Observations on Health Care Reform

Posted on March 31, 2010 by Andrew Kurz

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Today, Obama signed the bill to repair bad parts of the health bill, and all are now the law of the land. Things might have gone better if this were called “Insurance reform” as that section caused the most heated debate.  Underlying the disagreements are two opposing philosophies. Those who think access to health care is a privilege will disagree with this reform.  Those who think that access is a basic right tend to agree.  Below are some observations about the whole messy process.

Everyone is entitled to their own opinion.   No one is entitled to their own facts. These last 14 months have seen far too many allegations passing as facts, and when repeated often enough, has many believing they are facts. Having spent so many months researching real facts from nonpartisan sources, most of the critics’ allegations are simply untrue.

One often repeated charge is that Democrats rammed this through and excluded all Republican attempts to participate.  One reason this process took so long is that Senators Baucus (Democrat) and Grassley (Republican) took months longer to reach agreement on their committee bill that was a bipartisan effort and more than 200 Republican ideas are included in the final bill.  Republican input is substantial and to say they had no voice is just politics, not fact.

Another reason is the Republican Party opted for a strategy to “just say no” to any partisan Obama bill and to appointments requiring Senate approval.  They even called the health bill, Obama’s Waterloo months before they knew what was in it. Withholding of appointments and repeated 100% NO votes attests to their non cooperation.  After months of joint effort, even Senator Grassley voted against his own committee bill.

Minority Leader Boehner complained that this bill would be Armageddon and Senator McCain said he would no longer participate.  Such hyperbole would be humorous save that far more inflammatory comments have stirred up unruly conduct in the public while leaders on the right remain mostly silent.

The majority of Americans disapprove this bill. One truth is political bickering has turned off the majority people. But it also depends on how the questions are worded.   Non partisan Kaiser Foundation asked about 12 specific benefits.  Over half favored 11 benefits, with 60%+approval on 6 benefits.

The individual mandate is unconstitutional. What people do not realize is federal law requires everyone be treated in emergency rooms, regardless of their ability to pay.   If you have mandatory expenses, you need mandatory income. Republicans initiated the idea of mandate during Hillary care and Democrats objected much like Republicans do now.  But like a card table, take out a key leg and the whole table falls down.  Healthcare is far more complex than four legs and all need to work together or reform collapses.

Republican governor Romney who passed universal health care for his state wrote in 2006 (and which it and the new law are quite similar) “Some of my libertarian friends balk at what looks like an individual mandate. But remember, someone has to pay for the health care that must, by law, be provided: Either the individual pays or the taxpayers pay. A free ride on government is not libertarian.”

This is a government takeover of healthcare. Somebody might want to remind those folks that 100 million people and ½ of all medical costs are already on government health care. While reform calls for an expansion of Medicaid, the bulk of reform retains the current mix of private and government insurance.  What IS reformed are the health insurers who over time have engaged in more and more nefarious acts that favor profits at the expense of the health of their insured.

Insurance reform is the number one issue for the public and this statute goes a long way, albeit gradually, in making those egregious acts illegal.  Controls on insurers are what all other industrialized nations do and their costs are about half ours.

Government will dictate coverage and ration care. There is some truth to that.  However, today, health insurers dictate coverage and too many care more about Wall Street than people’s health.  In fact, some 45,000 people die each year because of lack of access to health care.  If one wants to complain about death panels and health care rationing, look no further than your for-profit health insurer of today.

Buried in those thousands of pages are new data reporting standards and requirements that will allow comparison of medical practices.  Since half of all costs are already taxpayer funded, why shouldn’t the government make an effort to eliminate waste by encouraging effective practices and discouraging non-effective ones.  Contrary to “popular” opinion, the bureaucrats analyzing those practices are not political flunkies, but doctors and medical personnel.

This will cut Medicare benefits. Hard as it may seem today, the government had grave initial concerns that few people would sign up for Medicare.  To encourage participation, Medicare offered private insurers a “bonus” of 15% above Medicare’s own costs to entice seniors to sign up.  Today, 25% of seniors are in Medicare Advantage programs.  Private insurers are free to modify that coverage and add benefits, but also free to charge more for any enhancements.

