Thursday, May 27, 2010


(This is the second of a series of commentaries on details of the 2010 health care reform legislation.)

Throughout his election campaign and his subsequent efforts to achieve passage of health care reform, President Obama assured Americans that anyone with existing coverage could keep that coverage. Consistent with the president’s promise, Democratic lawmakers worked to include language guaranteeing continuation of coverage in the reform legislation.

They may have been too successful.

Section 1251 of the Patient Protection and Affordable Care Act provides assurances that nothing in the Act requires that an individual terminate existing coverage, excludes many of the provisions of the Act from applying to existing coverage, and goes on to guarantee that existing coverage can be extended to new employees (in a group plan) and additional family members (if allowed by any plan).

On the one hand, these provisions counter some concerns about reform (at least for those who understand them). On the other hand, the grandfathering of existing coverage undermines much of the intent of other parts of PPACA. Grandfathered plans are exempt from each of the following reform requirements (and others):

(1) Elimination of cost-sharing for preventive care
(2) Elimination of annual limits (individual plans only)
(3) Elimination of preexisting condition exclusions (individual plans only)
(4) Provision to consumers of “plain language” plan information
(5) Availability of a standard appeals process
(6) Limitation on premium variations by age and other factors
(7) Guaranteed availability of coverage
(8) Guaranteed renewal of coverage
(9) Prohibition on discrimination based on health status
(10)Provision of comprehensive health care coverage

In other words, grandfathered plans will be able to continue most of the practices that have angered consumers—and discriminated against those most in need of coverage.

There’s another problem, too. In the small group market—and possibly also in the individual market in some states—the effect of grandfathering may be to reduce the diversity of the insurance exchange risk pools. Insurers will be eager to perpetuate their current plans and avoid most of the new regulatory requirements, while employers with younger and healthier employees will want to retain their prior lower-cost coverage, leaving older and sicker groups to migrate to the exchanges, with regulations and rates more favorable to them. The effect in states currently with high numbers of uninsured—and therefore potentially with the most exchange enrollees—may be minimal, but in others the result may be that premiums are higher for plans available through exchanges than for those outside, while many insurers may decide to focus on their present less-regulated business and simply avoid the exchanges.

Wednesday, May 26, 2010


According to, the Obama administration is making a very big push to increase awareness of some of the most attractive aspects of health care reform and ensure that their implementation is a success.

Even though PPACA was structured so that the most politically attractive provisions would come into effect early (starting in 2010), while more controversial (and costly) provisions are mostly delayed until 2014, the public view of reform remains negative.

The administration’s efforts to change public opinion include accelerating the comment process for regulations providing for addition of young adults to parents’ coverage, disseminating information to small businesses about potential breaks on this year’s taxes, and (mostly successfully) pressuring insurers to drop their most egregious rescission practices, and to allow this summer’s college graduates to stay on their parents’ policies even though the corresponding PPACA provision is not effective until September.

With spending on anti-reform advertising currently running at close to twice that of pro-reform, we can probably expect to see even greater efforts by the government to publicize the short-term benefits of reform, especially among seniors who will gain from gradual elimination of the Medicare D “doughnut hole”.

Sunday, May 23, 2010


(This is the first of a series of commentaries on details of the 2010 health care reform legislation.)

The Patient Protection and Affordable Care Act, signed into law by President Obama in March, is in many ways a significant step towards a more equitable health insurance system in the US, potentially making coverage available to millions of the currently uninsured. Unfortunately, health care reform’s political strategy of let’s-just-apply-lots-of-bandaids-to-the-present-broken-system is likely to produce some major disappointments.

Positive changes like assuring coverage for children with preexisting conditions are likely to be overshadowed by others that are equally well-intentioned but fatally flawed—like PPACA’s limits on insurers’ medical loss ratios.

Beginning in 2011, unless medical loss ratios (the percentage of premiums paid out for medical care) are at least 85 percent for large group health plans, and at least 80 percent for small group and individual plans, insurers will be required to offer rebates to enrollees.

Given that the MLRs of the ten largest for-profit health insurers dropped from 95 percent in the early 1990s to around 80 percent today (or, put another way, administrative expenses, overhead and profit jumped fourfold from 5 percent of premium to 20 percent in just over 15 years), it’s easy to see why this provision seemed so attractive to its principal backer, Senator Jay Rockefeller.

Unfortunately, as with other reform issues, the politicians’ understanding is proving incomplete. Two weeks after enactment of PPACA, the Federal Register invited comments on how the new MLR requirement should actually be interpreted. The 70-page response (including appendices) from the National Association of Insurance Commissioners demonstrates just how complicated the issue really is. (A separate response from AHIP, the insurers’ lobbying group, argues for treatment of almost anything that reduces medical expense as part of the MLR “medical care” numerator.)

PPACA’s (imprecise) MLR definition is quite different from that currently used by state insurance regulators, but NAIC does estimate that most large and small group health plans will meet the new requirement, thanks to the exclusion of state and federal taxes from non-medical costs (and implicitly assuming that the impact on MLRs of the currently uninsured will not be significant). In other words, most group plans are likely to be unaffected—and if AHIP is at all successful, may even be tempted to increase their profit percentages while boasting compliance with the PPACA limits.

Individual plans present a very different case, and one where the political cure may be much worse than the disease. NAIC comments “Some issuers would likely have aggregate MLRs below 80% in at least some states even after the adjustments...” The reasons for individual plans’ possible MLR problems include the higher administrative costs of such plans, the typically more restricted benefits (thereby reducing medical care costs relative to non-medical costs), and greater year-to-year volatility. So, are plans with MLRs below the 80 percent threshold going to pay rebates to enrollees or, alternatively, slash administrative costs or profit?

Probably not. No insurer will want to pay rebates, not only for the obvious reason of not wanting to see dollars going out the door, but because this will be perceived by consumers as a signal that premiums are too high. Equally, cutting profit for investor-owned plans will cut share value, something that insurance executives with stock options will certainly resist. Administrative costs could be cut by reducing care management and fraud detection efforts (assuming AHIP fails in its lobbying to include these as medical expenses), but doing so would simply increase the costs of care—and premiums.

Insurers are going to be left with a couple of strategies. One is to increase both benefits and premiums in order to reduce the impact on the MLR percentage of non-medical costs, an actuarially risky approach that could result in plans attractive only to high utilizers. The other is simply to withdraw from the individual market—one that plans like American National Insurance are already starting to choose.

It’s easy to criticize the shareholder profits and CEO incomes of investor-owned insurers (and the inefficiencies of some of their non-profit competitors), but this kind of political micromanagement isn’t the answer. While there is certainly a case for consumers knowing how their premium dollars are being spent, legislating expense ratios—rather than encouraging effective market competition—is more likely to lead to loss of coverage than to lower premiums.


Health Care REFORM UPDATE came to a screeching halt late last fall when I left for a trip to Southeast Asia, and discovered just how difficult posting comments on reform bills could be from small towns in Laos and the mountains of northern Vietnam.

By the time I returned, in December, it was clear that the details of reform legislation were not going to be influenced by anything other than political expediency.

Now, we have reform legislation (although no regulations as yet), and it’s time to look at how its implementation may work—and maybe, influence the regulatory process. Over the next several weeks Health Care REFORM UPDATE will provide a series of commentaries on details of the legislation, along with news relating to implementation of the new law.