Health Insurance Crisis

Even though they have not yet qualified for California’s general election in November and are still in the signature gathering stage, proposed ballot initiatives to limit hospital profits and subject health insurance and managed care plan premium rates to prior regulatory approval are already generating considerable political heat and smoke.

Both measures are playing not so much as health care reform measures designed to apply brute governmental force to hold down rapidly rising health care costs and premiums.  More accurately, they represent new battlefronts in California’s perennial conflict between plaintiffs attorneys and labor unions on one side and tort reform and business interests on the other.  Health payers and providers are aligning in the latter camp to oppose the measures.

Hospitals argue the proposed Fair Healthcare Pricing Act of 2012 that would cap hospital profit margins at 25 percent is an attempt by unions representing health care workers to gain leverage at the bargaining table.  Meanwhile, health care providers this week announced a coalition to oppose the proposed insurance rate regulation measure, the Insurance Rate Public Justification and Accountability Act.  It would add health insurance to existing law put in place by a 1988 ballot measure, Proposition 103, that subjected most property/casualty insurance rates to prior approval by the state’s elected insurance commissioner and subsidizes costs of those who intervene on behalf of the public to contest proposed rate increases.  A similar proposal stalled in the current legislative session.

While constitutional soundness of the Patient Protection and Affordable Care Act (PPACA) is to be decided this year by the U.S. Supreme Court, health care reform will continue to move along a rapid trajectory of change in California regardless of the high court’s ruling.  That’s the view of health care industry panelists at a recent symposium hosted by the Sacramento Business Journal, according to this item from the California HealthCare Foundation’s California Healthline.

Michael Taylor — senior vice president of operations for Dignity Health’s Greater Sacramento-San Joaquin area — said, “We believe we need to drive health care reform whether it’s legislated or not.” He added, “Health care costs are out of control and we need to bend the curve.”

According to the California Healthline item, the panelists agreed reforms must address a shortage of primary care physicians, the need to refocus health care on prevention instead of treatment of preventable conditions, and a transition away from employer-based health coverage to a new model where individuals dictate plan purchases instead of employers. I’ve lately read suggestions by some observers that shift could take the form of a defined contribution health plan.

When a large vertically integrated health care insurer that also has a health utilization and wellness consulting unit takes over a physician group that has a pre-existing relationship with a payer, that payer may well feel threatened.  Enough so to motivate it to sue the physician group.

That’s what has happened following the acquisition of California-based Monarch HealthCare last year by UnitedHealth Group’s Optum Health unit.  Blue Shield of California’s breach of contract lawsuit against Monarch shows the transition from traditional payer-provider relationships to broader-based relationships aimed at reducing patient medical utilization and improving health outcomes will encounter some speed bumps along the way.

California HealthLine has the story here.

The Los Angeles Times reports on 2012 rate increases being taken by health plans and insurers in the Golden State’s individual market.  According to The Times, premiums are headed up on average between 8 and 14 percent.  The newspaper reported that outpaces the cost of medical care, citing federal government data showing the cost of goods and services associated with medical care increased by 3.6 percent over the past 12 months.

However, payers cite claims experience — and not underlying medical costs— to justify the rate hikes.  That’s consistent with the adverse selection that is gripping the state’s individual market.  Premiums increase to cover fewer and sicker people who keep their coverage, shrinking the pool as healthier people refuse to pay the higher premiums required to cover the claims costs of the former.  The accelerating adverse selection calls into question whether the state will have a viable individual health insurance marketplace to participate in the California Health Benefit Exchange when it opens for business in January 2014.

In 2011, some health insurers were conceding the individual market was failing, entering the dreaded death spiral of adverse selection.  But none went as far as Aetna CEO, Chairman and President Mark Bertolini at a Las Vegas conference this week in proclaiming the business model of health insurance broken and facing extinction.

“The system doesn’t work, it’s broke today” Bertolini was quoted as saying by HealthData Management in remarks to attendees of the HIMSS12 conference. “The end of insurance companies, the way we’ve run the business in the past, is here.”

