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A Middle-Ground Proposal for Making Health Care Premiums More Affordable

Averill, Richard F., MS; Hughes, John S., MD

The Journal of Ambulatory Care Management: July/September 2019 - Volume 42 - Issue 3 - p 188–194
doi: 10.1097/JAC.0000000000000288
Moving Forward the Health Policy Agenda
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Passage of any health care reform that addresses the rising cost of health care in the United States will be a difficult political challenge unless a middle-ground compromise between government control of health care insurance and free market approaches can be found. On the basis of the competitive market for Medicare supplemental insurance, a Medicare Adherence Policy insurance option is proposed that would leverage Medicare's authority to set prices to create a practical middle-ground reform that can strike a balance between the role of government and the free market.

The Hesperium Group, Seymour, Connecticut (Mr Averill); and Yale University School of Medicine, New Haven, Connecticut (Dr Hughes).

Correspondence: Richard F. Averill, MS, The Hesperium Group, 38 North Benham Rd, Seymour, CT 06483 (rfaverill@hesperium.com).

The authors have disclosed that they have no significant relationships with, or financial interest in, any commercial companies pertaining to this article.

This is an open-access article distributed under the terms of the Creative Commons Attribution-Non Commercial-No Derivatives License 4.0 (CCBY-NC-ND), where it is permissible to download and share the work provided it is properly cited. The work cannot be changed in any way or used commercially without permission from the journal.

REFORMS of the US health care system aimed at making health care insurance more affordable range between 2 radically different philosophical approaches. At one end of the spectrum is some form of government control of health insurance such as in Medicare-for-All–type proposals, and at the other end is the creation of a more competitive free market for health care insurance. With the 2 political parties favoring different philosophical approaches, legislation to make health care more affordable will likely be deadlocked. However, there is a potential middle-ground incremental reform that can strike a balance between the role of government and the free market and can make health care insurance more affordable.

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GOVERNMENT CONTROL OF HEALTH CARE INSURANCE

With the premium for a family commercial health care insurance policy having risen to nearly $20 000 a year (Kaiser Family Foundation, 2018), Medicare-for-All proposals are now favored by up to 60% of polled consumers. However, when consumers are told that Medicare-for-All proposals could eliminate commercial health care insurance plans (Medicare for All Act of 2019), support drops to 37% (Kaiser Family Foundation, 2019), presumably from consumers with employer-subsidized health care insurance who are largely satisfied with their plans. Since a Medicare-for-All system would essentially eliminate the commercial health care insurance industry, it would face immediate and strong political opposition not only from the commercial insurance industry but also from many individuals enrolled in employer-sponsored private insurance plans (Martin & Goodnough, 2019). A variation of a Medicare-for-All system that simply provides the option for individuals to join Medicare (Senate Bill 2708—Choose Medicare Act, 2017–2018) would likely have the same impact on the commercial insurance industry because commercial insurers must negotiate prices with providers while Medicare can impose prices without the need to negotiate, giving Medicare an enormous competitive price advantage. That price advantage would ultimately make the commercial health care insurance industry noncompetitive and no longer viable. Even commercial managed care plans that accept capitated rates would be at the same disadvantage because they too must negotiate prices with downstream providers.

In addition, Medicare-for-All–type proposals tend to ignore that the existing commercial insurance industry is subsidizing the lower provider payment levels from Medicare and Medicaid, especially for hospital care. Without the subsidized payment levels paid by commercial insurers, many hospitals and hospital-based provider networks will experience significant financial difficulties depending on their volume of patients with commercial insurance. Providers recognize this financial reality and will oppose any reform that does not explicitly fund the current subsidization from commercial insurers. Faced with the likely strong opposition from commercial insurers (Japsen, 2018), providers (Leonard, 2018), and individuals in employer-sponsored private insurance plans, enacting a Medicare-for-All–type system will be a very difficult political challenge.

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A COMPETITIVE FREE MARKET SYSTEM FOR HEALTH CARE INSURANCE

A competitive free market approach also faces major obstacles. Price transparency is often proposed as a means of making health care more competitive and more affordable (Senator Bill Cassidy Press Release, 2018). The underlying assumption is that price transparency will allow consumers to shop for health care services based on price and thereby foster price competition. Although an Amazon-like price shopping experience for health care services sounds attractive, it requires consumers to have sophisticated knowledge about what they need to purchase, have access to comparable unit prices, and be willing to use relative prices to both shop across providers and select a provider. While consumers may select insurance plans in large part based on relative premium levels, there is little evidence that price at the level of the individual unit of service is a strong factor in patient selection of a provider. In addition, even if full-price transparency were possible, it could lead to Federal Trade Commission (FTC) scrutiny for antitrust issues (U.S. Department of Justice & Federal Trade Commission, 1996).

