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Will Association Health Plans Fix Our Ailing Healthcare ‘System’?

After at least six failed attempts to repeal and replace the Affordable Care Act (ACA), President Trump and some Republicans, notably, Kentucky Sen. Rand Paul, are poised to resurrect the quest to fix our ailing healthcare-cost conundrum. This new attempt, issued on October 12 through an executive order, discontinues cost sharing reductions for many low-income Americans, expands short-term, limited-duration medical plans, and expands access to association health plans (AHPs).

The AHP is really an old approach, shrouded in anecdotal arguments that sound hopeful – at least in theory.

AHPs would allow small-employer groups and individuals to join newly-created federal-certified associations based on certain types of professional, trade or interest groups – that offer insurance coverage to its members. The plans would be sold across state lines and have reduced state oversight. It should be noted that many states already have interstate agreements that allow their residents to purchase out-of-state plans. According to supporters, AHPs allow small employers to have more bargaining clout with insurance companies and be exempt from the ACA’s requirements on having to offer essential benefits. The argument is that AHPs will increase product options for insurance shoppers and, in doing so, lower health insurance premiums.

AHP History

The idea of AHPs has been around for decades, often cloaked in different names depending on how they are funded (fully-insured vs. self-insured). For example, ‘small business health plans’ are also known to be AHPs. These plans are proposed to operate outside state insurance regulatory authority and beyond the reach of state consumer protections and solvency laws. Another name given to AHPs in the past are multiple-employer welfare arrangements, or MEWAs. Self-insured MEWAs have a checkered past, largely due to having no clearly-defined regulatory authority. This caused a great deal of problems when multiple MEWAs went bankrupt and consumers had problems addressing financial responsibilities.

Adverse Selection

Opponents of AHPs are concerned with a two-word nemesis found in the insurance world – adverse selection. In health insurance, adverse selection happens when sicker people buy health insurance while healthier people don’t buy coverage. The American Academy of Actuaries, an organization that provides actuarial advice on risk and financial security issues for policymakers, is justifiably concerned that if AHPs are given preferential treatment on regulatory insurance rules, other individual and small group markets will be adversely impacted by having more costly Americans maintain coverage in alternative, non-AHP plans.

Through AHPs, young, healthy Americans would likely gravitate to acquiring cheaper, non-ACA insurance plans that would offer fewer comprehensive benefits. On the other hand, older, sicker Americans would desire to keep the more comprehensive ACA plans, thereby remaining with the alternative non-AHP plans. Over time, the insurance rates would increase for the older Americans and become more unaffordable. In the insurance world, this adverse-selection phenomenon creates a ‘death spiral’ that will eventually drive insurance companies out of the non-AHP markets.

Based on my past work in the benefits world, I have found AHP-type arrangements to be long on anecdotal promises, as mentioned above, but seldom provide the desired outcomes in a highly dysfunctional healthcare ‘system.’ Yes, removing some restrictive regulatory barriers may possibly shave a few percentage points off premiums, but this approach does little to nothing in reforming the complexities and inefficiencies found within the delivery of healthcare – where most time and energy must be spent to control costs and improve quality-of-care outcomes.

If AHPs can survive legal challenges from states and federal courts, AHPs may possibly serve one instructive role – the eventual demonstration that this ‘market-based’ silver bullet won’t fix the crux of our healthcare woes.  Broad competition currently happens between health plans, provider networks, hospital groups, physicians and clinics. How well has this level of competition ‘fixed’ our cost and quality problems? It has not.

In their 2006 book, Redefining Health Care, Michael E. Porter and Elizabeth Teisberg argue that the ‘right’ level of competition should be addressing particular medical conditions over the “full cycle of care, including monitoring and prevention, diagnosis, treatment, and the ongoing management of the condition.” The authors believe that if we want competition in healthcare, we must push for better ways for physicians and hospitals to compete – making them the best at addressing a particular set of medical conditions.

The value in healthcare comes from the delivery of the care, rather than relying on insurance approaches that merely attempt to carve up an already-bloated pie. The centric goal in healthcare should be to improve the quality of health outcomes per dollar spent. This is known as healthcare’s true ‘value.’

Embracing AHPs does little to address this value.

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Healthcare Spending – Few Incur the Most in Claims

A country’s distribution of wealth can be eerily similar to its distribution of healthcare spending. For example, a larger portion of wealth of any society is owned by a small percentage of the people in that society. Likewise, the preponderance of healthcare spending comes from a small percentage of people with multiple chronic conditions.

