Three Downsides to Commercial Health Insurer Consolidation

Writing in The Wall Street Journal, Scott Gottlieb argues that the Aetna-Humana and the Anthem-Cigna combinations are evidence of waning insurer competition that is the direct result of Obamacare.  Not only are ACOs not a panacea, but the Affordable Care Act's insurance mandate to limit administrative costs is forcing Aetna et al to spread their costs over a larger base.  Dr. Gottlieb fears that the oligopolies won't be able to deliver on innovation and will limit consumer choice   

Too bad The WSJ didn't give him more print space.  If they did, Dr. Gottlieb may have also pointed to three other potential downsides to commercial insurer consolidation:

1) The concentration of risk: While having a small regional health insurer go bust is a big problem for hundreds of thousands of insurance enrollees, having a for-profit national insurer with tens of millions of enrollees go bust would be a national catastrophe. Think Lehman Brothers, Black Swans and Too Big To Fail.

2) Cronyism: Politicians and C-Suite executives no longer blush at the prevalence of the revolving door between government and all industry.  Health insurance will likewise be too regulated and complicated to leave to anyone other than insiders, who will naturally be unable to discern the line that separates their interests from the patients'.
 
3) Political Power: Will Washington DC and 50 states really be able to stand up to a handful of companies that dominate a fifth of the national economy?  Years ago, the commercial insurers remained silent while they were called "Fat Cats." The Population Health Blog bets that the next time a While House blames the insurers for rising costs, they won't remain so deferential.

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For the Commercial Health Insurers, Winter Is Coming

Fans of HBO's hit fantasy TV series Game of Thrones will recognize the adage. 

In the show, the continent of Westeros has had a long hot summer of breasts, butts and beheadings. Now, it's not only getting colder, but there have been sightings in the North of blue-eyed freeze-dried warrior zombies. Crops are failing, the northern tribes are fleeing and the crows are looking more sinister by the minute. The only thing that separates civilization from catastrophe is The Wall.  That's made of a lot of ice and it is guarded by the Night's Watch.  The Watch is made up of mostly unsavory criminal types who have been given the choices of decapitation or taking The Oath.  Think of them as the Fence Frozen Legion.  Cue camera, raise swords... action!

Naturally, the Population Health Blog is enjoying every minute of it, and so is, inexplicably, the PHB Spouse.  We're both gained valuable insights.  While the PHB ponders her observation that men are untrustworthy swine, it has more constructively responded that Game of Thrones has many lessons that speak to the health insurance market.

To wit:

The Night's Watch may be made up of villains, but they're our villains and they're performing a valuable function.  Commercial health insurers likewise have their knaves, but for years they have been pooling risk and paying claims. 

Unfortunately, times are changing. While we've had a lusty summer of low cost inflation and innovation, Accountable Care Organizations are not as successful as hoped, insurer networks have gone skinny, out-of-pocket expenses are climbing and tax bills are coming due.  While we thought the undead "Medicare for All" was just an unpleasant memory, there have been sightings here and here. 

Will the Night's Watch of commercial insurers hold the wall?  Cue camera, raise swords.... action!

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The Two-Sided Iron Triangle of Cost and Access and What It Means for Health Reform in 2015

From time to time, the Population Health Blog likes to refer to this article on the "iron triangle" of health care reform. Using classic project management theory, it suggests health care planning is:

a) bound by 1) cost, 2) quality and 3) access, and

b) if there are limited resources, health system planners can only optimize two out of three.

Want to decrease costs?  Either quality will go down or access to care will decline. 

Want to increase access?  Docs and operating rooms will spend less time with patients (quality will suffer) or costs will go up, because you have to hire more docs or build more operating rooms.

Suppose you want to increase quality?  Because most interventions that increase quality are not free, it'll cost you.  Alternatively, fixed budgets and resources will have to be tasked to additional needs, so access will suffer.

It's admittedly simplistic, but this framework can be used even by the amateurs in the White House to better define the Veteran Affairs scandal. As the PHB understands it, VA administrators wanted to increase quality (more primary care, better mental health services), but they didn't have the budget to match it. Access declined and, voila, waiting lists developed.

Which brings the PHB to the insurers' dilemma.  The generous narrative is that commercial and government insurers can leverage "quality" and somehow increase access for more persons with insurance and/or "bend the curve" of cost inflation.  The "iron triangle" says that's not true and the PHB agrees.

That's because:

1) while it's possible to statistically assess outcomes in primary care settings, there is a shortage of primary care providers.

