Kaiser Family Foundation
Health Care Costs

Whenever consumers have a choice among different insurance arrangements, there is a tendency for people to choose a level of insurance based on their expected need for what is being covered (in this case health care). At any given price, people with a relatively high perceived need for the covered item are more likely to want coverage (and given coverage, more likely to want generous coverage) than people with a lower perceived need for the covered item. This is often referred to as “adverse selection.” Since high deductible plans generally are less generous than typical insurance policies — particularly for people with employer-sponsored coverage — some have raised concerns that CDHPs could disrupt the pooling of health risk in insurance markets.

To demonstrate that a relatively small share of enrollees can have a meaningful impact on average claims costs, we present an exercise using a database of medical claims complied by the Society of Actuaries.

What we can see from this exercise is that adverse selection can occur and have a meaningful impact on claims cost even where there are no extreme changes in enrollment. The enrollment shifts portrayed here would be far too small to substantially change the demographic make up of either pool in terms of age, gender, income, or other observable factors — even the 60%/40% scenario only increases the overall census of the adverse selection pool by 2%. Generalizations about enrollment would not reveal the real differences in underlying claim costs. If bias enrollment patterns such as these persist and insurers base premiums on claims experience, or if insurers can anticipate enrollment bias and base their premiums on expected claims, then these small enrollment differences would translate into fairly significant premium differences.

http://www.kff.org/insurance/snapshot/chcm111006oth2.cfm

Comment:

By Don McCanne, MD

This study demonstrates the simple fact that shifting a very few high-cost patients from one insurance pool to another (adverse selection) can have a very dramatic impact on the premiums that must be charged to cover health care costs for the pools.

This phenomenon is of much more concern now because of the greater use of cost sharing, especially though higher deductibles. People with needs will avoid those plans since they would be exposed to unaffordable out-of-pocket expenses. More comprehensive plans will attract the higher cost individuals, and the shift of only a few would make the premiums unaffordable. People with needs are being priced out of both coverage and health care.

Many policies have been suggested to eliminate adverse selection through risk adjustment. They don’t work. Separate high risk insurance pools have been established in several states to insure these people. They don’t work.
Medical underwriting is used in many states to be certain that pools can continue to exclude higher cost individuals, thereby ensuring that pooling will never work.

With a single, universal risk pool, adverse selection disappears. Why do we continue to avoid the inevitable?

by Robin J. Moody
Portland Business Journal
November 3, 2006

Fewer than 20 percent of medical practices nationwide — probably even fewer in Oregon due to the preponderance of small medical groups — conduct comprehensive reviews of payments.

By failing to audit bills, clinics are leaving money on the table.

Clinics that do conduct audits — including a handful that recently completed a pilot project to gather data on the underpayment problem — have identified clear patterns in billing errors.

Preferred Provider Organizations are the worst offenders, administrators said, especially those that lease their networks to out-of-state health plans.

Under PPOs, a network of medical providers charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.

A notable finding was the volume of underpayments with sums under $10, which are hard to spot without billing-audit software.

When Portland-based Women’s Clinic PC Administrator Marilyn Happold-Latham used such software, she was surprised to find consistent, albeit small, discrepancies in sums less than $10.

“There were underpayments of a few dollars, over and over again, for the same types of procedures or office visits,” said Happold-Latham.

Happold-Latham’s experience with underpayments prompted her to organize other administrators to perform manual audits. Three companies that completed the audits found numerous small discrepancies.

“Our personnel find the large mistakes, but without payment audit software you won’t find the $2 underpayments that come up time and time again and really add up,” said MaryKaye Brady, administrator for Metropolitan Pediatrics, which learned that the practice was underpaid by $77,000 in one year.

Because 65 percent of Oregon’s doctors practice in groups with fewer than 10 doctors, the cost of a billing-audit system many seem out of reach for many groups. As income levels decline for primary care doctors and stagnate for specialists, however, physician advocates say that auditing bills is an increasingly important business practice.

http://www.bizjournals.com/portland/stories/2006/11/06/story7.html?page=2&b=1162789200^1371308

Comment:

By Don McCanne, M.D.

