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.

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AHIP Report Puts Health Care Reform Surcharge In Spotlight

America’s Health Insurance Plans have struck a nerve. The carrier’s industry association issued a report warning  that Congress is heading for a set reforms that could dramatically increase the cost of health insurance coverage for American consumers. The study, prepared by PriceWaterhouseCoopers warns that various taxes and fees, combined with a weakening of provisions requiring all Americans to purchase coverage, will raise premiums paid by a family in 2013 by $1,700 more than they would pay without the reform. Premiums for a single person would go up by $600 more than would otherwise be the case.

The AHIP report examined the impact of four provisions of the Senate Finance Committee bill. These are:

• Requirements on carriers to sell coverage coupled with “weak coverage requirements” on consumers along with rating reforms
• Taxes on so-called “Cadillac plans”
• Cost-shifting resulting from $400 billion in cuts to Medicare
• Taxes on insurance companies, medical device manufacturers and other health care sectors

Significantly, the study did not consider other proposals in the reform legislation that might reduce the cost of medical coverage. Even so, what the report has to say about current medical cost trends and these four elements of the reform package is important to understand.

According to PriceWaterhouseCooper, health care costs in America are expected to “grow over the next decade by approximately 6 percent per year under current law, which is more than double the expected growth in the Consumer Price Index of approximately 2.5 percent per year.” This means the cost of private health insurance coverage is expected to increase by 26 percent between 2009 and 2013 and 50 percent between 2009 and 2016. If the four provisions it reviewed are implemented, however, health insurance premiums would increase by 40 percent between 2009 and 2013 and by 73 percent between now and 2016. Meaning the average cost for single coverage, $4,800 today is expected to increase to $5,800 in 2013 under current law, but to $6,400 in 2013 given these reforms. And instead of costing $6,900 in 2016, the average single policy would cost $7,900. These are average increases. The impact by market segment is even greater:

• 49% increase for the non-group (individual) market\
• 28% increase for small employers (those firms with fewer than 50 employees)
• 11% increase for large employers with insured coverage
• 9% increase for self-insured employers.

Again, the impact of other provisions of the Senate Finance Committee’s proposal might reduce this trend, but there’s two conclusions that can be drawn from the report:

First, the status quo is unsustainable. Any system in which the cost of a service increases year-over-year-over-year by more than twice general inflation will eventually become unaffordable. Change is needed.

Second, key elements of the reform package expected to be passed by the Senate Finance Committee today will increase costs significantly beyond the already unacceptable trends.

Not surprisingly, proponents of reform have vociferously attacked the AHIP study. The White House described the report as “Distorted and flawed.” An AARP spokesman called it “Fundamentally dishonest.” Senator Jay Rockefeller described AHIP’s publication of the study as “The misleading and harmful claims made by the profit-driven insurance companies are politicking for corporate gain at its worst.” (That AHIP also represents numerous non-profit health plans has apparently escaped the Senator’s notice).

The harsh tone of the attacks on AHIP and its report reveals correlates with the significance of the study’s conclusions. Supporters of reform had long claimed it would reduce the cost of health care for most Americans or, at the very least “bend the cost curve.” For voters happy with their current coverage this is a critical message. They generally support health care reform, but that support could waiver if the cost to them personally is too high. And AHIP is now demonstrating what the cost to these individuals is in dollars and sense. That could undermine support for reform just as the legislation heads for a crucial stage: consideration and a vote in the next few weeks by the Senate and the House of Representatives.

In the next few days, critics will undermine points in the study. The tax on high-end plans may drive consumers to less rich benefit packages, reducing their premiums. The Medicare cuts could eliminate waste and, consequently, avoid shifting additional costs to individuals with private insurance. The taxes on medical suppliers will be passed through to consumers, but spread over a broader population as more Americans obtain health insurance coverage.

But if nothing else the study will bring highlight an important reality: a requirement on carriers to sell coverage that is not tied to a strong, enforced requirement for consumers to buy coverage will dramatically increase insurance premiums. The Congressional Budget Office concludes the Senate Finance Bill will increase the number of Americans with insurance from 83 percent today to approximately 94 percent. Karen Ignagni, AHIP’s president, says “You really have to have a coverage level in the high 90s to make this work.”

You don’t need high priced analysts to recognize that mandates to buy and to sell coverage need to be balanced. New York and New Jersey currently require health plans to guarantee issue coverage, but has no requirement that their citizens purchase insurance. Not surprisingly, premiums for individual health insurance coverage is two-to-three times what it is in California. The difference is a health reform surcharge paid for by the residents of those states.

But the example of New York and New Jersey isn’t even necessary: common sense shows the impracticality of an unbalanced approach. Imagine if consumers could put off buying auto insurance until the tow truck arrives at the scene of their accident. Auto insurance costs would skyrocket. What would fire insurance cost if it could be purchased after the flames are extinguished?