What reform does is gradually reduce that 15% “bonus” as it certainly is not needed to encourage seniors to sign up. But it does so in an intelligent way, allowing efficient insurers to keep more of the bonus while discouraging inefficient ones.

Closing Medicare Drug “doughnut hole”. There is bipartisan support for this provision as there was in the initial Bush statute.  What few remember is that there was zero funding included in that Republican bill and its 10 year costs about equal the current reform bill. Republican complaints of adding to the deficit or raising taxes are rather hypocritical given their history of deficit spending.

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Affordable Care Act – Table of Contents

Posted on March 25, 2010 by Andrew Kurz

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The Affordable Healthcare Act for All Americans is without a doubt, a large and complex piece of legislation at just over 2,400 pages.  But how big is 2,400 pages when wide margins, lines numbered, text double spaced, large font,  multiple levels of indent, and more than a few references to other documents?  The sample page below (standard 8.5 inch wide paper) is indicative of the 2,400 page document. The actual content is but a small fraction of a page. AHA legal text sample

Aside from the claims of too lengthly and complex, Republicans argued that this was a Democratic bill rammed through congress.  Interestingly, AHA includes more than 160 Republican amendments accepted during the month-long mark-up through just one committee (HELP), one of the longest in Congressional history.

Critics have claimed it’s a government takeover of our health system.  It may be news to those critics but half of the health system is already government-run.  And the great bulk of the reform bill deals with steps to improve existing government systems that has hardly drawn any attention.  The following provides a quick breakdown of the law sections.  The PDF report that can be viewed/downloaded shows the entire table of contents.

There are 10 “Titles” or major topics in the bill.  Only the first, at 374 pages, less than one sixth of the entire bill deals with changes to how the private sector handles health care. Yet, this is the section that has garnered nearly all the criticism. The bulk of Title I deals with prohibiting abuses by the insurance industry, which, if you ask on an issue by issue basis, most people will agree with the new provisions. Nothing in the bill involves a “takeover” of private insurers.

The next three Titles [II,III,IV] deal with improving Medicare and Medicaid programs and comprise 852 pages, one-third of the bill.  These Titles address reduction of waste, fraud and abuse, and pilot new payment methods towards a “results” oriented method common in most other industrialized countries.  There are few objections to this section.

Title V, at 256 pages, addresses anticipated shortages of primary physicians and other healthcare workers due to services that will be required by aging baby boomers.  This is totally opposite the “death panels” that ration healthcare that unfortunately got too much press for a falsehood.

Title VI uses 323 pages to improve transparency and integrity, yet more efforts to reduce waste, fraud and abuse in both the public and private health sectors. Who objects to efforts like this?

Title VII  improves Access To Innovative Medical Therapies, with focus on lowering the cost of drugs

Title VIII addresses ‘‘Community Living Assistance Services and Supports Act’’ or CLASS Act. This title The purpose of this title is to establish a national voluntary insurance program for purchasing community living assistance services and supports.  Moving people from higher cost hospitals and nursing homes to assisted living lowers costs, a laudable goal.

Title IX includes the revenue provisions that include provisions to raise revenue to pay for the expanded coverage.

The final Title X addresses 1) Medicaid and CHIP, 2) Support for pregnant and parenting women, and the major section 3) Indian health care improvements.  None are controversial issues.

Title I——-Quality, Affordable Health Care For All Americans [374 pages – 14%]

Title II——Role Of Public Programs [221 pages – 8%]

Title III–—Improving The Quality And Efficiency Of Health Care [501 pages – 19%]

Title IV–—Prevention Of Chronic Disease And Improving Public Health [130 pages – 5%]

Title V——Health Care Workforce [256 pages – 9%]

Title VI–—Transparency And Program Integrity [323 pages – 12%]

Title VII-—Improving Access To Innovative Medical Therapies [65 pages – 2%]

Title VIII—Class Act [53 pages – 2%]

Title IX—–Revenue Provisions [93 pages – 3%]

Title X——Strengthening Quality, Affordable Health Care For All Americans [373 pages – 14%]

.