A fundamental function of any form of insurance is underwriting the selection and rating of risks. With medical underwriting ending January 1, 2014 under the Patient Protection and Affordable Care Act (PPACA), it’s no wonder Bertolini sees the end of health insurance as we have known it.

The PPACA as well as other factors are forcing health insurers to reinvent themselves.  But as what?  Since Accountable Care Organizations (ACOs) being created by the reform law are risk sharing mechanisms that reward better patient outcomes and reduced treatment costs though more coordinated, more holistic patient care, Bertolini sees a role for insurers to help manage that risk.  “We need to move the system from underwriting risk to managing populations,” Bertolini was quoted as saying. “We want to have a different relationship with the providers, physicians and the hospitals we do business with.”

What about state health benefit exchanges created by the PPACA that open for business in 2014?  The exchanges are to serve as purchasing pools to help individuals and small businesses aggregate purchasing power to get better deals on health insurance than they would otherwise get negotiating on their own behalf.  If health insurance is becoming a thing of the past as Bertolini predicts, what will they be buying?  Bertolini foresees all-inclusive, branded “health systems” (perhaps similar to California-based Kaiser Permanente) that leverage health information technologies to put patients in charge of their health.

Critics of employer-based health insurance (and single payer advocates) will likely point to this recent article by the California HealthCare Foundation’s California Healthline reporting on a recent UCLA Center for Health Policy Research report finding 670,000 Californians lost employer provided health insurance in 2008 and 2009.  The article quotes Shana Lavarreda, lead author of the report, describing the numbers as an indication that medical coverage among middle class Californians was significantly undermined by the economic downturn and resulting job losses.  “The uninsured here is less and less an undocumented [worker] problem, and now it’s more of a Main Street problem,” Lavarreda told California Healthline.

The report has implications for the Patient Protection and Affordable Care Act, which is predicated on all Americans being in a public or private managed care or health insurance plan by 2014 — with the bulk of private coverage employment-based.  The experience of California (and certainly other states) in the two years leading up to the enactment of the Act in 2010 shows that employer-based coverage — which had been eroding even prior to the recession with fewer small employers providing coverage — remains quite vulnerable to fluctuations in the economy that disrupt employment.

If the U.S. Supreme Court severs a keystone element of the Patient Protection and Affordable Care Act that mandates all Americans have public or private health coverage by 2014 but leaves intact another key provision requiring insurers and managed care plans to accept all applicants without medical underwriting, payers would experience adverse selection and premium rates would necessarily rise in response, making coverage less affordable.  That undermines a key objective of the 2010 law designed to reduce the number of people who are medically uninsured, the UCLA Center for Health Policy Research concludes in a research note issued this month.

The note determined this scenario would result in only a small reduction in the number of medically uninsured Californians by 610,000 or 13 percent of the eligible uninsured by 2019. Eliminating the minimum coverage requirement while leaving in place the PPACA’s modified community-based rating where coverage is guaranteed to all applicants would not allow payers to avoid covering less healthy individuals more likely to need expensive medical care.

The UCLA research note effectively concurs with an amicus curiae brief in the Supreme Court case filed by health insurers and plans who contend the PPACA’s coverage mandate is designed to work in conjunction with community-based versus individual medical underwriting and therefore cannot be excised from the law.  “The result would be a ‘marketwide adverse-selection death spiral’ that would thwart rather than advance Congress’s goal of expanding affordable health care,” they warn.

The California HealthCare Foundation’s CaliforniaHealthline reports today on an about face by California’s Pre-Existing Condition Insurance Plan (PCIP) that could be a warning of things to come for other state high risk pools.

California’s PCIP was among the first state pools to open for business under a provision of the Patient Protection and Affordable Care Act (PPACA) that created interim high risk pools to provide temporary coverage at standard market rates until insurers and managed care plans must accept all applicants starting Jan. 1, 2014.  The PPACA allocated $5 billion to subsidize the pools since by definition they are an adverse risk selection mechanism and aren’t likely to cover claims costs solely with insureds’ premium dollars.

