Trillion Dollar Question: Cost Shifting in Health Care Reform

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Employers and others are enormously worried about what health care reform will mean to them. High on the list of worries is whether the large expansion of Medicaid and the subsidized state individual and small group plans will mean such dramatic provider pay cuts that providers will universally raise the rates for any employer-sponsored health plan.

  

In 1997, when the federal government passed the Balanced Budget Act which lowered hospital payments, hospitals effectively shifted costs to private payers.  

Will this pattern repeat in 2011 and beyond?  I don't think so.

In most businesses, when one purchaser strikes an exceptionally good deal, prices are eventually suppressed for all purchasers. When Wal*Mart lowers its acquisition cost for duct tape, sooner or later all duct tape manufacturers figure out how to wring efficiencies out of their production.  They often move production to places with lower labor costs, and they retool their factories to remove unnecessary steps and friction.  Manufacturers who maintain their pre-Wal*Mart resource requirements fail, and eventually prices come down for all purchasers.

Health care, of course, is different. We can’t send hospitals to developing countries (there’s a little bit of medical tourism, but not much), and many of us regard health care as a necessity and a social good, and not a mere consumer product.  The purchaser of duct tape doesn’t care so much about what the factory looks like, while the consumer of health care (the patient) is right in the middle of the exam or operating room, and cares a lot about the conditions there.   So, health care delivery is not like manufacturing duct tape.

But employers are not willing to pay continually higher prices for health care they purchase.  The demand for lower costs per unit from newly enlarged public payers won't possibly be fully funded by increases in the prices to employer-sponsored health plans. 

In January, I argued that Medicare payment cuts would not lead to dollar for dollar decreases in the cost of care.   Still, I believe it won’t be possible for health care providers to increase prices to make up for the entire shortfall from Medicare cuts, Medicaid expansion, and likely lower prices from subsidized state exchanges. Our costs per unit in the US are very high compared to the rest of the developed world., and this difference is likely to decrease.   I believe the downward price pressure from health care reform will be severe enough to promote delivery system reform, and thus lower overall health care costs substantially.  We’ll be well advised to look to other countries, including developing countries, to learn how to lower the cost of health care delivery.   We’re also likely to need substantial reform of primary care.

By the way, here’s a link to Ezra Klein’s graphics showing the very small incremental cost under health care reform, compared to the huge decline in the uninsured population. 

Insurance Companies Targeting High Risk Patients for "Recission"

Reuters published an excellent and scary article this weekend about Anthem/Wellpoint routinely targeting those with newly diagnosed breast cancer for investigation and possible termination of their coverage. The article is replete with multiple case studies of women forced to pay out of pocket or delay care while they fought with Wellpoint.

Wellpoint suggests that its efforts to find 'cheating' and kick sick patients off its insurance plan is part of its responsibility to prevent fraud and lower the cost of health care.  There is some truth to this - if the sickest lie to gain voluntary insurance, it raises the cost for all.  The truth is, though, it's always less expensive to care for a healthy population than to care for a sick population.

In some ways, this is old news.  In 2008, Wellpoint paid California a fine of $10 million and agreed to resume coverage for almost 1800 it had kicked off the plan. (search for "cancellation" to find the story within this Wikipedia entry).

Health care reform will outlaw these practices, and the Reuters reporter suggests we need more vigorous regulatory enforcement.    I agree - but I don't think that goes far enough.  

We need
(1) Universal mandate - so that everyone chooses health insurance - not just those with illness. We can't make health care affordable if only those with adverse risk choose to be in the "pool."  Health reform has this, although many worry the mandate might be weak enough than many healthy people will continue to opt out.
(2) A community-wide reinsurance pool so that exceptionally expensive cases can't threaten the financial viability of a health insurance plan.  Katherine Swartz suggested an approach that would do this in 2003 (here's a link to an RWJ interview with her.)

Sick people are very expensive to care for, and that won't change.  Rather than just setting up regulations to make it more difficult for insurers to shirk their responsibility, we should make structural reforms to make it less profitable to discriminate against those who need insurance most.

Good News at a Low Price: Coverage for (Some) Young Adults

Federal health care reform mandates that employer-funded and insured health plans must allow adult children to stay on their parents’ health insurance policies until age 26.   This is especially important in the current economic environment, where jobs with benefits don’t abound.   The requirement applies to employers with self-insured health plans, which is unusual. Under ERISA (Employee Retirement and Income Security Act), employer self-funded health plans are exempt from most state regulations.  While the federal government can regulate these self insured health plans, it has not done so extensively.  

