“Two Thoughts About Possible Reforms To The Massachusetts Health Insurance Market” by Nancy Turnbull

Thought #1

The Globe today has a story about an “offer” from America’s Health Insurance Plans and the Blue Cross and Blue Shield Association, the two largest health insurer trade groups, to give up risk rating—the practice of varying premium rates by health status. Massachusetts did this back in 1990 for small employers and in 1996 for individuals. So, ho hum for our state. But the story did remind me that I’d been meaning to suggest that Massachusetts should think about abandoning the major discriminatory rating practice we do still allow, and that’s age rating. Our insurance laws permit health plans to charge older people as much as twice the premium rate as younger people for the same product. The classic argument in favor of age-rating has been that it’s necessary to have lower rates for younger people in order to convince them to purchase insurance. But this argument isn’t so convincing in Massachusetts any longer because of the state’s individual mandate, which requires most adults, including younger people, to purchase insurance. The ability of health plans to age-rate also creates a troubling inequity in the state’s affordability schedule at the highest income levels, where the schedule requires people to purchase insurance regardless of the cost. This requirement, combined with age rating, means that an older person with exactly the same income as a younger person might be required to pay as much as twice the amount—and therefore twice the percent of income—to comply with the mandate.

I can just hear the teeth gnashing about the suggestion of doing away with age-rating, particularly at insurance companies, small employers with younger workers, and by state policymakers who are concerned about keeping insurance as affordable as possible for younger people. But if we look back at the history of many insurance practices that were once common in the insurance market in Massachusetts but have been abolished—like rating based on race or gender, or not providing coverage for maternity care and mental health—we find the same initial opposition. We’ve done many innovative things under the state’s health reform law—let’s talk about whether eliminating age rating should be another one.

Thought #2

As reported here last month, the health insurers in the state recently filed their 2008 financial reports, including information about executive compensation. (Insurance Commissioner Burnes is to be commended for re-instituting the requirement that health insurers provide information about executive compensation, which was eliminated about ten years or so ago in another administration.)

At the state’s three largest health plans, BCBS CEO Cleve Killingsworth made $3.7 million, HPHC’s Charlie Baker made $1.7 million and Tufts CEO Jim Roosevelt was paid $1.1 million. Total compensation for BCBS’s top ten most highly compensated executives—which is what insurers must report—was $17 million and the company paid 18 board members a total of $1 million, for a total of $18 million. At Tufts, the total paid to the top executives was $6.1 million and the board was paid $420,000, for a total of $6.5 million. Harvard Pilgrim had not filed its executive compensation schedule when I got these data, so I don’t know the figure there.

So, what are we to make of this information? The press thinks executive compensation at the health plans is a newsworthy story (in response, the health plans often file the information on Friday so the story runs on Saturday, the day of lowest readership.) Many of us in health care community look at and gossip about the information. Health plans argue that executive compensation isn’t really an important issue, pointing out that the pay of their executives comprises a tiny fraction of total administrative costs, which comprise a small proportion of health insurance premiums. They also argue that their senior management needs to be paid well so that they can attract talented leaders. Leaders at Massachusetts health plans point out that they are paid much less than their counterparts at publicly traded health insurers. (For example, the president of Centene, a for-profit insurer that is partnering with Caritas Christi to offer a new Commonwealth Care plan in Massachusetts, was paid $8.7 million in 2007.)

At BCBS, the total compensation of $18 million works out to be about $6 per member per year. At Tufts Health Plan, the comparable figure is about $10 pmpy. If HPHC’s previous patterns of compensation are any indication, the per member per year figure is in the same range. Hardly a major contributor to the level or trend in health insurance premiums.

So, is this an issue we should worry or talk about? Certainly, the country’s economic crisis and the increased focus on executive compensation in other sectors gives it more salience than ever before. As someone who worked for a time for the foundation of one of the health plans, and was paid very well, here are a few questions I think about:

Are these amounts of executive and board compensation at odds with the status of the state’s largest health plans as non-profit, tax-exempt public charities? Should public funding, in the form of foregone tax revenues, be used to support these levels of executive and board compensation?

Has the composition of health plans boards—now comprised largely of people from for-profit businesses that bring their for-profit values and experiences about executive compensation into health plan board rooms—distorted executive and board compensation for these not-for-profits?

