Insurers’ Profits Swell, Nation Can’t Afford to Get Sick, Can’t Afford to Get Well

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.

Image by Karen Apricot

Gregg Bloche’s The Hippocratic Myth

Georgetown law professor Gregg Bloche’s new book, The Hippocratic Myth, looks to be a major contribution to health policy debates. I haven’t had time to read it yet, but many reviews and radio shows give the impression of a rigorous work leavened with engaging narratives of individual patients and providers.

Bloche’s approach to rationing will rekindle many of the health care debates of 2010. A former advisor to the Obama health policy team, Bloche concludes the following:

Medicine’s therapeutic potential has surpassed our ability to pay for it, but our elected officials are afraid to tell us. The historic health reforms enacted last year will protect 30 million Americans from the Darwinian cruelty of lack of access to care. But contrary to much wishful thinking in Washington, these reforms do little to stave off looming medical cost catastrophe. Our future fiscal and social stability will turn on our ability to gain control of spending without imperiling patients’ trust in their caregivers.

Bloche also observes the importance of the medical profession in upcoming bioethical debates:

Medical judgment incorporates hidden political and moral beliefs, and doctors have become key political and legal decision-makers—on such matters as child custody, criminal punishment, access to performance-enhancing drugs, and the politics of obesity, abortion, and homosexuality.

Doctors and the rest of us will need to address the morality of innovations we never thought possible. Drugs that block—or boost—biological mechanisms of stress resistance, brain-scanning methods that read minds, and medicines that interfere with formation of traumatic memories are among the technologies that will soon be with us.

During his interview with NPR’s Leonard Lopate, Bloche mentioned an aspect of insurer practice that renders suspect many consumer-directed ideals of medical care. Many insurers’ care protocols are kept secret, as proprietary information. Bloche found the practice deeply troubling, and I agree. Insurers’ criteria for providing care are important aspects of the service they are providing. They should not be hidden from patients or doctors. In more encouraging news, Bloche notes that he has not lost an appeal of a medical coverage decision to an insurer.

Enforceable Contracts for Cheaper and More Limited Care

Bloche seems committed to permitting consumers to make enforceable contracts for lower levels of care. Tyler Cowen recently evoked that possibility of ala carte insurance in his evaluation of the recent Ryancare proposal:

Let’s say it’s 2027 and I’ve just turned 65. I fill out a Medicare application on-line and opt for a plan with superior heart coverage (my father died of a heart attack), not too much knee coverage and physical therapy (my job doesn’t require heavy lifting), no cancer heroics (my mother turned them down and I wish to follow her example), and lots of long-term disability. Is that so terrible an approach? Is it obviously worse than having the Medicare Advisory Board make all of those choices for me?

Cowen worries that “Perhaps an individual will choose ‘no coverage for lung cancer,’ but the government cannot precommit to the outcome of no coverage.” But Bloche makes a point in an NPR interview that suggests that a physician’s decision to withhold care in that instance would not violate the Hippocratic Oath:

The rationale there is that the doctor who stints on care three years later when you get really sick is acting in accordance with your preferences as you expressed them in the employee benefits office three years before. And therefore, the doctor is not violating the Hippocratic Oath. The doctor is merely complying with your preferences when you rolled the dice in the employee benefits office.

Of course, that is in the private insurance context, not Medicare, and I don’t know if that distinction would make a difference for Bloche. But it does help me see how the book attracted a blurb from a Heritage Foundation analyst. Contemporary conservative health policy experts are committed to giving individuals the chance to buy low-cost plans, and so far the Obama Administration has been quite accommodating in granting waivers for them. My sense is that Bloche is committed to a minimum essential benefits approach that would allow consumers to opt out of “cancer heroics” (perhaps defined as biotechnology drugs costing over $7 million over one’s lifetime?), but not to waive “lung cancer” coverage generally.

Bloche argues in the book that:

[M]edicine’s capabilities and costs will inexorably grow. Increasingly, doctors will need to say no to care that’s technologically possible and that could prolong life, but that does so in competition with other national priorities. We must empower them to do so even when the consequences seem tragic. But we must give them this power without asking them to break faith at the bedside. To this end, the current regime of covert rationing, under cover of ‘medical necessity,’ should be supplanted by visible resource allocation rules–rules set for doctors and patients by social institutions. (58-9)

Transparency of this sort will compel us to come to terms the truth that insurers must say no to beneficial care to stay within the limits we impose when we seek low prices for products for products and services, elect politicians who promise low taxes, and choose cheaper health care plans for ourselves.

Though I hate to disagree with such an eloquent statement by so eminent a scholar, I am slightly troubled by that language. I think money saved from the health sector is more likely to go to new adventures in the Middle East or dot-com, housing, and commodities bubbles than it is to be allocated to “other national priorities.” Health care is only one of many sectors where US-style casino capitalism has seriously distorted capital allocation.

I also believe that the invocation of “we” here glosses over the moral role of redistribution in an extremely unequal economy. A privately insured person who really wants a procedure can spend himself down to bankruptcy, then apply for Medicaid. At that point, the government must make a decision. Given that “the government collected less in taxes in 2010 than it has in over three generations, and tax rates are at historic lows” for the very wealthy, I don’t think it is entirely fair to say “we” can’t afford certain care. Rather, those at the top of the income and wealth scale are increasingly supporting politicians who will not tax the wealthy. The current scarcity of care for the least well off is not a natural feature of the world; rather, it is epiphenomenal of repeated decisions not to impose certain tax burdens today even though they would have seemed perfectly fair 50 years ago. Since a “Wall Street transactions tax of only 0.50% on short-term speculation could raise up to $170 billion annually,” I fail to see an imperative to reduce incomes in the health sector until problems in much less socially productive sectors are addressed.

On the other hand, if our government “of the top 1%, by the top 1%, for the top 1%” continues, major cuts to the health sector are inevitable. If they must come, we need more trusted and fair voices like Bloche’s at the table. As Daniel Alpert has observed, “the U.S. has engineered a winner-take-all economy and indebted both the majority of its people and its government to keep a ‘don’t tax, but spend anyway’ consumerist fantasy alive.” Bloche helps us face the difficult task of unwinding the consequences of all those bad economic decisions.

Bloche is also admirably restrained in his sense of how much current law can do to rationalize health care spending. As he notes in a book excerpt:

30 percent of health spending [is] wasted on worthless care—about the price of the $700 billion mortgage bailout, squandered each year. . . [One study estimated that only] about 10 to 20 percent of medical procedures rest on “gold-standard” evidence — randomized clinical trials. . . . Risky and pricey therapies routinely make their way into common use without such studies. . . .

