It is hard to imagine a more interesting time to have been blogging than during the period from last July to now, particularly given the strange course of federal health reform legislation. I feel privileged to have been able to comment and question and am equally convinced that I was obliged to do so.

Please continue to read Let’s Talk Health Care. The perspectives of the people responsible for making Harvard Pilgrim the number one rated commercial health plan in the United States for five consecutive years cannot fail to be relevant.

Here’s to a national political-economic consensus that is strong enough and wise enough to meet the financing challenges of universal coverage.

The first is expanding HIPAA portability restrictions on medical underwriting and preexisting condition exclusions (as long as there is no gap in coverage) to apply to all shifts in coverage, whether they be group to group, group to individual, or individual to group. If all fully insured and self insured plans abided by these rules, no one who is currently insured would be forced out of the market unduly. Second, the uninsured could be offered a one-time open enrollment (or even an annual open enrollment) to limit adverse selection and put insurers on an equal footing. Third, the full cost of insurance (including the employer share) should be exposed to employees if the employer is subsidizing care. And fourth, there needs to be full data transparency on the comparative cost/quality performance of health care providers in a form that is understandable and actionable for consumers.

These are interesting recommendations, but they don’t quite go far enough. Expanding HIPPA portability and offering a one-time or annual open enrollment in non-group would still result in some adverse selection, and there would need to be a high-risk pool or other reinsurance mechanism to smooth out the risk problem. There is also the issue of what to do about non group rating rules. Many states have few restrictions on what can be charged for non group coverage. Even if individuals are guaranteed enrollment, they may find that they cannot afford the premiums, especially if they are older or less healthy. But addressing this by compressing rating bands, as the House and Senate passed bills do, would result in dramatic shifts in price and greatly increase costs for many who are currently insured, especially younger individuals.

The exposing of data to consumers on the full cost of insurance and provider cost and quality is important but won’t be particularly effective if health insurance products and employer contribution policies overly insulate consumers from the consequences of making bad decisions. In order for information to be actionable consumers need to care enough about it, or the information is merely academic. Consumers whose “right” to choose any provider for any reason is now heavily subsidized should pay for the privilege in the future. Health insurance products and employer contribution policies need to be structured so that data transparency actually means something.

Finally, the health care cost problem (i.e. medical trends) must be addressed, or we will continue to nibble around the edges of reform. I am increasingly convinced that a collaborative effort involving health plans, providers, employers, and government working in concert to affect trend is the only answer.

It would seem to me, Dr. Gawande’s recent article on the value of pilots notwithstanding, that the answer is no. If we think about why costs are rising and where the health care dollar goes, it becomes apparent that the larger economic forces at work are unlikely to be affected by Medicare pilots that test bundled payments, Independence at Home, medical homes, and accountable care organizations; or by studies of per capita spending, geographic variation, and geographic adjustment factors; or by the creation of an Independent Payment Advisory Board, CMS Innovation Center, or Patient-centered Outcomes Research Institute – all of which are contained in either the House or Senate bill. As worthy as these efforts may be, they are unlikely to control medical costs that grow at two to three times the rate of inflation and make up roughly 90% of the health care premium dollar.

If we think honestly about what drives medical trend it is the unit cost of services. A report issued last week by the Massachusetts Attorney General’s office concluded that price not utilization is driving costs in Massachusetts and that the “market leverage” of certain hospital systems is the chief driver of price increases. The term “market leverage” has many meanings, affecting all major players in the health care system.

Market leverage means that some hospital systems by virtue of their size and brand strength or geographic dominance command higher and higher prices. It helps that the official definition of “hospital” is less than clear so that these systems are reimbursed for many otherwise freestanding services at hospital rates. But market leverage also means that health plans are competing on the breadth of their networks, not on cost and quality.  Health plans cannot afford to exclude such systems – which would otherwise be a reasonable response to higher and higher prices — because the employers who purchase health insurance for employees generally have no tolerance for limited provider networks even when based on cost and quality. And finally, market leverage means that individuals who consume health care are overly influenced by the brand strength of large systems rather than by cost and quality data.

Pilots, studies, and new offices are unlikely to change these dynamics. Getting serious about data transparency, cost, quality, and value-based purchasing might.

This is unfortunate, because the need for real (as opposed to illusory) health reform remains. The options for proceeding would seem to be 1) the House passes the Senate bill and a reconciliation process is used in the Senate to modify it to be acceptable to the House or 2) a scaled-down bill is introduced. The former seems unlikely, but the latter is an idea that may be gaining traction. Last week the President said “I would advise that we try to move quickly to coalesce around those elements in the package people agree on.” A Wall Street Journal headline yesterday read “Democrats Focus on Key Elements of Health Bill”. Many possible piecemeal approaches are surfacing, but even finding the right combination of scaled-back proposals will be a challenge.

