Dealing with Changing Change

The folks over at American Health Line are doing a series of guest posts discussing health policy developments over the the past year and what’s likely to happen in 2011. I was honored to be asked to participate and my contribution was posted today. Entitled “The Plot Will Thicken” it expresses my viewpoint that health care reform will continue to evolve over the next few years and especially in 2011. This doesn’t mean that every change will be for the better (which is an easy prediction to make since, depending on your perspective, what is “for the better” may be “for the worse.”) But it does mean what we think the Patient Protection and Affordable Care Act will do may not be what it actually does.

One reason is that the impact of the PPACA will vary to a significant extent by where you live and work. This aspect of the health care reform package hasn’t received a great deal of attention. While the PPACA is a federal law (two laws if you’re being technical — HR 3590 and HR 4872) state regulators and lawmakers will be responsible for its implementation. For example, Congress requires each state to have a health insurance exchange up-and-running by 2014 or have the Department of Health and Human Services run one for them. In the health care reform package they described in broad terms what those exchanges are supposed to do and how they’ll operate. The operative word here, however, is “broad.” States will determine whether all health plans will be eligible to participate in their exchanges, the role of navigators and brokers, the ability for consumers to enroll directly with a carrier directly through the exchange, and a lot more.

What the states decide on these questions will vary considerably. In California we’re seeing a push for a heavy government-hand in the marketplace.  In other states the exchanges are likely to have a lighter touch, adopting the role of an information resource rather than negotiating with carriers. Regardless of the approach, the states will comply with federal requirements, but their impact on the market and stakeholders will vary considerably.

Another reason the Patient Protection and Affordable Care Act will continue to evolve is the political reality that the Congress convening in 2011 is far different from the Congress that passed HR 3590 and HR 4872 in 2010. The impact of Republican gains — at both the state and federal levels — cannot be ignored. Nor can the shadow that is already being cast by the 2012 presidential election.  

The new Republican majority in the House of Representatives will try to repeal the PPACA and they will fail, but that doesn’t mean they will be unable to influence how the reforms are implemented and interpreted. And it doesn’t mean Congress won’t attempt to modify aspects of the law. Doing so will not be easy, but that doesn’t mean it’s an impossible task.  We’re already seeing strong bi-partisan support for changing some elements of the law, for example, the 1099 reporting requirements. As more of the burdensome elements of the law become apparent the greater will be the pressure to make adjustments.

Then there’s the changes to the PPACA the courts may require. The judge in Florida hearing a suit brought by 20+ state attorneys general is likely to throw out the individual mandate contained — and he may find the entire law is unconstitutional. From a legal perspective this will be a non-event (except for providing a lot of lawyers the opportunity to appear on cable news channels). Other judges will uphold the law (and some already have). The Supreme Court will ultimately decide both of these issues. What will matter is the wind this decision will put in the sails of those seeking to amend the PPACA.

To assume that the law as we understand it today will remain as is over the next few years is to ignore the dynamic nature that is legislative and political change. Laws as complex and far-reaching as the PPACA are not set in stone. To be fair, they’re not set in sand either. They’re set in something more closely approximating Silly Putty. (Sorry, I couldn’t resist that one).

Even in California, one of the states that seemed immune to the conservative wave that swept across the rest of the country in the recent election, health care reform will evolve. There has been widespread concern among California brokers concerning their implicit exclusion from the exchanges. One reading of the law is that unlicensed navigators will perform the role of counseling consumers on the best health plan for their unique needs. Yet the board charged with running the exchange may realize the short-sightedness of this approach. I’m not saying they will. And until we see who is appointed to the board I wouldn’t bet on things getting better. Regardless, there will be a lot of folks (including CAHU and myself) working hard educate the exchange board, lawmakers and regulators concerning the value of brokers and how we can help achieve the shared goal of making health care coverage more affordable and accessible to Californians. Whether this effort will succeed remains to be seen — and its success if far from certain.

That health care reform will evolve doesn’t mean that brokers, providers and carriers (to name just a few of the groups impacted by the PPACA) should simply sit back and wait to see what happens. Brokers, for example, need to examine their business strategies, recognize that their world has changed and begin the process of adapting to it. Some readers of this blog (and we’ll no doubt hear from them in the comments section, below) are convinced that brokers specializing in the sale and service of individual policies are doomed to extinction and no amount of changes in the PPACA will change them. Given that reasonable people can disagree, others have expressed their intent to diversify into other product lines or market segments, but to continue to be fully engaged in the individual market.

How individual brokers (or physicians or carriers) respond to the changes resulting from implementation of the Patient Protection and Affordable Care Act will depend on their tolerance for risk, their ability and willingness to adapt, the nature of their current business, the state or states they operate in, and the like. What’s important for all of us to recognize, however, is that we need to keep an eye on those changes resulting from implementation of the Patient Protection and Affordable Care Act. Because the changes will be changing, too.

Requirement that Carriers Justify Double-Digit Rate Increases a Teachable Moment?

Reasonableness, like a host of other things, can be in the eye of the beholder. Regulating reasonableness, consequently, is nothing like a science. Yet the Patient Protection and Affordable Care Act requires health insurance carriers to disclose their reasons for “unreasonable premium increases.” The Department of Health and Human Services has issued a preliminary version of the regulation aimed at determining how and where this rate increase disclosure will take place.

