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Life Health > Health Insurance > Health Insurance

A Pound of Cure

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There is nothing wrong whatsoever with the health care system in the United States, except for two things: the pricing model and the supply model.

Health care now is the largest industry in America. It’s 17% of the gross domestic product and growing at three times the rate of inflation.

The whole country–employers, employees, business owners, the unemployed, families, taxpayers, government leaders–is worried about paying for the costs of health care. Despite the latest efforts, politicians haven’t figured out how to pay for health care on a sustainable, affordable basis. Business decision-makers and families are worried about rising premiums, co-pays and out-of-pocket costs.

The pricing is not right. The U.S. health care system uses a pricing system that rewards health care providers per event. Thus providers create a lot of events (tests and procedures). Certainly many are necessary. However, we need to move to a pricing model that–instead of rewarding each test or procedure–rewards providers for making someone well.

Case in point: Minnesota recently took a bold step in this positive direction. Former Republican Governor Tim Pawlenty, through negotiations with a Democrat legislature and with the agreement of major health care provider groups, in 2010 moved the state in a radical direction.

Here’s how: Minnesota has an entitlement program called General Assistance Medical Care (GAMC). This 100% state-funded program fills an existing gap in Medicaid (which itself is jointly funded by the federal government and the state). A Medicaid enrollee has to be part of a certain demographic class and have very low income. Able-bodied adults without children do not meet the first criteria for Medicaid eligibility, even if very poor, so GAMC is their safety net for health care services.

GAMC cost Minnesota $748 million in fiscal year 2010-2011. In the next two-year budget cycle (fiscal year 2012-13), the unreformed GAMC would have cost the state $928 million. Under Pawlenty’s reform, the legislature passed a new GAMC program that was budgeted at $214 million for fiscal year 2012-13, a tremendous savings.

How did Minnesota realize savings of such magnitude while not dropping any GAMC recipients? Under the program, hospitals formed “coordinating care delivery systems” to manage and provide care. Providers received a payment to keep patients healthy. Hospitals were paid an upfront lump sum on an annual basis to cover all GAMC patients, thereby creating incentives for providers to control costs.

The lump sum to providers was based on the number of GAMC recipients receiving care at each facility, and was not dependent on the amount of procedures. Hence, reimbursement was converted to a per-person annual payment model, away from the prior model of reimbursing providers for procedures.

States can and should be laboratories for reforms. Other states, health care payers (employers groups and union plans), and even the federal government should consider Minnesota’s pricing reform approach that Pawlenty pioneered.

While this was a step in the right direction, Pawlenty left the governor’s office in January 2011; unfortunately, the new Democratic governor has partially dismantled this reform. Under Obamacare, the new Medicaid eligibility rules allow broader eligibility criteria, and Minnesota is now moving thousands of people from the newly redefined, innovative GAMC program to Medicaid. Medicaid, of course, continues the broken model: A payment system where the more procedures that providers supply, the more taxpayers pay.

Meanwhile, there is a dirty word in the health care debate: rationing. It inflames passions in many quarters. But the United States needs a grown-up conversation about health care rationing.

Americans realize that, for transportation, not everyone can drive a BMW to work. Yet there is a basic understanding that some mode of transportation is necessary for people to get to work. In contrast, when it comes to health care Americans expect that everyone should get the best and/or most-expensive care. This results from a sense of entitlement that sooner or later must change. In no other sphere of public life does this exist, whether it’s in education, transportation, or any other area.

Related to rationing is individual responsibility. That too has to change. No matter what their health habits and practices are, Americans are now getting subsidies and a new entitlement to buy health insurance. Compare it to driving. If you’ve had two convictions for driving under the influence and don’t carry car insurance, no one expects that the government would give you a free luxury car and pay for your insurance. Yet on one level, that is what is happening in health care and health insurance. Our health care culture must change.

Big Changes on the Way

The recent health care reform package passed by Congress, however, missed making dramatic and needed shifts in the pricing model and supply model of health insurance. So even as the health care and health insurance industries might need structural changes–what some call “reform the reform”–today insurance agents and brokers must deal with the actual implementation of the Patient Protection and Affordable Care Act of 2010.

