Health care inflation rates are unsustainable. Costs are now growing four times faster than wages, driven primarily by hospital pricing and drug utilization. The average family of four with health insurance now pays over $12,000 in health care related costs each year; their health insurance premiums alone are just under $11,000. The cost of health insurance has forced employers and employees to forgo heath insurance, causing providers to shift costs to their insureds, thereby raising premiums by $922 per family.

I have been speaking with several knowledgeable individuals about these issues, trying to puzzle out when the crisis will reach a point where it will be addressed in a meaningful way. One of the conversations has been with Bob Laszewski, one of the nation's leading experts on health care policy, the insurance markets, cost drivers, and pragmatic approaches to all. In a recent conversation with Bob about health care cost drivers, he pointed out that the "leveling off" of the health care inflation rate is now affecting pricing for health insurance. Indeed, early indications are that large employers and health plans buying reinsurance (insurance to cover unexpectedly high losses from their members) are keeping rate increases somewhat lower than overall trend rates.

How is this happening? Simple, really. The ‘invisible hand" of the market is at work. There is intense competition amongst health plans for market share, share that is harder and more expensive to come by. It is no secret that the equity markets demand growth from the publicly-traded health plans, and the not-for-profits are affected by the twin influences of competitive pricing and a need to maintain share. The growth imperative is coming up against a difficult market reality; with health insurance presently in a near-oligopoly state, the only avenues for growth are:

-- acquisition (getting very expensive to buy revenues),
-- organic growth (also very expensive as it requires under-pricing),
-- diversification into other lines (workers comp is attractive for now, but this will fade quickly as total WC medical expense nationally is under $30 billion, thus market is too small),
-- brand differentiation although the vast majority of health plan marketing is pathetic in comparison to consumer goods (compare Kaiser to Nike…)

The fallout from this dynamic is already being felt. Aetna's purchase of HMS Health, CalPERS' success in keeping increases for HMO plans to under 9%; Coventry's First Health acquisition; the rise in stock prices of mid-tier health plans, and Aetna's expansion into workers comp are all indicators that the market is reacting to present conditions.

We are approaching a period of hyper-competitiveness. Health plans must grow top lines, and will do so by buying other businesses, slashing rates, diversifying, streamlining operations, and cutting costs.

What does this mean for you?

Time to think creatively and not just buy, cut, and pray. Branding may be helpful, but the larger opportunity is to step out of the commodity market of health care and into the "health care as productivity driver" industry.

Posted by Joe Paduda at 8:31 AM | Link to this post

In yet another sign that the group health world is consolidating, Aetna has purchased PPOM, the dominant non-Blues network in Michigan, along with parent company HMS Health. PPOM looks to be the prize of the deal, as it adds a very strong network to Aetna's offerings, while removing PPOM from the target list of Anthem, United, et al.

PPOM has 11% market share (defined as 11% of ALL state residents) in Michigan covered by its more than 27 thousand providers in the state. The network also has about 30,000 additional providers contracted in other Midwestern states.

For Aetna, with a paltry 262,000 insureds in Michigan out of its total population of 14 million, the acquisition opens up a significant market where it was previously virtually unable to compete. The acquisition also strengthens the Hartford, CT-based insurer in Colorado, as it includes the Sloans Lake and Mountain Medical networks.

The usual post-deal press releases indicate the new Aetna companies will continue to operate under their present names, staff will not be affected, etc. Perhaps true over the short term, but highly unlikely over the long. This industry is just too competitive to forgo any expense reduction opportunities.

Notably, two of Aetna's competitors, Humana and MCare, also access PPOM. Although Aetna has said they will continue to provide access to the networks in Michigan to these other entities, one has to wonder how long that will last. Perhaps when Aetna's membership grows enough to justify losing the other payers' access fee revenue...

For work comp payers, PPOM is almost the only game in town in Michigan. With Aetna's workers comp network still struggling to gain traction, one can see a strong push by management to non-renew other WC PPO contracts in an effort to grow the Aetna WC business.

What does this mean for you?

Hold on to your smaller PPO and HMO stock holdings. Someone is bound to come knocking soon. If you are a mid-tier player, sell while you still have some membership left.

Posted by Joe Paduda at 4:55 PM | Link to this post | Comments (1)

On a plane yesterday I engaged in a brief conversation with a professional woman (accountant) working for ING Insurance about health care. An opinionated person, she was quick to tell me that employer-based health care was the only solution and that government based programs were bad due to waste and long waiting lines for treatment.

When I pointed out that Medicare was one of the highest-rated "health plans" in the nation, with administrative expenses significantly lower than any other plan, she stated that the only innovation would come from private insurers, and that the "Clinton plan would have been a disaster". She then proceeded to complain about the one-year waiting lists for surgery in the UK, and about the problems w the pharma reimbursement system in the UK and it's refusal to pay anything for "profits".

Here is a very intelligent, educated, numbers-oriented person who likely votes and contributes and is active, who has some serious misconceptions about health care, and absolutely no appreciation for the trade-offs inherent in health care. As an accountant I would have expected her to argue the cost-benefit of procedures or financing mechanisms, but her arguments were more based on the Health Insurance Assn of America (a now defunct organization)'s famed "Harry and Louise" advertising campaign.

There was no time to engage, and it would not have been productive - her mind was made up. When asked about how to handle the uninsured, she said that doctors should be required to do pro bono work, and then proceeded to complain about socialised medicine. Leaving aside the thought that requiring workers to do something for no compensation via governmental fiat smacks of socialism or communism for that matter, I was amazed at the complete lack of thought given to these obviously firmly-held beliefs.

If this is the kind of voter we have, than we are indeed a long way from addressing the problems inherent in our health care system.

What does this mean for you?

Likely continued frustration...

