ACA Health Insurance Exchanges – Not All are Competitive

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SUMMARY

The Affordable Care Act (ACA) created state run Insurance Exchanges to stimulate competition among health insurers. Some believe that private insurers are better suited to manage the complex health insurance market. But are they?

Kaiser Health News (KHN) recently published premiums that private insurers charge on ACA Exchanges. KHN identified 10 ACA Exchanges with the highest premiums, and 10 with the lowest. They found extreme differences and attributed them to competition or lack thereof. This analysis confirms those conclusions by comparing actual Medicare costs for those same areas.

Detailed cost data published by Medicare show that medical costs for seniors are fairly consistent across these 20 ACA Exchanges. Though costs for seniors are much higher than for those under 65, they provide a valid proxy for all medical costs when comparing one market area with another.

Medicare payments are based on service costs with pricing input from the American Medical Association. Medicare adjusts for regional differences so costs are consistent across the nation. Medicare essentially ignores hospital and doctor billing prices.

Private insurers, on the other hand, derive their costs more from provider billing prices which have been shown to be highly inconsistent.  (http://insr.us/hospbill) Insurers do negotiate discounts from billing prices, but if the billing basis is inconsistent, it is harder to get a consistent result.

If there are few dominant providers, insurers have less leverage over discounts. If there are few dominant insurers, they are less inclined to aggressively set lower premiums.

Only one conclusion supports the enormous differences in premiums between the high and low cost ACA Exchanges. In areas where little competition exists, whether it be providers or insurers, private insurers are unable or unwilling to offer competitive pricing. The belief that private insurers are better suited to restrain market prices rings false in these instances.

METHODOLOGY

For years, health insurance markets have been divided into areas that coincide with county lines. The ACA insurance Exchanges continue to abide by these market boundaries.

Kaiser Health News (KHN) analyzed these “market areas” and found huge differences in ACA Exchange premiums. They identified 10 most expensive market areas and 10 least expensive areas (listed in Appendices 3 and 4).

ACA Exchanges insure people under 65, and premiums are derived from expected costs based on historical costs in the counties that make up each ACA Exchange.

Medicare publishes medical costs data down to the county level. Though Medicare costs apply primarily to seniors, one can map those costs to align with the 20 market areas. It does not matter that Medicare’s costs are much higher than for those under 65. The relative costs are what are important.

If two market areas have similar Medicare costs, it is fair to assume that medical costs for those not in Medicare will also be similar. Conversely, if Medicare costs are far different, one expects non Medicare costs will also be different.

Medicare data include all costs, while ACA Exchange data is only for premiums. Is this apples and oranges? Well no, because ACA requires insurers to offer plans identical in coverage and which differ only in cost sharing.

With identical coverage, the costs of each plan are identical. All that differs is the cost sharing. Plans called “Bronze” have premiums that cover 60% of expected costs, “Silver” which cover 70%, “Gold” – 80%, and “Platinum” – 90%.

Knowing this, one simply divides the premium by the percent coverage to derive total expected costs. If premiums for a silver plan are $280 per month, total expected costs would be $400 per month (280 / 70% = 400).

Since the KHN report applied to Silver plans for a 40 year old, premium costs were divided by 70% to get total expected costs. Direct cost comparisons can now be made between 40 year olds on ACA Exchanges and seniors on Medicare.

DISCUSSION

Kaiser Health News (KHN) recently published premiums that private insurers charge on ACA Exchanges. KHN identified 10 ACA Exchanges with the highest premiums, and 10 with the lowest. They found extreme differences but did not include an analysis of the causes.

The graph below shows monthly Silver Plan premiums for a 40 year old in the 10 LOWEST ACA Insurance Exchange Areas. As the labels at right show, those market areas occur over multiple geographic regions.

The green bar at bottom of the graph shows the average premium which is just over $170 per month.

