Below is an interesting chart from the PricewaterhouseCoopers’ Top Health Industry Issues of 2011 report, showing regional variation in the percentage of consumers who say they are willing to stay within an accountable care organization for all of their care needs. Nationwide, PWC found, 50% of consumers say they were willing to do so.
We keep talking about the healthcare market shifting toward “consumerism.” Well, here’s what consumers surveyed by PricewaterhouseCoopers had to say about healthcare and reform. From PWC’s annual Top Health Industry Issues report:
- Only half of consumers said they would stay within an ACO-like organization for all of their care.
- Less than half of consumers know what a health insurance exchange is.
- Nearly three-fourths of consumers said they would trade employer-sponsored insurance for higher pay.
- Currently, eighty-six percent of consumers do not access their medical records electronically.
- More than one-third of consumers said costs and waiting times would increase as a result of healthcare mergers.
- Consumers seek health information from media companies more than from government, healthcare companies, and consumer companies combined.
We all knew that the advent of health insurance exchanges through reform — along with the need for health plans to cut costs to maintain profit margins – would result in slashed individual and small group commissions to insurance brokers. Case in point: Aetna. An analysis by Carl McDonald of Citi suggests that Aetna has cut 2011 individual premiums by about 50% — a number the company wasn’t able to verify by presstime. The new individual commissions will apply nationwide (as opposed varying state by state as in the past) and will be based on volume as shown in the chart below from the Aetna individual commission schedule sheet:
As for small group, here’s a link to an interactive commission schedule from Aetna, allowing comparison of broker commissions by state for 2011 versus 2010. In some states, Aetna shifted to a commission structure based on number of employees (i.e., a per employee per month structure) from one based on a percentage of premiums. In other states, Aetna maintained the percentage of premium structure, but simply reduced the percentages. The company explains in an email:
The impact on brokers will vary from state to state. In states where we are moving to a PEPM model, the impact will depend on the amount of membership that a broker has with Aetna. In states where compensation will remain a percent of premium, we made a number of adjustments to remain competitive. In some states we have simply reduced the percent of premium brokers receive in order to offset medical inflation – for example in California the compensation rate decreased from 7% to 6.7% (4.3% decrease). In other states, we have kept the percent of premium the same for new business but lowered the compensation level for renewal business, again to offset medical inflation – NJ new business remained the same and renewal compensation was lowered from 4.5% to 4% (11% decrease).
(Editor’s Note: Post modified to add details of Aetna individual broker commissions).
Here’s the link to proposed HHS regulations released today, which would make health plan premium rate hikes of 10% or more in the individual and small group markets subject to regulatory review and require insurers to publicly justify and list the assumptions behind the increases. States would make the final call on whether a rate hike is “unreasonable,” unless the state doesn’t have an effective rate review process — in which case HHS would handle the review. HHS says that 43 states already have some form of rate review, and a “significant majority” are expected meet the standards of an effective review process. HHS and state officials at a press conference made clear the goal isn’t to supplant state authority, but rather to provide a backstop. A 10% hike isn’t necessarily “unreasonable,” but could be deemed so “if the actuarial assumptions underlying the increase were invalid or unreasonable.” Even in cases where states don’t have the regulatory authority to reject a rate hike, the thinking is the very process of making public and questioning the assumptions behind the increases will help moderate trends. The 10% national threshold is only a starting point and is expected to be made state-specific over time. In setting the 10% threshold, HHS found that “the majority of increases in the individual market exceeded 10% each year for the past three years.”
Here are the headlines from the December 2010 issue of ACO Market News:
- Thoughts on Aetna’s Acquisition of Medicity for $500 Million
- CMS Picks 8 States for Medical Home Demonstration
- ACOs, Medical Homes: Where Do Health Plans Fit in the Mix?
