Friday, July 28, 2006


A 95% Failure Rate

A recent article at Insurance Newsnet describes a disappointing situation (subscription required):
In response to the growing consumerism movement in health care, insurance brokers have begun providing wellness and other health management services to employers.

But even though most of the services are available at no cost-brokers offer the services to differentiate themselves-most brokers say they must persuade employers, particularly smaller employers, to take advantage of them.
Drawing from various large brokers' experiences a shocking conclusion is found. In the small to midsize employer market, less than 5% of employers are taking advantage of free wellness programs offered by their brokers. Apparently many brokers are offering free wellness programs to their clients in a bid to stand out from their competition. So why are so few employers taking advantage of a proven method of reducing long term health claims? Money quote:
"The savvy employers, no matter what the size, are seeing it has to be done a different way," (a broker) said. But, for the most part, "we're still carrying the message to the employers as opposed to being asked."(my emphasis)
Wellness programs normally face a difficult, uphill sale. They must justify their existence with strong ROI's and case studies. In other words, most employers don't even understand they have a wellness problem. Why fix what isn't broke? Convincing an employer otherwise requires education and hard work. On top of that, whenever a service is offered for free it cheapens the program's overall value. Take a look at health insurance. How many employees understand how much health insurance costs? How much has that misunderstanding of value contributed to the entitlement mentality we face today? If an employer doubts the value of a wellness program, not to mention even the need for such a program, why would they commit any resources to it? Offering wellness services at no charge may seem like a compelling sales tool, but ultimately only serves to devalue wellness initiates in the eyes of an already skeptical market.

And that brings us to the second problem. Adopting CDHP's or other "consumerism" approaches without undertaking wellness efforts is at best foolish and at worst downright destructive. Brokers advocating consumerism will look to provide their clients with a solid wellness foundation. But selling wellness is hard. Unlike health insurance, wellness programs are not demand products. So why not kill two birds with one stone? Offer wellness as a free, value added program, thereby eliminating cost barriers and adding another bullet to our list of agency provided services? When wellness is one bullet in a list of many it does not command the attention and education it deserves. Coupled with the fact that there is a strong disincentive to give the product away (cost), lackluster results should be expected.

When a pitch fails 95% of the time, shouldn't its merits be re-evaluated?

Wellness is a critical part of consumerism efforts. As such it should not be relegated to an uninspiring value-added program. Additionally, amassing an arsenal of value-added weapons amounts to zero competitive advantage if the dogs don't eat the dogfood. "We're still carrying the message to the employers as opposed to being asked." Well, as insurance brokers it is our duty to advise our clients what they should be doing, not just doing "what is asked." Brokers that successfully advise their clients to implement long term strategies, like wellness programs, will guide their clients to long term success. In doing so, they will overcome their competition and most definitely see a sales rate well above 5 percent.

Tuesday, July 25, 2006


Are We Missing Something?

Is the growth of medical technology driving the cost of healthcare? Are increases caused by overutilization? How much impact are prescriptions having?

Amy Finkelstein, an Assistant Professor of Economics at MIT, has released new research on the Health Insurance market that seeks to answer a fascinating question: Has the expansion of health insurance itself increased the cost of healthcare? The research will be published in an upcoming issue of Quarterly Journal of Economics, but a copy is already available on Amy's website. From Insurance Newsnet:
As a percentage of gross domestic product, U.S. health expenditures grew from 5% in 1960 to 16% in 2004, notes MIT economist Amy Finkelstein, whose research observes that this trend has accompanied a rise in insurance coverage. While less than half of all medical expenditures were covered by insurance in 1960, by the year 2000, that figure had grown to 80%.

Finkelstein isn't the first to study the two accompanying trends, yet most research -- dating back to the landmark Rand Corp. Health Insurance Experiment in the 1970s -- traditionally has estimated the effect of insurance on rising health-care costs to be small, accounting for no more than one-eighth of the growth. Among the largest randomized controlled experiments ever attempted in the United States, the Rand study found little difference in the health choices made by individuals who were assigned to various kinds of health insurance plans, with varying degrees of cost-sharing. But Finkelstein's research found that the proliferation of health insurance may account for nearly half of the rise in health care spending.
An analyst from the Congressional Budget Office is already praising Finkelstein's research yet fine tuning her conclusions. By correctly weighting Medicare's impact according to spending rather than population, Phillip Ellis from the CBO cuts Finkelstein's 50 percent to 25 percent. Still, twenty five percent of a $1.8 trillion dollar increase over 50 years is quite significant.