The draft regulation, which is open to comment and subject to change, requires carriers to publicly disclose any individual or small group rate increases higher than 10 percent. While double-digit increases will not be automatically considered unreasonable, they will trigger a review by state or federal regulators to determine if they’re justified. States will get the first shot at scrutinizing the rate hikes. Only if HHS determines a state lacks the ability to do a thorough actuarial review of premium increases will federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

Over time this 10 percent threshold could be adjusted on a state-by-state basis according to the National Underwriter. “After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state’s cost trends.”

HHS has the authority to require disclosure of large group rate increases, but chose not to do so.. They’re asking for comments on the advisability of seeking disclosure of large group claims, but according to the National Underwriter, regulators are concerned that doing so would not align with current practices. 43 states, however, already review — and some can deny — rate increases on individual and small group medical insurance coverage. Significantly, neither the regulation nor the PPACA gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted (again, unless a state regulator prevents it). 

The mechanics of the rate review are described in the proposed regulation. To oversimplify, if its desired rate increase is over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer’s web site. In evaluating the increase HHS will consider whether:

1. “the rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard
2. “one or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
3. the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.”

The timing of the rate increase is determined by state law, so HHS’ review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process.

Transparency is one of the reasons Consumers Union praises the draft regulation. According to Kansas City InfoZine, its spokesperson, DeAnn Friedholm, cited two benefits the group expects the premium regulations to deliver: “First, it provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases. And second, it will help consumers better understand why their rates are going up and they can decide to look for better plans.”

Which could lead to an interesting result. As the Consumer Union notes, the regulation could “help consumers better understand why their rates are going up .…” And the scrutiny on carriers explanation for increases will be intense. Which makes the posting of the reasons behind the price hikes a powerful  “teachable moment.”

Carriers can use the disclosure to tell a detailed explanation for their actions. For example, in California, hospital rates increased by 150% between 2000 and 2009. Carriers can, and should, get creative in presenting how this medical trend drives premium increases. The question is whether carriers, their actuaries and their attorneys have the skill and willingness to take advantage of this opportunity to present the full story behind skyrocketing insurance costs. Regence Blue Cross Blue Shield provides an example of a meaningful explanation for premium hikes. They even explain the impact of deductible leverage, which is no mean feat.

Regence is providing a general explanation of how pricing works, something other carriers will need to do as well. However, when justifying specific rate increases, Regence and others should go further, naming names. A hospital increases their reimbursement rates by 10%? Name the hospital. A pharmaceutical manufacturer introduces a new drug that costs 20% more than the effective medicine it replaces? Name the drug and the manufacturer.

Carriers could – and should – get even more specific. If the hospital initially sought a 20% increase the insurer should note it’s success in reducing the increase. After all, the beneficiaries of carriers’ successful negotiations with providers are consumers. As I’ve noted previously, health insurers need to do a better job justifying their role in the system. Most health insurance executives would justify their enterprise’s contribution to the system as lowering the cost of health care. Yet with every rate increase they undermine this argument by offering the broad excuse that premiums are rising due to increases in “medical inflation.” Well, now they have the forum and the reason to be specific about what — and who — is driving that inflation.

Who knows, some day regulators may decide to ask medical providers if their charges are reasonable. Until then, there’s no reason carriers can’t ask that question – publicly and loudly. As long as transparency is coming to rate setting, the bright light of disclosure may as well shine on as many parts of the system as possible.

NAIC Submits Standardized Benefit Summary Recommendations to HHS

Before I worked for a carrier I’d often wonder if the folks who write health plan benefit descriptions go to a special school that teaches them how to write these documents in as confusing and obtuse a manner as possible. After all, each carrier writes documents in their own way sometimes using the same or similar terms to mean something different. As a General Agent, my first job in the industry back in the early 80s, I spent considerable time trying to rewrite these benefit summaries into a somewhat standardized form to help brokers and their clients make more accurate and meaningful apples-to-apples comparisons.

Even today general agents and quoting systems devote a tremendous amount of time, money and resources to molding the various descriptions published by health plans into standard benefit summaries. In fact, one of the biggest barriers of entry for new software aimed at presenting rates and benefits is not the quoting engine itself, but the data entry and especially the benefit descriptions. Given the number of medical insurers and HMOs competing in today’s health care system and that even the offerings from the same carrier can vary significantly from state-to-state, we’re talking about literally thousands of benefit plans. The effort required to wrestle this tsunami of data into a standard format has required a Herculean effort.

The Patient Protection and Affordable Care Act is about to change that. Section 1001(5) of the PPACA requires the Secretary of Health and Human Services to work with the National Association of Insurance Commissioners to develop standards for benefit summaries and coverage explanations for individual and group insurance products. Significantly, HHS and the NAIC is required to establish a working group of representatives from carriers, consumer groups and others with expertise in the area.

After over 25 meetings lasting over 120 cumulative hours with approximately 100 working group members or observers participating, the NAIC has sent to the Secretaries of HHS and the Labor Department their recommendations for both standard benefit descriptions and a glossary.  The recommendations are now available for public review and comment. The Secretary of HHS is required to finalize the standards by March 23, 2011 and carriers must provide the forms to consumers beginning March 23, 2012.

