McKinsey Report Says Employers Will Abandon Health Insurance

Today’s Managing Health Care Costs Indicator is 30%

A report from the consulting firm McKinsey has been getting a lot of attention this week; it suggests that almost 1/3 of employers will exit health insurance following the implementation of the major elements of the Affordable Care Act in 2014.

The report provides conclusions, but shares little detail of the underlying assumptions and data.  McKinsey has evaluated the economic “best interest” for firms, and combined this with its own polling data.   Interestingly, the McKinsey survey concludes that employer sponsored insurance is not that highly valued by employees.  Most surveys show employees value health insurance second only to wages.

The McKinsey conclusion starkly differs from the Congressional Budget Office evaluation, which suggests that only a million   will be dropped from employer health insurance due to the Affordable Care Act.  RAND  and the Urban Institute  have also evaluated this question and concluded that the ACA will not lead to wholesale employer exit from the insurance market.

The McKinsey study is consistent with the Towers Watson NBGH 2011 survey , which shows that the percentage of responding employers who believe that they will continue to offer employees health insurance ten years from now has dropped by almost half since 2007.

  

McKinsey also suggests that employers will continue to sponsor wellness programs even if they exist employer-based health insurance.   The economic rationale for many wellness programs is that they will lower medical costs; if the employer is no longer responsible for those costs, wellness programs will be more difficult to justify in corporate budgets.

It’s hard to make predictions – especially about the future, as Mark Twain (and perhaps Yogi Bera) said.  Here are some circumstances that could make the McKinsey predictions more likely:

1. All or virtually all states have functional exchanges where employees could individually purchase good health insurance without fuss and without big bills for those with preexisting conditions.   The Washington Post http://www.washingtonpost.com/national/health%20care/states-slow-to-adopt-health-care-transition/2011/06/03/AGbZbjJH_story.html recently reported that exchange creation has been slow going in many states.
2. The federal government continues to fund generous subsidies for low and moderate income Americans, and these subsidies rise at the rate of medical inflation.   Paul Ryan’s plan to cap Medicare expenditures through a privatization program suggests that there will be limits to the willingness to provide funding for continued rises in health care costs.
3. Health care costs continue to rise at rates substantially above inflation, making more employers subject to the “Cadillac” tax, which increases the effective cost of providing employer sponsored insurance. However, I believe that if too many employers are subject to this tax, the rules themselves will be revised.
4. The penalty for not offering insurance remains low.   Most employers offering credible employee health insurance pay more than $2000 per employee for this coverage,  so many CFOs will see the benefit of exiting employer-sponsored insurance.  However, the Massachusetts experience http://voices.washingtonpost.com/ezra-klein/2010/10/what_massachusetts_tells_us_ab.html is that even with a substantially lower state penalty there have been few employers who exited the market.
5.  Employers are allowed to segment their populations, offering health insurance to some employees who are expensive to recruit, train and retain, and not offer insurance to low-skilled workers.  The ACA specifically prohibits companies from doing this, but companies might change their corporate structures to allow this.

Employers far prefer to know their future costs, and so prefer a defined contribution to a defined benefit plan.   The defined benefit plan carries an unknown future cost, which is hard to budget for, hard to account for, and in many cases, hard to pay for.  Employers rushed to the door to get out of defined benefit pension plans when an Accounting Board rule made them divulge future liabilities, and most Americans no longer have a fixed pension for retirement.  Employers have largely exited retiree health insurance at this point as well. So there is some reason to believe that they could do the same for active employee health insurance.

Employers pay about a third of the cost of health insurance in the US – over $700 billion.  Widespread employer abandonment of health insurance will require funding from alternate sources – and neither out-of-pocket payment nor increased taxes are getting high poll numbers right now.  I suspect that if employers do discontinue offering health insurance in large numbers there will be “tweaks” to the Affordable Care Act to encourage them to continue to offer or at least fund health insurance.  

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High Deductible Health Plans Lower Cost AND Lower Preventive Care

Today’s Managing Health Care Costs Indicator is 14%

This month's American Journal of Managed Care has a review of a year of experience for a huge diverse population with high deductible health plans.  The report is from Rand Corporation, and my Towers Watson colleague Roland McDevitt is a coauthor.

The researchers looked at change in health care costs for those who enrolled in HDHPs in 2005 – and compared this with change in health care costs of families who did not have the opportunity to enroll in HDHPs (as their employers did not offer these plans). The result: HDHPs were associated with a 14% lower cost than non-HDHPs.  They evaluated different ranges of deductible, and found that $1000 deductibles changed cost substantially, while lower deductibles (or plans that had a large company payment to a health savings account that offset the deductible) did not have this impact. The impact was large enough that total cost increases were down overall in companies that offered HDHPs compared to those which did not offer such plans.

The unexpected and unsettling finding is that those on high deductible health plans, which offered cost-free preventive care without first meeting the deductible, received substantially less preventive care.   They had fewer mammograms, colonoscopies and pap smears, and their children had fewer immunizations.  It’s incongruous, but those on high deductible plans had more hemoglobin A1C tests (for diabetic control).

