Posts Tagged ‘risk selection’

What Good are Health Insurers?

March 6, 2010

As the health reform effort moves into the final stages, everyone seems to be taking a whack at health insurers.  Some of the insurers’ wounds are self-inflicted, such as WellPoint’s announcement of 39% premium increase for individual policies in California.  Some of the attacks are calculated to build public support for health reform, since every good crusade needs a good enemy.  Some of the criticism has even suggested that we don’t need private health insurers.  Michael Hiltzik asked the question in a recent column “What do we need health insurers for anyway?”  James Surowiecki – usually a careful and thoughtful observer of business and economic issues – said the following in a recent article in the New Yorker:

Congress [in its health reform bills] is effectively making private insurers unnecessary, yet continuing to insist that we can’t do without them. The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

Surowiecki goes on to comment on what the world would look like without private health insurers:

In fact, the U.S. already has such a system: it’s known as Medicare. In most areas, it’s true, private companies do a better job of managing costs and providing services than the government does. But not when it comes to health care: over the past decade, Medicare’s spending has risen more slowly than that of private insurers. A single-payer system also has the advantage of spreading risk across the biggest patient pool possible. So if you want to make health insurance available to everyone, regardless of risk, the most sensible solution would be to expand Medicare to everyone.

Not so fast.  I would feel more optimistic that this would work if we had a different political system.  One of the limitations of this approach is that Medicare’s spending is ultimately determined through the political process.  The U.S. political system – for better or worse — allows the health care industry (or any other well-funded interest group) to use its financial resources and lobbying power to increase the flow of government funds into the health sector.  The idea that Medicare has a “hammer” to force providers to accept lower payment rates is largely an illusion.  In the current system, Medicare can do this only because there is a safety valve, i.e., a large private insurance segment that pays much higher rates to providers.  If Medicare gets larger or replaces private insurance altogether, there will be less opportunity to use the safety valve, so providers will step up their efforts to use political pressure to increase payment rates in Medicare. I simply don’t see a strong countervailing political force that would exert sufficient political pressure to hold down costs.

Is there an alternative to this?  Unless we change the U.S. political system by reducing the effect of money on elections and legislation, the best potential solution lies in healthy competition in the private market.  In this approach, government has an important role in setting the “rules of the game” to ensure that the markets are competitive and will benefit consumers.  The current Senate and House bills implicitly embrace this approach.  For example, the insurance reforms prohibiting medical screening will eliminate “unhealthy” competition based on risk management.  This should help to encourage “healthy” competition based on cost, service and quality.  Another example is the creation of insurance exchanges, which should offer increased choice and information to consumers, thereby stimulating healthy competition.  If the exchanges are allowed to grow over time, this could be a significant factor in bending the cost curve downward.

In this model, there is a very important role for private health insurers.  As the successful insurers adapt their business strategies by moving from risk management to cost management, they will develop new approaches to paying providers to create incentives for efficiency and quality.  Insurers may also become more selective in contracting with providers, by including in their networks only those who demonstrate the ability to manage costs effectively.  And competitive price pressures may cause insurers to exert stronger negotiating tactics with providers.  All of this is separated from the political process and thus more likely to be effective than a government-run effort to control costs.

To put it another way, the control of health care costs depends on the existence of a strong buyer.  In the current system, buyers are in a relatively weak position vs. hospitals, physicians, and drug companies, especially in small or mid-sized markets where there are only one or two hospitals and consolidated medical groups.  (A recent article by Berenson, Ginsburg & Kemper highlighted the trend toward increasing concentration among hospitals and physician groups in California, leading to higher payment rates to providers.)  Similarly, consumers are in a very weak position, since they are dependent on physicians for telling them what kind of medical care they need, and there is a lack of useful information to help consumers compare the price and quality of physicians and hospitals.  Employers likewise have been relatively weak, since most of them seem unable or unwilling to become knowledgeable and effective purchasers.  The government’s ability to be a strong buyer is limited because of the political pressures described above.

So who will be the bad guy and become a purchaser that is strong enough to balance the power of hospitals, physicians and drug companies? Although most health insurers haven’t been willing or able to exert pressure on providers during the past 10-12 years, they are probably the best candidates.  They are already accustomed to being bad guys; it would be hard to damage their public image much further.  And they have the mechanisms to have an impact: traditional tools such as utilization management, prior authorization, and physician profiling, as well as more progressive ones such as new incentive payment models, data analytics and feedback to physicians.  If health reform passes, insurers in the exchanges will have to compete more on price, since the traditional tools of risk management will be taken away.  Healthy competition among insurers will drive them to find ways to work with providers to hold down costs.  From an overall policy and political perspective, it’s probably better to have the providers negotiating and sometimes fighting with private insurers rather than lobbying the government for higher payment rates.  And some of the insurers might actually be seen as good guys, if they can develop constructive partnerships with providers to offer affordable, high quality health care.

