Wednesday, December 29, 2010


HHS has now released its final set of draft regulations for provisions of the Affordable Care Act scheduled to go into effect early in 2011. This last regulatory publication—actually a “notice of proposed rulemaking” inviting comments prior to implementation—provides proposed rules for disclosure and justification of “unreasonable” premium increases.

The proposed “confess and explain” regulation requires insurers to publicly disclose rate increases in the individual or small group markets of ten percent or more in 2011, or above individual state-by-state thresholds starting in 2012. The thresholds will be set by HHS, presumably in conjunction with the states.

Although the proposed rules require review either by HHS or, if a state has an “effective rate review system,” by the state, no authority is provided for the rejection or modification of rate increases. Apparently, the Congressional drafters of the ACA language—which the proposed rule generally follows—felt that the threat of a premium increase being called unreasonable would have an adequate sentinel effect. However, insurers who show a “pattern or practice of excessive or unjustified premium increases” can also be excluded from insurance exchange participation.

In summary, the process proposed by HHS would require insurers requesting premium increases exceeding the thresholds to disclose their justification either to the appropriate state regulator or—if HHS has determined that the state does not have an adequate rate review procedure—to HHS itself. If the state (or HHS) then decides that the increase is excessive or unjustified, it is expected to make this decision public, with HHS then posting the determination on its website. The hope, obviously, is that an insurer will want to avoid such negative publicity and will trim or abandon the increase.

Reform advocate Timothy Jost has posted a lengthy critique of the HHS proposal in the Health Affairs Blog. He expresses concern that the rule would not apply to the large group market, that by tying the proposed rule to so-called “products” individual groups could face increases much higher than the nominal thresholds, and that the information that insurers would be required to disclose would be too limited (and could be further limited by recourse to protestations of trade secrets).

In a comment on Jost’s critique, Jeff Goldsmith questions the capability of HHS in evaluating a requested increase—and notes the potentially substantial effort involved—given that it might be driven by risk selection or the actions of monopolistic providers or other factors that may be difficult to determine. Goldsmith comments: “it’s a charter for arbitrary ‘jawboning’ of the industry, not an explicit charter for actually regulating it.”

HHS provides some statistics that help provide an estimate of the amount of effort that insurers, states, and HHS may incur as a result of the proposed rule. Based on HHS’ numbers, it seems likely that somewhere between 500 and 1000 premium increases a year could be subject to the disclosure and review processes, with the number gradually increasing as groups lose their grandfathered status, and with each review requiring hundreds or thousands of man-hours. How many of these reviews might result in insurers trimming their increases is anyone’s guess, but Goldsmith’s expressed preference for market competition over HHS rules may well be justified.

Tuesday, December 21, 2010


Included in the latest Benefits Package blog carnival (see previous post) is a piece from Joe Paduda’s Managed Care Matters, criticizing health plans and their industry groups for their contradictory attitudes to escalating hospital costs and government involvement in the health care system. On the one hand, Paduda comments, health plans are looking for help from the government in controlling health care costs, while on the other hand fighting any government intervention in their own industry. Paduda complains: “health plans have not fulfilled their primary mission – [to] control costs and deliver quality care.”

This produced the scathing comment from one reader to the effect that insurers perceived their mission very differently; it was simply to extract profit from the system.

Therein lies one of the major reasons for the public’s dissatisfaction with the insurance industry. The public believes that insurers exist to control the costs of health care for consumers, while for-profit insurers, like other businesses, believe that their primary responsibility is to their shareholders. This doesn’t mean that insurers don’t try to negotiate affordable provider rates or limit their networks, but it does mean that they are much less hard-nosed than if consumer cost were the only criterion.

Like other businesses, insurers succeed by giving their consumers what they want—and it turns out that for the majority of Americans whose coverage is being paid for in large part by their employers, lower cost is less important than access to the most prestigious hospitals or being able to keep the same providers. Only when employees have to pay significantly more for these benefits do they decide that lower cost is truly important.

If the public really wants insurers to control health care costs more aggressively, there are a couple of options. One is to go beyond the “confess and explain” premium increase provision of the Accountable Care Act to impose absolute limits on increases—a crude tool that fails to consider individual insurer circumstances, and that could prove counter-productive. The other is to eliminate the tax break for employer-paid coverage in order to raise employees’ cost-consciousness—an increasingly popular idea on Capitol Hill but one that would face enormous opposition from unions and from many employers.

Monday, December 20, 2010


The second Benefits Package blog carnival is out, including a piece (on the Virginia individual mandate decision) from Health Care REFORM UPDATE.

With an emphasis on health care and other employee benefits, the Benefits Package carnival includes some interesting pieces from a slightly different viewpoint than other blog collections. Take a look!

Wednesday, December 15, 2010


Notwithstanding the dramatic headlines in the New York Times and elsewhere, no-one should have been surprised by Federal Judge Henry Hudson’s decision this week on the constitutionality of health care reform’s individual mandate.

Judge Hudson ruled against both of the Obama administration’s primary arguments: that the Commerce Clause of the Constitution allows the government to require the purchase of insurance as part of regulating an interstate commerce market, and that imposing a penalty for noncompliance with the mandate is within the government’s taxing authority.

Judge Hudson, described by the NYT as having “a long history in Republican politics in northern Virginia,” had provided enough clues during the hearing and in preliminary opinions that the Obama administration (and the media) must have been expecting the decision he handed down, at least in terms of support for or opposition to the mandate.

While Judge Hudson’s decision must have disappointed reform advocates, whether they expected it or not, it’s important to remember—as administration officials were quick to point out—that two other federal judges had previously issued opinions supporting the mandate. Meanwhile, at least one other federal case is pending, in Florida, with—as in Virginia—the judicial decision being handed down by a Republican appointee who has already expressed skepticism about the government’s arguments.

It’s clear, and without implying strictly partisan thinking to the judges involved, that judicial conservatives are going to find it much more difficult than their moderate or liberal counterparts to stretch the Commerce Clause to allow the mandate.

However, there’s obviously a long and bumpy road ahead for mandate opponents—and proponents—as suits continue to be filed and heard in federal district court, and then in federal appeals court. Lawyers for and against the mandate will be modifying their arguments to reflect the various judges’ opinions—and to try to demonstrate for the appeals courts how they may or may not be in error.

Supreme Court rulings have, over sixty years, stretched interpretation of the Commerce Clause to include decisions such as preventing farmers from growing wheat for their own consumption (since this would mean they didn’t have to buy it, thereby depressing retail prices), and allowing Congressional regulation of the growing of marijuana personal use (since it is a form of economic activity). Such rulings certainly suggest that a ruling in favor of the individual mandate wouldn’t be outlandish. On the other hand, the government may have to work very hard to persuade the present Supreme Court’s conservatives that the non-purchase of insurance by an individual has a measurable impact on the cost of insurance for others.

Finally, it’s important to emphasize that it may be as much as two years before the Supreme Court hears individual mandate arguments (assuming it chooses to hear the case at all) and that the Court’s make-up may have changed by then.

Tuesday, December 14, 2010


It’s amazing how much trouble a couple of hundred inexpensive health insurance policies can cause.

Up until a few weeks ago, few people were aware of the existence of so-called mini-med policies. Marketed primarily by for-profit insurers Aetna and Cigna, they are designed to provide bare-bones coverage to employees of low-wage low-margin service companies. Unlike other approaches to affordable insurance that emphasize catastrophic coverage, mini-meds typically keep premiums affordable (some as low as $15 a week) by imposing very low annual benefit limits, although with no medical underwriting or pre-existing condition provisions and with fairly generous benefits up to the limits.

Mini-meds first hit the news in September, when McDonalds reportedly threatened to stop offering this coverage to its employees in response to Affordable Care Act rules that set annual benefit limits at $750,000—far, far higher than mini-med limits, and potentially turning mini-med coverage into typical high cost insurance.

With insurers and employers reminding the public of President Obama’s campaign promise to allow Americans to retain their existing coverage, HHS Secretary Kathleen Sebelius quickly backed away from the language of ACA. Early in October, HHS announced the granting of one-year waivers of the ACA benefit limit provision for McDonalds and several other employers, a number that has now climbed to more than 200.

The next mini-med problem to find the spotlight was ACA’s medical loss ratio provision, requiring at least an 85 percent MLR for large group coverage, but with mini-meds’ very low benefit payouts relative to administrative costs making the threshold impossible to achieve. Insurers with only a very small percentage of mini-meds might still be able to meet the MLR threshold, but companies with substantial mini-med business would find achieving the 85 percent target impossible.

One reaction to the mini-meds’ difficulties came from Senator Jay Rockefeller, a key backer of the MLR rules. The Senator quickly convened committee hearings on the issue, and was able to hear testimony from a parade of witnesses who had discovered too late that their “affordable coverage” covered almost none of the costs of any serious illness or accident. In contrast, insurer and employer representatives touted the pluses of offering at least a minimal level of coverage to as many as a million workers, until the premium subsidies of ACA are scheduled to become effective in 2014.

Trapped in a kind of Bermuda triangle between the threat of insurers’ abandoning the plans, Senator Rockefeller’s determination to stamp down on them, and the possibility of a million workers losing their insurance—however inadequate—HHS demonstrated some fancy footwork.

