Industry the Jan/Feb 2014 issue

The Four Horsemen of the Apocalypse

Handicapping what is supposed to happen with Obamacare with what likely will.
By Mike Turpin Posted on January 28, 2014

Each missive is written in uppercase font and is part of a forwarded email chain directed to conservatives who have way too much time on their hands. The message always starts: “IF THIS IS TRUE, WE ARE IN DEEP $%#@.”

When the Affordable Care Act was passed, my father, along with many Medicare-dependent retirees, began to see monsters under their beds. Although the ACA was focused on insurance regulation and uninsured coverage expansion, there was real concern about its fiscal integrity as well as imagined terror over hundreds of pages of unread provisions that conspired to strip retirees of their physicians, coverage and perhaps the first floor of their homes. 

Despite reassuring Dad that euthanasia squads were not being formed and that Medicare was likely to still be waiting for him in January of 2014, he remained unconvinced. I did share with him that he was essentially living on the government dole, as Medicare did not collect enough premiums from him over the course of his professional life. He had outlived actuarial projections by a good 20 years but was unrepentant in refusing to pay the estimated $250,000 that he was likely to consume beyond the premiums that he has paid into Medicare.

“God, I hate the idea of socialized medicine and a single-payer system,” he said, “but I do love Medicare.”

About this time I would turn to an imagined audience and make a perplexed face. This, after all, was coming from a guy with a 140 IQ who spent years as the CEO of a large company.

Angst is falling like acid rain as we ponder the future of healthcare and the impact of reform. While we’ve been hanging around the proverbial horse track of healthcare for some time, we now are waiting for the main event. The big race determining the future of reform is a mixed field of untested scenarios and uncertain outcomes. The four horses running this six-year race are an ensemble of hopefuls, dark horses and “Bismark” bets that carry good odds but seem somehow doomed to pull up lame. The going on the track is sloppy after a continuous deluge of public opinion, partisan fighting and misinformation. The race is anything but decided. Veteran healthcare handicappers remain divided as stakeholders plot, wrangle and position themselves in hopes their horse and interests might prevail.

Out of the Gate

November 2013 was a bad month for government reform advocates and President Obama as, the official site of the federal insurance exchange, suffered a major setback in enrolling or winning over consumers. It seems inept technology conversions and 1.0 rollouts are not confined to the private sector. The final tally of October federal enrollments fell well short of the president’s stated goal of 500,000 new members. To add muddy insult to self-inflicted injury, President Obama finally understood the section of the Affordable Care Act where the legislation stated that all policies offered in the individual marketplace must incorporate minimum essential benefits. His ACA pledge to Americans—“If you like your insurance, you can keep it”—dissolved under the practical realities of millions of personal policies being cancelled, rewritten and re-priced to incorporate expanded coverage to meet the new law. Male policyholders were left perplexed as to why they must now purchase policies with maternity benefits.

Around the track, financial and industry bookmakers are in turmoil studying each of the scenarios as they ready for the next stage of Obamacare—a six-year race that concludes in 2020. Each year offers a mile marker of critical changes to the legislation and a next set of consequences. Each “horse” has been handicapped based on its probability to prevail. The field is supported by owners, trainers and a range of stakeholders whose deep interest in winning has led them to risk their reputations and livelihoods.

Mile Markers to Watch

2014: The Year of Rhetoric

A symbolic early turn in the race. Public and private entrants will remain stuck in formation as a majority of the field witnesses low rates of participation in public exchanges—especially by young invincibles. Private exchanges will trumpet their latest additions to enrollment but fall well shy of the critical mass required to truly alter insurer-pricing practices and create adequate spread of risk. Gratefully, the consumption of healthcare will continue to move sideways, keeping pace with a low-growth economy propped up by stimulus dollars and low interest rates. It will be a year of rhetoric more than reality.

2015: First Renewals Mean a Year of Cautious Tinkering

Acrimony and arguing will mark post-election-year politics as pundits declare the race won or lost. The first-year policy renewals of public exchanges and the debut of small-employer SHOP exchanges with community-rated rates will get attention. Individual exchange renewals are likely to be lower than actuarially expected as they will likely be propped up by reinsurance pools, narrower plan designs and reserves that many carriers have accrued to offset higher loss costs.

More cautious national insurers may choose to join additional exchanges to gain access to the small-group market and to play in individual coverage exchanges where politics are not rife and where loss ratios are not out of control. Small-group pools might initially face similar individual market adverse selection as younger and healthier groups seek self-insurance to avoid tighter rate banding and community rating that favors older workers. Legislatures may seek to curb self-insurance to avoid reductions in premium taxes, anti-risk selection and instability in small-group financing. Employers quietly keep moving plans toward defined contribution designs to limit their overall exposure.

