Fraud in health care

Today’s Managing Health Care Costs Indicator is $3239

The Wall Street Journal  has performed an important service by suing the Centers for Medicare and Medicaid Services (CMS), and has obtained a claims paid database showing Medicare physician payments.  Because of a 1977 court ruling, they are prohibited from naming individual physicians who received government payment.

The WSJ did a bit of data diving, and discovered that a single New York physician, a family physician with no specialty training, received an estimated total of over $2 million in payments from Medicare in 2008.  (WSJ extrapolated this from $142,500 in payments for a mere 44 patients, or $3239 per patient. The claims set represents 5% of the total claims paid during 2008).  There were another two dozen physicians who also had suspiciously high claims – and a number of them had already been investigated.

Just for perspective, total care for those over 65 costs around $14,700 per year   This includes hospitalizations, chemotherapy, and all sorts of expensive care.  Primary care would never represent a fifth of the total cost of care of an elderly population.

This physician certainly didn’t make this money through office visits.   Au contraire!  The vast majority of the payments were for very expensive procedures – like sleep studies, ultrasounds, and neurologic tests.  Her billings increased by a factor of 16 from 2006 to 2007 – often a flag for overuse or frank fraud.  Some of the fraud experts called on by the WSJ said that this physician was highly unlikely to have performed all of these procedures.   Her rejoinder in the WSJ:

The New York-area physician, in the interview, denied any wrongdoing and said she only administered tests "recommended by the [medical] literature." She added: "I read a lot of literature."

The physician said that she stopped doing most of these tests since 2008, after an audit by a Medicare contractor.  That’s a sign the system is working at least a bit – this was investigated by the government before the WSJ got its hands on the data, and the physician says she stopped the most egregious billing.  Still, she has not lost her privileges to participate in Medicare, and there has been no restitution for previously billed tests.  We also don’t know for sure that she committed fraud.

Fraud and abuse cost the health care system billions of dollars a year – and while there are some cases that appear egregious and clear, there are many cases where it’s much harder to draw a bright line.  Medicare has a harder time fighting fraud because

-        Physicians don’t need to be credentialed for Medicare, as they are for private health plans.  If a physician has an active license and agrees to participate, she is in.  

-        Medicare has very low administrative costs. That’s good – because the dollars are spent on medical care instead of bureaucrats.  It can be bad, though, since there are fewer administrative people to guard Medicare’s precious resources.   

-        Medicare can ban a physician from participation in the program, but it rarely does so.  CMS represents a large portion of participating physician income, so physicians will usually fight adverse determinations in court.   

Clearly, fraud and abusive billing are damaging

-        Money is wasted

-        Patients are exposed to unnecessary tests, which can themselves be dangerous, and can lead to incidental findings that cause patients more inappropriate discomfort, risk and expense

-        We lose faith in the system.

Systematic approaches to fraud, such as this kind of data mining, are important adjuncts to traditional means of finding fraud, such as patient complaints and tip lines. If we cannot trust a physician not to recommend highly remunerative but unnecessary tests, we cannot trust her to take care of us in illness.

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Scary Halloween Cartoon

This is from Kaiser Health News.  You can subscribe to this news service, where most of the content is far more serious, at this link

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More Provider Consolidation in Face of Health Care Reform

Today’s Managing Health Care Costs Indicator is 53%

 That's the portion of cardiologists who have already sold their practices to hospitals (40%) or are strongly considering sale of their practices in the next three years  

Here's a link to a March, 2010 NY Times story on physicians abandoning private practice.

There are a series of articles out over the last few weeks about how health care reform is leading to consolidation.

On the provider side, the AMA News reports on insurer consolidation (including United Health Care taking over business from Health Net and Principal) and hospital consolidation (including a two hospital merger in Chicago and a physician group merger with a hospital in Michigan). 

Here’s a quote from the physician leader of the group merging with a hospital:

"Hospitals and physicians together are facing future expectations for rapid improvements in quality of care and value as accountable health networks that would be difficult to achieve independently," 

Kaiser Health Network in collaboration with NPR pointed out that there are few physicians hanging out shingles at this point; most join hospitals or groups.    What does consolidation mean for overall health care costs? 