And there are problems to be wary of. For instance, without an individual mandate (which seems to be off the table) health insurance reforms may drive up premiums for the currently insured and trigger adverse selection. Tax credits for small business and federally subsidized expansion of state Medicaid programs, both relatively non-controversial measures, would each require financing. If the financing comes from the problematic list of financing sources contained in the Senate or House bills, doesn’t the familiar gridlock reappear? A patient bill of rights with new, mandated benefits would create a similar dilemma.

Over the weekend Administration and Republican leaders explored options for a scaled-back bill. These included Administration ideas like moving forward with Medicare health plan and provider rate cuts to “extend the life of Medicare”, issuing refundable tax credits to small businesses to help offset the cost of offering health insurance, eliminating pre-existing condition provisions, and expanding Medicaid. Republicans focused on ideas like medical malpractice reform and allowing individuals to purchase insurance with pre-tax dollars. Perhaps there is an acceptable, affordable package here that would at least be a positive initial step, but I wonder.

The elephant in the room remains - the underlying health care cost problem, which neither side seems willing to address creatively. All reform ideas to date ignore the problem, add new costs, or distort the commercial market in an attempt to lower federal spending. If we are going to reassess health care reform, perhaps we should start with an unbiased look at what is really driving health care costs and try collaboratively to address the problem. The Administration seemed interested at one time in this approach, when early in the process the President hosted all the major stakeholders at the White House and secured a promise to work together to lower medical trends. The agreement disappeared in a flurry of Congressional deal-making. Without a broad, collaborative effort to address health care costs, piecemeal reforms will be just a sideshow.

The actuary’s office reported that in 2008 private health insurance premiums grew 3.1%, while Medicare spending grew 8.6% and federal Medicaid expenditures grew 8.4%. Of the nation’s total health care dollar 62% went to hospitals, physicians, and pharmaceutical companies, and only 7% to “program administration” (presumably health plans are included here?). The total health care dollar came almost equally from public and private sources.

There are, of course, many moving parts to this report – like the effect of the economic downturn on private insurance enrollment, employer “buy-down” of benefits, or an accelerated federal Medicaid match as part of the stimulus legislation – but the baseline is what it is, and the trends are unlikely to change in the near term. One rarely sees governmental health care funding reduced once it is in the base.

In a separate report the actuary’s office found that federal health reform would increase national health spending by $222 billion over the next ten years (even though actual spending would not start for four more years). Ironically, since most of the new spending would come from expanded Medicaid enrollment and new federal subsidies for the uninsured, the report goes on to project that the combined effect of low Medicaid payment rates and Medicare payment cuts to providers and plans authorized in the legislation would cause many providers to stop accepting patients insured by the government.

Whether or not you agree with this analysis, it raises some interesting questions. If Medicare and Medicaid costs are growing at almost three times the rate of private insurance premiums, shouldn’t the focus of cost control efforts be on whatever is driving costs in these programs? If hospitals, physicians, and pharmaceutical companies account for 62% of spending shouldn’t most of the focus be there? Why would a public plan that pays Medicare rates and operates like Medicare save any money, if Medicare spending growth is so much higher than private spending growth? How can an additional $222 billion increase in spending be afforded except by reducing actual health care costs (rather than by taxing the health care system)?

Given that health care spending is half governmental and half private currently, and assuming the governmental share increases with health reform (expanded Medicaid, federal subsidies) aren’t the likely outcomes in the absence of true cost containment 1) a two-tier system like the one projected by the chief actuary, 2) a severely under-reimbursed provider sector, or 3) a spiraling federal deficit?

And of course, if the top federal health care actuary is releasing reports that generate questions like these, the ultimate question is why we aren’t trying harder to answer them.

I have wondered during the course of the health reform debate why state insurance commissioners as a group have remained relatively silent. Perhaps because Harvard Pilgrim operates in markets where the national reforms being contemplated are largely in place has there been so little local concern expressed about the impact of the pending bills, but in some states the impact would have to be profound. Consider a state where non group and small group insurance is medically underwritten, where there are no rating bands, and where pre-existing condition clauses are used routinely. These practices have presumably been approved by the insurance commissioners, and I would venture to say that the cost of insurance for the insured population in these states is probably among the lowest in the country. Nobody really likes medical underwriting or pre-existing condition clauses, but they do keep insurance costs low for those who are insured.

Now think about a state insurance commissioner in one of these states contemplating health reform rules that eliminate medical underwriting and pre-existing condition exclusions, go to a 2:1 or 3:1 age rating band, and rely on a weak individual mandate to create a sound risk pool. The likely reaction, I think, would be visions of huge increases in cost for the currently insured population, particularly for the young and healthy.

The NAIC letter lists 12 ways that the bills under consideration might create higher costs or dramatic winner-loser shifts. These range from the issues mentioned above to the federalization of health insurance regulation; to the grandfathering of existing policies (about which I have posted previously); to a need for the effective dates of reforms to be simultaneous; to the effect of vouchers on employer-sponsored care; to the structure of temporary high-risk pools; to the selection problems that would exist if a national plan not subject to state-level regulation were offered side-by-side with state-regulated plans.