Posted by Joe Paduda at 10:43 AM | Link to this post | Comments (2)

A conference on Cape Cod this weekend concluded that the US' dependence on employer-sponsored health care is "fundamentally flawed, as it restrains productivity and leaves too many people without health coverage." I could not disagree more.

Before we enter the debate, a few take-aways from the conference. Panelists noted the benefits of employer-sponsorship which include a drive for innovation and purchasing power together with the enormous costs of "de-coupling the employment link" (63% of non-elderly Americans are insured through their employers) make it quite difficult to shift away from the employer-sponsor system.

Sponsored by the Federal Reserve Bank, notables including Alain Enthoven of Stanford, Henry Farber of Princeton, and Henry Aaron of the Brookings Institute all view the link between employment and health insurance as a significant problem, with Enthoven noting "The employment basis of health insurance is hopelessly flawed." Among these flaws are:

1. "companies are not in the business of managing health." They are motivated to produce their particular good or service, and the "responsibility" of providing health coverage is a burden.
2. "Job-based insurance leads to distortions in the labor markets…The availability of health care influences whether people stay in the labor force or stay in particular jobs," Brigitte Madrian, an economist specializing in financial gerontology at the Wharton School of the University of Pennsylvania, said at the conference in Chatham, Massachusetts."
3. "a lack of access to health care for the self-employed "hurts the entrepreneurial spirit."
4. not mentioned but also critical is the decision by many employers and employees to forgo health insurance. This drives employees to seek coverage under Medicaid, increasing the tax burden.

After decrying the problems inherent in our system (of which there are indeed a plethora), the participants appeared to conclude that there is little that can be done to change the financing system due to the infrastructure, tradition, and frictional costs of changing to another system, along with the public's low appetite for government-run programs.

While the panelists may all be erudite, highly intelligent and incredibly well-respected scholars and leaders in this field, they have missed the point entirely.

Health care is the only economic good that has measurable inputs but no attempt to measure the output. Therefore, it is impossible to engage in any meaningful economic debate about health care, for without a consensus on the result, the discussion of how to obtain a result is meaningless.

I continue to be amazed that the national debate on health care misses this fundamental point. And because they do, these experts have come to a fatally flawed conclusion, for effective health care should be measured by its impact on productivity. Functionality is the measurement by which health care should be judged.

And functionality drives productivity, which is of paramount importance to American industry and government. Therefore, the linkage between employment and health insurance is indeed a vital part of our economic success. Unfortunately, few employers have understood this linkage, and fewer still have molded their health insurance programs around this basic precept.

What does this mean for you?

Until and unless these experts, and our nation for that matter, start focusing on the output of health care, the debate is pointless. Always ask your insurer, HMO, or consultant what impact your investment in health care has on productivity. They will look at you blankly, but keep asking.

Posted by Joe Paduda at 7:05 AM | Link to this post | Comments (3)

Workers' Compensation claims counts are down again, reflecting an overall "macro" trend that has been persisting for over a decade. However, the types of claims that have been eliminated tend to be the smaller, less costly ones; overall they have dropped by 34% since 1999, while the most expensive claims (over $50,000) have only decreased by 7% over the same period. And, there has been an increase in the number of claims with long disability duration.

The data comes from a report by the National Council on Compensation Insurance, one fo the major rate-making and research organizations. NCCI's research is top-notch, credible, and although it suffers from data limitations (it only has data on states where it is involved in rate setting) it clearly indicates national trends.

The big question is why? During periods of economic expansion and flat growth, rising and level/falling employment, the trend has continued. Declines have been consistent across injury types, jurisdictions, occupations, and employer types. Moreover, the shift in occupational types, driven by macro-factors such as off-shoring and increases in construction activity, appear to have little impact on this welcome trend.

Amidst the good news, there are clear signs of trouble.

Disability duration
NCCI looked at claim frequency by duration of disability, and found that there has been a 6% increase in claims with an indemnity duration of more than 31 days. And, the longer the duration of the disability, the smaller the decline in frequency.

Medical costs
The average annual rate of inflation from 1999 through 2004 was 9.8%. This was driven by higher prices, utilization, and the use of more types of medical procedures on the average claim (this from other sources, including WCRI research).

So, all claim counts are dropping, which is good. But the decrease in frequency has been overmatched by medical inflation. That's bad.

What does this mean for you?

Manage the medical! Be especially careful to identify and manage lost time claims that may become long-term claims, as these most-costly claims appear to be increasing in frequency.

Posted by Joe Paduda at 8:14 AM | Link to this post | Comments (1)

Health care inflation was 8.2% in 2004 for privately insured Americans. This was 2.6% higher than overall economic growth, and almost twice as high as the general rate of medical inflation (4.4% in February) . The largest driver of health inflation was outpatient hospital, which increased 11.2%, while drug cost inflation moderated somewhat, coming in at 7.2% for the year.

The Center for the Study of Health System Change authored the report that is the source of these data, noting:

"Trends in four of the five spending categories—inpatient and outpatient hospital care, physician services, and other services—stabilized in 2004, while prescription drug spending grew at a slower rate for the fifth year in a row.

Meanwhile, the slowdown in employer-sponsored health insurance premium growth continued, with 2005 average premium increases estimated to range between 8 percent and 10 percent, down from 12 percent in 2004. The continued slowdown in premium trend likely reflects the lagged relationship between underlying health spending trends and premium trends.

In recent years employers have increased patient cost sharing, through higher deductibles, copayments and coinsurance, as a way to cope with double-digit premium increases. This trend appears to have continued in 2005 for the fourth year in a row, although to a lesser degree than in recent years."

The good news is the rate of inflation has leveled off. The bad news is we are getting older, the number of uninsured is growing, health insurance is increasingly unaffordable for employers or employees, the use of technology in medicine is increasing, and we have no solutions on the horizon.