Here’s Paul Ginsburg of the Center for the Study of Health System Change on provider consolidation:

 “..hospitals that employ doctors generally have more negotiating clout with insurers than doctors working in private practice. The price difference can be so big … that hospitals can pay the doctors more and ‘still have something left over’ for themselves.”

Kaiser Family Foundation also produced an impressive article last week on the varied prices of hospitalizations by county in California.  

My take is that provider consolidation is likely to lead to better integration, better access to capital, better implementation of electronic health records and other health care IT and better coordination – but higher unit prices. See this post from August on what questions regulators should ask about provider consolidation. 

I’ve argued earlier that the small “boutique” health plans with very little concentrated membership have low leverage in provider negotiations. Hence, they are likely to pay high prices – and their disappearance will likely lower overall health care costs.   More competition can be good – but too much fragmentation in the health insurer business is likely to lead to high unit prices.   

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Health Plan Demands Lowest Rates and This Raises Prices

Today’s Managing Health Care Costs Indicator is 70

The US Department of Justice and the Attorney General in Michigan announced on Tuesday a suit against Blue Cross Blue Shield of Michigan (BCBSM) for demanding the lowest prices of hospitals in the state.   BCBSM has in place a “most favored nation” contract with at least 70 of the 131 acute care hospitals in the state.

Here is the Justice Department statement:

The department’s lawsuit alleges that the intent and effect of Blue Cross Blue Shield of Michigan’s MFNs is to raise hospital costs for competing health plans and reduce competition for the sale of health insurance. As a result, consumers in Michigan are paying more for their healthcare services and health insurance

Here is the BCBSM VP for Corporate Communications: 

Through this lawsuit, the federal government seeks to deny millions of Michigan residents the lowest cost possible when they visit the hospital.

Who is right here?  Is it really bad for society for BCBSM to insist for its members on always getting the lowest rate?

It certainly is!  

Most favored nation clauses feel like a good deal (“I get the best price.”) But what they really do is make it tough for suppliers to lower their prices for anyone else. See a recent blog on the effect of most favored nation pricing on pharmaceuticals.   The BCBSM contracts are especially inflationary –because they don’t merely demand the lowest price, but they specify how much higher a price other insurers would have to pay.

This is especially damaging to competition in Michigan, where BCBSM has a 60% market share.    There is no way for other insurers to compete effectively in that market, since hospitals cannot sell extra capacity at marginal prices.   Hence, despite the BCBSM cries that they are simply getting a good deal for their customers, BCBSM is causing all consumers in the state (including their own customers) to pay higher prices for health care.

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Physicians Net Big Fees from Pharmaceutical Talks

Today’s Managing Health Care Costs Indicator is $219,975

That’s how much a single Harvard-affiliated physician made from speaking engagements for pharmaceutical companies during portions of the last two years.   This was reported by the Boston Globe / (reporting with Propublica, a nonprofit investigative reporting organization). Massachusetts physicians were paid $6.3 million during portions of 2009-10 by seven pharmaceutical companies that disclosed their payments.

 

Harvard, to its credit, has announced that its affiliated physicians would no longer be able to be on speakers bureaus as of January of next year.  The investigation also revealed that many of the physicians who got large speaking fees from pharma  were previously disciplined by their state medical boards. In one instance, a physician who was admonished by the FDA for making false claims for one pharmaceutical company continued to collect speaking fees from other pharmas.  Of course, many physicians who speak on behalf of pharmaceutical companies are top researchers in their fields.

I believe that most of the physicians giving pharmaceutical-sponsored talks represented their genuine clinical beliefs.  Still, here’s a link  to a New York Times magazine article by a physician who resigned from the speaking circuit when he felt his integrity was being compromised.

It’s impossible to remove all inappropriate financial incentives from the practice of medicine.  It’s also hard to believe that physicians could totally insulate their prescribing behavior when they can double their income from pharmaceutical speeches.   

