Fact Check: Put health plan profits in perspective

Posted on March 4, 2010 by Andrew Kurz

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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

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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.

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Senate Gridlock – the Filibuster Factor

Posted on February 15, 2010 by Andrew Kurz

This Analysis has been replaced with a new version: Senate Filibusters Reveal Deliberate Obstruction

 

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Health Care Reform: Separating the Wheat from the Chaff

Posted on February 8, 2010 by Andrew Kurz

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By Andrew Kurz* and Miles J. Zaremski**

 

It is time to hit the reset button—not on legislation—but on all the disparaging rhetoric surrounding it.  Denigrating a position or viewpoint one knows nothing about or is premised on incorrect “facts” makes it harder to adopt positions that best serve what Americans need and really want.  It is also more difficult to garner broad support from the general public if one succumbs to only what special interests desire.

The shot across the bow sent Democrats by the voters of Massachusetts with the election of Scott Brown can have many meanings, but one in particular has to be striking: politicians in Washington are not getting things done to help us outside the beltway.  A clear message from the Massachusetts’ electorate was that it is just as easy to remove an elected-official, as it was to vote that individual into office.

Americans are rightly upset with Washington, and certainly with good reason—particularly with health care reform, and other major pieces of legislation.  So little gets done, and when something is finally accomplished, it generally contains much unneeded and unnecessary pork.

We are here to focus strictly on explaining health care reform issues that make sense to all parties.  The focus is not on the current state of legislation, on Congress, or on the President.  We begin with the premise that accessing and affording health care in this country is truly broken.  On that, there is universal agreement.  Most would also agree that basic health care is a right for all Americans, not a privilege or responsibility—although a measure of personal responsibility is certainly involved. The authors also have the luxury of being “outsiders” and are not otherwise bound by having to politically compromise.   We can look at the best of what both sides of the aisle have offered that every American can readily understand and assimilate into their own experiences and household needs.

We offer a couple of other observations before we do.  Of the 2,000 pages in either the present House or Senate bills, less than 20% of them are concerned with much discussed reforms to private health insurance.  The remaining portions improve Medicare and Medicaid, and as well public health and the workforce.  Those changes are extremely important to bending down the cost curve for a segment that consumes about 50% of all health care dollars.  Ironically, for those who believe that reform is socialism, these programs are already government managed or sponsored.

Health care is cast in terms of affordability and accessibility.   Affordability is typically cast through the prism of a health insurance policy since that is how and where the majority of Americans receive their care.  Main Street also knows that what they pay for insurance is out of sight—sending thousands into bankruptcy, and, for millions, effectively denying them any insurance coverage at all.  For the overriding majority of the uninsured, insurance premiums either would consume far too much of their income, or they are locked out because of some pre-existing condition.  So health care reform, at least for starters, is health insurance reform.

Insurance reform has three fundamental goals or objectives: lowering costs, increasing availability, and maintaining or improving quality.  While there is wide agreement on these goals, there remains less agreement on how to achieve them.  When reviewing the paths to achieve each of these “end points”, the question is, whether they lead to progress toward achieving them (goals) or whether the means to get there are simply different paths with no discernible difference in outcome.  The strength of any analysis must focus on the former, as we now do.

ISSUES ON WHICH THERE IS BROAD AGREEMENT

The following objectives of which we speak have no adversary, though politics has a habit of tinting some folks’ glasses.

1. Accessibility: Broad agreement exists that insurance policies should (a) not exclude pre-existing conditions; (b) not allow cancellation of an existing policy owing to a medical condition; (c) guarantee issuance and renewals; (d) extend dependent child coverage to 26 years; and (e) allow cancellation only premised on non-payment of premium or fraud in the procurement of a policy.

2. Affordability:  Broad agreement also exists that insurance policies should (a) not set lifetime or annual limits on benefits; (b) set reasonable annual limits for cost sharing, i.e., deductibles and co-pays; (c) not allow pricing differentials based on sex; (d) set reasonable restraints on age-related differentials; and (e) create a national high risk reinsurance pool to protect insurers from the few enrollees who incur extremely high cost medical treatments.

(3) Quality:  Broad agreement also exists that insurance policies should (a) not require cost-sharing for basic, preventive health care services, though not necessarily for visits beyond recommended check-up intervals; (b) require an essential benefits package that covers all basic health care needs and allows comparison based only on price and service; (c) standardize forms in order to reduce paperwork and inefficiency in processing claims and enrollment; and (d) further the work of computerizing necessary medical information without running afoul of privacy laws.