I would also highlight the disparity between the overall rate of medical inflation and the privately insured rate. The disparity, a full 3.8%, reflects the fact that the inflation rate for privately insured individuals is significantly higher than that for governmental programs and non-insured individuals.

Cost shifting, anyone?

What does this mean for you?

The rate of inflation and attendant problems make this an unsustainable situation. Beware of cost shifting and "care shifting" as consumers and providers alike seek to shift the burden of medical expenses to payers with deep pockets.

Posted by Joe Paduda at 8:57 AM | Link to this post

CorVel and Gallagher Bassett are the subject of a highly critical article in the South Florida Sun-Sentinel, that could be subtitled "When bad claims management and bad managed care meet bad employers, it's bad news." In this case, Broward County School District's internal audit uncovered a raft of problems with the District's $34 million annual workers compensation program. The article itself looks like it was co-authored by Carl Hiaasen and Dave Barry, two of South Florida's keenest observers and funniest writers.

Iin addition to the District itself, the two entities receiving the harshest criticism are CorVel, the District's managed care "partner", and Gallagher Bassett. GB receives slightly more than $2 million a year to "manage" the program, while CorVel was paid $2.7 million during the 2003-2004 school year. Here are some of the more interesting quotes from the article in the South Florida Sun-Sentinel which reviewed an audit of the workers comp program by District auditors.

"Examples of waste or botched oversight range from using a pediatrician to treat adults to paying a claims investigator for working more than 24 hours a day, three times in one month"

"Auditors are also sharply critical that Itasca, Ill.-based Gallagher Bassett subcontracts medical duties, such as selecting doctors and assigning patients, to another firm, CorVel Inc. of Irvine, Calif., but will not give the district a copy of the agreement to evaluate."

"In one example cited, the firms (CorVel and Gallagher Bassett) spends (sic) $2 million a year to assign a field case manager to supervise nearly every case no matter how minor, a service that usually includes escorting patients to a doctor's office. Other workers' compensation companies usually reserve that level of service for catastrophic cases, said Reilly and Shaw. In one case, the district paid a case manager $2,800 to accompany an asthma patient at the doctor's office.

"Auditors chose five doctors at random from CorVel's list. One had four malpractice settlements since 1992. CorVel has only rejected two out of 1,200 doctors it uses, one for questionable service and one for demanding payment up front.

Additionally, referrals for physical therapy for specific patients were based not on a therapist's track record, location near the patient or expertise. Instead, therapists were chosen alphabetically, based on which firm was next on an approved list, auditors said."

In perhaps one of the more stellar examples of understatement, the report noted "It appears the district has taken a casual interest in the operations, resulting in higher direct costs including excessive medical, indemnity [lost time], litigation, monetary settlements, permanent impairment ratings and personnel costs associated with replacement or substitution for injured workers," auditors wrote.

To quote Dave Barry: "and I'm not making this stuff up."

One wonders if this will lead to an official inquiry, as the relationships between managed care entities, TPAs, and employers have been the recent target of subpoenas and news articles.

Actually, it is likely not a question of "if" but "when".

What does this mean to you?

Make sure your managed care relationships are clear, explicit, and public, that all transactions are transparent, and you hire the right managed care firm. Unless you want to see your name in print.

Posted by Joe Paduda at 12:46 PM | Link to this post | Comments (1)

The two competing economic models of health care are greatly influencing the debate on the future of health care in the US. One, hewing closely to the free-market standard, calls for consumer-driven decisions, free markets open to all investors in facilities, technology, and insurance. The other views health care as a unique good, one in which unfettered competition will never work and wherein market-based competition will lead to unacceptable social consequences. The latter model typically calls for more regulation and tighter controls.

An excellent perspective on this debate was brought to my attention by Peter Rousmaniere, a wise man and good friend. Steven Pearlstein of the Washington Post has written a great synopsis of the debate, one that is well worth considering. Using CMS Administrator Mark McClellan's recent decision (or more accurately non-decision) on the licensing of ambulatory surgery centers (he decided to procrastinate) as his foil, Pearlstein frames the issues quite succinctly.

"When they are vilifying insurers and managed-care companies, physicians like to present themselves as Dr. Welby -- selfless professionals whose medical judgments would never, ever be colored by their financial interests. But in lining up behind physician ownership of specialty hospitals, the doctors essentially acknowledge that they are just like the rest of us, their behavior swayed by even modest financial incentives.

You can't have it both ways. And the way the people would have it is to pay their doctors well, put them in the central decision-making role in the health care system -- and then demand that they give up the right to invest in MRI machines or specialty hospitals or get incentive payments from drug companies."

Leaving aside Pearlstein's claim to know what the people want, his arguments about physicians are on point.

However, I believe his analysis, excellent as far as it goes, misses a critical point. In all his discussion, and the national debate for that matter, on costs, process measures, outcomes, motivations, consumer-directed v. regulated, price controls and the like, there is no mention of the output.

I fail to see how an economic debate can serve any useful purpose if it does not consider what individuals or societies get for their expenditure. Think back over the last many years, and all the arguments you have heard and/or participated in, all the columns and studies and analyses and debates. Has anyone ever said, "well, we need to spend $X because it will increase the population's productivity/functionality/quality by Y%, and that is a better return on investment than my opponent's recommendation."

Hell no.

This makes me nuts. The entire health care debate is almost useless, because we are arguing about process, about inputs with no appreciation for outputs and economic good.

Until and unless we engage in a debate about what health care should deliver, we are wasting time, words, intellectual capital, and newsprint.

Posted by Joe Paduda at 8:07 AM | Link to this post | Comments (2)

There are signs that drug marketing is beginning to change, as the FDA focuses on off-label use and some of the big pharmas cut back on their sales forces. This may well be as part of big pharma's efforts to defuse some of the harsh criticism leveled at them by physicians, consumer groups, and health plans frustrated with pharma's aggressive marketing tactics.

