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A year on from Wellpoint’s ju-jistu move of announcing a 39% rate increase in California, therefore re-invigorating the health care bill and guaranteeing themselves billions in government subsidies, Blue Shield of California, the non-profit rival to Wellpoint’s Anthem Blue Cross, announced a 59% increase! In the annals of THCB, Blue Shield has a mixed record. CEO Bruce Bodaken was a big supporter of the ACA and consistently called for universal coverage, but at the same time the behavior of Blue Shield after the revelations about the insurance recissions was worse than any other insurer. It actually fought much harder for the right to continue them than Wellpoint, Healthnet and the rest. The most recent rate increases also concern the individual market—you know, that segment of the insurance market that Mark Pauly thinks works pretty well.
Blue Shield is saying that the rates really are only a 15% average increase, and that for some individuals they’re getting a delayed increase—in other words they should have been charged more last year—which is where that 59% number comes from. Why are rates going up? Blue Shield put out a handy press release giving its side of the story. Blue Shield is pretty explicit that the extra costs of the abolition of life-time maximums and the addition of kids up to 26 on family policies was only around 4% over 2 years. The big factor was that utilization went up 7%, unit costs (prices) went up 5% and the rest of the increase (3%) is due to lower overall out of pocket costs relative to what the insurer was covering (because of overall cost increases).
Translated into “where the money went,” hospital payments went up 15%, drugs up 12% and doctor payments went up 9%. In addition, although Blue Shield doesn’t state it, the pooled risk profile of everyone in a particular individual market product gets worse as while they all get charged the same at “entry”, and then more healthy people drop out as prices go up than sick ones. This is the insurance death spiral we used to hear so much about.
However, it’s not just Blue Shield and it’s not just the individual market.
My tiny company just got its rate increase from Healthnet which sells us a high-deductible PPO product in the California small group market. This is not an experience-rated product—in other words every company in the 2–50 employee group gets charged the same despite their employee’s health status. The only adjustment are for age of employees (i.e. the company pays more for the 40+ crowd than the 20 somethings) and location.
What happened this year? No fanfare in the media, but our rates went up 20%. Higher than Blue Shield’s average in the individual market.
And the real story is told when you look at the rates charged by region. For small businesses California is divided into 9 regions. For a 30–something employee with no family our premiums in Region 3 (San Francisco Bay Area) are $347 a month. Move our company to some zip codes (but not all!) in Los Angeles and the premium falls to $320. In fact up the coast in Santa Barbara it’s only $315. But the same employee in rural northern California costs $429! That equates to a variance of 40% in pricing for exactly the same benefit.
That tells me that pretty much Blue Shield is telling the truth. What’s driving premium increases is the increase in utilization and increase in pricing from providers. So I do have some sympathy for Blue Shield and Tom Epstein (their public policy spokesman who I interviewed here last year). But my sympathy is limited for two reasons.
First, the government just reported that overall health care costs only went up 4% in 2009 and that the rate of increase is slowing. (Admittedly costs went up to 17.6% of GDP but that’s because the economy fell off a cliff). As Jeff Goldsmtih has been saying, the health sector is entering a slowdown. So how come America’s health care costs are going up 4% but Healthnet’s and Blue Shield’s are going up 15–20%?
Second, (and you know this is coming). If all the things health plans do (and don’t do) are resulting in them being more inefficient at keeping costs down than the nation as a whole, and by the way, the Federal Government. Why do we need them?
And third, even if the ACA won’t be repealed (and it won’t for a bunch off reasons despite the idiocy of the tea party), we’re still going to have health plans operating the insurance system in the future—albeit with more regulation when the exchanges come into play. And I still see no real changes in how they’re operating.
PS I’m struggling to get much of a reference to Duke basketball in this piece. But yesterday I did meet Ronnie Chatterji who sort of has the health portfolio on the Council of Economic Advisors these days (since Bob Kosher left). And he’s on leave from Duke. It’s a reach I know, but I’ll tell you my Mick Jagger story someday.
