Health Care Reform: Haven’t We Been Here Before?

Legislation is like the framing of a house. For example, the recent health care reforms the President signed into law provides the basic structure for a new way of doing business. But that’s all. Similarly, when a contractor puts up the frame of a house it provides a sense of where things are headed, giving a clear sense of the broad outline of what’s coming. But without the carpenters, plumbers, painters and other craftsmen, it’s not a home. Same with legislation. Without the regulators, judges, businesses and civilians interpreting, implementing and simply trying to figure out how things are supposed to work, the legislation is merely a law, not a part of life.

Nothing like an overwrought metaphor to start off a blog posting, but there you go. What got me thinking about this was coming across some material I wrote in the aftermath of California’s comprehensive small group health care reform. Best known as AB 1672 the law took effect in 1993. The legislation included guarantee issue for all small groups, limits on how carriers could rate for risk and a state-run purchasing pool. In short, AB 1672 changed the way small businesses shopped for, purchased and renewed their coverage. Immediately after the legislation was signed into law there was tremendous consternation among health insurance brokers, carriers, and others. Clients had questions. Entrepreneurs wondered about their future. Executives needed to figure out how to adapt their businesses to the new world. Eventually, they did and have prospered.

With the passage of HR 4872 and HR 3590 (the bills embodying President Barack Obama’s health care reform plan) the anxiety, fear and confusion is palpable in ways very similar to the early 90s in California. Which is reassuring. Because we too often forget that we’ve all survived tectonic shifts in the business before. All states enacted some version of health care reform in the past couple of decades. Yet, for the most part, the transition worked out. (There are exceptions. The state reforms in Washington and Tennessee, for example, needed to be dramatically rewritten when they proved impractical and ineffective. And they were).

There was also significant consternation when the Health Insurance Portability and Accountability Act (much better known as HIPAA) became law in 1996. And many were concerned about the Children’s Health Insurance Program. And let’s not even get started on the fear generated when Medicare was first enacted in the 60s. In the end, however, the insurance industry, business community and the public adapt and even prosper. In short, it’s a familiar drill. Markets change. Regulations change. Products change. Been there. Done that.

Yes, President Obama’s health care reform plan will have much greater consequences than state laws and even HIPAA. The new law touches upon more people and a greater part of the economy than Medicare and Medicaid. Yet, it is far from the government takeover of health care that some critics contend. The new law does not create a single payer system. Nor does it do away with private enterprise. As Howard Fineman wrote recently in Newsweek, “If this (health care reform) is socialism, then Warren Buffett is Karl Marx.” (Please note, this is not an invitation for a host of screeds on the Obama Administration, Republicans, Democrats, television pundits, the mainstream media or the state of American politics. We’ve had more than enough comments along those lines on this blog already. If you absolutely have to, go ahead, but please do not feel obliged to add to the heap).

Yes, the new laws will require change. But keep in mind, insurance companies, and health insurance companies in particular, have long been one of the most regulated industries in the country. Those regulations will change because of the new law. There will be more of them. But it’s not like regulations are being imposed for the first time.

Yesterday (well, in 2008) governments at all levels accounted for roughly 45 percent of health care spending. Tomorrow (let’s say 2014) it will be somewhat more. But it was going to be more even without reform.

Think of it this way, if the government was taking over health care and the health insurance industry, would there be so many people spending so much time figuring out how to deal with the reforms? Brick walls are pretty easy to identify and to deal with – find a new job. Instead we have a much more challenging task: we have to be ready to adapt the way we do our jobs to an uncertain future, but a future that includes a role for us.

And when I say “uncertain future,” I mean uncertain. That’s because, as in the stretched metaphor above, legislation is just the starting point, the framework, for defining that future. There’s a lot more to come. The good news is, for the most part, the regulations, court decisions, carrier policies, etc. will bring some clarity and certainty to the situation.

What will the exchanges look like? The law says there will be exchanges, they will be run by the states, and that nothing prevents brokers from selling their products. There’s more, but it’s more framework along these lines. How the exchanges actually work is unknown at this time, but we’ll be learning more over the next few years.

