POLICY: Low prices ain’t cheap enough

Mercer says that the number of small businesses offering health insurance to workers went down last year despite the greater and easier availability of high-deductible and HSA plans.

Fewer small employers offered health insurance this year, despite
the widespread availability of new, lower-cost high-deductible
insurance plans, a survey released today by benefit firm Mercer shows.
Advocates of the high-deductible plans touted them as one solution to
the growing number of uninsured, expecting the plans to appeal to small
employers, who would continue to offer health insurance as a result.
"That’s not happening," says Blaine Bos, a Mercer partner and one of
the study authors. "In fact, the reverse is happening."The
study of nearly 3,000 employers found that the percentage of employers
with 200 workers or fewer offering any kind of health insurance fell to
61% this year from 63% in 2006.That drop came even as the cost
of high-deductible plans with tax-free savings accounts averaged $5,970
per worker per year. That was $700 less than a comparable plan without
a savings account and far lower than the $7,120 for the average HMO,
the study says.

HSA/HRA type plans are growing in the market, but not as fast as employers are dropping coverage.

about 5% of all workers with insurance have an account-linked
high-deductible plan this year, up from 3% last year. "That’s pretty
significant growth," says John
Goodman, a longtime proponent of health savings accounts and president
of the National Center for Policy Analysis, a non-profit group that
backs free-market approaches to issues such as health insurance."I am surprised it is not doing better in the small-group market," Goodman says.

Goodman’s surprise I think misses the overall
point. The low wage employer who’s been offering insurance on the
margin is struggling because even if they can save 10–15% by switching
to a HDHP they can’t get the major savings individuals can by making
that switch because they’re usually already experience-rated. The only
individuals of course who can get those switching savings are the ones
who can pass the underwriting test–i.e. the ones who aren’t sick.

Instead it’s just cheaper for the employers on the margin to not provide
insurance at all
, or to ask the worker to pay for most of it themselves, which amounts to the same thing. So suggesting that we can
make serious headway into the uninsured numbers by getting employers to voluntarily
switch to lower cost plans is missing the point.

The obvious solution that the mainstream insurance industry
is now glomming onto is to have government subsidies take up the slack.
Hence the keen support (from most of them) for something that looks
like the Arnie plan—compulsory pay or play for employers and
individuals, subsidized by the taxpayer, with not much in the way of cost constraint built in.

The WSJ noted exactly that yesterday in a piece called Health reform plans aid industry— In fact it’s so damn obvious that Karen Ignagni manages to comment upon the Presidential proposals without even telling an direct lie!

The industry’s chief lobbyist, Karen Ignagni, president of America’s
Health Insurance Plans, says she is encouraged by the debate so far and
says her group is focused on trying to get universal insurance enacted
rather than stopping it. "At 20,000 or 30,000 feet, we have heard
encouraging statements from Democrats and Republicans," she says.

I suspect however that she’s more encouraged by the Democrats–if one suspects that a future Democratic President will trade away cost-containment in order to get to universal coverage-lite. That would make the plans very happy and get rid of the low-wage employer problem–details to be worked out of course.

And frankly it’s a trade I’d take too. because once the uninsured issue is out of the way, then we can take a real look at how we’re actually spending the money. But if nothing else, the Mercer study shows that if we’re going to fix employment-based health insurance, it’ll be done by the visible hand of government not the invisible hand of the market.

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23 replies »

  1. Michael,
    It is a fact that HMOs (and insurers generally) are exempt from some, not all, Federal anti-trust regulations. They are NOT exempt from state anti-trust regulations. The exclusion from Federal anti-trust is limited, and as state regulations have grown over the years the significance has shrunk. For more, see here.
    I do not know of any state in which HMOs are allowed to collude and price fix with each other. Do you? I also do not know of any state (though they may exist) in which HMOs are exempt from anti-trust considerations when it comes to market share. When one HMO buys another it may be forced to sell off some of its business so that it isn’t too dominant. This has happened on more than one occasion recently (United’s purchase of Sierra, for example). State anti-trust regulations are a major reason why the remaining 8 or so publicly-traded health plans haven’t shrunk to 3 or 4. There are dozens of non-profits.
    But we don’t need to speculate about insurer profits and whether they are “artificially” inflating premiums. There aren’t any secrets here. It is not hard to find out exactly what the average profit margin of HMOs (and health insurers generally) has been over the years. You will see that it has been below average nearly every single year. I think maybe starting around 2001 it may have entered into average territory for American industries.
    I think you’ll find this very interesting
    For a nice graph, check this out from the financial ratings firm Weiss here.
    There is a classic graph showing changes in premiums compared to medical costs over 2-3 decades, but I didn’t find it after a quick google search.

