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.
Monday, October 26, 2009
Monday, October 19, 2009
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.
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.
Tuesday, October 13, 2009
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.
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.
Thursday, October 8, 2009
"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.
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.
Monday, October 5, 2009
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.
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.
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