Download PDF Report >>> Senate bill TOC

 

Filed under: Commentary, Health Costs, Health Insurers, Health Quality, Healthcare Reform, U.S. Senate | Tagged: , , , | 1 Comment »

Key Healthcare Provisions – Fortune Magazine

Posted on March 22, 2010 by Andrew Kurz

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Fortune Magazine Source

By David Ewing Duncan, contributor

March 22, 2010: 12:58 PM ET

(Fortune) — Those of us alive last night will one day retell the story of how mere mortals in Congress and the White House defeated a combined army of Harpies, Gorgons and Minotaurs that for decades have thwarted all efforts to reform the American health-care system.

So maybe most of America last night was riveted not by Parliamentary antics in Congress, but by college basketball. Nonetheless the House of Representatives did the deed when they passed the Senate’s health reform bill at 10:44 pm. A package of changes to the bill still needs to be approved by the Senate, but the basic health-care bill will become law when President Obama signs it.

Now we really can get busy and work on health-care reform.

I’m not talking about the sort of epic reform that was just passed by Congress. That was as much about showing the country that Washington can govern and take on powerful interests, as it was about healing our ailing health-care system.

I’m talking about an agenda of urgent matters that still need to be addressed to truly fix American health care. But not in the hyperventilated, do-or-die atmosphere that has characterized the health-reform debate every time it has been seriously proposed since at least Harry Truman. These remaining issues can be thought of as smaller epics, like chapters in the health-reform Odyssey rather than the entire narrative.

Here’s what’s left to do.

Reduce costs: According to President Obama and Congressional Democrats, the bill just passed will pay for itself over the next ten years. But what about the rest of the $2.7 trillion the nation will spend this year on health care? That works out to almost $9,000 per American — which is nearly twice what the next most expensive country in the world — Switzerland shells out.

Spending this much on health care takes away resources from education, defense, and other priorities. Medicare and Medicaid alone are estimated to cost $763 billion in 2010, which have edged out defense and social security for the first time as the number one expenditure for the federal government, costing 21% of the president’s $3.5 trillion budget.

Improve care: Contrary to the widespread belief that the U.S. has the best health-care outcomes in the world, on many measurements we lag behind nations that spend far less. For life expectancy, the U.S. ranks 23rd out of 27 for Organization for Economic Co-operation and Development countries, which also include most of Europe, Japan, Korea, Turkey, Australia, New Zealand and Canada.

While mortality rates in the U.S. for stroke and some cancers rank among the best — meaning fewer deaths, according to the OECD — the U.S. ranks toward the bottom in mortality rates for other maladies such as diabetes. We rank 26th, second to the last, for our infant mortality rate.

Comparative Effectiveness: The bill just passed by Congress allocates funding for investigating and assessing which pharmaceuticals, devices and procedures work best. This effort needs even more funding and a larger mandate to rid health care of expensive treatments that don’t work — or that work no better than less expensive alternatives. We wouldn’t buy a car without consulting Consumer Reports, so why shouldn’t we have the same information available for health-care treatments?

Personalized Health: A revolution in predictive and preventive health care is underway thanks to new discoveries in genetics and molecular biology. The current bill provides some funding and support for translating these scientific discoveries into clinical applications — which is added to previous funding provided by the National Institutes of Health — but much more is needed.

The goal is to shift health care from focusing on sickness and symptoms to emphasizing prediction, early diagnosis, and prevention. (Not all prevention is high tech — holding anti-smoking classes for middle-school students, for instance, is a low-tech option for preventing teens from becoming smokers).

Expanding the publicly funded safety net: Right now 100 million Americans — one in three — have govern ment-funded and administered insurance, mainly through Medicare, Medicaid, and the military. The bill that just passed will go a long way to making sure most of the rest of America is insured, though efforts to provide a publicly financed option to private health insurance failed to make it into the final measure.

Making sure that Americans have an affordable insurance option required by law is unfinished business. We now need to insure that every American — like every citizen in Britain, Germany, Japan, and Korea — is covered by a basic insurance safety net.

Of course, none of these mini-epics will be addressed anytime soon, not with so many other monsters running amok like financial reform, jobs, education, and Afghanistan. But what a relief that the mortals in Washington rose above their bickering to slay at least one or two of the beasts plaguing our land.