Now that most of the public has to buy the product that health plans sell—because of the state’s individual mandate–does this change the public’s right for accountability about how health plans are using our money, including how much they are paying their executives and boards?

Do health plans undermine their credibility and ability—with the public, providers and others– to take on rising health care costs when they pay such large amounts to their executives and boards?

Should we think about regulating health plan compensation? We could limit it to $500,000 per year, as has recently been done at the federal level for executives of financial institutions receiving TARP funding. It’s hard to imagine that health plans could not still attract excellent leaders for this amount. Lots of very talented people in the Commonwealth get paid a lots less (Governor Patrick, all of the members of his cabinet, Senate President Murray, Speaker DeLeo, and Attorney General Martha Coakley are just a few who come to mind…not to mention the people running most of the other health non-profits health care organizations in the state).

Should we allow the members of health plans to vote on executive and board compensation above some level—this is similar to proposals to allow shareholders to vote on the compensation of executives at for-profit companies.

We should not kid ourselves that executive and board pay is more than a symbolic factor in the problem of rising health care costs. But sometimes addressing symbols is very powerful and important, particularly if it would improve the ability of health plans to do all they can—and should—to control health care costs.

Nancy Turnbull, Harvard School of Public Health

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  • Nancy Turnbull

    One of my friends and professional colleagues sent me an email about my posting that she gave me permission to share (without using her name). Although she was writing in response to my thoughts on health plan executive compensation, it turns out to be relevant also to Dr. Buyse’s comment about the need to focus more on what’s causing rising health care costs:

    “I think it is very reasonable to have a debate on the executive compensation of the insurance executives. However, I think you also owe it to your readers to raise the issue of executive compensation of hospital executives, and maybe even more revealing – the compensation of physician specialists. I think everyone already thinks that insurers are the bad guys, but there is greater value in raising the question of whether specialists should be paid in the high stratosphere that is the norm. These salaries are generally well-hidden from the public, but as you know are often way above the $500,000/year number you suggested is adequate for executive pay, and is a far greater factor in the high cost of medical care.”

    I agree with my friend that the questions I raised about compensation for health plan executives are also important ones for other executives of other non-profit public charities, including hospitals. I don’t know if most hospital board members receive compensation or how much. If they do, then the level of their payment should also be included in any conversation about these issues.

    Since physician practices are almost never organized as public charities or not-for profits, there are few publicly available data on physician compensation. But research shows that physicians in the US are certainly paid very well, particularly compared to the average US worker or doctors in other countries. The U.S. spends far more per capita on physician services than other countries, and this is an important reason why overall health care spending is so high in the US.

    Dr. Buyse’s comments are thoughtful and raise several interesting issues. First, she’s absolutely right that we need to focus on finding ways to control medical costs, since medical care spending comprises 85-90% of health insurance premiums. Eliminating age rating would reallocate spending but not reduce it. I don’t think this is any reason not to have the conversation but I agree it’s important to be explicit about what goals we would—and would not—achieve by this change.

    Second, Dr. Buyse reminds us how many problems are created by having a system of health coverage in which people can opt-out. While the tax penalties associated with the individual mandate now make the cost of opting out higher than it was before, it is still cheaper not to buy health insurance. And younger people, because they value health insurance less, will still choose to opt-out at much higher rates than older people. This is a major reason why other developed countries don’t have voluntary systems of health coverage. (Of course, they generally finance their systems in a way that is based on income and would never think of considering personal characteristics like age in determining how much people pay for health coverage.)

    Third, Dr. Buyse rightly points out that eliminating age rating would create challenges and disruptions, at least in the short-run. As someone who was involved in the early 1990s in implementing the law that eliminated health risk rating and other long-standing rating practices in the small employer market, I know that there are “winners” (those who rates go down) and “losers” (those whose rates go up). The losers complain loudly and the winners generally think they are still paying too much for health coverage. It’s very hard to change systems in which some people are advantaged at the expense of others. When the state last made major revisions to permissible underwriting and rating changes in the nongroup and small employer markets, it was done over several years to moderate the impact of the changes. A similar approach would be needed if we moved to eliminate age rating.

