Betting on Health Care Reform

At least investors think health care reform will be happening some time soon.  The Wall Street Journal reported that managed care stocks fell after Obama asked Congress to take an up or down vote Wednesday afternoon.  It might be wishful thinking (or dreadful, depending on which way you look at it) for the investors who are moving their investments from managed care plans.  With Congress members still treating health care reform as a game of cat and mouse, whether a vote will happen and whether the vote will be for reform is yet to be determined.

Take for instance Nathan Deal, a Republican from Georgia, who is purposely postponing his resignation from the House until a vote on health care happens so that he can get his nay vote in.  Then, there is the promise from Senate Republican leader Mitch McConnell to repeal health care reform before it has even been passed.  And despite Wall St. estimations to the contrary,  with the complications of reconciliation, the prospect of getting a bill that actually creates a mass exodus out of managed care seems at least somewhat iffy.

Interestingly, as the Washington Post revealed on Wednesday, private insurance companies, such as the infamous WellPoint, will be the primary beneficiaries of a failed health care reform attempt.  As Ezra Klien stated:

The argument is simple: Wellpoint’s business model is uncommonly concentrated in the individual and small-group markets. Those are the exact markets that health-care reform will drastically change. Those are the markets where people get rejected for preexisting conditions, where insurers spend 30 cents of every premium dollar on administration and where rate hikes are volatile and constant. Health-care reform wants to change all of that, and if it does, Wellpoint’s business model will be changed, too.

It would seem, then, that health care reform would not be difficult to carry through in considering who stands to win and who stands to lose if reform is not passed.  One of the major barriers is the Republicans’ animosity towards using reconciliation to pass a final health care bill, an idea they consider foreign to the democratic process.  However, as NPR just reported this past week, reconciliation is not “unprecedented,” and in fact, it has been used many times in the course of our country’s history to pass similar bills.  COBRA, Children’s Health Insurance Program (CHIP), and changes to Medicare have all happened through reconciliation.  Moreover, between 1981 and 2008, 16 out of 21 reconciliation bills were Republican initiatives.

Without a final vote on health care soon, many worry that the momentum will be lost.  Many members of Congress, steadfast in their platform promises, are not helping the process move any quicker.  In the meantime, insurance companies continue to prosper; Americans continue to pay the price.

High-Risk Pools: a Precarious Pillar of Republican Reform

At the Health Summit last week we were able to more fully observe the Republican vision for reforming health care. A constant idea that the Republican leadership came back to was the concept of “high risk pools.” But what are high risk pools, and what potential do they have to lower costs?

High-risk pools are state-run programs that provide insurance for those who suffer from pre-existing conditions or have some other issue that makes them “medically uninsurable.”  They are often utilized by those in limbo who were previously covered by an employer’s group coverage, but for whatever reason are now relegated to the veritable disaster that is the individual market. Currently, 34 states have high-risk pools, with the combined number of insured from those pools at 200,000. (See Kaiser Family Foundation, State High Risk Pools: An Overview). As noted by Kaiser, coverage is typically at 125% to 200% of the standard market rate for health insurance.  In some states, the high-risk pool insurance costs as much as $14,000 per year. Thirty states offering high-risk pool coverage have waiting periods before pre-existing medical conditions can be covered.

Edmund Haislmaier of the Heritage Foundation has provided a succinct and helpful discussion of the relationship between high-risk pools and the related concept of “reinsurance.”  Haislmaier breaks down these risk-transfer tools into two groups: “inclusionary” and “exclusionary” risk-transfer mechanisms:

The “exclusionary” mechanisms segregate high-risk individuals from the low-risk population, subsidizing them in a separate pool. The “inclusionary” mechanisms keep high-risk individuals in the same pool as everyone else but seek to redistribute and/or subsidize their more expensive claims.

A common exclusionary mechanism is a state-run “high-risk pool” for the individual health insurance market. The pool offers coverage to people who have been refused coverage in the individual market due to poor health status. Although coverage carries high premiums, the premiums are not enough to cover the cost of claims by enrollees. To make up the difference, lawmakers use a mix of assessments on private insurers and public subsidies. In some states, the losses are funded entirely out of assessments on insurers and, thus, ultimately included in the premiums paid by everyone with health insurance coverage. In other states, the losses are funded primarily out of general revenue appropriations and, thus, are ultimately born by all the state’s taxpayers. Still other states use a mix of both funding sources.

Inclusionary risk transfer mechanisms operate on essentially the same principle, except that high-cost individuals are not given separate coverage. Instead, some portion of their claims is pooled and then proportionately redistributed among the carriers in the market. As with high-risk pools, public subsidies may also be used to offset some of the cost of claims. This type of mechanism is often called, somewhat inaccurately, a “reinsurance pool.” A more precise termed is “risk-transfer pool.”

Notably, Haislmaier recognizes that high-risk pools offer little help when it comes to the true goal of health reform: reducing costs:

Regardless of design, risk transfer mechanisms only shift or redistribute costs among funding sources. Specifically, risk transfer mechanisms offer ways to more equitably redistribute the costs of a small number of expensive cases or individuals across a broader population. While these features enable health insurance markets to function more smoothly, they are not a solution for controlling health care costs in general.

This is noteworthy coming from the Heritage Foundation. However, to be sure, high-risk pools are not peculiar to Republican health reform proposals. Both the House and the Senate bills provide for high-risk pools. The follow table is from The Kaiser Foundation’s paper “High-risk Pools: An Overview”:

The important row of the above table is “Timeline.” Whereas the House and Senate bills utilize high-risk pools as a temporary measure to provide insurance to those with pre-existing conditions before the exchanges take shape, the Republican proposal would implement risk transfer mechanisms as the primary means by which individuals with pre-existing conditions can obtain coverage. For those purchasing on the individual market, the Republican proposal would provide federal funding for state-run high-risk pools. Reinsurance mechanisms would operate in the small group market.

