Monday, April 19, 2010

Health Reform: Massachusetts Premium Caps

Is the Patrick Administration's decision to unilaterally cap heath insurance premiums a prelude to what the nation can expect under the new health reform law?

The Massachusetts and U.S. laws both expand access to coverage without doing anything meaningful to lower costs. Coverage cannot be denied, yet the cost of coverage continues to rise. It is also a sad truth that people who need health insurance are willing to pay whatever it costs, while the healthy will take their chances. This further increases the cost of insurance, as the risk pool worsens.

Massachusetts has experienced exactly this phenomenon. Despite near universal coverage, the cost of care rises. Small businesses are affected most because they are rated in the same pool as newly insured individuals, many of whom are expensive. Small business and the Governor believe that insurance companies are to blame. Someone should look at the effects of the health reform law itself. "We have met the enemy and they is us".

In this strange atmosphere, where the underlying medical cost (i.e. price) problem is ignored, what is there to do but act arbitrarily? Until we get serious about what is really driving health care costs, the implementation of our health reform laws will be like a bad, formula-driven movie -in the end, quite unsatisfying.

Saturday, April 10, 2010

Health Reform: ACO's

Let me start by saying that ACO's (Accountable Care Organizations) are a good idea and that hospitals and physician groups would be wise to start organizing themselves in this way. No matter what happens with payment reform, cost-efficient, high quality systems will have a competitive advantage.

Nevertheless, the Medicare ACO initiative approved by Congress in the new health reform legislation is something of a disappointment. I think the best way to characterize it would be as a new (and expensive) Medicare fee-for-service provider type. This is ironic because the stated reason for changing the way Medicare delivers care and pays was to move beyond fee-for-service.

Medicare participating hospitals and physicians organized as ACO's will be responsible for all Part A and B services for an enrolled population (at least 5,000). Hospitals and physicians and other providers will be paid in the usual fee-for-service way. At the end of a defined period, CMS will calculate the difference between these fee-for-service payments and a CMS-derived benchmark that is based on historical spending. If the ACO meets certain evidence-based medicine and quality benchmarks and actual fee-for-service spending for the ACO is lower than the CMS benchmark the ACO will be eligible to share a percentage (TBD) of the calculated savings. This model is like an incentive or performance-based contract used by many private payers today with some PHO's or multi-disciplinary physician groups.

There are a few challenges involved in adopting this approach broadly for Medicare. It is not immediately clear what the ROI will be on the infrastructure investment needed to create an ACO just for Medicare. This is especially true because other parts of the health reform legislation direct Medicare to reduce payments to hospitals and physicians, who will naturally want to understand the net impact of all the reimbursement changes before making significant IT or clinical integration investments and managing all the services for an enrolled population. CMS also holds all the ACO purse-strings, and until it is clear what the benchmarks are, what percentage of savings an ACO will be allowed to retain, how the risk adjustment will work, etc there will be skepticism. And, of course, the fledgling ACO will need to convince participating hospitals and physicians, who are used to making up Medicare payment shortfalls through utilization and cost-shifting to private payers, that changing the way they practice and making the necessary infrastructure investments is worth it, especially when the alternative is the usual fee-for-service model.

It will be interesting to see whether this initiative, structured as it is, produces actual Medicare cost savings.

Tuesday, April 6, 2010

Health Reform: The Impact on Insurers

A post by Maggie Mahar on The Health Care Blog today tries to assess the short and long-term impact of federal health reform legislation on insurers. She highlights many of the same cost-driving changes I have tried to bring to light and rightfully questions the myth that the bill is a boon for insurers. This myth is not so much a myth as an intentional delusion that was needed to secure the bill's passage. You can find her post at

Although she hits many of the right notes, I am not in full agreement with some of her conclusions. Her assertion that not-for-profit regional plans will fare better than national for-profits is unlikely to prove true. At Harvard Pilgrim we estimated that the value of the new premium tax alone would exceed our annual net income. Regionals will find it difficult not only to bear the cost burden but to increase premiums or convince providers that they must accept lower rates. Nationals will find more and more effective ways of spreading and passing along these new costs across multiple business lines. No amount of medical management will help regional not-for-profits withstand the new taxes and the Medicare cost-shifting built into the bill.

I also find it hard to believe that Congress will revisit the individual mandate and strengthen it. If anything, the political pressure will be to weaken it. The best we can hope for is that it stays as is, and I would not expect much improvement in the risk pool from the existing mandate. Massachusetts has an even stronger mandate yet is suffering from a post-reform cost explosion so great that the Governor, in frustration, has imposed arbitrary premium caps.

As for the prediction that the legislation will drive insurers to be more efficient, this is probably the case, but the savings will be a mere drop in the bucket of potential system savings. Nothing in the legislation addresses the true cost problems in the commercial sector - cost shifting from Medicare, hospital-physican consolidation, lack of transparency, and consumer unwillingness to accept limits on provider choice.

Friday, April 2, 2010

Health Reform: The Sequence of Events

It will take some time to understand what exactly the health reform legislation means for the average American. Major reforms do not take effect until 2014, and at least four Congressional sessions, each with the power to modify the law, and a Presidential election will occur before they happen.

That said, there are changes that go into effect immediately, and their impact may influence the law's ultimate success or failure. Some of these changes raise costs for those who are currently insured, some provide financial assistance, some provide access. The net impact of these changes will be a mixed bag, with winners and losers.

Among the changes that will immediately increase costs are a prohibition against lifetime or "unreasonable" (definition TBD) caps on coverage. Some existing products rely on these coverage caps to lower premium costs. Another change that will increase costs is a requirement for first-dollar coverage of preventive services. Many cost-sharing products will have higher premiums due to this change. A third change is a requirement that businesses provide equal coverage for all full-time employees. It is unlikely that this change will lower costs for employers, many of whom are already booking liabilities associated with tax law changes included in the final bill.

On the other hand there are changes that provide financial assistance or access to coverage, some of which may or may not raise costs. A temporary high-risk pool for those with pre-existing conditions who have been uninsured for six months or more will begin to address the adult pre-existing condition problem. Children with pre-existing conditions must be covered by insurers, and their inclusion in the risk pool will no doubt be a cost problem. Small business will be eligible for tax credits to offset the cost of providing insurance. Except in cases of fraud so-called "recissions" of coverage will be prohibited.

I am afraid that the net impact of all this may create more losers than winners, since most people are insured and will see their rates rise. Remember that everything mentioned above happens on top of an annual medical cost trend that is running at two to three times the rate of inflation.