Virtually every other industrialized country worldwide has health care inclusive of the above provisions.   These nations also provide universal coverage, exceeding the 95% range.  While all such programs operate differently, all have a private marketplace component and deliver health care at half the cost and with about the same average quality as the U.S.   Moreover, while the U.S. leads other nations in some criteria used to judge access and affordability, it lags in other criteria.  One measure where our country lags is the number of patient visits.  Our falling down on this measurement is oxymoronic to the claim that the US has the best health care system while citizens elsewhere wait an interminable amount of time to see his or her physician.

ACCESSIBILITY ISSUES ON WHICH THERE IS LESS AGREEMENT

While Medicare at 55 has been proposed to increase accessibility, the three major avenues to increase accessibility have been: (1) a public option; (2) lifting the antitrust exemption; and (3) allowing insurers to sell health insurance across state lines.   We address the latter three now.

PUBLIC OPTION: Arguments favoring a public option are that it would be a non-profit insurer with the sole goal of providing basic insurance while incurring minimum overhead.  This should bend prices down which also improves affordability.  Arguments against a public option are that it adds government insurance into the mix, pulling business and profit margins away from private insurers.  It is fair to note that private insurers did not object to government insurance for seniors – Medicare –which took the lion’s share from private insurers, though the private market still operates within segments of these programs.

ANTI-TRUST: The second method for increasing access through competition is to remove private insurers’ anti-trust exemption.  This exemption allows insurers to not only collude on setting premium prices, but also to monopolize markets of whatever size.   Both promote concentration, less competition, and higher prices.

SALES ACROSS STATE LINES: The third method is for insurers to sell across state lines. There are two ways to achieve this.  The first alternative is leveling the playing field with a uniform set of rules that a national exchange would establish, similar to what CAFE mileage standards do for car manufacturers when mandating “corporate average fuel economy” that apply in all states.  A national exchange is the health equivalent for enforcing uniform standard rules.  The other alternative is to use the credit card “model”, where different rules apply to different policies depending upon the insurer’s home state.  The question becomes, would the public prefer insurers to act more like credit card companies (banks) with no federal intervention, or to participate on a level playing field with federal enforcement?

AFFORDABILITY ISSUES ON WHICH THERE IS LESS AGREEMENT

TORT REFORM: High on the list for many is tort reform, though neither pending bill in Congress includes this.  Typically cast in terms of placing caps, or ceilings, on non-economic damages, it is an element of the health care reform debate that has gained attention in many quarters.  Many states already have such reform, but this would be a federal cap.  The argument in favor of caps on these damages is that there would be less defensive-medicine, overall health care costs would drop significantly, and doctors would find their malpractice insurance premiums lowered. The argument against caps is that there is minimal relationship between caps on these type damages and premium charges, or health care costs.  Opponents argue that premiums increase more as a result of insurers’ not obtaining projected financial returns from investments while “defensive medicine” has more to do with generating income than avoiding liability.

If the theory is correct, viz, that a cap on damages will reduce health care costs, consider establishing a 3-5 year period with a federal cap of, let’s say, $1.0M on non-economic damages and that would not pre-empt states which have such ceilings in effect.  If utilization drops significantly indicating less defensive medicine, then such caps could become permanent; it not, then the federal cap would sunset.

AFFORDABILITY CREDITS: Affordability credits are a sliding scale subsidy for individuals and families earning less than some multiple of the federal poverty level (FPL).  The House suggested an upper limit of 400% of FPL while the Senate proposed less.  To fund affordability credits (the premium subsidies), a tax could be levied on individuals with adjusted gross income exceeding $250K ($500K for families), and taxing plans with “Cadillac” benefits.  Rather than setting a flat rate, a fairer method would be to use regional cost bases, and to tax only the amount exceeding some percent of average, basic, benefits by region.  Arguments for and against affordability credits tend to center on the method of funding.  The two above are funding options under consideration.

PURCHASE MANDATE: This provision mandates that all citizens purchase health insurance.  Arguments in favor are that by adding millions of customers, insurers would incur lower costs.  First, overhead would be allocated over more policies creating unit savings.  Second, with larger risk pools, the “risk margin” insurers require would be less, which should lead to lower premium prices.  Mandatory insurance would also have the salutary effect of reducing the number of those without insurance who rely on hospital emergency rooms for non-emergency health care—a very inefficient way to render treatment.  Arguments against mandatory purchase includes whether such a requirement is constitutional, though it seems similar to employees “purchase” of Medicare insurance through wage withholding at work.  Those who do not favor a mandate as well point to insurers’ gaining considerably in revenues, yet question whether or not insurers will increase premiums for any new insurance reforms, like no pre-existing condition barring coverage.

