Insurance Companies Leaving Health Care Will Lower Costs

Today’s Managing Health Care Costs Indicator is

840,000

That’s how many people will no longer be able to obtain health insurance from Principal Financial Group of Iowa, which announced yesterday  that it would retreat from the health insurance market. 

Principal has focused on small businesses, and does not have a large footprint in any given geographic market.  I believe that Principal has decided to stop writing health insurance because

1)     The new law requires “medical loss ratios,” or the portion of the health care premium to be spent on health care, to be at least 80%.  It’s hard to get a reliably low MLR with very small accounts where the costs of sales and administration tend to be high.  Further, with small populations spread across many states, Principal might have been viewed as multiple different health plans, and randomness alone might have meant some of those plans would had MLR of >100%, and Principal would have still owed premium back for the states in which it was profitable.

2)     The exchanges to be established in each state will be highly attractive to small businesses, and thus will compete with Principal’s current business.  Principal is not a low-administration organization, and will find it hard to compete in this space.

3)     New regulations will require systems changes at all insurers, and smaller insurers won’t be able to amortize the cost of these changes over as many members. Examples of changes include the requirement to report the value of health insurance on W4 forms, and the requirement to cover certain preventive services.

Many commentators are worried that the loss of some smaller insurance companies from the health insurance market could lead to rising health care costs.  Here’s why I believe that the withdrawal of Principal (and other similar health plans with small membership dispersed over many markets) will lower health care costs.

Health plans add value, and help control the costs of care, through

1)     Discounts from providers that decrease cost per unit

2)     Network contracting that includes the highest value providers, and excludes providers who charge too much or whose quality is poor.

3)     Pay for performance or other contracting that encourages and rewards wise resource use

4)     Product design that encourages members to use care wisely

5)     Utilization management programs that decrease utilization

6)     Health management programs that decrease utilization or improve health

7)     Competent claims administration that interdicts fraud and prevents overpayment

In general, regional health plans with significant market penetration in their geography can develop deeper relationships with providers and might be able to do a better job than the four large national health plans (Aetna, Anthem/Wellpoint, Cigna and United Health Care.

However, small health plans that are widely geographically scattered generally have high administrative costs, and they’re not able to increase value through higher discounts, better contracts, or higher value networks.  They don’t have the data capabilities of the big nationals, or the on-the-ground knowledge of the regional health plans.  They don’t have the integrated network that is at the heart of the value equation of Kaiser, or Geisinger, Mayo, and Cleveland Clinic. 

The withdrawal of this type of health plan from the market will lower costs in two ways.

1)     Providers are able to charge health plans with small footprints relatively higher unit prices. Therefore, the withdrawal of companies like Principal is likely to increase health plan leverage, and should result in lower unit costs.

2)     Small health plans that are widely distributed have high administrative costs

There will be many unintended consequences from the health care reform bill.   Not all of them will be bad!

Can the Public Option Raise Costs?

The public option is reborn, with Harry Reid promising a public option in the Senate health care reform bill, and Nancy Pelosi committed to a public option in the House bill.  Progressives are jubilant – they feel that a government plan is an important counter to the influence of private, largely for-profit, health insurance plans.  They note how well Medicare runs, and say (correctly in my belief) that Medicare helps contain medical care unit price. Conservatives are aghast --  the government is already doing more than enough to disturb the free market, thank you very much.

What does a public option mean for health care costs?

It depends on the public option.

The Congressional Budget Office suggested that a public option would substantially lower costs.  There’s a big “if", though.  The public plan would lower costs not through administrative savings, but rather through deeper discounts by enforcing the Medicare fee schedule (or Medicare + 5%).   Here’s a link to a good diagram from the Blue Cross Blue Shield Foundation showing that currently  Medicare is a net deficit payer for hospitals, which “make it up” by extracting higher payment from commercial health plans.  If a substantial number of employed people were on a plan with Medicare or near-Medicare rates, either the extra costs passed on to remaining private insurers would escalate dramatically, or prices would come down.  And medical prices are higher in the US than in any other country. 

What if a public option had to play on a “level playing field?”  The level-playing-field public option would have

• Higher costs for delivering care
• A platoon of network contracting specialists across the country negotiating contracts
• Difficulty convincing hospitals and physicians in rural areas to accept its preferred fee schedule
• A much less complete network
• A much larger challenge in marketing itself, which would lead to higher advertising and customer relations  costs

In some markets, the public option without leverage of enforcing Medicare-like prices or tying participation to Medicare eligibility might even raise unit prices.   This could happen because the new hobbled public option might actually fragment the insurer market further, in the context of a consolidated provider community.  Each of the insurers in this scenario has less leverage to demand price concessions, which could lead to prices for all insurers going up.

It would be ironic if the public option actually increased unit costs.


Background: A post in June about public option http://managinghealthcarecosts.blogspot.com/2009/06/public-plan-some-perspectives.html


Addendum: Nancy Pelosi has announced that the public option in the House bill will include a requirement to negotiate rates with providers.