This is in contrast to both the House and Senate proposal which both prohibit the insurance exchanges  from denying coverage because of an applicant’s pre-existing condition–thus negating the need for high-risk pools.  Instead of subsidizing high-risk pools that would segregate the sick from the healthy, the individual mandate in the Democrats’ bill would ensure that the costs of high-risk and currently sick individuals would be spread throughout the exchange.

As Haislmaier noted, it is unclear how risk transfer mechanisms would lower health care costs. For example, whereas exchanges would increase competition by making the purchase of health insurance more accessible, high-risk pools and reinsurance would not alter the current maze that is the individual insurance market.   It is somewhat remarkable that the Republicans opt for high-risk pools instead of a proscription against pre-existing condition preclusions, especially given the public disdain for pre-existing condition preclusions. But the Republicans have little choice. Since they are wholly opposed to the individual mandate, insurers and states running high-risk pools under the Republican plan would not have healthy individuals paying into the system to offset the cost of sick insureds.

Why Angela Braly, CEO of the WellPoint Insurance Co., Deserves a Raise

Angela Braly, CEO of  health insurance giant WellPoint, deserves a raise. As regular readers of this column know, Ms. Braly did not make as much as Aetna’s Ronald A. Williams in 2008.

In a post written back in May of 2009 I noted of Insurance Company CEO Total Compensation:

Aetna’s Ronald Williams received $24,300,112 last year. That’s $467,309.85 per week. That’s a house. Maybe not a house that Mr. Williams would live in, but a house nonetheless. The man makes a house a week. And interestingly enough, if Mr. Williams were to eschew the purchase of a house on any given week and instead look to deposit the money in a bank– in order to remain FDIC insured (up to $250,000)– he would actually need to open more than one account–every week. Lest we lament the fate of the other CEOs on the list, in 2008 Ms. Braly had to get by on $189,311.76 per week….

Less than half of what Mr. Williams brought in, in 2008 Ms. Braly was forced to make ends meet on $9,844,212.

In 2007, her first year on the job: $9,094,271. Which, for those keeping score at home, is $174,889.83 per week. Her predecessor at Wellpoint, Larry Glasscock, received  $23,886,169 in total compensation in 2006. Again, in 2008 Ms. Braly had to get by on $189,311.76 per week. True, it was $14,421.93 more per week than she had made the year prior, but that won’t be nearly sufficient for this year.

So why does Angela Braly deserve a raise? Pay so high that the  FDIC limits on insurance (yes, it’s somewhat ironic) won’t work for her weekly paycheck? Because WellPoint subsidiary Anthem Blue Cross of California has found the audacity to raise individual insurance premiums in that state 39%. That’s right, 39%. This, according to Secretary of Health and Human Services Kathleen Sebelius, “as WellPoint Incorporated, has seen its profits soar, earning $2.7 billion in the last quarter of 2009 alone.”

Profits “soar,” raise rates. What more could Wall Street want?

Secretary Sebelius has demanded “justification” for the increase. In a letter sent to the Wellpoint subsidiary Anthem Blue Cross, she writes:

One of the biggest pressures facing families, businesses and governments at every level are skyrocketing health insurance costs.  With so many families already affected by rising costs, I was very disturbed to learn through media accounts that Anthem Blue Cross plans to raise premiums for its California customers by as much as 39 percent. These extraordinary increases are up to 15 times faster than inflation and threaten to make health care unaffordable for hundreds of thousands of Californians, many of whom are already struggling to make ends meet in a difficult economy.

Your company’s strong financial position makes these rate increases even more difficult to understand. As you know, your parent company, WellPoint Incorporated, has seen its profits soar, earning $2.7 billion in the last quarter of 2009 alone.

And there you have it, profits soar, raise rates, the stock soars–as will, presumably, Ms. Braly’s stock options. She won’t have “to get by on $189,311.76 per week” for all that much longer. With that kind of move it’s only a matter of time before she finds herself in Mr. Williams’ neighborhood.

Now that the healthcare reform debate awaits its Summit, from the vantage point of its nadir, one might imagine other Insurance Company CEO’s to embark upon a similar strategy. Good thing we jettisoned all those proposed pesky insurance regulations contained in the House & Senate bills.

Because it never gets old to me, here’s the list of Insurance Company CEO Total Compensation:

Res Ipsa Loquitur.

Ins. Co. & CEO With 2007 Total CEO Compensation

• Aetna Ronald A. Williams: $23,045,834
• Cigna H. Edward Hanway: $25,839,777
• Coventry Dale B. Wolf : $14,869,823
• Health Net Jay M. Gellert: $3,686,230
• Humana Michael McCallister: $10,312,557
• U.Health Grp Stephen J. Hemsley: $13,164,529
• WellPoint Angela Braly (2007): $9,094,271
  L. Glasscock (2006): $23,886,169

Ins. Co. & CEO With 2008 Total CEO Compensation

• Aetna, Ronald A. Williams: $24,300,112
• Cigna, H. Edward Hanway: $12,236,740
• Coventry, Dale Wolf: $9,047,469
• Health Net, Jay Gellert: $4,425,355
• Humana, Michael McCallister: $4,764,309
• U. Health Group, Stephen J. Hemsley: $3,241,042
• Wellpoint, Angela Braly: $9,844,212

See Nonprofit Health Related CEO Compensation Here.

NY State Senator Eric Schneiderman, Ian’s Law & the Insurance Company Two-Step

Interesting conversation over at WNYC on The Brian Lehrer Show: New York State Senator Eric Schneiderman (D-Manhattan/Bronx) was interviewed about legislation he and State Senator Neil Breslin (D-Delmar; Insurance Committee Chair) recently introduced called “Ian’s Law.”

Ian’s Law is meant to combat an insurer practice whereby insurers attempt to rid themselves of costly policies through a two-step process which circumvents state laws which forbid insurers from dropping policy holders because of conditions which require costly care.

