Another Health Care "Stealth Tax" On Small Businesses And The Middle Class

Okay, so with much hoopla and hyperbole, the Senate passed its version of a health care reform bill in the wee hours of Christmas Eve, just in time for Senators to declare victory and get out of town. (And for those keeping partisan score, the total process in both Houses garnered 278 "yes" votes from Democrats, 2 from Independents, and zero votes from Republicans).

Now the process will revert to a conference committee, which will try to reconcile House and Senate bills into a single piece of legislation.

I've been saying for a couple of months that it's been extremely difficult for me to decipher any element of bills passed in either House which suggest there's any hope for reducing the rise in health insurance costs for small businesses and individuals. It's much easier to see where the bills could lead to further and faster increases in the cost of health insurance. Several of the key funding elements of the legislation could easily fall directly on the small business owners and the self-employed.

That thought is echoed by New York Times columnist Bob Herbert, who writes today about the "middle class time bomb ticking in the Senate's of President Obama's effort to reform health care.' Read his column at http://www.nytimes.com/2009/12/29/opinion/29herbert.html?emc=tnt&tntemail1=y

The culprit is the so-called Cadillac tax on high-cost health plans. While the idea was born of grass-roots anger at the bankers and financial speculators who have continued to enjoy big salaries and bonuses even as they trashed the economy, the unintended consequence of such a tax is set up to have a big impact on working people, small business owners and their employees, and on the self-employed.

You may recall that the Senate bill imposes a 40% tax on the "excess value" of health plans which cost more than $8500 per year ($708 per month) for individuals and $23,000 per year ($1916 per month)for family coverage. The tax is projected to raise $150 billion over ten years, so it's a big element of the estimated $870 billion needed to fund the Senate's healrh care reform plan.

The tax has been hailed by numerous economists and talking heads as a cost-containment measure, presumably because companies and individuals would seek to avoid the tax by purchasing lower-cost health plans...which just goes to sow that those economists and talking heads haven't shopped for health insurance lately.

That's because the only way to purchase a lower-priced health plan is to reduce the level of benefits the plans cover. That merely passes a higher level of deductibles, co-pays and other out-of-pocket expenses on to the beneficiaries. And given that much of the health insurance reform fever began to spread due to outrage over higher deductibles and co-pays, this "stealth tax" would seem to run counter to what our political leaders say they want to accomplish with reform legislation.

The Congressional Budget Office estimates that the "Cadillac tax" would effect nearly 20 percent of workers, or some 31 million people. The primary opposition to the tax thus far is organized labor, and a big chunk of those affected by the tax would be union members with generous health plans they've negotiated with their employers. I suspect that those large employers savor the opportunity to place their unions over a barrel, using the tax as a possible means to negotiate benefits concessions from their workers. To them I say, "Let the games begin."

But the folks who will really take it in the teeth will be small businesses and the people they employ. It's taken as conventional wisdom that small companies pay 18-20 percent more for their health coverage than large companies do for comparable coverage. And those higher costs are due to the 25-27 percent of premium costs which have nothing to do with health care: insurer administrative costs.

I wrote a few weeks ago about my own attempt to shop for both group and non-group health insurance coverage. At my age (a factor in setting premium rates)and with my family, the best deal I could find was for a plan with a $3000 family deductible and a 10% co-pay...hardly a "Cadillac plan"...and that was for $1880 per month. That works out to $22,560 per year...in 2008.

Assuming a modest 10% increase per year (and most folks would consider a 10% increase a good deal), that same plan would cost $3027 per month, or $36,330 per year.

So the tax on the "excess value" of the plan, or $13,330, would be over $5,000.

If I raised my deductible to $6,000 per year, my premiums might be reduced by 20% or so...but that's STILL $29,064 per year. So I could reduce the tax liability to a mere $24,300.

And even though the politicians are touting an exemption from employer mandates or payroll tax penalties for nearly 90 percent of small businesses, there's simply no way to exempt small businesses form a "Cadillac tax" and still hope to generate enough revenue to meet their targets.

The geniuses who support this tax have suggested publicly that, in the face of such a disincentive, small businesses would buy less expensive coverage. If that's the case, of course, nobody pays the tax, and there's no revenue. But small business employees would see PLENTY of new expenses in the form or higher deductibles and co-pays.

I see two possibilities: either the policy "experts" are mistaken in their suggestion that the tax would create an incentive to buy cheaper policies, or they know their observation is wrong and are saying it anyway...in other words, they're lying. They know that health costs will be so high that it'll be impossible to avoid a tax on your health benefits, whether they're Cadillac plans, or just Chevys.

Mistaken or lying. Who'll get to the bottom of that Hobson's Choice? You may want to ask your Congressman or Senators.

Senate Health Bill Can Pull 60 Votes...The Easy Part's Over...

A key procedural vote in the wee hours this morning has given Democratic Senate leaders confidence that they've found the 60 votes necessary to pass a health insurance reform bill with no support from Republicans.

The vote followed two weeks of intramural bloodshed among Democrats, and featured the sort of politics which gives politics a bad name.

Senator Joseph Lieberman of Connecticut proved it's possible to do the right thing, even for the wrong reasons, when he went to bat for the hometown insurance industry in refusing to vote for any bill which contained a public option. He won no friends among the Democrats (with whom he caucuses) by refusing to support a trial balloon Medicare "buy-in" for Americans between 55 and 64.

Senator Ben Nelson of Nebraska held the Senate hostage on principle, refusing to vote for any measure which did not prohibit the use of any public funds for abortions. In the end, he got some "fig leaf" legislative language punting responsibilities to the states...and some extra Medicaid money for Nebraska.

Apparently a half-dozen key Senators held their votes till they received the same sort of deal, which will provide additional Medicaid subsidies for their states to cover the extra cost of the bill's expansion of Medicaid.

The Senate expects a vote on this "historic" measure by Christmas Eve, so everybody can go home for the holiday.

Then the REAL bloodletting will begin, as negotiators try to reconcile a Senate bill with three others passed by the House. At issue are "irreconcilable" differences on issues like the public option, Medicare cuts, taxes on the rich, taxes on "Cadillac" health plans, and a whole range of funding issues.

Maybe we'll learn a little more about the Senate bill's particulars before they pass it.

Capping Insurer Administrative Costs: Good Intentions, Unintended Consequences

As the debate over health insurance reform plods along in the Senate, there are reports that Senators are considering a measure which would cap insurer administrative costs at about 10 percent of premium. The stated purpose of the proposal is to limit insurer profits, and to assure that 90 percent of premium dollars go to covering the cost of medical care and improved health.

Insurers are undoubtedly making defiant noises about such a proposal, but would accept it in a minute. Because doing so would require few changes in their actual behavior, nor would it impact how much money they make, in all but the most egregious circumstances.

Why? Because insurers play games with "averages." Most insurers will tell you that their administrative costs average 10 percent of premium or less. And strictly as a factual matter, that's accurate.

But it's not truthful.

Insurers typically provide services to individuals and to companies of various sizes. The larger the group, the lower the administrative cost ratio. Most state regulators currently exempt insurers selling individual (non-group) coverage from any regulations governing pricing, which is how insurers manage to sell individual coverage with administrative cost ratios of 30-40 percent of premium. It's why insurers have made such a big "bet" on non-group coverage.

In the group business, insurers can average the 5 percent of claims costs the charge to administer large, self-insured group plans with what they earn to run Medicare supplemental business, and with the 25-27 percent they charge small groups, and produce a "weighted average" of 10-12 percent of premiums.

If you're going to hammer down administrative costs, don't count on averages. Approach the problem by business segment, and include large group, small group, and individual coverage segments.

And when you're shopping for coverage, ask your insurer or agent specifically about the administrative costs they assign to your market segment (individual, small group, mid-size group, etc.). You'll usually get an assurance that your insurance company's administrative costs typically "average" 9-10 percent of premiums. Ask what percentage they charge for your segment, and you won't get an answer. Because by and large, agents don't know. And insurers don't tell.

Premium Increases, Administrative Costs, Pooling Risks...A Little Third-Party Validation

Toiling in the small group health insurance reform vineyards can be lonely work. In feverish debate over the "macro issues," very little attention is usually paid to the realities of the small business marketplace...even though it's widely agreed that small companies pay more money for less coverage, and for fewer of their employees, than do larger employers.

So it's interesting (though not always comforting) to see one's assumptions validated by outside experts. Here are three examples from over the past week or so...from a couple of authoritative sources.

I wrote last week that there was very little in current heath insurance reform legislation which provided much hope that small businesses might expect to see the prices they pay for small group health coverage go down, or even see the rate of increase in their premium costs go down over time.

Last week Robert Pear, the veteran health policy writer for the New York Times, reported on the findings of the Congressional Budget Office (CBO) regarding the Senate's health care reform bill. You can read the article by clicking here:http://www.nytimes.com/2009/12/01/health/policy/01health.html?th&emc=th.

The analysis suggests that, while individuals purchasing coverage could see their premium expenses go down due to the bill's new federal subsidies (at a 10-year cost to taxpayers of over $450 billion), "for most people who get health insurance through employers — five-sixths of the total market — the budget office concluded that there would be little change in their premiums relative to the amounts projected under current law."

While the article touts this as a victory for supporters of the legislation, it just confirms the belief by many small business owners that, for all the furor about reducing health costs, the legislation before the Congress will have the net effect of, at best,costing them no more than if the Congress did nothing.

