First it was Aetna. Now Blue Shield of California is doing the right thing. Who will be next? Health Insurers are beginning to slice premiums and rebate money to customers.
Last year, many of health care reform’s critics (on the left as well as on the right), argued that the Obama administration had made a “deal” with the private insurance industry, giving it carte blanche to continue driving health care costs skyward.
I disagreed. Certain tough provisions in the Affordable Care Act (ACA) suggested that the insurance industry was not dictating the terms. In particular, the requirement stipulating that insurers pay out 85 percent of the premiums they receive in reimbursements to doctors, hospitals and customers signaled that insurers were not holding the pen while legislators pretended to write the bill. Under the ACA, if insurers do not meet this standard, they will have to rebate hundreds of millions to their customers. Now, this is beginning to happen.
(Insurers must pay out only 80 percent of premiums when offering insurance to small groups because in these cases, insurers' administrative costs, as a percentage of revenues, are so much higher. But this, too, will crimp net income.)
Climate Change: Blue Shield of California
Just 15 months after health reform legislation was signed into law, we’re beginning to see how the Affordable Care Act is reining in some of the nation’s largest insurers.
Today, ModernHealthcare.com reported that “Blue Shield of California, San Francisco, has pledged to cap net income at 2% of revenue.” This commitment will apply retroactively to income earned in 2010, when Blue Shield's net income exceeded the 2 percent target by $180 million. The company is now voluntarily refunding that amount to customers and the community. Close to $167 million will go to individual and fully insured group members. Another $10 million will be invested in hospitals and physician groups seeking to form Accountable Care Organizations, and $3 million will go to the Blue Shield of California Foundation, which supports organizations that provide health care to low-income Californians. The biggest winners will be customers who pay the most: those in small groups (2-50 employees). Rebates will average $125 for one employee and approximately $340 for a family of four.
At a news conference, Bruce Bodaken, the chairman and CEO of the non-profit Blue Shield indicated that he sees the move as a way to make health insurance more affordable: “We know now that expanding access to coverage is not enough.” he confessed. “Blue Cross executives said they hope the move inspires other insurers and providers to consider a similar move,” reported ModernHealthcare.com “’ Everyone is going to need to do the kind of soul-searching we've done,’” Bodaken added.
Did “soul-searching” lead to this decision? Perhaps. But I would suggest that Blue Shield is responding, in an enlightened and pragmatic way, to a climate change within the health care industry.
Government regulators are beginning to take a hard look at insurance premiums. Blue Shield California “had recently come under fire by state regulators for rate hikes,” ModernHealthcare.com explains. “In March, the company abandoned plans to raise rates on individual policyholders for the rest of the year, under pressure from the California Department of Insurance."
Blue Shield is trying to inoculate itself against further criticism (and regulation) by getting ahead of the regulators. $180 million is hardly a huge sum. But pledging to put a 2 percent cap on net income is a serious step forward. This should help curb premium inflation–assuming that the company doesn’t fudge the way it calculates “net income.” Though now that Blue Shield has made a public commitment, I would guess that state regulators will keep an eye on that number. If they don’t, California’s many consumer advocates will remind them.
Aetna Slashes Premiums in Connecticut
Last month, nearly 10,000 Aetna customers in Connecticut were, no doubt, dumbstruck to learn that their health premiums would plummet by as much as 19 percent in September.
“The lower premiums will affect 9,745 policyholders. Premiums will fall 5% to 19.5%,” observed American Medical News. The average premium will fall by 10%.
Why would Aetna voluntarily clip its revenues? ”The company expects to pay customers rebates for 2011 –meaning it expects not to meet the medical spending minimums set under the Patient Protection and Affordable Care Act,” according to the department's executive summary of Aetna's application.
In other words, in 2011 Aetna won’t be meeting the requirement that insurers pay out 85 percent of premium revenues to large groups, and 80 percent to small groups. Going forward, Aetna would rather not send out refunds. Instead, it is lowering premiums.
The Affordable Care Act is changing the landscape. In the past, some states had the authority to challenge health insurance rate increases, yet they hardly ever used that power. Now, however, more states are beginning to stand up to premiums hikes. And some are succeeding. Rhode Island, for instance, recently ruled that Blue Cross Blue Shield could lift premiums for members who buy their own insurance by no more than 1.9 percent–not the 7.9 percent the company requested.
These are still early innings in the battle for health care reform. No one yet knows if Aetna’s retreat signals a trend. It won't be clear until early 2012, after a full year of medical spending, whether customers will receive rebates, and from which insurers. But there is no question: insurers are beginning to feel the pressure built into the new law.
Maggie-
Good news indeed.Thanks!
But as you say too early to declare a trend.
Dr. Rick Lippin
Southampton,Pa
Actually your Wrong, Blue Cross of North Carolina, was the fhirst to give back money, lasy year I think
Donald
You’re absolutely right. Last fall they made the annoucement below. (This makes me even more optiimistic that this could be the beginning of a trend.)
