Health experts and non-experts alike agree that the U.S. healthcare system is in need of significant reforms. Yearly increases in health insurance premiums are particularly vexing. To relieve some of the pressure, President Barack Obama promised significant reforms when he signed the Affordable Care Act (“ACA”) into law –- arguably the biggest healthcare overhaul in U.S. healthcare history since the passage of Medicare and Medicaid in 1965.
One of the key additions to the ACA is section 2718 of the Public Health Service Act, which requires health insurance issuers offering individual or group coverage to submit annual reports to the Secretary of Health and Human Services on the percentages of premiums that the issuer spends on reimbursement for clinical services and activities that improve healthcare quality and to provide rebates to enrollees when the issuers fail to meet the given year’s minimum requirements.
Under the direction of section 2718, the National Association of Insurance Commissioners (“NAIC”) developed uniform definitions and standardized calculating methodologies, which the HSS fully adopted, for requiring issuers to spend at least 80-85% of their premiums on actual medical care, with the remaining 15-20% going towards administrative costs, marketing, and other non-health care-related expenses. The NAIC defined these activities as the Medical Loss Ratio (“MLR”), also known as the 80/20 rule.
In response to consumer advocates’ concerns the final rule implementing the MLR standards, was revised to establish a mandatory onetime simple MLR informational notice requirement for issuers in the group and individual markets that meet or exceed the applicable MLR standard. The purpose of the notice was to inform the current subscribers of the new regulation. These onetime MLR informational notices are different from MLR rebate notices, which have to be send every time the issuer fails to comply with the 80-85% requirement The final MLR regulation entered finally into effect on June 15, 2012.
This new MLR rule reflects the ACA’s main goal to ensure that “hardworking, middle class families […] get the security they deserve” and that every American is protected from the “worst insurance company abuses.” Essentially, the MLR is intended to help ensure that all of us receive value for our premium dollars by requiring health insurance companies to spend at least 80-85% on healthcare and activities that improve the quality of healthcare (“QIA”). However, if the issuers spend less than the required minimum of 80-85%, they will have to return the portion of the premium revenue in excess of the limit as a rebate.
The new amendment requires all issuers, independent of whether they complied with the 80-85% MLR rule to notify their subscribers of this new regulation, which is an important step towards reinforcing consumer protection. However, as I argue in this post even the improved notice rule falls somewhat short of addressing all of the consumer advocates’ concerns.
In the global scheme of the current MLR regulation, consumer advocates are satisfied with the added notice requirements. However, they demand that the Department of Human Health and Services (“HHS”) strengthens the notice requirement, removes ambiguities and takes a step further by requiring health insurance companies to disclose how much they have spent on healthcare and quality of care in their current and previous year.
Consumer advocates believe that these improvements will increase health plan transparency, reduce consumer confusion, and ensure that all consumers receive information about how their premiums are spend. However, there is some criticism from health insurance companies about the added notice requirement. They claim that, in addition to the added cost of preparing and sending out notices, providing consumers with more information will only lead to more confusion as to how the 80-85% MLR is calculated. They reason that because the MLR has many value enhancing services that, according to the issuers, are not captured by the MLR formula, but nevertheless benefit all of us, we as consumers will draw mistaken inferences about insurer’s spending. Essentially, keeping us in the dark about how insurance companies spend OUR premium dollars, as was the case in the past, will only benefit us – along the lines “I know what’s best for you, so the less you the know/care the happier you’ll be.”
In an attempt to meet the demands of consumer and health insurance advocacy groups, the HHS adopted a balanced approach seeking to minimize the cost of additional notice requirement to the issuers while protecting the interests of consumers. Essentially, the HHS determined that while failing to require MLR information notices from issuers would result in reduced transparency, any greater notice requirements, like those demanded by the consumer advocates, would impose a greater burden on the issuers than is necessary. As such, the HHS decided to merely impose a simple onetime notice that only provides standard limited information about the MLR rule. However, the HHS misses the mark.
