Health-Care Reform, 2015
What the next health-care fight will look like—and why it might be even harder than the last one.
No one who has studied the private medical market in recent years can fail to recognize the unhealthy consolidation that has taken place on both the demand (insurer) and supply (provider) sides. A revealing indicator of the problem: Just as the health-care bill neared passage, the American Medical Association (AMA) released a report finding that 99 percent of metropolitan areas studied had “highly concentrated” insurance markets. Equally striking, a single private insurer held 70 percent or more of the private market in 24 of the 43 states examined (up from 18 of 42 just a year earlier).
The AMA was understandably less eager to point out the simultaneous consolidation of medical providers–with large physicians’ groups and flagship hospital systems gaining enormous leverage to drive up prices, even when faced with dominant insurers. As one health-plan executive recently complained to researchers studying California’s escalating medical costs:
I am shocked there isn’t an outcry over the fact that our costs are driven out of control. We would like to establish some sort of boundary, beyond which these guys can’t go. We’d welcome some regulatory intervention to break up these monopolies, because they are just killing us.
Yet “regulatory intervention”–whether to push back against consolidated health plans, or “break up” dominant provider groups–is not in the cards in most states. The federal government has the leverage to hold down price increases. Medicare, for example, has held annual spending growth (for comparable services) at a level 2-to-3 percentage points below private insurance over the past 15 years or so. By contrast, as a recent report on California health spending (written by Robert A. Berenson, Paul B. Ginsburg, and Nicole Kemper) notes, private insurers’ “payment ratesto hospitals and powerful physician groups approach and exceed200 percent of what Medicare pays, with annual negotiateddouble-digit increases in recent years.”
When the public option was sidelined, California’s senior senator, Dianne Feinstein, called for requiring insurers seeking increases in health-plan premiums to get approval from states before doing so. Although Feinstein’s amendment didn’t make it into the ACA, states have the authority to establish such procedures under the new law. Unfortunately, prior approval is unlikely to have much effect on the long-term trajectory of costs. The majority of states already require prior approval of premiums for at least some insurers and some specific markets. And while regulators sometimes insist on and receive lower premium increases, the overall trajectory of medical costs has continued sharply upward. To be sure, prior approval might be more effective when insurers are constrained from changing what and whom they cover. But even with reform, insurers will be able to lower premiums by restricting (within regulatory bounds) provider networks, the conditions under which they pay for needed care, or coverage terms.
The ACA does, however, include a new requirement with greater potential bite. Under the law, insurers are required to spend at least 80 percent of premiums on medical care, as opposed to administrative costs and profits. More significant still, insurers that do not meet this 80 percent standard–known within the industry, revealingly, as the “medical-loss ratio” or MLR–have to provide rebates to consumers equal to the difference between 80 percent and their actual spending on care. MLRs have been falling since the 1990s, but on average, insurers still exceed this 80 percent threshold: In 2008, the industry-average MLR was 81 percent. Yet many insurers spend less than 80 percent of premiums on care, and in the individual and small-group markets the share can be as low as 60 percent. According to the advocacy group Health Care for America Now, the six largest for-profit companies would have had to provide nearly $2 billion in rebates in 2009 if the requirement had been in effect that year. (It actually takes effect in 2011.)
The MLR requirement represents an important step in encouraging private insurer transparency. If properly implemented, it could ensure that a higher share of premiums was spent on care, and it might even lead to one-time premium reductions. Like prior approval, however, it will not do much to slow the growth in costs over time. The MLR is a ratio–care versus administration. It says nothing about whether overall spending is excessive or not. What’s more, insurers are doing everything within their power to gut the MLR rules even before they take effect, arguing that scores of functions historically treated as administration–such as the costs of denying care (“loss adjustment expenses,” in insurance-speak), fraud prevention, network management, and provider credentialing–are actually “care.” The Obama Administration is currently standing firm. But some state regulators are already saying that they will exempt categories of insurers or phase in the requirements over an extended period. It is safe to assume that the final MLR rules will be even weaker than those envisioned in the ACA.
By far the most promising approach for state leaders may be to institute “all-payer” rate setting. This is the dominant form of cost control in the advanced industrial world, and it is one that has been pursued by some states and localities in the past. Canada, for example, has used all-payer rate setting for decades, and not only features medical spending roughly half ours on a per-person basis, but has also seen that spending rise much less quickly since the mid-1980s. Just across the border from Canada, Rochester, New York, pursued an innovative all-payer system for its hospitals in the 1980s–with apparent success in restraining cost increases and improving participating hospitals’ financial stability.
Under an all-payer system, payments for specific services or treatment of patients with particular diagnoses would be set through a negotiated process in which insurers, providers, and state governments, as well as consumer representatives, had a seat at the table. These rates would be used by all payers (hence the name), and they could be extended to more complex payment methods, such as payment for entire episodes of care (e.g., treatment of a heart attack). By consolidating bargaining power on the demand side and limiting the ability of providers to play one payer off against another, all-payer systems have the potential to both create lower and more uniform payments and restrain the increase in service prices over time.
The key to controlling costs over the long term, however, is reviving the public option. Besides the one-time savings created by a public option with no need to earn a profit and large numbers of subscribers over which to spread administrative expenses, the public option will restrain costs in two ways. The first and simplest is by building on Medicare’s past and expected success in controlling spending. Indeed, the public option could be the primary vehicle for extending to nonelderly Americans the innovations in payment and care management that will be used to slow Medicare spending growth in the coming years.