The glossary uses plain language to describe terms of art such as co-insurance, deductible, balance billing, primary care provider and the like. Some terms, such as “formulary” are missing, but the list is relatively complete and will no doubt be added to over time.

And these are terms of art. I once did a man-on-the-street interview asking random individuals what certain health insurance terms meant. One, a teacher, described “co-insurance” as referring to the situation where two people in the same household both have insurance. (Being me, I asked if the two people had to be married. He replied that was a local issue, but not in San Francisco).

For those unfamiliar with the term, the NAIC proposed glossary defines co-insurance as “Your share of the costs of a covered health care service, calculated as a percent (for example, 20%) of the allowed amount for the service. You pay co-insurance plus any deductibles you owe. For example, if the health insurance or plan’s allowed amount for an office visit is $100 and you’ve met your deductible, your co-insurance payment of 20% would be $20. The health insurance or plan pays the rest of the allowed amount.” (And. yes, “Allowed Amount” is also defined in the glossary).

The draft NAIC standardized benefit summary is also a remarkably document. (Remarkable in that most people don’t expect government committees to put forward clearly written work). One welcome feature: in addition to explaining the benefits, the NAIC benefit descriptions also includes a short “Why This Matters” statement which puts the information into a useful context.

The documents could be improved, but even as they stand, they’re much better than what is often provided by carriers and quoting systems. And by aggregating these descriptions in one place they will make it easier for entrepreneurs to find new and helpful ways to provide this kind of information to consumers.

Working at a carrier I discovered there was no school teaching brochure writers to be confusing. Lawyers and the general dynamics of “writing by committee” made such a school unnecessary. And the impact of these groups will continue to assure that each carrier presents information in a unique voice. Still the standardized formats will assure a lot more transparency and clarity across products than exists today.

The PPACA has many provisions that are counter-productive. Anything it does to bring intelligibility and understanding to plan descriptions, however, is a good thing.

A Few More Unrelated Health Care Reform Items

There’s always something happening related to health care reform in general and the Patient Protection and Affordable Care Act in particular. As I continue my year end “clean-up” here’s some short takes on some of the more noteworthy events and ideas I’ve come across lately.

The AMA and the Individual Mandate:
The American Medical Association is of two minds when it comes to requiring everyone to obtain health care coverage  This individual mandate is at the heart of many of the law suits seeking to overturn the PPACA in court. During the health reform debate they supported this requirement. As reported over at the HealthAffairs blog, during their recent interim House of Delegates meeting the AMA voted to reverse this position. Only after “desperate scrambling by AMA leaders” the House voted to refer the issue to the AMA Board of Trustees and to hold a vote concerning their their position on the individual mandate when the House reconvenes again in June.

Both votes were close and reveal a deep schism within the AMA. Like the Wright on Health blog where I came across this item, I don’t believe the result will actually split the AMA, but if the organization abandons its support for the individual mandate it would be a serious political blow to the Obama Administration.

The PPACA and Medicare:
President Barack Obama and his allies argue that the Patient Protection and Affordable Care Act will strengthen Medicare even though the health care reform package cuts about $500 billion from the federal health program over the next 10 years. The Associated Press did an interesting fact check that sheds some light on the PPACA’s impact on Medicare. The bottom line: unless there are offsetting cost reductions in Medicare, the cuts to the program required by the PPACA will simply need to be replenished by other sources. While the Associated Press’ Q&A points out another example of the financial gimmickry so common in Washington, it also highlights the need to reform Medicare, especially in terms of reining in medical spending. The PPACA creates some pilot projects and the like to do just that. Whether they will generate the savings necessary in time is the $500 billion question.

And for a lighter look at Medicare, feel free to check out “The New Medicare Drug Card” brought to you by the Onion.

Speaking of Controlling Medical Costs:
Health insurance premiums reflect the cost of health care. This is a fact that many lawmakers seems unable to grasp. Perhaps its a gap in their education or, at the risk of being appropriately cynical, perhaps it’s because it is easier – and better politics – to beat up on insurance companies than it is to take on hospitals and doctors.

One way to reduce costs is to reduce needless care. As David Leonhardt wrote in the New York Times earlier this year, the potential savings from eliminating unnecessary medical treatment is huge, both in terms of dollars and in lives. Mr. Leonhardt, who writes the Economic Scene column for the paper, identifies three steps necessary to earn these savings: 1) “learning more about when treatments work and when the don’t;” 2) “give patients the available facts about treatments;” and 3) “changing the economics of medicine to reward better care rather than simply more care.”

What’s especially interesting, and especially for those who believe the PPACA does nothing to restrain health care costs, is Mr. Leonhardt’s point that the new health care reform law makes a good start down this path. As he makes clear, the PPACA doesn’t go as far as is needed, but it lays the groundwork for much of the hard work yet to come.

Physician Owned Surgery Centers:
Here’s a not surprising headline: “Doctors with ownership in surgery center operate more often: U-M study.” Shocking, no? The University of Michigan study shows the financial incentives gained by doctors when they have a financial stake in a a surgery center. One possible explanation the researchers mention for this is “that these physicians may be lowering their thresholds for treating patients with … common outpatient procedures.” Those financial incentives can be hefty, amounting to what the authors call a “triple dip.” Doctors with a stake in a surgery center “collect a professional fee for the services provided … share in their facility’s profits and [in] the increased value of their investment.”

