May

Medicare Set-Asides – the real problem

Posted by Joe Paduda on Monday, May 24th, 2010 | Comments

As CMS seeks to ensure taxpayers don’t pay for care due to comp, liability, or other causes, Medicare Set-Asides will become more common. And as we’ve seen recently, one of – if not the – biggest cost areas is pharmaceuticals.
NCCI’s studies show that the older claims are, the greater percentage of spend is for drugs, which can account for as much as forty percent of spend in older claims. That, and the recent news that CMS is revising its position re some issues related to projecting future drug costs, have brought much-needed attention to this issue.
My read on the drug-cost-projection issue is simple: to a large extent, the problem is self-inflicted by the work comp industry. With some notable exceptions, most payers have simply not done enough to manage the long term drug therapies of their long term claimants. Understanding that in some states this can be problematic; that many claimants have legal representation; that evidence-based guidelines and research on the science of pain is not as robust as we’d wish; and that patients drive much of the decision making and big pharma has huge dollars to influence physicians and consumers, there’s still much that can be done.
Here, in no particular order, are a few strategies worth considering.
1. Partner with a PBM that has a strong clinical orientation coupled with data mining expertise.
2. Motivate adjusters and case managers to identify potentially problematic drug usage and give them the tools and clinical back-up to do something to forestall issues.
3. Put in place early warning processes and flags to identify claims that appear to be heading towards questionable drug use or use of medications with uncertain benefits for the comp injury.
4. Assess the various evidence-based clinical guidelines and determine if they can help your claims staff.
5. Identify physicians with appropriate and potentially inappropriate prescribing patterns, assess those patterns, and determine how best to use that information to direct claimants and ‘mange’ physicians.
6. Encourage treating physicians to use opioid contracts and drug testing in their normal course of practice.
Most importantly, be proactive. Don’t whine, complain, and blame the system, pharma, bad docs. They all may be contributors, but blaming them doesn’t solve the payer’s problem – action does.
What does this mean for you?
Addressing drug usage early and intelligently can dramatically reduce MSA settlement costs. Oh, and it can certainly help cut indemnity and reduce disability duration as well.

