Harvard Pilgrim-Tufts Health Plan Merger

Today’s Managing Health Care Costs Indicator is 2

  

Yesterday the big news in Boston was that Tufts Health Plan and Harvard Pilgrim Health Care were exploring a merger.  These are among the two best health plans in the country; each has a long and proud pedigree – and each has very deep roots in the community here.  Together, they are still just 2/3 the size of Blue Cross Blue Shield of Massachusetts (see below).

The Boston Globe reports that the two CEOs and Board Chairs have already agreed to positions, so it’s likely that this merger will indeed go through.

What does this mean for health care costs?

Some immediately imagine that a decrease in health plan competition is bad – and will raise costs for consumers.  We need to evaluate how health plans price their services, and how the merger will affect the acquisition costs for health care services.  I believe that decreased health plan competition in a market is likely to lower overall health care costs – and here’s why.

Jim Roosevelt (CEO of Tufts HP) and Eric Schultz (CEO of Harvard Pilgrim)  and said today that there would be administrative savings – and that’s absolutely true.  The two health plans will only need one set of senior executives, and will be able to have a single set of IT systems – so there are a bunch of fixed costs of having two health plans that will diminish when they merge.  They’ll  diminish, of course, after a brief period of increased costs associated with harmonizing different systems.  These lower administrative costs, though, aren’t how this merger can add social value by lowering health care costs.

There’s a lot of talk about high executive pay and administrative waste – but if you could dramatically lower administrative cost –that would not be the way to make health care (much) more affordable.  Health plans spend 85% in general on payments to physicians, hospitals, ancillary providers and others.  The “medical loss ratio” is closer to 90% for these regional nonprofits.  

The only way the merger will lower costs will be if it lowers the price paid by these health plans for medical care.  It can do this through larger discounts or different payment methodology – but the larger the health plan is, the more leverage it has to pressure the provider community.

One of our local NPR affiliates WBUR  had a series of health care experts talking about the impact of this merger on competition –and a number of them raised fears that health plan consolidation would lead to provider consolidation, and thus could raise prices.  Regina Herzlinger quoted this National Bureau of Economic Research working paper , which  does indeed express this fear. However, provider consolidation is subject to antitrust rules, and the Attorney General and the FTC can prevent provider consolidation that would lead to increased prices.  No surprise that the Mass Hospital Association expressed concern about the proposed merger.

It's a paradox that sometimes more competition can lead to higher prices if the fragmented intermediaries have to pay for higher 'ingredient' costs due to their lack of leverage.

My take - Tufts Health Plan and Harvard Pilgrim will fit well together culturally, will overcome the inevitable IT and ops integration challenges, and will after some period of time be more effective at procuring health care for a lower overall cost.  They will lower their total administrative costs, too (which means many of my friends and colleagues will be looking for new positions).   The AG hearings on this proposed merger will give us an interesting window into both health plans, and their strategy to increase value through the merger.  

Click on image to enlarge

Correction 1-27-11. HCHP changed to HPHC in first line of post. Thanks to an alert reader for pointing out my error 

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!

Unit Cost vs. Utilization As Reason for Health Care Cost Increases

The Massachusetts Attorney General published a final report about two weeks ago showing the impact of unit price increases compared to utilization increases for the three major regional health plans in Eastern Massachusetts.    As you can see, over recent years the overwhelming reason for increased overall health care costs was increase in unit cost - not increase in utilization.  

You can click any of these to enlarge - or go to the full report