Tuesday, October 5, 2010

Regional Healthcare vs. National Healthcare

One of the issues that has not received a lot of attention is the impact of national healthcare on the total cost of healthcare. As an example, an individual on Medicare on average costs 3 times more to cover in parts of California, southern Florida, and New York compared to southern Indiana. But individuals in the high cost regions do not pay 3 times more into the Medicare system than individuals in southern Indiana.

Therefore, we effectively reward high cost markets for being high cost by effectively reimbursing them more for costing more. The more we "federalize" entitlements the more we create systems that shift income from states with lower costs of living to states with higher costs of living. As a result, we raise the overall cost of health care in the nation by a significant amount.

What if we calculated annual Medicare premiums in a manner that would cap Medicare's cost at that of the national average for each region? Any region with higher than average medicare costs per person would have higher Medicare premiums for the individuals.

Over time, I suspect you would see retirement communities springing up in lower cost markets and senior populations migrating to those areas bringing their consumer dollars with them and helping the local economies. Meanwhile, higher cost markets would see a drop in demand for healthcare services and would need to figure out how to lower health care costs to retain their senior population.

As a nation trying to cope with health care costs, this system is likely to lower health care costs paid by the government by 25% and eventually reduce the overall health care costs of the nation by an equal amount or more.

I don't believe we should tell people where to live. But I don't think we should subsidize where people live either. Especially a subsidy going from the lower cost markets to the higher cost markets.

States might opt to subsidize their seniors by making up the lost federal premiums, but that would be their option and in this budget tight enviroment I doubt it would happen. Because this suggestion involves the relocation of people, I would suggest it be announced 5 years prior to implementation and then implented on a phased in basis over 5 subsequent years.


Thursday, September 23, 2010

An idea to expand health care coverage or lower its costs

One idea on how to expand health care coverage in American or lower its costs would be to regulate health insurance profits such that insurers could earn up to 5% in pretax profit margins on health care premiums or fees before they would need to distribute any excess earnings in one of two ways.

Option 1, the health insurance companies could refund "excess profits" (based on premiums paid) to policyholders. This would lower the cost of healthcare to policyholders who collectively worked with their insurers to lower the cost of care.

Option 2,the health insurance carrier could "reserve" the excess profits for one year and use them to "subsidize" the premiums of individuals that could not secure insurance at standard insurance rates. On the second option, the insurer would actually increase their total profits by earning 5% on the premiums of individuals they would not normally have accepted for health insurance. But they would need to do so while maintaining competitive rates or they would lose the healthy subscribers/policyholders.

Under my proposal, health insurance carriers could split the excess pretax profits between both Options 1 & 2. In effect, I would be converting health insurance companies to a hybrid between the old mutual insurance companies collectively owned by their policyholders and the current stock insurance companies owned by their stockholders.

I would love comments on this idea as I think it preserves the competitive environment that our system depends on for its effectiveness while lowering health care costs or expanding health care coverage.

Multiple Employers Banding Together to Lower Health Care- Good Idea?

Another idea being bantered about to lower health care costs revolves around the idea that employers should band together to lower their health care costs. Good idea? Yes or no. If you said no, then you are right.

Regardless of how many people band together the actual healthcare costs for the individuals will be the same. Think in terms of adding 1+1+1=3. Whether you have the sum of three or three ones the total is the same. So what changes? In theory these groups could negotiate lower premiums by demanding lower administrative, marketing and profit margins.

The problem for the insurer is that these "artificial" groups represent higher risks to insure since these "artificial" contracting groups are made up of individual employers that could opt in or out of the group. Those employers with healthy employees could in many instances get lower premium rates by opting out. Those employers with employees that generate higher health care claims would stay in the group looking for a subsidy from the other employers.

Over time the "group" would become "toxic" from an insurance point of view and insurers, who have a long history insuring these types of groups, would avoid them. Once again normal economic theory does not work.

Tuesday, September 14, 2010

Why selling health insurance across state lines won't impact health care pricing

Several of CNBC's news anchors advocate selling insurance across state lines to lower health insurance premiums. This is another instance of people attempting to use traditional economic theory to address the issues in health care and in doing so misleading anyone that believes them.

Thirty years ago before managed care made its impact on the industry, hundreds of insurance companies sold insurance products all over the country by licensing their policies in nearly every state. Today, most states are dominated by a few insurance carriers. Often the top 3-4 carriers have over 85% market share if you exclude individuals covered under government health care programs.