The Insurance Company Two-Step, How it Works

Because insurers are forbidden by NY State law to drop individuals because of costly care, the insurer merely drops an entire class or group of people and then re-offers policies to that group– but omits coverage in the newly “re-offered” policies for the specific kinds of care which the costly care individual needs, and the insurer had formerly paid for. So… if someone has a chronic condition, which requires say… regular or  continuous skilled nursing care, the insurer just drops the entire group, and then offers everyone in that group a policy that does not include regular or continuous skilled nursing care. Voila! Pretty much everyone except the person who needs the skilled nursing care accepts and “re-applies” and the problem is solved. Two steps, no violation of the law and no more having to pay for all that costly care.

The following comes from Sen. Schneiderman’s website and describes Ian’s law and the litigation which brought the practice to light.

The bill is named for Ian Pearl, a 37-year-old man with muscular dystrophy who lost his insurance when Guardian, acting under current New York law, terminated the entire class of policies in the State  that covered Ian and others. Mr. Pearl became ventilator-dependent in 1991 and relies on a skilled nursing benefit under his insurance policy to receive care that has kept him alive since he suffered respiratory arrest.

The Pearl family charged in court that Guardian terminated the entire class of policies in New York in order to get around the fact that New York law prohibits an insurance company from dropping the policy of an individual simply because he or she needs care. An internal document from the insurer, released as a result of a legal challenge, showed that company officials justified dropping the entire line of policies statewide in order to get rid of “the few dogs”, like Ian Pearl, who were filing claims. Guardian, which denies any wrongdoing, has since settled with the Pearl family and restored Ian’s coverage.

In the interview with Brian Lehrer Senator Schneiderman said that the practice is “actually not limited to one company or one individual” and that “the litigation that Mr. Pearl brought revealed internal documents showing that they [the Insurance Co.] actually were scanning through their list of expensive patients preparing what they called “hit lists” of people who they were really trying to find a way to get rid of.” As noted in the quote above, these expensive insureds were referred to as “dogs.”

And that, in a nutshell is for profit health insurance. But I think there may be a larger lesson here as well. In many ways, this practice is not very different than the design of  “wellness incentives” substituting for pre-existing condition discrimination and penalties, a topic we covered just a little while back:

It may also be useful to consider how, in practice, “incentives” have been utilized by employers in the marketplace. By engaging in a two-step process, an employer may rather easily render a “wellness incentive” into a preexisting condition premium.

The Washington Post reports that

Valeo, an auto parts supplier, four years ago raised the deductible on an employee health plan to $2,200 from $200 for individual coverage and to $4,400 from $400 for family coverage. Then it gave employees the opportunity to reduce the deductible to its starting point by not smoking and by meeting goals for blood pressure, cholesterol and body mass index, said Robert Wade, Valeo’s director of human resources for North America.

“If they don’t comply, they end up being penalized, if you will, but we refer to it as a Healthy Rewards program,” Wade said.

And the point is this–Insurers hire the best and brightest they can find, and almost any legislation or regulation meant to protect the public from unconscionable unfairness is just one smart executive and two steps away– maybe three– from being danced around.

Repealing Insurers’ Antitrust Exemption Under McCarran-Ferguson: Less There Than Meets the Eye?

Tim Greaney, Saint Louis University School of Law

The House Judiciary Committee’s vote (20-9) to send H.R. 3596 , to the floor has been heralded by proponents as providing a significant spur to competition in health insurance. Sorry to rain on this parade, but there is less here than meets the eye.

The bill  would repeal, but only in part,  the McCarran-Ferguson Act’s limited exemption from antitrust law for health and malpractice insurers. The bill narrows McCarran’s reach, providing that “nothing in that act shall be construed to permit  insurers “to engage in any form of price fixing, bid rigging, or market allocations in connection with the conduct of the business of providing health insurance coverage or coverage for medical malpractice claims or actions.” A Senate bill with broader effect was the subject of hearings by the Senate Judiciary Committee last week.

Although, as I’ve argued elsewhere, competition in health insurance markets has been less than robust, the case law reveals only a handful of instances in which the exemption protected anti-competitive conduct in the health care sector. The most prominent example, Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), involved an HMO’s challenge to the exclusionary effect of the dominant insurer’s pricing policy and its offering a rival HMO product. Ironically, this conduct would not appear to be covered by H.R. 3596 and hence would remain immune from antitrust scrutiny.  In addition, the Supreme Court has narrowly interpreted McCarran-Ferguson requirement that only the “business of insurance” is exempt; hence insurers’ actions vis a vis providers is not exempt.  Moreover, it appears that health insurers do not engage in the kind of activities that are most clearly protected by McCarran-Ferguson, viz. joint forecasts of future medical costs and cooperative ratemaking.

Despite these reservations, repeal is not altogether a bad idea.  Most antitrust authorities agree McCarran-Ferguson is not needed to protect pro-competitive conduct, which already is well-insulated under modern antitrust doctrine.  For example, the Antitrust Modernization Commission (a blue ribbon –and very mainstream– panel that examined antitrust policy a few years ago) concluded that McCarran-Ferguson immunity was unnecessary to accomplish the Act’s goal of allowing insurers to collect, aggregate, and review data on losses so that they can better set their rates to cover their likely costs. Insurance companies, it found, “would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings.” When insurers engage in anti-competitive collusion “they appropriately [should] be subject to antitrust liability.” Moreover in insurance lines other than health, such as property/casualty, the exemption may protect collective price fixing with few offsetting benefits for consumers.

It is also noteworthy that the Department of Justice stopped short of endorsing repeal.

Assistant Attorney General Varney testified as follows:

In sum, the Department of Justice generally supports the idea of repealing antitrust exemptions. However, we take no position as to how and when Congress should address this issue. In conjunction with the Administration’s efforts to strengthen insurance regulation and states’ role in setting and enforcing policies, the Department supports efforts to bring more competition to the health insurance marketplace that lower costs, expand choice, and improve quality for families, businesses, and government.

