The future of Medicaid

With the nomination of of Mike Leavitt to the post of Secretary of Health and Human Services, President Bush has sent a clear signal of his intentions to drastically reform the Medicaid system. Leavitt, a former governor of Utah, was instrumental in helping Utah secure a waiver from HHS that enabled the state to make significant changes in its Medicaid program.
These changes represented significant trade-offs, namely funding expanded coverage (adding populations not previously covered by Medicaid) by implementing cost sharing for beneficiaries and cutting some benefits.
Mr. Bush has made it quite clear that he intends to move the nation towards the “ownership society”. In the case of Medicaid, the implication is the states will receive block grants of funds from the federal government, funds that they will have significant discretion in regards to how they spend them. According to the LA Times, “In the past, the administration has proposed capping the federal share of Medicaid, currently about $180 billion a year…Medicare faces pressure to cut payments to hospitals and other providers.”
The net result – states will “own” Medicaid, be free to develop and implement their own programs, and do so with minimal interference from the feds.
While this sounds great at first blush, even Republican governors have serious concerns. In essence, their concern is that the President is making Medicaid a “defined contribution” program, thereby limiting the federal government’s future expenditures. This is a marked change from the present “defined benefit” form of Medicaid, where the governments (state and federal) are allocate enough funds to cover the benefits provided to qualified individuals’ costs. Remember, the feds took over the provision of health care to the poor in large part because some states were not doing what federal legislators deemed an adequate job.
In addition to his experience as Utah governor, Mr. Leavitt was head of the EPA and got his start as an insurance broker in Utah. Leavitt is known for his political prowess and willingness to stick to the task. While he will be tasked with Medicare reform and other issues, Leavitt will likely start with Medicaid.
This nomination is the clearest possible signal that Medicaid is in for the biggest change in its forty-some years of existence.

Health care blog worth watching

The Piper Report is a health-care oriented blog focused on Medicare, Medicaid, and some employer-based health programs. The author is well-read and well-informed about governmental programs, and seems to be on top of the latest research, with a heavy emphasis on governmental programs pertaining to drug coverage.
For example, Piper’s latest contribution summarizes some of the latest thinking regarding Medicare prescription drug programs.
Other links on Piper’s blog include the National Pharmaceutical Council’s health care cost:quality equation and a prognostication about possible Congressional action on Medicare.
As you travel through the blogosphere, you’ll encounter sites such as Mr. Piper’s that provide a depth of insight into a specific topic unobtainable anywhere else. Kudos to Mr. Piper et al for their willingness to share their perspectives.

Property and Casualty Results

Fitch Ratings has released its’ “final” analysis of the P&C industry’s results for 2003. The report focuses on reserve deficiencies, and while the results look better than those from a year ago, the overall message is troubling.
Here are the highlights and my comments in italics…
–total reserve deficiency at the end of 2003 was between $43 and $61 billion…the industry continues to be unable to predict future costs with any accuracy; this will give investors pause as they consider whether to provide funds to the P&C industry, leading (over the longer term) to capital constraints and therefore a tighter market
–most of this is due to under-reserving in the accident years 1994-2003, with the bulk between 1997 and 2002. historically poor reserving in this period has been due to a failure to predict the rise in health care costs. Many reserves for claims occuring in the late nineties assumed a health care inflation rate of 7-8%, an assumption that continues to drag down financial results, and has even contributed to the demise of several P&C carriers, including Atlantic Mutual.
–asbestos is responsible for between $15 and $25 billion of the total, reflecting the industry’s continued head-in-the-sand approach.
How do we put this in context?
1. The P&C market appears to be softening, with rates for short-tail lines (those where claims are usually reported within a few months of the end of the policy term) falling while longer term lines (liability, Workers’ Comp) leveling off or declining somewhat. This softening cannot continue if carriers are going to add to reserves – without higher premiums to make up the deficit, the reserve deficiency will continue to hang over the market.
2. Health care costs receive barely a mention in the Fitch report. Health care costs are the primary driver of most claims, and this lack of attention on the part of a premier rating agency and industry expert does not bode well for the industry as a whole – if they do not know what is causing the problem, they will not be able to address it. And the industry has not demonstrated ANY awareness of or commitment to addressing rising medical costs, even as trend rates in P&C exceed 12%.
3. Asbestos, asbestos, asbestos – the word that brings chills to the executive suite at many an insurer. Some carriers have “bitten the bullet”, while others seem to be adopting a “hope and pray” approach to dealing with their reserving problem. That approach, especially when viewed in the context of the softening market, will likely mean additional financial struggles for some P&C carriers and reinsurers.