    I disagree with Dr Buyse about whether or not age rating is discriminatory. From an “actuarial perspective” it’s not—but I don’t think that is the appropriate way to think about the issue. As I pointed out in my posting, there is “actuarial justification” for varying insurance rates on many factors but as a matter of public and social policy, we don’t let insurers use them all. I mentioned two such factors–race and gender– in my post, both of which were commonly used in the past in insurance underwriting, and may, from an actuarial perspective, be predictive of certain types of expense. Given the enormous health disparities that arise from poverty and social inequality, I can think of many characteristics–income, amount of education, zip code of residence, to name a few—that would probably all have actuarial justification. As would having a family history of certain medical conditions, regularly riding a motorcycle or flying small planes, hanging out with friends or family members who smoke, and eating lots of red meat. But as a matter of public policy, we don’t allow insurers to use these factors in setting our health insurance premiums.

    Age rating does make health insurance less expensive for younger people, but of course this comes at the expense of making it more costly for older people and not affordable for many of them. (This is a particular problem for older women.) In our current system, the societal cost of permitting age rating as a means of keeping coverage affordable for younger people—and hence required under the individual mandate—is that we leave many older people uninsured. I don’t think this is an acceptable outcome and we need to figure out ways to fix it.

    Finally, thank you to Dianne for reminding me that it’s easy in a discussion of health insurance to use language that loses the human dimension. I certainly don’t think of the people who’ve been newly insured under the health reform law—or anyone else– as “cash cows.” For me, the goals of ensuring that people have health coverage are to improve their health, provide financial security for them and their families, promote community health, and improve social equity. It’s important not to lose that focus in any discussion about expanding health coverage—regardless of our disagreements about the way to get there.

  • http://www.guythomas..org.uk Guy Thomas

    We want (or should want) the level of rating classification which maximizes the amount of medical care delivered. This is NOT necessarily the same as maximizing the number of people covered, which is what the insurance industry always talks about. Read this paper:
    “Loss coverage as a public plicy objective for risk classification schemes” http://tinyurl.com/cgal3g

  • dianne

    Reading the Turnbull and Buyse comments, one would think the two of them were talking about cash cows instead of human beings with faces, names and lives. It is sickening.

    For the truth about the MA plan, check out Part I by Trudy Lieberman, a journalist who is not afraid to tell it like it is. I can’t wait to read Part II.

    http://www.cjr.org/campaign_desk/health_reform_lessons_from_mas.php

  • Marylou Buyse, MD

    An important component of Health Care Reform was to get younger, healthier individuals enrolled, because the primary reason they don’t buy coverage is the cost. The Department of Revenue’s Data on the Individual Mandate and Uninsured Tax Filers for Tax Year 2007 illustrates that point. While individuals between the age of 18 to 26 represent just 14% of all adult residents, they comprised 28% of tax filers without coverage in 2007 and 60% of uninsured tax filers in 2007 were under the age of 40. Charging everyone the same rate will increase the cost for a group of individuals that Health Care Reform was designed, in part, to get into the pool. This will result in more of these individuals choosing not to buy coverage, undercutting Health Care Reform by increasing the cost for those who remain.

    Age rating is not discrimination. The question is whether that classification is fair, founded in sound actuarial evidence and whether its use results in an appropriate spreading of risk that helps keep coverage affordable for the broadest range of individuals. Age rating meets all those tests. It reflects the correlation between age, health status and use of the system, and, because Massachusetts limits the extent to which rates can vary based on age, it also fairly spreads risk between the older and younger populations.

    States without any kind of age rating, such as New York, have higher insurance costs than Massachusetts. According to the Kaiser Family Foundation, the average single premium for individuals enrolled through an employer in 2006 (the last year data was available) was more than $150 higher in New York than in Massachusetts. For small businesses, those additional costs are significant. Until the individual mandate is enforced completely, young people will continue to avoid paying for coverage and more will drop from the insured ranks if they are forced to subsidize older populations even more than is already required under the current rating law. As the risk pool gets older under this scenario, older people will end up paying more, not less, for their coverage.

    Making changes to the rating rules does nothing to get at the underlying factors driving the cost of health care. Health insurance premiums are driven by health care costs and the bulk of the premium dollar – roughly 90 cents – goes to pay for medical services, such as doctor visits, prescription drugs, and hospital costs. Doing something about how much medical services cost will go a long way towards making health care more affordable as opposed to changing the rules so that younger people pay more.

  • Dianne

    Health care should be treated as a right, and Medicare should be expanded to include everyone. This is a fiscally responsible way to deliver affordable, quality, EQUITABLE, guaranteed CARE. None of this hybrid private, public and subsdized nonsense with mountains of bureaucracy. Just get rid of the nonprofit for-profit (that part gets to me everytime) insurance companies and support HR676.

