Insight, analysis & opinion from Joe Paduda


HMO rate increases

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.


AIG’s Greenberg is gone

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.


Workers compensation premiums

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.


Managed care fees, TPA charges and transparency

An article in 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.


The impact of the uninsured on health insurance premiums

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.


Aon’s workers compensation consulting

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


Growth in limited health plans

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.


Aetna, data, and care management

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.


Surgeons and carpenters

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.


Premium increases’ impact on uninsurance

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.

Joe Paduda is the principal of Health Strategy Associates




A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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