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May 11, 2010

The Coming Age of (Health Insurance) Exchanges

Bryce Williams, CEO of Extend Health, a Psilos portfolio company, has written an interesting piece for SHRM (Society for Resource Management) that explains the primary benefit of a heath insurance Exchange, namely its ability to allow individual purchasers of health insurance to buy exactly what they want in a competitive market (buzz words to keep in mind: personalization, choice, competition, consumerism, to name a few).  Bryce’s company Extend Health demonstrates these benefits to its customers today, every day, and has been doing so for several years now, even before the enactment of healthcare reform, first in Massachusetts’ and now nationally, where in both cases the role of the Exchange takes prominence as a tool for expanding health insurance coverage.

So how does an Exchange work?

In the case of Extend Health, the users of its private Exchange are Medicare beneficiaries (aged at least 65 years) that receive supplemental health insurance from their former employers as a negotiated retiree benefit.   The Exchange enables these retirees to purchase an individual Medicare Advantage Plan (MA for short, which is similar to a HMO or PPO for Medicare) or Medicare Supplemental Insurance (Med Sup or MediGap for short, and it is what it sounds like, supplemental insurance that covers many of the coverage gaps in the standard Medicare package).  Today, both MA and Med Sup products are sold to individuals by most major national and regional health insurance carriers (United Healthcare, Blue Cross / Blue Shield, Aetna, et al).  Extend Health works with the former employers to establish individual accounts on behalf of each retiree, usually a Health Reimbursement Arrangement (HRA) or something similar.  The former employer funds the individual HRA(s) in lieu of purchasing a group health policy from one insurance carrier that covers all of the retirees (typically referred to as a Group Plan).  The retiree then uses the money funded into the HRA to purchase any MA or Med Sup policy offered on Extend Health’s Exchange (as of this writing Extend Health offers over 1900 policies from over 60 insurance carriers).

Operationally, and from a consumer’s perspective, Extend Health’s Exchange works the way most non-healthcare related consumer purchases work, which, oddly, makes it very unique in the healthcare world.   Retirees can access information about all available plans online at Extend Health’s website.  While the website is enabled for transactions, almost all of Extend Health’s customers make telephonic appointments with a licensed benefit advisor.  During these appointments, which usually last about 30-45 minutes, retirees review their budget and healthcare needs with the advisor and ultimately select and purchase health insurance coverage.

Today Extend Health has over 45 corporate customers (a/k/a the former employers) and has helped more than 250,000 retirees compare and choose a MA or Med Sup plan that meets their needs.  After this much experience the evidence is clear that the aggregate cost of individual insurance purchases is significantly less than the cost of a Group Plan, in some cases up to a 35% reduction in cost to the former employer and $500 per year for the individual retiree.

In his article Bryce sites the following as among the reasons for the savings:

  1. Consumerism and Personalization:  Retirees purchase the precise insurance benefit that they want.  The money in the HRA is theirs to spend on healthcare and as such they naturally spend it wisely and avoid waste.
  2. Geographical Efficiencies and Competition:  As an example, individuals living in Florida do not require primary provider networks in other states, and as such it is cheaper to buy local health insurance individually than through a national or multi-regional Group Plan.  Further, local competition for the individual business drives pricing rather than Group Plan underwriting by a national carrier.
  3. Guaranteed-Issue:  With few exceptions, MA and Med Sup plans are “guaranteed-issue” coverage, which means that no one who is eligible for Medicare can be denied coverage, eliminating an economic advantage of the Group Plan, namely the underwriting of large groups to enable expansion of coverage to high-risk individuals.

Psilos’ investment in Extend Health demonstrates our belief in the economics of Exchanges and the power of a true consumer, and I expect that over time Exchanges will evolve into one of the primary ways people access health insurance in the US.  In the market for employer funded retiree health, the Group Plan no longer makes economic sense, and today the Exchange model is facilitated by the Guaranteed-Issue structure of the Medicare market.  As 2014 approaches and the insurance market for people under the age of 65 begins to trend toward a Guaranteed-Issue structure because of the deployment of risk-pools and the prohibition on denying coverage for “pre-existing conditions” (as outlined in PPACA), I expect Exchange models to offer a viable option for corporations to provide insurance to their active employees.

