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November 17, 2010

“Mayhem” – How Much of Health Insurance is Insurance?

Filed under: Healthcare — Steve Krupa @ 12:12 pm
Tags: , , , , ,

Do you know Mayhem?

He’s a new character played by Dean Winters in a recent run of pretty-damn-funny Allstate commercials.  Check this one out (< 30 seconds).

You see, before you (the driver) caught sight of the hot babe in the awesome pink headband you needed adequate property and casualty insurance to protect you from the distraction that caused you to drive into that light pole.  However, in the immediate moment after you drove into that light pole, you did not need insurance, because its cost would have been exactly equal to what you really need, which is a new car.  Insurance is valuable to you before you run into Mayhem when its price (the insurance premium) is considerably less than the consequences of Mayhem, or in this case, the cost of a new car.

The cost of insurance is much less than the cost of Mayhem because of pooled risk.  Lots of other easily distracted drivers bought car insurance too but most of them managed to veer away from the light pole at the last-minute, avoiding damage, thus providing you with a pool of funding to buy a replacement car after the accident.  Pooling the risk of low-probability high-cost events makes insurance a very valuable product for all purchasers in their effort to protect themselves against Mayhem.

In the health insurance market Mayhem represents the possibility we might get sick, which we know can be very costly.  Very good drivers can drive into light poles.  Similarly very healthy people can require health insurance to pay for unexpected costly medical procedures.  But either way, the fact that the costs are unexpected makes an event insurable at a price significantly less than the cost of the event.

Someone who is sick and is not insured does not need health insurance; they need to be provided with healthcare.  Including someone who is already sick in an insurance pool is the same as including you in an automobile insurance pool after you drove into the light pole.  The event is no longer unexpected, and so your individual premium, which is the cost of your new car, will be spread among the members of the insurance pool, the economic equivalent of your passing a hat around and collecting enough money to pay for your car – in this instance you are not being insured, you are being subsidized.

A type II diabetic with health insurance that covers the costs associated with diabetes is being both insured for the incidence of diseases other than diabetes and subsidized for the known costs associated with diabetes.

Continuing with our property and casualty analogy, consider flood insurance.  There is a much higher probability of Mayhem occurring at a property located on a riverfront than for a property located on a hilltop miles from the water, and, as such, it costs much more to purchase flood insurance for riverfront property.  I wonder, is this fair?  Would we all stand up for a homeowner’s right to live by the river and insist that the unit price for all property insurance be the same regardless of where the property is located?  If we did the cost to insure waterfront property would reduce and the cost to insure the hilltop property would increase, effectively subsidizing riverfront home ownership.  Now, is that fair?  If we were to subsidize anything shouldn’t we instead subsidize safe behavior, a la, living away from water and well above sea level?

A seemingly healthy person with an unhealthy lifestyle that receives health insurance at the same price as people with healthier lifestyles, as is typical in most Group Health insurance models, is being subsidized for the higher probability of Mayhem.

Insurance markets, left to their own devices, are awesome at pricing risk and incentivizing safe behavior (we all know your premium is going up after you file your auto insurance claim for driving into that light pole).  However they (insurance markets) don’t handle subsidization well at all.  If subsidization is going to be required, then it must be structured by forces outside of the insurance market.

The Group Model of health insurance, which is used in the market for corporate-based insurance, is one such structure.  If you work for a corporation and you are receiving a health insurance benefit from your company, you most likely pay the same per member cost as everyone else at your company.  This is done by pooling both the risks and the subsidies.

Clearly the pooling of subsidies creates fertile ground for Moral Hazard, a phenomenon discussed frequently here, but curiously left out of much of the discussion regarding the problems of health insurance, particularly when the subject is healthcare reform.  Healthcare reform claims to be insurance reform, but in fact insurance is insurance – if you have a pre-existing condition you cannot be insured for it because it is already there (your car has hit the light pole).  At the public policy level “healthcare insurance reform” as it is defined within PPACA, is the regulation of the portion of health insurance that represents subsidies and their funding.

All other things equal, an increase in the probability of Mayhem (more unhealthy people) and the expansion of subsidies into the insurance pool (the insuring of more sick people) will cause proportionate increases in health insurance premiums.  On this basis alone, the provisions of the health reform bill are unquestionably inflationary w/r/t insurance premiums.  Count on it.

As a greater portion of insurance premiums represent subsidy, the role of the health insurer has to change from one of underwriting risk, i.e., pricing the probability of Mayhem, to managing risk, i.e., working to reduce the cost of known conditions within the insurance/subsidy pool, the latter requiring a substantially different set of skills than the former.  This transformation of the health insurance industry was already under way prior to the passage of PPACA (our healthcare reform law), as corporations began requiring risk management programs from their insurance companies.  Without this transformation, healthcare inflation is destined to sustain at its current levels, probably for eternity, or at least until the increases in the prevalence of chronic illnesses and the probability of Mayhem achieve some steady state, which with the baby-boomers now reaching 65 years-old will not occur anytime soon.  Regardless of who “pays” for the insurance/subsidies the costs of healthcare are going up, up, up, until the system shifts toward a structure where patients, payers and providers are economically accountable for managing risk.