In the MLR final interim regulations released at the end of November, HHS included separate rules for mini-meds, essentially allowing insurers to inflate benefit expenditures in computing MLR percentages in order to have a chance of meeting the ACA thresholds.

Then, last week, HHS issued additional transparency rules for mini-meds: insurers must notify consumers if their health care coverage is subject to an annual dollar limit lower than what is required under the law. Specifically, the notice must include the dollar amount of the annual limit along with a description of the plan benefits to which the limit applies. These latest rules also limit new sales of mini-med plans, including restricting such sales only to insurers who already have obtained waivers of the annual limit provision.

Reactions from insurers have been muted, presumably indicating that the industry believes it can live with the new rules, at least until Republican-dominated House committees can further erode HHS’ implementation of ACA.

Friday, November 19, 2010


State governments, like California’s, that are already well into the efforts involved in establishing insurance exchanges meeting ACA requirements, may be starting to worry after the mid-term election results.

With Republican politicians apparently unified in their determination to roll back health care reform, is there a risk that come 2014 there will be neither a statutory requirement nor any funding to support exchanges? Could states’ efforts to build exchanges be in vain?

About-to-be-Speaker Boehner is promising a House bill to repeal ACA early in 2011. It’s likely to pass, but then will almost certainly die in the Senate. In the highly unlikely event of a repeal bill passing the Senate, it will then certainly be vetoed by President Obama.

In the cynical world of politics, of course, having Democrats kill a reform repeal bill is exactly what Republicans are aiming for, so that it’s almost certain that the Boehner bill will be little more than a simple repeal, rather than any attempt to restructure reform in accordance with conservative principles. Having watched the Democrats tie themselves in knots during the 2009 reform debate, no sensible Republican politician will want to risk the same by proposing anything much more specific than a simple rollback.

All of this is part of the prologue to the 2012 election, when Republicans—still playing on public confusion and dissatisfaction with reform—hope to capture the Senate and the White House. And that’s really the big worry for states trying to implement ACA.

President Palin (h-m-m, maybe) will certainly make repeal of ACA a priority. So where does that leave state exchanges, which even under the current reform legislation don’t have to be implemented until 2014, but for which planning and implementation efforts may take three or more years?

One problem that President Palin will face is that, after four years of unrelenting Republican criticism of ACA, people will expect the new administration to have an alternative. And with unrelenting premium increases continuing and perhaps as many as sixty million uninsured, this expectation will be accompanied by considerable public pressure. In other words, a simple rollback of ACA isn’t in the cards.

A second problem for President Palin is that her own party (Republican, not Tea) will be less than unified in their opinions. In fact, some of the pre-ACA proposals for insurance exchanges came from the GOP side of the aisle. This shouldn’t be too surprising, since it was the conservative Heritage Foundation that was an early backer of the exchange concept, while key congressman Paul Ryan is a strong supporter of a voucher approach, something that needs an exchange in order to be effective.

So, will our first female president dump the insurance exchange model along with the parts of reform she really hates? Probably not. Aside from the likelihood of outcries from states who will already have made major investments in their exchanges, it’s a model that could support a conservative rewrite of ACA.

What’s a reasonable conclusion? While there will continue to be plenty of uncertainty about implementation of many details of reform, the states that have already indicated their intent to establish exchanges probably will continue to have federal support. After all, what could be more Republican than effective market competition?

Thursday, November 18, 2010


A combination of commission reports and announcements from individual senators this week points to efforts to think beyond the current provisions of the Affordable Care Act, although with varying motivations.

On the surface, the release of draft recommendations from the co-chairs of the National Commission on Fiscal Responsibility and Reform, set up by President Obama earlier this year, would seem to be the most likely to lead to change. The Commission’s charge is a challenging one: “to identify policies to improve the [nation’s] fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” It’s also one that inevitably includes some emphasis on health care expenditures, especially Medicare and Medicaid.

With the Commission’s final report due on December 1, the co-chairs’ draft might be expected to be both detailed and politically realistic. However, the almost universally negative reaction to the draft from Commission members, politicians, and interest groups, suggests that neither is the case and that the likelihood of a final set of recommendations gaining majority approval is very slim indeed.

For Medicare and Medicaid the co-chairs’ draft might be summarized as “everyone pays a little more, everyone gets a little less.” Medicare and Medicaid cost-sharing would be increased, fraud would be reduced (as usual), adopt tort reform (as usual), expand successful cost containment demonstrations (if there are any), and cap Medicaid long-term care payments (that should improve nursing home conditions), etc, etc.

Meanwhile, elsewhere in the DC swamp, a second commission just released its deficit reduction recommendations. This “unofficial” commission, created by the Bipartisan Policy Center and co-chaired by former Senator Pete Dominici and Alice Rivlin (also, oddly enough, a member of the President’s National Commission) produced much more aggressive recommendations for health care than the “trimming the undergrowth” approach of their cross-town rival.

The BPC commission’s proposals include phasing out the tax exclusion for employer health benefits, hiking Medicare premiums, and gradually moving Medicare to a partial voucher program, and imposing big taxes on sweetened drinks. It’s a package that, were it to be implemented, stands a much better chance of bending the health care cost curve. Implementation, however, seems as unlikely as for the “official” commission co-chairs’ draft, with liberals and conservatives alike already raining objections on the recommendations.

Meanwhile, individual senators are tossing out ideas.

Very-vulnerable-to-defeat-in-2012 Senator Ben Nelson, actually isn’t so much tossing out ideas as soliciting them. He’s desperate to find an alternative to the ACA individual mandate (not a big winner in the Senator’s home state of Nebraska) and has asked the GAO to come up with suggestions. Stay tuned…

One proposal that stands a better chance has come from Senators Ron Wyden (D) and Scott Brown (R). They want to move up to 2014 the possibility of states’ being granted ACA waivers. This is something that vulnerable senators like Ben Nelson (and maybe Scott Brown, too, by 2012) could find very appealing: potentially it offers states the opportunity to try to achieve what reform was intended to do, but without the unpopular ACA. The downside is that passage of the proposal could result in having fifty health care systems with different rules (not to mention the effects of the uncertain future in every state); the upside is that there might be one among them that is effective.

Or maybe, all these ideas will die an early death…

Saturday, November 13, 2010


American businesses spend a lot of time complaining about overregulation, but with the passage of the Affordable Care Act now some eight months in the past, it’s the lack of regulations that is becoming a problem.

The most obvious and urgent area concerns the medical loss ratio provisions of ACA. With just six weeks left before the MLR rules will be imposed on insurers who must decide whether to remain in certain markets, the Secretary of Health and Human Services still has not released final regulations.

It’s not all the fault of HHS. The core definitions and computations of MLRs were entrusted to the National Association of Insurance Commissioners, who initially promised delivery by the end of May, then delayed, and delayed, and delayed, before finally submitting their proposal to HHS in late September. Given the likely impact of the NAIC proposal on some insurers in the individual market (and on their consumers), and the certain Republican response to their problems, it’s not surprising that Secretary Sebelius is hesitating.

HHS has already backpedaled on MLR rules for mini-med policies like those offered to McDonalds’ employees, and supposedly is now trying to craft “special rules” for calculating these plans’ administrative costs for MLR purposes, presumably in an effort to allow them to pass the ACA ratio test. The trouble is, creating special rules for the plans that would otherwise fail the MLR test by the widest margin opens up a major can of worms. Why not have special rules for more generous plans? Why not have special rules for every type of high-deductible plan? How can the dilemma be solved without rejecting the regulatory language that ACA delegated to the NAIC?

Meanwhile in an another part of the insurance swamp, it’s state governments who may be starting to be anxious about the lack of ACA regulations. Those states, like California and Washington, that are moving fastest towards implementation of insurance exchanges, are about to discover that vague and contradictory language in ACA is going to make policymaking hazardous and IT design of dubious value. Without at least having draft regulations, states will find it hard to make critical policy and procedural decisions. Republican state governors may shed few tears over the problem, but unless the GOP succeeds in rolling back reform, even they may prefer to implement their own exchanges rather than yield to federal control—and that means having regulations sooner, not later.

Wednesday, November 3, 2010


Having pulled off a very big win in the House of Representatives and substantially reduced the Democrats’ majority in the Senate, Republicans are now faced with deciding just what strategy to adopt towards health care reform.

GOP leaders are already promising a bill to repeal reform early in the new session, but with the Senate and the White House in Democratic hands, this is political posturing. Almost certainly there will be a repeal bill offered, and the odds are that it will pass the House, only to die or be vetoed in the following weeks. Given the huge amount of public confusion about the contents of the Affordable Care Act, much of it created by commentators on the right, the best guess is that the Republican bill will be a simple one, intended just to roll back most ACA provisions. The real objective, however, given its certain fate, will be to reemphasize how out of touch Democrats are with the “will of the people.”

More realistically, Republicans will then turn to their alternative strategy, of trying to starve reform of funding by voting against the budget. This is a risky strategy, as Newt Gingrich discovered in the time of the Clinton administration, but with Democrats having just a half-dozen majority in the Senate, it could be one that forces some compromises by the Democrats.