The Los Angeles Times reports today that United Health, Wellpoint, and Humana have announced that they will honor this requirement immediately, rather than waiting for the September 23 implementation date.  This is a sea change.  The Washington Post reported just this past fall that 60% (!) of employers including some states were using dependent eligibility audits to push young (ineligible) adults off their parents’ policies. 

This is not as big a deal as it looks for two reasons

1)       United’s press release  makes it clear that this applies only to fully insured health insurance plans (a minority of UHC’s business) and only to graduating college students. So – it really only applies to a minority of the college class of 2010. 

2)       The cost of providing insurance for adults between 18-26 is quite low.  Actuarially, this group needs little care that is expensive.  There are a small number of pregnancies, trauma cases, and malignancies that can be devastatingly expensive, but most young adults have very low medical expenses.  Therefore, this is a perfect group for insurance coverage!   

This is good news at a low price for a small group of young adults.  

Health Care Cost Containment in Massachusetts

 The battle continues to be sure that close-to-universal health care doesn’t break the state budget and the budget of small businesses –and there have been three interesting developments over the past week.

1. The state Division of Insurance, which rejected proposed rate increases for dozens of small group policies, is playing hardball.  It threatened fines if health plans did not return to writing small group and individual policies at 2009 rates – and a judge rejected the health plans’ request for an injunction.   Most of the health plans have complied – although Harvard Pilgrim and Fallon  again submitted rates higher than the state wants (stating that other policies with these rate increases had been approved earlier in the year.   

The DOI is in a bind – if it is successful at forcing these lower rates on the health plans, they will lose substantial amounts of money – and the DOI’s other job is to be sure the health plans are adequately capitalized so there is no risk they will collect premium revenue and not be around to pay for related claims.   The health plans are in a bind, because they’ve negotiated multi-year deals that lock in their unit costs in fee for service contracts – so they’ll need lower utilization and/or concessions from providers on unit price to make this sustainable.

2. Partners (Mass General, Brigham and Womens and others) announced that it would give insurers rebates of a total of $40 million  this year to support selectively lowering rates for small business.   Interestingly, Children’s Hospital did something similar – announcing a price rollback in exchange for some up-front payment to build infrastructure, in fall, 2009.   Other hospitals  are figuring out their next steps – Partners and Childrens are both paid rates higher than other providers – so these rebates probably still don’t level the playing field, and it will be hard for the lower-paid facilities to match this.

3. State Senate President Therese Murray  outlined her plan to control health care costs, with initiatives including

·         Insurers would gain approval of their proposed rate increases as long as they pledged  to have “medical loss ratios” of at least 90%.  This means that 90 cents of every dollar would go to paying medical claims – the other 10% would include all administration costs including marketing and profit  (or reserves for nonprofits).

·         Allowing insurers to change rates based on age (rather than 5 year age group), which will mean no huge rate increases when someone turns 50, for instance).  Also, allowing insurers to increase base rate if necessary to prevent a “rate shock” to a specific subgroup

·         Annual enrollment (to prevent people from coming into the insurance system for an elective procedure, and then leaving again)

·         Prohibiting those eligible for employer plans from entering the individual market (to avoid adverse risk selection)

·         High risk reinsurance pool

·         Require narrow network products with lower cost. 

·         Give a 5% discount to employers who establish a wellness program

·         Ask for $100 million in contributions from providers in good financial shape

·         Establishing a purchasing coalition for small groups through the Connector

·         Review all mandated benefits every four years

In my opinion, the most important effort here is the narrow network option.   This has the potential to substantially lower unit cost – in part because narrow networks encourage providers to compete on price (There is no reason for providers to try to deliver a lower price to an all-inclusive network, as they maintain very high leverage when every health plan needs every provider).  The Globe today  offers some evidence that narrow networks are starting to gather some momentum.

Avoiding adverse risk selection is critical (article in tomorrow’s NYTimes shows what happens if the healthy opt out of  purchasing insurance.)  Therefore, it’s important to require an  annual enrollment only, as well as to guard against employers sending a few sick individuals into the small group market.

Small businesses overestimate the savings they’ll get from group purchasing – the larger groups are less expensive because there are genuinely lower administrative expenses for insurers to enroll 25,000 covered lives all at once, rather than as 1000 separate 25 person companies, and because there is less opportunity for adverse selection in a large company than with multiple small companies.  I did a more complete review of the reasons why small companies pay more in Fall, 2009. 

Wellness programs are not likely to save 5% in the first year or more when they are implemented. Therefore, a mandate to offer small businesses with wellness programs a 5% discount will raise the cost of health insurance for all.  It’s not a bad idea – and might lead to better, healthier lives.   However, this is not going to help us control health care costs over the next 1-3 years.