And the existence of new federal subsidies to enable some individuals to buy coverage 1) won't reduce the actual cost of their health coverage, just push some of the cost on to taxpayers, and 2) will have to be paid for somehow.

But, however nasty the reality of the situation might be, the analysis does validate my sense, from way over here in The Grass Roots Of America, that small business owners looking for benefits from this legislation will be waiting for a long time.

High among the many "opportunities for improvement" for real health insurance reform is a focus on reducing insurer administrative costs which, for small businesses and individuals, can run between 25 and 40 percent of premiums. The complexities entailed in dealing with the patchwork of private insurance plans and procedures is one of the issues discussed by leaders of the Cleveland Clinic in an article in the December 7th edition of Newsweek. Dr. Delos (Toby) Cosgrove, the Clinic's CEO, discusses the difficulties entailed in billing for procedures and wrestling with insurers to get paid. Though Dr. Cosgrove doesn't say so, Newsweek suggests that much of the complexity arises from the fact that "insurers count on rejecting a proportion of claims the first time they're submitted, delaying as long as possible the disbursement of actual cash."

The article says,"...if you're looking for "waste" in the health care system...defined as expenses which do not contribute directly to medical outcomes...a good place to look is the nation's cobbled-together system of competing private insurers." And Clinic Doctor Steve Nissen says simply, "the overhead for private insurers is 29 percent. For Medicare, it's 3 percent. If what's left over is what you can spend on patients, I think 97% is a much better deal."

Even if you don't buy the notion that Medicare administration is only 3 percent of claims costs (and for a number of government-accounting-related reasons, the number is low), the point should be well-taken. Small business owners and individuals are getting screwed on both ends: high administrative costs put a strain on the ability to pay for coverage, and the administrative cost burden gets passed along to hospitals and physicians, which raises the cost of health care for everyone.

As I've repeatedly written in this space, perhaps the only way to get control over administrative costs, and use those cost controls to combat the trend in premium increases, is to take steps to encourage the formation of large purchasing pools, which could negotiate with insurers on behalf of their participating members. With that in mind, it was encouraging to read this op-ed by Paul Starr, A Princeton professor of economics and public policy, who argues that the only real hope for substantive health insurance reform is to move up the reform timetable and take aggressive steps to create larger risk pools, within states if necessary, but preferably on a national scale, through the accelerated development of health insurance exchanges which are contained in both House and Senate bills. Read the article here: http://www.nytimes.com/2009/11/29/opinion/29starr.html?_r=1&emc=tnt&tntemail1=y. Starr says, among other things, "accelerating the timetable of reform ought to be a priority. Although the legislation calls for some important interim measures, the Senate bill defers opening the exchanges and extending coverage until 2014. By comparison, when Medicare was enacted in 1965, it went into effect the next year."

Skeptical small business owners need to hold their elected officials accountable, and have every right to ask the question of how all this sturm und drang will benefit them, specifically. And we can't afford to wait until governments to get around to developing co-operative approaches to reducing the cost of health insurance through group purchasing and administration. We know it works. We know it will be hard. But doing hard things is what entrepreneurs do.

Teeing Up (And Teeing Off On) The Senate's Health Bill

While I was down with H1N1 flu last week with the rest of my family, I read an excellent column by Newsweek's Robert J. Samuelson which very directly spoke to why many Americans are skeptical about health care reform legislation. You can access the article here: http://www.newsweek.com/id/222795.

Back in the days of ClintonCare, health care policy experts would say that there are three major components of health care reform: Cost, access, and quality. Most policy changes can touch successfully on any two of them, but it's hard to do all three without creating chaos in the health care market.

The Senate's health care reform legislation, like its counterpart in the House, sacrifices both cost containment and quality improvement to the expansion of access for those currently uninsured and subsidies for those struggling to maintain their coverage.

And as is the case with Samuelson's article, many Americans (not just Republicans) have begun to question very loudly whether the reforms contained in the legislation are worth the cost, and if there might not be a more effective, or at least more honest, way to achieve the goal of expanding access.

As was the case with the House bill, I'm hard-pressed to point to many elements of the Senate's bill which hold out much hope of "bending the curve" on health care expenditures for the upcoming decade. But it's unfortunately pretty easy to identify provisions which will increase cost both to the federal government and, importantly, to the private sector (increases in private sector costs are never considered in CBO analyses).

It should be easy for a layman to understand that one cannot reasonably 1) increase the number of people receiving health benefits, 2)enhance the benefits people receive and 3) directly subsidize those benefits without increasing overall benefits costs. So it's reasonable that regular folks should question how their Members of Congress or their Senators would miss out on that little fact. And yet, those saluting the "historic importance" of this legislation seem to be missing that point entirely.

It is also quite easy for regular people to understand that we cannot reasonably expect to reduce the growth in hospital, drug, equipment and physician costs in any meaningful way, while still giving those players a virtual pass on reform, save a little token trimming.

The recently-documented rush to increase prices on the part of drug manufacturers in order to get ahead of health insurance reform may place a little more focus on the bill's lack of meaningful provider cost containment elements.

Congress' recent efforts to forestall efforts to reduce physician reimbursements under Medicare in a separate bill, so its $200 billion- plus impact on the deficit won't be "recognized" as part of the health reform bill, is both an exercise in political cynicism and an example of the difficulty entailed in holding Congress to any promise to reduce costs in the face of influential lobbies.

I wonder how the President and his Congressional colleagues feel now about the soaring rhetoric of the 2008 campaign, and the sense of urgency they sought to instill for comprehensive reform, in the face of such an ugly bill? Surely they can't just hope Americans hope to forget the President's promises to 1) leave people who like their current insurance alone, 2) not add one dime to the federal deficit, and 3) bring down the cost of insurance premiums. As Samuelson says, "The disconnect between what Obama says and what he's doing is so glaring that most people could not abide it. The president and his allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both."

And yet, for all its ugliness and cynicism, the reform, debate has had some value. After over fifteen years (under both Democrat and Republican Administrations) of being virtually ignored, health care reform is back at top-of-mind with many Americans.

And we are reminded that there's a cost to doing nothing. For those who decry "government-run" health insurance, consider that Medicare, Medicaid, The Veterans Administration, and the Federal Employees Health Benefit Plan (FEHBP) will spend one trillion dollars on health care this year. Left alone, by 2020 those plans will double in costs, to over two trillion dollars.

And consider that private-sector health premiums have also more than doubled in the past ten years, and premium costs for small businesses and individuals have more than doubled. Maintaining the status quo will result in their more than doubling again.

I haven't seen any independent analyses which project the costs of this version of health care reform against the cost of doing nothing. That's often a weakness of CBO-type analysis.

While making the sausage has proven to be quite a bit more difficult than Our Leaders may have anticipated, the fundamental rationale for their actions has remained pretty sound. The nation's health care expenditures are on an unsustainable course, both in the private sector and in the government. And for all the resources, public and private, which we direct to health care, Americans are not appreciably healthier or more secure in their coverage than residents of other countries spending half as much.

That's why it's important for those wailing and gnashing their teeth to remember that for all the energy invested in the early stages of the debate, the real debate is just beginning. And things can change dramatically.

I've been saying for several months that, once enacted (and something called health care reform will pass), the actual reforms enacted into law will cost more and do less than meets they eye. The Senate's big financing tool, the "Cadillac Plan" tax, will be out the window, because labor unions (including government workers) won't stand for it. That's $450 billion Congress will have to find elsewhere. A "soak the rich" tax as proposed by the House is probably a non-starter in the Senate, and raises less than the Cadillac Tax anyway.

When the debate is over, we'll likely see insurance reforms (phased in over 10 years for small businesses) and some subsidies, Medicaid expansion, and a few other experiments in cost containment, and not much else.

And unfortunately for Democrats, Americans are likely to get well into 2010 feeling as though all the sturm und drang invested in the health care reform debate over the previous year won't have helped them at all, and that their own health insurance premiums have continued to increase. And that will be bad for the democratic majority.

Insurance Reforms Are "Up Front" In House Health Bill: How Will Insurers Respond To The Challenge?

Think a 1000-page health care reform bill is hard to digest? Well, the latest House version is currently 1900 pages long...before manager's amendments, before any real public debate begins. It's a foregone conclusion that there's much to dislike; it's also a foregone conclusion that much will change.

It is significant, though, that the first three big sections of the bill focus on health insurance reform. There's a basketful of "immediate reforms," a series of required changes in insurer behavior, and a section dealing with insurance exchanges, co-ops, and the public health plan.

We'll try to digest this a piece at a time over the next few days. But overall, it's clear that Our Friends In Congress (majority Democrats, at least) expect to see major changes in the health insurance market, some coming from changes in insurer behavior, and some, at least nominally, from changing the nature of the "risk pool" by encouraging the formation of large purchasing groups, whether public or private.

The politics are far from over, but regardless of the specifics of the outcome, insurers are going to be under great pressure to reduce administrative costs and simplify their marketing, sales, and business processes. It's interesting to wonder whether, somewhere behind the curtain of political opposition, some health insurance industry leaders are thinking about how they'll have to become more efficient and transparent, either to compete effectively against a public option, or to forestall one.

Wouldn't want to bet on it, though...

