I’ll be out Monday at our annual Managed Healthcare Industry Forum on Emerging Technology (See Agenda), but I’ll report on the event later in the week.
Click here for a very good Q&A that ran in BusinessWeek between Aetna chairman Ron Williams and Charlie Rose. Here’s an excerpt:
Rose: Will insurance premiums go up?
Williams: The answer is yes, and some of the things that will drive those premiums are significant additional taxes the industry will ultimately have to pay in the first year….
Rose: Are we also going to see consolidation?
Williams: I’m much more worried about the solvency question. If you’re a small plan and you experience costs that you simply weren’t able to price for, there could very well be insolvencies. It’s been a long time since we’ve seen them in the insurance industry, but the insurance commissioners know what can happen….
Rose: Do you feel like the insurance industry was demonized in this debate that took place over the last year?
Williams: Yes, I do. And I think our 35,000 employees at Aetna were perplexed and really, I think, very disappointed in the leadership of the country and their selection to demonize and impugn the motives of employees, doctors, nurses, and pharmacists.
There was a funny moment during the floor speech of House Minority Leader John Boehner (R-OH) during the final healthcare reform debate on Sunday just prior to the vote. It was when he was eliciting responses from members of Congress (I’m guessing the responders were largely Republicans). Anyway, the funny moment starts at the 3:18 mark.
Boehner: Look at how this bill was written. Can you say it was done openly?
Boehner: With transparency and accountability?
Boehner: Without backroom deals, and struck behind closed doors, hidden from the people? Hell no you can’t! Have you read the bill?
Boehner: Have you read the reconciliation bill?
Boehner: Have you read the manager’s amendment?
Boehner: Hell no, you haven’t!
I actually think he almost started laughing at this point.
I’ve received several inquiries this week about the impact of reform on health insurance industry profits. There’s no way to sugar-coat this. Yes, comprehensive healthcare legislation signed into law by President Obama will bring millions of new members to managed care plans. But the law will negatively impact profit margins among health plans – especially those with large exposure to the individual, small group, Medicare and possibly even Medicaid markets.
The argument during the reform debate that somehow this legislation would bring windfall profits to health plans is just silly. Or as Carl McDonald of Oppenheimer says: “The added membership that plans would receive would be far outweighed by the margin pressure the health reform bill would bring.” Here’s a few reasons why:
1. According to our annual report The Outlook for Managed Care 2010, individual membership will increase dramatically after the uninsured gain access to subsidized health plans through healthcare exchanges. Our best estimate is that there are about 11 million individual plan members in the U.S., and that number could easily reach 15 million or 16 million with reform. Unfortunately for health plans, the commoditized nature of the products to be offered to individuals and small groups through the exchanges is likely to hurt plan profits in these segments.
2. Medicaid health plans are probably best served by reform. Overall, reform is expected to add about 16 million new Medicaid members – a large number (perhaps 5-7 million) of whom will choose managed care plans. Aggregate profits will likely increase for Medicaid health plans. Still, there will be challenges. Margins on this new business will remain tight. Furthermore, the addition of childless adults to the Medicaid ranks will mean a whole new group of members with incomplete or unknown medical histories — and potentially higher than expected costs.
3. Medicare Advantage, with about 11 million members, is one segment likely to see membership decline because of reform. Additional reimbursement cuts will mean plan exits, consolidation and pressure on profits. Hardest hit will be private fee-for-service and special needs plans. Medicare HMOs will hang in there, but feel the squeeze. Medicare PPOs will likely see membership gains. All told, we’re estimating a net loss of membership of about 2 million post-reform, perhaps more. In addition, minimum medical cost ratio requirements in the law will further impact profits at Medicare plans.
4. Health insurers will also be saddled with $2 billion in new taxes beginning in 2011, rising to $10 billion annually in 2017.
So here’s a back of the envelope estimate: Figure the health insurance industry generates about $25-30 billion in annual profits. Reform could easily cut that by a third. All of which suggests the likelihood of additional industry consolidation, administrative streamlining (including job cuts) and leaner times ahead. But it also suggests that the innovative plans that truly deliver on the promise of managing care (i.e., improving access and quality while reducing costs) will not only survive but thrive.
Eli Lilly chairman and chief executive John Lechleiter speaking about healthcare reform and the need for innovation to improve quality and access while reducing costs:
Innovation is not a panacea for the challenges facing our health care systems, but it is hard to see any way out of the current crisis – and I don’t think that’s too strong a word – without innovation. Indeed innovation needs to be the purpose of health care reforms.