Change is looming. The 2010 health reform law created a “Patient- Centered Outcomes Research Institute,” funded by levies on Medicare and private insurers, to sponsor such research. But the funding level, less than a tenth of a percent of what Americans spend on health care each year, will do little to increase the fraction of medical decisions that rest on science. And the Institute’s governing body — composed mostly of representatives from the hospital, insurance, and drug and device industries, as well as physicians — seems almost designed to enable stakeholders to block studies that threaten their interests. Moreover, multiple provisions in the law (sought by providers and drug and device makers) hobble Medicare’s ability to base coverage decisions on research the Institute sponsors.

The mix of hope and realism in the paragraphs above reflects the judicious sensibility of the many Bloche articles I have had the good fortune to learn from. I look forward to reading his book.

Health Insurance CEO Total Compensation in 2009

Last year we posted the Total Compensation for a number of Health Insurance Company CEOs for 2007 & 2008. Those numbers, culled from the companies’ SEC filings (Schedule 14A) appear immediately below. Below that are the numbers for 2009, courtesy of FierceHealthcare.com.

As you can see, the year has brought decreases for some CEOs (but not all). One wonders, discretion being the better part of valor, if the clamor for health care reform in full force during the course of 2009 counseled caution –at least for the time being– with regard to executive compensation. If the timing for further compensation has merely been adjusted so as to backload payments until after the health care reform debate is settled? As the clamor for health care reform has turned into a political clamor for reform of health care reform, I wonder what the 2010 numbers will be. If, perhaps, the wait for the Supreme Court to settle the individual mandate question– when insurers will know whether or not a country full of customers will be ushered into their pool, will influence compensation–and the timing of its public display. Either way, the numbers for 2009 pretty much speak for themselves. And not everyone on this list can be accused of prudence– Ms. Angela Braly of WellPoint received total compensation of $13,108,198 in 2009– which is more than $3 million more than her compensation the year prior. This, of course, is the same Angela Braly who evoked the wrath of many, including Secretary Sebelius, by raising premiums as much as 39% in California amidst allegations of systemic insurance recissions for women suffering from breast cancer. It should be noted, however, that part of her total compensation figure for 2009 included additional security, “in light of growing concerns regarding the safety of Ms. Braly.”

Last year we noted with some amazement that

…it has struck me that 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, and Mr. Hemsley had to somehow manage on $62,327.73 per week (but perhaps he was able to save a little from last year when he made $253,164.02 per week).

We’ll leave Mr. Williams of Aetna alone this year, as his compensation dwindled to a mere $18,058,162 in 2009. Though not particularly inclined to hear Mr. Williams’ recession story, he had to make ends meet on $347,272 per week.

I am somewhat interested in Mr. Allen Wise of Coventry Health Care though. Mr. Wise received $17,427,789 in 2009. His first year at the helm, some of that is signing bonus. Nevertheless, it amounts to an astounding 7% of Coventry’s net income. Yes, 7%.

As my own car, a 2003 Ford Crown Victoria, has recently exceeded 100,000 miles, I thought it might be interesting to look at this total compensation in terms of cars. More specifically, my car. I like my car, one of the last of the large American rear wheel drive sedans, and expect (knock on wood) that I’ll be driving it for some time to come. It’s paid off. It came with a full leather interior and eight cylinders of pure speed. In 2009, the list price for the car brand new was $29,115. I’ll suppose (perhaps foolishly, but hypothetically) for a moment that Mr. Wise lacked my haggling skill but liked and wanted the Crown Victoria– en masse.

In 2009 Mr. Wise’s could have bought 11.5 brand new Ford Crown Victorias per week, or 599 for the year.  Considering you can’t buy a new car in New Jersey on a Sunday, that’s almost 2 per day. And in case you were wondering, $17,427,789 per year comes out to $47,747 per day. If he tired of the Crown Vic, though anachronistic, he could also purchase a 2011 Mercedes Benz SLK 300 Roadster– each day.

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

Ins. Co. & CEO With 2009 Total CEO Compensation

• Aetna, Ronald A. Williams: $18,058,162
• Coventry, Allen Wise: $17,427,789 (took over from Dale Wolf)
• WellPoint, Angela Braly: $13,108,198
• United Health, Stephen Helmsley: $8,901,916
• Cigna, David Cordoni: $6,593,921 (took over from CEO H. Edward Hanway)
• Cigna, H. Edward Hanway: $18,800,000
• Humana, Michael McCallister: 6,509,452
• Health Net, Jay Gellert: $3,643,342

From Viral Marketing to Medical Profile Contagion

As ACA implementation lumbers ahead, and challenges to it slouch toward the Supremes, the U.S. health care system’s arbitrary old ways continue to mystify and frustrate. Consider this story on one person’s quest to obtain insurance:

Most employees assume that if they lose their job and the health coverage that comes along with it, they’ll be able to purchase insurance somewhere. . . .My husband, teenage daughter and I were all active and healthy, and I naïvely thought getting health insurance would be simple. . . .

Then the first letter arrived — denied. . . .What were these pre-existing conditions that put us into high-risk categories? For me, it was a corn on my toe for which my podiatrist had recommended an in-office procedure. My daughter was denied because she takes regular medication for a common teenage issue. My husband was denied because his ophthalmologist had identified a slow-growing cataract. Basically, if there is any possible procedure in your future, insurers will deny you. . . .

As I filled out more applications, I discovered a critical error in my strategy. The first question was “Have you ever been denied health insurance”? Now my answer was yes, giving the new companies reason to be wary of my application. I learned too late that the best tactic is to apply simultaneously to as many companies as possible, so that you don’t have to admit to a denial.

As was recently reported, “50 to 129 million (19 to 50 percent of) non-elderly Americans have some type of pre-existing health condition.” The “health care market” is sending a strong signal: don’t step out of the system if you have any continuing need for even minor care.

But what’s more worrisome are the types of information circulating about you that you aren’t even aware of. Consider this story from Businessweek about the profiling of insurance applicants by third-party intermediaries:

Most consumers and even many insurance agents are unaware that Humana, UnitedHealth Group , Aetna (AET), Blue Cross plans, and other insurance giants have ready access to applicants’ prescription histories. These online reports, available in seconds from a pair of little-known intermediary companies at a cost of only about $15 per search, typically include voluminous information going back five years on dosage, refills, and possible medical conditions. The reports also provide a numerical score predicting what a person may cost an insurer in the future. . . .

[A] 57-year-old safety consultant in the oil and gas industry, says he tried to explain that the medications weren’t for serious ailments. The blood-pressure prescription related to a minor problem his wife, Paula, had with swelling of her ankles. The antidepressant was prescribed to help her sleep—a common “off-label” treatment doctors advise for some menopausal women. But drugs for depression and other mental health conditions are often red flags to insurers. Despite his efforts to reassure Humana, the phone interview with the company representative “just went south,” Walter recounts. He and his wife remain uninsured [as of 2008].