PC Industry Profits in 2004

Best’s has released their latest report on the profitability of the Property and Casualty insurance industry. The net is 2004 has been a very good year, despite the large number of catastrophic events most notable of which were the four hurricanes that devastated the southeastern US.
The industry appears to have been profitable on an underwriting basis to the tune of over $4 billion for the nine months ended 9/30/04. This is a very strong performance, as the industry typically loses money on an underwriting basis, relying on investment income (from investing premiums in debt and equity instruments) to deliver profits.
If not for the estimated $20.5 billion in covered losses from the hurricanes (most of which was incurred by US insurers), 2004 would have been a stupendously profitable year. But, as one wag put it, that’s why they call it insurance.
This silver cloud has a grey lining. Historically, senior management in the P&C industry has a pathologic aversion to profits, which they demonstrate by cutting premiums and writing lots of bad business whenever they start to make lots of money. Expect this condition to perpetuate itself in the new year. In fact, Best points out that it may already have started…
“(the) industry’s operating performance measured by return on revenue improved to a healthy 10.3 percent as of nine-month 2004 results, up from 8 percent in the comparable 2003 period. However, operating results moderated from the 13.8 percent return on revenue reported for the first six months of 2004 due to reduced underwriting income…”

WC pharma costs

HSA will be conducting the second Annual Survey of Prescription Drug Management in Workers’ Comp.
For those unfamiliar with this issue, here are a few factoids.
– Pharma costs are the fastest growing component of WC medical expense
– Pharma costs are now 12% of total WC medical dollars, up from less than 4% ten years ago.
– Last year’s survey indicated most payers were searching for answers, and most vendors were not supplying the answers payers wanted.
HSA conducted the first survey on drug costs in workers’ comp last year.

The myth of drug reimportation

The panacea that is drug reimportation is finally getting its due. I’ve been wondering what the big hoopla is regarding “cheap” drugs from Canada and other foriegn nations. Sure, the Canadians and other countries use their monopolistic buying power to negotiate cheap prices from drug manufacturers, and some American consumers may be able to save significant dollars (barring a more significant decline of the US$) by piggybacking on those nations’ smart buying.
But on the whole, buying drugs from Canada is NOT an answer to the US drug cost inflation problem.
A just-published HHS study on the reimportation of drugs demonstrates that this “strategy” provides negligible savings.
Leaving aside the question of how a country that consumes 2% of the world’s pharmaceuticals can supply a nation that consumes over 50%, the real implication is clear – reimporting drugs is no solution. While it may be politically expedient, it is merely allowing US consumers to use the leverage of the Canadian government to buy drugs at a marginally lower cost.
Interestingly, the same US politicians that bought into the (at the time politically attractive) Medicare Drug bill also included provisions prohibiting the US government from negotiating with drug manufacturers. Thus, the politicians refused to allow the US government to employ the same “price lowering” tactics used by the Canadians, tactics that were delivering prices so attractive to voters that these politicians were in favor of allowing drug reimportation.
Have your cake, eat it too, and don’t get fat. Or in this case, please the big pharmas, protect the little guy, and thus preserve both campaign donations and votes. What a great country.
An excellent summary of the issues surrounding drug reimportation is provided by California HealthLine.

Prescription drug safety concerns

A recent post on the HealthBeat blog concerns a 2002 survey of employees of the US FDA. The survey indicates many FDA scientists are concerned about drug safety after approved drugs were on the market.
The study found that fully 2/3 of FDA scientists “lack confidence in the agency’s process for ensuring drug safety…(and) Nearly one in five said they had been pressured to approve or recommend approval for a drug despite safety and quality reservations.”
Other findings addressed drug labeling concerns:
“Only 12% of scientists were completely confident that FDA “labeling decisions adequately address key safety concerns” while 30% were not at all or only somewhat confident”
and perhaps most troubling, internal political pressure to approve new medications:
“Nearly one in five scientists (18%) said that they “have been pressured to approve or recommend approval” for a drug “despite reservations about the safety, efficacy or quality of the drug.”
The full study, conducted by the Office of the Inspector General of DHHS, reports on potentially dangerous gaps in the approval and marketing of prescription drugs.
As pressure grows on the FDA in the wake of the Cox-2 fiasco (Vioxx and Celebrex to the layperson), it is likely this survey will get increased attention.
Of note, the present head of CMS (Center for Medicare and Medicaid Services, Dr. Mark McClellan, was formerly the Commissioner of the FDA.
McClellan was Commissioner from 11/2002 to 3/2004, so his tenure post-dated the survey.

FDA improvements

The HealthLawProf blog has an interesting post about the need for the FDA to set up an independent testing arm. The post opines positively about this idea and makes a solid case.
The blog cites a NYT article, and provides a good synopsis (brief and to the point).

Coventry – First Health deal passes key test

Coventry’s pending acquisition of First Health passed a key milestone with the Feds’ approval of the merger. This is now a “done deal”, not that there was much doubt it was going to happen.
News from sources familiar with First Health indicate that Pat Dills, Lee Dickerson, and Ed Wristen (FH senior leadership) will be departing the organization in the (very) near future. Art Lynch, present head of sales for FH, will remain on board, and will likely assume additional responsibilities.
One interesting tidbit related to this is the pending issues resulting from Coventry’s ability to access HealthNet contracts. Huh? Read on…
FH acquired the WC assets of HealthNet earlier this year. As part of the deal, FH received access to HealthNet’s WC contracts with their providers – this was perhaps the most attractive piece of the deal to FH, which had long been under pressure to improve California network results. Well, sources indicate that the FH-HealthNet contract does NOT include any change in control language, leaving HealthNet contracts (at least in theory) accessible by Coventry.
If these sources are correct, one has to wonder what HealthNet was thinking…rumors had abounded earlier this year about FH’s shaky future.