As We Eliminate Life-Time Benefit Caps on Health Insurance, We Continue to Short Change Ourselves on Health Care

Thanks to a provision in the Patient Protection and Affordable Care Act, we’re living in the midst of one of the more significant changes in American health care – the elimination of life-time benefit caps on individual, health-insurance policies.

Between September 23, 2011 and September 23, 2012, the annual limit capped out at   $1.25 million. And between September 23, 2012 and January 1, 2014, the limit rises to $2 million. After January 1, 2014, caps will cease entirely.

The elimination of life-time benefit caps comes as a welcome change by those who are insured. But nothing is unalloyed. Consumers will encounter increases estimated at two to three percent to compensate health insurers for the costs that result from the caps elimination.

The end of caps on health benefits will have scant effect on many insured.  Comparatively speaking, few would have reached pre-2014 caps in their coverage. The real value of the elimination will be felt most people who require health care that’s extraordinarily expensive. They include people who suffer from chronic illnesses like hemophilia, cancer, HIV AIDS, diabetes rheumatoid arthritis, and heart disease. Costs to treat these conditions can sky rocket into the high six figures in a single year.

Some months ago, I wrote about Edward Burke, a resident of Palm Harbor, Florida, who was diagnosed with hemophilia at an early age in 1960 and suffers from Factor VIII deficiency. According to the National Hemophilia Foundation, about one in 5,000 males born in the United States has hemophilia. All races and economic groups are affected equally

Factor VIII created by drug companies early in the 1970s was a god send for Burke. This chemical takes the place of the blood factor that enables clotting in non-hemophiliac individuals but is lacking in people with hemophilia. Factor VIII has enabled Burke to lead a life that’s close to normal.

But Factor VIII doesn’t come cheap. This chemical costs nearly $1 million a year. At this rate in the past, he reached his lifetime health insurance caps in no time, and had to change employers and health plans frequently to renew his health coverage with new plans.

The unspoken social bias at work here is that we, as a society, should do whatever it takes to deliver the best of health care to whomever needs it, regardless of the cost. But this bias begs the question: Why must it cost such staggering sums to deliver health care to people who suffer from debilitating and life-threatening conditions? And this raises the ultimate dilemma that looms before us: How are we going to pay for our future health-care needs?

In the April 2011  paper titled “Health Care Spending in the United States and Selected OECD Countries, the Kaiser Foundation lays it out with abundant clarity:

“This issue is particularly acute in the United States, which not only spends much more per capita on health care, but also has one of the highest spending growth rates. Both public and private health expenditures are growing at rates which outpace comparable countries. Despite this higher level of spending, the United States does not achieve better outcomes on many important health measures.”

Clearly, we are not only spending more on health care than other countries In the bargain, we are short changing ourselves on health care and will continue to do so until we resolve this woeful situation.

Health Benefit Plans for Consumers: More Choices at Higher Cost

There’s little doubt that health insurance as we knew it -- or as some would like it to be again -- is irretrievably lost.  The cost of healthcare services and the declining health of Americans have precipitated a fundamental shift in how health benefits will be structured, financed, and delivered.  Events of the past week offer a critical insight into how these changes are taking place.

First, the National Center for Health Statistics reported that the percentage of employees enrolled in high-deductible healthcare plans (HDHP) has jumped significantly during the past four years.  During the first quarter of 2011, 20.3% of group health-care plan participants were enrolled in a high-deductible plan, up from 12.9% in 2007.  The center defines a high-deductible health plan as one with deductibles of $1,200 for self-only coverage and $2,400 for family coverage in 2011. This compares with a deductible of $1,150 for self-only coverage and $2,200 for family coverage in 2007.

During the same period, enrollment in consumer-driven, high-deductible plans nearly doubled, rising to 8.8% of plan enrollees during the first quarter of 2011 from just 4.5% in 2007. A CDHP is a high-deductible plan linked to a health savings account or health reimbursement arrangement.  Combined, HDHPs and CDHPs are now used by 3 in 10 group healthcare plan participants.  It’s likely that an even larger percentage of Americans who purchase health insurance directly choose either a HDHP or CDHP plan.