“Raleigh, NC — North Carolina’s largest health insurer will refund $155 million to more than 215,000 individual policyholders as a result of the Affordable Care Act that took effect earlier this year, the company said Monday.
Individual policyholders will get back the equivalent of one and a half months of premiums. The average refund will be about $700 and should be paid before the end of the year.
The company also said the state Insurance Department approved an overall 5.3 percent increase in rates for its Blue Advantage policies, less than the 7 percent Blue Cross had requested. Those increases are driven by higher medical costs and individual policyholders may see larger or smaller increases in their premiums .. . ”
As we begin to get those underlying medical costs under control- (not by cutting benefits, but by cutting waste), premiums should flatten or come down.
Over the last 10 years, Blue Shield of CA’s net income as a percentage of premium revenue averaged 3.5%. So, capping their profit at 2%, in effect, results in a one time price reduction of 1.5% on average from what it would have otherwise been. From that reset base, premium growth will continue to reflect medical cost growth and changes in the average risk profile of the insured population among other things.
Insurers will tell you that, at the population level, people between 55 and 64 consume 5-7 times as much healthcare as those in their 20’s. So, an increase in the average age of the insured population can, by itself, account for a material increase in medical claims costs in any given year.
If regulators were really interested in reining in healthcare costs they would do the following four things: (1) stop paying for services, tests, procedures and drugs that either don’t work or cost more than they’re worth, (2) enact tort reform that moves medical dispute resolution from juries to special health courts and provides doctors with robust safe harbor protection from lawsuits when they follow evidence based guidelines where they exist, (3) work to reset patient expectations so they stop demanding unnecessary or marginally useful diagnostic testing, especially expensive imaging, and drugs they saw advertised on TV, and (4) push providers toward a more sensible approach to end of life care including universal availability of palliative and hospice care, encourage more people to execute living wills and advance directives and store the information on a registry so it’s available to doctors and hospitals when needed and change the end of life default protocol in the absence of an advance directive or a healthcare proxy from “do everything” to apply common sense depending on circumstances without having to worry about being sued for not doing everything possible.
At the end of the day, the insurance reforms in the ACA are “small ball” in the overall battle to bend the medical cost growth curve.
Barry–
You write: “Over the last 10 years, Blue Shield of CA’s net income as a percentage of premium revenue averaged 3.5%. So, capping their profit at 2%, in effect, results in a one time price reduction of 1.5% on average from what it would have otherwise been.”
No, capping profits does a lot more than that. First, it means that the company is going to have to concentrate on being efficient– or it will go under. It doesn’t have a fat margin to protect it.
Secondly, capping profits sends a signal to the entire company. When profits are capped at 2%, shareholders and even some boards are more likley to begin to question the 7-figure and 6-figure salaries that many in top management (not just the CEO) receive.
An insurers with a 2% margin is also going to be more frugal about paying fat commissions to brokers.. (Some brokers add little or no value to the business, particularly those that act broker insurance for small companies and non-profits. (I can attest to this from the point of view of the Century Foundation. )
Finally and very importantly, if an insurance company caps its profits from operations (i.e.selling insurance) at 2%, it is not capping its profits from investments.
Investment income is very important to an insurer. If a company is making only 2% on operations, and very little on investments, no one will buy the stock.
Over the past 20 years or so, insurance companies have had a bad reputation as investors. They seem always to be behind they curve. They were lending money to Donald Trump when even I hard heard that he was going bankrupt.
Going foward,if they want to survive, they are going to have to make wiser decisions, which means hiring more sophisticated money-managers who know how to invest globally, how to
diversify into different asset classes etc. Probably the person overseeing investments should be earning more than the CEO. (Or, at the very least, each year, part of his salary should reflect his success as an investor, giving him the potential to make significantly more than the CEO.)
Wise use of capital (all of those premiums that you dont’ need to pay out immediately) is a major part of what the insurance business is about.
Finally,all of the reforms you talk about are in the ACA– the Seretary of HSS can lower reimbursents for over-valued services withotu going through Congress; IPAB can recommend cuts that automatically become law unless Congress can find equal savings without cutting benefits or shifting costs to patients. (This is what has drug=makers, doctors, equipment makers and others so worrired.) Medicare’s annual updates (increases ) in payemtns to hospitals, nursing homes nad other “non-physicians providers” will autmatically be cut by 1% a year for the nest 10 yaers, netting an estimated $196 billion. The savings could be greater, since the financial pressure will cause some hospitals to become much more efficient, reducing errors, etc.
Hospitals that are not able to lower their infection rates, their rate of preventable errors and their rate of preventable readmission stand a good chance of being closed. Nationwide, we have more beds than we need, and we’re increasing the capacity of community clinics by 50%. A community clinic is a much better place than an ER for a patient to receive continuous care from a clinic that knows the patient and the family, has their history, etc.
And if and when the patient needs to be in a hospital for surgery, he will be much better off in one of the best hospitals in town , rather than in a safety net hospital that doesn’t have the resources to provide the best care.
