California Network Regulation Musings

Good doings in California on network regulation.  Two quotes jumped out at me. 

The problem this leaves is who's going to eat the excess charge? That's the core of the medical association's problem with the bill. It's asking that the measure be amended to "require an efficient, equitable dispute resolution mechanism that guides parties towards a reasonable rate for services," in the words of an Assembly staff analysis. The California Medical Assn. says it favors the approach of a 2014 New York law, which requires arbitration between providers and insurers, leaving the patient out of it. 

Arbitration in this context sounds like a polite word for "crappy rate setting process with limited input, limited consistency and limited accountability."  Why would anyone want that?  If we know physicians will do these services for these patients why not deal with it upfront by establishing what they will be paid?  That allows the possibility of opening the process and incorporating more of the interests involved.  Someone could argue, "why make a big deal about this when there's essentially no process around in network contracting?" but the difference is control.  If an insurance plan has a too-expensive or too-cheap network one can switch plans.  There's no equivalent remedy with out of network providers, whatever process the state comes up with is what everyone in the state lives with.  It ought to be held to a higher standard.

Here's the background. in the good old days, doctors in those three key specialties[radiology, pathology, and anesthesiology] were employees of hospitals, so if your hospital was in your insurer's network, they were too. Over time, many hospitals have outsourced these specialties to independent doctor groups, which may or may not be in the same network as the hospitals themselves. If they're not in yours, you could suddenly get a bill with an astronomical number at the bottom line.

Organizational structure matters.  Shock bills are stemming in part from hospitals arbitrarily and without any public discussion deciding that radiology, pathology, and anesthesiology are no longer their problem, instead it's the patient's responsibility.  That's a huge change that I don't think we'd accept uncritically in any other industry.  Airlines are getting pushback about baggage fees, imagine the outcry if one day they decided that ticket prices no longer paid for pilots and passengers had to pay that on their own.  Part of the solution here might well be stricter controls on what hospitals are allowed to outsource and what they're required to bundle within their own services.

Food for thought as I look forward to Oregon jumping into network regulation.

Market structure matters

This story shows how the exchange may succeed, but it also points to a problem.  If insurers are allowed to arbitrarily adjust their rates after filing (and after they've seen competing filed rates) there can be de facto collusion.  Insurers could initially file high and then go only as low as necessary to be competitive.  If they all play that strategy everyone files high and there's no need to go lower.  That's not what we want the exchange to do.

On the other hand it isn't plausible or desirable to say that insurers who want to lower their rates and who can bear the risk should be prevented from doing so.

I think the solution is to make such changes expensive.  If a company fudges filed rates the "error" should be widely publicized so as to create reputational damage.  Who wants to pay higher rates just because?  There should also be a financial hit, perhaps by the state contracting out for third party review at the filing company's expense.  Not only does it create a penalty to discourage such behavior, it's prudent since where there's one "error" there may be more.

And I have to add, I'm shocked... shocked that Providence had fat rates.

Providence revisited

DCBS has rendered a decision on the 11/1/12 Providence individual rate filing.  They knocked the increase down from 15.7% to 12.2%.  The change is mostly driven by a reduction in annual trend from 7.2% to 5.5%, or as a 23 month factor from 14.3% to 10.8%. 

I wrote before that I thought the Providence trend was high, below is an update of the chart that shows why.  I'm starting it with January of 2010 because that was when the explosive growth in membership tapered off.  Prior to that comparing the book to a point 23 months earlier would be apples and oranges, as the book had more than doubled in that time.  Click for a larger view:

The blue line shows the 12 month change in the rolling 12 month normalized cost per member per month.  It's the same as the figures included in Providence's filing attachment G, column N, except that I'm compounding the changes over 23 months the same way the filing uses them.  So the Feb-2012 value of 7.2% becomes (1 + .072) ^ (23/12) - 1 = 0.143.  That 14.3% figure happens to be what Providence proposed using, it's the actual factor by which the experience claims are marked up for trend as shown in the Rate Projection attachment A.  That pick is shown on the chart as the flat red line.

There are two more lines on the chart.  The flat purple line is what DCBS approved, and the green line is the 23 month change in rolling 12 month normalized cost pmpm.  That is, instead of looking at a 12 month change and extrapolating it over a 23 month period I'm looking at the actual change over 23 months. 

People can decide for themselves how reasonable the proposed and approved trends are.

Providence Rate Filing

I'm normally sympathetic to insurers, but something about this filing rubs me wrong.  Maybe it's because someone thought it was important that everyone know that we're paying an extra 1.1% for women's preventative health services through the ACA, so important that they included it as a line item in the summary.

Or maybe it's because of this:

Instead of estimating an annual factor and blowing it out over 23 months I'm looking at the actual 23 month changes.  I'm comparing that to Providence's selected 7.2% annual factor, which compounds out to 14.3%.  Even against the worst point in 2011 the factor used in the proposed rates is almost double.  Putting it in comparative terms,

Maine vs. Anthem Decision

The Maine Supreme Court released its decision in the Anthem case last week, where the insurer had challenged the adequacy of the Superintendent of Insurance's approved rate.  I'm glad the court found in favor of the Superintendent, states should have flexibility in regulating and a judicially imposed profit load would just be a mess.  But I'm a little amused at the court's dismissal of the subsidization argument, where Anthem argued that the low profitability of the individual and small group lines would drive up large group pricing.

Here is the key section addressing this on page 18, emphasis mine.