  2. How can you guys ignore the pink elephant in the room and not even comment on the most obvious reason why health insurance is so expensive? Fact: The HMO’s are exempt from anti-trust. Fact: They are allowed to collude and price fix. Fact: No matter how you wonk it out they will artificailly inflate premiums until this exmeption is revoked.

  3. I agree with pretty much everything in Barry’s last post, though I’d add that the competitiveness of the market varies by region.
    In some states, the local BCBS company dominates the market (50% or more share) and has some pricing power. Most of them are still non-profits, so their margins have not historically been as high as they could be.
    Also, brokers play an important role, particularly for companies in the range of 50-500 employees. These brokers are supposed to increase competition and get the best deal for employers, but as some recent scandals have shown this is not always the case. Even when no malfeasance is being conducted, brokers tend to have a short list of insurers that they prefer, which reduces the ability of insurers to compete on price.
    These are small effects in the big scheme of things, and there is enough competition to ensure that changes in medical cost trend are passed on to purchasers through premiums pretty quickly.

  4. Peter,
    It was interesting that you mentioned car insurance. Here in NJ, we were the most expensive state for car insurance in the country for years until the mid to late 1990’s. Insurers were very tightly regulated, could not make an adequate return, and quite a few either left the state entirely or cut back on the business they were willing to write here. I paid close to $1,000 per car (for two cars) for insurance at that time. NJ was one of two states (MA was the other) that Geico would not operate in because the environment was horrible.
    Finally, under a Republican governor, three things happened. First, regulations were eased to allow insurers more flexibility in pricing their product. Second, we got litigation reform in the form of a no fault law that compensated victims for accidents but did not allow lawsuits for pain and suffering except for a narrowly defined list of serious injuries. Third, there was a serious effort to crack down on fraud including rings that staged accidents and than sued for phony injuries. Now, about ten years later, I pay 30% less for car insurance than I did then. Geico has been doing business here since shortly after the reforms took effect and currently has a series of commercials running touting another recent price reduction.
    With respect to health insurance, group business gets rebid every two or three years. In a market that has not been growing much in terms of total members, there are always competitors willing to bid with a sharp pencil. If insurers have recently experienced cost reductions in either medical cost trend or administrative overhead, that favorable cost experience will be reflected in their bids. Moreover, not everyone has the same costs, especially on the overhead side. Some are more efficient than others or have more scale or are especially good in certain geographies. It’s a competitive business where returns on capital are, at best, average by corporate standards. If it were so easy to continue to win business without passing through most or all of more favorable cost experience, their returns would be much higher than they are. You can think whatever you like about evil insurers, but the industry’s financial performance, both recent and going back over a longer period, simply doesn’t square with your perception.

  5. Peter
    Great article on mandates in this months Health Affairs. Auto insurance not required in every state. Overall, this is a fantastic review on why “mandates” may not succeed in any future health rewiring. Also, I think Barry was referring to self-insured plans as far as savings. Agreed, if commercial plans could reap a windfall if it is their nickel, they are not going to give it back.

  6. I clicked to soon and want to add:
    All you have to do is look at car insurance. I believe it is regulated in every state because it is mandated in every state. In NC our commissioner looks at expenses and profits and every so often orders insurers to reimburse policy holders because they OVER CHARGED in relation to expenses. He is always reducing their rate increases. And Barry if insurance acts as good citizens then why did the AG of NY have to get involved to force transparency on rate calculation?