The study is huge – over 800,000 households, and 53 employers.  They researchers didn’t compare families who accepted HDHPs with those that declined them, figuring that there would be substantial selection bias.   The researchers also did propensity matching to adjust for potential confounding variables. 

One potential reason for such large changes is that members switching to a high deductible health plan  “stockpiled” health care in the months leading up to the transition.  For instance, women might have made an appointment to get their mammogram and pap smear in December of 2004, just before switching plans. Elective procedures, such as knee arthroscopies or hernia repairs could also be “stockpiled.”    However, the ‘baseline” (2004) costs for those who switched to HDHPs was no higher than the cost of controls.

It’s also likely that preventive care is suggested during office visits that are not preventive in nature, so that children who see their pediatrician are flagged to get any lagging immunizations, and those over 50 seeing their primary care physician are sometimes scheduled for colonoscopies, even if their reason for an office visit is a sore throat.   The line between preventive and non-preventive care is also sometimes blurry.  In our company, women discovered that the HDHP insurance plan held them financially responsible for the increased cost of digital mammography. A ‘preventive’ colonoscopy can become a ‘diagnostic’ colonoscopy when a biopsy is performed.  This would lead to a patient believing that her procedure was covered fully, and discovering instead that she was responsible $1000 or more in “member cost share.”

It’s clear that greater patient cost exposure leads to less use of care.  This can substantially lower cost of care.  This research reminds us that patients subject to a high deductible forego both discretionary, low-value care, as well as recommended high-value care.  Even offering the high-value care free of the deductible didn’t overcome this problem.  

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“As Good as it Gets”: RAND's Evaluation of Health Care Reform Bill

RAND researchers Elizabeth McGlynn et al have used a microsimulation model to conclude that the health care reform bill signed into law did about as good a job of expanding coverage without increasing the bill (much) as we could reasonably expect within the confines of the real political world.

The researchers did a sensitivity analysis with multiple variables, including:

1)       Varying individual or employer penalties for not obtaining or providing health insurance.  Researchers found that lower penalties increased the cost of expanded coverage.  Increased penalties lowered the cost of increased coverage – but were not likely politically palatable.  

2)       Varying the threshold for Medicaid eligibility. If this is lower than the federal poverty level, the rate of uninsurance remains high.   If it is set above 133%, there is more ”crowd out” with members leaving employer-sponsored plans, which increases the cost to government.

3)       Varying the restrictions on increased costs for older enrollees.,

All modeling was done as if there was a single national exchange, and the researchers did not consider penalties collected (essentially discounted these at 100%).

The researchers also evaluated which scenarios led to the highest value for consumers.  Invariably, there was a proportionate relationship between government spending and value to consumers – so to reliably give more benefit to consumers, government spending would have to increase. 

In the graphic above, the origin (red square) is the health care reform bill as passed.  Area 1 represents less government spending AND more people insured.  It’s the smallest area – meaning the fewest of the simulations were here.  All of these were judged by the authors to be political non-starters,.  Area 2 is unequivocally worse outcomes – higher government cost with fewer new enrollees covered.  Area 3 represents more coverage and higher spending, while Area 4 represents less coverage and lower spending.  (3B and 3B represent better ‘value’ – in that there is less government spending for each newly insured person).

We all know what’s wrong with the Patient Protection and Affordable Care Act (PPACA).  We wish that its cost saving was more iron-clad, and we wish some of the benefits came more quickly. We are worried that some of the cost savings might be overstated.  Having said that, the sausage-factory that is Congress ultimately passed a bill that does an admirable job of increasing coverage and being prudent with taxpayer dollars.  

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RAND Cost Saving Estimates, August (MA) and November (US)

(Click on graphic to enlarge)
The Mass Division of Health Care Policy and Finance sponsored an impressive review by RAND researchers of potential cost-saving opportunities in Massachusetts, which was published in August. I blogged about this late this summer, and have always felt that this extensive analysis didn't get nearly enough attention.

The NEJM last week published an article by same RAND researchers extending this analysis to the rest of the country.

This remains an important study - and I'm glad to see an extrapolation getting new press.

I'm also intrigued by the differences in findings.

Hospital rate setting: Maximum savings in MA 4%; US 2%
Healthcare IT: Maximum savings in MA 1.8%; US 1.5%; Maximum increase in costs in MA 0.6%; in US 0.8%
Expand scope of practice for NPs and PAs: MA range savings 0.6%-1.3%; US 0.3%-0.5%
Medical home: MA maximum savings 0.9%; US 1.2%
Disease management:  MA maximum savings 0.1%; US maximum savings 1.3%

It makes sense that rate setting might be more effective in Massachusetts to the extent that prices are higher. In fairness, this might not be a 1:1 comparison since the NEJM lumps a few different options together.  Scope of practice savings might be different based on supply of physician and non-physician providers.  I'm surprised to see higher projections of savings for medical home, since our specialist:primary care ratio is high in Massachusetts.  I also can't explain why disease management would have so much higher projected maximum savings in the US overall compared to Massachusetts.

This analytic work is especially important as we consider what cost-control mechanisms should be included in health care reform.

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