American consumers will do the math. If the penalty for purchasing coverage is the equivalent of one month’s premium (which is roughly what the Senate Finance Committee is proposing) every month they go without coverage (minus the first month) is money saved. When they face medical charges greater than the penalty, they’ll buy it. Once they’re treated, they’ll drop the coverage. The result will be a surcharge on all those with health insurance coverage.

Passage of the Senate Finance Committee legislation is not the end of the health care reform debate. It’s merely a milestone – and important one, but in the end, just a milestone. As the reforms move forward, lawmakers will need to face up to the need for balanced reforms.  That will require making tough decisions, such as telling their constituents they must have coverage. But health care reform, if it’s to be done right, takes both common sense and political courage.

Health Care Industry Groups Identify Cost Savings

The devil dances in the details and that’s especially true when it comes to health care reform. Words and policies seem to mean something different depending on your perspective and where you fit in the system. It’s like a group of people each looking into a room from a different window. It’s the same room, but it sure looks different depending on where you stand. Testing this is both easy and fun: get a doctor, hospital administrator and insurance executive in the same room and ask them to come up with a shared definition for the term “cost containment.”  For extra fun, ask them to come up with ways to implement cost containment.

Meanwhile, back at the details: back in May, leaders of six health care stakeholders met with President Barack Obama to promise $2 trillion in medical cost savings over the next 10 years. The meeting was groundbreaking, in that the six groups were: a) willing to appear together; and b) asking to be part of the reform process instead of simply opposing everything. In the past, these organizations — the Advanced Medical Technology Association (AdvaMed), America’s Health Insurance Plans (AHIP), American Hospital Association (AHA), American Medical Association (AMA) , the Pharaceutical Research and Manufacturers of America (PhRMA) , and the Service Employees International Union (SEIU) — were not known for working together.

While the mere act of making the promise was significant, as a friend of mine is fond of saying, “it’s trash ’til it’s cash.” Promises are cheap — especially in Washington, D.C. — so the real question was: how would they go about achieving these savings?

Now we know. The six groups sent their medical cost reduction proposals to the White House today. It calls for simplifying administration and reducing the cost of doing business (expected to generate $500-$700 million in savings), better managing chronic disease ($350-$850 billion in savings), and helping clinicians and other providers more cost effectively improve quality and safety for their patients ($150-$180 billion). You may have noticed, even the high end fails to reach $2 trillion, coming in at around $1.73 trillion — still a healthy number (you’ll pardon the pun). And the groups claim their cost estimates were conservative, so the proposals may represent even more savings.

According to the Associated Press, are already harping that the proposals fail to identify how any savings “would accrue to the federal government, rather than to the health care system as a whole.” Because the Obama Administration needs to find the resources to pay for health care reform, this kind of detail is critical. Further, as noted by Politico.com, it’s not clear how the proposals would be enforced — or even if they are enforceable.

Another interesting aspect of the submission is that each organization wrote their own section. There’s nothing wrong with this and it may even help hold each group accountable. But it does make for a disjointed presentation.

While imperfect, the document moves the health care reform debate forward. Lawmakers will no doubt comb through the package to find elements they can incorporate into legislation. And even if there are still lots of dancing devils yet to identify, the mere existence of proposals put forward by these groups to reduce costs in the system is a sign that the health care reform debate this time actually has a chance of improving America’s health care system.

Making Health Care Cost Reduction Promises Real

Representatives from insurance companies, doctor groups, hospital organizations and the pharmaceutical industry had their moment in the presidential sun on May 11th promising to slow down how quickly medical care costs increase. Their promise: $2 trillion in savings over 10 years. That would not only make it more affordable to provide coverage for the uninsured, it would be a huge boost the economy and to the financial condition of state governments.

In a letter signed by, among others, the American Medical Association, the American Hospital Association, the Pharmaceutical Research and Manufacturers of America, America’s Health Insurance Plans and the Service Employees International Union, which, as the Los Angeles Times described it “shepherded the agreement.” The unprecedented agreement among these health care stakeholders is meaningful for two reasons. First, these organizations were among the leading opponents of the Clinton Administration’s failed health care reform effort in the 1990s. Second, if it’s real, we’re talking about serious money.

And there’s the rub: is it real? President Obama is trying to find out. He’s instructed the organizations to come back to White House with specifics on how it will make this pledge real. As the Administration has demonstrated with the business plans demanded of the auto industry, the White House will hold these interest groups to a high standard. Which it should. The political stakes are high. If the cost cutting plans lack credibility President Obama will look, as the Associated Press noted, he “will be seen as naive for entertaining such promises.”  By holding them to a high standard, however, President Obama also has the power to undercut the industries’ opposition to his health care reform plan. Accusing them of insincere promises and inadequate commitment to cost cutting would bolster those who seek a bigger role for government in any new health care system.

The stakeholders have an equally important political task. By coming forward with voluntary, credible proposals for cutting costs, they provide political cover for those opposing the expansion of the government’s involvement in the system. If their proposals pass muster they will have gone a long way toward morphing from being a target of reform to being a part of the solution.  Their specifics for cutting costs will be part of the health care reform legislation Congress will produce this summer, which means they’ll have to live with them. But if that means the forthcoming legislation is a bit friendlier to their interests, that’s a reasonable price to pay.