Why did this happen? Simply stated market share dominance is the key to provider discounts. A health care provider typically provides health insurance carriers discounts as a means to "channel" patients to their practice or facility. The more "channeling" power the insurance carrier has the greater the discount.

Therefore, large market share health insurance carriers enjoy a discount greater than their competitors. In addition, they have broader networks and are better able to "manage care" within those networks because they can spread the cost of these activities over a larger base of policyholders.

As a result, carriers with small market shares cannot compete regardless of how large their market share is in other markets because many health care providers are local (especially the physicans) and therefore local marketshare is the only thing that matters to them.

Therefore, small market share carriers cannot compete on the cost of claims. The only way small market share carriers can compete is through "no claims" underwriting. In other words using very stringent underwriting standards to exclude offering insurance to anyone that might file a claim. In other words, out of state carriers could "cream" the market of healthy individuals leaving the sick for the other carriers to insure. In addition, small market share carriers are effectively locked out of the "larger group" insurance market since they could not control underwriting with this group.

This results in outrage by the citizens of a state that find as they grow older they are unable to secure insurance as individuals. In the end, this strategy is a failure and the conservatives advocating it should drop it and move on. It just makes them sound ignorant.

How can you introduce competition in health care? The best way would be for the state to mandate that individuals or insurance carriers be able to rent any health care carrier's network. In other words, the large insurance carriers would be required to rent that networks like a utility (like telephone companies do today). The rental rates for these networks would be overseen by a regulatory body like the insurance commission or CMS (Medicare).

Now you have competition by individuals themselves, who may opt to self insure some amount of their care and contract for catastrophic health insurance. In addition, under this scenario interstate competition could work.

Administratively, the large networks would submit their contract rates to large electronic claim exchanges (these exist today) and claims would be repriced by these exchanges and sent to the carriers.

Now you have competition!

Tuesday, April 6, 2010

A Response to "Embracing health care reform"

This is substantially an article I wrote for my local paper, the Hingham Journal:

“What ‘dire consequences’ do we face from the recent legislation and the President’s comments about it?”. I think there are consequences that should be understood, whether they are dire or not is a matter of opinion.

The bill is going to cost over a trillion dollars. A trillion dollars isn’t what it used to be, but it’s still a lot of money. The “bill” was “sold” as budget neutral. This means that there were revenues in the bill equal to the costs in the bill. But revenue neutral only applies to the government’s net cost of the bill and not to the total cost of the bill. In addition, the revenues and cost savings in the bill were in many cases not real, not related to the new health care programs.
For example, the bill included revenues from taking over the student loan program (which I am sure the Federal government will do a better job running then they have with their other loan programs). These revenues may or may not happen in the end and have nothing to do with health care. The bill also included Medicare budget cuts to physicians that are going to be substantially reversed, so the cost savings are not real.

Other revenues will come from increased taxes on the “rich” and the “retired”. I saved in order to semi-retire early. My wife and I planned our lives around the historical tax structure. Many other retirees similarly depend on investment income to supplement their retirement. The new “Medicare Tax” on passive income hits us directly. Given the high Massachusetts tax on passive income, the expiring Bush tax cuts and the upcoming Federal tax on passive income, my wife and I have begun to seriously consider moving out of state. I am certain I am not the only one.
I suspect most retirees as well as the wealthy will do what they can to modify their portfolios to reduce their tax liabilities (in other words, the tax increase will distort investment behavior and at the same time not produce the revenues the government desires). In addition, historically tax increases always produce less revenue than expected.

Just as importantly, the people most affected by these new taxes own or operate many of the companies in this country. When I ran companies, I looked at taxes as a cost. If one of my costs went up, I would try to cut another to offset the cost increase or raise my prices to offset the cost. So who really pays for a tax increase on the “wealthy”? You guessed it, you do.
You pay for it in one of three ways. You pay more for products and services that you buy, you get less of an annual increase in pay or no increase at all (ever hear at work that with cost increases we cannot afford to pay you more?), or you get laid off (we can’t raise our prices so the only way to keep down our cost is to produce it overseas).

