Monday, October 26, 2009

60 Minutes: Medicare Fraud

Last night, CBS's 60 Minutes aired a 14 minute piece on Medicare Fraud titled "The $60 Billion Fraud." It hits a lot of good points in an easy-to-digest way including fake providers billing for fake services and equipment. It doesn't even get into some of the other ways these criminals defraud the system like inventing patient ID numbers (necessary to bill Medicare) or paying off seniors to let providers bill for high reimbursement services - such as fake chemotherapy (ie. a kickback or bribe). The investigation does go straight to the Medicare fraud capital of the US - South Florida where there are hundreds of thousands of Medicare recipients. In Miami-Dade county, it is expected to cost Medicare $14,851/person/year in 2009 primarily due to the extra fraud costs. For comparison's sake, there are other US counties where it costs $6,000-8,000/person/year to cover the elderly (primarily the more rural counties with cheaper labor costs.) It's quite an interesting video!

Watch CBS News Videos Online

Sources: CBS News, Centers for Medicare and Medicaid Services

Tuesday, October 20, 2009

What’s wrong with the individual market? A look into the uninsured.

Today’s healthcare reform has started with two goals in mind: 1) Lower the overall future cost of healthcare (dubbed “bending the cost trend”) and 2) cover the uninsured. Unfortunately, most of proposals currently being debated in Congress do little to attack problem #1, but they do cover quite a bit of the uninsured. What exactly does that mean though? To understand how to do it, it will help to understand what the uninsured population looks like in the first place. Unfortunately this may prove to be useful information. With unemployment trending higher and the young workers being more likely to be laid off (ie. Gen Y!), we may find ourselves dealing with finding insurance on our own sooner than we’d like.

Today, there are 45.7mm uninsured people in America. 17% of that population makes over 300% of the Federal poverty limit or $66,150 per family of 4. These people can generally afford some type of healthcare coverage, but they choose not to get it either because they feel that they do not need insurance or may not even know how. Another ~30% already qualifies for Medicaid – the state/Federal health insurance program for the poor. It may sound like a funny concept to qualify for such a beneficial assistance program and not take advantage of it. There could be several reasons for this. They may not realize their income (or lack thereof) qualifies them for the program. Some may be children of low-income families where the child qualifies but the parents do not. Whatever the reason, they qualify for Medicaid but aren’t in the program. (Incidentally, if you live in the New York, New Jersey, New Mexico, or California areas, there is a great program called Single Stop that helps needy families find programs and services that are already available to them. The remaining uninsured earn somewhere around $22,050 to $66,150 for a family of 4, which is a zone where buying health insurance would arguably constitute a significant burden on them.

Each state regulates its own insurance market today. Before we get into the exceptions, we can take a look at what a typical state looks like to understand why there are so many uninsured people. It’ll be pretty easy to see how broken this system really is. In the individual market, health insurers can underwrite individuals – nobody is pooled together and nobody has guaranteed coverage. This means that they can take an assessment of your health status and charge you a premium that they would expect to cover their costs + a profit. This works great for 3 parties: 1) healthy individuals, 2) the insurance companies, 3) the insurance brokers. For healthy individuals, they are getting charged a low premium because they don’t cost a lot in the first place. It’s certainly a lower premium than if they were pooled together with more expensive, older patients. For insurance companies, very few of them actually lose money on the individual market unless they are subject to special rules, so they’re typically making 5-15% of profits. The insurance brokers are skimming as much as 20% of the premium for their services. [Opinion alert – I am biased against health insurance brokers. They’re not taking on any risk like the insurance companies, and I don’t think that selling that product should warrant 20% of the cost. With online brokers and online shopping becoming more prevalent, I am sure this piece of the cost will shrink significantly.] If you take a step back, you see that as little as 60% of the premium is actually going to medical cost.

Really, it gets worse from here. I did say that it works great for healthy individuals. Part of that is the access to the discounts that health insurers get on drugs, hospital admissions or surgeries, etc. It’s great to have coverage if you need one-off care like mending a broken arm from a rugby accident or something. What isn’t very appealing is if you need chronic care. If you get cancer and need chemotherapy for the next 3 years or if you get diabetes or have heart problems, your rates will go up severely enough that you will either lose your coverage or won’t be able to afford it. [To be fair, in a market like this, it’s easy to argue that insurers aren’t taking significant risk either.] So for the sick or future sick, the individual health insurance market is not a pleasant place. While the individual insurance market is broken, we’ll look at various ways that some states have tried to solve it.