The only way a mandate works is if affordability credits are extended to millions of financially disadvantaged.  Those affordability credits will come from government subsidies, and because taxpayers are responsible for these monies, many believe it fair to expect insurers to discount, or reduce, premium charges when setting rates.  Insurers are not likely to do this voluntarily.  Price controls are one way to restrain premium rates, but are not viewed as a long term solution.  The best solution remains competition.  This is why many argue that the anti-trust exemption must end, though they feel even that may not be enough; that stronger measures are needed.  The current mix of for-profit and not-for-profit insurers has not been successful in restraining prices, and a government backed not-for-profit is needed.  This thinking is the impetus behind advocating for a strong public option.

DISCOUNTED DRUGS: The final affordability issue would be to allow Medicare to negotiate drug discounts and to allow cross-border purchases.  Arguments against discounting are that margins are needed for research into new drugs and that the quality of imported drugs cannot be assured.  Arguments in favor of discounts are similar to the purchase mandate.  The government handed big pharmaceutical companies $Billions of new business with no risk.  Many feel that the pharmaceutical industry should be forced to accept “discounts”.  The current no discount policy has resulted in U.S. drug prices far above what pharmaceuticals cost in other industrialized countries.  As for quality, many of the drugs purchased here are the very same pharmaceuticals that buyers in other industrialized countries purchase.  Recall, too, that the Medicare drug program costing hundreds of billions of dollars was not funded, with the entire cost of the program being added to the federal deficit.

INTERIM CONSUMER PROTECTIONS WHILE REFORMS ARE IMPLEMENTED

Many of the above provisions cannot be implemented quickly.  Some method is needed to restrain premium increases in the interim.  To prevent health insurers from imitating credit card companies who increased rates before reforms became effective, a gatekeeper, whether through a national commission, state insurance commissions, percent increases imposed by statute, or another mechanism, ought to be in place from the outset of any reform enacted into law.

CONCLUSION

In less than ten pages, we have summarized the salient components of 2010 health care reform.  What we have penned allows the reader to understand the core provisions for any reform, pro and con.   Moreover, the material described in the foregoing pages is a give and take where no one constituency will be entirely happy.  But in order for every American to afford and access health care, each segment of our society must give up something that may have been sacrosanct to them.  Such compromising also levels the playing field between corporate and Main Street America.   If every “player” comes to the table called health care reform in good faith and acts fairly and openly, the nation as a whole will benefit.  Partisanship only leads to what occurred in Massachusetts; we cannot afford to see this with efforts to reform health care any longer—our system is broken and on the brink of disaster.

© 2010 Andrew Kurz and Miles Zaremski

*   Mr. Kurz is a former CFO for Blue Cross-Blue Shield of Wisconsin.  He has done extensive research into healthcare reform and has been recognized and quoted for his analyses, statistical charts, and insights into reform efforts.  He is now retired in suburban Chicago and can be reached at agkurz@att.net.

** Mr. Zaremski is a health care attorney and author, with extensive background in healthcare policy.  He has counseled and represented Members of Congress.  His law firm is in Northbrook, Illinois; he can be reached at mzaremski@gmail.com.

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Summary – Health Care Reform: Separating Wheat from Chaff

Posted on February 8, 2010 by Andrew Kurz

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Insurance reform has three fundamental goals:

  1. lowering costs,
  2. increasing availability,
  3. maintaining or improving quality.

When reviewing the paths to these “end points” of healthcare reform, the question is, whether they progress toward achieving them (goals) or whether the means to get there are simply different paths with no discernible difference in outcome.

ISSUES ON WHICH THERE IS BROAD AGREEMENT

ACCESSIBILITY:  Insurance policies should (a) not exclude pre-existing conditions; (b) not allow cancellation of an existing policy; (c) guarantee issuance and renewals; (d) extend dependent child coverage to 26 years.

AFFORDABILITY:  Insurance policies should (a) not set lifetime or annual limits on benefits; (b) set reasonable annual limits for deductibles and co-pays; (c) not allow price differentials based on sex; (d) set reasonable restraints on age-related differentials; and (e) create a national high risk reinsurance pool to protect insurers from enrollees who incur extremely high cost medical treatments.

QUALITY:  Insurance policies should (a) not require cost-sharing for basic, preventive health care services; (b) require an essential benefits package that covers all basic health care needs; (c) standardize forms to reduce inefficiency in processing claims and enrollment; and (d) further computerizing medical information.

ISSUES ON WHICH THERE IS LESS AGREEMENT

PUBLIC OPTION: Arguments in favor are that a government non-profit insurer would provide basic insurance with less overhead.  Arguments against are that it adds government insurance into the mix, pulling business and profit margins away from private insurers.  Note: private insurers did not object to government Medicare for seniors which took the lion’s share from private insurers.

