Insurance Companies Betting on Government Health Plans

Today's Managing Health Care Costs Indicator is
$3.8 billion

 

Source (click image to enlarge)

Cigna agreed last week to purchase HealthSpring, a Medicare and Medicaid health plan based in Tennessee, for $3.8 billion.  This prompted Wall Street analysts to increase the valuation of Medicare and Medicaid health plans --which it says are now worth $6000 per enrollee (Medicare) and $1200 per enrollee (Medicaid.)

This is a big bet - the insurers are wagering that the Medicare HMOs will continue to be paid a hefty amount (12-13%) more than traditional Medicare on a risk-adjusted basis, leaving a nice profit margin even after accounting for costs of marketing, enrollment, and network contracting that indemnity Medicare doesn't have to worry about.

The Affordable Care Act lowers Medicare Advantage plan reimbursement by $130 billion over 10 years, and past deficit reduction bills had additional cuts, although no one is sure what the "supercommittee" will suggest, if it suggests anything at all.

Medicaid plans are being cut by all 50 states, but many of them hope to wring out some savings through sending more members into managed care, leaving this an area of potential growth.  Medicaid should also enroll an extra 16 million members as a result of health care reform - although that's been in some jeopardy due to state cuts as well. Most states intend to move more Medicaid beneficiaries into managed care - which means plans with a track record of good Medicaid management should be especially valuable.

Wall Street financiers have an incentive to project hefty insurance plan profits from government health plans in the future.  This helps convince the big four (or five) health plans to open up their wallets (reserves) and pay high valuations for other companies, which leads to higher transaction fees.  The Affordable Care Act offers some tax advantages to nonprofit health plans, but that is also apparently not making investers any less skittish about putting their dollars into health plan stock.  Government cannot keep paying more and more for health care, though, and I think fee cuts for these health plans are highly likely in the coming years.

I believe that we're likely close to the top of this market, and health plans will have to show a genuine ability to lower health care costs while satisfying their members to justify such high valuations in the future.

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Will Shaving a Half Trillion Dollars from Medicare Save Money?

It depends.

The Medicare cuts will certainly save the federal government money – that’s why the Senate and House health care reform bills cut the deficit over the next ten years.   However, whether they lower the overall cost of health care really depends on whether resource costs are diminished, or whether costs are just shifted from Medicare to other payers.

Here’s a graphic from Tom Bodenheimer seven years ago, showing that Medicare has been very effective at lowering rate of health care inflation – a contrast to the sustained high rate of inflation of private health insurance premiums .

 Abstract 

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Here is the counterpoint, also a graphic from Health Affairs, showing the estimated cost shift from Medicare (and Medicaid) to private payers. 

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So – will the half trillion in Medicare cuts lead to cost shifting to other payers?

David McGuire, VP for Contracting at Partners, is quoted in today’s Boston Globe  that low Medicare rates are the cause of high prices for non-Medicare patients. 

The Medicare cuts (from a memo from the CMS Actuary)

- Medicare Advantage Plans ($201billion)

- Provider payment cuts – adjusting for productivity increases over time ($282 billion)

- Pharmaceutical cuts ($129 billion)

Medicare Advantage cuts will likely lead to lower enrollment in the private plans, and increases in premiums and cuts in benefits for some beneficiaries.  This is not likely to create much cost shifting.

Provider payment decreases could mean increased cost shifting to the private sector.  It’s likely that this will lead to some substantial efforts to lower the cost of care delivery.  Note also that some provider fee cuts might just not happen.  The AMA has successfully pressed for reversal of physician fee cuts each year, and hospitals are now complaining that their agreed-to lower increases were contingent upon a more substantial decrease in the uninsured than would be accomplished under the current Senate bill.

Pharmaceutical cuts  are likely to lead to higher utilization – so overall costs might not decrease.  Assuming that the higher utilization is for cost-effective medications, we could be purchasing high value from the increased drug spend (but we probably won’t save money).

Health care cost increases are complex and multifactorial.    Large Medicare cuts could lead to higher value from health care delivery – but are not likely to lead to dollar-for-dollar decreases in overall health care costs.

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CMS: 2008 Medical Inflation Much Lower

The Centers for Medicare and Medicaid studies released its report on health care spending in 2008 – published in Health Affairs on Monday and covered extensively in the press.   The good news is that health care inflation overall was lower than it’s been for years (4.4%).  The bad news is that health care inflation continued to outpace growth in the economy – so health care moved from 15.9% to 16.2% of GDP. 

Some of the conclusions that have been widely reported 

- Health care is not immune to the effects of severe recessions

- Hospital inflation decreased to 4.5% - and hospital prices only went up 3%

- Physician services increased by 5% - the slowest rate since 1996.  Medicare physician spending, however, increased by 7.8%

- Prescription drug spending increased only 3.2% - continuing a trend of relatively low pharmaceutical inflation with the onset of many new generics and without big blockbusters coming out of the pipeline. Still, most of this increase was price (2.5%) as opposed to utilization.

-Medicare spending was up 8.6% - and growth in Medicare Advantage plans played a role.  Big cuts in Medicare Advantage reimbursement in health care reform could now have an impact on more constituents.

- Medicaid spending increased.

One observation that has not been covered extensively.  The government pays much lower rates (especially Medicaid). Therefore, a shift of a patient from commercial health insurance plans to Medicaid could  easily mean a decline of 50% in reimbursement to many hospitals.  If providers shift these costs by charging private insurers more, then there are no “real” savings.  On the other hand, if providers see decreases in revenue and reengineer their processes to allow for sustainability at lower reimbursement, then the increased government role should lower unit prices.

I’ve often blogged about the problem we have with unit price in the United States.  The CMS article has a great graphic (below) showing the role that price inflation (compared to utilization inflation) has played over the last 30 years.

 (click the image to enlarge it)

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