Ultimately the results make sense though. We cannot make fundamental changes to how healthcare is delivered without changing how much care itself costs (it's actually not unlike the Observer Effect in science). Regardless, it is still a fascinating paper and could effect how we address rising premiums.


WSJ Cost Sharing Poll

More interesting stuff from WSJ:
A new health-care poll indicates growing U.S. support for charging higher insurance premiums or out-of-pockets medical costs to people with unhealthy lifestyles.

The online survey of 2,325 U.S. adults found that 53% of Americans think it is fair to ask people with unhealthy lifestyles to pay higher insurance premiums than people with healthy lifestyles, while 32% said it would be unfair. When asked the same question in 2003, 37% said it would be fair, while 45% said it would be unfair. Healthy lifestyles were described as not smoking, exercising frequently and controlling one's weight.

In the latest poll, 53% also felt it was fair to charge higher deductibles or co-payments to people with unhealthy lifestyles, while 30% said that would be unfair. In 2003, 36% said it would be fair and 47% said it would be unfair.

Among other findings: 56% agreed that people who are unemployed and poor should get the same quality health care as people who are employed and pay substantial taxes.
Educating the public on why this is a bad trend should be a priority for insurers and insurance professionals. Charging different rates based on lifestyles is a slippery slope. Soon after, "Why not have the smokers pay a few additional percentage points?" we would hear, "Smoking drives a large portion of national healthcare costs - why shouldn't the smokers bear that cost? Even better, why not the evil tobacco companies?" This train of thought ultimately leads to adverse selection which can have disastrous consequences.

Certainly helping people connect choices with consequences is beneficial. Implementing a few controlled disincentives for unhealthy lifestyles can work, but we must be careful not to go too far. Positive rewards and incentives for healthy lifestyles are harder to implement, but don't usher in adverse selection.

The public is frustrated. They have little to no control over their health insurance costs. This poll clearly demonstrates that people want this to change. This can be a good thing if done properly, but without guidance could create even greater problems. Insurance professionals and providers we must guard against misguided initiatives.


PBM Pricing Transparency

Some good news from today's WSJ (subscription only):

The two PBMs, Medco Health Solutions Inc. and Caremark Rx Inc., each handles the drug benefits for tens of millions of Americans. They have agreed to participate with eight smaller PBMs in a purchasing model that would require them to pass on to clients their own costs for acquiring retail and mail-order prescriptions. They also have agreed to pass along the price rebates, rarely disclosed in the past, that they receive from drug manufacturers.

The more transparent purchasing model is the brainchild of a coalition of 56 large employers, including Caterpillar Inc., International Business Machines Corp., Starbucks Corp. and Ford Motor Co. With more than $4.9 billion in collective pharmaceutical costs last year, they say the complex financial arrangements PBMs have with drug makers make it difficult for them to know if they're getting the best price for their employees' medicines. The idea is to certify PBMs that are willing to follow the group's criteria for transparency, giving employers an alternative that puts pressure on their own PBMs to change.
Pricing transparency is critical to the future of our healthcare system. The system has become bloated with complexity and thousands of "middle men." Getting accurate and timely pricing data in the consumer's hands is a prerequisite to consumerism. Fortunately carriers and providers are finally recognizing that patients and consumers have no idea how much their healthcare costs until after they get their EOB (and I would wager most people don't even look at EOB's). Throw in commissions, bonuses, and fee disclosures on top of that and we'll be getting somewhere.

More and faster please.


