Q: How is a rat different from U.S. healthcare policy?
A: A rat learns from experience.
We were recently asked to comment on the challenge faced by the so-called “consumer owned and operated” health plans (or “CO-OPs”) created by the Affordable Care (“ObamaCare”) Act and originally funded to the tune of $6 billion dollars by U.S. taxpayers. CO-OPs are supposed to be non-profit member-controlled organizations who are entering the health insurance business for the first time, and whose profits “are required to be used to lower premiums, to improve benefits, or for other programs intended to improve the quality of health care delivered to its members.”
The CO-OP program has come under close scrutiny recently by the House Committee on Energy and Commerce, which has questioned the honesty and validity of the accounting used to finance the program and the award of grants and loans to organizations that, according to the wording in the ACA law, should not have been legally eligible to receive funding. While the Department of Health and Human Services had originally claimed that loans made to these organizations would have a 35%-40% default rate, the Appendix to the President’s most recently proposed budget reflects an expected loss rate of 91%. A major concern raised by this scenario is that many Americans would eventually be insured by CO-OP organizations that are fully expected to spend all of their Federal grants and loans and go out of business – leaving patients and their families without insurance.
Another problem posed by the committee is that, although the law specifically states that: “An organization shall not be treated as a qualified non-profit health insurance issuer if—(A) the organization or a related entity (or any predecessor of either) was a health insurance issuer on July 16, 2009; or (B) the organization is sponsored by a State or local government, any political subdivision thereof, or any instrumentality of such government or political subdivision.”, certain organizations such as the Freelancers Union already sell health insurance, but have been awarded CO-OP funding by HHS.
As reported by Kaiser Health News this past February, the administration argues that the union itself is not an insurer, despite the fact that it sells health insurance:
Republicans on the House Ways and Means Committee criticized the loans made to Freelancers Union-sponsored co-op plans, claiming they violate the law’s provisions that loans cannot be made to any pre-existing insurers or for-profit entities. They also said the Freelancers Union receives state and local government funding in New York and that the law says loan recipients can’t receive such support.
But a CMS spokesman said the Freelancers Union meets the law’s standards for a co-op plan sponsor because the union itself is nonprofit and not an insurer. A Freelancers Union spokeswoman said the co-op boards and executives are distinct and independent from the union’s board and executives, and none of the co-op entities have received state or local government funding.
But let’s put aside all of the weasel words and slick accounting for the moment. Since the Road to Hellth is paved with good intentions, is this idea of forming a bunch of non-profit insurance companies to provide competition in the individual and small business market a good idea? More importantly, is it a sound idea as passed into law by Congress and signed into law by President Obama? Especially since the taxpayers will be losing nearly $6 billion in the process?
Let’s start with the question of whether non-profit health insurers tend to have lower premiums than for-profit insurers. After all, the whole idea is to save money for the people paying the premiums. The news on this front isn’t terribly encouraging. In 1983, Adamache and Sloan compared the premiums charged by non-profit Blue Cross-Blue Shield (BCBS) health plans and their for-profit competitors, and found that non-profit status had virtually no effect on premiums or market share. But that was nearly 30 years ago. What about now? At least partly as a result of the CO-OP provision of the ACA, Leemore Dafny and Subramaniam Ramanarayanan decided to revisit the question in 2011. They did so by looking the premiums charged by non-profit BCBS companies that switched to for-profit status. The results?
Using a regression-adjusted premium index for each geographic market and year, we find that premium growth is no different, on average, in post-conversion markets versus markets not experiencing conversions. There is no difference in premium trends prior to conversions. The resulting instrumental variables estimate of the impact of FP insurer market share on premiums indicates no effect of for-profit status on premiums, on average.
Further analysis reveals the impact of BCBS conversions varied depending on the market share of the converting plan. Specifically, marketwide premiums increased when converting BCBS plans had shares in excess of ~20 percent, and decreased otherwise.
In other words, it doesn’t so much matter whether insurers are for-profit or non-profit – what really matters is whether there is true competition in the local market. Monopolies and oligopolies are bad, because they tend to increase the prices of all insurers.
If we think about these results as they pertain to the “real world”, it makes perfect sense. “Non-profit” is a tax status, not a business plan. If non-profits were to routinely charge lower premiums and provide better coverage than for-profit insurers, the latter would inevitably go out of business. But that’s not what we see in the real marketplace. Instead, for-profits and non-profits behave in essentially the same ways as businesses; only the terminology is different. While the former has “profits”, the latter has “revenues in excess of expenses”. We have personally worked with many non-profit and for-profit companies, and can personally vouch for the fact that the management of each one is equally concerned about generating more than enough revenue to cover expenses and building up surpluses to fall back on when times get tough. These observations are clearly borne out by the facts. As reported by the Seattle Times just this year, the non-profit health insurers in Washington state (which is virtually all of them), have been amassing enormous surpluses even as they’ve rushed to raise premiums in anticipation of the huge new expenses imposed by the ACA.
This business-like behavior applies even those companies that are genuine cooperatives. Late last year, the non-profit Group Health Cooperative of Eau Claire, Wisconsin asked for a 13% increase in the premiums it charged it members. When it was granted only a 1.4% increase it did what any for-profit company might have done – it dropped coverage for 10,000 state employees. Business is business. These are health insurers, not charities.
So we’ve established that non-profits do not appear to behave much differently than for-profit insurers when it comes to the cost of insurance premiums. Despite all of the hand-wringing, “profits” and “investors” by themselves really don’t enter into the cost of insurance premiums. Is there any reason to think that the new CO-OPs financed by the ACA are going to be any more successful at reducing costs than existing insurers?
