Stay on Course Through Waters of Health Care Reform

As the old adage goes, the only constant is change, and that certainly is true in the murky waters of today’s health care picture. Employers and employees both have been scrambling to understand the ramifications of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, which will bring fundamental changes to how Americans access health care and how bills will be paid. Depending on your viewpoint, the glass could be half empty (representing possible negative changes to how health care is delivered and paid) or half full (the rise of consumerism in health care, with patients taking better charge of their health). Or maybe somewhere in the middle.

This special section of CDHC Solutions examines possible scenarios of the new health care law. Columnist Ron E. Bachman, president and CEO Healthcare Visions Inc., says the four major phases of the legislation are legislation, regulation, compliance, and litigation and that smart companies already have begun strategic planning.

Frequent contributor J. Kevin A. McKechnie, staff director at The ABA HSA Council writes that investors already are shying away from startup health care companies, which could stymie innovation, and that payment vehicles such as HSAs, FSAs, and HRAs are under attach, with the potential to send health care costs higher.

Several industry leaders also share their thought leadership in this issue, which is the first in a series that will help you navigate these uncharted waters.

Employees Opt for Better Choices with Health Care Consumerism

By Ronald E. Bachman, FSA, MAAA president and CEO Healthcare Visions Inc.

ObamaCare is now the law of the land. It’s called the Patient Protection and Affordable Care Act (PPACA). It may change with pending constitutional challenges, but the time has come to plan ahead and prepare for a very different future. Individuals and businesses must consider what this legislation means, discover what options they have, and what actions are required under the law. Employers have two major needs. First, senior management must be alert to the many changes that are still likely to happen that may alter their strategic benefit planning. Second, benefit managers need to know what to do tactically today and tomorrow in order to prepare for the next open enrollment.

It will be hard to create a multiyear strategic plan. There are many uncertainties. The legislation, developing regulations, and interpretations of the law will take years to write, understand, clarify, and litigate. Aspects of the law start in 2010 and go through 2018 and beyond. The tactical day-to-day work efforts by benefit managers will be defined by senior management’s strategic decisions and a focus on the effective dates for the various initiatives as set by the law. The key is to stay flexible.

Strategic Planning

For strategic planning, there are four major phases to consider: Legislation, regulation, compliance, and litigation. The following insights and warnings are to help HR executives and benefit managers understand the potential changes and the importance of strategic planning.

Legislation. The confusing and sometime contradictory language of the law will likely require a large “technical corrections” bill. In Washington, technical corrections are not limited to a layman’s understanding of the words “technical corrections.” Politicians and special interests can use a technical corrections bill to pass entirely new provisions not a part of the original law. For example, the public option could return as a “technical correction.” Look for a technical corrections bill this summer or fall. Stay alert, the devil is always in the details.

Regulation. The departments of Labor and Health & Human Services (HHS) are hiring more than 700 new staff to write the regulations for the 2,700-plus page law. Their interpretations will not necessarily match a layman’s understanding of the bill’s language. The regulatory process is likely to be a nightmare of delays, missed deadlines, and confusing interpretations. In the bill there are scores of references to decisions to be made by the Secretary of HHS. Major areas of implementation and coverage determinations for “essential benefits” are left to the discretion of the Secretary.

Lobbyists from every provider and self-interest group will converge on the bureaucrats to have their services included through regulation. Ultimate coverage mandates are likely to go beyond what employer plans typically consider as medical/surgical benefits. We saw this in 1993-1994 as part of the ultimate demise of HillaryCare. Back then, the plan details were debated as part of the legislation. This time the Congress deferred to the Secretary those controversial decisions and the benefit cost implications. As of today, nobody knows what will be included as “essential benefits.” Therefore, no employer can know what the cost of coverage is ultimately going to be.

Look for added social welfare requirements, potentially including expanded transportation to/from office visits and daycare services for children while parents seek care. Areas of added coverage may include additional home health services, school health services, and personal care coverages. Mandated preventive care may be expanded to include medications, tests, diagnostics, and lab work beyond anything employer health plans previously considered medically necessary or appropriate.

