The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Posts Tagged ‘Purchasing Pool’

Hospital Cost Disparity Study: Implications for ABX1-1

Posted by Alan on January 17, 2008

The press is abuzz with the news that there’s a wide disparity in what different California hospitals charge for providing the same services. The study found that hospitals sometimes charge more than they need to in order to maximize their profits (or, for the non-profits, retained earnings). It seems hospitals charge what they can get away with. Amazing! (For examples of the coverage the report is receiving, take a look at what the Los Angeles Times, the San Jose Mercury News, San Francisco Chronicle, and the Kaiser Family Foundation’s web site have to say about it.) Not to fan the flames further, but there are also studies out there that show there’s no correlation between the cost of services and the quality of the outcomes.

The new hospital cost study was sponsored by the California Public Employees Retirement System (Cal-PERS) and the Pacific Business Group on Health (PBGH). Pardon my lack of surprise at the findings, but the findings are kind of old news. Health plans have been making this point since at least the late-90’s. Their claims were generally dismissed as mere justifications for rate hikes, but the facts have been out there for a long time.

There’s a host of reasons for these disparities. For example, there’s the impact of consolidation among hospitals. Community-based hospitals got tired of having their pricing requests ground down by carriers representing substantial numbers of potential patients. They realized the need for some heft of their own and consolidation was a way to get it fast. When the M&A activity settled, some hospitals were the only game in town — literally. This not only helped those hospitals negotiate higher reimbursements, it helped their chain as well. If a carrier wants a contract with the only hospital in City A, it might have to offer a sweeter deal to that hospital’s sister facility in City B. The result: higher hospital costs and, consequently, higher premiums.

Cal-PERS and the PBGH have done a public service by recognizing this market dynamic and having the credibility to draw attention to it. And anything that reminds policy makers that the key driver of health insurance premiums is the underlying cost of care is a very good thing.

What the study does not do, in my mind, is validate the need for a state-run purchasing pool as is called for by Assembly Bill X1-1, the compromise health care reform bill promoted by Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez. Yet some see the study as confirming the need for the state to gin up its own activities as a health insurance buyer to negotiate with carriers. This is the public policy equivalent of 1950s Japanese monster movie. When Mantra invades, the government calls in Godzilla to fend him off. Of course, the city gets trampled in the process (or at least a cardboard facsimile of the city gets trampled), but in the end, these citizens who survive are assumed to be winners.

I have a great deal of respect for the folks at Health Access. I appreciate the thought they put into their positions even when I disagree with their conclusions. Yet I was surprised to see them play the Godzilla card concerning the purchasing pool. A recent post on the Health Access blog claims the hospital cost study underscores “why AB x1 1 has a purchasing pool–bigger than CALPERS–to negotiate the best possible deal with insurers and drug companies.” But the ABX1-1 purchasing pool won’t be negotiating directly with hospitals. They can hang tough with carriers all they want, but it won’t begin to touch the problems cited in the study.

In fact, several California carriers already have roughly as much, if not more, purchasing power than the state-run pool is likely to have and have long used it to try to negotiate lower prices for their members. (As noted in an earlier post, another study estimates the government-run pool ABX1-1 seeks to create would provide coverage to about 2.5 million Californians.) Ironically, when carriers leverage their purchasing power in this way, they’re sometimes condemned for it. The reality is, however, that in a seller’s market — where there are monopolies or near monopolies, for example — purchasing power isn’t very, well, powerful.

Nor is it clear how successful a purchasing pool will be in negotiating down insurance premiums. The California HealthCare Foundation has studied the performance of several such arrangements around the country. They conclude that “a voluntary purchasing pool will not automatically reduce premiums.”   

The last time the state created a government-managed pool was as part of the small group health care reform package passed in 1992 known as AB 1672. That legislation created the Health Insurance Plan of California (HIPC). The HIPC was later transferred to  … wait for it … the Pacific Business Group on Health which renamed it PacAdvantage. It failed to reduce costs or to remain competitive in the marketplace and is out-of-business.

The hospital cost study is an important contribution to the health care reform debate. It underscores the need to rationalize spending with outcomes. To claim it justifies the creation of a state-run purchasing pool is too far a stretch.


Posted in California Health Care Reform, Health Care Reform, Health Plans, Healthcare Reform | Tagged: , , , | 2 Comments »

Four Problems with the Governor’s New Health Care Proposal

Posted by Alan on October 12, 2007

The Governor’s revised health care proposal is a substantial improvement over what he originally put forward in January of this year. I’m impressed with the Administration’s willingness to listen to concerns and to try to address them. As I’ll be writing about the proposal a great deal in the next several days I thought it would be appropriate — and easier — to address my four biggest concerns in a separate post (this one). That way I don’t have to recite them in each of these future posts. (Warning: The bill is complex and I haven’t thoroughly digested it yet, so I reserve the right to increase this list later).

