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Commentology: What Your Employer Is Secretly Thinking As Obamacare Goes Live Part II

In response to Kip Piper’s recent post, “What Your Employer Is Secretly Thinking As Obamacare Goes Live” Michael Turpin writes:

A very comprehensive article and predominantly spot on. I do have a few alternative views.

Employers are waiting to see if public exchanges are viable alternatives – As a consultant who works with employers every day, the universe of employer sentiments is varied. The preponderance of public exchange options with be narrow network, lower level reimbursement plans that will not be like for like equivalents to employer sponsored open access PPO plans. With low individual mandate penalties and higher costs for younger exchange enrollees due to 3:1 community rate banding, there is concern that the first enrollees will select against the plans and not be offset by younger, healthier participants who will balk at the prospects of higher premiums.

Self insurance will be highly prevalent – The average employer can save as much as 6% by self funding their insured benefits. It is true they take on higher liability but the first 6% is essentially playing with house money because the employer will not pay taxes on insured benefits or insured PPACA taxes. Employers, especially those with young healthy employees, would be better served self insuring to avoid community rate cost old to young shifting and insured premium taxes. Younger consumers use fewer benefits. Average year over year medical trends will likely be low single digits — much lower than the likely community rated increases tendered the first year in the exchanges.

Private exchanges will gain some traction – The IBM decision is only for retiree medical benefits. Walgreens is the first major retailer to adopt a private exchange for actives. A private exchange is to health plans what the 401k was to defined benefit pension plans. A true private exchange pits multiple insurers against one another in a Cost Co type private market where individual enrollees are given an annual stipend to buy benefits. Each enrollee can choose between a range of plans and insurers.


The premise is that insurers will cannibalize each others pricing — not unlike a retail store, and in doing so, drive pricing below what employer sponsored plans have been able to achieve as single purchasers. The current private exchange market is very limited in terms of employers choosing to force active employees to buy on a defined contribution basis. It is appealing for employers who want to cap their annual liabilities by merely cost shifting to employees. Employees tend to be less fussy about having less purchasing power if they have lots of health plan options to choose from — versus the usual two to three options available from their employer. There are risks. Many employees tend to buy down, purchasing high deductible plans to achieve more affordable monthly premiums.

As premium dollars reduce with each cheap plan selection, there are fewer dollars to offset the cost of claimants. This was the demise of cafeteria plans in the 1990s when young, healthy employees opted for cheaper coverage and contributed fewer dollars to the employers plan. High utilizers continued to incur the same amount of claims but now had fewer plan dollars to offset losses. Loss ratios spiked and plan options disappeared because they became too expensive.

Private exchanges are more a Trojan Horse opportunity for employers to cost shift to employees without overtly dropping coverage. Most of the initial private exchange players will be low wage workforces and low margin businesses — retail, hospitality and agriculture. White and gray collar firms will wait and see what choices prove best for their strategy.

Expect employers to drop spousal coverage for working spouses – Expect changes to plans with aggressive wellness, smoker premium differentials, a greater prevalence of high deductible plans, penalties for non compliance with biometric testing, carve outs of bundled high margin insurer programs like RX and a more aggressive enforcement of a bi-lateral contract of health: we provide your healthcare and you take personal responsibility to ensure you are not assymptomatically ill ( get an annual physical ), close gaps in care ( be compliant with chronic care treatment regimen ), improve consumerism with cost comparison tools for ambulatory services( don’t get a $3,000 MRI when you can get one for $800 ) and reduce access to outlier providers who charge higher costs for similar outcomes.

It’s going to be a wild time as providers become insurers, insurers become providers, consulting firms begin to see products and a group purchasing market fragments into a variety of consumer based procurement models. There will be lots of misinformation.

Employers will bear the brunt of the responsibility for educating an irritable, insured and uninsured employee population that does not like the idea of being the first generation to leave the safety of open access PPO, co-pay island to enter the primordial world of medical homes, captivated care and tightly managed medical oversight.

Michael Turpin is frequent speaker, writer and practicing benefits consultant across a 27 year career that spanned assignments in the US and in Europe. He served as the northeast regional CEO for United Healthcare and Oxford Health from 2005-2008 and is currently Executive Vice President for Benefits for the New York based broker, USI insurance Services. He writes at Usturpin’s Blog.