Health-related data from a wild west of unregulated intermediaries may spread to employers and other decisionmakers, just as credit scores have migrated from the bank context to influencing insurance pricing, and credit histories now influence employers. Sharona Hoffman has observed that “It is not uncommon for employers to obtain applicants’ and employees’ medical records. According to one source, every year, over ten million authorizations for release of medical information are signed by workers prior to the commencement of employment.” She has predicted disturbing possibilities arising out of that access to data:

Existing laws, including the ADA, GINA, HIPAA, and their state counterparts, provide important assurances to applicants and employees but are insufficient to guarantee that they will suffer no ill consequences as a result of EHR disclosure to employers. Employees may be especially concerned in times of recession, knowing that financial pressures make workers with health problems particularly unattractive to employers. Employers or their hired experts may develop complex scoring algorithms based on EHRs to determine which individuals are likely to be high-risk and high-cost workers. In addition, in times of financial difficulty, limited resources may be available to implement technology and policies that will secure EHR confidentiality.

Secondary uses of health data could be a very lucrative niche for profilers of the future.

Given these possibilities, individuals should at least have the right to access and correct the health data that intermediaries have compiled about them. The FTC recognized this right, and “forced the [insurance] industry to begin disclosing the use of prescription information under . . . the Fair Credit Reporting Act. . . . Copies of prescription reports are supposed to be available to consumers at no charge under federal law.” This is a small step forward. But if the “scores” assessing individual risk are compiled according to proprietary algorithms, the consumer may still feel “in the dark,” unable to adequately influence the presentation of herself to the insurer.

As Esther Dyson has stated in another context, mysterious data flows can jeopardize individual autonomy:

The comforting thing about the kind of data that Facebook primarily deals with is that it’s public. If your friends and other people can see it, so can you.

More troubling is the data you don’t even know about – the kind of data about your online activities collected by ad networks and shared with advertisers and other marketers, and sometimes correlated with offline data from other vendors. By and large, that’s information you can’t see – what you clicked on, what you searched for, which pages you came from and went to – and neither can your friends, for the most part. But that information is sold and traded, manipulated with algorithms to classify you and to determine what ads you see, what e-mails you receive, and often what offers are made to you. Of course, some of that information could go astray.

Online advertisers already slice and dice population segments (and distribute opportunities & exposure to ads) via marketing discrimination. Will the “e-health revolution” bring their methods out of cyberspace, and into the deadly serious business of offering employment and insurance based on estimates of health status that applicants can’t understand or challenge?

Recommended Reading: Interesting Takes on the Individual Mandate

In her pithy, provocative essay The Freedom of Health (forthcoming in the University of Pennsylvania Law Review), Abigail Moncrieff argues that there exists a nascent constitutional right to “freedom of health” — that is, to “individual autonomy in healthcare decision-making.”  The right is primarily a negative one, a “freedom to reject care” not to demand it (in contrast to the international human “right to the highest attainable standard of health”).  But Professor Moncrieff argues that there is also a “freedom to obtain care” that is “implicit in and therefore tethered to the [Supreme] Court’s reproductive rights jurisprudence” but which “also gained five non-precedential votes in the assisted suicide case.”  Among other implications, Professor Moncrieff argues that the freedom of health complicates the analysis of the constitutionality of the Patient Protection and Affordable Care Act’s individual mandate.  She explains that

“today’s insurance contracts are not mere risk pools, gathering and distributing funds for healthcare consumption at the discretion of the insured.  Instead, today’s contracts give insurers variable amounts of discretion, under ‘medical necessity’ review, to decide whether or not their insured can buy various kinds of healthcare with the pool’s money.  That is, insurance companies today use their contracts to steer individuals towards certain healthcare consumption decisions, often refusing to cover treatments that they deem ineffective, unnecessary, or even just inordinately costly. … There seems, therefore to be a colorable claim that the mandate infringes the freedom of health by requiring individuals to enter discretion-limiting insurance contracts–requiring individuals to give a third-party insurer the power to influence or even to direct their healthcare spending.”

While Professor Moncrieff ultimately concludes that PPACA’s individual mandate does not unconstitutionally impinge on the freedom of health because it is narrowly tailored to achieve the compelling government interests in “[e]xpanding health insurance coverage and decreasing costs of insurance on the individual market,” this in no way diminishes the timeliness or relevance of her essay.  It seems inevitable that we will confront much closer cases in the not-too-distant future.

Theodore Ruger’s Can a Patient-Centered Ethos Be Other-Regarding?  Ought It Be? (published as part of a symposium on patient-centered health and ethics at 45 Wake Forest L. Rev. 1513 (2010)) also takes on the individual mandate, explaining that it “reflect[s] the principle of group solidarity” in that it “will drive more healthy Americans into larger private risk pools, and the prices they pay will in many cases be higher than is appropriate for their own age- and health-adjusted actuarial risk; this mandate will effectively result in a redistributive tax on youth and good health.”  Professor Ruger’s essay explores the tension between, on the one hand, the principle of group solidarity reflected in the individual mandate and elsewhere in PPACA and, on the other, the “preference for individualization in American medicine” and “the correlative resistance to therapeutic standardization among providers and patients.”  Professor Ruger notes that there is a “normative clash” between those who believe “medicine could be, or ought to be, standardized through collectivized expert agencies” and those who favor a “patient-centered conception of decisional authority.”  Disputes like the controversy in late 2009 over the United States Preventive Services Task Force’s breast cancer screening recommendations, are “bound to recur in a system that is becoming increasingly interconnected, particularly given the scholarly and bureaucratic interest in giving greater prominence to expert cost-effectiveness research and best-practices standardization.”  Professor Ruger discusses several ways that “concern for broader systemic goals” might be incorporated into a “patient-centered ethos of medical care,” but is skeptical that medical ethics will, or ought to be, dislodged from its individualistic focus.  Instead, he concludes his thought-provoking essay by raising the possibility of “enhanc[ing] sensitivity to patient concerns on the part of the public and private institutions that in future decades will exert more standardizing and collectivizing pressures on the individual therapeutic relationship[.]“

Linnaean Regulation in Health Insurance and Information Technology, Part II

[Ed. note: This is the second part (perhaps evident from the title) of a two part post. Though each could well stand on its own, the first part can be found here.]

Insurance Reporting and Classification

Reporting requirements may not seem like a notable accomplishment. Nevertheless, the trend toward monitoring the products and services offered by insurance companies is an important step toward accountability. HHS needs to impose some order, some translatable logic, on fields that have threatened to become enormously parasitic and unproductive by or masking the true nature of their commitments.

Consider the practical illegibility of the average insurance plan. A vanishingly small number of subscribers actually read such plans. A plan may have complex cost-sharing requirements that vary among in-network and out-of-network primary care doctors, specialists, surgeons, hospitals, and procedures. While a “great risk shift” makes consumers all the more responsible for their choices in health care, it’s hard to imagine anyone accurately mapping the true fiscal consequences of given disease episodes in an aggressively complex plan.

