Managing Healthcare Costs: rebate

Today’s Managing Health Care Costs Indicator is $1.93 billion

The Commonwealth Fund released a study today estimating that insurers would have had to refund almost $2 billion to employers and consumers in 2010 if the Affordable Care Act provisions requiring “medical loss ratios” of at least 80-85% were in place.

The paper reviews MLR methodology -and points out that the Affordable Care Act has a broader definition of medical cost than that traditionally used by actuaries – including quality and antifraud programs, excluding tax payments from consideration, and allowing for additional administrative cost for plans with very few members. A number of states have received waivers – and the decreased rebates due to waivers is modeled in the calculations.

The rebates would have been highest in the individual market (53%; an average of $183 per policy), but lower for small group (24%; $85 per policy) and lowest for large group (15%; $72 per policy). This is not necessarily because health insurance plans are fleecing individuals. The MLR includes everything besides for claims costs paid to providers, and the marketing and administration costs are much higher for policies sold to individuals compared to policies where a single signature arranges insurance for hundreds or thousands of policyholders.

Some states already regulate MLR – and no insurers would have owed rebates for individual insurance in Hawaii, Rhode Island and Vermont, while 98% of the market would be owed rebates in Kentucky, and 95% in Arizona. Insurers representing 12% of the Minnesota market would have owed rebates, even though that state prohibits for-profit insurers.

I wouldn’t expect that health care costs would have been $2 billion lower if the ACA had been in place in 2010. There is considerable judgment in determining what is a medical cost and what is a nonmedical cost. When insurer stock price soared with low MLRs, health plans were more likely to count slightly clinical services as nonmedical. With regulations to prevent low MLRs, health plans will do all they can to move arguably nonclinical costs into the medical loss ratio.

While the MLR ratio requirements won’t save as much money as suggested in this white paper – it does put pressure on health plans to reduce nonmedical costs. That pressure will force tiny plans to consolidate, which will help them increase efficiency. It discourages health plan arms races that lead to inordinate investments in expensive marketing. It is likely to put downward pressure on brokers’ fees– and lead to health plan products that are simpler to administer and need fewer explanations. This regulation pressures the individual health insurance market to deliver health care products that have far more value to health care consumers (aka patients.)

That seems like a great idea to me.

Click on image to enlarge. Source

The New York Times reports today that two pharmaceutical companies are entering the “pay for performance” market to preserve lower patient copayments for their expensive brand name medicines and maintain or grow market share. This is modeled after a Johnson and Johnson deal with the British NHS to offer refunds for an expensive oncology medicine if it did not shrink an individual patients’ tumor(s). See an earlier blog on how the British comparative effectiveness program led to this discount offer.

Merck will give discounts to the insurer Cigna on its diabetes medicine Januvia (and combination pill Janumet) if Cigna patients in the aggregate have lower blood sugars, and the makers of Actonel, an osteoporosis medication, will give a small insurer cash payments for adherent patients on this medication who have osteoporosis-related fractures. There are alternative far cheaper generic medications that can readily substitute for Actonel and Januvia/Janumet.

The Times does not mention that drug companies are subject to a “most favored nation” clause which guarantees Medicaid programs the lowest price – so that any price concession to even a small insurer can lead to large rebate checks for every state Medicaid programs. In general (and counterintuitively), this most favored nation arrangement keeps prices unnecessarily high – since it enforces price discipline among the pharmaceutical companies. My sense is that a refund for nonperformance would not “count” as a discount, and therefore this approach allows the pharmas to offer lower rates to the most price-sensitive health plans without jeopardizing Medicaid rates.

On one hand, this is a good move. Pharmaceutical companies are selling a result (lower blood sugars and fewer nonspine fractures) rather than selling a pill.

Will this lead to lower health care costs? My guess is “no,” since these are very expensive drugs, and even discounts or refunds are not likely to bring them down to the true cost of generic alternatives. There is a better argument that Januvia represents a real advance over other oral diabetes medicines. However, I doubt that the incremental value of Januvia, even with the discounts Cigna will obtain, will be cost-saving, as opposed to cost-effective. This also leads to some opacity in the pharmaceutical market, which will allow for more price discrimination and likely yield higher pharma margins. Even if this yields higher overall costs and higher pharma margins, though, it might lead to increased value in the health care delivery system.