Although there are many reasons for the failure of a competitive market in health care (Cooper et al., 2018), an increasingly prominent source of market distortion over the past several years has been the enormous provider consolidation in many geographic areas (Fulton, 2017). Typically, this consolidation occurs when a large hospital in a geographic region acquires the majority of nearby hospitals and physician practices. This type of consolidation has led to many geographic regions having a single dominant health care provider that can exert virtual monopoly power to dictate prices and demand deals that restrict competition. Three-fourths of the US population now live in hospital market areas that are considered “highly concentrated” (Matthews, 2018). Although these dominant health care providers claim to be more efficient and to eliminate duplication, the reality is that health care costs in highly concentrated areas can be substantially higher than in areas with less concentration (Fulton, 2017). Recent studies have found that health care costs in highly concentrated areas can be 11% to 54% higher (Abelson, 2018). Price competition in the commercial health care insurance market has ceased to exist in any meaningful way in many parts of the country. Essentially, the health care insurance marketplace has become dysfunctional, contributing to the continued rise in health care costs and insurance premiums.

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FINDING A MIDDLE-GROUND COMPROMISE

Any middle-ground compromise solution needs at a minimum to address 3 key issues.

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The role of commercial insurers

Any reform that essentially eliminates the commercial health care insurance industry, or even substantially limits it, will face enormous opposition due to the insurance industry's considerable political clout. Instead, the reform needs to provide a framework that empowers and encourages commercial insurers to be more effective in controlling health care costs.

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Explicitly address the payment subsidized by commercial insurers

The functioning of the existing health care financing system relies on payment subsidization by commercial insurance companies. Some degree of subsidization needs to be maintained at a reasonable level in order to avoid creating significant financial difficulties for many hospitals and hospital-based provider networks. The key issue is the determination of what level of subsidization is reasonable to maintain.

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Address the anticompetitive impact of provider consolidation

When a geographic region is dominated by a single health care provider, commercial insurers along with private companies and states that self-insure their employees (collectively referred to as private insurers) are left with virtually no bargaining power, so they pay higher prices, resulting in higher health insurance premiums that must be paid by employers and states or passed on to their employees. The balance of bargaining power between private insurers and dominant providers with the power to dictate prices needs to be restored.

A middle-ground compromise could leverage the price setting authority of government payers as a means of restoring the competitive balance between private insurers and providers. To understand how this can be accomplished, it is useful to understand a health care market in which such a balance has successfully been implemented.

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THE COMPETITIVE MEDICARE SUPPLEMENTAL INSURANCE MARKET

In contrast to the lack of price competition in the dysfunctional health care insurance marketplace, Medicare beneficiaries are constantly bombarded with mail, e-mails, and advertisements from insurers, encouraging them to buy a Medicare supplemental insurance policy (Medigap). Medicare supplemental insurance plans are private insurance plans that cover 20% of the cost of professional and outpatient services that Medicare Part B does not cover (Medicare.gov, n.d.). Although limited to 20%, the financial risk can still be quite substantial. The existence of an aggressive competitive market for Medicare supplemental insurance is all the more surprising, given that Medicare beneficiaries are disproportionately sicker and costlier than the rest of the population.

So why do Medicare supplemental insurance plans thrive even in geographic regions with a dominant health care provider? The answer lies in Medicare's ability to set prices. The key distinction between government and private insurers is that government insurers such as Medicare have been given the legal authority by Congress to establish payment levels without the need to negotiate with providers, as long as those payments are reasonable and sufficient to cover provider costs. This contrasts with private insurers that must establish a contractual relationship with providers and negotiate prices, a process that is highly dependent on their relative negotiating skill and bargaining power. The Medicare supplemental insurance market works because private insurers offering a Medicare supplemental insurance policy can leverage Medicare's price setting authority. Supplemental insurers avoid negotiating prices with providers and instead pay providers 20% of the prices Medicare has established as reasonable.