- Jury Still Out on Health Plans Medical Home Payment Models
- UnitedHealth CFO Says Provider Payment Models May Take Many Forms
- Humana to Buy 300+ Clinics with 650 Physicians
- Is UnitedHealth Interested in Acquiring Physician Practices
- WellPoint Has 10 Medical Home Pilots Touching 80,000 Members
- Humana Has 50,000 Commercial, Medicare Lives in Medical Homes
- 0.4% of U.S. Physician Practices Are Recognized as Medical Homes
Click here for a copy of today’s ruling, in which U.S. District Judge Henry Hudson in Virginia found that the mandate included in the healthcare reform law requiring virtually every American to purchase health insurance by 2014 or pay a penalty is unconstitutional. Given that a federal judge in Michigan ruled otherwise, the next stop for this dispute is the U.S. Supreme Court. Hudson also ruled that the mandate could be invalidated without finding the entire law unconstitutional.
The decision is already being described as a defeat for Obama that could further erode political support for reform. But the irony is thick. Obama, who didn’t want the mandate in the first place, had to be dragged on board. Yet Republican state attorneys general are the ones litigating against the mandate. Meanwhile, the health insurance industry — also an opponent of reform — favors the mandate to protect against adverse selection (i.e., only the sick buying insurance) and to ensure membership growth.
Assuming the going rate for healthcare information exchanges (e.g., Medicity, Axolotl) is eight to 10 times revenues, Carl McDonald of Citi posits that Availity could be worth about $1 billion. Aetna announced it was acquiring Medicity for a fat $500 million, while UnitedHealth bought Axolotl for a undisclosed sum. Humana owns 22% of Availity, which suggests its stake could be worth more than $200 million, McDonald says, or about 2% of Humana’s market cap.
Yet more rumors are flying about the possible break-up of trade group America’s Health Insurance Plans, possible ouster of AHIP chief executive Karen Ignagni, and/or possible formation of a splinter group by five top health plans to supplement AHIP’s lobbying activity.
David Whelan of Forbes writes: “There’s been a great deal of discontent on the part of the large plans, who had the most to lose from health reform. They believe AHIP waited too long to get political during the build-up to the legislation.” Click here for additional coverage by the Kaiser Family Foundation.
From the New York Times profile of Ron Williams, who stepped down as chief executive of Aetna in November:
Mr. Williams rarely speaks of his childhood, or any topic of a personal nature. He grew up in a poor neighborhood in Chicago and is one of the few African-Americans to run a large corporation.
Growing up, he says he watched his friends and neighbors struggle to get medical care. When his mother was told she had breast cancer in 1972, Mr. Williams said he witnessed how hard it was for someone, even with insurance, to try to find appropriate treatment. He is unsure whether she got the best care she could have.
As a result, Mr. Williams says he is not blind to the need to overhaul the nation’s health care system to make it better. “There is no question in my mind that the health care system has to work,” he said.
During the healthcare reform debate last year, President Obama cited a New Yorker article by Atul Gawande, M.D., which suggested that a pervasive “culture of money” drove up Medicare costs in McAllen, TX, compared to nearby El Paso, TX. I wonder if the President plans on reading this follow-up study in the December 2010 Health Affairs, which compares non-Medicare members in the same two towns.
Although spending per Medicare member per year was 86 percent higher in McAllen than in El Paso, total spending per member per year in McAllen was 7 percent lower than in El Paso for the population insured by Blue Cross and Blue Shield of Texas….Our study is consistent with Gawande’s finding of a “culture of money”—increasing the use of profitable Medicare services when there is diagnostic and procedural discretion and clinical latitude—but that such a culture may also be constrained by private insurance plans with their more stringent reviews of the use of medical services. (emphasis added)
The Health Affairs article cites several care and cost management efforts used by BCBS-TX:
Members with high-severity and high-expense conditions are contacted by a Blue Care adviser, who encourages members to participate in management programs. Chronic conditions and complex cases are managed through a variety of condition-specific management programs based on evidence-based interventions.
Blue Cross and Blue Shield of Texas has also developed several mechanisms to encourage cost-effective care by providers. All elective inpatient admissions must be preauthorized, and counseling before admission and after discharge is used to establish postoperative goals and identify discharge planning needs. Furthermore, triggers such as a catastrophic event or claims higher than $50,000 per month activate a case management process that entails reviews of potential alternative treatment plans and follow-up after discharge from acute care.