We know that the Exchange model empowers the consumer and drives greater competition.  As such, I expect it to serve as a force to inspire the innovation in healthcare delivery necessary to reduce healthcare inflation and promote greater service quality.  Over time, I believe its practical and effective economics will become irresistible to a society desperate to reduce the total cost of healthcare.

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April 5, 2010

The Genius of the Healthcare Consumer

On 3/23/2010 in my post, A First Reaction to Our New Healthcare Reform Law,  I wrote that an engaged and accountable consumer would be a necessary element for universal coverage to work. 

Of course, consumers are always “engaged and accountable,” most notably to themselves, and so, I went on to say parenthetically that HC should not be perceived as “free” or a “right,” but as a cost/liability managed by the collective diligence of individual beneficiaries (and I point out here that often some of my better points end up inside parenthesis).

So what did I mean by this?  Well, check out what is claimed to be going on in Massachusetts, as reported by today’s Boston Globe in a piece titled, Short-term Customers Boosting Health Costs:

“Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage…  [According to Blue Cross Blue Shield of Massachusetts] the typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month…  The problem is, it is less expensive for consumers — especially young and healthy people — to pay the monthly penalty of as much as $93 imposed under the state law for not having insurance, than to buy the coverage year-round.”

Here we again have individuals acting in their self-interest, something we have been able to predict perfectly since the origins of economic theory.  The Bay State healthcare law contains perverse incentives and consumers are exploiting them to the detriment of the collective goal.  No doubt, this behavior will be a cause for premiums to rise unless incentives are altered.

Ideally, self-interested consumer behavior, which is a given in all cases, should be leveraged to improve quality and lower cost in HC.  This requires that all individual consumers have a direct economic stake in HC costs.  That is not the case in HC today and it will definitely not be the case under our new reform law, which contains the same moral hazard problems as the Massachusetts law.

March 23, 2010

A First Reaction to Our New Healthcare Reform Law

Getting health insurance for everyone in this country is a worthy objective that I have wanted to see achieved.  However, I believe the techniques used in the new law to accomplish universal health insurance create serious financial issues that its sponsors have avoided addressing, assuring that as a nation we are bound to confront a massive healthcare driven financial crisis in the very near future.

Recall that several weeks ago I put together a simple post titled “Follow the Money,” that explained that it would cost at least $200 billion to cover all 47+million of the uninsured under today’s average insurance premiums. Presumably the $200 billion would be financed by mandated individual payments and government subsidies (paid for by tax increases). These costs should be expected to grow annually by about 8% (which is the annual growth rate of HC costs, today).

It is fair to speculate, as some have, that using current HC costs and growth as a projection tool misses the latent demand for HC services present in the high-risk uninsured population.  As this manifests, it could create an immediate upward shift in demand for HC and in turn accelerate the rate of growth of HC costs.  As someone who deals with the actuarial realities of HC costs as part of many an investment analysis, I believe this concern has merit.  Over the past 20+ years, as private healthcare evolved from indemnity (80%/20% with a deductible) to first dollar insurance (HMOs, PPOs and POS plans), healthcare utilization accelerated massively, at a minimum demonstrating that HC consumption follows the law of moral hazard, i.e., it increases when HC is perceived as “free.”

As a matter of legislative necessity the new law “works around” this real economic problem and its analysis.  The mechanics of the law requires tax revenues to expand ahead of the provision of subsidies, creating a ten-year projection of net federal deficit reduction (about $134 billion, read, the plan is profitable for the first ten years).  This is exactly how the law had to be structured for it to pass the CBO test and be eligible to become law.  Unfortunately, at some point within or shortly after the 10-year projection period it seems certain that HC subsidies will overtake tax revenue, creating the same ongoing funding problem(s) we constantly face with the current Medicaid and Medicare programs.

On this basis, my first, and unfortunate, take on this law is that it will fail on a financial basis without significant modification to its financial sources, incentives and HC delivery mechanisms.  Such modifications need to be designed to curb moral hazard and HC cost inflation.

One of the main purposes of this Blog (and my professional life) is to explore (and invest in) solutions to these issues. This law accelerates the need for these solutions, almost to an uncomfortable extent.  It may be too much of a financial burden too soon in the technology cycle, which I see as only recently focused on simultaneously lowering costs and improving quality in the HC system.