This is an example of how sunshine is the best disinfectant. The Affordable Care Act requires more such reporting of physician financial relationships, which is a good start.

If you’re interested in seeing if your physician (or you) are in the Propublica database, here’s the link 

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Drug Discounts Which Raise Health Care Costs

I’m a value shopper. Like many people, I want to be guaranteed that I’ll get the lowest price around.   I like my clothes with large “percent off” labels.  But there is growing evidence that apparent deals to help us get lower prices on medications are costing American insurers and consumers billions of extra dollars.

Here are four examples of apparent discounts that are anything but a good deal.

1) Medicaid “Most Favored Nation”

Medicaid is guaranteed rebates from the pharmaceutical industry, based on the Omnibus Reconciliation Act of 1990.   The amount of these rebates will increase under the Affordable Care Act (health care reform of 2010). Further, Medicaid has a “most favored nation” clause under which any pharmaceutical company which sells a drug for less than the net Medicaid price must send a rebate to every state Medicaid program to ensure it got the lowest price around.

Unfortunately, game theory shows is that most favored nation clauses actually RAISE prices. They make the supplier realize that the cost of discounting is very high, and thus they reinforce supplier price discipline.  Pharmaceutical companies that used to give Kaiser a huge discount, for instance, would suddenly have to give that same discount to 50+ Medicaid programs, which together represent almost a quarter of all pharmaceutical purchases.  Kaiser –say goodbye to your discount.

This works in the hotel business too.  Marriott (and others) promise that you get the cheapest price on their own website.  This forces them to avoid selling their surplus rooms at a very low rate, because they might then have to give a refund to people who purchased at the full rate.  Hence, an apparent discount leads to higher prices.

Here’s a link to a wonky Rand article showing that the Medicaid most favored nation clause raised the overall price of drugs by about 4%.   Harvard Link  NonHarvard Link 

2) Novartis Covers Copayments for Gilenya, a new oral multiple sclerosis drug.

Novartis just announced that it will charge $48,000 per year for its new MS medication.   Gilenya is reported to work as well as a number of other biopharmaceuticals, but requires no injection.  The drugs it replaces are among the most expensive around– they tend to cost between $20 and $30,000 annually. 

Novartis will give the medicine away to those with income less than 500% of the federal poverty level, and will cover many or even most copayments or coinsurance for others. 

Who could argue with that deal?

In fact, the fixed costs of drug manufacture are large, and variable costs are low.  Novartis will maximize its profit by offering the medicine without allowing patient price sensitivity to reduce demand.   Most of those who will take the medicine will switch from the less expensive medications. Hence, the total amount paid for effective MS medications will rise because Novartis is offering the drug for reduced prices.

3) Medicis, the maker of Solodyn, an extended release minocycline for acne, offers a card that guarantees a $10 per month copayment for this medicine, which otherwise costs over $400 per month. 

This might seem like a good deal, but generic minocycline (taken twice a day) costs 75 cents a pill!   Here’s a pharmacist’s rant on the topic (a bit obscene –don’t click unless you’re ready for some expletives)  

The discount card is a great idea for the pharmaceutical company, which has taken a generic drug that can be purchased wholesale for pennies and converted it into a very expensive brand name medicine.  For consumers and the overall health care budget, this is a bum deal indeed.

4) The pharmaceutical industry has volunteered to give Medicare beneficiaries 50% off the price of brand name drugs when they are in the “donut hole” between spending $2840 and $4550 each year.

Again, how can we go wrong with 50% off?

Brand names remain substantially more than twice as expensive then generics within the same class.  For instance, generic simvastatin to lower cholesterol costs about a dollar a day retain (drugstore.com, 20mg), while brand name Lipitor costs over $3 per day (drugstore.com, 10mg).  So, Medicare beneficiaries who have no generic choice will do well with the discount. However, Medicare beneficiaries who are convinced to take the discount instead of moving to a generic will continue to pay more than they should.

We have to look at the total cost of care – not just the prices or the discount for a particular product or service.  The great discounted prices sometimes camouflage unnecessarily high costs.