In the end, there is a potentially important role for private health insurers in a post-reform world.  Getting this right is hard and the results are uncertain, but it’s probably the best chance we have to design a financially sustainable health care system.

[edited 3/6/10 to add final sentence re: good guys in next to last paragraph]

Winners and Losers: Strategy in a Post-Reform World

September 3, 2009

Most health policy experts are focusing on the daily ups and downs in the political battles over health reform.  Within the health care industry, however, there is a buzz about who will be the winners and losers after health reform passes.  A.M. Best’s U.S. Health and HMO Insurance Index has been volatile since last November, reflecting high uncertainty about the effect of health reform.  Earlier this summer, there was some speculative analysis about the potential impact of reform on health care stocks.  Will health insurers come out as winners?  What about hospitals, doctors, drug manufacturers, and insurance agents?

It’s good to look ahead, but I think most people are asking the wrong question.  Each of these health industry sectors – in aggregate — will probably do just fine in the post-reform world, as Bob Laszewski points out in his recent blog.  The more important question is: who will be the winners and losers within each sector?

Change is coming.  After all of the political maneuvering this fall, some kind of health reform bill is likely to pass.  The basic shape of the post-reform world is coming into focus, and it is likely to include:

  • Insurance reform: guaranteed issue (no medical screening), along with rating rules and standardized benefits in the individual and small group markets.
  • Broader coverage: expansion of Medicaid, subsidies for low-income people and an individual mandate.
  • New market structures: an insurance exchange for individuals and employees of small groups.
  • Cost containment: increased attention to costs, transparency and accountability for insurers and providers.
  • Payment reform: a gradual shift from fee-for-service to bundled payments, as well as incentives for quality outcomes.
  • Emphasis on prevention, primary care, chronic disease management, and the use of comparative effectiveness research.

These changes in the regulatory and market environment will create changes in the dimensions of competition within the health care industry.  In the PRW (post-reform world), health insurers and providers will require different skills and strategies to be successful.

Health Insurers:  In the past, the key to financial success was risk management, i.e., making sure that the expected medical costs of enrollees were predictable and not too high.  Insurance CFOs focused on the “loss ratio” — medical claims payments as a percentage of premiums – as a key measure.  Insurers used medical underwriting, targeted pricing and benefit design to manage the risk profile of their enrollees.  Many insurers also tried to hold down medical costs and administrative expenses, but it’s much harder to do that.  (No one likes being yelled at by doctors.)  Most insurers have deep expertise and experience in risk management, so it’s not surprising that this would be the primary tool for achieving their financial goals.

In the PRW, however, the usefulness of risk management tools will be greatly diminished.  Medical screening won’t be allowed, and insurers will be limited in their ability to use pricing and benefit design to attract only low-cost enrollees.  Even if they do, risk equalization mechanisms within the new health insurance exchange will reduce the financial benefits of cherry picking.  Insurers will need to put more effort into managing expenses, for both administration and medical services.  In other words, insurers will need to move from risk management to cost management.

The second major change for insurers will be in the small employer market segment.  In the past, insurers focused on the employer as the customer, not the employee.  They worked through brokers to get access to employers, to whom they offered coverage on a sole source basis.  Insurers – rightly concerned about adverse risk selection in a multiple choice arrangement within a small pool – insisted on being the only health plan offered within a small group.  The employees could only join the plan offered by the employer, so there was little need for consumer-oriented marketing.

In the PRW, the employees of most small businesses will purchase their coverage through a health insurance exchange.  The employer will have a minimal role, and the employee will have a choice of multiple health plan options.  Insurers will need to focus their sales and marketing efforts to consumers rather than brokers and employers.  In other words, insurers will need to shift from employer-based to consumer-based marketing.