This carefully-worded statement (”in conjunction with …efforts to strengthen insurance regulation and states role in setting and enforcing policies“) seems to signal that the Justice Department is worried about hamstringing state regulatory efforts by allowing parallel antitrust scrutiny of insurance industry practices.  But I would have expected the Antitrust Division to take precisely the opposite position.  Perhaps the strongest argument for repeal of McCarran-Ferguson (and also redefining the state action doctrine) is that a system that relies on extensive state-based insurance regulation (and perhaps state-run exchanges) risks undermining the consumer benefits of competition should regulators become beholden to insurer or provider interests. If history is a guide, this is a legitimate concern.

Consumer Protection in a Reformed Health Care & Insurance System

Implementation is critical to the success of translating universal coverage into access to appropriate health care for all.  Sound follow-through demands the design and execution of well-tailored consumer protection regulations. The first step is a prohibition of underwriting or rating decisions based on preexisting illness.  Insurers have agreed to this reform, as a quid pro quo for the millions of new customers they’ll get from coverage mandates.  Universal coverage and this prohibition of discrimination go together.  Insurers are right that it doesn’t make business sense to ignore preexisting illnesses if consumers can wait for illness to appear before contributing to the insurance pool.  They seem to agree that coverage mandates can adequately do the work of preexisting illness exclusions, rendering them superfluous.

Insurers’ position on non-discrimination would clearly change if folks like Rep. Tom Price (R. Ga.) have their way.  Price objects to mandates because they would allow the government to define “insurance” thereby disadvantaging some forms of currently-marketed coverage, such as bare-bones and HSA-linked consumer-driven products.  But underinsurance has been devastating the American middle class for years; real reform must establish basic levels of fiscal security, as well as medical coverage.  Representative Price’s attack on standards is, then, merely a back door attack on universal coverage.  It is a necessary package deal: either we have universal coverage with an end to preexisting illness exclusions, or markets will continue slicing and dicing “insurance,” leaving huge gaps in coverage. Read more

Competition among private plans: Who is served?

Our private health insurance marketplace works poorly.  Commentators including Jacob Hacker, and many Democratic legislators, argue that the creation of a public plan to compete with existing private plans will assist in the dual tasks of improving quality and reducing cost inflation.  Responding today to these assertions in a NYT Op-Ed, David Reimer and Alain Enthoven argue that there is a role for government in a reformed health finance system, but not as a market participant.  Rather, they argue, it is as a regulator that government can cure the ills of our poorly functioning insurance marketplace.  Implementing their vision might or might not benefit well, low-cost workers; it would not, however, help those with chronic illness and other high-cost insureds — those who need coverage the most.

Reimer and Enthoven argue that government-run exchanges can adequately address market failure in the health insurance market, allowing well-regulated private insurers to compete in terms of price and quality.  The exchange would ease consumer comparisons of insurers by limiting incentives (tax or otherwise) to a benchmark created by reference to the lowest-price qualifying plan.  As consumers would then be required to pay any excess out of pocket, plans would be incented to stay at or close to the benchmark price, driving cost pressure down to providers, thereby reducing health inflation.  At relatively uniform prices, plans would presumably distinguish themselves by putting together “good, economical plans.”

The argument over whether the market for purchasing health insurance could operate in a classically efficient manner, at least absent distorting outside influences, is long-running.  Enthoven has argued the affirmative vigorously and ably for decades.  Tim Jost and others have argued that classical economic analysis is largely inapplicable to the market for health insurance because the timing of the purchasing decision confounds consumer decision-making, and because health care is a sufficiently special good that we are unlikely to hold people to their restrictive ex ante decisions as to coverage.

Let us for the present accept that a market for health insurance, well-regulated as Reimer and Enthoven suggest, can produce “good, economical plans” for the average consumer.  This would occur because insurers would seek to enroll as many of these average consumers as possible, and to maintain good service and low pricing to keep them enrolled.  But, as I described previously,  there is a class of people insurers would not welcome.  Health care costs are heavily concentrated in the sickest 10% of consumers, and many of the most expensive users are easily identifiable in advance because they have chronic illnesses.   Rational, self-maximizing insurers would shun these consumers absent some risk-adjustment payment Reimer and Enthoven do not mention, and that indeed appears not to exist to an extent adequate to reasonably combat insurers’ selection bias.  Insurers can be required to offer them coverage, even to provide coverage for chronic care services.  But will rational, self-maximizing insurers serve them well, left to their own devices?  Why would they, if they could discourage their patronage by providing lackluster care coordination, home care, physical therapy, and other services that are markers for expensive chronic illnesses?  We ought not rely on self-interested market participants and expect them, all else being equal, to act contrary to their own self-interest.

Competitive private markets for health coverage might make sense if health costs were homogeneously spread, or even if high costs occurred unpredictably.  In a world where a large number of Americans are predictably poor bargains for insurers due to known chronic conditions, we need, as an option, an entity whose sustainable, reliable mission is to provide good, economical coverage for those who most need care, and who incidentally represent a substantial portion of our health care budget.  If committed public plans show the way to excellent chronic care coordination, we will be able to judge the efforts of private insurers in this important regard; otherwise, the needs of the chronically ill can too easily be swept under the rug.

Jost on Cooperatives

In the last post, I introduced Timothy S. Jost and his case for a public insurance plan option. Jost has also recently addressed the new “middle ground” between a public option and the status quo: cooperatives. I’m honored to print his analysis below on our blog.

Are Cooperatives a Reasonable Alternative to a Public Plan?
by Timothy S. Jost

First, a word about history. We have tried cooperatives before. During the 1930s and 1940s, the heyday of the cooperative movement in the United States, the Farm Security Administration encouraged the development of health cooperatives. At one point, 600,000 mainly low-income rural Americans belonged to health cooperatives. The movement failed. The cooperatives were small and undercapitalized. Physicians opposed the cooperative movement and boycotted cooperatives. When the FSA removed support in 1947, the movement collapsed. Only the Group Health Cooperative of Puget Sound survived. Over time, moreover, even Group Health, though nominally a cooperative, has become indistinguishable from commercial insurers–it underwrites based on health status, pays high executive salaries, and accumulates large surpluses rather than lower its rates.

