Health Insurance Crisis

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.

Underlying the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010 was a fundamental policy choice that rejected the idea of cutting out private “middle man” health plans and insurers in order to make coverage more accessible and affordable by adopting a Canadian-style single payer model in which the government pays all medical bills.  Or have a government-run insurance plan compete with private payers — the so called “public option.”  The Obama administration rejected these deprivatization schemes as too radical and instead chose to build upon the existing system largely based on working age people and their families having private health coverage paid for by employers.

Two recent surveys by benefit consulting firms Towers Watson and Mercer suggest however the foundations of that system could ironically erode under the PPACA if employers drop their group insurance and managed care plans and opt to have their employees purchase coverage in the individual market.  One of the major motivators, this AP article suggests, is the creation of health benefit exchanges designed to make it easier for individuals and families to buy their own coverage.

Given steep medical cost inflation that has rapidly accelerated the cost of covering workers over the past decade, at least some employers see “opting out” of providing health coverage as their cost control “nuclear option” despite the adverse tax implications and penalties they would incur by not covering their employees.

The implications of the Towers Watson and Mercer surveys are controversial and are drawing caveats from administration officials, particularly insofar that the benefit exchanges won’t open for business until January 2014.  With more than two years until then, it’s hard to draw any firm conclusions regarding what employers will actually do when the exchanges become operational.  But benefits consultants warn that it won’t take many employers to start a trend of opting out as the AP story notes:

Benefits consultants say most companies, especially large employers, will continue to offer coverage because they need to attract and keep workers. But that could change if a competitor drops coverage first.

Michael Turpin, a national practice leader at broker and consultant USI Insurance Services, said one of his clients plans to drop coverage as soon as any competitor does. The client, a major entertainment industry company he declined to identify, will be at a financial disadvantage if it doesn’t.

“In those industries … if somebody makes the first move, the others are going to follow like dominoes,” Turpin said.

If that happens, the PPACA will have the unintended consequence of radically altering the employer-based system of health care coverage in the United States, moving it instead toward one based in individuals purchasing their own coverage.

The constitutionality of the so-called “individual mandate” of the Patient Protection and Affordable Care Act (PPACA) — the law’s requirement that all Americans have a public or private third party payer covering most of their medical bills starting in 2014 — is under review in multiple U.S. Circuit Courts of Appeal.

Opponents of the mandate — including more than two dozen state attorneys general — contend the law is unconstitutional because it impermissibly forces someone to engage in commerce when they purchase coverage if not covered thorough their employment or a government program.

One of the more interesting arguments raised in the mandate’s defense this week in the 11^th Circuit is based on EMTALA — the Emergency Medical Treatment and Active Labor Act of 1986.

Acting U.S. Solicitor General Neal Kumar Katyal noted the rationale behind the coverage mandate is to more equitably allocate the costs of medical care provided for those not privately covered or in a government health program by those who incur them.

“You can walk out of this courtroom and be hit by a bus,” Katyal told the court.  Without medical coverage, he argued, the treating hospital and the taxpayers will have to pay the costs of the emergency care, he added.

Under EMTALA, the hospital is required to assess and medically stabilize that bus accident patient regardless of medical coverage or his/her ability to pay.

Katyal is correct the hospital could end up eating some of the cost of providing the hypothetical bus accident victim’s care.  Hospitals also write off a significant portion of unreimbursed medical care as uncollectible debt or charity care.  That’s in large part why emergency room bills for those paying on their own are so stratospheric.

However, Katyal’s argument that taxpayers also foot the bill is questionable.

In December 2006, the New America Foundation (NAF) estimated that about 10 percent of California health care premiums are comprised of unreimbursed medical costs incurred by those without medical coverage.  The foundation’s study of this so-called “hidden tax” or “cost shift” is significant given that California is not only the nation’s most populous state, but also has more medically uninsured people than nearly all other states.

Bottom line: The burden of uncompensated medical care is borne privately, not by taxpayers.

That point aside, I suspect the real concern driving the challenge of the individual mandate derives from playing it out several years into the future.