What might such compromises look like? It may be too late for the much-debated medical loss provision to be eliminated, although many Dems would surely be glad to offer this embarrassment up as a sacrifice. Medicare changes are an obvious area, since the program is dependent on the federal budget. Insurance exchanges could also be a victim, perhaps being reduced to a series of demonstrations, for example only in states where governors are actually eager to put them in place. Given the Tea Partiers’ emphasis on slashing expenditures, some of the subsidies and credits in ACA may also see some cutbacks, although neither party’s leaders will want to be accused of taking away individuals’ entitlements. There may also be a few areas, like the opt-out provision for lower-income group plan enrollees, that would simplify ACA without significantly generating political opposition on either side of the aisle. One last possibility, given the Democrats’ small Senate majority, is a revival of some of the features of last year’s bi-partisan Wyden-Bennett bill, like changing the tax treatment of employer premium payments, although the tempting threat to union negotiating power may not be enough to offset other employee and employer concerns.

One area where a compromise will not happen is the individual mandate. The White House will not give on something so fundamental to universal coverage—or so necessary to spread insurance risk and premium dollars—while many Republicans may feel confident that the Supreme Court will find it unconstitutional and be willing to wait for that ruling.

Finally, it’s also possible that Republicans may really not worry too much about repealing reform. With the majority of state houses in GOP hands, and given the inherent difficulties of implementing insurance exchanges and expanding Medicaid, there may be political advantages to waiting for the inevitable problems to start to become apparent in the fall of 2012, just in time for the next presidential election.

Thursday, October 28, 2010


Many weeks after its original target date, the National Association of Insurance Commissioners sent its proposed regulations for computation of medical loss ratios and associated rebates to HHS Secretary Kathleen Sebelius yesterday. Secretary Sebelius must now decide whether or not to accept the proposal (ACA provides no other option) for inclusion in the full set of federal MLR regulations.

The NAIC cover letter forcefully reemphasizes state regulators’ concerns about the MLR provisions: “We continue to have concerns about the potential for unintended consequences arising from the medical loss ratio. As we noted in our letter of October 13th, consumers will not benefit from higher medical loss ratios if the outcome is destabilized insurance markets where consumer choice is limited and the solvency of insurers is undermined. This is of particular concern in the period before guaranteed issue and exchanges are implemented in 2014, as those who lose coverage may be unable to find or afford other coverage.”

The letter goes on to remind Secretary Sebelius of NAIC’s earlier point that state regulators are better able than HHS to determine if waivers are necessary: “We reiterate our request that your Department give deference to the analysis and recommendations of state regulators when determining how the new requirements will be implemented in a destabilized market.”

Finally, the cover letter reiterates NAIC concerns that insurance agents and brokers will be hard hit by the MLR provisions, since their commissions are counted as insurer expenses in the proposed MLR computation, and insurers will presumably be unwilling to cover these costs in future.

Whatever HHS’ response is to the NAIC comments, federal officials and state regulators will have very little time to prepare for their implementation on January 1, 2011, and—if there are further changes— health insurers will have even less time to decide how to respond, including whether to remain in existing markets.


One expectation in the wake of the passage of the Affordable Care Act seven months ago was that it would lead to major changes in the health insurance industry.

Throughout the reform debate, insurers were painted as the “bad guys” of the American health care system, guilty of egregious policy cancelations, huge premium increases, heartless rejections of applications for coverage, and overly generous executive compensation, all in the context of an inefficient and ill-structured industry.

Not surprisingly, insurers became the primary targets of the new law. ACA will prevent insurers from imposing annual and lifetime benefit limits, arbitrarily canceling policies, denying coverage to children with pre-existing conditions, imposing copayments on preventive care, excluding necessary services, and basing premiums on health status or gender. ACA will also force far more open competition though insurance exchanges and limit insurer administrative expenses and profits.

So far, though, in spite of a steady stream of complaints from America’s Health Insurance Plans, the industry lobbying group, there has been little apparent impact on the health insurance industry.

Many insurers have increased premiums to compensate for ACA’s increased benefits, and some have decided to no longer offer “child only” policies, to avoid the risk of accepting children with very costly pre-existing conditions. In terms of the overall market, however, these are very small blips.

There have been a few other blips. Following national publicity over McDonalds’ threat to cancel its min-med employee insurance plan, HHS granted waivers of the annual benefit provision to the burger chain and some thirty other employers. A couple of small insurers have withdrawn from the health insurance market and transferred their policies to larger competitors. And three states have applied to HHS for waivers of the MLR provisions.

Overall, however, there has been a remarkable absence so far of change in the health insurance industry. Given all the potential threats of ACA, why do insurers seem to be in some kind of limbo?

There are three reasons: delay in finalizing medical loss ratio regulations; uncertainty about HHS’ approval of waivers; and the November mid-term election.

ACA’s medical loss ratio provisions offer a huge threat to smaller insurers, especially those specializing in “affordable” high-deductible policies which typically have high administrative expenses relative to benefit costs. The National Association of Insurance Commissioners has finally—after several delays—completed its proposal for MLR computation, but until this is accepted by HHS Secretary Sebelius and incorporated into regulations, insurers will continue to be unsure of its impact.

Secretary Sebelius also must decide how to rule on MLR waiver requests already submitted by a handful of states, and on the larger issue raised by NAIC of how to measure the potential market destabilization that ACA requires to trigger a waiver. Again, this is an issue with huge ramifications for many insurers. A rigid interpretation by HHS of waiver requirements could lead to a wholesale insurer exit from the individual market.

Finally, the November election is seen by insurers as providing the chance to squeeze the Obama administration’s implementation of ACA. With a strong enough showing by Republicans, the insurance industry hope is that threats of a funding cut-off by the new Congress will lead to dilution of many of the more onerous or profit-crippling ACA provisions.

And if insurers don’t get everything they are hoping for? Starting in January 2011, when the new MLR regulations are scheduled to be effective, we can expect to see three things: insurers dumping their small group and individual business, replacing high-deductible policies by more costly coverage with lower limits, and the wave of consolidation in the industry that executives from the largest carriers have been forecasting for several months.

Thursday, October 21, 2010


If anyone ever doubted the extent to which Congressional committees could turn good intentions into a bureaucratic nightmare, they need only to look at PPACA’s premium subsidy provisions and their potential impact on insurance exchanges.

PPACA offers premium and enrollee cost-sharing subsidies for lower-income people not eligible for Medicaid or SCHIP as one of the three key components—along with liberalizing Medicaid income restrictions and requiring everyone to have coverage—of reform’s attempt to solve the affordability problem that’s resulted in fifty million Americans being uninsured.

How will the subsidy process work? It takes up 25 pages of the final reform legislation, so the following is a vastly simplified description. It’s also one that assumes that the final regulations will not deviate significantly from the law itself.

First, anyone wishing to be eligible for a subsidy must submit an application to an exchange. The application must include all information necessary to determine if the applicant is eligible for Medicaid or SCHIP, as well as for the PPACA subsidies. (Massachusetts’ Connector—the prototype exchange—requires a 12-page page form to convey this information.)

Second, the exchange transfers the applicant’s information to the state Medicaid and SCHIP agencies to determine possible eligibility for those programs. If either is the case, and depending whether all or just some family members are affected, the applicant must be notified, and may no longer be eligible for exchange enrollment.

Third, assuming no eligibility for Medicaid or SCHIP, the exchange must determine if the applicant’s income appears to meet PPACA subsidy rules. If not, the applicant must be notified that no subsidy is available.

Fourth, the applicant’s information is forwarded to HHS, which will—in conjunction with the IRS and other federal agencies—verify the submitted information. (The Congressional Budget Office estimates that the cost to the IRS of implementing the eligibility determination, documentation, and verification processes would be between $5 billion and $10 billion over 10 years.)

Fifth, HHS will notify the exchange of the results of verifying the submitted information. The exchange must then notify the applicant, including whether any discrepancies were found and must be corrected.

Sixth, assuming the application meets PPACA subsidy rules, the applicant can finally select an insurance plan from the exchange. However, in order to receive a cost-sharing subsidy as well as a premium subsidy, only Silver plan selection is allowed. Thus, lower-cost Bronze plans cannot be chosen by anyone wanting to reduce their out-of-pocket costs. The exchange must also notify the applicant of the reduced premium amount and the impact of any reduced cost-sharing.

Seventh, the exchange must notify HHS of the applicant’s choice of plan.

Eighth, HHS must notify the Treasury Department, which will then make the monthly premium subsidy and reduced cost-sharing payments to the selected insurer.

Of course, the above describes the most straightforward situation in which a well-organized individual applies for subsidies well ahead of the start of coverage deadline, during an annual open enrollment period, with timely and accurate communication among the various agencies involved.

Unfortunately, there are likely to be many cases when a subsidy application is incomplete or inaccurate, or when it is submitted only just before a deadline, or when information supposed to be forwarded from one agency to another goes astray, or when an individual moves from one state to another in mid-year, or when any of the myriad of other problems occur associated with 11 million people (CBO’s premium subsidy population estimate for 2015) encountering a new government program on January 1, 2014, the same date that an estimated 15 million others will become newly eligible for Medicaid or SCHIP, with every one of these 26 million individuals’ applications being processed by the same state agencies.

Could it be that reform’s attempt to solve American’s health care problems by applying a giant Band-Aid to the existing system is going to lead to an even more incomprehensible muddle?