The Blue Cross/Blue Shield movement, which also began in the 1930s, shared some of the characteristics of cooperatives. Although the Blue Cross plans were initiated and long-dominated by the hospitals and the Blue Shield plans by physicians, they did have a goal of community service. The plans were established under special state legislation independent from commercial plans. They were non-profit and, in many states, exempt from premium taxes. They were exempt from reserve requirements in some states because they were service-benefit rather than indemnity plans and because the hospitals and physicians stood behind the plans. They were exempt from federal income tax until the 1980s. In turn, they initially offered community-rated plans and offered services to the community, such as health fairs. In some states their premiums were regulated and they were generally regarded as the insurer of last resort for the individual market.

Over time, however, the Blues lost their focus on community service and began to look more and more like their competitors. They abandoned community rating (which, realistically, they could not maintain when faced with competition from experience-rated commercial plans) and began to impose underwriting and cost-sharing requirements indistinguishable from the private plans. Although providers lost control of the Blue plans, the plans never took a leadership role in bargaining aggressively with providers, despite their market dominance in many states. Many of the largest Blue plans became for-profit, and those that remain non-profit are largely indistinguishable from commercial insurers. Although the national Blue Cross/Blue Shield association offers some coordination services to local plans, it has not resisted the move of Blue plans away from a community-service toward a for-profit orientation. Lacking a national focus on public service, state and regional plans have become indistinguishable from their commercial competitors.

Blue plans are not the only non-profit insurers that survive. Many church and fraternal organizations have their own non-profit plans. Although these plans often try to serve their communities, they usually have a small presence and little bargaining power in most communities in which they operate; tend to insure individuals and small groups, the most costly market; are often the victims of adverse selection; usually underwrite much like commercial plans; and tend to offer low value, high cost-sharing policies. They are not a model on which to build national reform. Mutual insurers are also in theory owned by their members. They also, however, are indistinguishable from for-profit insurers in most states.

What can we learn from this history? First, health care cooperatives are, in fact, an American response to health care reform. Cooperatives and non-profit insurers were there before for-profit commercial insurers entered the health insurance business, and we could try to revive the idea again.

But why would state or locally-run cooperatives be any more successful now than they were when we tried them before?

First, it is hard to imagine how they would get underway. Capitalization and critical size were problems before and would likely be problems again. Senator Conrad’s recent draft suggests that members of the coops would elect their boards, and that the coops would then obtain state licensure as mutual insurers, meeting state standards for solvency and reinsurance (with the help of federal seed money). But there is a chicken and egg problem here. Until the coops had members they could not have a board. Until they had a board, how would they meet licensure requirements? The state coops, moreover, would, under Conrad’s proposal be supervised by a national board, but the national board would be elected by the state coops. Again, the state coops would presumably not be able to get underway until the national board provided policy guidance, but the national board could not get underway until the state coops were formed to elect it. None of this makes sense.

Second, there is every reason to believe that small, state run coops would fail like their predecessors did in the 1930s and 1940s. Unless they reached the critical mass necessary to bargain effectively with providers, to accumulate reserves, and to compete with national private insurance plans, they would be doomed to failure. Even if they managed to succeed here and there, they would contribute nothing to a national effort to control costs, drive value, and make affordable care accessible.

Third, if state-run coops in fact, against all odds, became large, successful competitors for insurance business, what would keep them from following the course of the Blue and mutual plans before them? Without strong Congressional direction and a unifying national leadership, what could keep them focused on cost control, quality improvement, transparency, and service rather than simply becoming indistinguishable from their commercial competitors? How would they drive the delivery system change we need?

Fourth, how does setting up cooperatives on a state-by-state basis drive national health care reform? Each state currently can set up cooperatives if it wishes to, but none have done so. Why would states suddenly embrace this concept? And what assurance do we have that they would pursue anything like a common strategy? To approach this issue on a state-by-state basis is simply to surrender on national health care reform. A federal fallback plan to be implemented in the future is also unlikely to work. HIPAA contained a federal fallback plan for states that failed to implement reforms in the individual market, but it was poorly implemented and eventually abandoned. To revert to a state-by-state approach is to surrender on national health care reform.

What Would Make the Cooperative Concept Work?

In fact the cooperative idea in itself is promising. The proposed cooperatives look much like the social insurance funds of Germany and of other central European states. Those funds are governed by their members and do a comparatively good job of keeping health care costs in check. But they operate in a strong framework of national laws and under the guidance of national leadership.

The only viable strategy is Senator Conrad’s Option 2–-a federal charter to license and regulate a national non-profit coop, with coop governance prescribed by Congress. Leadership could initially be appointed as directed by Congress to represent consumer, labor, and small business interests, and thereafter be elected by the membership. The federal government could provide seed funding to assure initial solvency, but thereafter the coop could be self-supporting. It would be financed through premiums, and compete on a level playing field with private insurers (although some account would have to be taken of the fact that private insurers, no matter what underwriting rules were imposed, would still dump high-risk insureds into the coop). Some administrative functions could be delegated to the regional level, much as Medicare Advantage or drug plans are administered at the regional level. Regional councils could also be elected by members, who could have a role in selecting the national board and an influence on national policy.

A national cooperative could perhaps compete effectively with national private insurers. It could perhaps bargain effectively with providers, including global pharmaceutical firms and national hospital chains. It is possible that it could drive creative national quality initiatives and provide national data on health care use. It would not be government-run insurance, the great fear of the American right. But it could perhaps provide a national solution for a national problem. It will not happen on its own, however. It will only work with concerted and probably long-lasting support from the federal government.

