Healthcare Town Hall

Milliman’s Mike Sturm is featured as part of a recent article in Health Plan Week (HPW) about gender as a rating factor and whether men and women should be charged the same premiums:

Gender is “like any other rating variable,” Mike Sturm, a consulting actuary with Milliman, Inc., tells HPW. “You want to establish people’s rates as accurately as possible, and obviously men and women have different health care spending patterns.”

Sturm calculates that women, including maternity costs, are about 30% to 40% more expensive than men, using Milliman research data on the weighted average of all commercially insured women and men throughout their lifetimes. Even factoring maternity into the calculation, women remain higher cost than men by 20% to 30% over their lifetimes, he notes.

Without gender rating, if a man costs $100 and a woman costs $200, the insurer would charge them $150 apiece, Sturm explains. The situation works if the man and the woman stay in the pool, he says. But if the man leaves the pool, the insurer has $200 worth of cost and only $150 of premium. Yet Sturm says this result is not necessarily clear cut because age and health status seem to be more significant rating characteristics than gender.

If an insurer rates appropriately by age, Sturm asserts that there likely won’t be much adverse selection from gender because men pay more for women’s maternity costs in the younger years, but women pay more for men’s health conditions in the later years, evening it out in the long run.

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We have talked about this before: So much in estimating the cost of covering the uninsured depends on starting with the right assumptions. The Wall Street Journal has an article on this topic today. Here’s an excerpt:

The Census Bureau estimates that the number of uninsured amounts to 45.7 million people. But the agency might be overcounting by millions due to faulty assumptions. Another problem: That 45.7 million figure includes undocumented immigrants, even though they aren’t likely to be covered under new laws.

“There is a range of uncertainty in health legislation that probably exceeds that of most other issues before Congress,” says Robert D. Reischauer, who headed the Congressional Budget Office when it was analyzing the Clinton health plan.

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ABC News published a Q&A on healthcare reform today, using the Milliman Medical Index to frame the healthcare reform challenge. Something about the $16,771 cost of healthcare for a typical American family of four seems to get people’s attention…

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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.

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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.)

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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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What follows is excerpted from a new health reform paper explaining the costs and complexities at work in the American commercial health insurance market. Read the entire paper here.

While simple answers to the question of how best to reform healthcare would be convenient, there is nothing simple about either the problems or designing a better system. A thorough understanding of health insurance costs, and the complex drivers of those costs, is essential to crafting meaningful and sustainable reform. The purpose of this paper is to illustrate and clarify some of the intricate interworkings of the factors that cause this complexity, while highlighting the need for an actuarially sound approach to healthcare reform that can consider these variables alongside one another.

Health benefit plans are complex in certain ways because they need to address various dynamics—the need for true insurance against catastrophic events, the balance between premium levels and out-of-pocket cost-sharing costs, the role of healthcare as a tax-deductible employee benefit in the U.S. system, the economic motivation underlying different copays and deductibles, and the various interactive incentives and disincentives at play as people access care. The wide range of service and provider types involved in healthcare, along with the sometimes discretionary nature of their use by patients, adds to the difficulty of achieving effective healthcare plan designs—now and in the future.

Variety in healthcare plan design enables consumers to make choices based on their own personal needs and preferences, and it allows plan sponsors and payors to manage costs and undertake innovation over time. This variety, and the resulting complexity that it necessarily entails, can be found in most parts of the American private health insurance market. Table 1 demonstrates this complexity by indicating some of the variables that contribute to differences in plan design and plan cost. Financial complexity is not unique to commercial insurance—it is also present in our large public programs such as Medicare, as well as in many other mature health markets around the globe, such as in Germany and the Netherlands.

How does the design of healthcare plans, with their inherent complexity, fit into the larger health reform picture?

·         First, simplistic reforms that do not recognize important, underlying design considerations may create unwanted, unforeseen consequences. Rather than wish complexity away, efforts might better focus on improving transparency to help all involved better understand how healthcare financing works.

·         Second, a reformed system should allow for continued innovation within the structure of the healthcare financing marketplace. Indeed, meaningful reform will require carefully crafted plan designs that help weed out and reduce waste.

·         Third, while there may be a need for or value in categorizing various levels of benefits—e.g., maximum levels for tax deductibility purposes or minimum levels for low income support—this categorization needs to be multivariate in nature. The Senate Finance Committee, in its paper “Expanding Health Care Coverage: Proposals to Provide Affordable Coverage to All Americans,”2 has categorized relative benefit levels in one way, which enables flexibility and innovation, but as presented does not deal with variables such as age and area of residence. While there is no universal yardstick for making benefit value measurements, recognition of the demographic and geographic diversity and the delivery system differences in the U.S. healthcare system today is essential. See page 5 for more specific detail on this.

This paper provides information related to some of the complexities involved in the design of healthcare benefit plans. Of particular importance in this regard is an understanding of differences in cost levels due to plan design. We address this by providing cost relativities among different benefits and by comparing different plans to a typical design for employment-based PPO coverage, the cost of which Milliman calculates annually as part of the Milliman Medical Index (MMI). The 2009 MMIcost for the typical American family of four is $16,771, including out-of-pocket health spending.

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Welcome to all readers, including those who have joined us from the Huffington Post after reading Deane Waldman’s latest article. We’ve included a copy of our post there from earlier today with various links to supporting materials.

Our post:

I’m part of the team that develops the Milliman Medical Index (MMI). We agree that healthcare costs are opaque and that the system is burdened by waste.

Two major factors affect healthcare costs. Reimbursement rates (how much is paid for a service or episode) and utilization (the volume of services). This year, utilization accounts for about one-fourth of the increase in our annual study, while the rest of the 7.4% cost increase is due to changes in reimbursement. But utilization remains a big deal. Talk of “reducing waste” requires smarter utilization. $700 billion a year in health costs is lost to waste. Of the “actual reasons for healthcare expenses” listed in Dr. Waldman”s article, some of the biggest sources of waste–action without evidence, inefficiency, perverse incentives, defensive medicine, and adverse outcomes and errors–result in overutilization.

Some of the top-performing care providers in the country have developed efficiencies that minimize poorly-coordinated utilization (misuse, overuse, or underuse that requires more care later). These providers’ efforts not only reduce costs but have led to better outcomes.

You could also lump “treatments available now that did not exist before” into the utilization bucket. While we continue to innovate, the cost of certain treatments has begun to exceed society”s ability to pay for them. Choices will have to be made. An effective, scientific understanding of outcomes will be an important part of that decision-making.

-Jeremy Engdahl-Johnson, Milliman Managing Editor

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