Fortunately, the target, while a stretch, is eminently doable. Researchers at Dartmouth University have done several studies over the years that demonstrate that high costs for medical care do not correlate with better outcomes. As the Associated Press reports, they found that “as much as 30 cents of the U.S. health care dollar could be going for tests and procedures of little or no value to patients.”

One person who paid attention to this finding is Peter Orszag, Director of the Office of Management and Budget. As I wrote in 2007, when he was Director of the Congressional Budget Office, Mr. Orszag was “pushing for more evidence based assessments of new technologies and the need to expand research on comparative effectiveness. They key, Mr. Orszag indicated, is to provide new incentives in the system aimed at changing provider and consumer behavior.” His goal: to eliminate the $600 billion in “wasteful or low-value services” currently in the system.

If health care reform is going to work, squeezing this $600 billion out of the system is crucial. The associations’ efforts are an important first step. According to the Associated Press article, the groups are focusing on different aspects of the problem. Insurers, for example, are looking at reducing administrative costs by, among other initiatives, establishing a common, shared on-line claim form doctors and patients could use. Doctors are looking at establishing guidelines for medical practice. Improving information on drug interactions and reducing hospital readmissions are also part of the mix.

Most experts agree that the savings are there to be found. Identifying the savings will require political will and a willingness to change “business as usual” in the medical, pharmaceutical and insurance industries. Whether they pass the test will be determined by President Obama. Having shared the stage with him to make the promise, the price of failure will be extremely high.

Unintended Consequences and Guarantee Issue

I’ve written a lot in this blog about unintended consequences. Like the law of gravity it is ever present, impacting everything. Simply put the law of unintended consequences is that whatever the intent of any given piece of legislation, among its impact will be things unhoped for. No matter how well intelligent and savvy the authors, no matter what intended consequences result, any piece of legislation will have unanticipated, unwanted and unwelcome results.

Proof that the unintended consequences is a strong force can be found in a report conducted by Milliman, Inc., a respected independent actuarial firm on behalf of America’s Health Insurance Plans, an industry trade group. Putlished in July, the report takes on special significance in light of the health care reform initiatives put forward by Governor Arnold Schwarzenegger, Speaker Fabian Nunez and Senate President Pro Temp Don Perata. (The Impact of Guaranteed Issue and Community Rating Reforms on Individual Insurance Markets).

The study demonstrates that while the goals of reforms which established guarantee issue and community rating were laudable, “they frequently had unintended consequences that disrubted the individual marketplace,” according to Leigh Wachenheim. a Principal and Consulting Actuary at Milliman.

This result shouldn’t surprise anyone. These reforms bring into the insurance system individuals with higher costs than those previously in the pool. This is what is these laws intend to do and, personally, I believe it is a good thing. However, where there’s no offsetting incentive or requirement for lower risk individuals to buy insurance, the result is higher claims than previously experienced. This means rates go up for everyone. This in turn drives some low risk consumers out of the insurance market. Which means further increases are required for what is now an even higher cost pool. This antiselection process leads to substantially higher premiums as only high risk individuals remain in the pool. There’s nothing sinister about this. It’s the way every medical coverage pool works whether it’s for-profit or non-profit, government-run or private.

And it’s what happened in the eight states studied by Milliman. In two of the states, New Hampshire and Kentucky, the results were so negative and severe the guaranteed issue and community rating laws were repealed. A similar dynamic occurred in Washington leading to a significant weakening of its guarantee issue provisions. In other states, carriers fled the individual market where they can and the cost of coverage has skyrocketed. Another impact the study identifies is that the reforms do not appear to be effective in increasing the number insureds in these states.

This report should be required reading for every legislator and the governor, too. Hopefully they will come to the logical conclusion: guarantee issue can have a very positive impact on the market, but only if it is done correctly. This means linking guarantee issue not on the promise of an effective mandate to purchase coverage, but on a mandate to purchase coverage proven to be effective.

That’s why the California Association of Health Underwriters, in its Healthy Solutions health care reform plan, recommends triggering guarantee issue only after 90 percent of California’s population has medical coverage. Until then, CAHU recommends expanding the current state pool for high risk individuals so it can serve as an effective  insurer of last resort. Even after the 90 percent threshhold is met, carriers should be permitted to raise the rates and exclude from coverage pre-existing conditions of the 10 percent who fail to abide by the law. (The length of time these penalties could be applied would be commensurate with the length of time the individual remained outside the insurance system).  

Without an effective mandate to purchase coverage, the guarantee issue provisions being pushed by the Legislative Leadership and the Governor will do more harm than good.  Premiums will increase, carriers will leave the market, and the number of uninsured Californians will remain untouched.  This obvioulsy is not their intent, but it would be the likely result. Afterall, just because consequences aren’t intended, doesn’t mean they’re not foreseeable.