caps. That means more and more people with catastrophic costs find themselves under-insured.

Ironically, providing insurance for the big health care claims is often the easiest part of the health insurance business:

• Catastrophic coverage is pure insurance--not just first dollar reimbursement.
• Catastrophic reinsurance is readily available to health plans at a reasonable cost.
• The industry does a very good job of managing the large and complex high cost claims.

It's time to review the lifetime caps with an eye toward keeping those up-to-date with the rising cost of health care.

That goes for employer sponsors and individuals as well as insurers.

I would recommend a cap of no less than $5 million.

Four Big Trends Toward Better Health Care Cost and Quality

Brian Klepper joins us again today and calls attention to four key trends in the marketplace, all targeted on improving both the cost and quality of care.

Four Big Trends
by Brian Klepper

Several events and trends emerged over the last year that will reverberate throughout the health care marketplace in 2008 and going forward. While none of these dominated the trade press like some other issues--electronic and personal health records, RHIOs, the evolving labor shortage, pay-for-performance reimbursement--these manifestations of change are occurring in the marketplace as well as through policy, and are moving health care forward in fundamentally positive and far-reaching ways.

Health 2.0
The most significant, in terms of its capacity to change how health care works in the long-term, is the Health 2.0 movement, which Matthew Holt and Indu Sabaiya have played a central role in facilitating and explaining. In some ways, Health 2.0 is simply a continuation of what has come before: companies creating new value through information and connecting with customers over the Web. Health 2.0 takes this approach into every area of health care data, often driven by companies outside of or at the margins of health care, who have no financial stake in perpetuating inappropriateness and waste, and who see an opportunity to make money by rationalizing the system.

We've already seen big, established IT companies like Microsoft and Google announce some forays into this space, as well as a slew of startups, most of whom have staked out interesting niches. But there are other players who haven't made themselves known yet: health IT companies who are positioned to aggregate data and feed it back to their clients; companies who already have established health care data streams and have large repositories; analytics firms; organizations from financial services and other areas that see an opportunity to leverage their own data strengths and expand into health care; and established health care organizations that, as the competitive market intensifies in health care, will use their strength to enter the data space and use it to advantage.

In the process, the health care data will move beyond simple transparency--public availability of pricing and performance information, which is often inscrutable for many groups, especially consumers, and difficult to make sense of. The creation of easy-to-use data-driven decision assistance tools that can help consumers, clinicians, designers and purchasers of all kinds will change everything.

My bet is that business and the health care sector, more than consumers, will first fully take advantage of the offerings that will gradually come online, and use this new information to make better clinical decisions, better purchasing decisions and to understand their own performance relative to the market. Ultimately, as payment is tied to results, this information will constitute incentives for performance and disincentives for waste.

Consumer Checkbook v HHS
Last August 22, the consumer advocacy organization Consumers' Checkbook won a Freedom of Information lawsuit against the US Department of Health and Human Services, which demanded that CMS be required to release Medicare physician data for 4 states and DC. Interestingly, HHS had argued that physicians are entitled to a right of privacy, a particularly curious position, given the generally progressive stance on health care pricing/performance transparency that CMS has taken under this Administration's tenure and keeping in mind the fact that physicians paid by Medicare are vendors taking public dollars. On October 19th, HHS filed an appeal, indicating that they would fight to keep the data secret. The case is still unresolved. Even so, Checkbook has filed suit for the release of Medicare physician data in all other states.

As I noted in writing about this previously, the AMA's fingerprints seemed to be all over this, but I had no direct knowledge that this was so. Then, a December 10th American Medical News article reported, "The Association is pleased that HHS is taking its advice, said AMA Board of Trustees Chair Edward L. Langston, MD." I'll bet they are.

The Checkbook case is a watershed moment in physician transparency. Until now, despite all the calls from supposed "market-advocates" for informed consumerism in health care, the public has had no way to really tell how a doctor compares to his/her peers in terms of resource consumption or results. If the data were released so it could be evaluated, that information could become available and one important part of health care could begin to work like a competitive market. Whatever the outcome of this case, kudos to Consumers' Checkbook for taking the initiative and, in the process, betraying the lie of those who call for consumerism but want to hold back the information that are necessary to make markets work, all so they protect their advantages.

Stopping the Payments for Hospitals' Mistakes
August must have been a big month, because that was also when CMS threw down the gauntlet and announced that, starting October 1, 2008, it would no longer pay for preventable errors. Until this change, hospitals were paid for the mistake and for the care of rectifying it, a no-lose proposition.

As Medicare goes, so goes the commercial payers, so this is momentous. Come October, hospitals will be on the financial hook for making sure they get it right the first time, a significant change from the past and potentially damaging when they fail, especially for organizations that have had average margins nationally of only five percent.

In a sense, this event is less important than the important quality and safety work underway at health systems around the country. (For a wonderful 5 minute articulation of the value of these efforts, see this short interview with Gary Kaplan MD, the CEO of Seattle's Virginia Mason Health System, recorded in April 2007.) But for those who are not yet focused on getting quality under control, CMS' action constitutes a major incentive.

Moving Toward A National Center for Comparative Effectiveness and National EBM Guidelines
American medicine is gradually, grudgingly acknowledging that using evidence to identify best practice, and then applying that best practice, typically results in improved outcomes and reductions in variation. The refinement process is unending, of course, and the number of different clinical approaches that must be evaluated is vast.