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PROPOSAL FOR A MIDDLE-GROUND COMPROMISE

Using Medicare supplemental insurance plans as a model, Congress could enact legislation that allows private insurers to offer a policy that (1) adheres to all Medicare coverage and payment rules and (2) requires that providers accept as payment in full a statutorily preset multiple of the established Medicare prices (eg, 150%), which would establish a fixed level of private insurance payment subsidization. This would represent an expansion of what already exists in the Medicare supplemental insurance market. We call this a Medicare Adherence Policy or MAP.

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A MEDICARE ADHERENCE POLICY

In return for the ability to limit the price paid to the preset multiple of the established Medicare prices, the private insurer would be required to:

  • At a minimum, cover all services covered by Medicare (essentially providing a definition of essential benefits);
  • Enroll any individual requesting a policy with no exceptions for preexisting conditions; and
  • Allow enrollees to use any provider that accepts Medicare assignment. However, if a private insurer was able to identify a subset of providers that accept Medicare assignment and are effective in controlling the volume of services, it could also offer a narrow network MAP with even a lower premium than a standard MAP.

Since all dominant providers that accept Medicare assignment would be required by law to accept the preset multiple of the established Medicare prices, the dominant provider would no longer be able to dictate prices to private insurers that offer a MAP.

In addition, since virtually all providers and most private insurers are already capable of administering payment under Medicare rules, a greater standardization on Medicare payment rules will provide a significant administrative simplification for both providers and insurers. Except for the dominant health care providers that will lose their unconstrained market power to dictate prices, a MAP option is a win-win for all segments of the health care industry.

A MAP is by no means a radical idea. Medicare supplemental policies already comply with Medicare payment rules. Congress already requires state Medicaid plans to provide services within an upper payment limit that is equal to the amount Medicare would have paid for the same services. Furthermore, the state of North Carolina recently proposed paying for health care services to its 720 000 state employees based on a percentage of what Medicare pays, ranging from 155% for inpatient hospital services to 265% for critical access outpatient services (Tosczk, 2018). The annual state savings are projected to be around $300 million. While Medicare's existing payment policies cover virtually all services that would be delivered to a non-Medicare population, there may be a need to review the existing prices for Medicare services not typically provided to Medicare beneficiaries (eg, newborn care).

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AN OPTION, NOT A REQUIREMENT

A MAP simply provides another option in the marketplace. No private insurer would be required to offer a MAP. The private insurer would set the premium level that should be lower due to lower unit prices and competition among insurers, similar to what is occurring in the Medicare supplemental insurance market. In addition, private insurers would be able to offer any policy options that now exist in the Medicare supplemental market (Medicare.gov, n.d.). No individual would be required to enroll in a MAP. It will be up to the market to decide whether a MAP meets consumer needs.

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DETERMINING THE LEVEL OF SUBSIDIZATION

Under a MAP, the primary issue for providers will be the magnitude of the multiple applied to the established Medicare prices for private insurers. In a state, the level of existing subsidization will be primarily driven by Medicaid payment policies, the presence of dominant providers that artificially drive up the level of subsidization, and the relative negotiating power of the private insurers in the state. Hence, the level of subsidization should be established on state-specific basis. However, in states with a very high level of subsidization, the level of subsidization could be based on a blending of the state-specific level of subsidization and the national average level of subsidization as a means of making MAP premiums more affordable in those states.

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PROVIDER RESPONSE

Given the negative response of providers to Medicare-for-All proposals, they are likely to react negatively to any reform that limits their ability to set prices, including a MAP. But the distortions in the market are becoming increasingly visible and unsustainable. Dominant health care providers, for example, are not only dictating prices but are also demanding antisteering agreements that prevent private insurers from directing patients to less-expensive or higher-quality providers (Matthews, 2018), provoking Senator Chuck Grassley to send a letter to the FTC requesting that it assess the impact of such anticompetitive conditions (Grassley, 2018). Without restoring some balance between relative market power of dominant health care providers and private insurers, aggressive action by the FTC and the Department of Justice's (DOJ's) Antitrust Division seems inevitable.

A MAP is a middle ground that provides private insurers with an option that strikes a balance between the relative market power of dominant health care providers and private insurers, thereby lessening the need for FTC and DOJ intervention. In addition, having the magnitude of the subsidization from private insurers specified in statute may be a prudent way for providers to protect the existing subsidies that might be lost under Medicare-for-All–type proposals.

