CPA.net

Impact of Antitrust Waiver for Health Insurers

Short post watching the morning talk shows. A Rep of AHIP suggested the antitrust waiver has a small impact on premiums. Doubtful if that is the case, but even if so, the antitrust waiver enables the health insurers to force down prices with providers - and is a major factor in the consolidation of providers looking to offset that negotiating power. More important, the lack of competition in health insurance within individual states has allowed insurers to reduce the amount spent on medical care - the Medical Loss Ratio (MLRs) - and increase the amount spent on administrative costs and allocated to profit. Studying the difference between MLRs of for-profit (most of the for profit industry is consolidated into Wellpoint, United and Aetna) and not for profit health insurers makes this painfully clear.

Upshot? The antitrust waiver has permitted unbridled consolidation amongst insurers, forced provider consolidation which contributes to cost increase, and permitted insurers to maintain their profit margins by simply passing the increases back to consumers. Breaking the cycle and really reigning in costs will require a wholesale reintroduction of competition into local healthcare markets.

Medicare Advantage: Wha' Happened?

Fred Willard's routine about a failed sitcom called "Wha' Happened?"in Waiting for Guffman is an excellent metaphor for the Medicare Advantage Program. As my last Post on this subject suggested, MA's predecessors had some not insignificant success in driving down Average Length of Stay. In addition, there were arguably some equally significant changes – for a time – in how utilization was viewed in the medical community. Like any successful capitalist-oriented system, this success was in part motivated by economic incentives. Why were these significant successes in large part reversed?

Wha' Happened? A little-understood phenomenon called the Underwriting Cycle probably explains a lot of it. Insurance - and Health Insurance - like the numerous other sectors of the Economy, has a Business Cycle. (This Health Insurance cycle closely tracks the performance of the S&P 500.) Utilization-restricting payments to providers – Capitation – are favored by Health Insurers when profit margins are tight: at the Bottom of the Underwriting Cycle. When profit margins are Fat: at the Top of the Underwriting Cycle, Health Insurers favor fee-for-service, because the profits inherent in the Capitation risk-shift inure to the Provider under Capitation rather than the Insurer. When margins are tight, Health Insurers only profit by limiting Provider payments via low capitation rates or poor fee-for-service rates. Poor fee- for-service rates tend to lead to excessive utilization which makes up for the low rates, while in capitation there is no way for Providers to make up for the low rate other than controlling utilization.

The near collapse of the Health Insurance Industry at the end of the 1990s (e.g., Oxford, Harvard Pilgrim) led to both an extreme need for profit and Consolidation of weaker players. Thus, the increasing market power of Insurers due to their Antitrust exemption coupled with the need to take back the utilization-limiting profits inherent in Capitation from providers contributed to the demise of the Capitation model.

The final straw breakin' the ol' Camel's back was the Medicare Modernization Act of 2003. Health Insurers were looking for a vein of Gold and found it in the MMA, which modified the historical Capitation model for Medicare HMOs and made it a cost-plus Model wherein the Insurers' profit was more or less guaranteed off the top. As I said in an earlier post, don't take my word for it, read it for yourself at http://www.medpac.gov/.

To borrow a paraphrase of an old proverb that the MMA missed:The camel who's nose is in the tent tonight will probably be all the way in a few night's hence. The sudden concern about Antitrust issues seems to be designed to get the camel out of the tent and back into the cold reality of Competition. They are awnry critters, however....

Antitrust Reform?

Having been onto this since I wrote my first book back in 1997-98, I am more than a little surprised that nearly 65 years after the McCarran-Ferguson Act established a federal antitrust exemption for health insurers (and medical malpractice insurers) and the DOJ/FTC wrote position paper after position paper extolling the benefits (e.g., http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf), the DOJ has suddenly decided that they do not like it.

Christine A. Varney, Assistant Attorney General, Antitrust Division, told the Senate Judiciary Committee on October 14 that DOJ “is generally opposed to exemptions from the antitrust laws, whether they be industry-specific or general, in the absence of a strong showing of a compelling need.”

Hmmmmm...

Health Affairs on Individual Responsibility

Health Affairs, one of the Best Sources for analysis, in a reasonably unbiased fashion,  of Healthcare in general and Reform in particular, just released this Brief entitled Individual Responsibility. Read it here.

http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=11

From their website (and this is a pretty fair statement)

"Health Affairs is the leading journal of health policy thought and research. The peer-reviewed journal was founded in 1981 under the aegis of Project HOPE, a nonprofit international health education organization."

I would encourage all my colleagues and anyone with a serious or even passing interest in Healthcare Reform to subscribe and support this Project Hope mission.