Jost on the Public Plan

Timothy S. Jost is one of the leading figures of the American health law academy. He has unparalleled knowledge of comparative health law, which he’s applied to the American debate in an impressive series of articles and books.

When I heard that Jost was writing on current debates, I really wanted his insights on our blog. Here is the first part of an essay he wrote making a case for a public option, which 83% of Americans support.

Why Public Plan Choice?
by Timothy Stoltzfus Jost

One of the most significant and innovative proposals of the 2009 health-reform debate has been the concept of public plan choice. Although the exact features of a public plan have not been specified, the public plan concept offers several significant benefits:

Cost control. Health reform cannot happen unless we can control the continual upwards spiral of health care costs. The public plan would control costs in three ways. First, it would be able to keep its costs down by not having to make a profit and by avoiding many of the administrative costs incurred by private insurers. Second, it would introduce competition into the health insurance industry. Although there may be, as Karl Rove asserted yesterday, 1300 health insurers in the United States, health insurance markets are segmented into the large group, small group, and nongroup markets and within each of those categories competition is exceedingly local. In 36 states, 65% of the small group market is controlled by 3 insurers; in 16 states one insurer controls half of the market. In any one locality, moreover, the market is even more concentrated. In my home town of Harrisonburg, Va., one insurer controls 86% of the market.

Private insurers simply do not compete; they simply take prices from providers and pass them on to consumers, driving the health care price spiral. A national public plan would introduce vigorous competition into every part of the country, forcing private insurers to compete for business and to bring down their premiums. Third, a national public plan would also have the bargaining clout to make providers moderate the increase in their prices, bringing down the cost of health care itself.

Choice. Right now the only choice available to most Americans is private insurance and, in many markets, small businesses have only a choice of one or two insurers. Americans want to have alternatives to choose among to best meet their needs. A public plan offers this.

Delivery System Reform. A national public plan could drive delivery system reform and improve the quality of care, as Medicare has been doing through its demonstration projects, payment reforms, and consumer information initiatives.

Transparency and Accountability. One of the most important developments in the health care reform debate over the past decade has been the data that has emerged from the Dartmouth research group on variations in health care spending. This data, discussed by Atul Gawande in his widely noted recent article on health care costs and the President in his speech at Green Bay, could only be collected because Medicare data are available to researchers. No comparable research can be done on the under 65 population because private insurers regard whatever data they have to be proprietary. Private insurers are also much more secretive about their coverage and utilization review policies. A public plan could make anonymized data available to researchers and be open with its subscribers about coverage and utilization policies.

A National Strategy. We have waited for decades for the states to make affordable health care available to Americans. A few have tried, most have failed. None have developed an effective alternative to private insurance. All Americans are experiencing the same problems with health care–lack of access, high costs, and uneven quality. We need a national strategy for health care reform that will help all Americans, not just some. We also need a national public plan that offers uniform benefits to all Americans and national bargaining power.

Market Entry by Health Care Cooperatives: Neither Quick Nor Easy

The idea of establishing regional cooperatives, advanced as an alternative to President Obama’s public plan option, has attracted attention as a means of assuring that health reform legislation contains some means to improve competition among health plans around the nation. But the proposal, which may have superficial appeal as a “middle ground” between a public plan option and an unchecked private market, is ill-equipped to fix the key problems a public plan would address. In addition, recent experience teaches that timely and effective entry by such plans is unlikely.

The first issue is whether a cooperative, organized by consumers or other groups, can effectively deal with the shortcomings of the existing delivery system and insurance market. Thus far, the proposal advanced by Senator Conrad is pretty sketchy, but are grounds for skepticism. A central reason for having government sponsored plans is to allow the efficiencies of Medicare’s well-established administrative structure and innovative payment experiments to carry over to the private sector. Coops provide no such advantage. A second advantage of public plans is that they would likely achieve some bargaining leverage by virtue of their probable role as insurer for people representing higher risks whom private insurers find some methods to avoid. Hospitals and physicians will be hard pressed to bypass such a significant presence in the market and the public plan can thereby exert market-wide pressure to keep provider and pharmaceutical costs down. Whether co-ops will be willing to undertake the role of covering such individuals or able to sponsor innovative delivery systems to treat them is far from certain.

In any event, it is hard to envision numerous regional coops gathering the necessary data, experience and reputation to serve as a benchmark or counterweight to dominant hospitals and provider groups across the country. Further, there is a serious question regarding the independence and mission of coops. It is a mistake to assume that nonprofit entities will necessarily work to the advantage of the public. Unfortunately, our experience with nonprofit hospitals and HMOs suggest that they can easily be persuaded to play along with other providers and may not always vigorously pursue their charitable mission. Keeping cooperatives’ eye on the ball would require close attention to the control and governance of such entities.

The second objection is based on timing and practical considerations. There is ample evidence from our experience with health insurance markets that developing effective coop-sponsored plans will not come easily or quickly. It is clear that new entrants into health insurance markets face a host of obstacles. The prevalence and magnitude of entry barriers is evidenced by the dominance and profitability of existing insurance plans. One or a handful of companies dominate most health insurance markets around the country and these firms have enjoyed consistent and robust profits. Economic theory would suggest that such profit opportunities should have invited entry by rivals eager to capture some of the profits available in those markets.

Additional proof of the obstacles to entry are found in the investigations by insurance commissioners into proposed mergers in their states. In Pennsylvania for example, the proposed merger of Highmark and Independence Blue Cross would have combined the dominant insurers in two large distinct geographic regions of the state. Evidence provided to the State indicated that numerous attempts by regional and national firms such as Aetna and Coventry to enter both markets had proved unsuccessful over the years. Expert studies suggested that a variety of factors including brand loyalty, difficulties in securing physician and hospital network contracts, regulatory and information gathering costs, and obstacles created by the contracting practices of incumbent providers, thwarted entry. Newly formed coops needing to acquire expertise and develop networks will surely face enormous difficulties penetrating markets.