Writing in Health Affairs, the data showed that “owners operated on an average of twice as many patients as non-owners” and their caseloads increased more rapidly and dramatically. Significantly, the study reports that doctors have a stake in 83 percent of surgery centers in the United States. To be fair, these out-patient centers often charge less for comparable treatments than hospitals do. But if they double the number of surgeries, how much do they really contribute to constraining health care costs?

The “Best of” CBO’s Health Care Reform Reports:
The Congressional Budget Office occupies a unique position in the legislative process. In a hyper-partisan Congress, they are an island of non-partisanship. (Of course, partisans in both parties only admit this when what the CBO reports supports their position, but that’s politics). This is not to say that the CBO is always right or that they’re not constrained by the questions asked or the data they are provided. But at the end of the day, when it comes to reliable information and analysis, there are few places better to turn to than the Congressional Budget Office.

When it comes to health care reform the CBO was instrumental in providing meaningful input to the debate. And now those reports – and other health care related studies – are compiled in a greatest hits collection entitled “Selected CBO Publications Related to Health Care Legislation, 2009-2010.” The information contained in this 364-page compendium is invaluable. But what will be even more fun five or 10 years from now will to look back on the CBO’s projections and see how rarely the world world abides by the predictions of even well-informed and well-intentioned economists.

Two More Unrelated Health Care Reform Items

In something as complex and pervasive as, say, changing the entire health insurance industry, the “big” things tend to divert attention from noteworthy items that deserve some attention, too. In my previous post I wrote about the inability of Congress to repeal the 1099 requirement contained in the Patient Protection and Affordable Care Act.  As I continue to clean out my (digital) files, there’s a few other items I’ve come across that deserve mentioning.

Anti-Trust Suit:

Back in October, the Justice Department filed suit against Blue Cross Blue Shield of Michigan claiming the health plan had used its dominant position in the market to force hospitals to charge higher prices to its competitors, a violation of anti-trust laws. According to New York Times, the complaint alleges the “most favored nation” clauses insisted upon by BCBSMi, which “require hospitals to charge other insurers a specified percentage more than they charge Blue Cross — in some cases, 30 to 40 percent more” result in “higher health insurance premiums for consumers and employers.” The clauses also prevent the medical providers from offering any other carrier a better price than they offer to BCBSMi. In exchange for the favorable treatment the suit asserts BCBSMi agreed to pay higher prices themselves.

A spokesman for the health plan was quoted by the New York Times as responding that it was against the insurer’s interests to pay more than they could otherwise negotiate and the “These kinds of low-cost guarantees are widely used in a variety of contracts in a number of industries.”

However the suit turns out, merely bringing the legal action will draw attention to what the Washington Post describes as the “concentration of power that dominant health insurers wield in many parts of the country.”  A study sponsored by the General Accounting Office last year found that the median small group market share of the largest carrier in a state was 47 percent. The dominance of a single insurer varied considerably from state-to-state: in Arizona the largest carrier had a 21 percent market share among small businesses; in Alabama the dominant carrier had a 96 percent share.

A government-run health plan, what was called the “public option” during the health care reform debate,  was President Barack Obama’s attempt to, among other things, provide competition to these dominant carriers. Of course, in bringing competition to Alabama (where arguably it is needed) he was also imposing a government-run plan on Arizona (where it apparently is not needed). Having failed to secure a public health plan in the PPACA, the Obama Administration is now using the courts to bring about greater competition among health insurers.

The courts will determine if what Blue Cross Blue Shield of Michigan does in its contracts are unfairly (and illegally) anti-competitive.  There’s nothing wrong with the Administration bringing suit to find out. That’s how America’s legal system works. But given a recent insurance industry study disclosing that hospital costs in California rose 159 percent over the past 10 years, in part because of the dominant position some medical providers enjoy in parts of the state, it will be interesting to see if the Administration gets around to exploring the anti-competitive activity that may be involved in their business practices.

Doctor Owned Hospitals

The Patient Protection and Affordable Care Act makes it extremely difficult, if not impossible, to create new physician-owned hospitals that bill Medicare for reimbursement. A group of Texas doctors sued to have this provision (Section 6001 of the new health care reform law for those keeping track at home) declared unconstitutional. U.S. District Court Judge Michael Schneider dismissed the suit, but the plaintiffs have pledged to appeal his decision according the Becker’s Hospital Review. The plaintiffs claim the provision, which also limits expansion of existing doctor-owned facilities and freezes the percentage physicians can own of a hospital, is “retroactive in effect.”

It was only last summer when Dr. Atul Gawande, writing in The New Yorker described the impact doctor-owned facilities had on making McAllen, Texas the most expensive town in the country in terms of Medicare spending. His article gained widespread attention and was cited by President Obama during a major speech on to the nation on health care reform. The PPACA attempted to address this cost driver. Doctors are suing to excise that provision. Whether they succeed or not, the law suit will (hopefully) bring additional attention to the advisability of having the those who help determine the amount of demand for care own the source of supplying that care.

And what both these items underscore is the important role courts will play in determining the nature — and affordability — of America’s health care system in the coming years.

Two Unrelated Health Care Reform Items

Two items of interest concerning health care reform: one concerning repeal of an unpopular provision of the Patient Protection and Affordable Care Act; the other a bi-partisan effort to allow states to opt-out of some of the health care reform law’s provisions.