  7. I’ve got to agree with Michael. I don’t trust insurance companies to give back anything. If they think profits look too high then they’ll just put up another building or give out bigger bonuses or larger stock dividends to bury those profits. “Joe Six Pack” will NEVER see any reduction from health insurers in premiums, lower deductibles or reduced co-pays. The industry will hide their cloning in a competitive cloak.

  8. Maybe I see things too much from a provders perspective. I just have my doubts that any industry that is exempt from anti-trust and has the legal right to price fix and collude would EVER lower prices. We see their “expenses” are so falsely inflated just so they can justify higher premiums and “cost” controls. Pretty oson people will be paying huge prices for absolutel yno benefit. That is completely unjustifiable and unsustainable in a fee market. HMO’s do not fucntion in a free market. Maybe the docs have been so beaten it’s the only way we can see it. If there was such free market pressure to lower premiums why don’t they do it already instead of reporting out such massive profits and executive bonuses?

  9. Do you seriously think that if waste was cut out of the system the HMO’s would give the money back by lowering premiums, deductibles, and co-pays?
    Absolutely, positively, yes! Why? Competition. If costs do not actually decline but grow more slowly, than the growth rate in health insurance premiums should slow commensurately. I assume no regulatory changes or other factors that affect insurer costs are also occurring. In recent years, the large insurers have gotten much better at estimating the growth in their medical cost trend for the upcoming year.
    Large, self-insured employers, who insure about 50-60 million people, would automatically benefit from lower utilization as they contract with insurers to provide administrative services only. A lot of full risk business goes out for bid, and plenty more is influenced by insurance brokers who are paid to help their clients get the best insurance value for their money.
    From a healthcare system standpoint, Shannon Brownlee and others estimate that 20%-30% of healthcare is wasteful, unnecessary or inappropriate. Some of this is driven by our litigation system and the culture of defensive medicine that it spawns. Some is driven by a futile, “do everything” mentality at the end of life because family members can’t let go or there is no living will or advance directive and providers are afraid they will be sued if they don’t do everything they can to keep the patient alive as long as possible.
    As for the issue of physician over utilizers, I think recent efforts by the major insurers – United, Wellpoint, Cigna, Aetna, etc. to develop premium designation systems that help consumers identify the best and most cost-effective providers and then give insureds an incentive to use them via differential (lower) co-pays could be very helpful. Now that the insurers have worked out an agreement with NY State Attorney General, Andrew Cuomo, that provides for transparency around how the ratings are determined, including the role of costs, and also allows for an outside monitor to oversee compliance, should open the way to widespread implementation of this approach.
    Health insurance is expensive because healthcare is expensive. It’s as simple as that. Profits earned by the entire private health insurance sector (including so-called non-profits) are probably no more than $35-$50 billion, a relative pittance within the context of $2.2 trillion of healthcare spending in the U.S. Private health insurance, by the way, pays only about 35%-40% of that bill according to the California Healthcare Foundation. Moreover, what we generally think of as healthcare costs (hospital charges, physician and clinical fees, including labs and imaging), and prescription drug costs account for only 71% of total healthcare spending. Another 10% is for dental, vision and other professional services, 10% is for long term nursing home and home healthcare, 3% is for public health initiatives and 6% is for investment including hospital construction.

  10. Michael,
    To answer your question, it’s impossible to say exactly what insurance companies would do if the medical cost trend started rising at a slower rate or even stopped rising for a while.
    There are a number of factors, including the degree of competition, possible new regulations, and the ability of plans to anticipate changes in medical cost trends.
    As a point of historical reference, when managed care hit it big in the 90s, the profits of insurers actually shrank. The years of highest growth for HMO, PPO and POS products were also years of dismal or non-existent profits for insurers because everyone was trying to grow their business by pricing aggressively. This period of around 93-98 was also the only time the medical cost growth was reasonable. For a year or two it was actually below the rate of general GDP growth. So, big system changes, even changes in which health care costs are brought under control, do not necessarily mean higher profits for insurers.

