Sales Commissions And Health Insurance Exchanges

As Al Franken's Stuart Smalley character was known to say, "Denial is not just a river in Egypt."

Insurance agents and brokers are apoplectic about a recent recommendation to the Obama Administration by the National Association of Insurance Commissioners, stating that sales commissions should be considered as administrative expenses under the new health insurance reform law.

This is significant because beginning as early as January 1st, 2011, insurers are under a federal mandate to spend at least 80 percent of collected premiums on medical expenses. This caps insurer administrative expenses at 20 percent of premiums for small group insurance coverage, and at 25 percent of premiums for individual (non-group) coverage.

Response from the insurance industry and lobbying associations representing agents and brokers has been predictable: they have blamed everybody else (hospitals, doctors, lawyers, pharmaceutical companies) for health insurance cost inflation; they've railed against government interference in health insurance pricing; they've predicted that many insurers may be forced to leave the market if they can't compete in a more efficient world; and they've made dire pronouncements about declining customer service if agents must abandon their roles as "educators and advocates" for their small business clients.

All of which conveniently overlooks some important objective realities.

Health insurance coverage costs an average of 18-20 percent more for small employers than larger companies pay for comparable coverage. The principal reason for the cost differential is administrative costs, which average 25-27 percent of premiums for small groups and 30-40 percent of premiums for individuals.

The largest components of those cost differences are related to marketing, sales, and underwriting. Easily half of the difference is related to commissions and overrides paid both to general agents ("wholesalers")and selling agents ("retailers.")

Despite the onslaught of information technology, small group coverage remains heavily dependent on paper forms, complicated business processes, and a lot of administrative inefficiency, as technology solutions which have permeated other niches of the industry have not touched the small group market.

Why not? Because insurers are almost solely dependent on third-party agents to sell their products. And business processes which might simplify shopping for coverage threaten to "disintermediate" third-party salespeople, who have a lot of power with insurers.

Back in the late 1980's and early 1990's a few small business organizations (including my COSE alma mater) were able to produce genuine cost savings for their members by using the power of large numbers to reduce administrative costs through more efficient marketing and sales, and through the use of management information to negotiate more cost-effective rates from participating insurers.

The growing leverage of these purchasing groups produced a backlash among smaller insurers and agents, which resulted in many states enacting laws which prohibited insurers from "discounting" administrative costs for such groups. This protected agents' income, even as it created a disincentive to develop any cost-related efficiencies in health insurance marketing and administration.

Health costs (hospital, physician, and pharmaceutical among them) being equal, the only way to have a meaningful impact on small business' health insurance costs is to attack these administrative expenses...including sales commissions.

Certainly, a key differentiator for new statewide health insurance exchanges ought to be the ability to use administrative efficiencies...in the form of plan standardization, simplification, and reduced marketing, sales, and underwriting costs...to affect the price of health insurance coverage. A small business owner purchasing coverage directly through an exchange on-line should not have to pay the same cost as a business owner who buys through an agent, whose paperwork is processed by a general agent.

Administrative efficiency can also be a differentiator for insurers who, because of their size or market position, cannot obtain the kind of discounts from provider groups that the big Blues or dominant local insurers can obtain.

There's no doubt that agents are going to be subject to a squeeze in the brave new world of health insurance reform, just as middlemen have been squeezed in virtually every service industry. Many of the protests raised by insurance agents in this instance mirror those of travel agents in the infant stages of Priceline.com.

In the long run, just as with travel services, customers will flock to purchase health coverage in the easiest most transparent and cost-efficient manner...and if that means sacrificing their relationships with agents for a lower-cost, better deal through an exchange, that's what's going to happen.

Insurer and agent fears about exchanges aren't based on fear that they won't work; it's based on fear that they WILL work. Much of agents' business success is based on managing the complexity of the status quo, and insurers use the complexity and pain involved in shopping for coverage as a defensive business strategy. Neither party sees itself benefiting from a system which encourages transparency and simplicity.

That's why, instead of trying to find ways to game the regulatory process, agents should be pressuring insurers to do everything they can to increase simplicity and efficiency, and reduce their costs...even though, since their commissions are largely calculated as a percentage of premium, lower costs may lead to reduced commission income.

And they should start collaborating to develop the means to compete with exchanges through faster, simpler, and more customer-friendly experiences, rather than hoping that the system will continue to reward complexity and lack of transparency.

In a world where shopping for health coverage is easy, efficient, and transparent, the only beneficiaries are the small businesses that pay the bill. And that's what health insurance "reform" is supposed to be about.

Ain't Nothing Free In Health Insurance, Part 2...

A few weeks ago, I gently chided Robert Pear of The New York Times for touting the introduction of "free" diagnostic screening tests as part of the new federally-mandated health insurance plan. Coverage which isn't subject to deductibles and co-pays isn't free; it's just being paid for in a different way.

An article in the Wall Street Journal last week demonstrated how the "free benefits" chicken have begun to come home to roost. The article is here http://finance.yahoo.com/insurance/article/110602/health-insurers-plan-hikes?mod=insurance-health. It reports that insurers are raising prices between 3.4 and 9 percent above their average planned rate increases to cover the cost of new benefits mandated by the insurance reform measure which have already been, or soon will be, effective for individual and small group consumers.

Those benefits include the elimination of "lifetime caps" on insurance coverage, elimination of pre-existing conditions exclusions for children, continuation of family coverage for dependent children up to age 26, and elimination of co-pays for diagnostic and preventive care.

There have been the expected expressions of outrage from The White House and consumer groups, who accuse insurers of using reform as an excuse to gouge customers. What the situation really illustrates is that any promises of greater access to coverage for more people, expanded benefits AND cost reductions are...well, a misstatement...and one Democrats don't need in advance of the November elections.

There IS a legitimate issue regarding HOW the additional rate increases are being calculated. There are suggestions that insurers are padding their rates excessively; insurers react with shock and horror.

Here's the real story: Insurers are like the house in Las Vegas; they never lose, because they're playing with your money. Insurers ask their actuaries to calculate the cost of these additional benefits, and the actuaries respond with an estimate which is as conservative (that is, favorable to the insurers) as possible.

And most states don't have the expertise or wherewithal to review these estimates. Insurers conceal their formulas as "trade secrets" to protect them from oversight. And most states' insurance departments have as their principal charge the protection of insurers' financial solvency, not consumer protection. So all insurers must do is say "we need these rates," and insurance departments have no choice but to say "okay."

Problem is, if their estimates are wrong...that is, if those rates are overstated...there's no mechanism for going back to recapture the overage and return in to consumers, whether directly or in the form of premium reductions or adjusted renewal rates. If the insurers guess high, and are wrong, they get to keep the money.

As is the case with most issues related to health insurance, the big need in the small group and individual health insurance markets is for someone on the consumers' side knowledgeable enough, and powerful enough, to challenge these rating assertions and negotiate something fair and accurate. Will exchanges play this role? Will state regulators? The federal government? Absent some smarts and power on the purchasers' side, consumers will continue to face "take it or leave it" pricing propositions, insurers will load rates to assure a very hefty profit, and health insurance rates will continue to increase at a rate up to three times the rise in actual health care costs.

What Goes Around Comes Around: Insurers Re-Discover Selective Contracting

Insurers and employers are turning to a once-popular, then-demonized strategy to reduce and control health care costs: creating closed networks of providers.

