Blue Cross of California, (owned by Wellpoint) has been talking a good game for a while about creating low cost products to help the uninsured. And they have been making some progress, Now they are taking a real and somewhat controversial step in that they are allowing immigrants without documentation other than that issued by Mexican consulates to sign up for health insurance. That’s a move that will have anti-immigrant groups, of which there are plenty in California, hopping mad–they’ve already thrown a fit over the issuing of driving licenses to illegal/undocumented immigrants in the last days of the Davis administration and Arnie the Governator (a not-too-legal immigrant himself back in the day) has promised to revoke that right. But it’s also a move that actually addresses to some extent the problem of uninsurance in the Hispanic population here, which is currently over 34%.

Here’s the press release.

Over at the Business Word Don Johnson notes that the healt plan sector took a nosedive even though United came out with pretty good numbers and forecasts for better numbers to come. Don and I have both been somewhat bearish on the health insurance sector, it looks like short-selling shills The Street.com are joining us, and I’ll give you three reasons why:

1) United says that medical trend is slowing. “Medical claims during the quarter were $90 million lower than the company had expected, bolstering the bottom line.” Short-term this is good news for the health plans, but over time they usually manage to pass on these costs to their customers. And their best years ever (in the last few) have been when premiums have been going up the fastest. It’s when they are in a price war over premiums that they suffer.

2) Health plans are increasing premiums in a market when employment isn’t growing much, and when more employees and consumers are being made “responsible” for more of the premium. So eventually there’ll be a price effect and fewer people will be signing up, and they’ll be signing up for lower premium plans. Ergo there’ll be relatively less revenue in the future.

3) They have failed in their overall mission to control health care costs, so they don’t deserve to have stock that goes up like a helium balloon. (OK this one is purely emotional on my part!)

However, I have been bearish on health plans since December 2004 and Don has since spring 2003! Looking at this chart of United, you might be wise to not trust our judgement implicitly and do your own DD!

You may recall a while back that I was a tad critical of Aetna for paying Jack Rowe $18 million for his efforts in 2003. They claimed of course that they had to keep his compensation competitive to keep him there. And of course events have proved them right. Why at any moment he’s likely to jump ship to Anthem, who yesterday announced that their CEO Larry Glasscock, in addition to his paltry $3m base salary for 2003, is going to get a $21m cash bonus and another $21m in stock vesting in the next 2 years. If I was Rowe, I’d be dragging the Aetna board back from the ski slopes (or wherever they are) and asking where they put the extra $28m he surely needs to keep him from taking over from Glasscock.

Assuming of course that Glasscock wants to sail off into the sunset rather than hang out in the new and improved Anthem with Len Schaeffer second guessing his every move.

2003 certainly was kind to Aetna which managed to complete its turnaround started in 2001. Back in the mid-1990s Jack Rowe was running Mount Sinai hospital in New York, and making less than $1 million a year. In my earshot he asked Ian Morrison to kindly not refer to hospital CEOs as overpaid facilities managers as Ian (then my boss) was inclined to do at board presentations! When Aetna was sailing to disaster after its US Healthcare merger and was getting killed in the market by underestimating its costs, and being sued by every physician in America, it went looking for a physician-friendly management team. Rowe was the physician executive the board chose to lead them away from the brink of disaster.

Rowe’s strategy was to be friendly to the doctors (and Aetna settled a huge lawsuit with several thousand of them), while figuring out which of Aetna’s client groups were unprofitable (and there were many) and getting rid of as many of those groups as possible. In the midst of that brutal turnaround Aetna actually increased its IT spending so it could get a more accurate read on client profitability and do better, more accurate, and faster underwriting. I recently saw a presentation about the turnaround which showed that before that IT investment they were working off cost data that was over 2 years old and were setting their rates essentially blind to the real costs. The same IT strategy finally integrated the numerous companies it had bought in its 1990s expansion binge, although as Jamie Robinson pointed out in a comprehensive article on the turnaround in the most recent Health Affairs, that essentially meant getting rid of huge books of business at a big loss, including virtually the whole of the Prudential business it had bought in the mid-1990s. Aetna also basically gave up the care management activities that in 1996 it had purchased US Healthcare with the then intention of adopting them system-wide. That HMO of course had the goal of actively managing care delivery at the individual provider level and was in a big way responsible for the backlash against managed care on the east coast.

