Value-Based Insurance at a Portland Steel Mill
Kaiser Health News staff writer Julie Appleby reports today on value-based insurance soon to be offered to workers at a Portland steel mill.
[E]mployees with certain conditions — asthma, congestive heart failure, diabetes, depression, heart disease, chronic bronchitis or emphysema — would get prescription drugs and visits with physicians free or at greatly reduced rates. High blood pressure, another common condition, would qualify for low-cost care if it was part of an overall diagnosis of heart disease.
Conversely, they’d pay much more if they have a treatment or test from a list of about 20 broad categories, including knee or hip replacement, cardiac bypass surgery, artery-opening stents, hysterectomies, high-tech-imaging exams or emergency room visits.
Appleby goes on to report that value-based design is not without controversy. In a world with heterogeneous responses to treatments there is no way that one set of financial incentives will seem fair to all policyholders, or to all clinicians. This is an unavoidable consequence to cost control via value-based design.
On the other hand, it is imaginable that some of those faced with relatively higher cost sharing due to their mix of use ultimately benefit in absolute terms from an overall reduction in health care costs. That is, relative to the counter-factual world with cost sharing incentives that are insensitive to efficacy and cost offsets, value-based design may benefit more people than just those with preferred conditions.
Len Nichols: Why Coverage Expansion Comes First
Some budget hawks argue that we must control health care costs before enacting coverage expansion. We can’t afford the latter without the former, they say. That sounds so sensible it should make anyone wonder why it isn’t. In a 24 February 2010 article in the New England Journal of Medicine, Len Nichols provides the answer (h/t Ezra Klein).
[T]he simple answer to the hawks … is that it is not feasible to tackle costs without tackling coverage. Our delivery system could not withstand the stress. Two thirds of hospitals lose money on Medicare now. Virtually all lose money because of Medicaid underpayment. To impose serious delivery reform and incentive realignment while leaving hospitals on the hook for the mounting billions of dollars in uncompensated care would bankrupt many and strain most to the breaking point. With expanded coverage, we’ll get absolutely essential hospital cooperation. Without expanded coverage, hospitals will have to protect themselves from change, and their local communities will want them to.
… Within a decade, we will face draconian health care price controls, massive benefit cuts in Medicare, Medicaid, and the private sector, or both. This credible threat of cost slashing without coverage expansion is one reason the powerful provider lobbies, such as the American Hospital Association, the American Medical Association, and PhRMA (Pharmaceutical Research and Manufacturers of America), have embraced comprehensive reform.
Backing up to the first sentence in that quote, in what sense is it “not feasible” to implement more severe cost controls without first expanding coverage? The answer includes some dire predictions about hospital bankruptcies. But the real answer, as Nichols makes plain at the end of the quote, is political. The powerful interest groups Nichols lists would resist cost control without coverage expansion. Like it or not, those interest groups must be on board for anything substantial in health policy to occur. That’s just reality.
Hence, proposed health reform is heavy on coverage expansion and light on cost control in the near term. If there is to be any real cost control it will come later, and gradually. To think it can be done first is fantasy.
The Marketplace Piece
The text and audio of the Nancy Marshall Genzer’s very brief story is already posted on the Marketplace website. I’m quoted as saying, “The vast majority of insurance markets are considered very concentrated. And that’s generally viewed as a threat to the welfare of consumers.”
Those are two true statements. There wasn’t room in the story for the other related things I have said or written, but you can find them elsewhere. In particular, it is still not at all clear that reducing insurer market power without parallel efforts on the provider side will help consumers. Nevertheless, allowing additional insurer market concentration via mergers is, in general, probably not a good idea provided health care providers do not themselves consolidate further.
The much larger and more important point, however, is that other elements of health reform are vastly more important to consumer welfare than the over-sized concern about insurer market concentration. We’re being distracted by that issue for a reason: it plays well and is helping sell the overall reform package by boosting Obama’s and Democrat’s popularity.
A Bit More on Premium Increases
This post is jointly authored by Austin Frakt and Ian Crosby. It is a supplement to our Kaiser Health News (KHN) column, which I also posted on this site on Sunday. If you haven’t read that column yet, do so first. This post links back to many of our prior posts on related issues. Thus it serves as a portal to further reading.
In his recent NY Times opinion piece, Reich claimed that the current antitrust exemption for insurers “is why a handful of insurers have become so dominant in their markets.” As we wrote in our KHN column, this claim is extremely dubious. Moreover, it is far more likely that premium increases are largely due to factors other than insurer concentration.
