The discussion of how Americans and their employers pay for increasingly costly health care coverage will likely be stoked by this recent study appearing in the journal Health Affairs that concludes consumer directed health plans — high deductible, catastrophic coverage combined with Health Savings Accounts (HSAs) — could achieve $57.1 billion savings annually if half of non-elderly U.S. population had them. That’s because they operate as true insurance plans, covering medical costs for unexpected, catastrophic events with people paying out of their own pocket for routine care and prescriptions. The study predicts the potential savings of such together with additional incentives in the Patient Protection and Affordable Care Act will encourage their growth.
Widespread adoption of this scheme would return the nation to something akin to the “major medical” coverage model of health insurance that existed in the post World War II period until pre-paid plans such as health maintenance organizations (HMOs) became prevalent starting in the 1970s and 1980s. Their growth created an expectation of no or minimal out of pocket costs for routine care and preventative screenings, leading the study’s authors to caution those in consumer directed health plans may forgo them, potentially leading to higher health care costs over the long term.
The authors also suggest that wider adoption of consumer directed health plans could be disruptive to the traditional health insurance and HMO markets and promote adverse selection in these product lines since healthier people may opt for consumer directed plans since their premiums tend to be lower. A major challenge facing health insurers and plans, however, is setting premiums for consumer directed plans low enough to jibe with consumer expectations of lower, more affordable premiums in exchange for taking on first dollar exposure up to a high deductible limit. Older albeit generally healthy people in the individual market have experienced sticker shock at rates for high deductible plans, deterring them from buying the coverage even though the premium rate reflects the actuarial risk of a catastrophic medical event.
The large group health insurance market is rearranging itself along the lines of medical utilization with those using more medical services opting for managed care HMO plans and those using fewer services opting for lower cost, high deductible PPO and POS plans. Premium rates are adjusting to this higher utilization, with HMO members expected to see a 9.8 percent bump in 2011, the highest rate increase since 2006’s 10 percent hike, according to a report issued this week by Aon Hewitt.
Since HMOs provide richer benefits but at a higher cost, they are preferred by employees who use health care more often and need coverage that is more robust. “Having a higher mix of these plan participants in HMO plans raises the risk pool, which can drive costs higher,” Aon Hewitt notes. In other words, adverse selection. Once the trend of adverse selection becomes entrenched, the risk pool enters a death spiral of fewer insureds to share costs, requiring big premium increases that speed depopulation of the pool.
Large employers are apparently already feeling those higher prices — and it could ultimately lead to contraction of the large group HMO market, Aon Hewitt warns. “Employers continue to be successful in reducing HMO rate increases by a few percentage points through aggressive negotiations with health plans, changes in plan designs and employee cost sharing,” said Jeff Smith, a principal and leader of Aon Hewitt’s HMO rate analysis project. “Still, these increases have been very difficult for employers to absorb, particularly this year when many companies are focused on economic recovery and complying with health care reform. If HMO rates continue to outpace average health care cost increases, employers may elect to take even more aggressive steps in the coming years, such as eliminating HMO plans altogether.”
This looks like yet another sign of the end of the rich, all inclusive employer provided health coverage of recent decades and a revival of major medical coverage for hospitalizations and other high cost services and not routine or minor ones.
The state Legislative Analyst’s Office has issued a report on how the Patient Protection and Affordable Care Act will affect California, which decades ago was the birthplace of the notion that a superior health care payment scheme is prepaid health maintenance rather than post-care health insurance. The Golden State and more specifically Kaiser Permanente pioneered the health maintenance organization (HMO) as an alternative to indemnity “major medical” insurance designed to cover hospitalizations and other major unforseen health care costs.
The rapid rise in health care costs over the past decade has turned the principle that preventative care costs less than “insured” care on its head. Since about 2003, California HMO premiums have ironically gone up faster than those for indemnity-based catastropic and preferred provider organization (PPO) plans, sending more people into the latter category and paying higher deductibles and cost shares than previously.
The LAO report suggests the HMO’s health maintenance objective has been stymied by a fragmentation of services and a lack of care coordination among providers and treating diseases but not necessarily focusing on improving the overall health of patients. Another cost driver identified in the LAO report is financial incentives that reward the quantity of services provided rather than the quality of that care. Services more accurately described not so much as health maintenance but sick care.
I believe America’s health insurance crisis is fundamentally due to the growing commercialization of health care and pharmaceuticals combined with a post-industrial service economy in which many people spend most of their sleep deprived waking hours commuting to and working at sedentary jobs. Too little time for exercise, sleep and nutritious “slow” food exacts a major toll on the nation’s overall health status. This is a socio-economic problem that no amount of health reform can solve.
The Obama administration and Congress can rightly claim to have made history by enacting health care reform after multiple failed attempts dating back to the administration of Frankin Delano Roosevelt. But unless Americans change how they work and live and value their health, it will be a hollow accomplishment. Health care costs will continue to go up as Americans get older and sicker, less fit and fatter. If current trends continue, by the time most of the reform provisions take effect in 2014, it will become actuarially evident that no system of paying for health care — pre or post reform — can be affordable. The health insurance crisis will be subsumed by a overarching health crisis.