Tag Archives: affordable care act

What Agents Must Know About The Mechanics Of America’s Healthcare Delivery System

I believe it is very important that agents fully understand the mechanics of America’s healthcare delivery system, why it is broken and what it might look like if it’s successfully overhauled.The fundamental problem with the American healthcare system is that we hardly spend any money on basic, general care which causes us to spend a whole bunch of money on specialty care. The fact is that five chronic diseases account for 70% of our country’s $2.6 trillion annual healthcare expenditures. Those diseases are coronary artery disease, congestive heart failure, diabetes, depression and asthma. The status quo of the way we deliver healthcare is conducive to inadequate management of chronic illness.

There’s not a lot of money in educating a family on what brings on an asthmatic attack and what to do in case a child suffers from one. But there’s a whole lot of money spent when an asthmatic is admitted to the hospital. The lack of proper care and management of diabetes can lead to very expensive care including amputations, dialysis at $10,000 a day and maybe even a new kidney at $250k. Outreach programs to help diabetics methodically check their blood chemistry, see their doctors regularly and gain access to nutritionists are generally poorly funded, if they exist at all. So it’s no wonder that diabetes alone accounts for 35% of Medicare expenditures.

Shortages in access to primary care due to lack of financial incentives (why be a general practitioner when you can make three times the money being a specialist?) cost our system hundreds of billions of dollars a year. Unless our country does more to encourage chronic disease management, the healthcare cost curve will continue upward and ultimately drive our country off the edge of an economic cliff.

Having said this, our system appears to be in the early stages of changing for the better.

For example, Congress included within the Patient Protection and Affordability Care Act (PPACA) language to encourage development of Accountable Care Organizations (ACOs) to help save Medicare money.

According to Wikipedia, many healthcare leaders define the three core principles for ACOs as follows: 1) Provider-led organizations with a strong base of primary care that are collectively accountable for quality and total per capita costs across the full continuum of care for a population of patients; 2) Payments linked to quality improvements that also reduce overall costs; and, 3) Reliable and progressively more sophisticated performance measurement, to support improvement and provide confidence that savings are achieved through improvements in care. Living examples kind of look like Integrated Delivery Systems such as Kaiser and HealthCare Partners Medical Group. In other words, in this model, hospitals and specialists within an ACO would be rewarded for positive health outcomes even if they never see the patient.

While Congress had making Medicare more effective and efficient in mind when they incorporated ACOs into PPACA, my bet is that large employers will be watching the development of this model with a great deal of interest. One of the advantages that large groups have over small groups is the fact that they can realize a return on investment (in the form of lower premiums and higher employee productivity) by incorporating chronic disease management and wellness programs into their employee management regimen. And that’s a good step towards lowering the cost of healthcare in our country.

But what about small employers?

Small employers don’t have the advantage that large employers have because of how small group rates are pooled in our markets. An employer with 10 employees who tries to help his employees live healthier lives will not realize a meaningful decrease in his health insurance premiums for his efforts because his company’s rates are pooled with thousands of others. But carriers being sensitive to the escalating cost of the delivery system and the threat this poses to the industry via reduced commercial enrollment are likely to take steps to modify their networks to look more like integrated delivery systems, ACO’s and , yes, even fully capitated HMO’s (remember those?).

Further, since the PPACA and its related changes to Medicare and Medicaid became the law of the land, the nature of conversations between providers and insurers appears to have changed for the better. So there is likely to be more productive innovation when it comes to developing future, new health care delivery models. Everyone realizes that unsustainable increases in cost are simply that: unsustainable.

Will these initiatives work? I think they will. All of this equates to more optimism that the healthcare delivery system has the potential to change and that the cost curve can begin to change course and begin to trend downward. But how long it takes to turn our system around and empower it to deliver and finance the level of care we expect for ourselves and fellow Americans for the long haul greatly depends on you, the agent.

The public needs to understand what we talked about above. The more they know about how the healthcare delivery system works, the more they will embrace and expect positive changes to it. Educating the public can bring you short term dividends, as well. The agent who typically explains away a rate increase by simply stating that this is “trend” is vulnerable to an agent who is on top of his game and can really explain what is behind the increase.

In the client’s eyes, the agent who knows his stuff and can explain in simple terms the mechanics of our healthcare system will come across as being more credible than the other guy. Increasing your understanding of how our healthcare system works will empower you to become more successful at building and retaining your base of clients. If you would like real case examples of the benefits of managing chronic diseases, let me know by completing the contact form below, and I’ll forward you the article. I promise you that it will find it eye-opening and inspirational.

Will the Outlook Get Worse?