As we’ve noted previously, the exemption (under the McCarran Ferguson Act) is very narrow, and does not apply to mergers, acquisitions, and most other kinds of conduct by which companies get big. We’ve also noted that there are some types of conduct by which insurers could defend and expand their market share that arguably do fall within the scope of the exemption, but they are sufficiently modest and theoretical that is unlikely they bear much responsibility for the current state of market concentration.
We’ve also made the larger point that even if repeal of the exemption or other forms of stepped up antitrust enforcement were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts against providers. A recent paper by Berenson, Ginsburg, and Kemper in Health Affairs documents the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans, and other stakeholders in six California health care markets, the authors conclude that
[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.
… [P]roviders are developing increased leverage through single-specialty group formation and merger-and-acquisition strategies that do not involve integration. Nevertheless, given the push in Congress and elsewhere to restructure health care delivery with accountable care organizations, it is instructive that whatever their merits in improving quality and efficiency, California-style integrated care systems currently produce higher prices that undermine cost containment.
Other work by health economists, reviewed on this blog, indicates that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Diluting the insurance market may have small downward effects on insurer profit and administrative efficiency, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
Therefore, concentration among providers, and in particular hospitals, must also be addressed. Unfortunately, permitting additional provider coordination and integration via accountable care organizations (ACOs), as envisioned in current health reform legislation, may not help matters. The bundling of payments ACOs would facilitate may save money, but only if the greater market power of additional provider integration does not act to offset those savings.
Taming health care costs will be hard. The job is made harder when we’re looking in the wrong place. Insurers may not deserve the special treatment they’ve received from the federal antitrust exemption. But they also do not deserve the level of blame they’ve received for health care costs.
Does Bart Stupak Want A Bill?
Congressman Bart Stupak (D-Michigan) leads a group of about a dozen Democratic representatives who demanded that restrictions on public funding for abortion services be included in the House health reform bill last fall. He is now insisting that he and his group will not vote for the Senate bill, currently before the House, unless some way is found to tighten the Senate bill’s restrictions on abortion. However, because the Senate no longer has the 60 votes needed to overcome Republican filibusters, the only way for the House to amend the bill is through a parallel “sidecar” budget bill that would be passed in the Senate via budget reconciliation rules. Abortion is not a budget issue so Stupak’s concerns probably cannot be addressed in the sidecar bill.
Is Stupak trying to kill health reform? He says he isn’t and he is continuing to negotiate with House leaders. Stupak’s statements closely parallel those coming from the US Conference of Catholic Bishops, which strongly supports the larger reform but insists on tighter abortion restrictions. The question for Stupak and the bishops is: Are you willing to risk losing your preferred abortion language to ensure passage of health reform? If so, the abortion issue could be split off into a third bill that would get a vote on its own. Such a deal would probably guarantee success for health reform. So far, Stupak and the bishops have not embraced this approach. Instead, they are demanding that their language be included in the sidecar bill. The bishops would then work to get 60 votes in the Senate to overrule the Parliamentarian and allow the abortion provision to pass via reconciliation. I don’t see how pro-choice Democrats and anti-reform Republicans could be convinced to vote with the bishops, so this strategy doesn’t appear to lead anywhere.
With victory on abortion unattainable for the bishops, the question remains: Do they want a bill? If so, face-saving votes can be arranged that demonstrate their commitment without killing the bill. If not, they will kill the bill. My personal guess is that they want a bill, but we probably won’t know for sure for about two weeks.
Popular But Ineffective: Repealing Insurers’ Antitrust Exemption
This post is a slightly modified version of one by Austin Frakt and Ian Crosby that originally appeared at Kaiser Health News last week. Full references have been added for academic papers cited.
It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.
Those who claim that the antitrust exemption is the main reason a few insurers have substantial market power don’t understand the narrowness of that exemption’s scope. The law at issue, the McCarran-Ferguson Act, shields most aspects of “the business of insurance” from federal (but not state) antitrust oversight. This means that only those insurer activities dealing directly with providing insurance–think underwriting risk, setting rates, defining benefits, and the like–are not ordinarily subject to federal antitrust scrutiny.
There are exempt insurance practices that, at least in theory and under certain conditions, could help insurers defend and expand their market share against competitors. But the exemption simply does not shield the most straightforward kinds of conduct that make companies big.