So how is this bill going to be paid for? Some money will come in from the higher taxes on passive income, but not enough. Just as in Massachusetts we have had to resort to raising the sales tax, I am fairly confident we will have a federal sales or value added tax within ten years. While this type of tax probably makes sense in lieu of higher income taxes, it is not a tax on the rich, but on all Americans. In reality, this is how we should pay for it, but why not start out this way, so everyone knows there is no such thing as a “free lunch”.

But Congress is putting this tax off as long as they can (they want to get re-elected and people tend not to vote for incumbents that raised their taxes), but it is coming. All taxes are a form of consumption. This increase in funds spent on health care will increase the nation’s total health care bill by estimates of around $100 billion per year by the government and more by the rest of us through higher premiums. This higher cost means we will have less money left for other items we spend money on today (i.e. an immediate lowering of our standard of living excluding health care expenditures) and less money to invest in our personal and the nation’s future. Each individual’s retirement and the nation’s long term standard of living are based on our collective ability to create wealth and to use that wealth to invest in the future. Reduce our savings rate or collective wealth means our future is less bright.

Don’t misunderstand me, I believe as a nation we should strive for universal health care. In my previous letters published in the Hingham Journal, I laid out a range of strategies which if implemented would provide enough savings to fund universal health care and put money back in every American’s pocket. But even if you reject those strategies, the point is we should be looking for ways to cut spending for health care and invest some of those savings in providing health to those that can’t afford it.

What troubles me about Obama’s methods is that “change” generally translates into taking money from one group and distributing it to another. This is dangerous ground, most people don’t like taxes, but if everyone pays, they get over it.
What would I do differently? I would start with the idea, that this nation spends more than enough money today to provide universal health care and still have money left (based on the cost of universal health care in other countries). If it can be done in other countries, there has got to be an “American” way to accomplish the same objective. This would have been change I could believe in.

Now let’s look specifics in the bill:

Allowing dependent children to stay on their parent’s health plan is nothing more than an invisible tax on those who don’t have children on their plans. The cost needs to be covered and it will be through premium increases. Is it the right thing to do? I think there are better options.

The “donut hole” in Medicare Part D was designed with a purpose. Eliminating the “donut” hole is nothing more than increasing the cost of Medicare Part D. Who pays for it? Keep in mind, that on average individuals over age 65 have higher incomes and more wealth than individuals under the age 30, who are likely going to help pay for the “donut hole” and therefore reduce their ability to save for their own futures. Should this have been a “global” fix or could the “donut hole” fix have been targeted to those that are truly financially stretched?

Certain preventative care programs will now be free of charge to patients. I generally don’t have a problem with this concept, but figuring out what should or should not be included will be a challenge in the future. Having worked in health care, we can’t even define what health care is. For example, which alternative medicines should be covered or not covered under health insurance. Are visits to the tanning booth a form of “light” therapy to address depression or a really bad way to get a tan? Why do California residents have so many individuals that need marijuana for medicinal purposes? Should it be covered under their health care insurance?

Eliminating pre-existing conditions from health insurance increases the cost of health care to the healthy. Why should they have to pay more? Small businesses will receive a tax credit to help pay for the cost of health insurance. Hey I pay out of pocket for my health insurance, where’s my credit? Why don’t we give everyone a credit? You pay for mine and I’ll pay for yours…hey wait, let’s cut out the middleman and pay our own insurance. Bottom line every time we create a new toll for Americans to pay, we incur the cost of the toll collector. So collectively we get less out, than we paid in.

Insurance companies will be prevented from imposing a life-time cap on the total cost of health coverage for patients. Who could disagree with this? In reality this touches on a very deep ethical issue. That issue is, “when has a society expended enough for one individual?” For example, from my health care experience, many families will not “pull the plug” on a brain dead patient until their life-time benefits are exhausted.

There are nursing homes all over America filled with patients that are brain dead and kept alive by machines until their life-time benefits are exhausted. At that moment the family decides to “pull the plug”. Is that the right time to do it? Should it have been done sooner? Should it not be done at all? I don’t know the answer, but at least the current system does create a point at which a decision is made. These are very difficult decisions and my heart goes out to those that need to make them.

In addition, many states have Medicaid “carve out” programs for individuals that have exhausted their life-time benefits. These programs allow us as a society to share the cost of assisting these individuals with their health care needs and deciding what we really collectively want to pay for. I am more willing to share the cost of a child born with severe birth defects, than I am for other situations like the one noted above. I do defend the right of an individual to spend their money as they choose, but not their right to spend mine.