For example, the Early and Periodic Screening, Diagnostic and Treatment (EPSDT) service is Medicaid’s comprehensive and preventive child health program for individuals under age 21. Federal Medicaid regulations provide for early and periodic screening and diagnosis of recipients under age 21 to ascertain physical and mental defects, and provide coverable services to correct or ameliorate defects and chronic conditions found even if the service is not otherwise provided under the medical plan.

The intent of the program is to enable providers to assess a child’s health needs through initial and periodic examinations and evaluations, and also to assure that the health problems found are diagnosed and treated early, before they become more complex and their treatment more costly. Look for these types of benefits to ultimately make their way into the essential benefits mandates.

Compliance. Consultants and lawyers will find an expanded need for their services. Insurers will need to determine if they are in compliance with the products, pricing, and coverages they market. They will need to assure their policyholders that the coverages provided are in compliance with the new laws and regulations. Employers not in compliance will be subject to large penalties and fines. Self-insured employers will need compliance audits to assure required essential coverages and mandates are included. Each employee contribution will need to be measured against the government’s “affordability standard.” Each year will likely produce new regulations and changes that must meet with compliance standards, or employers will suffer penalties and fines.

Employers will need to continuously assess the financial alternatives of directly providing medical coverage versus shifting employees to the government exchange. The employer penalty for not providing coverage in 2014 is $2,000 per full-time worker and is indexed in future years. Employee subsidies available in the new health exchanges may make it advantageous for employees to get coverage through an exchange and financially attractive for employers to pay the penalty rather than provide medical benefits.

Already compliance issues are in play. By March 31, 2010, employers had to file any changes impacting their financial conditions with the Securities and Exchange Commission. Employers providing retiree prescription drug benefits with a government subsidy (subsidies from the 2003 Medicare Modernization Act) to support continuation of retiree drug benefits were immediately impacted by the PPACA removal of that subsidy. At least 15 companies have announced noncash charges of $2.8 billion as required by the Financial Accounting Standards Board ruling 106 (FASB 106). More hits to employers providing retiree coverage may be on the way. If the required essential benefits package is richer than existing benefits and those benefits are carried into retirement, employers will face additional FASB 106 charges. Those charges must be posted as a liability as soon as the change is known.

Litigation. In the end, courts will decide what the language of the law’s 2,700-plus pages mean. New laws require a period of adjustment that can take decades to sort out the meanings and conflicts of legal interpretations. Given the national impact and financial consequence of any single coverage requirement, every self-interest group wanting to be included in the essential benefits package will push litigation to add or solidify their coverage demands. The never-ending cycle will then repeat itself, as new laws will be passed to respond to court decisions.

During these periods of uncertainty, it is more important than ever for benefit managers to directly share insights and understandings with other benefit managers. Consultants will have plenty to do, but those information channels alone are not broad enough to get the insights and timely information that benefit managers will need.

It is only by working together and sharing experiences that these next years of change may even be manageable. The stress and strain on organizations and individuals will be significant. This is an enormous undertaking of trying to effectively and efficiently move toward compliance. No one wants a team from the additional 16,000 Internal Revenue Service agents, who are being hired to monitor compliance with health reform, to show up on their doorstep.

Good Tactics—Health Care Consumerism

The best tactic is to make changes that are beneficial even if regulations are delayed, legal challenges reverse the law, or compliance is uncertain. Megatrends represent major movements so powerful that the direction of change cannot be stopped.

Federal laws can speed up or slow down megatrend forces. But, like dammed rivers, megatrends will redirect themselves to achieve the inevitable result. Health care consumerism is such a force. Government and the quest for political power is a strong force in and of itself. Cynics will point to increasing demands for federal support and government dependency by large parts of our population, but growing welfare and expanding entitlements is not a financially sustainable path and, therefore, cannot be a megatrend.

The future is not the opiate of government, but the empowerment of “health care consumerism.” Health care consumerism is about transforming health benefit plans by putting economic purchasing power and decision-making in the hands of participants. It’s about supplying the information and decision support tools needed, along with financial incentives, rewards, and other benefits that encourage personal involvement in altering health and health care purchasing behaviors.