Activities not connected with the basic risk-spreading function of insurance are deemed “the business of insurers” rather than “the business of insurance” under the law, and do not enjoy any federal antitrust exemption. Thus mergers and acquisitions among health insurers are as aggressively (or passively) scrutinized as those in any other industry by federal antitrust enforcers.
Health care reform advocates concerned about the high degree of concentration in today’s insurance market cite the more than 400 mergers among health plans allowed over the last 13 years. But repeal of the McCarran-Ferguson antitrust exemption would have literally no effect on this trend. Even if other forms of stepped-up antitrust enforcement or other means of encouraging competition were to have a material impact on insurer market power, there is little reason to believe it would produce tangible benefits for consumers absent parallel efforts targeting the provider side of the market.
While there is some evidence that insurers’ market concentration plays a role in premium increases, that role is small. For example, a National Bureau of Economic Research paper [1] found that only 2.1 percent of employer-sponsored health insurance premium increases between 1998 and 2006 were due to insurer concentration.
It is far more plausible that a high proportion of premium increases are due to a combination of concentration in the provider market and adverse selection, especially in the nongroup market. After all, most premium dollars are not kept by insurers and go toward payment of health care services [2]. Insurers take a little off the top, but not enough to be blamed for anything like the perennially large rate increases.
A recent Health Affairs paper [3] describes the upward pressure on costs driven by provider organization and concentration. Based on hundreds of interviews with representatives of hospitals, physician organizations, health plans and other stakeholders in six California health care markets, the authors conclude that “[t]he shift in who holds the upper hand in negotiating payments—once held by health insurance plans but now resting with health care providers—has had a major impact on California premium trends.” And we all know what those trends have looked like lately.
Perhaps counter-intuitively, large insurers can be bulwarks against high costs driven by provider consolidation. Two papers [4, 5] by health economists in the International Journal of Health Care Finance and Economics indicate that the high degree of market power held by insurers acts as a counterweight to that held by hospitals. Therefore, diluting the insurance market may have small downward effects on insurer profit and administrative costs, but it could have large upward effects on prices of health care services. Those higher prices would be passed on to consumers.
That’s why those who understand our health care system know that costs will not be tamed by a focus on the insurance market alone. The Congressional Budget Office has scored the likely effect on premiums of health insurer antitrust repeal as insignificant. Therefore, concentration among providers, and in particular hospitals, must also be addressed.
Don’t get us wrong–we don’t think that the current antitrust exemption is good law or policy. But cracking down on insurer market power without doing the same against providers may well have the opposite of its intended effect. Taming health care costs will be hard. Attacking insurers is, by comparison, very easy, as well as popular. But in this case, what is popular will not be particularly effective.
References
[1] L Dafny, M Duggan, and S Ramanarayanan (2009). Paying a premium on your premium? Consolidation in the U.S. health insurance industry. NBER Working Paper 15434.
[2] L Dafny, K Ho, and M Varela. (2010). Let them have choice: Gains from shifting away from employer-sponsored health insurance and toward an individual exchange. NBER Working Paper 15687.
[3] R Berenson, P Ginsburg, and N Kemper. (2010). Unchecked provider clout in California foreshadows challenges to health reform. Health Affairs Web Exclusive, February 25.
[4] R Feldman and D Wholey. (2001). Do HMOs have monopsony power? International Journal of Health Care Finance and Economics 1(1).
[5] L Bates and R Santerre. (2008). Do health insurers possess monopsony power in the hospital services industry? International Journal of Health Care Finance and Economics 8(1).
Creeping Fraud
Uwe Reinhardt may be right to doubt, based on his own experience as a board member of both for-profit and non-profit hospitals, “that any hospital board or any hospital executive in the country would even dream of knowingly defrauding the United States government.” But that’s not how Medicare and Medicaid billing fraud and overpayment generally happens. Rather, as the the massive Columbia/HCA fraud of the 1990s illustrates, the role of hospital boards and executives in cultivating fraud is more likely to be the application of relentless and unrealistic pressure to increase profits, combined with lax oversight and indifference to how results are achieved. Under these conditions, fraud (and its systematic rationalization) is something that grows organically within a company.
