By Maggie Mahar
What will health care reform mean for insurers, hospitals, doctors, Medicare patients, seniors who are now on Medicare Advantage, Medicaid patients and state budgets? Who wins and who loses?You may be surprised by some of the answers. The legislation is rich in details that have been ignored. Liberals as well as conservatives are making assumptions that just don’t square with the facts.Below, I focus on the impact that reform will have on the private insurance industry--and on the industry’s customers.
MYTH # 1: Health Care Reform represents a “boon” for private insurers.FACT: It is s true that, beginning in 2014, virtually all Americans will be required to buy insurance, or pay a fine. But while insurers will pick up a boatload of new customers, many will be refugees from a health care system that treated them poorly. Think of the boat as a life raft. These could be very expensive customers.
Moreover, between now and 2014, insurers will face some serious financial hits. These new regulations will make our health care system fairer and more affordable. But the rules also suggest that going forward, for-profit health insurance may not be a viable business--unless these companies learn how to keep patients healthy, while insisting on value for health care dollars. Insurers that over-pay drug-makers or hospitals will find that they can no longer turn a profit by simply passing the added expense along in the form of higher premiums. Consider what will happen in the next three years:
1) This year, Washington sliced funding for private insurers who offer Medicare (a.k.a. Medicare Advantage) by 5%. Next year, payments will be frozen. In 2012, the serious cutting begins. Over ten years, Medicare will slash over-payments to Medicare Advantage insurers by $132 billion.When the Medicare Advantage bill was passed in 2003, Congress agreed to pay Advantage insurers 12 percent more, per beneficiary, than it would cost Medicare to cover those patients itself. Most agree that this is corporate welfare that our health care system cannot afford. But recent years, insurers have become increasingly dependent on the windfall payments from Medicare Advantage. As unemployment rises, insurers have been losing customers in the employer-based insurance market, and Advantage has come to represent a larger share of their profits. Humana, for example, has been receiving 60% of its operating income from Medicare Advantage.Meanwhile, insurers selling plans in the private sector have been scrambling to rachet up premiums fast enough to keep up with the spiraling cost of healthcare. For ten years private insurers’ payouts to doctors, hospitals and patients have been climbing by roughly 8% a year. Rising prices plus volume have driven reimbursements skyward. Each year Americans are taking more medications and undergoing more surgeries and tests. And every year, virtually every product and service in our healthcare system costs more. This is why, according to Morningstar Investment Research, the health insurance industry showed an average profit margin of just 3.4% in 2009. This means that, in terms of profitability, it ranked 87th out of 215 US industries. As Henry Aaron, a highly-respected progressive reformer and senior fellow at the Brookings Institution observed last fall, “Insurance company profits in the larger picture have very little to do with the overall rising cost of health care.” Given the skimpy profits that the industry has seen in recent years, generous subsidies from Medicare Advantage have remained what Carl McDonald, an analyst with CIBC World Markets in New York, calls a “bright spot” for companies such as industry leader UnitedHealth Group.
2) Next year, the new rules regarding pay-outs will apply to private sector plans. Insurers selling in the individual and small group market will be required to spend 80 percent of premium dollars on medical services, while plans in the large group market will be expected to spend 85 percent. Insurers that do not meet these pay-out thresholds will have to provide rebates to policyholders.
3) The new pay-out rules will make premium hikes far less profitable for insurers. Even if an company raises its premiums by 10%--for example, lifting a $14,000 annual premium for a family plan to $15,400--the insurer must pay out 85% of the $1,400 increase, or an additional $1,190 to hospitals doctors and patients , keeping only $210 of the $1,400 to cover overhead and profits.
4) Another new cost for insurers: beginning in 6 months, all new group health plans as well as new plans in the individual market will have to provide coverage for preventive services at no charge. Co-pays and deductibles will not apply to recommended services.
(5) Beginning this year, if you become seriously ill, insures won’t be able to drop your coverage on the grounds that you forgot some detail of your medical history when you applied for insurance. They will be able to rescind your policy only if they can prove fraud, or that you intentionally set out to deceive them. This won’t be easy.