In the two days since the House passed healthcare reform, a group of 12 healthcare stocks tracked by this blog were up a combined 1.6%. Not surprisingly, there were definite winners and losers. Medicaid health plans, which are expected to enjoy big membership gains from reform, led the gainers. Centene rose 11% in the two days ended March 22 following Sunday’s yea vote on reform, while Amerigroup was up 6%, and Molina rose 3%. Outside pure-play Medicaid plans, another winner was Aetna — which has limited exposure to the small group and individual markets impacted by reform– rising 1.5%. The biggest loser was UnitedHealth, which is big in individual and Medicare, down 4%. WellPoint, which has a large individual and small group business, fell 2%.
Not by much, but still a new Gallup/USA Today poll shows that 49% of Americans think passage of the healthcare reform bill was a “good thing,” 40% think it was a “bad thing,” and 11% had no opinion. The poll was based on telephone interviews with 1005 adults. Democrats overwhelmingly favored passage (79%), while Republicans were overwhelmingly opposed (76%).
Overall results are shown in the chart below from Gallup. The specific question was as follows:
As you may know, yesterday, the U.S. House of Representatives passed a bill that restructures the nation’s healthcare system. All in all, do think it is a good thing or a bad thing that Congress passed this bill?
Aetna chairman and CEO Ron Williams on healthcare reform:
Millions of Americans can look forward to gaining access to health insurance, a significant milestone for this country. The challenge unmet by this bill, however, is how to effectively deal with the critical issue of affordability, which has become a burden for so many people, particularly individuals and small business owners.
I’d say it a slightly different way. This legislation is mostly about expanding coverage, and that’s a necessary first step toward reforming the U.S. healthcare system. Now comes the far harder task of bending the cost curve. At best this legislation “nudges” (Jonathan Cohn’s word) us in the right direction. But we have a long way to go — and a lot of difficult choices to make.
Williams goes on to say:
Aetna plays a significant role in helping our members – both employers and individuals – meet the cost challenge. Our role won’t change with this legislation. But, as a nation, we need to come together to bring greater focus on addressing the many underlying factors that are driving soaring health care costs. When the nation inevitably turns to finding ways of reducing this alarming trend, we stand ready to help.
And that’s really the challenge for health plans in this brave new post-reform world. Can the industry deliver on the promise of truly managing care, i.e., improving quality while at the same time reducing costs. Now is the time for health plans to prove that spending 10% to 15% of premiums on administration isn’t a waste.
I have received several angry emails related to my support of healthcare reform. One in particular gets to the heart of Corporate Research Group’s mission and deserves comment. A reader writes:
I thought you guys were supposed to be looking out for the best interests of the insurance and managed care markets?
I would argue that we do — by telling the industry what it needs to hear, not just want it wants to hear. And that’s why our research reports, newsletters and consulting services have been utilized by the industry as a leading source of unbiased information, analysis and forecasts since 1993.
For the record….
We sided with WellPoint in its public relations battle with the White House over premium rate increases of up to 39% in California — noting that a for-profit plan is acting logically and predictably when it raises premiums on a money-losing product to cover rising costs.
We sided with the managed care industry in noting that industry profits aren’t the problem; in fact, health plan margins are paltry compared to other leading industries.
We slammed the liberal Healthcare for America Now! for slanting the truth in its analysis of 2009 profit growth among five leading managed care plans.
We sided with the managed care industry in noting that repeal of the antitrust exemption for health plans would do very little to address rising premiums and healthcare costs.
We sided with the managed care industry in noting that a strong coverage mandate was important to protect the risk pool and avoid adverse selection.
We sided with the managed care industry in noting that the reform legislation doesn’t do enough to control rising medical costs.
But when Scott Brown was elected to the U.S. Senate — and everyone was saying reform was dead — we took a lot of heat for predicting that reform would still happen even if the Democrats had to use reconciliation. It was a minority view, and it wasn’t very popular with the industry. But it was correct.
When the industry was arguing that the insurance underwriting cycle was dead, we correctly pointed out that another downcycle was around the corner.
We said years ago that the leadership of the managed care industry was failing on two fundamental industry issues. The first was a policy issue: the failure to offer a viable solution to the problem of the uninsured immediately following the demise of the Clinton healthcare proposal; instead, the industry waited more than a decade as the ranks of the uninsured swelled to more than 45 million. The second was a consumer issue: the failure to consistently provide plan members with the insurance protection they need — and the healthcare coverage they have paid for — when they are sick. These failings are why we have reform today.