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Drug Discounts Which Raise Health Care Costs

I’m a value shopper.  I like my clothes with large “percent off” labels.  Like many people, I want to be guaranteed that I’ll get the lowest price around.  But there is growing evidence that apparent deals to help us get lower prices on medications are costing American insurers and consumers billions of extra dollars.

Here are four examples of apparent discounts that are anything but a good deal.

1) Medicaid “Most Favored Nation”

Medicaid is guaranteed rebates from the pharmaceutical industry, based on the Omnibus Reconciliation Act of 1990.   The amount of these rebates will increase under the Affordable Care Act (health care reform of 2010). Further, Medicaid has a “most favored nation” clause under which any pharmaceutical company which sells a drug for less than the net Medicaid price must send a rebate to every state Medicaid program to ensure it got the lowest price around.

 Unfortunately, game theory shows is that most favored nation clauses actually RAISE prices. They make the supplier realize that the cost of discounting is very high, and thus they reinforce supplier price discipline.  Pharmaceutical companies that used to give Kaiser a huge discount, for instance, would suddenly have to give that same discount to 50+ Medicaid programs, which together represent almost a quarter of all pharmaceutical purchases.  Kaiser –say goodbye to your discount.

This works in the hotel business too.  Marriott (and others) promise that you get the cheapest price on their own website.  This forces them to avoid selling their surplus rooms at a very low rate, because they might then have to give a refund to people who purchased at the full rate.  Hence, an apparent discount leads to higher prices.

Here’s a link to a wonky Rand article showing that the Medicaid most favored nation clause raised the overall price of drugs by about 4%.   Harvard Link  NonHarvard Link 

2) Novartis Covers Copayments for Gilenya, a new oral multiple sclerosis drug.

Novartis just announced that it will charge $48,000 per year for its new MS medication.   Gilenya is reported to work as well as a number of other biopharmaceuticals, but requires no injection.  The drugs it replaces are among the most expensive around– they tend to cost between $20 and $30,000 annually. 

Novartis will give the medicine away to those with income less than 500% of the federal poverty level, and will cover many or even most copayments or coinsurance for others. 

Who could argue with that deal?

In fact, the fixed costs of drug manufacture are large, and variable costs are low.  Novartis will maximize its profit by offering the medicine without allowing patient price sensitivity to reduce demand.   Most of those who will take the medicine will switch from the less expensive medications. Hence, the total amount paid for effective MS medications will rise because Novartis is offering the drug for reduced prices.

3) Medicis, the maker of Solodyn, an extended release minocycline for acne, offers a card that guarantees a $10 per month copayment for this medicine, which otherwise costs over $400 per month. 

This might seem like a good deal, but generic minocycline (taken twice a day) costs 75 cents a pill!   Here’s a pharmacist’s rant on the topic (a bit obscene –don’t click unless you’re ready for some expletives)  

The discount card is a great idea for the pharmaceutical company, which has taken a generic drug that can be purchased wholesale for pennies and converted it into a very expensive brand name medicine.  For consumers and the overall health care budget, this is a bum deal indeed.

4) The pharmaceutical industry has volunteered to give Medicare beneficiaries 50% off the price of brand name drugs when they are in the “donut hole” between spending $2840 and $4550 each year.

Again, how can we go wrong with 50% off?

Brand names remain substantially more than twice as expensive then generics within the same class.  For instance, generic simvastatin to lower cholesterol costs about a dollar a day retain (drugstore.com, 20mg), while brand name Lipitor costs over $3 per day (drugstore.com, 10mg).  So, Medicare beneficiaries who have no generic choice will do well with the discount. However, Medicare beneficiaries who are convinced to take the discount instead of moving to a generic will continue to pay more than they should.

We have to look at the total cost of care – not just the prices or the discount for a particular product or service.  The great discounted prices sometimes camouflage  unnecessarily high costs.

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Prescription Abandonment on the Rise

Today’s Managing Health Care Costs Indicator is 86%

That’s how much the rate of prescription abandonment rose over the last four years, as reporting on public radio's Marketplace this afternoon. 