Nor are such dynamics a thing of the past. Take, for example, the practice of “upcoding” — a form of diagnosis inflation in which procedures and patients are systematically assigned higher standardized Medicare reimbursement codes than they really warrant. To give an example that figured prominently in the HCA fraud, a hospital can double its reimbursement for a simple pneumonia patient by classifying the patient’s condition as a complicated respiratory infection. Silverman and Skinner (2004) identified a starkly greater incidence of such upcoding among for-profit hospitals compared to non-profits during the heyday of upcoding in the 1990s. And the Center for Budget and Policy Priorities cites Centers for Medicare and Medicaid Services findings that upcoding persisted in the last decade:
In reviewing data from 2000-2003, CMS found an increase in patients being categorized as needing higher levels of care, but did not find a corresponding change in patients’ underlying health status or in the average amount of home health care resources used to treat them. CMS concluded that some of the changes in how patients were categorized likely reflected upcoding. Further analyses revealed that since 2000, the observed case mix — an indicator of the characteristics of the beneficiaries being served by home health agencies, such as age, gender, and health status — increased by roughly 13 percent. However, more than 90 percent of this increase was a result of changes in documentation and coding practices rather than changes in patients’ medical needs.
In light of these findings, its easy to see how measures designed to maximize legitimate reimbursements can drift into systematic overcharging without any conscious decision by management or directors to cross the line. The internal controls that Reinhardt decries as burdensome and unnecessary cost centers are in fact a necessary immune system in economic organisms that are metabolically inclined toward fraud. While these costs (and those of Senator Coburn’s absurd secret inspector corps that the President has sadly embraced) can’t reasonably be avoided in the existing fee-for-service Medicare regime, perhaps further progress toward outcome-based reimbursement in the direction set by the Senate health care bill can move us in that direction.
Small Businesses and the Excise Tax
Kaiser Health News and National Public Radio have a jointly-produced story today on small businesses and the excise (Cadillac) tax. It’s reported by Jenny Gold who writes
Higher-cost plans, dubbed “Cadillac” policies by some, often have generous benefits with low deductibles and co-payments, but this is not always the case. Premiums may also be high because customers are charged more because of their age, gender, geographic area or heath status.
Small businesses are at a particular disadvantage. A study published in 2006 in the journal Health Affairs found that the smallest employers pay an average of 18 percent more than large businesses for the same health plan, because they don’t benefit from pooled risk the way a large business does, and administrative costs tend to be higher.
I think there’s more to the story than what was included in the piece. First of all, small businesses will have access to the exchanges. So they won’t be subject to the high loading fees they experience today. Second of all, the risk pool of exchange-based plans will be the entire population in those plans, not the specific population of an employer. Finally, it is my understanding that the excise tax will be modified to accommodate variations in age of risk groups and geographic variation in health care costs.
Putting those reform features together, it doesn’t seem that a small employer has much to be concerned about. In fact, on the whole, I would expect small employers to be better off under health reform. I think the excise tax is only something to fear if one views it in isolation, without consideration of the other reforms that benefit small businesses. But nobody is proposing to pass just the excise tax. So, analysis of it apart from the full package makes little sense and leads to incorrect conclusions.
Kaiser Health News Opinion Column
Ian and I have a co-authored Kaiser Health News opinion column out today. We argue that repealing insurers’ antitrust exemption won’t change things much and isn’t likely to help consumers significantly. Further, a focus on competition in insurance markets has the potential to distract policymakers and the public from the principal source of increases in premiums: concentration in the provider market.
Here’s the opening paragraph:
It is well known that concentration in the health insurance industry is to blame for rapidly rising premiums. Well known, but wrong. Taking political advantage of this common misconception, last week the House passed a bill to repeal insurers’ antitrust exemption. But even if that bill becomes law it won’t do much good, and politicians’ distraction could actually harm consumers. It’s far more likely that premium increases are largely due to other factors.
Kinda makes you want to read the whole thing, right?
Medicare Advantage Payments Illustrated
My post earlier today explained the difference between administrative and competitive pricing systems. The administrative pricing system I study (a lot) is that for Medicare Advantage (MA) plans. To present some of my work on such plans at seminars and conferences this year I cooked up some graphs (below) that illustrate the relationship between traditional Medicare costs and administratively set MA payments in a way I’ve not seen before. Those very familiar with the MA payment system can skip to the fourth paragraph (beginning with “Onward … “).