Small Group Health Insurance Rates To Spike In 2010...And A Bunch Of Nonsense From The Insurance Industry

I recently had a long chat about health insurance reform with the former CEO of one of the nation's leading non-profit health plans. We were sharing our frustration at the behavior of the health insurance industry's lobbying group, America's Health Insurance Plans (AHIP) in the face of increasing pressure from the White House and Congress to clean up its act. My companion said, "It's as if the insurance industry is crying out, 'Please, please regulate us! Protect us from ourselves'!"

Certainly there is no clearer evidence of this (in the past week or so, anyway) than in this story, which appears in today's New York Timeshttp://www.nytimes.com/2009/10/25/business/smallbusiness/25health.html?th&emc=th. It reports that 2010 will see health insurance premium increases for small businesses which are twice as high as the previous year's. Brokers are projecting an average increase of at least 15% in small group health insurance premiums.

Typically, spokesmen for the health insurance industry blame the rise in premiums on rising medical costs. And one AHIP spokesman, who doth protest too much, says quite clearly (and with a straight face), "profits are not responsible for increased health care costs."

Nonsense....

Certainly there is a component of these projected increases which relates to inflation in medical costs. If you want to know how much, look at the year-over-year increases in costs for large, self-insured employers. Because they mostly self-fund their employees' medical expenses, their cost increases are usually pretty close to the increase in the cost of health care. A good estimate would be about five percent.

The rest?...

2009 was a bad year for health insurers. Typically (and where the AHIP flack's statement is at least partially true), a health insurer's underwriting profits...the difference between premiums collected, claims paid out, and administrative expenses...would be about 2 to 3 percent of premiums.

But the majority of those insurers' income is based on investment returns...income derived from taking premium income and investing it, usually for the short term. And when the stock market crashed, many insurance companies' portfolios took it on the chin.

How much of insurers' profits come from investment income? Unless the insurers are publicly traded, it's impossible to say. Most insurers file their financial reports with state insurance commissions, and State Approved Accounting Principles (special reporting rules for insurance companies, different from the Generally Accepted Accounting Principles most businesses must adhere to) do not require insurers to report income from investments, or from "non-insurance-related activities," such as providing administrative services to self-insured companies.

Small group health insurance rates are increasing to help insurers polish up their balance sheets after a bad year for investments. But they're also increasing due to an old-fashioned phenomenon called "featherbedding." Insurers fear that future health insurance reforms may put pressure on their rating structures, so they're getting what they can now. An actuary might call it "a strategic recalibration of rates."

And of course, as we've pointed out before, when insurers raise their rates 15%, the percentage of those rates which are attributable to administrative costs...which make up 25-40% of small group and individual health insurance rates...tends to go up 15% as well...the equivalent of giving your insurer a 15% raise for doing no extra work.

The Times article points to the underlying truth to these rate increases: small employers have very little marketplace leverage in a small group market which is highly concentrated and in which competition is constrained. They pretty much have to take the rate increase or buy coverage elsewhere.

During my time at COSE in the olden days, our small business members enjoyed premium rates which were as much as 30% lower than rates on comparable plans, and which grew at less than half the rate of small group insurance rates generally. When we once asked our insurer's chief actuary where the differences came from, he said, "COSE can negotiate; the other guys can't."

There is fairly little in any of the current House or Senate bills which would really change that negotiating balance. There is slight hope that a "public option" would develop the leverage to be competitive with health insurers for many years...at least until the public option amasses 10-15 million customers. Health insurance exchanges might help, but if they're constrained by the same rules governing private insurers (which insurers will certainly insist on), they'll have a hard time differentiating themselves in a competitive marketplace. COSE-type co-ops could, but only if they're run correctly (COSE's no longer is), and if they're given time to grow to scale.

We've written here before that there's fairly little in existing health insurance reform legislation which has much apparent promise to reduce even the rates of increase in small group and individual health insurance premiums. And despite broad promises or speechifying, our public officials can offer no solid evidence that small group premiums will do anything but escalate. Which may be a reason that small employers continue to be skeptical about the government's efforts to help them.

Why Taxing "Cadillac Plans" Will Hurt Small Businesses

One of the key revenue-raising elements of the Senate Finance Committee's health insurance reform plan is a tax on so-called "Cadillac" health plans. A proposed 40% excise tax on plans costing more than $8000 per year for individuals (that's $666 per month) or $21,000 per year for families (that's $1750 per month...and thanks for pointing out the earlier typo, Greg)), irrespective of whether they are group or non-group health plans, is anticipated to raise a big chunk of the bill's forecast $880 billion price tag.

There are a number of big issues with this proposal which have already been widely discussed in the media. Foremost among those concerns is that, while the issue has been positioned as a way to tax high-rolling white-collar types and their big compensation and benefit plans, the primary negative effect will be on union members, and especially government employees, whose unions have fought hard to protect the generous health plans their members receive. That issue alone may force the Congress to re-think the excise tax idea.

But here's another one: such an excise tax is liable to be another slam on small businesses' health plans, and the big guys may be able to duck the tax altogether.

Big companies tend to be self-insured; they pay directly for their employees' health care expenses, and rely on insurance companies primarily to pay claims, to make use of the insurers' provider discounts, and to help-out with stop-loss coverage. So large employers generally don't pay monthly per-employee premiums.

On the other hand, almost all small businesses, and almost all self-employed individuals, who pay for health coverage do so by purchasing fully-insured "products" from insurance companies. And we know that companies with fewer than 10 employees pay, on average, 18-20% more for their health insurance products than do their larger counterparts for the same coverage. And non-group insurance purchasers pay even more, for less coverage.

I recently wrote about my quest last year for non-group insurance coverage for my family. Because of my age, and because of a couple chronic but not serious health conditions, the best deal I could find was $1880 per month for a plan with a $3000 family deductible. It sure didn't feel like a "Cadillac plan" to me.

But at $22,560 per year, that plan would have been subject to a 40% excise tax, which would have raised the cost to $31,584 per year.

Do policymakers really expect that my insurance company will eat the extra $9000 per year? I sure don't; I expect that the lion's share of that tax will be passed along to me, and will raise my premiums another 40% in addition to whatever annual rate increase I might expect from my insurer. So within a couple years, my family's health insurance costs would exceed $40,000 per year...perilously close to our country's median annual household income.

The only relief might come from purchasing a plan with a $10,000 family deductible...but that won't reduce my premiums by more than 25%...and would greatly increase my family's exposure to out-of-pocket health expenses.

Seems to me as though that's the opposite of the intended effect of health insurance reform legislation.

The bottom line here is that maybe assessing a tax based on the price of a health insurance policy is not the smartest way to levy such a tax. It has the advantage of being simple, but it's terribly imprecise, may not reach its intended targets, and may actually end up hurting small businesses...and /or dramatically increase the federal tax subsidies required to enable folks to purchase coverage.

The alternative will be a much-more-complicated, but more precise, focus on the "actuarial value" of health plans, to put the emphasis not on higher prices, but on more generous benefit levels. it may be a fairer way to levy such a tax, but it won't be any easier to enact.

AHIP Tosses A Well-Timed Grenade...And Raises Some Issues

The White House was all aghast yesterday when a study by PriceWaterhouseCoopers commissioned by America's Health Insurance Plans (AHIP), the insurance industry trade association, suggested that the Senate Finance Committee's health reform bill would raise the price of health insurance 40% more than would be the case under current law.

If you'd like to review the study, here's a link: http://www.americanhealthsolution.org/assets/Reform-Resources/AHIP-Reform-Resources/PWC-Report-on-Costs-Final.pdf

As is usually the case with the debate over health insurance reform, the report is a mixture of worst-case-scenario doomsday predictions...and some inconvenient truth.

The report focuses on four elements of the Finance Committee's bill:
1)...The introduction of insurance market reforms and consumer protections that would raise insurance premiums for individuals and families if the reforms are not accompanied by a universal coverage mandate;
2)...An excise tax on employer-provided high-value health plans ("Cadillac plans")that in a few years could raise premiums on moderate-value plans;
3)...Cuts in payment rates for public health plans which would accelerate cost shifts to the private sector, and;
4)...New taxes on health care entities which would be passed on to consumers.

AHIP's first concern is that a requirement that health plans be guaranteed issue, and that the variation between rates for the youngest and healthiest vs. the oldest and sickest individuals be not more that 4:1, will raise rates for younger people and make it difficult for them to afford coverage, even with generous subsidies.
The organization's stated concern is that if young people aren't able to buy coverage affordably, and aren't required to buy it, they'll wait to purchase coverage until they're sick, and make a mess for everybody. And if you buy the report's analysis, their conclusion is valid.

But I don't buy it for a second.

The industry's interest in a requirement to purchase coverage is the expectation that an individual mandate would create a brand new pool of young, healthy people who'll pay a lot in premiums cumulatively, but won't use their coverage. This is VERY profitable for insurers. That's why insurers are so interested in keeping prices as low as possible for younger people, even if doing so socks it to older folks (okay, like me).

And right now, while most states limit the variations on group insurance premiums (in Ohio, the variation is plus-or-minus 80%), there's currently no limit on the difference between what insurers can charge people in the individual market. And the differences in premium rates can be staggering.

A change to community rating and guaranteed issue would, indeed, raise premium rates for younger individuals; they might pay a little more than insurance industry actuaries would like to charge them. But they also tend to age eventually, and then will benefit from that subsidy.

A 60% increase in my 24-year-old's insurance premiums would raise them from $125 to $200 per month. But as he gets older, the rating reform suggests that his rate wouldn't be more than $800 per month as he got to his 60's.

