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.
Tuesday, March 30, 2010
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.
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.
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.
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.
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.
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