Health care wonks know that an individual enrolled in MA costs Medicare more than (s)he would if (s)he enrolled in traditional fee for service (FFS) Medicare. MedPAC and CBO have both estimated that MA plans are paid about 12% to 14% more than FFS Medicare (depending on year). Both organizations have recommended cutting MA payments, and the House, Senate, and President’s health reform proposals would do so, though in different ways.
Before explaining the graphs, I need to mention one technicality. Other than certain entities with special relationships with Medicare (like CBO and MedPAC), researchers do not have access to the exact amounts Medicare pays each MA plan per month for covering a beneficiary. What is public, however, is the “benchmark payment rate.” That’s the maximum monthly amount a plan can receive for an average risk beneficiary. The difference between the benchmark and the actual payment is not large on average; it’s a few percentage points. So, for research purposes it is common to use the benchmark as a proxy for payment. Given the close correspondence of the two, conclusions based on one versus the other are unlikely to be qualitatively different.
Onward … The first graph, immediately below, plots monthly per beneficiary benchmark payment rate versus per beneficiary FFS cost (both in year 2000 dollars) for 2008. Each datum is a circle that represents a single U.S. county, of which there are about 3,100. The area of each circle is proportional to the total county MA enrollment. The 45-degree line indicates what the payment rate would be if it were set to FFS cost (as recommended by CBO, MedPAC, and the House health reform bill).
The first thing to notice about the 2008 plot is that every county benchmark exceeds FFS cost (the centers of all circles are above the 45-degree line). Moreover, many of them exceed the FFS cost by a lot. This is a visual representation of the additional cost to Medicare of MA enrollees. The second thing to notice is that for FFS costs above ~$550, the data points seem to follow a line that is parallel to the 45-degree line (explained below). The final thing to notice is the clustering around benchmark payment rates of about $550 and $625 for FFS costs below about $550. These two effects–above and below the FFS cost $550 mark–can be explained by the manner in which benchmarks are set.
By statute, benchmark payment rates are a complex function of many things. The key is that since 1997 the function is not directly related to local, current year costs. In each county, the benchmark is the maximum of eight or so various intermediate “candidate benchmarks” (for lack of a better term). Most of the candidate benchmarks are, in one way or another, tied back to historic (not current) county-level FFS costs, trended forward using Medicare’s overall (national) cost inflation rate. This accounts for the linear (45-degree line) trend in the foregoing figure above $550 in FFS cost. (Clearly benchmarks are related to local, current year FFS costs. The plot is not complete randomness. But since local, current year FFS costs are also observable to the researcher, one can control for it.)
Large urban areas with populations of over 250,000 people are subject to a minimum urban floor rate. Other less populated areas are subject to a minimum rural floor rate. These account for the clustering at $550 (due to rural floor) and $625 (due to urban floor) for FFS costs below about $550. The actual benchmark is the county-level maximum of all the various candidates, which explains, in broad terms, the rest of the structure of the graph.
The choice of year isn’t that relevant here. The general structure of the foregoing graph is the same in 2009 and for several years prior to 2008. Go way back to 2001, however, and things look a bit different (see the following figure). Notice that in 2001 some payment rates are below FFS costs (the 45-degree line). Also, notice that the effect of the urban and rural floors is less pronounced.
In general, data in the 2001 graph are shifted downward and leftward relative to the 2008 figure. Though both are adjusted to 2000 dollars, they are done so using the CPI-U, not medical inflation. The latter has grown more quickly than the former so 2008 payments and costs are higher than those for 2001, even accounting for general inflation. It is also worth noting that the 2001 figure are actual payments. Though the vertical axis is labeled as “benchmark,” such a thing didn’t exist in 2001. However, as mentioned, the difference between benchmarks and payments is small.
The differences between the 2001 and 2008 figures can be explained by a combination of changes in payment rate methodology (I won’t go into it, though urban and rural floors existed in both years) and the emergence of private fee for service plans (such plans are explained in a prior post). PFFS plans emerged in 2001 but didn’t become popular until after 2005. They have expanded rapidly in urban and rural floor counties, causing those features to be more pronounced in the 2008 graph as compared to the 2001 graph. More than any other plan type, PFFS plans are responsible for the increase in costs of the MA program over this time period.
In conclusion, the fact that MA payments are set administratively (by statute) and partly in ways divorced from local, current year cost explains why per beneficiary MA payments exceed those of FFS Medicare and why the difference between the two has been growing over time. These are not new revelations. But the graphs above make obvious the effects of what is otherwise an inscrutable payment system.
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