By setting “a minimum level of health benefits, called the essential health benefits, that must be offered by certain health plans.” As Jessica Mantel explains, the term “‘essential health benefits package’ means coverage that not only provides for the essential health benefits defined by the secretary, but also limits cost-sharing for coverage of the essential health benefits in accordance with the parameters specified in the statute.” The Cancer Action Network has applauded the ACA for promoting “more standardization in the scope and value of private health insurance coverage available.”

Similarly, setting a “medical loss ratio” involves a careful delineation of insurer payments and functions that actually contribute to care. As Tim Jost explained in Health Affairs:

Medical loss ratios have long been of interest primarily to investors. An insurer that could achieve a low MLR by holding down expenditures on health care for its enrollees was a good investment. . . . On November 22, 2010, the Department of Health and Human Services released its interim final rule implementing the requirements of the new section 2718 of the Public Health Services Act (added by section 10101 of the Affordable Care Act), entitled, “Bringing Down the Cost of Health Care Coverage.” This provision is usually referred to as the “medical loss ratio” (or MLR) requirement . . .

Section 2718 requires health insurers (including grandfathered but not self-insured plans) to report to HHS each year, the percentage of their premium revenue that the insurer spends on 1) clinical services for enrollees, 2) “activities that improve health care quality,” and 3) all other non-claims costs, excluding federal and state taxes and licensing or regulatory fees. . . .

Jost describes in details how the classification works, and how it is designed to encourage more responsible insurer behavior.

Setting a Standard for Electronic Medical Records

Electronic health records systems will also need to develop shared data management standards. EMR vendors long argued that they needed flexibility to innovate in order to best reflect doctors’ practices and improve the capture of medical information. However, there is a tension between untrammeled innovation by vendors at any given time and later, predictable needs of patients, doctors, insurers, and hospitals to compare their records and to transport information from one filing system to another.

One system may be able to understand “C,” “cgh,” or “koff” as “cough,” and may well code it in any way it chooses. But to integrate and to port data, all systems need to be able to translate a symptom into a commonly recognized code. Health care providers can only avoid getting “locked into” a system if they can transport their records from one vendor to another. Patients want their providers to seamlessly integrate records.

HHS rulemaking has lain a groundwork for this type of common language of medical recordkeeping. As Sharona Hoffman and Andy Podgurski explain,

To address this problem, it is necessary for all vendors to support what we will call a “common exchange representation” (“CER”) for EHRs. A CER is an artificial language for representing the information in EHRs, which has well defined syntax and semantics and is capable of unambiguously representing the information in any EHR from a typical EHR system. EHRs using the CER should be readily transmittable between EHR systems of different vendors. The CER should make it easy for vendors of EHR systems to implement a mechanism for translating accurately and efficiently between the CER and the system’s internal EHR format.

There are also important opportunities for standardization in the security field:

As is true for a common exchange format, standardized security policies and mechanisms are unlikely to be adopted by vendors and providers without a regulatory mandate. In order to facilitate compliance and provide vendors with clear guidance, the regulatory mandate might incorporate, by explicit reference, some established and emerging security standards, such as the Internet Engineering Task Force’s Transport Layer Security (“TLS”) standard or its Public-Key Infrastructure (X.509) standard.

The discussion can quickly become technical, and it is difficult to explore all the ins and outs of the process. But the underlying purpose is clear: to develop some standard forms of interacting in a realm where “spontaneous order” is unlikely to arise and “network power” could lead to lock-in.

Of course, there are important differences between the EHR and health insurance landscapes. Symptoms refer to conditions that are, by and large, objective. (One can even imagine ubiquitous video cameras and sensors creating something like a complete patient record (or medical life log) for patients who consent to that type of monitoring.) Insurance contracts, by contrast, do not have the same “ontological firmness.” They must contemplate vague and open-ended spells of illness.

Nevertheless, a process similar to common exchange representation is now going on in the consumer affairs office of HHS. As the Office of Consumer Information and Insurance Oversight lays ground rules for ACA implementation, it must decide on some basic questions: what counts as insurance? What is a deductible? The ultimate goal is to require insurers to convey with far more precision what services they truly cover. The health insurance and health IT landscapes will only become governable when practices are nameable, classifiable, and comparable.

X-Posted: Concurring Opinions.

Linnaean Regulation in Health Insurance and Information Technology, Part I

I was recently listening to Health Affairs’s “Newsmaker Breakfast with Karen Pollitz.” She gave a fascinating presentation on the challenges she faces as she develops HealthCare.Gov as a portal for information about health insurance. As I noted a few years ago, health insurers can easily mislead consumers about the nature of their coverage, and disclosure charts can be very helpful.

But even disclosure charts run up against the slipperiness of language. Pollitz noted that for some plans, a “deductible” was not really a deductible; you could easily spend much more out-of-pocket on health care than the stated “deductible level” before coverage kicked in.

How can an individual make an informed choice when words lose their meaning in a tangle of qualifications and conditions? At what point does a deductible cease being a deductible? While this might seem like a relatively technical question of insurance regulation, it is reflects a more general information-gathering problem that will confront regulators in coming years. Scientists could only predict and control aspects of the natural world when they could be named and classified. Any successful regime of healthcare reform will depend, at a bare minimum, on a flexible yet standardized classification system that can map what health insurers are doing. Like Linnaeus patiently organizing a welter of living forms, regulators will need to taxonomize pullulating permutations of insurer practices.

The Rise of Health Care’s Middlemen

The United States leads the world in payments to private insurance providers. The industry has extraordinary power over access to health care. In 2010, long-standing dissatisfaction with the sector culminated in the Patient Protection and Affordable Care Act (ACA). Congress rejected changes like a public option in healthcare, in favor of a complex and reticulated statutory scheme to better regulate insurers. There have not been dramatic changes in the way that health insurance companies are run, and their stock prices tended to rise as reform became more certain.

The ACA has set in motion dozens of regulatory proceedings. The government also allocated $20 billion toward equipping all medical offices with electronic health records in the 2009 stimulus bill, the American Reinvestment and Recovery Act. Health regulators must now try to catch up with technologically advanced intermediaries in insurance and IT fields.

Immediately after the ACA passed, naysayers on both left and right complained that divisions like OCCIO were unprepared for their new regulatory roles. Perhaps the most compelling case for repealing the ACA is a belief that regulatory agencies will inevitably be captured, or overwhelmed with information from far far better funded attorneys and lobbyists representing insurance and IT firms.*

Nevertheless, the ACA has catalyzed one very important process: the development of an infrastructure of monitoring and reporting that will be necessary for any future informed regulation. It’s shocking to consider how inadequate past reviews were here. As of 1997, the “US Department of Labor had resources to review each employer-sponsored group health plan under its jurisdiction once every 300 years.” The Bush years did not significantly address that shortage. Moreover, “state insurance department staff levels declined 11% in 2007 while premium volume increased 12%.” The personnel simply haven’t been around.