    MA has turned health care into a dreaded nightmare. Too many of us are worse off than we were before Chapter 58. Living in this state for the past three years has been
    oppressive. We have to watch our income – in some cases intentionally lower it or keep it low. This creates a new class of poverty and keeps the poorest from trying
    to advance themselves.

    My neighbors own a small business with ten employees and would like to expand. In fact, they need to do this but can’t b/c they can’t afford to insure their employees. There are many in this boat.

    How do any of the above-described situations help the economy and morale? All this does is make us furious, more stressed, and out of frustration, causes us to duck for
    cover.

    Oh, what our goverment – both state and federal – will do for money from corporations and lobbyists trickling into their pockets! It is shameful. Bailouts to crooks when
    Congress knew what was going on all along including the sub-prime time-bomb, more bailouts, bonuses, lying, passing the buck, then feigning anger.

    We the people are not feigning anger, and it’s peaking more everyday. To top things off, Obama wants to dump a MA clone with a twist on our backs under the pretext of helping save
    the economy. In fact, yesterday he tried out the tired Romney bit about mandating health insurance just like motor vehicle insurance is mandated. If you can’t afford motor
    vehicle insurance, then you don’t drive. If you can’t afford health insurance, then whadd’ya do? Leave the country? He’s marketing this like Bush et al sold the invasion of Iraq under the false pretense of WMD and Saddam Hussein being responsible for 9-11.

    He says the insurance companies are coming around and will cover pre-existing conditions if the insurance is mandated. Obama, I have breaking news: we don’t take stupid
    pills. We know that the insurance companies will always find a way to slip out the back, Jack, and not cover pre-existing anything. There are plenty of ways to skin a cat.

    We here in tiny MA have been censored by the collusion of gov’t and media. Folks in the heartland aren’t gonna taking this sitting down once they find out what has hit them
    in the face and their pocketbooks.

  • Michael Metzler

    We have to stop thinking about health plan coverage in the terms of an insurance product where price depends on actuarial determined risk. Coverage is a social good that is a right. An older person should not be in a position of unaffordability because an age-determined rate pushes them over the line to unaffordability. An employer should not be pushed over that line because of a workforce with a high average age.

    Aa long as we continue to treat health coverage as an insurance product we will come to the wrong conclusions on how to structure pricing on something which is a social good.

  • MCC is a tax

    Nancy,

    Your argument about the affordability scale falls down when you start to consider other real life expenses. If you take a 64 yr old couple and a 27 yr old couple with the exact same income, their expenses are dramatically different. The 64 yr old couple could be living in a home purchased for 50K and the 27 yr old couple could be buying a home for 500K. One couple could be taking distributions from an IRA, the other saving for college. The younger couple has life and disability insurance to pay. The older couple might not have a mortgage or car payments. This is a pretty common scenario.

    To place these groups on the same premium level for insurance is punitive. First you tell them that they have to have insurance but it will be reasonable because they are young. Then you want to change the rules and financially punish them again. Remember that the Connector has outlawed true catastrophic plans and forces everyone to buy RX coverage.

    Mass. has already determined that someone’s smoking and health issues are not their problem, but everyone’s problem by removing surcharges for smokers(which is about absurd as anything that I have ever seen) and health conditions. If age rating is removed, I predict that there will be a huge push towards self funded products. I am already seeing my clients requesting those solutions

  • Biff Goodwin

    Thank you, Nancy. Thank you! You’re the first reputable person I know of who has called into question — or at least raised questions — about the perverse nature of health insurance company compensation. Now let’s take a look at BCBS disreputable $1 billion reserves, which is necessary for … what again? And let’s look at the fact that a NON-PROFIT BCBS has its own little NON-PROFIT foundation. What’s the point of that? These comically excessive salaries may not be the cause of the health care financing problem but they support the people running a system that is administratively burdensome. Numerous plan options, excessive reporting requirements, plans waiting until the 45th day (or longer) to pay out claims — it’s not supportable. It would be good if a paper like the Boston Globe reported on Blue Cross and their corrosive influence on the health care system. But wait, the Blue Cross Foundation runs that sly little reporter education arm run by a former Globe reporter. Can’t bite the hand that hand feeds you information, can you?