More and more Americans are in health plans with higher member cost share, and people are going into the pharmacy expecting to pay $20 for a prescription, and discovering it’s $40 or more.  For many Americans, this is just too much to pay.

One of the interviewees noted that he also saw his patients deciding to skip physical therapy because of high copayments.

This is one of the bitter ironies of the increased coverage of health care reform.  More Americans will be insured (mostly starting in 2014), but even those with “full” coverage often find that their insurance doesn’t cover them as it once did.

This is bad news for health.  The pharmaceuticals introduced over the last decades represent quantum leaps in the treatment of HIV, depression, ulcer disease, asthma, diabetes, cholesterol and many cancers.  However, these innovations are no good if people can’t afford them.

The answer for consumers is often generic medications –which can be purchased at a fraction of the cost of brand name medicines.  Generic prescribing rates are currently around 70% in states with ‘mandatory substitution,’ where a physician must explicitly demand the brand or else the pharmacist must use a generic.  However, closed health care systems can achieve an 80% generic rate, which dramatically lowers overall costs.

The public policy answer to high pharmaceutical costs is less clear.  Possible answers include

1. Price Controls: Most industrialized countries have some form of price control.  As a result, drug costs are dramatically higher in the US, which helps attract additional capital into the pharmaceutical industry. Price controls are politically difficult in the US – and unlikely to be implemented. 
2. Antitrust enforcement:  Consolidation in the industry leads to less price competition. (Pfizer just shelled out $2.6 billion for a generic drug maker, King Pharmaceuticals).  Even more important in terms of promoting sane prescribing would be prohibiting cross-promotion of medications.  This is when a company allows discounts on a popular medicine only if the pharmacy benefit manager (or health plan or employer) agrees to put other company products on a preferred list.  This process helps keep actual prices opaque, and leads to higher costs.
3. Patent Vigilance: Patent protection is why brand name medicines are so expensive.  Congress has periodically offered further patent protection to the industry, and limiting patent protection would make the industry less profitable and less attractive to new investors while it would lower costs.

The rising abandonment rate is further indication we need to lower the costs of prescription medications.  It won’t be easy to do so, but there are a lot of people wheezing away who can’t afford their asthma inhalers.  We don’t want them to be hospitalized, and an inhaler is a good deal compared to an emergency department visit

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Payola in Health Care Purchasing

Today’s Managing Health Care Costs Indicator is

$37.5 billion

What if you joined a buying club, and instead of getting a lower rate, you paid higher prices?  What if, in fact, you paid $37.5 billion extra per year?  Would you  join the buying club next year?

Let’s bring this back to health care.   Hospitals band together to form “group purchasing organizations” to obtain the best rates on medical devices – things like pacemakers and artificial hips.  These GPOs have a specific antitrust exemption, since competing hospitals participate in them. The idea is that the GPOs push manufacturers for the best prices. The reality is more complicated than that..

The New York Times has been on this case since 2002.  The Times documented astounding practices including awards of company stock to those making purchasing decisions, favoritism toward former employees of the purchasing group,  and fees representing a percent of revenue if certain targets for revenue were met.

The Medical Device Manufacturer’s association just published an academic-style study examining circumstances when hospitals had rebid contracts after a GPO had used an auctdion to establish a price.  There were 8100 such aftermarket transactions, and savings ranged from 10-14%. 

This is an imperfect study – because it’s likely that hospitals made aftermarket transactions selectively when they felt the GPO didn’t get a good enough price.  BUT – we clearly should not allow a group purchasing organization to be paid a kickback from vendors.  It’s just too obvious that this is a bad idea likely to drive up costs

The medical device companies would be happy to eliminate middlemen, but it is also pretty interested in maintaining high prices, and that industry is not nearly as interested in promoting effective competition as you might think from its press release. 

There’s no need to ban GPOs.  Medicare should insist that they are subject to anti-kickback rules, and hospitals would have to pay for their services (rather than suppliers paying fees as a portion of total revenue.)  We won’t save $37.5 billion –but we would be remove a pernicious influence on health care purchasing.  . 