"Brand name" insurers such as Aetna, Wellpoint/Anthem and UnitedHealthcare are experimentally rolling out health plans which save participants money by limiting the hospitals and physicians they can see, and severely restricting...or even denying...benefits when they use non-network providers.

For those with a grasp of ancient history, HMO's and Preferred Provider Organizations (PPO's) were a foundation of the "managed care" movement of the late '80's and mid-90's. Insurers would assure selected providers of increased patient volume in exchange for favorable reimbursement rates. Providers which would agree to the rates usually did experience an increase in business, usually at the expense of providers not in the preferred networks.

Selective contracting is one of the relatively few broad strategies which could be proved to save consumers money over time. But they were not popular with two groups. The first group consisted of providers who didn't win contracts with insurers. The second group was insurers which didn't have the market share to enable them to develop favorable contracts with hospital and physician networks.

By the late 1990's, selective contracting was under assault by these interests, cloaked in the guise of "limited consumer choice." The steady drumbeat of this criticism, together with the move toward provider consolidation in most local markets, succeeded in undermining the effectiveness of selective contracting as a cost-containment strategy.

(The case could be made that a major impetus for the evolution of "health systems"...hospital and physician networks...was a backlash against insurers' success in using selective contracting to control costs. In communities like Cleveland, with significant excess capacity, selective contracting was a demonstrably successful cost containment strategy. But in an environment of provider consolidation, restricting insurers' contracting options to two or three instead of 25 or 30 helped providers keep their prices up.)

But with employers' concerns over hyperinflation in health costs, and with increasing pressure on Medicare and Medicaid to control health care cost inflation, insurers are betting that consumers will be willing to accept some limitations on provider networks as a way to keep some control over costs.

And with insurers facing new restrictions on plan design, especially limitations on deductibles and co-pays, look for products featuring limited provider networks as The Next Thing in cost containment. It worked 25 years ago, and it'll work today.

What The Politicians AREN'T Saying About The Massachusetts Connector: A Cautionary Tale

Throughout the Washington debate over health insurance reform, advocates lionized the experiment enacted in 2006 by the State of Massachusetts. The "Massachusetts Connector" is a key model for the Obama Administration's notion of "health insurance exchanges:" electronic marketplaces which would enable small businesspeople and individuals to shop on-line among a variety of health plans.

The Connector is credited with increasing access to health insurance coverage for Massachusetts residents; compared with 89.5 percent of the non-elderly population in 2006, over 95% of the population was covered by private insurance in 2009. That increase in coverage was largely due to generous subsidies provided to families whose income was less than three times the federal poverty level (about $66,000 for a family of four).

I've looked closely at the Connector from a user perspective, and it IS easy to use. That's partially due to Massachusetts' being a state which community rates both individual and small group coverage, and which guarantees that coverage will be available to anyone who applies, irrespective of health condition.

So far, so good, except...

Robert J. Samuelson, who writes on economics for both Newsweek and The Washington Post, recently published a column called "As Massachusetts 'Reform' Goes, So Should Obamacare" (http://www.washingtonpost.com/wp-dyn/content/article/2010/07/18/AR2010071802733.html), which highlights several issues political leaders in Massachusetts have ignored, at their increasing peril, and which should serve as cautionary tales for states moving forward with implementation of their own exchanges.

The article illustrates the inevitable outcome of a strategy which places a higher priority on access to coverage than on cost control. It also points out how difficult it is...and will be...for politicians to take concrete steps to curb runaway health insurance costs once a new entitlement has been enacted.

First, while The Connector is credited with an incremental increase in the number of people with insurance, the offsetting benefits have been slow to come by. "Emergency rooms are as crowded as ever; about a third of the non-elderly go at least once a year, and half those visits are for 'non-emergency' conditions."

The expected gains in health status trumpeted under the program are seen as mostly long-term, since the evidence suggests that the majority of the newly-insured are younger, and therefore healthier, than the general population. This should be good for participating insurance companies, since they're selling more plans to young people who won't use them, but the effect on public health has been negligible.

But not the effect on health costs; they're spiraling out of control. As recently as 2009, the Massachusetts legislature was investigating ways to limit benefits under the State's plan by denying coverage to certain groups, such as illegal aliens. But that didn't happen.

But health care costs have exploded. There is additional burden on small employers, who are required to pay at least 70% of premiums for their workers. But the burden on State finances has been even more drastic. "In 1990, health spending represented about 16 percent of expenditures," Samuelson writes. "By 2000, health's share of the budget was 22 percent. In 2010, it's 35 percent. And ninety percent of the State's health spending is on Medicaid."

How have political leaders responded? By beating up on insurance companies. Massachusetts' insurance commissioner began denying "unreasonable" premium increases. A State commission ruled those denials were illegal; negotiations with insurers continue.

A blue-ribbon commission concluded that the villain was fee-for-service medicine, and recommended the enactment of "global payment systems" to force providers to be more efficient. But the commission offered no clue as to how to implement such payment systems, and since hospitals, doctors, and other providers objected to the recommendation,the political process stalled.

Concludes Samuelson: "The lesson from Massachusetts is that genuine cost control will be avoided because it's so politically difficult. It requires limiting the incomes of hospitals, doctors, and other providers. They object. To encourage "
'accountable care organizations' would limit consumer choice of doctors and hospitals. That's unpopular."

"Obama dodged the tough issues in favor of grandstanding....What's occurring in Massachusetts is the plausible future"

Policymakers and groups working to implement federal insurance reforms can develop an exchange approach which combines administrative efficiencies, large-scale purchasing power, network management, and regulatory flexibility to effect real pro-consumer change in the health insurance marketplace. The tools are generally available, as is the knowledge of what works...and what doesn't...to achieve the laudable goal of expanding access to affordable health coverage for small businesses, their employees, and their families.

But where's the debate?...As long as it's confined to the halls of politics, the interests of those who pay will be overwhelmed by the interests of those who get paid.

Ain't Nothing "Free" In Health Care, Mr. Pear...

Robert Pear has been writing about health care policy and politics for The New York Times for a couple decades, and is surely one of the most respected voices in mainstream media on the subject of health care and insurance reform.

But this article in last week's Times (http://www.nytimes.com/2010/07/15/health/policy/15health.html?th&emc=th)contains a real whopper...or at least, a cynical oversimplification of an important issue.

The article begins with a dramatic statement:"The White House today issued new rules requiring health insurance companies to provide free coverage for dozens of screenings, laboratory tests and other forms of preventive care."

What?...

The body of the article clarifies the issue somewhat: effective September 23rd, many health plans, both for groups and individuals, will be required to provide their customers with access to a pretty wide range of diagnostic and preventive services at no out-of-pocket cost; that is, not subject to deductibles and co-pays.

But that ain't "free."

Now, there are some pretty good policy reasons to impose such a condition on health plans. Americans in general use diagnostic and screening services at about half the rate of other countries. And since the introduction of high-deductible health plans, there has been ample evidence that patients in such plans avoid "non-emergency" services because of high deductibles, often at risk of their own health. And the earlier illnesses such as heart disease, cancer, and diabetes are diagnosed, the easier they are to be treated successfully.

Still, Mr. Pear's reporting reflects a dangerous half-truth: treatment which is not subjected to deductibles and co-pays is not "free;" instead of being paid for directly by the patient, the cost is covered indirectly through the health plan, which leads to higher overall premiums.

