Obamacare’s Most Popular “Patient Protection” is Why Patients Can’t Get Paid for Saving the System Money

Last Monday, I posed the rhetorical question “Why Can’t Patients Get Paid for Saving the System Money?” and gave some examples, such as Medicare’s competitive bidding for durable medical equipment and incentives offered by Medicare Advantage plans, demonstrating how rules inhibit patients’ ability to participate more fully in forming prices and controlling costs. The primary reason for such rules is to compensate for Obamacare’s most popular provision: Prohibition against medical underwriting, so that sick and healthy patients of the same age pay the same premiums.

Health Savings Accounts, Flexible Spending Arrangements and Health Reimbursement Arrangements are powerful tools to engage patients in managing healthcare costs. However, as structured today, they are very blunt. Once a patient hits his deductible, he becomes immune to further costs. This is the primary reason why hospitals’ costs and prices are so hard to control.

The California Employees Retirement System (CALPERS), in collaboration with WellPoint, Inc., introduced reference pricing for knee and hip replacement surgery. This meant that the employer would pay a fixed fee — and no more — to have the operations done at high-quality, low-priced facilities. Employees who wanted to go to higher-priced facilities paid the difference. As a result, high-priced facilities cut their rates by one third.

This started back in 2008. So, you would think that, by now, WellPoint would have introduced reference pricing for hip and knee replacements to all its corporate clients across the United States. No such luck. As a result of Obamacare, the U.S. Department of Labor (DOL) is threatening to regulate this practice:

Reference pricing aims to encourage plans to negotiate cost effective treatments with high quality providers at reduced costs. At the same time, the Departments are concerned that such a pricing structure may be a subterfuge for the imposition of otherwise prohibited limitations on coverage, without ensuring access to quality care and an adequate network of providers.

Needless to say, hospitals would love to regulate reference pricing out of existence. So, it is understandable that insurers and employers are gun-shy about expanding it. The key phrase in the DOL’s statement is “access to quality care and an adequate network of providers.”

The DOL is hyper-sensitive to this because Obamacare’s prohibition of medical underwriting motivates insurers to attract the healthy and deter the sick from applying for coverage. The easiest way to do this is through the price system. After all, if an insurer can design benefits such that some beneficiaries can pay lower prices for services but others are motivated to pay higher prices because they need highly specialized providers, is a pretty good proxy for charging sicker beneficiaries higher premiums than healthy ones.

Another frequent suspect is corporate wellness programs, which have a spotty record at containing medical costs. Nevertheless, according to a recent Wall Street Journal article, these programs continue to grow rapidly. The state of Maryland has just announced fines that will reach up to $450 per person for public employees who do not participate in its wellness program. CVS Health, Inc. charges employees who fail to complete annual health-risk assessments $600 more for health coverage.

Because such policies also look like charging sick beneficiaries more for coverage than healthy ones, government agencies audit them carefully. The Equal Employment Opportunity Commission recently sought a court order to stop Honeywell, Inc., from imposing surcharges on employees who don’t participate in its wellness program. A federal judge just rejected the EEOC’s request.

As long as the government forbids insurers from medically underwriting beneficiaries, it will also impose rules that inhibit the price system from functioning the way it should. As a result, patients cannot fulfill their potential to cut costs by responding sensitively to prices. Reformers who reject medical underwriting but enthuse about price transparency and deregulated health insurance neglect this internal contradiction.

Medical underwriting is politically touchy. NCPA’s Heath Policy Blog has discussed a number of approaches to permitting it while protecting sick patients. Our favorite is health-status insurance (also known as “insurance against becoming uninsurable”). Another, second best, solution is risk adjustment, wherein insurers which enroll more heathy people subsidize insurers which enroll more sick people. However, risk adjustment in Medicare still needs improvement; and Obamacare’s version comprises more of a bailout of health insurers than protection for sick people.

Comments (12)

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  1. Fred says:

    That CALPERS example is spot on. There is no incentive for people to shop around if they have no sensitive to price.