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In search of an accountable care organization

A funny and a bit disturbing short (3 minute) video from YouTube.

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Mini-Med Plans

Today’s Managing Health Care Costs Indicator is $2000

There’s not a lot you can buy in health care today for $2000.   An MRI? Often $2000.  A hospital day (not a hospital stay!), more than $2000.   Obstetrical professional charge for care through pregnancy?  $2000.

So it was big news when the Wall Street Journal reported that McDonalds was threatening to discontinue its “mini-med” health insurance plan, which has an annual coverage limit of $2000 (or $10,000, according to the WSJ article). This plan has high administrative costs as a percentage of total premium, since the total premium is so low and there are certain fixed costs of operating a health plan. Health care reform requires that at least 80-85% of total premium is spent on delivering health care.

The Obama administration indicated that it would grant exemptions to these health plans until 2014, when health exchanges would be in place to allow these employees to purchase their own health policies with substantial federal subsidies.  David Leonhardt  in tomorrow’s NY Times points out that the mini-med plans are good if you’re healthy, but they are not especially helpful if you have any serious illness.

But let’s look ahead to 2014.  Someone making minimum wage will be eligible for substantial subsidies to purchase much more meaningful health insurance – the kind that would cover him if he got leukemia, or needed an emergency appendectomy.   Socially – this is good, because people won’t delay seeking care, and there will be less uncollectable bad debt at hospitals. 

But I have another fear.  How will the post-health-care reform world look to the bike messenger? See this archival article from the Boston Phoenix for the reference.  I’m worried that this will look like a raw deal for the bike messenger who would have foregone health insurance altogether, or for the burger-flipper who would have paid $7 a week from his paycheck for a policy that wonks know is inadequate, but that serves the healthy 23 year old perfectly well.  The new world of having to pay $25 per week for “real” health insurance is likely to be very unattractive. 

Ultimately, the problem is not McDonalds – where a full-fledged health care benefit would cost half again as much as the employee’s salary.  The problem isn’t immortal 23 year old bike messengers, who can’t believe they could ever have a serious illness.  The problem is that health care is too expensive, and American consumers are too price sensitive to allow low-wage companies to add the cost of full-benefit health care insurance to their prices.

Let’s hope that other elements of health care reform, including Medicare cuts, comparative effectiveness research, limited networks, and transparency are successful at suppressing medical inflation so that this problem won’t seem even worse by 2014.

A few miscellaneous links:

·        Brigham and Women’s researchers, including HPM235 alum Angela Bader, did a simulation to show that even hospitals with a modest complication rate would save money by implementing surgical checklists.  There are ways to save health care resources that even improve the quality of care – but they take leadership and they’re not easy.

·        The Washington Post ran a good article last week about how costly the newer biopharmaceuticals have become.  From the article:

The latest is Provenge, a first-of-a-kind therapy approved in April. It costs $93,000 and adds four months' survival, on average, for men with incurable prostate tumors. Bob Svensson is honest about why he got it: insurance paid.

·        The October Health Affairs  has hit the internet (although it’s probably still weeks from my mailbox).  The headlined topic is comparative effectiveness – more on this in future posts.

·        The AMA’s American Medical News reports that hospitals are having a historic high number of layoffs in 2010.  This indicates that many hospitals really are seeing the need to constrain the resources they use.  This is bad news for an already-shaky economy.  But realistically, we can’t expect the health care sector to be lowering health care inflation and robustly hiring simultaneously – since labor costs are a substantial portion of the resource cost of delivering health care.

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Prevention is a Good Deal - But it's the Vaccines that Save Money!

Today’s Managing Health Care Cost Indicator is 2.3 million

Double click to enlarge image.  Last column header is "net medical costs per person per year" 

That’s how many quality adjusted life years we could gain if we achieved 90% preventive care.

Maciosek and colleagues at Health Partners in Minneapolis performed a literature review and did economic forecasts and concluded that it would cost just $72 billion annually to achieve 90% adherence to preventive guidelines. 