Requiring everyone to have coverage may provide a temporary respite for the smallest and most troubled source of medical coverage: the individual market.  It’s already circling the drain of adverse selection. Bringing more individuals into the risk pool expands its ability to spread risk and generate premium dollars to offset rapidly rising medical treatment costs.

However, those rising costs are passed along as higher premiums.  That could well lead to some — most likely people under age 40 or 45 — to conclude they’d be better off paying the penalty for not having coverage and dropping out of the pool.

Then the individual market would be quickly be back on the brink of adverse-selection driven collapse where it stands today.  That in turn could lead the states and/or the federal government to step into the breach with a government run risk pool or by expanding Medicare/Medicaid for those unable to obtain affordable coverage on the individual market.

Either outcome likely has the states worried.  Recession-hammered states are strapped fulfilling their current obligations as well as meeting their share of state Medicaid programs. They probably don’t relish the prospect of maintenance of effort requirements for a new federal/state insurance program that would take the place of a defunct private individual insurance market.

The bulk of individuals buying health plans through health benefit exchanges established by the Patient Protection and Affordability Act (PPACA) starting Jan. 1, 2014 will be low to low moderate-income earners, making less than 400 percent of the Federal Poverty Level (FPL).  An actuarial projection by Mercer Government Human Services Consulting presented this week at a Sacramento, Calif. symposium sponsored by the California HealthCare Foundation estimates that just 25 percent of about 4.6 million Californians not covered by employer or government plans will purchase coverage through the California Health Benefit Exchange.

Most in the state’s individual market earning more than 400 percent of the FPL will purchase commercial insurance and managed care plan products offered outside the exchange, the Mercer estimate concludes.  On the other hand, “virtually all” individuals earning between 200 and 400 percent of the FPL will opt to purchase their coverage through the exchange, Mercer projects, in order to benefit from subsidies in the form of tax credits.

That’s shaping up as a bifurcated individual market, giving rise to insurer concerns over the prospect of adverse selection, with higher cost insureds gravitating toward the exchange, particularly if commercial insurers continue their primary competitive strategy of avoiding those with pre-existing conditions.  But as noted at this week’s Sacramento forum, insurers won’t be able to wall off higher risk individuals in the exchange since they will be required to pool risk from both exchange and non-exchange insureds.  That has some insurers concerned that the experience of the exchanges could actuarially jeopardize commercial markets outside the exchanges.

The nascent California Health Benefit Exchange hopes to stave off adverse selection by penalizing or excluding from the exchange insurers that engage in marketing practices designed to cherry pick healthy individuals while directing higher-risk consumers to the exchange.

A New York Times piece published May 13 suggests insurers see tougher times coming once the exchanges open for business in less than three years.  In the meantime, they’re making hay while the sun is shining and medical utilization is suppressed by a weak economy.  “I think they’re going to go through a winter,” Paul H. Keckley, executive director of the Deloitte Center for Health Solutions, a research unit of the consulting firm Deloitte, told The Times.

More evidence the individual health insurance market segment in the nation’s biggest individual market — California— appeared in today’s Los Angeles Times. While an Anthem Blue Cross spokeswoman wouldn’t confirm the account, the newspaper reports a couple was told by the insurer it was shuttering the couple’s $2,500 deductible plan because the risk pool is shrinking and no longer viable.

“A shrinking risk pool will eventually mean that the only people left in the plan will be ones with preexisting conditions,” John Barrett, a Pasadena health insurance broker told The Times. “Over time, rates would go up more than other plans.”  In a nutshell, that describes adverse selection in which insureds likely to place the greatest demands on the risk pool comprise an increasingly larger portion of the pool, forcing the insurer to raise premiums in order to ensure the pool remains solvent.

The report comes a little more than two months after Paul Markovich, COO of Blue Shield of California, told a Sacramento, Calif. health care forum that adverse selection is placing “tremendous stress” on the individual health insurance market.

The Kaiser Family Foundation has published an excellent primer on the actuarial foundation upon which “qualified health plans” must be based under Section 1301 et seq of the Patient Protection and Affordable Care Act (PPACA).  The plans will be sold through state health benefit exchanges starting Jan. 1, 2014.  The exchanges will serve as marketplaces aggregating purchasing power among the small group and individual markets — the most distressed health insurance market segments where coverage is far less accessible and affordable than large group and government insurance plans.