A Closer Look at Medicare Advantage

In an earlier post, I promised to offer some insight into the workings of Medicare Advantage.  If you would like to read about it yourself, visit www.medpac.gov and download the 2009 Report to Congress and read Chapter 3.

The predecessors of Medicare Advantage – Medicare Risk and Medicare+ Choice – originated at the behest of west coast HMOs back in the 1980s (TEFRA).  (read more here: http://www.cms.hhs.gov/HealthCareFinancingReview/downloads/06-07Winpg81.pdf ) The original model had the Medicare Program paying the HMO 95% of the local traditional (or fee-for-service) Medicare Per Capita spending, known as the Adjusted Average Per Capita Cost or AAPCC.  Theoretically, this was to save 5% for the Medicare Program; however, most studies indicated that enrollees in these Medicare HMOs tended to be healthier than those in traditional Medicare and therefore have lower levels of spending.  Nonetheless, for reasons explained below, these Models had a large impact on Medicare spending.

The early models used capitation to pay physician practices or larger, integrated entities which included hospitals.  Capitation pays a fixed fee per month to the practice or other entity for each patient enrolled with that entity, from which all the costs of care for the patient must be paid. This contrasts with fee-for-service, which pays for each treatment the patient receives.  Fixed payment per patient enrolled versus variable payment based on services utilized.  The effect for many years was to drive down utilization and therefore cost. To the extent that the physicians did a good job managing the care and cost of their patients, they earned financial incentives from the difference between the capitation payment and the cost of caring for the patients.

The reduction in Hospital utilization as measured by Average Length of Stay (ALOS) was dramatic in the early years.  As capitated Medicare moved into new markets, ALOS would decline significantly in both Medicare HMOs and fee-for-service Medicare!  This saved money for sure and for a time altered the way hospitals were utilized.  However, as can be seen from the following Graph, by the end of the 1990s, most of the savings from reducing ALOS had been squeezed out of the system.

Next Post on this topic: “Wha’ Happened?”

Managed Care Across the Pond?

Just back from Phoenix and the Healthcare Conference. Met my colleague from the UK there who was kind enough to have flown over the Pond with the September issue of Independent Practitioner Today in which my article on Managed Care appears. Read it here. Download Managed Care_Independent Practitioner Today

Given all the hoopla about European-style healthcare in the Reform discussion here, my readers might find it interesting to get a first-hand view of what goes on in the UK. Subscriptions for Independent Practitioner Today – the unique UK business magazine for doctors with a private practice – are usually 320 dollars (10 issues a year) but there is a special introductory offer of 280 dollars including postage and packing. You can subscribe on www.independent-practitioner-today.co.uk or email jackie@marketingcentre.co.uk

Updated Antitrust Guidelines?

Lo and behold, appears someone has woke up. FTC/DOJ announced they are considering updating the Merger Guidelines; apparently Modern Healthcare sees the implications in the Healthcare Industry as they sent an ALERT as soon as the announcement came out.

http://www.usdoj.gov/atr/public/press_releases/2009/250236.htm

More on Insurance and Healthcare Reform

A family member who would, no doubt, prefer to go unnamed, e-mailed me a link today to a rather clever Flash presentation titled Healthcare Explained on the Back of a Napkin. http://www.buzzfeed.com/gustavoa/health-care-explained-on-the-back-of-a-napkin-4bf/  Since I recognize that much of the public's assessment of what is wrong with the healthcare system is based upon the disinformation of politicians, uninformed views of newscasters and their copy editors, and the Blogosphere, I offer here edited portions of my response. Sadly, I am not clever enough to draw stick figures and put them in a Flash Presentation.

Four sources of "problems" with healthare spending not covered in the clever Napkin assessment: 1) Technology and its Manufacturers and Users; 2) Hospitals - most powerful healthcare lobby in DC - get disproportionate share of funds and high executive salaries in nonprofit/tax-exempt sector (recent GAO and IRS studies and lots of attention from Senator Grassley); 3) Big Pharma - second most powerful healthcare lobby in DC - producing new drugs, many of which have only marginally more (or even less) efficacy than the ones they replace; 4) Medicare, which is the key underlying structural reason for the high cost of healthcare in the US (ultimate cost-shifter and politicization of healthcare technology and coverage decisions). The Health Insurance lobby I would rate behind Hospitals and Big Pharma and the AMA (physicians) is dead last. Thus, the Napkin assessment of the importance of the Doctor in healthcare decisions is grossly overstated.