ANTI-TRUST: Removing private insurers’ anti-trust exemption increases competition.  Exemptions allow insurers to not only collude on setting premium prices, but also to monopolize markets resulting in higher prices.

SALES ACROSS STATE LINES: There are two ways to sell.  The first is leveling the playing field with a uniform set of rules similar to what CAFE mileage standards do for car manufacturers when mandating “corporate average fuel economy” that apply in all states.  A national exchange is the health equivalent for enforcing uniform standard rules.  The other alternative is to use the credit card “model”, where different rules apply depending upon the insurer’s home state.  The question becomes, would the public prefer insurers to act more like credit card companies (banks) with no federal intervention, or to participate on a level playing field with federal enforcement?

TORT REFORM: Many states already have such reform; this would be a federal cap on non-economic damages.  The argument in favor is there would be less defensive-medicine and overall health care costs would drop significantly.  The argument against is there is minimal relationship between caps and health care costs; that “defensive medicine” has more to do with generating income than avoiding liability.

AFFORDABILITY CREDITS: Affordability credits are a sliding scale subsidy for individuals and families earning less than some multiple of the federal poverty level (FPL).  To fund affordability credits (subsidies), a tax could be levied on individuals with adjusted gross income exceeding $250K ($500K for families), and taxing plans with Cadillac benefits.  Arguments for and against tend to center on the method of funding.

PURCHASE MANDATE: This mandates that all citizens purchase health insurance.  Arguments in favor are that by adding millions of customers, insurers would incur lower average costs.   Mandatory insurance would also have the salutary effect of reducing the number of those without insurance who rely on hospital emergency rooms for non-emergency health care—a very inefficient way to render treatment.  Arguments against include whether such a requirement is constitutional, though it seems similar to Medicare insurance through withholding work; and whether or not insurers will increase premiums for new insurance reforms, like no pre-existing condition barring coverage.

The only way a mandate works is if affordability credits are extended to millions of financially disadvantaged.  Affordability credits will come from government subsidies, and because taxpayers are responsible for these monies, many believe it fair to expect insurers to discount, or reduce, premium charges when setting rates.

MANDATE EXPECTS LOWER PRICES: Insurers are not likely to do this voluntarily.  Price controls are one way to restrain premium rates, but are not viewed as a long term solution.  The current mix of for-profit and not-for-profit insurers has also not been successful in restraining prices.  The best solution remains more competition, and is the impetus behind those advocating a strong public option.

DISCOUNTED DRUGS:  Allow Medicare to negotiate drug discounts and cross-border purchases.  Arguments against are that margins are needed for research into new drugs and that the quality of imported drugs cannot be assured.  Arguments in favor are that the current no discount policy has resulted in U.S. drug prices far above what prescription drugs cost in other industrialized countries.  As for quality, many of the drugs purchased here are the very same that buyers in other industrialized countries purchase.

© 2009 Andrew Kurz and Miles Zaremski

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World Quality Compare

Posted on December 19, 2009 by Andrew Kurz

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Summary

A summary glance at the graphs below should serve notice to all that the U.S. healthcare is in crisis. The left graphs show 2006 health spending both as a percent of GDP and on a per capita basis to be far above all other nations in the OECD (Organization for Economic Co-operation and Development).

And if that wasn’t bad enough, the graphs on the right show that the trend is so bad compared to these OECD countries that without a major policy change, the U.S. will be paying far more into health care and far less in productive activities compared to its competitor nations.  That all were similar years ago suggests that a U.S. solution is possible.

Yet, for all these higher costs, is the U.S. really getting better health care than other OECD countries?  Graphs show only selected countries, but data include all 30 nations.  The U.S. more often than not compares unfavorably in key areas.

All data in this report are derived from OECD Health Data 2009 – Version: June 09 .  Below each graph are all nations’ computed average, the percent the U.S. is over or under that average, and the min and max for those criteria.

Of the areas selected, the U.S. is significantly above average in % of GDP spend, health care and prescription drug costs per capita, MRI units, CT scanners, and infant mortality.

The U.S. is significantly below average in acute care beds, doctor’s consultations and hospital discharge rates per capita, in average length of stay in acute care hospitals, and in population over 15 years old who smoke.

The U.S. is about average in life expectancy at birth but lags key European countries.  It is average in cancer death rate. There are other factors that are not part of the OECD report, but the issue is whether the U.S. is getting its money’s worth.

Average: 8.9%    U.S. vs. Average: 78%    Minimum: 5.8%    Maximum: 15.8%.

The U.S. clearly pays the highest percent of its GDP for health care.

Average: 8.9%    U.S. vs. Average: 78%    Minimum: 5.8%    Maximum: 15.8%.

The trend of OECD countries is clearly lower than for the U.S.