People rail about the fact that health care consumes 16-18% of our nation’s resources, this provision alone may add another 1-2% to that number in the future combined with the underlying trends of an aging population and expanded utilization of health care by all ages and our nation’s health care bill is very likely to burst through the 20% level within 5 years. There are a host of tough ethical issues surrounding the provision of unlimited health care services and passing a bill that avoids addressing those issues is plainly wrong.

Insurance companies will be required to disclose the cost of medical care in relation to their administrative costs and proposed premium increases will be subject to review. Great idea…unfortunately, it already is the case in most states, where insurance commissions must review and approve rate increases. Health insurance is a regulated industry with state insurance commissions responsible for overseeing their activities in every state. It is still not clear to me, the roll of the Federal government versus the state governments with respect to this oversight mandate.

Now that we increased the cost of insurance, we are going to mandate everyone buy a policy. In other words, young people with lower incomes who are healthy will need to purchase much higher cost health insurance to subsidize others. We have this in Massachusetts, it must be good. Oh wait a second, this program is driving the state broke and we are begging Washington to send us money to us pay for it. If we can’t fix the problem here (remember we have some of the best brains in the country at places like Harvard and MIT), why do we think the Federal government will do a better job.

Health insurance exchanges sound great, but they don’t work. It would take another article to explain why, but trust me health insurance exchanges in one form or another have existed for over 30 years. They have gone by such names as Multiple Employer Trusts (an exchange made up of small employers) or Affinity Groups (an exchange made up of people with something in common like CPAs or lawyers). In each and every form they have failed.

But isn’t it the outlandish profits of health insurance companies that are driving up the cost of health insurance…that is why we in highly regulated Massachusetts with our universal health care, “not-for-profit” hospitals and “not-for-profit” insurance companies have the lowest health insurance premiums…oh wait a second …we actually have among the highest health insurance rates in the country. Go figure, “a non profit motive” does nothing to reduce high health care costs…doesn’t sound right, but happens to be true.

As to making Medicaid available to families making less than $88,000 a year. The median family income in America was just over $61,500 in 2008 (according to the US Census Bureau). Are we really saying we are going to offer a subsidy to just over 50% of Americans? Does this really make sense? Or do we need to focus on the cost of health care so that Americans don’t need a subsidy to purchase it.

Companies with over 50 employees that don’t offer health insurance will be charged a fee. I have run some fairly large companies. Each year I would sit down with my Human Resource executive and my benefits consultant and we would calculate what our benefit costs were going to be in the next year. That would then influence what we had available for salary increases to staff. In other words, this cost will come from the employees not the employers. With many Americans already being squeezed, the government has dodged dealing with health care costs and instead forced everyone to contribute more towards it. In the end, Americans will be “taxed” through lower salary increases to pay for health care. This is already happening, it is just going to get worse.

Insurance companies will be prohibited from denying coverage or imposing higher costs based on medical history. This is called community rating and it already applies in many states, like ours. In general, I agree with the concept of community rating with adjustments for age and lifestyle (i.e. smoking as an example), but it does result in healthy people subsidizing less healthy people and it does nothing to lower health care costs. More importantly, we did not need Federal legislation to get “community rating”.

That said, I strongly believe in “pre-existing health insurance” exclusions for individuals that have not maintained insurance coverage either through private insurance or government programs. This makes the whole concept of community rating work by preventing people from opting out of insurance and paying a small fine and jumping in when something bad happens.

As to the challenge for alternatives, I would point to the several articles I have written in the Hingham Journal (who I thank for publishing them) with respect to making health insurance more available and affordable, but more importantly to the article I have written on how to actually reduce health care costs.

Less you think I am against everything Obama is attempting to implement. I do support his proposal to require new cars to get 36 miles per gallon on average. We need to shift the balance of trade so that wealth flows into this country instead of out. The money that exits this country to fund our energy needs dwarfs the cost of universal health insurance.

I even support a limited carbon tax on coal and oil, where alternative competitive energy sources could be easily substituted, on the one condition that such taxes were used exclusively to fund the transition to other domestically produced energy sources.

But getting back to health care, I think this new legislation should be repealed. We needed to start with “health care cost reform” before or in tandem with universal health insurance coverage, but we didn’t. The legislation does nothing to address the rising cost of health care and instead contributes to it. Is it “dire”? That is a matter of opinion, but it is expensive and we are all going to pay a great deal for it.

