The New York Times
March 2, 2003
A New Health Plan Works, at Least for the Healthy
By Beth Kobliner

Last fall, Mrs. Welborn, 32, a senior training specialist in corporate development, signed up for a new kind of health coverage, called a health reimbursement arrangement, or H.R.A. As part of the plan, her employer, CompuCom Systems, an information technology service provider in Dallas, has given her a $2,000 health care savings account that she can use to pay for medical care.

But Mrs. Welborn’s new plan also comes with a hefty deductible of $3,400. That means that if she spends more than her allotted $2,000 in the account this year, she will be liable for the next $1,400 of expenses. After she reaches the deductible, the insurance plan kicks in; it will cover 80 percent of costs, if network doctors are used, and 60 percent if not.

But if any of the $2,000 remains in her account at year-end, she can add it to the next $2,000 CompuCom will set aside for her in 2004. Mrs. Welborn… can have a maximum of $6,000 in her account.

Consumer-driven plans are variations on P.P.O.’S and H.M.O.’s, but with two important differences: they carry considerably higher deductibles, often around $1,500 for individuals and $3,000 for families; and employers cushion these higher deductibles at the front end, by financing individual cash accounts ranging from a few hundred to several thousand dollars.

http://www.nytimes.com/2003/03/02/business/yourmoney/02MEDS.html

Comment: Medical savings accounts (MSAs), tax free medical accounts backed up by high deductible (catastrophic) insurance, have long been supported by those who claim that we will bring health care costs under control only when we make patients sensitive to costs by spending their own funds. Once their medical savings are depleted, then the catastrophic plans will cover all costs. But this is really a fantasy, as we’ll see below.

For several reasons, insurers and employers have been reluctant to offer these products. But an IRS ruling last year authorized the version called health reimbursement arrangement (HRA). One of the features that made HRAs more attractive is that the unused funds could be rolled over from year to year. It is important to note that employers retain ownership of the HRA. Unspent funds on job termination are not converted into a cash or retirement benefit for the employee, but remain with the employer. So it really is a pooled fund source with a low spending cap per individual or family. Since the accumulation of funds will stop when the maximum is reached ($6000 in the example in the article), the family would be motivated to be sure that the funds are spent or they will fail to receive additional contributions and will eventually lose what’s left anyway. Since most healthy families spend less than the amount placed in the HSA, they will be motivated to increase their utilization of health care services, the exact opposite of the intended result.

The high deductible coverage offered with these HSAs also raises concerns. These catastrophic plans are not indemnity plans that “cover 100% of costs after the deductible is met.” They are PPO and HMO managed care plans, using contracted providers. Some plans may allow patients to use their own non-contracted providers, but only with severe financial penalties.

Let’s look at an example using the numbers in the article: a $2000 HSA, with a $3400 deductible, and then a PPO with 80% for network providers and 60% for providers outside of the network. What is not mentioned is that this is 80% or 60% of the allowed fee. The contracted provider is required to adjust off the disallowed balance, but, of course, the non-contracted provider can demand the full fee.

Now let’s say that the patient needs an $85,000 coronary bypass. The university center in town has a cardiovascular surgery program noted for its excellent outcomes. The other hospital in town is being investigated for doing a very large number of bypass surgeries that appear to have been unnecessary. But because of the higher cost of care at academic centers, the charges will be $108,000 instead. Although this may be a somewhat extreme example, it is realistic. And most of us would certainly opt for what we perceive to be better care, especially for our loved ones.

How do the numbers work out? Let’s make one more assumption. The PPO has contracted with the hospital under investigation for a fee of $56,000 for the package, a reasonable fee since the PPO can offer that facility a high volume of insured patients. But the PPO has repeatedly failed to negotiate a similar contract with the academic center, which then remains a non-contracted provider.

The numbers? The employer funded HSA pays the first $2000. The patient pays the next $1400, when the deductible is met. The allowed amount, $56,000, minus the deductible of $3400, leaves a covered amount of $52,600. Since the center is not contracted, the PPO pays 60% or $31,560 and the patient pays $21,040. But the patient is also responsible for the disallowed charges of $108,000 minus $56,000, or $52,000. So this HRA with a catastrophic plan that “covers expenses after the deductible is met,” results in an out-of-pocket expenses for the patient of a total of $84,240. That is quite a tab for an $85,000 procedure, especially for a family with an income of $42,228 per year (median household income 2001, US Census Bureau).