2) it's far more difficult to statistically assess outcomes in specialty settings, where there are limited numbers of patients, fewer commonly accepted outcomes and a greater impact of patient variation.

In other words, quality is neutralized. That means health care is a two sided triangle.

Assuming quality is now constant, the PHB now has another reason to predict that insurers will have only two options in 2015:

1) increase access to care for more persons, but that means increasing, not decreasing costs. That means higher out-of-pocket costs for patients, or lower reimbursement for providers.

2) lower costs, but that means decreased access to care. Providers will refuse to contract or more restricted provider networks be created.

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Over Four Million Dollars to Save a Life?

Enjoy the ride!

Lebron James fan Jason Shafrin of the Healthcare Economist blog hosts the latest edition of the Health Wonk Review.  It's not only fit for a king, it's also fit for any student of health policy that wants unique insights unavailable anywhere else. 

Lots of learning with links can be found here.

The Population Health Blog's recent post on the life-saving attributes of health insurance is included in Jason's Review.  In it, the PHB points out that mandating coverage for 830 persons to save one life is not welcome news.

Docs like the PHB conventionally (and arbitrarily) believe that a reasonable "number needed to treat" (the number of patients that have to be exposed to a treatment in order to achieve a successful outcome) is less than a hundred.  Start going higher than that, and we begin to worry that the treatment may be worse than the disease.

Attach dollars to it and the number becomes even more telling.  Assuming an average health insurance policy "costs" $5000 per year, that's a back-of-the envelope cost of $4.15 million per life saved.  While the PHB would be the first to point out that every life is precious, that falls outside usual assessments of cost-effectiveness.

Bottom line?  These data suggest that we can save lives by mandating insurance, but there is no free ride.

In fact, this one is gold plated.

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A Reprise of the Infamous CBO Report on Disease Management and the De-linking of Health Insurance and Wellness

Two things "heard on the street" at today's Medical Home Summit:

1) The recent JAMA article on the failure of the medical home to reduce health costs is provoking the same defensiveness as the infamous 2004 CBO report on "disease management."  PCMH advocates are using the same arguments that were used by the old DM vendors to defend their business model back in 2004.

Two of the more common ones heard by the Population Health Blog are that 1) today's model is far improved over the Ver. 1.0 reported in the JAMA article and 2) the improved health status of populations is not correlated with reduced insurance claims expense.
 
2) The bad news is that employers have given up on health insurance and many are prepared to push their workforce into the health insurance exchanges.  The good news is that they are continuing to invest in wellness and health promotion programs for their employees - not because they believe it saves money, but because it increases productivity.

In other words, commercial health insurance and wellness are being de-linked.

The Dreaded Strike Three for Obamacare: Corrupted Exchange Data and Inaccurate Insurance Policies

While the prescient Disease Management Care Blog was among the earliest to identify the threat of an Obamacare-induced insurance "death spiral," it missed spotting the potential fallout from a delay of the individual mandate.

As shrewdly pointed out in this Politico article, health insurance timelines require at least three months of claims experience to inform future rate setting.  Once that actuarial work is done, it then has to go through the states' Insurance Departments for approval.

In other words, if large numbers of Obamacare customers are allowed to sign up after March 31, 2014, insurance companies won't know what to charge their customers on January 1, 2015. 

While overcharging can be remedied by customer rebates, it remains to be seen how accommodating Washington DC will be if the insurers undercharge. That means negative cash flows, raiding surpluses and facing the ire of their investors and Boards of Directors.

It's baseball season, so think of the death spiral as a potential strike one, and inaccurate rate setting as a potential strike two.

Which brings the DMCB to a dreaded strike three. If it happens, the health reform brand could be irretrievably tarnished.  It could also and sink the current version of Obamacare.

Strike three would be a critical mass of inaccurate insurance policies.

If reports like this and this are even remotely representative of the back-end of Obamacare enrollment, the relative trickle of individuals who are successfully navigating the exchanges are getting commercial polices that depend on a very vulnerable reconciliation process involving many moving parts.  That includes information from the "hub" as well as user-based data entry. As noted in this report, commercial insurers are being forced to manually "clean up" the information prior to issuing their exchange-generated policies.

The DMCB suspects that a "garbage in, garbage out" adage may apply. Thanks to sheer number of inputs, clean-up mistakes are going to be inevitable.  And it will get a whole lot worse if the healthcare.gov web site gets only partially fixed. 

