Download PDF Report >>> CBO Estimate of Healthcare Reform
SUMMARY
Few doubt how unsustainable current medical trends are. With medical inflation consistently outpacing the CPI, health costs will continue to take a greater share of the economy. Private insurers claim they can solve the problem with reform but without a Public Option. History suggests this is a dubious claim at best. Looked at from multiple angles, private insurers are not likely to succeed. Profits gains have far exceeded key indices, medical loss ratios have gone way down while costs have gone way up, competition is diminished by concentration of major insurers, and tort reform complaints carry little water.
DISCUSSION
The graph below shows CBO projections of under 65 population by insurance group. The top, red bars are the uninsured that continue to grow each year. While insurance through employment is fairly consistent, greater employee cost sharing is an increasing burden.
Neither the Senate nor House reform proposals provide financial support to unauthorized immigrants. When analyzing various effects of reform, this group has no effect. For data consistency for both before and after reform, unauthorized immigrants are not included in the populations. Removal lowers uninsured population between 5 and 8 million over the 10 year period.
Source: CBO, Oct 7, 2009 letter to Senator Baucus
While the country may be coming to some agreement that reform is needed, differences exist on how to achieve reform. Health Insurers want to have participation mandatory which is a valid point. Except they have offered no other steps on how to reduce costs and are against Public Option that would offer real competition. However, they would be beneficiaries of millions of new customers.
Those customers would come from those currently uninsured, or insured through individual and employer groups. In the graph next column, CBO assumes reform includes an Exchange that would shift nearly 40 million from uninsured, individual and employer groups (left side of graph) to Medicaid and the Exchange (right side). Note that not all the movement is to the Exchange. A large number of uninsured poor would switch to Medicaid. Still, the Exchange is expected to grow quickly to nearly 25 million. This group is the target for private insurers and Public Option.
So why is it necessary to have a Public Option on the Exchange?
On its face, private insurers could certainly cover 25 million new enrollees without government involvement. But the catch is that the government IS involved because of another feature of reform.
Source: CBO, Oct 7, 2009 letter to Senator Baucus
That reform feature is “affordability credits”. Even those with insurance find their total health care costs consume so much of their income that they do not get needed care. Affordability credits help those with lower incomes pay premiums and shared health costs. The effect is shown in the chart below. Medicaid pays for the very poor while credits help less well off people in the Exchange.
Source: CBO, Oct 7, 2009 letter to Senator Baucus
In short, the Government will be paying some $100 billion each year in credits to Exchange enrollees, much of it going towards insurance premiums. Will private insurers provide good value for this outlay? Their track record is not encouraging.
Health care costs fall into two categories: medical cost outlays and administration / overhead costs. In 1993, 95% of premiums went for medical costs at Investor-owned insurers as shown below. Over the next 14 years, this decreased to just above 80%, a shift of about 14% or one percent per year. Meanwhile Medicare administration and overhead costs have remained fairly constant through the period. While some may argue this is not a direct comparison, the fact that Medicare medical loss ratio stayed constant while investor-owned insurers drop significantly cannot be denied.
Sources: PricewaterhouseCoopers’ Health Research Institute, and U.S. Center for Medicare & Medicaid Services
14% becomes urgent when you consider premium dollars as shown in the chart below. Private insurance runs over $600 billion. 14% of this is nearly $90 billion per year. Fortunately, one-third of private insurers are non-profit. But that leaves some $60 billion added overhead including contribution to profits since 1993.
Source: Center for Disease Control – Health, United States 2008 Figure 19
Profits did not grow to $60 billion, but they sure did grow as shown below, exceeding by a huge margin the S&P 500 and CPI for urban wage earners. All the growth occurred since 2002.
Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Standard and Poors, and Health Insurers’ 10K’s
Not only did investors do well, but so did executives and all at the expense of people paying for health insurance. 7 insurance CEO’s drew nearly $70 million total compensation in 2008.
