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.

Segment Me: Even the Government is telling Health Plans about it

One of the biggest goals of a good product portfolio is a well-segmented product suite. If you're going to offer more than 1 widget, ideally it would appeal to a different type of purchaser that looks for different features. A goat herder who sells goat milk would appeal to more customers if they get chicken and sold eggs rather than getting yaks and selling more yak milk. In case any reader is curious, yaks do make milk and it tends to be higher in fat and creamier. Did you also know that yaks are called "grunting ox" and can climb as high as 20,000 feet? All right, I'll stop. I went over a month without any animal husbandry posts and as you can tell, that was too long.

My insurance company had previously been more rudimentary in its segmentation. We would offer an expensive HMO plan and a cheaper HMO plan and just focus on price. However, there are people who would rather lick an ash tray than join an HMO so that only broadened our appeal by so much. Even the federal government in the form of CMS is getting the idea of segmentation. They recently released a call letter for everyone involved in the private Medicare world that told us as much:

[Private Medicare Plans] must eliminate those Medicare Advantage (MA) and Prescript Drug plans that are substantially duplicative in terms of cost sharing, provider networks, and benefit design, including Part D offerings,” CMS said in the draft letter. “It is expected that the cooperation of private plans in this matter will help beneficiaries to select the MA plan that best suits their needs.”

In other words, don't flood the market with just different versions of the same animal by-product to make it seem like you have a lot of plans to choose from when it's all just the same sausage.

Other industries are farther ahead of health insurance in terms of segments and developing products that match segments. For Medicare, all we have essentially come up with so far is cheap/expensive and limited provider choice (HMO) and lots of provider choice (PPO).

For our individual commercial plans, we're a little better. Just in case you're trying to figure out why I only talk about individual or Medicare plans, it's because that's what I am in charge of. I get to ignore the whole employer group segment. For individual, we use age and figure what kind of benefits or features would each age band would want. We're trying to figure out what consumers value and would pay more money for in terms of plan features. State requirements for certain type of features get in the way but we still have a lot of opportunity. Here are some of the thoughts that we have for segmenting our individual plans:

1. Drugs and who needs them? Prescription drug coverage is a significant cost and for anyone who is not on regular prescriptions, they would not value drug coverage for the price that they would. I see a split by with and without drugs which is kind of how a lot of people view the world. Some things are just better with drugs but I digress.
   


2. Catastrophic coverage? Another significant part of the health plan price or premium is what we call the out of pocket maximum. That is the most that would ever have to pay for health care in a year and it can be anywhere from $2,500 to $10,000. For some, knowing that you won't ever have to pay more than $X is very re-assuring. For some, their only projected health care expenses are a doctor's visit, a bottle of Advil, and a packet of cue tips so this thousands of dollars of out of pocket maximum is meaningless. I do wonder how many people really even look at this.
3. Is is just the message? I wonder if the we'll reach different segments not with new features of insurance plans but more deciding what features we call out. Would we point out that for a $20 copay you can see any number of Ear, Nose, and Throat doctors in order to appeal to the musicians? Do we point out the accident benefit and Emergency Room copay for the extreme sports people? These are all pretty common features of health plans that aren't always obvious unless you look at the details. Do we just need to do a better job of pointing out relative information?

Would any readers let me know what they think would be the most valuable feature of health insurance for them? Or what do you think are some of the largest segments of individual health insurance purchasers?