Starting essentially from scratch, Pollitz and her fellow regulators are engaging in a painstaking rebuilding of the foundations necessary for substantial regulation. Having long neglected even to closely monitor the sharp practices of health insurers, federal regulators are now beginning new programs of surveillance.**

*The latter point does appear to be valid with respect to the public record now being compiled in dozens of rulemaking processes. In rule after rule, industry comments overwhelmingly dominate public interest or academic contributions. It’s sad to think that groups like Campaign for America’s Future, or labor unions, having spent so much time getting the ACA passed, are now ceding much of the regulatory field to insurers. On the other hand, given the Administration’s recent appointments, and recent McSurance waivers, who knows whether good comments would have an impact.

**For more on the importance of ongoing surveillance in complex business environments, see Larry Cata Backer on SarBox, and the last part of my earlier post on high finance.

Part II

X-Posted: Concurring Opinions.

Balance Billing: The National Conference of Insurance Legislators’ Plan

This past week I found myself (once again) sitting across a big desk from the surgery scheduler who works for my son’s ear nose and throat doctor.  She had a stack of papers for me to sign and as she passed me each one she offered a brief explanation of what it was.  As required by the March 2009 revisions to New Jersey’s Codey Law, one informed me that the surgery center where my son’s ear tubes were to be inserted was “physician-owned,” another that it was “out-of-network.”  Regarding the latter, the scheduler reassured me that, while the center could “balance bill” me for the portion of the facility fee not covered by my insurance, it would not.  I was told the same thing the first time around and nevertheless received a bill from the center for nearly $5,000; after I got over the shock, I called to ask that it be reduced and breathed a sigh of relief when it was, to $100.

So, balance billing was already on my mind when I received an email from Interim Vice Provost & Professor of Law Kathleen M. Boozang, calling my attention to a recent St. Louis Post-Dispatch article reporting that Steven Powell “has sued Washington University in St. Louis, accusing the university’s doctors and other Missouri health care providers of routinely and illegally over-billing for medical services.”  After Mr. Powell was hospitalized in 2008 at Barnes-Jewish Hospital, the hospital’s owner and Washington University, whose doctors staff Barnes-Jewish, sued Mr. Powell to recover fees not covered by his insurance carrier that he would not or could not pay.  Mr. Powell’s prospects for success are not clear, since Missouri, like most states, does not, at least not explicitly, forbid out-of-network health care providers from billing their patients for the portion of the provider’s fee not covered by insurance.

In 2009, two states, Louisiana and Texas, enacted laws that tackle the problems associated with balance billing not by banning the practice but, among other things, by requiring that the practice be made transparent.  The National Conference of Insurance Legislators, the self-described “voice of state legislators in Washington in the face of mounting federal initiatives to preempt state insurance regulation,” has promulgated a draft Balance Billing Disclosure Model Act modeled on the Louisiana and Texas statutes.  NCOIL will consider adoption of the Model Act at its next meeting, to be held in March of this year.

Under NCOIL’s draft Model Act, healthcare facilities would be required to provide “conspicuous written disclosure to a consumer at the time the consumer is first treated on a non-emergency basis at the facility, at pre-admission, or first receives non-emergency or post-stabilization services at the facility,” informing the consumer that the facility is either in- or out-of-network and, if the latter, that “the consumer may be billed for medical services for the amount unpaid by the consumer’s health benefit plan.”  Health benefit plans would also be required to make disclosures about the potential for balance billing, “in conjunction with issuance or renewal of the plan’s insurance policy or evidence of coverage.”  Finally, facility-based healthcare providers  would be required to (1) take steps to include sufficient information in their bills to enable patients to understand why they are being balance billed, (2) provide patients with over-the-phone assistance understanding such bills, and (3) work with patients to implement payment plans.

NCOIL received comments on the draft Model Act from a number of stakeholders.  The American Hospital Assocation wrote that “[a]n approach focused on disclosure sidesteps the key issue here: the adequacy of the insurer’s network with respect to contracts with facility-based physicians.”  Families USA suggested that “[a]s part of requirements that health plans maintain adequate provider networks, health plans should contract with an adequate number of anesthesiologists, emergency room providers, and other facility-based providers to see their members at each in-network facility and should establish reasonable procedures to help both patients and families to identify and locate those participating providers.”

Predictably America’s Health Insurance Plans have a different take, arguing that the most pressing concern is “[p]rotecting consumers from runaway charges billed by some out-of-network providers[.]“  AHIP points out that “[w]hen an individual receives services from a facility and accompanying facility-based practitioners, the consumer rarely has the opportunity to select the radiologist, anesthesiologist or pathologist.  Therefore, the proposed disclosure of charges and participating status of the practitioner would have a very limited practical impact because the consumer generally cannot act on this information.”

Tellingly, everyone agrees that disclosure will not be a magic bullet.

Pharma Coupons: Enriching the Drug Companies

A recent New York Times article highlighted an increasing trend in pharmaceutical consumerism.  Many drug companies are providing copayment or coinsurance payment assistance.  These subsidies now exist “for about half of the top 100 brand-name drugs sold in this country,” according to health analyst Richard Evans of Sector & Sovereign Research.  Some patients receive copayment cards or coupons from their physicians while others find them on the internet.

So what’s the big deal?  Insurance companies use cost sharing to encourage patient selection of less-costly therapeutic options.  Pricing differences influence consumer choices; The American Journal of Managed Care reported in 2005 that most studies of cost sharing and prescription purchasing estimate that a 10% increase in price would decrease consumer use by 1-4%.  As NPR reported, “[t]he copay strategy worked so well that in 2003, more than half of all drugs picked up at pharmacies were generics.”

In mid-2006, pharmaceutical companies introduced coupons to reduce beneficiaries’ out-of-pocket costs for expensive drugs.  The “pharmaceutical subsidies” act as a counter-incentive, steering patients toward more expensive drugs–which wind up costing the consumer less– or zero–out-of-pocket.  As a result, the use of pharmaceutical copayment cards or coupons has tripled since their inception.

Financial Assistance or Greedy Marketing?

According to the NY Times, “[d]rug companies say the [copayment assistance] plans help some patients afford medicines that they otherwise could not.”  However, this seemingly altruistic explanation rings–shall we say– like something less than the entire truth.  For starters, these coupons are widely available on the internet and physicians who distribute the cards do not screen patients for financial need.  As the NYTimes reports,

Executives at Medicis, the company that sells Solodyn, have told investors that the co-payment card is used by an “overwhelming majority” of patients, and is largely responsible for doubling use of the drug, to 26,000 prescriptions a week.

That sounds like brilliant marketing, not need-based financial assistance.

Also, when we think of those who are most in need, we often think (rightly or wrongly) of the uninsured, the poor and the elderly — none of whom benefit from the pharmaceutical subsidy!  As the Amgen First Step Program website states, it is “a medical benefit co-pay coupon program to help commercially insured eligible patients with their deductible, co-insurance, and/or co-pay requirements” for listed drugs.  Excluded from the program are the uninsured or those in publicly funded health insurance plans.

