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Saturday, September 11, 2010

Moving Away from a Middle Finger Relationship in Health Reform

During one of the many webinar's on health reform where I was multi-tasking (or looking at youtube videos of water skiing squirrels), there was a presentation on the evolution of the relationship between insurance companies and regulators. The speaker described it as an arm's length relationship that needed to move towards a hand shake or hug for the industry to be more successful. I disagree with this. The relationship is not currently arm's length but rather a middle finger relationship that may involve orifices shortly. The worst part is that the Obama administration has a model in place that could move the insurance industry and regulators to a friendlier position.

Health and Human Services Secretary and prominent middle finger extender, Kathleen Sebelius, fired off a statement last week accusing the insurance industry of blaming health reform for a 1%-9% increase in prices. Sebelius felt the price increase attributed to health reform should only be 2% at the most. The insurance industry pointed out that removing maximums on lifetime benefits, making preventive services like colonoscopies free for everyone, requiring that children under 19 never be denied insurance, and other provisions are not going to make insurance any cheaper and defended their numbers.

Implied was that insurance companies should reduce their profit margins which average 3%. While that is reasonable (and expected given the current viewpoint that the only difference between insurance companies and a horde of pillaging Vikings is that the insurance companies have moderately better personal hygiene), the insurance companies have been losing profit margin with other reform provisions. There are billions in new fees and a requirement that medical expenses be at least 80%-85% of revenues which has taken a few percent off profit margins already. Additionally, the reduction in Medicare Advantage payments will increase the cost that employers and individuals pay for insurance. Medicare Advantage was most of the profit margins for insurance companies the last few years.

Insurance companies are prepare to give the middle finger right back by refusing to participate in the coverage of all children under 19 by not offering individual insurance to any children at all. There has been some movements in that direction and it's increasing in my home state. Individual insurance covers 9% of all Americans and children make up around 1/3 of that group. Therefore, it's a very small line of business and insurance companies are signaling that they may leave it entirely rather than follow the new rules. Individual insurance may stop being sold to any child no matter how sick or how healthy as a result. I was initially surprised at the speed in which insurance companies deployed a nuclear option. However, given the Obama approach towards the industry, it's not like insurance executives were going to be invited to play pick up basketball anytime soon.

The state regulators are in no position to enforce rules as Sebelius has promised they would. In my state, the email around a proposed open enrollment period as a solution to this issue had the subject line, "Please disregard previous email, this is the correct version." If state regulators can't even send the right attachment with a very important email, they are not in a position for this volatile and tricky negotiation.

What makes this situation even more unfortunate is that the Obama administration has a way to avoid all these dueling middle fingers. That way is the much maligned Medicare Advantage program. This is the program that Obama has said doesn't work since it overpays insurance carriers since it pays 15% more than the federal government pays for traditional Medicare.

The private Medicare Advantage program used to be called Medicare + Choice and it paid 5% less than traditional Medicare. Not many insurance companies and only 7% of the seniors participated in it. I listened to a webinar with Tom Scully, former administrator of Medicare, where he explained that they needed to pay insurance plans more for participation. This increased payment did result in 25% of seniors participating and a lot more insurance companies. However, he agreed that 15% more was too much which is why Obama should have cut the payments (despite the impact on employer and individual insurance which I describe above). With the payment cuts, there are quality bonuses that plans can earn for demonstrating good customer service, medical management, and ensuring high quality care. To earn these bonuses, plans have to cover preventive services for free, pay 85% of revenue on medical expenses, and similar requirements as health reform. However, insurance plans are not fighting these provisions because of the Golden Rule. Medicare has all the gold so they make the rules. Insurance plans will be paid more for following these provisions and less if they do not.

This supports a future health insurance model of the government contracting with private insurance plans which is the current Medicare Advantage model. It's the simplest incentive plan in the planet. If the government controlled all payments for health insurance, insurance companies would have to follow the rules. There are no middle fingers given in Medicare Advantage. In fact, Tom Scully's advice for how insurance companies could form a successful relationship with Medicare regulators was:
"Suck up, suck up, and suck up some more. Take a nap, then suck up, suck up, and suck up again. Medicare likes working with good plans and doesn't like working with plans that don't follow the rules."

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