Your AHIP Quiz Question of the Day

This is something that’s been puzzling me for a few weeks. We all know that insurers are very good at  making sure that they insure healthier risks than average. In the individual market they do this openly, by underwriting against poorer risks. Those “risks” (who are most of the people with the really tragic stories) end up uninsured or in massively over-stretched state major risk pools.

But there’s a market in which insurers already operate that has guaranteed issue and no underwriting—just the reforms that AHIP is saying that it’ll accept as part of a universal coverage plan. And in that market the same process goes on. That market is of course Medicare in which Medicare Advantage plans are so good at risk selection that their being paid 12% more than what the standard FFS program would pay for the care of those self-same patients. Essentially private insurers are able to game the system by taking the more profitable patients and leaving the less profitable (and sicker) ones in the public plan.

As far as I can tell the regulation that AHIP is promoting would put them in a similar position to the role they play in Medicare in the commercial insurance market. But without a place to dump the people they don’t want to insure.

So here’s your quiz. If insurers need a place to risk-select against which they know will have to take the patients they don’t want, why is AHIP opposing a public plan?

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20 replies »

  1. Insurance companies should not be allowed to “risk select.” And insureds should not have to pay for doctors’ so-called administrative costs. Government insurance should be designed not to pay any administrative costs, just the health care. And the government insurance should be free to all citizens. That’s why we elected President Obama. Nobody should make a PROFIT on people’s sickness. That is sick. We need single payer, here’s your pay: take it or leave it. I am totally on the same wave length as Matthew Holt.

  2. Last night, my house was burgled and torched, which stressed me out so much that I crashed my car on the way to work this morning.
    I don’t have either car or homeowner’s insurance, so I immediately started shopping around this morning. Do you believe it? Nobody would offer to cover either my car or my home! Why are property & casualty insurers allowed to “cherry pick” like this?
    All sarcasm aside, what Matthew Holt calls “cherry picking” is actually called “insurance”. So, what we call health “insurance” in most markets in the U.S. (Medicare, Medicaid, small group in most states) is not “insurance” at all.
    My guess is that AHIP just recognizes the political trend and wants to hang on to the table by its fingernails. They don’t want a “public plan” because the best case scenario is 20% market share for Medicare Advantage, and then the government decides they’ve got too much market share – just like the government killed Medicare Choice before Bush/Leavitt reinvigorated it as Medicare Advantage.
    They probably figure that a “public option” for everyone will seize 80% market share. Now, AHIP wants mandatory coverage, so maybe in a perfect world they could risk select the healthiest 20% and churn out the sick ones every year, but that is a fantasy.

  3. Of course AHIP is opposing a “public plan”, whatever that is. Tough to compete against a competitor who sets and enforces the rules in their favor.
    The real question is why would we spend another trillion to reduce the uninsured by 13 million (CBO estimate)? Isn’t the deficit excessive as is?
    Random thoughts on MA:
    The Chief Actuary of Humana was on MedPac until recently, so I wouldn’t call them “lefties”.
    As to MA profitability, UNH picked the counties where reimbursement exceeded cost and exited counties where the profit margin was thin (or none).
    The insurers have benefited greatly from the “floor reimbursement rate” set in rural counties.

  4. First Aon is not an insurer they are a broker so you are wrong there.
    PacifiCare’s SecureHorizons unit has 705,000 senior members. United has 320,000. In total, PacifiCare has 3 million members and United has 23 million.
    If you care to link to something besides your memory we can settle that point.
    “but if private plans were losing so much money on their Medicare business in the last decade at the same time as overall commercial enrollment was falling, why did their stock prices go through the roof in between 2003 & 2007?”
    I have never once said they were losing money, in fact i specifically said MA is profitable at times.
    I like how you know better then United on why they bought Pacificare. I think your ego has finally got completly out of control.
    “The managed-care industry saw 33 mergers and acquisitions between July 2004 and June 2005. Six of those deals involved consumer-directed plans — up from zero two years earlier, Steever says.
    In November, United bought Definity Health, one of the biggest administrators of consumer-directed plans to large, self-insured employers. A year ago it bought Golden Rule, a firm that sold and administered consumer-directed plans to individuals.
    So why did it buy Golden Rule and Difinity, for their MA business?
    But UnitedHealth’s chief executive, Dr. William McGuire, said yesterday that gaining size was not as important in the deal as expanding the company’s presence in Medicare and in Western states where PacifiCare is strong.