This upward trend should come as no surprise.  Employers will continue to adjust benefits and shift greater exposure to employees as long as healthcare costs exceed employee productivity gains.  Increasingly, employers want to limit their health benefit exposure, and are moving to defined- contribution financing models, similar to what occurred with retirement benefits.

The benefits industry is moving quickly to respond to this trend.  Last week, three Blue Cross Blue Shield Plans – Blue Cross Blue Shield of Michigan, Health Care Services Corporation and WellPoint – jointly purchased Bloom Health, an emerging leader in the development of private insurance exchange capabilities. 

Although the public attention has focused on the development of government-led health insurance exchanges, the private sector has been busy creating exchange models for employers who don’t participate in the public exchanges.  Private exchanges, marketed directly to employers, will facilitate the defined contribution model that employers are favoring.

All of which tells us that in the near future, look for most employers to offer employees a fixed amount to be spent on health care--and other benefits-- available through an exchange platform.  Employees will likely have more benefit choices to choose from, but the choices will more often involve HDHP and CDHP plans.

The era of the healthcare consumer is upon us.  A growing number of fully accountable purchasers are entering the market.  There’s still a lot not to like about American health care, such as the reimbursement mechanisms now in place. But the foundation for a consumer marketplace is well underway. 

It’s Time to Rethink the Tax Exemption for Non-Profit Hospitals

Simply put, it’s time to end the tax-exemption for America’s hospitals. 

This issue resurfaced recently as the result of a decision by the State of Illinois to revoke the property-tax exemption for three hospitals. The reason: Their average percent of revenues dedicated to charity care was only 1.3 percent.  In revoking the exemption, the state established a simple litmus test: Is the hospital a charity or a business?  Is it Motorola or is it a soup kitchen? 

When hospitals came on the scene more than 100 years ago, they were more like soup kitchens than Motorola.  The health care they provided to our communities was a luxury.  Many communities lacked e doctors, and even fewer had hospitals.  Many hospitals were established only when community leaders pooled their treasures to build and staff them.   Back then, it was only fitting that these institutions be chartered as nonprofit entities, exempt from paying taxes.  The healing profession was as much a calling as a career.  That’s all changed. 

Can anyone argue that today’s hospital is anything other than a commercial enterprise?  Watch more than five minutes of Sports Center highlights and you can’t help noticing a community’s local hospital system advertising its services across a stadium or arena.  In communities with more than one hospital, open competition exists for patients who will occupy treatment centers and fill beds.  American hospitals are now fully entrenched in the business of providing health care. Many of them are $100- million-plus businesses. Today, more hospitals resemble Motorola than soup kitchens.

The foundational problem with exempting hospitals from paying taxes is this: Doing so implies that they’re something they’re not.  Hospitals are not charities in the classic sense.  Hospitals don’t agree to provide care to all without regard to the ability to pay for their services.  Indeed, think about the first question you’re typically asked when you’re admitted to a hospital:  Do you have insurance?

Yes, hospitals provide free care to some, but this is the exception.  The overwhelming majority of patients are insured by private or government programs, and others without insurance pay for their care out of pocket.  What’s more, hospitals don’t rely solely on contributions from the public to support their charitable cause.

The hospital community will almost assuredly oppose any thought of repealing their tax exemption, but the repeal may actually work to their benefit in three, important ways.

First, taxing hospitals will eliminate a significant, public relations problem – executive compensation. The public image of a tax-exempt charity is at odds with the compensation practices of today’s hospital systems.  In Illinois, one of eight hospital CEOs earned seven figure paychecks in 2008.   

Second, providing charity care will soon be much less of an issue for hospitals than it’s been in the past.  That’s because the number of Americans without coverage will decline significantly in 2014 as health care reform is more fully implemented.  The traditional argument not to tax hospitals as we do other businesses will lose its merit.