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September 24, 2010

Talkin’ Health Insurance Rate Increase Blues

 A super-enormous spending bill gets press attention, so I’ve been talking with the media these days (1) regarding recent health insurance premium rate increases following the enactment of health reform, which is estimated to cost approximately $250 billion per year once fully realized.  While rate increases by Aetna and certain Blue Cross and Blue Shield plans correlate with the recent passage of health reform, it is hard to believe health reform is the cause, at least not entirely.  The fact is that health insurers have been raising premiums at hard-to-believe rates for well over a decade.  The primary cause then and now is runaway healthcare inflation.  It is true that for the most part insurers, like any other business, look to maximize profits, but most markets for health insurance are extremely price competitive.  Generally it is the increase in expected medical expenses that drive rate increases, and unfortunately demand for medical care has been increasing at approximately 3x the rate of general inflation.  From what I can tell this will continue forever until fundamental structures in the healthcare system change, so expect ongoing rate increases from insurers to persist, despite the political pressure.

A recent study by the Kaiser Family Foundation, while subtle in its presentation, is astounding in its exposition of runaway medical inflation’s impact on health insurance premiums.  Take a look at the charts below.

       

Compounded Annual Growth

   

Absolute 10 Year Growth

Total Health Insurance Premiums   7.8%   114%
Employee Contribution to Insurance Premium   9.5%   147%
Employer Contribution to Insurance Premium   7.3%   103%
US Inflation   2.4%   26.8%
US Real GDP (2000-2009)   1.6%   15.3%

From just this small amount of data it is clear that health insurance premiums have been sky rocketing for almost two decades.  US inflation averaged 2.4% per year, while health insurance inflation has averaged 7.8% per year, with the brunt of this premium increase being absorbed by employees at an average rate of 9.5% per year.  Wage increases have essentially kept up with inflation, meaning the annual disposable income of the average insured family, in real terms, was reduced by nearly $2,000 over the past decade as a result of medical inflation.  W/r/t employers, their bills rose at 7.8%, about 3.25x their ability to raise prices.  Result: employees and shareholders are getting squeezed.

Why so much medical inflation?

There are lots of little reasons that emanate from one major trend: we (the US and its medical profession) keep getting better and better at keeping people alive.

There are many definitions of the word “doctor,” the most relevant to understanding medical inflation being (from MWD – free version):

Doctor : (n) a person who restores, repairs, or fine-tunes things

Today there are an astounding number of ways to restore, repair and fine-tune humans. “Take two aspirin and call me in the morning” is all but gone.  We now understand thousands of causes of the headache, from too much protein in the diet, to brain tumors, to meningitis, to stress, to something called Syringomyelia ($1 to the first reader that knows what this is, and no fair if you are Neurologist), and so on. 

We now know so much that we are increasing exponentially the things that doctors can restore, repair and fine-tune, creating treatments for ailments, many of which were once life-threatening that are now survived regularly, leaving us with an older and sicker population that costs more and more to fine-tune every year.  In short, much of our medical inflation is a symptom of our amazing technology and our wealth.  Modern medicine, while an awesome exposition of human inventiveness, is slowly and steadily eating away at the more productive sectors of our economy that created the means for such inventiveness in the first place.

Will it end?

If the “it” is invention, the answer is clearly no.  We will forever be extending our life expectancy and reducing the health and fitness levels necessary to achieve it.  Medical invention will not be stopped.

If the “it” is medical inflation, the answer is not anytime soon.

Much of the healthcare chat on this blog, and that of my business partner Lisa Suennen, involves the many structural changes that must take place within the healthcare economy in order for medical inflation to come under control without the government resorting to over-reaching measures like rationing of care and reimbursement controls.  Many changes are underway, and everyday we meet new companies designing new systems and technologies created to both reduce healthcare costs and improve quality.  Unfortunately it will be many years, perhaps decades before the healthcare system begins to function primarily around a cost/quality paradigm.  I would look for measureable changes in the following areas before expecting any meaningful downward shift in the medical inflation trends:

  1. Patients evolve toward more active, cost and quality conscience consumers of healthcare and health insurance.
  2. Insurers evolve to managers of health risk rather than pure underwriters.
  3. Providers evolve their business models from a strict fee-for-service reimbursement model to a more pay-for-performance model, like most advanced industries (will doctors offer one-year warranties? – why not?).

 Such an evolution spawns subsets of ideas like wellness, care management, value-based health insurance, healthcare information exchanges, insurance exchanges, provider pricing based on quality scoring, telemedicine, and on and on.  I have been and will be discussing them all with the understanding that without meaningful progress medical inflation is here to stay.  Expect it (healthcare inflation) to continue at about 8%, so in 5 years our average family will cost about $20,000 or more a year to insure.