  11. I read through jd’s stuff and it is quite compelling. I will read it more throughly over thre weekend. I can’t get enough of this stuff. I think we’re basically aksing for the same thing, however, what these these reports do not break down are the particular habits of individual docs or hospitals. If you ask any doc in a given town they know who the over-utilizers are. I know I do. I guarantee of the 18 chiros in my area just 2-3 of them are responsible for for 90% of the waste. Roughly 10-20% cause 90% of the problem in my zip code. There has to be a better way that punishing the rest of us that are within acceptable guidlines, no?
    There is a model out there by a chiro admin company called AMI that I think has some potential. They basically measure outcomes per Dx and using EBM set up a “norm” for phy-med treatment plans. Docs are herded into the normative ranges and rewarded with less paperwork, less pre-certing, less direct oversight, and more freedoms, if they stay in range. The ones who spike out (they say 4-7% of the docs cause the real problems) go through a process of peer counselling and practice modification and if they do not stay in the range they are either booted or deeply restricted. Many state and naitonal chiro associations are looking closely at this concept. I believe AMI has the BC/BS program in MD and is currently lining up something with CMS. There’s a possible solution to the waste problem the honest docs like myself would embrace.
    I really do out perform my colleagues and competition from other disciplines and save the system a boatload of money…so why am I punished with increased restrictions and decreasing revenues every year? This current system is killing the good docs. Kind of anti-American, let alone anti-competetive, isn’t it?

  12. jd- Thank you. I look forward to reading through the material you have posted. The chiropractic profession has begged the insurance industry to eliminate waste in physical medicine by focusing on measureable outcomes and rewarding the individual providers of any discipline that are performing well. We desperately want to be measured fairly against our Ortho and PT counerparts using a valid measure. Chiropractors in whole make up less than 1% of the premium cost. However, if used properly, and I underscore the word properly, we can save the system hundreds of millions of dollars.
    Do me a favor. Answer a few questions honestly, please? Do you seriously think that if waste was cut out of the system the HMO’s would give the money back by lowering premiums, deductibles, and co-pays?
    Again, please look at what is happening in the field not just in the reports…preimums are rising steadily, co-pays have tripled over 7 years, deductibles are doubling and now finding their way inside networks yet HMO’s report out record growth and profit while their CEO’s average $20mil per year…and at the same time doctor revenues are sinking to a level of near loss per patient visit in many cases…answer honestly…where is the money? It’s not in the medical industry anymore. The studies may be flawed or inflenced if they say otherwise. Practice one day in the country and you’d see we really do need health insurance reform.

  13. Michael Kane,
    The list is so long.
    The first thing I recommend is the work of Jack Wennberg. Check out the policy briefs here. Also the work on Medicare .
    In the same vein, here’s a nice popular treatment in Consumer Reports:
    Here’s a book on overtreatment by Shannon Brownlee.
    There is also Maggie Mahar’s Money Driven Medicine (interview here)
    Then there is Alain Enthoven and the argument of the need for managed competition among integrated delivery systems to reduce care fragmentation.
    Even physician organizations see the need for reform in health care delivery as well as in insurance. The advanced medical home is a concept being put forward by the ACP that is gaining steam.
    That’s a start. Once you’ve read these, you can do some targeted searches to find the rest.

  14. “….because with current trends insurance carriers are pricing themselves out of the market.”
    Scott, with a deal like Med PartD they’ll then start to price the taxpayer out of the market.

  15. JD- Not sure exactly which literature you are talking about, please provide me with some direction. I never said we only need health insurance reform. There is a pile of waste in the system but reportedly it’s committed by only 4-7% of the providers. reward and promote the docs that do it well. The chiropractors have been asking for that for 15 years.
    My point is that the people are generally satisfied with the care and access. Anyone can get treated. Not everyone can afford the health insurance and don’t think it’s because doctors are paid too much because we simply are not. The problem is the cost of insurance premiums and the inherent restrictions on care coupled with the high cost of premiums which are then tacked on top of another layer of cost with high deductibles and high co-pays. It’s simply cheaper not to have insurance nowadays. To be honest, with doctors fees going down steadily while patient’s insurance related expenses go up we really need to ask “where’s the money?”
    It’s not healtchcare reform that we need. It really is an overhaul of the insurance industry that is needed. I work everyday with happy, satisfied patients who get outstanding care in our practice…the only thing they complain about is the insurance situation and not the access or treatment. And a full third of our practice either has no insurance or has some sham incentive built into it so as not to use it.