Just as most of us thought things were improving and as the Dow was seemingly stabilizing with all of us hoping for a strong recovery, it happened. The elongated and painful negotiations regarding the debt limit, the downgrading of the US credit, and then a tumultuous stock market drop. What’s next? The recent Health Affairs article from the CMS Office of the Actuary suggests that we are now faced with higher than average health care cost increases.

One of the “hoped for” outcomes of health care reform, known as PPACA or Obamacare, was reduced health care trends and more controlled healthcare costs. Although filled with controversy, the general understanding of the overarching and primary objective for reform was the goal of achieving health care cost savings.

The forecasts are not encouraging. The impact of rising health care costs on the federal budget and deficit is concerning at best, when at the same time the value of Treasury securities is declining in the financial markets. Perhaps one of the most disappointing predictions is the table below.

The authors suggest that PPACA has significantly increased the costs of all of the key sectors related to health care. Other than the projected increase in government administration, the two most significantly increasing categories were prescription drugs and net cost of health insurance. These increases are concerning and something that we cannot afford. The biggest increase occurs in 2014 when a major part of the program is implemented.

So what should we do? What steps should be taken to be sure we achieve some control on the rapidly escalating health care costs? I propose a three step plan, one that will reduce costs no matter what happens with health care reform. We need to take action and action that is effective! The three steps are:

  • Stronger focus on eliminating potentially avoidable health care services. We need to be sure we need to do what is being done. Ongoing studies show that as much as 50% of what is done in the hospital today is potentially avoidable. There are considerable opportunities to reduce length of stay without negatively impacting the quality of health care. Complementary information shows that as much as 35% of what physicians do in the ambulatory setting is potentially avoidable. Until we eliminate true medical “waste” we have no hope of reducing the cost of care.
  • Continue to negotiate additional discounts in reimbursement for health care services to be sure that we avoid paying for more than needed. Ideally it would be better to move to an all-payer system where health care providers are paid a common fee for their services no matter who is the payer (i.e., public or private). Studies show that the private sector has more than a 16% cost shift from public payers that are unwilling to pay their fair portion.
  • Introduce incentives that work to motivate everyone to reduce health care costs. This includes incentives to providers to limit services to those necessary, to patients to live healthier lifestyles, and employers/plan sponsors to consider appropriate plan designs that minimize over consumption of services.

Although the CMS actuaries are only projecting health care costs, the concerns they raise are important and need to be carefully considered. Our economy is fragile and it cannot survive continued surprises. Hopefully we will take the steps to avoid further problems. It is a time for action.

The California Partnership For Long Term Care Insurance

Nationwide about half of all nursing home residents are on Medicaid. In California, we call it Medi‐Cal and the percentage of nursing home residents on Medi‐Cal is closer to 60%!

Let’s keep in mind what this means. In order for one to qualify for Medi‐Cal you have to spend down all your “countable” assets down to as little as $2,000. In other words, 60% of people in California who are in nursing homes have spent down all their assets. For most that means decades of savings have been spent down in a matter of months.

In 1995 California decided to become a pioneer State in offering a “hybrid” product that would encourage more people to purchase long term care insurance (LTCI). It’s called The Partnership for Long Term Care Insurance.

In researching why people buy or don’t buy this important coverage they found that most people have two major concerns with this type of insurance.

The first is that most plans are limited in nature, meaning that they tend to pay for care in periods of time such as 3 years or 5 years of care. Considering the statistics that the average length of care is around 3 years and that 90% of people don’t exceed 5 years of care, these plans do tend to protect you against the odds. However, most people still view the insurance as “catastrophic” protection and they voiced concerns of having such a policy that is not good for an unlimited amount of time. This is a valid point since the very definition of an accident involves an unanticipated event which can have long term effects for an undetermined amount of time.

The second concern most people expressed involved having a claim when one is elderly and incapacitated and the challenge of dealing with an insurance company in this condition. So the Partnership with the State set about creating a product that would provide people with additional benefits to add incentives to taking out this kind of protection.

Let’s look at these two incentives:

The Asset Guarantee
The first benefit is the asset guarantee. The idea of this benefit is to allow one to buy less coverage which means a lower premium but, to have the peace of mind that the whole reason you are taking out this coverage, which is to protect your assets from having to be spent down due to a catastrophic health problem, is guaranteed to be achieved.

That’s a mouthful, so let’s break it down to the specifics. The greatest percentage of people who would suffer the most from a long term care situation is the Middle‐Class. The poor don’t really have anything to protect and they would quickly qualify for Medi‐Cal. The rich can often absorb the impact of long term care costs. So it’s the Middle‐Class who are the hardest hit when they have a stroke and suddenly have to fork out $6,000 per month for care (the average cost of full‐time care in California).