  5. I’m pretty sure Kevin is talking about entire admin costs including those of the providers dealing with private plans. His numbers came from a recent study I cant remeber but they’re close enough to numbers in a California study in Health Affairs a while back
    However there are for sure various health plans which do have MLRs in the 50%s and below…I guarantee you that a full examination of Mega Lifes & Health books would show you something like that — and my guess is that Tonik’s ain’t far behind. After all if the parent company (Wellpoint) is averaging in the high 70s (as it did for much of the past decade) you cant tell me that the line with the highest sales cost and lowest premium didn’t have a much lower MLR–and to be fair Medicare’s very low admin cost rate is a fraction of its much higher per head costs.
    Nate sadly I don’t have either your brilliance or patience or carpal tunnel syndrome…but if private plans were losing so much money on their Medicare business in the last decade at the same time as overall commercial enrollment was falling, why did their stock prices go through the roof in between 2003 & 2007?
    And you’re flat wrong about Pacificare. 50% of its business was in Medicare even in 2003 before the increase in payments–that’s exactly why United bought it. Not because it was a consumer directed plan–it wasnt. Sure it was a regional plan too. But if that’s all it wanted case why didnt United buy Healthnet?
    And you really can sit there and type that plans cant select risk? Go research AON’s activities in the municipal market where it directed healthy groups to plans who paid it bribes. US Healthcare did similar things in the 1990s–and Aetna did exacly the same in reverse in the early 2000s (got rid of expensive risks) Go look at Medicare Risk recruitment in the 1990s–literally putting the office on 2nd floor walkups.
    And of course, as I said in the post insurers do this every day in the individual and small group market in any state where it’s allowed. But that’s legal-ish

  6. The coordinated care does save money, only a couple percent though. In order to eliminate waste you need aggressive rationing, few MA plans or private HMOs are in a position to do that anymore. Specific to MA plans there is considerable mobility in the population, if a MA plan managed care to control cost members would leave to another plan or FFS where they could get the care they felt they needed, which we all know is 30% more then they really do. It’s hard to understand market forces when you only read about this stuff in books and papers. No study is going to give you the experience of sitting and talking to a couple hundred retirees and actually going through the process with them.
    This is where FFS should be eating MAs lunch, FFS doesn’t have competition, if you don’t like the utilization review they do or their care guidelines you don’t have another FFS plan to enroll in. But FFS does none of this. In a functioning market the FFS plan would be the uber efficient no frills base plan and MAs would charge more for expanded benefits and loser guidelines. MAs advantage over FFS is they don’t get ripped off nearly as bad.
    Let me repeat again becuase I get the feeling you haven’t caught on to this yet, MA plans deliver Medicare FFS benefits a couple percent cheaper then FFS does. The additional money MA collects pays for additional benefits not covered under FFS and lower premiums. They don’t need more, they get more becuase they do more.
    The lefties at commonwealth or the lefties at MedPac, there really isn’t much difference, their both pushing politics over facts.
    No I never said they cremeskimmed I said they pulled out of markets when loss ratios went bad, that is completly different.
    How can they skim preferred risk in today’s market if a public plan was introduced? Your big on theory but lack reality. You want to accuse insurance companies of engaging in activity you have no understanding of. How will the do it? I’m in the business and do this stuff every day and can’t think of any method by which a carrier can selectivly write healthy risk only. I don’t forsee them repealing HIPAA or any of the small group reform laws in place, so how can they do it? Lacking any possible way for them to do it under current law how can you accuse them of it? Again I will remind you carriers will write any risk they can charge a sufficient premium to cover said risk. Your premis is faulty from the start.
    I would assume there will be a high risk plan for those that are not insurable. It is not skimming risk when someone shows up at your door with 100,000 in medical claims asking to buy a policy that would only cost a couple thousand and you say no. Skimming risk would be cancelling sick groups or individuals or not writing people that fall within underwriting guidelines due to the possibility of having a claim, all that is neary impossible to do. Dening the person that waited till they where sick to buy a policy is not skimming.
    Do you really think Pacificare was only about their MA business? They where a regional carrier in a period of mass consolidation. You really need to read more. I’m very familiar with Pacificare as they where one of the top 3-4 carriers in NV when United bought them and then bought Sierra/HPA who was the dominate carrier. Please lets talk about what I know and what you read. Less then 1/3 of Pacificare’s business was MA. United had no presence out west as they struggled to become a dominate national carrier. The stock price of all regional and small carriers took off during that period as WellPoint, Anthem, United, CIGNA and the big ones where buying them up like trading cards.
    “The managed-care industry saw 33 mergers and acquisitions between July 2004 and June 2005. Six of those deals involved consumer-directed plans — up from zero two years earlier, Steever says.”
    “In November, United bought Definity Health, one of the biggest administrators of consumer-directed plans to large, self-insured employers. A year ago it bought Golden Rule, a firm that sold and administered consumer-directed plans to individuals.
    Buying PacifiCare further strengthens this business. PacifiCare owns American Medical Security Group, which it acquired in December.”
    Why can’t you do some basic research before you go throwing claims like that out there? Even a basic search in any business mag or financial site or any article written about the merger at the time would have told you this. Instead you come up with these cockamany conspiracies. Yes off and on there is profit in MA but it never was this profit goldmine for private insurers you think it was.
    Kevin your comments are even close to be accurate. You had to make those up yourself becuase no article would even be close to what your claiming.