The study notes that there are fewer such controls in Medicare:
Medicare still enjoys some advantages over private insurance in its ability to set prices for payment to providers. Private insurance companies by contrast must negotiate prices. Yet for managing the use of medical services, private insurers have the advantage of a “threat point” at which they can ultimately refuse to contract for services to specific physicians or hospitals—something that Medicare cannot do.
The study wasn’t able to compare clinical outcomes, which is a key limitation. The authors also warn against assuming the results can be generalized across the nation. Still, it’s good news for a health insurance industry struggling to prove its relevance in a changing marketplace.
Kevin Klobucar, chief executive of Blue Care Network (the HMO unit of Blue Cross Blue Shield of Michigan), on why healthcare reform won’t likely be repealed:
It’s hard to argue against all the things reform stands for.
by John Moore
First it was United Health Group’s (UHG) Ingenix Division’s acquisition of leading HIE vendor (and top competitor to Medicity) Axolotl. Then this morning Aetna counters by acquiring Medicity. In just a few short months these two payers have completely changed the landscape of the HIE market by acquiring the two leading HIE vendors in the market today. Now that both of these vendors are in the hands of payers what are the implications both to the HIE market and more broadly the healthcare sector? Following is our assessment based on our continuing research of the HIE market and a number of interviews today, not only with the Aetna and Medicity, but also several other active participants in the HIE market.
Aetna acquired Medicity for a King’s ransom of $500M, a handsome multiple of Medicity’s 2010 gross revenue. Medicity will operate as a separate entity under the Aetna brand maintaining its current headquarters in Utah. According to Medicity, initial conversations began in late October/early November and quickly accelerated to the deal announced today. Aetna plans to close the deal before the end of year. As part of the deal, the senior management team of Medicity has agreed to stay in place for the next few years.
While some may argue that Aetna was simply looking to counter the move by UHG or Aetna’s new CEO was looking to make a mark, Chilmark sees a more thoughtful and strategic move at play here which in the end may justify the price paid.
With the passage of the healthcare reform and subsequent actions by CMS, the industry is moving towards a shared risk payment model based on Accountable Care Organizations (ACOs) and Patient Centered Medical Home (PCMH). The implications are many-fold but a couple of big ones are:
Self-insured employers will begin directly contracting with ACOs, relegating payers to the low margin role of a third party claims administrator (TPA). This is already starting to happen and will accelerate in the future. Therefore, payers need to rethink what their value-add is to the market in this changing landscape to maintain healthy margins. It appears that both UHG and Aetna see their role as leveraging their core competency in IT as both of these companies have been clear leaders among payers in the innovative and effective use of IT.
As new payment models are introduced and IDNs move to an ACO model, diagnosis-related groups (DRGs) will expand their definition in both directions and these ACOs will need solutions to help them more effectively manage risk across an expanded definition of care. This is a daunting challenge for IDNs who today struggle with just managing their physicians and affiliated practices, let alone risk. This will likely force closer relationships between ACOs and payers as a payer’s core competency is indeed managing risk and ACOs look to tap that expertise.
For Aetna it’s quite clear: Link Medicity to their care management/CDS solution, ActiveHealth, to deliver best practice medicine at the point of care thereby morphing Medicity’s existing market presence and network from one of just data pipes, to intelligent pipes. Also, having ownership of Medicity may allow Aetna the opportunity to obtain much better, timely and accurate population health data to more effectively manage risk and concurrently create more personalize benefit plans for their customers.
For Medicity it is less clear. Yes, they now have a huge public company backing them and viability will no longer be an issue, but there is that thorny issue of payers being so close to clinical data, something that makes many in the industry uncomfortable. In the near-term, Medicity will likely lose several prospects to competitors and several current customers may rethink their relationship with Medicity going forward. Both Aetna and Medicity will need to be extremely artful in their messaging to the market to belay fears and minimize these defections for at least in the case of the Ingenix/Axolotl deal, Ingenix had a history of neutrality and their solutions are used by many payers. But in the case of Aetna/Medicity, Aetna has less of a track-record demonstrating such neutrality.