The second means by which the public option will hold down costs is by serving as a competitive benchmark for private plans. The public plan will represent a simple, affordable plan available on similar terms throughout the nation, reassuring Americans newly required to have insurance that they can gain access to a transparent insurance product that offers a broad choice of providers. As such, the public option is likely to be an attractive alternative to private plans, pressing insurers to work harder to restrain their own premiums and to showcase their own distinctive merits. In today’s weakly competitive market, even a modest spillover of the public plan’s cost-control efforts into the private sector could have major effects.
In theory, states could create a Medicare-like public option of their own under the new law–and a handful may well do so before the exchanges go live in 2014, including Oregon, Vermont, and my home state of Connecticut. A state public option would create greater accountability for private insurers, especially in states where a single insurer dominates the market. But a state public option would, of course, be available only to those who live within the states that offer it. If only a handful of states move forward, most Americans will be shut out. For the same reason, the cost-control potential of state public plans will be limited. States have far less market leverage than the federal government: A national public option, if equally attractive, would have 500 times as many subscribers as a Vermont-only plan.
Perhaps more important, states also have far less political leverage. State public officials–often less closely monitored by constituents than national leaders, possessing fewer administrative tools and more limited budgets, and frequently term-limited–are a weak match for a determined, consolidated private medical industry. As a prominent consumer representative working to influence state insurance commissioners recently explained, “Insurers spend tens of millions of policyholder-supplied funds to lobby for insurer interests. In contrast, consumer interests have few such resources.” The entire consumer participation budget at the National Association of Insurance Commissioners–the organization of state insurance regulators–is dwarfed by the salary of a single insurance lobbyist. In the face of the industry political onslaught, many states whose leaders are contemplating a state public option may not end up with one at all.
Hence the need for a national plan. A simple Medicare-like public option could build on the provisions of the law that establish at least two national plans offered within state exchanges (at least one of which must be a nonprofit). Offered within every state exchange, a national public option could provide simple, predictable coverage and use its bargaining power to obtain better rates. Moreover, a public option would have the incentive and ability to invest in innovative payment and care-management strategies, building on the improvements in Medicare envisioned under the ACA. As poll after poll during the health care debate showed, the public option is popular. And unlike many popular ideas, it will actually save serious money. (Recently, the CBO calculated that a stand-alone bill to revive the public option would save nearly $70 billion between 2014 and 2020.)
The public option is often seen–mostly by conservative detractors–as an alternative to relying on private insurance. Although it will certainly cover some Americans who would otherwise enroll in private plans, it is best thought of as an alternative to relying exclusively on regulation to make private plans act in the public interest. The public option is a means of allowing the private and public sectors to operate in cooperative tension with each other, without putting excessive faith in the ability of regulators to make the private sector behave in fundamentally different ways.
Above all, the public option is the renovation that solidifies Harkin’s starter home in the face of the perfect storm. What the advocates of Social Security recognized and fought for in the 1930s and beyond was the strongest structure. They understood that a firm foundation could be built on, that a popular, capable program could attract more financing and greater institutional resources. The case for the public option is not primarily a political case, though it will be an addition to the law that a majority of Americans will welcome. It is a substantive case: The public option is a crucial addition to the institutional architecture of the law, filling in the weakest aspect of the home’s foundation–its anemic cost-control measures–so that the other reforms I have discussed can expand that home to include more Americans over time.
Organizing for American Health Care
Reformers may have won the war in 2010, but they lost the battle for public opinion: Americans were convinced reform was needed, but not that the federal government should have the authority to make sure it was done right. Reformers cannot afford to lose the second battle for public opinion.
Winning it will require organization and narrative. It will also require that progressives coalesce around a broad vision, as they did in the years after the passage of the Social Security Act. That vision should have two sides: the case against insurers and the case for government.
Private insurers are partners in the new law, not potentates. Their cooperation will not be automatic; it will need to be extracted. The largest private insurance companies are a gift for populist critics that just keeps on giving. To get the law up and running and build public trust, federal officials need to keep putting insurers in their place prominently and without apology. They can begin by resisting insurers’ self-serving entreaties to be freed from the requirement that they spend at least 80 percent of their bloated premiums on the actual delivery of care.
But making a case against insurers is not enough to justify the stronger federal role that is essential. Reformers are regrouping to convince Americans that the law is in their interest. But they should not be afraid at the same time to point out where the law needs to be strengthened, especially when that also means pointing out where private insurers continue to fall short. And nowhere is this more true than when it comes to the public option.
This was the approach taken with Social Security, whose champions celebrated the law’s achievements yet never ceased to point out how the law still failed to provide the foundation of economic security promised in 1935. On the third anniversary of the Social Security Act, FDR delivered a stirring reminder of the law’s achievements–and its unmet promise:
We have come a long way. But we still have a long way to go. There is still today a frontier that remains unconquered–an America unclaimed. This is the great, the nationwide frontier of insecurity, of human want and fear. This is the frontier–the America–we have set ourselves to reclaim.
In 2015, we will have come a long way in achieving health security. But we will still have a long way to go. Making the case for the changes that are needed–from strengthening the relatively weak employer requirements in the law, to opening up the exchanges to larger employers, to creating a national public option to slow escalating costs–will require more than incremental steps to build trust in the law. It will also require a broader vision of how the overarching goal of affordable, quality care for all can be achieved, backed up by an ongoing, organized movement. Like FDR in 1938, reformers in 2015 will have to identify the next unclaimed “frontier of insecurity,” and show Americans how and why to cross it.
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