So it’s another story of a great corporate turnaround, but of course there’s a But. The goal of health insurance companies is supposed to be to deliver increasingly better services at increasingly better price to their clients. While the corporate machinations engineered by Rowe’s team (which included lay-offs, culture change, the IT investment, and keeping a management team focused under conditions of great uncertainty in 2001 and 2002) should be applauded, , I’m not sure anyone’s much better off other than Aetna’s shareholders. For a start, it’s very likely that the several thousand laid-off employees aren’t.

Aetna earned $966.8 million profit in 2003, compared with a $266 million loss in 2001. And for this in 2003 Rowe got paid $18m. Ex-Blue Cross of California President, and current Aetna President, Ron Williams received $9.1 million, plus stock options that could be worth another $4.3 million. So the "risk" they took leaving secure and well paid employment certainly paid off!

However, all Aetna has really done is accurately mine and understand the information on its client base to figure out which client groups among them were better actuarial risks. So at a system level it’s contributed to the increase in health premiums seen over the past few years, both by sticking price increases to its clients and by adding a pool of not-so-good risks to the rest of the market–some of whom probably found themselves unable to get insurance. So either their "greater fool" competitors, or their former clients, or the rest of us taxpayers are footing the bill for those groups that Aetna got rid of. Meanwhile, the taxpayer is paying uninsurance benefits to the employees let go, and the clients who stayed with Aetna didn’t exactly see their premiums go down.

So while this is business turnaround success story, because Aetna gave up attempting to manage care and innovate in the face of medical cost increases, it’s actually set back the role of health insurers as a potential source for progress in the system. And I don’t think Jack Rowe could argue with a straight face that he’s not overpaid any more.

Coda: Rowe is of course by no means alone among unbelievably highly paid health insurance executives in either the private sector, in PBMs and among the non-profit Blues, who have all reaped massive rewards for making their companies profitable mostly by being able to stick price increases to their corporate clients. And their clients in their idiocy or their incompetence seem to feel they have no option but to take it in their necks and then to try to pass it on to their employees. As I’ve said before, this cannot last forever, but it can go on for a while.

Afternote: After writing this I re-read Jamie Robinson’s article and realized that great minds think alike (or I subconciously stole his theme–take your pick!). Jamie wrote in his conclusion:

The implications of its turnaround are less unambiguously positive for the health system as a whole, however. The employment-based health insurance system is proving to be less willing and able to perform the redistributive functions of social insurance in addition to the risk-spreading functions of market insurance. The nation appears unenthusiastic about any prospect of pursuing social insurance through explicit taxes and subsidies, continuing to prefer implicit transfers that do not raise the specter of big government (even as an alternative to big business). In the absence of adequate governmental subsidies for less healthy citizens, however, Aetna’s improved ability to predict and price risk will expose it to obloquy as a failure at social insurance rather than to praise as a success at market insurance. In the health care sector, where no one agrees on the appropriate division of labor between the public and private sectors, no good deed goes unpunished.

You know that health plan margins are too high when you see who the latest entrant into the business is. Yup, Walmart, the 800lb gorilla of brutal discounting is now offering health insurance for small businesses via it’s Sam’s Club. Those providers who’ve been complaining about harsh discounting from aggressive managed care firms haven’t seen anything yet! I can just see America’s hospital and physician and pharma execs waiting for their turn in the "seven-by-ten-foot blue roomlet–one fluorescent light, one table, one photo of Mr. Sam. So, says the buyer in his unfailingly polite manner, how can your company help Wal-Mart?"

I saw a talk yesterday by Mike Parkinson, Chief Medical Officer of Lumenos–one of the leaders in the emerging CDHP movement. Lumenos has around 54 clients with around 100,000 covered lives in its products sold to self-insured employers. Another commenter at the same conference predicted up to 40m Americans (or nearly 25% of the commercial market) would end up in CDHPs.