1099s:

First, a quick update on the inevitable repeal of the Patient Protection and Affordable Care Act’s requirement that businesses issue a 1099 when they pay any vendor or contractor more than $600 for goods or services. The update: it’s still inevitable.

Virtually everyone agrees this part of the new health care reform bill needs to be repealed or, at the very least, greatly revised. President Barack Obama wants to lift this burdensome paperwork. 61 Senators have voted to repeal it. A majority of the House wants to repeal it. The Senate tried twice to repeal the PPACA’s 1099 provision in late-November. But the provision has yet to be repealed.

Just this week Democrats tried to repeal this tax reporting requirement by attaching it to the legislation the Senate is considering to extend the tax cuts about to to expire. Politico reports Republicans squashed the move because the deal ““wasn’t part of the original [compromise] framework, and nobody involved in the negotiations allowed any add-ons.” Apparently exceptions to the “no add-ons” rule are not allowed even by nearly unanimous consent.

There’s plenty of time to repeal the 1099 requirement as it doesn’t take effect until 2012. It’s inevitable repeal remains inevitable. That it’s taking this long says more about Congress than the policy underlying the 1099 provision. But even a broken clock is right twice a day. Eventually Congress will get the job done, even against its natural tendency not to.

Waivers:

Senator Ron Wyden is clever. He inserted a little noticed or discussed provision into the Patient Protection and Affordable Care Act that has the potential to, as The Hill’s Healthwatch blog put it “take the partisan venom out of the healthcare reform debate.

As reported by Healthwatch, Senator Wyden’s amendment allows states to seek waivers from various parts of the law, including, for example, the requirement that everyone obtain health care coverage.

Currently, this state waiver provision doesn’t take effect until 2017. However, Senator Wyden, a Democrat, has joined with Republican Senator Scott Brown to seek these waivers in 2014 which is, not coincidentally, when some of the most controversial elements of the PPACA take effect (think exchanges, guarantee issue, and the individual mandate to name a few items).

State’s can’t just choose not play in the PPACA sandbox because, well, they simply don’t want to play (sorry Governor Perry).  States seeking a waiver need to demonstrate that their own health care reforms will accomplish the same results as are expected to come from the federal reforms in terms of the number of people covered, affordability and comprehensiveness. Some might call this a “put up or shut up” requirement; others consider it a deal killer. Regardless of the interpretation, as The Hill quotes Len Nichols, a George Mason University professor of health policy as observing, “It really is a clever way to force an adult conversation. It brings the conversation to the level where the state has to consider its options.” In any event, it at least creates the potential for states to go their own way in making health care coverage more affordable and available.

The legislation by Senators Wyden and Brown is the first bipartisan effort to revise the PPACA since the midterm elections. Given split control of Congress (Republicans in command of the House; Democrats with a majority in the Senate) bi-partisanship will be required to make any changes to health care reform.

This might seem to completely undermine the potential

Federal District Court Declares PPACA’s Individual Mandate Unconstitutional

A federal district judge in Virginia found the Patient Protection and Affordable Care Act unconstitutional today.

The ruling by Judge Henry Hudson makes the count at the district court level 2-to-1 in favor of the new health care reform law’s constitutionality. Another Judge in Virginia and one in Michigan ruled in favor of the legislation’s requirement that individuals obtain health coverage beginning in 2014. There are nearly two dozen legal challenges to the PPACA and no doubt others will go against the law as well, while others side with the Obama Administration.

In making his decision, Judge Hudson concurred with the arguments put forward by Virginia Attorney General Kenneth Cuccinelli. The core of his this argument is that while the federal government has the power and authority to regulate interstate commerce, whether or not to buy health insurance coverage is a local decision and beyond the reach of the federal government. The Washington Post offers a quote from the 42-page ruling that makes this position clear: “Neither the Supreme Court nor any federal circuit court of appeals has extended Commerce Clause powers to compel an individual to enter the stream of commerce by purchasing a commodity in the private market.”

In claiming the individual mandate was unconstitutional, Judge Hudson specifically stated that “portions of the law that do not rest on the requirement that individuals obtain insurance are legal and can proceed,” according to the Washington Post. Officials in the Obama Administration concede that, if the Supreme Court were to find the individual mandate requirement the goal of President Barack Obama’s health care reform law would be crippled. Politico.com, reports that these officials concede “the lack of a mandate would cut the number of uninsured people who would get coverage in half and threaten the ban on denying coverage [to] people with pre-existing conditions.” Medicaid expansion, the creation of state-run insurance exchanges and the medical loss ratio requirements would not be impacted, however.

The ruling by Judge Hudson was not unexpected as he was very skeptical of the law during a hearing in October. Nor did Judge Hudson stay implementation of the law, which means implementation of even those PPACA provisions tied to the individual mandate may continue until a decision on the laws constitutionality is made by the Supreme Court. 

With various judges deciding differently the constitutionality of the law will need to be determined by the Supreme Court. The new Virginia decision, the others in which a federal district court judge has ruled, and a decision yet to come on a suit filed by 20 states against the PPACA in a Florida court, will need to work their way through the judicial system before the issue reaches the Supreme Court. Attorney General Cuccinelli has requested that his suit bypass the Fourth Court of Appeals (which would normally hear an appeal from a Virginia federal court) and go directly to the Supreme Court. To accept this request, the Washington Post notes that the Supreme Court would have to decide that the case “held extreme public importance” and immediate intervention was required.

