Healthcare Town Hall

With the idea of expanding the Federal Employees Health Benefits Program (FEHBP) now in the news, it makes sense to revisit an earlier paper about cost and complexity in health plans, which includes analysis of the most popular FEHBP plan. For example, consider the range of costs among different health plans:

Read the full paper here.

Cost Bob Dobson, complexity, FEHBP, Ron Harris, Tom Snook

An article in yesterday’s Wall Street Journal about the role of “age rating” in healthcare reform is just the latest to examine what’s been described as an “arcane” issue by some in the press. The fact of the general media taking notice is quite a departure for a topic that has in the past largely generated discussion only in insurance and academic circles (and sometimes outside of healthcare).

But with healthcare reform shining light on so many different topics, age rating is a big story from coast to coast. We have blogged about age rating before and how it contributes to healthcare cost and complexity.

The Kaiser Family Foundation offers an online calculator that looks at how age rating and other reforms under various scenarios might affect premiums. The Robert Wood Johnson Foundation and Urban Institute have also collaborated on a study. And we have weighed in before on the topic of young invincibles.

Electronic Health Records age rating, complexity

What follows is a preview version of a healthcare reform briefing paper due out later this week.

“Young invincible” provision points to lingering questions
about cost and sustainability

An unresolved quandary under reform arising from the complexity in health plans

By Thomas D. Snook, FSA, MAAA

For the last several months, various Congressional committees have sought to categorize different benefit levels and establish certain minimum “actuarial values” for benefit plans. While the motivation for these requirements may make sense – if you’re going to mandate coverage, it should meet certain criteria – there are a number of potential unintended consequences that may ultimately defeat some of the purposes of reform.

This dynamic is documented in a June healthcare reform briefing paper, “Understanding Healthcare Plan Costs and Complexities.” That paper looks at various benchmarks of “actuarial value” put forward by the Senate Finance Committee and highlights a challenge to reform efforts; namely, that the values initially suggested as minimums were in fact higher than those for many existing plans. For example, the minimum “actuarial value” suggested for a “platinum” or “high option” benefit plan (i.e., the richest plans) had a value of .93 when in fact typical HMO-style plans carry an “actuarial value” lower than that, such as the one with a .91 value shown in our paper. The operating definition of “actuarial value” is borrowed from the Finance Committee: “the ratio of benefit costs to allowed cost (i.e., the cost of covered services, prior to member cost-sharing).”

Since releasing these initial actuarial values in May, the Senate Finance Committee has modified the ratios downward somewhat. A paper published by Sen. Max Baucus over Labor Day weekend, “Framework for Comprehensive Health Reform,” includes values that are lower than those suggested in May (e.g., the new value for “platinum” plans is .90, more in keeping with the typical HMO-style plan).

That said, the risk still exists that any minimum benchmark may in fact exceed benefits for existing plans, which may result in cost increases for payers and consumers.  This is particularly true of the “bronze” level of benefits cited in the Baucus paper.  At 65%, this minimum “actuarial value” would preclude high-deductible health plans, which currently constitute a preponderance of policies in the individual health insurance market.  Essentially, the position in the Baucus proposal is that reform will require these individuals to buy up to a richer benefit package than they currently have.

A new wrinkle

The “Framework” paper also highlights another possible issue when it outlines an exception to the bronze, silver, gold and platinum benchmarks set forward. Quoting from the paper:

“A separate ‘young invincible’ policy would be available in addition to these benefit options. This policy would be targeted to young adults who desire a less expensive catastrophic coverage plan but with a requirement that preventive services be covered below the catastrophic amount. Cost-sharing for preventative benefits would be allowed.”

On the one hand, the creation of a “young invincible” group makes a certain amount of practical sense. Many uninsured are young people with modest income who do not see the need for insurance, and they are likely to desire the most affordable option. Indeed, their particular risk profile may warrant a less-expensive option.  This same thinking may also apply to other population sub-groups.

On the other hand, creating a separate pool for these people will result in unintended consequences elsewhere. The people most likely to be attracted to “young invincible” policies—obviously the young and healthy—are people with precisely the kind of risk profile that can help offset the costs posed by older and/or less-healthy individuals under community rating. 

Put another way, any insurance pool has a mix of healthy and non-healthy lives. If you take, say, the healthiest 10% and isolate them in their own pool, the cost for the remaining 90% will be higher. Might participation by these healthy individuals have otherwise helped minimize the cost of the standard platinum, gold, silver and bronze benefit options without the lure of a “young invincible” policy?  Would they have been willing to pay the cost associated with any of the four standard options?  These are challenging issues that need to be considered carefully.  The “risk mix” is a key consideration when developing benefit options and risk pooling provisions that may be prescribed under insurance reform.

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Different healthcare benefit plans have different actuarial values, which have been defined by some as the ratio of benefit costs to allowed cost (i.e., the cost of covered services, prior to member cost-sharing). In other words, the actuarial value (using that definition) represents the portion of the total cost of covered benefits that are paid by a health insurance plan.

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Managed Healthcare Executive interviewed Milliman principal Tom Snook about his recent health reform paper, “Understanding health plan costs and complexities.” Excerpting from the article:

“Looking forward into the post-reform world, execs will need to be prepared for the possibility of a different—possibly dramatically different—landscape,” says Thomas D. Snook, FSA, MAAA, principal and consulting actuary, Milliman. “All of us will need to be agile and flexible to adapt to new market conditions and perhaps give up old maxims. Evolve or prepare for extinction.”

The paper provides a primer on certain key variables that influence the cost of healthcare—and thus health insurance—in complex ways.