For the broader market there are a few clear outcomes:
- Analytics will play an ever increasing role in healthcare as we digitize the sector through the HITECH Act and the accelerated adoption and use of standards (e.g. IHE stack in HIE market).
- Administrative and clinical data will increasingly become co-mingled as healthcare/payment reform takes hold. The solutions available today to assist with managing that data and delivering it where it is needed when it is needed are still immature. Acquisitions such as this and others to come will focus on addressing this need/opportunity.
- The high valuations paid for both Axolotl and Medicity are reminiscent of the dot-com days of yore though unlike those dot-com brethren, both Axolotl and Medicity had clear brand equity, were neck and neck leaders in the HIE market and have impressive customer-bases. The few independent HIE vendors left are likely thinking big acquisition thoughts of their own but those may be pre-mature as leaders in any market always get the highest valuation. But what is certain is that in 12-18 months time there will likely not be an independent HIE vendor left in the market.
Third-quarter 2010 enrollment data from leading health plans reinforced familiar trends, according to the latest issue of Health Plan Market Trends. Fully funded enrollment is down. Self-insured is up. Medicaid and HSA-compatible high-deductible health plans are enjoying gains. Third-quarter 2010 enrollment data from leading health plans reinforced familiar trends. Fully funded enrollment is down. Self-insured is up. Medicaid and HSA-compatible high-deductible health plans are enjoying gains.
Karen Ignagni, chief executive of America’s Health Insurance Plans, in response to the National Commission on Fiscal Responsibility and Reform’s recommendations on how to reduce the deficit:
The Commission is absolutely correct that there is no path to long-term fiscal responsibility that does not include a comprehensive approach to reducing health care cost growth. In addition to its impact on the federal budget, health care cost growth threatens our economic competitiveness, our public safety net, and the affordability of coverage for families and employers. We urge legislators at the federal and state levels to work on a bipartisan basis to pass reforms that will bring down the soaring cost of medical care.
The question, of course, is how much do health plans really care about reducing costs. Cost increases translate into premium increases, which all else being equal translate into rising profits for health plans. That’s been the formula for some time. UnitedHealth released projections this week suggesting that up to half of its profit growth in the years ahead will be driven simply by premium increases of 5% to 8% — on par with rising healthcare costs. The rest will come from administrative savings and capital management.
It reminds me of the exchange I had at an investor conference in February with WellPoint chief financial officer Wayne DeVeydt. During a Q&A session, I asked DeVeydt the following: “This may sound cynical, but why do you care about rising costs under reform when rising costs lead to higher premiums and rising premiums are a built-in driver of EPS growth?” His response: The idea that “if costs go up we win” might have been true five years ago, but today “the issue has become affordability.”
Then came the infamous rate hike proposal of up to 39% in California.
WellPoint Inc. (Indianapolis) announced yesterday the departure of two key executives: chief strategy and external affairs officer Bradley Fluegel and chief actuary Cynthia Miller. Both spoke for the company during the California rate hike fiasco that helped push healthcare reform over the finish line. Miller testified before Congress in defense of the proposed hikes, while Fluegel tried to justify the hikes in comments to the media. Other key WellPoint executives to leave this year included Leslie Margolin, president of the company’s Blue Cross of California unit; and Dijuana Lewis, president and chief executive of the company’s comprehensive health solutions business unit. WellPoint also announced that it was reaffirming 2010 profit projections. Shares in the company were down nearly 2% in midday trading today.
In other management changes, WellPoint general counsel John Cannon will assume responsibility for government affairs and communications; chief financial officer Wayne DeVeydt will assumed responsibility for the actuarial group; and consumer business unit president Brian Sassi will assume responsibility for marketing, strategy and international.