Monday, October 18, 2010


Massachusetts’ Connector, operational since 2006, is the prototype for PPACA’s insurance exchanges. Connector boosters have claimed it is a vital and successful part of Massachusetts’ health care reform; its critics have noted its failure to influence either benefit or administrative costs or to attract significant enrollment. However, whether success or failure, the Connector offers lessons for other states.


As Massachusetts discovered, it’s impossible for the exchange to influence premium rates without a significant share of the small group and individual markets. Massachusetts succeeded with its subsidized plans, where it was the dominant purchaser, but not with its unsubsidized plans. Insurers will see no reason to risk cannibalizing their non-exchange business by offering especially competitive rates within the exchange if the potential enrollment is too low to be attractive.

Low enrollment also means high per capita administrative costs. Implementation expenses ($25 million for the Connector) will be politically unacceptable unless substantial enrollment can be guaranteed, while ongoing operating costs spread over too few enrollees could make the exchange noncompetitive with non-exchange offerings—resulting in even lower enrollment.

Massachusetts attempted to make individual coverage less costly (and therefore more attractive) by combining individual and small group markets. This creates a larger enrollee risk pool, and greater per plan enrollment, but results in higher small group rates.

PPACA exchanges should gain from being the only sources for those receiving premium subsidies, with subsidized and unsubsidized enrollees expected to choose from the same menus of plans (unlike the Connector). However, competition from non-exchange plans may be significant since PPACA puts few limits on such offerings, other than to require that premiums be the same if the identical plan is offered through the exchange, and to require that exchange and non-exchange enrollees be part of the same risk pool.


To maximize enrollment, exchanges must compete successfully with individual insurers. To overcome the government agency stigma, exchange enrollment processes must be exceptionally well-designed to attract potential enrollees (and supported by advertising), be easy to navigate (while providing the information needed by enrollees), and fast (so enrollees don’t quit before enrollment is completed).

Massachusetts’ Connector website provides a good model for plan selection and enrollment by non-subsidized individuals, but could require considerable modification for a state with more plans, and to attract small employers (few of whom have chosen to use the Connector).

PPACA’s subsidized enrollees will present problems because of the need to review income and other details. Exchanges will have an effective monopoly of this group, but enrollment will be a two-step procedure, as in Massachusetts, separated by a—possibly lengthy—state and federal subsidy determination process.


Massachusetts’ Connector (and also California’s 1.3 million enrollee CalPERS public employees exchange) shows that people tend to choose lower cost options IF they can easily compare premiums and benefits. Such comparisons are essential to controlling the costs of coverage and—eventually—medical care.

The Connector (and also CalPERS) offers limited menus of plans, with benefits defined by the exchanges. This reduces the complexity of plan choice and—in theory—means that enrollment isn’t spread so thin that it becomes insignificant to individual plans.

PPACA exchanges may encounter pressure to include the products of every licensed insurer in the state or region, and to allow variations from standard benefits. Insurers may also attempt to cherry pick outside the exchanges by offering products aimed at the best risks, while trying to finesse PPACA’s risk-pooling provisions. Allowing such flexibility would undermine any potential that exchanges have for controlling health care costs.


Massachusetts took an activist approach to exchange operation, including specifying allowed coverage options and providing a website that readily allows price comparison. Similarly, CalPERS has worked closely with insurers to provide affordable and comparable options. (In contrast, Utah’s so-called exchange offers little more than would be provided by a Google search on “health insurance.”)

PPACA gives exchanges a lengthy list of responsibilities, including requiring that an exchange provide “standardized comparative information on plans,” and that it assign a “quality and price rating.” However, the law is silent on key issues like the exchange’s ability to determine which insurers and which products are to be included, or exactly how they are to be compared, or whether restrictions could be imposed on competition between exchange and non-exchange products.

Without a strong activist approach, exchanges will provide no incentive for insurers to control their own costs or the costs of their contracted providers—and their success will still be dependent on meeting enrollment and price competition goals.


Having a-l-m-o-s-t completed the final draft of the medical loss ratio calculation rules for approval by the Department of Human Services (a responsibility delegated by PPACA), the National Association of Insurance Commissioners is now pressing for a more generous waiver policy for the individual market than envisioned by Senate proponents of the MLR requirements.

In an October 13 letter to HHS Secretary Kathleen Sebelius, NAIC officers ask that HHS “give deference to” state regulators’ determinations of whether imposition of the MLR and rebate provisions would destabilize individual markets.” The letter lists a series of factors that state regulators would consider, including possible impact on insurer solvency and the ability of policyholders to find alternate coverage if waivers were not granted. In other words, the NAIC is requesting that HHS grant waivers to states with a minimum of argument. As the letter says, “State regulators are most familiar with local health care and health insurance markets.”

The NAIC letter emphasizes the importance of a smooth transition to fully implemented reform, and points out that while the MLR provision is scheduled for 2011, the major components of PPACA will not be effective until 2014. (The letter fails to note that, starting in 2014, the MLR calculation must be based on a 3-year rolling average, so that even with waivers prior to 2014 it may be impossible for insurers to meet the 80 percent individual market threshold in 2014.)

The underlying threat, of course, is that unless state regulators’ requests for waivers are granted, HHS will become the whipping boy for every individual policy that is canceled, and for every departure of an insurer from a state market. Democratic insurance commissioners may not complain too loudly, but the Republican majority certainly will.

What is Secretary Sebelius likely to do? Given the rapidity with which HHS folded in the face of concerns about mini-med policies, it’s a reasonable bet that the final federal regulations will require HHS to consider state regulators’ determinations, at least through 2014. It’s also likely, given that the MLR provisions become effective in just a few weeks, that the waivers already requested (from Iowa, Maine, and South Carolina) will be quickly granted.

Saturday, October 9, 2010


PPACA’s medical ratio loss rules continue to generate problems. Mini-med health plans, providing extremely modest coverage with low premiums, have been in the news this past week, with HHS’ announcement that plans offered by McDonalds and other low-wage employers will receive waivers from PPACA’s annual benefit limit provision to avoid potential termination of these plans. Given the need to maintain insurance market stability (and avoid the politically embarrassing contradiction of President Obama’s campaign promise that anyone with existing coverage could keep that coverage), it’s easy to see why HHS Secretary Kathleen Sebelius granted the waivers. However, the annual limit provision is only one of the mini-med problems.

Mini-med plans also run afoul of PPACA’s medical loss ratio rules. Because administrative costs are high compared with premium, even a highly efficient, non-profit mini-med plan will fall below the MLR thresholds. Again, HHS has indicated that it will allow some form of waiver for mini-meds. However, an MLR waiver faces two obstacles. First, the NAIC draft regulations for MLRs are based on reporting by legal entity, rather than specific product, implying that a waiver would somehow have to exclude mini-med data from the entity’s MLR calculation. Second, insurers marketing conventional high-deductible plans may reasonably argue that they also should be granted waivers—why should HHS waive a plan that offers almost no coverage, but not a plan that offers much more generous coverage (but less than needed to pass the MLR test)?

There is another potential MLR problem, but it’s one that may not be apparent until closer to 2014. Starting in that year, insurance exchanges will offer up to five levels of coverage (Platinum, Gold, Silver, Bronze, and catastrophic. The problem is that, if past exchange experience is any guide, the less expensive coverage levels (Silver and Bronze) will be most popular—and that will mean MLR trouble for insurers offering these levels.

For example, at the Bronze level, and assuming that exchanges will, as in Massachusetts, fund their operations through a premium levy of 4-5 percent, insurers will find it almost impossible to meet the MLR threshold of 80 percent for individual plans. Currently, the most efficient large group plans have MLRs of around 88 percent, indicating non-benefit costs of some $600 for typical single coverage (roughly equivalent to PPACA’s Gold level). With the addition of a 4 percent premium levy, non-benefit costs increase to $800, enough to cause almost all Bronze plans and many Silver plans to fail the MLR test. Only if insurers enroll startlingly large numbers at the Gold level will they be able to avoid the requirement to offer rebates—and that’s unlikely to happen.

Friday, October 8, 2010


Health Care reform supporters won a victory this week in Michigan, when a federal judge in Detroit rejected an attempt to overturn the individual mandate provision of PPACA.

Judge George Steeh ruled that Congress did not exceed its authority in requiring that almost all Americans have health insurance by 2014, or pay a penalty.

The plaintiffs, from the Thomas More Law Center, had argued that the individual mandate violated the Commerce clause of the Constitution in attempting to regulate an “inactivity” (the non-purchase of insurance).

The Judge cited Supreme Court rulings in which the Commerce clause had been extended to the growing of both wheat and marijuana for personal use, finding that such cultivation impacted the larger market, and also noted that the failure of some to purchase insurance inevitably resulted in higher costs for others. Interestingly, he also found that the issue was “ripe” for judicial determination, even though the mandate does not come into force until 2014, apparently accepting the plaintiffs’ argument that they would have to make financial decisions considerably before that time.

While Judge Steeh’s ruling is definitely a victory for reformers, it may be a short-lived one. Similar cases in Florida and Virginia are about to go to trial, possibly with judges less inclined to take a broader view of the extent of the Commerce clause. Ultimately, however, it will be up to the Supreme Court to rule on the individual mandate—and that may be two or more years in the future.