(6) In 2011, insurers will no longer be allowed to cap how much they pay out to an individual over the course of his or her life. If a customer suffers from a serious illness that requires multiple hospitalizations and high-tech treatments over many years, the insurer faces an open-ended bill. Starting in 2014, insurers will no longer be able to limit how much they pay out annually.Make no mistake: patients need this protection. Parents should not have to worry that the insurance covering a child suffering from cancer is going to “run out” if her care costs too much in any one year—or if she survives too long. But while the new rule is welcome, it will make the insurance business riskier: Actuaries will have a hard time guesstimating just how high those bills could mount, especially over 10 or 15 years. This is another reason why reform is far from a sweetheart deal for insurers.
(7) In 2011 it will become more difficult to raise premiums. Given falling Advantage reimbursements, coupled with rising expenses, one might assume that insurers would simply lift premiums to make up the difference. But it won’t be quite that easy. Reform legislation helps states insist that insurance companies submit justification for requested premium increases. Any company with excessive or unjustified premium increases may not be able to participate in the new health insurance exchanges. Already, some state regulators are getting tougher. In March, the Providence Journal reported that Rhode Island’s state health insurance commissioner slashed proposed premiums increases, keeping rate increases in the single digits, while calling Blue Cross's proposed 14.6-percent hike "just not affordable." And in April the Massachusetts insurance commissioner rejected nearly 9 out of 10 rate increases—ranging from 7% to 34%--that the state’s health insurers had requested for individual and small group plans.Still, many argue that long-term, insurers will emerge as big winners.
MYTH #2: In 2014, when the mandate requiring that everyone must purchase insurance kicks in, insurers will capture millions of new customers, government subsidies in hand, and their profits will, at last, soar.FACT: In 2014, insurers will find that many of those new customers will be coming from low-income households. These are families who are not poor enough to qualify for Medicaid, but too poor to purchase insurance without the government subsidies that will become available in 2014.
Today about one-third, or nearly 15 million of the 47 million uninsured live in households earning between $25,000 and $50,000. These are the families who will be receiving good subsidies—and they are likely to sign up for insurance. But many will need extensive care.
According to a 2009 report issued by the Kaiser Family Foundation, 11% of the uninsured are in “fair “or “poor” health, compared to 5% of those with private insurance. About half of all uninsured adults suffer from a chronic condition. About 75% have gone without insurance for more than one year; 55% have not had insurance for more than 3 years. Some haven’t seen a physician during that time. Others have seen doctors, but have not been able to afford the medications physicians prescribed.
These patients are likely to need more tests, treatments and surgeries than the average customer.Keep in mind that, under the new reform law, insurance companies will not be able to charge these new customers more than they charge others in their community. Moreover, insurers will have to offer all patients comprehensive insurance that meets a high bar defining basic benefits. No more “Swiss cheese” policies filled with holes. This is all fair. But it does mean that insurers will be operating in an unfamiliar marketplace, where the rules are designed to benefit patients, not the corporations that sell them coverage.
Of course, not all of today’s uninsured are poor: 9.7 million live in households earning over $75,000 a year. Why don’t they have insurance? Some suffer from pre-existing conditions that have made it impossible for them to secure insurance. Most likely, they will buy coverage adding to the number of sick patents in their insurers' pool.Many others in this income bracket are healthy, and haven’t bought insurance because they just don’t think it’s a good value.
Under reform rules, most earn too much to receive government subsidies. Unless premiums are significantly lower than they are today, many may well decide to pay the penalty rather than buy insurance.After all, the penalties for individuals who ignore the mandate are surprisingly low: $95 in 2014, $325 in 2015, $695 (or up to 2.5 percent of income) in 2016. Families will pay half the amount for children, up to a cap of $2,250 per family. After 2016, penalties are indexed to the Consumer Price Index.
In addition, roughly 40% or about 19 million of the 47 million uninsured are 18-to-34-years old. Most in this group are healthy, and just don't believe that they need protection. Under the reform legislation, some under the age of 26 will sign up for their parents’ insurance. But many of these invincible youngsters are likely to shrug, and pay the puny penalty.As a result, analysts at Fitch, the bond rating agency, observe: “It is not unreasonable to envision that too many new sick customers will overwhelm the individual segment of the market, driving many health plans from it altogether.”