First, the MLR notices are intended to simply inform consumers of the existence of the new law. The fact that they were required to be sent only this year, raises the question of whether the notices will reach every subscriber as intended. Also, even assuming that they do reach every subscriber, the problem with the onetime notice is that all future subscribers will be out of luck and thus remain ignorant. However, Issuers that owe rebates will still be required to send out rebate notifications. There is an interesting notion in the regulation where the HHS explicitly “allows” issuers to voluntarily send out MLR notices. But, relying on issuers’ willingness to volunteer additional disclosure is not only impractical, but can be counterproductive because sending out random notices will only increase confusion and irritation among consumers. The ongoing annual MLR notices, on the other hand, will establish a ubiquitous presence, which is essential in creation of new expectations among consumers. Knowing where and how the premiums are spend, will likely reduce consumers’ resentment and disappointment with the relentless annual health insurance cost increases.
Second, the general information about the MLR rule and the actual MLR percentages is available on the HHS website and must be referenced in the MLR informational notices. Thus, the issuers’ fear that providing such detailed MLR information to the consumers in the notices will be too burdensome and counterproductive, is unjustified. Rather, by requiring the issuers to provide more information in the actual MLR notices, the HHS would only ease consumers’ access to such information and enable consumers to evaluate their issuer’s performance on the spot. Likewise, issuers contention that consumers might misinterpret the MLR information because the MLR formula is too complex and contains value enhancing services that according to the issuers, are not captured in the MLR formula, is unpersuasive because the NAIC and the HHS have already determined that MLR is a reliable measure of issuers’ performance in terms of their healthcare and quality of care versus administrative spending. Accordingly, the HHS should require issuers to include more information about the MLR in general, and demand that issuers’ provide their current and past year’s MLRs.
Finally, issuers argue vehemently that the mandatory notice requirement is too costly and imposes a great burden on the issuers. There appears little support for that. The HHS has already determined that the benefits to consumers will outweigh the administrative costs incurred by insurers through the issuance of notices to the policyholders. In particular, according to the HHS estimates, the total administrative cost for preparing and mailing notices to issuers that meet or exceed the MLR target would merely amount to approximately three million dollars, an average cost of $9,000 to 10,000 per issuer for the 2011 reporting year, translating to an average added cost of $0.16 per enrollee for preparing and sending a notice by mail, including labor and supply costs. Importantly, the estimates are for the first time notices only. By requiring frequent annual notices, the cost of such notices can be reduced even further as the notices become more automated. This only supports the recommendation that the HHS should require annual notices.
With these important amendments to the final rule the HHS can expect to achieve greater transparency and more accountability regarding how the issuers use their premium revenue, which is the main purpose of the ACA.
The HHS has promulgated an important consumer empowering regulation, but there is still a lot of work to be done. Consumers deserve to know how their premium dollars are spent and demand that the bulk of their premium dollars is primarily spent on health care. The MLR rules help move us toward that goal.
Ina Ilin-Schneider is a fourth year part-time student at Seton Hall University School of Law. She graduated summa cum laude from Hunter College in 2008 with a B.A. in Psychology and a minor in Economics. While an undergraduate, Ina worked as a teaching assistant in the “Statistical Methods in Psychology” class and as a research intern at the Memorial Sloan-Kettering Cancer Center performing analysis on prevalence of alcohol abuse in the gay community. During her second year of law school, Ina served as a Judicial Intern to the Magistrate Judge, the Honorable Mark Falk, providing assistance in legal research and drafting memoranda on legal questions. Ina intends to practice compliance law after she graduates in May of 2013.
Filed under: Hospital Finances, Insurance Companies, Transparency
Can a market work when buyers are kept in the dark about the prices they’ll pay? That’s an increasingly urgent question for fans of consumer directed health care. In vogue during the administration of Bush fils, CDHC is reemerging as Obamacare’s opponents seek a standard to rally around (other than “laissez mourir“). In theory, consumers could force doctors and hospitals to compete by shopping around for services. But when the rubber hits the road, informed consumption is easier said than done, as Josh Barro describes:
Recently, my employer switched to a high-deductible health insurance plan, which means I’m paying at the margin for most of my health care. As a result, I have become more aware of the true cost of the care I receive—and more aware of how difficult it is to figure out that cost. . . . if you ask doctors how much a service costs, they tend not to know. I once had an argument with my doctor, who did not want to give me a blood test for fear that my insurer would deny the claim for the expensive test. I later found out that this test costs all of $9.48 at my insurer’s negotiated rates, despite a list price of $169. When I got orthotics, my podiatrist told me they would cost nearly $600. But that was the list price; the actual insured price was less than $250. . . .