Finally, we have noted that the winners in this industry will be the ones who follow a prescription put forth by Aetna chief executive Ron Williams by focusing on products and services that improve quality and control costs, convenient tools and easy-to-understand information to help members make better-informed healthcare decisions, transparency, and new wellness and prevention programs.
Our research reports, consulting services, and newsletters provide solutions, forecasts and analysis you can believe in. Said another way, if all you want to hear are opinions that agree with your worldview, then CRG isn’t for you. If you want the type of strategic insights that tell you what’s really happening in the marketplace and how to win, then we’ve got the answers.
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Former General Electric chairman and CEO Jack Welch on CNBC Squawk Box commenting on the outlook for Democrats in the November elections following the passage of healthcare reform:
I don’t think they’re going to get wiped out. I think the economy is picking up….and freebies are now coming my way. My kids are now covered….I’m not predicting what it’s going to be, but it’s not going to be the broad-brush sweep blow them out.
Here’s a fun chart (hat tip: Paul Krugman) showing the Intrade.com price on a bet that healthcare reform would pass; the time period shown spans Scott Brown’s election to the final yea vote.
Rich Umbdenstock, CEO, American Hospital Assn., March 21:
Today’s vote will chart a new and better course for our nation’s health and health care. Bottom line: the health reform bill may not be perfect, but it expands coverage to 32 million people, enacts significant insurance market reforms and lays a solid foundation upon which we can continue to build.
J. James Rohack, M.D., president, American Medical Assn., March 21:
By extending health coverage to tens of millions of uninsured, improving competition and choice in the insurance marketplace, promoting prevention and wellness, reducing administrative burdens, and promoting clinical comparative effectiveness research, this bill will help patients and the physicians who care for them. There are increased payments for primary care physicians caring for Medicaid patients and bonus payments for physicians in underserved areas.
Throughout this long process, we have been guided by a belief that all Americans should have access to high-quality, affordable health care coverage and services. This legislation, while not perfect, is a step in that direction. Even as we support health care reform legislation, we continue to have concerns about a number of issues including the overly broad powers of a non-elected Independent Payment Advisory Board (IPAB), which could enact sweeping Medicare changes without action by Congress and would not be subject to judicial or administrative review.
Karen Ignagni, CEO, America’s Health Insurance Plans, March 21:
The access expansions are a significant step forward, but this legislation will exacerbate the health care costs crisis facing many working families and small businesses.
Thomas Donohue, CEO, U.S. Chamber of Commerce, March 21:
This $900 billion, 2800 page bill is not health care reform. It fails to fix what is broken and risks breaking what already works. It will drive up health care costs and make coverage less affordable for businesses and families. It marks a major step down the road to a government-run health care system. It will further expand entitlements and explode the deficit, and raises taxes by a half a trillion dollars at the worst possible time. American jobs and growth are at risk thanks to the decision by the House today.
(Note: Revised to include most recent AHIP comment on the legislation).
I’ll have a lot more to say about healthcare reform later today. Five quick points right now:
1. This is not only historic, it’s also a very good thing. For all the rhetoric about healthcare reform, the fact is that it will help a lot of people: 32 million to be exact. These are the people without health insurance who will now be able to get coverage because of this legislation. Others will have access to much better coverage than they have now. The sick won’t be denied coverage anymore. And people who already have coverage through their employer can rest assured they will still be able to afford coverage if they lose their job.
2. The health insurance industry — which played the role of villain in the reform debate — is going to see its profits suffer. The industry will take hits on its Medicare Advantage, individual and small group business lines. It will also experience some adverse selection because the legislation calls for guaranteed issue of health insurance without a strong coverage mandate. Other costly regulations and taxes will take a bite as well.
3. The managed care industry will survive. Yes, it will be less profitable (which suggests the need for additional consolidation), but the industry isn’t going away. The winners will be the companies that take the advice of Aetna chief executive Ron Williams and focus on four areas: products and services that improve quality and control costs; convenient tools and easy-to-understand information to help members make better-informed healthcare decisions; transparency; and new wellness and prevention programs.
4. You’ve got to hand it to President Obama. He’s made history — again.
5. I hate to say, “I told you so” (all right, actually I love to say, “I told you so”), but I predicted on that dark day following Scott Brown’s victory in Massachusetts that the House would pass the Senate bill. If you want to know what will happen next, be sure to pick up a copy of our annual report The Outlook for Managed Care 2010. Our forecasts were based on the assumption of last night’s yea vote.
Here’s a moving article in BusinessWeek titled The End of Life: Lessons from a $618,616 Death by Amanda Bennett about her husband’s seven-year battle with cancer, which highlights the dilemma over who pays the cost of healthcare and how do you put a price on a life. But the article also points to the tremendous inefficiencies and inequities in our system, including sky-high administrative costs and varying prices for drugs and procedures.