Problem #1: The Purchasing Pool.
Having a state-purchasing pool for individuals enrolled in state programs like MediCal and Healthy Families makes sense. A pool for individuals receiving premium subsidies through tax credits doesn’t. Purchasing pools have repeatedly shown themselves unable to bring down the cost of coverage, but they can distort the marketplace. Further, they can  become an irresistable magnet for expanding state interference in the market (I personally believe the state’s role in health insurance is to regulate the market, not to participate in it).

If the Governor insists on a pool that goes beyond MediCal and Healthy Families, however, there should be legislative language to thwart the natural tendency of regulators and state agencies to tilt the playing field in the favor of the pool. After all, when the umpire picks up a bat and steps up to the plate, he’s rarely called out on strikes. If there is to be a pool for those receiving premium subsidies it should be voluntary (which it is in the Governor’s plan) and it should have no artificial advantages over the private marketplace. This needs to be made clear in the legislation.

Problem #2: Minimum Coverage
The Governor’s January proposal outlined the minimum coverage individuals would need to obtain. In the October version he instead calls for the Secretary of the Human and Health Services Department to develop the minimum package. The problem is, without knowing what this coverage will look like it’s impossible to determine the impact the reform package will have on individuals’ pocketbooks and the state’s finances. I appreciate the political challenge in defining a minimum package in the legislation itself, but that’s the responsible course and the Governor should take it.

Problem #3: Enforcing the Mandate to Buy
I personally support requiring carriers to accept all applicants for coverage, regardless of their health (something called “guarantee issue”), but only in the context of a mandate for individuals to buy coverage. Otherwise there’s no reason for anyone to get insurance until they’re on their way to the hospital. It’s the equivalent of allowing people to buy auto insurance after their wreck is in the body shop. New York and New Jersey’s health care systems work this way and it’s a major reason why New Yorkers and residents of New Jersey (what are residents of New Jersey called? New Jersians?) pay 350% more for their individual health insurance policies than do Californians.

The Governor’s proposal is a bit vague on how it would enforce the mandate to obtain coverage. It allows late applicants to buy only the minimum benefit package (although, as noted in Problem #2, it fails to define what that is). But as enforcement goes, this is downright weak. The Administration a more robust plan. As I have before, I strongly encourage them to consider the enforcement mechanism outlined in CAHU’s Healthy Solutions health care reform plan.

Problem #4: The 85% Medical Loss Ratio
I understand the motivation behind the Governor requiring carriers to spend 85 percent of the premium they take in on health benefits (in insurance speak this means an 85 percent Medical Loss Ratio or “MLR”). If individuals are going to be required to buy insurance, they should know their money is being used efficiently. An 85 percent MLR would seem to address this concern. Unfortunately, the unintended consequences that could result more than offsets the intended benefit.

First, this proposal may drive up the cost of insurance. Since most administrative expenses are fixed costs, if the 15 percent of premiums left to cover them is insufficient carriers will have two options: eliminate administrative activity or increase premiums. The latter will be the easiest and, in many instances, the most reasonable approach After all administrative costs are not by definition bad. When a problem arises, as they do in any organization, having a customer service rep to talk to is a good thing, although it is also an administrative expense. So if a carrier wants to compete on service, it needs what it needs to cover the cost. Since 15 percent of a $100 per month policy is $15; but on a $200 premium it’s $30, the right thing to do might be to eliminate the less expensive plans.

The second unintended consequence of the 85 percent MLR provision is that it may diminish choice in the individual health insurance market segment, exactly where competition is needed most. After all, if you’re going to require people to buy coverage, you want a robust marketplace where robust competition drives down prices. The Governor’s proposal goes a long way to making the 85 percent Medical Loss Ratio fair by applying it to all of a carrier’s business. Yet the fact remains that administering coverage to individuals costs more than providing coverage to large groups. So carriers with a greater than average share of their business in the individual market will have a tougher time meeting the MLR requirement than its competitors whose business is primarily large group business. And new carriers will first need to develop a strong large group presence in the state before entering the individual market if they are to have any chance of complying with this law. This may inadvertently result in carriers shifting resources to attracting large group business and away from the individual market.

Personally, I don’t think the MLR requirement is necessary (although I see the political benefit of it). If the Governor won’t eliminate this from his plan, he should at least add language which instructs and empowers the regulators who will enforce it to encourage increased competition in the individual market space.

So, these are my four biggest problems with the Governor’s October plan. There’s much in it I support: expanding state programs; premium subsidies through tax credits; the fact it would eventually lead to universal coverage; and the cost containment elements; and wellness provisions to name just five. Maybe I’ll write about these later. For now, I just wanted to go on record with my concerns.

And I’m curious, what are yours?