The physicians signed these PPO contracts in good faith, assuming that they would be paid at the contracted rates. Apparently the PPOs feel that they are not constrained by good faith contractual terms. This policy of chiseling down the rates is particularly egregious when considering that overhead expenses are relatively fixed and that these reductions come directly out of the physicians’ paychecks. A two dollar reduction is a twenty-five percent reduction when the net income would have been eight dollars for the service provided.

If a government-run single payer program reduced compensation by two dollars, it would have done so, by design, only after negotiating and reaching an agreement with the providers. Apparently private insurers use market arguments to operate on a different ethical plane. If you are caught violating the terms of a contract, then the marketplace will take care of that. Or will it?

As long as we leave the private insurers in charge, we can expect the amoral or immoral ethics of whatever the market will bear. A public system would be held to a much higher ethical standard. Let’s go public!

By Robert J. Blendon, Sc.D., and Drew E. Altman, Ph.D.
The New England Journal of Medicine
November 2, 2006

Whichever party wins in the November congressional election, the margin of victory is likely to be small, and for this reason, the outcome of the election will have only a limited effect on the current direction of national health policy. The new leaders of the Congress will have to deal with the problems of scarce new federal revenues, a deep partisan division over the direction of health policy, and resistance by many conservative members to new plans for health care spending. In addition, as the presidential election of 2008 approaches, opposition by members of each party to the other’s health care proposals will intensify. In this environment, important new health reform initiatives are unlikely, and the congressional focus will be on incremental policy changes.

http://content.nejm.org/cgi/content/full/355/18/1928

And…

Health Reform: Time For A Wake-Up Call

By Drew E. Altman and Robert J. Blendon
Health Affairs Blog
October 30th, 2006

For health reform to again gain a foothold at the top of the national political and policy agenda, it needs to become a central issue in the 2008 election campaign, so that candidates who are elected to office and the new president feel that they were elected, at least in part, to address the nation’s big health care problems when they start work in 2009. This is by no means guaranteed, but there is a scenario under which it could happen.
First, if we are fortunate enough to see external problems like Iraq stabilize or subside and no new big ones arise, health would have the opening it needs to compete for center stage as an election issue. Second, as Americans pay more and more each year out of their own pockets for health care, they will become increasingly concerned about health as a voting issue and policy priority.

But what health needs most to rise up in American politics is for national political candidates, whether from the political left, right, or center, to begin talking about the issue again as they did in the early nineties. Most important of all are the presidential candidates, who receive so much national media attention. If even one major candidate begins to seriously address health reform, the others will be forced to follow suit. The presidential candidates’ level of attention to health will be decisive to where health ranks on the national agenda going into the 2008 election and
2009 Congress. If they do play a leadership role on health, the media will follow, and the agenda-setting power of a debate driven from the top will meet the public’s concerns rising up from the bottom like two weather fronts colliding.

http://healthaffairs.org/blog/2006/10/30/health-reform-time-for-a-wake-up-call/

Comment:

By Don McCanne, MD

So this election wasn’t about health care reform, but the next one can be. Get to work!

Centers for Medicare and Medicaid Services
November 1, 2006

Starting next year, the Medicare program will pay physicians more for the time they spend talking with Medicare beneficiaries about their health care and will pay for a broader range of preventive services. The changes, which will become effective January 1, 2007, are included in the Medicare Physician Fee Schedule (MPFS) final rule released today by the Centers for Medicare & Medicaid Services (CMS).

CMS projects that it will pay approximately $61.5 billion to over 900,000 physicians and other health care professionals in 2007 as a result of the payment rates and policies adopted in this rule. This new spending figure reflects current law requirements to reduce payment by 5 percent to account for the combined growth in volume and intensity of physician services.

