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Tuesday, May 4, 2010

Medicare is Teaching Private Health Plans about Free Market Principles

I never thought that I would write a title about the Center for Medicare and Medicaid Services (CMS) is teaching private health plans about free market principles. I shouldn't be surprised considering how our current president has captured the merchandising opportunity that passing health care legislation presented. My sister bought me a T shirt from Obama's store that immortalized Joe Biden's reference that health care reform is a big f#cking deal. After seeing the Obama store, I don't see how anyone can accuse Obama of being a socialist. That's like accusing Dick Cheny of being nice.

Back to Medicare's venture into capitalism. They recently issued a memo announcing that if a health plan has multiple Medicare Advantage plan designs, there must be a significant difference the total out of pocket costs for a member. Medicare analyzed utilization for 15,000 Medicare members to come up with the significant cost difference at $20 per month between 2 plans that a company offers. Therefore, if a plan has 2 different Medicare Advantage plans (in the same category like both HMO or both PPO), than the member's copays, coinsurance and other costs must have greater than a $20 per month difference.

This is good old fashioned proper product segmentation. Good product design will result in plans that appeal to different segments based on how much they want to spend and the difference in benefit design. If plan sells 2 HMO plans and the only difference is the color of the brochures and $500 in hospital visit copays, that's poor product development. That's like selling cars whose only difference is the size of their spoiler. Or breeding yak whose only difference is whether there fur turns into dread locks (I haven't made an animal husbandry joke in a while). Those are 2 overlapping plans and the insurance company should have the good sense to terminate one of those plans or change it. They appeal to the same segment of customers and offer no significant choice or benefit.

However, private insurance plans have not done that themselves which is why Medicare has stepped in with a good lesson on proper product segmentation. In the early wild west of the Medicare Modernization gold rush, health plans through some plans on the wall just to see what stuck. Some ideas didn't work and it's the private plans fault for not correcting their portfolio on their own.

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