These plans that cover from 60 percent (bronze) to 90 percent (gold) of an individual’s projected medical costs show the era of health coverage with minimal cost sharing and out of pocket costs has come to an end for individuals and those employed by small businesses.  That new reality that emerged in recent years is now institutionalized as public policy in the PPACA.  That policy is reinforced by tax policy allowing individuals to establish tax deductible Health Savings Accounts, which have been in existence only since 2004.

The bronze plan’s 60 percent coverage level could be equated to “major medical” plans of decades past that covered as the name implies only major expenses such as hospitalizations but not routine doctor visits.  As medical treatment and pharmaceutical costs continue to push up health coverage rates leading up to 2014, it remains to be seen if the higher level silver, gold and platinum (90 percent of projected actuarial costs) will be affordable for individuals and small businesses even with their new purchasing power via the benefit exchanges.  Many could find their budgets can handle only the low end bronze plan, shifting the bulk of these market segments to a major medical level of coverage.

The Interim High Risk Pool created by the enactment of the Patient Protection and Affordable Care Act’s (PPACA) one year ago has not changed the underlying dynamics of the individual health insurance market and consequently appears to be having a negligible impact on reducing the ranks of the medically insured.

The pool, formalized as the Pre-Existing Conditions Insurance Program (PCIP), was created to provide temporary coverage for those with pre-existing conditions who don’t meet minimum medical underwriting standards of insurers and managed care plans.  It goes away on January 1, 2014, when the PPACA outlaws medical underwriting and requires payers to accept all applicants regardless of medical history.

So far, few have signed up for the plan.  As prior to the PCIP, younger people who would be eligible for PCIP enrollment pay lower rates for coverage but tend to go without.  Older folks in their 50s and early 60s who want coverage are finding PCIP rates out of reach. An added deterrent, other observers note, is the requirement that applicants for coverage be continually uninsured for at least six months.

“The PCIP is a great health plan and the out-of-pocket maximum is low,” Barry Cogdill, president of Business Choice Insurance Services in San Diego, told SignOn San Diego.  Nevertheless, he added, PCIP premiums are too expensive for many.  “That’s why health care reform happened,” Cogdill explained.  “The individual market has been the Achilles’ heel of the health insurance market. You end up with a lot of uninsured people.”

It appears many in this circumstance who aren’t covered by group or government plans will remain so.  Whether they will be able to find affordable coverage when state health benefit exchanges designed to aggregate purchasing power of individuals and small employers open for business in January 2014 remains to be seen.

Less than one week after Blue Shield of California said it would raise rates on individual market products May 1 because premium revenues were not keeping up with losses due to rising medical costs and increased utilization of high cost procedures, the insurer has cancelled the increase.

Losses are now ameliorating, Blue Shield spokesman Tom Epstein told the Los Angeles Times, coming in below projections for the latter part of 2010.  While the insurer isn’t fully certain of the reason, it believes consumers are assuming more risk by purchasing higher deductible policies with fewer benefits in order to keep rising premiums affordable.

“It’s definitely happening,” Epstein told The Times. “As rates go up, people do tend to downgrade into less rich products that have more cost sharing.”

In canceling the planned May 1 rate increase that was to average 6.5 percent and boost premiums by as much as 18 percent for some policyholders, Blue Shield said March 16 that it still expects to lose money in 2011 after $27 million losses on individual policies last year.

Duke Helfand of the Los Angeles Times has yet another story in today’s issue on the enormous and unsustainable increases in California individual health insurance premiums.  Helfand’s story spotlights recent rate hikes by Blue Shield of California, which according to his story have gone up 50 percent or more for about a quarter of 193,800 individual policyholders since last fall.

Blue Shield spokesman Tom Epstein defended the increases as reflecting soaring medical care costs and increased utilization of more costly services by policyholders as well as new state and federal mandates.  Those cost drivers required Blue Shield’s actuaries to recalculate projected claims payouts.

Nevertheless, Epstein explained, the outgo continues to exceed premium revenue.  Blue Shield expects to lose $20 million to $30 million on its individual policies this year after a loss of $27 million the previous year, he said.

