When Public Policy Meets Reality

A short (less humorous) version of an old joke goes: an engineer, a priest and an economist are stranded on a desert island with just a can of beans. They’ll starve if they can’t open the can. The engineer proposes a solution involving situating the can among rocks in such a way as to heat the can to the point of exploding. The priest suggests praying for divine intervention. The economist’s approach: “assume a can opener.”

Replace “economist” with “public policy expert” and you get a nice metaphor for why any massive reform is an arena where unrealistic expectations intermingles with unintended consequence. This dynamic doesn’t mean big problems don’t require big solutions, but it does imply that the assumptions and predictions of “experts” – especially those detached from what would generally be regarded as the “real world” – are unlikely to work out as well as hoped.

The Patient Protection and Affordable Care Act is no exception to this phenomena. The health care reform law is chock full of the favorite “concepts” proposed by academics over the past few decades. Exchanges. Standardized plans. Modified community ratings. On-and-on. Some of these ideas were the favorite of Democrats; some were originally proposed by Republicans. Most all of them are based on theories about how the real world should work, with the emphasis on “should.”

A case in point. One of the better provisions of the PPACA is aimed at creating a standardized approach to presenting the benefits included – or excluded – by a medical insurance policy. Standard terms and descriptions must be used by carriers beginning in 2012 so consumers can easily make apple-to-apple comparisons between policies. The PPACA lays out the requirements of these Summary of Coverage forms (e.g., they can be no more than four pages long). Developing the template and permissible language, however, is left up to the Department of Health and Human Services in consultation with the National Association of Insurance Commissioners.

Ask most policy experts and they’ll argue that standardizing these benefits will empower consumers to make informed decisions concerning the appropriate health care coverage that best fit their needs. Some will even be willing to state that this provision is another reason why brokers will be less necessary in the future. By making it simple to understand and compare policies, the expertise brokers provide will be less necessary.

In theory.

The reality appears to be something else.

While finding that consumers considered the initial version to be appealing and well received, a study by Consumers Union showed the Summary of Benefits “could lead [consumers] to select a plan that was not in their best interest.” The reason is because of:

  • Significant participant difficulty with cost-sharing concepts (allowed amount, coinsurance, benefit limits, deductibles, etc.)
  • Significant participant difficulty with covered service definitions (understanding what was included in specific service categories, like preventive care)

In other words, while the information was presented clearly, consumers lacked the expertise to use this information effectively.

Consumers Union, which publishes Consumer Reports, used focus groups to explore the effectiveness of the draft version of the standardized summaries. One of the study’s observations is that “shopping for health insurance was an aversive task, fraught with anxiety for many respondents. They were afraid of making a costly mistake if they chose the wrong plan. Even respondents with good health insurance literacy skills lacked the confidence to choose a plan, reflecting a concern that it would expose them to potential financial liabilities.”

I made a similar point in yesterday’s post: “health insurance is complicated, expensive, rarely shopped for, very personal and extremely critical to one’s health and financial security. This is not a purchase to be made lightly. Consequently, consumers and small businesses want an expert to help them make the right choice.”  But it’s nice to have this observation borne out in independent research.

Providing information in a user-friendly, clear and understandable way is very hard. And I believe standardizing the presentation of policy information is a worthy goal.

Where I part company with some policy experts, however, is when they assume that consumers are likely to be able to use this information effectively. Some may, but many will not.

Nor is this likely to change by simply improving the form. People shop for health insurance coverage maybe once a year or three times a decade. They’re not going to get good at it. In the torrent of information we all face, for most people spending the time necessary to become savvy about the ins-and-outs of health insurance just doesn’t rank very high.

That’s one of the reasons why the academics who create what they view as a transparent and agent-free health insurance market are doomed to disappointment. In an ideal, hypothetical world you can assume full understanding of clearly set forth information – heck, you can assume a can opener on a desert island. But once that theory comes in contact with reality, consumers want, need and deserve independent expertise from qualified professionals both before and after the sale.

Assumptions are fine, but reality is what counts.

Requirement that Carriers Justify Double-Digit Rate Increases a Teachable Moment?

Reasonableness, like a host of other things, can be in the eye of the beholder. Regulating reasonableness, consequently, is nothing like a science. Yet the Patient Protection and Affordable Care Act requires health insurance carriers to disclose their reasons for “unreasonable premium increases.” The Department of Health and Human Services has issued a preliminary version of the regulation aimed at determining how and where this rate increase disclosure will take place.

The draft regulation, which is open to comment and subject to change, requires carriers to publicly disclose any individual or small group rate increases higher than 10 percent. While double-digit increases will not be automatically considered unreasonable, they will trigger a review by state or federal regulators to determine if they’re justified. States will get the first shot at scrutinizing the rate hikes. Only if HHS determines a state lacks the ability to do a thorough actuarial review of premium increases will federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

Over time this 10 percent threshold could be adjusted on a state-by-state basis according to the National Underwriter. “After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state’s cost trends.”

