• Do health plans even want to control spending?

    I asked Brian Klepper why private insurers are such slaves to the Medicare’s relative physician payment rates and if anyone has interviewed plan executives on the subject? Here’s his answer, posted with his permission:

    I doubt there is much academic literature, mostly because the plan execs aren’t all that interested in being scrutinized, and its difficult to do the work without their cooperation. I would argue that, broadly, health plan reimbursement was rooted in Medicare and still follows it for many things.

    But its important to remember that, contrary to the mythology that they want health care costs to be low, health plans make a percentage of total cost, passing the excess along into higher premiums in subsequent years. They want health care costs to be higher. In the case of primary care, low reimbursement mitigates against complexity, translating into shorter visits that encourage specialty referrals at the drop of a hat. Primary to specialty care referrals have doubled in the last decade, and a traditional primary care case that is now in a specialist’s hands will almost certainly cost 10x what it would have if it had remained. […]

    The issue is that, over the past 40 years, the health care industry has found many ways, mostly hidden, to extract large amounts of money that they’re not legitimately entitled to. This is why primary care medical homes, while important, aren’t enough. It takes a more comprehensive approach. I wrote about this somewhat here

    My recent, relevant posts are here.


    • I would agree that health plans have little incentive to control costs.
      Generally, the larger the revenue flow, the higher the profits.
      This is why insurers typically do not want to offer high deductible plans, at least with deductibles high enough to justify significant premium increases.
      It seems that people are resigned to accept premium increases way beyond their growth of incpome.
      In our discussions with Milliman, they had medical trend of 7% per year, and 7.5% for catastrophic claims!
      Even the recent IRS proposed regulation on premium subsidies, showed a family plan in 2016 costing $20,000 per year.
      I understand the subsidies will substantially reduce that cost, but does it make economic sense for the government to be paying 80% of the premium?
      One of the accepted reasons for a non-profit is to “lessen the burdens of government.”
      If our plan can make it to market, we can cut those subsidies over time by 60-80%, for those people who can maintain their health.
      That will substantially reduce the government’s burden, and give us a reason to exist.
      And, for those with larger claims, their premiums will be reduced from typical experience rated premiums, for our premiums are fully community-rated, not simply 3 to 1. This provides a significant break for older and sicker participants.
      Don Levit

    • Insurance companies have to balance cost and pleasing their customers. Since most insurance is bought by employers and the average American stays with an employer 5 years, limiting providers in any real way will require customers to change doctors, something they hate. And, quite possibly, new providers might be inclined to do a bunch of expensive tests on new patients with minor health problems, particularly if the records don’t get properly transferred.

      Further, insurance policies that exclude the biggest or best providers aren’t popular. So, the insurance companies have to take the prices they charge.

      In short, their leverage to lower prices is not great.

    • If you take Klepper at his word, then right now the only incentive they have to lower rates is public opinion and pushback from the odd insurance regulator (e.g. after a double digit premium hike). Global budgeting, like Massachusetts is attempting, could help. Or rate setting for various services.

      Unfortunately, as the infamous RUC demonstrates, an ill-designed rate setting program can be captured by the entities being regulated. On the other hand, Maryland’s hospital rate setting program is (afaik) well-regarded.

    • The “Plans” usually negotiate their costs for physicians through a PHO that is largely controlled by a hospital system. By leveraging this contract for the hospital system as well as their medical staff, the PHO contracts for physician reimbursement as a per cent (%) of Medicare. If the PHO is willing to abandon a contract, it may be able to achieve physician reimbursement of more than 130% of Medicare physician reimbursement rates. If not, the reimbursement could be lower than Medicare, i.e., 95% or less. By using Medicare reimbursement as the Benchmark, the Plan doesn’t require the effort to maintain their own reimbursement data base (a very large effort). The PHOs have IRS rules to follow since there are restraint-of-trade issues, especially if the PHO and its hospital system dominates a market.

    • While I agree that insurers often lack the negotiating leverage to lower costs, insurance in many ways is just like any other widget. Price goes up, demand goes down and you lose market share to competitors. So to say that insurers have no interest in lowering costs seems like an extraordinary claim.

      It’s like saying that Coke is beter off charging $5.00 a can, because 20% of $5.00 is greater than 20% of $0.85.

    • @Mike

      As prices of health care go up, so does the need for insurance. The Coke drinker can switch to water. The patient who declines insurance can’t choose not to get sick.

    • SAO – But we’re not dealing with a monopoly. The Coke drinker can switch to Pepsi if they have lower prices.

      And the insurance purchaser (in most cases) can switch carriers if another carrier offers a lower price.

    • This could be partially due to the fact that health insurance was invented by doctors and hospitals.

    • Health insurers on one hand say they want lower costs.
      On the other hand their profits are higher when costs are higher.
      The entire incentive disincentive is screwed up.

      ACA makes it even worse for consumers and better for insurers, until the govt has strangled health professionals into submission. At that point the insurers will be the next target.

      It is not who in the health industry will survive the govt power grab. It is just who will be eaten first and last.