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 (1) Here are a couple of links.  First an brief piece on medical inflation from TheStreet.com along with a podcast interview (download the podcast titled “Best (and Worst) Bonds, Insurers and Obama, Gold’s Rush” – my segment comes in around the 23:00 mark).

March 2, 2010

Psilos White Paper – Healthcare Reform and Combatting Rising Healthcare Costs

Please check out a fairly recent (and pretty awesome) white paper written by Al Waxman, Lisa Suennen and Darlene Collins, three of my partners at Psilos Group, titled Cost, Quality and Alignment: A Step-Wise Plan to Reform and Transform Healthcare (published in September, 2009).

The paper was written during the heat of the debate over healthcare reform, last summer, well before either the Senate or the House passed their respective bills.  It was sent to many members of congress (many actually read it) and media editorial boards (many actually wrote about it).

The overall theme of the Waxman et al paper parallels the message I sent a couple of days ago to Senator Patty Murray (D-Washington).  It recommends an incremental approach to healthcare reform designed to achieve the following goals over the next 10 years:

1.  Reduce overall healthcare inflation to 3%

2.  Enable universal access

3.  End prior condition refusals for insurance and policy cancellation for sick people.

4.  Extend solvency of the Medicare Trust Fund beyond 2017

5.  Reduce medical errors

6.  Improve the US healthcare quality ranking from #35 in the world to #5.

7.  Stimulate investment in new healthcare technologies that improve healthcare quality and lower costs

As a practical solution the current versions of the Senate and House bills (and Obama’s slightly abridged plan) have serious problems in that we don’t know the cost effect of many of the individual provisions let alone whether as a whole either bill will rein in healthcare costs (in the state of Massachusetts, universal care seems to have had no impact on rising costs).  They (the Congress) seem to be attempting to solve all of the problems in the system with one fell legislative swoop with little or no proof that their ideas will lower medical inflation.  As I discussed in my previous post, healthcare reform is not financially viable without successfully reducing healthcare costs and inflation.

Logically, the Psilos team recommends an immediate focus on cost reduction that, if successful, would yield much of the long-term financial capital necessary for expanding access (read: health insurance for the 47 million uninsured in the US).  Note that they are not just offering ideas, but proven solutions.  Among others, they note the following areas as low hanging fruit:

1.  Management of the chronically ill, particularly those in Medicare (could yield $750 billion in savings over 10 years)

and

2.  Deployment of technology to eliminate hospital-based errors (recall my prior post on Atul Gawande and checklists, one such error reduction program), which could yield $7-$10 billion annually to Medicare

More advanced programs that could improve costs include:

1.  Performance-based reimbursement for providers

2.  Financial incentives for individuals to lead healthier lifestyles

3.  Deployment of Personal Health Records and individual patient information for real-time point-of-care access

Obviouisly there is much to discuss here, including the young companies that are developing the technologies and programs that make these ideas work.  In the meantime, my colleagues’ white paper, a truly non-partisan view of the healthcare crisis and reform is extremely informative as to what’s possible in the ongoing effort to control runaway healthcare costs.

February 25, 2010

Follow the Money – Re: Healthcare Reform

Approximately 47 million Americans are uninsured.

 The average individual health insurance premium is between $300-$400 per month, or $3600 – $4800 per year.

(Multiplying)  Today it would cost $188-$225 billion to provide health insurance to all of the uninsured.

 This cost is currently rising between 8-10% per year.

Generally tax revenue growth is proportional to GDP growth.

How can our government finance an additional $200 billion per year growing at 8+% per year when historically GDP growth has been well below 8+%. 

Can they keep raising taxes?

Most reasonable people would say no, we cannot raise tax rates year after year (or perhaps even now for that matter).

To accomplish universal coverage we need to discover enough healthcare initiatives that together result in reducing healthcare inflation to the level of inflation of the economy in general (about 0-4% over the last 10 years or so).

If we can achieve this goal, then we can realistically and responsibly begin to create proposals for getting everyone insured.

The two biggest areas of potential cost savings are: (1) waste and redundancy (estimated at a total cost of $700 billion/year) and (2) the expansion of the prevalence and cost of chronic illness (about 70% of the $2.4 trillion healthcare economy, or $1.7 trillion per year).

Initial approaches to healthcare reform should focus on measuring these costs and implementing initiatives to reduce them over time.  Many of the technologies and proven approaches  to tackling these issues are currently available, but are going largely ignored by lawmakers as they craft reform.  Many more are in development and will appear over the next 5-10 years.  Many of them cross my desk as potential investment opportunities everyday.

Look for insights on modern and novel approaches to improving healthcare quality and reducing costs as this blog develops.

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