Like the summer temperatures, healthcare seems to be heating up over the last few weeks. In this post, we look at some previous issues discussed in Strategic Insights, and provide an update with the latest information.
DOJ vs. Big Insurers
Clearly, Nostradamus we are not. Late last year, we predicted relatively smooth sailing for the two mega healthcare mergers announced last year: Aetna taking over Humana and Anthem eating up Cigna. This was based on two thoughts: (1) that the legal teams of the plans had done some thorough homework to counter the Department of Justice’s Anti-Trust Division’s (DOJ and ATD) expected concerns (heightened by the general anti-business sentiment of the administration); and (2) shedding of some lives and products around the country to meet the competitiveness objections. Well, the recent announcement by the DOJ rocked the insurance world. As time went on, we began to suspect that the Anthem-Cigna marriage was on the rocks, as states lined up against it. But trouble with the Aetna-Humana merger is a little more surprising. It seems to be based in part by a rather specious ATD argument that there would be too little Medicare Advantage competition if the two giants merge. Aetna and Humana might yet win the day on this one (if the finances still make sense as the issue drags on), but the Anthem-Cigna merger looks difficult to save.
Obamacare State Pullouts by Humana
Adding to the major Obamacare pullout that United Healthcare announced a few months ago, Humana made public its massive retrenchment regarding the Affordable Care Act (ACA) as well. Humana plans on reducing its ACA participation from 19 to 11 states in 2017. More dramatically, the number of counties it will participate in will drop from 1,351 to 156, a reduction of about 90%. The change may have been driven in part by the potential demise of the merger discussed above. Aetna has been much friendlier toward the ACA than Humana. Anticipating the merger could fall through, Humana may be looking to focus on its core Medicare profitability.
Plan Losses and Rate Hikes Hitting Obamacare Nationally
If California were a nation, it would have the world’s sixth largest economy as measured by Gross Domestic Product (GDP). Therefore, how Obamacare performs in this healthcare-mature state is a good barometer for predicting how the ACA might succeed or fail nationally.
After ACA rate increases in California were held to about 4 percent in 2015 and 2016, CA residents are in store for a whopping average 13.2 percent rate increase in the Covered CA Exchange plans next year. Two of the three leading providers, Blue Shield of California and Anthem, have among the highest increases, at about 20 percent and 17 percent respectively. Kaiser Permanente will have about a 6 percent increase in the state. These three players, along with Health Net, have about 90 percent of the Covered CA enrollment. The increases are by no means borne of plan greed for profit margins. The average profit in the Covered California system is just 1.5%. The major increase is driven by inflation, the need for greater margins and the phaseout of two of the three transition programs (reinsurance and risk corridors).
The bad news in California was accompanied by two other national studies that add to the concerns. A report by the Commonwealth Fund finds that only about one third of plans in the Exchange nationally made money in 2014 with their individual products. Now the individual market has always been volatile and three-quarters of the insurers who lost money in 2014 also lost money in 2013. But there are three important findings to note: (1) one-quarter of those who lost money were profitable in 2013; (2) while the top quartile of plans averaged 8.5 percent profit, the bottom quartile’s losses averaged nearly 22 percent – a huge disparity; and (3) the difference in assumed medical expense and actual that year was about 2 percent, and that was primarily because of the existence of the transitional reinsurance program (which goes away in 2017).
The consulting firm Avalere Health also found that the average rate increase being requested from regulators for Silver plans in 2017 is 11 percent across 14 states. These Silver plans are the ones that Americans must enroll in to get their subsidies.
To say all this is a blow to the healthcare experiment is an understatement. What it shows is that the fragile financial underpinnings of the system are coming home to roost. The Centers for Medicare and Medicaid Services (CMS) and the Obama administration are downplaying the expected increases because the vast majority of enrollees are subsidy-eligible and, therefore, the federal government shoulders almost 100% of the increase. This is a tired argument. Printing money is now a sound way of delivering healthcare over the long haul? The federal government’s head-in-the-sand approach to the harbingers of trouble and the political inflexibility it has shown to change may yet spell doom for the system unless common sense prevails.
Mike (Pence, that is) Likes Medicaid
The pop culture surrounding Republican Vice Presidential nominee Mike Pence is that he is a solid conservative. Hence, the pick by Donald Trump is an attempt to shore up his appeal to the traditional GOP base. But Pence’s record on Medicaid expansion signals a much more pragmatic politico than one might think. Long-time legislator Mike Pence has been known to rail against the evils of Obamacare. But as a Governor (where a politician actually needs to run something and make practical decisions), Pence assessed the ACA and made a decision to expand Medicaid in the best interest of his citizens. Pence and the Indiana Legislature expanded Medicaid to 133% of the federal poverty limit (138% with income exclusions). But they did so in a novel way – requiring all beneficiaries to pay a premium of sorts into a Health Savings Account (HSA). The HSA is used by the state to pay initial costs, with the state picking up the overage. Contributions made are as little as $1 and up to $28 per month, depending on income. If individuals do not keep up with their premiums, various penalties are levied, including lower benefits, institution of copays, and loss of coverage for up to six months before re-enrollment.
Now the system appears incredibly complex, but the consumer-directed personal responsibility approach appears to be bearing some fruit, with ongoing contributions to the HSAs being made at reasonable levels and reductions in high-cost services such as Emergency Room usage. The proposal is consistent with our recommendations to get other states to expand Medicaid (at least to 100% of FPL) and to ensure personal responsibility at the lower end of the income subsidy scale in the Exchanges by reducing the near 100% subsidy (98%). It is only in this way that healthcare inflation will truly be moderated.
As summer winds down and the election arrives, we should begin to know more about how these issues resolve and where healthcare reform is headed.