Fixing health reform – Part Two, Medical Loss Ratios

A couple weeks ago I started what was going to be a discussion of how we should ‘fix’ health reform that was intended to run on consecutive days – only to have that sidetracked by goings-on in the health, political, and financial worlds that pushed reform to my back burner.
Let’s get back to reform.
First, the easy part. There’s no question Congress has to address the 1099 issue – the requirement that all businesses have to inform the IRS when they pay anyone more than $600 over a year. As a small business person myself, I have zero time to send out 1099s to my cell phone, internet access, web hosting, legal, accounting, admin support and other suppliers. No brainer.
Here’s a much harder one. Medical loss ratios (MLR).
For politically-obvious reasons, the Senate included requirements that health insurers spend a set percentage of their premiums on actual medical costs and quality improvement activities; at least 80% for individual/small group policies and 85% for larger group coverage. If an insurer’s admin expense (all costs EXCEPT medical costs are higher than 20%/15%, policyholders get a refund/rebate of the ‘extra’.
The rebate requirement kicks in on January 1, 2011; insurers are already scrambling to figure out how to identify, aggregate, and report costs; lobbying HHS and the National Association of Insurance Commissioners to consider medical management and prevention expenses part of the medical cost category; and crunching numbers to figure out what their medical costs will be in 2011, and based on that, what premiums they can charge.
The MLR requirement is going to require health plan execs to spend an inordinate amount of time and energy figuring out what costs go where and how they need to report those costs to HHS. If they screw up and their medical costs and quality improvement expenses are below the threshold, they have to pay a penalty.
While one can make a rather superficial argument that this is all to the good as it improves transparency, I’m hard pressed to understand how this ultimately benefits anyone.
Health plans that do a great job managing chronic conditions may well be ‘penalized’ for that success. Plans that contract with providers who deliver excellent preventive care, ensure expectant moms take their vitamins and don’t smoke, and get their tubby patients to drop a few pounds may find they are cutting checks come MLR audit time. Payers channeling patients to hospitals with low infection rates and few re-admissions will be in the same situation, as would those that carefully monitored potential diabetics’ health status and clinical signs.
These programs are costly, many have unproven benefits and/or won’t pay off for some years, and therefore the cost of the programs today (if they don’t qualify as ‘quality improvement’) will add to expenses, driving down the MLR.
While I‘m not a believer in the infinite wisdom of the free market, I do know that the health plans that deliver lower costs – over time – will have a major competitive advantage over their less-capable competitors. While insurers and providers need very, very close watching when it comes to risk selection, rescission, underwriting, and care authorization, we don’t need to waste their time – and ours – worrying about their MLR.

The Humana – Concentra deal: this isn’t that hard to figure out, people

We’ve all had a few days to digest the recently announced Humana – Concentra deal, and perhaps think thru what this means for Humana, why they did the deal, and if this gives any insight into what other health plans may do.
Perhaps the best one-sentence synopsis of the deal was provided by a Humana spokesperson: “This acquisition is consistent with the goals of health reform”.
Here’s the slightly longer version.
1. Three million Humana members are located in close proximity to Concentra facilities.
2. Concentra knows how to deliver primary care efficiently. They are also working hard at wellness and health promotion.
3. Health plans are going to be desperate for primary care providers come 1/1/2014, when their membership will explode.
4. Health plans that can keep patients away from specialists, expensive diagnostics, and facilities are going to do very, very well. That can only be accomplished with good primary care.
5. Concentra has very strong relationships with local employers, and solid experience selling to those employers.
I was a little surprised to read some of the financial community’s statements about the deal.
For example, AM Best said “This transaction is expected to be a source of business diversification for Humana as well as unregulated cash flows.”
This was the lead sentence in their comment on the deal, and while it mentions a couple benefits, I doubt they were the primary reasons Humana decided to shell out almost $800 million. Sure, the cash flow is unregulated, and business is different, but workers comp also faces a structural issue with declining claims frequency and is highly vulnerable to regulatory risk, two factors that would militate against a ‘diversification and cash flow’ rationale.
Then there was this gem from Marketwatch: “Plus, the company said it was buying privately held insurer [emphasis added] Concentra Inc. in Addison, Texas, for $790 million in cash.”
There has also been some speculation that the deal was – at least partially – due to a desire on the part of Humana to buy a provider and thus get around, avoid, or mitigate Florida MLR rules. While this may have been a contributing factor, it is highly unlikely it was one of the top reasons Humana did the deal. Humana already has primary care centers in Florida as a result of the CarePlus deal in 2005 and Concentra doesn’t have a lot of facilities in the Sunshine State.