Even if hospitals fear that they’ll be disproportionately disadvantaged by charity-care patients, a number of ways exist to equitably share this cost across the hospital community.

To those who argue that the burden of paying taxes will simply increase the cost of health care, I offer two responses.  First, the current tax exemptions, on the margin, distort the true cost of health care to the extent that these institutions do not pay taxes.  Second, factoring the burden of paying taxes into a hospital’s cost structure will force hospital leaders to more aggressively manage their expenses.

Third, eliminating the tax exemption will eliminate the time and expense hospitals spend on justifying the exemption.  Wouldn’t this time and energy be better spent on delivering care?

Hospitals have become sophisticated, commercial enterprises.  This is a good thing; it’s a reflection of the gains we’ve made in treating the health-care needs of our communities.  

Because of these changes, the time has come to update our thinking on the tax benefits we provide hospitals. 

Medicare May Be Serving Seniors, but It’s Putting the Rest of Us in a Financial Death Grip

Information released this past week point out the damaging impact that government health-care programs are having on the commercial, health-insurance market, and the market for private health benefits.

The first bit of news comes from the latest Healthcare Economic Indices released by Standard & Poor's (click here for the indices).  The indices show that the average cost of health-care services covered by private-insurance companies jumped by nearly 7.5% for the year ending June 2011.  By comparison, the average cost of services covered by Medicare increased only 2.5 percent for that same time period.  Experts speculate that hospitals will likely continue to shift costs to private payers as government programs squeeze hospitals and doctors with lower reimbursements to manage their program shortfalls.

For every action, there is an equal and opposite reaction.  On Monday of this week, the National Business Group on Health released the results of a survey of its membership.  The news here is that large employers expect their health care costs to increase 7.2% in 2012.  Is it just coincidence that hospitals are increasing their charges to private insurers by 7.5% and that commercial health-care costs will be up by an expected 7.2% in 2012?

The secondary affect of these developments is that employers now plan to offer even more consumer-driven health plans in 2012.  Of those surveyed by the National Business Group on Health, 75% said they expected to offer a high-deductible health plan (HDHP) with a health savings account (HSA) in 2012, compared to 64% this year.  Realistically, we should expect all, large employers to offer HDHP/HSA products within the next two to three years.

Some time ago, the virtues and vices of high-deductible health plans used to spark fierce debates. Not now.  For the time being, those debates have been overshadowed by the reality of health-care costs that continue to rise, and to increase disproportionately for commercial insurance programs.  High-deductible health plans are now the default choice for employers seeking to shield themselves from the costs of commercial health insurance.

Far from being better purchasers of health care, the government simply establishes a price it is willing to pay, leaving hospitals and physicians to right size their income statements and balance sheets by digging into the pockets of their customers.  As long as employers continue to finance the lion’s share of the private sector health-care tab, they will adjust their benefit programs to achieve a premium price point that’s affordable.  This will drive the continued adoption of high-deductible health plans and health savings accounts.

In the short run, advocates of greater health-care consumerism are benefiting from the continuing cost shifting from government programs that’s taking place.  This phenomenon may be single-handedly creating millions of HDHP/HSA health-care consumers, who are learning firsthand how to become savvy health-care purchasers.  This may, however, simply be the proverbial “lipstick on the pig.”

Unless America’s government programs are reformed quickly, they will continue to crowd out private benefit programs and make them even less affordable.  The increased prices paid for services in the commercial market are, in reality, a hidden tax paid to support the solvency of the Medicare program.

Equitable, sustainable, payment system reform can’t come quickly enough.

Health Care Reform, the “Constitutional Hazard” and Innovation

It would be entertaining to hear health-care experts debate whether health-care reform has been a catalyst or deer edterrent to innovation within the health care market.  On the one hand, tremendous uncertainty exists as to whether or not the health-care reform law, in part or in the whole, will withstand the constitutional challenges now working their way through the lower courts.