When you take out a Long Term Care Insurance plan, you can either get limited or unlimited coverage. Most people cannot afford the latter, so most end up being able to afford a 3 year or a 5 year plan.

With most plans on the market, if the benefits are exhausted, you then have to spend‐down your assets to Medi‐Cal levels (as low as $2,000). But, if you qualify for one of the five Partnership plans, then the State of California guarantees that if your plan runs out, you are able to protect an amount of assets equal to what was paid in benefits. So in other words, if your plan paid out $250,000 and then ran out, the State of California gives you an entitlement that guarantees that you can protect $250,000 from Medi‐Cal spend down.

Once again, this allows most middle‐class people to buy less coverage with a lower, more affordable premium. But you have the peace of mind to know that the whole reason you’re taking out this protection, which is to protect your assets, is guaranteed to be achieved.

Care Management
The second benefit the State provides as an incentive is Care Management. What this means is that when you have a claim, the State requires the insurance company to hire a local 3rd party company in your community who will work with you and your family to help file the claim, find care, set the care up and monitor the care on an ongoing basis. This takes tremendous burden off the family when they often have never been through a long term care situation before.

In Conclusion
When the Partnership was first made available in California, it was to be a 10 year experimental program. It was so successful that Governor Arnold Schwarzenegger signed it into permanent law in 2005. Then in 2006 Congress passed the Deficit Reduction Act which called for the creation of the National Partnership Program. Now all States either have or are in the process of creating a Partnership program modeled after our program here in California. At the most recent Long Term Care Industry Conference which was sponsored by The American Association for Long Term Care Insurance in November 2009 in Kansas City, Missouri, The National Partnership was the most talked about topic at the conference. It is the future of long term care protection in America.

Healthcare Underwriting And Rating Under the Affordable Care Act

The health care reform act, known as the Patient Protection and Affordable Care Act (PPACA), was quickly passed and unfortunately includes many inconsistent and incomplete provisions. Major fix-ups are being incorporated to make it possible to actually enforce (e.g., loss ratio definitions, loss ratio oversight, integration with insurance departments, etc.). Some new provisions are being included, for example, the August 2011 addition of copay free contraceptives. Although the country is politically polarized regarding the Patient Protection and Affordable Care Act, it actually does include some significant improvements and benefits over what we have today.

The Patient Protection and Affordable Care Act introduced several benefit changes including:

  • No copays, deductibles or limits on preventive services
  • Basic definitions of benefit levels (i.e., bronze, silver, gold, platinum)
  • New benefit requirements (i.e., maximum child age, contraceptives, etc.)

The Patient Protection and Affordable Care Act also formally introduced comparative effectiveness and value based benefits to improve the cost of care. As time passes, we anticipate other additions. Most of the changes increased near term costs.

The Patient Protection and Affordable Care Act introduced restrictions on several aspects of underwriting and rating:

  • Medical underwriting for the purpose of setting rates (i.e., no more medical questionnaires)
  • Use of ancillary information to set rates (i.e., prior pharmacy use)
  • Rejecting coverage for prior medical reasons
  • Gender-specific premium rates or premium rating factors, even though females generally have greater costs than males.
  • Breadth of rate differences (i.e., ratio between high and low)

For at least the near term, the Patient Protection and Affordable Care Act permits other rating practices that are in place:

  • Age rating (i.e., use of age based rate differences)
  • Group experience rating (i.e., use of prior creditable experience to set rates as long as they aren’t based upon specific experience of individuals)
  • Standardized rate tables for use in exchanges
  • Use of 2-tier rating structure (i.e., single vs Family coverage). The regulation appears to outlaw the very typical 3-tier rates (i.e., single, 2Party, Family).

On the horizon we expect additional market movement to Value Based Benefit design. These have been used to somewhat of a limited extent to date, but the Patient Protection and Affordable Care Act encourages the use of these as an attempt to reduce health care costs and to “bend the trend downward. There is limited evidence these programs accomplish this, but there is great hope that it will. Groups continue to explore whether or not there are advantages by
paying the penalty and terminating their benefit programs. Many have concluded that in this economy they have no choice. Exchanges are increasing in popularity and the use of private exchanges to compete with the public ones is emerging in more markets. Many experts believe that the individual mandate to purchase health insurance will be tossed out, although this is still up in the air.

One of the big items impacting the health care system for the older and less fortunate individuals in the country is the Medicare professional payment levels. Medicare regulations provide the government with an opportunity to reduce payments (i.e., currently estimated at more than 30%). This adjustment has been deferred for several years, primarily from political fallout reasons and a desire to not disrupt the system. The fiscal challenges facing the government right now likely increase the probability that some adjustment such as this will occur. This will have a significant impact on the health care system with the likely result of increasing charge levels for everyone else. In addition to the financial impact of raised fees, it will likely impact the ability to access providers.