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Key Healthcare Provisions – Kaiser Foundation

Posted on March 22, 2010 by Andrew Kurz

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Kaiser Foundation Source

Some of the items that go into effect in the first year include:

NEW HELP FOR SOME UNINSURED: People with a medical condition that has left them uninsurable may be able to enroll in a new federally subsidized insurance program that is to be established within 90 days. The legislation appropriates $5 billion for this, although that may not be enough to cover all who apply; it’s not clear how much consumers would pay as their share of the cost. About 200,000 people are covered in similar state programs currently, at an estimated cost of $1 billion a year, says Karen Pollitz, a research professor at Georgetown University.

DISCOUNTS AND FREE CARE IN MEDICARE: The approximately 4 million Medicare beneficiaries who hit the so-called “doughnut hole” in the program’s drug plan will get a $250 rebate this year. Next year, their cost of drugs in the coverage gap will go down by 50 percent. Preventive care, such as some types of cancer screening, will be free of co-payments or deductibles starting this year.

COVERAGE OF KIDS: Parents will be allowed to keep their children on their health insurance plan until age 26, unless the child is eligible for coverage through a job. Insurance plans cannot exclude pre-existing medical conditions from coverage for children under age 19, although insurers could still reject those children outright for coverage in the individual market until 2014.

TAX CREDITS FOR BUSINESSES: Businesses with fewer than 25 employees and average wages of less than $50,000 could qualify for a tax credit of up to 35 percent of the cost of their premiums.

CHANGES TO INSURANCE: All existing insurance plans will be barred from imposing lifetime caps on coverage. Restrictions will also be placed on annual limits on coverage. Insurers can no longer cancel insurance retroactively for things other than outright fraud.

GOVERNMENT OVERSIGHT: Insurers must report how much they spend on medical care versus administrative costs, a step that later will be followed by tighter government review of premium increases.

Some of the major changes the reconciliation proposal would make to the Senate-passed bill:

HEFTIER SUBSIDIES: Compared to the Senate legislation, the reconciliation bill would provide more generous subsidies to low- and moderate-income Americans to help them buy health coverage.

THE “MASERATI” TAX: The levy on high-cost insurance plans is scaled back and delayed, rendering it more a “Maserati” than a “Cadillac” tax. It would apply only to the portion of plans costing more than $10,200 a year for individuals, up from $8,500, and $27,500 for families, up from $23,000. The tax wouldn’t kick in until 2018, reducing the projected revenue to the government by 80 percent. Over time, however, the tax would hit more and more plans, because the tax’s threshold is set to increase at the rate of inflation while premiums are expected to continue to grow much more quickly than that.

CLOSING THE DOUGHNUT HOLE: Unlike the Senate bill, the reconciliation measure would eventually close the coverage gap, called the “doughnut hole,” for Medicare beneficiaries enrolled in Part D drug plans. (Currently, seniors who hit the gap must bear the full cost of their medications until they spend a certain amount, when coverage kicks back in.)

Under the new bill, seniors who hit the gap this year would get $250 to help cover the costs of their medications. Starting next year, they’d get a 50 percent discount on brand-name drugs, with the cost borne by the drug industry. In subsequent years, the discounts would expand and begin covering generic drugs, with the expense picked up by the government. By 2020, the discounts would reach 75 percent.

SHIFT IN MEDICARE ADVANTAGE PAYOUTS: Government payments to Medicare Advantage, the private-health plan alternative to traditional Medicare, would be cut back more steeply than under the Senate bill: $132 billion over 10 years, compared to $118 billion.

The government currently pays the private plans an average of 14 percent more than traditional Medicare. The new bill, besides reducing payments overall, would shift the funding; some high-cost areas would be paid 5 percent below traditional Medicare, while some lower-cost areas would be paid 15 percent more than traditional Medicare. The Senate’s plan that would have shielded some areas of the country such as South Florida from major cuts was largely eliminated.

A RAISE FOR DOCTORS: Primary care doctors would get a Medicaid payment boost in the reconciliation bill. Beginning in 2013 and 2014, the doctors’ payment rates would be on par with Medicare rates, which typically are about 20 percent higher than Medicaid. The goal is to ensure that there will be a sufficient number of doctors willing to care for the millions of additional people who would become eligible for Medicaid under the health care overhaul.