The authors estimate that we would save $62 billion dollars in preventable medical costs by dramatically increasing preventive care. Thus we could save 2.3 million quality adjusted life years for just $10 billion dollars, a measly 0.6% of total health care spending. (That’s a bit over $4000 per QALY – much better than most medical care!)

Honestly - there isn't a better deal around - and we should sign up.

But let's not lose track of where the savings really are in preventive care.  Immunizations, counseling to use aspirin, smoking cessation, and a handful of other things save money. Immunizations in fact are genuinely cost saving, and are calculated to save $322 per person annually, while the entire bundle of preventive services saves only $48 per person.  

So – we should approach immunizations as a public health imperative as well as a good deal.  Some states (Massachusetts is one) have purchased childhood vaccine for all children regardless of income or health care coverage - and as a result achieve VERY high rates of immunization.  In Massachusetts, funding for this program has been maintained temporarily year to year.    Many states are cutting back on their vaccination programs because of declining state revenue.

There are very few genuinely cost saving therapies in health care – and even most preventive care just offers better outcomes at a reasonable price.  Vaccinations are an exception. Let’s invest in them.

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Insurance Companies Leaving Health Care Will Lower Costs

Today’s Managing Health Care Costs Indicator is

840,000

That’s how many people will no longer be able to obtain health insurance from Principal Financial Group of Iowa, which announced yesterday  that it would retreat from the health insurance market. 

Principal has focused on small businesses, and does not have a large footprint in any given geographic market.  I believe that Principal has decided to stop writing health insurance because

1)     The new law requires “medical loss ratios,” or the portion of the health care premium to be spent on health care, to be at least 80%.  It’s hard to get a reliably low MLR with very small accounts where the costs of sales and administration tend to be high.  Further, with small populations spread across many states, Principal might have been viewed as multiple different health plans, and randomness alone might have meant some of those plans would had MLR of >100%, and Principal would have still owed premium back for the states in which it was profitable.

2)     The exchanges to be established in each state will be highly attractive to small businesses, and thus will compete with Principal’s current business.  Principal is not a low-administration organization, and will find it hard to compete in this space.

3)     New regulations will require systems changes at all insurers, and smaller insurers won’t be able to amortize the cost of these changes over as many members. Examples of changes include the requirement to report the value of health insurance on W4 forms, and the requirement to cover certain preventive services.

Many commentators are worried that the loss of some smaller insurance companies from the health insurance market could lead to rising health care costs.  Here’s why I believe that the withdrawal of Principal (and other similar health plans with small membership dispersed over many markets) will lower health care costs.

Health plans add value, and help control the costs of care, through

1)     Discounts from providers that decrease cost per unit

2)     Network contracting that includes the highest value providers, and excludes providers who charge too much or whose quality is poor.

3)     Pay for performance or other contracting that encourages and rewards wise resource use

4)     Product design that encourages members to use care wisely

5)     Utilization management programs that decrease utilization

6)     Health management programs that decrease utilization or improve health

7)     Competent claims administration that interdicts fraud and prevents overpayment

In general, regional health plans with significant market penetration in their geography can develop deeper relationships with providers and might be able to do a better job than the four large national health plans (Aetna, Anthem/Wellpoint, Cigna and United Health Care.

However, small health plans that are widely geographically scattered generally have high administrative costs, and they’re not able to increase value through higher discounts, better contracts, or higher value networks.  They don’t have the data capabilities of the big nationals, or the on-the-ground knowledge of the regional health plans.  They don’t have the integrated network that is at the heart of the value equation of Kaiser, or Geisinger, Mayo, and Cleveland Clinic. 

The withdrawal of this type of health plan from the market will lower costs in two ways.

1)     Providers are able to charge health plans with small footprints relatively higher unit prices. Therefore, the withdrawal of companies like Principal is likely to increase health plan leverage, and should result in lower unit costs.

2)     Small health plans that are widely distributed have high administrative costs

There will be many unintended consequences from the health care reform bill.   Not all of them will be bad!

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