Parkinson’s opinion is that consumers are connecting the flat line in their salaries with the increases in their health costs, and so are ready to take control of what they’re paying.

How does it work? The average employee health cost for their groups is around $6500 per capita. If an employee signs up for the Lumenos CDHP option they first carve out and cover preventative services. The employer puts somewhere from $2-6,000 per family goes into an HRA (or now an HSA) tax-free for spending on every day health needs (e.g. doc visits and drugs). Then there’s a bridge (or a donut hole) of out-of-pocket costs that the employee must pay before the catastrophic policy cuts in. The bridge tends to be roughly half of what goes into the HSA/HRA.

Lumenos has a fairly sophisticated web interface that gives comparative prices for drugs office visits and procedures. Their results, which apparently include a standard share of sick people based on risk profiles gathered from Health Risk Assessments. So far they are seeing:–12.5% cost reduction compared to prior years–14% increase in preventative visits–18% of reduction overall visits–15% reduction in spending on pharmacy costs–90-95% generic substitution

Even more remarkably, Parkinson said it also caused a big reduction in hospital admissions and hospital days, although he backed away from the 25% reduction in admissions number that he showed. Parkinson stressed over and over that the chronically ill are the ones who need these plans most. In fact they incent people to take health risk assessments, and the consumer can possibly cover their whole "break" by accepting working with a health coach, who’s job is to push the consumer into behaving better, eating better, taking all their meds, etc, etc.

So assuming this is true, what does this mean to a self-insured employer. I did a few back of the envelope calculations. Lets assume that a 1,000-employee company spends $6,000 per employee on health care. 80% of that $6,000,000 goes on 20% of the people. So that’s $24,000 each on those people and $1,500 each on the rest. If the company gives $1,500 each to the employees’ HSA it should more or less balance out. If they give $2,000, then potentially the employer is risking putting $400,000 at risk of "leaving" their pool and being rolled over by the individuals into next years HSA. But, and this appears to be the kicker, if the CDHP can reduce spending inflation by a big amount–i.e. it would have been 14% up but was only 4% instead, then $600,000 is "saved" which effectively pays this back.

Does this mean that the math behind CDHP only works if it really cuts health care costs. It appears so to me. But maybe it will work.

If it doesn’t contain costs, then there are some obvious next steps

1) Employers will reduce the amount put into the HSAs, potentially down to close to zero and put the onus on employees to put their rather than "their company’s" money into it2) Increasing the "bridge" amount that has to be paid after the HSA amount expires before the catastrophic coverage kicks in.

So if the CDHP really takes off, it had better work, or else it will REALLY turbo-charge cost shifting and maybe even get employers out of the business of insurance totally.

Or maybe I still just don’t understand it!

Apologies for the appalling pun, but HSC is out with a very thorough and readable analysis of the for-profit conversion of many Blues plans, and what the impact of these conversions has been.  They note that virtually all the converted Blues are ending up in one big organization (the new Anthem) and their conclusion pretty much matches my opinion–it doesn’t really make any difference whether the Blues are for-profit or not, they always acted the same way (i.e. like a health insurer!).  But on the other hand the amount of money gained by the states or Foundations that resulted from the conversions is more than enough to exhaustively study all of health care’s problems. It’s just not enough to actually solve any of them.

OK the headline is bogus, but sometimes I should believe myself. Not too long ago I posted about health insurance and in the middle of that post I wrote this:

How do health plans make their money?. …..it helps if you are at the top of the underwriting cycle. Sadly for plans we are now somewhere near the top. At least HSC also reports that, in the first half of 2003, health costs only went up 8.3% as opposed to 10% for the last half of 2002. Given that for health plans the last few years have mostly been "cost-plus" actors, there’s slightly less "cost" to "plus" onto.

So my gentle conclusion was the health plan stocks were at the top. Unfortunately I don’t work for Goldman Sachs and so no one noticed. (I know that Don Johnson at The Business Word agrees with me, note what he says about the Wellpoint-Anthem merger, story number 3 in his excellent year end roundup).  However, yesterday (Monday 4th Jan) Matthew Borsch, who does work for Goldman Sachs, figured out that the non-profit Blues were making loads of money and may be pressed to reduce rates next year–a rollback which will create price competition with the for-profit carriers. So the health plan stocks are down heavily, with for example United off 6% and Humana down 7%. And yet again I was too wussy to go short . . . . .