It is unsurprising that the uninsured are excluded from participation.  According to Joshua Schimmer, a biotechnology analyst, “it seems the best strategy for a pharmaceutical company is to price their drug as high as they possibly can and offer that co-pay assistance broadly.”  For example, over the past five years, Jazz Pharmaceuticals has quadrupled the price of its narcolepsy drug Xyrem, while increasing copayment assistance to a maximum $1,200 a month.  In order for the pricing system to work, pharmaceutical companies rely on consumers to choose the subsidized drug and insurers to foot the increased bill.

It is likewise unsurprising that the publicly insured are excluded, but for a very different reason; to offer subsidies to Medicare or Medicaid patients would be illegal.  Under 42 U.S.C. § 1320a-7b (1),(2), the knowing and willful offer, payment, or receipt of any remuneration in return for the purchase of any good “for which payment may be made in whole or in part under a Federal health care program” is a felony punishable by up to $25,000 or five years imprisonment.  Illegal remuneration includes “waiver of coinsurance and deductible amounts (or any part thereof)…”  (§ 1320a-7a (i)(6)).

So What’s the Big Deal?

The pharmaceutical copay cards and coupons are a big problem.  First, they circumvent the cost sharing structures established by health insurance plans, raising systemic health costs.  As the NYTimes reported:

“The member is somewhat insulated from the cost of the prescription,” said Kevin Slavik, senior director of pharmacy at the Health Care Service Corporation, which runs Blue Cross and Blue Shield plans in Illinois and three other states. “In essence, it drives up the total cost of providing the prescription benefit.”

That increased cost is passed on to the privately insured in the form of increased premiums and to the public through increased taxes.  As Eileen Wood, vice president of the Capital District Physicians’ Health Plan, told NPR in 2009:

those coupons come with a consequence. If everyone started using coupons to get the more expensive drugs, “we’d have to raise premiums,” she says. “There’s no question about that.”

Furthermore, publicly funded plans must also pay the increased price of prescription drug benefit, which is passed on to taxpayers.  Any benefit to the coupon user in the form of reduced out-of-pocket expenses is diminished by higher premiums and taxes.  In the final analysis, the only real beneficiaries of these “pharmaceutical subsidies” are the drug companies who offer them.

Moving Forward

This issue is not one that is likely to disappear.  Currently, Massachusetts is the only state that does not allow pharmaceutical coupons; it is possible that other states or the federal government will follow suit.  As for insurers, some may begin requiring patients to try generic drugs first, as Capital District Physicians’ Health Plan has, or simply drop coverage of these drugs altogether.  Either way, drug company coupons will remain a topic to watch in 2011.

Reform Rodeo

1. The Health Care Blog has an important piece on the role of HIT in Accountable Care Organizations (ACOs) and whether they will be open networks or walled gardens.

Will ACO (accountable care organization) IT models be walled gardens or open platforms?  i.e., will ACO IT platforms focus on exchanging information within the provider network of the ACO, or will they also be able to exchange information with providers outside the ACO network?

2. Kaiser Health News  discusses rules proposed by the Obama administration that would require health insurers to justify double-digit increases in premium rates.

Under the proposal, the flagged premium increases would be subject to review by the states – or the federal government in some cases – to determine if they are unreasonable.

In following years, the Department of Health and Human Services will adjust the specific percentage threshold for each individual state. Thresholds would vary partly because medical costs vary by state.

3. The New York Times has run a piece on a new antitrust lawsuit filed against Blue Cross Blue Shield of Michigan.

Federal prosecutors contend that Blue Cross in Michigan thwarts competitors by pressuring hospitals to charge rival insurers more to provide care, a practice prosecutors say has made health care extremely expensive in a state that can’t afford it.

4.  Tim Jost provides an overview at Health Affairs of the current state of the argument over the constitutionality of the individual mandate — including the recent decision by a federal judge in Virginia ruling the mandate unconstitutional.

Virginia adopted a statute purporting to nullify the minimum essential coverage requirement even before Congress enacted the Affordable Care Act, and the lawsuit was brought to enforce this statute.  Judge Hudson had earlier this year denied a Justice Department motion to dismiss the Virginia case, holding that the Commonwealth had standing to defend its legislation.  In his earlier decision, Judge Hudson had also held that the Commonwealth had an arguable claim that the minimum coverage requirement was unconstitutional.  Subsequent briefs filed by the Justice Department and by amici (interested parties who file as “friends of the court,” or amici curiae) supporting the reform law apparently failed to change Judge Hudson’s mind.

5. The Wall Street Journal has a story outlining the tremendous pecuniary benefits that certain spine doctors are receiving for conducting spine surgeries that some question as unnecessary.

The five surgeons are also among the largest recipients nationwide of payments from medical-device giant Medtronic Inc. In the first nine months of this year alone, the surgeons—Steven Glassman, Mitchell Campbell, John Johnson, John Dimar and Rolando Puno—received more than $7 million from the Fridley, Minn., company.

An Ounce of Prevention: Coverage Battles Rage Over the Biologic Synagis

Yesterday, I got a note from my son’s kindergarten teacher alerting me that the class had run out of hand sanitizer and tissues and needed donations to replenish their supply.  Proof positive that cold and flu season is upon us.

Less commonly known is that, in most or all of the country, it is also respiratory syncytial virus (RSV) season.  RSV is a widespread respiratory virus; almost everyone gets it by the time they turn two and it doesn’t usually result in anything more than a common cold.  As the CDC explains, however, RSV can cause lower respiratory infections such as bronchiolitis and pneumonia and these can be severe.  The virus is the number one cause of hospitalization in babies under one in the United States.

While there is no RSV vaccine, the biologic Synagis (palivizumab) can help prevent the development of severe illness in high risk children.  According to the American Academy of Pediatrics’ influential Red Book, this includes children under two with chronic lung disease, babies under one born at 28 weeks gestation or earlier, babies under six months born at 29-32 weeks gestation, and babies under six months born at 32-35 weeks with at least one of a number of enumerated risk factors such as daycare attendance.

There is a catch.  Synagis costs $900 or more per injection and each injection lasts just one month.  Because a season’s worth of protection from RSV costs many thousands of dollars (one payor puts it at $7,030 per patient), it is perhaps unsurprising that there is ample anecdotal evidence of baseless denials of coverage, by both private insurance companies and Medicaid.  The law student who blogs at Nonsense and Frippery has written three searing posts about her family’s Herculean efforts to secure Synagis shots — first from her private insurance company and then from Medicaid — for her son who was born at 25 weeks gestation in April 2010.  (The posts (which contain some strong language) are here, here, and here.)