While a few mistakes are acceptable in large risk pools, more than a few could be huge problem at three levels:

1. At a business level, where a core competency of insurance companies is to cover their enrollees and only their enrollees. Insurance companies are really good at knowing who is and who isn't insured for a covered or non-covered service with or without a variety of co-insurance arrangements.  It's more than just getting it right, it goes to the core of their business model. If enough policies are inaccurate, it could bring the finances of some smaller health insurers to their knees.

2. At national health policy-making level, where a critical mass of insured customers with premiums and subsidies mismatched to the risk could destabilize the market and distract our political leaders. Think about the customers who assume a service is covered, providers who expect to get paid accurately, balance sheets that don't reflect the truth about claims expense as well as IBNR and regulators who will need to sort it all out.

3. At an Obamacare "brand" level.  Think about all those unfriendly and anecdotal news reports about vulnerable patients who ended up legitimately - if mistakenly - paying more out of pocket for care, or persons mysteriously lacking insurance, or hospitals and doctors being unable to get paid. It could ultimately track back to the HealthCare.gov web site that everyone will loves to hate.

The worst part is that the White House has done such a masterful job of bullying the insurers that it's unlikely that they'll want to rock the boat by going public with any notification that their enrollment data is corrupted.  Mr. Obama will naturally claim that he wasn't in the loop and his loyal aides will deflect blame elsewhere.

Strike three, and we may not even see it coming.

How Badly Obamacare Beat Up On the Health Insurers, and What Does It Mean for the Individual Market

D.C. deals with health insurers

As Disease Management Care Blog readers are aware (for example, here and here), Obamacare forces health insurers to spend at least 80% (small group) to 85% (large group) of their premium income on health care, leaving only 15% for "other," including administrative overhead and profits. If that 80%-85% "medical loss ratio" (MLR) threshold is not met, insurers have to rebate the difference to their customers.

 While the White House has been happy to extoll the millions of dollars that were repaid to consumers (even though the individual checks were hardly eye-popping and then there is the risk that they're taxable), the DMCB is interested in what actually happened to the commercial insurers.  Did they game the system and garner even higher profits?  Or, have they gotten their comeuppance, are now losing money and have to pursue other lines of business, like covering zombie attacks?

This article in the latest Health Affairs looked at that impact of the law when it went into effect on January 1, 2011.  The authors used NAIC data to examine the impact on the individual (N=1,219), small group (N=804) and large group market (N=750) insurers.

Individual, small group and large group numbers are broken out below. If there is a *, the change is statistically significant.

In the individual market, from 2010 to 2011:

Median medical expenses, as a percent of premium, increased      by 5.5%*.
Administrative expenses, as a percent of premium, decreased            by 2.6%*.
Profit (otherwise known as "operating margin" or the bottom line) decreased by 1.3%*. "For profit" insurers fared even worse, with a decline in operating margin of 2.2%* vs. their nonprofit competition with a decline in 0.8%.

2011 operating margins were overall negative:

Individual overall -0.1%.
Nonprofits:  -3.5%.
For profits:  0.4%.

In the small group market:

Median medical expenses increased by 0.7%.
Median administrative expenses declined by 1%*.
The bottom line increased by .5%. Nonprofits saw an increase of 1.2%* vs. the for profits having a small decline of .3%.

2011 operating margins were positive, ranging from 2.8% to 3.8%  across the non and for profits, respectively.

In the large group market:
Median medical expenses declined by 0.7%.
Median administrative expenses declined by 0.9%%*.
Profit increased by .7%*. Nonprofits saw an increase of 0.1%* vs. the for profits having a increase of 1.2%.

2011 operating margins were positive, ranging from .7% to 2.6%  across the non and for profits, respectively.

The DMCB's take:

Obamacare had a single digit impact on health insurers.  More was spent on health care and less was spent on administrative costs.  While the shifts were relatively small, those changes represent swings of hundreds of millions of dollars to the bottom line in an already thin margin business. If the purpose of Affordable Care Act was to beat up on the health insurers, it was more of a push than a shove.

Small and large group profitability increased and operating margins were positive, while the individual market struggled. As readers may recall, the inability of individuals to obtain coverage at any price was a big factor in the eventual passage of the Affordable care Act. While the future individual market may eventually benefit from an influx of healthy young "invincibles" armed with an accompanying bolus of insurance subsidies, Obamacare ironically hurt the individual market in 2011. If health care utilization didn't go down in 2011 as a result of the economy, it could have been a lot worse.