There is no evidence in the record to suggest that the approved rate increases will inexorably result in higher rates being charged to Anthem’s unregulated group insurance consumers. To say that Anthem might occasionally need to use its substantial company-wide surplus, which we agree is funded in large part by the financial success of its unregulated group insurance products, to pay for intermittent losses sustained by the individual lines, is both in form and substance a different statement than saying that its group consumers are in fact being charged higher rates in order to subsidize the regulated lines. Without some discernable proof that cross-subsidization is occurring as a result of the rate approved by the Superintendent that included a 1% risk and profit margin, Anthem’s argument falls short of persuading us that the Superintendent overstepped the bounds of her statutory authority by using her concept of the “inadequate” standard as a vehicle to consider the financial health of the company as a whole.

The judges acknowledge that the surplus is largely derived from the unregulated lines, and that regulated lines will occasionally take money from that surplus.  They don't say it explicitly, but clearly they understand that the lower the margin on the regulated lines the more it will take from surplus and the less it will contribute back to it.  So where is the money supposed to come from?  How is this not requiring subsidization?

 What the judges are really saying is that to make this claim stick you need clear evidence of subsidization, such as attaching a "you are now subsidizing the regulated lines" fee onto all the unregulated business.  That works for utilities, just look at all the line items broken out on your bills.  Utilities can throw whatever they want on there without consequence because customers have no choice, it's a monopoly.  That isn't the case with large group health insurance.  Businesses have plenty of options if they don't want to effectively help out all the employees of companies that don't bother offering health coverage.  I think that kind of subsidization is unsustainable even when it is under the table, eventually people would figure out that insurers that didn't write any regulated business would be cheaper than those who did.  But how much quicker will that happen when you slap businesses in the face with an overt penalty fee?  The judges made a lot out of the lack of evidence submitted by Anthem, but what could Anthem say without sabotaging the lines where they actually make money?

Grist for the mill for those thinking about how to effectively regulate health insurance.

OSPIRG and ineffective medicine

I was struck by an op-ed relating OSPIRG's efforts to open up the rate review process in Oregon.  OSPIRG working in concert with DCBS brought rate review before the public in a big way.  That is certainly a good thing.  But how good?  The trouble is, the individual and small group markets were already pretty well regulated:
Notice the horizontal axis crosses the vertical at 80%.  To be clear, the medical loss ratio is the portion of premium going to medical bills.  The portion above the medical loss ratio is production expense, admin and profit.  That insurance portion of premium is what OSPRIG is gunning for, they've said nary a word about the money on the medical side, where the vast bulk of the dollars go.

OSPIRG's efforts are further limited in that the review process they're promoting is limited to individual and small group markets.  In the latest Health Insurance in Oregon report those two groups total 36% of the private market.  Which is to say, among Oregonians who have private insurance for every one who might be helped by these efforts there are almost two who will not.

Combining the market distribution with a lowball MLR pick of 80% and you get this:
Not as ineffective as Republicans when it comes to health care reform, but it sure does leave room for improvement.

Pushback on rates

This is interesting.  A large health insurer is suing Maine for setting rates below what would be required for a "a fair and reasonable return."  The margins in question are

• 2009 3%
• 2010 0.5%
• 2011 1%

For context, Oregon (cited in the article) set rates at negative returns, specifically saying they wanted to take insurer surplus and give it to consumers.

This kind of “taking” looks fair if you don’t think about it.  After all, why shouldn’t consumers benefit if insurers have excess capital?  The problem in a nutshell is that the excess capital wasn’t paid in by the same people who would be getting it out.  People who are policy holders in 2011 are not necessarily the same people who were policy holders in prior years when the surplus was built up.  Even more so, there are differences in product mix.  If an insurer is making “fat” profits off large group customers, what is the moral reasoning behind taking that money and giving it to small group or individual customers?  It subsidizes small business at the expense of large, or even worse subsidizes employers that don’t offer insurance by taking from those that do.  Anthem leaves this to section III-A-3 in their brief, but to me it’s their best argument.

I hope the Anthem suit fails because regulators should have maximum flexibility to respond to market place needs.  But at the same time the concept of “taking” deserves much more public scrutiny, and for that I’m glad the suit was filed.  Scheduled for oral arguments 11/8/2011.

Rate Review vs. the Legislature

One thing worth pointing out is the open and democratic nature of the provider pricing regulatory process in MA.  Hospitals will push back and rightly so, whatever doctrine emerges will need their support and consent.  The right way to get at that is through a legislative process.  That may be slow, cumbersome and prone to unwieldy compromises but so is life.

In contrast certain people in Oregon have pushed to twist premium rate reviews into the be-all end-all of healthcare reform.  Rate review is a poor forum for the task, it is dominated by technical calculations that few people understand and has no apparatus or experience with assimilating input from all the interests involved.  With limited input you are more prone to get unintended consequences. 

Case in point, the call to subsidize individual policies at the expense of large group plans.  That would in effect penalize companies who offered health coverage to the benefit of those who did not.  Obviously, it would encourage companies to drop employee coverage which goes against the stated objectives of reform advocates never mind the politics.  It’s an absurd policy on it’s face that would likely not make it out of committee in the legislature.  Rate review on the other hand is basically at the discretion of DCBS.  It merely takes an ambitious Director to put such an ill-conceived policy into practice.

It makes you wonder, why are reformers so reliant on demagoguery?  If it’s good policy bring it through the legislature, make a case for it and make it law.  The back door stuff demeans us all.