Health+Benefits the June 2016 issue

Brokers Out of the Money

The Obamacare Stakes is off to a slow start. A longer course and the likely winner could leave employer-sponsored healthcare plans in the dust.
By Mike Turpin Posted on June 27, 2016

It’s 2016, and the muddy track of the Affordable Care Act is as congested as ever. There are no signs of a clear leader, but cracks are beginning to show in the edifice of owner solidarity.

Each horse will usher in its own brand of consequence when it crosses the social and political finish line. One could argue that since my original predictions were proffered, the horses have run true to form. Yet the track is sloppy, and the race looks like it will be slower and longer than predicted as Congress delays regulations and factions rage against the weak early returns of the federal law.

If you consider its debt obligations, the United States is essentially a huge insurance company with its own private army. When you combine our defense budget with the net present value of our financial obligations to our citizens through Medicare, Medicaid and Social Security, you quickly run out of money for anything else—except perhaps servicing $20 trillion of debt. I guess that pothole I hit along I-95 won’t be filled any time soon.

While the healthcare reform horses are contributing to presidential mud-slinging, this handicapper has a hard time finding an impartial pundit to assess how the race is being run. Tempers are running hot, and the normal civility at the track has been replaced by an ugly rage. Inquiring minds have questions, but we can’t seem to get a straight answer from stakeholders without the risk of a fistfight. It is indeed a sign of the apocalypse when a major insurer is suing its contract pharmacy benefits manager for a bad contract. It’s interesting that those who own their own PBMs seem to be getting along just fine.

My 85-year-old father keeps peppering me with questions about healthcare, convinced the proverbial Medicare bus is headed toward a fiscal cliff. Fox News has persuaded him that changes in immigration laws and healthcare rationing will lead to his getting open-heart surgery from an ISIS cardiologist who uses no anesthetic and a rusty spoon.

Still, I say, we have been true to form in our race for healthcare reform. The predictable first few years have been characterized by:

  • Large losses by public exchange insurers, as a highly regulated individual marketplace is laboring under reckless regulatory exceptions for open enrollment, schizophrenic pricing of new entrants, and the failure of reinsurance and risk pools
  • Irrational regulators unwilling to tolerate market pricing to combat adverse selection arising from a large percentage of the younger, healthier uninsured who would rather go without coverage than pay for a policy that exceeds their budget
  • Accelerated mergers of payers and health systems and a growing concern over antitrust actions
  • Slower than expected adoption of private exchanges, integrated healthcare delivery networks and accountable care organizations
  • Higher than expected barriers to entry for nontraditional insurers attempting to change the system by capturing millennials, engaging digital consumers and making good on investor returns (or at least not losing their money)
  • The continued irrational exuberance of private equity financing niche healthcare technology and services with little understanding that the most common sense solution in healthcare rarely prevails and the best ideas often lag the market’s willingness to embrace them
  • The rising calls for regulation of Big Pharma and a closer scrutiny of pharmacy benefits managers, who are often perceived as conflicted sentinels presiding over runaway specialty drug costs, which are now in danger of outstripping inpatient care as the largest percentage of any employer’s total healthcare spending.

Cadillac Style

There have been one or two surprises, the most notable being the delay of the Cadillac Tax—a substantial piece of regulation that could have served as a tipping point for employers to drive fundamental market reforms while blaming the government for their changes.

The delay of the tax has had an opiate effect on employers—dulling their sense of urgency about the need to change. It has also led them to believe—incorrectly—that the Cadillac Tax is not likely to survive the legislative process and will be permanently repealed.

My 85-year-old father peppers me with questions about healthcare, convinced the proverbial Medicare bus is headed toward a fiscal cliff.

I think it’s more likely this legislation will indeed be implemented but with more rational provisions, such as the adjusted regional averages that exist with other excise taxes. Once the Cadillac Tax becomes law, we could see a sprint toward the safer lanes of lower-trend medical solutions, such as high-deductible health plans, and the accelerated adoption of defined contribution plans through single-insurer private exchanges using digital decision support. Any movement toward transparency and consumer engagement represents progress. Healthcare, like a shark, must keep moving forward or it risks dying. But given all this confusion, I now refer to the

Affordable Care Act as the Consultants Full Employment Act of 2010.