In other words, these Fitch analysts are suggesting that a fair number oy insurers may not even try to compete for the new but unprofitable business in the Exchange. “This could become most acute under a scenario in which healthy, younger individuals decide to pay the penalty as opposed to purchasing coverage,” the Fitch analysts write, “and older individuals let policies lapse during periods when they do not need medical services, and purchase coverage only when they face a pending medical need, such as a surgery or expensive sets of tests or treatments."This is why I predict that sometime between now and 2014, Congress will lift the penalties, and change the rules to make it impossible for someone to pay a penalty--and then buy insurance when he or she falls ill. The rest of us cannot afford to carry "free riders."
Some have suggested that when a person decides not to buy insurance, he should be required to sign a document saying that he will not try to buy insurance for three years, taking the financial risk that he will be in an accident or become sick during that period of time and wind up broke, with medical debt that he will be paying off for years.We need young, healthy people in the pool or insurance will become unaffordable for everyone.
Make no mistake, there are many unknowns. We don’t yet know whether premiums will be high enough to guarantee that insurers will recover the dollars they spend on new customers. But industry analysts predict that rate increases will be held in check by the new rules on the percentage of premiums’ that insurers must pay out, and by heightened competition for customers, who will have more choice of plans than they currently do in the individual market. Insurers "will be free to price themselves into oblivion if they choose to do so," Sheryl Skolnick, an industry analyst with CRT Capital Group, told the Washington Post.
When all is said and done, it strikes me that the cuts and regs that go into effect in the next four years could easily lead to an industry shake-out. My guess is that some for-profit insurance companies won’t make it to 2014.
On Wall Street, analysts vary in how they assess the net effect of reform legislation on insurers, but no one is jubilant. Keep in mind that most Wall Street analysts would prefer to be optimistic.
Most companies are in the business of selling stocks. It is not good for business to be bearish.But everyone on the Street knows that while insurers will have more customers, profit margins are likely to be even lower than they are now. At best, this could prove to be a wash.Offering a moderate assessment of the damage, Ana Gupte, an analyst with Sanford Bernstein, suggests that "insurers come out a net negative, but not severely net negative."
What Will This Mean For You? If for-profit insurers are going to survive and thrive, they will be compelled to be more creative and efficient than they are today. They will be competing in the Exchanges where they will be offering comparable policies that promise the same essential benefits with less fine print. Thus it will be far easier for customer to make head-to-head comparisons.
If you are buying your own insurance or work for a small business that doesn't offer insurance and are shopping the exchange, you are likely to find that insurers are offering better value for your health-care dollars.
This will not mean that premiums for employer-based coverage will climb. If insurers selling to large corporations try to jack up premiums, many corporations will simply switch to another insurance company. In this new, more regulated environment, buyers will have more leverage. Meanwhile, the best of not-for-profit insurers are likely to do well in a regulated market.
Some already have pioneered using comparative effectiveness research to learn how to keep customers well. Kaiser Permanente, for examples has been honored for its work in preventing heart disease. Some for-profits also have been trying to do a better job of managing chronic disease.
But too many-profit companies have relied on various gimmicks to stay in the black: cherry-picking, selling Swiss cheese policies, canceling policies when patients become ill, putting caps on annual and lifetime pay-outs.
Many have relied on Medicare Advantage to stay afloat, while shifting risk to Advantage customers. Now, they are going to find themselves operating in much more difficult climate.
Some of these companies just don’t know how to make money unless they are able to do it the old-fashioned, predatory way. I suspect that more than a few will go under.If that happens, it is quite possible that non-profits that couldn’t have competed in the laissez-faire environment of the past will become viable.
In the 1980s and early 1990s for-profits with deep pockets drove many non-profits out of business. Now, new non-profits are likely to pop up.Finally, if for-profit insures have difficulty designing affordable plans that meet the new rules, my guess is that Congress will revive the public option.
A senior fellow specializing in health care issues at The Century Foundation, Ms. Mahar is the author of Money-Driven Medicine: The Real Reason Health Care Costs So Much (Harper/Collins
No comments:
Post a Comment