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BENEFITING FROM MEDICARE PAYMENT POLICY INNOVATIONS

The affordability of a MAP would benefit from innovations in the Medicare program aimed at lowering costs. A MAP addresses the price of each unit of service but not the volume of services. Since failures in quality will typically result in a need for more services, Medicare has begun adjusting the price it pays based on quality as measured by outcomes such as complications and readmissions (Medicare.gov, Hospital Compare, n.d.). To the extent that Medicare payment incentives for quality are effective, there will be a direct positive impact on the volume of services provided to individuals covered by a MAP and ultimately on the MAP premiums.

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A WIN-WIN COMPROMISE

A MAP would provide benefits to all segments of the health care industry:

  • Private insurers: By leveraging Medicare price setting authority, private insurers will be able to not only offset the price setting power of a dominant provider in a geographic region but also avoid the high costs associated with the onerous price negotiation process and reduce the costs associated with managing a fractured and highly variable claims processing system. Advance knowledge of, and confidence in, the price setting framework will enable private insurers to offer lower premium options with much greater predictability and price stability. A MAP does not eliminate the private insurance industry but, instead, allows commercial insurers to become more effective in offering affordable policies.
  • Providers: Although providers are likely to object to any policy that limits their ability to set prices, a MAP will have advantages for providers as well as insurers. With lower premiums, more consumers will be able to afford health insurance, resulting in providers having fewer uninsured patients and the associated collection and bad debt issues. Furthermore, nondominant providers that possess a weak bargaining position relative to a major commercial insurer would be guaranteed a payment amount consistent with the established multiple of the standard Medicare price. Since Medicare prices recognize that some providers have legitimate reasons for higher costs (eg, teaching hospitals), these providers will not be put at a competitive price disadvantage.
  • Consumers: Consumers will have access to lower-cost policy options, freedom of choice of provider or plan, and a clear definition of what services are covered.

A MAP is a practical middle-ground compromise between government control of health care insurance and reliance on the free market that can be a win-win for all stakeholders.

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LIMITATIONS

A MAP can provide incremental improvements to the current health care affordability dilemma, particularly by creating a more affordable private insurance option, but it will not be a panacea. While a MAP will not limit prices within the broader health care market—a particularly difficult task for the reasons noted earlier— it can have a substantial impact on costs to the extent it is adopted by consumers. Controlling overall quantity or volume, on the contrary, will require other interventions such as capitation-based payment, bundling of services, or other payer-generated explicit limits on redundant or overused services. A MAP cannot correct all the problems of an overly complex health care administrative structure, but it can provide an option for private insurers to make health care insurance premiums more affordable.

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CONCLUSION

A MAP provides an option in the health care insurance marketplace that can be a win-win for all stakeholders. It maintains the role of private insurers and potentially improves their effectiveness by giving them an option for a new health insurance product. For providers, although it could constrain monopolistic pricing, it will protect the subsidy from private insurers. For consumers, it provides a lower premium insurance option. Nevertheless, it is likely to encounter criticism from both sides of the political spectrum. Those who want Medicare-for-All will say it does not go far enough. Those who want free market solutions will say it is a step toward a government takeover of the health insurance market. Both extremes will forget that the status quo is making health insurance far too expensive for far too many citizens.

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REFERENCES

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Leonard K. (2018, August 14). Hospitals present a major roadblock to Medicare for All Act. Washington Examiner. Retrieved from https://www.washingtonexaminer.com/policy/healthcare/hospitals-present-a-major-roadblock-to-medicare-for-all-act
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Matthews A. W. (2018, September 18). Behind your rising health-care bills: Secret hospital deals that squelch competition. Wall Street Journal. Retrieved from https://www.wsj.com/articles/behind-your-rising-health-care-bills-secret-hospital-deals-that-squelch-competition-1537281963
Medicare for All Act of 2019, H.R. 1384 (2019). Retrieved from https://www.congress.gov/bill/116th-congress/house-bill/1384
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Tosczk M. (2018, November 1). No more negotiations: State health plan wants clearer process, lower prices. North Carolina Health News. Retrieved from https://www.northcarolinahealthnews.org/2018/11/01/no-more-negotiations-state-health-plan-wants-clearer-process-lower-prices
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Keywords:

health care markets; market concentration; Medicare Adherence Policy; Medicare supplemental insurance; price transparency

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