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.
Wednesday, October 27, 2010
Monday, September 13, 2010
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.
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.
Tuesday, September 7, 2010
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.
"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.
Wednesday, August 11, 2010
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.
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.
Friday, July 23, 2010
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.
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.
Monday, June 21, 2010
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...
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...
Thursday, May 6, 2010
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...
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...
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