Vilfredo Pareto, an Italian civil engineer, economist and sociologist, termed the distribution of wealth, now known as the Pareto principle, as the “80/20 rule” – of which 20 percent of the population controls 80 percent of the wealth (some caveats apply, but you get the gist of this concept).

Let’s take a look at healthcare spending in our country. Most recently, the National Institute for Health Care Management (NIHCM) released a series of charts that provides a great deal of insight on how a few Americans can greatly impact overall healthcare spending. This insight, of course, is nothing new, yet the slides have been updated, using data from the 2014 Medical Expenditure Panel Survey.

The chart below provides a bird’s eye view of American’s spending distribution in 2014. In that year, the top 10 percent of healthcare spenders accounted for two-thirds of all spending. In healthcare, Pareto’s 80/20 rule might need to be adjusted to the “90/10 rule.” Digging deeper, the top five percent of spenders comprised half of all spending, while only one percent of spenders made up more than one-fifth of all spending.

In a country that spent roughly $3 trillion on healthcare in 2014, about $2 trillion was spent by 10 percent of all spenders and $600 billion was spent by just one percent of healthcare spenders. On the backside, the bottom 50 percent of spenders account for only three percent of spending – quite amazing, right?

In the chart below, the bottom 90 percent of the “Civilian Non-Institutionalized Population” paid $1,500 or less in out-of-pocket costs in 2014, while the top one percent of the distribution had out-of-pocket costs in excess of $6,100, and their mean spending burden was estimated to be nearly $11,000.

Over the past decade (2006-2015), spending for personal healthcare services increased by more than $2,400 per person – roughly a 40 percent increase. Higher spending was observed in all six sectors during this time, with hospital care leading the way:

  • Hospital Care48 percent
  • Home Health & Other LTC Facilities and Services41 percent
  • Physician and Clinical Services35 percent
  • Retail Prescription Drugs34 percent
  • Dental and Other Professional Services30 percent
  • Retail Durable Medical Equipment & Other Medical Products28 percent

Yes, prescription drug costs continue to attract a great deal of media air time concerning price inflation., But it’s hospitals, physician and clinical services and home health that grew more than retail prescriptions over this same time period.

The following chart illustrates the steady increase in per-capita spending for most types of services – such as hospital care, home health and other long-term care, and physician and clinical services. However, retail prescription drugs increased most rapidly from 2013 to 2015, warranting public scrutiny.

Aggregate national spending on personal healthcare services has risen by over 50 percent over the period 2006-2015. Public and private payers are spending more in total, in addition to patients personally paying more (out-of-pocket).

Despite more Americans having high-deductible health plans, other payers (e.g. Medicaid, Medicare and Private Insurance) continue to pay a higher share of the cost.

As health costs continue to increase, the share of total health spending by patient or family has actually decreased (see below).

What do these charts suggest? Healthcare continues to be highly concentrated (few spenders incur the most in claims), costs for all major types of care continue to increase more than we would like, and the spending of the public and private plans continue to outpace the out-of-pocket costs that individuals are required to pay. Finally, personal healthcare spending accounts for a greater portion of the median personal income (see below).

Despite the implications of the above data, recent House and Senate activity in Washington fails to address the source of the cost issue. Much of the ‘healthcare’ debate is about the individual insurance markets, including how to fund Medicaid. What we need is to have an honest, public debate about the relative costs and worth of healthcare – also known as ‘value.’ Currently, we reward volume, not value, in how we pay for the care we receive. The incentives and disincentives we use to ‘reward’ the players in healthcare determine both intentional and unintentional consequences. Because of this, our healthcare ‘system’ is merely performing as haphazardly designed. Let’s solve the individual market and move on.

Perhaps as we move forward, progress will be possible when politicians set aside ideology and focus on pragmatic solutions that put consumers first. That should be our collective hope.

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The Cost of Having Healthcare Choices

Throughout our lives, each of us must make choices between unpleasant options. For example, our backyard deck is due for a major overhaul since many boards have rotted.  Should we hire a reputable carpenter to replace our deck, which can be very expensive? Or, should I perform the work myself, which may take longer and not look as great? Given my lack of carpentry experience, neither choice is desirable, yet a new deck must be built.