And, of course, should a screening lead to a diagnosis, treatment for the health condition will still be subject to deductibles and co-pays. So you might find out you have cancer based on a "free" test, but seeking treatment will remain expensive.

It's easy to beat up on insurance companies; sometimes it's even fun. But, as is the case with so many provisions of the new health insurance reform law, it's a disservice to consumers to trumpet the introduction of "free" services on the one hand, then express shock and dismay when insurance premiums continue to rise faster than inflation. This one ain't the insurers' fault; this one's on the politicians.

As Insurers And The Government Dicker, Who's Speaking For Purchasers?

WOW!...Time flies...After a few weeks of triumph (our baby daughter's high school graduation) and my Mom's death, time to check back in for a view from the grass roots of America...

I spent some time in Ohio's state capital (Columbus, for the geographically challenged) talking with officials of the state's Department of Insurance about the implementation of federal health care reforms at the state level, where most of the really heavy lifting and ongoing work of actually covering people will be done.

They're a little busy. The first order of business is to implement the federally-mandated and (partially and temporarily) funded high-risk pool for hard-to-insure Ohioans. Ohio has had some experience with such a risk pool, and most of it has been unpleasant: largely because of very high premium rates, Ohio's current risk pool covers fewer than 1500 Ohioans. A temporary federal subsidy may make rates a little more affordable for some folks for awhile. The high-risk pool is supposed to be in place by July 1st.

By September 1st, all employer plans will be required to extend family coverage to dependents under the age of 26. While large, self-insured employers have till September to take that action, most Ohio insurers have already implemented that change for fully-insured customers (read: small groups and individuals) effective July 1st. The cost? We'll see...but it ain't free...

The REAL action, though, is going to revolve around the establishment of a statewide health insurance exchange by January 1st, 2014. Through the exchanges, individuals and companies with fewer than 50 employees are supposed to be able to shop for, compare, purchase and manage their health plans on-line. Larger employers will supposedly have the option a couple years later. And ultimately, the high-risk pool will be absorbed into the exchanges.

The exchanges are going to have a lot of work to do. In addition to packaging, marketing and managing health plans for participating insurers, they'll be tasked with means-testing applicants to determine whether they will qualify for an expanded Medicaid program (again, temporarily subsidized by Federal funds) or for a private insurance subsidy (ditto) for participation in a private health plan.

How's all this going to work? No one knows. The Federal government has yet to produce regulations which will guide the states' implementation of the exchanges.

This is, of course, a practical problem. I have a little experience with developing large-scale health plans and the infrastructure needed to support them. And three and a half years is NOT a lot of time.

Beyond logistics, though, there are policy issues to be agreed to between the Fed and the industry. Those negotiations are very likely to involve a lot of chicanery. In general, insurers are not happy at all at the prospect of having to do business in a new environment of transparency and efficiency. Here are just a few of the issues to be determined:

What incentives will be created to encourage administrative efficiency? This is a really big deal for small businesses and individuals, where between 25 and 40 percent of premiums go to cover administrative costs. The new Federal law requires insurers to hold their administrative costs to 20 percent or less of premiums for small groups, and 25 percent or less for individuals. Currently, insurers' efforts are focused on attempts to re-classify what have long been considered as administrative costs as clinical costs, including many marketing and community outreach costs.

Recently, for example, the CEO of the Ohio Association of Health Plans suggested that insurers be "incentivized" to encourage hospitals and physicians to adopt universal electronic medical records by classifying the associated costs as related to patient care, rather than administrative costs. Expect to hear much more highfalutin' rhetoric from insurers about their focus on patient care as a result of games like these.

What will happen to underwriting costs?No one knows for sure what percentage of insurers' administrative costs are attributed to the health screening imposed on every individual and small group application, but it wouldn't be unreasonable to estimate the costs at 6-7 percent of premiums. By 2014, those underwriting practices...and theoretically, their attendant costs, will be going away. Presumably, a portion of those underwriting costs will have to be re-allocated to enable exchanges to do the means testing work they'll be required to do. How will we know whether that happens?

What will happen to marketing, advertising and sales costs?Marketing, advertising and sales costs make up easily 10-12 percent of small group and individual administration costs. Insurers say that these costs are high because the process of selling small group and individual coverage is very inefficient. Theoretically, the exchanges should bring a high degree of simplicity, standardization, and administrative efficiency to the process. In Massachusetts, for example, it appears that groups using the Massachusetts Connector for their coverage pay lower premium rates when they access the Connector directly than when they do so using an agent or broker. But in most states, including Ohio, there are literally laws against rewarding marketing and administrative efficiency with lower rates. A well-run exchange has the potential to reduce marketing and sales costs by as much as half. Who'll make sure that happens?

While much ink is being spilled over the Obama health plan's relatively weak efforts to rein in medical costs, insufficient public discussion is occurring around these matters which...well, matter...so critically to the prices which small businesses and individuals pay for their health coverage. Given the ability to do so, exchanges could reduce the administrative costs portion of their health plans by as much as half.

But right now, those conversations are taking place largely in the dark, between newly-hired federal bureaucrats and seasoned and cynical insurance industry lobbyists. Which ought to make us all just a tad uncomfortable...and skeptical...that these important new vehicles really will have the flexibility to change the small group and individual insurance markets. Usually, if you take a bunch of broken stuff and jam it all together, you just get one big, REALLY broken thing.

Hope our self-styled small business advocates are paying attention to the right things...

The End Of Rescission: The Perils Of Regulation By Anecdote

Last week the national media triumphantly announced that, well in advance of the legislatively-imposed deadline of September 1st, the insurance industry had agreed to end the process of rescission: that is, canceling coverage for insured customers who developed medical conditions after having purchased individual health coverage.

Accounts suggested that big insurers such as Wellpoint had run individuals' claims through a computer model to determine whether customers who had developed, for example, breast cancer after having purchased their health plan might have known about their health conditions prior to buying coverage, and therefore may have misrepresented their health conditions on their applications.

(Interestingly, I haven't seen any accounts indicating what percentage of applicants screened in this way might actually have lied on their applications).

The year-long debate over health insurance reform was predicated largely on the need to curb such behavior on the part of the insurance industry; one was left with the impression that rescission was rampant across the country.

But, setting aside the notion that such behavior can easily be seen as reprehensible, the numbers tell a slightly different story.

In its editorial on the subject, the New York Times reported that three big insurers had rescinded coverage for 20,000 individuals nationwide since 2005. The National Association Of Insurance Commissioners issued a report concluding that some 27,000 policies had been rescinded over an overlapping period.

For those who faced rescission, the effect is undoubtedly catastrophic; having had their coverage abruptly canceled, and having been accused of misrepresentation by their insurers, those individuals (who all had health conditions) would have been unable to find coverage anywhere at all in the private market.

But...

Even if those two studies measured parallel universes, over a five-year period, rescission occurred among fewer than two-tenths of one percent (.0019) of the 24.7 million individuals who are privately insured (the 176.3 million people covered by group plans aren't subject to rescission, unless it can be proved that an insured lied on his/her application).

So of all the 200-+ million people with private insurance in America, this new regulation has benefited about two-thousandth of one percent of the insured population.

The health reform debate has almost always relied on individual stories to make it real for voters and legislators. And this is an excellent example of how such stories can be a tad...distorted...in the political context.