Perhaps Humana is going to add occ med services to the ten or so CarePlus facilities;
this would help it’s soon-to-be subsidiary and give analysts evidence of that oft-cited ‘synergy’ thing.
The net is this. Reform is coming, healthplans must drastically change their operating models, and winners will be the ones that figure out how to market to and manage previously-uninsured, and solve primary care.
Humana’s got a good start.

Why all the sound and fury about the individual mandate?

The objections to the individual mandate are loud, frequent, and hyperbolic. What they are not is credible.
Much of the criticism of the mandate appears to be coming from people and organizations that previously supported a mandate. That’s why it is so difficult to take them seriously.
Here are a couple examples.
Mitt Romney, who could teach a kite a thing or two about moving with the political winds, signed a bill into law saying it was “a personal responsibility principle”; a bill that was pretty similar to the one he now describes as “an unconscionable abuse of power.”. (and yes, Romney did endorse a Federal mandate)
Romney also said “Some of my libertarian friends balk at what looks like an individual mandate. But remember, someone has to pay for the health care that must, by law, be provided: Either the individual pays or the taxpayers pay. A free ride on government is not libertarian.”
– Sen Orrin Hatch (R UT) cosponsored a bill that required a universal mandate back in 1993. Today, he says:””If they mandate you have to buy insurance, it’ll be the first time in this country that the government can tell you what to buy,” said Hatch, warning the measure could portend even more government control in the future.”
– Newt Gingrich, who backed a mandate back in 2008, and…doesn‘t now.
Many of the loudest objectors were strong supporters of the mandate in the past, including the worthies at the Heritage Foundation. Here’s what they said then (text spacing issues from original):
The second central element-in the Heritage proposal is a two-way commit ment between government and citizen. Under this social contract, the fed eral government would agree to make it financially possible, through refund able tax benefits or in some cases by providing access to public-sector health programs, for every American family to purchase at least a basic package of medic a l care, including catastrophic insurance. In return, government would require, by law every head of household to acquire at least a basic health plan for his or her family.Thus there would be mandated coverage under the Heritage proposal [emphasis added], but the mandate w ould apply to the family head, who is the appropriate person to shoulder the primary responsibility for the familys health needs, rather than employers, who are not.
And here’s what they say now:
This “personal responsibility” provision of the legislation, more accurately known as the “individual mandate” because it commands all individuals to enter into a contractual relationship with a private insurance company, takes congressional power and control to a striking new level. Its defenders have struggled to justify the mandate by analogizing it to existing federal laws and court decisions, but their efforts do not withstand serious scrutiny. An individual mandate to enter into a contract with or buy a particular product from a private party, with tax penalties to enforce it, is unprecedented– not just in scope but in kind–and unconstitutional as a matter of first principles [emphasis added] and under any reasonable reading of judicial precedents.
Which leads to the question – why have Romney, Gingrich, Hatch, and Heritage (amongn others) changed their view? Could it be due to a re-reading of the Constitution? New evidence that the original authors didn’t want universal health care?
Or could it be that no one to the right of center wants to say anything neutral, much less positive, about anything the President and his fellow Democrats advocate?
Why is this? The reform plan, which has more than its share of warts, doesn’t include a public option, has a relatively weak mandate mechanism, relies on private insurers to provide coverage, and doesn’t do anything to manage price or utilization.
One would think all conservatives wouldn’t find that so universally objectionable.
This doesn’t make sense at any level; their flipflopping is patently obvious and readily identified, and all the Dems have to do is advance increasingly centrist ideas and watch while the GOP partisans howl in outrage, backing themselves into a really small corner.
If they don’t wise up, they’ll find themselves a very, very small party.
There’s a lot left to do to truly ‘reform’ health care. Without the contributions of legislators from all parts of the political spectrum we will end up with a system designed by one party. Some will never ‘buy in’ to that system, no matter how moderate and effective the reforms may be.