Health Insurance Crisis

The discussion of how Americans and their employers pay for increasingly costly health care coverage will likely be stoked by this recent study appearing in the journal Health Affairs that concludes consumer directed health plans — high deductible, catastrophic coverage combined with Health Savings Accounts (HSAs) — could achieve $57.1 billion savings annually if half of non-elderly U.S. population had them.  That’s because they operate as true insurance plans, covering medical costs for unexpected, catastrophic events with people paying out of their own pocket for routine care and prescriptions.  The study predicts the potential savings of such together with additional incentives in the Patient Protection and Affordable Care Act will encourage their growth.

Widespread adoption of this scheme would return the nation to something akin to the “major medical” coverage model of health insurance that existed in the post World War II period until pre-paid plans such as health maintenance organizations (HMOs) became prevalent starting in the 1970s and 1980s.  Their growth created an expectation of no or minimal out of pocket costs for routine care and preventative screenings, leading the study’s authors to caution those in consumer directed health plans may forgo them, potentially leading to higher health care costs over the long term.

The authors also suggest that wider adoption of consumer directed health plans could be disruptive to the traditional health insurance and HMO markets and promote adverse selection in these product lines since healthier people may opt for consumer directed plans since their premiums tend to be lower.  A major challenge facing health insurers and plans, however, is setting premiums for consumer directed plans low enough to jibe with consumer expectations of lower, more affordable premiums in exchange for taking on first dollar exposure up to a high deductible limit.  Older albeit generally healthy people in the individual market have experienced sticker shock at rates for high deductible plans, deterring them from buying the coverage even though the premium rate reflects the actuarial risk of a catastrophic medical event.

California legislative health committees have approved legislation authored by their chairs that would require health plans and insurers to transition from medical underwriting to community-based rating in 2014.  The authors of the bills, AB 1461 and SB 961, said they would conform California law to a similar provision of the federal Patient Protection and Affordable Care Act (PPACA) that becomes effective that year.

The California Association of Health Plans (CAHP) opposes the bills unless they are amended to also mirror the PPACA’s requirement that all individuals be enrolled in a health plan or have health insurance.  If the PPACA’s so-called “individual mandate” is set aside as unconstitutional by the U.S. Supreme Court this year, CAHP fears without a similar requirement in California law, health plans will fall into the adverse selection death spiral and become actuarially unsustainable.

But putting teeth into any California requirement that all residents have some form of medical coverage could prove problematic since those teeth like the PPACA version would likely take the form of a penalty or excise tax.  As a new tax, it would require approval by two thirds of the California Legislature, which would be a near political impossibility as long as Republicans hold at least one third of the seats in either house.

CAHP also dislikes provisions in the bills that would bar health plans from considering smoking when setting an applicant’s rates, arguing it would lead to non-smokers subsidizing smokers.

Various California officials have been signaling over the past month or so that the Golden State would implement health reforms similar to those of the Patient Protection and Affordable Care Act (PPACA) if the U.S. Supreme Court rules the law unconstitutional this summer.

One influential state lawmaker, Senate Health Committee Chairman Ed Hernandez, put that intent on record this week.  He amended his SB 1487 to state legislative intent “to enact into state law any provision of the Affordable Care Act that may be struck down by the United States Supreme Court and that is necessary to ensure all Californians receive the full promise of the act.”

California continues moving forward to implement the Patient Protection and Affordable Care Act (PPACA), advancing legislation this week setting minimum coverage standards for health plans offered by small employers and sold through the California Health Benefit Exchange.

Section 1302 of the PPACA delineates 10 “essential health benefits” small group and individual market plans must offer including ambulatory and emergency services, hospitalization, maternity and newborn care, treatment for mental health and substance use disorders, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive and wellness services and chronic disease management and pediatric services, including oral and vision care.

Since health insurance markets vary among the states and to speed state efforts to establish health benefit exchanges, the U.S. Department of Health and Human Services late last year issued guidance allowing states to choose one of the following plans sold in their jurisdictions as a benchmark:

• One of the three largest small group plans in the state;
• One of the three largest state employee health plans;
• One of the three largest federal employee health plan options;
• The largest HMO plan offered in the state’s commercial market.