There's little doubt that, for those who are or might have been affected by rescission, the new health reform law will be a real benefit. But it does beg a few other questions, such as:

1) Given how extremely rare such cases have actually been, why did it take a new federal law to prohibit it? Are insurers simply that arrogant, or that ignorant, that they couldn't have stopped the practice voluntarily themselves?

2) Relative to the cost of building those computer models, what was the actual cost savings to insurers (and, by their own implication, their customers) from rescinding this microscopic percentage of individual policies, and what will be the actual cost of discontinuing the practice (this will be important when insurers begin crying the blues over the premium increases they'll attribute to covering people with existing health conditions)?

3) How might that cost compare with the everyday outrage that, for small businesses and individuals...every single small group and every single individual in America with private coverage...between 25 and 40 percent of their health insurance premiums cover not medical expenses, but administrative costs? Compared to the inefficiency and bureaucracy which result in those costs, the actual cost of rescission is absurdly inconsequential (though it did have clear political benefits).

Just brings to mind what a former Congressman friend used to say about campaign financing: Everybody knows what should be against the law; it's what's legal that'd make you cry...

"Don't Blame The Wolf For Being a Wolf:" The Need For Insurance Industry Oversight.

I'm reminded of the Russian proverb above when I hear people moralize about the "outrageous behavior" of the health insurance industry.

The wolf is the product of its evolution and its environment. Its behavior reflects those elements.

In much the same way, the health insurance industry is the product of the regulatory environment in which it has grown over the last 75 years or so, since the emergence of the first Blue Cross and Blue Shield plans, and the subsequent entry of commercial life insurance companies into the health insurance business.

(Recall that, until relatively recently, life insurance companies sold health insurance coverage as sort of a loss leader: a product which it was necessary to sell to get group customers to buy group life products, which were much more profitable. The emergence of mega-health companies is a product of the last thirty years or so.)

In general, companies selling fully-insured products, whether to groups or individuals, are strongly influenced by state regulations. And since the regulatory process is very closely monitored and managed by insurers, some states have very special and industry-friendly regulatory standards. In Ohio, for example, insurers operate under a special set of accounting rules which enable them not to report investment income on their balance sheets.

And since most states' regulators have as their primary mission the protection of the solvency of insurers doing business in their states, instead of advocacy for the consumer, how insurers account for their costs of doing business tends not to receive too much skeptical oversight.

As the federal government begins to take up a much broader role in industry oversight, some of the cracks in the existing state regulatory structure are going to become increasingly apparent...as will the magnitude of the challenge which federal regulators will begin to confront as they attempt to exercise more control over insurers' behavior.

Late last week media accounts pointed our (rather shrilly) a perfect case study in regulatory inconsistency and the role of the federal government as overseer. Ostensibly in the face of the new federal requirement that health insurers reduce maintain an administrative cost ratio which must not exceed an average of fifteen percent of premiums, accountants at Wellpoint reportedly have reclassified some 500 million dollars in administrative expenses as patient care expenses. Community outreach programs, brochures created for distribution at health fairs, material promoting nurse-on-call programs...the company apparently sought to dump any expense they could possibly justify as patient care into the medical claims cost bucket, in an effort to reduce their administrative cost ratio in advance of the new law's taking effect.

Needless to say, this is not what Our Friends In Congress had in mind. Their focus is on the 25-27 percent of small group premiums, and the 30-40 percent of individual health insurance premiums, which insurers keep as administrative costs. And their intention is that insurers find ways to become more efficient. The combination of the enhanced use of technology and simplified underwriting provide insurers with opportunities actually to reduce their spending.

But of course, the new law doesn't say precisely HOW insurers are to bring their administrative cost ratios down. So Wellpoint just did what insurers typically do: play accounting games to create the appearance of compliance with the law without actually changing their behavior.

The next two or three years will produce dozens and dozens of similar stories. Federal regulators are going to have their hands full trying to bring the wolves to heel.

The Massachusetts Connector: Public And Private Lessons About Insurance Exchanges

The Massachusetts Connector, the state's 4-year-old health insurance exchange, is the conceptual model for the kind of electronic marketplace incorporated into the new health insurance reform law.

Through the Connector, individuals and small businesses have the opportunity to shop for, compare, and purchase health coverage from among a number of health insurers. So if you want to see what a public health insurance exchange might look like, go to http://www.mahealth connector.org/portal/site/connector.

I thought I'd take a little tour of the site myself, and here are a few things I found:

1) As is the case with many quoting sites, the Connector's portal contains a few "front doors:"one for individuals and families, one for employers, and one for brokers. There's even a neat little electronic process enabling small business owners to compare plans and enroll without the need for paper forms;

2) State government has clearly established the criteria for the content of plans available through the Connector. They fall into Bronze, Silver, and Gold categories based on plan features. Each category has low, medium, and high options, featuring lower deductibles and co-pays as one moves from low to high option. The plans are standardized, which makes apples-to-apples comparisons easy;

3) For the ZIP code I entered as my business' location, I was able to receive quotes from three health insurers. Don't know how many insurers overall participate in the Connector, but comparisons of standardized plans from among three insurers seemed to give me enough variety without being confusing;

4) With Massachusetts' emphasis on community rating and guaranteed issue coverage, underwriting issues are dramatically simplified, which must have a significant effect on insurer administrative costs through the Connector. And it would appear that individuals and small businesses who apply directly via the connector pay somewhat lower rates, since there are no brokers involved in the transaction;

5) The downside of community rating and guaranteed issue is that the rates available through the Connector seem high relative to other markets. I'd estimate the premiums are 20-25% higher than is the case in Ohio, for example. On the other hand, these rates probably reflect the absorption of previously-uninsured (and uninsurable) individuals into the Massachusetts risk pool. There's no easy way to compare rates within the Connector against rates available outside the Connector, but I'd guess state law keeps the rates comparable.

So on the one hand, the Connector seems pretty easy to use. There seems to be a decent selection of standardized plans at standardized rates, and the presentation is simple enough for a non-insurance guy to understand. So at least publicly, the Connector seems to be a good model for how to use technology to achieve greater transparency in plan design and rating, and in reducing other barriers to access. And state subsidies help to offset some premium costs for lower-income people.

On the other hand, as the politicians touting the Connector have been less willing to discuss, the Connector is hemorrhaging money...

After my little self-guided tour on Friday, I was intrigued to see this article in Saturday's New York Times
http://www.nytimes.com/2010/03/27/health/policy/27massgov.html?emc=tnt&tntemail1=y. The article summarized Massachusetts' dilemma this way:

"...Four years ago, when Massachusetts enacted a health insurance plan that became a national template, state leaders deferred any serious discussion about controlling health care costs, with predictable results. While the law succeeded in covering nearly all residents, the State had to raise taxes and trim benefits to preserve its essential contours." Sound familiar?...

The Connector's future has become a bellwether issue in the Massachusetts governor's race. The Democrat incumbent, Deval Patrick, has taken on the extraordinary power of directing his insurance commissioner to deny any premium increases which the State deems "excessive" starting April 1st. This has the insurance, hospital, and physicians' industries in an uproar...and has been a fundraising boon to Mr. Patrick's chief Republican rival, who happens to have spent the last ten years as CEO of Massachusetts' Harvard Pilgrim Health Plan.