And even when the regulations come out there’s this nasty thing called reality that tends to make its presence known. The best laid plans of mice and regulators are no match for 300 million Americans. What will give health care reform shape and substance is how Americans use the new system; what parts they seize and what aspects they ignore.

Consider this: there’s nothing in the law that says doctors have to give up their private practices. Yet as the New York Times reports, fewer young physicians are opening up private practices, instead preferring to become salaried employees of hospitals and health systems. The article notes older doctors are following suit. These doctors are reacting to regulations (and to the economy and a host of other factors). But what they’re doing is beyond and besides what current laws require. Similarly doctors, insurers, brokers and consumers will make decisions beyond and besides the new laws.

People who know they are going to be impacted by the new law want to know what those impacts are. The anticipation of change, like the anticipation of a shot or dentist visit (or worse, a shot during a dentist’s visit) is usually worse than the actual shot and/or visit. But for now, anticipation is all we have. The framework is there. The details are not.

So what to do? Worrying simply adds to the stress. Fretting is non-productive. Nothing is going to come as a surprise. And nothing will come suddenly. So the smart thing to do is to prepare.

How to get prepared? I’ll offer my thoughts in upcoming posts.

Compromise on Public Health Plan Not Easy to Find

If Congress is to enact comprehensive health care reform on anything approaching a bi-partisan basis, Democrats are either going to have to jettison their calls for creating a public health care plan to compete with private insurers or fashion a compromise that makes such a government-run plan acceptable. This won’t be easy.

Last week, 17 Senators  signed a letter to Senate Finance Committee Chair Max Baucus and Health, Education, Labor and Pensions Committee Chair Edward Kennedy insisting that a public health plan needed to be a part of any health care reform package.  The 16 Democrats and one independent argued that “There is no reason to believe that private insurers alone will meet the public purpose of ensuring coverage for all Americans at affordable prices for taxpayers.” According to The Hill, the originator of the letter, Senator Sherrod Brown, told reporters that “A public plan option ‘would provide competition to the sometimes dysfunctional private insurance market.'”

Seventeen Senators is a significant block of votes, especially when they’re expressing the position of the Obama Administration as well. Yet Republicans are, thus far, united in their opposition to a government-run plan.  And not all Democrats are sold on the idea, either. The New York Times counts Democratic Senators Ben Nelson and Arlen Specter as among those expressing “reservations about a public plan.” If these and other moderate Senators object to the public plan, their liberal colleagues will be faced with the need to either give in on the issue or give up on comprehensive health care reform.

Thus the search for common ground.

The New York Times reports Senator Charles Schumer is attempting to do just that. The article  is indispensible reading as Senator Schumer’s was asked to search for a compromise by Finance Chair Baucus. Senator Schumer identified four principles that might make a public health insurance plan acceptable to moderates:

  • “The public plan must be self-sustaining. It should pay claims with money raised from premiums and co-payments. It should not receive tax revenue or appropriations from the government.
  • “The public plan should pay doctors and hospitals more than what Medicare pays. Medicare rates, set by law and regulation, are often lower than what private insurers pay.
  • “The government should not compel doctors and hospitals to participate in a public plan just because they participate in Medicare.
  • “To prevent the government from serving as both “player and umpire,” the officials who manage a public plan should be different from those who regulate the insurance market.”

This approach was echoed, with less specificity, during testimony before the House Ways and Means Committee by the new Secretary of Health and Human Services, Kathleen Sabelius. According to The Wall Street Journal, she told a Congressional  Committee, “What I can assure is that it can be done as a level playing field.” The key, she went on to say, is how the program is set up. “It is about the rules that are established at the beginning.”

But there’s the rub. The rules in the beginning are not necessarily those that apply long term. California had a government managed health plan competing with private carriers in the small group market not all that long ago. The Health Insurance Plan of California (HIPC) was created by AB 1672 as part of a comprehensive small group health care reform package. The HIPC operated under many of the prinicples put forward by Senator Schumer. Ultimately the HIPC, which was spun off from the government and became the PacAdvantage, failed.