I think the industry's real fear is that young folks would jump ship from private insurance to an expanded Medicaid program (assuming they earned less than some appropriate multiple of the poverty line), and they'd lose all that revenue.

I want to talk about the two tax-related issues together, so let's focus for a minute on the cost-shifting boogeyman. The industry's concern is that reductions in the growth of spending on Medicare and Medicaid would accelerate a cost shift to the private sector. The report makes no allowance, however, for the possibility that the spending reductions might actually reduce costs and increase efficiencies on the provider side.

It's an unfortunate political truth that spending cuts in health care are almost always specious...often, they're accounting tricks to move expenditures off the books in one year only to restore them in the next year. But AHIP's analysis suggests NO reductions in the rate of spending will occur over the next ten years, and ALL the excess costs will be passed along to a helpless and hapless private sector. Cost shifting is easy to suspect, and hard to prove...not worth the doomsday picture the industry's analysis suggests.

Now the taxes...that's another story...

The Finance Committee has proposed a 40% excise tax on "Cadillac plans"...basically, plans that cost more than $8000/year for one person or $21,000 for a family, regardless of whether the plan is a group plan or a non-group plan. I've said here before that this provision just shows how little our elected officials know about what health insurance costs.

Last year, when I was forced to shop for non-group insurance for my family, the best price I could get, on a plan with a $3000 family deductible, was $1880 per month: more than my mortgage payment, and a whopping $22,560 per year. Sure didn't feel like a Cadillac plan.

A 40% excise tax on that plan would add up to $9024, making the effective cost $31,584. It's an easy-seeming way to raise revenue, but:
...Do we really expect that insurance companies will just eat that nine grand?...Puh-leez!...Insurance companies are like the house in Vegas: they never lose, because they're paying with your money. Somehow, that cost is going to get passed along, and;
2)...Do we really buy the contention that the tax will force employers to buy less generous plans?...Like what...a plan with a $5000 family deductible?...$10,000?...

And while this is being positioned as a go-after-the-rich-guys tax, I suspect a close analysis would conclude that many folks on generous health plans are union workers and government employees, who will fight like tigers to keep from having those plans modified.

Now maybe there are large employers who would like to think the imposition of such an excise tax could be used as a gun to the head to wring concessions out of their workers. But certainly nobody's saying that.

The taxes proposed for drugmakers and equipment manufacturers fall into a similar category. Do our elected officials really expect these industry groups to swallow hard and just absorb these tax hikes? And when customers/patients encounter rising co-pays or deductibles for medication or medical equipment, they encounter then through their health plans, and blame the insurance companies for the higher prices. They walk, fly, and quack like stealth taxes on consumers...let's call them what they are.

Finally, though, even as I suggest that the insurers aren't all wet in their analysis, I point out a little thing nobody's talking about: The change from a complex, medically-underwritten system of insurance to a community-rated, guaranteed-issue system should vastly simplify the business processes for health insurers, which should result in a significant reduction in administrative costs. Add in the efficiencies that could be produced by the development of highly-automated insurance exchanges, and there's a strong possibility that the administrative costs for small group and individual insurance coverage could be cut from 25-40% of premiums to half of that. And a significant reduction in those administrative costs could really "bend the curve" for small businesses and individuals. The effects of reducing and controlling administrative costs actually magnify over time, if purchasers can de-link the cost of administrative costs from medical costs, and build marketing, distribution, and management systems which take advantage of economies of scale.

Of course, AHIP's analysis doesn't anticipate that, either.

"Powering Up" Insurance Exchanges

With the likelihood diminishing that Congress' health care reform legislation will include a "public option," the principal hope for expanding health insurance coverage among small businesses and individuals rests with the creation of health insurance exchanges. Through these new entities, small businesses and individuals seeking coverage would have access, via the Internet, to a range of different health plans offered by a wide range of insurance companies, and could shop, compare, apply for and purchase their coverage on-line.

The problem is that these entities are easier to imagine than they are to build and manage. And the track records of many states which have experimented with the formation of such entities in the past...in Texas, Florida, California, and North Carolina, for example...suggest that exchanges face some genuine market-related challenges to their success.

This week in the New York Times, an op-ed piece by the founding Chairman of the Texas Insurance Purchasing Alliance traced the history of his own experience with a state-sponsored, non-profit exchange. While the exchange enjoyed some success over its first three years (1993-1996), it was out of business by 1998. The principal reasons for the exchanges eventual failure were:
...participating insurers, who could sell coverage both outside and within the exchange, used the exchange as a "dumping ground" for customers with unfavorable health profiles, while taking the better-risk groups for themselves;
...the state's political leadership changed, from a governor who founded and advocated for the exchange (Democrat Ann Richards) to a governor who de-emphasized the importance of the exchange (George W. Bush), and;
...ultimately, the exchange was unable to establish enough market share to be able to negotiate effectively with insurers, and without the support of the political leadership, the exchange was forced out of business.

The author's conclusion: "If Congress now creates new exchanges, as seems increasingly likely, it must prevent this phenomenon by setting two national rules: Insurers have to accept everyone and have to charge everyone the same rates regardless of health status.

Such rules would force insurers to spread risk. But enforcement would also be difficult. Every aspect of health insurance — from the rules for underwriting and setting premiums to the marketing of policies — would need to be monitored stringently to prevent companies from steering all bad risks to the exchanges."

It's best to think about the powers needed by exchanges to be considered in the context of three market realities:
1)...The health insurance market is highly concentrated. In most local communities, three or fewer health insurers control 70% or more of the market; in many communities, one health insurer enjoys market share of 90% or more. This condition severely limits competition, which leads to higher prices for small companies and individuals;
2)...State insurance regulations in most states have established "rating corridors" which govern the ranges in prices which insurers may charge different groups for the same health plans. Most insurers say that these rules do not permit them to provide special deals to groups or organizations which purchase coverage "in bulk," thus giving them the chance to duck the formation of group purchasing arrangements which might require them to become more efficient, and;
3)...Unlike large, self-insured companies, whose health plans are administered by insurers for less than 10 percent of claims costs (and typically 5-6%), administrative costs for smaller groups can average 33-37 percent of claims, which translates into 25-27% of premium costs. The administrative costs for individual health plans can be as high as 30-40% of premium costs.

If we're going to create insurance exchanges that work for small businesses and individuals, here's what we have to do:
1)...Policymakers must state that engendering a higher degree of competition among insurers is a matter of good public policy, and exchanges must have the ability to attract new competition into state and local markets through the development of interstate arrangements. If insurers in Iowa can offer coverage to small companies in Ohio at a lower cost than Ohio insurers can, those Iowa insurers ought to be able to participate in an Ohio exchange;
2)...The federal government must explicitly require the states to examine any existing regulations governing the pricing and underwriting of small group and individual health plans, and in establishing exchanges, establish rules which encourage the aggregation of small businesses and individuals into large, more actuarially credible groups. Insurers will hate this, and will claim that doing so will affect competition. But in states where one insurer controls 90% of the market, how can the effect be anything but positive?;
3)...Even in an environment in which insurers might be required to establish some sort of community rating, guaranteed issue arrangement, those elements of insurance premiums not related to medical risk...that is, administrative costs...must be subject to negotiation between insurers and the exchange. The best way to reduce and control small group health costs is to reduce that administrative cost ratio through the use of technology, a reduction in marketing and sales expenses, the development of "universal" application forms, and the simplification of underwriting, and;
4)...Given market conditions as they currently exist, and the magnitude of technical, process, and cultural challenges facing the insurance industry in the next 3-5 years, there will certainly be a considerable period of transition, as a re-configured private market integrates with expanded Medicaid and other programs to provide access to health care for those close to the poverty line. But in order to add a sense of urgency to the implementation of needed reforms, legislators would be extremely wise to make provision for the development of a "public option," in the event that the industry's efforts don't meet with some agreed-upon performance targets for greater access and more effective cost-containment. Absent such a "doomsday machine," it's likely that insurers will merely temporize, take advantage of the regulatory process, and then do the absolute minimum required by regulations they themselves will write...which is how we got here in the first place.

Taking these steps would enable insurance exchanges, over time, to use their presence in the marketplace to reduce market-related inefficiencies, bring down administrative costs, become stronger competitors, and lead ultimately to a reduction in the rise of small group and individual health insurance costs, both within and outside the exchanges.

Health Care Reform Tourism...A Pilgrim's trip To DC

Been down with my own recent encounter with the health care system: a nasty case of pneumonia that's had me tired and wheezy...but no so out of sorts that I'd miss a quick trip to DC to talk about health insurance reform with a few key members of Congress.

We thought briefly of squeezing into the room where the Finance Committee was meeting to narrow down the differences both between and within the parties over the Committee's health insurance reform plan, but between the lobbyists and the media the crowd was 50 deep, so we met with members and staff instead.