With the passage of health reform, the United States has, for the first time, an abbreviated approval pathway for biologic drugs that are “biosimilar” to or “interchangeable” with already-approved biologics.  Its passage creates hope that less expensive versions of at least some biologics will be available here at some point in the future.  As the FDA concedes, however, there are many “issues and challenges associated with the implementation of the Biologics Price Competition and Innovation Act of 2009.”  Monoclonal antibodies like Synagis are likely to prove particularly challenging, for industry and regulators, because they are immensely complex molecules.  In Europe, where there has been an abbreviated approval pathway for biologics since 2004, the European Medicines Agency has yet to approve a biosimilar “mAb”.  This is expected to change, though.  In November, the EMA released a draft guideline for biosimilar “mAbs” and generic versions of rituximab, a drug used to treat non-Hodgkin’s lymphoma and rheumatoid arthritis, are in development.

While biosimilars may someday provide some relief to payors, in the meantime, one may merely seek to hold those payors accountable for baseless denials of Synagis and other expensive, but cost-effective, medicines that they purport to cover.

Mini-Med and the Hidden Backstop

We started the Health Reform Watch Blog at Seton Hall two years ago in part because I worried that, whatever legislation emerged from the 111th Congress, it could be severely compromised during the implementation process. As HHS continues the Herculean task of promulgating rules based on the text of the ACA, and adjudicating disputes, it is bound to make some mistakes. I am glad to say that one of our bloggers commented on one of those mistakes a couple months back, well before it got the spotlight of Congressional hearings that it deserves.

Mini-med health plans are characterized by low premiums and very low payment caps. At McDonald’s, low-level employees can get $2,000 a year of coverage for $680.68 of premiums; as Tim Noah reports, “$24 per week for a policy with a $5,000 ceiling and $32 per week for a policy with a $10,000 ceiling.” Mini-meds faced several regulatory hurdles this year, as Noah explains:

Annual limits on payouts are already being phased out under the health care law; as of Sept. 23, they aren’t allowed to fall below $750,000, which is a whole lot more than McDonald’s’ $2,000, $5,000, or $10,000. But HHS signaled it was willing to grant waivers to mini-meds. Then the mini-meds fell afoul of another pending regulation concerning the “medical-loss ratio”; i.e., how much revenue insurers spend on health benefits as opposed to overhead or dividends to stockholders.

The rule requires health insurers to spend between 80 percent and 85 percent of their revenue on medical care. No can do, McDonald’s told HHS in an e-mail obtained by the Wall Street Journal’s Janet Adamy. The high turnover rate among McDonald’s’ employees, the company said, occasions lots and lots of paperwork, so we can’t keep our administrative costs down relative to our payouts, which—in case you hadn’t noticed—are pretty darned low to begin with. On these dubious grounds, HHS granted the mini-meds an exemption through 2011 that could easily stretch to 2014.

Reporting on yesterday’s Senate Hearing on the mini-med plans, Noah describes one employee’s experience with this exciting, flexible market innovation:

Eugene Melville, a witness who works part-time for a big-box retailer . . . said he purchased through his employer a mini-med policy from Aetna with a $20,000 annual limit. In July, Melville said, he went to the doctor “for what I thought was an injury from a car accident.” The doctor noticed a lump in Melville’s neck, ordered up a biopsy, and diagnosed Melville with oral cancer. Melville figured he had close to $20,000 left to spend on the recommended treatment, but he quickly learned that within that $20,000 ceiling there were smaller ceilings–$2000 on hospital lab tests, surgical supplies, and drugs; $2000 for outpatient treatments such as chemotherapy—that effectively prevented him from using his mini-med insurance at all. Eventually he enrolled in a program for the medically indigent that did not offer the surgical options recommended by his doctor. The kicker, Melville said, was that Aetna sent him a letter suggesting that his oral cancer was a preexisting condition.

As I noted in 2008, supercheap plans have many social costs. MiniMed providers call their offerings “health insurance,” but they skip out when the really serious bills start. Then it’s up to the state to force hospitals to provide care via EMTALA, or providers to seek some way of providing uncompensated care. Medicaid, charity care, other subsidies—all form the hidden backstop that make mini-med function as a nice bonus to the minimally ill, and a fig leaf of “insurance provision” for firms shamed into some semblance of social responsibility. Just like the Fed’s long-stonewalled 2008 commercial paper intervention helped McDonald’s weather financial storms, the hidden backstop of government-funded health care saves it from the embarrassment of watching its employees die from lack of treatment if their McSurance fails to pay for more than a half-day at the hospital. In both cases, a titan of the “free market” is ultimately dependent on government intervention.

Health Reform Watch blogger Corey Klein worried about the implications when the waivers were granted in October:

Remember, a poll by the Associated Press reminds us that Americans who believe the health care bill did not go far enough outnumber those who believe the health care law went too far two-to-one. . . . [But] [t]he McDonald’s episode could be the start of many unintended consequences of the health plan. If the administration is so quick to buckle to private insurers demands, then what hope does the health care law have of actually making a difference in how American’s get their health care?

Noah concludes that “what [McDonald's] call[s] health insurance wouldn’t meet the fiduciary standards of a second-rate Christmas club.” Let’s hope this ill-advised 2011 waiver doesn’t last into 2012.

HHS Releases Much Anticipated Medical Loss Ratio Regulations

Closely resembling model regulations recently released by the National Association of Insurance Commissioners, the Obama administration today released regulations implementing the provisions of the ACA which govern the amount of each premium dollar that health insurers must spend on medical care. This amount that must be spent on actual health care or quality improvement (as opposed to administrative costs or dividends) is known as the medical loss ratio.

The ACA requires that health insurers spend at least 80% of premium revenue on treatment or quality improvement in the small group market, and 85% in the large group market. The statute also provides that the premium dollars required to be spent on health care or quality improvement, but which are not in fact spent on such services, must be rebated to the insured.

Healthcare.gov’s factsheet on medical loss ratios states that:

In 2011, the new rules will protect up to 74.8 million insured Americans, and estimates indicate that up to 9 million Americans could be eligible for rebates, starting in 2012, worth up to $1.4 billion.  Average rebates per person could total $164 in the individual market.

One aspect of the regulations that has caught the attention of many is a provision allowing health insurers to include the money they spend on federal taxes towards their medical loss ratio — essentially making it easier for insurers to meet the requisite level. As Bloomberg reports:

U.S. health insurers can include the cost of federal taxes in determining whether they spend enough on patient care, increasing the amount that can be kept for administration or profit under new rules. Company shares rose.

Bloomberg , quoting the U.S. Health and Human Services Department, also notes that insurance companies may receive favorable treatment in terms of the timing of the MLR rules:

Health plans led by Indianapolis-based WellPoint Inc. may also win delays from the spending requirements if individual states show the federal government that the so-called medical- loss ratio rule will destabilize insurance markets.

HHS has provided a number of resources on the medical loss ratio regulations, including:

• A News Release
• A Fact Sheet
• The Regulation (pdf)

Barring any of the possible delays mentioned above, the rules are slated to go into effect in 2011, with rebates, if any, being provided in 2012.