The current governor maintains that price controls are a temporary measure, until a state commission's recommendations regarding how to reduce and control health care costs can be implemented...over a five-year period.

It's going to be a challenge for health insurance reform proponents to continue to point to the Massachusetts Connector as a national model without also acknowledging that the sword cuts both ways: administrative standardization and simplicity on one hand, and rapidly-escalating costs on the other hand. But interested observers should stay tuned. Because as Massachusetts goes, so will the nation.

Passing Laws Vs. Solving Problems

It's hard to recall a vote in the House of Representatives which has been as closely watched or widely discussed and debated as Sunday's vote on health insurance reform legislation.

But it's not hard to be a little concerned that the legislation once again will highlight the confusion Members of Congress and the Administration regularly experience on big issues: the notion that passing a law is the same as solving a problem.

Because from where I sit here in the grass roots of America, the problems with implementation of this new law (assuming it passes in the Senate and is actually permitted to take effect) are just beginning...and they're huge.

I take very little issue with the intentions of the bill: especially in the face of our current economic downturn, with high unemployment and great uncertainty about the future, literally millions of families are seeing their health security...if they ever had it..evaporate. And the market for individual health coverage (created by the enactment of HIPAA in the mid-1990's, by a Republican Congress) had plenty of built-in dysfunction which fairly cried out for regulation. Generally, premiums for both small businesses and individuals have more than doubled in the past decade, and the escalating costs have created anxiety among many Americans.

But it takes the naivete of young idealists or the statutory cluelessness of the Congressional Budget Office to see how this bill will have any prayer of "bending the curve" of increasing health costs for the next decade.

I'm not even considering the "process improvements" and pilot projects incorporated into the bill.

I'm thinking about how we will actually pay for the cost of subsidizing access to health insurance for every American family earning below four times the poverty rate...beginning in 2014.

The vast majority of the financing for those subsidies are assumed cuts in the growth of Medicare reimbursements, which have never been enacted in the prior history of Medicare. Those cuts are typically threatened in any given year and restored before the year is over. Do we really think Congress will find the courage to do something which it has yet to find the courage to do in the 45 years since Medicare was introduced?

The other big source of financing is the so-called "Cadillac plan tax" on high-cost health plans. Originally scheduled to take effect in 2014, the House kicked that can down the road till 2018, by which time the cost of even a low-benefit health plan will probably qualify for an excise tax.

Proponents of the reform legislation like to point out the potential benefits to consumers which might materialize in the out-years after the bill takes effect. And there are some real benefits.

But even considering those benefits, it's hard to see many provisions of this legislation which will control health insurance costs for small businesses and the self-employed, and plenty of provisions which could lead us to real fiscal calamity. Once again the Congress has attempted to craft legislation creating a gigantic new entitlement without having the courage to pay for it (or, more specifically, to require US to pay for it).

And that's the embodiment of their confusion over the difference between passing a law and solving a problem.

The Health Care Industrial Complex, And "Why Don't You Give Yourself A Nice Raise?"

I just have to leave it to the Big Brains in Washington to prognosticate on the future of health care reform legislation. I have nothing to add to the white noise.

But here are a couple thoughts that small business people and their friends might find a tad illuminating.

In his final speech to America in 1961, President Eisenhower warned against "the potential for a disastrous rise of misplaced power" among the then-recently-organized relationship between the U.S. Armed Forces and a new industry of private armaments dealers...the "Military Industrial Complex." Because of its economic and political power and pervasiveness into so many sectors of American life, Eisenhower saw how easily this network of military leaders and defense contractors could have outsized influence on politics and policy.

Flash forward to 2010:

The budget for the "military industrial complex" is $782 billion for the fiscal year.
That comprises 23% of budgeted federal spending, and 4.7% of Gross Domestic Product (GDP) for the year. The Federal government spends another $1-1.2 trillion on defense-related activities (the Veterans Administration, Homeland Security, nuclear weapons research) which are financed through other budgetary departments.

Total economic power of the military-industrial complex: $1.982 trillion.

This year, federal spending on Medicare and Medicaid alone are a projected $676 billion. That's 19% of federal expenditures and 4.06% of GDP. Those government expenditures are matched by another $1.99 trillion in private money...from health insurance and Medicare Part B premiums to what we spend on aspirin.

So, the total economic power of the nation's "health care industrial complex:" $2.6 trillion.

How come nobody's warned us about the spectacular rise in economic and political power which has arisen among that health care industrial complex since the mid-1960's? How come we're not all a lot more skeptical of "the potential for a disastrous rise in misplaced power" of the parties involved in the health care debate?

It's not just about the insurance companies. It's about all those providers of products and services who make their livings in the health care sector. As the campaign has illuminated so clearly, those interests have great power to shape events in ways that favor them...and none of it has anything to do with getting paid less...

And another thing...

It's interesting how easy it is, even for experts, to miss the real point.

There has been a lot of (well-earned) outrage directed at big insurers who seem to be taking advantage of the uncertainty in the individual health insurance market by issuing big rate increases to their customers...with the biggest rate increases for those who are actually using their health plans.

Insurers cite many factors to justify their rate increases: the non-group pool is shrinking, they say, as economically hard-pressed individuals decide to go without coverage. That leaves a higher percentage of unhealthy people in the pool, and their utilization rates are higher, thus rates must rise higher, etc.

Okay, but...

For individuals purchasing non-group coverage, somewhere between 30 and 40% of their health insurance premiums relate not to health costs, but to administrative costs. And in general, when they're calculated at all, those costs are calculated as a percentage of premiums.

So when an individual's premiums rise by, say, 25%, the portion of premiums allocated to administration rises 25% as well. In effect, the insurer is giving itself a 25% increase in its compensation, for doing no more work.

As long as we're seeking ways to reduce health care costs without adversely affecting the cost of care, how about focusing on that little bogey: the 25-27% of small group premiums, and the 30-40% of non-group premiums, which insurers pass along as administrative costs?

These are, after all, the same companies which administer the federal employees' health plan for 4-5% of claims costs, and administer self-insured companies' health plans for 5-6% of claims costs...and manage to make money.

There is no doubt that the costs of marketing, selling, enrolling, and underwriting small group and individual coverage is more expensive than for the big guys. But six or seven times as high? Really?

Health Insurance, Small Businesses, And Jobs...Why The Geniuses In DC Better Hope They Get It Right

Politicians like to deal with issues in isolation. It makes it somewhat easier to ignore the potential downstream consequences of their actions. So when advocates attempt to tie the cost of health care to job creation, politicians like to dismiss such concerns as "muddying the waters."

Of course, they're not alone. During the years I served as COSE's Executive Durector (waaay back when the membership was growing by an average of 1000 companies per year, net of losses...which hasn't occurred since...well, since I left), some corporate godfather would ask, during a meeting of the Chamber's Board. "What does helping small businesses get discounts on health insurance have to do with economic development?"

Here's an answer, for politicians and corporate oligarchs alike.

It's by now an article of faith that nearly 80% of the new jobs created in our economy over any given period are created by small businesses. As Cleveland emerged from the recession of the mid-1980's, independent research showed that nearly all the jobs being created in the local economy were produced by small companies.