PUSHING UP THE MEDICARE TAX: The Senate bill adds a 0.9 percentage point to the Medicare payroll tax on earned income above $200,000 for individuals, or $250,000 for couples. Under the reconciliation bill, starting in 2013, people in those income brackets also would face a 3.8 percent tax on investment income, such as interest, capital gains and dividends.

PENALTY FOR NOT HAVING INSURANCE: Under the new bill, most Americans without insurance would face an annual penalty, starting in 2014 at $95 – the same as in the Senate bill. But in following years, the penalties in the reconciliation bill are slightly different. Those without insurance in 2016, for example, would pay the greater of two alternatives: a flat fee of $695, down from the Senate’s $750, or 2.5 percent of their income, up from 2 percent in the Senate bill.

EXPANDING MEDICAID: The reconciliation package differs from the Senate-passed bill in several ways. It would delete a provision dubbed the “Cornhusker kickback” that would have exempted Nebraska from paying any cost of a Medicaid expansion included in the bill. But it would provide full federal funding to all states for newly eligible Medicaid recipients for three years. And it would give additional funding to states like Vermont and Maine that have already moved to cover adults without children, which isn’t required under the Medicaid program.

MEDICARE SPENDING BOARD: The Senate bill would create an independent, 15-member board to recommend ways to control Medicare spending. The board remains in the reconciliation package, but would be expected to produce just about half of its original projected savings of $23 billion in the Senate bill. That’s because the new proposal would make greater cuts in Medicare Advantage plans.

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Insurers Hide Profitability Behind Return on Sales

Posted on March 10, 2010 by Andrew Kurz

Download PDF Report>>> Insurers Hide Profitability Behind Return on Sales

SUMMARY

Health insurance companies have repeatedly claimed their earnings were a very modest 3-5% return on sales. Implicit in their claim is that many others earn far greater returns.  But comparing sales ratios to other industries can be misleading.

High value added industries like software have high sales margins.  Low value added industries like groceries and insurance and have low sales margins. While health insurers may not compare well with the high valued group, they show very fair returns compared with lower added value industries.

Other financial ratios used to compare include ROI and ROE that key not on sales but on gross and net investment. How much money was used to generate profits.  Here the picture is significantly more favorable for health insurers. They are not only near the top of basic industries, but are well positioned compared with more discretionary industries.

RETURN ON SALES

Return on sales, while prevalent, is not the only financial ration used to compare performance.  Each ratio has its strengths and weaknesses.  The weakness of return on sales is that it completely obscures the differences in the value companies add to the goods and services that they sell.

The chart below highlights returns for three industries based on value added. (Ratios are for example only.) The bottom bar represents high value added firms like computer software where purchased goods and services are nominal compared to what they pay their staffs and what they earn on sales.

The mid range covers companies like manufacturers who buy raw materials and intermediate goods, perform significant steps (like conversion and assembly) incurring added costs, and (hopefully) sell at a margin above their internal costs.

Finally, at top are industries where the bulk of their costs are purchased, like groceries and insurance, and while they add value it is small compared to their purchase costs.

In all three cases, a consistent ratio of internal costs of 60% and margin of 40% was applied.  But notice that the margin on final sales (at 100%) ranges from 36% for high value added industries to only 4% for low value added. To rely on returns based on sales is meaningful only within industries with similar value added components.

INDUSTRY COMPARISON OF RETURN ON SALES

Ratios of returns on sales are also influenced by where they stand on a “necessity” scale.  Sales for basic items like food, housing, and utilities, tend to be fairly stable and many of their costs are simply “passed through” to the customer. The more the pass through, the lower the markups tend to be.

Conversely, purchases discretionary purchases for luxuries, entertainment, and cell phones can be expected to have higher margins.  Sales levels are more affected by economic conditions and higher margins compensate for greater risks.

As noted, health insurers act like the poor kid on the block using net profits on sales.  It is true that a group of industries have far better returns than health insurers as shown below. The chart shows returns based on net profit margins divided by sales (Source: Yahoo Finance – Industry Index by Sector).

