Health Reform and the “Bifurcated” Health Insurance Marketplace
One of the clear trends of the past few years has been the emergence of a bifurcated health insurance marketplace: a heavily state-regulated, largely fully insured market for individuals and small companies and a non state-regulated, self-insured market primarily for larger companies. In the first market the products and benefits are approved by state regulators, and state-mandated formulas drive pricing for the entire market. In the second market products and benefits are not filed for approval, and health care costs reflect the actual experience of the employer’s pool of employees.
There are a few interesting features to this bifurcation. First is the ongoing shift away from insured products to self-insurance. At the beginning of the decade Harvard Pilgrim’s book of business was 75% insured and 25% self-insured. It is now 50-50, with self-insurance projected to grow further. Most plans are experiencing a similar trend.
Second, the two markets have very different attitudes toward fee-for-service reimbursement of health care providers. Regulated markets increasingly view fee-for-service reimbursement as a key driver of health care cost increases. The self-insured market not only prefers but usually requires fee-for-service reimbursement because of the transparency it affords into the actual claims experience of the group.
Third, the federal health reform effort is largely focused on the regulated, insured market, less so on the self-insured market. This is because self-insured employers are protected from insurance regulations by a federal law, ERISA, which has been left relatively unscathed by the various proposals put forward by Congress. In fact the impetus for reform and most of the complaints about health care costs are coming from the regulated market. The private self-insured market has been strangely silent.
What are the implications of all this? The increasing attractiveness of self-insurance certainly means that any payment reform proposal mandating global payments to Accountable Care Organizations, for instance, may be resisted by a large portion of the marketplace. Another implication is that federal health reform efforts to date only affect half the marketplace. An interesting question however is why the self-insured market has worked hard to maintain its ERISA protections and has been relatively silent about health care costs.
Could it be that the half of the market regulated by government is having the bigger cost problem?
Bruce, I like where you are going with this but would ask you to inform your last question. You are in a wonderful position of being able to study and tell us if your insured book compares to your ERISA book as it moved from 75% insured to 50% insured. If your hypothesis holds it would be an interesting study that should be explored. I think your right. Controlling for the causes will be hard but you should be able to do it on a broad scale given your knowledge of benefit changes, mandates and impacts of the percentages going to value driven benefit plans and consumer driven plans in the insured and ERISA markets. If you haven’t done it I would wonder if AHIP has commissioned some firm to look at it?
So whats the answer? Does the data show the smoking gun?
Bruce, I like where you are going with this but would ask you to inform your last question. You are in a wonderful position of being able to study and tell us if your insured book compares to your ERISA book as it moved from 75% insured to 50% insured. If your hypothesis holds it would be an interesting study that should be explored. Overall I think many of the points are right. Controlling for the causes will be hard but you should be able to do it on a broad scale given your knowledge of benefit changes, mandates and impacts of the percentages going to value driven benefit plans and consumer driven plans in the insured and ERISA markets. If you haven’t done it I would wonder if AHIP has commissioned some firm to look at it?
So whats the answer? Does the data show the smoking gun?
We need a few more inputs before making a judgment on this issue. I am assuming whichever insurance is used to pay claims, some payment formula is used. I am guessing Medicare forms some basis for this. If these rates are similar to “regulated” insurers then the cost factor on payouts must be similar. Is this true? It could also be that these companies harbor a cohort of healthier employees and therefore are a special group using less services. Is this true or not? We also need to know the overhead costs to administer these plans since marketing issues and also claims handling will be simpler or non existent. Is this true? Finally are the benefits as robust as the “regulated” market. If there is cost shifting this will also give an appearance of less costs. Is this true? So Bruce could you fill in these gaps and probably the question will answer itself.