Note: This blog represents my  personal opinions. It is not an official blog of the California Association of Health Underwriters (of which I’m a Vice President) or any other organization. In this case, however, it should be noted that CAHU shares these same four concerns

Posted in Arnold Schwarzenegger, California Health Care Reform, Health Care Reform, Healthcare Reform | Tagged: , , , , , | 3 Comments »

AB 8 and Unintended Consequences: Funding the Pool — Part II

Posted by Alan on August 20, 2007

In an earlier post I pointed out how medical costs rise at a faster rate than wages, meaning the 7.5 percent payroll fee/tax imposed by Assembly Bill 8 would, over time, need to be dramatically increased. (The sponsors call it a fee so only a majority vote is required to pass  the bill; opponents call it a tax so a two-thirds vote of both houses of the Legislature is required. I call it a fee/tax because, well, why not?).

In reality, however, the 7.5 percent levy is inadequate from the first day of operation.

Proponents of AB 8 disagree with this claim. They cite a study by Jonathan Gruber, Ph.D of the MIT Department of Economics which, among other conclusions, seems to show that AB 8’s 7.5 percent fee/tax will not only cover the costs of the purchasing pool (called Cal-CHIPP), but generate a reserve as well. But there’s a gaping hole in the Gruber study. Apparently Dr. Gruber assumed plans in the purchasing pool would be reimbursing providers at MediCal rates — which are substantially below what commercial carriers normally pay physicians, hospitals and other providers. The study consequently used an average monthly cost of providing participants medical coverage through the pool of $224.

However, it is highly unlikely doctors and hospitals will accept these reduced fees from Cal-CHIPP, which is expected to attract as many as four million participants. Many doctors won’t accept any, or at least any additional, MediCal patients. They claim they lose money on such patients.

Which means that projected $224 average monthly premium Dr. Gruber used should be compared to what’s out there in the real world. According to a California Health Benefits survey, the premium for a single adult in California through a group plan in 2006 was $379 (of course, rates in 2008 will be higher than those in 2006).

Meanwhile, Cal-PERS, the state-run pool which insures state employees and officeholders recently published 2008 rates for its plans. They range from $351 to $742. Then consider that it is very likely the custodians of Cal-CHIPP, the Managed Risk Medical Insurance Board (MRMIB) will be heavily pressured to provide benefits in their pool closer to those offered through Cal-PERS than through MediCal.

The result is that the average cost of a participant is likely to be at least 57 percent higher than anticipated in the Gruber study. Which means MRMIB will be forced to substantially raise the fee/tax on employers to cover this higher cost. There goes the reserve. And there goes a 7.5 percent fee/tax.

In most instances, increasing a fee/tax would require the approval of the Legislature. Yet, in what some are calling an acknowledgement that a higher levy will be needed, AB 8 empowers MRMIB to raise the rate on its own. As much as it deems necessary.

And what it deems necessary is likely to be a lot, starting on the first day MRMIB opens Cal-CHIPP for business.

 Note: AB 8 was amended on August 20, 2007. It now appears MRMIB may increase the fee/tax only once per year. This post was modified on August 21st to reflect this change.

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Schwarzenegger Health Care Reform Redlines Lower Income Californians

Posted by Alan on May 18, 2007

Several health care reform proposals call for subsidizing insurance premiums for those earning too much to qualify for state programs, but not enough to afford typical premiums. Governor Arnold Schwarzenegger’s health care plan and CAHU’s Healthy Solutions plan are two examples of initiatives taking this approach.

There’s a significant difference between these two plans concerning how these subsidies can be used. Under the Governor’s proposal, those receiving subsidies can only use them to purchase coverage offered through a state-run purchasing pool called an “Exchange.” Under the CAHU reform plan, subsidies can be used in the open market. The distinction is significant.

By redlining subsidized Californians into a state purchasing pool the Governor’s plan limits their choice. The only real beneficiary is the agency running the pool: they’re guaranteed a clientele whether they “earn” it or not.

The CAHU proposal calls for subsidizing health insurance premiums for those earning 400% of the Federal Poverty Level or less. And it gives them the same freedom and choice as their neighbors not earning subsidies.

Imagine a legislator introducing a bill limiting Californians receiving food stamps to use them in a state run grocery store. The outcry from the left and right — and from the Governor’s office — would be loud and swift. What’s the difference here? Maybe the subsidies should be called “health stamps” to make things more clear.

Just because someone needs help paying their premiums doesn’t mean they should be denied the same rights, choices and access to innovation available to everyone else. The Administration’s current course of segregating subsidized individuals into a state run purchasing pool is neither fair nor needed. Redlining is redlining. The state should root out such behavior, not promoting it.  The time has come for the Governor’s team to rethink this part of their health care reform plan.

Posted in Arnold Schwarzenegger, California Health Care Reform, Health Care Reform, Healthcare Reform | Tagged: , , , , | Comments Off on Schwarzenegger Health Care Reform Redlines Lower Income Californians