Average: $3,073    U.S. vs. Average: 126%    Minimum: $1,322    Maximum: $6,933.

The U.S. clearly pays the highest per capita cost for health care.

Average: $3,073    U.S. vs. Average: 126%    Minimum: $1,322    Maximum: $6,933.

The trend of OECD countries is clearly lower than for the U.S.

Average: 72.9%    U.S. vs. Average: -38%   Minimum: 44.2%   Maximum: 90.9%

There is still a large percent of private health participation in OECD nations.

Average: $451    U.S. vs Average: 87%   Minimum: $178    Maximum: $844

The U.S. pays almost double per capita for its drugs versus the OECD.

Average: 3.9    U.S. vs. Average: -31%    Minimum: 1    Maximum: 8.2

While the U.S. is comparable to some nations, it lags behind some key nations.

Average: 9.7    U.S. vs. Average: 173%    Minimum: 1.4    Maximum: 40.1.

Except for Japan, the U.S. has more than twice as many MRI’s as other nations.

Average: 21.7    U.S. vs. Average: +57%    Minimum: 3.4    Maximum: 92.6.

Not quite as extreme as MRI units, but the US is still out front of EU countries.

Average: 6.7    U.S. vs. Average: -43%   Minimum: 2.8   Maximum: 13.6.

Access to care in other countries?  They are far ahead of the U.S. in this category.

Average: 16,256    U.S. vs. Average: -22%   Minimum: 5,486   Maximum: 28,440.

If you do not admit, there is no discharge.  U.S. is moving to outpatient.

Average: 6.9    U.S. vs. Average: -19%    Minimum: 3.9    Maximum: 19.2.

But for those needing acute care, the U.S. is about average for other than Japan.

Average: 79    U.S. vs. Average: -1%    Minimum: 71.6    Maximum: 82.4.

Considered a health quality factor, the U.S. lags behind key countries.

Average: 5.1    U.S. vs. Average: +31%    Minimum: 1.4    Maximum: 22.3.

The U.S. clearly lags in this health quality measure.

Average: 164.5    U.S. vs. Average: -4%    Minimum: 96.5    Maximum: 219.8

With cancer the leading cause of death, the U.S. is still only average.

Average: 24.4%    U.S. vs. Average: -34%    Minimum: 14.5%    Maximum: 40%.

Despite more smokers in Europe, they still have longer life expectancies.

APPENDIX

The following tables offer a complete list of data available.  Those highlighted are included above.

OECD Health Data 2009 – Frequently Requested Data

Health expenditure

–         Total expenditure on health, % of gross domestic product

–         Total health expenditure per capita, US$ PPP

–         Public expenditure on health, % total expenditure on health

–         Pharmaceutical expenditure, % total expenditure on health

–         Pharmaceutical expenditure per capita, US$ PPP

Health care resources

–         Practising physicians, density per 1 000 population

–         Practising nurses, density per 1 000 population

–         Medical graduates, density per 1 000 practising physicians

–         Nursing graduates, density per 1 000 practising nurses

–         Hospital beds, density per 1 000 population

–         Acute care beds, density per 1 000 population

–         Psychiatric care beds, per 1 000 population

–         MRI units per million population

–         CT Scanners per million population

–         Mammographs per million population

–         Radiation therapy equipment per million population

Health care activities

–         Doctor consultations per capita

–         Hospital discharge rates, all causes, per 100 000 population

–         Average length of stay for acute care, all conditions, days

–         Coronary artery bypass grafts (CABG), per 100 000 population

–         Coronary angioplasties, per 100 000 population

–         Caesarean sections, per 100 live births

Health status (Mortality)

–         Life expectancy at birth, females, males and total population

–         Life expectancy at 65 years old, females and males

–         Infant mortality rate, deaths per 1 000 live births

–         Potential years of life lost (PYLL), all causes females and males

Suicides, deaths per 100 000 population

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Healthcare Bill – Initial Reforms

Posted on December 19, 2009 by Andrew Kurz

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SUMMARY

This article was written before final passage of the bill.  The provisions noted here are all in the final bill.  Like all legislation compromises find their way into the Senate bill.  Nevertheless, there are still many good reforms that deserve passage of the bill. Below are nine good reasons that occur just in 2010 to justify passage.

DISCUSSION

Howard Dean suggested senators reject the current form of the senate bill as not offering an alternative to private insurance and thus, unable to control costs.

One senator disagreed saying that while we wanted to build a nice house, all we can afford is a cottage.  But that cottage has a very solid foundation.  In time, we can make additions, but if we do not have a foundation, no additions or changes will even be possible.

This article addresses just a few foundation items that take effect early in the program.  Though one should not stop pressing for greater reform, not passing any bill would have even greater adverse consequences.