Still, Investor-owned insurers argue that their profits are a mere 3% of revenue. Another and better measure is Return on Equity (ROE) which is profitability based on investment. By this measure, health insurers are earning 17%. From the chart below some industries do have greater returns, but 17% should be nothing to complain about. The 10 insurers are even higher than credit card issuers.
Sources: 10K reports for top 10 Investor-owned Insurers and CCH Almanac of Business and Industrial Financial Ratios, 2009 Edition
Now high returns to executives and investors might have some justification if private insurers were successful in containing and bringing down the major component of health care – medical costs. Yet, year after year, medical costs outpace the CPI. One could almost argue that insurers “administer” health care costs rather than provide a value added “management” of those costs.
Competition often has something to do with companies holding down costs. In competitive markets, insurers need to maximize cost control efforts to maintain market share. But is there really competition? The graph below shows the market share of the top two insurers in each state weighted for population covered.
Sources: AMA, Consumer Union, Sector & Sovereign analysis
Over half the U.S. population lives in states where two insurers control over 60% of the market. That is not a good omen for competition. For instance, insurers claim that their market share allows them to negotiate lower rates with providers. It would not be fair to paint all insurers with the same brush. But a number of insurers have been found not to be driving down rates, but of negotiating with providers to NOT contract lower rates with their competition. Instead of reducing costs, these illegal acts increase medical costs compared to a truly competitive environment.
Insurers and others also argue that tort reform would bring down medical costs owing to current waste of defensive medicine. There is no argument about the waste. But is it due to defensive practice or simply practice? Data suggests that the latter is more prevalent.
The graph below, derived from Dartmouth College data, groups two sets of hospitals, the 100 highest cost, and 100 lowest cost hospitals for Medicare spending per decedent during the last two years of life. The bars represent average costs by states that have enacted tort reform setting caps on non medical damages. For the lowest cost hospitals, tort reform shows virtually no effect on hospital costs. For the highest cost hospitals, it is mixed. But there is no clear evidence that tort reform will substantially lower costs.
Source: Dartmouth_hosp_DAP_Hosp_HRR_ST_01_05.xls
So far, private insurers’ track record suggests that left to the free market, they will not be very successful in lowering costs, either administrative or medical costs, with or without tort reform. It may be unrealistic to even expect investor-owned insurers to succeed given that their number one priority is to their investors.
Instead of using their actuaries to data mine patterns to help providers reduce costs, their efforts are focused on denying claims and raising premiums to high claims groups. Instead of returning surpluses to people paying premiums, they are buying back billions of dollars of their own stock to increase value to their shareholders.
Thus far the focus has been the cost of illness. Another aspect is the benefit of staying healthy. Corporations have had success in wellness programs. They not only reduce health care costs, but lower absenteeism. (http://www.uscorporatewellness.com/USCW White Paper 2009.pdf) Some insurers offer wellness programs, but they often include a health risk assessment on employees and that runs a risk that insurers may use that data in setting rates for the company: if towards lower rates, good. If higher rates, not so good.
Fortunately, large corporations are the biggest block of insured people, and their wellness efforts can have a broad effect. The graph below shows the U.S. population by source of health care coverage. Big business covers 45% of the population, 28% who self insure and another 17% who shift risk to insurers.
Source: CBO, EBRI, CMS, Goldman Sachs Research estimates
Groups at a disadvantage to big business include individual and small group business and the uninsured that together make up over a quarter (27%) of the population. If private insurers are unable or unwilling to lower administrative and medical costs for them, then the next best alternative is to offer a Public Option.
Without progress in both lowering administrative and medical costs, the affordability credit paid for by the government is going to cost taxpayers more than can be justified. The question is not whether a non-profit Public Option will succeed. The question is whether private insurers can succeed after years of failing to take the needed steps to contain costs.
The stakes are huge. CBO projects that with a Public Option, the insurance picture changes dramatically as the graph below shows. Medicaid grows a bit for the poorest, but the uninsured and non employer based population can look forward to more affordable insurance. Meanwhile the majority of the population is unaffected.