Yet almost immediately after it’s creation, legislators from both sides of the aisle put forward proposals to buttress the plan by giving it special status. Government, regardless of the party in charge, when seeking to build new programs, tends to look to existing programs as a foundation. Which means the level playing field promised by Secretary Sabelius may not last long. The principles enunciated by Senator Schumer may not last. As with any public program, once a government run health plan is in place, the rules that apply can be changed at any time. And someone is likely to try.

This doesn’t mean the search for a compromise shouldn’t continue, but  it highlights the difficulty involved. Unless the restrictions on the public plan aimed at preventing it from gaining an unfair advantage in the market are strong and long lasting, any compromise will simply be a milestone on an inevitable journey.

AB 8 and Unintended Consequences: Increasing Small Group Premiums

On Tuesday I participated in a conference call with over 550 agents. After describing Assembly Bill 8 (Nunez)) and the California Association of Health Underwriter’s response to it, we took questions. One question in particular reminded me how some of the less discussed elements of the bill can be just as dangerous as those getting all the attention.

The changes to the individual market AB 8 imposes has received a lot of attention — as they should since the bill will increase rates and reduce consumer choice. The 15 percent cap on administrative expenses has gotten a lot of attention, as has the underfunded purchasing pool the bill creates.

But few folks are talking about a seemingly modest change made by AB 8 to California’s small group market (the rules governing the marketing of small group coverage in the state is sometimes referred to as “AB 1672” after the bill which created them back in 1992).

AB 8 seeks to extend the AB 1672 protections enjoyed by groups with 50 or fewer workers to companies with up to 250 workers. Personally I support this reform. Unfortunately, AB 8 doesn’t stop there. It then calls for the elimination of “Risk Adjustment Factors” on January 1, 2010.

What are Risk Adjustment Factors (RAFs)? AB 1672 requires carriers marketing small group coverage to accept virtually all legitimate groups applying for coverage. The authors of AB 1672 knew this could lead to higher prices for some groups, so they gave carriers the ability to modify their standard rates. Today this rate modification allows insurers to lower their standard rates for low risk groups by 10 percent and to increase them for high risk groups by 10 percent. Subject to the other rating rules created by AB 1672, the premiums charged small groups all fall within this rating band.

The ability to make relatively small adjustments to rates provides just enough flexibility to help lower premiums for all small groups. If AB 8 takes the ability to apply an RAF away, however, tens of thousands of groups will see their rates increase. Granted, tens of thousands of other companies may see their premiums decrease, but over the long run rates will be higher than they would have been if the RAFs continued.

So the interesting question is, why make the change? In the 14 years since AB 1672’s rules went into effect I’ve never heard one complaint about the risk adjustments. Is this then a solution in search of a problem?

Maybe, but it’s just as likely to be a way to help out the purchasing pool created by AB 8 (the California Cooperative Helath Insurance Purchasing Program or “Cal-CHIPP”). Historically, purchasing pools don’t fare well against competing health plans, neither gaining substantial membership nor reducing rates. (The California Health Care Foundation has an insightful study on the challenges faced by state-sponsored pools).  So states have a tendency to tilt the playing field to help them out. One way is to require certain populations to enroll in the pool.  After all, if a pool can’t win the business of consumers, compelling them to participate works almost as well. This is the approach Govenor Arnold Schwarzenegger takes in his health care reform plan.

Another way to help purchasing pools compete is to hamstring the competition. This is the path AB 8 seems be taking. State-run purchasing pools have both administrative and political problems in applying an RAF. As a result they tend to be more attractive to high-risk groups (which might face a surcharge in the open market) and less attractive to low-risk groups (which could receive a discount of up to 10 percent outside the pool). The result: the pool’s membership incurs higher than average claims, the pool raises rates to meet the higher cost, and it becomes even less competitive against the private marktplace. This is one factor in the demise of the state-run purchasing pool created by AB 1672.

There are two ways to deal with this challenge: 1) come up with creative ways for the purchasing pool to apply RAFs; or 2) do away with RAFs altogether. The proponents of AB 8 have apparently chosen the latter course of action —  stacking the deck in the favor of Cal-CHIPP to the detriment of tens of thousands of small employers.