David Wilson's Health Business blog notes that Wyeth and Pfizer have both announced plans to cut sales staff. The reasons are:

1. "Mirrored sales teams --the practice of sending multiple sales reps to the same doctor to talk about the same drug-- are causing a backlash from doctors and also making it hard to measure the effectiveness of individual sales people
2. There is little new to talk about --because of fewer product launches and in the case of Wyeth the curtailment of uses for its hormone replacement therapy. (Could it be that the more a doctor knows about hormone replacement therapy the less they will prescribe?)
3. The availability of efficient, effective outsourced sales forces available from Ventiv, Innovex and PDI have enabled pharma companies to reduce fixed costs."

The issue of pharmaceutical detailing has been extensively addressed in DB's MedRants, a highly entertaining and informative blog authored by physician Robert Centor. Centor has also commented on the recent decision by Bristol-Myers-Squibb to impose "a ban on advertising its new drugs to consumers in their first year on the market, adopting voluntary restrictions that go further than what is anticipated in an industrywide advertising code to be announced next month." Centor notes

"The optimist in me hopes that the outcries from physicians has influenced their policy. The skeptic in me believes that they understand the DTC drug advertising carries both risks and benefits. Big Pharma has a major image problem. TV drug ads generally hurt their image. "

As to the issue of off-label use, this is a significant area of concern for many payers, including workers compensation insurers. In my firm's "Second Annual Survey of Prescription Drug Management in Workers' Compensation", payer respondents noted off-label use as a significant concern. Typical was the use of Actiq as a pain med for musculoskeletal pain. Actiq is a brand drug used for break through pain associated with cancer; thus its use in workers comp is the very definition of "off-label".

What does this mean for you?

If big pharma is finally getting the message, that bodes well for a "decrease in the rate of increase" in pharmaceutical inflation. However, these companies are the ultimate capitalist organizations (that is not intrinsically bad) so they will seek to maximize their returns. And we all know who pays for those "returns".

Posted by Joe Paduda at 10:07 AM | Link to this post

Ohio's workers compensation scandal continues to grow, heading off in ever-more-interesting and bizarre directions every day. The fallout is both political and financial, and has reached the governor's office.

Here's the latest information from our friends at "Workers Comp Insider" and other sources. It appears the Bureau of Workers Comp, the entity that oversees the state's monopolistic workers comp insurer, has lost somewhere around $215 million in funds. These losses were due to investments in rare coins (!); with shady investment manager Alan Brian Bond; and in a hedge fund that was amazingly adept at losing large sums and charging high fees for that ability.

In one of the more entertaining chapters of this growing story, one of the key players suffered an alleged burglary at the home of Michael Storeim that resulted in the loss of significant ‘personal assets'.

Here's the brief from the Toledo Blade.

"The suburban Denver home of a former employee of Tom Noe (one of the principals in the scandal) was burglarized over the weekend, with thieves making off with artwork, guns, jewelry, cars, and $300,000 in wine — possibly purchased with money from the state of Ohio.

Michael Storeim, a suspect in a Colorado criminal probe into Ohio's missing coins, reported Monday night the valuables had been taken from his Evergreen, Colo., home while he was vacationing with his wife.

Investigators from the Jefferson County, Colo., Sheriff's Office on June 3 took custody of 3,500 bottles of wine valued at $500,000, and seized hundreds of rare coins, 265 Cuban cigars, computers, and documents from Mr. Storeim's home and office as part of a criminal investigation.

The wine was left in a locked cellar in the home, but police had changed the locks."

Despite the losses from these "investments" , up until last week, BWC was claiming it was going to continue to rebate dividends to policyholders while raising premiums ‘only slightly' by 4.4%. However, the firestorm over the financial debacle appears to have killed the BWC's dividend and rate increase plan, at least for now.

What does this mean for you?

For those not in Ohio, a great way to start Monday with a smile. For those in Ohio, more bad news about incredibly arrogant, self-serving, and possibly criminal politicians and their friends.

Posted by Joe Paduda at 7:05 AM | Link to this post

The growing scandal in Ohio surrounding the Bureau of Workers' Compensation's wildly inappropriate behavior has officially hit the big time. Initially surfaced by local press, and blogged on several occasions at Workers Comp Insider, the mess has just hit the national press. BWC's investments in rare coins, affiliation with a politically-connected investment manager, apparent desire to hide losses totaling over $200 million, and perhaps even worse is covered in Paul Krugman's column in today's New York Times (free registration required).

Here's one of Krugman's more trenchant observations:

"We're not just talking about campaign contributions, although Mr. Noe's contributions ranged so widely that five of the state's seven Supreme Court justices had to recuse themselves from cases associated with the scandal. (He's also under suspicion of using intermediaries to contribute large sums, illegally, to the Bush campaign.) We're talking about personal payoffs: bargain vacations for the governor's chief of staff at Mr. Noe's Florida home, the fact that MDL Capital employs the daughter of one of the members of the workers' compensation oversight board, and more."

One has to admit, this is lots of fun for outsiders. Perhaps now that Michael Jackson has returned to his devoted fans and home/amusement part/daycare center, and Scott Peterson has left the headlines, the press will focus on this mess, bringing notoriety and "human interest" to our little corner of the world. Imagine, workers comp will be the center of the cocktail party or soccer sideline discussion, enabling the cognoscenti (that's us) to dispense our wisdom and hard-won knowledge to listeners eager to get in on the latest. I can see Peter Rousmaniere on "NightLine", Tom Lynch on "Larry King Live", Larry Dorman on Greta van Susteren, Jon Coppelman on "The Daily Show"...