Health care consumerism is independent of plan design. So it is not dependent on the essential coverage requirements of HHS. Health care consumerism includes opportunities to accumulate funds and/or receive grants through “shared-savings.” That is, individuals can be financially rewarded for doing the right activities that improve their health and lower costs. Rewards can include activities such as participation in a wellness assessment, compliance with a condition management program (e.g. taking medications, diet, exercise, office visits), and maintenance of good health characteristics (e.g. blood pressure, cholesterol, nicotine use, body mass index).

For many employers, a popular form of health care consumerism has been HSA-eligible plans. Insurance with personal savings accounts (HSAs and FSAs), while not killed, may be limited in PPACA. But these are not the only forms of health care consumerism. In 2002, health reimbursement arrangements (HRA) were established by the Treasury Department. HRAs can be used with any plan that the Secretary mandates. Recently, plans with HRAs have been growing even faster than HSA-eligible plans.

PPACA deals with limited plan choices, mandated benefits, and premium controls. The real world has moved to next generation health care consumerism with member engagement, rewarding healthy behaviors, and promoting personal responsibility. Plans are now focusing on rewards and incentives. Health incentive accounts (HIA) are a special form of HRA that builds value only from rewards and incentives. There are many other special use HRAs that may become the channels for health care consumerism.

Health care consumerism is a compelling force because it embraces lowering costs, improving quality, enhancing choice, and expanding access by empowering individuals and reinforcing personal responsibility. It is the force operating throughout our economy and is just beginning to be structured into health care and insurance.

The 2009 American Academy of Actuaries multiyear study of health care consumerism concluded that first-year claims could be lowered by 12%-20% with future cost trends decreased by 3%-5%. While HSAs are disfavored, employers and insurers would be wise to consider health care consumerism as allowed. Under the legislation, financial rewards based on health status are increased from 20% to 30%. The Secretary of Health and Human Services has the authority to increase that limit to 50%. PPACA still allows unlimited rewards and incentives for participation and engagement.

PPACA will produce changes and unintended consequences for individuals, employers, companies, and medical industry stakeholders. Everyone will now begin to reposition their personal and business interests to minimize the damage and maximize opportunities in this new world of PPACA. As some await the ultimate demise of PPACA, the megatrend of health care consumerism continues.

The Growth of Health Care Consumerism

Consumers want more control over decisions involving their life and health. Americans who bank electronically at ATMs, purchase stocks over the internet, buy and sell goods through eBay, maintain their music with iTunes, keep personal videos on Facebook, seek employment through LinkedIn, and control television programming with TiVo. This level of personal involvement and engagement is now evident in health and health care.

Released April 14, 2010, a Mercer study for the American Association of Preferred Provider Organizations (AAPPO) showed that insurance with health care consumerism now covers an estimated 23 million lives.

These account-based insurance plans give choice, options for care, and key health decisions to patients. There are several types of personal care accounts, but all are growing rapidly. Plans with HSAs and HRAs grew 27% from 2008 to 2009, up from 18 million to 23 million lives.

For the first time in our history, people are choosing plans that empower individuals and lower premiums without shifting costs to patients. Karen Greenrose, president and CEO of AAPPO said, “At a time when employers are faced with the difficult choiceof limiting benefits or raising health care costs to their employees, they are turning to consumer-driven health plans (CDHP) given the cost savings inherent in these plans.”

Health care consumerism encourages good health and health care purchasing behaviors with support for higher use of prevention, more adherences to medical treatments, greater personal responsibility, and an emphasis on health and health care education.

Health care consumerism is an inclusive concept for engagingplan members. It is good for both the healthy and those suffering from chronic conditions. Health care consumerism is a voluntary system rather than a coercive process. No one is forced to be compliant. Individuals have free choice. The success of this approach is no longer theory. HSA-eligible plans, insurance with HRAs, and other consumer-driven options have been proven to lower overall health costs and improve care. These plans work for young and old, male and female, rich and poor, Republicans and Democrats, progressives and conservatives.

