Thursday, August 08, 2013

A lesson from Harvard

There are a lot of really bright folks at Harvard, including some of the world's experts in the health care field. How meaningful, then, when the university falls for the marketing plans of health insurance companies and finds itself under a rock.

The New York Times lays out the story:

It [Harvard] dropped its standard deal — a subsidy that rose in line with the price of the insurance policy — and switched some 10,000 workers on its payroll to a fixed subsidy that encouraged them to shop around for care. Families of workers who chose the Preferred Provider Organization offered by Blue Cross/Blue Shield — the most comprehensive plan, with lots of doctors and hospitals on its network — faced a $500-a-year jump in their out-of-pocket spending on health care.

Younger and healthier workers canceled their P.P.O. plans, enrolling in cheaper H.M.O. options or dropping Harvard insurance altogether. Left with a sicker patient base, the P.P.O. raised its premiums further, which prompted the next layer of relatively healthy customers to leave. 

Harvard has not been alone in facing this predicament.  I laid out the commercial logic of this pricing scheme a few months ago:

Notwithstanding public pronouncements to the contrary, it is evident that insurers have persuaded plan fiduciaries (i.e, companies who offer health insurance to their employees) to adopt plan designs that are priced to diverge from the rates that would be based on actuarial calculations.  Plan designs for high-cost subscribers are subsidized by plan designs for low-cost subscribers.  I believe the insurers do this for strategic reasons, to migrate customers to those plans that create the most income for the insurers.  The plans that create the most income for insurers are the ones that generate growth in claims:  Insurers want larger groups to insure and they want to insure unhealthy populations.  After all, claim adjudication is the major source of income for the insurance companies.

The purpose of the Times article is to explore whether a similar phenomenon might occur under Obamacare or whether there will be enough competition among insurers to keep a lid on "the death spiral of adverse selection" and rate increases. Of course, that national issue is more complicated than the one facing a single employer.  The problem, as I have noted, is the growing lack of competition on the supplier side, a trend that is encouraged by the administration's desire for Accountable Care Organizations that will be large enough to bear a larger portion of the actuarial risk of population groups.  Indeed, that consolidation can more than offset the hoped-for competition in the insurance market.  From the Times:

“The more health plans compete for insured in a local health market, the more fragmented the payment side of the market will be vis-à-vis the ever more consolidated supply side,” Uwe Reinhardt of Princeton, a contributor to The Times’s Economix blog, wrote me in an e-mail. “And the higher prices for health care will be.”

We need to accept the fact that there is really very little in the national health care legislation that is likely to control the ascent of costs. We have the country's underlying demographic trends and other factors like the medical arm's race; requirements on insurers for guaranteed issue and expanded coverage; and greater concentration in the provider market.  The drafters of the legislation knew this to be the case and assumed that the higher costs would be met by new taxes during future administrations.  The logic and need for universal coverage of the population is incontrovertible, and it needs to proceed. But as I said many, many months ago, when the President promised the nation access, choice, and lower costs, he was misleading us.  You get two out of three, not all three.


Unknown said...

The promised innovations to reduce cost have either failed, backfired or been marginal. It's not eary to reduce costs in healthcare because while everything in life has an 80-20 rule, the 80-20 rule in healthcare is that 80% of the time there is no 80-20 rule.

On the other hand, in the immortal words of the great philosopher Meat Loaf, two out of three ain't bad

Budd said...

This explanation on insurance company strategy is important, but I'm afraid I don't understand all of it. This puzzles me: The plans that create the most income for insurers are the ones that generate growth in claims: Insurers want larger groups to insure and they want to insure unhealthy populations. After all, claim adjudication is the major source of income for the insurance companies.

I'm wondering if you could expound a little on this; I would think others would be interested as well.

Paul Levy said...

Premiums are set proportional to expected claims. A fixed percentage of every premium dollar collected is profit. Increased claims->increased premiums->increased profits. It is as simple as that.

Budd said...

As to consolidation, I'm sure you are right, but once again, consolidate the hospitals and the insurance companies and who will get it in the neck? Private primary care docs. Yet that is where our major problem now lies for access.

Lynn Nicholas said...

Paul, in Massachusetts where we are trying to build a system of accountable care by providing services and networks for systems of care, it’s desirable to have more patients in HMOs and similar structures. The big concern overall in Massachusetts is that while providers are working together with health plans to develop systems that are risk-bearing or that pay for value versus volume, the market has been shifting more toward PPOs overall. As for my own small organization, I stopped subsidizing employees’ health insurance at a percentage of either the PPO or HMO options, and instead offered a fixed level of premium support targeted at the HMO. Employees still have choice, but as with Harvard, many migrated to the HMOs – as did I. Our cost is down significantly, although there were other factors likely at play in the market. People still get the care they need and we are supporting an important market transition to help control costs while providing access to care. If the PPOs become more expensive as a result, that may not be a bad thing

Dan Munro said...

This should be required reading for anyone wishing to debate healthcare cost, care or policy.

Contrary to the argument offered by many - universal coverage is NOT single payer. The 2 are mutually exclusive. Always have been - always will be.