In November 2006, economist and former HCFA Administrator Gail Wilensky published a Health Affairs paper that described the background and laid out the arguments for the establishment of a national agency that would sift available data to support better clinical decision-making. Another long-overdue idea that has private sector precedents in efforts like the Blue Cross and Blue Shield Association's Technology Evaluation Center (TEC), the concept of a national Comparative Effectiveness Center is beginning to finally get traction.

In September, when Senator Clinton released her proposed health plan, a Comparative Effectiveness Center was featured prominently as a key element of required change. And more recently, in December, the Congressional Budget Office published a paper called "Research on the Comparative Effectiveness of Medical Treatments," that argues for the value of a governmental role in identifying best practice, the need for tying identified best practice to financial incentives in the marketplace, and the difficulties of creating these changes in a policy environment so highly susceptible to private interest influence.

The Long View
One of the most difficult of life's realities is the time required to effect desperately needed change. Each of the trends I've described above will take years to get traction and actually change the ways that care manifests, but they're moving us in the right direction. Equally important, change is spreading to more areas and accelerating in health care, partially in response to the increasing pressure, but also simply because technology continues to enable approaches that the marketplace can leverage. To those of us consigned to take the long view, this is great news and important perspective while we're also focused on health care's persistent, moment-to-moment problems.

An Important and Disciplined Review of the Health Care Marketplace--The Latest Site Visit Report From 12 Markets

Good health care market intelligence is hard to come by. Information tends to come in the form of detailed and narrow, often backward looking, surveys that give us little texture for what key players are thinking. Or, at the other extreme, market information is often based on a relatively few almost random anecdotal impressions by "experts" as they do their work in the market.

The highly respected Center for Studying Health System Change (HSC) has been conducting detailed and disciplined surveys of 12 metropolitan health care markets since 1996. HSC's work gives us a perspective into the U.S. health care market unlike anything I know of. For more than ten years, they have used the same techniques to drill down into these markets talking to insurers, employers, providers, and other key players. As a result, they can give us a historical perspective and objective analysis like no one else I know of.

Their latest report is now available and required reading for anyone in this business.

Here is a quick summary of their findings taken from the report's abstract:

• Little has changed in local health care markets since 2005 to break the cycle of rising costs, falling insurance coverage and widening access inequities.
• Intense competition among hospitals and physicians for profitable specialty services continues.
• Employers and health plans are looking to consumers to take more responsibility for medical costs, lifestyle choices and treatment decisions.
• While consumer-directed health plans have not gained widespread adoption, other developments—including a heightened emphasis on prevention and wellness, along with nascent provider cost and quality information—are advancing health care consumerism.
• However, concerns exist about whether these efforts will slow cost growth enough to keep care affordable or whether the growing problem of affordability will derail efforts to decrease the rising number of uninsured Americans and stymie meaningful health care reform.

If you are in this business, you need to read this report. The six page report of initial findings is very efficiently done. You can access it here.

Health Insurance Premiums Rose Only 6.1% in 2007--But This May Be The Last Year the Trend Rate Will Fall

According to the annual Kaiser Family Foundation survey of employer health benefit plans, the average employer premium rose 6.1% in 2007--the lowest increase in four years of successively falling trend rates.

The increase was 13.9% in 2003 (the recent peak), 11.2% in 2004, 9.2% in 2005, and 7.7% in 2006.

The average cost of family health insurance also rose to an incredible $12,106 while the average cost for individual coverage in an employer plan was $4,479.

The relatively low employer medical trend rate of 6.1% was still more than twice the rate of inflation--which was 2.4% in July.

Even a 6.1% trend rate is unsustainable because it is so much greater then the general inflation rate, the increase in wages and the overall growth in the economy--all in the 3% range.

Worse, I expect this to be a bottom in the health care trend line.

Health plans, in their recent quarterly earnings releases, are generally reporting medical trend rates and medical cost ratios that are flat to beginning to edge up a bit.

Even looking back to last year, TheStreet.com recently completed a study of publicly traded and not-for-profit health insurer results in 2006 and reported the following:

• A review of 2006 annual financial statements found that the industry made $11.2 billion in underwriting income compared to $11.3 billion in 2005.
• While that was a very slight decline in health underwriting results for 2006, it came on the heels of a series of double-digit improvements in profitability in the prior years of the decade underscoring the conclusion the easy money in health care has come to an end.
• Insurers collected $232.56 per member each month in health revenue in 2006 compared to $216.08 in 2005—a 7.6% increase.
• However, medical costs rose by an even greater 8.5%, from $181.14 per member each month in 2005 to $192.52 in 2006.
• “Competitive pressure” on premiums resulted in a decrease in overall profit margin from 4.4% to 3.8% in 2006.
• The commercial health insurance line saw a full 1% decline in margin while the private Medicare business saw its margins rise from 4.9% in 2005 to 5.7% in 2007.

TheStreet.com summarized its findings saying, “The industry is now facing a decline in margins on the commercial business, while potentially facing cutbacks in Medicare and an uncertain future regarding how the country finances health care.”

That about sums it up--escalating commercial cost trend just as Medicare payments are at serious risk in a Democratic Congress.

Just as the political heat is growing for health care in an election year, costs are likely on the rise again.

That is a very volatile political mix!

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.

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.

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.