Insurers ARE the “poor kids on this block.”  But look at the “block.” Cigarettes, beer, wine and liquor, golf clubs and perfume, cell phones and cable TV.  These industries can hardly be defined as meeting basic customer needs.  These are discretionary purchases that can cut back on during tough times.  Purchases of basic necessities are harder to cut back.

Below is a different group of industries covering more basic needs. One would reasonably assume that health insurance is a basic industry and where value added is small compared to total costs.  While Health Insurers (gold bar) may not be the highest in this group either, they are by no means the lowest.  What you don’t see are these other industries complaining about their low returns on sales as health insurers do.

OTHER FINANCIAL RATIOS:  ROI/ROA AND ROE

With wide swings in returns based on sales revenue, Wall Street uses several other ratios to compare rates of return. One is return on investment (ROI).  Buy a CD and earn 2.5%.  It’s simple.  ROI = 2.5%.  Now buy a house. Pay cash and it’s just like a CD.  But if you take out a mortgage, you have leveraged your returns.  Your house will change value the same regardless of how much equity you have invested. But your Return on equity investment (ROE) is different.

The chart below shows how this works. Assume you buy a house and take out a mortgage for 60% of the purchase. A number of years later, you sell the house for 20% more than you paid.  If you had paid cash, your return would be 20%. But if you had mortgaged 60%, you put up only 40% cash and your return is a 50% (20% return /40% cash invested). ROE is similar to return on investment (ROI) or assets (ROA) but reflects only the net amount of equity investment.

INDUSTRY COMPARISON OF RETURN ON EQUITY

Previously described were two groups of industries, those dealing in basic necessities, and those more in discretionary items.  The groups are the same but comparison is different, using the return on equity (ROE) ratio as just described.

Again we begin with the discretionary group where health insurers fared poorly.  Using ROE ratios, health insurers rose in rank, passing up beer, cable TV and cell phones.  Again, one has to ask whether anyone should be comparing the service provided by health insurers to be in this “block.”

Wall Street considers returns on equities in the 15-16% to be normal average for all industries. But again the question is whether health insurers should be considered “average” when they satisfy basic needs where lower ROE’s are expected.

Comparing health insurers with the same group of basic industries shown previously, the picture below dramatically changes.  Insurers are near the top of the group with the majority of industries coming in lower.  These industries are more suitable comparisons than insurers prefer to use.

One final observation.  Health insurance used to be heavily non-profit. For profit insurers came later as life insurance companies began to diversify into more profitable fields.  Now look at the ROE for life insurance: at the bottom.

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Fact Check: Provider Consolidation Driving Up Costs

Posted on March 4, 2010 by Andrew Kurz

Download PDF Report >>> Fact Check – profits and consolidation

Fact Check:  Provider Consolidation Driving Up Costs

  • · Massachusetts Attorney General issued a report that: “points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs” and “found no evidence that the higher pay was a reward for better quality work or for treating sicker patients”.
  • · According to a new report in Health Affairs, Paul Ginsburg and Robert Berenson found that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.”
  • · According to a brief from the National Institute for Health Care Management: “With only a few exceptions, results consistently demonstrate that hospital consolidations result in higher prices for hospital services.”
  • · The Federal Trade Commission and the Depart­ment of Justice noted: “Most studies of the relation­ship between competition and hospital prices have found that high hospital concentration is associated with increased prices, regardless of whether the hospitals are for-profit or nonprofit.”

FACT CHECK CHECKED: The above are arguments that America’s Health Insurance Plans (AHIP) included in their response to advocates of reform. What AHIP may not recognize is it has set forth some of the most compelling arguments for a “public option”.

AHIP freely admits that insurers are powerless on their own to control provider costs. Even with anti-trust exemptions, they have failed to combine forces and confront providers.  Short of a government takeover, the only long-term solution is more clout.  The only entity with more clout is the government itself being an insurer, which, by the way, it already is – Medicare.

Medicare doesn’t so much “ask” providers what they charge.  Medicare almost “tells” providers what it will pay. Republicans were so concerned with Medicare’s clout that they wrote into law “prohibiting” negotiated drug discounts.  But discounts will become necessary.

For many Americans, a drastically reformed healthcare system was a non-starter.  The administration politically tried to blend features of the current into the proposed system to reduce upheaval to such a large part of the economy.  Any change can be unsettling, and how you view it is very important.  Is the glass half full or half empty?  At some point, radical cost control will occur, and private insurers will not be leading the charge.

