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Bradford Kane

Bradford Kane

Posted: February 24, 2010 10:57 AM

The Health Care Reform Summit: Two Areas for Common Ground

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President Obama's health care summit with Republicans and Democrats this week provides a profound opportunity to identify areas of common ground for health care reform. If all parties approach the summit with a focus on policy and a good faith commitment to collaboration -- rather than partisan, political gamesmanship over process issues -- then many elements of reform can emerge as being palatable to a diverse range of the participants. Here are two issues on which progress could be achieved, that satisfy objectives of the President and could be agreeable to legislators of both parties.

A Hybrid Solution for a Limited Public-Private Option

At this point, it appears that only a scaled-down version of a public option would be able to garner the requisite votes in Congress, and a public-private partnership model would increase its chances. It would have to be available only to the individual, family and small-business markets, which face the steepest premiums, and be offered as just one of many options available through the health insurance market exchange.

Insurance companies have objected to a full-fledged public option, since they would not be able to collect premiums from those people who choose it, and they fear the competition that a public option would provide. But public option proponents seek that competition in order to pressure insurance companies to restrain premium rates and rises, since the small group and individual markets are the most vulnerable to insurer pricing schemes.

A hybrid solution, in the form of a public-private partnership, could accommodate both perspectives, satisfying the competition, coverage, quality improvement, and cost control rationales of the public option, while not allowing the federal government to function as a full-fledged insurer for this market (even though it does so with Medicare and Medicaid). A public-private partnership between the government and the insurance companies could serve this market, through a blend of roles:

1. The government would market a "publicly administered option" to individuals, families and small businesses who are eligible to participate in the "exchange," enroll those who select this option, and create a risk pool among those who are covered;

2. Insurance companies that seek to cover enrollees would apply to participate in this program and would submit their underwriting, coverage and customer service plans to the program administrator to ensure conformance with standards established by the administrator;

3. Proposed premium rates would have to be approved by the administrator, and an insurer could not participate -- nor, in the future, increase premiums -- until the administrator approves the rate schedule;

4. Enrollees in the "publicly administered option" would select a participating insurer, pay their premiums directly to the insurer, and interface with the insurer for their customer service needs;

5. Participating insurers would assemble provider networks to satisfy all enrollee health care needs, manage all financial aspects of its relationships with providers (e.g., payment of claims and other forms of compensation), and transfer to the administrator a small share of premium revenues to cover the cost of the administrator's role;

6. Enrollees in the option could switch insurers during open-enrollment periods if they are not satisfied with their insurer for any reason (e.g., cost, customer service, the provider network); and

7. The option's administrator would establish an ombudsperson and a review board for enrollees to resolve complaints and appeal decisions relating to the insurer's practices and decisions.

This hybrid of roles would satisfy the objectives of the public option, while still keeping the government from becoming a direct competitor of the private insurers. Coverage would be expanded by virtue of No. 1; competition would be enhanced by Nos. 2, 4 and 6; cost control would be advanced by Nos. 3, 5 and 6; and health care quality would be improved by Nos. 2, 5, 6 and 7. At the same time, the private health insurers' role in the market as underwriter would be maintained by virtue of No. 2.

Private insurers would be the underwriters of policies under this hybrid, and they may also compete for business in the "exchange" as a stand-alone option. Yet, the "publicly administered option" still offers considerable value to consumers. This option will ensure that the risk pool is large enough to minimize costs, the premium rates and rises are scrutinized and approved by the administrator, customer service mechanisms are in place, the provider networks are sufficient, and there is recourse to challenge practices and decisions which consumers find objectionable.

Insurer Use of Premiums for Health Care, Not Overhead

In President Obama's reform proposal, under "Policies to Improve Affordability and Accountability", the proposal states that, "One essential policy (in the House and Senate bills) is 'rate review' meaning that health insurers must submit their proposed premium increases to the State authority or Secretary for review. The President's Proposal strengthens this policy by ensuring that, if a rate increase is unreasonable and unjustified, health insurers must lower premiums, provide rebates, or take other actions to make premiums affordable."

To implement this policy, strengthen cost control, improve patient health, and increase consumer satisfaction, health insurer expenses must be more transparent. This would enable consumers and regulators to judge the degree to which premium dollars are being spent on health care services and treatment, as opposed to being allocated to administrative expenses and profits. Consumers could then gravitate to the insurers who are effectively serving health care needs, and regulators could restrain inefficient and self-serving insurer practices that are imposed at the expense of patients. Consumer choice would reward insurers that responsibly and efficiently maximize their spending on health services rather than overhead. These aims and outcomes have been sought by both Republican and Democratic government leaders.

To achieve this, insurers should be required to regularly declare their "expense to premium ratios" (which are much more informative than "loss ratios") and provide detailed documentation to substantiate their numbers. "Expense to premium ratios" indicate the amount of premiums spent on administrative expenses rather than on claims for health services and treatment. Administrative expenses include executive salaries, advertising, utilization review, policy administration, agent fees, corporate retreats, lobbying, and profits. If an insurer's expenditures on overhead exceed an acceptable ratio, as specified by regulators, then the insurer would be directed to rectify the problem and a steep fee would apply as a disincentive to excessive expenses, salaries, profits, etc.

"Expense to premium ratios" are very useful in evaluating proposed hikes in premiums, deductibles, and copayments, as well as to promote cost containment and consumer value. Ratios would have to be declared separately for each line of business of an insurer, including each health insurance market that they serve (e.g., large group, small group, individual), so that insurers may not leverage and distort results by aggregating markets or lines of business for which there are often vastly different ratios.

"Expense to premium ratios" are a more accurate reflection of insurer behavior than "loss ratios" because "loss ratios" do not include insurers' substantial revenues from the investment of premiums between the time that premiums are received and the time that claims are paid, during which insurers are making money off of premiums. "Loss ratios" are cited by insurers because they erroneously create the impression that premium dollars are the only revenues with which health insurers operate. "Expense to premium ratios" are much more accurate, whereas "loss ratios" enable profiteering and high expenses.

For example, a "loss ratio" of 75% means that for every one dollar of premiums, 75 cents worth of health care was administered. That gives the impression that only 25 cents of each dollar went toward administrative expenses, executive salaries, commissions, profits, etc. But that is simply not true, because "loss ratios" do not account for investment income. Expenses and profits are much higher than 25 cents in this example.

It is important to note that standardization of health insurer terminology is also vital for effective transparency and accountability. Currently, the lack of uniformity enables insurers to disguise their finances by creating and redefining categories of expenditures. This multiplicity creates considerable confusion, defies easy analysis, and affords accountants flexibility to structure, hide, and characterize many expenses as they see fit. Effective regulation and consumer protection are impeded. Nationally standardized terminology is necessary to eliminate accounting gamesmanship on what constitutes profit (e.g., corporate reinvestment, shareholder dividends, risk capital, reserves, executive bonuses, etc.), which premiums are used in the ratios (e.g., direct premiums, gross premiums, net premiums, earned premiums), and what constitutes general administration (e.g., advertising, agent commissions, corporate junkets, conventions, and utilization management reviews which are designed to withhold coverage for treatment).

Conclusion

Bridging the gap between Democrats and Republicans, and the House and Senate, can certainly be challenging. However, a public-private partnership for a "publicly-administered option" and transparency in insurer spending to ensure consumer value are two areas where common ground can be found. These approaches have the potential to satisfy a broad range of stakeholders and achieve support for the benefit of American consumers and patients.