Source: CBO, Oct 7, 2009 letter to Senator Baucus
Download PDF Report >>> CBO Estimate of Healthcare Reform
Filed under: Analyses, Congressional Budget Office (CBO), Health Costs, Health Insurers, Healthcare Reform, MLR - Financial Ratios | Tagged: CBO, concentration, CPI, MLR, private insurers, profits, tort reform | Leave a comment »
Health Reform Trends, Research and Analysis 
Individual Mandate not necessary – But will you like the alternative?
Download PDF Report >>>Individual Mandate Alternative
SUMMARY
Of all the issues in the Patient Protection and Affordable Care Act (ACA or PPACA), one that has drawn an extraordinary amount of attention is the Individual mandate. Looked at in isolation, it may seem like an overreach. However, a broader view indicates why this provision or similar was included at all.
It is included because another section of ACA prohibits Health Insurers from rejecting people with pre-existing conditions as they do now. Some medical conditions may be avoidable, but the vast majority of pre-existing conditions occur through no fault of the individual. Insurance of all types is to spread risk, and the more skewed the risk the greater the need for insurance. Health costs are extremely skewed making health insurance vital to a modern economy.
ACA mandated that everyone buy insurance and that makes sense. However, the objection is forcing people to buy from a private company. There are several options to resolve that. One is to create a government-run insurer. That would eliminate forcing people to buy from a private insurer. A second is to make payment for any service obtained by an uninsured person a loan similar to student loans that could not be discharged for any reason. They would carry interest and be payable in full no matter the circumstances.
DISCUSSION
The percent of people with pre-existing conditions is small and to the majority of folks without such a condition, it may seem like a trivial matter. However, the number of people with pre-existing conditions is in the millions, and the cost to them has been and can be horrific. Medical expenses for these people have led to thousands of bankruptcies as health care costs sapped all their savings and more.
Insurers soon will be required to insure ALL persons regardless of medical condition. There is the very real risk of some people will avoid buying insurance, and then when they have an injury, or find they have a chronic condition like asthma or diabetes, they would only buy health insurance AFTER they know they have a medical condition.
One would think that any notion of personal responsibility would have all persons get insurance in order to spread health costs risks over the greatest population. The more people that buy insurance, the lower the cost per person. However, experience has shown that some people will NOT buy insurance if they feel they will not get sick or injured.
Fortunately, many employers offer health insurance for their employees, and by law, health insurers covering insurance through work (group insurance) MAY NOT exclude people with pre-existing conditions after some limited period of time, usually less than a year. However, the same did not apply to individuals until health care reform.
Note that employed individuals usually have access to health insurance. Full time employees, that is. With rising costs, what have many employers done including some of the largest? They have reverted to greater use of part time employees who do not enjoy the same privilege and access to health insurance as do full time employees. This is putting more pressure on reforming individual insurance plans.
People do not just dream up laws in a vacuum. Most fall into two categories. One is responses to maintain clean food, air and water, or help disadvantaged people, often the result of some abuse (social laws). The second are financial laws, like taxes or efforts to reduce taxes via special treatment for some (loopholes). ACA addresses the former by adding a financial provision, the individual mandate.
Everyone who works pays into social security and Medicare. Since Medicare is health insurance, there already is a mandate for working individuals to buy health insurance from the government. The only distinction is that Medicare is government-run insurance, while the ACA mandate applies to buying insurance from private companies.
ALTERNATIVE ONE
In the state run insurance exchanges to which any health insurer can join, add a government-run health insurer. Then the individual mandate does not require buying from a private insurer. However, if an individual decided against all private insurers they would have to buy the government-run insurance plan, just like Medicare and clearly legal.
However, politics intervened. Draft legislation DID INCLUDE a government-run insurer. They called it the “Public option”. It would operate on the same level field as private insurers and not be subsidized in any way. Private and government insurers would compete for business. Still, critics objected, and politicians stripped this provision from the final bill.