It doesn’t have to be this way. We could legally obligate hospitals and medical practices to disclose their full price lists—both the inflated list prices and the rates negotiated with each insurer that the practice accepts.
A commenter on Barro’s blog retorts:
I’m a little surprised to see a blogger at the [National Review Online] suggest that the government “require” price disclosure from private market participants. This goes well beyond the market interference that some other odious “mandates” require. Why don’t we mandate that everyone disclose exactly what they pay each employee? . . . If you have an HSA or High-deductible policy, I would suggest it’s incumbent on the insurance provider to help you figure it out. If consumers want it enough the system should respond, right? Why not switch to an HDP that is more transparent?
The problem, of course, is that lots of parties have to agree to provide transparency, and there is a great deal of inertia. If all the other insurers aren’t transparent, there’s little reason for one of them to try to distinguish itself if it already has a steady customer base. And when it stirs itself to do so, it will find a wall of resistance from providers, who say “why should we give all this information to you—no one else is demanding it?” (Moreover, the “prices” don’t really exist except on paper on a “chargemaster,” and they’re practically meaningless (except as opportunities to gouge the unlucky). The real price is the negotiated price, and that’s generated out of iterative interactions.) Moreover, many interventions involve multiple providers, as a reader of Andrew Sullivan’s blog explains:
Filed under: Health Care Plans, Health Law, Health Reform, Insurance Companies, Taxation
It was the intent of Congress in enacting the Patient Protection and Affordable Care Act to regulate health insurance comprehensively. Most of the regulatory provisions of Title I (the insurance reforms) apply to “A group health plan and a health insurance issuer offering group or individual health insurance coverage.” The definitions of these terms are drawn from the definitional section of the Public Health Services Act (added by the Health Insurance Portability and Accountability Act), which defines a “group health plan” as an ERISA plan, and a “health insurance issuer” as “an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.” 42 U.S.C. § 300gg-91(a)(1), (b)(2). Thus the ACA covers both self-insured ERISA plans and insured individual and group plans.
In fact, however, the ACA does not apply to all health insurance coverage, and does not apply to all health insurance coverage to which it does apply to the same extent. HIPAA excepted benefit plans, including specific disease and fixed-dollar indemnity plans, and short term individual coverage are not subject to ACA requirements, and many of the provisions of the ACA that apply to individual and small group plans, including the essential benefit package, the risk adjustment program, and the risk pooling, community rating, minimum medical loss ratio, and unreasonable premium increase justification requirements do not apply to self-insured plans. It is, therefore, important to read the ACA section by section to determine which requirements or prohibitions apply to which types of health insurance.
One particularly important provision that has not received enough attention is section 9010, “Imposition of Annual Fee on Health Insurance Providers” (at 811-815 in the link). This provision is found in Title IX of the ACA, but was amended both by the December 2009 Managers’ Amendment, which became Title X, and by the Health Care and Education Reconciliation Act, enacted in March 2010. Section 9010 imposes a fee, beginning in 2014, on a “covered entity’s net premiums written with respect to health insurance for any United States health risk.” The fee is determined by multiplying the fraction determined by dividing the covered entity’s net premiums by the net premiums of all covered entities that are taken into account under the statute times a set annual amount, which begins at $8 billion, but rises to $14.3 billion by 2018. This fee will be an important revenue source for funding the ACA’s coverage expansions.
The fee imposed by section 9010 does not apply to all insurers equally. Insurers with annual net premiums of $50 million are fully taxed on their revenues, while insurers with annual net premiums of $25 to $50 million are taxed on only half of their net premium revenues, and insurers with net premiums below $25 million are not taxed at all. Certain tax-exempt insurers are also taxed on only half of their net premium revenues (after applying the small insurer discount just mentioned).