Here are a few thoughts:

1)...The President seems to be of a mind to get some sort of health care reform plan signed by Thanksgiving recess. It'd be a nice symbol, but we encountered some genuine skepticism (especially among veteran staffers) that such a timetable was practical. After the Finance Committee finishes its mark-up, it must reconcile its version of the bill with the Senate Health, Education, Labor, and Pension Committee's mark-up...and the same exercise must go on among the three House Committees which have already passed their own (considerably more liberal) versions.
That's a lot of brinksmanship over a fairly short time, especially given that not even all the majority members of the Finance Committee seem willing to support their own bill;

2)...There seems to be some degree of resignation that whatever does manage to pass both Chambers will consist of a less ambitious plan than previously advertised. The big impact will largely be on insurance regulation, a necessary, but insufficient, component of health care reform. Reforms to the individual health insurance market will not take effect until 2013, at the earliest, and won't reach the small group market until five years after that. And while there are considerable political benefits to pushing the implementation of "reforms" out past the 2012 elections, the political calculation could backfire if people don't see the personal benefits of reform before the vote in 2012. And a bunch of Blue Dog Democrats fear voter backlash in 2010, regardless of what they do;

3)...It's hard to see how the reform plan actually saves anybody any money. Tax subsidies (which have yet to be paid for) may help to offset the cost of coverage for some people, but it seems clear that most insurance reforms will have the effect of, at best, re-distributing costs, and will probably cause a significant net increase in spending for small businesses and individuals, whether through taxes, through premiums, or more indirect means, such as bogus "excise taxes" on insurers, drugmakers, equipment companies, or other health care players, who'll just pass them on to consumers downstream.

We spent a considerable amount of time talking with Members and their staffs about the hug differential that exists between large employer groups, and small companies and self-employed individuals, in the realm of insurer administrative costs, and discussed ways to use information technology to make the process of shopping for insurance faster, easier, and more transparent for insurers, consumers, and brokers. This would be the best way to create a material and sustainable reduction in insurance costs...to focus on the 25-40% of insurer administrative costs which have nothing to do with medical claims, and everything to do with the institutionalized inefficiencies in the small group and individual insurance markets.

Technology could also be used to introduce a little much-needed competition into the health insurance market. In most local communities, three or fewer insurers control 70% or more of their local markets; in some communities, one insurer holds market share of 90% or better. With these realities, it's hard to see how insurers can say with a straight face that the introduction of a public option, or purchasing co-operatives, or insurance exchanges, could have a negative effect on competition...unless it's Opposite Day in Insuranceland.

Health Insurance Reform: God (Or The Devil) Is In The Details II

Health Care Co-operatives: The Senate Finance Committee's reform plan allocates $6 billion ($300 million per state) to establish statewide non-profit health insurance purchasing co-operatives by 2013. To qualify for federal start-up funds, the co-operatives must meet fairly stringent criteria. The organizations applying for the funds cannot be in the insurance business, or be related to insurance companies (this will be a disappointment to mutual insurance companies). They also must not be organizations currently offering insurance, though it's not clear whether that would include Chambers of Commerce or trade or professional associations currently offering health insurance coverage to members. Co-ops must be in the primary business of providing access to health care services to their members, and any excess revenue generated by the co-ops would have to be returned to its members, or invested in other health care-related activity. The would also be self-insured, and would be expected to stand on their own within one year of being established.

The co-op idea is meant to be a more politically palatable alternative to a "public option" health plan. It's certainly a less disruptive concept than a public health plan, and so much more palatable to the insurance industry. But as one who's had a good deal of experience in the health insurance co-operative business, I'm not sure that's the best idea.

Even with a compelling value proposition (substantial savings for participating companies and individuals), it takes considerable time to build sufficient critical mass within a co-op to enable it to be competitive with private insurers already in the marketplace. And co-ops will have to expend a lot of resources on marketing, sales and underwriting, just like their commercial brethren. Nonetheless, a well-run co-op could produce some economies of administrative scale, and if run solely for the benefit of their members, could be a player in the marketplace over time.

Both co-ops and exchanges will also be encouraged to enter into interstate "compacts" for the purposes of purchasing services more efficiently. This is a back-door entryway into a national market for health care coverage, a necessary innovation to enable true competition to develop in the health insurance market, where large insurers have the ability to use their economies of scale nationwide.

Elements of this part of the bill are bound to change significantly. I'd certainly expect to see some sort of "trigger" introduced to the bill providing that, after a substantial time had occurred to permit insurance reforms to work and co-ops and exchanges to be established, a public health plan could still be introduced if all these reforms had NOT resulted in better access and more controllable costs for group and individual consumers.

Legislators will be counting on the threat of the introduction of a public plan to be sufficient motivation to persuade insurers to play fair.

Don't panic just yet; should such a "trigger" be pulled, it wouldn't be till 2018 at the earliest.

Mandates: Beginning in 2013, every American would be required to have health insurance coverage, whether through an employer or through an exchange. Tax credits would be available to individuals who might need help in obtaining coverage, up to 300% of the federal poverty line.

Companies with 200 or more employees would be required to enroll all their qualified employees in a health plan. Companies with more than 50 employees would have to enroll their employees or pay a fairly modest penalty for those employees who must purchase coverage on the individual market. Companies with fewer than 50 employees would be exempt from any mandate.

Seems to me that, no matter what you call it, the bill imposes mandates on employers and individuals to provide or purchase health coverage under most circumstances. As I've written before, if the voluntary market can be demonstrated to be working as well as it can, and everyone who wishes to purchase coverage can do so at a reasonable cost, it might make sense to enact a mandate to cover thee outliers who have refused to purchase coverage, even when it's available.

We're by no means there yet. And I fear that, in the face of a looming mandate, insurers will merely bide their time and do fairly little, because the clock will be ticking toward a date when everyone will be required to buy their product, no matter what the price.

Health Insurance Reform: God (Or The Devil) Is In The Details

The Senate Finance Committee's health insurance reform plan does propose some significant changes to the small group and individual health insurance markets. I say "changes" and not improvements because there still aren't a lot of details, and those details there are don't suggest a lot of hope that small business owners and self-employed people will experience much short- or long-term cost savings...in fact, the betting would be on higher costs and even more limited control over them.

The major elements of the insurance proposal fall into four categories: rate and underwriting regulations; the creation of insurance exchanges; the development of statewide, non-profit health insurance co-operatives; and the individual mandate.

Insurance Rating Reforms: beginning on January 1, 2013, insurance companies would no longer be able to deny coverage to any individual applicant for health reasons. And insurers would have limits on the variations they might impose on rates: in general, the highest price for any given health plan could not exceed 7.5 times the cost of the lowest-cost plan. And rates can be set using only the applicant's age and family size, plus variations for smoking and geography.

The same conditions would apply to small groups (with 1-50 employees) by 2019.

Who might win here?...Obviously, people who haven't been able to purchase coverage because they wouldn't pass through a health screen, and probably self-employed people, who would qualify for group coverage under the plan. The rating rules would theoretically benefit younger insureds, and more or less smack it to older folks.

The thing is, though, that we won't know till at least 2019 how any of these regulations might help or hurt the market, since there seems to be no oversight.

Insurance Exchanges:States will be required to set up insurance "exchanges," which will use standardized application forms, technology-assisted marketing and communications and customer support, to marketplaces for purchasing health plans. The timing would supposedly follow the insurance reform timetable, with exchange-based plans available to individuals by January 1, 2013, for small groups by 2018, and for larger groups five years after that.

It's a lot easier to pass a law that says, "Thou shalt set up insurance exchanges" than it is actually to build one. No one really has any idea how such a marketplace will be set up and operate. It's also not clear how plans available through an exchange might be different form those offered by insurers themselves, whether all insurers operating in a state will be required to participate, if that participation will be proportionate to their market share...or anything else.

And again, small businesspeople who are feeling the health insurance squeeze now shouldn't be rushing to the bank with all the money they're going to save on health insurance premiums. It'll be three to five years before the structures will even exist, and another three to five to determine whether this approach is working.

Tomorrow: Co-ops and Mandates

Taxes And Taxes Which Aren't Taxes: Plenty Not To Like In Baucus Health Bill

It's actually a pretty good sign that the health reform plan released last week by Senate Finance Committee Chair Max Baucus immediately drew fire from both left and right, from both Republicans and Democrats. It's the sign of a compromise that all parties feel unsatisfied with the result.

What the release of the plan really triggers is the beginning of serious horse-trading, as the Finance Committee's bill is debated against a bill reported out earlier in the summer by the Senate Health, Education, Labor, and Pensions Committee, which is considerably more liberal than the Finance Committee's version. And once the Senate has agreed upon a bill, then the action will move to the House, which must reconcile four different health reform bills. Then House and senate members will form a Conference Committee to reconcile House and senate bills into the final piece of legislation.

The point here is that we're a long, long, way from knowing what the final version of health reform legislation will look like. So if you're part of the insurance industry, it's way premature to be celebrating that the Finance version doesn't contain a "public option." And if you're a manufacturer of pharmaceuticals or medical equipment, it's too soon to panic over the imposition of billions of dollars in fees meant to cover the cost of insuring the uninsured via a means which would not add to the federal deficit.

But for small businesspeople and other taxpayers, it ISN'T too soon to be concerned that whatever comes out of the legislative sausage-maker will make health insurance more expensive for you, unless cooler heads prevail along the way...which isn't likely.

Republicans have virtually invited themselves out of the debate, which means that they've abandoned their role as negotiators on behalf of limited government and lower taxes in favor of mere obstreperousness. And Baucus has already made clear his willingness to increase tax subsidies to assist middle-income Americans to buy coverage, and to raise the ceiling on his spurious proposal to tax "gold-plated" health plans.