Posted by Joe Paduda at 7:01 AM | Link to this post | Comments (1)

CalPERS has managed to hold HMO rate increases for 2006 to 8.7%, while PPO increases are up 9.5%. CalPERS is widely recognized as one of, if not the most, effective negotiators with managed care plans, so their achievement will set the standard for other employers/unions/etc as they begin their negotiations with their health plans. According to their website,

"California Public Employees' Retirement System ... provides retirement and health benefits to more than 1.4 million public employees, retirees, and their families and more than 2,500 employers..."

The 8.7% is the lowest increase since 1999; with 2005 rates up 10%, 2004 16.4%, and 2003 a mind-numbing 24.1%. Of particular note is that benefit design was essentially unchanged as were copayments and prescription drug coverage.

When health plan rate increases negotiated by a very savvy, and very large, payer are more than three times the overall rate of inflation, and when that is trumpeted as good news, you know we are in trouble.

What does this mean for you?

Hold on to your wallet - if you can keep your rate increase below 11% without significant damage to your benefit design, congratulations.

Posted by Joe Paduda at 7:03 AM | Link to this post

Well, our officials in Washington have lost their minds. How else to explain the requirement by Medicare officials that the new Medicare Part D programs ""offer a surprisingly generous array of prescription drug choices"?

Pharmaceutical firms are likely ecstatic about the news, as the "open formulary" combined with the prohibition against the Federal government negotiating drug prices means that there is likely to be many drugs offered at what the pharmas will deem to be appropriate prices.

CMS Administrator Mark McClellan,and Babette Edgar, a pharmacist at CMS both claim that the diverse population covered under the Medicare and Medicaid programs necessitates a diverse formulary. According to a New York Times article cited in California HealthLine, the original cost assumptions for the Part D program may have to be reworked, as they assumed a narrower formulary. The result - costs will be higher than previous projections. Here's the quote:

"In 2003, the Congressional Budget Office estimated that the Medicare prescription drug benefit would cost $395 billion over 10 years, but earlier this year, CBO raised the estimated costs of Part D drugs to $849 billion between 2006 and 2015 (California Healthline, 3/11). According to the Times, CBO cited the federal formulary requirements as one factor in its higher estimate.

CBO Director Douglas Holtz-Eakin said the agency's estimates so far have assumed that Medicare drug plans would use "restrictive formularies" to help control spending. He added, however, that with the broader drug lists being required by the government, CBO "now expects that prescription drug plans will be slightly less effective at controlling drug spending than we had previously assumed."

CMS denies costs will be driven up, citing the plans for the Part D vendors to use cost control mechanisms similar to those used by commercial plans. The problem with that statement is that Part D vendors are specifically prohibited from using many of these techniques, such as prior authorization.

The last estimate indicated the program, originally forecast to cost $395 billion over ten years, will actually cost just under $900 billion over the same period. With these "unforeseen changes" costs may get close to the trillion dollar mark.

What does this mean for you?

I'm not sure; but if the Chinese decide to stop providing loans to the Federal government, it is either higher taxes, drastic cuts in other governmental programs (it is tough to get $100 billion by cutting HeadStart or NASA budgets), or cancellation of the program.

Posted by Joe Paduda at 7:03 PM | Link to this post | Comments (2)

There are several signs that indicate a growing awareness of the importance of the physician in managing workers comp injuries. While many in the industry have paid lip service to the treating physician, their actions have been louder than words. Utilization review requirements, onerous communications protocols, invasive medical management procedures, requirements that physicians provide care at a discount to an already-low fee schedule are representative of the way physicians have been treated by the community.

Now, that is starting to change. Here's the evidence.

--a major workers comp insurer is considering using a PPO network that includes physicians paid above the workers comp fee schedule. This despite their long-held and loudly trumpeted historical attachment to large discount-drive networks.
--another carrier is closely examining its data to identify the physicians with the best outcomes. The plan is to pursue a contractual relationship with those physicians that is predicated not on discounts but on results.
--large employers such as Supervalu have been working directly with certain providers in specific locations that they deem to deliver excellent care. Again, outcomes, not discounts, are the measure of quality.
--a large Longshore-Harbor Workers insurer has arrangements with many physicians where they pay a negotiated rate that is typically above the fee schedule. This gets them prompt, effective treatment, speeds communications, etc.
--Choice Medical Management, the fastest growing workers comp care management firm in the Southeast (also a client) has been recognizing the physicians of the year for several years. This year the number of physicians nominated and the volume of nominations have been significantly higher than in years past, forcing the company to adopt a more streamlined method of evaluating nominees.

This is great news, but a few items do not a trend make. The encouraging sign is that this growing recognition appears in large carriers and small carriers, in TPAs and at employers, among adjusters and execs.

What does this mean for you?

If you don't have a physician-centric approach to managed care, it is time to start thinking about how you are working with the people who have the most influence over your claimants.

Posted by Joe Paduda at 5:39 PM | Link to this post

Workers' Comp Insider has a fascinating post on workers comp in Iraq. Jon Coppelman discusses safety issues, premium rates (as high as $80 per $100 of payroll, for people making $100k a year!), the "competitive bidding" situation between AIG and ACE, and other intriguing points.

I highly recommend it.

Another interesting post discusses the costs and benefits of Ambulatory Surgery Centers, with particular attention paid to safety issues. An issue not covered in the post or resources on the post is the issue of ASCs siphoning off the profitable, private pay patients from hospitals, leaving hospitals with sicker, poorer patients. The result, hospitals' outcomes go down, costs go up, and profits disappear.

Another post in Medpundit lead me to a great article about an American's experience in the British health system. One quote from the article (originally in the Wall Street Journal) in the Medpundit post is particularly telling:

"There is much better teamwork among doctors, nurses and physical therapists in Britain. In fact, once a week at Queen's Square, all the hospital's health workers--from high to low--would assemble for an open forum on each patient in the ward. That way each level knows what the other level is up to, something glaringly absent from U.S. hospital management."