The fee also only applies to “covered entities.” Section 9010(c) defines “covered entity” as an entity that “provides health insurance for any United States health risk,” subject to a number of exclusions. These exclusions include “any employer to the extent that such employer self-insures its employees’ health risks;” government entities; certain non-profit insurers that derive 80% of their revenue from government programs; and VEBAs that are tax exempt under I.R.C. § 501(c)(9).What is the universe of “covered entities,” however, that remain subject to § 9010 after these exclusions are applied?
To answer this question it is necessary to parse the meaning of “health insurance” and “United States health risk.” Both terms are defined in the section, but only in part. “United States health risk” is defined to include the health risk of an individual who is a United States citizen, resident, or located in the United States. § 9010(d). “Health insurance” is defined to exclude certain but not all forms or HIPAA excepted benefits (as defined in I.R.C. § 9832(c)), long-term care insurance, and Medicare supplemental insurance. Nowhere in § 9010, or indeed anywhere in the Internal Revenue Code, however, are the terms “health insurance” or “health risk” defined. Section 9010 tells us what “health insurance” is not, but not what it is.
The most interesting question is whether health insurance for a United States health risk includes stop-loss coverage. The sale of stop-loss coverage to small employer groups is increasing very rapidly. As noted above, self-insured small groups are not subject to many of the consumer and market protections that the ACA applies to insured small groups. Self-insured group plans are also not subject to state regulation because of ERISA preemption. There is thus a great deal of interest in the part of small group plans in self-insuring. Small groups can only self-insure, however, if they can find generous stop-loss coverage that will assume most of the health risk of employees. A small employer that fully assumed coverage for its employees without stop-loss coverage would face unacceptable risk. Some insurers, therefore, are actively marketing stop-loss coverage, often with very low attachment points, to small groups.
Is this stop-loss coverage subject to section 9010? It certainly is “insurance” and it certainly covers a “health risk.” It also does not fit within any of the explicit exclusions from the term “health insurance.” But is “stop-loss insurance” “health insurance”? The term “health insurance” is nowhere defined in the Internal Revenue Code (which would be the relevant code since the fee is administered by the Secretary of the Treasury and the fee is considered to be an excise tax, see § 9010(f),(h)(1)). “Health insurance coverage” and “Health insurance issuer” are defined in § 9832, but those are not the terms used in section 9010, presumably intentionally. By analogy, the term “group health plan” is used throughout the ACA to mean an ERISA plan, but in § 1301(b) the term “health plan” is explicitly defined to not include self-insured ERISA group plans. Wherever the term “health plan” is used in the ACA without the adjective “group,” therefore, it does not include self-insured ERISA plans, but where it appears with the adjective “group” self-insured plans are included. Similarly, it must be presumed that Congress used the term “health insurance” to mean something different from the defined terms “health insurance coverage” or “health insurance issuer,” which terms are used throughout the ACA in different contexts.
Is stop-loss insurance that covers health care risks health insurance? This is certainly a reasonable interpretation of the term. Moreover, the fact that Congress explicitly excluded from the definition of “covered entity” risk borne by employers in self-insured plans, but not risk that they pass on to stop-loss insurers, indicates that Congress did not intend to exempt stop-loss plans from the fee.
Applying the fee to stop-loss coverage would help to level the playing field between conventional health insurers and health insurers that insure health risk through stop-loss plans, and might help stem the flood of small groups to self-insured status, which in turn threatens to undo the consumer protections extended to employees insured through small groups and the market protections built into the ACA to stabilize the small group market (such as the risk adjustment and risk pooling requirements).
Section 9010(c) tasks the Secretary of the Treasury with providing implementing regulations and guidance. It is to be hoped that the Secretary will clarify through the regulatory process that the § 9010 fee applies not only to conventional insurance, but also to stop-loss insurance. Stop-loss insurance increasingly serves as an alternative mechanism for covering the same health risks that are covered by conventional insurance, while at the same time providing a means of evading ACA consumer and market protections. Section 9010 should be applied to stop-loss insurance just as it is to conventional insurance.