  7. Kevin, please provide that study. I am sure it does not say what you think it says.
    The only way those admin numbers are close to true is if they include more than just the health plan admin cost, but also admin for provider and employers in their dealings with health plans.
    I have studied this at length using numerous sources. Private health insurer admin costs average somewhere between 12% and 15% (including broker payments). Profit is between 3% and 5% on average. Thus, total overhead is less than 20%. You can take that to the bank.
    For large groups and self-insured plans, total overhead is closer to 10%. Barry Carol knows those numbers pretty intimately, I think. Maybe he’ll chime in.
    For Medicare Advantage, total overhead is less than 10% among private insurers.
    I think under current conditions, private insurers are sitting on at most a 5% structural disadvantage if the public plan has to negotiate its rates rather than ride on Medicare’s tail. But that advantage will not remain. Private plans will find a way to remain competitive (even if they lose a 20-50 million people to the public plan first). I think the main way they will do this is to consolidate further and then stick it to the providers through tougher negotiations. I’m not against that, by the way. One way or another, the providers will have it stuck to them, because they are where a large majority of the excessive costs lie.

  8. I suspect the potential administative advantage of a public plan over the private health plans may be greater than a “couple of points.” According to a recent Kaiser Foundation study, the administative cost for individual/non-group coverage administered by private plans is roughly 41% on average. Broker commissions which average @20% of premium in the first year (and scale down dramatically in the 2nd and subsequent years) comprise a significant percentage of this admin. cost.
    The same study stated that admin. expenses for small group (<50 subs) averaged 24%. Presumably, a public plan could administer coverage for significantly lower expense in these two segments.

  9. Oh, and Medicare FFS actually does pay for residents and other stuff who do things to Medicare and other patients, Medicare Advantage plans don’t. So it’s not clear to me why that should be taken out of the calculation.

  10. Nate. FFS Medicare is a basket case with huge amounts of overtreatment and terrible care. The “Coordinated care” the private plans provide is supposed to save money. Why do the plan need more money for it? They should be able to provide care for 30% less, yet they need more
    And you can quote the lefties at Commonwealth,I was quoting MedPAC…
    And you finally confess that back in the dark days of 1993-2002 Medicare Risk HMOs creamskimmed. Why do think they wont do that to the first iteration of a public plan?
    And please to explain to me why if there was no profit in Medicare Advantage the action in Pacificare’s stock price between late 2003 and its purchase by UNited? Ineffcient markets, perhaps?

  11. Nate, how does the HCC weight factor in the payments to MA plans? From what I understand, the base amount per beneficiary is multiplied by the HCC score, so if you “judiciously” code all your beneficiaries, you can make a boatload of money on top of the benchmark rates. Is that cost factored in when comparing MA to FFS?

  12. 52 “Medicare Advantage in 2007,” Centers for Medicare & Medicaid Services, p. 19.
    As CMS has noted, “Before MedPAC or the Commonwealth Fund compared payments made to MA plans to estimate Medicare FFS amounts, each group reduced the FFS amounts to carve out payments for certain teaching hospital expenses (i.e. indirect medical education (IME))while leaving similar IME payments in the MA side of the equation. In both the MedPAC and Commonwealth analyses, IME costs were removed from estimated FFS costs to reflect the current double payment for IME (one going to hospitals, and one included in plan payments) on the part of Medicare.”52
    “In fact, the cost differences are overstated, as becomes clear once benefits are incorporated into the calculation: “Based on the most current data, if one compares comparable benefits and does not reduce Original Medicare FFS costs for IME, the differential is reduced from 12 percent to 2.8 percent. The remaining differential reflects Congressional decisions to increase payment above FFS in certain areas in order to assure access to private plans across the country.”53
    “MA plans provide care coordination in the treatment of disease. Traditional Medicare does not.”