Health Care Providers:  Hospitals and physicians face similar changes.  The analogy to insurers’ risk-management strategies is providers’ payer mix strategies.  An important factor in providers’ financial performance has been the mix of commercially insured, Medicare, Medicaid, and uninsured patients.  Since the payments for commercially insured patients have been much higher than for the others, many providers have systematically minimized or avoided patients in the other three categories.  Even not-for-profit safety net clinics have been forced to increase the proportion of commercially insured patients to stay afloat financially.  Many providers have also tried to hold down medical expenses, but it’s much harder to do that.  (No one likes being yelled at by staff physicians and nurses unions.)

In the PRW, the effectiveness of payer-mix management strategies will be reduced.  Most people will have insurance coverage, which will provide new revenue to providers who had been serving the uninsured.  There probably will still be payment differences between commercially insured vs. Medicare and Medicaid patients, but the importance of payer-mix management will be reduced.  In response, providers will need to focus more on managing their costs of delivering care.  In other words, providers will need to move from payer-mix management to cost management.

The second major change for providers will be in provider payment formulas.  In the past, the fee-for-service payment system rewarded a higher volume of services, regardless of the patient’s health outcomes.  The CFOs of provider organizations used key indicators such as the number of hospital admissions, the number of medical procedures, and billable physician time.  There was increased pressure for improved physician “productivity”, and billing systems were upgraded to maximize fee-for-service revenue.

In the PRW there is likely to be a movement away from fee-for-service payments — although it will probably happen gradually — and the incentives for increased service volume will be dampened.  Instead, providers will be paid for a “bundle” of services, and there will be a greater emphasis on quality processes and outcomes.  Hospitals will not be paid for a patient’s readmission for the same medical condition or for correcting medical errors (“never events”).  Physicians will be paid to take care of patients with chronic conditions via a specialized capitation or case rate.  Providers will need to coordinate their services and improve the management of chronic disease patients.  There will be stronger incentives to invest in electronic health records, use evidence-based clinical guidelines, and develop integrated delivery systems.  Providers will need to move from increasing service volume to improving patient care.

These are only a few of the changes that will be driven by health reform; the effects of reform are likely to be far-reaching.  The new legislative and market landscape will be very different from the one that insurers and providers have been accustomed to.  Smart health care organizations are already thinking ahead and developing strategies to be successful. The ones that don’t adapt will be moving against the tide.  Some insurers will gain, and others will shrink.  Some providers will thrive, and others will struggle.  Within a few short years, we’ll be able to sort out the real winners from the losers.

Saving Two Trillion Dollars – What’s Missing?

May 13, 2009

Can we bend the cost curve without covering the uninsured?  Slowing the growth of health care costs seems to be the focus of the current political debate; undoubtedly, this is an essential element of health reform.  If we don’t get costs under control, the strain on government budgets, employer benefit expenses, and individual budgets will be immense.  We also know that increasing costs have been driving the rise in uninsurance.  Zeke Emanuel made this point nicely in his 2008 article (“The Cost-Coverage Trade-off”, Ezekiel J. Emanuel, MD, PhD. JAMA, February 27, 2008 – Vol. 299, No. 8)).

Efforts to bend the cost trend downward – such as the May 11 announcement by health care industry leaders – are admirable, but the results will be limited until we fix the problem of the uninsured.  While rising costs are a primary cause of the rise in uninsurance, the reverse is also true:  the rise in uninsurance contributes to rising costs. Why?

It starts with the cost shift problem.  As the number of uninsured increases, the amount of uncompensated care costs increases.  In response, hospitals and providers shift costs to privately-insured patients, which causes insurance premiums to increase.  This cost shift adds to the problem caused by the underlying rise in health care costs.

There is one other important factor in the link between rising uninsurance and rising costs.  In the current environment, the easiest way for most insurers and providers to achieve their financial goals is not by being more efficient.  Managing expenses by improving efficiency is hard; insurers face provider backlash, and hospitals and physicians face internal management and political obstacles.  Managing revenues is an easier path.  For insurers, it is easier to “manage” their risk profile.  For hospitals and providers, it is easier to “manage” their payer mix.  Until we minimize the incentives for insurers to use risk selection strategies (e.g., by legislating guaranteed issue, rate pooling for individuals and small groups, and risk adjustment mechanisms), they are unlikely to pursue greater administrative efficiencies.  And until we minimize incentives for providers to use payer mix management strategies (e.g., by reducing the number of uninsured), they are unlikely to develop more efficient care delivery processes.

In summary:  Emanuel’s article stated, “without controlling costs, any attempt at universal coverage will be transient”.  I agree, and I would add: without universal coverage, any attempt at controlling costs will be unsuccessful.