“Our primary intended audience is those outside the managed care/health insurance industry,” Snook says. “These individuals may not intuitively grasp some of these ideas, which those of us in the industry have dealt with for years and hence are intimately familiar with. Our goal is to caution those in a position to reform healthcare that the issues are very complex and will not be easily solved with a simplistic approach.”

Cost, Reform complexity, Tom Snook

What follows is excerpted from the new health reform briefing paper, Understanding Healthcare Plan Costs and Complexities.

Not all health plans pay providers at the same rates, creating another layer of complexity. The Centers for Medicare and Medicaid Services can pay less for Medicare services than commercial insurers because of the strength that comes with its size (it is the largest payor in many if not all U.S. markets) and because of the fact that it is backed by the power of federal law. The same principles apply to state Medicaid programs, although the relatively low levels of reimbursement, even compared to Medicare, have led to problems in a number of geographic areas with access to certain types of providers. In private commercial healthcare plans, the largest insurers can generally negotiate better rates than smaller payors, and typically enjoy competitive advantages as a result.

The fact that large government programs such as Medicare and Medicaid generally pay lower rates than commercial insurance plans creates a pattern of differential revenue levels to providers, which can produce a variety of consequences. For example, hospital payment rates for Medicare and Medicaid are determined unilaterally by those respective public programs. By contrast, most private healthcare plan payment schedules are negotiated. Cost-shifting to nongovernment plans and/or other steps to balance revenue against costs occur because of the overall budget needs and revenue desires of individual hospitals—which vary based on such factors as their mix of patients, their underlying cost structure, and the efficiency of their operations.

There is no easy solution given the need for fair and adequate payment to providers and the need for improved efficiencies and lower costs that do not impair access or quality. Both the potential revenue shortfalls and the need for increased efficiency are real. This added layer of complexity overlays the other variables at work to create a sometimes confounding interplay that demonstrates the shortcomings of simple solutions.

Cost, Reform Bob Dobson, complexity, Cost, Ron Harris, Tom Snook

What follows is excerpted from the new health reform briefing paper, Understanding Healthcare Plan Costs and Complexities.

Network and provider choice is another dimension that is important in figuring costs. When employees (or individuals purchasing their own insurance) are choosing a benefit plan from a list of potential choices, price will be a factor, and depending on their socioeconomic status, it may be the main factor. But the doctors and hospitals in the plan’s network may also be a factor. Often in the employer group market, provider options must meet certain minimum standards for an employer to even offer a particular benefit plan to its employees. For example, Phoenix has a number of hospitals, but there are three prestigious, tertiary, relatively expensive hospital systems—these are the hospitals with a reputation for excellence in treating complicated conditions and for performing highly specialized surgeries. A plan serving the Phoenix market usually must include two of these three hospitals in its network or find itself at a strong disadvantage from a competitive standpoint.

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What follows is excerpted from the new health reform briefing paper, Understanding Healthcare Plan Costs and Complexities.

Selection is the notion that people will make economic choices to their own benefit when they choose an insurance plan. In this context, to their own benefit refers to the person’s need for insurance. Typically, people with high morbidity—that is, people with relatively higher expected claim costs in the coming year—are more inclined to select richer plans. They do so because they anticipate significant healthcare spending and they want to choose the plan that costs them the least out of pocket. Conversely, people who expect a lower morbidity—that is, people who don’t think they’re going to spend much on healthcare costs because of their age, health, etc.—usually choose relatively less rich benefit plans. This pattern is not absolute, but it holds up over a large population of insured.

For most healthier people, the cost sharing is not a large concern, although the share of health insurance premium that they are required to pay may be. These people may seek savings with a plan that requires them to pay a lower premium. This becomes important when considering plans like the most popular FEHBP plan and the Milliman Medical Index plan. The availability of a relatively rich benefit program, as is the case with these two examples, is more likely to attract sicker people, while healthier people are more likely to choose a less rich plan with lower associated premium costs. (This dynamic is discussed in more detail in an interview published last year.)

Cost, Reform adverse selection, Bob Dobson, complexity, Cost, Ron Harris, Tom Snook

What follows is excerpted from the new health reform briefing paper, Understanding Healthcare Plan Costs and Complexities.

Total cost depends on a number of factors that begin with plan design and then take into account specific characteristics of the population insured. Factors can include age, gender, and other demographics as well as health status and habits. Tables 2 and 3 give a sense of the range of costs associated with different people across different plan designs. There are several ways to compare cost, including the per-member per-month (PMPM) measure often used by insurers and other plan sponsors.

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What follows is excerpted from a new health reform briefing paper, “Understanding Healthcare Plan Cost and Complexity.”

Healthcare plan design begins with the definition of services that are covered under the plan. Most comprehensive plans today cover the vast majority of services determined to be medically necessary by a licensed physician, although certain specific service types may be excluded under some plans. Other limits and conditions may also apply. For the purposes of comparative results in this paper, a broad and comprehensive scope is assumed (including coverage of preventive care and parity for mental health and substance abuse treatment).

Within the scope of covered services, benefit provisions vary widely. Some plans require copayments for certain types of services at the time the service is rendered. Some plans incorporate a deductible, which must be satisfied before benefit payments commence for the services involved. Following satisfaction of the deductible, coinsurance typically applies (e.g., 80% paid by the plan and the remaining 20% falling to the consumer as an out-of-pocket expense). Separate provisions may apply to out-of-network services or to services subject to prior authorization under an HMO or PPO.

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Cost, Reform Bob Dobson, complexity, Cost, Ron Harris, Tom Snook