California advanced legislation this week, AB 1453, defining HMO Kaiser Permanente’s small group plan as of December 31, 2011 as the Golden State’s benchmark.

The Los Angeles Times‘ Chad Terhune via the Sacramento Bee quotes a key California legislator expressing support for a California version of the Patient Protection and Affordable Care Act’s (PPACA) coverage mandate if the federal law’s mandate is ruled unconstitutional by the U.S. Supreme Court.  California Insurance Commissioner Dave Jones also seems to favor an insurance mandate if the Golden State ultimately moves to put its own in place but doesn’t directly say so in Terhune’s story.

A week earlier, California Human Services Secretary Diana Dooley expressed support for the mandate, which state payer organizations contend is essential to prevent adverse selection in the state’s individual market, the largest in the nation as a percentage of working age adults and their dependents.

If the U.S. Supreme Court decides this summer that the Patient Protection and Affordable Care Act’s (PPACA) mandate that all Americans have health coverage or purchase it by 2014 is unconstitutional, California could nevertheless move forward with its own health reform plan including such a mandate.  That’s according to the state’s Health and Human Services Secretary Diana Dooley, per this excerpt from this story appearing in today’s Sacramento Bee:

If the court does rule the federal law unconstitutional, state Health and Human Services Secretary Diana Dooley said California should at least consider enacting its own universal health care legislation, including requiring every Californian to buy insurance.

“I think that we should be committed to making this system more rational than it is today, and improving the health of the people of California,” Dooley said in an interview. “If we ask the insurance plans to take everybody and insure everybody with no screens or pre-existing conditions, then we have to have everybody buying some level of health insurance to meet their responsibility to the system.”

That reciprocity was a core principle of the Health Care Security and Cost Reduction Act.  In early 2008, California lawmakers considered but rejected the legislation championed by then-Governor Arnold Schwarzenegger and top legislative leaders.  Like the PPACA, the act was modeled after Massachusetts legislation enacted in 2006 that also served as a prototype for the PPACA and included as a central feature the so-called “individual mandate” requiring adults to have some form of public or private health insurance or managed health care plan.  In turn, insurers and health plans would abandon medical underwriting and accept all applicants regardless of medical history, thereby making coverage accessible to more people.  Other key policy goals of the mandate are to alleviate “cost shifting” in which those who have coverage end up paying for health care costs of those without coverage through higher premiums and to reduce the threat of adverse selection that can rapidly render payers insolvent.

It remains to be seen whether California would move forward with its own reform plan if the PPACA fails to survive judicial scrutiny by the nation’s highest court.  Increasing the probability is the view among the Golden State’s health care industry leaders that health care reform has achieved critical mass and will move forward regardless of what happens at the federal level.

Also generating momentum for reform is the state’s already partially spent federally funded investment in setting up the California Health Benefits Exchange under the PPACA to create a marketplace to help individuals and small employers aggregate their purchasing power.  Then there are the state’s demographics.  California is the nation’s most populous state and has more people in the individual health insurance market than other states — about eight percent of those 65 and younger versus about five percent in the nation as a whole.  It also has a relatively large percentage of medically uninsured residents, whose numbers have increased as many people lost employer-paid coverage in the economic downturn.

The recession was just getting underway when the Health Care Security and Cost Reduction Act was before the California Legislature, prompting then-state Legislative Analyst Elizabeth Hill to question if the state could afford its tax credits, subsidies and other costs.  Four years later, the state’s finances remain under siege amid ongoing deep budget deficits. Selling the individual mandate could also prove politically challenging as it did in 2008, when California health care payers were divided over it and business and consumer interests nearly uniformly opposed.

Self-insuring health benefits has traditionally been the province of large employers that could afford to assume the risk of paying much of their employees’ health care costs.  Smaller employers with too few workers to feasibly spread that risk have traditionally relied on insurance as a risk transfer mechanism.

In a sign of how distressed the small group health insurance market has become, that notion is being turned on its head.  Now small employers are shunning insurance and self-insuring their health benefit risk — to a certain point.  After an employee’s medical costs hit a set amount, stop loss insurance kicks in.  That “attachment point” as it’s referred to in insurance terminology can be as low as $10,000 to $20,000, according to this Los Angeles Times article.