May

CMS, MSAs, and credit where credit is due

Posted by Joe Paduda on Friday, May 21st, 2010 | Comments

My post on Monday about the internal memo released by CMS regarding MSA allocations triggered a round of name-calling, motive-assumption, and general nastiness by people in the MSA business furious that I awarded PMSI much of the credit for the change.
That, and/or the change has been described as not material and raising more questions.
Here’s how I put it Monday.
“[MD Kent] Takemoto has been working with CMS for over a year in an effort to revise/revamp/redo the methodology used by CMS to calculate/estimate drug costs in Medicare Set-Aside allocations.
After multiple meetings, lots of analysis (both mathematical and scientific) of drugs commonly used in comp v drugs not commonly used, drug substitution, and plenty of persistence Kent’s efforts have borne fruit…The methodology developed by PMSI and approved last week by CMS is a major step in the right direction.”
I was contacted by several individuals who claimed that they or their organization were at least partially responsible for the revision; I asked each to provide documentation of their activity, noting I’d “be happy to amend my post if necessary.” I’d hasten to add that some correspondents were professional and courteous; others engaged in name-calling and inferred I wrote the post to somehow ingratiate myself with PMSI, or because PMSI is a client, or was somehow duped by PMSI.
Let me address each in turn.
Name-calling – either grow up or shut up.
Clients – As long-time readers are well aware, I ALWAYS note when a client is mentioned on the blog. Therefore, insinuating that I wrote this to aid a client is flat out wrong.
Marketing – I have written complimentary posts about numerous companies and organizations that are NOT clients, including Aetna, Harbor Health, Broadspire, SRS, Progressive Medical, Mitchell, Medata, Datacare; heck, I’ve even written nice things about Coventry. Inferring that I wrote the post to schmooze PMSI, a company I’ve taken to task rather bluntly in the past, reflects poorly on those who would make that inference.
Duped – There’s ample evidence that PMSI did, in fact, help CMS develop solutions to several key issues, solutions that will help the entire industry. Yes, this will certainly help PMSI, as their methodology was approved by CMS; it will also help payers, PMSI’s competitors, and CMS over the long run.
As I stated in the original post, the CMS memo came “After multiple meetings, lots of analysis (both mathematical and scientific) of drugs commonly used in comp v drugs not commonly used, drug substitution…”. I’ve seen research documents, email correspondence, visitor passes, and other materials pertaining to PMSI’s efforts. It is abundantly clear that PMSI and Takemoto expended a lot of effort and brain power to develop a solution.
I spoke with PMSI CEO Eileen Auen about this (Auen is a highly respected and very well regarded executive and a person for whom I have the utmost regard). She verified my understanding of the research and analytical work put into the problem by PMSI, noting the level of effort was commensurate with the result. But what Auen really wanted to focus on was the positive impact of the revision on all payers, and her desire to see the industry working more closely together on this and other issues. As Eileen told me, “others have also worked to advocate for change – we applaud their efforts. Perhaps the lesson out of this, is that the MSA industry should find ways to collaborate more closely (like we have in Pharmacy and Ancillary Service) to drive an industry agenda.”
I asked two of my critics to provide me with documentation of their role in effecting this change at CMS. One said they wouldn’t as PMSI is an HSA client, the other said they would provide such documentation but as of this moment has not.
I’ve no doubt that many individuals and organizations spoke to CMS, sent letters, complained, called, sent emails, and met with individuals at CMS about issues related to MSA allocation calculation bases and methodology. Their efforts and attempts to resolve a very difficult issue are laudable. If any of them played a material role in effecting this change, they have yet to share evidence of that role with me. If and when they do, I’ll review it, give credit where credit is due and write it up for your reading pleasure.
Until then, I stand by my post.
Now – could we please get back to work?

Apr

Coventry – a good Q1 2010, but what about the future…

Posted by Joe Paduda on Friday, April 30th, 2010 | Comments

Coventry released its Q1 2010 financials today, and looking at the numbers one would have to be a naysayer to find fault. The company is successfully exiting the Medicare Private Fee for Service business, growing its Medicare, Medicaid, and Part D revenues, and has also seen an increase in commercial membership.
From a financial perspective, earnings are on a solid path and guidance is up over previous numbers. Medical Loss Ratios are well under control across all products, reserve development has been positive, enrollment in governmental programs is strong, and commercial membership is up by a bit.
While one would think it’s all good, I’m less sanguine.
Commercial membership was up due to an acquisition in Kansas, a region of growing interest at Coventry. Same store growth was actually negative by 20,000 members – not surprising given the economy, but nonetheless something to watch.
MLRs are being ‘managed’ more by rate increases than by ‘managing’ the medical; while Chairman and CEO Allen Wise talked a bit about the need to be the low cost provider, there wasn’t much – if any – discussion of exactly how Coventry was going to do this beyond identifying good providers and narrowing their networks to focus on those providers.
That’s all well and good, but any health plan can figure out who the ‘good’ providers are and strike a deal, and many of Coventry’s competitors are quite a bit larger, have lots more members, and therefore have greater leverage.
The skills, assets, and capabilities a health plan will need to survive and prosper in the future are fundamentally different from those that Coventry has deployed so adroitly in the last few quarters. Successful healthplans will be those with:
– market share that enables them to negotiate from a position of strength in each geographic market
– a strong, positive brand image in the employer and individual sectors
– skill and deep knowledge in medical management, including data mining and especially chronic care management
Less successful healthplans will:
– not be among the market leaders in their geographic targets
– have long and highly successful traditions of risk selection and underwriting, attributes that are of far less importance in the brave new post-reform world
– be late to the medical management party, with a culture more akin to the old indemnity insurance companies than a true Health Maintenance Organization.
When you step back and look at what’s made Coventry’s resurgence possible, it’s fairly simple – getting out of unprofitable businesses, risk selection and underwriting, careful management of the Medical Loss Ratio through pricing.
All valuable and necessary, but not nearly as important in the future as brand, share, and medical management