  2. Ralph @ MediBid says:

    Competitive bidding works in every part of the economy INCLUDING health care. Calpers has proven it, and MediBid is proving it.
    Yet, many businesses still embrace the big insurance companies who want to keep costs up.
    Why is this?

  3. Underwriterguy says:

    As a 30 year veteran of a “big insurance company” I am puzzled by Ralph@MediBid’s contention that insurers want to keep costs high. High costs lead to high prices which in turn leads to loss of market share. And unanticipated high costs in guaranteed cost products leads to lowered profits.
    Ralph where is your evidence?

    • Ralph @ MediBid says:

      The BUCAHs dont care how much client money they spend in an ASO contract, and if they charge an access fee, they make more on higher costs

      • Underwriterguy says:

        I beg to differ. As someone who was responsible for both target claim costs and admin fees I can tell you that the surest way to lose a customer is to disregard costs in an ASO arrangement.
        And access fees have nothing to do with the level of claims. they are an expense charged for the use of the insurer’s network. Hence, to earn the fee on an ongoing basis, the network needs to create value (be lower or no higher than competing networks).

  4. Don Levit says:

    Underwriter guy
    If costs are higher than anticipated the insurer raises premiums the next year
    This guarantee sounds like a multi year guarantee
    Regarding the DOL ruling how do they jump from praising reference pricing and providing high quality providers to their concerns about access to quality providers and an adequate network
    It seems the DOL’ s concern is with the number of providers in a reference priced system
    Were the number of providers in the Calpers system inadequate
    I did not
    Know the DOL could prophesied on the adequacy of future reference priced networks
    Don Levit

    • Underwriterguy says:

      Don, it is almost impossible to raise premiums sufficiently in a subsequent year to recover a loss in a proceeding year. Prospective pricing of guaranteed cost products does not have an element of loss recovery. Anyone foolish enough to do so would price themselves out of the market.

      Retrospectively rated policies, not guaranteed cost, sometimes have a deficit recovery margin, but this, too tends to put pressure on competitive rates.

  5. Don Levit says:

    Underwriter guy
    Thanks for your insight
    As I understand the group market rates are guaranteed for one year
    There is a plan currently available that guarantees the rates up to 5 years
    To learn more go to nationalprosperity.com
    Don Levit,CLU,ChFC

  6. Barry says:

    Can an employee be charged a deductible more than once per year? Here’s the deal. Someone decided we needed to change our benefit year to match our fiscal year in 2013. The deductibles and co-ins were supposed to remain by calendar year. Couple days before our fiscal year ended, we get an email that our plan year has to match our benefit year, so deductibles were starting over on Nov 1. So our benefit year was only 10 months and now it’s starting over. I’m wondering if it’s legal. We didn’t change carriers or anything like that.

    • Ralph @ MediBid says:

      Barry, annual deductibles can be plan year or calendar year. I prefer monthly deductibles, because they reduce utilization, and costs

      • Bart I. says:

        I think Barry is asking about the transition from plan year to calendar year. In other words, if a year is cut short, shouldn’t this require pro-rating of the deductible for either the previous or the upcoming year.

        It sounds as though someone’s employer decided to engineer a one-time cost saving.

  7. Charlie Bond says:

    Hi John,

    The solution is very simple: Don’t use premiums as either a carrot or a stick.
    The employer wellness plans that work are the ones that directly and positively incentivize behaviors with real rewards in real time for specific changes and improvements made by the employee. Indirect rewards and penalties get ignored.

    For this reason, I am working with a great group of innovators in developing CareChange(tm), for the specific purpose of developing a method of incentivizing patients to assume individual responsibility for their own wellbeing. We are looking to build CareChange into all ACO and gainsharing contracts as a means of getting patients involved in ACO’s and incentivizing them to help cut their own health care costs. Imagine having an accountable care organization that is accountable to patients! Even more radically, imagine patients being accountable for their own health choices. After all, patient behavior is both the greatest predictor of outcomes and the greatest driver of costs. We have to get patients actively involved in the campaign to cut health care costs.

    I believe we will be crowd-sourcing the funding for CareChange by year’s end. It’s a great project. Anyone interested should feel free to contact me at cb@physiciansadvocates.com.

    Charlie Bond