Time for a Closer Look (and Lower Costs)



One of the effects of the exaggerations, misinterpretations, distortions, and downright lies about Congressional health care reform proposals—mostly from far-right politicians and their hangers-on—has been to deter more objective analysis.

In fact, two key features of the current Senate and House bills—the insurance exchange structure, and the controversial public plan option—need much closer examination, and possibly considerable revision.

FIRST, the insurance exchange structure. It’s a reasonable concept: if insurers were to compete via an exchange for individual and small group business, they would offer highly competitive rates to attract as much business as possible.

Unfortunately, as a Health Affairs blog piece by the former managers of the PacAdvantage exchange makes clear, it isn’t as simple as that. PacAdvantage, which served some 150,000 California small business employees, ultimately collapsed and closed its doors in 2006, a victim of adverse selection. As the PacAdvantage managers explain, having insurers also marketing directly to small groups allowed them to cherry pick the best risks, leaving the less-good risks in the exchange. As adverse selection continued its work, the exchange went into a death spiral with worsening exchange risk leading to higher rates, leading to the least-bad risks leaving the exchange, leading to even higher exchange rates, and so on.

The obvious way to avoid this problem in national reform is to require that ALL individuals and ALL small group employees be included in each regional exchange. Unfortunately, health reforming politicians have adopted “you’ll be able to retain your existing coverage” as part of their reform pitch. It’s understandable, since forcing groups to switch to an exchange is not going to help the prospects of legislation that’s already in trouble, but it instantly opens the door to cherry-picking by insurers, with the prospect of failure of every exchange.

Is there a solution? Rather than imposing an additional mandate on businesses, current bills could be modified to require that all insurers participate in the exchange, and that their exchange rates be no higher than those offered directly to any insured group, thereby forcing insurers to treat exchange and non-exchange insureds as part of the same pool and avoiding the adverse selection effect.

SECOND, the public plan option. So far, the political controversy has focused on the obvious arguments for and against the public plan: it would force insurers to offer better rates, but it could push millions of Americans out of private coverage into a government program.

A close look at data from Medicare Advantage, in which private plans compete with the traditional government option, indicates that both arguments are questionable.

MA’s private coverage alternative is indeed more costly than traditional Medicare, by some 13 percent—more than $11 billion in 2009. However, most of the difference is due to the additional benefits offered. The private plans’ 2009 base bids to CMS—excluding the cost of additional benefits—averaged 102 percent of FFS rates, with HMO and PPO bids averaging just 99 percent of FFS.

These base bid rates include profit and administrative costs, in contrast to the FFS rates which exclude both administration and financing costs. Even the most conservative estimate of these additional costs would put fully-loaded FFS rates above those of the average private plan.

The comparison of Medicare FFS and MA plans is further skewed by the MA bid process. Not only do the ridiculously high “county benchmarks” used in payment setting favor high bids, but the payment formula (which discounts the difference between the base bid and the benchmark, but not the base bid itself) encourages excessive loading of profit and administration into the base bid. In other words, in a more rationally designed competitive environment, average private plan costs should be significantly below those of traditional Medicare.

In terms of the current Senate Health and House bills, with proposed payment rates higher than Medicare, the public plan looks even less competitive.  While there would undoubtedly be some who would opt for a government program over a private plan, the vast majority are likely to choose the lower cost option, with the public plan more likely to increase health care costs than decrease them.

Are there compromises that might satisfy liberal politicians’ desires for a public plan? One possibility is to build a “trigger” into the bills that would allow creation of public plans only where private plans fail to meet cost control benchmarks.

Another possibility is to build on the existing public plan for the non-elderly: Medicaid. Congressional committees are already proposing Medicaid expansions, while simultaneously proposing subsidies to make exchange participation more affordable for non-Medicaid eligibles, leading to an anomalous situation in which one family may receive free Medicaid coverage, while a second family whose income is only a few dollars greater is forced to pay a significant part of the exchange premium in order to comply with an individual coverage mandate.