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8 replies »

  1. Mr. Turpin:

    Seems that in addition to low margin industries, those with older and therefore sicker/more costly workforces will also move aggressively to exchanges?

  2. I’m glad not to be seen as just another crank. Thanks for that. I do appreciate your background, mostly because my entire career was in management for the very labor-intensive cafeteria environment. When I use the expression “bottom of the food chain” it takes on a real meaning both literally and metaphorically. My subordinates were always the working poor. The food business is not known for good wages except for a few select jobs. After three or four decades I should have been a Republican, but my daily contact with the people who were the life blood of the business gave me a measure of sympathy for their circumstances that made both Republican and LIbertarian ideas about economics, especially all social safety nets, seem both mean-spirited and counter-productive. I saw the truth of Lincoln’s words that the Lord must have loved the common man, He made so many of them.

    I came to terms with the realities of low wages. It is unrealistic to dream otherwise. Someone will be working at the lowest legal rate, some will actually work for less. But wages are set more by the marketplace than the law. Wages are set by the same formula as prices of goods and services — supply and demand. In a vigorous economy wages will be high (as in North Dakota these days) and when the local economy is in the tank, wages will follow (which is why legal minimums must protect workers against exploitation — see the “developing” world… or the rust belt, or the rural South).

    Where this is headed is for the health care environment, which is the subject of The Health Care Blog, and the ever-rising costs of health care. And this is why I put that little reference above to the difference between costs and prices. I am convinced that most prices in health care have only a trembling echo of the actual costs involved. And the main reason goes to something missing in health care which the rest of the economy takes for granted — a connection between buyer and seller which is the pivotal transaction which drives any marketplace, from housing and cars to ice cream cones and cotton candy. That transaction, plus a competitive environment, is what keeps markets more or less stable and appropriate for the greatest number of people.

    And those elements — competition, plus a face to face conversation about prices between health care professionals and the patients whom they serve– have been preempted by both insurance arrangements and the vast hospital networks that make up the delivery system. Except for a few in-store experiments at WalMart and a few grocery and drugstore chains, nobody is trying to attract consumers of medical care by either convenience or prices — and even they they are not interested in any but those who really aren’t sick.

    Insurance, like health care, serves a very real need. Both are in risk management, but they do not manage the same risks. Health care professionals manage disease and injury risks. Insurance professionals manage financial risks. And unfortunately most people, even in these two vital categories, conflate each with the other. And a moment’s reflection shows they are only alike as risk management mechanisms, nothing more. The reason for universal insurance is that in our economic system (including hybrid public/private arrangements) there is no other path to universal health care that makes sense. And universal health is good for well people as much as those who are sick or injured. Nobody wants to be around others who are sick or banged up.

    My pet peeve is that the footprint of the typical health care system all over the country is too big and inefficient, typically located conveniently to the most affluent, densely populated part of the area, and granted something of a monopoly by “certificates of need” which is another term meaning they are allowed cartel status, very much like franchised companies protect franchisees from cannibalizing each others’ territories. As if that isn’t enough, the main institution is typically a non-profit which is a functional money-laundering exchange and referral site for a vast campus of FOR-profit practices, labs, clinics, imaging centers, rehab facilities, and specialty places for heart, cancer, orthopedic, surgical and Lord knows what else — all of which have separate facilities, amortization schedules, garbage and landscaping costs, infrastructure expenses that have nothing to do with medicine — janitorial, uniform and cleaning services, accounting and legal resources…. you see where this is going. And in many cases patients and family members often become the couriers between all these fabulous (did I mention expensive?) resources. And often get charged for parking!

    So yes, getting back to the subject, employers are taking a look at their costs. But sooner or later, if and when the country wakes up, employment and health care will be uncoupled altogether. In a global economy when US goods and services have to compete with other countries where universal health care is paid for mainly by taxes and delivered by health care professionals who concentrate on what they do best (which doesn’t seem to be running a competitive business, dividing their attention between the waiting room and the board room).

    Thanks for reading. I’ll stop here. Rattling along in comments threads is a satisfying outlet for me in retirement. It costs nothing. And whoever doesn’t want to read can skip it. And who knows… something I say might make a difference one day They say the preacher who converted Billy Graham was not very successful. But look what followed that single conversion.