That tells the DMCB that, contrary to the insurers' reports of doom and gloom, the 80%-85% MLR rule hasn't been a catastrophe.  On the other hand, it hasn't been good news for the individual market.  If the young invincibles don't 1) respond to the individual mandate, 2) use functioning insurance exchanges and 3) sign up, it could portend further stress on that sector of the health care economy.  No wonder the Obama Administration is pushing that so hard.

Commercial Health Insurers Not Only Are Not Going Away, They Shouldn't. Here's Two Reasons Why

Hugging a health insurer

It's an old conservative joke, but what is the one key difference between health insurers and terrorists? 

Answer: liberals only occasionally attack terrorists.

For the latest example of the continuing disdain for health insurers, check out this rather typical July 5 Washington Post article "Is this the end of health insurers?" After extolling one enlightened company's decision to self-insure its workers*, writer Sarah Kliff points out that hospitals can cut out the insurer middle man and offer the same service. The result, says the article, will be the wiser use of the premium dollars, lower costs and fewer coverage denials.

While the physician Disease Management Care Blog agrees that the health insurers' have only themselves to blame for their bad reputation, it doesn't think that these companies are going to go away anytime soon.  It's not because, under Obamacare, U.S. citizens are now required to buy their product at any price.  It's not because they control hundreds of billions of dollars.  And it's not because they've had the ear of the political class for years.

The contrarian DMCB thinks they'll continue to stick around because they perform a two useful public services:

1. Keeping Providers From Going Belly Up: There have been too many examples of hospitals and physician organizations being unable to collect today's premium dollars and hold them as a promise to pay for tomorrow's sickness.  Whether it's not charging enough or being unable to say no, providers are vulnerable to running out of cash and being unable to cover their insureds' health care bills.  The DMCB says it's better to insulate hospitals and doctors from the perils of the underwriting cycle.  Insurers do that.

2. Keeping Providers From Going to the Dark Side: Assuming a hospital or physician organization can hold the dollars, pay for all that health care and end the year in the black, there's a good chance that they'll do it by ultimately employing the same tactics used by many mainstream insurers: denials of services based on determinations of "medical necessity."

*As an aside, self-insured companies don't always act in the their employees best interest.  Look at this infamous example and note that Cigna only "administered" the insurance plan on behalf of a self insured organization.

AHIP Steps Up With Their Version of Health Reform

While HHS Secretary Sebelius reassures the House Republicans that the Fed's health insurance exchanges are on track, that the implementation of the Affordable Care Act will not be a "train wreck" and flies around the country touting Obamacare, Disease Management Care Blog readers may want to check out this 3 page article by the notorious anti-Sebelius a.k.a. AHIP's CEO Karen Ignagni.  In it, she mounts a vigorous defense of her trade association's commercial insurer members.

She points out:

1) Commercial insurers' versions of accountable care organizations include a variety of prospective payment approaches that are tailored to the provider's willingness to take on insurance risk.  What's more, commercial insurers can "calibrate" the benefit so that consumers', physicians' and hospitals' economic incentives are all aligned.

2) Health plans are quite able to share data and analytics support that translates into early identification of trends, accurate payment designs and the targeting of programs at patients who are at greatest risk.

3) AHIP's members are routinely providing health risk assessment tools, predictive modeling, medication compliance programs and care management services.

4) AHIP is well aware of the difference between true cost savings versus mere cost shifting.  As a result, they are asking for greater transparency on commercial and government fee schedules so that the potential impact of cost shifting can be better understood.

5) While Washington DC deserves a lot of credit for promoting a quality agenda, it could do a better job of working with all insurers to come up with a set of universally used quality measures.

6) While commercial plans are required to use uniform billing systems, providers are under no obligation to submit their claims electronically.  While this certainly helps physicians over the short term, the long term inefficiencies are not cheap.

7) Commercial insurers would rather cover treatments that have been shown to work. The "Patient-Centered Outcomes Research Institute" is not mentioned by name, but you get the idea.

8) AHIP supports letting non-physicians practice "to the top of their license."

9) State-based "laboratories of democracy" are a useful way to try out a variety of health reforms before they are adopted by Washington.

The DMCB's take?

AHIP and Karen Ignagni have been mostly out of the public eye.  Could this be a sign that they're less wary of the Administration's anti-insurer bluster?

While Medicare's Innovation Center continues to get high marks, the commercial insurers appear to be advantaged by having more leeway to test new payment and care management strategies.

AHIP's members are aware that many providers could fold if they mismanage the risk that underlies prospective payment systems.  Unike Washington's one-size fits all approach, they seem prepared to adapt their contracting accordingly.

Care and disease management programs?  The commercial insurers have rolled this into standard operating procedure.