Whether Attorney General Cuccinelli’s request is accepted or not, the Supreme Court is expected to rule on the constitutionality of the Patient Protection and Affordable Care Act prior to 2014.

Understanding Broker Anger

Non-insurance brokers reading this blog may be wondering what the fuss is about. Yes, commissions are being reduced, especially in the individual market segment. Who didn’t see the writing on that wall? Given the Patient Protection and Affordable Care Act’s medical loss ratio provisions, a substantial cut in individual health insurance commissions was a mathematical certainty.

So why the anger, despair and sense of betrayal? Yes, fear that one won’t be able to make a living in one’s chosen profession has a tendency to make macro events very micro – and personal. This would explain the despair, but more is going on here than concern over a reduced revenue stream.

Most brokers reading this blog are far more engaged in insurance sales and service than I currently am and can express how brokers feel far better than me. (Hopefully they will – and will do so civilly). However, I’d like to offer some observations to non-broker readers to start the dialogue.

First, let’s get the obvious issue out-of-the-way. Yes, the money matters. Professional brokers add value to the products they sell and service. (The service aspect of what brokers do is too often overlooked, but it is a major part of the job). Brokers want to be fairly compensated for that value. There are bills to pay and other products to sell. Time and resources are being spent and commensurate compensation is deserved.

The commission cuts we’re seeing vary greatly from state-to-state, carrier-to-carrier and product segment-to-product segment. In the individual market (where consumers buy coverage without support of an employer) commission reductions of roughly 30-to-50 percent appear to be the norm.  Cuts of this magnitude would disrupt any enterprise. Imagine telling GM that their new $41,000 Volt must now be sold for $25,000. So much for paying back their government loans. Look at what happened in California when state revenues fell by roughly 20% from fiscal year 2007-08 to 2008-09. (For those not paying attention, the result has been a fiscal, policy and political nightmare).

Brokers recognize that during the Great Recession others have sustained even harsher financial hits. Yet when it’s your cash flow, company doesn’t reduce the misery. Yes, brokers are better off than the owner of a neighborhood business bracing for the arrival of a Wal-Mart in their neighborhood or of a worker watching her job shipped overseas. After all, when a business closes or a job ends, all compensation revenue and income ends, too.

Brokers, however, still have strong relationships with their clients. There are other products to sell and service. Some producers no doubt have already calculated that the size of cuts to commission rates in many instances do not necessarily reflect commensurate cuts in actual compensation (in some circumstances, unfortunately, they do). Between 2004 and 2009 the average premium in the individual health insurance market segment increased by 31% for single coverage and 43% for family policies according to two reports published America’s Health Insurance Plans, a trade association for carriers. Premiums have no doubt increased in 2010 and will again in 2011 – the PPACA will see to that.

Still, given commission reductions of the magnitude being reported, the response of many brokers is neither surprising nor inappropriate – and it is intense and genuine. Because there is more involved here than the money.

Professionals who have devoted their careers to serving their clients and supporting their carriers are being told by those same companies that those services will no longer be worth tomorrow what they are today (in a monetary sense). At the same time, carriers are reminding brokers that their role in educating consumers has never been more important given the new health care reform law. How could anyone in this situation feel anything but devalued personally and professionally?

Intellectually most producers knew changes to the commission structure were inevitable even in the absence of reform. Tying broker compensation to the rate of medical inflation, which brokers know has greatly outpaced general inflation for years, was becoming increasingly difficult to justify. Knowing this, however, doesn’t make commission cuts any easier to accept. This is especially true when some carriers seem to be hiding behind health care reform to lower average commissions below what the math embedded in the PPACA’s medical loss ratio provisions seems to require (roughly to 7-to-8 percent of premium). Were these carriers to fully explain why they were reducing commissions significantly below their competitors, brokers might find the situation more easy to accept. Instead, brokers are being told “Here it is, take it or leave it.” A message that does nothing to address brokers concerns, but simply inflames their anger.

Worse, some carriers have apparently chosen to apply the compensation reductions to brokers’ existing block of business. This is a tactic brokers find unacceptable (and I feel for the sales executives of these carriers who have to explain and justify an approach they vehemently opposed).

Why are brokers concerned about retroactive commission cuts? For the same reason no health plan CFO would let their company offer a policy empowering subscribers to unilaterally lower premium payments simply by declaring that “household costs must be cut.” Yet these same CFOs are asking brokers to accept such an arrangement.

That even one carrier would attempt to take this approach undermines trust in all carriers. Brokers entrusted their clients and a portion of their livelihood to these insurers. Yes, there are contracts governing these arrangements, but there’s a large element of trust involved, too. Brokers rely on insurers to provide the coverage promised in their policies, to treat their clients fairly, and to be dependable business partners. Retroactively cutting commissions on existing business defies the definition of dependable.

My guess is that when their sales drop precipitously, as they inevitably will, these carriers will reconsider this approach. Insurers have, after all, retreated from similarly bad compensation ideas in the past (more on these examples in a future post). Even then, however, the sense of betrayal brokers feel today will linger.

