Health insurance is increasingly difficult to afford. As reported in the 2018 Milliman Medical Index (MMI), the typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan will have annual healthcare expenditures totaling approximately $28,166. Californians are not exempt from this trend, also paying increasingly high costs for their healthcare. According to the 2013 Berkeley Forum report, employer-sponsored health insurance premium rates were projected to nearly double from 2011 to 2022, ultimately reaching $31,728 for family coverage in 2022. Those premium increases will be borne by both employers and employees. According to the MMI, on average premiums are funded approximately two-thirds by employers and one-third by employees through payroll deduction.
Some good news for Californians is that they would likely be paying a lot more without managed care plans that use the delegated model. In brief, the term “delegated model” describes a health insurance plan where financial risk for healthcare services is transferred from an insurance company to healthcare providers (e.g., physicians or hospitals). Most commonly this involves the insurance company paying a fixed, per capita dollar amount (a capitation rate) to a group of physicians, and the physicians assume financial responsibility to provide all professional services for each health plan member. They may also have full or partial risk for hospital services provided to those same members. In California, capitation can only be used in health maintenance organization (HMO) plans. Other common types of plans, PPO-style plans and other fee-for-service (FFS) plans, cannot use capitation.
Measuring the impact of the delegated model on healthcare expenditures is tricky for at least two reasons. First, the average person who enrolls in an HMO plan might have a different health status from the average PPO/FFS plan enrollee. For example, they might be younger, or just healthier than average. Second, per capita healthcare costs vary by geographic area, for a variety of reasons. HMOs tend to be concentrated in urban areas, while PPO/FFS plans are prevalent in all areas of the state.
IHA Atlas data quantifies savings
Fortunately, data published by the Integrated Healthcare Association (IHA) allows us to compare per capita healthcare expenditures for HMO versus PPO/FFS plans, adjusted for differences in the mix of members by health status and by geographic area. Results indicate that for commercial health insurance plans (i.e., non-Medicare, non-Medicaid), total healthcare expenditures per capita are lower under HMO plans than under PPO/FFS plans, as shown in the graph below. They were 5% lower in 2013 and 7% lower in 2015.*
As we move into April, health plans are working toward impending deadlines to complete rate filings for insurance products that will be available next year on state health exchanges. Last week we saw the release of two notable public analyses of premium impacts—a 50-state report from the Society of Actuaries, and a Milliman analysis for the California exchange, Covered California—and there are probably more estimates coming soon as the healthcare industry and the nation look to better understand the cost implications of the Patient Protection and Affordable Care Act (ACA).
Even though public debate has been wrestling with reform topics for three years now, there continues to be confusion over the interaction between insurance premiums and federal subsidies for lower-income individuals.
The common mistake here is that, while subsidies may reduce the amount that a lower-income individual has to pay directly for health insurance, they do not affect the actual premium. If a monthly premium for an individual policy in California is $450, a federal subsidy of $392.50 would reduce an individual’s cost to a manageable $57.50. But this is different from reducing the premium. The premium remains $450, with or without the subsidy. Here’s an illustration of this idea:
This distinction is important because premiums reflect the underlying cost of care. We cannot reduce premiums without reducing the underlying cost of care. Subsidies help make increasing premiums more affordable for lower-income consumers, but they do not actually reduce premiums. Someone still has to pay the full premium in order for the health plan to remain solvent. If the public is to better understand healthcare costs, it also needs to understand this distinction, because it is that underlying cost of care that is driving health insurance rates upward.
For a better sense of how the underlying cost of care affects premiums, read this paper. The Milliman Medical Index is also a useful reference in understanding this concept as are the videos in Milliman’s “Understanding Healthcare Costs” video series.
The Wall Street Journal reports on how states are looking to their own healthcare reform efforts as the nationwide effort stalls. Here is an excerpt:
Lawmakers in at least two states, California and Missouri, have introduced legislation for the current session to create government-backed coverage for state residents. In others, including Virginia and New Jersey, legislators are hoping to tweak existing state programs to include more people.
In 11 states, lawmakers have proposed bills for this year aimed at improving access to health care, said the National Conference of State Legislatures.
Spurred by continued voter discontent with the status quo, both Republicans and Democrats in state legislatures aim to advance their own proposals, particularly if a national overhaul remained stalled or was scaled back. “The ball’s back in our court,” said Melvin Neufeld, a Republican legislator in Kansas who is vice president of the state legislatures conference.
The head of the group’s health committee, Indiana Democrat Peggy Welch, said states had hit the “pause button” on many health issues, but they may soon be “back for the states to wrestle with.”
As the reform conversation intensifies, people are looking for lessons from various state efforts to reform their respective healthcare systems. The Chicago Tribune ran an article today comparing the Federal effort with reform attempts in Wisconsin. In March, Health Affairs looked to draw lessons from California’s attempts at reform. And of course Massachusetts is instructive.