A survey of Greater Cleveland's economy versus those of a few "competitor cities," showed that, while Cleveland's economy was competitive with these other cities from a wage standpoint, Cleveland was at a labor cost disadvantage compared to those other cities. The reasons were non-wage labor costs...particularly the costs of health insurance and workers compensation.

So, our thinking went, if small businesses are creating the vast majority of new jobs, and they're at a labor cost disadvantage because health care and workers comp costs were high, then working hard to reduce health insurance and workers compensation costs would reduce the cost of creating new jobs

That's what led to a COSE health plan which reduced members' costs by 30%, and to our campaign to create an association-based workers comp program which reduced members' costs by as much as 80 percent.

Reduce the cost of labor, and you reduce an important barrier to job creation among small businesses, collectively, the country's job-generating machine.

Why is this important today?

Well, in the white noise surrounding the health care reform debate, a critical piece of research from the Bureau Of Labor Statistics showed that, between 1999 and 2009, the U.S. economy created virtually NO new jobs...almost zero...even as the U.S. population grew by 21 million people.

Net new population growth of 21 million, net new job growth of zero...this is a recipe for economic catastrophe.

Tax credits for job creation will not work if the cost of creating a new job is increasing every year, both from direct taxation (like payroll taxes) and indirect taxation, such as increases in health insurance premiums.

This is something I guarantee Our Friends In Congress are NOT thinking seriously about as they consider health insurance reform.

Despite public pronouncements, I still see nothing in the massive reform bill bumping and stumbling its way along the legislative process which even suggests reductions in the rapid increases in health insurance premiums for small businesses; in fact, most elements of health insurance reform seem destined to ADD to the hyperinflation of health insurance premiums.

This is an issue that small businesses and the people who supposedly advocate for them should be discussing at every opportunity. There is a correlation between the cost of creating jobs and job creation. Reduce the cost of job creation and, as if, by magic, jobs will grow. Increase labor costs, and job creation stops...or goes backward...among the primary job-growth engine, the country's small companies.

I'd really, really like to hear some acknowledgment on the part of Our Friends In Congress and The White House that they really get this idea. But I haven't. Because they don't.

Using Facts To Distort The Truth

Getting one's arms around objective reality in the health care reform debate can be a big challenge because the issues are so complex that one's view of the issues will almost always be affected by the part of the prism you're looking through. Here's an example:

A local Chamber of Commerce holds a half-day session on health reform for its members, which are both large and small businesses. In one break-out session, a senior executive with a big health insurer puts a graphic up on the wall. It's a dollar bill divided up five ways. "Here's the problem," he says. "Health care costs make up 65% of the health care dollar. Prescription drugs make up 10%. Our sales costs make up 10%. Administration is another 10%, and all other expenses, including our profits, make up 5%. You can't really expect health care reform to work unless it successfully addresses the rise in health care costs."

The big business guys harrumph in agreement. For their health plans, 95% of costs relate to health care services. Their insurers administer their self-insured plans for 5% of the cost of claims, and makes plenty of money.

In another room, a senior hospital executive is making a presentation. On the wall is exactly the same graphic. But the hospital executive is saying, "For many people, only 65% of what they're paying for health insurance goes to coverage of health care services; the rest is insurer overhead: drug benefits, marketing, sales, administration, and their profits. The cost of health care is going to continue to escalate until we can get those insurance costs under control, so a greater proportion of their health care dollar is actually paying for health care services."

The small business owners stand up and cheer. They know that for their companies, and for self-employed professionals, between 25% and 40% of their health insurance premiums gets allocated off the top to their insurers before a claim even gets paid. That's if they can obtain coverage at all at a reasonable rate.

Both presenters are right, of course. Just as both points of view have their constituencies in business. That's why the business community is sort of at odds with itself over the goals for health care reform.

But both presenters are also sort of fibbing. They're using the obvious shortcomings of their counterparts to distract attention from their own issues.

Think about the Anthem California case that's got everybody talking. There's no doubt that the state's economy is facing a crisis, that unemployment is rising, and that the pool of those with private health coverage is shrinking due to those market forces.

And pressure on public plans, on a grand scale, places pressure on private health insurance rates due to cost-shifting and creative expense allocation on the provider side. This will drive up health cost trends.

And because health costs NEVER go down, it's understandable that a component of a health insurance premium renewal is due to increasing health cost trends. By all accounts, the rising cost of health care accounts for 9-10 percent of premiums.

Now, the insurer says its pool is shrinking, and that's due to young, healthy people leaving their plans because their costs have gone up, leaving only older, sicker people enrolled. This, they say, is why health insurance coverage should be mandatory for everybody, so we can confidently spread the costs across a known risk pool.

Well, maybe, but...

About half of the group we call "the uninsured" are without coverage for 69-90 days in a given year. So they're folks between jobs, on layoffs, but usually not chronically without coverage. This suggests that the hard-core uninsured consists of about 24 million people.

How many of THOSE folks are uninsured by choice because they're young and invincible: Half? 12 million?

I guess this is where I stop following along with those Anthem folks.

First of all, a good Commonwealth Fund study concluded that fewer than 1 in 10 people who apply for individual health coverage through an insurance company actually end up buying it. Expense is certainly a factor, but an even more significant factor is that applicants reported having health conditions which resulted in either significant "rate-ups" in their premiums or in outright denial of coverage.

What I think all this means is that in general, Anthem's, or any insurer's individual insurance pool consists at the outset largely of younger and healthier people; the older and sicker don't get in in the first place. And that the definition of "sicker" means merely that an individual has one or more conditions, or potential conditions, that make them an unattractive risk.

But let's not focus on the one-third of Anthem customers getting rate increases in the 30-39% range. Let's focus on the two-thirds whose increases will average "only" 25%.

Medical trend is 9-10%. "All other" constitutes the other 15%, I guess.

Except, here's the biggest distortion: Anthem (or any other insurer) just gave ITSELF a 25% raise on this business.

How?...Think back to that dollar bill. For individual health coverage, over 30% of premiums are allocated to administrative costs. So when they raise premiums, they also raise the administrative cost component of those premiums.

How will Anthem justify that, in the face of state laws which restrict their administrative costs to not more than 30% of premiums? Well, when you add the 30%-plus they charge individuals, plus the 25% they charge for small groups, PLUS the five percent they charge large groups, and divide by three, you get an "average" administrative cost ratio of 20%, from which Anthem will subtract sales costs, and say with a perfectly straight corporate face that their administrative costs average at or around 10% of premiums.

And that's how, eventually, insurers get pretty much what they want. Based on the facts. They just happen not to be telling the truth.

The Anthem Fiasco: Who's Negotiating For The Small Purchaser?

Ample ink has been spilled covering the attempt by Anthem Blue Cross Blue Shield to hike premiums on its non-group customers in California by up to 39 percent. Everyone is outraged, and parties all throughout the health insurance reform debate have interpreted the case as evidence for their own versions of reform.

But while the numbers in this case are particularly attention-getting, the case itself represents merely a variation on business as usual, and points up an important issue: left to themselves, small businesses and individuals seeking health care coverage at an affordable cost can expect no help from anyone.

It's particularly telling that California's Insurance Commissioner, in a state whose insurance department is considered particularly activist (and which has been a political platform for several commissioners, including the current one, to run for higher office), is essentially powerless to deny Anthem, or any insurer, a rate increase which might be deemed excessive. The State's role is limited to determining whether an insurer's requested increase would increase the insurer's administrative costs above 30 percent of premiums.