Kaiser Family Foundation - The Uninsured
Department of Health and Human Services

Next Post: What have other states tried? What can we learn from them?

Friday, October 9, 2009

How can we put on the brakes on cost? Why is “Health Maintenance Organization” a bad word? How has it influenced our current employer-based system?

It’s certainly not the first time in history that we’ve had uncontrollable costs. Back in the 1990s, the US turned to the Health Maintenance Organizations (HMOs) as the answer to control costs. Well, they “worked” – and I use that term loosely here. The mid-90s brought some of the lowest cost trends this country has seen ~0% (Remember healthcare cost trends are historically 6-10%). If you’ve heard the term at all, HMO has a bad connotation to it, and for good reason. First though, it is helpful to understand what it’s ~supposed~ to be. Then we’ll look at what they morphed into back in the 90s.

An HMO is an insurance product that gives access to a tightly managed network of providers. It’s supposed to be more efficient through two methods. 1) Negotiate better rates with providers by guaranteeing a certain number of patients – trading lower rates for volume. 2) It is supposed to give better care and keep its members healthier than they otherwise would be. It uses the ‘gatekeeper’ model, where you have a specific primary care physician that coordinates all your care. In an ideal world, he oversees your care and refers you to specialists when such care is called for. In this hub-and-spoke model of care, he should have intimate knowledge of the patient, the drugs being taken, any treatments being performed, etc. He would also be responsible for preventing any adverse interactions – if drug A from specialist #1 can not be taken along with drug B from specialist #2. Of course, that is more relevant for the senior population who can often be on 6+ drugs at a time vs. a health individual taking 0-2 drugs at a time. On the fiscal side of things, these HMOs are given a fixed monthly premium to care for the patient, so the less money they spend on the care, the more money they get to keep. I think this incentive was a foreshadowing of potential issues, but the earliest HMOs had some success providing better care at a lower cost. Then a lot of things went wrong pretty quickly.

There are a couple key things to consider. One is that the earliest HMOs were genuine medical companies that had been in the business for decades. Some of these guys were Kaiser Permanente, Blue Cross Blue Shield, and other smaller local companies. Second, these organizations targeted small-medium sized employers so that the volume of patients was manageable for a small-medium sized group of doctors. It didn’t take long before every insurance company, including life and property insurers who had no experience in health insurance, was throwing together a haphazard group of doctors and calling it an HMO. On top of this, larger sized employers started to join HMOs and forcing thousands of employees into groups of hundreds of doctors and a handful of hospitals. If you can imagine the scene, you had doctors with little to no experience in an HMO being overwhelmed by thousands of employees who previously were able to see any doctor they wanted. The inexperienced insurance companies turned to their only weapon to stay in business – they started to deny care. To clarify, whenever care is properly managed, some care will be denied. Inherently keeping costs down involve denying wasteful spending or seeking lower cost alternatives with superior health benefit / dollar cost ratios. These inexperienced insurance companies were denying/discouraging optimal care. You can imagine all of these factors combined lead to dissatisfaction for everyone involved, especially the physicians and patients. To exacerbate those problems, it’s a pretty heartfelt news story to show a soon-to-be-retired grandpa not getting his heart medication and dying of a heartattack a few weeks later. By the late-90s with the economy roaring back and employers and employees able to afford indemnity plans again, the era of the HMO was gone. Employees pushed back hard against being forced to see an overworked primary care physician and being subject solely to his medical opinions.

The pendulum of cost and choice had swung back around. To give employees more choices but still keep an eye on costs, the PPO (Preferred Provider Organization) was invented. This insurance product gave a list of physicians and hospitals that were “in-network” that carried reduced co-pays, co-insurances, and deductibles. To go “out-of-network,” employees had to pay higher cost-sharing amounts. The other primary difference is that employees had to find their own primary care physician and were again allowed to see any doctor or go to any hospital they wanted – as long as they paid a higher amount. This really amounts to little more than a discounting system.