Tuesday, March 30, 2010

Health Care Reform

While I was away on vacation, Health Care Reform passed. While the bill was presented as a bill that was funded, this was simply a lie.

The bill included revenue from the government taking over the national student loan program (which it won't and besides has nothing to do with health care).

It included Medicare cuts to physicians, that will be restored with a subsequent bill.

In addition, the bill added taxes on passive income to fund Medicare and therefore the revenue from this new tax was not really relevant to the incremental cost of this bill.

As written today, the initial cost of the program will be funded by young healthy people who previously opted out of the cost of health insurance, selective health care providers, and individuals with passive income.

Obama seeks to "finish" the transformation of America into the Great Society. However, to realize the vision of the Great Society, we must use innovation and not income redistribution as the primary means of funding new entitlements. We must restructure our health care delivery system to make it more efficient and to utilize resources more effectively.

Otherwise, America is likely to move towards an American form of European socialism, which in time leads to a nation's decline. Eventually, this decline will reflect itself in every aspect of our standard of living.

In closing, the passing of the Health Care Reform bill will create the largest redistribution of wealth since the social programs of the 60s. In addition, over time it will transfer wealth that would have gone into investments to consumption and therefore make our nation as a whole poorer.

When Obama ran on "change we can believe in", I was skeptical. Now I am more so. As someone who has spent a career in health care doing turnarounds, I know that the only sustainable way to increase the standard of living of a group of people is to either increase the "revenues" of the group or decrease the "expenses" of the group. It doesn't matter whether we are talking about a family, a community, a business, or a nation.

The Health Care Reform bill failed on both accounts. Bottom line, while I favor many of the "ends" of the Health Care Reform bill, I cannot support it. If given a chance, I would vote to repeal it until a better "means" of achieving those "ends" were put in place. I may get my first chance at doing so this November, I just hope there are candidates with real vision.

In closing, this blog is not intended as an endorsement of the Republicans or a condemnation of the Democrats, since both parties since focused on power more than the future of the nation.

Wednesday, March 17, 2010

Efficient Claims Payment, Claims Avoidance, and Claims Delay

Efficient claims payment, claims avoidance and claims delay are all key competitive strategies for health insurance companies.

When I worked in the insurance industry our statistics indicated that every time we turned down a claim there was a 3% chance that the claim would not be resubmitted. A health insurance company paying $2 billion dollars of health insurance claims a year and rejecting 25% of those claims on the first pass can effectively add $15 million of profit to their bottom line every year. Since many claims are rejected more than once, the actual financial impact is much greater than $15 million.

As an example, Humana had a policy in place when I was COO of a large physician group in Florida requiring documentation for all neonatology level 3 or higher service level claims. The medical service level (generally 1-4) indicates the type and intensity of service performed with 1 being the lowest intensity and 4 being the most comphehensive. The purpose of the documentation in theory would be to assist Humana's medical review department to determine if the claim was properly coded.

We started submitting the documentation with our level 3 and 4 service claims to avoid the delay that was occurring when Humana would reject our initial claims along with a request for documentation.

Humana threw away the attached documentation and denied our claims. Then they issued the request for the documentation they had just throw away. I determined that Humans initial claims data entry department was not equipped to handle the documentation they required for a claim. Humana wanted us to wait for the claim to be rejected and then to send in the necessary documentation to the medical review department.

The purpose of this policy was to either coerce physicians to under code to level 2 all level 3 and 4 services or to wait 60-90 days for their claims to go through medical review. In addition, most physician billing departments are far better at submitting initial claims than processing resubmissions.

As COO of a large physician group of over 300 physicians, we had the resources to sue Humana and a history of being willing to do so. Humana quickly backed off this policy when we threatened to sue knowing that Florida's "clean claim" statute meant we would prevail in a legal action.

When I ran a benefit imaging management company administering claims for CIGNA, we determined that we were getting "flooded" with ultrasound claims from OB/Gyns that owned their own ultrasound equipment. So we issued a letter to all of the OB/Gyns in our market on behalf of CIGNA indicating that they would be required to obtain referrals for ultra sounds; even if they performed them in their own office.

We knew the OB/Gyns would not have the time to read this letter, so we were able to reject nearly every ultrasound claim for 2 months before the physicians caught up with our policy change. Eventually, the physicians caught on and the volume of ultrasounds crept up again.