Premiums 10 lowest

Like the first graph, the graph below shows monthly Silver Plan premiums for a 40 year old in the 10 HIGHEST ACA Insurance Exchange Areas. Again the labels at right show those market areas occur over multiple geographic regions.

The green bar at bottom of the graph shows the average premium which is more than $400 per month.

Premiums 10 highest

Combing the highest and lowest, the graph below compares the monthly premiums, gold for the highest cost areas and green for the lowest. The differences in premiums are huge. The lowest ACA Exchange areas have average premiums less than half (about 40%) the premiums of the highest.

Prem hi vs lo

Having a direct comparison between high and low premiums, the next step is to compare all these 20 ACA premiums with another measurement common to all the same market areas. Medicare spending fits that bill, as it not only occurs in every area, it also comprises half of ALL medical spending in them.

This works only if Medicare costs are an appropriate proxy for ACA Exchange costs. To test, one needs comprehensive data on personal health care (PHC) spending by age group. Medicare provides that data which covers millions of people though only through 2004 as shown in the graph below.

Health Spend all ages

The top line, seniors 65 and older, incurred a sharp increase in health care spending 1987 – 1996. Since 1996, cost increases have been proportional among all age groups. A closer look within Medicare age groups is done to assure Medicare is an acceptable proxy for all health care spending.

The following graph subdivides Medicare only costs into three age groups. The sharp rise in 1996 average cost was most affected by those 85 and older. Since 1996, all age group’s costs have risen proportionately. As cost trends for all age groups are similar since 1996, Medicare costs offer a good proxy for medical costs of other age groups as well.

Health Spend Medicare

The graph below combines the prior graphs of total Personal Health Care Spending per capita into seven age groups. The four left bars include all groups under 65 years old. The next three bars (aqua, gold and light blue) represent the three Medicare age groups. The last two bars on the right show national averages for all those under 65 (red) and all those 65 and older (green).

HC Spend all n avg

It is clear that health costs rise rapidly with age, accelerating more in senior years. The average costs for 40 year olds are included in the second (yellow) bar from the left which costs average less than $400 per month.

Averages for Medicare health costs, as shown in the far right green bar, are some three times greater than for 40 year olds. While this data is only through 2004, all medical costs have risen at about the same rate. One can expect Medicare costs today to still be about three times that of a 40 year old.

The above graph shows costs. To directly compare these total costs with ACA Exchange premiums, just covert premiums to total costs. As noted in the Methodology, divide premiums by 70% to get expected costs for each ACA Exchange.

The next graph shows these total estimated costs for each of the 20 market areas. For the 10 most expensive areas, costs average about $600 per month. For the 10 least expensive areas, total average costs are about $245 per month, 40% of the high cost areas. The graph is the same as that for premiums above, but with 40+% higher monthly costs.

HC Cost hi vs lo

With total costs available for all, the graph below compares Medicare costs with costs of 40 year olds in each of the 10 lowest cost ACA Exchange areas. The low Medicare costs in the 4th series is Hawaii, which is the only outlier in this series.

In these competitive ACA Exchange areas, the average spread between Medicare and ACA is over four times. On a national average as shown above, the spread is around three times which shows competition really can reduce premiums.

Medicare vs 10 low

Before comparing total Medicare costs with the highest cost ACA Exchange areas, it is helpful to know what Medicare costs are in the highest cost areas relative to lowest cost areas. The graph below shows Medicare costs in all 20 market areas. While there are variations in total Medicare costs between market areas, there are no trends that favor either high or low cost ACA Exchange areas.

Medicare 20 hi n lo

The conclusion drawn from this graph is that high cost ACA Exchange areas have Medicare costs similar to low cost ACA Exchange costs. Nothing is inherently different for seniors.

The next graph compares total Medicare costs with total costs of 40 year olds in each of the 10 highest cost ACA Exchange areas. As expected, seniors’ Medicare costs are higher than are 40 year olds costs. However, with the national average spread around three times for this age group and Medicare, the difference here is one tenth of that, less than a 30%.