Posted by Joe Paduda at 10:23 AM | Link to this post

Initial HMO rate increases will "only" be 12.4% in 2006. This comes as good news, as increases this year averaged 13.7% according to Hewitt Associates, who also noted the 2006 number is the lowest in five years.

We'll get to the "if this is the good news, I'm not wanting to hear the bad news" in a moment. First, the details. The actual rate increases tend to be lower than the initial rates. The reason is that employers, shocked by the initial rate increases, cut benefits, increase employee co-pays, alter prescription drug programs, and change HMOs. This usually results in final increases somewhat lower than Hewitt's "initial rate increase statistics.

So far, so good. Before we all relax, consider that the only way rate increases were held to a rate more than three times the underlying rate of inflation was by shifting costs to the insureds and reducing coverage. Not exactly innovative or long term strategies. However, Hewitt expects that more of this will occur this year, as companies cut benefits and increase copays to offset at least part of the rate increases final increases are likely to be in the 8-9% range.

One benefit that has been particularly affected by these design changes has been prescription drugs. For example, over the last five years, the number of companies offering a $5 generic copay has been cut in half, while the number with a $10 copay has more than doubled and companies are now requiring a $15 copay. With many generics costing pennies per pill, the result is insureds are paying much, if not all, of the cost of many of their generic prescriptions.

Particularly hard hit will be employers offering health plans in the northeast, with initial rate increases coming in at 15.8%.

What does this mean for you?

Leaving aside the benefit design changes and other financial alterations, this means that your health insurance costs for the same benefits you "enjoy" today will cost more than twice as much in five years.

Posted by Joe Paduda at 7:00 AM | Link to this post

Hank Greenberg has resigned from AIG's Board of Directors (last Wednesday), but the disarray within AIG continues. This marks the final separation of Greenberg from the company he led for decades and built from a small international insurer to a global force.

It appears that he was "estranged" well before the final resignation, as AIG was evidently withholding financial information from Greenberg. The resignation comes on the heels of the May 31 restatement of earnings by AIG, lowering net income over the last ten years by $3.9 billion (ten percent of total earnings).

Internal sources indicate there is a lack of decisiveness prevalent in AIG and the AIG companies that was previously unheard of. American General has switched target markets and market emphasis several times over the last year, leadership changes that appeared to be in process are now in limbo, and some underwriters at the AIG companies are unsure what they should be writing at what price.

Some confusion is always present in even the best-run companies, as communication through multiple layers and multiple individuals with disparate agendas is unclear at best. However, the extent of the issues at AIG indicates a larger problem. Perhaps the autocratic style that was so successful for the company for four decades is to blame, and/or politics is taking the lead over productivity as individuals scramble to position themselves while the sands shift under them.

What does this mean for you?

If you work at AIG, keep the faith. There are lots of very talented, highly motivated people at AIG, and barring unforeseen criminal indictments of the enterprise itself, the company will survive and prosper. It would be easy to say keep forging ahead and ignore the tumult around you, but probably more intelligent to suggest you keep reading the tea leaves. Unfortunately, so much of success in big companies is based on politics not productivity.

Posted by Joe Paduda at 6:35 AM | Link to this post

Although the firm Market Scout contends that the workers compensation market is not softening, critics question their data, objectivity, timing, and conclusions. Market Scout provides quotes for property and casualty lines, including workers comp, to agents and brokers. For those not immersed in the arcane world of insurance, a "softening market" is one where prices are dropping and coverage expanding as carriers seek to build market share, often at the expense of sound underwriting (risk selection) principles.

Evidently, one of the carriers that they use most often is the primary source of their data. At the least, this calls into question Market Scout's conclusions; one carrier does not a market make.

There are two other potential concerns with Market Scout's information and conclusions.

1. their data tends to lag the industry, and there are some indications that rates have begun to soften significantly since June 1.
2. other market watchers are seeing a definite, and larger, drop in WC rates than Market Scout indicates.

My sense is the market is indeed softening more rapidly than Market Scout indicates.

What does this mean for you?

If you are in the WC industry, you can either follow the numbers-challenged off the cliff or tell senior management pricing is about to cross the "stupid line". If you choose the latter, document document document.

If you work in or provide services to a WC payer, be prepared for them to request price cuts, reductions in work force, and other means to reduce admin expense. When prices are dropping, most payers just look to cut internal expenses instead of focusing on lowering claims expense.

Posted by Joe Paduda at 7:43 AM | Link to this post

An article in CFO.com analyzes the complex web of transactions, relationships, and incentives that exist in the employer-TPA-managed care firm web. David Katz notes:

"risk managers, by some accounts, often hand over the management of claims and medical costs to third-party administrators (TPAs) without a clear idea of their relationships with medical and claims-services providers.

In some cases, such wholesale delegation can result in "the complete outsourcing of the risk manager's fiduciary responsibility to the organization and its shareholders by allowing these service providers to control what should be viewed as a line of credit," according to one senior sales executive for a managed care organization specializing in workers' compensation. Potentially, a self-insured corporation's lax management of its workers' comp outlays could represent "a huge hole in internal controls," said the executive, who asked not to be identified."

Katz goes on to discuss some of the legal investigations now in process that may be related to these issues.

What does this mean for you?

With Mr. Spitzer et al hot on the trail of unseemly transactions in the property and casualty industry, participants would be well-served to monitor their TPA relationships closely.

Posted by Joe Paduda at 1:51 PM | Link to this post | Comments (1)

There is now evidence that the health care costs of the uninsured are borne in part by those who do have health insurance. A study by Families USA reported in Bloomberg News indicates that the annual "surcharge" is $922 for the average American family with employer-sponsored health care coverage. Why? Because providers who treat the uninsured only receive about 1/3 the cost of their care from the uninsureds, leaving others to pick up the tab for the rest.

According to the report, about 8% of insurance premiums goes to cover costs associated with caring for the uninsured. And, the cost will rise to over $1500 within five years.