Under the best circumstances, the patient would pay the $1400 share of the deductible and 20% of the contracted rate, with the balance being adjusted off. That would still amount to $11,920, an almost unaffordable amount for a median income household.

Who would elect these plans? Individuals that shop for plans based on premium alone might select them because the premiums for high deductible coverage are lower. Those that are better informed may still elect these plans, gambling that they would remain in good health. But those that develop a major acute medical problem will lose their bet. Individuals with significant chronic disorders would not select HSAs but would select more comprehensive plans. Concentrating higher cost patients into more comprehensive plans will drive up premiums, threatening affordability of comprehensive coverage for the rest of us.

Private indemnity insurance has been priced out of the market and is gone forever. The fragmented system that we are left with can only perpetuate and compound the inequities that characterize our system today. We already have enough money in the system to provide comprehensive services for everyone, but the only way we can ever obtain value for that already invested is to establish a single, equitable risk pool. Why do we keep delaying the inevitable?

Aetna
Press Release
February 11, 2003
Aetna Reports Fourth Quarter And Full-year 2002 Results

“In 2002, Aetna improved its financial performance,” said John W. Rowe, M.D., chairman and CEO. “This success was built on a seven-point reduction in the medical cost ratio (MCR), as well as lower administrative costs. This decline in MCR was driven by three factors: reduction of membership with historically higher MCRs … (premium increases)… (and changing contracts and benefits).

Full-year 2002 results for Health Care show operating earnings, excluding other items, of $361.6 million, compared with an operating loss, excluding other items, of ($161.9) million for full-year 2001, primarily reflecting improved underwriting results, driven by an increase in the premium yield and a decline in the medical cost trend, combined with continued reductions in operating costs and a decrease in amortization of intangibles.

“Aetna delivered on its promises in 2002, and we believe the company is now firmly re-established as a top-tier competitor in the health care arena,” President Ronald A. Williams said. “Our broad operational goal for 2003 and beyond is to build on our competitive advantages and grow profitably.”

http://www.aetna.com/news/2003/pr_4thquarter2002_earnings.htm

Comment: Building success on reduction of membership with higher medical cost ratios, and increasing the premium yield with a decline in medical cost trends was accomplished by withdrawing from high cost markets and pricing plans with high cost patients out of the market. Eliminating beneficiaries that actually need health care will allow Aetna to fulfill its goal of building on their competitive advantages and grow profitably.

Should we criticize a corporation for reducing losses and improving profits? No. It is their obligation to their shareholders to do precisely that.

Should we criticize health care policymakers for insisting that we continue to build on this system that thrives by excluding from coverage those with the greatest health care needs? No, criticism is not enough. We need to dismiss them and replace them with policymakers that will design a health care funding system that has a mission of actually meeting the health care needs of all of us.

Uwe Reinhardt responds to Deborah Socolar on her comments about price disparities:

In connection with price disparities in health care, I wonder what Deborah Socolar means when she uses the term “free market” in her sentence:

“If it were a free market, competition would mean prices would tend to converge (as happens with, say, prices in pizza parlors).”

A distinguishing characteristic that sets pizzas apart from, say, coronary bypasses is that the former can, in principle, be resold among customers while a CABG cannot. Absent a resale market for CABGs (and most other health services), the stage is set for price discrimination, that is, charging different customers different prices for the same thing.

Now, if CABGs and other health services were perfectly standard commodities that are purchased in a national market (i.e., Jones does not care whether his or her CABG is procured in Holy Mercy in San Diego or Apex Hospital, Inc. in Dallas or Womens and Brigham in Boston), then there might still be price convergence. That is why hotel rates quoted to conventions tend to converge across areas with similar climatic and other characteristics.

But CABGs and other health care are not at all perfectly standard commodities and they are not traded competitively over large national markets. Price convergence in a “free” (unregulated?) market would be unlikely to obtain.