On the other hand, there’s no denying that the reform act and the escalating cost of care in general have spawned a tremendous surge of activity as market participants seek to cash in on the stated – and perceived  – changes that will take place over the next three to five years.

The events of the past week further underscored the dynamic nature of health care in 2011. The 11^th Circuit Court of Appeals affirmed an earlier decision striking down the individual mandate as unconstitutional.  Admittedly, the ruling was a divided one. And though other courts have affirmed the constitutionality of the mandate, the 11^th Circuit’s decision reminded us once again that we really won’t know for certain whether the Affordable Care Act will stand until the U.S. Supreme Court issues a final ruling.

In the meantime, the regulatory machinery tasked with implementing the Act churns forward.  Almost simultaneously with the 11^th Circuit’s decision, The Department of Health and Human Services announced that it was awarding more than $185 million in “Exchange Establishment Grants” to 13 states and the District of Columbia to support state-level implementation of health insurance exchanges, that  must be operational by January 1, 2013.  Dozens of other major initiatives either have been or are being implemented.

All of which presents a real policy dilemma and what I call a “constitutional hazard.”  Should policymakers take a go-slow approach with implementation until the Supreme Court provides a final ruling?  Don’t look for the Obama administration to do so anytime soon.  Or should the Supreme Court hasten its review of the legal issues?  The Court has already settled this question, having already denied a request for an expedited review. 

All of this introduces the possibility that the Supreme Court judges may be asked to factor into their deliberation the fact that so much has already been done to implement the law. They could decide that a full and outright repeal, while perhaps the legally correct outcome, would be so disruptive as to be unwise.  This is the “constitutional hazard” confronting us today.

If ever there were a reason for health-care decision makers to take a wait-and-see approach, this is it.  Except that underneath the storm cloud of uncertainty hovering over the health-care market, a high level of innovation is taking place.

Consider, for example, the announcement last week by Walgreens that this fall, the company would begin marketing health insurance to its customers through its own version of a health-insurance exchange. Walgreens will partner with selected health-insurance partners and attempt to use its enormous retail footprint to become a one-stop shop for all health-care needs. 

To understand the potential significance of this, ask yourself: When driving down a busy street, what am I more likely to observe – an insurance brokerage, or a Walgreens store?  If consumers show a willingness to buy insurance from the same retailer that sells them prescriptions, we may soon see insurance brokers working for Walgreens.

Other companies are also putting their toes in the health-insurance exchange waters.  Aon, the large national insurance consultancy, announced earlier this year that it would create a health-insurance exchange for employers with more than 1,000 employees.  The value Aon seeks to create lets large employers exit the business of administering health-benefit programs.  In the Aon model, a large employer simply decides how much to spend on health benefits and lets Aon do the rest.  For their part, employees presumably get more choices to select from, and avail themselves of more professional, simplified administrative support.

Within the broad uncertainty of health care reform implementation, there are then, at least two significant trends emerging.

The first is the growth of the retail, health-benefit consumer.  Whether through state-sponsored exchanges, a Walgreens exchange, or an Aon model, consumers are likely to take on greater decision making authority for their health-care benefits and the costs associated with them.  This will occur as employers take steps to cap their exposure for health-benefit programs.

Second, market participants are aggressively re-examining their traditional business models and markets and are looking to grow into adjacent markets that expand their footprint.  This is the case with Walgreens, but they’re not alone.  Hospitals are becoming health systems, and many will also become insurers within their local markets.

Whether driven by reform or the pressures of the market, change is afoot in health care.  I will leave it to others to decide whether all this change represents true innovation.

The National Significance of the Highmark and West Penn Allegheny Merger

A health-care transformation is unfolding in Pittsburgh that has national implications for health care. Recently, Pittsburgh-based Highmark announced its purchase of West Penn Allegheny Health System (WPAHS), a five-hospital, health system that’s the second largest health system in the Pittsburgh area. 

With this announcement, the two organizations have begun to create a preview for what the future of health care may look like.  In fact, the merger of these two organizations offers a glimpse into the challenges that await health-care organizations that take bold steps to reposition themselves into the future.