As I fought to buy my husband more time, it didn’t matter to me that the hospital charged more than 12 times what Medicare then reimbursed for a chest scan. It also didn’t matter that UnitedHealthcare reimbursed the hospital for 80% of the $3,232 price of a scan, while a few months later our new insurer, Empire BlueCross & BlueShield, paid 24% for the same test. And I didn’t have time to be thankful that the insurers negotiated the rates with the hospital so neither my employers nor I actually paid the difference between the sticker and discounted prices. Looking at that stack of documents, it is easy to see why 31% of the money spent on health care went to paperwork….
When it came to the insurance companies, the sticker price meant little since they had negotiated their own deals with the hospital. Neither the hospital nor the insurance companies would elaborate. The entire medical bill for seven years, in fact, was steeply discounted. The $618,616 was lowered to $254,176 when the insurers paid their share and imposed their discounts. The portion of the charges that were not covered for the most part vaporized. Terence and I were responsible for and paid $9,468—less than 4%….
Taking it all into account, the data showed we had made a bargain that hardly any economist looking solely at the numbers would say made sense….As costly as his treatment was, no one can say for sure if it helped to extend Terence’s life…Only I know that those months included an afternoon looking down at the Mediterranean with Georgia from a sunny balcony in southern Spain. Moving Terry into his college dorm. Celebrating our 20th anniversary with a carriage ride through Philadelphia’s cobbled streets. A final Thanksgiving game of charades with cousins Margo and Glenn.
Cleve Killingsworth upon resigning his job as chief executive of Blue Cross Blue Shield of Massachusetts — less than a month after the company announced a 2009 statutory net loss of $149.2 million and a 3% decline in membership:
I look forward now to moving the discussion of quality and affordability to a national level, where I believe my experience can be of value.
UBS analyst Justin Lake says the odds are 60/40 in favor of the enactment of the Senate healthcare reform bill with certain changes made through a budget reconciliation process. Lake says that House Speaker Nancy Pelosi (D-CA) is building momentum to win the votes necessary to pass the Senate bill in the House. While she’s not there yet, Lake says, “The power of the Presidency; the power and respect that Pelosi commands with most of her Democrats; and the power of being the majority party and being able to manipulate the rules of the game — all argue that the Democrats will get it done.”
Last month, I asked Aetna financial officer Joseph Zubretsky if the company’s PBM was still for sale. His response was that despite the rumors, Aetna never confirmed it was shopping its PBM. But J.P. Morgan analyst Lisa Gill still thinks a sale makes sense and that Medco would be the most likely buyer. Gill puts the value at $1.6-2 billion, assuming Aetna’s PBM processes 107 million claims annually, has EBITDA per adjusted claim of $1.50, and sells at a 10% discount to WellPoint’s sale of its PBM to Express-Scripts. Gill adds, “The ultimate value of a transaction is likely to be highly dependent on the long-term PBM contract that would be entered into between the two parties.”
New Republic reporter Jonathan Cohn on health insurance industry profits:
The issue…isn’t the profits that insurers make. It’s the actions insurers take to maximize those profits….The quickest, surest way for insurers to boost profits is to avoid spending a lot of money on sick people. And, particularly in the individual insurance market, insurers can do that in any number of ways. They can charge sick people higher premiums, deny them coverage altogether, or — failing that — revoke their coverage after they start filing claims….They can make it difficult for the chronically ill to get the care they need, by manipulating benefits and provider networks or making it more difficult to obtain authorization for treatments. And they can always jack up rates on blocks of business that have high expenses.
All of which gets at something I’ve been trying to say for some time. Industry profit margins of 3% to 5% aren’t the problem. Administrative costs of 10% to 15% of premiums– i.e., expenditures aimed largely at maintaining the infrastructure needed to do all the things Cohn outlines to ensure profitability — is a big part of the problem. Cohn continues:
These practices help explain why people with serious medical problems so frequently find insurance inadequate or simply unavailable. But they don’t explain why health care generally is expensive for everybody, even the healthy–and why it’s getting expensive so much more quickly. Those problems are the result of the entire health care sector–doctors, hospitals, device makers, the drug industry–providing too much medical care or charging too high a price for it. The insurance industry likes to point this out and it is right to do so.
Said another way, I can understand when insurers raise premiums — even at double-digit rates — to offset rising costs (sorry Mr. President). But I can’t justify higher rates simply to support an administrative infrastructure aimed at denying coverage and care to the sick. Only a highly regulated public-private insurance market or a single-payer system gets at a solution.
