Wednesday, September 28, 2011

The Provider Version of a Death Spiral?

The health care commentariat are all wee-weed up over the just-released Kaiser Family Foundation survey on employer health benefits.  The report, based on telephone interviews of a representative sample of more than 2000 employers, shows that the cost of employer-provided insurance has increased by a whopping 8-9% this year. 

Supporters of Mr. Obama and Affordable Care Act argue the increases have preceded the chief provisions of the ACA and are the best evidence to date that federally-led health reform is necessary.  In the meantime, foes of Obamacare are glomming onto the increases as proof that current and anticipated federal mandates are doing nothing about the underlying causes of cost inflation and are ruining any hope of slowing it down. 

And so the debate goes on and on.

Unlike the political class, the DMCB has never found that there is any "single" culprit or simple explantion when it comes to health care cost trends.  In this instance, the 8-9% increase is likely due to variations in the underwriting cycle and a combination of insurance and provider market forces. They include new (and expensive) technology, an aging workforce, continued reliance on fee-for-service mechanisms, grabbing some additional  rate before federal oversight increases, the cost of covering all those college students and other various mandates.

But the perceptive DMCB will offer up one more cause: the provider equivalent of the insurer "death spiral."   If insurers are having a bad year thanks to increased claims, they can be forced to increase their prices.  In response, persons who don't need insurance exit, leaving only the persons who must keep the insurance because they know they are a bad risk. That leads to another bad year, another price increase and more exits until the insurer is left with a small book of business that is unaffordable.

Thanks to 1) 9% unemployment leaving persons without health insurance, 2) high "under" employment also leaving persons without insurance and 3)  high out of pocket expenses for those who do have insurance, the DMCB suspects many more persons with a choice are electing to not go to the hospital or the doctor.  That leaves fewer persons, but they're sicker, higher cost and unable to pay. Less margin, bad debt and fixed costs are forcing providers to increase their rates

While this a arguably a form of cost shifting, the DCMB doesn't believe that term adequately captures what is going on.  If it's right, the lower frequency of claims with a much higher severity could point to a true spiral and next year's increases will also be unexpectedly high.  In addition, once the economy improves and all that pent-up demand can be addressed, it'll get worse.

Combined with everything else going on, this doesn't bode well.

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