So we changed our policy again. This time we implemented an appropriate policy, which limited physicians to one ultrasound per patient in their office. Additional ultrasounds would need to be referred to a paranatologist (experts in this area that generally have better equipment than OB/Gyns). Even though we paid more per ultrasound to have them performed by paranatologists than we were paying to the OB/Gyns, the reduction in volume more than compensated for the incremental cost per ultrasound and the patients needing a second ultrasound were getting a better diagnostic test.

These are two examples among hundreds of incidences that I have experienced as an executive of physicians groups or helped design as an executive of health insurance companies to avoid or delay claims payment. In the short term, it saves money for the insurance company and their customers by taking money out of the pocket of physicians that perform a medical service.

In the long term, it adds a great deal to the cost of health care by adding administrative burden to physicians that eventually works its way into the overall cost of health care.

But rejecting a medical claim costs money and if you are going to pay the claim eventually anyway, why bother?

The answer is the time value of money combined with the 3% chance that the claim will not be resubmitted. For example, a $100 rejected claim has a 3% chance of not coming back (that is a $3 profit). In addition, if it takes 60 days to be resubmitted, you have 60 more days to invest that $100. Assuming a 7% annual investment rate of return, that amounts to about $1.67 per rejection of additional investment income on the 60 day delay. This translates into savings or investment income of $4.67 on a $100 claim, the cost of processing a claim used to be about $1, but with today's systems you can process a claim for far less.

So the key for the insurance company is to develop an efficient claims system that rejects as many claims as possible at the lowest possible cost in order to lower claims cost and delays claims payment where possible to maximize investment income. The profit opportunity is obvious and hence abuse became widespread.

Now in fairness to the insurance companies, as in the examples I cited, there was some excessive use of health care services. For example, Ob/Gyns, that had their own ultrasound equipment, were generating nearly twice as many tests compared to their peer group that did not own the equipment. When we required them to refer patients to a peranatologist for a second ultrasound, the number of ultrasounds dropped to almost the exact same level as their peers that did not own the equipment.

Likewise some physicians do up code, charging higher service codes than the work they performed would justify. That said, the insurance companies are using these physician abuses to create policies, procedures, and claim edits that are equally abusive.

So what is the answer? First, the federal government should mandate that all insurance companies accept claims in the same format that Medicare accepts claims as the only documentation required to pay a claim.

In addition, they should mandate that insurance companies pay interest effective 15 days after the day that medical services were performed regardless of whether they have received a claim or not. The interest rate would equal the investment rate earned by insurance companies on the portfolio as represented in their state statutory filings.

These two steps take away the incentive for insurance companies to delay the payment of claims and increase the probability that health care providers will submit claims that have no errors. This simple requirement could lower the cost of health care by as much as 5-6%.

There are many other mechanisms that health care insurance companies can utilize to manage health care costs outside of the standard claim payment process. These mechanisms will be a topic of a future blog and are in fact more effective since they focus on the physicians who are abusing the system and not on those that are not.

Tuesday, March 16, 2010

Health Care Underwriting

Health insurance companies use underwriting to evaluate the health insurance risk of an individual or group of individuals. Through this process an insurer estimates the cost of providing health insurance to each customer.

Historically, health insurance underwriting is used to underwrite individuals and employers of less than a 1,000 employees. Large employers are generally excluded from underwriting for two reasons.

First, they often self-insure and use the insurance company or a TPA (third party administrator) to administer the company's health plan, while accepting the insurance risk corporately. They hedge this risk with "stop loss" insurance, which I won't go into since it is not the focus of this article.

Alternatively, because of a large employers size, the insurance company believes that the employees of the company reflect a measurable risk based on the prior year's claims and therefore they do not go through the process of individual underwriting, but rather base their rates on historical claims adjusted for expected future claim trends.

Individuals and small employers are very price sensitive. By excluding individuals that have higher health risk, health insurance companies can offer lower premiums. Historically, 3% of the people in America account for 20% of the nation's health cost and 20% of Americans account for 80% of the nation's health cost.

Given this dynamic, the health insurance company that is better able to identify the 20% of individuals that will represent 80% of the health care claims can offer lower prices to 80% of the target market and still make a reasonable profit.