The Congressional Budget Office’s estimate of $120 billion in revenues arising out of the excise tax is a misguided supposition. The assumption employers will increase wages for employees to make up for benefit cuts exposes a worrisome reality of the current administration—fewer than 8% of those holding key offices have actually worked in the private sector. We don’t expect to see a surge in GDP spending driven by benefit cuts. I think the CBO has been sitting at the bar a little too long, downing mint juleps while waiting for its horse to come in.

Meanwhile, my father is ticked off and sending emails. “Did you see the debate last night? Is it true that opening up interstate competition can create more competition in healthcare?”

“No,” I tell him and proceed to explain how difficult it was for me when I was working at a major carrier and tried to move us into a new market in an adjacent state, having no market share to offer providers in exchange for their precious discounts. It would have cost me tens of millions to gain new member market share against more competitive in-state insurers. So I ended up with few new members because my negotiated discounts made my premiums less competitive, and when you sell health insurance, price matters.

“What about socialized medicine, Dad?”

That was followed by his familiar exhortation: “God, I hate the idea of socialized medicine or a single-payer system,” he said, “but I do love Medicare.”

I smiled. “What about Medicare for everyone—even those under 65?”

Silence. Dad is thinking. “That sounds OK.”

So much of healthcare, like so much of politics, is all about semantics.

Was I Right? What Changed?

How good were my predictions in 2014? Has the race moved in a new direction? Let’s take a look.

2014: The Year of Rhetoric

I was dead-on with 2014. Low growth in medical trend and some exchange enrollment had the U.S. Department of Health and Human Services and the federal exchange declaring victory, while state exchanges struggled to get their administrative acts together. Rhetoric indeed trumped results. It actually took an insurance company subsidiary to straighten out, which has driven more and more states to cede exchange management to the feds simply because that enrollment system finally works. Low exchange participation rates across the board—partially caused by low tax consequences for not participating—masked adverse selection that would come home to roost in 2015.

2015: Healthcare’s Intricate Underbelly Revealed

I did not expect the Obama administration to delay community rating and the Cadillac Tax. The designers of the law apparently didn’t contemplate election-year politics and understand that these changes would set in motion a tipping point. Nothing like 50 million angry voters wanting to know why the ACA has cut their insurance.

Preparing for community rating had its impact with small-employer increases and mandatory modified coverage. Most employers grudgingly moved to community-rated exchanges and pricing commoditization, which led to predictions of agent disintermediation and commission cuts. This development appeared to have legs when firms like Zenefits automated the placement process, gained rapid share and seemed to drive right through the road barriers that regulated broker rebating—until they got caught.

Fox News has persuaded him that changes in immigration laws and healthcare rationing will lead to his getting open-heart surgery from an ISIS cardiologist who uses no anesthetic and a rusty spoon.

Delays could not prevent the predicted blood bath of more than $220 million in carrier and co-op losses from exchanges. Cautious insurers did jump into markets in 2015 but threatened to jump back out and, in the case of many co-ops, went belly up faster than a fat man floating in salt water.

There was no shortage of calls to eliminate the ACA, including numerous congressional efforts that passed either the House, the Senate or both only to meet a presidential veto. No big shock there. The real surprise was that exchange losses came faster, as did bankruptcies of new entrants whose hubris revealed what we already knew: it’s harder to fix healthcare than people think.

Lumbering into the Future

2016: More Cost Shifting and Hillary

I deeply distrust Hillary Clinton, but I predict that she will prevail over the confused roster of governors, “midgets,” “liars” and orange-faced clowns from the soon-to-be-renamed Whig party. And Hillary, as president, will likely mean the least amount of change.

Community rating for small employers will be mixed but generally a success. Insurers and regulators have lived with it and understand it. Real profit and share gain depend on which states force all smaller employers to join pools and which legislatures draw the line at 50 lives, allowing groups to opt out through self-insurance.

