Controlling rising health care costs

[Biochemist]

This is insurance company propaganda. No business survives on margins of 1-2%.

Buff- you are an MBA. I did not say margin. I said "make", as in income. This is most assuredly not propaganda.

Any actuary will tell you that each incremental customer is the same whether they're in an individual or group plan. Group plans get MUCH better rates because they are "volume purchases" its no more complicated than that.

Buff- I think you ought to talk to an actuary before you respond to this if you know one. Avoiding adverse selection is the core of the game. Employers are known risks because they have aggregate claims history. Any employer that renews is rated on their employees' claim experience with that plan. Individuals have no such statistical history. This is NOT propaganda.

...the Insurance industry would *never* let it happen because they *do* get significantly higher margins from the individuals,

Insurers don't care about this. They want to avoid risk. I suspect most insurers would be tickled to switch to community rating because it makes their actuarial analysis simpler, and it cuts their sales costs down. They still make their 1-2%.

[bumab]

There will probably always be some inequality based oneconomics. Most countries with socialized medicine allow those who can to pay for extra services of some sort. The well to do get better food too.

 

True, although that doesn't mean we shouldn't look for another way...

 

If we were to imagine buying a car the way we buy healthcare, we would go to an automobile consultant who would order a set of parts. We would commit to purchase a set of parts that might end up as a functional vehicle, but there would be no guarantee that it would actually run. We would not know which parts were ordered, whether the parts were good or bad, and we would not know the price of any individual part. We would not know the price of the automobile consultant either. We might know what it would cost to see him/her once, but we would not know how many times we would have to see him/her to get a completed vehicle. The auto consultant would hire a mechanic to assemble the vehicle. We would have no idea of the total cost of the car, but it would not matter much because the consultant, the mechanic and the parts suppliers all would bill our auto insurance directly. The cost of the car after the first several thousand dollars would be covered by our auto insurance. If the car failed, we would go back to the auto consultant and see if we need more parts, more service or both.

 

Unfortunatly, health care does not equate to buying a car. Trying to apply this analogy to health care assumes that (as in the car scenario).

1. All problems can be diagnosed correctly the first time.

2. All problems can be addressed in a set number of visits, contingent on 1.

3. All solutions to these problems can be addressed in a certain way that will always work for all individuals.

 

If those conditions are not met, I fail to see how the insurance companies would allow such a thing (and those conditions will NEVER be met). You are asking a company to provide a product which inherently has a very large variablity in cost. A car has a fundamental price which is easily identifiable. A human has no such price, and as such is much more difficult to set a value on for insurance.

[Biochemist]

That's an amazing rate. What's your deductable? The insurance companies do "coercive marketing" on this, because they would LOVE to have people go to these higher deductable plans

Yes, and it is true in your state too. My deductible is $7500 per family, $3500 per person. I think Blue Shield CA has a similar plan in your state. But by now there are probably a lot of them.

 

Key point: The reduction in premium is GREATER THAN THE DEDUCTIBLE. That means that even if I incur the entire deductible (which is unlikely), I still save cash. And this is before any tax advantages of the HSA are included (I have not brought that up yet).

 

This relationship beteen premium and deductible is generally only true for folks over about 40, and it varies a bit by health plan. But I think that any individual or family should probaly be in a high deductible plan. The only folks that might not want to be are young high-utilizers, and there are not many of those (i.e., it is not 20% of the population)

[Biochemist]

That is a very good program...

Fst- FYI, This is an INDIVIDUAL program. It is not through an employer. But it is rated. Some folks might not qualify.

 

If we had community rating, it would not be an issue.

[bumab]

I'm also curious about the community rating you are suggesting. What's the range of the community? Your town? Your city? Your county? Your state? Your circle of friends?

[Biochemist]

Unfortunatly, health care does not equate to buying a car. Trying to apply this analogy to health care assumes that (as in the car scenario).

1. All problems can be diagnosed correctly the first time.

2. All problems can be addressed in a set number of visits, contingent on 1.

3. All solutions to these problems can be addressed in a certain way that will always work for all individuals.

B- I did not assume these things. If you take the example of a coronary artery bybass graft (CABG), physicians usually know about how many visits they need both before and after surgery. They would fixed-price-average it. The hospital costs are generally known. The failure rate is generally known. The outcomes are not usually published for any particular surgeon, mostly becasue they are afraid to. This is far easier than offering a fixed price on large consulting engagements (which I have structured many times) and whcih are EXPECTED in the industry.