There's plenty in Baucus' bill to give taxpayers pause. Here are a few:

...A 35% excise tax on insurers which offer generous benefit plans. Setting aside for a moment the notion of on what basis such a tax might be calculated (actual premium cost vs. some sort of "actuarial value" calculation), insurers are likely (indeed, they'll lobby furiously for the right) to pass the cost of the excise tax on to the consumers who purchase these generous benefits plans. And while they've been characterized as punishing the white-collar tycoons who run big banks and insurance companies, these benefits plans are really enjoyed mostly by union workers. The idea won't fly unless it's seriously watered down, but since it's one of the biggest keys to generating revenue to pay for other stuff, watering it down will require either cutting benefits for some or raising revenue some other way;

Taxes which aren't taxes: In similar fashion, the Baucus plan proposes imposition of $13 billion in fees on insurance companies, drugmakers, and equipment manufacturers to cover part of the cost of insuring the uninsured. These fees have also been cooked up to generate revenue in a way that doesn't look like a tax. But the costs would be passed straight back to consumers as well.

I don't know about you, but when my costs go up, it doesn't matter much whether the extra costs goes to the government or my insurance company, it feels like a tax to me.

Tomorrow, I'll try to take uo the upside and downside of the Baucus bill's insurance reforms.

"Do Insurance Companies Deserve All The Crap They're Getting?"

A blogger's dream...I finally received an actual question from an actual reader (thanks for both, by the way), and it happens to be an important question, at that.

First, "deserve" has almost nothing to do with it. As the past several months of debate have made clear, health care reform is a complex exercise, because of the many powerful entities...hospitals, physicians, pharmaceutical manufacturers, medical equipment makers,...who, together with insurers, are both contributors to the current mess we're in, and beneficiaries of the status quo.

But no matter how complex, the standard public relations strategy for shaping discussion of an issue is the old game of "villains and victims." Every story needs a good guy and a bad guy. So in this debate as well as any other, you're either one or the other.

We know the pharmaceuticals industry and the hospital industry have already pledged their support for the President's efforts in exchange for a pledge that the resulting reforms will mitigate their downside (whether all these pledges hold up through the legislative process remains to be seen).

We also know that most people's views of the health care system are seen through the lens of their health plans. If a claim is denied, if a treatment isn't authorized, if the newest prescription drug isn't on the "approved" list, people tend to blame their insurance companies. If patients are surprised by big co-pays or out-of-network penalties, they tend to blame their health plans, And rightly or wrongly, those other big players tend to see insurers as curbs to their ability to generate as much revenue as they believe they deserve.

So no one likes insurance companies, which makes them a convenient choice to play the villains in this debate.

The many talking heads who have bemoaned the fact that the current debate seems to be focused primarily on health insurance reform, rather than on reform to the overall delivery system, are all right...but they all miss the point. The President has made very little headway selling systemic reform as necessary because of the complexity of the message. Simplifying the message to focus on a villain is helping to sell the public on the need for reform; everybody has a horror story about how they or someone they know have been "screwed by an insurance company." And in the politics of this debate, it's less important to actually fix the entire health care system than it is to be able to take credit for having done something good. And beating up on insurance companies is an activity which many people find satisfying.

Is this to say that insurance companies have been unfairly singled out for abuse?...That they're innocent victims? Hardly. Health insurers have made out pretty well over the past 15 to 20 years, largely on the basis of a big push they made both in Congress and in state legislatures across the country which established many of the pricing, underwriting and administrative rules under which they currently operate.

It was the health insurance lobby which defined "small group health insurance" as coverage for companies with between 2 and 50 workers...thus creating a lucrative and exclusive market for individual health insurance coverage.

It was the insurance lobby which made sure that those individual health plans would not be subject to the same government regulations as group coverage...thus enabling the pricing, underwriting, and recission issues that we hear about so often.

It was the insurance industry which has created high-deductible health plans, and sold families on $10,000 family deductibles as a smart financial decision...even when those families might earn $40,000 a year or less, and the deductible would ruin them.

It's health insurers who created short-term health coverage, and limited benefit plans, and sold them to often ill-informed customers who had no idea how useless those "products" are when a serious illness or injury occurs.

But as unacceptable as many of those practices seem, it's important to recognize that they are all perfectly legal. And within the industry, there are reasons for them.

The health insurance industry is not monolithic. There are nearly 2,000 licensed life and health companies out there. Much of the outrageous behavior we see in the marketplace has resulted from efforts by small, "niche" insurers to use the legislative and regulatory process to undermine the market power of the few gigantic mega-plans which dominate local and regional health care markets. In over 70 percent of local communities, three or fewer insurers hold 75% combined market share or more.

The small guys find it hard to compete under those conditions. So they've gamed the system a little to create opportunities for themselves.

An excellent example of these curbs on more open competition is regulation which impedes large insurers from forming association-type "pools," which can reduce administration costs and bring down prices for participating companies. Smaller insurers won rules which prohibit insurers from discounting administrative costs or taking any other steps which might enable them to make use of the laws of large numbers to offer lower rates to some small groups than for others.

The combination of the promotion of heavily-underwritten individual health coverage and curbs on efficiencies in the small group market have been major factors in the devolution of the risk pool, requiring insurers to rate each small group and individual application as if it were a universe of one, two, or three people. This strategy of risk-based selection has been a bonanza for small specialty insurers, and has undermined incentives for large insurers to find ways to reduce their costs and create a more competitive local market.

Interestingly, it's these same insurers who have objected to the formation of large non-profit purchasing co-ops, on the outrageous assertion that the formation of a bunch of co-ops would "fragment the risk pool." Actually, their fears are just the opposite: that the formation of co-operatives would mobilize groups of purchasers into economic units which might be able to negotiate aggressively on behalf of their participating members. Insurers hate negotiating in the small group and individual markets; they vastly prefer their "take it or leave it" approach.

Keep in mind that it's easy to talk just as broadly about outrageous behavior on the part of hospitals, doctors, drug and equipment makers...even individual Americans whose risky behavior drives up costs throughout the system...as it is about perfectly legal "abuses" by the insurance industry. We're all contributors to our health care crisis.

But changing some of the more egregious practices within the insurance industry, enabling the formation of large risk pools through co-operative purchasing, opening the group market up to self-employed individuals...these steps really could help a lot of people, stabilize rates, and expand coverage in the private voluntary market.

Reading Between The Lines Of The President's Address

Much ink and airtime have been invested since Wednesday night in critiquing the President's health care reform address. I have just a few thoughts:

1) The President gave an okay speech, but touched on relatively few new ideas. I thought his principal audience was House Democrats, particularly those on the left. He sought to assure them that he hadn't abandoned a few core issues...like a public health plan option...even as he virtually asked them not to abandon a health care bill which probably won't contain one.

It's pretty clear to me that a public option is probably not going to be included in a final bill. After the speech, both House Speaker Pelosi and Senate Majority Leader Reid backed off insistence on a public plan, except as a back-up measure in the event legislated insurance reforms don't work. And if one were to be enacted, it would be way down the line.

From the beginning, my prediction has been that the House might pass a bill containing a public option (though it would give the Blue Dogs fits), but the Senate won't, and the final bill would contain a provision to enact a public option only if the insurance industry were, after at least five years, unable to reduce costs and increase the incidence of insurance coverage enough to avoid "triggering" a public option. The President's address, and the Congressional leadership's response to it, makes that outcome more likely;

2) While it makes political sense, the idea of exempting 95% of the small companies in America from compliance with either a mandate to provide coverage to their employees or from tax penalties for not doing so doesn't just severely weaken the credibility of the overall health care reform strategy, it also signals some other significant potential problems down the road. Companies with fewer than ten employees have the hardest time purchasing group coverage to begin with, and when they can get it, pay nearly 20% more for it than large companies do. A "hands off" approach to the problems facing this segment of the marketplace could suggest that, while small businesses may be spared some of the expense entailed in the reform plan, they may not benefit much, either. And absent some very significant changes in the pricing and underwriting rules governing both the individual and small group markets, some of the President's suggested insurance reforms could make coverage more expensive for companies that are currently struggling to provide coverage to their workers (and to their owners' families as well) and put the cost of coverage further beyond the reach of those that don't.

3)Until there's a real bill, with real numbers, exercising too much concern about what might or might not be in it is a waste of time. The process is essentially starting over. I think it's going to be a matter of months, at least, before there's action on anything resembling a final bill. The first provisions of the bill, when it's enacted will not take effect till 2013, and will be phased in over probably a five-year period. So even under the best circumstances, a fully-realized program is nearly ten years away from fruition, and there are TONS of details between here and there.

Co-Ops, Triggers, Mandates...Where Will Health Reform Legislation End Up?

Several weeks ago, I wrote about a few elements of health care reform legislation which, if enacted, might actually help small business owners and self-employed individuals get and maintain access to health care coverage at a more affordable cost. Those elements are:
-undoing federal and state regulations which impede the formation of large purchasing groups, or co-operatives, which would enable small businesses and the self-employed to combine their purchasing power for lower costs and a greater variety of choices in health coverage;
-expressly making it clear that self-employed individuals purchasing coverage through such co-ops will be able to obtain group coverage at group rates (since the "group" would be the co-operative, not the individual companies which are members);
-establishing a series of pilot projects or demonstration projects aimed at using information technology to make it easier and more cost-effective to shop for and purchase health coverage, and;
-establishing a five-year window for these initiatives to take effect, and for the insurance industry to demonstrate that they "get it," before considering the enactment of either a "public option" health plan, or a mandate of any kind.