It is undeniable that commercial health insurance is currently regulated by states, and that states have made vastly different regulatory decisions. It would be a mistake for Congress and the President not to take the concerns of local regulators seriously and try to superimpose on states a system, however logical and reformed it may be, that will have large-scale unintended costs and consequences. Making health reform a reality will require the joint efforts of everyone, recognition that the states are in very different places, enough flexibility and time to be able to work through innumerable transition details, and structural reforms that are practical enough to be implemented across the country.

As the head of a health plan that provides data to and participates through both websites, I found the article interesting and provocative – interesting in that New Hampshire and Maine deserve much credit for being trail-blazers on the issue, and provocative because it is hard to understand why more states do not avail themselves of this opportunity to assist consumers.

Several commonly stated reasons for the reluctance of states to move in this direction are actually addressed by the article. For instance, it is often asserted that health plans, hospitals, and physicians would resist having their contract rates made public, but the article references the view of New Hampshire’s site manager that “resistance faded … once insurers and providers realized that no single insurer consistently had the best deals.”

Another common objection has been that exposing actual contract rates will drive up costs because low-cost providers will become high-cost providers. According to a health policy analyst for the New Hampshire insurance department, this has not been the case in her state.

It is also routinely claimed that comparative cost transparency will not change behavior as long as health insurance subscribers are heavily-subsidized. While it is true that the more subscribers share in the cost of care, the more important cost transparency will become, the article implies that there have been cracks in the armor.

In Maine, ambulatory surgical centers have seen “a slight increase in new patients who mentioned selecting their facilities for their low costs”. An employee of the University of New Hampshire with a relatively low cost sharing plan is quoted as saying “I was surprised by the spread, and I was surprised by the cost…. Even though I had a small out-of-pocket expense … the percent I’ve had to pay has gone up. It’s still very reasonable, but I’m still aware that if I don’t shop better, then that’s just going to continue to increase over time.” The article mentions that the percentage of higher cost-sharing plans in New Hampshire has been “rising sharply in recent years” and quotes the manager of Maine’s website on the issue of cost variability as follows: “People start asking the question, ‘Why is that so?’”.

Indeed. So, if New Hampshire and Maine see a few positive results from comparative cost transparency and if commonly held fears about negative impacts have not materialized, why don’t more states follow their lead? In Massachusetts, for instance, the state Legislature created a Health Care Quality and Cost Council a few years ago and gave it the authority to publicize comparative quality and cost data. It is apparently unwilling however to make available average health plan payment rates to specific providers and unable, without further legislative authority, to reveal health plan specific rates of payment, even though the following appears on its website: “We also use our own database of healthcare services paid for by Massachusetts commercial health plans. This database includes the actual price paid by the health plan and the patient for the services provided.”

With the advent of national health reform legislation, which is likely to include new transparency provisions, perhaps it is time for states to take a closer look at New Hampshire and Maine?

The flawed structure of the bill is therefore retained, which means that expansion of eligibility and other reforms are largely delayed to 2014, but changes having the effect of increasing health insurance premiums will take effect prior to 2014. Before seeing any material benefits of reform, some will see their Medicare payroll tax rate increase, many fully insured subscribers will, beginning in 2011, see the effects of the health insurance premium tax, and everyone in the commercial market will see the cost-shifting effects of Medicare payment reductions and the tax on drug and medical device manufacturers. Medicare Advantage plan enrollees will also see sharp increases in premiums. Since there is no significant cost containment in the bill, these increases will occur on top of normal medical trend. And because the universal requirement to purchase coverage is weak, adverse selection will further increase costs starting in 2014.

It is a shame that the bill has to be structured in this way, but it is a direct result of expanding eligibility and benefits, imposing health system taxes to pay for it, and ignoring the health care cost problem. While this approach may have short-term political benefits, it cannot work in the end because the underlying costs driving commercial health insurance premiums are unaddressed and are in fact exacerbated by the bill. We can focus on insurance reform all we want, but the medical cost tidal wave continues.

Imagine how this plays in Massachusetts, where the insurance market is already reformed, the cost of health insurance is already high, and the major health plans are not-for-profits. The impact of federal health reform will be little more than higher premiums. Massachusetts is already grappling with its own health care cost problem in the wake of a three-year old health reform expansion, and like the federal government’s approach the focus of the effort is on health insurers and not on the underlying drivers of medical costs. Our colleagues at the Massachusetts Hospital Association just released a “Health Plan Performance Report” which compares key financial indicators for the state’s health plans. It shows that in 2009 the four dominant not-for-profit health plans in Massachusetts all have less than a 1% profit margin and a medical expense ratio of 90% or higher. Not much room there to finance anything else.