The Patient Protection and Affordable Care Act has significantly changed the way health plans do business and will do business. This creates considerable uncertainty and risk for the health plans. Since health plan costs have increased far more rapidly than anyone wishes, any further influence to increase health care costs is unwanted by most. Very recent reports suggest that US health care will exceed 20% of GDP in the very near future. How much more
can we absorb? No one really knows, but we are so close to that point that other changes are needed to help stop the rise.

So Do We Really Need Health Care Reform?

Health care reform in the form of PPACA was signed into law by President Obama on March 23, 2010. Now more than a year later it is still a significant matter of discussion. The House and the Senate continue to discuss whether or not we need it. Yes this topic has its political sides and strong supporters on both sides, but few seem to get to the real issue, “do we really need it?” Health care reform has been widely discussed for most of the past forty years. Many have feared its coming, others have anxiously awaited it. Now that it is a reality, it continues to dominate much of the discussion.The key reasons for wanting health care reform have included:

  • Significant numbers of uninsured and underinsured individuals (i.e., more than 40 million or about 1 out of 7 individuals)
  • High expense of health care services in excess of 17% of the GDP (i.e., more than 1 out of 6 dollars spent on healthcare)
  • Need for improved quality in healthcare (i.e., continuing medical errors as reported by the Institute of Medicine leading to more than 130,000 deaths per year)
  • High rate increases for insurance products limiting the public’s ability to purchase insurance

Most of these reasons are inter-related. The high cost of care forces up premium rates which in turn impacts the ability of individuals to obtain health insurance. This in turn stresses our excellent health care system with the large number of individuals without health coverage, sometimes leading to more than expected medical errors.

Although more needs to be done, PPACA attempted to deal with most of the above issues. It enabled the creation of exchanges to maximize the availability of coverage options to those without coverage. It created a mandate to force individuals to obtain coverage. It provided a significant subsidy for those who could afford it the least. It attempts to fold in to the current Medicaid and Medicare system many, and hopefully most, of those without coverage. It created a concept known as value based reimbursement to improve quality and minimize medical errors. It instituted loss ratio limits to constrain the prices of health insurance products. All of these were attempts at trying to get at the key issues. Were they enough? Probably not, but many of them were focused in the right direction.

The big question remains, do we need health care reform? Did PPACA do enough in the right direction to be worth the effort and expense to continue it? Although this, on the surface, seems to be a simple question with strong supporters on either side of it, it remains a challenging question.

One of the biggest issues inadequately discussed is the second bullet above which deals with the percent of GDP spent on health care. Yes we all know how expensive health care is, but have we seriously considered the economic impact of increasing health care costs. Although I am not an economist, I have spent most of my professional career studying the health care system at both the micro and macro levels. I understand that different sectors of the economy are continually in battle for their share of the economy. Whenever one sector grabs more than its fair share, the rest of the economy essentially fights back wanting it back. For years this has happened without concern. The economy has demonstrated amazing levels of elasticity, responding to new demands, new technology, etc. As long as the economy was strong there seemed to be an endless supply of resources for any sector of the economy.

However, as the economy has become more sluggish, dollars more scarce, with more concern about the economy’s viability, there has been increasing concern about sectors of the economy that are consuming more than expected or more than desired. In the past several years the discussion about elasticity of the general economy has become more common. In a stagnant economy, one without growth, some economists have raised the perspective that the residual elasticity might be as low as four or five percentage points. If true, this suggests that there may be no more than four or five percentage points of the economy available to any current sector without an offsetting reduction by another sector. Most projections for the health care sector show continuing increases with demands for more than four or five percentage points by 2014. What does this mean? This simply means that health care could by itself consume all of the available elasticity by 2014. This is delayed with a robust recovery in the economy, but still presents a serious problem if the economy fails to rebound. The impact of an economy without any additional elasticity is its inability to respond to needs for resources. Without available resources sectors of the economy will potentially decline and die. In our “just in time” economical world, the economy relies upon smooth transition and free access to resources. Without this serious economic problems emerge.

The bottom line is that we need to conserve the available elasticity of our economy to preserve our economy. To the extent that any sector is consuming more of the economy than its reasonable fair share, that sector needs to be restrained to protect the economy. Perhaps the biggest reason for health care reform is this restraint. Without it, our economy is at significant risk. We as a country cannot afford this economic risk. We need health care reform, there is not doubt. However, we need to thoroughly question whether or not adequate controls exist in PPACA to restrain the health care system’s desire to consume more than its fair share.