For any HC reform that envisions universal coverage to work, both financially and medically, it will need eventually to include:

  1. Expansion of consumer accountability and engagement in HC purchasing decisions (HC cannot be perceived by anyone as “free” or a “right” – it is an individual and collective cost/liability that must be managed by the power of the consumer marketplace and the diligence of individual beneficiaries)
  2. Changing HC service compensation from fee-for-service to performance and quality based compensation (just like in almost every other American industry)
  3. Mandated reductions in medical errors and redundancy, especially in hospitals
  4. Deployment of technology and accountable care management designed to more efficiently care for the chronically ill, which represents 70+% of all healthcare costs, especially those insured individuals with 4 or more chronic illnesses

Unfortunately all of these necessities are materially absent from our new law, and as a result, I am unable to applaud its passage despite my genuine belief that universal coverage is a desired and ultimately obtainable goal.  With this legislation I am afraid we are headed down a path that does not portend eventual success.

February 12, 2010

Clinton’s Stent(s) and True Comparative Effectiveness

Filed under: Healthcare — Steve Krupa @ 8:51 pm
Tags: , , , ,

It’s ironic to me that on the same day (11-Feb-2010) Bill Clinton underwent surgery to place two stents in one of his coronary arteries Keith Winstein published an article in the Wall Street Journal titled A Simple Health-Care Fix Fizzles Out which explores, among other things, the idea of Comparative Effectiveness, and whether it is or ever will be effective at reducing health care costs.  His article discusses the COURAGE study which concluded (an abstract of the study is available here) that stenting patients with stable coronary artery disease (CAD) did not reduce the risk of: (1) death, (2) myocardial infarction (heart tissue dies because it is starved for blood, similar to a heart attack), or (3) other major cardiovascular events (like a stroke) when used as an addition to optimal medical therapy (drugs); or, in other words, if your medical objective is to manage (1), (2) and (3) above, drugs alone work as well as and maybe better than drugs plus stents (and, by the way, no one gets just stents, they always get the drugs too).

The Wall Street Journal article’s point, however, is the stent procedure, which costs about $15,000, continues despite its apparently dubious medical efficacy for this class of patient.

So, let’s start with some math (I am using Winstein’s numbers here).  The 1 million stent implant procedures done in the US per year cost $15 billion (about $15,000 each).  About 1/3 of those are performed on patients with stable CAD, so adherence to the study’s findings could yield an annual savings of $5 billion.  Compare this to the $200 billion or so it will cost to insure the uninsured in the US and you would be about 2.5% there.  Hey, it’s a start.

Let’s now take the case of Bill Clinton, or anyone else for that matter, who showed up at the doctor with chest pain and got his stents right away.   It has not been reported whether Clinton is a stable CAD patient or not, but his symptom, i.e., his chest pain, is the same symptom demonstrated by stable CAD patients.  According to the output from COURAGE, the protocol for treatment should be drugs for 12 weeks and then a follow-up set of stress tests to determine if the stents are needed.

Winstein goes on to express some perfectly valid reasons why the results of the COURAGE study are largely ignored in practice.  Here’s a short list, containing the usual suspects:

1.  Doctors:  Cardiologists make more money putting in stents.

2.  Payers:  Health insurers don’t monitor stent usage because they pass the cost on to their customers anyway

3.  Patients:  they have no incentive to decline costly care

These reasons point to one of the many problems with the healthcare system, namely the lack of financial accountability, similar to lessons on moral hazard we all learned during last year’s banking crisis.  When we talk about healthcare on this blog, we’re going to come to this moral hazard issue often, it’s imbedded in all that is wrong with the healthcare system.  But I believe the problem with the COURAGE study lies in its inadequate endpoints.  They are primarily clinical and they are economically incomplete and therefore they are not sufficient for a Comparative Effectiveness study.

I would argue that Bill Clinton did not get his stent to avoid a heart attack in the FUTURE.  He got it to reduce his chest pain today.

For Comparative Effectiveness to be a useful economic tool the studies have to measure true economic variables.  One of those variables is patient demand, and I believe if a patient believes his chest pain will diminish from a stent procedure he will see that as the optimum treatment versus drugs alone even if the odds of having a heart attack in the future are not changed.

So, I am a believer in Comparative Effectiveness in theory, but a skeptic that medical trials alone will guide the way.  As a result, I believe innovation requires the deployment of science that brings together clinical realities and market economics to determine the most cost effective approaches to meeting the needs of the patient.  If we couple this with a financial system that includes true consumer financial accountability we will move toward having one of the key components to a value-based purchasing market for healthcare.

Stay tuned…

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