The following page lists excerpts from the senate bill as published earlier.  The comments below hopefully “translate” some of that legalese into layman’s language for the rest of us.  Hopefully, they provide encouragement to continue to press for better and better reform, but not to throw the baby out with the bath water if it seems reform does not go far enough. Below are nine good reasons that occur just in 2010 to justify passage

Actions Effective when Reform Bill is Enacted

  1. Section 1003 establishes in each state a process for review of unreasonable premium increases, approval of increases, and disclosure by insurers of justifications for their increases.  While this does not lower rates, it should constrain unreasonable increases and create transparency. Insurers are open to embarrassment if they press for extreme increases.  This section further provides a $250 million fund to the states to enforce this provision and give it some teeth.

Actions Effective within 90 Days of Enactment

  1. Section 1101 provides creation of a high risk pool for immediate access by uninsured with preexisting conditions. It requires enrollees to pay only “normal” premiums with cost deficits covered by a $5 billion appropriation.  It also includes an anti dumping clause to prevent plans from discouraging anyone from remaining enrolled. In effect, neither insurers nor companies could offload their high cost persons onto this subsidized high risk pool.
  2. Section 1102 effectively extends COBRA coverage for “retired” employees ages 55 and older. To protect employers extending COBRA, it provides them a reinsurance plan whereby if a retiree’s claims exceed $15,000, the government will reimburse the employer 80% of costs in excess of the $15,000.

Actions Effective within 6 Months of Enactment

Section 1001 contains 6 key subsections that are not practical to enforce immediately but are too important to delay for a whole year.

  1. Sec. 2711 prohibits insurers from setting lifetime or unreasonable annual dollar value limits on what they will pay under a plan
  2. Sec. 2712 prohibits insurers from rescinding coverage once an enrollee is covered under a plan
  3. Sec. 2713 prohibits insurers from imposing cost sharing (deductibles or copayments) for preventative services, immunizations, and preventative services for young children
  4. Sec. 2714 extends coverage of dependent unmarried children until age 26
  5. Sec. 2715 requires Uniform Explanation of Coverage Documents and Standard Definitions.

(a)    Establish strict disclosure rules including limiting documents to 4 pages of 12 point font (no fine print), understandable language, and clear benefits description and cost.

(b)    Preempt states with lower standards

  1. Sec. 2718 is designed to bring down costs

(a)    Establish accounting rules that standardize and segregate medical claims and  non-medical costs

(b)    Set minimum MLRs (according to rules in (a).  MLRs are already in the legislation, though their levels are similar to today’s actual MLRs (85% for groups, 80% for individuals).  Excess margins would be rebated to customers. MLRs could be made more stringent in the Senate-House reconciliation.

(c)    Require hospitals to “establish and make a list” of standard charges. The provision removes some of the secrecy and multiplicity in hospital pricing. By making them public, people can make more informed decisions about costs.

Subtitle A — Immediate Improvements in Health Care Coverage for All Americans

Sec. 1001. Amendments to the Public Health Service Act. (effective 6 months after enactment)

  • Sec. 2711. No Lifetime or Annual Limits.

Insurers may not establish—(1) lifetime limits on the dollar value of benefits for any participant or beneficiary; or (2) unreasonable annual limits

  • Sec. 2712. Prohibition on Rescissions.

Insurers shall not rescind such plan or coverage with respect to an enrollee once the enrollee is covered under such plan or coverage involved

  • Sec. 2713. Coverage of Preventive Health Services.

Insurance coverage shall provide coverage for and shall not impose any cost sharing requirements for—Preventative services, Immunizations, and preventative care for infant, children and adolescents

  • Sec. 2714. Extension of Dependent Coverage.

Policies covering dependent coverage of children shall continue to make such coverage available for an adult child (unmarried) until the child turns 26 years of age

  • Sec. 2715. Development and Utilization of Uniform Explanation of Coverage Documents of Standardized Definitions.

SUBSECTION (a) In General – Not later than 12 months after the date of enactment … develop standards … in compiling and providing to enrollees a summary of benefits and coverage explanation that accurately describes the benefits and coverage under the applicable plan or coverage.  The standards include:

  1. Appearance – not more than 4 pages
  2. Language –utilizes terminology understandable to an average enrollee
  3. Contents – must include:
    1. Uniform definitions so customers may compare
    2. Description of coverage including cost sharing for –Each category of benefit

1)      Exceptions, reductions, limitations

2)      deductible & co-payments

3)      Continuation provisions

4)      Examples to illustrate common benefits

SUBSECTION (e) PREEMPTION.—The standards developed under subsection (a) shall preempt any related State standards that require a summary of benefits and coverage that provides less information to consumers