Only in highly regulated market with either administered prices set more or less unilaterally by the buy side (Medicare, Medicaid) or uniform prices negotiated by large bodies representing individual buyers and seller, respectively, (Germany) would price discrimination disappear. Even then price might or might not reflect costs.

Uwe Reinhardt

To Quote of the Day list members:

It should not have surprised me to receive the responses that objected to the poetry expressing opposition to the war, but it did. I mistakenly believed that those who support health care reform would also support activities designed to prevent the premature death and suffering characteristic of a war that most of the citizens of the world believe is avoidable.

For those that did complain, I wish to thank you for being willing to express your thoughts on this highly controversial topic. I also wish to apologize in advance for the fact that my comments to follow will not end the controversy.

I sent the message out after the Bush administration announced a second condition for preventing the war, a regime change in Iraq. Since it seems that we are only days away from war, I believed that our stridency must increase. I believe that an effort to prevent this war must be the first priority of everyone at this moment. Our work on health care reform can continue, but it is a task that will never be completed though, hopefully, we will have major breakthroughs such as the eventual establishment of a universal single payer.

The decision to send the poems to the Quote of the Day list was mine and mine alone. Although I am president of Physicians for a National Health Program, and most of the messages are posted on the PNHP website, technically they are my personal project and not a project of PNHP. It is appropriate that PNHP publishes my comments since my personal views coincide precisely with the policies developed and supported by PNHP. I’m not saying that I’m always right on target since I’m only human, and I have no staff to critique my views before I send them out. But I am saying that, to those who were offended, please direct your ire exclusively toward me and not to PNHP.

Because I sent the anti-war message to a list that is for health policy issues, I certainly can be criticized for having sent out spam. And for that I do sincerely apologize.

Although I erred in my selection of the forum in which to express my views, I did not err in my expression of those views. For speaking up on this issue, I cannot apologize.

Many undoubtedly were offended by the particular poems that I selected from the thousands on the Poets Against the War website. The poems suggested that the president’s decision-making process on the issue of the war is no more sophisticated than that of a young child. With all of the options available, our president is down to a list of only two. Either Saddam Hussein walks, or we attack. Even a child can understand that expanded inspections until hell freezes over would be a much better option, but that has already been rejected by President Bush.

Ardent supporters of Mr. Bush might be expected to be offended by my remarks. But I am more offended by their callous disregard of the people of Iraq and disregard of our standing in the international community. No political personality is worth protecting at that price.

I will not use the Quote of the Day list for any further comments on the war. I intend to limit the list to health policy issues. But for those of you who believe that I have already exceeded my bounds to the degree that you want off the list, you can unsubscribe at http://two.pairlist.net/mailman/listinfo/quote-of-the-day, or you can send me an e-mail directly at don@mccanne.org.

For those who agree with me, more stridency please!

Don McCanne

Deborah Socolar, MPH, Co-Director, Health Reform Program, Boston University School of Public Health, comments on price disparities, using the example in the comments about the deficiencies of health reimbursement arrangements:

Here’s one thought on a issue you touch on. Some might quibble with saying that this is an $85,000 procedure — “out-of-pocket expenses for the patient of a total of $84,240. That is quite a tab for an $85,000 procedure” — since one place is CHARGING $108K and the other $56K. It would of course also be quite a tab for even a $108K procedure.

But further — the price disparities help highlight the point that in today’s unfree market, where big buyers have the market power to negotiate discounts, charges tend to bear little relationship to costs, and the uninsured and those in smaller plans face big cost-shifts, subsidizing those who could often afford to pay more. If it were a free market, competition would mean prices would tend to converge (as happens with, say, prices in pizza parlors). Of course today’s such wild disparities in prices make it absurd to think that people can do very much to price the care they think they might need in the coming year and estimate their o-o-p costs to help decide on plan/”level” of coverage, etc…even assuming no major changes in health status. (Obviously folks just all need comprehensive coverage…)

And in a rational system, although I hope we’d pay for much care through global budgets, prices in cases where we do pay for individual services would bear a close relation to costs.

Health Reform Program, Boston University School of Public Health: http://www.healthreformprogram.org/

Although this message seems to be a departure from the topic of health policy, what could be more unhealthy than war?