  3. John, you hardly sound like a neophyte. My views are formed like a bizarre cord of random threads accumulated from a career as a consultant both here and in the Europe — where I was hospitalized in the Uk’s NHS with very serious pneumonia. I also served for as a senior executive with a major insurer for three years but found my desire to “fix” the system conflicted with our shareholder obligations. Altruists and free radicals don’t always make great for profit CEOs. I must confess the graphic you allude to is not mine — but an illustration I chose for that particular column. You are correct– the system is wildly comp,ex and exists in a long continuum from the transparent and effectively managed to the opaque and unmanaged. Where there is no transparency and effective competition, you general have oligopolies and excessive waste. My own father who is a retired CEO routinely disparages the notion of nationalized healthcare but then goes on to tell me how much he values Medicare. Go figure. The migration of the US to an eventual three tiered pyramid of concierge private care for a small percentage of Americans followed by perhaps 30% of private, employer sponsored plans resting on top of a base of Medicaid, Medicare and Tri-Care — is already underway. My guess is that within ten years, public spending consumes 65-70% of the 17% GDP spend. The other 35-40% will be privately financed. I’d love to start with having a single payer purchase all drugs and fundamentally dismantle the $250B PBM industry. Just a pet peeve of mine as it is one of the great shell games in healthcare. There is lots to improve with everyone who has their hand in the proverbial pie arguing that the sentinel effect they bring to controlling healthcare costs justifies the profit they make — even though they are not patients or providers. In some cases, they are correct as quality and excellence in medicine will only prevail if we maintain incentives to attract our best and brightest into medicine and we continue to invest in R&D. However, we do need to parse through the misaligned incentives and poor behavior. There’s plenty to go around. in the end, no graph can effectively define the continuum of experiences in healthcare but suffice to say, we are moving toward a new normal. It’s happening right now although many of the changes fly over the head of average consumers like acoustic shadows in battle. We shall see…thanks for your thoughtful post. Love the discourse!

  4. John, you hardly sound like a neophyte. My views are formed like a bizarre cord of random threads accumulated from a career as a consultant both here and in the Europe — where I was hospitalized in the Uk’s NHS with very serious pneumonia. I also served for as a senior executive with a major insurer for three years but found my desire to “fix” the system conflicted with our shareholder obligations. Altruists and free radicals don’t always make great for profit CEOs. I must confess the graphic you allude to is not mine — but an illustration I chose for that particular column. You are correct– the system is wildly comp,ex and exists in a long continuum from the transparent and effectively managed to the opaque and unmanaged. Where there is no transparency and effective competition, you general have oligopolies and excessive waste. My own father who is a retired CEO routinely disparages the notion of nationalized healthcare but then goes on to tell me how much he values Medicare. Go figure. The migration of the US to an eventual three tiered system

  5. Thank you for your reply, Mr. Turpin. I have read through your 2011 post two or three times and tried my best to understand what it means. But I’m just an old food service manager in retirement with no expertise in the fine points of actuarial and insurance formulas and accounting. I feel like a first quarter undergraduate trying understand the arguments of a doctoral defense. Correct me if I’m wrong, but your two-axis graph seems to be textbook Libertarian with no wriggle room — which makes interesting conversation but doesn’t take into account the many hybrids scattered across the health care landscape.

    When I see “Socialised medicine” and “Free Market” counter-posed I think about the difference between prices and costs, which are not the same. The so-called socialist approach has no need for profits from which non-medical expenses are funded — marketing, sales commissions, shareholder payouts, executive compensation, etc. I understand and appreciate the efficiencies of privatising some activities, but that implies at least some amount of competitive bidding. The bidding process presumably yields the best results at the lowest price, but when I measure what the private sector has done with health care I can’t find much evidence of competition on the basis of price. In fact, if a clinic, physician or hospital advertised lower prices most Americans would smell a rat. We are convinced that more of anything is better and the more it costs the better it must be. That mind-set is really good for sales, but I question whether it is the best way to deliver health care with the most favorable outcomes.

    To be fair, we already have pure government-run health care through the VA and armed forces health care systems. I was an Army medic and learned when I was serving that the Brooke Army Medical Center in San Antonio was considered the worlds leading burn center at the time. (That was long ago, so that may have changed.) And I was fortunate to have my wisdom teeth removed by an oral surgeon — an officer, paid more than me as an enlisted man more in recognition of his professional status than his military training, and even more because he was an oral surgeon, and I don’t know what else. But that was not “profit” for any corporation. The assistants were all other people in uniform, using government issued supplies and equipment, working in a facility owned and operated by the Army, etc. You see the picture.