Jim/Dr. Green:
All great questions, but hard to answer because of the apples-oranges problem in comparing the two markets. We do know that provider payment rates and overhead would not account for any material cost difference between the two markets, at least from the carrier perspective. We also know that community rating means that everyone pays a variation of the same premium, whereas experience rating creates a greater spread between groups. Of course, the customers who choose to self-insure probably know something about the likely difference between their own experience and the community experience. We also know that, because state mandates and filing rules do not apply, self-insured customers are free to (and do) deploy product and benefit options that aren’t available in the regulated market.
Without these drill down answers, the answer is reduced to guessing. That’s fine but it is no basis to make policy until more is known. Marketing and community underwriting is a significant expense for regulated players. It should not be brushed under the rug. The bottom line, without some clarification, one should be careful about making any conclusions.
Not to be too simplistic here but isn’t this just a question of risk? There is little if any risk (for the insurer) while there in an insured option there is lots of risk. My guess the lack of comment from the self insured market is a function of their role as a pure administrator.
Have I got someting wrong here??
Lincoln:
My question actually refers to whether or not the cost of insurance to employer customers is greater in the regulated market or not. This is different than the cost of health care to the carrier. The cost of health care to the carrier (or through the carrier,in the case of a self-insured arrangement) can be similar for the regulated and self-insured markets, but the cost of coverage can differ, due to product, benefit, administrative cost, selection, and cost of reinsurance issues, to name a few. The lack of comment from self-insured employers may reflect the fact that their cost of coverage problem is not as great as that for employers in the regulated markets.
Well without this more in depth knowledge, once, again, we can only guess. More musing will not point us in the right direction. Anyway why is it relevant to the present debate?
Dr. Green: Yes, musing about whether or not the federal effort really intends to reform small and nongroup markets only.
I don’t think so. I have seen no such breakdown and I have been watching the Senate Finance Committee meeting very carefully. There will be new regulations on all insurance companies in terms of underwriting, coverage, and out of pocket expenses. The non group is what goes into the “exchange” and then there is the ongoing debate over the “public option.” The latter occurs within that structure. Fortunately for HP its non profit status already incorporates many changes.
Oh and I forgot. Prepare yourself for significant reductions in Medicare Advantage. For Massachusetts I suspect this will be about 12% off the top. It is important for the health plans to plan for this, not fight it. Subscribers have reached their limit on any more cost shifting(co-pays, deductibles, co-insurance payments). If you can not target true administrative reductions i.e. lower amount of personnel in whatever department can stand it. This is the handwriting on the wall.
Any time I see examples like this of the heavy hand of government gone wrong, I can’t help but think of the old line…. the nine scariest words in the English language “I’m from the government and I’m here to help.”
No. Isn’t Medicare Advantage a biggy for the big markets. Rules concerning out of pocket expenses, pre-existing conditions, etc. are going to be part of the bill. If the health plan does not take the initiative to streamline their operations now they will be forced to. It is a curse to tell people, “I told you so.” I would rather they understand that this is a moving train and they need to get out of the way. I understand it is difficult to turn the ship in a different direction but it is the mark of good leadership of any company who can get ahead of these changes.
Bruce,
Large self-insured plans should have administrative cost advantages related to not having to pay for medical underwriting, advertising, broker commissions or insurer profits aside from the profits insurers earn on their low revenue ASO contracts. They also have the opportunity to offer employees financial incentives to quit smoking, lose weight, control blood pressure and lower cholesterol which, as I understand it, cannot be offered by the regulated fully insured market. I wonder if there is any difference in the medical cost trend experienced by the self insured vs. the fully insured marketplace especially when comparing people comparable in age and socio-economic status. I’ve heard that some companies such as Safeway and Pitney-Bowes experienced meaningful reductions in their medical cost trends through such strategies as disease management, financial incentives to adopt healthier lifestyles, and movement toward high deductible CDHP plans or plans with a Health Savings Account attached. Any information you can share related to these factors would be helpful.