In the vast majority of states, insurance departments' regulatory activities are limited to assuring the solvency of insurers doing business in their states.

One of the "unintended consequences" of insurance "reforms" which swept through the states in the early 90's, and culminated in the enactment of HIPAA in the mid-90's, was that insurers became much freer to raise rates for small groups and individuals without the need to provide any information, either to the states or to their customers, to justify the increase. The idea was that the "pooling of risk" made insurers treat all their small group and individual customers in the same way, so it was unnecessary to explain to customers what specific factors may have led to the rate increase being imposed on them.

The idea hasn't worked very well...unless you're an insurer.

Here in Ohio, insurers may splinter the risk pool for small businesses and individuals into as many as 36 classifications, based on age, risk, utilization, geography, industry, and a host of other considerations. Based on these factors, insurers have the right to adjust rates any way they want. For small groups, the only consideration is that the rates in the highest "tier" can't be more than 80% higher than the rates in the lowest tier. No such limitations exist for non-group coverage; it's not unusual for rates for the costliest coverage to be three times higher than the least costly coverage.

So when insurers raise rates, they do so based upon their own criteria, and upon their own "proprietary" utilization data and actuarial assumptions, which are always the most conservative (read: insurer-friendly) scenarios conceivable.

)And consider also that a 30% increase in insurance premiums ALSO means that the insurer generally pays itself a 30% raise in its administrative costs; when the rates go up, the 25-40% of premiums attributable to administrative costs goes up, too.

How about that? A 30% raise for doing no additional work, Nice work if you can get it...)

So the Anthem's assertion that the dip in its customer base was due to younger, healthier people opting out of coverage is very likely not based on documentation, but on actuarial assumptions, which may or may not be accurate, but certainly are irrefutable by anybody who matters. The rates are based on these assumptions, and if you buy the assumptions, you have to buy the rates. And since no one has any data with which to refute the assumptions...the insurers win.

So more than 700,000 insureds get their letters a state-mandated minimum of 30 days in advance of a rate increase, and their choice is to accept the rate increase or go elsewhere...if they can.

Then insurance industry is using this case as a reason to justify its call for an individual mandate. If everybody were required to purchase coverage, the line goes, then younger people participating in our health plans would expand our risk pools and stabilize our costs. Public policy experts seem to buy this idea, as well.

But what if they're wrong (as I think they are)? What if, instead, Anthem, or other insurers, decided it was necessary to increase EVERYBODY'S rates by 30%, and you had no choice but to pay the price?

What's REALLY needed is a means to consolidate the purchasing power of small businesses and individuals into groups which have the knowledge, and the mission, to push back against those proposed rate increases. The only way to establish more of a market for health insurance coverage is to enable the formation of a genuine purchasing dynamic, so that negotiations can evolve from "take it or leave it" to "let's talk."

Because today, nobody...not government, certainly not the industry...is watching the store.

Let's get a bunch of insurance exchanges launched, shall we?

The (Latest) Health Care Reform Debacle: What Went Wrong, And What to Do Next

I've been following the politics of health care reform for nearly 30 years, and I have never seen anything so bizarre as what has unfolded in DC since Tuesday's special election in Massachusetts.

There has been so much dithering about what Senator #41 means to the future of health care reform in this Congress and forward, that I can't find anything new to say about it.

Except this:

By my own crude sense of measurement, I've participated in six attempts to reform the health insurance system at the local, state, and national levels (modesty and post-traumatic stress disorder prevent me from listing the specifics, but buy me a couple of beers and I'll spill everything). Most of them not only failed miserably, but did so in a way which rendered the environment "toxic" for years to come.

Most of the failures had a few things in common. One was hubris on the part of the principals, the type which says, "we know so much more about the issues than you do; trust us, and when we solve your problems you'll be so grateful."

The second was a kind of tone-deafness which comes from sharing the same foxhole with a few other embattled souls in a nasty fight. I recall listening to a pitch from a very senior corporate executive extolling the virtues of a certain merger. I asked him after his presentation if his company was prepared for the severe public backlash that would result from his proposal becoming public. His answer: "The only people we need to persuade are in the state capitol; we don't care whether the media like us or not."

The third was an attempt to use the complexity of the issue to fog up the real questions, and try to divert the public from the simple, basic question which any reform proposal must answer: What does this mean for my health plan?

I think this is an essential element of the latest meltdown: the proponents of "reform" have, for the past six months or so, walked a very thin and fragile line of credibility, and completely forgot that most people in America already have health coverage, and like what they have, though they are concerned about what might happen in the future. So when regular people with health insurance see big expansion of government programs, subsidies for a bunch of people who already have coverage, a bunch of new bureaucratic and regulatory structures, and truly craven deals with both industry groups and individual lawmakers, they asked themselves, "What does all this matter to my health plan?" And by and large, the answer was either straightforwardly "your costs will go up," or a much more common, and much less honest, "we're pretty sure your costs might not go up quite as fast as in the past, but of course we can't be sure."

People aren't dumb.

Conversely, the reform strategies which succeeded best were those which were best equipped to answer the "What's in it for me?" question. If you can keep people's focus on the benefit to them, and talk straight to them, it's possible to sell common-sense reforms.

I hope Our Friends In Congress and the White House take this to heart as they consider how to re-package and sell a more highly-targeted health insurance reform strategy. The strategy should be based on using existing structures and programs to solve some of the real problems in the private insurance market and in our public health plans.

There's plenty both parties agree upon. Curbing the most egregious practices of the health insurance industry is a natural place to start; it was the first chapter in both the House and Senate bills. And it's hard to envision even the most flint-hearted conservative objecting to the idea of prohibiting insurers from denying or cutting off health coverage for people who are sick. Most of the House and Senate insurance reforms make sense; only insurers will object to them. Without a mandate that everyone purchase their product, there's nothing in it for them. Too bad...

It's also become common knowledge that the small group and individual health insurance markets are highly dysfunctional: highly-concentrated, inefficient and expensive. Small businesses pay 18-20 percent more for health coverage than larger companies do for the same benefits. Most of that excess cost is attributable to the costs of marketing, selling, and underwriting small group business. 25 to 27 percent of small group health premiums consist of administrative costs; for self-employed individuals, up to 40 percent of premium costs are administrative.

The small group market would benefit from a push for administrative efficiency in the health insurance market, especially through strategies which enable small businesses and self-employed individuals to take advantage of the laws of large numbers in shopping for and purchasing health coverage. Both the House and Senate agree on the potential value of insurance exchanges to encourage competition and administrative efficiency in the small group and individual health markets. There is disagreement only over whether an exchange strategy should be national or state-by-state in its scope.

In the spirit of practicality, I'd suggest we start with a series of federal grants to states which wish to establish either public or private non-profit insurance exchanges. They can be set up quickly, within three years, and have a reasonably good chance of impacting markets at the regional and local levels. Let them collaborate, share services, and merge if they want to. The most important thing is to use consolidated marketing, selling, purchasing and administration to put just a little more power into the small group customers' hands.

It's also generally agreed upon that the best way to reach the truly most vulnerable Americans is through an expansion of Medicaid. The House and Senate versions disagree merely as to the matter of degree of the expansion.

Finally, a wild card: giving Medicare the right to negotiate with pharmaceutical companies would probably enable Medicare to fill in a lot of the "doughnut hole" without a massive new subsidy.