A less costly and unfair approach might be to allow individuals to buy-in to Medicaid. Since average per capita Medicaid costs are approximately $2000, compared with estimated subsidy costs of close to $4000 (based on CBO estimates, in 2009 dollars), this would eliminate both the anomaly and the need for subsidies, with a potential dramatic reduction in the ten-year cost of reform of some $770 billion.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care Reform Update.

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3 replies »

  1. http://www.voluntary.com/articles.cfm?articleID=171
    another trend unfolding in the employee benefits marketplace involves employers combining high-deductible plans with self-insurance to ease the sting of employees having to pay first-dollar coverage on their own.
    Several leading players, including Blue Shield, Health Net, Kaiser Permanente and Anthem Blue Cross, have threatened to terminate contracts and gut commissions for brokers who sell so-called wrap-around packages, according to a recent report in the Sacramento Business Journal. They’re also pressuring employers to sign statements pledging not to combine such plans or risk losing coverage, concerned about the effect these actions could have on health plan utilization and profit margins.
    And it’s no wonder: One particular estimate based on how these schemes would affect a 40-person business operating in the Golden State found potential savings as high as 40% compared with traditional coverage without skimping on benefits.
    I have the quotes that have the warning.
    The lies exaggerations….are worse from the left, your mostly claim is BS.

  2. Nate — You need to check your facts on CalChoice. It was created by insurance brokers, not politicians, and it does offer HSA-type high deductible plans.
    And, by the way, if you really think that the claims about health care reform by right-wing pols like Sarah Palin and Betsy McCaughey don’t provide examples of exaggerations, misinterpretations, distortions, and downright lies, you must be out of touch with reality.

  3. “FIRST, the insurance exchange structure. It’s a reasonable concept: if insurers were to compete via an exchange for individual and small group business, they would offer highly competitive rates to attract as much business as possible.”
    There is no solution, exchanges are a failed idea that never where about improving the delivery of insurance. Exchanges are a wasted layer of fat that allow governments to control the products and raise revenue. They increase cost with no benefits.
    Roger ever heard of a country called California? Might want to stop bashing the right for one night and read up on it. They have an exchange there called CalChoice, as far as competitive rates na not so much. MA has an exchange, never seen any competitive rates their. Can you name any place with an exchange that has competitive rates?
    If you want to over look Roger’s exaggerations, misinterpretations, distortions, and downright lies the truth about exchanges is they kill competition. Let me give you an example Roger is apparently to far retired to be aware of. In most states in the US tens of thousands of employers are buying high deductible plans then self funding back down to low deductibles. The employees have the same extensive benefits the employer just saves a fortune in offering them. Know one place you can’t do this…that’s right CA. The carriers in CalChoice got together and decided they just wouldn’t offer the high deductible plans. You see when you pull all the competitors together and allow them to design the playing field it usually doesn’t benefit the consumer. The carriers all make out, they continue to charge inflated premiums, and the public loses. Why would Roger overlook this, it is the single biggest insurance market in the country. The reason Exchanges fail is they are poorly designed by politicians. CalChoice is a perfect example, a 20% margin between your healthiest group and sickest means healthy people have a huge reason to not buy insurance and take their chances and sick people have no reason to try and improve their health. When a politician forces you to engage in adverse selection who’s fault is it when you do?
    “the political controversy has focused on the obvious arguments”
    I think you meant to say no government “options” is guaranteed to stay an option. Or unfair power to dictate reimbursements and force providers to accept them, or you meant the cost shifting that makes it impossible to compete with a public option, those are the obvious arguments. The one you mention is the strawman liberals drag out when they want to steer the argument and make the right look bad.
    Parts of this weren’t bad but when you start off with a needless bash on people who have an honest disagreement with you then your just asking to be taken to task for your own BS. Glass houses Roger.