In contrast, the insurance company that fails to underwrite and uses a "community rating" method (averaging the cost of everyone in the community to price their product) will be more likely to attract the individuals, who are have serious health conditions (since the healthy individuals will seek the lower cost insurance offered by the companies that do underwriting) causing their claims to be higher than the community's average. This is called "adverse selection". These companies will end up losing money regardless of what they charge.

To address this issue some states have mandated that insurance companies use "community pricing" to level the playing field. "Community pricing" prohibits health insurance companies from underwriting risk. When this happens, it becomes imperative that health insurance companies secure a significant market share in order to have an average "risk" pool of individuals and consequently drives smaller competitors out of the market.

At the same time, it makes health insurance more expensive to healthy individuals, who comprise 80% of the market. Demographically, these individuals tend to be younger with lower incomes. As a result, some individuals that could have afforded health insurance with underwriting now find they cannot and drop health insurance.

In effect, we have changed the uninsured pool from those that could not get health insurance to those that cannot afford it. Over time, more and more healthy young people opt out of insurance for cost reasons. As more and more people drop insurance coverage for affordability reasons, the insurance pool loses revenue disproportionately to claims.

This causes insurance companies to raise prices at a much greater rate than inflation to keep the insurance pool financially sound. Eventually, these rate increases are so high, that the news media and politicians are outraged and demand action. The politicians generally fail to acknowledge that past political actions were a major contributor towards the problem.

Massachusetts addressed this problem by mandating everyone have health insurance to keep the "healthy young people" from escaping the insurance pool and thereby keeping health insurance rates lower. Mandating insurance maintains the health of the "risk pool" but does so by effectively "taxing" healthy young people with lower incomes to subsidize individuals with higher health care costs.

By itself this is probably okay, but these same young people are being asked to shoulder and increasing Social Security cost, Medicare cost, and national debt of the nation. How much is to much?

Often as a product of underwriting individuals are offered insurance at standard rates, but have pre-existing health conditions excluded from coverage. Pre-existing exclusions can also apply when underwriting is not done or a health condition is not revealed at the time a policy is issued (this is called point of claim underwriting).

Briefly, "point of claim underwriting" is a term used to describe how an insurance company reviews a claim to determine whether an applicant misrepresented information on a health insurance application.

For example, a woman finds she is pregnant and purchases insurance without disclosing her pregnancy to the insurance company. Six months later she delivers her baby. When the delivery claim comes to the insurance company, the insurance company checks and determines that the woman failed to disclose her condition at application and denies the claim.

Regulations prohibiting insurance companies from limiting coverage for pre-existing conditions increases the cost of health insurance and therefore eliminates access to health insurance to others based on affordability.

So what is the answer.

In my opinion, we should allow insurance companies to underwrite individuals and to "rate" them according to their health risk. In addition, they should be able to issue "pre-existing" condition limitations that apply for up to one year. If as a society, we choose to subsidize individuals that have substandard health risk, then we should do that directly in order to keep the cost of health insurance for healthy individuals affordable.

My recommendation is that we do subsidize health insurance premiums for individuals with substandard health risk. But, the subsidy should be adjusted for income and lifestyle. Insurance companies would go through their standard underwriting process and offer a premium based on the risk rating of the individual. If the insurance rating resulted in the individual paying higher than standard rates, the individual could apply for a health insurance premium subsidy from the government.

The maximum subsidy would be the difference in the individual's insurance premium and standard rates. This subsidy would be reduced based on the individual's income and lifestyle. At some income level, the subsidy would vanish. Likewise, controllable lifestyle factors would be used to adjust the subsidy. This would provide a financial incentive to individuals asking for a subsidy of their health care cost to contribute to reducing that cost by pursuing a healthier lifestyle.

So where am I going with this? I believe we can "reform" the current health care system in America to make health care universally available and affordable at a cost below what our health care system costs today. This blog will continue to examine health care issues and solutions, please continue reading and send me your feedback.

Monday, March 15, 2010

Market Share and Health Care Pricing

The term "market share" is more properly termed "available market share". I am excluding from the overall market share, individuals that derive their health care benefits from government health care programs such as Medicare and Medicaid and do not elect a "private market" Medicare plan.

Government programs often account for more than 50% of the market especially in rural or 'inner city' markets. Therefore, the health insurance companies are not competing for the whole market but rather the available market.

However, within this context, market share is extremely important. It allows insurance companies to secure discounts from community health care providers. These discounts provide large market share insurance companies a significant cost advantage against their smaller competitors. Similarly, these rates are often a fraction of what individuals pay for the same service if they do not have access to these discounts.