  • Sec. 2718. Bringing Down the Cost of Health Care Coverage

a)      Clear accounting for Costs – annual report concerning the percentage of total premium revenue that such coverage expends—

1)      on reimbursement for clinical services provided to enrollees under such coverage;

2)      for activities that improve health care quality; and

3)      on all other non-claims costs, including an explanation of the nature of such costs, and excluding State taxes and licensing or regulatory fees.

b)      Ensuring That Consumers Receive Value for Their Premium Payments.— Requirement To Provide Value For Premium Payments.—rebate to each enrolled amount exceeding

  1. Group market – 20%
  2. Individual market – 25%

c)      STANDARD HOSPITAL CHARGES.—Each hospital operating within the United States shall for each year establish and make a list of the hospital’s standard charges

Sec. 1003 – (and Sec. 2794) Ensuring that Consumers Get Value for their Dollars. (effective when enacted)

(a)    Initial Premium Review Process.—

1)      IN GENERAL.—The Secretary, in conjunction with States, shall establish a process for the annual review, beginning with the 2010 plan year … of unreasonable increases in premiums for health insurance coverage.

2)      The Secretary shall ensure the public disclosure of information on such increases and justifications for all health insurance issuers.

(b)    Grants in support of process

  1. Premium Review Grants During 2010 Through 2014.—The Secretary shall carry out a program to award grants to States during the 5-year period beginning with fiscal year 2010 to assist … in carrying out the ….. reviewing and approving premium increases
  2. Funding – ‘(A) IN GENERAL.— appropriated to the Secretary $250,000,000 to be available for expenditure for grants

Subtitle B—Immediate Actions to Preserve and Expand Coverage (effective within 90 days)

Sec. 1101. Immediate Access to Insurance for Uninsured Individuals with a Preexisting Condition.

a)      IN GENERAL.— the Secretary shall establish a temporary high risk health insurance pool program ending 01/01/14

e)      Protection Against Dumping Risk By Insurers.— (1) IN GENERAL.—The Secretary shall establish criteria for determining whether health insurance issuers and employment-based health plans have discouraged an individual from remaining enrolled in prior coverage based on that individual’s health status.

g)      FUNDING; appropriated $5,000,000,000 to pay claims against the high risk pool

Sec. 1102. Reinsurance for Early Retirees.

a)      Administration — (1) IN GENERAL.— the Secretary shall establish a temporary reinsurance program to provide reimbursement to participating employment based plans for a portion of the cost of providing health insurance coverage to early retirees (and to the eligible spouses, surviving spouses, and dependents of such retirees) during the period beginning on the date on which such program is established and ending 01/01/14

Download PDF Report >>> Healthcare bill-Senate initial reforms

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Medical Malpractice

Posted on December 8, 2009 by Andrew Kurz

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Does tort reform lower medical costs?

The Robert Wood Johnson Foundation wrote a paper titled Medical Malpractice: Impact of the crisis and effect of state tort reforms.  That report shows states that have passed tort reform to limit awards of noneconomic damages.  This analysis compares data from 100 highest cost and 100 lowest cost hospitals and groups them by those states.

The graph below compares spending in the last 2 years of Medicare decedents at lowest and highest cost hospitals arranged into 4 “tort” classes: in states with no tort reform, those with caps over $500K, those with caps $250K–$500K, and strict states with caps of no more than $250K.

For both lowest and highest cost hospitals, tort reform had virtually no cost differences for Medicare decedents during last 2 years of life.  For seniors, there appears to be little or no correlation between tort reform and medical savings.

Source: Center for Disease Control – Health, United States 2008 Figure 20

Does tort reform reduce medical care?

Another measure of medical care may be outcomes.  Extra efforts (and cost) may prolong life, especially for seniors.   In 100 highest cost hospitals, there were 130,000 deaths while 100 lowest cost hospitals incurred 65,000 deaths. One tentative conclusion is that chronically ill seniors may favor higher cost hospitals in hopes of getting extra care.

Measuring tort reform by outcomes is less conclusive.  One might expect that defensive medicine would improve life expectancy due to added, if wasteful procedures. But the data show a mixed result.  In states with moderate tort limits, there were fewer deaths at higher versus lower cost hospitals.  But in the extreme, or states with either no limits or very strict limits, there were more deaths in the higher versus lower cost hospitals.  It would be tenuous at best to conclude that tort reform has any meaningful impact on life expectancy.

Source: CDC – Health, U.S. 2008 Figure 20 & Dartmouth Atlas of Healthcare 

Does tort reform affect hospital quality?

The Dartmouth study uses Medicare data to compile costs and quality for hospitals.  The 200 sample hospitals in this analysis were derived from this Dartmouth data.  Using that data, the graph at left compares the technical quality measures of those 200 hospitals.