HHS has the authority to require disclosure of large group rate increases, but chose not to do so.. They’re asking for comments on the advisability of seeking disclosure of large group claims, but according to the National Underwriter, regulators are concerned that doing so would not align with current practices. 43 states, however, already review — and some can deny — rate increases on individual and small group medical insurance coverage. Significantly, neither the regulation nor the PPACA gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted (again, unless a state regulator prevents it). 

The mechanics of the rate review are described in the proposed regulation. To oversimplify, if its desired rate increase is over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer’s web site. In evaluating the increase HHS will consider whether:

  1. “the rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard
  2. “one or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
  3. the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.”

The timing of the rate increase is determined by state law, so HHS’ review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process.

Transparency is one of the reasons Consumers Union praises the draft regulation. According to Kansas City InfoZine, its spokesperson, DeAnn Friedholm, cited two benefits the group expects the premium regulations to deliver: “First, it provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases. And second, it will help consumers better understand why their rates are going up and they can decide to look for better plans.”

Which could lead to an interesting result. As the Consumer Union notes, the regulation could “help consumers better understand why their rates are going up .…” And the scrutiny on carriers explanation for increases will be intense. Which makes the posting of the reasons behind the price hikes a powerful  “teachable moment.”

Carriers can use the disclosure to tell a detailed explanation for their actions. For example, in California, hospital rates increased by 150% between 2000 and 2009. Carriers can, and should, get creative in presenting how this medical trend drives premium increases. The question is whether carriers, their actuaries and their attorneys have the skill and willingness to take advantage of this opportunity to present the full story behind skyrocketing insurance costs. Regence Blue Cross Blue Shield provides an example of a meaningful explanation for premium hikes. They even explain the impact of deductible leverage, which is no mean feat.

Regence is providing a general explanation of how pricing works, something other carriers will need to do as well. However, when justifying specific rate increases, Regence and others should go further, naming names. A hospital increases their reimbursement rates by 10%? Name the hospital. A pharmaceutical manufacturer introduces a new drug that costs 20% more than the effective medicine it replaces? Name the drug and the manufacturer.

Carriers could – and should – get even more specific. If the hospital initially sought a 20% increase the insurer should note it’s success in reducing the increase. After all, the beneficiaries of carriers’ successful negotiations with providers are consumers. As I’ve noted previously, health insurers need to do a better job justifying their role in the system. Most health insurance executives would justify their enterprise’s contribution to the system as lowering the cost of health care. Yet with every rate increase they undermine this argument by offering the broad excuse that premiums are rising due to increases in “medical inflation.” Well, now they have the forum and the reason to be specific about what — and who — is driving that inflation.

Who knows, some day regulators may decide to ask medical providers if their charges are reasonable. Until then, there’s no reason carriers can’t ask that question – publicly and loudly. As long as transparency is coming to rate setting, the bright light of disclosure may as well shine on as many parts of the system as possible.

Progressives Accepting of Half a Health Care Reform Loaf?

Assembly Speaker Fabian Nunez has long supported a single payer health care system for California and prefers that solution to his own health care reform plan, Assembly Bill X1-1, passed by the Assembly earlier this month and awaiting consideration by the State Senate on January 16th.

Yet, he takes Governor Arnold Schwarzenegger at his word that he will not sign a single payer bill and notes that the Governor previously vetoed such legislation, Senate Bill 840. Consequently, he encourages progressives to recognize this reality and line up behind ABX1-1, health care reform that can be enacted.

The Speaker made this plea explicit in posts on several liberal blogs (that’s one, here’s another and another) last week. In his post, Speaker Nunez warned  progressives that “it would be a shame if disappointment over the chances of single payer (and I’m a supporter of single payer)  detracted from the opportunity we have to do a strong measure of good for the millions of Californians who don’t have, or are having trouble affording, health care.”

His plea for liberals to line up behind ABX1-1 seems to be having an effect. Consumers Union is on board. Several labor organizations, including the Service Employees International Union (SEIU), are backing the bill. They, and others, are finding ABX1-1 to be a very satisfactory partial health care reform loaf.

Mike Russo, Health Care Advocate and Staff Attorney for the California Public Interest Research Group (CalPIRG), does an excellent job in parsing the legislation and pointing out the reason progressives should support it: “ABX1-1 sets out an entirely new framework for health care in this state, and it’s critical to focus on making that framework the best it can be, rather than rejecting it for an unsustainable, intolerable status quo.” Whether you agree or not with his politics, his post is insightful and well worth reading.