The report notes:
"Insured families in six states - New Mexico, West Virginia, Oklahoma, Montana, Texas and Arkansas - will pay more than $1,500 in additional premiums this year to cover the costs of patients who lack medical insurance, the report found. By 2010, the list will include five more states: Florida, Alaska, Idaho, Washington and Arizona."

Here's the impact in real world terms. On an individual basis, your family premiums would be $900 less if the uninsured had coverage. On an employer-specific basis, General Motors is paying about $480 million a year in "excess costs" to cover the uninsured. And nationally, considering the Federal and state governments' expenditures on health care, our taxes are paying more than $50 billion a year to "insure the uninsured".

I have been saying for several years that the "uninsured" are actually "insured" through a mix of taxation, cost-shifting, and self-insurance. This is the first study that quantifies the cost of that "insurance".

What does this mean for you?

Until and unless we address the funding of coverage for the uninsured, these hidden and overt taxes will continue. It adds to everyone's costs of doing business, reduces industrial competitiveness, and damages balance sheets. Yours too.

Thanks to Peter Rousmaniere for the heads-up.

Posted by Joe Paduda at 1:00 PM | Link to this post | Comments (3)

Two Aon execs have published a piece on workers compensation managed care in Risk Management that is uninformed, self-serving, and reflects a lack of appreciation for the true cost drivers in comp. I try not to comment on other consultants' work, but this article demands a response .

Briefly, the article by Charles D. Reuter, senior vice president and Heidi Mader, assistant vice president with Aon Consulting, Inc in New York office calls for workers comp insurers to either "follow the herd as the industry has become accustomed or…lead the charge to innovative, results-oriented solution development". Unfortunately, the charge they intend to lead is right off a cliff, with a long stop at Aon to purchase their proprietary workers comp network analysis software application. While I have no problem with consultants selling their services (after all I do every day) I have a big problem when the services will NOT deliver the results the consultant claims.

In this case, it appears the problem lies in Reuter's and Mader's ignorance of the basic cost drivers in workers comp. They tout three components of their "strategic framework for optimizing financial performance for workers compensation organizations":

--data mining and warehousing
--medical network opportunities
--performance guarantees

The first is a no-brainer. The second utilizes Aon's newly-developed proprietary technology to "address these competitive differences in the workers compensation arena to allow for adjustment and valid comparisons using a standard network evaluation tool." Fine so far, but the article goes on to note: "incremental savings for a workers compensation organization can be substantial, representing a significant cost reduction opportunity (all other factors such as utilization and medical management performance are assumed equal for the sake of this discussion".

What utter nonsense. Discounts have been proven to have little to no impact on total workers comp medical expense. If discounts were the answer, states with the lowest fee schedules would have the lowest cost. Look at Massachusetts and Florida, states with very low fee schedules and their attendant total medical costs. Until their fee schedule was INCREASED, Florida's medical expenses were well above industry median according to the Workers' Compensation Research Institute. So, Aon's proprietary technology addresses one of the least important components of medical cost - price per service. It does nothing to address utilization or medical performance.

Finally, performance guarantees. I have constructed several of these programs in the past, and have extensive experience in this area. The article off-handedly comments that performance guarantees will have to factor in "new, integrated medical and indemnity performance metrics". Nice idea, extremely difficult to implement, and even harder to evaluate. But, lots of consulting needed.

The article concludes with a mention of consumerism and web sites and other stuff, noting that it will be more important for workers comp payers to utilize the web to educate claimants, providers, etc. Again, nice idea, but a lot of claimants do not have web access, there are problems inherent in publicizing medical guidelines (who owns them, for example), and pharmaceutical recommendations that are too extensive to cover here.

There are at least a dozen other major and minor problems with the article and the thinking or lack thereof behind it which I don't have time to write and you don't have time to read.

The net is this type of uninformed, superficial, obviously commercial hype is a disservice to those of is in the consulting business who really know what we are doing and want to deliver results, not land huge engagements.

What does this mean for you?

Do not hire consultants because they have a big name or for any reason other than they know a lot, have different ideas, are willing to learn a lot about your business, and are committed to your success. Grill them thoroughly, and beware of platitudes, generalities, and barely covered ignorance.

Posted by Joe Paduda at 9:33 AM | Link to this post

Limited health plans, covering only routine, non-hospital care, appear to be growing in popularity. The plans, with little to no underwriting and guaranteed level premiums, limit coverage by capping expenses at levels from $1000 to $20,000.

Companies such as Intel, Sears, and IBM, in addition to a number of other large employers, are slated to begin offering these plans next year.

I can't figure out why anyone would buy one of these plans. The big fear that drives health insurance coverage is catastrophic care; as people buy insurance based on fear, the limited plans do little to meet the market's need.

One potential impact if these plans grow in popularity is the reduction in the number of those uninsured. However, that would be a highly misleading finding, as the low coverage limit will undoubtedly lead to uncompensated care. One could also argue that insureds will be more likely to pursue more expensive care, as they are not disincented from routine office visits, diagnostic lab and x-ray, and other medical services that may find potentially expensive medical conditions.

Posted by Joe Paduda at 7:30 AM | Link to this post | Comments (1)

Aetna's acquisition of ActiveHealth Management is part of a growing trend wherein large health plans are seeking to mine their data for better ways to manage cost and care and enable their providers to better utilize "evidence-based medicine". ActiveHealth has strong assets in these two primary areas, both based on their CareEngine technology.