In this graph, there appears to be an INVERSE relationship between cost and tort reform.  The higher quality scores ALL were in the lowest cost hospitals, and quality declined for all hospitals in direct proportion to the extent of tort reforms.  Maybe this whole cause and effect is backwards.

The accepted argument is that tort reform is needed to reduce defensive medicine and lower costs.  Rather, a logical argument is that lawsuits or threats occur because quality is in fact low.  While tort reform may be desirable, it may not be as important as reforming hospital quality.

Source: CDC – Health, U.S. 2008 Figure 20 & Dartmouth Atlas of Healthcare

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Non-Partisan CBO Estimates of Healthcare Reform

Posted on November 30, 2009 by Andrew Kurz

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: , , , , , , | Leave a comment »

Stroger Hospital 11/02/2009 Chicago Press Conference

Posted on November 2, 2009 by Andrew Kurz

Download PDF Report >>> Stroger Hospital Press Conference

The following comments were delivered at a gathering at Stroger Hospital (Cook county’s primary hospital)  The public option was dropped from the health reform law.  Like all legislation, compromise is paramount.  The comments below explaining the merits of the public option remain relevent regardless of the legislative outcome.  – Andrew Kurz

Today I would like to speak in support of the issue of public option.  Whenever you spend over two trillion dollars affecting three hundred million people each year, you have something very complex.  To discuss health reform, it helps to break it down into smaller chunks.

First, what is the public option?  Is it a whole new bureaucracy, or is it similar to anything out there today?  A fair comparison is Medicare but for people under 65 … though not exactly the same.

Administration could be the same and if it is, it could leverage the infrastructure and computer programs that already exist for Medicare.  Using them would greatly simplify matters and allow an easier startup.  Management could also be contracted out to private insurers, just as is done now with Medicare.

Who is public option for?  The initial targets are the millions of self-employed, unemployed and under 65 retired, who cannot afford the high cost of individual policies. It also includes small business groups and workers whose employers don’t offer health insurance.

Note this does not include large group employers and the millions who have health insurance with these employers.

There needs to be a balance of people in the plan.  If too many join at once, you overwhelm the system.  If you restrict public option to too few people, you get what insurers call “adverse selection”, overloaded with sicker folks. That could drive premiums so high that we are right back to square one.

What is the taxpayer cost of public option as this IS a government program?  There would be one loan to fund initial medical payments. But it would be repaid over 10 years from surplus with minimal cost to the taxpayer.

Beyond that, public option would have to operate just like any other non-profit insurer.  Premiums must cover medical payments and overhead expenses. Rates must rise if there is a deficit. But if costs fall, the savings must be passed back.

How does this save you Chicagoans money?  As just noted, costs have two parts: medical payments and overhead.

Twenty five years ago overhead expense was not a problem. Most health insurers then were non-profit with low overhead.  Over the years, this shifted to more “for profit” insurers with higher overhead. The result is fewer premium dollars going for health care. How much less?

Overhead went from less than 10 cents on the premium dollar to 20. Now a 10 cent increase may not sound like much until you apply it to billions of insurance premium dollars. That thin dime of new overhead devours 50 billion dollars annually, much of which wasn’t there years ago.

Even bigger savings for you would be to lower medical payments. All insurers negotiate discounted rates with medical providers. The more the competition, the harder they negotiate, just like any other business enterprise.

Like politics, all competition is local. It doesn’t matter if America has thousands of insurers. If Peoria has only one or two large insurers, that is not a competitive area.  And in many areas of many states, just a few insurers have a concentrated hold on the market.

There are two ways to bring down costs in concentrated markets. You can force them down with government controls, or you can increase competition and let the market do the work for you.

The ideal competitor is a non-profit insurer who would enter all areas of all states. Right now, the only entity that would or could do that is public option.

It is not subsidized with tax dollars. It plays by the same rules as all current non-profit insurers. But it allows all of you, all of Illinois, and all of America to have more choices.

More choices leads to lower costs as insurers compete for your business.  I would even bet that anyone who has doubts now will sign on later.

Last question. How would public option set prices with providers?  Worst case would be to negotiate every service with every provider.  Better would be to negotiate a single complete package of services with those providers.

For that package, we look to Medicare. For years they have been adjusting for cost differences, urban and rural, north and south, rich and poor, and more. They built a relative rate structure to equalize medical service costs for all states. They built a level playing field.

If the field is not high enough to meet providers’ demands, a simple multiplier raises the entire field.  One hopes that public option will find an efficient way to negotiate with providers.

In closing, there is a lot to like in public option once you understand what it is. I hope you like it and will support it too.

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