From Justin Lake of UBS:
House Leaders Looking At A Tried & True Parliamentary Procedure To Pass The Senate Bill. This is far from certain, as we are at least 9-14 days away from any potential votes, but the House Dem Leadership is looking at avoiding an up or down vote on the Senate passed bill from December 24, 2009 when the House debates the as-of-yet unformulated Budget Reconciliation/FixIt bill. The Leadership is looking to use a procedural maneuver that would be part of a self-executing Rule — a process that has been used from time to time in the House by both parties when they have been in the majority. It would work something like this:
*Before the House takes up the Budget Reconciliation/FixIt bill they would have to adopt a Rule governing the debate as is the normal procedure. The Rule would contain a self executing clause that would state that upon adoption of the Rule and then debate and adoption of the Budget Reconciliation bill that the Senate bill/December 24, 2009 would also be considered as adopted.
*The whole package would then go to the Senate for approval. In this manner, assuming Senate approval, the Senate bill/December 24, 2009 and the Budget Reconciliation/FixIt bill would all be sent along to President Obama at the same time. And nervous House Democrats would be assured that the Senate bill would not move to the President by itself without the Budget Reconciliation/FixIt bill alongside; since many House Dems do not trust the Senate to pass the Budget Reconciliation/FixIt bill once the House has already stuck out its political neck and taken the tough vote.
The White House says…
On Wednesday, a leading insurance broker laid out in clear terms what many Americans could already guess: the insurers’ monopoly is so strong that they can continue to jack up rates as much as they like – even if it means losing customers – and their profits will continue to soar under the status quo.
…which refers to an article by Sam Stein of The Huffington Post that says…
The market concentration for health insurance is so monopolized in some areas that insurance companies are willing to raise prices and lose customers in an effort to improve their bottom line, a leading insurance broker told Wall Street analysts on Wednesday.
…which is based on a conference call hosted by Goldman Sachs with insurance broker Steve Lewis of Willis. The only problem is in reading the transcript from the call, I’m not exactly sure that’s what Lewis said. (I called Lewis for clarification, but didn’t hear back by presstime). What he did say for sure was the following:
We feel this is the most challenging environment for us and our clients in my 20 years in the business. Not only is price competition down from year ago (healthcare) inflation is also up and appears to be rising. The incumbent carriers seem more willing than ever to walk away from existing business resulting in some carrier changes.
What this says to me is that health insurers are coming out of an underwriting downcycle and putting margin improvement (i.e., profits) ahead of membership growth — similar to what happened a decade ago when the health plan market was far less concentrated. Costs are rising and therefore premiums are rising — and therefore the likelihood is more people will be priced out of the market, face higher costs or suffer reduced benefits. As Goldman notes:
Two years ago, Lewis and his team were one of the few industry sources pointing (correctly) to aggressive pricing by the carriers in a lead up to severe margin deterioration….Now, Lewis and his team find price discipline has strengthened noticeably.
So the effect is the same, but the cause isn’t as clear-cut as the monopoly argument suggests (an argument that ignores the impact of similar consolidation in the hospital industry). That’s not to say a top-heavy insurance market isn’t part of the problem. And as Lewis notes, employers do buy in when Obama and the Democrats “rail at what may be termed oligopolistic behavior of carriers in certain markets.” But as the Congressional Budget Office said when evaluating the potential impact of a repeal of the health insurance industry’s antitrust exemption:
Enacting the legislation would have no significant effect on the premiums that private insurers would charge for health insurance.
President Obama after his meeting last week with health insurance companies:
They couldn’t give me a straight answer as to why they keep arbitrarily and massively raising premiums — by as much as 60% in states like Illinois.
Here’s a funny spoof from the Onion News Network, which reports that President Obama is bipolar. Among the signs:
Last week he proposed a healthcare plan that was nothing more than, “If you need a doctor, go see a doctor.”
Actually, that’s not a bad proposal.
President Obama outlined both the far-left and far-right positions on healthcare reform in a speech yesterday:
On one end of the spectrum, there are some who’ve suggested scrapping our system of private insurance and replacing it with a government-run healthcare system. And though many other countries have such a system, in America it would be neither practical nor realistic.
On the other end of the spectrum, there are those, and this includes most Republicans in Congress, who believe the answer is to loosen regulations on the insurance industry — whether it’s state consumer protections or minimum standards for the kind of insurance they can sell. The argument is, is that that will somehow lower costs. I disagree with that approach.
Compromise — and I’m just guessing here — would be something in between.