So what’s the future hold for Coventry?
Corporate culture is brutally hard to change, and Coventry’s culture is built on risk selection, tough price negotiation with providers, and an intense focus on the numbers. While one would think these are assets in any market and some of those skills are indeed critical in any market, some will actually be counterproductive in the post-reform world.
Despite what Coventry’s leadership says, and I’m sure believes, Coventry is not now, and will never be, the low cost supplier in most of their markets – they just don’t have the negotiating leverage with providers. In the past this was OK; what they didn’t have in buying power they more than compensated for with admirable skill in risk selection.
Coventry appears to be working closely with Wichita Kansas health care system Via Christi; owners of the HMO just bought by Coventry, and the provider for a new Medicare Advantage product offered by Coventry as well. If Coventry is going to be successful they are going to have to build lots of similar relationships fairly quickly. I would be remiss if I didn’t note that Coventry’s HMO/PPO share in the state is second (at 19%) to the Blues at 37%.
That skill will be of very little value in the future.

Feb

Medicare and Workers’ Comp – NCCI’s view

Posted by Joe Paduda on Tuesday, February 2nd, 2010 | Comments

Recently NCCI released a white paper entitled “Medicare and Workers Compensation Medical Cost Containment”. The report goes well beyond a discussion of the relationship between Medicare’s physician and hospital reimbursement policies’ impact on workers comp; not that it doesn’t address that timely topic in some detail, but it also details the unforeseen implications of using Medicare reimbursement, the impact of the growing Medicare deficit on future health care, and the demographic factors and how they are felt differently in work comp and Medicare.
Ok, pretty geeky stuff I’ll admit, but interesting nonetheless. (wait, isn’t that contradictory?)
Here’s my summary of takeaways you should know.
The Center for Medicare and Medicaid Services (CMS) projects health care as % of GDP will go up one full point to 17.6% this year, driven by a declining economy while the demand for health care decline. US health care costs continue to be the highest in the world, by far.
Unlike group health, there’s an increasing disparity between Medicare reimbursement for specialty care, sx and radiology and Work comp fee schedule rates. Comp pays relatively more than group for these services.
One of the (many) issues inherent in basing WC on Medicare is that Medicare rates change for reasons specific to Medicare. As an example, the adoption of changes due to the budget neutrality factor legislation in 2008 changed the basic formula used in setting physician reimbursement. The changes increased relative value units (RVUs) and decreased conversion factors (CF). For those WC states that only adjust CFs, this may well have unintended consequences. The NCCI report stated “simply updating CFs for inflation and not offsetting the RVU change will give MARs that are about 8% higher than is likely to be intended.”
One conclusion in the study really stood out: CMS says the vast majority of Medicare patients “have access to specialty care, so it follows that many wc specialty care MARs (fee schedules) are well above what is needed to assure access [for wc patients]”.
As an example IL work comp pays 450% of Medicare, AK 510%, CT 360% for surgery.
That does raise a question: If most reimbursement for WC is below the WC fee schedule, does that not at least partially negate the importance of the FS as a price setting mechanism?
Finally here’s another finding worthy of consideration. The percentage of comp medical costs subject to physician fee schedules has declined from 58% in 2001 to 53% in 2006 (+/-). And, more and more procedures are being done on outpatient basis, and many states don’t have outpatient reimbursement schedules that have limits on utilization or even address it like Medicare’s methodologies do.
What does this mean for you?
Watch what happens with Medicare. Closely.

Jan

What’s replacing AWP?

