Massachusetts Rejects Small Business Health Plan Rate Increases

Massachusetts’ Division of Insurance has rejected  the lion’s share of proposed small group rate increases from the state’s largest nonprofit insurers – citing new regulations  requiring justification for rate increases in excess of medical inflation.  The state has long had the authority to deny proposed rate increases – and this is the first time it has done this.

Some of this is politics – Governor Deval Patrick’s likely Republican opponent was a CEO of one of the health plans – and this is an opportunity for Patrick to score ‘easy’ points against the health insurance industry, which is an easy target.   National health care reform considered this approach, at which point Karen Ignani  of America’s Health Insurance Plans said

“Regulating premiums won’t do anything to reduce the soaring costs of medical care. This would be like capping the prices auto makers can charge consumers, but letting the steel, rubber, and technology manufacturers charge the auto makers whatever they want.”

Will this move by Massachusetts regulators lower costs?

Probably not.

The idea is that the health plans, with no ability to pass on cost increases, will do a better job in negotiating fee schedules with providers, and will improve their existing medical management capabilities.  However, provider rates are already locked in –and health plans have long since implemented the medical management programs with the largest potential to decrease cost. 

What else can health plans do? 

They can change benefit design – but it’s too late to do this for April, 2010 accounts. (Most small businesses have an April 1-March 31 health plan year).  Beyond that, they can take a loss on the small business portion of their portfolio, and take this out of their reserves.   However, the Division of Insurance which has rejected these rate increases is also responsible for being sure the health plans have adequare reserves.  These two goals are likely to come into serious conflict over the next 12-24 months.

Lowering the cost of health care delivery will require more than an emergency regulation allowing the Division of Insurance to freeze health plan rates. 

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Limits on Age Differentials Will Penalize Young

Good article in Washington Post yesterday pointing out that the health care reform bill’s restriction on age based premium can only vary by a factor of 3 means that young insured adults will be subsidizing older insured adults.  This change has the largest impact on young adult males ; they have low costs actuarially, so in the past were able to purchase very inexpensive insurance (as long as they had no preexisting illness).

There is no free lunch. Restricting the ratio between the highest and lowest health care premium is great for those on the upper end – but this ‘compression’ of rates means higher rates for those at the lowest risk.  In the end, we have to manage the total costs we incur – just shifting costs from one group to another is painful, and threatens to be a “wedge” issue to make health care reform less popular.  

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Potential Cerberus Exit Strategies After Caritas Investment

In my last post, I reviewed ways that the Cerberus private equity takeover of Caritas Christi Health Care System could, but likely would not, lower overall health care costs in Massachusetts.

What are Cerberus’ potential exit strategies?

1)     1. No Exit. 
Hospitals have serious cash flows, and if the new Caritas can make money, this could be a good business to be in.   Further, expect Cerberus to assess management fees upon Caritas which will be a recurrent source of revenue.  However, venture capital firms seek high rates of return, and hospitals almost never would meet a venture funds “hurtle” rate.  Therefore, I believe long-term full ownership seems unlikely. Continued Cerberus ownership would require profits for eventual distribution to the investor – and historically Caritas has had margins of under 1%.  A private owner would not likely tolerate such a low rate of return.

2)      2. Buy Low and Sell High
Hospitals could be undervalued now due to uncertainty surrounding health care reform.   Having fewer uninsured in the post-health-care-reform environment should be good for hospitals, so perhaps their value will be increased in the future even absent huge improvements in Caritas’ value proposition. On the other hand, there is real worry that the Senate bill just passed will still leave more uninsured than was hoped. Some of the subsidies will be funded through lower fee updates in the Medicare program over the next ten years, which will place additional financial pressure on hospitals. If Cerberus sought to sell Caritas and other acquired health care facilities, there would be large pressure to show very high margins in the quarters immediately prior to the sale.

3)    3. Dividend
Both HCA and Vanguard Health Systems just paid their venture capital owners enormous dividends (in the case of HCA, a total of $1.75 billion) over the last year.  They accomplished this by taking out large amounts of debt.    Essentially, these private equity owned systems recently took on just the kind of debt which Cerberus is pledging to wipe off Caritas’ book. Such a dividend payment would leave the new organization in much the capital-starved position it finds itself in now.    

4)      3. Selective Health Care Asset Sale
Some of the Caritas facilities are financially successful on their own, and could be attractive to other for-profit owners.  After the three year period, the organization could sell Norwood Hospital, for instance.  It could not likely sell Carney Hospital, a perennial money-loser in a relatively poor neighborhood with a predominately disadvantaged population.   Selective health care asset sale would likely be a prelude to eliminating money-losing programs and facilities.

5)      3. Selective Sale of Non-Health Care Assets
In some cases, Caritas’ real estate alone might have substantial value. This was the case with the K-Mart-Sears merger, where the value of the real estate exceeded the ongoing value of the retail chains.  Waltham Hospital was kept on life support briefly by a developer – who eventually secured the property for mixed use development.  It’s possible that selective non-health care asset sale could provide resources to maintain social mission and maintain money-losing programs, which could provide social value.  Cerberus could approach this more dispassionately than a nonprofit management.

One way or another, whether Cerberus maintains ownership or transfers ownership to another party after the three year period has ended, the Caritas system will have to increase its earnings to cover

•    Local and other taxes from which nonprofit Caritas is now exempt
•  Loss of philanthropic donations
•  Additional layer of management
•  Payments to investors recognizing the time-value and the risk of Cerberus' investment.

That’s why it’s likely that over the long run health care costs will likely be higher as a result of this investment, despite the recent coverage suggesting otherwise. 

Link: Part One (Ways Acquisition Could Save Dollars)
Link: Part Two (Ways Hospitals Can Improve Profitability)

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