Filed under: Insurance Companies, Secretary Sebelius
In a post last week, “Insurers’ Profits Swell, Nation Can’t Afford to Get Sick, Can’t Afford to Get Well,” I noted with some distaste that health insurers were said to be looking “for premium increases amidst what [Reed] Abelson describes as ‘flush’ reserve coffers and shareholders ‘rewarded with new dividends.’”
As you might have gleamed from the title of the post, the primary reason for the increased profits was thought to be attributable to “a recessionary mindset” which has led to the insured deferring treatment and thereby not utilizing their health insurance benefits.
As I noted then, despite record profits now, “someday there might be a rainy day” [was/is] a common refrain/justification among insurers.”
Apparently, the Obama administration was none too thrilled with either the prospect of double digit premium increases or the justification. The New York Times reports that
Kathleen Sebelius, the secretary of health and human services, issued a final rule establishing procedures for federal and state insurance experts to scrutinize premiums. Insurers, she said, will have to justify rate increases in an environment in which they are doing well financially, with profits exceeding the expectations of many Wall Street analysts.
“Health insurance companies have recently reported some of their highest profits in years and are holding record reserves,” Ms. Sebelius said. “Insurers are seeing lower medical costs as people put off care and treatment in a recovering economy, but many insurance companies continue to raise their rates. Often, these increases come without any explanation or justification.”
PPACA requires annual reviews of “unreasonable increases in premiums.” Starting in September, insurers will need to justify rate increases over 10 percent–with state by state adjustments to that presumptive number the following year. You can read more about the details here, in the Times.
Filed under: Insurance Companies, Private Insurance
Reed Abelson wrote an interesting piece in The New York Times recently– and it is worth considering. Entitled, “Health Insurers Making Record Profits as Many Postpone Care,” the first paragraph speaks volumes:
The nation’s major health insurers are barreling into a third year of record profits, enriched in recent months by a lingering recessionary mind-set among Americans who are postponing or forgoing medical care.
But still there is the push to further increase premiums– with “someday there might be a rainy day” a common refrain/justification among insurers.
I’ll leave alone for now the premium increases amidst what Abelson describes as “flush” reserve coffers and shareholders “rewarded with new dividends.” Res Ipsa Loquitur. But you may want to take a quick look at Reed Abelson’s article.
Having said that, I am taken again by the equation which is said to have filled those coffers: people too broke to get themselves fixed– despite having health insurance. It’s a calculus largely unto itself. In many articles here at HRW we’ve discussed how health insurance is unlike other commodities in the marketplace– averring that the economics of health care itself and that of health care finance may not be reckoned the same as say automobiles or butter and bread.
In this instance we consider health insurance– an asset, or benefit– garnered by an employee in return for work provided to an employer. Presumably, this benefit is received in lieu of an increased rate of pay– cash– that that employee would otherwise receive. The employee may also contribute to paying for the insurance out of his or her wages– once again lessening available cash. And the benefit is not utilized– for lack of cash, or the perceived inability to take time from work in the midst of a recession. But the premium is still, of course, paid. I generally eat the butter and bread I buy.
With health insurance we pay for an assurance (mutually contracted with risk spread) that in the event we need medical care it will be available. An assurance that we will have the means at our disposal to get well, or at least for someone to try. Though at present, it seems, the economy itself (and the prevalent high co-pay/ deductible structure) has dictated that we are not available to receive the medical care we bargained for– despite it being, ostensibly, available. More years into a recession than I care to count, as a nation we can’t afford to get sick, and can’t afford to get well. For insurers, it’s a perfect storm of the optimal. Having said that, putting aside for the moment the prospect of the catastrophic, the employer/employee/health “benefit” seems somewhat illusory. And yet, unlike butter uneaten we will continue to buy it. That is the nature of insurance– you buy it and hope you don’t need it. Though “need” as of late seems to have been redefined economically. As such, it is a very sunny day for the umbrella salesmen– the umbrellas have been all paid for, but they only hand them out on rainy days. It seems the height of hubris to now seek more money for those umbrellas because someday it might rain– or just business as usual. Apparently the risk spread over time doesn’t include insurers.