 

Physicans could even offer a guaranteed repeat if a particular outcome was not achieved. This would be REALLY EASY TO DO. There just has to be a market pressure to make them do it. It would be trivial for a particular physician to buy reinsurance for their CABGs and add that to the cost for the guarnatee. It would be a minimal cost. Good surgeons in large groups would not even buy the reinsurance. They would self insure.

 

Further, once a surgeon had enough volume in a particular fixed-price package, he/she would optimize care for the package, not for reimbursement. This would be standard Total Quality Management. Currently, the surgeon has to make sure you see him in his office since he gets paid that way. There are a lot of better ways to manage pre-and-post surgical management than seeing a doc in his office.

I fail to see how the insurance companies would allow such a thing

Insurers would not care. They are paying a fixed fee. And paying fewer claims as well since the claims are bundled.

A car has a fundamental price which is easily identifiable. A human has no such price, and as such is much more difficult to set a value on for insurance.

We are not pricing humans. We are pricing diagnoses and treatments. Patients still have insurance to cover most of large-dollar items (think of homeowers insurance or auto insurance) but most costs are not insurance costs.

[Buffy]

Buff- you are an MBA. I did not say margin. I said "make", as in income. This is most assuredly not propaganda.

Metlife's net income for 2004 was 7% of sales and Wellpoint's was 5% of sales. And that's *after* taxes.

Avoiding adverse selection is the core of the game. Employers are known risks because they have aggregate claims history. Any employer that renews is rated on their employees' claim experience with that plan. Individuals have no such statistical history. This is NOT propaganda.

Its easy to twist it this way and the insurance lobby certainly does, but an actuary will tell you it all evens out in the end. There are amazing parallels between insurance and gaming, and in the gaming industry they know *much* less about the gamblers coming in the door. On the other hand the insurance company hedges its bets on the way in by forcing an exam, punishing you if you have any lapse in your insurance history, putting limits on start of coverage (we just started a dental plan and orthodontia will not be covered for 18 months! Even though we're paying the same rate today as it will be in the future!), long lists of exceptions for pre-existing conditions. They just about totally eliminate their risk!

Insurers don't care about this. They want to avoid risk. I suspect most insurers would be tickled to switch to coimmunity rating becasue it makes thier actuarial analysis simpler, and it cuts their sales costs down.

If that's so, then why don't they? My thesis is because they would be losing their higher margins on those individuals, but you clearly don't agree with my logic on that one...

 

Cheers,

Buffy

[Biochemist]

I'm also curious about the community rating you are suggesting. What's the range of the community? Your town? Your city? Your county? Your state? Your circle of friends?

Probably by county, but there are lots of opinions on this. Usually rural county costs are far lower than urban counties. People that have easier acess to care use it, and their average costs rise because of it. If you do it by state (which you could) the rural counties would subsidize the urban ones. But that might be ok.

 

You probaly could not rate by city since all geography has to be covered, and many folks are not in cities. But there are a lot of ways to slice this problem.

[bumab]

We are not pricing humans. We are pricing diagnoses and treatments. Patients still have insurance to cover most of large-dollar items (think of homeowers insurance or auto insurance) but most costs are not insurance costs.

 

Obviously I worded that poorly ;), but the point was addressing the difficulty of setting treatment prices ahead of time.

 

I apologize for pressing you so hard, I'm contemplating applying for medical school again (I was not accepted in the past mainly because of my lack of knowledge about the health insurance fiasco in Washington).

 

Could you list what you think the major changes would have to be to impliment your idea? Where would the regulation come from as far as making sure communities got identical rates? Etc, etc.

[Biochemist]

Metlife's net income for 2004 was 7% of sales and Wellpoint's was 5% of sales. And that's *after* taxes.

You have to take the average over time. Some years they are negative in a bad underwriting cycle. I think the average for pure health insurers (MetLife is not) is a little under 2%.

Its easy to twist it this way and the insurance lobby certainly does, but an actuary will tell you it all evens out in the end.

Sure at the national level. Or for very large insurers. But if an insurer can just avoid one sick baby, they save $250,000 in cost. For small insurers (anybody under 300,000 members) a single sick baby can take up their entire net for the year. Do you suppose they don't think about that???

On the other hand the insurance company hedges its bets on the way in by forcing an exam, punishing you if you have any lapse in your insurance history, putting limits on start of coverage (we just started a dental plan and orthodontia will not be covered for 18 months! Even though we're paying the same rate today as it will be in the future!), long lists of exceptions for pre-existing conditions. They just about totally eliminate their risk!

You are now making my point. The insurers are doing all of this to avoid adverse selection. Most folks who commence orthodontia insurance do so because they expect to make a claim. If you make orthodontal insurance mandatory across a large employer, it is a trivial add-on. If you make it optional, it is an expensive add-on. That is because, in reality, the add-on is NOT INSURANCE. It is closer to a prepaid dental plan. The only folks who select it are going to use it. Unless the deductible is high......