Making the Case for the Public Plan, Part II: Public Option as Private Benchmark

Ezra Klein has given a nice explanation of the advantages of public options in our health insurance ecosystem. He summarizes three different types of options that could develop, including a “trigger plan” (which be “triggered into existence [where] the private insurance market” failed), a “weak public plan” (which “couldn’t use the low rates that Medicare sets” and would just act as another insurer) and a “strong public plan” (which would basically be modeled on Medicare). Klein argues that, whatever public plan were adopted, “The existence of another option changes the market. Individuals will have access to private insurers, but they’ll no longer be stuck with them.”

I agree with Klein that a public option can help us achieve the trifecta of health reform–increasing access, reducing costs, and improving quality. Tyler Cowen challenged Klein today, and I’ll try to answer Cowen.

First, Cowen argues that the public plan will be very expensive, for if “public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.” Even if that’s the case, other industrialized nations have used prospective and retrospective risk adjustment to level the playing field between plans. As I noted yesterday, even private health insurance lobbies have conceded that “spread[ing] costs for the highest-risk individuals” is necessary to guarantee coverage for all. Risk-adjustment should not be seen as a subsidy—rather, it’s a way to keep a level playing field between the public and private plans.

Private insurers’ apparent acceptance of risk-adjustment may seem irrational if you think that they are only in the business of trying to gain the healthiest customers and shed the sickest. Tempting as it is, that cream-skimming is only one part of the broad range of things that insurers do. Many large insurers make substantial “administrative services only” revenue–for example, by administering self-insured employers’ plans. (In that way they avoid financial risk from sick insures–that risk is assumed by the employer funding the plan). Risk adjustment would further reduce their incentives to avoid people with pre-existing conditions. In terms of quality, private insurers can compete with the public plan on several dimensions, including identifying good providers, incentivizing best practices, and fairly determining access to treatment and payments for providers.

It’s that last function—coverage and payment determinations—where the public plan really has a chance at improving insurance for everyone. Today’s default for private insurers is secrecy in pricing, and opaque “gotchas” buried in thick plan documents. As Uwe Reinhardt has noted,
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Health Insurance Administrative Costs to Doctors = $31 Billion Per Year

Back in January, in a post titled Health Care and Productivity, a National Cost, I had occasion to write a line or two about the affect of insurance paperwork upon my family physician, whom I had just seen. I ventured then in a roughshod way (I was sick), that such would impact his productivity, and consequently that of the nation:

…if my family physician and his staff of two are grudgingly forced to devote numerous hours to a maddening array of paperwork and phone calls (”it gets worse every year”) in an attempt to navigate the various streams of insurance authorizations and payments (”some of it seems designed solely to frustrate and slow or prevent payment”) -he will not be seeing patients. Tomorrow, he will not be seeing patients; he will be trying to catch up on paperwork–as will his staff.

Perhaps then, when we consider that Health Care costs amount to 16% of the GDP, we might also consider that this number does not take into account the difficult to gauge loss of national productivity. And although the sickness of one can be the work of another, the exchange does not seem to be an even one as it relates to national production: the doctor functioning, in a sense, as a support and enabler to the productivity of others. Having said that, if that doctor is unavailable (through lack of insurance or remoteness) to remedy the ills of the now unproductive (or the less productive) the nation suffers for it. If the doctor is needlessly enmeshed in tasks, inefficient and ancillary to patient treatment, the nation suffers for it.

A portion of the suffering has been gauged: L. P. Casalino, S. Nicholson, D. N. Gans et al., “What Does It Cost Physician Practices to Interact with Health Insurance Plans?” Health Affairs Web Exclusive, May 14, 2009, gives us numbers–and they agree with my doctor.

Key Findings

• Physicians, on average, spent 142.3 hours per year interacting with health plans, or 3.0 hours per week and 2.7 physician work weeks per year. Primary care physicians spent significantly more time (164.9 hours per year) than medical specialists (123.7 hours) or surgical specialists (100.3 hours).
• Nursing staff spent an additional 23 weeks per year per physician interacting with health plans, while clerical staff spent 44 weeks and senior administrators spent 2.6 weeks doing so.
• Compared with other interactions, physicians, on average, spent more time dealing with formularies (78.2 hours for primary care doctors, for example), and the least on submitting or reviewing health plan quality data (1.9 hours annually for all physicians).
• Converted into dollars, practices spent an average of $68,274 per physician per year interacting with health plans; primary care practices spent $64,859 annually per physician, nearly one-third of the income, plus benefits, of the typical primary care physician.

The authors further note that “the estimated $31 billion in costs physician practices incur in their interactions with health plans comprises 6.9 percent of all U.S. expenditures for physicians and clinical services. That is six times the amount the federal government spends annually on the Children’s Health Insurance Program (CHIP).”

The study also notes that “Primary care physicians, especially those in small practices, spend larger amounts of time interacting with plans than those in other specialties.”

My physician and his staff of two devote an entire day every two weeks, and his staff devotes a great deal of the time in between to this “maddening array of paperwork and phone calls (’it gets worse every year’) in an attempt to navigate the various streams of insurance authorizations and payments” –some of which “seems designed solely to frustrate and slow or prevent payment.” The study estimates that expense for a primary care physician (though more for those “in small practices”) at $64,859 annually.

For more details you can read a brief Commonwealth Fund article on the report  here
or the Health Affairs article with the report here.

Greaney on the Public Plan

Is genuine health reform possible? Several recent developments are promising. President Obama’s big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid. Key interest groups are less “Harry and Louise” and more “try to appease.” Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the “ownership society” are now self-evident. As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call ‘bilateral monopoly,” the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration’s new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can’t imagine them having much effect within any reasonable time frame.
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More Employers Are Adopting Consumer-Directed Health Plans

As the cost of health care increases and employers continue to struggle in the bleak economy, many employers are said to be faced with a decision: whether to opt-out of their existing health plans, either by eliminating health benefits for their employees or finding a more cost-friendly alternative. CNN reports that more employers are offering consumer-directed health plans as what is considered a cost-friendly alternative.