The reality is, when the umpire steps up to the plate he’s rarely called out on strikes. That’s what happens when the state dives into the comercial health insurance marketplace. In ways big and small, the government tilts the playing field in its own favor. It’s human nature. Bad public policy, but typical human nature.

Where Have You Gone Joe Dimaggio? I mean, Burt Margolin?

The small group health insurance marketplace was a nasty environment back in the late-1980’s and early-1990’s. Groups were declined coverage because of the nature of their business. Rate increases of 100% or more were not uncommon and were applied selectively on businesses with employees who dared to actually use their coverage. And health plans came into — and out of — the state more frequently than a caffeine addict into a Starbuck’s.

Then Speaker Willie Brown decided to do something about the situation. And in 1991 he introduced AB 350, a “pay or play” bill with a lot in common with several of the proposals being considered by the Legislature today. However, there was no realistic way such a proposal was going to become law. So Speaker Brown and Senate President Pro Tem David Roberti created a conference committee around AB 1672, which until then, I believe, dealt with the medical component of automobile policies.

Speaker Brown and Senator Roberti appointed Burt Margolin to chair the conference committee. Mr. Margolin was highly regarded, smart and very much a liberal (he represented parts of West Los Angeles and Hollywood). But most importantly, he was serious about finding workable solutions to difficult problems. Solutions which were fair, would work and were responsible. He made sure all sides were given an opportunity to speak their peace. More importantly, the committee and its staff listened. They didn’t always agree, but by focusing on policy instead of politics, by being open to all points of view, they fashioned a balanced, effective piece of legislation.

AB 1672 became law in July 1993. While not perfect, it went a long way toward fixing the system without destroying it.  No small business could be denied coverage, rates were required to fit within specified bands and rate increases, again within rate bands, were applied equally to all groups in a particular health plan. In short, AB 1672 made the small group marketplace much more fair while creating only a few, manageable unintended consequences.

Comparing the process which led to AB 1672 with what’s happening with AB 8 and with the Governor’s proposal is, at best,  disconcerting.  The dialogue with stake holders seems perfuntory and almost passive-aggressive. There’s conversations, but it doesn’t seem like anyone’s listening. By meeting with interested parties separately, the drafters are denied the ability to observe and learn from the give-and-take which occurred during the AB 1672 deliberations. And instead of meaningful public policy being the primary focus, it appears that politics and election time tables are front-and-center now.

It seems to me that what today’s process needs is a few more Burt Margolins.

P.S. Incidentally, Burt Margolin is doing fine. He’s president of the Margolin Group, a health policy and lobbying firm which includes among its clients the County of Los Angeles.

On Schadenfreude and The Timing of Political Power

There’s a lot of quiet sniping about Governor Arnold Schwarzenegger’s failure to have his administration’s health care reform package introduced as legislation. The smell of schadenfreude is in the air and you almost hear them say, “He may be a movie-star-gazillionaire-governor, but we have a bill and he doesn’t!”

Big deal. What the Governor does have going for him is, well, he’s a movie-star-many-multi-millionaire-governor. Cripes, he even appears on The Apprentice. He has what’s known as clout. The ability to shape debates and influence legislation. He’s above needing a particular bill. He has the power to hijack most any of them.

The fact is, no bill becomes law as introduced. They are shaped by amendements, compromises and, sometimes, the force of powerful individuals. Look at what happened with AB 1672, the small group health insurance reform bill of the 90’s. You can trace it’s genesis back to AB 350, introduced by then Speaker of the Assembly Willie Brown. It would have created a “pay-or-play” system in California. It sparked the reform debate, but never became law. Instead, a conference committee was convened for AB 1672, which as originally introduced dealt with auto insurance, if I’m not mistaken. Stakeholders negotiated for months and the result was a very good piece of legislation.

The moral of the AB 1672 story is, the health care reforms being introduced now are merely the starting point. Eventually real negotiations will start. The political sausage making process will kick in and the political clout the governor enjoys will come into play. It would be fun to watch if the outcome wasn’t so darn important.