Be careful what you wish for America…

| June 5, 2010 | Comments (0)

As the economy continues to struggle with high unemployment and massive amounts of new debt – Congress enacted the Patient Protection and Affordable Care Act, also known as “ObamaCare.”  This new law will insure 32 million more Americans – 50% of them will be enrolled in Medicaid – tax payer subsidized health insurance – which will force many states to take an active role in managing healthcare, raise taxes and grapple with exponentially higher health insurance premiums.  How do I know this?  Because we are living with it now in Massachusetts – be careful what you wish for America…here is a preview of things to come.

Almost four years after implementing the Massachusetts healthcare reform law (MassCare), the private market is “wrestling” with state government to address rising health insurance costs.  What was lost in the national debate and threatening the sustainability of MassCare is the fact that health insurance is expensive because healthcare is expensive.

Massachusetts is home to 4 of the top 12 health plans in the country as ranked by U.S. News and World Report in 2009.  All 4 of those health plans are non-profits that spend more than 88% of premiums on medical care, the balance on administrative costs.  Three of them posted significant operating losses totaling just under $200 million collectively.  Pointing the finger at health insurers is politically convenient, but significantly misguided.

Before you read on – I must disclose that I am a co-owner of an employee benefits firm and serve the insurance needs of over 350 employers and 21,000 employees primarily located in the New England region.  As a result, my commentary may be perceived as self-serving because in part, I earn a living through the sale of health insurance.  However, what’s not so well known is that our firm is passionately committed to partnering with our clients to reduce health insurance costs through Consumer-Driven Health (CDHP) and Wellness plans – a proven solution built on a foundation of personal responsibility – and a program that pays us much less and requires much more work.

Intelligent, Genius or Neither?

It has been said, the mark of intelligence is learning from your own mistakes and the mark of genius is learning from other people’s mistakes.  Did Congress apply “intelligence or genius” and learn from Massachusetts when they created ObamaCare?  Sadly, the answer is no – ObamaCare is MassCare with $500 billion in Medicare cuts and a significant number of new taxes – and that’s really disappointing. Rather than solve the real challenge of rising costs, MassCare was signed into law in 2006 to insure the uninsured.  Its foundation is an individual mandate requiring every resident age 18 or older to purchase health insurance and provide subsidies to those who can’t afford it.  Prior to the passage of MassCare, Massachusetts ranked 3rd in the country for the lowest number of uninsured…now it is #1, insuring almost 98% of its residents compared to the national average of 83%.  Almost all agree – this was a noble cause…but at what cost?  What did it really accomplish?

What did MassCare accomplish?

In March 2010, Massachusetts Treasurer Tim Cahill said, “our healthcare reform law is a fiscal train wreck.”  Initially, MassCare was expected to cost $88 million a year – today the MA healthcare budget exceeds $4 billion and our fiscal budget for 2011 is $294 million under-funded because of this law – simply put, Massachusetts can’t afford it.

Before the advent of MassCare, the state implemented a slew of insurance reforms like guarantee issue underwriting for small groups, no pre-exiting condition limitations, unlimited lifetime maximums and “children” up to age 26 to be carried on their parent’s health insurance plan provided they were students or dependents.  Most people believe these are reasonable protections, but also acknowledge they drive up cost when coupled with dozens of state mandated benefits like infertility coverage.

According to the Massachusetts Department of Revenue, it is estimated that roughly 5% of some 3.2 million taxpayers or 450,000 to 650,000 residents were uninsured.  As of March 2010, MassCare insured 408,000 of them – nearly 2/3 of which are enrolled in state or federally-subsidized health insurance.  3% were deemed able to afford health insurance, but self-assessed a penalty for not having it. The remaining 2% were exempt from the requirement to have insurance either because they could not afford to buy it or because of their religious beliefs.

What LESSONS does MassCare offer?

Lesson #1 – the individual mandate increased cost.  Why?  It is common knowledge that most people will find a way to do what is in their best interests.  An individual mandate doesn’t work if it’s not accompanied by strict rules (i.e., individuals must buy insurance at certain times of the year and keep that insurance for at least a year) and a steep penalty for non-compliance (i.e., more expensive than buying a low cost health insurance plan).

These design flaws created a phenomenon called the “jumpers and dumpers.”  Without the proper safeguards in place, people quickly figured out that they could purchase a health insurance plan at any time they had healthcare needs (like buying auto insurance after you get in an accident), drop that coverage after they received care and pay a pro-rated penalty for the number of months they weren’t insured.  These people paid a fraction of the cost for their care and “gamed” the individual mandate – this has translated into higher premiums for everyone.

Lesson #2 – the merger of the individual and small group markets increased cost.  MassCare merged the individual and small group markets to provide individuals with an opportunity to reduce their health insurance rates by as much as 20-25%.  Sounds like a good idea – but in reality it shifted the financial burden to small employers (<50 employees) by as much as 5-7% on top of 10-11% healthcare trend.

Lesson #3 – the creation of minimum creditable coverage increased cost.  Rather than protect consumers from a lack of full disclosure about what an insurance plan covers, the law went a step further and forced tens of thousands of Massachusetts residents to buy an insurance plan they didn’t want, couldn’t afford or both.