The real problem is not health insurance, but the whether or not "insurance" is allowed to work like "insurance." The idea behind insurance is spreading risk of adverse events over a sufficiently large population of insureds such that the cost of adverse events to any one individual is borne collectively - same thing we see with hurricanes and flood insurance.  Taking the profit out of health insurance will not change the actuarial dynamics of risk-spreading.  Without profit, however, there will be no capital raised in the private sector to invest in health insurance companies and it will end up in the hands of the government by default - just like Medicare, GM, AIG and all the Banks. This is the underlying intent of many of the so-called Reform proposals and a recipe for disaster.

There are arguably a lot of 'bad' insurance companies out there - whether it be perception or reality - and defining what must be covered and for how long would fix some of those problems.  BUT, the greater the exposure, the greater the cost. And, the sicker the populations being insured, the greater the cost. That is about all the Napkins got right - the cost has to go somewhere.

And, I am reminded of one of my favorite quotes from a Physician/Surgeon/Professor at the University of Chicago where I lectured back in 1998 in the Graduate Program in Health Care Management: "The Plural of Anecdote is not Data." We all do well to remember this when we listen to stories from politicians or view admittedly clever Flash programs..

Let me add one of my own: "One man's problem is another man's livelihood."

Never was so much owed by so many to so few...

Sir Winston Churchill is one of the historical figures I admire most* (along with WWII's General George Patton) and I was pleased to visit the Museum in his honor underground the Parliament Buildings in London this past May on my aforementioned lecture travels. Without those two, the World would not have been made "safe for democracy." Thus, I apologize for paraphrasing him on the American Healthcare Reform Debate:

'Never has so much been said by so many who know so little.'

Burma Shave...

*He never caught the last train for the Coast!

How Far Is It?

Its about 650 miles from Paris, France to Berlin, Germany.  It’s about that far from Boston to Charlottesville, Virginia and from San Francisco to Portland, Oregon. And, its about 3000 miles from Portland to The Big Apple.  Along the way from West to East, you pass over mountains, through deserts and vast hectares of farmland where very few people live.  Point is, a lot of things change when you move far away from a given location. Lifestyle, food, environment, health and – guess what – healthcare.  There are a lot of rather silly comparisons between European-style healthcare systems for small countries you can easily cross in half a day and the United States, one of the largest countries by square miles in the world and with an ethnically diverse population.  These comparisons are similar in foolishness to the comparisons of public transit systems in countries the size of American states.  The population of England is about 51 million in an area less than the state of Oregon, whose population is less than 4 million.  England is 9 times more densely populated than the US: I’ll betcha that makes public transit work better – if you can find a seat.

California has the sixth or seventh largest economy in the world – at least it did before the recession.  The areas like San Francisco have very mature Managed Care market structures.  If you go to Jackson, Mississippi you are not going to find a Managed Care insurance system like San Francisco.  And, given the lack of population size and density, you could never make one work.  The Greater Boston Area has the highest concentration per capita of physicians in the country – and perhaps the world.  (find it here: http://www.cms.hhs.gov/MedicareMedicaidStatSupp/LT/list.asp#TopOfPage)  That is not true of Millinocket, Maine or the State of Montana.  Because of the disparity in geographical distances and provider concentration (among other factors) the Medicare Program has a special class of hospital called a Critical Access Hospital to service rural areas, which are paid based upon their costs rather than the standard Medicare Prospective Payment System – Millinocket has one of these.  Montana has less than 1 million people, but in size it is about the same square miles as Germany, which has 82 million residents.  You have to travel a long way for healthcare in much of Montana, without public transit.

I heard a rather curious report on NPR yesterday, which did not serve to freshen the air. http://www.npr.mobi/templates/story/story.php?storyId=112172939.  The interviewee was a Washington Post Reporter who had traveled around the world for three years to write a book on different healthcare systems.  He had a number of anecdotes about doctors he had interviewed in various countries, the collection of which made him an expert on what healthcare system was best, I guess.  To be fair, I haven’t read the book, but I have been doing this for more than 30 years and doubt you could learn every major health system in only three years.  My favorite story was how the Japanese love going to the doctor.  He failed to mention that per capita spending on pharmaceuticals in Japan is 16% higher than in the US, the highest in the developed countries. Don’t take my word for it, read it for yourself. http://www.vfa.de/download/SAVE/en/vfa-en/publikationen-en/e-statistics/e-statistics-2008.pdf  This has something to do with the fact that “Japan has fewer physicians per capita than most other OECD countries. In 2006, Japan had 2.1 practising physicians per 1 000 population, well below the OECD average of 3.1. The relatively low number of doctors per capita in Japan is due at least partly to government policies fixing limits on the number of new entrants in medical schools.” http://www.oecd.org/dataoecd/45/51/38979974.pdf  No time for treatment, take this pill.  He did say, without elaboration, that Japan’s average hospital stay is 36 nights versus our 6 nights.  I, for one, would love to hear what he learned about that.