The AAPPO report shows 43% of large employers now offer a health care consumerism plan. The benefits of account-based plans are now reaching small employers. In 2009, small employers were the major source of increase in health care consumerism enrollment rising from 9% to 15%, a 66% increase.

There are opportunities for health care consumerism in PPACA that could be expanded. PPACA emphasizes prevention and allows increased rewards and incentives. The use of biometrics to reward healthy behaviors has real potential. Insurers and specialty vendors are preparing to help employers implement changes that will work and are encouraged under PPACA. These are aspects of the new law that are consistent with the movement to health care consumerism. The regulatory process can support this movement if the administration hears the voice of Americans, then they will let health care consumerism flourish. If employers are looking to control costs, health care consumerism is still a major opportunity.

Mandated Paper-Based Transactions Cause More Chaos for Health Insurers

By J. Kevin A. McKechnie, Staff Director The ABA HSA Council

One of the most promising start-up companies in America, a health insurer no less, has decided that while it was able to weather ObamaCare’s legislative phase, the ensuing regulatory regime would make it impossible to continue offering high-deductible health plans (HDHP) to employers. nHealth a Richmond, VA-based company, said in a letter to its broker community that, “Despite a product that was gaining increasing acceptance among companies throughout the Commonwealth, the uncertainties in the regulatory climate coupled with new demands imposed by national healthcare reforms have made it challenging to sustain the level of sales required to remain viable over the long run.”

The first casualty of ObamaCare is here and why it happened so fast is instructive. nHealth fell not so much because of an inability to comply with the rules, but because of an inability to attract investment capital in the face of such dramatic uncertainty about what the rules might eventually be. This is the sort of unavoidable market deflection that ensues anytime Congress makes such a broad grant of authority to a bureaucracy. Absent any statutory or other limit on government, how can markets assign capital when the definition of political and regulatory risk changes constantly or is unknown?

This dynamic is usually found outside the United States, and not in some highly technical comparison of Britain’s National Health Service to ours, or in the murky minutiae of some other command economy’s approach to financing heath care. Instead, it can be found in the market for political risk insurance, a product most companies purchase when they want to make an investment in a nation where the local constitution is, shall we say, somewhat flexible.

Pouring millions into cell towers in Sudan or fiber optics in Nicaragua can be fruitful investments indeed, but for the fact that the local juntas have a habit of nationalizing companies depending upon their need for resources at any one time. The American version of the same experience is having the Department of Health and Human Services (HHS) empowered with so much regulatory discretion that one minute your insurance products are approved and selling and the next they are prohibited and illegal. Either way, the end result is the same: Investors are penalized arbitrarily by government instead of for underperformance by markets.

This brings us to ObamaCare’s first and perhaps most onerous regulation: Medical Loss Ratio (MLR) rules for insurers selling in the small and large group markets.

The section of the Patient Protection and Affordable Care Act (PPACA) that may prove the most destructive to the American insurance industry isn’t the command to cover a certain type of person or disease but to do it while losing at least 80 or 85 cents on every dollar collected. Pause for a moment and reflect upon how eager the investor community would be to buy a mutual fund or a stock in a company that by law can’t make a return greater than 15%.

Would you want to give that enterprise your retirement fund?

Probably not, and that’s the first issue: In our world of publicly traded health insurance companies how can a health insurer attract capital when investors know that earnings, by virtue of having mandated losses, are capped? More to the point,how eager will an investor be when it’s clear that one role now entrusted to HHS is to monitor insurer profits and restrict them by defining which operating expenses are medical and which administrative?

In our letter to HHS, the American Bankers Association’s HSA Council discussed this dynamic at length by pointing out that improving access to care by making health insurance more affordable requires more insurers competing against each other to lower prices. But, in a marketplace where health insurers are required to sustain a minimum loss ratio, achieving that affordability through price competition will be difficult at best.

It’s also difficult when health underwriting is no longer permitted. The PPACA includes a mandate for individuals to purchase health insurance and penalties for companies that do not offer it to their employees. It’s important to note, however, that a mandate to buy insurance doesn’t mean much if there is no affordable insurance to buy. A mandate to offer employee benefits is similarly onerous if the cost of the benefits is too great per employee to avoid the penalty.