Today, different geographies are dominated by different systems. The HMO system still thrives in California, where it had its strongest roots and its best practices. Kaiser Permanente was founded there – we’ll look at them at a different post. The PPO product has become the dominant form in most areas, particularly the Northeast. Although, with the consolidation of insurance companies (only 4 major ones), the PPO product of today can almost feel like an indemnity product that allows employees to go anywhere. As an example, my Oxford health insurance PPO (aka. United Healthcare) offers me well over 300 potential primary care physicians within 1 mile of where I live. Heck, I have my choice of 56 acupuncturists too! Granted, I live in Manhattan, so maybe that’s a poor comparison.

Where do you live? What type & brand of insurance do you have? How much choice do you have when picking your physicians? In other words, how many primary care physicians (sometimes called internists, OBGYNs, or general practioners) can you choose from within 1 mile of where you live or work (or 5-10 miles if you’re in a suburb)?

Thursday, October 1, 2009

Why does healthcare come from our employers anyway? How did that get started?

It started long ago with the idea that employers should do their part to keep their employees healthy and productive. Of course that was a lot more relevant in the 1800s when industrial revolution’s working conditions and the era’s public health were mediocre at best. The US employer-sponsored healthcare took firm root during World War II when the US government placed wage restrictions on employers but did not restrict the amount of fringe benefits. To compete for the best talent in an environment with fewer workers, employers beefed up their health benefits.

It was the Revenue Act of 1954 that solidified the employer-based healthcare system that we have today. It explicitly categorized health benefits as non-taxable income. This created a ripple effect that has influenced the way we purchase and receive our healthcare. The first effect is that workers would always demand healthcare through our employers. Any other way would be tax-inefficient. All else being equal, $1 of health benefits and $1 of cash wages cost the same to the employer; however, the employee health benefit would be $1 through the employer but only $0.65 if purchased on the individual market with taxed cash wages. This tax arbitrage lead to more compensation being given in the form of non-cash health benefits, and this fact is readily apparent in many union negotiation contracts. Unions have some of the best benefits available, and its origin is derived from the tax treatment of such benefits. It’s no wonder that GM now spends more on healthcare than steel or that Starbucks spends more on healthcare than coffee beans!

An employer typically offers benefits in one of two ways, either on a fully-insured or self-insured basis. Both types function the same way for employees. Fully-insured employers tend to be small to mid-sized companies that purchase health insurance from an insurance company – usually a United Health, Aetna, Cigna, or Blue Cross / Blue Shield plan, who can take on the insurance risk and pool it with other employers. Self-insured employers tend to be large to nation-wide companies that purchase only the administrative services portion but takes on the fiscal responsibility/liability of paying the claims. The idea is that with a sufficiently large employee population, the company can act like a mini-health insurer and save on cash-insurance costs, particularly if it finds that it employs a younger or healthier-than-average population. Because of our insurance mechanism of payment, the second (and likely unintended) effect is that employees incur primarily indirect costs, which skews the purchase decision. The employer pays most or all of a premium on behalf of the employee to the health insurer. That premium is determined by the aggregate cost of covering all the employees or in the case of smaller companies by the aggregate cost of covering everyone in the insurance pool. Because of this pooling, the individual’s use of healthcare will only serve to increase future premiums by a relatively small amount, i.e. a relatively small marginal cost. With this imperfect information, consumers do not know or understand what the true costs of the healthcare that they are consuming relative to the benefit that the employee is receiving. Said another way, a doctor’s visit may feel like it’s costing $10 out-of-pocket for the co-pay, but the real cost of the visit may be $80. The hidden $70 makes it way back to the insurance pool where the rates get raised later. Since the marginal cost is hidden away, demand and overconsumption runs rampantly in the system.

So while employers wanted to do something good for their employees and the government wanted to encourage a way for people to get healthcare coverage, the tax-advantaged health insurance system has certainly contributed to the way healthcare costs have grown unchecked.

Next Post: How can we put on the brakes? Why is “Health Maintenance Organization” such a bad term?