 

Actuaries are not usually dumb.

[Biochemist]

If that's so, then why don't they? {switch to community rating}My thesis is because they would be losing their higher margins on those individuals, but you clearly don't agree with my logic on that one...

No. The problem is that the first insurer that does community rate gets annihilated in adverse selection. Can you see why this is true? You would have to require all insurers to do it in a given geography.

[Buffy]

You have to take the average over time. Some years they are negative in a bad underwriting cycle. I think the average for pure health insurers (MetLife is not) is a little under 2%.

Wellpoint is and actually their profits have been *more* stable...

Sure at the national level. Or for very large insurers. But if an insurer can just avoid one sick baby, they save $250,000 in cost. For small insurers (anybody under 300,000 members) a single sick baby can take up their entire net for the year. ..... The insurers are doing all of this to avoid adverse selection.

Nope you're making my point. Insurers limit the risk with exceptions. A single sick baby does cost a lot, but with in a population, it is going to be paid for by the others and the risk of an *unpredictable* event is *just* as likely in an employer-plan population. This is simple statistics. Yes, for small insurers, it would be riskier, but that does not explain the differential from large insurers. They charge more because they *can*. People do not have an option not to have insurance if they can avoid it all. In any case "small insurers" are going the way of the dodo, and in any case, they usually use reinsurance to cover their risks of high payouts.

 

Cheers,

Buffy

[Buffy]

No. The problem is that the first insurer that does community rate gets annihilated in adverse selection. Can you see why this is true? You would have to require all insurers to do it in a given geography.

So that's gonna require... government intervention ;) If its a really good idea for all of them, I'd think they'd get together and do it themselves!!!

 

Cheers,

Buffy

[Biochemist]

...I apologize for pressing you so hard, I'm contemplating applying for medical school again (I was not accepted in the past mainly because of my lack of knowledge about the health insurance fiasco in Washington).

 

Could you list what you think the major changes would have to be to impliment your idea? Where would the regulation come from as far as making sure communities got identical rates? Etc, etc.

Heavens, no apologies necessary. I like the questions.

 

In the current market, all that is "reguired" is for set of providers to agree on a fixed price for particular service set and then arrange for that to be paid by one or more health plans. The last part is pretty easy. The difficult part is usually getting providers (particularly physicians) to agree on their relative portions of the pie. Physicians are their own worst enemies.

 

Once the service set is defined, the docs shouold begin to collect quality metrics on the service set and then MARKET THE QUALITY METRIC. Healthcare practitioners do not currently market based on quality. They are generally afraid to. Last I heard, less than 30% of docs would like to have their quality metrics published. Do you suppose it is the bottom 70% that is the most concerned????

 

If consumers start pushing for this kind of bundling, more docs will do it. Docs are probably advantaged if they are in slightly larger multi-speciality groups. Most docs are currently in smaller groups. Relatively few are in groups larger than 50. There are about 400,000 practicing docs in the country, and last I looked, 300,000 were in groups of three or less. Of the other 100,000, about a third of them arer KaiserPpermanente groups, which are not generally accessible to the public (i.e., only for Kaiser members). These number might be a couple of years outdated, but they are not far off.

[Biochemist]

So that's gonna require... government intervention ;) If its a really good idea for all of them, I'd think they'd get together and do it themselves!!!

I don't think that is likely. There would be no way for any plan to stop a new plan from getting approved by the state insurance commissioner and the commencing the adverse selection process again. It would have to be mandated through the state insurance commissioner.

 

Community rating is not required for the consumer directed plan to work, but it would increase the numberr of insurers offering products to any individual consumer.

[Biochemist]

Insurers limit the risk with exceptions. A single sick baby does cost a lot, but with in a population, it is going to be paid for by the others and the risk of an *unpredictable* event is *just* as likely in an employer-plan population. This is simple statistics.

I am really lost, Buff. My point is that insurers avoid the risk of adverse selection by avoiding high risk groups (and individuals unless they are rated-"rated" means they can deny you insurance), by watching for legal risk associations, and by implementing exceptions and waiting periods. For example, some populations are more likely to have sick babies, and that does affect the rate that the insurer offers. This is what actuaries do for a living.

 

I am not sure what point you were making.

[Biochemist]

In any case "small insurers" are going the way of the dodo, and in any case, they usually use reinsurance to cover their risks of high payouts.

New small insurers are starting regularly. I don't think they are going to be eradicated soon. Most get bought by larger insurers eventually, but new ones are alway cropping up.