Since Medicare costs are not so different between high and low cost areas, the only conclusion is that ACA Exchange costs are too high. These high cost estimates have led to private insurer premiums far higher expected.

Medicare vs 10 hi

In conclusion, Medicare costs do not differ much between high and low cost ACA Exchange areas. By extension, health care costs for a 40 year old should not differ by much. Yet, the difference in premiums is huge.

If the insurer has near monopoly power, it has little reason to demand deep discounts. Insurers’ margins are constrained by ACA law to 20%. In short, 20% of a higher cost is more profitable than 20% of a lower cost. So why press harder for lower costs?

If the provider has near monopoly power, the insurer has little leverage since there are no competitive providers as an alternative. Either way, individuals in some ACA Exchanges are paying higher costs than expected.

Medicare doesn’t worry about either dominant insurers or dominant providers. It has a national payment scale, and with Medicare amounting to half a provider’s business, the providers are virtually forced to accept Medicare’s terms.

ONE SOLUTION IDEA

There is a solution that could remedy this situation. Amend the ACA with a proviso to apply only to any ACA Exchange market area in which the spread between insurers’ premiums and Medicare payments is greater than some threshold.

If the spread exceeds that maximum, ACA could create a public insurance option and where the public option requires providers to accept both Medicare and the option or neither. Public option premiums would key off Medicare payments plus an added profit margin to level the playing field with private insurers. This would force competition regardless of whether the insurer or the provider was dominant.

APPENDIX 1

One further check on Medicare as a proxy is a deeper dive into its major components to see if any are skewing total costs. The two graphs below highlight hospital admissions and emergency room visits per thousand beneficiaries in the 20 ACA Exchange areas. As expected, variations exist, but no consistent pattern appears between Medicare admissions between ACA Exchange areas.

CMS Hospital

CMS ER visit

There is one outlier and that is Medicare costs in the highest cost ACA Exchange area, a ski resort area. Here Medicare hospital and emergency room visits are markedly lower. It is likely that seniors living here may be more active in winter sports. This suggests they may be generally fit than the average senior, and thus incur fewer hospital and ER visits.

APPENDIX 2

Source for the 10 least expensive and 10 most expensive ACA Health Insurance Exchange areas were compiled by Kaiser Health News (KHN) from data developed by the Kaiser Family Foundation Program for the Study of Health Reform and Private Insurance, healthcare.gov, and ACA Exchanges. The costs analyzedwere for a 40 year old person.

KHN is a nonprofit news organization committed to in-depth coverage of health care policy and is an editorially-independent program of the Kaiser Family Foundation, a non-profit private operating foundation, based in Menlo Park, Calif., dedicated to producing and communicating the best possible analysis and information on health issues.

APPENDIX 3: 10 Least Expensive Areas (Counties)

$154: Minneapolis-St. Paul. Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, Sherburne and Washington counties.

$164: Pittsburgh and Northwestern Pennsylvania. Allegheny, Armstrong, Beaver, Butler, Crawford, Erie, Fayette, Greene, Indiana, Lawrence, McKean, Mercer, Warren, Washington and Westmoreland counties.

$166: Middle Minnesota. Benton, Stearns and Wright counties.

$167: Tucson, Ariz. Pima County.

$171: Northwestern Minnesota. Clearwater, Kittson, Mahnomen, Marshall, Norman, Pennington, Polk and Red Lake counties.

$173: Salt Lake City. Davis and Salt Lake counties.

$176: Hawaii. All counties.

$180: Knoxville, Tenn. Anderson, Blount, Campbell, Claiborne, Cocke, Grainger, Hamblen, Jefferson, Knox, Loudon, Monroe, Morgan, Roane, Scott, Sevier & Union counties.