In healthcare, given the paucity of price and outcomes information, we frequently face unpleasant options between the providers (physicians and hospitals) we use and the health plan coverages available for purchase.  Both provide uneasy choices that test our abilities to become full-fledged ‘consumers.’

To become knowledgeable consumers, Americans want to have numerous options available before making a purchase. This is the nature of a market-based economy that allows transparency to keep vendors honest and accountable for their products and services. In a functional marketplace that allows for cost and quality transparency information, sellers are nudged to provide the best possible ‘product’ at the most competitive cost – a winning recipe for delivering ‘high value.’

Cost of Healthcare

According to a recent article, “Healthcare Costs are Bankrupting Us,” by H. Gilbert Welch and Elliott Fisher, among the 54 prescription drugs commonly-used by Americans age 65+, Medicare pays “nearly twice as much per dose as do the government systems in Canada, England and Norway.” Open heart surgery costs 70 percent more than the next highest country, while an appendectomy is over two times more. We pay five times as much in our hospitals than other developed countries. Why? According to the authors, we have a complicated insurance system that requires “an army of billing clerks – employed by hospitals and physicians on one side and private insurance companies on the other.” Because of this, U.S. employer-sponsored health costs continue to outpace other developed countries.

Similarly, another article written by Elisabeth Rosenthal, MD, “Those Indecipherable Medical Bills? They’re One Reason Health Care Costs So Much,” paints the picture of a costly “coding war” between healthcare providers who hire legions of consultants to find ways to “upcode” procedures in medical bills. Not to be outdone, insurers hire their own coding consultants to protect their interests. Meanwhile, the patient gets lost in the complicated claims process – another reason why prices are not transparent to the public.

Cost of Health Insurance

As we all know, rising health insurance premiums have eaten into take-home pay over the years. In Iowa, the 2016 premium for family health coverage was $15,743, which is 186 percent higher than the family premium in 1999 ($5,508). This family premium is 28 percent of the Iowa household income (adjusted for inflation). In the next 10 years, using the average five-year premium growth rate in Iowa (7.7 percent), the family premium would climb to $33,056 – growing to 52 percent of the household income (assuming a 1.5 percent annual increase).

About two-thirds of the Iowa family premium is paid by the employer. Because of high-premium growth over the past decades, incomes of workers are suppressed. After paying for health premiums, take-home money is then used to pay for escalating health-plan deductibles, copayments and coinsurance. This financial tension contributes to personal bankruptcy and emotional stress – not to mention impairing the overall health and well-being of the workforce – a primary purpose for employers offering health coverage.

The Premium Dollar

In March, America’s Health Insurance Plans (AHIP), a national association of health insurers, released a simple chart showing where the premium dollar has been spent during 2014. This chart is based on national data for insured patients under age 65 for commercial and nonprofit health insurance companies. The breakdown of the premium dollar is as follows:

  • Prescription Drugs – 22.1 cents
  • Physician Services – 22.0 cents
  • Outpatient Services – 19.8 cents
  • Inpatient Services – 15.8 cents
  • Operating Costs – 17.8 cents
  • Net Margin – 2.7 cents

Aside from Medicare and Medicaid, which have lower operating costs compared to private (commercial) insurance, almost 80 cents of the premium dollar for private plans is used for medical expenses, while the remaining 20 cents flows to operating costs and net margin. The operating costs for private plans in the U.S. are about twice as high as the overhead costs in other less-complex healthcare systems around the world.

Medical Loss Ratio Status?

Prior to the passage of the Affordable Care Act (ACA) in 2010, many insurers who sold individual health policies admitted that between 55 – 65 cents of the premium dollar was spent on medical expenses, and the remaining amount was retained by the carrier. The ACA established the “medical loss ratio (MLR),” so that at least 85 percent was spent for medical services by large insurers and at least 80 percent was spent by smaller insurers. Of note, should the ACA be repealed, replaced or repaired, whether the MLR remains intact or not is yet another issue to be addressed.

When it comes to health insurance, Americans ‘appear’ to be willing to pay for the privilege of having choices among health insurance carriers and the multitude of plans offered by each carrier. But will having these choices really provide the added ‘value’ in the care we seek? In some cases, thanks largely to limited provider networks, we may (unknowingly) give up the freedom to choose among healthcare providers, such as physicians, hospitals and others. Will this undermine the competition we wish to have among our market providers?

As I ponder the unpleasant choices we have in healthcare, I must also focus on the backyard deck that awaits my attention.

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