Thursday, October 7, 2010


PPACA's medical loss ratio rules, to be implemented effective January 1, 2011, are causing more current heartburn to insurers and employers than any other aspect of health care reform. Previous REFORM UPDATE posts have discussed some of the issues involved, with new wrinkles becoming apparent almost every week.

The release of draft MLR regulations by the National Association of Insurance Commissioners last week eliminated much of the uncertainty, especially concerning the inclusion or exclusion of federal and state taxes from the MLR computation. With the NAIC drfat in hand, and assuming that it will be accepted by HHS Secretary Kathleen Sebelius, it's become a lot easier for insurers and employers to figure out how they may be affected, and what kind of strategic response is most approriate.

BNA's Pension and Benefits Daily asked REFORM UPDATE Editor Roger Collier to provide a detailed review of the issues facing employers and insurers. It was published on October 6 as a BNA Insight article and is available to BNA subscribers.


Two big steps were taken this week towards creating the insurance exchanges called for by PPACA. The State of California enacted legislation establishing a state health exchange, followed just a couple of days later by the National Association of Insurance Commissioners issuing its draft of a model state statute for insurance exchanges.

California’s new statute was signed into law by Republican Governor Arnold Schwarzenegger in the face of fierce opposition from the Chamber of Commerce, NFIB, and Anthem Blue Cross—but apparently after a nudge from President Obama. The law creates an independent statewide exchange authority, effective January 1, 2011 (but not providing exchange services until 2014), with responsibilities for determining eligibility and enrollment requirements under qualified carriers. The new entity will be headed by a five-member commission.

Opposition to the exchange legislation centered around two issues: funding and authority. Taxpayer and business groups argued against the use of premium levies to fund the exchange, while major insurers (but not Blue Shield or Kaiser) vehemently opposed giving the exchange the power to negotiate benefits and rates and to require that the coverage offered to exchange enrollees also be offered in the general individual market. Other insurers expressed concern that small plans could be effectively shut out of the exchange.

The NAIC draft issued just after the California signing is intended to be a template for state exchange legislation and, accordingly, is far less specific about funding, responsibilities, and authority. It is, however, a useful starting point, especially for states still confused about how to approach PPACA’s exchange provisions. The draft includes clauses covering all essential exchange functions, reflecting the PPACA requirements, together with discussions of how to put various state options into statutory language. States are not required to utilize the NAIC language (like California, they can choose to develop their own statutes), but the NAIC draft clearly is a valuable source.

Wednesday, October 6, 2010


With the passage of insurance exchange legislation in California, and the release of a template for state exchange statutes by the National Association of Insurance Commissioners, many state eyes are turning towards the only existing exchange comparable to that required by PPACA: Massachusetts’ Connector.

The Connector, which offers Commonwealth Care subsidized coverage for those with incomes below 300 percent of FPL but not eligible for Medicaid, and Commonwealth Choice private plans for other families and individuals and small employer groups, has been touted as a major success by current and former Commonwealth officials and many national reform advocates.

But, after four years of operation, just how successful has the Connector really been? Has the Connector simplified health plan choice and enrollment, increased the number of insured, reduced marketing costs, created competition, or driven down premiums? It turns out that the answers are far less positive than the Connector’s boosters have admitted.


For some, at least.

For the 33,000-enrollee unsubsidized Commonwealth Choice program the answer is yes. Health plan selection and enrollment for CommChoice’s seven plans (with six levels of benefits each) is directly available via the Connector website, with simple well-designed screens and navigation, and easy comparison of alternatives. However, in spite of the ease of use, only half of Massachusetts’ post-reform non-subsidized insured have chosen coverage via CommChoice.

For the 155,000-enrollee subsidized Commonwealth Care program, enrollees face enough complications that a 13-page booklet is necessary to guide them through the process. Plan selection and enrollment for CommCare’s five Medicaid managed care plans (with multiple benefit levels depending on income) require applicants to first complete a benefit request form with income and other details; only after eligibility is determined by the state Medicaid agency is plan selection possible, either on-line or, for those without convenient web access, through submission of a paper form. Not only can this be a time-consuming process, but it’s one that is explained on the Connector website in language that may require a higher level of education than many potential applicants possess.


Only marginally, at best.

A few CommChoice enrollees may have purchased coverage as a result of the easy-to-use Connector enrollment procedures, but—given the pressures of the individual mandate and its associated penalties—most would otherwise have bought insurance through brokers or directly from carriers.

CommCare enrollees are even less likely to have acquired coverage because of the Connector’s capabilities. Most CommCare enrollees pay no premiums and presumably would have submitted applications for coverage regardless of the Connector.

Overall, although the Connector provides a useful source of information, most of Massachusetts’ post-reform insured were probably influenced more by media coverage of the individual mandate and other reform details than by the Connector. In fact, neither the media nor the Connector has persuaded all eligibles to become covered. The latest Census Bureau figures show Massachusetts—while having the lowest uninsured rate in the US—still with five percent uninsured, while a 2010 Robert Wood Johnson Foundation study estimates that almost half of these uninsured are eligible for either CommCare or Medicaid.


Probably not.

For CommChoice, the Connector’s costs (funded by a 4.5 percent levy on premiums, roughly equivalent to broker commissions) are additive to health plans’ own administrative costs. Although the plans presumably incur somewhat less enrollment effort as a result of the Connector, the volume of enrollees gained (less than 5 percent of total enrollment) isn’t large enough to influence plan costs significantly.

For CommCare, the Connector’s costs (funded by a 4 percent levy on premiums) also are additive to plans’ administrative costs. However, because the Medicaid managed care plans contracted by CommCare have cost structures that assume enrollment is a state function, plan costs are not affected by use of the Connector.

Connector administration costs to date are actually significantly higher than the premium levy amounts indicate, since initial implementation efforts were funded by a one-time $25 million appropriation.


Only to a limited extent.

The Connector website allows applicants to compare costs of plans with similar benefits—essential for a competitive market. Initially, the Connector allowed choices between “actuarially equivalent” plans, but more recently has switched to offering plans whose benefits are almost identical in order to facilitate price comparison.

For CommChoice, price seems to have played a significant role in plan and benefit choice: most enrollees have chosen the lower Bronze or Silver benefit levels, with less costly plans being most popular. However, with CommChoice enrollees representing fewer than five percent of the individual and small group market, the Connector’s price-comparison capability is unlikely to have influenced overall market competition.

For CommCare, most enrollees pay no premiums so that price comparisons are meaningless. For the remaining CommCare enrollees, premium differences between plans are small and seem not to have been a major influence on plan selection.


Possibly, for the subsidized CommCare plans, but not for CommChoice.

Connector administrators have taken activist roles in attempting to control premium increases, especially for CommCare, rejecting plan proposals until lower rates have been offered. For CommChoice (whose plans are available in the general market), Connector administrators supported the state insurance regulators’ rejection of rate hikes that led to a brief “insurance strike” in the spring of 2010 and ultimately to reduced increases. What is not known for either program is the extent—if any—to which state pressures on individual market premiums may have resulted in cost shifting elsewhere.

Although Connector officials have claimed in Congressional testimony that CommChoice’s creation led to a dramatic drop in non-group premiums, the reality is that this was primarily due to the state’s combining of the small group and individual markets, something that also resulted in premium increases for small groups. The very small CommChoice enrollment is simply too little to influence the overall Massachusetts market (which has the highest health insurance premiums in the nation): the tail does not wag the dog.


In a sense, the very existence of the Connector—a pioneering state effort to offer truly competitive—and easy—health plan selection—represents a success. However, this success is due in part to the factor that undermines the Connector’s effectiveness: the very low enrollment numbers. Establishing the Connector would almost certainly have been much more difficult and faced far stronger opposition if Massachusetts had had more pre-reform uninsured, especially those above the 300 percent FPL level, as will be the case in most other states who must establish PPACA insurance exchanges.

The real value of the Massachusetts experience is likely to prove not to be to the Commonwealth itself, but to other states. Whether they can achieve greater success, and the lessons they can learn from Massachusetts, will be the subjects of a subsequent article.

Saturday, October 2, 2010


Anyone interested in the politically-biased interpretation of numbers should take a few minutes (but not longer) to read a recent post on the otherwise-reputable Health Affairs blog. The post is by Thomas Miller and a young colleague at the conservative American Enterprise Institute, titled “Out-of-Pocket Theory for Health Spending Cutbacks is Clueless.”

Starting with a snide comment about a New York Times article that quotes a study by the prestigious National Bureau of Economic Research on the effects of the recession on medical care usage in different countries, the post goes on to attack the study itself. Miller’s complaint is “the NBER study assumed facts that were not in evidence—that Americans face significantly higher OOP costs for health care than people in other comparable nations. It confused absolute dollar totals (in a larger health economy) with the more decisive “share” of health spending that is paid OOP.” Miller criticizes the NBER study for using OECD nations’ OOP percentages of GDP without adjusting for the much higher share of GDP for health spending in the US, and accuses the NBER authors of “detaching the numerator from the relevant denominator, to make the former look larger compared to another less-related one.”