  13. In fairness there was one area of abuse that was egregious that was stopped years back. When MA first came out the people most liekly to join were young and healthy retirees. In the early days a plan could start, enroll healthy people then 5 years later when they started getting sick pull out of the market and out them back into traditional. That was fixed YEARS ago though and pulling out of a market now means you are out for a long time.
    “MA plan payments reflects MA benefits. Medicare Advantage is often criticized because its plans are “overpaid” by 12 percent over traditional Medicare fee-for-service (FFS)benefits. A breakdown of MA benefits versus traditional FFS benefits will reveal that the two are not so easily compared. For example, Medicare Advantage payments yield additional value which is not available in traditional Medicare. These private plans are then required to return any “overpayments” to beneficiaries in the form of additional benefits or lower cost-sharing.8 MedPAC and Commonwealth Fund studies show reduced FFS payments because they excluded indirect medical education (IME) expenses. However, both studies included these expenses in the MA portion of the equation, thus showing higher MA payments. In a fair comparison, without ignoring IME payments for traditional Medicare FFS, the differential between MA and FFS is reduced from 12 percent to 2.8 percent.9 Finally, MA plans provide care coordination and care management services not available in traditional FFS.10”
    Wow it’s almost like some partisian hacks in government and at the commonwealth fund tried doing some sloppy research to advance a political goal knowing most of their readers are to lazy to do any real rsearch. If your going to quote far left partisians expect to be frequently corrected. Commonweatlh knows as much about healthcare as your average politician.

  14. Lets approach this another way, I have sold Medicare Supps and Advantage plans, that is from the point of taking the app to submitting it and getting the approval. Please explain to us the mechanism by which an insurer cherry picks risk. Having enrolled sick people in MA plans I say there isn’t a way. Having read some articles by other people that have never actually sold a policy at any time in their life you say there is. Just explain to us how it is done and the argument will be resolved.

  15. Thanks for clarifying, Matt.
    For what it’s worth, I left a sentence unfinished in my first post. It should have been:
    Regional non-Blue insurers built on a network model rather than integrated delivery system (maybe 20% of the overall private market) will probably disappear if a public plan is created. They are slowly disappearing anyway.

  16. I’m so sorry that Nate doesn’t believe me, But that’s OK. I’m only quoting MedPac & CBO, not one who actually bothers to do research
    Having said that JD is correct in that CMS has changed the way it pays Medicare HMOs in recent years. But the changes he cites have only been in operation in very recent years.
    But the history of Medicare private plans has always been that they used risk selection and have financially benefited by the existence of a public plan. In fact the private insurers have torpedoed any efforts to either have them competitively bid for Medicare business OR cut payments to them (until last year when the AMA finally beat them).
    And if you really have any doubt about how well the Medicare private plans did from the situation of having a public plan check out Pacificare’s stock price from 2003 until it was acquired by United.
    Would those private insurers have done as well if there was no Medicare FFS program to risk select against? Maybe, but why take the risk?

  17. From the CBO:
    The current payment system for private health plans
    was established by the Medicare Modernization Act,
    which was enacted in 2003.
    1) Private plans that want to participate in the Medicare
    Advantage program must submit bids indicating the
    per capita payment for which they are willing to provide
    Medicare’s Part A (Hospital Insurance) and Part B
    (Supplementary Medical Insurance) benefits—and to take
    on the financial risk of doing so.
    2) The government compares those bids with countylevel
    benchmarks that are determined in advance
    through statutory rules. The benchmarks are the
    maximum payment the government will make for
    enrollees in private plans; in most cases the plans’
    bids (and the resulting payments) are lower than the
    benchmarks. (The benchmark for a plan that serves
    more than one county is an enrollment-weighted
    average of the county-level benchmarks in its service
    If a plan’s bid is less than the benchmark, Medicare
    pays the plan its bid plus 75 percent of the amount
    by which the benchmark exceeds the bid. Such a plan
    must return that 75 percent to beneficiaries as additional
    benefits or as a rebate of their Part B or Part D
    premiums.3 For example, if a county’s benchmark is
    $800 per person per month and a plan bids $700,
    Medicare will pay the plan $775, and $75 of that
    amount must be returned in some form to the beneficiaries.
    Such additional benefits and lower premiums
    are a primary factor distinguishing one Medicare
    Advantage plan from another and Medicare Advantage
    plans from Medicare’s fee-for-service (FFS)
    Benchmarks are required to be at least as high as
    per capita expenditures in the FFS program in every
    county and are higher than FFS expenditures in
    many counties. For 2007, the Congressional Budget
    Office calculates that benchmarks are 17 percent
    higher, on average, than projected per capita FFS
    expenditures nationwide. Benchmarks are updated
    each year by either the growth in national per
    capita Medicare spending or 2 percent, whichever is
    greater. For 2008, the benchmarks will increase by
    3.5 percent.
    Medicare also adjusts payments to Medicare Advantage
    plans to reflect their enrollees’ health status. That
    “risk adjustment” is meant to encourage plans to
    compete on the basis of efficient delivery of services
    rather than selective enrollment of healthier beneficiaries.
    To that end, the Centers for Medicare &
    Medicaid Services (CMS) collects information on the
    medical diagnoses of every beneficiary in the FFS and
    Medicare Advantage programs and uses it to calculate
    the relationship between individuals’ health and subsequent
    spending on their behalf for Medicare services
    and to thereby adjust payments to plans
    (upward for those with sicker beneficiaries and downward
    for those with healthier beneficiaries).
    In managing the risk adjustment system, CMS has to
    confront difficult issues of data collection and validity,
    statistical complexity, and potentially different
    coding practices among plans and the FFS sector.
    Each judgment the agency makes for each of those
    aspects of risk adjustment can increase or decrease
    payments to Medicare Advantage plans.