$180: Western and North Central Minnesota. Aitkin, Becker, Beltrami, Big Stone, Cass, Chippewa, Clay, Crow Wing, Douglas, Grant, Hubbard, Isanti, Kanabec, Kandiyohi, Lac qui Parle, Lyon, McLeod, Meeker, Mille Lacs, Morrison, Otter Tail, Pine, Pope, Renville, Roseau, Sibley, Stevens, Swift, Todd, Traverse, Wadena Wilkin and Yellow Medicine counties.

$181: Chattanooga, Tenn. Bledsoe, Bradley, Franklin, Grundy, Hamilton, Marion, McMinn, Meigs, Polk, Rhea and Sequatchie counties.

Source: http://www.kaiserhealthnews.org/Stories/2014/February/13/10-Least-Expensive-Health-Insurance-Markets-In-US.aspx

 

APPENDIX 4: 10 Most Expensive Areas

$483: Colorado Mountain Resort Region. Eagle, Garfield and Pitkin counties, home of Aspen and Vail ski resorts. Summit County premiums are $462.

$461: Southwest Georgia. Baker, Calhoun, Clay, Crisp, Dougherty, Lee, Mitchell, Randolph, Schley, Sumter, Terrell and Worth counties.

$456: Rural Nevada Esmeralda, Eureka, Humboldt, Lander, Lincoln, Elko, Mineral, Pershing, White Pine and Churchill counties.

$445: Far western Wisconsin. Pierce, Polk and St. Croix counties. (across the border from St. Paul, Minn.)

$423: Southern Georgia. A swath of counties adjacent to the even more expensive region. Ben Hill, Berrien, Brooks, Clinch, Colquitt, Cook, Decatur, Early, Echols, Grady, Irwin, Lanier, Lowndes, Miller, Seminole, Thomas, Tift and Turner counties.

$405: Most of Wyoming. All counties except Natrona and Laramie.

$399: Southeast Mississippi. George, Harrison, Jackson & Stone counties. In Hancock County, the lowest price plan is $447.

$395: Vermont.* (Unlike other states, Vermont does not let insurers charge more to older people and less to younger ones. Its ranking therefore will differ depending on the ages of the consumers)

$383: Connecticut. Fairfield County. (The southwestern-most county, which includes many affluent commuter towns for New York City.)

$381: Alaska. All counties.

Source: http://www.kaiserhealthnews.org/Stories/2014/February/03/most-expensive-insurance-markets-obamacare.aspx?p=1

APPENDIX 5: Source-healthcare spending by age group:

http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/2004-age-tables.pdf

 

APPENDIX 6: Source-Medicare Costs and Utilization by geographic area:

Table_State County_All_December 2013.zip from Centers for Medicare & Medicaid Services (CMS).

Website: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-Geographic-Variation/Downloads/State_County_Table_All.zip

 

APPENDIX 7: Some Relevant Provisions of the Affordable Care Act.

It now appears that some market areas have less competition and the only way for an insurer to offer qualified plans is for ACA to ease a bit regarding condition (B) “ensuring sufficient choice of providers”.

Section 1311. AFFORDABLE CHOICES OF HEALTH BENEFIT PLANS (emphasis added)

1311(c) (1) Qualified Health Plans

(1) IN GENERAL.—The Secretary shall, by regulation, establish criteria for the certification of health plans as qualified health plans. Such criteria shall require that, to be certified, a plan shall, at a minimum—

(A) meet marketing requirements, and not employ marketing practices or benefit designs that have the effect of discouraging the enrollment in such plan by individuals with significant health needs;

(B) ensure a sufficient choice of providers (in a manner consistent with applicable network adequacy provisions under section 2702(c) of the Public Health Service Act), and provide information to enrollees and prospective enrollees on the availability of in-network and out-of-network providers;

(C) include within health insurance plan networks those essential community providers, where available, that serve predominately low-income, medically-underserved individuals individuals, such as health care providers defined in section 340B(a)(4) of the Public Health Service Act and providers described in section 1927(c)(1)(D)(i)(IV) of the Social Security Act as set forth by section 221 of Public Law 111–8, except that nothing in this subparagraph shall be construed to require any health plan to provide coverage for any specific medical procedure;

1311(c) (2) Rule of Construction

RULE OF CONSTRUCTION.—Nothing in paragraph (1)(C) shall be construed to require a qualified health plan to contract with a provider described in such paragraph if such provider refuses to accept the generally applicable payment rates of such plan.