My rationale for those initiatives were first, that mandating either employers or individuals to purchase health care coverage makes sense only if the marketplace is working as well as it can, and that coverage is generally available at reasonable prices to anybody who wants to buy it (today, that's not the case); and second, that the establishment of co-operative purchasing groups makes sense only if they are not subject to the same crippling, anti-consumer pricing and underwriting practices which have made health insurance more expensive and harder to obtain for small businesses and the self-employed.

As the President prepares to speak to the nation this evening, and as Congress re-convenes and begins efforts to "re-boot" health care reform legislation, I'm more confident than ever that these elements will be a part of the outcome of whatever health care reform legislation emerges from the Congressional sausage-maker. Here's why:

1) There's already broad consensus that the individual health insurance market needs to get fixed. It's a very safe bet that, at the very least, the legislation will prohibit insurers from rejecting applications from individuals with health conditions, and curb some of the industry's more egregious practices, such as recision (the practice of canceling coverage for individuals who develop health conditions after purchasing coverage), or dramatically increasing premium rates for individuals who are less than perfectly healthy;

2) Whether they're called exchanges, co-operatives, or something else, there's broad agreement that cost and access relief for the small group and individual markets will come from creating larger "risk pools," taking advantage of the actuarial laws of large numbers, as well as collective purchasing power, to enable participating companies to negotiate more effectively on pricing, and reducing the cost of administration, which can be six times higher for small businesses than for large ones;

3) The bill being reported out of the Senate Finance Committee will, at the very least, enable states to experiment with various mechanisms for pooling risks, whether via state-sponsored "public options" or co-operatives, and providing some Federal resources to encourage such experimentation.

That leaves the debate over the so-called public option. The House leadership has made it quite clear that House members probably can't pass without the inclusion of a public option. The Senate leadership says that a bill which contains a public option won't muster the votes necessary to pass, and the Senate Finance Committee does not contain a public option, settling for a "trigger" for a possible public option if, after three years, the insurance industry hasn't gotten its act together.

I expect that House members will get what they want: a bill which contains some sort of public option provision. But the Senate bill will not contain a public option, and MAY include a provision for some sort of medical malpractice reform as an olive branch to win some wavering Republiicans.

In conference committee, where the House and Senate bills will be reconciled, the parties will agree to hold off on a public option for three to (probably) five years, giving private market reforms a chance to work.

This would give the House the chance to say they supported a public option, and the President to say that a public option is a part of the bill. It would also give the market time to adjust to whatever regulations come out of the legislative process after the legislation passes (the regulatory process itself could take a couple years), and put the insurance industry on notice that, unless it plays a major role in reducing the number of uninsured people and reducing administrative costs, it could face competition with a robust public option.

And by the way, it would also give the geniuses in Washington the chance to decide exactly what a public option might look like, and how it might work. Because, as I've said several times in the past, currently there's almost NOTHING about the health care reform plan which has been specifically spelled out in legislation. So until that happens, both proponents and opponents are contending with shadows.

A Bipartisan Small Group Reform Bill?...

Here's the good news: a bipartisan group of Senators managed to craft a small group health insurance reform bill which would enable groups of small businesses and self-employed individuals to form large purchasing pools, eliminate underwriting discrimination against the self-employed, reduce insurer administrative costs, and provide tax relief and other incentives for purchasing health coverage through large group purchasing plans.

The bad news: it was introduced in the waning days of the previous Congress. But it could be a roadmap for bipartisan small group reform as Congress re-convenes next week.

The bill was S2795, with the tortured acronym the SHOP Act (for "The Small Business Health Act Options Program Act"). It was introduced by a bipartisan group of senators as an improvement to S1955, which would have established the ground rules for development of large, association-based Small Business Health Plans, and laid the groundwork for a national market for health coverage. S1955 had the support of many national trade and business associations, but was undercut by objections from the insurance industry, and from local organizations like Chambers of Commerce, which derive a lot of revenue from proprietary health plans and feared the emergence of large national association competitors.

Even though it went nowhere, S2795 contained some very practical and helpful ideas for stabilizing the small group health insurance market. Among its provisions were:
...important underwriting, rating, and access provisions which would provide self-employed individuals with the same protections as small group employers, by making each state's small group underwriting and rating rules the same for the self-employed.
...reducing fears of excessive risk segmentation by forming all interested associations in a state into a single large, statewide association risk pool;
...diversifying the risk pools by encouraging the formation of association groups which would represent a broad base of industries;
...providing a broader range of health plan choices for participating small businesses by pooling risk, enabling participating associations to rely not just on one insurer for coverage of each association's members, but by making all health plans available through the statewide pool available to all the members of all participating associations;
...providing modest tax credits to small companies and self-employed individuals who purchase coverage through the statewide pools, and;
...making the plans available through each statewide association pool subject to each state's existing regulations, while establishing a process for developing a nationwide regulatory framework under which national associations might eventually operate.

Clearly the opponents of S1955, which would have created a national market for small group health coverage through national associations, had a concern that the rapid evolution of a national market dominated by national associations would undercut existing state insurance regulations such as mandated benefits, thus providing national groups with a competitive advantage which statewide or local groups would not have. While arguably the current regulatory environment of 50 separate sets of statewide insurance regulations actually benefits no one but insurers and existing association group plans, S2795 recognized that starting with the aggregation of groups at the statewide level, and migrating over time to a national set of standards, would reduce fights with insurers, state insurance commissioners, and other critical elements of the status quo.

The bill is clearly not perfect, and exactly how some provisions might be made to work is not clear. S1955 was a much more comprehensive (some would say radical) approach to consolidating the market power of small businesses on a nationwide basis. But S2795 was a sensible, thoughtful, and practical approach to beginning the process of small group reform incrementally, and within the existing regulatory structure.

And it had the support of both Democratic and Republican Senators, plus a token Independent. And in the current health insurance reform environment in Washington, how many reform proposals can say that?

"Shared Responsibility" Premium Hike Effective In Ohio Today

Here's how easy it is for the government and the insurance industry to spend your money to solve their problems.

Today, the State of Ohio institutes a 4% increase in the cost of individual (non-group) health plans to subsidize the cost of similar plans for people with pre-existing health conditions.

Ohio insurers are required by law to offer "open enrollment" health plans to indviduals with pre-existing health conditions which might disqualify them from conventional health insurance coverage. The plans are quite costly; individuals covered under the plans spend an average of $800-850 per month for coverage, well over twice what healthier people pay for similar coverage.

The plans are also hard to find. Insurers are required to offer them to the public only one month per year, and there's no standard for informing the public (usually you'll find a box in the classified section).

For both these reasons, not many Ohioans participate in the plan. Only about 1,300 out of Ohio's million or so uninsured residents have signed up for them.

The State budget passed in July sought to create a subsidy for open enrollment participants by assessing a 5% rate increase on all health plans sold in Ohio, including small group health plans. That would have created a huge windfall for insurers who sell non-group plans, in exchange for solving a problem for only a relatively few people.

The Ohio General Assembly eventually abandoned that approach, choosing instead to focus the premium surcharge on individual health plans. (It's not clear that a similar effort to hike small group premiums could have stood up to constitutional review, but individual health plans are at the Legislature's mercy).

So the Ohio Department of Insurance has been given an "oversight" role, to monitor rates and report back to the Governor. Ostensibly, if overall rates in the individual market rise more than 5 1/2%, the Department will scale back on the subsidy for open enrollment plans. Translation: if so many sick people sign up for subsidized coverage that it drives rates up, the Insurance Department will use pricing to slow down the rate at which they sign up.

This is a sign of things to come. When insurers tell legislatures, as they've told the White House, that they'll gladly stop rejecting applicants with pre-existing health conditions as long as everyone must buy health coverage, what they're generally NOT saying is that the cost of that largesse will be paid for by raising rates for everyone else...all in the name of "shared responsibility." But the REAL effect is to provide insurers with a subsidy enabling them to sell more individual health policies. And eventually, the price won't matter, because the law will require everybody to buy a health plan, no matter what it costs.

Let A Thousand Co-ops Bloom...With A Little Careful Congressional Cultivation

Might "co-operatives" be a tool for increasing access to more affordable health coverage for small businesses and individuals?

That's a relatively new component of the health care reform debate, particularly as ideas regarding a "public option" health plan have begun to lose their luster due to fears of enhanced government involvement and the threat of significant costs.

Keeping in mind once again that very few details regarding any element of health insurance reform legislation are at all clear, here's what we know about the deliberations regarding co-operatives.

Essentially, proponents see co-ops as non-profit, member-owned organizations which would self-insure for the health coverage provided to members, and which would have the ability to negotiate reimbursement rates directly with providers. The government would somehow assist start-up co-ops with some initial capital to enable them to establish necessary reserves. After that, they'd supposedly be required to satnd on their own through their premium income.

Opponents say that co-ops would be highly unlikely to make much of a difference in reducing or controlling health care costs for many years. It would take a long time for co-ops to develop the market power to be able to negotiate with providers from a position of strength, unless they're able to offer reimbursement rates roughly equivalent to Medicare (and idea hospitals and doctors hate). And unless they're exempted from many of the regulations which make small group and individual health insurance inefficient and costly to administer (an idea insurers hate), they'd have to operate just as inefficiently as insurance companies do, so they'd probably be unable to compete based on administrative efficiency.

There are also concerns that there aren't many good examples of successful health care co-ops to serve as role models of good performance over the long haul.