  18. Matt, either you just taught me something or your central premise is wrong. As Nate says, charmingly as usual, I believe the primary reason that the average MA member cost the Feds 12% more than the average traditional Medicare member is that CMS sets the per member rate higher, and that most but not all of this additional cost goes into better benefits (though also bringing with it more care management).
    It sounds like you’re saying that on a per member basis the total payment may be close to the same, but that the MA members tend to be healthier and since MA plans are payed a flat rate per member they get to pocket the difference, whereas if they were in traditional Medicare the Feds would get the savings. In the next post I will paste a lengthy excerpt from CBO describing how MA plans are paid that indicates risk selection is probably not a major factor, though that description certainly could be less than the full story.
    In both Medicare and Medicaid, and hopefully for private insurance as well, the future (and present, to some extent) is risk-adjusted payments to insurers that remove the incentive to select risk.
    Insuranceman, the way the “public” plan seems headed, it does not appear that it will have a very large price advantage over private plans. It’s administrative advantage will produce an AER perhaps a couple of percentage points lower than private plans and despite what other say, the difference in net income will be only 1 or 2 percentage points as well. Initially, the public plan may also have an advantage in provider payment rates. But nothing is static. Private plans will have an overwhelmingly powerful incentive to become as large as possible in order to get rates as low as the public plan or lower. You will see consolidation on a large scale, I imagine, reducing the public plan’s pricing advantage to something pretty darn small. There will only be three types of private plans in the future: huge national plans (probably 3 or 4 of them), Independent Blues plans with 50% market share or more, and plans attached to integrated delivery systems. Regional insurers (maybe 20% of the market.
    What a public plan will definitely do is make the private plans scramble. It will be harder work, at least for the first few years, figuring out how to compete effectively with the public plan. Industries tend to resist being forced to change. The whole “who moved my cheese?” thing.
    In any case, Matt and insuranceman, isn’t it reason enough for private insurers to oppose the public plan that it will be a major new competitor, taking millions of members that would have gone to private plans? What industry would invite a major new competitor? One way or another, premium would be at least enough to cover those members, whether or not they are the lowest risk. Those additional people would be profitable enough to be worth taking on. Occam’s Razor, guys.

  19. Being the blog boss you can just make S&^# up I guess?
    “Medicare Aadvantage plans are so good at risk selection that their being paid 12% more than what the standard FFS program would pay for the care of those self-same patients.”
    I don’t have any idea what a self-same patient is but your apples and oranges comparison is BS. MA gets 12% more in exchange for offering considerbly better benefits. Studies comparing the cost for MA to deliver the same benefits as traditional Medicare show it does so 1-2% cheaper when adjusted for all things that need adjusting.
    As for the rest of your drabble did you really think I would let you get away with claiming insureres select without hitting you with the ole HIPAA club? Care to enlighten us how exactly they do this with HIPAA being 10 years old? How do all those states with small group guarantee issue let insureres get away with selecting risk? Ah that’s right they dont.

  20. They do not want it because the cheaper price tag will attract many of the industry’s more lucrative clients. If you are well and working, why not get the cheapest plan?