Others are better positioned to ascribe the true catalysts behind this acquisition.  Nonetheless, it’s entirely plausible to suggest that Highmark was driven to this acquisition out of a fear that UPMC was simply becoming too large a force in the Pittsburgh health-care market.  If that’s the case, Highmark’s move can be seen as a defensive counter-response.  Having said that, Highmark and West Penn Allegheny describe another motive for coming together, one that is more far-reaching and significant.  Together, they describe their desire to create an integrated health-care system that marries the financing and delivery of care.

Why is this a big deal?  After all, there are examples of integrated health systems across the country that also market health insurance to the public. The Geisinger Health System is an example of such a model.  This one, though, is different.  Highmark comes to this acquisition already well entrenched in the health-benefit market.  Highmark’s health plan includes more than 3-million members and holds significant market share in Western Pennsylvania as a stand-alone insurer. 

Highmark also includes almost every hospital in the area in its network of hospitals and physicians.  This means that Highmark will have to manage a hugely difficult transformation.  The company occupies the leadership position in the benefits market and the market power that comes with this.  It is less clear that the Pittsburgh market will cede to Highmark the same position as an integrated health system.  Equally as significant, the company will eventually find itself in direct or indirect competition with many of the hospitals and medical professionals now in its networks.

Health plans have historically avoided ownership of health-care delivery systems for a couple of sound reasons.  Agreeing to managed-care joint ventures with hospital systems has been about as far as health plans have been willing to go, and most of these have not performed up to their promise.  In fact, these partnerships have underperformed because the two parties involved were not as aligned as they wanted others to believe. 

What’s more, health plans have sought competitively advantageous pricing from their partners, and health systems have sought competitively advantageous referrals to their systems.  Neither party has been truly able to make a difference in how care was priced or delivered.

In their own words, Highmark and West Penn Allegheny are attempting to create what health-care thought leader, Clayton Christensen, in The Innovator’s Prescription, describes as an integrated, fixed-fee provider system.  As such, Highmark and West Penn Allegheny are undertaking a tremendous change agenda.  In the future they describe –when  health-care practitioners will deliver care in a world in which revenues and resources are fixed, not variable. 

This doesn’t mean health care will be rationed.  It does mean the delivery of health care will be rationalized.  In other words, patients will be much more likely to receive care from professionals who are best matched to provide the care they need.

With this shift in focus, change of great magnitude is possible.  The new health system will be encouraged to make resource allocation decisions based not on how best to generate immediate revenue, but on how to best maximize fixed, scarce resources.  If accepted in the market, the new organization will be motivated to invest in the health of its members/patients to avoid longer-term costs.

It is too early to say whether this new, combined organization will be accepted into the Pittsburgh market or granted regulatory approval.  But if the answer is yes to these two stipulations, Highmark and West Penn Allegheny have the opportunity to create a “super” accountable care organization (ACO)–an integrated health system that’s also integrated into a large health plan. 

The rest of the United States will certainly watch this development closely for its impact on the immediate and long-term impact on American health care.  It’s also worth watching because of the significant leadership challenges and questions the combination of Highmark and West Penn Allegheny presents. 

Can the combined management bridge the cultural divide that has defined health-care payers and providers?  If so, how long will it take?

Can the combined management effectively integrate the two organizations into a seamlessly integrated health-care financing and delivery system?

And how quickly can Highmark and West Penn Allegheny abandon their current ways of thinking and redirect their focus toward population-based care delivery and long-term health management?

The nation should watch this game being played in Pittsburgh.  It doesn’t involve the Steelers or the Pirates.  But it is worth keeping a close eye on to see how it all plays out and how it advances a new form of health-care. 

Its Time to Get the Government out of Fixing Prices for Health Care

Nine family physicians have decided to leave Indianapolis-based American Health Network (AHN) in favor of practicing their profession trade as part of Riverview Hospital.  The Indianapolis Business Journal’s reporting of this seemingly innocuous decision by nine doctors offers rich insight into the convoluted nature of the American health-care payment system.