  16. I completely agree with every statement Matt made in the last two paragraphs.
    Most of AHIP would prefer a Clinton-Obama-Edwards style plan than a Guiliani-McCain style plan (who knows what Romney would do). More insured people means more revenue, and it means they get one of the monkeys off their back…the one about refusing to cover the people who most need it. The monkey is only partly based in reality (much more true of the individual market than group or managed Medicare/caid), but it’s a big source of anger.
    In order to get universal coverage enacted, only modest belt-tightening will initially be demanded of health plans and providers. AHIP knows more substantial measures will be taken down the road. However, consider that the large majority of savings will have to come from the provider/supplier side rather than the health plan side.
    When efforts are made to rein in costs, there will be a lot of work that managed care could do. Health plans will position themselves to do that work, whether as part of an insurance product or an administrative service for a government plan. I think we’ve only seen the tip of the iceberg for disease management, wellness and assisted self-care.
    Michael Kane, I don’t know how you can say that we only need health “insurance” reform and not health “care” reform. How much of the public health and health policy literature have you read?
    Final thought: It doesn’t take much insight to see that the most likely source of resistance within AHIP to universal health care will be the resistance of the publicly-traded companies to the increased regulation that will have to accompany reform. I think publicly-traded plans have around 65% of the private market, so this is a force to be reckoned with. Somehow, these plans will have to be convinced to accept things like higher limits on MER (such as moving from 80% to 90% over 10 years). They will have to be convinced that the trade-offs are worth it (less cyclicality, increased baseline revenue, better public image, eventual focus on things managed care was meant to do), or at least close enough to worth it that they don’t mobilize in force to oppose reform.

  17. Peter –
    “I BET the insurance industry wants universal coverage, just like the deal the drug companies and plan providers got for Med PartD”
    Yeah, that would be the smart move to get on board now and help shape policy because with current trends insurance carriers are pricing themselves out of the market.

  18. We need health “insurance” reform…not health “care” reform. We even let them control what we call it. Maybe one way to level the playing field is to eliminate the HMO’s anti-trust and collusion exemptions? As the result of some antiquated federal laws passed in the ’70’s they currently can collude and price fix because they carry “risk.” Doesn’t colluson and price fixing dive up costs? Duh, here we are. Also, when was the last time we saw an HMO actually carry any legit risk? They farm out many services to third party vendors in captitated arrangements that completely eliminate their risk. They do not pass any of those savings on to the consumers or providers but reprt them out as “growth.” Let’s make them actually work hard and fair(like the rest of us) to provide a quality product for an affordable price by eliminating their anti-triust and price fixing exemptions. That’s when health insurance reform can happen.

  19. Why insist that the issue of the uninsured must be “out of the way” first? Surely to try to deal at once with the insurance problems and the excessive cost issue would should a greater concern with equity.
    And then there’s the problem that Arnold’s solution may promote poor quality insurance.

  20. I wonder if employees really understand the implications of high-deductible health insurance. Don’t forget that they will still owe co-pays with high-deductible. They can’t afford the co-pays and deductibles now of a serious illness and have no way to understand the real costs of an illness thanks to the keep-it-secret insurance industry. I BET the insurance industry wants universal coverage, just like the deal the drug companies and plan providers got for Med PartD. And lets not forget the $2 million check Congressman Billy Tauzin got for a lobbying job with the pharma industry just after he pushed through the legislation – for his mother. I can still see his smiling face holding the check on “Sicko”. I bet there’s not a few politicians who will be looking forward to getting the insurance industry the universal coverage they want.

  21. It’s quite possible that people are understanding that they get a lot less coverage for just a little less cost? No matter how it gets sliced the people still pay more and the insurance companies pofit more. This may be the result of the fact that we have left the industry in charge of reforming itself.