Were MLR regulations to shrink the availability of insurers offering HSA-qualified HDHP plans, employers would have no choice but to offer higher-cost plans that would vastly increase the number of small businesses subjected to the penalty. And the math here is staggering: take the number of employees (for companies of 50 or more, just like nHealth), add the number of hours each part-time employee works in a month and multiply the result by $3,000. That’s the penalty for not providing qualifying benefits to your employees.

When talking to HHS or to the National Association of Insurance Commissioners (NAIC), the state regulatory group responsible for issuing the MLR rules, one has the feeling that all is going to be well in the end. The PPACA contains explicit prohibitions on writing rules that negatively affect competition, disadvantage small insurers relative to their larger cousins, or prevent new companies, like nHealth, from entering the market.So what went wrong?

nHealth’s exit from the market exposed the unhappy truth that you can’t legislate investor confidence. Merely creating the perception that the American health insurance industry is under attack has dissuaded all but the most knowledgeable investors from allocating capital to this sector.

These were the known consequences to the health insurance industry Democrats in Congress understood before casting their votes in favor of ObamaCare. The unknown consequences to the industry, arising from legislation reforming the financial sector, are just beginning to be understood.

One provision of S. 3217, the Restoring American Financial Stability Act, passed in the Senate, would impose a cap on the fee (known as the interchange fee) card issuers charge merchants to process transactions. The net effect of handicapping yet another well established financial utility is that so many of the insurance and employee benefit programs that use card technology—HSAs, HRAs, FSAs, state unemployment insurance programs, Social

Security checks etc.—would have to revert to paper-based transactions, thereby shouldering all the additional costs such low tech systems entail. Unable to offer electronic card solutions at the government’s imposed price, insurers and the government itself will not be able to pay doctors or issue benefits through these facilities. Instead, the more expensive, less efficient technology of yesterday will supplant the 21st century systems banks have already developed.

For example, in 2001, electronic payments, including payments processed through card networks, cost about one third as much as a paper transaction. HHS reports a more dramatic disparity: According to HHS’ Administration for Children and Families, the cost of sending a paper check is $1.90; the cost of processing the same transaction electronically was just $0.14, more than 13 times less expensive.

According to the Network Branded Prepaid Card Association, the state of Maryland saved $400,000 in check printing and mailing costs by dispensing unemployment benefits on prepaid debit cards. In 2008, the Treasury Department reported $1.17 billion was loaded onto prepaid cards for 450,000 Social Security recipients, at a savings of more than $0.90 per benefit payment.

The final irony: HHS awards very large grants, billions of taxpayer dollars, to develop electronic medical records. Moving from paper to the electronic world is so important that Dr. David Blumenthal, the Obama administration’s national coordinator for Health Information Technology says, “Those who ‘get on board’ will be paid more by Medicare and Medicaid, beginning in 2011. But in 2016 the subsidies disappear and those still using paper records risk sanctions, including reduced Medicare fees.”

The stated goals of the PPACA included making health care financing more efficient, making health insurance products more affordable, and providing American consumers with more choice. It seems clear that forcing health insurers out of business through profit restrictions and vastly increasing already high administrative costs by mandating paper-based transactions seems a step, maybe even a leap, in the wrong direction.

Ronald E. Bachman FSA, MAAA is president and CEO of Healthcare Visions Inc. He is a senior fellow at the Center for Health Transformation, the Georgia Public Policy Foundation, the Wye River Group on Health, and the National Center for Policy Analysis. Ron is the chair of the editorial advisory board of CDHC Solutions and can be reached at ronbachman[at]healthcarevisions.net.

J. Kevin A. McKechnie, executive director of the American Banker Insurance Association and staff director of The ABA HSA Council, represents both associations before Congress. He served as legislative director to former U.S. Rep. William Dannemeyer of California. Kevin can be reached at 202-663-5172 or Kmckechn[at]aba.com.