Private exchange renewals won’t be propped up by reinsurance, and anxiety will grow as the backstop of risk adjusting and reimbursement erodes. Congress isn’t likely to appropriate money for HHS to pay underperforming plans for market losses as promised. Insurers like Anthem and the nonprofit Blues that are lashed to the saddles of the small and individual markets will insist all is well within exchanges, while those who live on the red meat of profitable membership will balk at staying in exchanges unless HHS works to curb special open enrollments and accommodations that lead to adverse selection. 

Accountable care organizations will move at a snail’s pace toward assuming risk for insured commercial membership. The health systems capable of becoming ACO insurers are also our largest and most expensive providers and don’t want to give up hard-fought unit cost reimbursement to start taking risk themselves.

2017: More Shiny Objects and Cost Shifting

Small Business Health Options Program pools will deliver double-digit increases in healthcare spending as rising prescription drug costs and other drivers continue to pressure medical trends. Employers will continue to shift costs to employees through contribution increases and high-deductible plans.

Employers will begin to move toward a digital candy store of healthcare delivery solutions, with technology playing an increasing role in the communication and selection of benefits. Those who believe we must change to appeal to millennial buyers will put on the hard sell for these shiny objects. The problem is millennial buyers still incur a fraction of claims costs and baby boomers are proving to be more baby than boomer when it comes to engaged self-service.

Employers will keep their heads in the sand about the Cadillac Tax and not make large buy-down decisions, which should help keep insurer stocks high. As co-ops fail, there will be a purported flight to quality as exchange members buy from larger, more stable and well-capitalized (and expensive) insurers.

Public exchange price increases will move to the higher end of tolerable, with averages in the higher single digits. Pressure will build on insurance commissioners. Expect major political grandstanding from states like California and New York. Most pending managed-care organization mergers will be approved with some market divestitures despite provider cries of antitrust.

2018-2020: Global Issues, Cadillac Tax, Single-Insurer Exchanges

Public exchange enrollments will settle well below 20 million. Considering that at least half of these people were uninsured a decade earlier, there will be some cause for celebration. But the more than 20 million Americans who remain uninsured, combined with the real cost of reform, will continue to fan the flames of debate.

When the Cadillac Tax hits, employers will move steadily toward a “total rewards” mindset and seek to lessen the distinction between benefits and direct compensation.

There may be discussion about amending subsidy thresholds to include those earning less than 250% of the federal poverty level, for this is where the risk pool is more balanced. Subsidies for those earning more than 250% are not so advantageous. Risk pools of participants between 250% and 400% of the poverty level are still averaging 100%-plus loss ratios.

The call for “Medicare for all” will grow in volume and resonate in the halls of Congress. We won’t hear the terms “nationalized healthcare” or “socialized medicine”—remember, it’s all about semantics. Refined wordsmithing and skilled inside-the-Beltway politicking will redefine this system so the words appeal to liberals and fiscal conservatives alike.

The delay of the Cadillac Tax has had an opiate effect on employers—dulling their sense of urgency about the need to change.

Who is going to lead this charge? It’s hard to know. Perhaps an unholy alliance of Paul Ryan and some enlightened Democrat. It will keep coming up as a means to reduce costs.

The call to open Medicare would combat the limited field of payers available in the public exchange market. Ironically, the same troika of carriers, maligned for their iron-grip commercial oligarchy, will be quietly writing half of the Medicare market as the government outsources this risk to private payers.

Of course, all of this means more poison-pen emails from my Dad.

It’s hard to imagine real change in healthcare delivery (unless the economy tanks or we have some other society-altering event), especially with Congress’s kick-the-can-down-the-road ethos. But I believe we will see movement toward value-based purchasing and possibly even Medicare’s Resource-Based Relative Value Scale in commercial plans—pitting patients for the first time against those who charge well in excess of median prices but can’t show superior outcomes.

Horses? We have horses in this race?

We still back the same four horses I identified in January 2014, but they’ve got new names. And we’ve lengthened the race. And, thanks to regulatory delays, we’ve moved the finish line. That doesn’t really make a fair race, does it?

Much depends on employers and whether they actively manage costs, lessen their financing of defined contribution plans or actively press to move a growing liability to the exchanges and, ultimately, to taxpayers. Expect geopolitical issues to overshadow the race. The potential for a real crisis may afford government a rare opportunity to declare fiscal martial law and make vast changes to Medicare in preparation for a new system.

