By MICHAEL TURPIN

The Affordable Care Act is officially under construction.  The framework for the minimum mandatory levels of benefits offered through state exchanges is now being researched and will soon be ready for prime time debate.

The Institute of Medicine, a non-partisan research group, has been retained by Health and Human Services to conduct public and private planning sessions to help shape final recommendations on what standard levels of benefits should be required as a “floor” for all health plans.

The queue of industry and special interest groups increases daily as stakeholders wade in to offer personal perspectives on why certain levels of benefits should be considered as “essential”. The stories will be heart wrenching as individuals plead for broader coverage terms and looser definitions of medical necessity to cover a range of therapies treating orphaned or difficult conditions that do not neatly fit into today’s definitions of coverage.  The unfortunate fact also remains that the average consumer expects “essential coverage” to be synonymous with open access, comprehensive coverage, minimal out-of-pocket cost sharing and an affordable price tag.  In effect, everyone wants a Cadillac when the nation can barely afford a Corolla.

As the IOM solicits perspectives from a range of medical, academic, public and private stakeholders, it is gaining valuable insights into the opportunities and land mines associated with attempting to define a basic level of benefits that can guarantee affordable, sustainable and high quality healthcare.  Those states that have already walked the path of attempting to define mandatory benefits are perhaps the best leading indicators of the intended and unintended consequences of setting benefits levels too high or at more minimal levels.  States such as Maryland, Massachusetts and Utah have struggled and led efforts to set up universal and affordable benefits anchored by standard benefits and medical necessity protocols.  In determining what should be covered by commercial insurance and Medicaid, these and other states can offer valuable lessons to legislators seeking to establish the boundaries of the coverage requirements under ACA.

As the IOM and subsequently HHS consider the flood of opinions from stakeholders, a few unenviable considerations loom large:

Essential benefits will dramatically impact the future level of benefits many employers choose to offer.  Essential benefit levels will determine whether employers continue to offer healthcare and/or what benefits are no longer subsidized. Many believe that if HHS establishes a “national” level of essential benefits, it will become the floor as well as the “mean” to which many employers will gravitate their current medical coverage levels.

A national essential benefit design that establishes lean levels of benefits will prompt some states to consider mandating levels of benefits above and beyond those required in a national essential benefits design. A national design that is too rich could accelerate the budget crisis in states as more employers drop coverage sending employees into exchanges and expanded Medicaid pools increasing the financial burdens already crushing state coffers.

States will naturally argue for the flexibility to administer their own versions of essential benefits, largely because of fear over escalating obligations under Medicaid, legacy coverage and provider issues, the recognition that healthcare is local and that there is no such thing as a “one size fits all” plan.  Legacy budget deficits, the unique nature of each state’s demographics and healthcare delivery systems (single hospital towns vs. large healthcare systems, urban vs. rural care ) and the political mood of its constituents will figure heavily in determining the appetite of each state to advocate a richer or leaner level of mandated essential benefits

While fiscal hawks fear an essential benefit plan that is too comprehensive and therefore too expensive, there is the potential that more pragmatic designs could prevail leading to an essential benefits plan that is less expensive and better designed than many current plans in the market.  Plans anchored by primary care based gatekeepers, value based plan designs, effective cost sharing to promote personal responsibility and consumerism, and network tiering to ensure plans only reimburse at the highest level those providers that practice efficient, high quality care – are likely to run at significantly lower medical trends and in doing so, be able to support lower premiums over a longer period of time.

Change Behavior or Ration Access – Nationalized, single payer health plans offer rich preventive and catastrophic care but suffer the reputation of rationed access issues when delivering elective or non-emergency care. In a political environment where there is often no will to change the underlying behaviors of those utilizing the healthcare system, the only way to control the costs that arise out of unlimited demand and finite resources is to ration access and reimbursement.

CMS may soon be dealing with similar issues if delayed Medicare cuts are ratified by the 112^th Congress. Medicare and Medicaid recipients may find themselves with rich benefits but fewer providers willing to accept reduced levels of reimbursement as payment for services. If the provider does accept coverage, the coverage will undoubtedly carry longer waiting times. Providers will either limit the number of recipients they treat or continue down the path of the “triage” encounter as they attempt to make up in volume what they are losing in unit cost.

It is important to note that access does not equal quality.  Yet, many Americans currently believe access is synonymous to quality. In a two tiered public/private system, access is as much a privilege as it is a right. The single payer country determines the pace of one’s access based on medical necessity. The ability to pay for the right to opt into private alternative delivery is the only way of bypassing a payer’s medical necessity and access protocols. While many argue that today’s current for profit system already functions in this capacity, the majority of medical necessity issues arise out of insured individual and small business coverage issues where there is no purchasing leverage and scarce clinical data to support broader coverage.  Individuals working at larger, self insured organizations generally do not have these issues as employers act as plan fiduciaries and have the ability to make the final decisions on medical necessity and reimbursement.