Right.  A little housekeeping. I’ve been under the cosh the last week or so, and you’ll see some evidence of the massive project I’m working on showing up in TCHB over the coming weeks. I can’t tell you exactly what it is but suffice it to say that it concerns looking into the inefficiencies of our "health care system" and, whatever viewpoint you come from, they are legion.

My various contributors in the Crestor/A-Z/Pfizer/Lipitor conversation are all alive and well. I’ll be getting back to that later, but apparently the Industry Veteran agrees with me about Chomsky but thinks that the Lancet /Pfizer relationship is too blatant to be as compromised as the Anonymous Cardiologist has suggested. I’m glad that some of you are enjoying this spontaneous series, and I’m sure that it’s continuing at least to confirm the complexity of the pharma marketing world. And it is complex.

But as Monty Python says: Now for something completely different. If you didn’t know this already, let me confirm it for you–the small group and individual insurance market is in a mess. I know this because as a solo operation I have to shop there. Because of a prior surgery, even though the same affected area is excluded from my first 6 months of coverage as a pre-excluding condition, for a $2,000 deductible and $4,000 max out of pocket, my insurance company wanted to put my rates up 350% over what they first quoted when I tried to buy the policy (when they didnt kno about the surgery). Instead I bought a temporary insurance plan at 30% of the cost (ironically enough from another division of the same company).  But those plans don’t cover people with systemic chronic illnesses, who are SOL.  Even in California I have friends who have been intermittently unemployed long enough that they have outlived COBRA and, due to various ailments, cannot get individual coverage at less than $1,000 a month for an individual. This is a broken market, and now the data is coming in to prove it.

The folks at the Center for Studying Health System Change (HSC) have a new report out in Inquiry on Health and the Cost of Nongroup Insurance. To quote the pres realease:

No shit Sherlock. In fact some analysis last year in Health Affairs from market-apologist Mark Pauly at Wharton, who’s always felt that health care spending grows as it should and damn the consequences, suggested that the small group market worked relatively well–for 80% of the participants.  But "its performance for the remaining 20 percent of low-income or high-risk persons is controversial." To me that’s like saying 80% of Iraqis are happy the US army’s there but 20% are trying to blow our boys’ heads off. Whatever Pauly and the Bush administration may want to say in both cases, it’s with the 20% that we’ve got a problem.

Funnily enough, while market failure continues in the small group market, for the last few years and especially the last year, what’s left of the managed care industry has been making out like bandits. Overall earnings rose 81% and earnings from Medicare went up over 118%.  How do health plans make their money?  It’s the same joke I used to tell in 1995–the easy part of managing care is not insuring sick people.  Oh, and it helps if you are at the top of the underwriting cycle.  Sadly for plans we are now somewhere near the top.  At least HSC also reports that, in the first half of 2003, health costs only went up 8.3%  as opposed to 10% for the last half of 2002. Given that health plans the last few years have mostly been "cost-plus" actors, there’s slightly less "cost" to "plus" onto. Although a poll of health plans earlier this month showed that while costs were slowing, it instead showed that increases were still well into the double digits.

Finally if you really believe (as Robert Prather does–we’ve respectfully butted heads over this issue in DB’s Comments a while back) that the solution for all this mess is to give everyone a HSA and have them spend their own dollars at the doctors, you might consider this. There’s a small problem, as David Durenbeger, former Republican Senator and wise old man of health care, shows–no one in health care has a clue what the actual transaction price for any service should be.

Just to quickly point out that the boost for health plans in the Medicare bill goes into effect next year rather than in 2006, so as the LA Times notes in this article called Medicare Reform May Be a Tonic for HMOs, Pacificare  and the others that have been pulling out of Medicare+Choice may be diving back into it. The list of the other potential segment winners in the Bill is discussed in this wire article from Dow Jones.