Lesson #4 – the law decreased access and increased wasteful spending.  Rather than improve access and reduce the reliance on hospital emergency rooms, MassCare created more patients with no additional doctors and increased emergency room usage by 17%.  According to the Boston Business Journal, Massachusetts has the highest number of physicians per capita of any state in the country – unfortunately, it is also boasts the longest wait times – an average of 46.7 days.

What is the BIGGEST lesson learned?

According to a 2008 report by Oliver Wyman commissioned by the Massachusetts Division of Insurance, between 2002 and 2006 the total cost for medical services increased by 55% or an average of 11.5% per year; plan designs are 27% richer (i.e., lower deductibles and out-of-pocket costs) and costs are 15% higher than the nation.  Healthcare spending is expected to double by the year 2020, rising 8% faster than the Gross State Product, threatening jobs and economic sustainability – and health insurance rate increases for small groups (< 50 employees) have averaged between 10–32%.

At the risk of over-simplifying the biggest lesson, MassCare created an unsustainable “access” model, because it didn’t address cost at the same time.  Instead, “Massachusetts kicked the cost can down the street” – and now it is confronting the real problem –  rising healthcare costs.

What’s REALLY driving costs higher?

Recently, the Massachusetts Attorney General issued a report on healthcare cost trends and drivers.  The report concluded that the contracts between doctors/hospitals and health insurers is the primary driver of health insurance premium increases.

The report concluded that prices for healthcare services are:

1.   Not tied to the quality of care; the sickness of the people being served; level of Medicare/Medicaid patients; or the underlying cost structure to deliver those services

2.   Doctor/Hospital market leverage based on size, geography and brand is the biggest driver of price increases

3.   Increases in prices paid to doctors/hospitals are the primary driver of health insurance premium increases not excessive health plan administrative costs

Health insurance costs are rising because healthcare providers get what they negotiate – and we all pay the price because for the most part, these costs are not transparent to us.

Where do things stand now?

In response to public pressure over rising premiums and a competitive race for re-election, Governor Patrick is playing politics with the issue by attacking health insurers and accusing them of being profit-driven, serving the needs of company executives at the expense of their policyholders.  It is temporary comfort for voters, but in Massachusetts it is simply not true.

The Massachusetts Health Insurance Market and the Governor’s Directive

Massachusetts is dominated by not-for-profit health plans that spend roughly $.90 of every premium $$ paying for doctors, hospitals and prescription drugs.  Instead of focusing his energy on the real problem – rising provider costs – Governor Patrick directed the Commissioner of Insurance to reject any rate filings that exceeded 4.8% and set aside prudent actuarial principles.

What the Governor doesn’t appear to understand is that his actions are highly disruptive to the market and will only exacerbate the cost problem.  Capping premium rate increases for all small groups renewing in April is fiscally irresponsible because it ignores the real problem and asks insurers to accept premiums that are less than what it costs to provide the necessary care.  It’s like asking an automaker to sell a car for $15,000 that costs $20,000 to make – how long would that automaker survive?

On the surface, the Governor’s directive sounds like a good idea – but it only addresses the symptoms.  The artificially low premium rates health insurers are being forced to charge are not based on actual costs and the “unintended effect” of his directive will cause insurers to drain their claim reserves, significantly weaken their financial position and place many of them (if not all eventually) in receivership.  Does Massachusetts really want to bankrupt 4 of the top 12 health plans in this country?

The Insurance Exchange aka “The Connector”

After a $25 million one time appropriation and a $5 million annual payroll, the insurance exchange called “The Connector” was created to connect the uninsured with insurance.  In addition to the state or federally-subsidized Commonwealth Care products – the Connector created a suite of non-subsidized private health insurance products called Commonwealth Choice.  Those products insure 21,000 participants, many of whom previously bought health insurance from their employers.

Faced with budget shortfalls and a threat to its existence, the Connector recently purchased a private distributor of health insurance (Small Business Service Bureau) with taxpayer money, gained unfettered access to Department of Revenue tax records and then spent taxpayer money marketing insurance products to over 170,000 small businesses.  Somewhere along the way, the Connector drifted into “Scope Creep” – and away from the intent of the law.  Connector officials will tell you they are following the law – but a closer look suggests that is a liberal interpretation and not the intent of the law as it was constructed.

As a result of these actions, the market is left to ponder several important questions:

1.   Where does the law suggest that the Connector establish itself as a distributor of small group private health insurance products to employers and consumers who are already insured?

2.   Where does the law suggest the Connector can use taxpayer money to acquire a private entity to help market those products?

3.   Where does that law suggest the Connector leverage confidential taxpayer information to market those products giving itself an unfair competitive advantage?

4.   Why was the commission to review and analyze the Connector’s effectiveness and scope of authority never convened?

Is this a preview of things to come?

Our healthcare system is the best in the world – and few will argue it’s broken and in desperate need of reform – but is more government involvement the answer?

Solving the rising cost of healthcare is akin to working with a “rubix cube” because it has so many moving parts and possible combinations to get the “right answer.”  But one thing is clear – health insurance is expensive because healthcare is expensive.

MassCare was designed to insure the uninsured and achieve near universal health insurance.  By most accounts, Massachusetts can claim success on that measure.  However, the architecture of the law has some significant flaws in its foundation and lessons worthy of not repeating on a national level – the question remains – will Congress and the Administration learn and apply those lessons before it’s too late?

Be careful what you wish for America…just look at Massachusetts to see OUR future if we stay on the present course.

Category: Position Statements

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