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Affordable Care Act – Table of Contents

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The Affordable Healthcare Act for All Americans is without a doubt, a large and complex piece of legislation at just over 2,400 pages.  But how big is 2,400 pages when wide margins, lines numbered, text double spaced, large font,  multiple levels of indent, and more than a few references to other documents?  The sample page below (standard 8.5 inch wide paper) is indicative of the 2,400 page document. The actual content is but a small fraction of a page. AHA legal text sample

Aside from the claims of too lengthly and complex, Republicans argued that this was a Democratic bill rammed through congress.  Interestingly, AHA includes more than 160 Republican amendments accepted during the month-long mark-up through just one committee (HELP), one of the longest in Congressional history.

Critics have claimed it’s a government takeover of our health system.  It may be news to those critics but half of the health system is already government-run.  And the great bulk of the reform bill deals with steps to improve existing government systems that has hardly drawn any attention.  The following provides a quick breakdown of the law sections.  The PDF report that can be viewed/downloaded shows the entire table of contents.

There are 10 “Titles” or major topics in the bill.  Only the first, at 374 pages, less than one sixth of the entire bill deals with changes to how the private sector handles health care. Yet, this is the section that has garnered nearly all the criticism. The bulk of Title I deals with prohibiting abuses by the insurance industry, which, if you ask on an issue by issue basis, most people will agree with the new provisions. Nothing in the bill involves a “takeover” of private insurers.

The next three Titles [II,III,IV] deal with improving Medicare and Medicaid programs and comprise 852 pages, one-third of the bill.  These Titles address reduction of waste, fraud and abuse, and pilot new payment methods towards a “results” oriented method common in most other industrialized countries.  There are few objections to this section.

Title V, at 256 pages, addresses anticipated shortages of primary physicians and other healthcare workers due to services that will be required by aging baby boomers.  This is totally opposite the “death panels” that ration healthcare that unfortunately got too much press for a falsehood.

Title VI uses 323 pages to improve transparency and integrity, yet more efforts to reduce waste, fraud and abuse in both the public and private health sectors. Who objects to efforts like this?

Title VII  improves Access To Innovative Medical Therapies, with focus on lowering the cost of drugs

Title VIII addresses ‘‘Community Living Assistance Services and Supports Act’’ or CLASS Act. This title The purpose of this title is to establish a national voluntary insurance program for purchasing community living assistance services and supports.  Moving people from higher cost hospitals and nursing homes to assisted living lowers costs, a laudable goal.

Title IX includes the revenue provisions that include provisions to raise revenue to pay for the expanded coverage.

The final Title X addresses 1) Medicaid and CHIP, 2) Support for pregnant and parenting women, and the major section 3) Indian health care improvements.  None are controversial issues.

Title I——-Quality, Affordable Health Care For All Americans [374 pages – 14%]

Title II——Role Of Public Programs [221 pages – 8%]

Title III–—Improving The Quality And Efficiency Of Health Care [501 pages – 19%]

Title IV–—Prevention Of Chronic Disease And Improving Public Health [130 pages – 5%]

Title V——Health Care Workforce [256 pages – 9%]

Title VI–—Transparency And Program Integrity [323 pages – 12%]

Title VII-—Improving Access To Innovative Medical Therapies [65 pages – 2%]

Title VIII—Class Act [53 pages – 2%]

Title IX—–Revenue Provisions [93 pages – 3%]

Title X——Strengthening Quality, Affordable Health Care For All Americans [373 pages – 14%]

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Non-Partisan CBO Estimates of Healthcare Reform

Download PDF Report >>> CBO Estimate of Healthcare Reform

SUMMARY

Few doubt how unsustainable current medical trends are.  With medical inflation consistently outpacing the CPI, health costs will continue to take a greater share of the economy. Private insurers claim they can solve the problem with reform but without a Public Option.  History suggests this is a dubious claim at best.  Looked at from multiple angles, private insurers are not likely to succeed.  Profits gains have far exceeded key indices, medical loss ratios have gone way down while costs have gone way up, competition is diminished by concentration of major insurers, and tort reform complaints carry little water.