Mr. Grady what you call the “heavy hand of government” was the previous administration’s attempt to privatize Medicare. It has been a financial disaster with little extra benefit to show for it. If you care about how your money is spent, then this move by the government is preserving Medicare for the future(an extra five years by this action). Medicare Advantage has been the equivalent of the $800 toilet seat. The Congress should get some credit for correcting this and redirecting it for more appropriate services. How do you react to “I am your private insurer and I am here to help?” There are problems on both sides. Let’s fix them if we can. I do favor a public/private partnership but reverse the equation. Everyone needs part A and can elect with the rest but then the private companies did to charge properly for their services. They ar not doing that now.
Dr. Green,
Regarding your comments about possible changes to the Medicare Advantage program, I think it is important to note that standard fee for service Medicare is full of holes. There is a deductible of slightly over $1,000 for each hospitalization. For Part B services, while the initial deductible is modest, there is a 20% co-pay for each service, test or procedure with no out-of-pocket maximum. For Part D, after a $295 deductible, there is a 25% co-pay followed by a couple of thousand dollars of 100% cost exposure (the donut hole) followed by a 5% co-pay once the beneficiary enters the catastrophic coverage zone, again with no out of pocket maximum.
Medicare Advantage is approaching 11 million enrollees or approximately 24% of the Medicare eligible population. It is especially popular among low income seniors who cannot afford a Medi-Gap plan and/or do not have retiree coverage from a former employer. Seniors have been choosing it in ever increasing numbers, presumably, because it meets their needs better and more completely than standard FFS Medicare.
First of all you can go argue with the Congressional Budget Office, an unbiased source, as to the overage to MA. Secondly the same offsets occur in MA as co-payments and yes, deductibles. MA is not available in all counties and many doctors are not in it. Why? Either they are reimbursed less than Medicare or they can not stick to budget or the hospitals that hire them do not get the payment they seek.
I would definitely like to see the numbers on how many low income people are in this product. My experience here in Mass is much different. Further MA has a select group that carries less risk of hospitalization or use of other services.
It is the government that is paying the medigap for these subscribers but at a much larger cost. If the money was folded back into the system this could be addressed much more cheaply.
You can not give more funds to a select group unless there is more compelling evidence that you are serving the indigent. “Especially popular” needs a number attached to it. Also once I see the word “presumably” it indicates a challengeable number. The rural population in the US is about 20% and so about 6.33% over 65 at about 6 million people. Not all of them are in a MA plan so this will be a very small number. It is probably less than 2 million countrywide. With the savings from MA this population would actually be covered more fully by either expanding Medicaid or some other program.
There is simply little justification to give a small group some minor upgrades in service with major excessive costs.
Barry:
Unfortunately, If you have seen one self-insured account you have seen one account. Depending on the experience/health status of the group, the product/benefit decisions made by the employer, the presence or absence of unions, etc. the cost experience can be very different. For a larger account willing to assume the insurance risk for its own employees, the self-insured option (which is usually administered by a health plan for a fee) effectively operates outside the purview of state insurance regulations. This has certain advantages when it comes to product selection, benefit rules, and rating. A movement from fully insured to self insured is already happening on a large scale (50% of our current book of business is self-insured), and if health reform focuses only on insured products, doesn’t it imply that only 50% of the market will be reformed - or less, if more employers decide to self-insure? And why the large-scale movement unless the self-insured employer is taking advantage of the opportunity to control costs?
Bruce this is only a problem if one is considering a nation wide risk pool. It would only present proposals in terms of how any changes are paid for. It would push for a more general tax rather targeting certain areas. Is your concern one of fairness? Could you articulate how this impacts what is happening in terms of congressional deliberations.
I have my 77year old parent living with me to help him out with the cost of living. I see what his medicare does not cover. His out of pocket costs are outragous. there is no dedutable, or the copay is very high. For him just to see his PCP runs him $100, for an office visit. I think that there should be a flat rate fee for the medical profession across the board. Example office visits only $25 to $50 . It is time to put the care back into health.