President Obama’s National Commission on Fiscal Responsibility and Reform — i.e., the deficit reduction commission — recommends that all 9 million dual-eligible Medicare-Medicaid members be placed into managed Medicaid plans. There are currently about 1 million dual eligibles in managed Medicaid, according to estimates from Scott Fidel of Deutsche Bank. “This is one of largest markets that has not yet been highly penetrated by managed care,” he says. Medicare would continue to pay its share of the costs under the proposal. According to the commission, “Medicaid has a larger system of managed care than does Medicare, and this would result in better care coordination and administrative simplicity.”
William Marino, 67, is retiring as chairman and chief executive of Horizon Blue Cross Blue Shield of New Jersey (Newark) March 1, 2011 after an amazing 17-year run. A list of accomplishments appears below. About the only thing he failed at was his attempt to convert the company to for-profit status through an initial public offering of common stock. Chief operating officer Robert Marino (no relation to Bill) will take over as president and CEO. Horizon board member Emmanuel Kampouris — former chairman and CEO of American Standard — will become chairman.
Horizon BCBS-NJ during Marino’s tenure as CEO:
- Total membership rose to 3.6 million, from 1.7 million members
- Revenues rose to more than $8 billion, from $1.3 billion
- NJ insured market share increased to 46.7%
- Launched Medicaid plan, now NJ’s largest with 470,000 members
- Dental membership rose to more than 1.1 million, from 350,000 in 1994
- A- rating from S&P, with strong capital reserves
Hard to argue with results like that.
Here’s an interesting chart from UnitedHealth CFO Mike Mikan from the company’s recent investor conference. It suggests some of the varying payment models that may serve different types of provider organizations.
UnitedHealth Group (Minnetonka, MN) released a lot of data during its 2010 investor conference yesterday, but the most interesting is the company’s projection that earnings per share will grow 13% to 16% annually over the next five years — despite a projected decline of 8% in 2011. In other words, earnings would have to rise 20%+ annually between 2012 and 2015 for United to hit the mid-range of its projection. [See correction below]. From 2005 through 2010, United is tracking at about 11% average annual EPS growth. And that’s before healthcare reform, minimum medical cost ratio requirements and Medicare reimbursement cuts. Scott Fidel of Deutsche Bank is projecting EPS growth for United of about 8% to 12% annually beyond 2011. You make the call.
Correction/Clarification (Dec. 1, 2010, 2:09 EST): I just heard back from UnitedHealth’s investor relations department, which clarified that the 13% to 16% annual EPS growth projection over five years uses 2011 as a base year. United expects to get there with a 6% to 9% annual increase in revenues, 20 to 40 basis points of annual improvement in administrative cost ratio, and a 5% addition to EPS from capital deployment. The projection is still higher than what analysts like Fidel expect, but there’s no need for United to boost EPS by 20% annually from 2012 to 2015 to hit the average (given the 2011 decline) as I had incorrectly suggested above.
It appears that the main benefit of J.P. Morgan’s new HSA broker program is that it makes it easy to switch health insurance clients from other banks to J.P. Morgan. At least that’s how Michael J. Gundzik of Denver-based broker Gundzik & Assoc. describes it. “It’s less headaches for me,” he says. Gundzik also says he’d be more likely to recommend J.P. Morgan to health insurance clients because the process of setting up an HSA is relatively easy.
In J.P. Morgan’s words, the new service “provides access to administrative, marketing, education and sales tools to facilitate brokers in their dialogue with clients….For small and mid-sized companies, J.P. Morgan offers streamlined, easy-to-implement HSA programs that can be set up in as little as five days. J.P. Morgan also offers more customizable plans for TPAs and large companies with more complex benefit needs.” J.P. Morgan has about 550,000 HSAs with assets topping $1 billion and serves about 10,000 employers.
Banks getting in between a health plan and its customers has always been the risk of HSA-compatible high-deductible health plans. According to the Nov. 29 issue of Health Plan Market Trends Letter, 20 leading banks boosted HSA assets 37% to $5.9 billion as of Sept. 30, 2010, compared to a year earlier. The number of accounts rose 25% to 3.5 million.