Posted by Joe Paduda on Friday, January 29th, 2010 | Comments

As industry insiders have known for almost a year, Average Wholesale Price as published by First DataBank, is going away. Triggered by a settlement in a lawsuit filed in Boston in 2006, as of March 2011 FDB will no longer publish their version of AWP. (There’s a bit of disagreement as to timing, as one authoritative source indicates FDB is scheduled to discontinue the publishing of AWP in October 2011 (not March). I’ll find out what I can find out)
Regardless, FDB’s publication of AWP is going to cease. Sources indicate the National Association of Chain Drug Stores (NACDS) is suggesting a move to a new pricing methodology based on Wholesale Acquisition Cost, or WAC.
What’s with WAC?
WAC is the manufacturer’s list price for drug wholesalers and direct purchasers, excluding prompt pay or other discounts. (Note WAC may not bear much resemblance to the actual price paid, a problem it shares with AWP…)
NACDS and drug retailers would like to see a conversion to WAC; in fact NACDS has been advocating WAC for at least five years. WAC is generally accepted in broad swaths of the payer community; around ten states use WAC in their Medicaid pricing; the huge TriCare program is also WAC-based.
Here’s a bit of history.
The original legal case rested on FDB’s selection of McKesson as the sole source of drug pricing data. FDB’s AWP was based on the actual price that McKesson paid for the drug, plus a margin. For years the typical margin was 20%; six years ago McKesson changed the margin to 25% to make it ‘simpler to administer pricing internally’.
The price increase also earned McKesson points with its customers, retail pharmacies, who saw an immediate increase in profitability – profits on Lipitor immediately jumped three-fold after the 2002 increase. As part of the settlement in the 2006 case, FDB agreed to stop publishing prices two years after the finalization of the settlement (which is March of next year).
As cognoscenti are well aware, the suit has already had repercussions. On September 26, 2009, First DataBank and MediSpan, the firms that publish Average Wholesale Pricing tables changed their methodology to revert to the 20% margin, thereby reducing the drug’s AWP cost by almost four percent.
Wait, it gets more complicated. FDB is not the only publisher of AWP, and AWP, as published by RedBook and MediSpan, may be around in some markets for a while. The case for the persistence of AWP is that it is broadly used today, and RedBook and Medispan have not been charged with the kind of pricing manipulation that led to the FDB settlement.
Conversely, for some time AWP has been disappearing in generic pricing, where it is being replaced by MAC (maximum allowable cost), FUL (Federal upper limit), and other methodologies that seem to provide a more objective and less fungible baseline.
There’s another reason AWP may be on life support; it is broadly reviled as few payers believe, and with good reason, it has any real objective basis.
Implications for workers’ comp
As I reported several months ago, work comp regulators are wrestling with the issue, as 33 states base their work comp fee schedule on AWP (California doesn’t). Where they end up will be heavily influenced by the metric chosen by group/Medicare/Medicaid; drug spend in comp is about 2% of the nation’s total bill of $220 billion.

Jan

How to change health behavior

Posted by Joe Paduda on Monday, January 18th, 2010 | Comments

I’ve been working with a mid-sized self-insured employer on their health benefits plan; they got hit hard with costs from diabetes last year and the (relatively thin) data available suggests it’s going to get worse in the near future; there are many more individuals at high risk for diabetes (among other ills). If they don’t do something to reduce their employees’ risks, their costs are going up, and fast.
While muddling thru the data, we all agreed that if we all exercised, maintained a reasonable weight, ate healthy foods and amounts, drank in moderation, and didn’t smoke, their costs would be much lower; heck, as a nation there’d be no health care financial crisis.
Good luck with that.
Alas, we’re getting fatter, lazier, and many of us are getting sicker as a result. With so much of our health care budget spent on lifestyle-driven diseases, it’s increasingly obvious that getting people to change behaviors – stop smoking, reduce their drinking, get off their duffs and get out for a walk/ski/cycle – would go a long way to reducing expenses.
So I’ve been investigating motivational techniques and results, looking for ways to help my client get their employees to make long term commitments to healthy behaviors/ There’s been lots published about this; Employers try to motivate healthy behavior by paying for gym memberships and smoking cessation, reducing premiums for employees who earn points for maintaining healthy weight levels, and hire fitness and health promotion experts to staff their wellness centers. These efforts have had some positive effect, but only on the margins.
Turns out the positive, reward-based motivation may well be misdirected. Instead of rewarding people for good behavior, the evidence suggests that penalizing them for ‘bad’ behavior by taking something away is much more effective.
Here, from a brief piece in The Economist:

In a new paper Tanjim Hossain of the University of Toronto and John List of the University of Chicago explore a real-world use of these insights. The economists worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective. Most might have recommended changes to the amounts of money on offer. But Mr Hossain and Mr List chose instead to concentrate on the wording of the letter informing workers of the details of the bonus scheme.
At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.
Objectively these are two ways of describing the same scheme. But under a theory of loss aversion, the second way of presenting the bonus should work better. Workers would think of the provisional bonus as theirs, and work harder to prevent it from being taken away.
This is just what the economists found. The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). [emphasis added] And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system.

What does this mean for you?
For managed care companies and employers, think of basing benefits on a plan with relatively modest employee coinsurance/contribution level, adjusted upwards for failure to comply with health standards. Yes, there will be complaining about what constitutes lifestyle issues v genetics, and how it may be unfair to penalize this or that lack of compliance, but while you’re dickering around with these points, your costs are continuing to escalate.

Nov

Your drug costs are going up…

Posted by Joe Paduda on Monday, November 16th, 2009 | Comments

The chances of some variety of health insurance reform passing are looking more likely and big pharma is getting ready.
By raising branded drug prices nine percent (so far) this year., and this at a time when the Consumer Price Index fell by 1.3%.
You may recall the big press event when pharma and the White House announced their ‘agreement’ whereby pharma would agree to not fight reform in exchange for reductions of about $8 billion a year in pharma costs. That deal is either off the table, or it wasn’t carefully enough crafted on the front end, because drug companies have been steadily raising prices for brand drugs this year, evidently in anticipation of big changes in the future. In fact, it looks like the increase so far this year more than compensates for the agreed-upon ‘cuts’ announced earlier.
Readers will remember the last time drug prices jumped significantly was just after the Medicare Part D program went into effect, when the largest quarterly increase in years just happened to coincide with the beginning of the program.
There are political as well as practical implications of these price increases. From a political perspective, pharma may be doing to itself exactly what healthplans did with the disastrous release of the PwC ‘report’. Health plans thought they had a deal with the Administration, only to infuriate the White House and Congressional Democrats with the flawed and incomplete ‘analysis’ (even though the concept was right and conclusions accurate, the presentation killed any chance of objective consideration).
With the release of this analysis, Congressional Democrats have yet more evidence of the profit-driven mentality that many believe is directly responsible for our dysfunctional health care system. Do not be surprised if the reaction from Congress is loud, fast and brutal.

What does this mean for you?
This is more of an issue for group and Medicare/caid operations than for workers comp, as comp has a greater percentage of generic fills. But there’s no doubt all payers’ drug costs are going up significantly this year.
If you’re a PBM, get ready to explain higher drug prices.

Nov

Note to CBO – don’t forget to add that quarter trillion to the cost of health reform