Complicating brokers evolving view of their carriers is that while the commission cuts are obvious, other cost cutting measures insurers are taking are less apparent. The ranks of home office executives are being reduced at many companies, for example. but unless these terminated officers worked directly with brokers, their departure goes largely unnoticed. As a result many brokers feel, (in many cases wrongly) that carriers are not accepting their a share of the pain necessitated by the PPACA.

Brokers rightfully consider the services they provide their clients – and their carriers – to be valuable and important. And they are. Clients trust their brokers far more than their carriers. Consumers listen to their agents when it comes to choosing a health plan; I’ve never heard of a consumer listening to a carrier when it comes to choosing their agent. Most carriers seem to be making the cuts that the math requires of them. Brokers who expect that 20% commissions in an age of 80% medical loss ratios can continue are being unrealistic. And attacks on all carriers for unfair or inappropriate actions taken by a few insurers are unfair. Yet doing so is all too easy – and human.

Whether as a non-broker you believe producers have been overly compensated or not, the reality is that the imposition of commission cuts understates and undermines the perceived value of the profession. Brokers may have been reassured by the resolution passed by the National Association of Insurance Commissioners expressed their concern about the negative impact the PPACA could have brokers this past summer. They may be heartened to know that state regulators was calling on the Administration to “protect the ability of licensed insurance professionals to continue to service the public.” But outcomes trump good intentions. And while the position of the NAIC may impact the role of brokers in the future, what producers are seeing now is a devaluation of their work.

I believe that’s the greatest source of anger. Yes, selling and servicing individual health insurance will be less profitable next year than this year. Producers will determine on a broker-by-broker basis whether selling and servicing individual health insurance will be profitable enough to justify continuing to do so. What works for one broker may not for another.

The income being lost today will, I predict, be replaced through an influx of new customers and increases in the cost of coverage. What will be far harder to set right is the diminished trust between brokers and carriers. Loyalties and relationships have been strained and must be reforged. Harder still, however, will be restoring brokers’ sense that the value they provide is recognized and respected. Doing so will require carriers, lawmakers and regulators to treat brokers differently than has been too often the case to date.

Whether they are inclined to do so remains to be seen. Until they do, however, broker anger will continue, even when the lost income is replaced.

California Hospital Charges Increase 150% in 10 Years

The Patient Protection and Affordable Care Act does a great deal to address insurance industry practices. The new health care reform law, however, has been rightly criticized as failing to directly and forcefully attack rising medical costs, the primary driver of insurance premiums. Yes, the new law establishes.

The PPACA has a number of pilot projects, demonstration programs, and studies buried in its provisions that could, in time, lower overall cost spending. And supporters of the bill will argue that the Medical Loss Ratio provision is aimed at keeping down the cost of coverage. (Ironically, the MLR limits may have the unintended consequence of raising insurance costs. Administrative costs are usually fixed and independent of the premium paid. The cost to have a claims representative process a claim is the same whether the coverage cost $1,000 or $3,000 per year. But the $1,000 policy makes only $200 available for administrative expenses under the medical loss ratio calculation; the $3,000 plan makes $600 available. In other words, because the MLR rules apply percentages, carriers have an incentive to eliminate low-cost plans).

Carriers need to educate lawmakers and the public about the elements that go into a premium rate. Yes, profit and overhead are a part of the cost. But the biggest driver of health insurance premiums is the underlying cost of medical care. And the carrier community may have begun this educational process.

America’s Health Insurance Plans, the industry trade association, released a study showing that, in California, hospital charges increased 150 percent between 2000 and 2009. The Sacramento Bee, quotes AHIP spokesperson Robert Zirkelbach as observing “What this data shows is that there needs to be much greater focus on the underlying cost of medical care that is driving those premium increases. At some point, people will have to address these underlying cost drivers if health care costs are going to come down.” In other words, you’ve taken your shot at the insurers, now, if you’re serious about reducing costs, let’s look at the hospitals.

Interestingly the AHIP report acknowledges that hospitals and other providers of medical care need to make up for underpayments by government health programs. In California, between 2000 and 2009, hospitals charges to health plans rose by 159 percent. This is more than twice the rate of increase for Medicare and eight times the increase hospitals received for Medi-Cal – the state’s version of Medicaid.

Needless to say the hospitals didn’t appreciate AHIP pointing this out. “It’s really tough for a pot to call a kettle black,” the Sacramento Bee reports Scott Seamons, the regional vice president for the Hospital Council of Northern and Central California. I don’t know if Mr. Seamons intended to acknowledge that hospitals are at least as much at fault for rising insurance premiums as carriers, but if the insurance companies are the pot and the hospitals the kettle, that is what he’s saying. If so, that would be a refreshing dose of frankness to the dialogue. Meanwhile, consumer groups, not unexpectedly, accused the AHIP of trying to shift the blame for rising premiums. Apparently they can’t accept that anything other than insurer greed and profiteering drives insurance premiums. Any correlation with hospital charges or medical inflation are merely accidental.

All of this rhetoric and accusing is standard issue among advocacy groups and trade associations. And if all that comes out of the report are fingers among these usual suspects pointing at the usual places, then this report will have done little good. If, however, the study represents the beginning of a concerted effort to bring to the public’s attention what drives their insurance premiums; if it leads lawmakers to ask “why” hospitals needed a 159 percent rate increase over 10 years; if it gets people thinking about the monopoly position some hospital chains enjoy – and employ – in parts of the state, that’s something altogether different. Because if these possibilities become reality, the AHIP report may be seen as an important start to what will be a long, but critical, educational effort.