In part, the acquisition reflects an understanding and appreciation on the part of Aetna senior management that the present use of medical guidelines and pathways is not working. Companies such as Interqual/McKesson, Milliman and Robertson, and IDG all promote their clinical guidelines, and most providers and payers use some form of guideline in the delivery or management of care. However, payers are noting:

- the health care inflation rate is twice that of overall inflation;
- provider practice pattern variation continues to frustrate regulators, academics, providers, and payers alike:
- providers continue to voice their displeasure with what they perceive to be overly-intrusive "management" by "bureaucrats";
- the chief complaint from providers is the present guidelines are "cookbook" medicine, which treat all patients alike regardless of individual characteristics; and
- the "return on investment" of utilization review and case management continues to diminish (in general).

In addition, payers are finally starting to understand that one of their key assets is the data resident in their claims and managed care information systems. Leaving aside the (rather significant) issues of data accuracy, consistency, and completeness, one of, if not THE key asset of most payers is their database of information on how providers treat, which providers have better outcomes for which types of patients and diagnoses, billing practices, and the like. This asset has been underutilized, to say the least.

If managed care companies/health plans/HMOs are going to be successful, they are going to start utilizing their data to determine the best way to deliver care, and utilize technology similar to ActiveHealth's to assist in that care delivery.

What does this mean for you?

If Aetna, UnitedHealthGroup, and others are starting to finally take meaningful steps, perhaps you should too. If you are a provider, you would do well to follow this trend carefully, because there is no doubt you will be affected by it.

Posted by Joe Paduda at 8:32 AM | Link to this post

A very interesting post from a surgeon defending his profession from an attack by someone stating that surgeons are no different from carpenters plumbers and engineers.

Those of us on the payer side of the table would do well to remember that there are passionate, highly intelligent, motivated and great people on the "other" side. Perhaps we should make that table round instead of rectangular?

What does this mean to you?

We are in this together, and insulting comments, intended or not, damage our mutual desire to deliver for our mutual customers.

Posted by Joe Paduda at 9:15 AM | Link to this post

If health insurance premiums continue to increase by 10% annually, the percentage of working adults in California with employer-based coverage will decrease from 58% to 53% within five years. The finding, from a study by the University of California-Berkeley, also noted:

-- for every 10% increase in premiums, 910,000 Americans lose employer-sponsored coverage
-- of those who lose coverage, 75% are uninsured and 20% are insured by Medicaid
-- the average premium increase over the last five years has been 11% nationally

According to the Contra Costa Times, 6/2Anthony Wright, director of Health Access, said, "We're getting close to the tipping point. ... Employers who do provide coverage (now) won't because no one else is".

I've been noting the convergence of a number of factors that seem to indicate growing pressure to come up with some national consensus on health care coverage reform. When middle class voters start to lose their health insurance, the "tipping point" will be reached. And when that happens, there will be reform.

What does this mean for you?

A reform that includes universal access would have relatively little impact on total medical costs (less than $90 billion annually) with significant improvements in health status of the presently uninsured. In addition, there would likely be less incentive for providers to cost-shift, thereby reducing the "hidden tax" inherent in today's dysfunctional health care funding mess.

Posted by Joe Paduda at 8:46 AM | Link to this post

Texas Governor Rick Perry signed a Workers Comp reform bill into law yesterday, authorizing the use of networks for treatment of injured workers.

To quote the Dallas Star Telegram;

"The revised law will create physician networks like those in commercial health plans and provide a small boost in benefits paid to injured workers. Texas has the country's third-highest workers compensation costs and the highest rate of injured employees not returning to work. The law replaces the Workers' Compensation Commission with a single, appointed commissioner housed in the Texas Department of Insurance and creates an Office of Injured Employee Counsel as an advocate for workers."

What does this mean for you?

At long last, perhaps meaningful reform of the one of the nation's worst workers comp environments. I'll be taking a much closer look at this legislation and potential impacts of same in the near future.

Posted by Joe Paduda at 8:42 AM | Link to this post | Comments (5)

Jon Coppelman at Workers' Comp Insider has an intriguing post about the problems at the Ohio Bureau of Workers Comp. Kudos to Jon as he appears to have scooped the New York Times, who published their article a couple days later. To quote Jon;

"The workers compensation bureau has invested $50 million in rare coins, working through Tom Noe, a man prominent in Republican fund raising circles. Indeed, Mr. Noe has been recognized by the Bush-Cheney campaign as a "Pioneer," as he raised over $100,000 for the President's re-election campaign.

Realm of the Coin
At this point, it appears that some of the coins purchased by the state fund are missing. Two of the most valuable, totaling a quarter of a million dollars, were "lost in the mail" according to Noe. An additional 119 coins were "misappropriated by an employee." The coins "went missing" back in 2003, but Noe neglected to tell anyone. The initial estimate for the missing coins was $400,000. Now, according to Noe's own attorney, the figure is somewhere between $10 and $12 million."

Despite the very troubling implications of this debacle, it does make for highly entertaining reading. Following the comedy of errors (being kind) perpetrated (or should I say committed) by elected and appointed officials will being a chuckle and shake of the head to most readers.

Posted by Joe Paduda at 3:52 PM | Link to this post

Kevin Piper summarizes the good, the bad, the ugly, the winners and losers from the new Medicare Part D program in his blog "the Piper Report". As more information has become available, it is clear that there will be substantial changes to the pharma supply chain, with most entities seeking to better understand utilization and price drivers and squeeze margins wherever possible.

Piper notes winners will include:

--low income Medicare recipients without Rx coverage today
--private employers with generous retirement medical plans will reap a multi-billion dollar windfall, although legislation may reduce this.
--large national insurers seeking to expand market share in this rapidly growing market of seniors
--lobbyists actuaries and consultants.

That may be true, but the fundamental problem of adverse selection still exists. It is getting lonelier by the day out here in the "but the business model just does not make sense" woods, but I have yet to hear anything that makes it sound like Part D providers will be protected from adverse selection.

What does this mean for you?

I'd be very careful of Part D; just because others seem to believe in this does not mean you should not carefully assess the risks.

Posted by Joe Paduda at 5:08 AM | Link to this post