The four horsemen of the affordable care apocalypse are coming around the turn, but it’s a long race between two breeders—with horses colored red and blue—public and private, Republican and Democrat, self-service and concierge, free market or entitlement, and solvency versus red ink.

So who has changed the odds in what looks to be a 15-year horse race? 

My Medicare
(Formerly Known as Lenin’s Ghost)
Odds: Improving
OWNERS: Bernie Sanders, Congressional Black Caucus and Elizabeth Warren

The future looks bright for this European filly simply due to the math around Medicare obligations and the looming fiscal debt crisis. A move to negative interest rates could exacerbate the call for greater affordability in healthcare. Lower than expected enrollment in exchanges and the growing roster of states complaining about lack of competition could create a call for Medicare to be open pre-65 on the public exchanges. Those not on the public exchanges would see an increasing Medicare eligibility age with this horse, along with means testing and bulk purchasing of prescription drugs.

My Medicare’s obvious shortcomings include a penchant to pay for anything that moves, including expensive prescription drugs, and a visceral reaction from employers when asked to cover older working Americans to age 68 or 70 under commercial insurance. This won’t make her finish easy or a sure thing. However, as an economist once remarked, “Any unsustainable trend eventually ends.”

Don’t expect this horse to finish in the money until Congress and the president are politically aligned. National demographics favor the Dems in this scenario, and we could see this horse breaking free if the Whigs keep shooting themselves in the hoof. It’s not a coincidence that the Big Three are all engaged in the Medicare

Advantage space. Ultimately, like veteran bettors, the largest national payers have every horse covered in the race. One thing is clear: nationalized healthcare, single payer and socialized medicine are permanently hobbled. My Medicare is alive and positioned well on the inside rail.

Fast Pass
(Formerly known as Three’s a Charm)
Odds 3:2
OWNERS: Bernie Sanders, Centers for Medicare and Medicaid Services, Legislators Who Don’t Read, and the AMA

Under all the mud, this horse runs a lot like My Medicare. Consider my comments from a few years back:

“A number of factors favor him over the next decade. Many believe employers have tired of owning the healthcare cost management problem…The false positive success of the exchanges will be short-lived as reinsurance ceases and pools dry up.

As loss ratios climb and reinsurance fails to moderate loss costs, insurers faced with the need to raise rates may find insurance commissioners and the Health and Human Services Department unwilling to accept increases. This will set in motion a race to the bottom for insurer margins and uneven participation in exchanges based on how politicized the prior approval of rates process becomes. As rates climb for those individuals and small businesses in 2016 and beyond, we may see a new public option rally cry among blue-state exchange sponsors and the federal government to compete with the private insurers who seem unable to contain costs and appear synchronized in their insistence on rate increase actions.

Once a public option is made available to exchange members, we begin a slow slide toward a three-tier system as Medicare gains market share in the pre-65 market. As private insurance shrinks, a three-tier pyramid emerges. We will call it three-tier the way that Chamber of Commerce marketing managers now refer to tornadoes as “micro-bursts.” It’s still bad for business and property values to use the term single payer.”

The race is likely to last until after 2020 and may be further delayed by some non-healthcare-related event that refocuses the electorate. However, a global financial crisis could allow more draconian fiscal solutions to temper the trend line of bloated, unfunded entitlement commitments.

“…Low GDP growth and a debt-to-GDP ratio of 120% will create the perfect-storm opportunity for the White House to declare fiscal martial law and argue for the expansion of Medicare for all and the integration of Medicaid with Medicare. This helps normalize provider reimbursement and address the current $50 trillion Medicare underfunding problem that the government faces as Americans live longer and consume benefits well beyond premiums submitted during one’s professional life. It shifts state obligations for Medicaid to a single payer and solves unfunded state liability issues surrounding long-term care. Once the fragile equilibrium of public/private spending is tilted toward public coverage expansion, the last private insurance plan will be paying for a $15,000 aspirin.”

Don’t expect this equine to move more steadily than your great-grandmother Ethel after a few pops of scotch, but she will be in the hunt—though at risk of political asphyxiation. Doctors know the end is coming to traditional fee-for-service medicine. There will be a lot of jockeying in the interim, but it’s likely that My Medicare and

Fast Pass end up siring a winner.

