Friday, June 11, 2010

Correlation or cause and effect?

Scientists and economists are trained to distinguish between correlation and cause and effect. The Boston Globe's Rob Weisman has written a series of stories that might lead us to wonder, "Which is it here?" Here's the sequence.

The MA health insurance companies (mainly non-profits) propose increases in the rates for small business and individual health insurance policies. The Division of Insurance disallows those increases and sets an arbitrary cap.

The new rates do not meet actuarial standards, which are important to maintain capitalization ratios for the insurance companies. An internal email emerges that indicates the Division's own staff has major concerns about this potential "train wreck."

The Division of Insurance puts several insurance companies under administrative oversight because of perceived financial weakness and expects to add more to the list soon.

How long will it take before some insurance company publicly posts financial results that are below state standards? What happens then? A loss in subscribers, as businesses lose confidence in that company. Then, do we see a forced merger or takeover, reducing the level of competition among the health plans?

The Division's answer: Insurers should stiff those hospitals who rates are up for renewal this year. The leaders of the state's hospital association note:

Cuts in insurance reimbursements for many of our state’s hospitals will further destabilize these institutions and are likely to lead to significant job loss at hospitals, some of which already are operating in the red.

Two train wrecks.

I vote for cause and effect.

Before we undermine two of the most important sectors of the state economy, it is time to change the rules and move away from an arbitrary system of health care finance to one that has legal accountability and transparency, one that enhances competition rather than diminishing it.

14 comments:

Anonymous said...

This issue is not limited to Massachusetts:

http://www.ama-assn.org/amednews/2010/04/19/bisc0419.htm

I find it amusing that in Maryland, we loved to complain about our rate-regulated state; now it's being held up as a model 30 years later.

It might be interesting to confidentially poll some Md. hospital CEO's about the benefits and drawbacks of its system. I know they will not speak on the record.

nonlocal

Amanda said...

Mr.Levy,
FYI--Your blog reaches me, a nurse and health care administration student from Rush University. I have
learned about you in classes from your DVD case study
about leadership and the BIDMC turn around and follow your blog to learn more about issues facing academic medical centers from your perspective, issues in the Massachusetts healthcare economy, and because it's interesing! I am graduating this Saturday, and just want
to thank you for taking that 15 minutes, because I really look forward to reading your blog every morning and sharing your "pearls" with my classmates.

Anonymous said...

Paul, are you really suggesting that an X% premium increase translates to an X% reimbursement increase to providers? And do you really believe that the lack of premium increase is the sole -- or even main -- cause of insurer's solvency problems?

Paul Levy said...

On your first question, of course not.

On the second, yes. From the numbers I have seen, investment income has now increased. It is the premium shortfall that will hurt the insurers substantially.

Keith said...

You are correct that it would be unfair for the state to allow a timing issue, that being the suggestion that those having contracts that are currently coming up for renewal take the brunt of the penalites. This likely will leave some of the worse offenders with an even larger competitive advantage. What insurers could do, however, is tell those with contracts coming up at later dates that they can expect some tough negotiating and potential clawbacks of these addtional premiums when their contract comes up for renewal, and to expect such and to start tightening their belts now. I don't think the state is in a position to tell hospitals with contracts in place that they should reopen negotiations early. It does not sound legally feasable. How would you propse the state act?

Years of profligate spending in the health care market, and the spending boom on new buildings and unproven technology are what is fueling this crisis. Up until now, the insurerers have been willing to go along with yearly increases it seems, without too much pushback. Someone has to put the breaks on, since the health care providers and insurers seem unwilling to see the party end. In my teritory of Chicago, all the major health care systems have new, expensive, and shiney new buildings (actually Rush is in the process of building their new Taj Majal) and it is silly to think this is not a significant piece of the cost escalation. In medicine, it seems competition leads to higher prices rather than lower prices and increased quality. Apparently the insurers who are not at all focused on quality have allowed market clout to determine pricing, rather than being the patients proxey for selecting the most high quality and cost efficient providers and creating incentives for patients to use these providers. So maybe some price pressure will give them the excuse and leverage they need to put the screws to organizations like Partners.

When I stop seeing construction cranes over every health care center, I will know things have finally changed. It is apparently too difficult to spend all that money fast enough in the so called non profit area of health care, so it needs to be stashed in ever greater and more lavish structures, not to mention the huge run up in executive compensation over the past 15 years.

Anonymous said...

Paul, fair to say you haven't seen these numbers?

http://www.naic.org/documents/committees_e_capad_lrbc_talf_guidance.pdf

76 Degrees in San Diego said...

Res ipsa loquitor!

Paul Levy said...

Anon 12:03,

Please explain what you mean, ok?

Anonymous said...

Paul, anon @ 12:03 here.

Just that banks are not the only institutions that play games with regulatory reserve levels and off balance sheet derivative exposures. Insurance companies are in that game too.

Unless you know what those numbers are at the insurers you're sizing up, you don't have a good sense of their financial condition. So my point was to challenge your assertion that you've "seen the numbers." Maybe you have, and maybe you've only seen the part of the picture those companies want you to see, consistent with the limits of current transparency requirements.

Anonymous said...

A friend reminded me of one aspect of the Maryland system which might help mitigate the high-cost problem admitted to by Partners, and affecting others in Mass for all I know.
If the Health Services Cost Review Commission (HSCRC) in Md. labeled you a "high cost hospital", compared to others in the state (adjusted of course for teaching, case mix, etc.), you were then penalized by little to zero rate (e.g. what you could charge) increase the next year. We the medical staff were always exhorted not to do things which made us a "high cost hospital". As you can imagine this is a potent incentive to keep your costs in line with your peers in the state. We faced a similar demographic to Mass, with large #'s of hospitals, many academic, in Baltimore, then mostly community hospitals elsewhere in the state.

nonlocal MD

76 Degrees in San Diego said...

common sense - I agree with Paul

Theresa said...

Paul,
There is now a proposal in New York State to give the state oversight of insurance company rate increases. Yesterday Michael Dowling, Pres. & CEO of North Shore-LIJ where I work, told employees that this system would be a disaster for hospitals, because it politicizes the issue and if insurance companies are unable to obtain the rate increases they need because it is an election year, hospitals will suffer in exactly the way you have described.

Cleary Squared said...

Paul:

This directive to cap rates is coming directly from HHS itself - as in Washington, DC.

http://boston.bizjournals.com/boston/blog/bottom_line/2010/06/insurer_rate_caps_are_here_to_stay.html?surround=lfn

Engineer on Medicare said...

The whole health care system must be put on a diet!

Organizations that don't have effective market and price competition get fat. For example, Detroit is gettting around to closing old and un-needed schools because they no longer have the money to keep them open. "http://www.msnbc.msn.com/id/37642350/ns/us_news-life/

"School officials say Cooley High had to close. The building is crumbling, there aren't enough students to fill its classrooms, and it would cost too much to fix all of its problems.

Under a $1 billion, five-year plan — paid for in part by federal stimulus money — the Detroit district will renovate many schools, consolidate some and eliminate others. But Domenech said schools like Detroit's and others across the nation also need more funding to keep teachers employed."

Too many organizations keep people on the job as long as there is funding rather than cutting people who aren't needed. When they finally can't get the money they make the cuts and tell the people there will be no loss of services.

The health care system won't reduce costs until someone imposes strict funding limits, either through real price competition or by controls imposed by major payers.