The Los Angeles Times reports Blue Shield of California is proposing to up individual plan premiums by an average of 12 percent in 2013, the penultimate year heading up to the launch of the California Health Benefit Exchange (Covered California) in 2014. Blue Shield’s rate hike is somewhat lower than California’s individual market share leader, Anthem Blue Cross, which last month informed regulators it would boost 2013 rates between 15 and 18 percent for its plans.
Both payers cite rising medical treatment costs for the rate increases. According to the Times story, Blue Shield is also boosting its reserves to cover claims costs from an expected influx of new customers in 2014, when payers must accept all applicants without medical underwriting and the state’s health benefit exchange will offer income tax credit subsidies to defray premium costs. “It’s a once-in-a-lifetime change in the healthcare market that will bring a lot of volatility, and we need higher reserves for that,” Blue Shield spokeswoman Lindy Wagner told the Times.
In its rate request, Anthem said its medical costs for this segment of the business are increasing nearly 11% and what it actually pays is rising 13.5% after adjusting for its portion after customer deductibles.
With those cost pressures, Anthem said that the profit margin on its individual insurance business in California is less than 1% this year and that it expects to lose money next year even with these proposed rate increases.
In addition to the 18% rate increase for about 630,000 customers, Anthem is seeking a separate rate hike of 15%, on average, for an additional 100,000 policyholders whose plans are regulated by the California Department of Managed Health Care. An agency spokeswoman said it is reviewing Anthem’s proposed rate increase and those of other companies.
Tom Blue, executive director of the Virginia-based American Academy of Private Physicians, has written a thoughtful and insightful analysis of what ails the current system of medical care and payment in the United States.
Blue’s main points:
- Health care is the only sector of the U.S. economy where insurance — fundamentally designed to spread and manage the risk of unexpected, catastrophic, and high cost losses — is used to pay for expected and preventative costs.
- Market forces have been disrupted by the third party payer system and cannot hold down rising medical costs.
- Consumers want health oriented care — what Blue terms as “functional medicine” — but the current third party reimbursement system is out of alignment, incentivizing payment for multiple procedures to treat sickness rather than promote health. As an example, Blue points to how diabetes is treated as a syndrome of discrete symptoms rather than as a condition that requires early, holistic intervention.
- Functional medicine represents the third era of U.S. medical practice. The first was focused on treating and eradicating infectious disease. The second era began in the 1970s and 1980s with the payer-side driven managed care model that Blue asserts can no longer control costs as intended and largely responsible for medical cost inflation that has outpaced annual GDP growth since 1970.
The death spiral of California’s individual health insurance market appears to be speeding up. The market segment — which covers about eight percent of working age Californians — has been plagued by adverse selection as relatively healthy people drop coverage. That in turn forces managed care plans and insurers to boost premiums to make up for the lost dollars when healthier people pull out of the pool and to cover the costs incurred by the less healthy who feel they must keep their coverage in place. Exacerbating the problem, payers attempt to staunch claims with strict medical underwriting guidelines that reject relatively healthy individuals whose premiums could bolster the solvency of the pool. As premiums keep rising, even more people question the value of paying the higher rates. Or can’t afford them even if they want coverage as monthly premiums equal the size of modest home mortgage payments. As the state’s individual market fails, self-employment is becoming synonymous with being medically self-insured.
Take for example, the Libresco family of San Rafael, California, mentioned in this recent Los Angeles Times story on the latest round of rate increases by the state’s largest individual market payer, Anthem Blue Cross:
Last month, Anthem notified Josh Libresco, a 57-year-old marketing researcher in San Rafael, that his family’s monthly premium would increase 29% to $1,636, effective May 1. This is after Anthem raised the deductible for the family of four to $5,900 from $5,000 last fall as well as increasing co-payments for doctor visits and prescription drugs.
“I don’t know how people can afford these increases every year. We are about at our limit,” Libresco said. “Whether it’s 20% or 29%, it’s still an enormous number.”
It’s not hard to see why this family might be inclined to drop its coverage. Especially when they are essentially getting only catastrophic coverage but not at a price they would expect to pay for it.
Health reform seen as unstoppable in California — notwithstanding U.S. Supreme Court ruling on PPACA
While constitutional soundness of the Patient Protection and Affordable Care Act (PPACA) is to be decided this year by the U.S. Supreme Court, health care reform will continue to move along a rapid trajectory of change in California regardless of the high court’s ruling. That’s the view of health care industry panelists at a recent symposium hosted by the Sacramento Business Journal, according to this item from the California HealthCare Foundation’s California Healthline.
Michael Taylor — senior vice president of operations for Dignity Health’s Greater Sacramento-San Joaquin area — said, “We believe we need to drive health care reform whether it’s legislated or not.” He added, “Health care costs are out of control and we need to bend the curve.”
According to the California Healthline item, the panelists agreed reforms must address a shortage of primary care physicians, the need to refocus health care on prevention instead of treatment of preventable conditions, and a transition away from employer-based health coverage to a new model where individuals dictate plan purchases instead of employers. I’ve lately read suggestions by some observers that shift could take the form of a defined contribution health plan.
As Business Law Daily reports, California legislation that would have subjected health insurers and managed care plans to a prior approval rate regulation scheme has been shelved for this year. AB 52 could however be revived in 2012, the second year of the two-year legislative session.
A logical argument can be made that health insurers and managed care plans should be subject to prior approval rate regulation. California’s market for health coverage is an oligopoly in which a handful of big payers control about 90 percent of the market. Given the lack of robust competition, market forces alone aren’t likely to check premiums. But it’s also not clear that placing payers under prior rate approval like the state’s far more competitive property/casualty insurance marketplace would do so either.
Payers would still pass along the relentless rise of medical care costs to policyholders and members. Perhaps not as quickly since regulators would first have to green light premium hikes. But ultimately higher medical costs would be reflected in increased premiums.
Just as the Baby Boom generation drove up auto insurance premiums in the years after its members got their drivers licenses until middle age and they became safer, more experienced drivers, the Boomer generation’s now aging cohorts are placing enormous cost pressures on health insurers and managed care plans. Those demographic forces as well as rising chronic conditions and obesity among later generations cannot be corralled by insurance rate regulation. They can be mitigated by healthier, more balanced lifestyle choices — choices made by individuals and not regulators.