Why the objections? Perhaps it was fear of competition. To understand the public option, all one has to do is look at Medicare. Different in that it would cover people under 65 years old. In addition, women over 65 do not get pregnant, so there would be some differences in coverage.
What few know is government manages Medicare entirely through private health insurers. Insurers use a term Medical Loss Ratio (MLR) do describe how much of a premium dollar goes to pay health care costs. For Medicare, the MLR is over 95% meaning over 95 cents per premium dollar goes for health benefits. For private insurers, not so much. Their average MLR is in the low 80% range, and for individual insurance, which Medicare is, the MLR is even lower. How can private insurers compete with someone whose costs are less than one quarter of their own?
The honest answer is they cannot, at least not as currently structured. However, where does the constitution guarantee private enterprise continued profitability or even existence? “Destructive renewal” is a term used by business to explain competition that virtually by definition requires companies to fail as other more efficient companies market their goods and services for less; or whose new goods and services make prior ones obsolete (think cassette tapes).
It is worth noting that private health insurers used to have MLR’s in the mid 90%, but that was 30 years ago when nearly all insurers were non-profit. Over time, for-profit insurers became more prevalent, and as they did, they had to show a profit for their investors. Some admin efforts were devoted to marketing. Some to reducing costs. Some to profits. The net effect, however, is that far fewer dollars went for health care costs and more went for overhead and profits. Yet some of these same companies administer Medicare contracts for less than 5 cents on the dollar. What is apparent is that insurers could cut back on what it now costs them to weed out people with pre-existing conditions, but more efficiency are needed to compete.
ALTERNATIVE TWO
Set the ground rules for individual insurance similar to that of group insurance obtained through work. If a person elects not to purchase insurance, and gets sick or injured, a person could still buy insurance but the law would allow pre-existing exclusions to extend for one year. Also like group insurance, if a person previously had health coverage, and not more than 60 days elapsed without coverage, then the person could buy health insurance with no waiting period.
This alternative needs to have a bit more teeth to be effective. This is because there is a law that hospitals have to treat EVERYONE, regardless of ability to pay, and a healthy person could delay for years purchase of health insurance. They would only buy insurance when they get sick.
The current Medicare drug program provides a template for solving this issue. If a senior fails to purchase drug insurance, the premium continues to rise for as long as one remained uninsured. One can apply a similar index to health insurance. But how does one provide assurance of payment? Since the person required services, it should be legal to require the person to purchase insurance to pay for those services, and if the person is unable or unwilling to pay, the government could advance a loan similar to student loans.
That loan would bear interest, need to be paid over time (though shorter than for student loans), and could not be discharged by bankruptcy. If not paid by retirement, payments would be deducted from that person’s social security, just like student loans. Gone is the mandatory requirement. Replacing it is an automatic loan that the individual must repay in full with no exits.
Since the government would initially pay the hospital, it also could determine the ability to pay of the person getting treatment. If that person was indigent, they could be put on Medicaid, and no medical loan would be created. If the person’s income were within the subsidized amount, they would have been eligible for had they carried insurance, the loan would be reduced by the amount of the subsidy. Since the hospital is paid in full, there would be no cost shifting to those who bought insurance.
ALTERNATIVE THREE
As noted above, a law requires hospitals to treat EVERYONE, regardless of ability to pay. One could rescind that law and force everyone to either have insurance, pay for service, or be denied service. But few would be willing to take that backward step. From a practical standpoint, this is not a viable option.
Download PDF Report >>> Individual Mandate Alternative
Filed under: Commentary, Health Insurers, Healthcare Reform, Medicare & Medicaid, MLR - Financial Ratios | Tagged: 95% MLR, Affordable Care Act, drug insurance, federal mandate, Mandate, Mandatory health insurance, medicare, Medicare drug, PPACA, pre-existing conditions, Premiums, public option | Leave a comment »