When it comes to drugs and devices, the FDA is already moving to become much tougher in approving devices– which account for 5% of healht care spending-and growing, rapidly.
I’m pretty certain Medicare will set up a formulary of drugs that it is willing ot pay for–and this will not include every drug the FDA approves. Then Medicare will begin negotiating prices with drug companies–if they are asking too much for a drug, and it just isn’t that much better than other drugs, Medicare will refuse to put it in the formulary.
Awards and settlements from malpractice suits account for a miniscule amount of health care spending.
That said, I’m certainly in favor of healthcare courts rather than jury trials–though when doctors review the results of jury trials they find that hosptials and doctors who are found guity almost always are actually guilt of malpractice.
As to whether a more rational system would reduce defensive medicine, some doctors will still say “I dont’ want to risk being sued, so I’m going to cover my ass even if I am overtreating the patient.”
Health care courts won’t reduce the number of suits. And health care courts will not cap the big awards– when a baby dies needlessly, when someone removes my left breast instead of my right breast, when someone amputates my left leg instead of my right leg, and so I wind up with no legs.. .
The amount of pain and suffering in these cases is impossible to measure.
And particulalry if decisions are made by judges with medical training, they will know how unncessary these errors are– and that we must make it clear that they will not be tolerated.
To suggest that the refomrs in the ACA are “small ball” is simply to repeat a conservative talking point without taking a serious look at what is in the legislation. See my fairly recent post titled “Shaggy Wolf story”
As for end-of-life care,
Palliative care, and end of life counseling would be in the ACA if conservatives and libertarians hadn’t fear-mongered about “death panels.”
Nevertheless, the palliative care movement is growing, and ultimately, both Medicare and the Secretary of HSS will find ways to reward hospitals that give patients choices, while penalizing hospitals who let too many people die in an ICU (or spend there last weeks there so that by the time they get to a hospital, they have only a few days left.)
I also expect the Secretary of HSS will lift reimbursements for palliative care as an “under-valued service” while cutting certain payments to oncologists, as well as payments for some surgeries that are over-valued (for reimbursements for the most expensive type of sugery for protate cancer. We have no clear medical evidence that it is any better.)
When you call the refoms in the ACA “smal ball” you are simply repeating a bumper-sticker “talking point” used by conservatives and libertarians who either a) haven’t actually read the bill and thought about it or b) don’t mind lying in order to promote what they view as a more important principle.
Maggie –
I’ll offer a few thoughts on your last comment.
First, non-profit insurers already control over 40% of the commercial insurance market and many already earn minimal profit margins and have for years. Highly regarded Harvard Pilgrim Healthcare, for example, routinely earns a net margin in the 1%-2% range yet healthcare in Massachusetts is more expensive than anywhere. Second, reported profit margins include income from investments. Most health insurers will pay claims attributable to a specific year’s premium within 15 months of receiving it. This is not a long tail product. As a result, the investment portfolio consists mostly of high quality and short duration fixed income securities. They have some equity investments but they’re not material. The very low interest rates that prevail today put a huge dent in investment income vs. what it was several years ago. Third, broker commissions are being restructured to reduce payments but the issue is most significant in the individual insurance market. On the other side if the ledger, technology and scale are becomingly increasingly important in the insurance business and significant investments are required. The ICD-10 coding system, which is scheduled to go live on October 1, 2013, is a large, complex and expensive undertaking. The number of hospital based procedure codes will go from roughly 14,000 to 69,000. That could create huge new opportunities for upcoding but that’s a discussion for another day. I’ve looked at these issues pretty carefully and, at the end of the day, I think the insurance reforms within the ACA are “small ball” in the context of controlling healthcare costs. You can disagree and call it a conservative talking point if you like, but I don’t think I should be lumped in or associated with people you consider liars about healthcare costs and what’s driving them.
Regarding tort reform, it doesn’t matter if health courts will not reduce the number of suits or the size of awards in certain tragic cases. What matters to a doctor is the perception that cases will be treated objectively, fairly and that similar cases will be decided similarly across jurisdictions. This is much more likely to happen if medical disputes are decided by judges with appropriate expertise and the ability to hire neutral scientific experts than by juries of people with no medical knowledge who can be swayed by sympathy and emotion. Non-meritorious cases are much less likely to ever see the light of day thereby eliminating the need for time consuming depositions and stress inducing uncertainty as the case works its way through the often lengthy legal process. The so-called failure to diagnose cases are most likely to benefit from dispute resolution by health courts.
I think the IPAB is a good idea and I would personally trust its experts to make decisions about what we should be willing to pay for and not pay for. There is a lot of opposition to it in Congress though and there is a risk that it could be eliminated or have its decisions more easily subject to a Congressional veto without having to offer alternatives to save the healthcare system a comparable amount of money.
Medical costs are the 800 pound gorilla in the room, not insurance company profit margins, or CEO and upper management compensation. For an excellent discussion of the NYC hospital market, why most hospitals are struggling, and why care in NYC is so expensive, see this New York Magazine article if you haven’t already seen it. http://nymag.com/news/features/68991/