DISCUSSION

The graph below shows CBO projections of under 65 population by insurance group. The top, red bars are the uninsured that continue to grow each year.  While insurance through employment is fairly consistent, greater employee cost sharing is an increasing burden.

Neither the Senate nor House reform proposals provide financial support to unauthorized immigrants.  When analyzing various effects of reform, this group has no effect. For data consistency for both before and after reform, unauthorized immigrants are not included in the populations.  Removal lowers uninsured population between 5 and 8 million over the 10 year period.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

While the country may be coming to some agreement that reform is needed, differences exist on how to achieve reform. Health Insurers want to have participation mandatory which is a valid point. Except they have offered no other steps on how to reduce costs and are against Public Option that would offer real competition. However, they would be beneficiaries of millions of new customers.

Those customers would come from those currently uninsured, or insured through individual and employer groups. In the graph next column, CBO assumes reform includes an Exchange that would shift nearly 40 million from uninsured, individual and employer groups (left side of graph) to Medicaid and the Exchange (right side).  Note that not all the movement is to the Exchange.  A large number of uninsured poor would switch to Medicaid.  Still, the Exchange is expected to grow quickly to nearly 25 million. This group is the target for private insurers and Public Option.

So why is it necessary to have a Public Option on the Exchange?

 On its face, private insurers could certainly cover 25 million new enrollees without government involvement. But the catch is that the government IS involved because of another feature of reform.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

That reform feature is “affordability credits”.  Even those with insurance find their total health care costs consume so much of their income that they do not get needed care. Affordability credits help those with lower incomes pay premiums and shared health costs. The effect is shown in the chart below. Medicaid pays for the very poor while credits help less well off people in the Exchange.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

In short, the Government will be paying some $100 billion each year in credits to Exchange enrollees, much of it going towards insurance premiums.  Will private insurers provide good value for this outlay? Their track record is not encouraging. 

Health care costs fall into two categories: medical cost outlays and administration / overhead costs. In 1993, 95% of premiums went for medical costs at Investor-owned insurers as shown below.  Over the next 14 years, this decreased to just above 80%, a shift of about 14% or one percent per year.  Meanwhile Medicare administration and overhead costs have remained fairly constant through the period.  While some may argue this is not a direct comparison, the fact that Medicare medical loss ratio stayed constant while investor-owned insurers drop significantly cannot be denied.

 Sources: PricewaterhouseCoopers’ Health Research Institute, and U.S. Center for Medicare & Medicaid Services

14% becomes urgent when you consider premium dollars as shown in the chart below. Private insurance runs over $600 billion. 14% of this is nearly $90 billion per year.  Fortunately, one-third of private insurers are non-profit.  But that leaves some $60 billion added overhead including contribution to profits since 1993.

Source: Center for Disease Control – Health, United States 2008 Figure 19

Profits did not grow to $60 billion, but they sure did grow as shown below, exceeding by a huge margin the S&P 500 and CPI for urban wage earners.  All the growth occurred since 2002.

Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Standard and Poors, and Health Insurers’ 10K’s

Not only did investors do well, but so did executives and all at the expense of people paying for health insurance. 7 insurance CEO’s drew nearly $70 million total compensation in 2008.

Still, Investor-owned insurers argue that their profits are a mere 3% of revenue.  Another and better measure is Return on Equity (ROE) which is profitability based on investment.  By this measure, health insurers are earning 17%.  From the chart below some industries do have greater returns, but 17% should be nothing to complain about.  The 10 insurers are even higher than credit card issuers.