Who’s clueless here? It seems as if it’s the Health Affairs blog post’s authors who are having the most denominator trouble.

If it’s their intent to show that OOP reductions in the US have less impact on consumers than in nations with “socialized” medicine, perhaps they should have surveyed US users of medical care. If so, they would have discovered that few, if any, Americans evaluate their OOP costs in terms of national spending on health care, any more than they consider the cost of a new automobile in terms of national costs of vehicle production.

And if the Health Affairs blog authors were trying to show that OOP reductions in the US are small in overall terms compared with those in other OECD countries, they have succeeded only in showing that almost any expenditure is small compared with the United States’ bloated health care costs. Using the post authors’ rationale—and their denominator—it seems there’s nothing like out-of-control total spending to make our OOP cutbacks look good (at least, in percentage terms).

Friday, September 24, 2010


Having originally hoped to publish its proposed PPACA medical loss ratio regulations by the end of May, then having slid the date, first to the end of July, then to mid-August, and finally to the “end of summer,” the National Association of Insurance Commissioners released its proposal late yesterday, September 23, the day of the autumn equinox.

Insurers and their lobbyists were quick to complain about the proposed regulations, although they must have been relieved to see that they had succeeded in their goal of getting almost all federal and state taxes and fees excluded from the MLR computation. The NAIC followed a “letter of the law” approach in interpreting the PPACA language exactly as written, rather than accepting the claimed intent of the law’s primary Congressional drafters that only new PPACA-specific taxes and fees should be excluded. The impact of the NAIC interpretation is significant, especially for investor-owned insurers: excluding all taxes but those on investment income will boost their MLRs by some two or three percentage points.

The day before the release of the NAIC’s proposal, three dozen of the state insurance commissioners met with President Obama, HHS Secretary Sebelius, and other administration officials. The key issue: whether the new MLR rules could be gradually phased in, rather than being fully implemented on January 1, 2011. Although PPACA allows the HHS Secretary to grant temporary waivers to states where requiring health plans to meet an 80 percent MLR could result in disruption of the individual market, many NAIC members would prefer much greater flexibility for both the individual and small group markets.

So far, only Maine and Iowa have formally requested waivers of the individual market requirement, but other states are expected to follow. PPACA does not allow for waivers of the 80 percent threshold in the small group market (or the 85 percent threshold in the large group market), and some state commissioners are anticipating that insurers currently offering “affordable” coverage with substantial deductibles and other consumer contributions may be forced to drop such policies (which typically result in lower MLRs) or leave the market altogether, leading their policyholders with higher premiums or problems getting insurance. However, the administration has so far given no indication of such flexibility and clearly is unwilling to start weakening the reform law.

Thursday, September 23, 2010


One of the most significant—and hotly debated—parts of the new health care reform law is scheduled to come into effect on the first day of 2011. It’s one that’s likely to impact insurers, employers, and individual consumers.

The medical loss ratio provision, intended to limit the amount of premium spent on other than medical care, will require large group health plans to spend at least 85 percent of premium on medical care and related health quality efforts, and small group and individual plans to spend at least 80 percent. Plans failing to meet these thresholds will be required to offer rebates to enrollees.

The Senate backers of the MLR requirement, notably Jay Rockefeller and Al Franken, obviously hoped that it would force insurers to be more efficient, and specifically to cut their administrative costs and profit. In the case of some insurers, the Senators are likely to be successful, as I noted in an article by Reed Abelson in today’s New York Times, if only by slashing broker commissions. However, as I also remarked to Reed, in other cases the new rule could lead to policy cancellations or even higher premiums.

While most large group plans are expected to be able to meet the new requirements, many small group and individual plans may have problems. In some small states—for example, Maine—there may be only one insurer (or none) whose MLR is above the PPACA threshold. Small group and individual plans will experience most difficulty for two reasons: higher administrative costs, resulting from higher marketing expense per enrollee, and less generous benefits, resulting from the need to offer affordable policies.

Although the regulations for enforcing the MLR provision have not yet been finalized, insurers are urgently trying to figure out how best to deal with the expected requirements, as reported in the New York Times article. In some cases, especially where plans are already close to the MLR thresholds, insurers are working on staff cuts and other expense reductions such as reducing or eliminating broker payments. However, others are considering either abandoning the market or extensively restructuring their coverage offerings. Restructuring coverage to increase benefits—for example, by lowering deductible limits—will increase a plan’s MLR, but will also increase premiums, hardly likely to be popular in the present economy.

So, the bottom line (for the moment) seems to be that some policyholders will gain from the MLR provision (although the gain may not be readily apparent as medical costs continue to grow), while others will find themselves facing higher premiums or needing to seek other coverage.

And those will be the ones that reform opponents will make sure we read about.

Saturday, September 11, 2010


Hot on the heels of the most recent REFORM UPDATE post comes a series of news items reported by Kaiser Health News. If anyone doubted that (a) insurers would fight back against the coverage requirements of PPACA or (b) that those being regulated will always have the advantage over the regulators, or (c) there’s no free lunch, these items should rapidly dispel the illusion.

The Wall Street Journal reports that several insurers, including Aetna and a number of Blue Cross and Blue Shield plans are asking for premium increases ranging from 1 to 9 percent “to pay for extra benefits required under the [new] law.” The increases apply primarily to small group and individual coverage, with large groups escaping so far, either because their coverage already includes PPACA mandates such as no-co-pay preventive care or because they are shielded by PPACA’s grandfathering provisions. The Los Angeles Times reports larger increases in the California individual market, with HealthNet, Blue Cross, and Blue Shield each gaining approval for up to 16 percent premium hikes.

In Texas, meanwhile, Grand Prairie-based National Health Insurance is telling policyholders it won’t renew individual policies. The Dallas Morning News notes that National Health has been experiencing financial problems for some time, but also manages to suggest that reform is to blame ("The cancellation highlights one way the new law is reshaping the health care landscape in North Texas and elsewhere. Some health economists say more small insurers may soon buckle under the weight of the law's mandates...").

And, finally, in Colorado, it’s reported that five insurers will no longer offer health insurance to children whose parents are not also covered by their plans. The Colorado Independent says: “The insurers say offering child policies made business sense when they could just cover healthy kids but that since federal law now requires them to offer insurance to all kids, including kids with pre-existing medical conditions, they are withdrawing from their child-only plans."

Monday, September 6, 2010


The latest Kaiser Family Foundation poll, conducted in August, shows public support for health care reform falling. After two monthly polls in which reform was viewed increasingly favorably, the new poll shows a sharp decline in public backing for the new law.

Kaiser polls in the first couple of months after enactment of PPACA showed more confusion than clear support or opposition, but by June favorable views gained an edge, with 48 percent supporting reform and 41 percent opposed. The July results continued this trend, with opposition falling to just 35 percent, and support continuing to gain, implying that Obama administration efforts to build support were paying off.

The August poll, then, came as a shock to reform advocates. The percentage of those viewing reform favorably slumped to 43 percent, while the unfavorable number rose to 45 percent. Why? Some part of the change can be attributed to growing disenchantment with the White House and government in general, while anyone whose coverage was renewed during the summer saw premium increases that could readily, if not necessarily accurately, be blamed on reform. At the same time, conservatives maintained a barrage of criticisms that appeared to be more persuasive than reform supporters’ promises that better times were coming (but mostly not until 2014).

Is the downward trend in reform support likely to continue? The positive publicity associated with the $250 Medicare D doughnut hole rebate checks and the ending of most pre-existing condition limits for children has faded, but many individuals will gain from other PPACA provisions being implemented this year. Most annual and lifetime benefit limits will be eliminated, children can be added to their parents’ coverage, preventive care will be available to most without out-of-pocket payments, federally subsidized high-risk pools will be created or expanded, and credits will be available for some small businesses. However, whether this collection of goodies will be enough to reverse the public’s unfavorable view of reform remains to be seen.

While it’s clear that reform provisions implemented in 2010 will benefit many, they will have to be paid for, and those changes without specific federal funding will result in premium increases—something that insurers and reform opponents will be quick to emphasize. For all its opposition to PPACA, the health care industry now has the perfect whipping boy for every escalation in costs and—in conjunction with political conservatives—will make sure reform takes the blame for each dollar of increased premium.

Meanwhile, the really major reform provisions remain in the future, with each carrying its own public relations risk. The potential downside of “health care for all” (or, at least, most) is the threat of penalties for those unwilling to obtain coverage (assuming the coverage mandate is not rejected by the courts). The potential downside of the insurance exchanges is that their implementation will be chaotic, at least in some states. The potential downside of enrolling into Medicaid those who cannot afford insurance is that Medicaid is still viewed by most as a welfare program—and most people don’t want to be on welfare.

For all its positives, PPACA merely redistributes the costs of coverage, meaning inevitably that many people will pay more. And—unless reform advocates can be far more persuasive than they have been so far—it will be these folk who drive the unfavorable public view of reform.

Monday, August 9, 2010


The Committee for Economic Development, one of the less doctrinaire business research groups, recently released a paper that should give health reform advocates (and opponents) some food for thought.