Posted by Joe Paduda on Wednesday, November 11th, 2009 | Comments

Because that’s what it is going to ‘cost’ to replace the current Medicare physician reimbursement scheme with something else. And make no mistake, as Trudy Lieberman of the Columbia Journalism Review points out, most of the nation’s physicians are adamant about ‘fixing’ Medicare reimbursement.
The issue is the Medicare Sustainable Growth Rate (details here). The net is simple – if the SGR formula/process is eliminated, a quarter trillion dollars gets added to the deficit, because that’s the amount the formula/process says has been paid to docs over and above SGR ‘limits’.
Current Congressional protocol requires CBO to ‘score’ any and all health reform proposals; unsurprisingly the SGR ‘fix’ has not been included in any reform measure, because it will push the cost way, way over a trillion dollars.
Thus, thru legislative legerdemain, Congress is avoiding talking about and being held responsible for the real cost of reform.
As long as we have to ‘fix’ the SGR – and I’m not arguing that Part B (physician reimbursement) doesn’t badly need fixing, hows’ about we ‘trade’ SGR elimination for some real reform, like, say, bundled pricing for specific procedures/conditions? Like, maybe, a flat cost for treating an asthmatic patient over a year including facility and physician and lab and other costs?
Or, for those chronic patients with more than one condition, a formula that pays for all their care based on a multiplier indexed to the number, cost, and severity of their conditions?
Or a requirement that all physician bills from practices that don’t have all patients on a share-able electronic medical/health record are paid under a non-fixed SGR, while bills from practices using ‘certified’ EMR are paid under a new schema?
Pretty draconian, you say? Not as draconian as anteing up another quarter trillion bucks, I respond. Sure it will be hard and take some time and isn’t easy and all that other blather. It’s a huge knotty ugly problem, requiring some ugly solutions, and none of them are going to be perfect. But they will be a damn sight more perfect than what we have if we don’t get reform-with-cost-control done this time around – family health care costs above $30,000 within ten years.
It’s time we got more from stakeholders than just their agreement to not block reform. We need a good more arm-twisting and a lot less gentle cajoling.
What’s the net?
Watch to see how Congress and the President handle the SGR redo issue. Do they use SGR as a lever, or do the docs use it as a club?

Nov

Controlling technology, improving health, cutting cost – not as hard as you may think

Posted by Joe Paduda on Monday, November 9th, 2009 | Comments

The use – and misuse – of technology in medicine is not only a major cost driver, it is also a major cause of unnecessary pain and suffering.
Far too many carotid endarterectomies were performed in a misguided effort to reduce
If we are to have any hope of slowing down the rate of increase in medical costs, we have to stop the abuse of unproven and potentially harmful technology.
WorkCompCentral [sub req] has a great piece on a program run by the State of Washington that does just that. The Health Technology Assessment program “assesses various devices, procedures, medical equipment and diagnostic tests, then issues recommendations that public payers must follow[emphasis added]. Those public payers include the Department of Labor & Industries, which runs the state’s monopoly workers’ compensation program.”
According to an article in the New England Journal of Medicine, HTA determines reimbursement on these technologies for programs including:
“Medicaid, the workers’ compensation program, the state government employee benefit plan, and the corrections department [which] provide $2.9 billion in benefits annually to approximately 773,000 Washington citizens through direct fee-for-service plans”
Before the wingnuts start spouting about death panels, know that the HTA has been widely accepted by politicians from both parties, it passed with a single ‘nay’ vote in 2006, supported by both the state Hospital and Medical Associations, and while individual conclusions may draw opposition, the program itself is viewed very positively.
The process is rigorous. According to the NEJM;
“The program’s assessments are based on a thorough, systematic review of the evidence related to the effectiveness, safety, and cost-effectiveness of a product or service, with each type of evidence examined separately. After considering the “most valid and reliable” evidence on all three of these dimensions, the health technology clinical committee — which must be made up of practicing clinicians — arrives at one of three recommendations: covered without conditions, covered with conditions (such as criteria defining medical necessity), or not covered. The entire process must be transparent.”
HTA is important because it shows what can happen when government intervenes intelligently and carefully. So far, HTA has rendered opinions and set policy on:
* Arthroscopic surgery for osteoarthritis of the knee. (Not covered.)
* Discography for uncomplicated degenerative disk disease. (Not covered.)
* Implantable drug-delivery systems for chronic, non-cancer-related pain. (Not covered.)
* Lumbar fusion for uncomplicated degenerative disk disease. (Covered, with conditions.)
* Upright or positional medical resonance imaging. (Not covered.)
* CT colonography. (Not covered.)
* Pediatric bariatric surgery. (Not covered for patients 18 or younger. Covered with conditions for patients between the ages of 19 to 21.)
These actions have reduced costs by over $20 million since its inception three years ago.
What does this mean for you?
Payers should look closely at following Washington’s lead.