After getting off to a slow start in 2010, federal and state officials grew concerned that too few people were signing up for coverage.  So this summer, the Obama administration opened the tap wider on the $5 billion interim high risk pool subsidies, reducing premiums effective July 1 in two dozen states where the federal government runs the pools.  California’s PCIP soon followed, reducing premiums by as much as 20 percent to attract more enrollments.  The tactic worked, but perhaps too well.  Previously believing there were too few enrollees, California’s Managed Risk Medical Insurance Board (MRMIB), which oversees the PCIP, is now apprehensive too many will come aboard and sink the ship.

CaliforniaHealthline’s David Gorn explains:

 The threshold for the number of Californians who might participate in PCIP was estimated at about 23,000 people. Since a few more than 5,000 people signed up in that first year – and new enrollees came on board at a rate of roughly 500 a month – it seemed that the program was financially stable and able to take on more participants.

But after the first year, state officials got their first real claims data to test that estimate, and the amount required by recipients was much higher than expected. That 23,000-person threshold estimate was reduced to 6,800 Californians.

That means (given current enrollment of 5,290 including last month’s bump of 726 new subscribers), there’s now only room for a little more than 1,500 new enrollees (which is about two months’ worth of enrollees, given October’s bump of 726 new subscribers).

Unless the federal government pumps more money into the program.

In other words, more people are enrolling, but bringing with them high medical utilization costs that challenge the ability of the MRMIB to keep the PCIP solvent until 2014 when it will no longer be needed.  Other states may soon experience a similar conundrum:  fulfilling the PPACA’s mandate to have the interim high risk pools serve markets of last resort that must accept applicants without medical underwriting while having enough money to pay for their care.  And manage to do so for nearly four years.

A little more than one year ago, this blog discussed how the interim risk pools could become a catastrophic coverage pool for those requiring very high cost care and threaten to rapidly draw down the $5 billion appropriated for them in the PPACA.  This may well be happening now.

As Business Law Daily reports, California legislation that would have subjected health insurers and managed care plans to a prior approval rate regulation scheme has been shelved for this year.  AB 52 could however be revived in 2012, the second year of the two-year legislative session.

A logical argument can be made that health insurers and managed care plans should be subject to prior approval rate regulation.  California’s market for health coverage is an oligopoly in which a handful of big payers control about 90 percent of the market.  Given the lack of robust competition, market forces alone aren’t likely to check premiums.  But it’s also not clear that placing payers under prior rate approval like the state’s far more competitive property/casualty insurance marketplace would do so either.

Payers would still pass along the relentless rise of medical care costs to policyholders and members.  Perhaps not as quickly since regulators would first have to green light premium hikes.  But ultimately higher medical costs would be reflected in increased premiums.

Just as the Baby Boom generation drove up auto insurance premiums in the years after its members got their drivers licenses until middle age and they became safer, more experienced drivers, the Boomer generation’s now aging cohorts are placing enormous cost pressures on health insurers and managed care plans.  Those demographic forces as well as rising chronic conditions and obesity among later generations cannot be corralled by insurance rate regulation.  They can be mitigated by healthier, more balanced lifestyle choices — choices made by individuals and not regulators.

With the advance this week of California legislation that would subject premiums for health insurance and managed care plans to prior rate regulatory approval, the New America Foundation’s Micah Weinberg correctly notes in a Sacramento Bee op-ed article that regulating insurance rates is a piecemeal solution.

From a logical standpoint, regulating premium rates makes sense insofar as only a handful of insurers and managed care plans control about 90 percent of the market in California.  That’s not a robust competitive market that will work to hold down premiums.

Even so, Weinberg correctly suggests, these companies are not the ultimate market makers for health care.  Insurance and managed care is a risk spreading and pre-payment mechanism, respectively, that doesn’t ultimately price the cost of health care.  Instead, insurers and managed care plans act as intermediaries, passing along the increased costs of health care utilization to their policyholders and members.  That’s why they strongly opposed the California rate regulation measure — out of well-justified fear of being squeezed by increasing costs for covering their customers at the same time regulators pressure for lower premiums.

Some states including Maryland recognize this and have responded — as some nations have done — by imposing price controls on medical providers.  Weinberg notes Massachusetts is considering legislation that would allow regulators to bar rates charged by hospitals to payers as excessive.