The undated paper, “Health Care in California and National Health Reform,” authored by distinguished health care economist Alain Enthoven and CED’s Joseph Minarik, seems to have been written during the course of the lengthy debate on reform, with editorial updates inserted after passage of PPACA. With an emphasis on CED’s own earlier proposals for reform, rather than on the new law, much of the paper elicits a “but the train’s already left the station” reaction. Nevertheless, the findings, especially some of those embedded in the reports of interviews with major employers, are worth examining.

The scope of the paper is limited to California, with a focus on large employers who offer a range of coverage options. Although California is clearly not a typical state, given its considerable HMO enrollment and per capita health care spending 12 percent below the national average and close to 30 percent below New York and Massachusetts, many of the findings could be extrapolated to other states with large employer groups. Of particular interest in the context of reform, California has the largest existing non-federal employer insurance exchange (CalPERS, the state employee benefit system), and the largest delivery system HMO (Kaiser), both of which have made considerable efforts to make health care more cost-effective.

Perhaps inevitably, given that they would be quoted in a published paper, the employer interviewees expressed satisfaction with their approaches to employee coverage, even while noting their concerns about the continued escalation of health care costs. Also perhaps inevitably, none of the interviews produced any comparative quantification of achievements: for example, employer premium increases versus state averages. The reader must take on trust satisfaction with the managed competition model adopted by CalPERS, the University of California, Wells Fargo, Stanford University and others, although each of these clearly believes that this model is superior to their prior approaches.

Given these limitations, the interviews indicate some significant findings:

1. The largest and most cost-conscious employers interviewed (notably CalPERS and the University of California) have, as remarked above, each settled on versions of the managed competition model, with fixed dollar employer contributions and choice of coverage from among a limited number of competing options.

2. Particularly for the large public and academic employers, the less costly options have been the most popular with employees, in spite of their more limited choice of providers. However, even with less costly options available, many employees choose more expensive (typically PPO) coverage, most likely because of greater flexibility of provider choice or because of existing provider relationships.

3. Activist exchange administration can reduce costs, as CalPERS has demonstrated in pressing their major carrier to create a “value network,” in sponsoring a quasi-ACO, and in weeding out less popular plan options. It is also possible that competing with less costly HMO options forced otherwise more costly plans to lower their rates.

4. While carrier (network-type) HMOs have the advantage of flexibility over delivery system HMOs like Kaiser, they usually suffer from the disadvantage of sharing with PPOs the same physicians, who may be unwilling to change their approach to care (including controlling hospital admissions and drug use) to accommodate the HMO risk structure.

5. In spite of its reputation for innovation in care coordination and IT, Kaiser’s premiums are only marginally lower than those of competing carrier HMOs (and, in one case, are slightly higher) suggesting that attempts in PPACA to simulate features of delivery system HMOs may yield smaller savings than hoped. (It is also possible that Kaiser could reduce its large group premiums further but sees no business reason to do so. On the other hand, especially in CalPERS, which does not risk adjust, Kaiser might be expected to attract healthier—and therefore less costly—enrollees than its competitors.)

6. Hospitals can be key to health plan costs, with the most prestigious (and typically most expensive) often essential to the marketability of an HMO or PPO network. Hospitals have recognized this, with the most aggressive showing unwillingness to negotiate rates and—in the case of the Sutter group—insisting that all hospitals in the chain be included. (In California, physicians have been equally aggressive in stifling competition by such approaches as backing a legal ban on physician hiring by corporations—such as hospitals.)

7. In spite of the apparent success of managed competition in the largest employers interviewed, the California market remains dominated by what the CED paper’s authors call “cost-unconscious demand,” in the form of a single FFS plan or a choice of plans with the employer paying a percentage of the premium (as opposed to a fixed dollar amount).

One question the CED paper suggests is: if a managed competition exchange is the optimum approach, why haven’t large employers successfully grouped together to form their own exchange(s)? While small group exchanges have failed because of adverse selection, large groups should be able to avoid this problem. Possible answers include: unwillingness to cooperate with competitors, preference for self-insurance (avoiding state regulations and mandates), union refusals to modify coverage to fit a larger system, and a desire on the part of human resources executives to control their own benefits.

What does the CED paper imply for PPACA health care reform? Not a lot that’s truly encouraging, beyond the apparent success of the CalPERS exchange model. Exchanges are most efficient with a limited number of options; cost consciousness depends on individual subsidies (if any) being in the form of fixed dollar amounts; anti-monopoly measures may be needed to avoid creation of cost-effective networks being stymied by dominant hospitals or physician groups; and exchange administrators must be activist to minimize costs. Unfortunately, PPACA provides few incentives that might lead to any of these being achieved. Also, discouragingly, the experience of the largest California groups suggests that innovations in payment methodology, care coordination, and IT, expected to be implemented for Medicare and then disseminated through the health care system, may produce only marginal savings.

Tuesday, August 3, 2010


The Commonwealth of Virginia won the first round this week in its challenge to PPACA’s individual mandate provision.

Federal Judge Henry Hudson refused to dismiss the suit by Virginia’s attorney-general that argued that the individual mandate went farther than the Commerce Clause of the US Constitution allows, while also violating the Commonwealth’s own Health Care Freedom Act (passed earlier this year in an attempt to derail health care reform).

The Virginia suit is the first state suit against PPACA provisions to have any kind of judicial ruling, but Judge Hudson’s decision merely allows the suit to proceed, while also having no direct impact on any of the other state suits. Nevertheless, Judge Hudson’s comments indicate considerable sympathy for Virginia’s arguments. “This notion that the government’s authority could include ‘the regulation of a person’s decision not to purchase a product’ was new to the federal courts,” the Judge wrote, and so the state’s protest was “legally viable” and could not be dismissed outright. Judge Hudson also noted that the PPACA mandate provision “literally forges new ground and extends Commerce Clause powers beyond its current high watermark,” and that: “unquestionably, this regulation radically changes the landscape of health insurance coverage in America.”

Opponents of the mandate seized on the judge’s opinion as undermining the new reform law, while reform advocates emphasized that this was no more than a procedural opinion.

As Judge Hudson commented: “While this court’s decision may set the initial judicial course of the case,” he wrote, “it will certainly not be the final word.”

Sunday, August 1, 2010


Recent stories in the New York Times and CQ give some clues about the insurance industry’s efforts to soften the medical loss ratio rules required by PPACA, with estimates of close to 200 comment letters already submitted to the National Association of Insurance Commissioners working groups preparing the draft regulations for HHS.

Insurers are fearful of the PPACA language that would require rebates to enrollees from plans whose MLR falls below 85 percent for large groups and 80 percent for small groups and individual plans, effective January 2011—and with states having the latitude to increase these ratios.

PPACA requires the new regulations to be in place by the end of 2010, but NAIC had hoped to provide their draft to HHS by the end of May. That date continues to slide, first to the end of July, most recently to mid-August, and with individual insurance commissioners (an eclectic mix of elected and appointed Democrats and Republicans) suggesting publication could be later still.

None of this should be surprising. A rigid interpretation of the PPACA language—including in the numerator only medical expenses, reinsurance, and “quality improvement”—could mean the end of many insurance plans. Accordingly, insurance lobbyists have been pressing for the definition of quality improvement to cover not only disease management, care coordination for patients with chronic conditions, 24-hour support for those with chronic conditions, and health and wellness activities, but also claims processing, IT, network development, and fraud detection. So far, given NAIC’s unwillingness to be characterized as a health plan killer, it looks as if all but the last three may be included, and even, possibly, some aspects of fraud detection.

A second set of issues revolves around the definition of a health plan. For example, will an insurer be able to segregate high administrative expense groups into separate “plans,” in order to insulate other business from the possibility of rebates? Complicating the entire process is the PPACA requirement that NAIC consider the “special circumstances of smaller plans, different types of plans, and newer plans.”

Meanwhile, aside from the lobbyists, NAIC is facing political pressures from liberal Democrats eager to see insurers forced to trim their expenses—and profits.

Finally, whatever NAIC recommends, the lobbyists will have an opportunity to continue their efforts in the individual market area next year, trying to take advantage of a PPACA clause that allows HHS to adjust the 80 percent target downward for a state if “the application of the 80 percent minimum standard may destabilize the individual market.”

Pity the elected NAIC commissioners who must go back to their states and justify the final regs.

Friday, July 30, 2010


A couple of states have just released their estimates of the effect of PPACA on state health care expenditures over the next ten years or so. Democratic Maryland sees significant savings for the decade, while Republican Virginia forecasts huge cost increases over the next thirteen years. Is this political bias or just state-to-state differences?

The Baltimore Sun reports that Maryland’s Health Care Coordinating Council estimates that reform will save the state $829 million between now and 2019 and provide coverage to half of those who would otherwise be uninsured. The report also notes that the savings will peak by 2019 and then start to reverse to become expenditure increases.

In contrast, Virginia’s recently filed lawsuit challenging PPACA claims that the commonwealth would incur $1.1 billion in additional Medicaid costs over the 2015-2022 period.

So, is either estimate realistic? Why are they so far apart?

While there may well be some political bias—conscious or unconscious—in the estimates, and especially in the figures accompanying Virginia’s Republican Attorney-General’s lawsuit, there are also reasons why the numbers are very different in spite of the two states being close in population and geography. First, the Maryland forecast includes only “good years,” in terms of federal funding, while the Virginia estimate also includes three ”bad years,” in which additional costs most outweigh increased federal funding. Second, Maryland’s Medicaid program is currently more generous than Virginia’s and will not require the additional expenditures to meet PPACA’s expanded eligibility levels. Third, Maryland’s unique all-payer hospital reimbursement system means that costs will be reduced for Medicaid (and other payers) as the number of uninsured shrinks.