At the same time, organizations ranging from mutual insurance companies to chambers of commerce to health systems are jockeying for definitions of what a co-op is that will suit their current operations, and enable them to conduct business as usual.

What should a co-op look like? Let's take a look back to s simpler time...

Health insurance companies didn't exist in any form till the 1930's, when the first Blue Cross Blue Shield plans were established. Before then, most people's "health coverage" was either paid for directly, or was covered through "benevolent organizations." These groups were organized around affinity groups: whether by church groups, ethnic organizations, or community service organizations, they were membership organizations consisting of people with some degree of common interest. Every member would pay a small amount of money in monthly assessments, and the societies would help to cover the health expenses of any members, should they require help.

Blue Cross Blue Shield plans had their roots in such organizations. They consolidated these efforts by providing administrative services to individuals and employers who wished to establish a "pool" of funds to help pay the hospital and physician bills of their members, and often operated as not-for-profit "mutuals," owned by their members, who voted to elect the plans' leadership and make other important decisions.

For quite awhile, my COSE alma mater was one of the largest and most successful health insurance purchasing co-operatives in the country. At one time it covered over 200,000 small business owners, employees, and family members throughout Northern Ohio. The COSE health plan was run by an independent Board, made up of members, which negotiated directly with insurers to develop plans which would operate in the members' best interests. COSE accepted no revenue from its insurers; costs were paid through member dues, and through fees paid by members who participated in the health plans. Because the group was so large, the fees charged to members were extremely modest: $12 per company and $1 per employee per month.

Our results over many years were impressive. For 15 years straight, participation in COSE grew by a net of 1000 member companies (6000 employees) per year. Members participating in the COSE health plan saved an average of 30% on their health insurance premiums. And for more than 10 consecutive years, members rates of increase in health premiums were less than 10% per year; in some years, members' rates didn't increase at all.

And this was in the small group and individual market. The average COSE member company had 6 employees, and many groups had 2 employees or fewer.

Unfortunately, COSE's recent history hasn't been so rosy. Bad management and governance is one reason. Another is that the organization decided a number of years ago to use the health plan as a source of revenue, which removed any incentive to keep prices low for members.

But another reason for the COSE health plan's failure to grow, or contain costs, is that, in the last round of federal health insurance reform legislation, insurers were successful in developing regulations which severely undercut the ability of membership organizations to negotiate volume discounts on rates or administrative costs with insurers. In addition, many states codified rules which established "group coverage" as applying only to employer groups, not to large purchasing groups. These same rules specifically disqualified sole proprietorships from eligibility for group coverage.

Properly designed, co-ops can be a powerful tool in increasing the availability of affordable health coverage, AND in increasing competition among health insurers. But it'd have to be done right. Here's what Congress would need to do:

1)Specifically state that the formation of group purchasing arrangements is a matter of public interest;

2)Permit the formation of purchasing groups by non-profit affinity groups a) formed for purposes other than that of purchasing health coverage,and b) consisting of at least 5,000 insured lives (though 10,000 would be better, for the purposes of actuarial credibility);

3) Require that such groups' health plans be governed by a separate fiduciary Board of Trustees, not as a revenue source for the sponsoring organization;

4) Specifically enable co-ops to negotiate volume discounts on rates and administrative costs with insurers and providers on behalf of their members;

5) Specifically prohibit the formation of co-ops by insurers or by provider organizations, and;

6) Support the creation of a limited number of pilot projects at the federal, state and local levels to demonstrate how such groups might use the combination of large numbers, administrative efficiencies, and negotiating power to control the rise of health insurance premiums.

Developing co-ops could be a relatively simple matter, if Congress would remove the obstacles to the formation of such groups which it itself has imposed, with the encouragement of the insurance industry.

This would keep health insurance reform in the private sector, but give purchaser the ability to consolidate purchasing power as a response to the consolidation of power which has taken place among insurers and providers over the past decade.

NFIB Nails Small Group Health Reform Priorities In Short Words And Simple Sentences

The National Federation Of Independent Business (NFIB) is the nation's largest small business advocacy organization, with over 600,000 member companies throughout the U.S.

The organization's politics has usually run toward the conservative side. NFIB was one of the organizations often prominently mentioned when talking about the failure of the Clinton Administration's health reform plan.

But this year, NFIB deserves recognition for the clearest and most actionable small group market reform agenda out there in the political process. And the organization has taken to the Net to spread its gospel.

Here's a link to their cover page:http://nfib.matrixgroup.net/tabid/565/Default.aspx?cmsid=49240&v=1 (If the link doesn't work, please copy and paste in to your browser)

NFIB is selling their agenda under three important principles. They're the 3 C's: Cost, Choice and Competition. Here's a summary:

"Cost...We must bring down the cost of health insurance for small businesses and their employees. Currently, they pay 18% more for health care than big businesses. Creating an equal playing field starts with improving the small group insurance markets.

"Choice...Small business owners and employees need more choice when shopping for insurance plans. Health care reform needs to expand the number of providers and affordable plans available to small businesses and their employees.

"Competition...Lack of competition makes it easy for providers and insurers to raise their prices. In many states, small business owners have only one or two choices of insurance providers. A recent study shows that in most states the five largest insurers control 90 percent of the market. We need more competition in the marketplace and access to larger purchasing pools to help lower the cost of insurance for small businesses."

This is a reform agenda to salute. It's concise, well-documented, and recommends action steps which, if enacted, would actually help small businesses control their health care costs. Contrast it to the fuzzy, murky rhetoric coming from other national groups, like the US Chamber of Commerce, The National Small Business Association, and even my COSE alma mater.

But NFIB is in for a fight.

For several years, NFIB has been thinking about the evolution of health insurance toward a national market. They're making a big bet that with their 600,000 member companies, they would be an early favorite to meet the criteria to form a non-profit health insurance exchange or co-operative that could cast a big shadow in the marketplace, and easily move their membership past the one million mark. The organization has developed a health plan for small employers administered by a big broker specializing in association health plans.

The principal impediments: Big local or regional health plan, like Blue Cross Blue Shield plans, who are already the largest insurers of small groups at the local level; and local or statewide Chambers of Commerce and other associations which have used exclusive relationships with these insurers to build their memberships and generate a ton of revenue from sales commissions and other fees.

These groups fear the emergence of national competitors, especially big ones which could negotiate very favorable rates with insurers and providers.

That's why you'll hear them say that, if such co-ops are to be formed, they should be subject to the same rules as insurers, including rules that protect insurers from having to negotiate with associations as big customers on behalf of their members. In effect, they'll demand that any national co-op should be required to be as inefficient as they are.

And that's why I'm cheering for NFIB to win.

What Does Health Care Cost?

In an attempt to change the subject from the excesses of its own behavior, the insurance industry has actually shed a little light on one of the most fundamental, and complex, questions in the health care reform debate: what does health care cost?

Last week, America's Health Insurance Plans (AHIP), the insurance industry's lobbying group, released a survey of its members which was meant to reveal the variations between what hospitals and physicians bill for services and what Medicare and insurers pay for them. You can read the New York Times article on the subject here.http://www.nytimes.com/2009/08/12/health/policy/12insure.html?emc=tnt&tntemail1=y

It's not a scientific survey. In fact, its purpose was to point out the most excessive billing behaviors on the part of health care providers. And the anecdotes do, in fact, illustrate absurd variations: an Illinois patient billed over $12,000 for cataract surgery for which Medicare pays $675; a California patient billed $20,000 for knee surgery for which Medicare pays $584; a patient in New Jersey whose bill for spinal fusion surgery totaled $72,000, while Medicare pays only $1629 for the procedure. And there are plenty of other anecdotes highlighting the difference between billed charges and insurer or provider reimbursement.

While the particular cases are meant to be particularly outrageous, they highlight an issue which is played out tens of thousands of times a day in communities across the country in smaller ways.

A patient sees a specialist for a medical problem. The physician bills $350 for a 20-minute office visit. The patient later receives a statement from his/her insurance company stating that, while billed charges were $350, the physician has agreed to take $125 as payment in full for the office call.

What does the doctor's visit cost?

In the real world, a patient without insurance coverage would be expected to pay the $350, or whatever lower number he might negotiate with the doctor's office. For the insured patient, the physician gets $125...or whatever amount the doctor has agreed to accept from whatever insurance carrier the patient subscribes to. The physician may be reimbursed at dozens of different levels for the same service, depending on the patient's health plan.

Throw in co-pays, out-of-network fees or penalties, and the picture gets even fuzzier.

But what does it have to do with the doctor's cost of doing business?

Here's the nasty part: in general, doctors and hospitals have no idea what their costs are; unlike every other element of business, pricing doesn't start with calculating the cost of providing a service, with mark-ups or discounts from "retail" based on volume. All they know is what Medicare, Medicaid, or insurance companies will pay them.

Again, in general, Medicare reimbursement sets the "floor" for paying providers. Insurance companies generally set their reimbursement rates as a function of Medicare: that is, 1.25 or 1.4 times Medicare rates.

But that still doesn't address the question of what those services cost. When hospitals or physicians state that Medicare reimbursement pays them below their costs, that usually means,"we're not getting paid enough."

The one thing which IS true, is that a provider writing off a charge for "uncompensated care" is charging off the highest possible billed charge.

When the President promises to "bend the curve" on health care spending to reduce costs, it'd be helpful to know exactly what that means. Frankly, I'd settle for some means to create more transparency and uniformity in billing for services...and actually, providers would benefit from that, too...