2016: Cost Shifting and SHOP Talk

More angry emails from my dad when Hillary gets elected. Second-year private exchange renewals will likely continue to be tempered by reinsurance pools. It will be clear that being a red or blue state matters when you are seeking healthcare as states encourage or discourage membership. Legislatures and governors will flex their muscles as Congress is viewed as the lowest common denominator of change. Focus could shift to manual and phone-based enrollment to stimulate expansion in markets with poor exchange participation. First-year SHOP increases result in a mixed bag of insurer entries and exits. We may see some higher-profile fights between regulators and health plans requesting larger increases. Cost shifting accelerates from public to private as government continues to cut, bundle or risk shift reimbursement. More employers embrace self-insurance, and unbundling of insurer services places pressure on insurer margins. Health system-based accountable care organizations offer slice opportunities in select markets. Employers and public entities continue to pivot away from defining benefits to offering choice in swap for capped subsidies in anticipation of 2018 Cadillac tax assessments.

2017: Lower Premiums at a Higher Cost—Reality Sets In

SHOP pools open to employers with more than 100 workers. SHOP plans mirror individual plan designs with limited networks and controls to ensure lower single-digit core trends. The second round of individual exchange renewals begins to lose the leavening effect of reinsurance pools. Employers continue shifting away from defined benefit to defined contribution designs, and in doing so they witness the migration of employees to high-deductible health plans. As plan costs fall for employees purchasing lower levels of benefits through high-deductible plans, private exchange managers continue to declare cost-control victory due to savings from buy-downs of coverage. Voluntary benefits purchasing increases as employees seek access to branded coverages that can partially self-insure out-of-pocket corridors in the event of critical illness.

2018: Cadillac Tax Hits, Employers Migrate South

The 2.0 versions of defined contribution and private exchanges accelerate in popularity. First movers to private exchanges see savings moderate as inflation erodes underlying plan economics. Employers remain protected by capping subsidies, but employees, particularly purchasers of richer plan designs, see their healthcare dollar eroding under inflation. Individual exchange participation increases as more employers purposely fail the affordability criteria to leave the door open for employees under 250% of the federal poverty level to move to public exchanges to receive coverage subsidies. SHOP exchanges continue to be challenged by adverse selection as larger employers with chronic double-digit rate increases join community-rated plans.

2019: Burying Our Collective Head in the Sand 

More poison pen emails from Dad. No change unless economic stimulus is tempered and the economy tanks. Not likely under current composition of kick-the-can-down-the-road government officials.

2020: It Finally Hits the Fan

The new year’s final turn will usher in a period of fiscal reckoning as we compare actual costs of the ACA to 2010 CBO estimates of a $140 billion deficit reduction, which resulted from a projected $940 billion in revenues offset by $800 billion in costs for expanded coverage. By this time, the federal government will be closer to $20 trillion in debt and closer to having to choose between default, raising taxes and tanking the economy, reneging on entitlement obligations or launching means-tested vouchers that enable individuals to choose between public and private options. 

The Odds on Obamacare: Who Places, Who Shows, Who’s Out of the Money

If you open up your trusty Baedeker’s Guide, you’ll find a four-horse roster and a handicapper’s view. (It’s pure coincidence that there were also four horsemen of the Apocalypse, but I digress.) If you’re reading this, the odds are you are already investing in this race. The key is placing your bets carefully. In this once-in-a-lifetime thoroughbred classic, the winner takes all and the losers may have to think about careers in trucking or fast food. 

“Three’s A Charm”

Post Position No. 1

  • Odds 3:2 
  • Owners:  The Rest of the World, Democrats (and my wife!)
  • Jockeys:  House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid

The tote boards have been volatile around this horse. However, a number of factors favor him over the next decade. Many believe that employers have tired of owning the healthcare cost management problem. The Affordable Care Act has conveniently backstopped public exchange underwriters with reinsurance financed by a reinsurance tax charged from 2014 to 2016 that will provide money to insurers that incur high claims for new members in the individual insurance market.

The coincidence of reinsurance protection aligning perfectly with the lead up to the 2016 elections is not lost on this handicapper. Odds are high that adverse selection will be present in the pools but moderated by less than stellar enrollment and reinsurance reimbursement. This allows exchange underwriters to protect loss ratios and deliver politically correct increases. It will be likely that exchange advocates declare victory just in time for Hillary Clinton to take the White House—the first time a Democrat has succeeded a Democrat since Lyndon Johnson followed John Kennedy.

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 rallying 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.

While Three’s Company is rounding mile marker 2018, private employers will be waking up to the Cadillac Tax, which will affect an estimated 40% of private plans whose compound annual growth rate cost trajectories will carry them over the tax-deductible limits of $10,200 per individual and $27,500 per family. As employers lose the deduction for a portion of their healthcare, they will begin to embrace defined contribution financing arrangements in higher numbers. As employers shift to become more passive financiers of care and fix their annual health spending to their annual rates of organic growth, employees may find private policies rising faster than the rate of medical inflation due to public-to-private cost shifting and a low-growth economy.

