The Hum of Healthcare Reform

Photo by Elsie esq. via flickr

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.

Making the Case for the Public Plan, Part I: The Difficulty of Private Health Insurance Regulation

As health reform moves to the top of the Congressional agenda, we will be hearing a lot about a possible “public option” in the plan. Earlier this Spring I began thinking about whether a public option was absolutely necessary to a successful reform. I started out hoping that it wasn’t, because Republican leaders despise it, and Democrats have sometimes let the “perfect be the enemy of the good” in health reform. But I’m now convinced that a public option is necessary, and I hope to spend a few posts explaining why.

To begin with, we should get clear on exactly what insurers do. I have tried to summarize it in a one page chart, which appears here. The right column focuses on the purely positive role of insurers–how they add value to the health care system. With massive amounts of data at their disposal, they can identify best and worst providers, good and bad treatments, and even spot dangerous side effects in drugs and devices. They can invest in new technology to better process claims. To the extent that they retain long-term relationships with customers, they have an incentive to reduce costs by keeping those patients healthy.

But the structure of the US health insurance market makes it difficult for most private insurers to respond to such incentives. About 21% of insurance policyholders cancel their plans in any given year, meaning that the average customer’s commitment to a plan lasts for about three years. That’s just not enough time for an insurer to gain much investing in the health of its members.* There are many more profitable strategies–which lead me to the left side of the column, bad insurer practices.

Health care costs are highly concentrated among a small portion of the population. As AHRQ notes, “Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount.” (The famed 80/20 rule also applies in health care expenditures.) This creates almost irresistible pressures for private insurers to “risk select;” i.e., to avoid covering those who need care most. While “pre-existing conditions” exclusions and recissions are most common in the individual insurance market, they and other tactics can undermine the idea of risk-pooling at the core of any feasible insurance scheme. Given that many private insurers began thriving by cherry picking (and lemon dropping) the healthiest (and sickest) customers, they have long resisted regulation of risk selection.

But now, as the chances for reform increase, leading private insurers are beginning to soften their approach in order to argue that a public plan is not necessary. They are promising to accept “guaranteed issue” coverage, “with no pre-existing condition exclusions.” They have even promoted plans for “risk adjustment,” which “spreads costs for the highest-risk individuals.” Would regulation like that preclude the need for a public option?

I don’t think so, because there are so many other ways for insurance companies to drive away the sickest customers. As noted in the chart, subtler selection can include refusal to respond to needs of high cost patients in order to drive them away, and attracting a disproportionate share of low‐risk individuals. For example, a plan might decide to increase coverage of gyms and cosmetic procedures (to attract fit customers) and devise complex forms to be filled out monthly in order for a patient to get oxygen or insulin (to repel customers with congestive heart failure or diabetes). These are not merely hypothetical concerns. The Netherlands is often held up as a model for US reform because of recent moves there to make their traditionally solidaristic system more market-oriented. But risk selection threatens to unravel the Dutch “middle ground:”

[After the Dutch moved in a more American direction, insurers] have more tools for managing care, which can also be used to select risks. . . . Insurers have more room to define the precise entitlements of their insured groups, which can be used to select favorable risks. Third, insurers are allowed to sell mandatory health insurance together with any other type of non–life insurance (such as supplementary health insurance, sick leave insurance, and car insurance), which prior to 2006 was not allowed.

In particular, supplementary health insurance can be an effective tool for risk selection, because insurers are allowed to reject applicants based on their health status. Fourth, insurers are free to give premium rebates to groups for the mandatory basic insurance, which prior to 2006 was not allowed. A group can have any risk composition, and the “organizer” of the group can selectively enroll preferred members only. Although the rebate for the basic insurance is at most 10 percent, insurers can give these groups any rebate on supplementary health insurance or other insurance products. . . . Given the increasing incentives and expanding tools for risk selection, further improvements of the risk-equalization method are necessary to prevent insurers from engaging in risk selection, which occurs, for example, in Switzerland.

US insurers are sure to import methods like that, and to continue along current lines of risk selection. As health policy expert Karen Pollitz has noted, all of the following tactics can be used to risk select:

–“Street” underwriting
–Selective marketing (including in competing markets)
–Renewal rating
–Closed blocks
–Benefit designs
–Payment practices
–Provider network design

Congress or HHS or state insurance commissioners could try to outlaw or restrict risk selection practices one by one. But as Pollitz has noted, 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 probably did not significantly address that shortage. Moreover, “state insurance department staff levels declined 11% in 2007 while premium volume increased 12%.” The personnel simply aren’t there, and when they are, they are as likely as not to be outgunned by private sector attorneys, lobbyists, and experts-for-hire. The right way to discipline private insurers is to have competition from a public option–not to allow them to continue a risk-selection race-to-the-bottom by deflecting regulation.

I have taught health care regulation at both Seton Hall and Yale Law Schools, and my students have always been dismayed by the cat-and-mouse games that regulators and insurers play to control (and evade control of) risk selection. I have very little faith that DOL, HHS, or their state equivalents (who are also often tasked with regulating life and auto insurance and banks) can really make private insurers accountable, no matter how ingeniously the insurance exchanges are designed.

So that’s a case for the public plan largely based on the problems with private insurance regulation. For a positive case, which I’ll develop in my next post, I’ll focus on the middle column of the chart–eternally contested insurer actions designed to ration access to providers.

*For recognition of this problem in the context of bariatric surgery, and a creative plan for solving it, see Ronen Avraham and K.A.D. Camara, The Tragedy of the Human Commons, 29 Cardozo Law Review 479 (”bariatric surgery is just one example of insurers’ failure to cover prospectively efficient treatments. A similar confluence of insureds switching insurers frequently, high transaction costs of individualized contracts, and medical-industry lobbying explain insurers’ failure to cover other prospectively efficient treatments.”).

X-Posted: Concurring Opinions.