The subtle difference is Fast Pass would explicitly encourage concentric markets of private care outside basic levels of publicly funded coverage. As the richest nation in the world, we will likely see a robust and competitive private consumer/concierge market in which access will not be an issue as long as you’ve purchased the “fast pass.”

(Formerly known as Market Reformer)
Odds 4:1, now moving to 10:1
OWNERS: AHIP, Big Pharma, Darwinists, Large Health Systems and Private Equity

Underperformer is a cynic’s dream. Once the great hope—a self-insured open market model that drives transparency and behavior change—Underperformer’s transparency also accelerates contempt for private sponsorship among employers who want to be freed from their obligations.

The financial cynic knows that for-profit stakeholders are 100% capitalist carnivores. It’s naïve to expect meat eaters to change. The cynic also believes that for-profit companies in healthcare will pursue the holy grail of expanded profit—even if it means, like Marx’s last capitalist, those companies ultimately sell regulators the rope used to hang them.

For-profit breeders will always insist on putting working capital into horses likely to offer a decent return on capital. The for-profit insurance game of running at lower margins while owned healthcare subsidiaries charge higher transfer pricing to their sibs, thus enabling the parent company to post better growth and profit numbers, may be coming to an end.

Self-insurance will continue to drive transparency. Pharmacy benefit management practices will be called into question as employers protest the conflicts of interest arising from payers that promise to be rigorous sentinels governing all vendors—except their own subsidiaries, which now charge for at least half of all paid claims.

Underperformer depends on ignorance of current stakeholders and stasis among politicians.

This mare performs well under the sunny skies of higher GDP growth and rising corporate earnings. She may falter if in-fighting among owners escalates. We already see America’s Health Insurance Plans pointing at egregious drug company practices. We also see Big Pharma redirecting attention to others, who claim their roles as sentinels are essential to healthcare but who charge huge premiums to manage the pipes through which healthcare transactions pass. This could pit payers against Pharma in a nasty game of finger pointing.

Underperformer wins if carnivores can go vegan, if dogs and cats can live in harmony and if Donald Trump can admit that he has no idea what he is talking about. As we noted in 2014:

The key to this horse’s success is the private sector and public sector locking arms, pushing back on overpaid or coddled stakeholders and demanding value, transparency, engagement and personal responsibility.

Hmm. Isn’t that against human nature?

Privatize and Thrive
(Formerly known as Vouch for Me)
Odds: 300:1
OWNERS: AHIP, Paul Ryan, Congressional conservatives and people who don’t go to the doctor but can balance their checkbook

This dark-horse gelding is already fading from the pack as its GOP owners squabble over the ethnicity of who should be allowed inside their private boxes. The fiscal conservatives who have bred this horse are long on understanding economics but short on candidates capable of convincing voters of the need to privatize anything.

Scare tactics will abound when discussing dreaded third-rail privatization of Social Security, 401(k)s or Medicare. That’s because privatization now competes with socialized for rank as the most inflammatory word in politics.

Liberal breeders, now calling themselves “progressives,” will hound this horse forever. Privatize and Thrive is already in big trouble, and the race has a long way to go. To quote the record from 2014:

“The polarized politics of Congress suggest no responsible austerity plan can work unless it comes in the form of martial law triggered by a fiscal crisis. Without a crisis to whip the rump of this steady performer, he can’t muster the energy to beat the others to the finish line.”

Settle in, folks. The race is likely to be interminable, but it will ensure many of you gainful employment. The political culture, which tends to move at the speed of the slowest participant, means that we could be into retirement and paying higher taxes before we are forced into a new delivery system. Whether taxpayers, my great-grandchildren or my modest nest egg end up financing this change is anyone’s guess. It’s as if we are no longer on an organized track but uncomfortably along for an endurance ride where the winner is the person who survives.

It’s going to take a crisis to shake us from our imperfect trajectory. It’s coming, but in what form? It’s hard to tell. Sit back and enjoy this Indian summer of surfeit. It’s going to end, and, frankly, I can’t wait.

Mike Turpin EVP & Managing Consultant, USI Insurance Services Read More

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