According to AHN, these doctors can now bill their services for around three times what they were asking patients to pay when they were part of American Health Network.  AHN estimates that the additional billings will add $6.9 million to the health-care tab paid by the Indianapolis community for health care.

A number of reasons may have prompted Riverside to want these physicians to come to work for the hospital, but the bottom line appears to be this: Because these physicians are employed by Riverside, the hospital can charge higher fees for their services. In fact, the fees are three times higher than the physicians charged before they worked for the hospital.  Are the services now three times more valuable to patients?  Doubtful.  Are the outcomes delivered by these physicians significantly better?  Probably not.  Why then, the difference?

As they say, “it’s complicated.”  Let’s try to uncomplicate it.

In its quest to engineer an equitable and efficient payment system, the federal government regularly adjusts the payments it will make to the medical community for serving Medicare patients.  Because Medicare is such a large and significant component of health care, private insurers often establish payment systems that mirror those of Medicare. 

To clamp down on suspected over-billing for services by physicians in outpatient settings, Medicare has taken steps, the result of which is to make the differential between services provided in an inpatient setting larger than it has been in the past.  Not surprisingly, hospitals and physicians are reacting as you or I might if we were in their shoes.  They’re following the money.

Decisions like this by players within the health-care market have little, if anything, to do with improving the quality of care or reducing its cost.  These decisions have to do with maximizing revenue. This is what one should expect within an open-ended, fee-for-service financing model.

On the other hand, what if there were open and free markets for the services these family physicians provide?  And what if the price for services were based on the perceived value of the service, not on where the service was delivered?

To make this happen, a number of significant and important changes would have to occur. First, the government would have to get out of ongoing and continuous central planning. By substituting its judgment for the wisdom of the market as to how to best allocate resources, the government has created so many market distortions that health care can no longer legitimately be described as a market.  At least not a free market. 

The U.S. health-care system suffers from a fate that’s actually worse than centralized planning.  In Soviet-style economies, central planning worked within the framework of fixed resources and this led to rationing.  In the U.S. health care system, we don’t ration services. Instead, the government has a safety valve – the private sector. Insurers and Patients are expected to pick up the tab for whatever the government won’t pay for.

Government would also have to get comfortable paying providers market prices for services it funds through Medicare and Medicaid.  It used to be gospel that these programs deserved preferential pricing because the alternative would be uncompensated care arriving at the doorstep of providers and hospitals.  This argument may have had merit early in the development of these programs. But this argument has outlived its usefulness.  The time has come to move beyond social policies that deliver preferential pricing for these programs.  Pricing policies like this inflict grave harm on the larger market for health-care services.

Second, care providers would have to rationalize their business models and actually become familiar with what they’re charging for their services.  Many types of care are necessarily open-ended, because it’s often difficult to estimate or predict what the total price for a regiment of care will be.  Diagnosing a particularly vexing ailment is a good example of the kind of service that can be hard to create a fixed price for.  On the other hand, a routine physical is pretty straightforward.  So is a normal baby delivery.  Do you think your doctor knows what he or she charges you for services like these?  Probably not.

Third, Insurers, with a helping hand from a newly-restrained government, would need to recognize that their own practices help cloud the market for health-care services.  This begs the question: What good is a posted price for services if the actual cost to the consumer is significantly adjusted by a health insurer after the fact? 

Under many benefit plans, the only meaningful price distinction drawn is among those providers who are or aren’t in the plan’s network.  Provider competition and innovation on the basis of price isn’t going to come anytime soon in this world.

Is all of this going a bridge too far?”  Hopefully not, but a realist would have to conclude that achieving even a beach head with these changes represents a lot of heavy lifting.  It’s not that it can’t be done.  It’s just that in health care, we’ve come to believe that markets don’t work, and that even if they did, we would collectively suffer. 

In the meantime, how can we blame the health care market for not working when we don’t have the discipline or conviction it takes to bring it to life?