Sources: 10K reports for top 10 Investor-owned Insurers and  CCH Almanac of Business and Industrial Financial Ratios, 2009 Edition

Now high returns to executives and investors might have some justification if private insurers were successful in containing and bringing down the major component of health care – medical costs.  Yet, year after year, medical costs outpace the CPI.  One could almost argue that insurers “administer” health care costs rather than provide a value added “management” of those costs.

Competition often has something to do with companies holding down costs.  In competitive markets, insurers need to maximize cost control efforts to maintain market share.  But is there really competition?  The graph below shows the market share of the top two insurers in each state weighted for population covered.

 Sources: AMA, Consumer Union, Sector & Sovereign analysis

Over half the U.S. population lives in states where two insurers control over 60% of the market.  That is not a good omen for competition.  For instance, insurers claim that their market share allows them to negotiate lower rates with providers.  It would not be fair to paint all insurers with the same brush. But a number of insurers have been found not to be driving down rates, but of negotiating with providers to NOT contract lower rates with their competition.  Instead of reducing costs, these illegal acts increase medical costs compared to a truly competitive environment.

Insurers and others also argue that tort reform would bring down medical costs owing to current waste of defensive medicine. There is no argument about the waste. But is it due to defensive practice or simply practice? Data suggests that the latter is more prevalent.

The graph below, derived from Dartmouth College data, groups two sets of hospitals, the 100 highest cost, and 100 lowest cost hospitals for Medicare spending per decedent during the last two years of life.  The bars represent average costs by states that have enacted tort reform setting caps on non medical damages.  For the lowest cost hospitals, tort reform shows virtually no effect on hospital costs. For the highest cost hospitals, it is mixed. But there is no clear evidence that tort reform will substantially lower costs.

Source: Dartmouth_hosp_DAP_Hosp_HRR_ST_01_05.xls

So far, private insurers’ track record suggests that left to the free market, they will not be very successful in lowering costs, either administrative or medical costs, with or without tort reform.  It may be unrealistic to even expect investor-owned insurers to succeed given that their number one priority is to their investors.

Instead of using their actuaries to data mine patterns to help providers reduce costs, their efforts are focused on denying claims and raising premiums to high claims groups.  Instead of returning surpluses to people paying premiums, they are buying back billions of dollars of their own stock to increase value to their shareholders.

Thus far the focus has been the cost of illness. Another aspect is the benefit of staying healthy. Corporations have had success in wellness programs. They not only reduce health care costs, but lower absenteeism. (http://www.uscorporatewellness.com/USCW White Paper 2009.pdf)  Some insurers offer wellness programs, but they often include a health risk assessment on employees and that runs a risk that insurers may use that data in setting rates for the company: if towards lower rates, good. If higher rates, not so good.

Fortunately, large corporations are the biggest block of insured people, and their wellness efforts can have a broad effect.  The graph below shows the U.S. population by source of health care coverage. Big business covers 45% of the population, 28% who self insure and another 17% who shift risk to insurers.

Source: CBO, EBRI, CMS, Goldman Sachs Research estimates

Groups at a disadvantage to big business include individual and small group business and the uninsured that together make up over a quarter (27%) of the population. If private insurers are unable or unwilling to lower administrative and medical costs for them, then the next best alternative is to offer a Public Option.

Without progress in both lowering administrative and medical costs, the affordability credit paid for by the government is going to cost taxpayers more than can be justified.  The question is not whether a non-profit Public Option will succeed. The question is whether private insurers can succeed after years of failing to take the needed steps to contain costs.

The stakes are huge. CBO projects that with a Public Option, the insurance picture changes dramatically as the graph below shows. Medicaid grows a bit for the poorest, but the uninsured and non employer based population can look forward to more affordable insurance.  Meanwhile the majority of the population is unaffected.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

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