Filed under: Health Reform, Insurance Companies
Shhhh. Can you hear it? Among all of that partisan pre-midterm election cheering and jeering? There’s a faint hum. The cogs of healthcare reform have started to turn.
Thursday marked the six-month anniversary of the Patient Protection and Affordable Care Act (PPACA) and the implementation of several consumer protection provisions. Can you believe it? We now live in a society where:
- Children under 19 years old can no longer be excluded because of pre-existing health conditions;
- “Young adults” (19-25 years old “dependents”) can stay on their parent’s plan until they turn 26 years old;
- Insurers can no longer impose lifetime limits on benefits;
- Insurers can no longer deny payment for services once a consumer gets sick nor search for errors on a consumer’s application in order to deny payment for services once that consumers gets sick (a practice called “rescission”);
- Depending on your age, all new plans must provide certain preventive health services — such as colonoscopies, mammograms, routine vaccinations, and diabetes tests — without co-payments or deductibles;
- Annual limits on insurance coverage will be restricted; and
- Consumers are ensured the right to appeal coverage determinations. If the insurer upholds its own decision, consumers can appeal to an external review process.
Granted, these protections aren’t perfect. For instance, “grandfathered” group plans do not have to offer coverage to young adults who qualify for group coverage at work nor do they have to offer the free preventive health services. Mary Agnes Carey of the Kaiser Health Network points out that most consumers won’t benefit from these protections anyway until their new health year plan begins after January 1, 2011. (Carey provides a basic Q&A on the provisions here.)
The greatest challenge for PPACA right now, though, seems to be the misperceptions circulating around the country. A recent AP poll found that:
[m]ore than half of Americans mistakenly believe the overhaul will raise taxes for most people this year….
Many who wanted the health care system to be overhauled don’t realize that some provisions they cared about actually did make it in. And about a quarter of supporters don’t understand that something hardly anyone wanted didn’t make it: They mistakenly say the law will set up panels of bureaucrats to make decisions about people’s care — what critics labeled “death panels.”
The uncertainty and confusion amount to a dismal verdict for the Obama administration’s campaign to win over public opinion….
Yet, folks, PPACA provides long overdue protections that will have a tremendous positive effect. The White House predicts that around 72,000 uninsured children with pre-existing conditions will gain coverage. Getting Covered, a campaign dedicated to helping parents and young adults benefit from the healthcare reform, estimates that New Jersey has 209,000 uninsured young adults, but next year that number will have been reduced by almost 28,000.
These protections come in the nick of time, too. Sabriya Rice of CNN reports that the impact of the bad economy has taken its toll on healthcare as:
[a] recent population report from the U.S. Census Bureau says there has been a dramatic increase in the number of people without health insurance in the United States. Between 2008 and 2009, the number of uninsured people increased by 16.7 percent, to nearly 51 million. An estimated 6.5 million people were no longer covered by private health insurance and equally as many had lost employment-based health benefits.
Patient advocates say Thursday’s changes are only the beginning. “The big resolutions will come in 2014 when you will start to see tens of millions of people getting coverage,” says Avram Goldstein, communication director for the Health Care for America Now, a liberal grass roots health advocacy organization.
Rice highlights a young man named Joshua Armstrong who took a break from school, lost his mom’s health insurance coverage and became one of the approximately 118,000 uninsured young adults in Alabama, and ran up a $10,000 emergency room bill after a car accident. According to Getting Covered:
Alabama is actually one of ten states that have not required employers to expand dependent coverage at all. As a result, most family plans in Alabama currently only offer coverage to young adults up to age 19 or after college graduation. With the new law, young adults in Alabama will now be able to join their parent’s plan for longer even if they are financially independent, out of school, married, or live far away.
The new protection provision won’t help Armstrong with that emergency room bill — he’s worked out a repayment plan with the hospital — but it will help him secure insurance for the future.