On March 5, 2003, about 15,000 poems will be presented to members of Congress By Poets Against the War. The poems are available at: http://www.poetsagainstthewar.org/

David Budbill

EASY AS PIE

The Emperor divides the world
into two parts:
the Good and the Evil.

If you don’t want to accept that,
The Emperor says
you are Evil.

The Emperor declares himself
and his friends:
Good.

The Emperor says as soon as
Good has destroyed Evil,
all will be Good.

Simple as one, two, three.
Clear as night and day.
Different as black and white.

Easy as pie.

_______________________________________________

Bruce Arthurs

This Is The Day

This is the day.
This is his Big Day.
This is the Biggest! Bestest! day
of his life.

This is the day
he will be remembered for.
This is the day
his father’s folly is erased.

This is the day
the naysayers are silenced.
This is the day
their numbers could not stop.

This is the day
the missiles will fly.
This is the day
when ancient cities burn.

This is the day
collaterals are damaged.
This is the day
that Jesus will applaud.

This is the day
his name becomes immortal.
This is the day
he finally shows them all.

This is the day.
This is his Big Day.
This is the Biggest! Bestest! day
of his life.

Washington Post
February 11, 2003
AARP Offers a Plan, but Experts Aren’t Buying It

AARP, in partnership with UnitedHealth Group, has launched an insurance plan for people too young for Medicare. Called the Medical Advantage Plan, it’s open to people between 50 and 64 who live in any of 10 states.

The two partners call the product “an affordable alternative to major medical insurance.” Unlike major medical policies, the plan does not, for example, guarantee to cover all or a certain percentage of hospitalization costs. Instead, the plan pays a fixed amount for a variety of small and large health items: …up to $7,856 for a coronary-artery bypass operation, and so on.

Marilyn Moon, a senior fellow at the Urban Institute, said she asked a colleague how much the tab was for his recent triple bypass heart surgery. About $80,000, he said — far more than the AARP plan would pay for such an operation.

“Trying to provide people in this age range” with insurance options “is very important,” Moon said, but buying this policy might “lure people into thinking they have a lot of protection.” Those with little to spend, she said, “should spend it on major medical [coverage] and not on this.” With traditional coverage, she said, at least you “protect yourself from major expenses.”

Julie Alexis, AARP’s manager of member health products, acknowledged that the plan is “not comprehensive in any way, shape or form,” but “we had to make something available [to] people who are going without coverage” because they cannot afford to buy individual insurance or to fully pay for their employer-sponsored group coverage after leaving their jobs.

“They shouldn’t call it health insurance,” said Karen Pollitz, project director of Georgetown University’s Institute for Health Care Research and Policy. “This is a supplement [that] could help you fill in the cost-sharing” demanded by many major medical policies, she said, but if it is your only coverage, “it will not protect you from financial ruin.”

http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A5 4433-2003Feb10&notFound=true

Comment: In the individual market for health insurance, premiums increase with age. For people between 50 and 65 who are not eligible for a group plan, finding affordable coverage can be difficult. This AARP/UnitedHealth Group plan demonstrates that products designed with affordable premiums for this age group fail to provide adequate coverage. Those with significant medical needs will face financial ruin in spite of this coverage.

The only way we will ever provide satisfactory coverage for this sector is to include them in a universal risk pool with the rest of us. Why do we keep fighting this inevitable conclusion?

James G. Kahn, MD, MPH, a professor at the Institute for Health Policy Studies at the University of California, San Francisco, responds to the comments on the Kaiser poll on the desire for affordable health care:

Don – you are so right. I would add that the respondents’ focus on affordability means that they are ripe for believing reforms that appear to control costs (premiums, anyway) by (quietly, surreptitiously) restricting benefits and/or excluding the sickest from coverage. – Jim

Comment: Jim’s point is absolutely crucial. Much of the discussion about affordability in health care has centered around the affordability of premiums. That is a very different issue than the affordability of health care.

Employers, individuals and even the government (FEHBP, Medicare + Choice, etc.) have directed attention to keeping premiums affordable. This can be done only by reducing coverage, through a reduction in benefits, an increase in patient cost sharing, or through measures to exclude high risk patients from coverage.