When confronted with rising costs, private insureds may become disaffected with defined contribution designs and lobby for more competition in the form of a public option. 

2020 means continued 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.

In the end, the U.S. winds up with a “three tier” pyramid care delivery system with a basic level of national coverage provided through a Medicare-for-all program. About 25% to 30% of the care is now provided by private plans offered by employers that prefer providing their employees with the ability to opt into private care for some or all of their procedures. A final razor-thin concierge market sits on the top. These serve those wealthy enough to pay for a fast pass to the best and brightest who organize around paying customers.

“Market Reformer”

Post Position No. 2

  • Odds 4:1 
  • Owners:  Industry Stakeholders 
  • Jockeys:  Karen Ignagni, President and CEO, America’s Health Insurance Plans, Rep. Rand Paul, R-Ky.

This horse depends heavily on all the stakeholders playing nice in the sandbox and accepting the notion that a short haircut is preferable to being scalped. Employers must be willing to engage and become significantly more willing to tolerate disturbance within their workforce by insisting on cornerstone affordability elements baked into every plan. The new normal plan design may feature:

  • Narrower PPO networks
  • Reduced ACO offerings in select markets where systems can demonstrate low single-digit trends and willingness to accept capitation
  • Consumer health management requirements, including smoker/nonsmoker rates
  • Mandatory biometrics
  • Primary care physician/gatekeeper based access
  • Self-insurance
  • Unbundled services to limit carrier profit taking
  • Limited conflicts of interests where claims payers also subcontract to owned subsidiaries to deliver healthcare services.

Market Reformer has the best chance to preserve the finest parts of healthcare, in which incentives to provide quality are not crowded out by global fee schedules and peanut butter spread reimbursement.

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.

“Vouch for Me”

Post Position No. 3

  • Odds: 8:1
  • Owners:  Fiscal Conservatives and Populists
  • Jockey:  Rep. Paul Ryan, R-Wis.

This dark-horse gelding may not make it past the third turn. The $60 trillion in unfunded Social Security trust and Medicare coupled with national debt that could eclipse $20 trillion in 2020 suggest we have four options as a nation:

  • Default on our debt
  • Raise taxes and kick the can down Pennsylvania Avenue for a few more years
  • Renege on our entitlement obligations
  • Introduce some kind of means-tested voucher program that pits the over- and under-65 public and private insurance markets against one another.

The focus must shift heavily to consumer satisfaction, and while Medicare enjoys unit cost advantages, some recipients may opt for private-payer plans that could shift the economics of purchasing care. This would make it harder for Medicare to dictate lower levels of reimbursement.

By offering retirees vouchers to purchase public or private care, the government can benefit from gains already achieved by private employers through retiree exchanges. 

Retirees will have to decide each year how much they want to augment their spending to purchase coverage. With retiree costs expected to eclipse $40,000 per capita for retirees in 2030, this horse promises a safe route to the finish line. However, handicappers are jaundiced. The polarized politics of Congress suggest that 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.

“Lenin’s Ghost”

Post Position No. 4

  • Odds 10:1 
  • Owners:  The Democratic Party
  • Jockeys:  House Minority Leader Nancy Pelosi, Senate Majority Leader Harry Reid

This horse has been injected with a liberal dose of hormones and is ready to run. The notion of a single payer and socialized medicine delivery system has been on the drawing board for some time. The architects of the national single payer blueprint have most likely not read Friedrich von Hayek’s Road to Serfdom or Michael Lewis’s Boomerang but instead have a deep ideological conviction that one payer will resolve pricing irregularities, fraud, waste and overtreatment. Given that Medicare is still plagued by $100 billion of fraud a year, it remains to be seen whether a single administrator can develop the checks and balances to really manage care instead of just paying reduced fees for units of care delivered.

Proponents of this filly point to embarrassing global benchmarks of public health and quality of life standards and argue the mean survival rate for many in the U.S. living below 400% of the federal poverty level will increase under a single payer while the over-served in healthcare may also live longer. The belief that we can take on 16% of GDP spending and drive it down over time while not tanking the economy is as perilous a proposition as the Federal Reserve raising interest rates.

The challenge will be the unsavory politics surrounding care decisions and end-of-life spending. Whoever wears the hat of payer must look good in black. You are now the bad guy.

It remains to be seen whether public officials really want to preside over “death panels for granny.”

So it’s anyone’s race.

For this handicapper, it means near-term employment, a theater of the absurd and compelling opportunities to make a difference. It’s going to play out on a sloppy track in an uneven manner. The field may begin to look as if the jockeys are purposely trying to pull back on the reins and avoid the winner’s circle. Riding any of these horses requires courage and conviction. The public will be influential in determining the winner in what could be a photo finish.

Here’s what is certain: The horses are now running, and the tote boards are constantly changing. 

When in doubt, always bet the gray horse.

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

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