All these measures would enable proponents to say quite clearly how health care reform will benefit them. All are based on expansions or refinements of ideas on which there is broad agreement.

The results wouldn't be perfect, but they should help our admittedly imperfect health care system to operate a little better, and make health care coverage a little more accessible and affordable.

Give these reforms five years to work. Once we can be assured that just about everyone who wants to obtain health coverage is able to do so, we may need new policy, such as a national mandate or a nationwide exchange, to fill in remaining market gaps.

I think this sort of package also has the benefit of being able to attract either enough bi-partisan support to pass easily, or enough ire toward Republicans who would be seen as obstructing the enactment of even a modest package of common-sense reforms, that it would give the White House the victory it needs.

But I'm not a Washington insider; I'm just a guy from the grass roots of America.

With The Deal Struck On "Cadillac Tax," Small Business, Like The Cheese, Stands Alone

You may have read it here first. As predicted, Congress and the Obama Administration have sought to blunt organized labor's opposition to the proposed 40% excise tax on "Cadillac" health plans by exempting health plans under negotiated labor agreements from the tax until 2018...five years after it's to take effect for everybody else.

And yet, the tax won't fall on everybody else.

The Senate version of the health insurance reform bill already exempts large employer health plans (which are usually self-insured) from any of the bill's reform requirements.

It's a blanket exemption, from plan design requirements, taxes...pretty much everything.

So, labor union plans get a pass. Large employer plans get a pass. So who's left?

Small businesses, that's who...

I wrote a couple weeks ago about how easily a health plan with even a large deductible ($1,500 for one person, $3,000 per family) can cost like a Cadillac plan, even if it doesn't look or feel like one. Because small businesses are generally denied the benefit of the laws of large numbers, they pay 18-20 percent more for their health insurance coverage than big companies do. So based on price alone, and with Congress jacked up to generate revenue, small business is once again the pigeon at the poker table.

Small business groups have won the amazing victory of exempting vision and dental plans from the Cadillac Tax computation. But the tax is still looming quite large.

Media accounts suggest that the tax will be on insurance companies, not on individuals or businesses, which is factually true but practically fatuous; the same outlets suggest that taxpayers seeking to avoid the tax would undoubtedly face either higher premiums or reduced benefits.

But the "reduced benefits" part is an illusion, too, since both House and Senate bills would cap deductibles at $2,000 for one person and $4,000 per family per year.

Of course, all this may be just so much speculation if the Republican candidate wins the special election to replace Massachusetts Senator Ted Kennedy.

But for now, estimates are that exempting labor union health plans will reduce the impact of the Cadillac Tax from $150 billion to $97 billion over ten years. Which means that, in addition to paying higher insurance premiums to insurance companies, small businesses have been set up to pay an additional $97 billion in taxes.

Remember when health care reform was about reducing the pace of runaway health care inflation, and making coverage more affordable for small businesses?

Seems like a lonnng time ago...

Is Your Health Plan A "Cadillac?" Proposed Tax Is A Clunker For Small Business

I wrote last week that the proposed 40% excise tax on"Cadillac" health plans could be a "stealth tax" imposed on small businesses whose health plans certainly don't FEEL luxurious. And a couple readers added to my concerns by contributing their own viewpoints, supported by their own reviews of the legislation.

You'll recall that the Senate's health insurance reform measure would extend a tax on the "excess value" of health plans costing more than $8500 per year for individuals and $23,500 per year for families. And I used my own experience in shopping for small group health coverage to show how even a plan with a $3,000 family deductible could generate a tax liability of over $5,000 come 2013. Largely, that's because small groups and individuals pay between 18 and 20% more for health coverage than do their big company counterparts.

Turns out the proposal is even more onerous than meets the eye. Because there are components of the "Cadillac tax" that I didn't even include in the calculation. All I counted was the monthly premiums for health coverage. A reader included some additional surprises.

Does your employer's health plan cover dental insurance? Gotta add that in, too.

Vision care? Ditto.

Does your employer contribute to a Health Savings Account to help offset the impact of that High-Deductible Health Plan? Do you contribute pre-tax dollars to a HSA? Turns out those contributions count toward the "Cadillac tax" calculation.

Does your plan include a Flexible Spending Account, which lets you use pre-tax contributions to offset co-pays and pay for other services? Toss that in, too.

Health care and dental and vision coverage. HSA contributions. Flexible Spending Accounts. These are all elements of a responsible employer-sponsored health plan, and several components are put in place by some employers to help their workers offset the cost of health care. Taxing dental and vision benefits and HSA and FSA contributions could add thousands of dollars to the potential tax liability for employers trying to do the right thing for their workers.

How are employers likely to respond? I'd suggested that employers' first step would include settling for health plans with much higher deductibles.

But another reader suggested that won't be an option. Apparently both the House and Senate bills contain provisions which will limit health plan deductibles to $2000 per year for individuals and $4000 per family.

In general, I'm a fan of limiting deductibles. With insurers marketing plans with $5000/10,000 deductibles currently, and with most employers NOT contributing to HSA's, even families with $60,000-65,000 in annual income could find themselves exposed to considerable up-front expenses before their health benefits kick in.

But if the option of increasing deductibles is off the table, employers would have no choice but to start slashing benefits. Dropping dental and vision coverage. Eliminating HSA contributions. Closing down FSA's. Or else paying a LOT of tax.

I'm neither a political leader nor an academic health care economist, but this does not strike me as "creating incentives to purchase more cost-effective health plans." It seems a LOT like penalizing employers who are struggling to do the right thing.

Here are a few related observations:

White House and Congressional leaders have sold the "Cadillac tax" as a tax on insurance companies. Really? As I understand it, the job of calculating potential tax liability would rest with employers.

This is being sold as a tad on the rich, and their generous health benefits. But the real impact would most likely be on small businesses, who pay more for insurance coverage to begin with, and on union health plans.

The larger the employer group, the lower and more uniform the per capita health care costs tend to be. For companies with 50 or fewer employees, rates are set based on the ages of the employees in the group. Even in a "community rating" environment, rates may vary significantly, with younger employees' rates which are half those of older employees. This would mean that within a company, some employees' plans could be subject to taxation and others not.

It's quite surprising that small business advocacy groups aren't SCREAMING about this expensive and counter-productive measure, which runs absolutely to the contrary of what the Administration says its health care reform goals are. Of course, these groups tend to talk mostly with Republicans, who have shut themselves out of the process, and those who ARE "at the table" tend not to want to ruffle feathers by actually being advocates; that might get them uninvited.

With the House, Senate and White House apparently agreeing to the unprecedented step of sidestepping the conference committee process in favor of private negotiations, opportunities to have any real input to the reconciliation of House and Senate bills will be pretty limited. Insider indications are that the House may accept the "Cadillac tax" provision, if its impact on some constituencies can be limited. Look for an exemption for union health benefits.

Absent some decisive leadership, public scrutiny, and/or aggressive advocacy, this tax is poised to do incalculable damage to small businesses, one of the very groups whose problems with finding affordable health coverage gave the Administration its pretext for reform.

The question remains: is this a potential "unintended consequence" of which legislative and Administration leaders are not aware, or are they intentionally misrepresenting the tax to the small business community...aided and abetted by small business advocacy groups for whom "being a player" is more important that winning the game?