Insight, analysis & opinion from Joe Paduda


New devices and reimbursement

An article in today’s New York Times discusses some of the issues inherent in the introduction of new medical devices and the quest for insurance reimbursement for same. Predictably, a spine surgeon accuses insurers of refusing to reimburse just to save money, insurers say they won’t pay until the device is proven more effective than alternatives, the manufacturer touts supportive studies and ignores less supportive data, and patients are completely confused.
The article does an excellent job of laying out the issues in an even-handed manner, and actually alludes to the significance of any new technology’s demonstrated ability to improve on the present “state of the art” in the reimbursement decision process. However, that is about as far as it goes. The article, and other commentary in California HealthLine, does not delve into other alternative treatments and their associated benefits and costs for conditions addressed by devices such as artificial disks, stents, and pacemakers.
It strikes me that device manufacturers certainly have this kind of information, as it is likely part of whatever studies they do. If that assumption is correct, the data is either not reported, was not used by the reporter, or was inconclusive. is no discussion about the potential for the device to replace other medical treatments (e.g. pain meds, therapy, etc.).
Reimbursement decisions are one of, if not the key success measures for new technology – and the way to get payers to cover these new devices is to show the impact on patient outcomes, functionality, and/or lifestyle improvements as well as the elimination of other medical treatment and the costs thereof.
I must be missing something here.
What does this mean for you?
Before approving a new technology for reimbursement, ask what the impact on patient outcomes is, in addition to what other services/devices/procedures it replaces.


Hard markets and Soft markets

Hard market, soft market, transitional market – all are terms that insurance industry veterans have used to characterize the various stages of the “insurance industry underwriting cycle”. Simply put, a hard market is when insurers are backing out of the market, insurance is expensive and getting more so, difficult to find, and likely limited when it can be obtained. Soft markets typically are marked by new entrants into the business, dropping prices, generous underwriting provisions, and aggressive discounting.
We are now in a soft market, especially in California. The next question is how did we get here and how long will it last.
Well, we got here because insurers raised rates for three years in a row beginning in 2001, thereby driving margins, and profits, up substantially. This newly profitable industry caught the attention of outside capital, which wanted to jump in on the action. Remember, those with lots of money to invest can put it into bonds (at very low interest rates) equities (with their only slightly better returns with much more risk), real estate (prices are high and speculation of a bubble rampant), or under a very large mattress.
So, among other insurance lines, workers comp looked especially good. And lots of capital jumped in, causing prices to drop. They are still declining.
The second part of the question is much harder to answer – but there are some indicators that predict it will not last nearly as long as the soft market of the late nineties. Most significant is the continued rapid increase in medical expenses. In workers comp, most medical expenses are paid out more than 12 months after the date of injury, and fully 1/3 of dollars are paid more than 36 months post injury. It is incredibly hard to accurately predict what medical inflation will do to a claim’s medical costs. And, all indications are that medical expenses in WC are rising faster than in the overall economy.
You can find an excellent review of past markets, market drivers, and other useful info at the American Association of State Compensation Insurance Funds. While the report is somewhat dated, the logic is not.
What does this mean for you?
Enjoy the soft market if you are a buyer, hope it ends soon if you are a seller, and whoever you are, remember that medical expense will drive the next hard market.


TRIA – the Terrorism Risk Insurance Act’s future

It appears increasingly unlikely that the Terrorism Risk Insurance Act will be renewed in its present form. A report filed by Treasury Sec. John Snow claims the robust economy is justification for its’ position that the Act is no longer needed, any renewal will stifle innovation and economic growth, and any renewal should factor in significant changes.
Referring to the potential for renewal of the Act, the report makes several recommendations, noting:
“Any extension of the program should recognize several key principles, including the temporary nature of the program, the rapid expansion of private market development (particularly for insurers and reinsurers to grow capacity), and the need to significantly reduce taxpayer exposure.”
Snow is recommending several specific changes, including:
“an extension only if it includes a significant increase to $500 million of the event size that triggers coverage, increases the dollar deductibles and percentage co-payments, and eliminates from the program certain lines of insurance, such as Commercial Auto, General Liability, and other smaller lines, that are far less subject to aggregation risks and should be left to the private market.
While Snow is correct that the Act was intended to be temporary, that was more because it was the first of its kind, we had no experience in this area, and far better to sunset a law than to let an inappropriate, ineffective, or bad law stay on the books automatically.
That said, there are benefits to the insurance industry if the Act dies. These include:
— No more onerous TRIA paperwork. Insurers/brokers are required to offer TRIA coverage to all policyholders (for most property/casualty and some accident/health lines) and prove that by getting signatures on documents from insureds. Most insureds opt out of coverage, meaning brokers are required to obtain, file, and maintain records without compensation.
— Outside major municipal areas, the vast majority of policyholders are rejecting terrorism coverage anyway due to higher costs.
Among the problems with any decision to non-renew TRIA are the regulatory requirements of certain states, the lack of a market for terrorism coverage, and the expense of private insurance.
New York state requires terrorism coverage, and is generally seen as the most likely target of an attack. Rock and a hard place, indeed.
Property and workers compensation insurers are particularly vulnerable, due to their high exposure, potential long-tail claims due to environmental fallout from any terror act, and in the case of WC, unlimited financial liability. Make no mistake, another significant terror attack could have a huge financial impact, one that the present insurance markets would not be able to withstand. Scenarios indicate an exposure into the tens of billions under certain situations for property and WC insurers if a dirty bomb event occurs in a major metro area.
What does this mean for you?
Depends on where you work and what your “exposure” is
. If you are in a major metro area or near a “high value” target, rates could climb drastically. If not, rates may still increase as insurers seek to mitigate risk by increasing their reserves ahead of a catastrophic event.
I’ll look into the potential impact on workers comp in a future posting.


Health Insurance Market conditions

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


Aetna’s HMS purchase

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.


The health care consumer/voter

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…


Health care and productivity

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


Workers’s comp claims counts are decreasing

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.


Health care inflation 2004

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


A new scandal in workers compensation

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.

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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