The Three Year Approximate Commission Calculation

Individual health insurance policies don’t stay on the books with a particular carrier for long. There’s a variety of reasons for this lack of persistency, but the most common reason for a policy lapsing is that the insured has been offered coverage through their job. Since employers usually subsidize at least half the the premium, dropping one’s own policy and taking the company’s is invariably a better value. Actuaries are pretty good at anticipating the lapse rate for a particular plan.

Lapse rates are highest during the first year a policy is in-force. This reflects the loss of consumers who purchased coverage while between jobs or the like. As a result, it’s not uncommon for one-third of individual and family medical plans to terminate in their first year. It takes roughly two years, however, for the next one-third to lapse. Put another way: sell 100 individual policies on January 2011 and you can expect to have 67 still on the books come January 2012 and 33 remaining on January 1, 2014. These are estimates and averages applied over large numbers. Your results may vary.

It’s also important to note that carriers and brokers have different experiences with lapses. A broker moving a client from Carrier A to Carrier B represents a lost case to Carrier A, but not to the broker.

How does all this tie into commissions? Because persistency is an integral part of the very idiosyncratic way I compare different commission schedules. And given the changes going on with broker commissions in light of the Patient Protection and Affordable Care Act’s medical loss ratio provisions, comparing commission schedules has become, by necessity, an obsession of most brokers.

The method I use to evaluate the commissions is what I call the Three Year Approximate Commission Calculation. Here’s the “thinking” behind it:

1. According to the lapse rates by actuary friends have shared over the years, a typical individual health insurance sale remains is on the books for approximately three years. Some never make it that far; others stay far longer, but three years is a good rule of thumb.
2. Broker compensation is usually (but not always) based on a percentage of the premiums paid by the consumer. Which means one way to compare broker compensation resulting from any particular sale is to add up the commission percentages paid each year and apply it to the first year’s premium. This is, admittedly, just one way and would, no doubt, make my actuary buddies cringe). Using this approach, a commission schedule that pays a flat 10% commission each year over three years is paying out roughly 30% of the first year’s commission over that period. A schedule that pays commissions of 15% first year and 7.5% on renewals is also paying out roughly 30% of the first year’s commissions.
3. Yes, this fails to take into account the impact of rate increases, but I’m not claiming to offer a precise way of determining commission equivalence. This is a way to approximate the value of a commission schedule on the fly – no spreadsheet software or calculators required. There’s a reason “Approximate” is in the name of this calculation.Besides, guessing at the net impact of future rate increases is just that, a guess.

The result is the Three Year Approximate Commission (or TYAC). While it was developed for comparing individual medical plan commissions it can be used on small group health insurance commissions, too, which also are likely to remain with a carrier for roughly three years on average.

The Three Year Approximate Commission Calculation is especially useful in comparing the “before and after” of commission schedules being announced by carriers seemingly on a daily basis. As I’ve written before, the math imbedded in the Patient Protection and Affordable Care Act demands broker compensation be cut (absent regulatory or legislative relief). Put simply, carriers will have 7-to-8 percent of individual and small group premium available for broker distribution after allowing for administrative costs and margins. This works out to a Three Year Approximate Commission of 21-to-24%.

Which is pretty close to what brokers are reporting in the Tracking Commission Changes post (please note: these are reported commission schedules and have not been independently verified – if anyone has corrections, please send them along).

In Arizona, Cigna is reducing individual plan commission from a Three Year Approximate Commission of 30% to one of 22% – a roughly 27% cut.

In California, Anthem Blue Cross’ 40% TYAC is dropping to 28% for the top tier – a 30% reduction. Their lowest tier pays has a TYAC of 21% – a reduction of 47.5%.

In Georgia, Humana is going from a Three Year Approximate Commission of 33% to one of 25% – a 24% drop.

Illinois BCBS’s TYAC is moving from 30% to 23% for top producers – a change of roughly 23%. For those selling less than 25 cases the TYAC is dropping from 25% to 20% – a decline of 20%.

You’ll note some carriers have tiered commission schedules paying more to larger producers at the expense of those writing just a few cases. While you may disagree with this approach, it is “broker-friendly.” A producer writes less than, say, 10 cases a year isn’t really in the business of selling individual major medical plans. Such producers earn the bulk of their income from other product lines. Selling an individual policy is often done as a convenience to an existing customer. The amount they are paid on these sales is secondary to the income they receive from clients on other lines of business.

A broker selling dozens or even hundreds of individual health insurance plans a year, however, is relying on this line of business for the bulk of their income. That carriers would want to soften the impact of commission cuts on these produces is reasonable and, for these large producers welcome.

Still, commission cuts of 20%-30% or more in one year are life changing. Name a city or state who who could withstand a 30% decrease in tax revenues in one year? A CEO announcing a 25% drop in revenue would not be CEO for long. And the resulting cutbacks in service, layoffs and closures would be a devastating on citizens and employees.

That impact – how big it is, what it means and what brokers can do about – will be the topic of upcoming posts. For today I just wanted to introduce the Three Year Approximate Commission Calculation so we’d have a common way of describing differing commission schedules.