The organizations applying for federal funding claim that they will be, but that’s to be expected. Like many people these days, they say that “medical homes” and “Accountable Care Organizations” (ACOs) will save the day:
Sponsors of many of the new co-op plans say they aim to encourage teams of physicians and other providers to work closely with plan members to provide coordinated – and less costly – care. That model is called the patient-centered medical home. Co-op sponsors say that unlike most existing insurers, their plans will pay providers to manage patients’ health, with a strong focus on primary care, rather than just paying for individual medical services.
“This is a new model of health insurance because of the principle of the patient-centered medical home,” said Matthew Katz, CEO of the Connecticut State Medical Society, which is co-sponsoring HealthyCT, a proposed co-op.
But let’s be realistic and look at the data, shall we? The basic principal underlying ACOs and medical homes is no different than those underlying HMOs such as Kaiser and Group Health. You have a bunch of clinicians who are basically hired hand and are supposed to pull together for the good of the collective. These types of organizations have been around for over 60 years. They have electronic medical records. They have all of the same incentives to cut costs that ACOs and medical homes do. Many would argue (us included) that for all practical purposes ACOs are nothing more than HMOs with a fancy new name. How have those business models influenced the growth of premiums?
As reported in Kaiser Health News, the cost of the insurance plans purchased by employers jumped yet again in 2011. “Exhibit B” from this report is shown below.
As you can see, premiums are pretty much the same for plans designed as health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service plans (POSs). There is, however, one exception: high deductible health plans with a savings option (HDHP/SO) such as a healthcare savings account (HSA). High-deductible plans with HSAs are significantly less expensive than any of the alternatives.
In this post we won’t go into an elaborate explanation as to why, but suffice it to say that of all the plans mentioned HDHP/SOs are those best able to harness market forces and give patients and their physicians a real incentive to ask questions, compare prices and minimize expenses. (See this post by John Goodman for an excellent review of these types of policies and savings accounts.) Indeed, some of the very organizations applying for CO-OP funds – such as the Freelancer’s Union – sell large numbers of HDHP/SO policies. Indeed, it’s one reason why Freelancer’s founder and CEO Sara Horowitz is able to claim that her plan’s rates are “40 percent cheaper than the competition yet the plan still reported surpluses the past two years.”
Here’s the rub. Lower cost HDHP/SOs are the one type of health insurance coverage that is virtually, but covertly, “outlawed” by the ACA. This is not done directly, of course, but indirectly by having the folks at HHS interpret the law in a way that will make these types of plans far more expensive to offer. Avik Roy explained this in a recent post:
It all hinges around a technical term called “actuarial value.” Actuarial value is an insurance concept that defines, on average, the fraction of costs that a particular insurance plan will cover, versus requiring the beneficiary to pay directly. For example, a health insurance plan with an actuarial value of 70 percent would, on average, require its beneficiaries to directly pay 30 percent of the covered health expenses, through co-pays, deductibles, and the like. The rest would be paid indirectly, through the insurance premium.
The problem is that health savings accounts aren’t really compatible with conventional “actuarial value” calculations. If you have a consumer-driven health plan consisting of high-deductible insurance and a health savings account, and you don’t count the HSA as a “health expenditure,” the actuarial value of your plan could be extremely low. On the other hand, if HSA savings are counted as a form of health spending, the actuarial value of your plan could be quite high.
As usual, under our new health law, the government gets to decide these things on our behalf… “The guidance is a mixed bag,” says Ramthun. The HHS guidance does allow employers to include the contributions they make to health savings accounts or health reimbursement accounts (HRAs). But contributions that individuals make into their own HSAs or HRAs won’t count. That’s particularly harmful to people who buy insurance for themselves on the individual market.
“This will make it much more difficult for high deductible plans to meet the minimum actuarial value standard of 60 percent,” says Ramthun. “If they can’t, these plans will either not be available, or these plans will have to raise their values by covering additional benefit expenses. This in turns means the premiums will have to be increased to cover the additional expenses, meaning HSA plans will not be as affordable as they are today.”
Ironically, as all this is happening, a group of credible analysts went ahead and published a study in Health Affairs about the potential impact of HSA-related HDHPs entitled: “Growth of Consumer-Directed Health Plans to One-Half of All Employer-Sponsored Insurance Could Save $57 Billion Annually”. As the title suggests, this would be the equivalent of a 4% decline in total healthcare spending for the non-elderly. The financial impact would roughly double in the percentage of HSA-related coverage were increased to 75% of employer policies. That would be more than a $1 trillion savings over ten years. Will these findings have any impact on HHS policy toward HDHP/SOs under the current administration? We doubt it. As we’ve said in a previous post, managing U.S. healthcare policy has become the domain of “religion” rather than thoughtful and sustainable planning.
None of this is good news for either the U.S. taxpayer (who are faced with record deficits their children and grandchildren will be expected to repay) or the millions of Americans who are already struggling to be able to afford health insurance. Based upon the objective evidence, there is no reason to think that CO-OP coverage is going to be any less expensive than anything currently available, or that the policies involved will be any more viable than Group Health Cooperative of Eau Claire, Wisconsin. Instead, the most likely outcome is one of billions of dollars in government funds that will be spent on grants and loans that generate little or no long-term benefit and will never be repaid.
This is evidence-based medicine?
As we keep saying – the road to Hellth is paved with good intentions.