Perhaps more important than whether or not Maryland’s estimates are optimistic or Virginia’s are pessimistic, the comparison points out that health care reform is going to have a significantly greater impact on some states—those with the least generous Medicaid and state-only health care programs—than others.

Sunday, July 25, 2010


One of the less controversial provisions of PPACA is the requirement that preventive services be covered by most health plans, generally with no patient cost sharing, for new and renewed enrollment after September 23, 2010 (the six month anniversary of the signing into law of the new act).

All plans other those grandfathered under PPACA must offer coverage of a list of preventive services based on recommendations from the United States Preventive Services Task Force, the CDC’s Advisory Committee on Immunization Practices, and HHS’ Health Resources and Services Administration.

Although grandfathered plans are excluded from the prevention requirement, many large group plans already cover some preventive services at no cost. As large groups modify their coverage and lose grandfathered status, they will become subject to the prevention provisions.

The interim final regulations just published jointly by HHS and the Departments of Labor and the Treasury are accompanied by a list of expected benefits including improved health from prevention or delayed onset or earlier treatment of disease, lower absenteeism and increased productivity, and lower health care costs due to avoidance of later more expensive treatment.

Also included is an estimate of the impact that the prevention coverage provisions will have on premiums. Not too surprisingly, adding coverage of preventive services with no patient cost sharing is going to result in premium increases. These are likely to be highest for those with individual coverage since these plans typically offer fewer preventive services today, and lowest for large groups which typically already include preventive care.

The average premium increases (due to a combination of increased demand for “free” services and transfer of some coverage costs from patients to insurers) is estimated to be about 1.5 percent, or around $200 a year for family coverage, an amount that reform advocates will likely claim is miniscule and opponents will trumpet as outrageously expensive in the middle of a recession.

Friday, July 23, 2010


Just when we thought it was dead and buried, our old friend the public option has been resurrected by a trio of Democratic congressmen, headed by Representative Pete Stark.

HR 5808, introduced in the House this week with support from some 120 congressmen, would establish a national public health insurance plan to be offered though the new insurance exchanges. This public option would pay providers at rates tied to Medicare, but with physician payments detached from the SGR formula. Providers would not be required to participate in the public plan in order to participate in Medicare.

The CBO estimates that the public option’s premiums would be 5 to 7 percent lower than private plans offered through the exchanges, and that by 2019, some 13 million individuals would be enrolled through exchanges—if the public option were available. The CBO also estimates that while some providers would decline to participate, many would in the expectation that a plan administered by HHS would attract a considerable population of enrollees (and—not mentioned by the CBO—would probably be administered more loosely than a commercial plan). The CBO’s bottom line is a projection of a reduction in federal deficits through 2019 of about $53 billion, due to lower exchange subsidies and increased tax revenues.

So, is there really any life in the public option? Although the positive CBO scoring will give it some appeal, it seems very unlikely that many in Congress—even supporters of reform—will want to revisit the reform battlefield, especially in an election year. (Actually, some Republicans might be delighted to extend the reform debate to include such a socialistic concept.) So, Representative Stark and his fellow liberals will gain a little political traction, but—whatever its merits or otherwise—the public option is likely to quickly find itself returned to the tomb.

Wednesday, July 21, 2010


One thing about a democracy, everyone is entitled to publish their predictions about the future, and on the costs (or savings) of the Patient Protection and Affordable Care Act over the 2010-2019 decade, there are enough to cover the dartboard. Whether any have hit the bull’s-eye is another question.

The two most authoritative darts so far are those of the CBO and CMS’ Office of the Actuary. Each assumes that reform will be implemented exactly as stated in the new law, with no successful legal challenges and with legislated cost reduction targets achieved. The CBO forecast is limited to federal spending, while the OA projections cover both federal and overall national expenditures.

The CBO’s well-publicized (by reform advocates, anyway) dart hit the board immediately prior to passage of PPACA with an estimate of federal savings of $86 billion (excluding advance premiums from the new CLASS long-term care insurance program), or slightly less than one percent of projected federal health care spending.

The OA dart, thrown a month later and applauded by reform opponents as contradicting the CBO forecast, landed on the $289 billion number for increased federal spending (prior to CLASS premium collections), and on $310 billion for increased national health care expenditures.

Other darts have been tossed from the left and right of the board by health care economists, including—from the left—David Cutler, and—from the right—Douglas Holtz-Eakin. Not too surprisingly, their darts hit far apart, with Professor Cutler and his co-authors (of a Commonwealth Fund paper) forecasting federal savings of $400 billion and national spending reductions of some $590 billion, and Holtz-Eakin and his co-author (of a Health Affairs article) projecting increased federal costs of a horrendous $554 billion (possibly along with the end of American civilization).

What are we to make of a dartboard spread of more than a trillion dollars?

Let’s start with the CBO and OA numbers.

Trying to reconcile the two governmental forecasts is impossible without more detail of their respective models, although it is apparent that assumptions about individuals’ coverage choices vary significantly. Even approaches to counting the covered population are different: CBO uses an FTE approach, while OA counts enrollment, so that, for example, dual eligibles are counted under both Medicare and Medicaid, leading to total insured enrollment appearing to exceed the entire US population. One common feature of the two forecasts, however, is the very limited savings each believes will be achieved by health care system “modernization,” such as use of ACOs, more effective IT, new payment approaches, and increased emphasis on quality and effectiveness.

Moving on to the health care economists, the range of scores across our dartboard is truly startling.

Professor Cutler and co-authors Karen Davis and Kristof Stremikis start with CBO’s estimate of federal savings, modify this to include all newly covered individuals’ spending, then adjust the result to reflect their estimates of savings from “modernization” and use of exchanges, to give reductions of $590 billion in national health expenditures and $400 billion in federal spending.

Is this a well-aimed dart, or merely a triumph of hope over experience? Certainly, Cutler et al seem cavalier about costs; in comparing their estimate of spending before adjustments with OA’s $311 billion higher figure, they comment: “$30 billion a year is very small on the scale of health expenditures…” (It’s tempting to ask Professor Cutler for the loan of a quarter; with this casual attitude to money, he’ll probably offer his wallet.) Aside from this modest $311 billion item, the major differences between Cutler et al ‘s numbers and those of the CBO and OA are in savings from exchanges and “modernization.” Cutler et al believe that use of exchanges will reduce average insurer administrative costs by three percent, compared with the CBO’s estimate of just 0.4 percent, and that system “modernization” will trim medical costs by one percent a year, each year after 2014, compared with the CBO and OA projections of close to zero.

Meanwhile, on the right-hand side of the dartboard, Douglas Holtz-Eakin and co-author Michael Ramlet also start with the CBO numbers, but reject almost all federal spending cuts as politically infeasible, then add in $260 billion for health grants and physician reimbursement not mentioned in PPACA, to give their estimate of a monster federal spending hike of $554 billion.

So, who is closest to the bull’s-eye? Of the governmental forecasters, OA has the advantage of more detailed federal spending data, so that its estimates for Medicare and Medicaid may be the more credible. On the other hand, one area where OA diverges most from the CBO numbers—by some $330 billion—is in projected revenue from drug manufacturer fees, hospital insurance taxes, and other provisions, which might be more within CBO’s budgetary forecasting capabilities. Inserting the CBO estimates into the OA forecast would give a net reduction of federal spending of $40 billion—reasonably close to the CBO savings of $89 billion.

In contrast to the conservative approaches of CBO and OA, the economists’ darts seem to have been thrown somewhat wildly. Cutler et al’s projection of exchange administrative savings is surely too high given that two-thirds of those privately insured are in large groups, whose costs will be little affected by the exchanges, while their estimates of savings from “modernization” assume a remarkable degree of provider cooperation in revenue reduction. These optimistic forecasts aren’t infeasible, but they assume a degree of behavioral change by insurers and providers that seems unlikely without a major restructuring of the health care system.

The Holtz-Eakin forecast is as overly pessimistic as Cutler et al’s is optimistic. The contention that virtually every PPACA spending cut will be rejected as politically infeasible seems close to absurd, given both political parties’ promises to cut the deficit. Almost certainly, there will be some yielding to lobbyists, but a more likely effect will be modest shortfalls in savings from, for example, IPAB-recommended payment changes.

The conclusion? While both the CBO and OA darts look to land somewhere close to the target in terms of federal expenditures (except for the difference in revenue estimates), the path to the national spending bull’s-eye is much more uncertain. Some of the reform law’s changes are likely to result in insurer industry consolidation, which could begin to change the balance between providers and insurers and lead to lower medical costs. At the same time, providers’ revenue expectations may—in the face of Medicare cuts—result in further cost shifting to the private sector. Basic economic theory may also play a major part: reform-driven demand will increase much faster than supply, implying further increases in medical prices (as appears to have happened in Massachusetts). And, finally, the individual mandate may be overturned by the courts, undermining much of the foundation of PPACA outside of Medicare and Medicaid.