Medical Loss Ratios

Beginning January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) requires all health insurance plans to spend a set percentage of their aggregate premium income on medical claims and “quality improvement expenses”–85% for large group plans, 80% for individual and small group plans.  This set aside provision is known as a “medical loss ratio” or “minimum loss ratio” (MLR).  Should a health plan spend even slightly less than the required MLR, it must reimburse its customers, pro rata.

Many states already have MLR-based insurance rate regulations, often around 50% to 60%.  Other states have ratios much closer–or in New Jersey’s case, equal–to what PPACA will soon require.  The big difference will be how those MLRs are calculated.  For that, Congress turned to the National Association of Insurance Commissioners (NAIC).

The NAIC submitted its final recommendations to HHS on October 14, after months of conference calls and minor revisions. PPACA actually calls for NAIC to define terms and methodologies to implement the MLR requirement under the law, subject only to certification by HHS.

• The NAIC excludes federal and state taxes from premium revenues, despite being told by the congressional committee chairs responsible for PPACA that the reform law intended only to exclude new federal premium taxes. Taxes paid on investment income would still be counted as revenue under the NAIC’s recommendations.
• For smaller carriers, the NAIC recommends a “credibility adjustment” of up to 8.3% added to actual claim and QI expenses, should their loss ratios be sub-regulation. This is meant to account for the increased difficulty of predicting future claims for smaller risk pools. Plans covering 75,000 lives or more would not be eligible for credibility adjustments. (The commissioners declined a “last-minute” proposal to allow adjustments for larger carriers.)
• In 2011, the NAIC does not think the super-small carriers–those covering fewer than a thousand lives–should pay rebates at all.
• Medical spending must be calculated state-by-state, and not nationally. Some large insurers pushed hard to have it the other way.

Obviously, the state commissioners are wary of the adverse effects uniform MLR requirements might have on small insurers.

As Timothy Jost, a consumer representative to the NAIC has noted, allowing smaller carriers some elbow room on the MLR calculations doesn’t run counter to the reform statute’s legislative purpose.  PPACA already allows HHS to temporarily “adjust” MLRs for individual plans to account for carriers in states with higher administrative costs.  The purpose of MLR regulations isn’t to mail rebate checks to consumers, but to ensure that the lions share of premium revenue is spent on actual medical care.

Oh, and quality improvement.

In states like New Jersey, determining the actual loss ratio for a plan is a matter of simple math, dividing the total amount of claims paid by the total amount of premium revenue collected.  Under the NAIC’s pre-reform rubric, the loss equals incurred claims plus the amount the carrier sets aside to pay future claims (the “contract reserves”).

The PPACA loss ratio, however, can include more than just claims paid in the numerator-namely, “activities that improve health care quality” or quality improvement (QI) expenses.

The commissioners settled on this basic definition for QI expenses:

“[E]xpenses, other than those billed or allocated by a provider for care delivery (i.e., clinical or claims costs), for all plan activities that are designed to improve health care quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements.”

The NAIC reigns in this fairly broad definition with four basic qualifications:

• QI expenses “must be directed toward individual enrollees or may be incurred for the benefit of specified segments of enrollees. . . . [S]uch activities may provide health improvements to the population beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees other than allowable QI expenses associated with self insured plans.”
• “QI expenses should be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical societies, accreditation bodies, government agencies or other nationally recognized health care quality organizations.”
• QI expenses “should not be designed primarily to control or contain cost, although they may have cost reducing or cost neutral benefits as long as the primary focus is to improve quality.”
• QI activities must be “primarily designed to achieve the following goals set out in Section 2717 of the PHSA and Section 1311 of the PPACA:

✓”Improve health outcomes including increasing the likelihood of desired outcomes compared to a baseline and reducing health disparities among specified populations;

✓”Prevent hospital readmissions;

✓”Improve patient safety and reduce medical errors, lower infection and mortality rates;

✓”Increase wellness and promote health activities; or

✓”Enhance the use of health care data to improve quality, transparency, and outcomes.”

The proposal goes on to explain, in detail, what it considers to be the parameters of those five requirements.  Some ambitious examples include various “[a]ctivities to identify and encourage evidence based medicine . . . .”  Such expenditures, aimed at improving the quality of care received by patients, are welcomed by most consumer advocates.

Other expenses are of less obvious value to the consumer.  Nurse hotlines, for example, are often criticized as being administrative, cost-cutting expenditures dressed up to seem more beneficial to consumers than they are.  The NAIC’s recommendations include “face-to-face, telephonic or web-based interactions” as QI expenses, so long as they accomplish one of the goals listed under the “Improve health outcomes” or “Increase wellness” categories.

The problem with nurse hotlines isn’t that they can’t benefit consumers, but that it will be difficult for state and federal regulators to be sure that they are.

For instance, last summer, our family doctor told my wife she might need some minor hand surgery; baffled by what kind of person did such a thing, I called our insurer’s nurse hotline and learned that--of course–hand surgeons do hand surgery.  The nurse then gave us the numbers and addresses of the nearest hand surgeons who accepted our insurance.  This saved us time, no question. But it’s also information we could have gotten by, say, calling a hospital or calling back our general practitioner.

Having happened in 2010, my insurer most likely has to recognize the hotline as an administrative expense, inapplicable to its medical loss percentage.  In 2011, if HHS adopts/certifies the NAIC’s recommendations whole cloth, the hotline may or may not be counted in the MLR depending on whether its “primary focus” is determined to actually improve quality or merely reduce the insurer’s expenses.

But how can regulatory agencies know for sure?  The line is seemingly somewhat open to interpretation. And this, of course, is only one example. If this is the new landscape of health care finance, you can bet that insurers will be hard at work attempting to “re-cast” administrative roles into “quality improvement” functions. It would seem as though someone, somewhere, has to be monitoring QI expenses very carefully.  At least half of the states have made their disinterest pretty clear.

Reform Rodeo

1. The American Medical Association: In the face of new health reform requirements that are now in effect, many of the top insurers have dropped child-only health plans.

2. Kaiser Health News Daily Report: Health Care reform’s elimination of discrimination based on pre-existing conditions has not fully materialized; In a sign of what could be a backlash against health care reform, the 3M corporation announced that it will stop offering its health insurance plan to retirees. Click here for the Daily Report.

3. In a sea of pessimism, the New England Journal of Medicine explores the lessons of a health care success story: Grand Junction, Colorado — one of the cities that Atul Gawande detailed in his celebrated article in the New Yorker.

4. At the Health Care Blog, Michael Lake explores recent trends in HIT, while providing many helpful links.

5. Webcast 1: On Tuesday, October 5th: Maggie Mahar and others will be participating in a webcast where they will discuss health care reform. Click here for Mahar’s overview on her Health Beat blog, including a link to the freely-accessible live stream.

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