May

Why hospitals are hurting and the impact on health plans and workers comp

Posted by Joe Paduda on Wednesday, May 6th, 2009 | Comments

Hospitals are in dire shape. 31% of US health care costs are from hospitals, and by almost any measure, they are hurting badly.
Revenues are declining, profitable services are way down, layoffs are announced weekly (layoffs, in healthcare!!), more and more patients are uninsured, and donations have declined dramatically. Those hospital systems that are reporting decent results seem to be doing so through one-time asset sales and other non-operating measures.
As to what’s driving the crisis; if you’ll forgive the creative math, here’s how the calculus works:
Rising unemployment -> more uninsured -> fewer profitable admissions + more charitable (i.e. non compensated) care + more Medicaid (i.e. money-losing) care = big financial trouble for hospitals
Almost all hospitals make their margins on private pay patients. According to Tenet Health’s CEO, (paraphrasing) ‘Tenet’s profits come from the 27% of patients who have commercial managed-care coverage; it breaks even on Medicare patients, and loses money, to varying degrees, on patients with Medicaid coverage, self-paying uninsured and those who qualify as charity cases’.
The latest bad news comes from Massachusetts, via FierceHealthcare and the Globe.
Here’s how the Globe put it:
“59 percent of hospitals statewide reported a drop in elective surgeries in 2008 and into the beginning of fiscal 2009…as more people forgo treatment, hospitals are suffering financially, industry specialists say. Their profits depend heavily on lucrative surgical procedures paid for by private insurers.” And that’s in a state that has fewer folks without health insurance than just about any other state in the country.
On the west coast, the problem is even worse. according to a CalPERS study, “One-third of private payers’ costs went to hospital profits and to subsidize a revenue gap”. Health plans paid hospitals $18 billion in 2005 for care that cost the hospitals $13 billion.
A hidden, but nonetheless significant contributor to hospitals’ woes has been the growth of high-deductible health plans. Patients with these plans seeking elective surgery often don’t have enough money in their deductible accounts to cover the deductible; hospitals are turning these patients away, unwilling to accept the risk of non-payment.
Impact on health plans
Health plans have been dealing with increasing hospital cost inflation for several years; what’s new is the worsening economy has significantly exacerbated the problem. Price has been the primary driver of hospital cost inflation; back in 2003-2004 prices jumped eight percent annually.
Healthplan giant Wellpoint saw hospital trend rates last year above ten percent; in their Q1 2009 earnings call they reported “Inpatient hospital trend is in the low double-digit range and is almost all related to increases in cost per admission. Unit costs are rising due to an elevated average case acuity and higher negotiated rate increases with hospitals.”
Aetna is also seeing significant cost inflation, driven by more services per admission, while HealthNet is enjoying cost inflation just under ten percent
The same trend hammered Coventry Health last year, leading to a big increase in their medical loss ratio, and eventually a management shakeup and re-ordering of priorities.
Impact on workers comp
Unlike group and individual health plans, workers comp patients don’t have to worry about deductibles and copays. Comp is ‘first dollar, every dollar’. And hospitals just love workers comp. Recall that workers comp generates one-fiftieth of a hospital’s revenues – and one-sixth of hospital profits It’s no wonder workers comp medical costs are starting to jump again – driven by cost shifting from hospitals desperate to make up for lost private pay patients
In recent audits (including a large self-insured employer and a workers’ comp municipal trust) the greatest year over year increase in their medical expenses was due to facility cost inflation (primarily hospitals and ambulatory surgical centers). Other clients are experiencing hospital cost trends above 10% year over year, and some are in the 12% range.
Post script – for a detailed review of the hospital perspective on the issues, click here.

Category: Medicare and Medicaid