Underlying the enactment of the Patient Protection and Affordable Care Act (PPACA) in 2010 was a fundamental policy choice that rejected the idea of cutting out private “middle man” health plans and insurers in order to make coverage more accessible and affordable by adopting a Canadian-style single payer model in which the government pays all medical bills. Or have a government-run insurance plan compete with private payers — the so called “public option.” The Obama administration rejected these deprivatization schemes as too radical and instead chose to build upon the existing system largely based on working age people and their families having private health coverage paid for by employers.
Two recent surveys by benefit consulting firms Towers Watson and Mercer suggest however the foundations of that system could ironically erode under the PPACA if employers drop their group insurance and managed care plans and opt to have their employees purchase coverage in the individual market. One of the major motivators, this AP article suggests, is the creation of health benefit exchanges designed to make it easier for individuals and families to buy their own coverage.
Given steep medical cost inflation that has rapidly accelerated the cost of covering workers over the past decade, at least some employers see “opting out” of providing health coverage as their cost control “nuclear option” despite the adverse tax implications and penalties they would incur by not covering their employees.
The implications of the Towers Watson and Mercer surveys are controversial and are drawing caveats from administration officials, particularly insofar that the benefit exchanges won’t open for business until January 2014. With more than two years until then, it’s hard to draw any firm conclusions regarding what employers will actually do when the exchanges become operational. But benefits consultants warn that it won’t take many employers to start a trend of opting out as the AP story notes:
Benefits consultants say most companies, especially large employers, will continue to offer coverage because they need to attract and keep workers. But that could change if a competitor drops coverage first.
Michael Turpin, a national practice leader at broker and consultant USI Insurance Services, said one of his clients plans to drop coverage as soon as any competitor does. The client, a major entertainment industry company he declined to identify, will be at a financial disadvantage if it doesn’t.
“In those industries … if somebody makes the first move, the others are going to follow like dominoes,” Turpin said.
If that happens, the PPACA will have the unintended consequence of radically altering the employer-based system of health care coverage in the United States, moving it instead toward one based in individuals purchasing their own coverage.
Los Angeles Times business columnist David Lazarus wrote last week about one of the biggest challenges to making medical care more accessible and affordable: rampant medical cost inflation. It will stoutly challenge the “affordable” part of the Patient Protection and Affordable Care Act (PPACA). Lazurus writes:
It’s a problem that affects all of us. As hospitals jack up prices to get more money from insurance companies, insurers in turn hike premiums for all members to cover their rising expenses. It’s a vicious cycle that exacerbates the unaffordability and inaccessibility of treatment in the United States.
It’s also a phenom that’s not responsive to competitive market forces to hold down the price of medical care and prescription drugs. A competitive market has two elements. One, many buyers and sellers. Two, competitive markets afford ample opportunity for buyers to shop around for the best deal. Most markets for medical care and medications have the first attribute but not the second. People who are sick or injured or facing conditions that threaten the quality of their lives and life itself aren’t inclined to question the cost. Especially when insurers and managed care plans are picking up most of the tab. As prices increase, payers pass through the higher costs to their insureds and plan members.
Of course, that can only go on for so long before premiums become so high they precipitate adverse selection, with healthier people dropping coverage and leaving payers covering sicker, costlier individuals. By requiring everyone to have some form of public or private health coverage, the PPACA hopes to stave off adverse selection and put more dollars in the coffers of insurers and managed care plans to cover those increasing medical and drug costs. However, without some mechanism to hold down the rising price of medical utilization — lowering demand through healthier lifestyles, for example — the PPACA’s insurance mandate may only buy a little time before we’re facing a more widespread health insurance crisis.
Kaiser Health News (KHN) provides a roundup of federal and state options to regulate health insurance premiums. Reading between the lines, however, the story is really about a larger issue: regulatory action to hold down the cost of medical care that underlies the actuarial basis of premiums. Either indirectly by giving insurance regulators more authority to approve or reject filed premium rates or more directly as KHN reports:
Tired of complaints that underlying costs are the problem, but hearing no consensus from the health-care industry on how to solve it, Massachusetts Gov. Deval L. Patrick (D) introduced a broad proposal to overhaul the way health care is paid for. Part of the proposal would allow regulators to reject premium increases if insurers pay hospitals, doctors and others more than a limit set by the state.
Either way, to providers it smells like price controls. In California, that prospect has doctors so alarmed that they’ve allied with their traditional payer adversaries to oppose pending legislation (Assembly Bill 52) that would give the Golden State insurance and managed care plan regulators prior approval authority over health insurance rate filings and allow them to bar the use of rates deemed excessive, inadequate, or unfairly discriminatory.
Massachusetts Gov. Patrick’s concept bears watching and could have national implications insofar as that state’s health care reform served as a template for the federal Patient Protection and Affordable Care Act (PPACA).
The Sacramento-based Center for Health Improvement (CHI) recently hosted an informative seminar on risk adjustment components of the Patient Protection and Affordable Care Act to help health plans and insurers manage and balance medical risk once they must begin accepting all applicants regardless of pre-existing medical conditions starting Jan. 1, 2014. (Background and a webcast of the seminar are available at the CHI webpage.)
Medical underwriting that can make obtaining affordable coverage difficult for many prospective insureds in the individual and small group market segments ends on that date. The framers of the PPACA put in place these risk adjustment mechanisms to ensure balance and stability in the individual and small group insurance marketplace when it arrives. They are intended to avoid adverse selection — when medical claims costs and premiums rise in a self-reinforcing manner and threaten insurers’ ability to spread risk among healthier people, threatening the solvency of the insurance pool — as well as cherry picking. The latter term refers to insurer risk selection aimed at weeding out people who could incur high medical bills and attracting healthier insureds less likely to file costly claims.
The PPACA provides three risk adjustment techniques for health plans and insurers. Two are of limited 3-year duration, intended to ease the transition from medical underwriting to community-based rating during the period of Jan. 1, 2014 to Jan. 1, 2017. They include reinsurance designed to help cover the cost of actuarially unexpected, very high cost claims that could lead to overall higher premiums, and risk corridors. Risk corridors are an equalizing mechanism that subsidizes insurers incurring disproportionally high claims costs and inversely, surcharges those that incur lower than expected claims costs.
The ongoing mainstay risk adjustment mechanism — risk adjustment — also employs a similar redistribution mechanism for insurers and health plans that shifts funds from insurers and plans enrolling low risk insureds to those with more risky, sicker insureds. Risk adjustment employs dollar weighted risk differentials assigned to each insured that take into account that person’s likely medical treatment costs going forward based on their medical diagnoses and conditions.
The American Academy of Actuaries has prepared an excellent primer on the three risk adjustment components of the PPACA.
Panelist John Bertko of the Centers for Medicare & Medicaid Services’ (CMS) and director of special initiatives and pricing for the center for Consumer Information and Insurance Oversight, summed up a key goal of the PPACA’s risk adjustment mechanisms: a means of sharing the growing burden of chronic disease across payers come 2014. It remains to be seen just how great that burden will be in 2014 as the cost of treating chronic, complex diseases such as diabetes and heart disease in an aging population continues to trend upward. While the PPACA’s risk adjustment mechanisms can help allocate these costs across payers, the overall increased cost will ultimately have to be borne by everyone covered by health plans and insurers in the form of higher premiums.