The Left is far from united on ABX1-1. Senator Sheila Kuehl, the author of SB 840, remains opposed. So is the California Nurses Association. But the fact that proponents of a single payer scheme for California are not united against ABX1-1 is a major victory for Speaker Nunez and Governor Schwarzenegger.

And it puts pressure on Senate President Pro Tem Don Perata to push the legislation through his house. Senator Perata, however, has placed the future of the bill in the hands of the Legislative Analyst’s office. He has asked them for an analysis of the legislation’s impact on the state’s finances. If the result is a report showing the state can’t afford ABX1-1, it would be hard for Senator Perata to bring the bill forward. If the analysis shows the health care reform package would help the state’s finances, he’s pretty much pledged to get the bill passed.

But what if the Legislative Analyst calculates a budget neutral impact or even that the impact is impossible to determine? In other words, what if it’s a “tie?” In that case, having a substantial portion of the liberal community advocating for the bill is to result in Senator Perata pushing ABX1-1 through the Senate. In other words, the support of liberals breaks the tie in favor of the legislation passing. 

Whether ABX1-1 should pass the Senate is still an open question for many of us. What’s interesting about the dynamic taking place in the progressive universe, however, is how it runs counter to business as usual.. 

True believes on either end of the political spectrum often take a “purist’s” approach to issues. It’s all or nothing. In their willingness to accept what they see as a partial victory, liberals have increased the odds California will pass comprehensive health care reform legislation next month. That’s hardly business as usual.

Chances for Meaningful Health Care Reform Dim as Positions Harden

Unions and others have decided it’s their way or the highway when it comes to health care reform. According to the Los Angeles Times, these interest groups are mounting a full-on campaign to defeat Governor Arnold Schwarzenegger’s health care reform package. Their campaign will include prayer vigils, television ads and demonstrations at the Governor’s public appearances. Joining the California Federation of Labor will be organizations like Health Access, Consumers Union and It’s Our Healthcare! Their main argument is that the Administration’s plan gouges the middle-class by requiring every resident to obtain health care coverage, but failing to provide sufficient subsidies to enough residents. For example, while the Governor would offer tax credits to households with annual income of 350 percent of the Federal Poverty Level (about $72,000); the coalition wants this eligibility level to at least 400 percent of the FPL (a bit more than $82,600) — which is a bit lower than the $103,000 target union officials mentioned last week. They also maintain California’s businesses pay too little of the funding toward the state’s health care system under the Governor’s plan.

So the gloves are now off and rationale debate is about to flee the scene (demonstrations and prayer vigils rarely lend themselves to civil, reasoned discussions). Passing health care reform during the current special legislative session was a tough assignment to begin with. Given Labor’s influence with the Democratic majority, this turn of events virtually eliminates any chance of responsible health care reform any time soon.

Reform is not impossible, however. Governor Schwarzenegger can be one of the most skillful politicians Sacramento has seen in decades (he can also be one of the most clumsy politicians Sacramento has seen in decades, but during the health care reform debate his most artful political persona has been on display). Speaker Fabian Nunez and Speaker Pro Tem Don Perata are no political slouches either. Plus, they would like to see health care reform enacted to help justify the changes to term limits they are seeking on the February 2008 ballot.

Even the Labor coalition has incentives to reach a compromise. They are looking at putting a health care reform initiative on the ballot in 2008 (presumably it would look a lot like Assembly Bill 8, which the Legislature passed and the Governor vetoed). The Governor is threatening to sponsor a competing initiative of his own. Meanwhile business groups and advocates of a government-run single payer system are also considering initiatives. When multiple ballot measures on one topic are put before the voters, historically it’s been easier to defeat all of them than to get any one of them passed (although there are exceptions). So if Labor and their allies aren’t careful they could wind up with no health care reform passing at all and starting over from square one in 2009. That would be squandering not only two years, but all the momentum behind the current reform efforts. And it would be bad news for all those who effective reform could help much sooner if a responsible compromise could be reached.

I was talking to someone today (who prefers to remain anonymous) who pointed out another dynamic in this situation that could make Labor’s position uncomfortable. The unions are supporting employer-centric reforms like AB 8. Governor Schwarzenegger supports an individual-centric approach. Senators Hillary Clinton and Barack Obama, Governor Bill Richardson are among the Democratic presidential candidates whose health care reform proposals mirror, to some degree, Governor Schwarzenegger’s approach. So all the rhetoric this coalition is aiming at Republican Governor Schwarzenegger may apply just as strongly to Democratic presidential candidate <fill in the blank> come 2008. And the unions will be strong supporters of that nominee. 

Politics is politics. Attacking an opponent while praising an ally who has the same position is not uncommon. For all but professional contortionists, however, it’s not a lot of fun either. But that will be then and this is now. For now, positions are hardening and the hope for meaningful health care reform any time soon is growing faint.