CNN states:

More than 51% of U.S. employers now offer a consumer-directed health plan (CDHP), up from 47% last year, according to the latest survey of 489 large U.S. employers from Watson Wyatt, a consulting firm that specializes in employee benefits.

A CDHP is a way of lowering health plan costs of employers by shifting the costs of medical care to individual employees.  The article reports:

Consumer-directed health plans (CDHPs) are typically lower premium but higher deductible health plans. They feature a kind of savings or spending account that helps employees pay their out-of-pocket expenses for covered services, or services that are not covered by a traditional plan.

One form of popular CDHP is Catastrophic Health Insurance– in these plans, often taken out in conjunction  with a tax exempt Health Savings Account (HSA). Under IRS rules, according to Insurance.com “the total out-of-pocket maximum (which includes the deductible and co-payments) for these HSA-linked catastrophic health plans is $5,600 for singles, and $11,200 for families.” In addition, Insurance.com states

Certain pre-existing conditions, such as diabetes and mental health disorders, might mean you can’t qualify for an individual catastrophic health plan without prior qualifying group coverage, or at least that you can’t get coverage for those pre-existing conditions.

Finally, many CDHPs have “lifetime caps” of somewhere between 1 and 5 million dollars. When medical bills surpass these amounts the insurance company is no longer liable.

As the cost of health benefits and health care continues to increase, alternatives to the traditional cost-sharing relationship between the employer and employee are being examined– and understandably so. As for the relative merit of CDHPs and their “catastrophic” brethren, perhaps it depends upon which lens one looks through.

Proponents of CDHPs often cite the increased value in cost conscious “out of pocket” consumer health care choices and the positive affect this “true market” driven approach may have on the cost and quality of care; but the reality of the basis for consumer choice, as Frank Pasquale noted on this blog, is that “brand power has a lot more to do with choices here than objective assessment of outcomes.” In addition, as Professor Pasquale points out, Partners Health in Massachusetts was able to use its power, (market, brand, and sundry), in order to demand “reimbursements up to 30% over what other hospitals receive for identical procedures. Their market share has steadily increased as well, allowing them to stockpile the resources necessary to enter into new markets and threaten the viability of cheaper community hospitals.”

If CDHPs are viewed through the “better than nothing” lens, they obviously have some appeal (But See immediately above); if viewed through the “universal coverage” lens they obviously leave something to be desired. Having said all that, CDHPs may not be a best alternative, but they are becoming– in a woefully ironic twist of the word– a more “popular” alternative.

“Who’s Looking At the Compensation of the Health Care Insurance Executives?” and “Where’s H.R. 676?”

Interesting comments from Kevin T. and Jeremiah regarding Conrad Dillon’s post the other day, “Obama to Unveil Plan for Health Care Reform.” Jeremiah is a proponent of John Conyers “single payer plan,” The United States National Health Insurance Act, H.R. 676 (you can also see the plan in the sidebar of this blog under “Health Reform Plans” and an excellent summary at Healthcare-NOW.org ).

We wrote about H.R. 676 back in December, in a post titled, “Medicare for All?” We noted then that “the plan seems to have received little mention in the media,” though it has a number of supporters–including, at the time, 94 co-sponsors, and “most labor unions, thousands of doctors, nurses and health care professionals.”

The Conyers proposal, also backed by the Physicians for a National Plan, would gradually provide Medicare for everyone who wants it and would pay a premium; it is sometimes referred to as “The Medicare for All plan.”

As Saul Friedman, columnist for Newsday, explained, the Medicare for All plan

“would absorb such programs as Medicaid, SCHIP and be paid for by taxes and premiums. It could relieve auto manufacturers and other businesses of paying for health insurance for employees and retirees. Its sponsors say it would save $300 billion a year in administrative costs, for it would deny insurance companies a role.”

And that may be the rub.

Friedman states:

“Getting over that hurdle may be why HR 676 has gotten so little publicity, even from alleged friends of older people. There is no mention of it on the Web site of AARP, which earns $700 million a year in royalties on the sale of private health insurance it sponsors.”

In an Op-Ed piece in the Atlanta Journal Constitution, Dr. Oliver Fein, associate dean and professor of clinical medicine and public health at Weill Cornell Medical College in New York and president of Physicians for a National Health Program wrote that

“As long as we rely on private health insurers, universal coverage will be unaffordable…. There is a cure, however. Eliminating the private insurance industry would save $400 billion annually in administrative costs, enough to ensure that everyone is covered and to eliminate all co-pays and deductibles.”

Perhaps understandably, there has not been a great deal of support voiced for the Conyers plan (or for Dr. Fein) by the Insurance Industry. The common adage concerning health care reform at present has been that “if you’re not at the table, you’re on the menu.” By all accounts, private insurers have taken a seat at the table–and the “menu” they’re protecting there would seem to readily qualify as sumptuous.

Kevin T. was kind enough to forward to us these figures concerning CEO compensation for major medical insurers. The figures for Insurance Co. profits (2007, Aetna: 1.831 Billion profit) as well as the CEO compensation figures can be found  here, courtesy of the very interesting Insurance Company Rules.org- a project of Health Care for America Now.org. The numbers were culled from the companies’ SEC filings (Schedule 14A) and are well worth a look. But I’ll list a few of the figures here as well:

Ins. Co. & CEO With 2007 Total CEO Compensation

• Aetna Ronald A. Williams: $23,045,834
• Cigna H. Edward Hanway: $25,839,777
• Coventry Dale B. Wolf : $14,869,823
• Health Net Jay M. Gellert: $3,686,230
• Humana Michael McCallister: $10,312,557
• U.Health Grp Stephen J. Hemsley: $13,164,529
• WellPoint Angela Braly (2007): $9,094,271
  L. Glasscock (2006): $23,886,169