Larger Employers Still Offer The Best Coverage and Most Balanced Cost Sharing – In the last ten years, employee out-of-pocket health cost sharing has risen 149% while wages have only risen 37%. According to a recent Towers Watson survey, the composite cost of healthcare per worker was $ 10,212 in 2010. The average cost sharing contribution per employee was $2,292. The average American worker makes $ 40,000 a year.  The total composite cost of health care per worker as a percentage of salary is 25%.  Employees currently share approximately 22% of coverage cost but only 5.5% of the total cost of this coverage as a percentage of their own gross earnings.

These numbers do not tell a complete story.  Cost sharing is greater among individuals working for smaller organizations as most small employers tend to subsidize less coverage and have less flexibility to affordably purchase more generous plans.  In addition, the average median wage for individuals working for employers of fewer than 50 employees lags those working for larger employers.  The crisis of affordability has been most acute among those who can least afford it.

At the same time as small employers are dropping coverage or fatiguing under its costs, as many as 75% of employees in a recent PWC survey, said that they would prefer to be paid salary in lieu of benefits – opting to purchase healthcare as individuals through newly established exchanges.  It is interesting to note in this PWC study that many of these same employees grossly overestimated what they believed their coverage was worth in additional salary. The question remains for many employers and for those watching healthcare reform develop – can affordable and sustainable essential benefits be established that can incent smaller employers to maintain and even potentially, rejoin those offering coverage?

As many as 70% of Americans earn less than 400% of the Federal Poverty level – the current cut off for ACA offering pro rata subsidies to purchase healthcare through exchanges. If essential benefits begin to eclipse those benefits currently offered by employers and subsidies net a savings to consumers, we may witness a larger migration of employees and their employers out of employer sponsored plans. It then falls to the Congressional Budget Office to recalculate whether the larger base of exchange participants and subsidy recipients has turned a modeled $ 140B reduction in public spending into a massive drag on the national deficit.

A more basic level of affordable essential benefits could induce employers back into the market as well as usher in a return to defined contribution style cafeteria plans – An essential benefits plan anchored by 100% coverage for primary care, shared responsibility through a health savings account, tiered networks, centers of excellence for chronic care, primary care delivered through medical homes and/or gatekeepers and compliance incentives could achieve cost savings while offering coverage  greater than bare-boned mini-med coverage.

A lower level of mandated essential benefits could also prompt employers to reduce richer coverage to a new, more affordable common denominator.   In aligning their benefit plans to a national norm, employers could adopt a defined contribution benefits approach – choosing to fund up to the level of benefits required by law and then grossing up individuals’ salaries one time to afford them the opportunity to spend dollars as they see fit e.g. greater take home pay, purchasing of voluntary benefits, upgrading to more generous medical designs etc.

Better Coverage Does Not Translate To Better Health – Coverage and consumer advocates will be pushing for expansion of coverage definitions to include diseases and medical conditions that have historically been excluded from private insurance.  The definition of medical necessity will be debated as advocates argue that comprehensive coverage will translate into improved public health. One has only to look at financially distressed municipal and collectively bargained plans that offer rich, first dollar coverage combined with broad open access networks to see that better coverage does not translate to better health.

To define and mandate essential coverage is to walk a mine field of ethical, moral and social issues. Some therapies may not necessarily improve the status of one’s health condition but may prevent it from becoming worse.  The unenviable task of establishing a process for determining medical necessity is the first step toward the difficult process adopted by other countries who have wrestled with the cost/benefit of determining what gets covered and what does not.

The UK’s National Institute of Clinical Excellence which determines medical necessity and establishes the basis for reimbursement of certain therapies is often maligned for the difficult choices it makes regarding palliative care and determinations surrounding when and how it may pay for experimental therapies. This is the unenviable role of any payer. Whether it is government making the call or a for profit insurer, any thing that falls to the unreimbursed side of the ledger will be viewed as a diminishing coverage and ultimately public health.

Now is a time for austerity – The dangers of creating unsustainably rich benefits plans are real. Not unlike Medicare, a rich essential benefit plan that drives higher medical trends will contribute to rather than reduce the public debt. If employers choose to drop coverage and more consumers receive federally subsidized coverage, the market will reach a tipping point where federal expenditures for healthcare outstrip the government’s ability to pay.

Aside from raising taxes and increasing assessments for failure to cover employees, the government will want to pressure the provider side of the market to reduce the costs of its services.  If the private insurer market can not reign in the costs of a rich essential benefit design (and they will not), there is a strong possibility that there will be a renewed call for a public option.  Once enough individuals join a cheaper, taxpayer subsidized public option, the public option payer will begin to ration reimbursement to providers as CMS has done with Medicare.  While single payer advocates argue that doctors and hospitals would have no choice but to accept reduced single payer reimbursement, most industry professionals argue that price controls as a means of controlling costs will lead to diminished quality and reduced investment in innovation. This is happening today under Medicare and Medicaid.

The table is being set for another food fight around health reform.  As healthcare impacts every American, we can expect 300 mm opinions on what “essential benefits” should cover.  It is a critical argument at a historic time for our country.  Without introducing fiscal restraint and evidence based medicine into this debate over essential benefits, we may end up with a rich and totally unsustainable level of healthcare.  As a nation we are already suffering from the palpitations of fiscal heart disease and the obesity of public debt. Offering too generous essential benefits could very well induce a budget coronary from which it will be hard to recover.

Be careful what you wish for, America. You may get it.

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz