When employers facilitate health plan choices, the method for setting employee premium contributions can create selection bias toward certain options. Selection bias happens when a sicker and more costly population tends to choose one option over another. A common example is when a more open network preferred provider organization (PPO) attracts those employees who want a broader range of providers and use their benefits more than those choosing a limited network health maintenance organization (HMO).
To reduce the selection bias, employers should adjust each
option for morbidity. Because selection bias does not change the overall
morbidity of the group, it is important to set the premium contributions
without consideration for how healthy the subpopulation is within any one
option. Otherwise, the option with the sicker subgroup will become more and
Risk adjustment is used to adjust the costs of two or more cohorts of people so all cohorts can be compared as if each had the same morbidity. A risk score is calculated for each person using age, gender, and medical conditions. Risk adjustment is a way to level the playing field so that the cost differences among options reflect benefit differences as well as network and operational performance differences, but not morbidity differences.
In this paper, Milliman’s Will Fox, Brent Jensen, and Ben Diederich explain in more detail how employers can address health plan selection bias using risk adjustment.
There are many reliable research statistics from the private sector and the federal agencies that support the evidence that medical costs are rising and the current pace is unsustainable. Medical cost trend has two primary components, the number of services provided to patients (utilization) and the cost of each of those services (unit cost). While utilization management can be important for achieving cost savings, some employers are now giving further attention to the significant price variation in unit cost. Chart 1 below provides an example of the price variation using the average reimbursement as a percentage of Medicare in Buffalo, New York; Indianapolis, Indiana; Ventura, California; and nationwide. As shown, going from Buffalo to Indianapolis reflects an 80% increase in cost, based on unit price alone.
We regularly encounter employers who don’t fully understand the impact of provider reimbursement variation on their medical plans’ financial performances. This comes as no surprise, given the limited transparency and complexity of current provider reimbursements.
Limited transparency of provider reimbursement (allowed charges)
For employers, the industry standard technique of benchmarking commercial allowable charges has historically been traditional discount analyses, which compare discounts to billed charges. However, these approaches do not provide the required rigor and precision to understand medical service reimbursement analysis—both across markets and within a given market. This is because billed charges are not standardized across providers or different services. As a result, the exact same discount could mean very different things, depending on the provider and service—in some cases, price differences of over 300%. In addition, providers often optimize their billed charges to enhance reimbursement on contracts based on billed charges.
Employers generally have had a difficult time measuring unit cost, which is solely due to the complexity of various medical procedures. There is a large amount of price variation within each inpatient diagnosis-related group (DRG) and outpatient type of service. Chart 2 below provides a powerful illustration of how reimbursement can vary significantly across even a single inpatient DRG or outpatient service category. The chart compares the commercial reimbursement for inpatient joint replacement and an outpatient MRI in three different metropolitan areas with what the government would pay under Medicare allowable. The variation in inpatient joint replacements, a large bundle of complicated services, is much lower than outpatient MRIs, which reflects a specific service that generally has little variation in intensity compared with a joint replacement.
Two reports commissioned by states planning for a health insurance exchange are now available for public consumption:
Of course every state is unique and faces its own challenges that reflect the local healthcare environment.
The Patient Protection and Affordable Care Act (PPACA) mandates that each state have a health exchange in place by January 1, 2014. These exchanges will be either of the state’s invention or under the aegis of the federal Department of Health and Human Services. This paper, the latest in a series of papers on exchanges, addresses the functions of an exchange and examines various operational considerations.
There is increased attention on Washington state’s Basic Health program with a recent Seattle PI article. Last year we checked in on this Basic Health program, which is examined alongside other reforms in Washington state.