Therefore, once two or three companies secure enough market share to enjoy this cost advantage, they virtually "own" the available health care insurance market. As a result, beginning in the "eighties", a saying emerged that in health care insurance it was better to be a "mile deep in local markets than 6 inches deep across the country".

This explains why throughout most of the country, the health insurance market has evolved into markets where no more than three insurance companies effectively compete for the market as a whole.

In some markets, where underwriting and pre-existing condition exclusions are allowed, small insurance companies focused at the individual and small employer market can still thrive. But they are niche players focused at insuring people that are unlikely to need routine health insurance.

Republican proposals to allow health insurance companies to "sell" across state lines will not work, since the current situation evolved because large market share companies effectively "out compete" out of market companies due to their provider discounts. Allowing them to compete, where they can't compete does not solve anything.

Democratic proposals to create a "new entity" will not be any more competitive and will result in the government statutorily dictating pricing. This converts the pricing mechanism in the market from an economic process to a political process. In the end pricing will be dictated by contributions to politicians instead of market forces.

So a better alternative is to compensate insurance companies to seek out discounts in the market, but to share those discounts with everyone. To achieve this goal, I recommend that the government through regulation require all providers to post their rates on the internet and to file their contracted rates with their state insurance commissions. These filings would be made available to the public.

Posted provider rates cannot be more than 10% higher than the blended rate of private market insurance entities comprising 50% of the available local market or 25% higher than Medicare reimbursement rates, whichever offers the consumer a better rate.

Providing the dominant market share health insurance companies up to a 10% pricing advantage compensates them for negotiating discounts on behalf of the community as a whole and provides them incentives to secure better rates that benefits everyone in the market.

Likewise, it provides for a fair negotiation between providers and consumers. A individual consumer being rushed to the emergency room is not in a position to negotiate rates. In contrast, insurance companies have the information and time to negotiate "arms length" pricing, provided competition at the provider level exists.

However, in some markets there is very little provider competition. There are a variety of reasons for the limited provider competition. In some markets, statutory limitations exist in the form of CONs. CONs (Certificates of Need) are used by states to control the number of providers. This article is not intended to debate the costs and benefits of CONs, but rather to note they exist and they limit competition.

Consolidation of provider services has resulted in a similar "own the market" condition that health insurance companies enjoy in many markets. As a result, health care providers dictate pricing to the health insurance companies. "Access" provisions in their contracts with employers force health insurance companies to contract with these "health care" providers without leverage.

In rural markets, "natural" monopolies occur due to the fact that the market is unable to support multiple providers within the same discipline.

For all these reasons, a second pricing mechanism is necessary, hence my provision that consumers and insurance companies can always default to pay Medicare rates plus 25%. This provides a burden on Medicare to determine a fair rate for providers in these communities and limits the ability of government to "cost shift" to private payers without totally eliminating their ability to do so. Ideally, Medicare will use information derived from competitive markets and information derived from "cost reports" to determine fair pricing in these markets.

With this change, I expect competition to health insurance companies to come from two sources. Smaller market share insurance companies can compete for a greater segment of the population and insurance companies outside the market can enter the market and have a chance to compete.

More importantly, health insurance companies will experience greater competition from their customers. Many individuals will opt to self insure using Medical savings accounts in combination with catastrophic health insurance policies, since they have access to competitive pricing for health care services. As a result, large health insurers will need to offer more benefits and tighter insurance pricing to retain their customers.

In effect, this suggestion is one step towards introducing the benefits of competition into the health care system.

Through this blog, I hope to introduce readers to my ideas based on over 30 years in the insurance and health care industry on how we as a country should approach reforming our health care system. Thank you for spending your time reading this blog, I hope you found it interesting and thought provoking.

Restoring Competition in the Healthcare System

Health care insurance companies determined more than 20 years ago, that the key to success in the individual and small business health care insurance business was based on two cornerstones: health care underwriting and market share.

In the large employer third party administered health insurance business, the key was market share, cost efficient claims management, claims payment delay and avoidance, and utilization management. So the insurance companies set out to excel in these areas in order to succeed.

I will examine each of these success factors over the next week in my successive blogs to provide you insights into the behavior of health insurance companies. In addition, I will attempt to lay out recommended regulation and legislation, that could restore effective competition to the health care insurance industry.