For insurance professionals in the business of underwriting and distributing health insurance, PPACA has shifted the sand underneath the industry. Actually, it might better be called a slow-developing earthquake.

Corporations and unions have found relief from burdens of PPACA through waivers from the U.S. Department of Health and Human Services. But the typical small business in the Midwest, for example, does not have the resources to get a federal wavier. Thus they are turning to their trusted advisors–their health insurance brokers–for guidance.

As for the group health insurance market, which has been the foundation of health insurance coverage in the United States since World War II, it has been losing one to two percentage points of market share each year. It is possible that pace will accelerate under PPACA.

After passage of PPACA, employers now have less flexibility to make the incremental changes (such as raising employee contributions and deductibles) they have made for the past several years. Now, business owners face a new stick (read: penalties) if they change their health plans. If a small business makes a change to its group plan (even if it’s simply a change in employee contributions), the plan loses the protection of ‘grandfather’ status.

In response, some of these small employers are simply not renewing their group plans. Instead, they are turning to their agents and asking for individual health insurance plans as an alternative to provide to their employees.

Meanwhile, PPACA will mandate subsidies to purchase health insurance for those who make up to four times the poverty level. This means that a Midwest family of four people with about $80,000 of income will now be eligible for federal subsidies to buy health insurance. This promises to explode the number of Americans on government assistance–far more than we’ve ever seen in American history.

How does this affect brokers? It is unclear yet how subsidies will work in practice, but they do stack up, and agents must speak out on what effect they have. It is possible that subsidies could only be used in the state insurance exchanges (mandated by PPACA), which limit consumer choice to four types of plans (as compared with the 200+ choices in the federal government employees’ health plan). It is not certain that insurance agents will be permitted to be part of these exchanges, since the exchanges are formed and regulated on a state-by-state basis.

Agents must advocate for their own involvement in insurance exchanges, because families of four making under $80,000 are a big part of the market in the U.S. If agents want to continue working in that market, they must be part of the still-to-be-formed state insurance exchanges.

Insurance must insure people. How cringeworthy it is for any life/health professional to read or hear about the number of uninsured Americans! After all, it is the job of the insurance business to insure people! For everyone who is outside of the system, our industry again takes another perception hit no matter whose fault it is. The more that people have health insurance, the better the industry’s standing in public perception.

This would be good news for insurance companies, which have taken the brunt of negative publicity related to health care reform and the uninsured, even if this may not be accurate. By contrast, for the most part consumers like their insurance agents. It does not matter what industry it is, people want to work with people they know and people they like. People like their brokers.

This puts agents in a strong position to diversify their product offerings as the market shifts from group to individual health insurance plans. Agents can add value by putting together the right combination of health, ancillary health, life, annuity, and other insurance products for consumers.

Other types of planners are looking for health insurance partners, too. Money managers and property/casualty agents are being asked by their clients what should they do about health care. Although they may not want to work in this product line themselves, they recognize they cannot ignore health insurance planning.

This is good news for life/health insurance agents. As other financial advisors hear questions from their clients, they are looking to health insurance producers for answers. Health insurance brokers are in good position to team up with other professionals to provide analysis, recommendations, advice and products.

Additionally, with the aging of the baby boomer population, more and more Americans are asking their financial advisors about Medicare coverage, long-term care insurance and related needs. Health insurance producers can be a good resource here too, to partner with their peers outside the health insurance business.

That said, major challenges remain. The medical loss ratio (MLR) requirement mandated by PPACA means that health insurance carriers must spend a minimum of 80 or 85 percent of premiums on medical expenses. From a distribution perspective this has already cut into agent compensation. It has also changed agent relationships with carriers: Some carriers simply will stop working with agents or the general agency system. Agents and GAs who do want to continue will need to look at other ways to add value to consumers and to carriers.

Margaret LeClair, Ph.D (Economics) is CEO of LeClair Insurance, a national insurance brokerage firm in Minneapolis.


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