Insurers can look on government as an unreasonable competitor or they can look on government as the only insurer who finally has enough clout to contain provider costs.  It may be that insurers eventually withdraw from the market for “essential medical benefits” and focus their efforts on supplemental policies that go beyond basic.  If they did, they would look a lot like health insurers in Europe and other industrialized countries. Diminished compared to today but not destroyed.

Download PDF Report >>> Fact Check – profits and consolidation

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Fact Check: Put health plan profits in perspective

Posted on March 4, 2010 by Andrew Kurz

Download PDF Report >>> Fact Check – profits and consolidation

Fact Check:  Put health plan profits in perspective

  • Ezra Klein, Washington Post:“… it’s hard to see how [health plan profit margins] are a primary driver of health-care spending, much less the growth in health-care spending.”
  • Henry Aaron, Brookings Institute: “Insurance company profits in the large picture have very little to do with the overall rising cost of health care.”
  • Kaiser Health:“With the nation’s health care spending estimated at $2.5 trillion this year, even the elimination of insurers’ profits and executive compen­sation would lower health care spending by just 0.5 percent.”

FACT CHECK CHECKED: Granted, the insurers cut is a miniscule piece of total costs.  But it is still billions of dollars of non medical costs.  Where are they spending them?  It should be in two areas: to responsibly manage insurance and contain costs. If insurers were managing just fine, reforms would not include rule after rule after rule to rein in unsavory practices that occur now.

Cost containment has two faces: price and volume. You can control one or both. Insurers can control volume by denying claims, and here they have been successful.  In the price area, they have utterly failed to contain prices from providers. But Wall Street is indifferent in how one generates earnings, only that one does.  Clearly, insurers’ focus is Wall Street and not Main Street.

Insurers claim they add value by negotiating discounts with providers.  But by insurers’ own admission, those providers simply raise their rates resulting in no actual cost reductions.  Insurers are adding virtually no value, but draw compensation as if they were saving billions.

All large companies pay cost control experts to contain costs. If they fail, the experts are fired or the companies go out of business. Yet insurers exert every conceivable pressure to maintain the status quo which they admit has been a failure in containing healthcare costs.

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Fact Check: Lines of Business Obscure Profit Margins

Posted on March 4, 2010 by Andrew Kurz

Download PDF Report >>> Lines of Business Obscure Profit Margins

FACT CHECK: In 2009, the percentage of premiums that went towards administrative costs and profits declined for the sixth year in a row and have been consistent for decades.

FACT CHECK CHECKED: America’s Health Insurance Plans (AHIP) combines self-insured line of business (LOB) and insured LOB and presents the results as if it were one homogeneous market.   Nothing could be further from the truth. Size wise, the ratio of self insured LOB to insured LOB is roughly 58% / 42% of self-insured / insured or underwritten.

Insurers charge self-insured (ASO – administrative service only) groups an administrative fee that, for the top 10 health insurers, averaged 6.94% of costs.  That translates to 6.5% of “premiums” which are really medical benefits plus service fee income.  This “efficient” administrative expense is not evident in the insured LOB.

To identify the administrative costs and profits for the insured group, one computes and then removes the self-insured revenues and expenses from the CMS Totals as shown in the table below.  Sources and stepwise methodology (top to bottom) are shown in the far right column.

The claim that insurers’ average percentage of premiums that went towards administrative costs and profits was around 11.75% (and have been consistent for decades) totally obscures two radically different lines of business with divergent expense ratios.   For 2008, self-insured admin costs and profits were about 6.5% for self-insured groups, but about 18% for insured groups.  Since the profit margin is VERY slim for the self insured, the bulk of profits are born on the backs of the insured groups which include small business and individuals. A reasonable question to ask is “why are insurers satisfied with profit margins of well under 1% on 55 % of their business but feel a need to push margins well beyond 10% on 45% of their business?”  Though risk is a small factor in the insured LOB, they have to compete far harder on self-insured LOB than on insured LOB where they hold oligopoly power in local market areas and convert that market power into profits.

Download PDF Report >>> Lines of Business Obscure Profit Margins

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