AP reporter Carla Johnson similarly highlights three families affected by the PPACA protections: one whose son is uninsurable because he’s a cancer survivor, one whose son lost coverage when he maxed out the $1 million lifetime limit, and a man whose insurer retroactively canceled his coverage after he had a stroke. The father of the latter summed up the situation quite nicely: “It’s despicable to leave a man who’s recovering from a stroke with no insurance.” Yes. Yes it is. Keep on humming, PPACA.
Filed under: Ethics, Health Care Economics, Health Policy Community, Health Reform, Insurance Companies, Prescription Drugs, Research
One of the most robust “memes” in contemporary law is the power of disclosure. In health law, disclosure comes up again and again: patients need to give “informed” consent, insurers are supposed to explain their policies clearly, and conflicts of interest, when not proscribed, should at the very least be exposed. But there are growing challenges to the disclosure meme, both within health law and without.
George Lowenstein and Peter Ubel note some problems with disclosure approaches in this article on the weaknesses of behavioral economics generally:
It seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs. Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. . . . But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address.
[T]ake conflicts of interest in medicine. Despite volumes of research showing that pharmaceutical industry gifts distort decisions by doctors, the medical establishment has not mustered the will to bar such thinly disguised bribes, and the health care reform act fails to outlaw them. Instead, much like food labeling, the act includes “sunshine” provisions that will simply make information about these gifts available to the public. We have shifted the burden from industry, which has the power to change the way it does business, to the relatively uninformed and powerless consumer.
The same pattern can be seen in health care reform itself. The act promises to achieve the admirable goal of insuring most Americans, yet it fails to address the more fundamental problem of health care costs. . . . [T]he act tries to lower costs by promoting incentive programs that reward healthy behaviors. . . . [But s]tudies show that preventive medicine, even when it works, rarely saves money.
At its worst, disclosure can become merely pro forma; as Kafka (via Trudo Lemmens) puts it, “Leopards break into the temple and drink to the dregs what is in the sacriﬁcial pitchers; this is repeated over and over again; ﬁnally it can be calculated in advance, and it becomes part of the ceremony.” Omri Ben-Shahar has argued that disclosure is one of many aspects of consumer protection law with little real impact on individual welfare. As Amelia Flood reports,
Ben-Shahar, who spent last summer studying all the mandated disclosure statutes in Illinois, Michigan and California, argues that consumer protection advocates have gotten it wrong when it comes to mandating information access for consumers. He says consumers get lost in a sea of technical language, unread disclaimers and long-shot lawsuits. . . . According to Ben-Shahar, disclosures are of more use to consumer ratings groups like Zagat and Consumer’s Digest than they are to most consumers.
So perhaps there is some hope here: third-party aggregators and raters might use disclosures as part of an overall effort to rate various hospitals or doctors. The question then becomes–who shall pay (and rate) the raters? One irony here is that doctor rating sites have themselves been accused of being insufficiently transparent about the ways in which they evaluate physicians. New York Attorney General Cuomo even pursued the matter. His office eventually settled with insurers who ran rating sites. They pledged to “fully disclose to consumers and physicians all aspects of their ranking system.”
What’s the lesson here? First, that consumers are, by and large, too busy to process piecemeal disclosures by professionals like physicians and other health care providers. Second, third party raters can fill some of this information gap by aggregating information. Third, this process of aggregation and rating itself will likely need to be closely supervised by a good-faith regulator, lest it fail to take into account the full range of interests (and quality of information) proper for the task.
Filed under: Insurance Companies, Private Insurance, The Uninsured
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.
Filed under: Insurance Companies, Private Insurance
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.
Filed under: Health Benefit Costs, Insurance Companies, Private Insurance
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.
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
Filed under: Insurance Companies, Public Plan
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.
Filed under: Health Law, Insurance Companies, Proposed Legislation
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.
Filed under: Health Care Plans, Insurance Companies, Transparency
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
Filed under: Health Benefit Costs, Health Care Plans, Insurance Companies
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.
Filed under: Health Reform, Insurance Companies, Private Insurance
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.