As Jim mentions, the control of premium rates is frequently engineered through quiet, surreptitious manipulations. Defined contribution programs, tiering of services, providing options of streamlined (i.e., bare bones) coverage, and offering low premium, high deductible coverage with some form of health reimbursement arrangement (similar to MSAs) are only a few of the manipulations that are designed to make premiums more affordable. The problem, of course, is that they do nothing to make HEALTH CARE more affordable. They merely shift costs to those with the greatest health care needs.

In our debates over the model of health care reform that should be adopted, we must diligently challenge those that claim affordability when they are referring only to controlling premiums. Those supporting employer mandate or individual mandate models of “universal” coverage will claim that they are controlling costs when, in fact, their current models will only control premiums. These models make health care UNaffordable by shifting costs to individual patients.

A universal, publicly administered program can make global health care costs affordable through mechanisms such as global budgeting, reduction of administrative waste, rate negotiation, and bulk purchasing. And with equitable funding, whether you call it an income-related premium or a tax, health care can be truly affordable for everyone.

BlueCross BlueShield Association News Release February 21, 2003 New BCBSA Report Shows Health Insurer Administrative Costs Rising Slower Than Premiums

Health plan administrative costs contribute to rising premium costs, but not as much as you might think. A new report from Milliman USA (Milliman), commissioned by the Blue Cross and Blue Shield Association (BCBSA), shows that administrative costs for America’s health insurers are growing, but at a rate slower than the growth of premiums overall.

Milliman studied national health insurance administrative cost trends from 1998 to 2002 and found that while premiums for commercial business increased by an average of 7.4 percent annually, administrative costs grew at a much slower average rate of 4.6 percent annually. The report shows that in 2001, an average of 85.7 percent of commercial premiums went to pay medical claims with 11.6 percent going to administrative costs and 2.7 percent going to profits. In comparison, an average of 86.5 percent of commercial premiums among Blue Cross and Blue Shield Plans went to medical claims in 2001, with 11 percent going to administrative costs and 2.5 percent going to profits.

“This report clearly demonstrates that the majority of premium dollars are being spent on healthcare services – as they should be,” said Scott P. Serota, BCBSA president and CEO.

“To keep healthcare affordable, we must know more than just how much we are spending. We need to know how well we are investing our healthcare dollars,” Serota said. “This research, like BCBSA’s previous research on healthcare cost-drivers, helps all of us – insurers, hospitals, physicians, employers, drug companies, consumers and government – find ways to eliminate unnecessary costs and improve quality. That’s the only way we as a nation are going to be able to keep healthcare affordable.”

For the press release: http://bcbshealthissues.com/relatives/20445.pdf?PROACTIVE_ID=cecfcbcec8c9c7c

Comment: BCBSA attempts to put a positive spin on these numbers by showing that medical claims grew more than administrative costs, but by the deceptive method of expressing them as a lower percentage increase compared to the higher percentage increase in actual health care costs. At a time when the health plans are under scrutiny for perpetuating excessive administrative waste, they wish to show that they are controlling administrative costs. But they aren’t. Administrative costs grew at a rate of 4.6% annually, in excess of the rate of inflation. In fact, the very nature of the middleman business model of health plans makes it impossible for them to ever control these administrative costs.

The 14.3% of commercial premium dollars that is being burned up in administrative costs and profits is only a small part of the problem. The administrative burden of our fragmented system of multiple private plans, public programs and no programs at all further increases the diversion of funds from patient care to wasted public and especially private administrative excesses. And this does not include the impact of the flawed system of allocating our resources, a system in which some entities and regions receive 30% more funds without any improvement in health care outcomes.

A single, integrated system of funding health care would dramatically reduce these administrative excesses, and would provide a basis for more rational allocation of our resources. Bruce Bodaken, Chairman, President and CEO of Blue Shield of California, recently called for universal coverage, but his model only expands on the current flawed system, perpetuating inequities and waste.

Instead of turning to Milliman for advice on how the egregious administrative waste can be hidden, we should move ahead with change that will minimize the waste, and utilize those resources more effectively, assuring affordable access to comprehensive care for everyone. Unfortunately but understandably, the BlueCross BlueShield Association apparently does not want to lead that charge.