As the Times reports, the practice is stoking controversy and raising concern it could steer small employers away from Small Business Health Options Programs (SHOPs) being set up under the state health benefit exchange component of the Patient Protection and Affordable Care Act (PPACA). Beginning in 2014, SHOPs will allow small employers to offer employees a variety health plans like so-called “cafeteria plans” offered by large employers.  The concern is without sufficient participation by employers, the SHOP plans could face increased risk for adverse selection by limiting the size of the SHOP’s risk pool.

While not directly saying so in the Times story, California’s insurance regulator is sufficiently alarmed by the potential threat to the actuarial integrity of that state’s yet to be formed SHOP that he wants legislation that would require higher attachment points for self-insured small employer health stop loss coverage.  That would also make self-insurance a less attractive option for small employers than getting coverage through the Golden State’s SHOP, reducing the SHOP’s spread of risk.  The California Health Benefit Exchange issued a solicitation last month seeking bids to help it design its SHOP.

The Patient Protection and Affordable Care Act (PPACA) will be unable to significantly slow the rising cost of health care.  As a result, the price of health coverage will soon become unaffordable for low and moderate income Americans, concludes a projection prepared by Richard A. Young, MD, and Jennifer E. DeVoe appearing in the March/April Annuals of Family Medicine.

The authors predict based on the current rate of increase in health insurance premiums and wages and barring significant structural changes in the health care system, the average cost of a family health insurance premium will equal half of household income by 2021 and surpass the average household income by 2033.  When out-of-pocket costs are added to premiums, the 50 percent threshold would be reached by 2018 and exceed household income by 2030, they forecast.

Based on their prognostication of a “barely bending” health care cost curve, Young and Devoe suggest America’s health care landscape could undergo major change.  The shift away from all in employer-paid group insurance coverage in favor of defined contribution health plans could accelerate.  They speculate that lower income workers could determine they can’t afford to participate in these plans and instead attempt to qualify for Medicaid under PPACA provisions expanding the government paid health coverage.

This point coincides with a Congressional Budget Office (CBO) estimate issued this month reducing the amount of people expected a year ago to obtain commercial insurance as the PPACA is implemented.  “Fewer people are now expected to obtain health insurance coverage from their employer or in insurance exchanges; more are now expected to obtain coverage from Medicaid or CHIP or from nongroup or other sources,” the estimate states.  “More are expected to be uninsured.”  The updated estimate is based on a revised CBO economic forecast of lower wages and higher unemployment during the 2012-2021 forecast period than projected in March 2011.

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.

I recently came across this interesting article published at the website of the American Medical Association discussing how large insurers are forming their own insurance exchanges to compete with state run exchanges.  State/regional health benefit exchanges are a critical component of the Patient Protection and Affordable Care Act (PPACA).  They are intended to aggregate purchasing power for individuals and small employers by providing them a single marketplace to purchase coverage from a variety of insurers and managed care plans.  The policy goal as stated in the PPACA is to increase consumer choice and competition among payers.

But perhaps an unforeseen consequence is that competition would entail payers competing not just against each other in government-operated exchanges but also directly against the exchanges themselves.  According to the amednews.com article, motivating payers is the desire to retain a degree of control and independence from state-run exchanges:

Large insurers have invested in private exchange start-ups with the idea that they can offer a better insurance marketplace for employers and workers than a public exchange, keeping private plans dominant in the commercial market.

Moreover, the article continues, payers believe they can do a better job at attracting individuals and small businesses with their own exchanges.  Rob Panepinto, managing director for the Client Practice and Exchange Solutions at Connextions, tells amednews.com that “government is not a good marketer.”  In California, however, the California Health Benefit Exchange is gearing up in the apparent hope to prove that assessment wrong.  The Sacramento Bee this week reported the Golden State’s HBEX tapped Ogilvy Public Relations to begin creating a marketing and public outreach and education strategy.

Looking back to the Clinton administration’s unsuccessful reform proposal of 1993-94, the emerging market dynamic of competing public and private exchanges wouldn’t likely have occurred.  The Clinton reform plan would have created government run regional purchasing alliances that would have controlled the entire universe of payer and provider markets with both payers and providers competing within the alliances under the reform plan’s “managed competition” principle.