    Now in my post-retirement job as a senior care-giver I see more than a few people being cared for by the VA as well as Tri-care, another government insurance program. And there is also Medicare, America’s single-payer for seniors, usually supplemented by private insurance (except in the case of Medicare Advantage, which as you know is totally private sector, the latter day rebirth of the old HMO’s). So all these hybrid arrangements don’t puzzle easily into your graph.

    Then there is the health care (if we can call it that) rendered by auto and liability insurance claims. And I never hear any mention of workers compensation claims… all of which are ancillary to the overall American health care picture. And I doubt that these are trivial parts, especially when the amount of revenue they furnish for the insurance and medical communities, all of which is given special accounting and tax status which further muddies the picture when anyone attempts to figure out why America’s health care bill is the highest on the planet and still gets less than the best outcomes… and still leaves literally millions in the ranks of the uninsured.

    This is getting far too long for a comment thread, but I still haven’t got to the part about Medicaid and the VA being able to buy medicine cheaper than Medicare, which is the drug industry’s biggest customer. One would think that price break would be in order, but one would be badly mistaken to think that.

    But I must stop before I get too long-winded. (Cue laugh line here.)
    Anyway, thanks for your reply. If you don’t reply to my screed I will understand.

  6. Brad, the early adopters of private exchanges are very attracted to the financial control and predictability you describe — they can allocate how much they want to spend and then let each plan option’s costs dictate whether people must spend more. The challenge will be that many private exchanges will offer coverage options but these plans may lack cost controls ( low co-pays, no consumerism, no wellness incentives, open access PPOs designs etc ) and in doing so, these plans will result in double digit year over year trend increase. If an employer is facing a 10% increase, they may set aside only 2% in budgeted contributions ( e.g. tied contributions to GDP growth, expense growth or profit margin increases YOY ) to increase their annual stipend. 8% of the costs or 80% of the year over year increase will need to be allocated to the plan participants. Some exchanges will artificially manipulate the premiums of each plan option within the exchange ( they call this risk adjusting ) to try to essentially have the lower loss ratio plans prop up the higher cost plans. Other plans will not subsidize poor loss ratio plans and as members migrate out of the expensive plans, the remaining participants will shoulder that cost until they finally do the math and realize the maximum out of pocket under a high deductible plan will be cheaper than paying high premiums for a low out of pocket plan. Younger workers won’t leave, they will just pick plans that cost the least.

    John, the only way to identify the ticks from the hosts is to drive market transparency. Self insurance is a brilliant way to reveal that many players — insurers, PBMs, brokers, providers, etc are highly variable in their billing, and performance Insurers are making more money now under the MLR regs because they get 15% for admin and profit and then make another 30% in revenues “selling” services to their own medical and RX subsidiaries. These costs are classified as “claims” under the MLR regs and the costs of these claims are “sold” to the insurer by their own subsidiary. The conflict of interest reeks in these arrangements — most of which are fully insured. Once you self insure, you begin to shine a light on these conflicts ( the $ 250B PBM industry is a great place to start ) You might like this article. An insurer told me it “sent chills down his spine”… https://thehealthcareblog.com/blog/2011/04/08/a-case-for-self-insuring-small-business/

  7. Since the key parts of the legislation were crafted more by the insurance industry than the sponsors, I am guessing that at some point a few key leaders finally woke up to the fact that unless something is done to curb costs the parasites will kill their hosts. it’s not like the insurance people have no other products — liability, life, fire, theft, auto, home owner’s — the list is endless. Most were TPAs anyway, so the worst pill they had to swallow was the medical-loss ratio. Not a bad trade-off in return for millions of new customers, subsidies in hand, of which 20% had their name on it.

  8. MIchael
    A question on your private exchange assessment:

    “As premium dollars reduce with each cheap plan selection, there are fewer dollars to offset the cost of claimants. This was the demise of cafeteria plans in the 1990s”

    With current (and future?) private HIX iterations, wouldnt the employer look at yearly expense, decide what they want to give their work staff the following year, and allocate “x” dollars across the board for each individual to apply for a policy?

    If more young folks by cheap plans and the sick folks by pricey ones, the amount employers will contribute to support workers per capita might go down.

    Perhaps what I am missing is a firm might lose younger workers if the financials for HC plan support unfavorable? Is that what you mean?

    Brad

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