The hallmark of this rule is a stronger emphasis on the physician-patient relationship. The final rule increases significantly the work component for the RVUs (relative value units) for the face-to-face visits (evaluation and management or “E&M services”) during which the physician and patient discuss the patient’s health status and the steps that can be taken to maintain or improve the patient’s health. For example, the work component for RVUs associated with an intermediate office visit, the most frequently billed physician’s service, is increasing by 37 percent. The work component for RVUs for an office visit requiring moderately complex decision-making and for a hospital visit also requiring moderately complex decision-making are increasing by 29 percent and 31 percent respectively. Both of these services rank in the top 10 most frequently billed physicians’ services out of more than 7,000 types of services paid under the physician fee schedule.

The increases in the work component for E&M services are the result of a comprehensive review of the values CMS has placed on the physician work involved in providing a service. Medicare law requires that this review be conducted at least every five years. Consistent with longstanding practice, CMS worked with the Relative Value Update Committee (RUC), which operates under the auspices of the American Medical Association, to review work relative value units for over 400 services. The RUC recommended the proposed E&M increases, and many of the specialty societies commented favorably on them in their comments on the proposed MPFS rule.

The Medicare law includes a statutory formula that will require CMS to implement a minus 5.0 percent update in payment rates for physician-related services. This is slightly less than the 5.1 percent reduction in the proposed rule. This formula compares the actual rate of growth in spending to a target rate, which is based on such factors as the growth in number of Medicare fee-for-service beneficiaries and statutory or regulatory changes in benefits. If the actual rate of spending growth exceeds the target rate, the update is decreased; if it is less, the update is increased. Every year beginning with 2002, in response to rising spending, the statutory update formula would have operated to impose payment cuts. The negative update went into effect in 2002, but for 2003 to 2006, Congress intervened and temporarily suspended the requirements of the formula in favor of specific, statutory updates.

Consistent with requirements of the DRA (Deficit Reduction Act of 2005), the final rule caps payment rates for imaging services under the physician fee schedule at the amount paid for the same services when performed in hospital outpatient departments. The final rule includes a list of codes to which the outpatient prospective payment system (OPPS) cap would apply. The rule also finalizes a policy of reducing by 25 percent the payment for the technical component of multiple imaging procedures on contiguous body parts. CMS will apply the multiple imaging reductions first, followed by the OPPS imaging cap, if applicable.

http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=2044

Final rule (1418 pages):
http://www.cms.hhs.gov/center/physician.asp and click on “CMS-1321-FC and CMS-1317-F”

Comment:

By Don McCanne, MD

As is typical for this administration, this release places a very positive spin on the message that announces a 5 percent reduction in the payment for physician services. For those who believe that they read that payment for an intermediate office visit is increasing by 37 percent, read it again. The 37 percent increase applies only to the work component (physician labor) and not to the practice expenses (office overhead). None the less, there is very positive news in the 1418 pages in the final rule (most of which I confess I have not read).

Although Medicare has been fairly effective in controlling fees, it has not been able to control the increases in frequency and intensity of services. The Sustainable Growth Rate (SGR) makes appropriate adjustments to physician fees based on factors such as demographics, inflation, and newly-authorized benefits. To attempt to control over-utilization, it makes downward adjustments when the frequency and intensity of services increase. This is appropriate when it appears that practice patterns change merely for the purpose of increasing the units for reimbursement. It is especially appropriate when it appears that there is a dramatic increase in high-tech services of no benefit, as has been demonstrated by John Wennberg and Elliott Fisher. The largest single component driving down the SGR-determined rates has been the explosion in the use of expensive imaging services. Another very important factor has been the shift from primary care services to more specialized services, even though primary care services have been proven to provide high-quality care at significantly lower costs.

The good news is that payments are being adjusted upwards to reinforce the primary care infrastructure, and downwards to discourage excessive use of non-beneficial high-tech services. The bad news is that expensive high-tech services that are beneficial may actually end up being under-compensated with these changes. They will certainly take the brunt of the 5 percent reduction. Continual oversight and refinement has to be a perpetual process.

The important point is that, as a social insurance program, Medicare is making every effort to try to achieve the greatest value for our health care dollars as we are ever closer to the spending threshold that we can tolerate. In contrast, the private insurance sector makes every effort to squeeze whatever it can get out of the system short of sacrificing too many patients and their providers. Public administrators who care about the health of patients serve us far better than private administrators who care more about being judged by the success of their business models.