“People are justifiably concerned when they get a significant rate increase. We wish that we didn’t have to do that,” Epstein told The Times. “When people are getting increases like that and we’re still losing money, something is seriously wrong.”

As Teal’C of Stargate SG-1 would say, “Indeed, O’Neill.”

If Blue Shield were a monoline carrier that sold only individual (and not group) health insurance, California Insurance Commissioner Dave Jones, piqued at Blue Shield’s rate hikes and seeking authority to allow him to approve rates before they go into effect, could have an even bigger problem on his hands: potential insolvency of the insurer.

The enactment of comprehensive health care reform nearly one year ago aside, the U.S. health care system needs deep systemic reform that can meaningfully reduce medical costs and align risk and incentives among consumers, providers and payers.  That’s the consensus among several panelists who took part in a health care forum Friday in Sacramento, California sponsored by the UC Berkeley Institute of Governmental Studies, School of Public Health and the UC Sacramento Center.

For Diana Dooley, California’s newly installed secretary of Health and Human Services, tamping down demand for medical services is an essential component of bending what all panelists agreed is an unsustainable, unrelenting upward trajectory in medical costs.  People have to take more responsibility for their health, Dooley emphasized, suggesting that the current mindset that equates more medical care with better health must be abandoned. “We have an inexhaustible appetite for health care and it’s a significant cost driver,” Dooley said.  “We have to have some very frank conversations around kitchen tables and in political dialogue and ask ‘How much medicine is enough?’ A lot of these cost drivers are our choices.”

Dooley’s absolutely right.  Poor lifestyle choices are within the control of individuals and are the ultimate cost driver.  I would add that those lifestyle choices are strongly influenced by cultural values that place too much emphasis on sedentary work, commuting and leisure time.  Those values reinforce spending too much time sitting, too little time exercising and sleeping and the interconnected lifestyle issues of excessive stress and bad eating habits.

In this environment, it’s no wonder people’s health declines and they become overweight and develop costly chronic conditions like obesity, cardiovascular disease and diabetes.  From the perspective of health insurers, all of that adds up to poor risk management.  But most people don’t view it that way.  Health insurance is seen more as a prepaid medical plan rather than a means of paying for unexpected, high cost medical expenses.  Health breaking down?  Get to the doc shop or the hospital and get fixed up.  The problem is as Dooley and others on the panel pointed out, when too many people adopt this way of thinking, insurers and managed care plans end up paying out too much, jeopardizing the financial solvency of these payers.  Hence, premiums keep futilely chasing after costs in a vicious, unvirtuous cycle.

Panelist Paul Markovich, COO of Blue Shield of California, underscored the seriousness of those escalating premiums in the individual health insurance segment.  Premiums can go up only so much before healthier people decide to drop their coverage, leaving less healthy insureds in the pool.  That is placing “tremendous stress” on the pool, Markovich said.  ”You have all heard of the death spiral (of adverse selection).  We are absolutely experiencing some of that stress right now.”

Cindy Ehnes, the director of the California Department of Managed Health Care, noted during her seven-year-long tenure managed care plans attempted to preserve their troubled individual markets through risk selection — what Ehnes termed “cherry picking and lemon dropping.”  Next, Ehnes explained, payers imposed high deductibles hoping to shift more risk to consumers and drive down the utilization of medical services.  Now with the individual market facing structure failure, that strategy has played out, leaving only steep premium hikes as a last, desperate measure to keep the market solvent.  That’s why premiums are high and headed higher despite high deductibles.  People paying high deductibles naturally expect their premiums to be substantially lower than those with low or no deductibles. When they don’t see lower premiums in proportion to their high deductibles, they understandably drop coverage figuring they’re getting poor value for their premiums.  That in turn takes more premium dollars out of the pool, forcing insurers to raise premiums even more just to stay afloat.

Not surprisingly, payers bearing the bad news of fat premium increases are coming under withering criticism from the consumer groups, the media, regulators and policymakers.  Ehnes noted — and I would agree — simply chastising “greedy” payers isn’t going to help.  There’s far more to it than that.