2007 Projection - Positive Trends

Early studies from Hewitt and Milliman are estimating a average rate increase of 10 percent for 2007, about 1% lower than 2006. While this is certainly positive, increasing health insurance costs are still outpacing by a wide margin.
In 2004, CDHPs accounted for just 1% of total premiums for health care, he says. That grew to 2.5% of the total a year later. “Are you going to see it double again?” Proebsting asks. “I think it’s unlikely. But you are going to see growth in the higher single digits.”
Whild CDHP's are certainly not a silver bullet for our healthcare woes, it is a promising approach. Once Hewitt's and Milliman's entire studies are made public it will be interesting to see how popular CDHP's actually are and whether or not they are contributing to the positive changes in the trend line.

Monday, July 24, 2006


Surge in Healthcare Venture Capital

Over at Dow Jones Market Watch - According to Ernst & Young LLP and VentureOne studies recent increases in venture capital activity have been driven by the healthcare market, representing almost a third of overall VC spending for 2006.
The biggest gains this year have come from the health-care sector, where investments grew 25% during the second quarter, with $2.24 billion flowing into 160 funding rounds, compared with $1.78 billion in 145 deals during the second quarter of 2005. As a whole this year, health-care deals have grown 26.1% to reach $3.84 billion over the first six months from $3.05 billion in the first half of 2005.
Healthcare is quite the booming business.


DOD Feeling the Healthcare Crunch

Sunday's Washington Post featured a Cindy Williams article on the Department of Defense's health insurance woes. The cost of the Defense Health Program has more than doubled in the last 6 years. The author correctly attributes the increases to several problems including the general, nationwide cost increases in healthcare. Another significant factor is Clinton era legislation that extended prescription drug benefits to 1.4 million military retirees over the age of 65. While the additional factors Williams identifies are important, an added 1.4 million drug coverage beneficiaries should not be de-emphasized or overlooked.

Current projections predict the DOD's healthcare costs will jump from $33 billion in 2006 to more than $64 billion by 2015. Williams attributes the "galloping" jump in costs to military retirees that are in the workforce but are opting to take their military benefits in lieu of their employer's (we'll come back to this). Even though Miss Williams is a research scientist from MIT, let's take a look at some math. First off, an increase from $33 billion to $64 billion is a 94% increase over 9 years - compared with a 100% increase from 2000 to 2006 that's a positive change in the trend line. Secondly, the actual "galloping" increase represents less than an 8% increase every year. Compared to the 2005 national average of 9.2% according to KFF's 2005 survey, that's not all that bad. I personally know a lot of companies that would be more than ok with an 8% increase. Note to DOD and Miss Williams: Health insurance is getting more expensive - join the club.

Williams does uncover some interesting statistics however.

  • Participants today only pay about 12% of total premiums versus more than 27% in 1995 (caused by a static contribution level that did not change as overall premiums increased)

  • Participants consume 40 to 50 percent more healthcare than people in civilian plans

  • 80% of military retirees under 65 are in the workforce - most of their employers provide health insurance

I am a strong supporter of the military and believe we should hold the men and women of our armed services in the highest regard. That being said, what we have here is a classic "Do as I say, not as I do" situation from the government. Military retirees have largely not had to deal with any premium increases for the last 11 years. Certainly the 50% difference in military consumption of healthcare comes back to shielding participants too much from costs. Let's do some more math. There are 9.2 million participants in the military health plan. If they shoulder only 12% of the overall $33 billion price tag that equates to about $430 per participant per year. That's $35 a month. To be fair, 1.8 million active duty personnel don't pay for benefits (which is as it should be), so really the 7.4 million remainder pay the 12%. That still only equates out to $535/year or $45/mo.

Apparently a noticeable portion of the 80% of retirees that are still in the workforce are jumping ship from their civilian health insurance and opting for their cheaper, government benefits. Nothing new here. I guess they have never heard of the cost savings strategy where if an employee's spouse has coverage available from their employer employees are disencentivized to enroll the spouse into the company's plan. Self-insured companies have employed this technique for many years, as I am sure at least the DOL knows.

Ultimately Williams concludes that the military ought to increase participant cost sharing in a bid to reign in costs. While I do think we owe our military personnel for their sacrifices, the best way to lead is to set an example. Practice what you preach!