Categories: Matthew Holt
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Matthew – I’ll offer a few thoughts on this.
First, with respect to age rating, the CEO of Harvard Pilgrim Healthcare recently posted two articles on this titled “Inside The Black Box.” In Massachusetts, each member of a group receives an age rating that ranges between 0.4 and 2.4 or a six fold difference between the high and low. By regulation, groups with lots of younger employees must be carry a rating of at least 0.66 while groups titled toward older employees cannot be rated higher than 1.32 or a two to one ratio between the high and low. A change in the average age of a small group can result in a significant change in the premium, both up and down.
Second, a PA based hospital executive recently told a small group of investors that his hospital system’s average cost per adjusted admission increased 2.0% in 2010, down from 3.5% in 2009. Cost shifting to make up for inadequate payments from Medicare and Medicaid, combined with considerable market power for certain hospital systems, accounts for price increases well above cost growth that powerful hospital systems can command from commercial payers. Insurers tell me that this issue is most prevalent on the East and West coast. In your area, Sutter is a clear example.
It’s interesting that premiums are lower in Southern CA than in Northern CA considering that the Dartmouth data claims that treatment of Medicare patients is much more aggressive (and expensive) in Southern CA. At the same time, a CMS executive presented a slide at a conference last year that showed that Medicare’s cost per beneficiary is generally higher in the larger cities but commercial insurers’ costs are higher in smaller cities and rural areas. It’s not clear why this is the case.
I also learned that insurers are pushing hospitals harder on utilization review. The large system I referenced earlier will now be subject to automatic utilization review for any stay of two days or longer.
Finally, even though Medicare and Medicaid, according to the hospitals, underpay them, neither program can control its costs very well. More and more states are looking to managed care to help control costs within their Medicaid program because unmanaged Medicaid isn’t getting the job done.
you can also see this if you break inflation down by carrier plan, HSA and high deductible plans usually have lower inflation then the $0 or $250 plans. There are factors that can effect that but I wouldn’t argue carriers administer low deductible plans less efficently then they do high dedutible plans.
Overall not a bad post Matt, couple points, (take this back just got to the bottom and the needless Tea Party insult, guess this weekend’s events won’t change much);
“So how come America’s health care costs are going up 4% but Healthnet’s and Blue Shield’s are going up 15–20%?”
I assume the government numbers are per American, 40-50 million of who do not have insurance. Their ability to consume more care was greatly diminished by the economy. Those that had insurance on the other hand could still freely spend and thus the gap in national numbers and insured inflation.
This would speak to the problem of out of pocket spending dropping from 50%+ in 1965 to 13% today and the inflationary stress it places on the system, people are obviously more free when spending someone else’s money.
“If all the things health plans do (and don’t do) are resulting in them being more inefficient at keeping costs down than the nation as a whole,”
None of your numbers would even begin to support this claim. You can’t say someone on a $0 deductible $15 co-pay HMO plan is equivalent to someone on Medicaid, Medicare, or uninsured. Without comparing similar demographics and similar benefits you can’t reach that conclusion.
Matthew, I think you understand the increases better than you say you do. The rate of overall national health spending bears little relationship to the rate of increase to health insurance. The former is driven heavily by what happens in the government program expenditures and in out-of-pocket spending, while the latter is driven by the composition of the risk pool, unit price changes, and utilization increases. unfortunately, in a world still without mandates and/or hefty subsidies, the risk pool is going to be the biggest problem; it doesn’t take many healthy people/groups to drop or switch coverage to start the spiral. It’s very difficult, if not impossible, for care management or admin efficiencies to offset the loss of healthier insureds.
Increases in unit costs due to provider consolidation or market leverage is also a concern (e.g., the MA AG report from a year ago), but I don’t know your market well enough to tell if that is a prime cost driver there.