Thank you for your post, Celia.

Do we know how the “$869 million to over a billion dollars next year” translates into profits for these Medicaid MCOs?

Celia, given that 90% of the premium dollar goes to pay claims and that the earnings average for health plans in Massachusetts is 1%, won’t your proposed increase create higher premiums or come from health plan reserves? Do we want higher premiums? Would you want to be insured by a company without reserves?

To bruce bullen who is a very highly paid HMO executive (at Harvard Pilgrim Health Care):

RE: “Do we want higher premiums? Would you want to be insured by a company without reserves?”

What people want is to be insured in a truly not-for-profit, care-centered plan such as universal social insurance. Improved Medicare-for-All is how we can get the best value as individuals, as employers, and as a society, for our collective health care dollars.

As soon as we voters and taxpayers succeed in our quest to get politicians to put people’s needs before corporations’ financial interests Medicare-for-All is the health reform plan we’ll get. So I suggest that you start thinking about what your next career move might be!

Celia, with all due respect, you’re not having the right conversation here. Private, profit-driven health insurance should not be the dominant model for health care coverage. It wastes huge sums of money and it leads to preventable suffering and early death for hundreds of thousands of people.

I except that you, Celia, and SEIU as a very resource-rich organization (SEIU is the labor union in which Celia is an executive officer), will eventually join the growing movement and be leaders to enact universal social insurance health reform. Doing this sooner rather than later will help prevent a lot more suffering and thousands more tragic, unnecessary deaths.

Ann, Isn’t the Medicare deficit a problem of not enough reserves?

Bruce:

Trying to ask logical questions is illogical with some people.

BR (Bill Randell)
Insurance Broker (HMO Broker-Operative)

Ceila:

While your analysis discusses the financial performance of the health plan industry over the last five years, I think a better perspective would be to look at the last two years – the period pre-Health Care Reform and the period post-reform.

Between 2006 and 2007, medical expenses accounted for a greater share of the premium dollar. For the five local commercial MAHP member plans, medical costs rose from 86.23% of the total premium in 2006 to 87.44% in 2007. Meanwhile, the portion of the premium that went to administrative costs decreased from 11.42% to 11.03%. Similarly, their surpluses dropped from 2.36% to 1.37%.

During that period, total revenues for those plans rose slightly more than 7%. Where did the money go? Medical expenses went up nearly 9% and administrative costs rose 3.67%. Surpluses decreased more than 37%. The state’s health plans are operating on extremely thin margins and any industry that sees surplus levels drop like that can’t be called a big winner.

Suggesting a tax on income from interest earned on reserves could have a destabilizing effect on the health care industry as a whole. Reserves are intended to ensure that consumers are protected and providers are paid if an unexpected or catastrophic event occurs, such as a pandemic or other natural disaster or a man-made disaster, resulting in an unpredictably high level of claims. In 2003, the state set statutory minimum net worth and reserve levels for health plans and health plans would still need to meet those requirements.

Our member health plans are committed to the success of the Health Care Reform Law, but unless we do something about the cost of health care, it will be difficult to keep premiums affordable if medical costs continue to rise at 8% to 10%.

Health insurance premiums are driven by health care costs and the overwhelming share of health insurance premiums today go to pay for the cost of medical care and other services that directly benefit consumers. Suggesting new assessments will do nothing to address those costs and will deepen the crisis consumers and employers face in paying for health care.

Whenever someone raises what other legs of the stool could chip in to help fund reform, that particular “leg” gets all upset. We all have agreed that we have a shared responsibility to make reform successful.

Consumers have chipped in over $20M in new premiums and co-pays. Consumers will pay a new tobacco tax that is projected to bring in over $150M in new revenue. And taxpayers (state government)are helping to provide coverage to more people. So why is it wrong to look at insurers,or businesses who don’t provide coverage, for a bigger contribution?

Looking over last five years of financial results for the health plans, it’s unusual to see any plan have a profit margin as low as 1% in any one year, let alone as an average. Most of the plans have an average margin that is 2 or 3 or 4 times as high.

For example, from 2003-2007, here are the profit margins for the largest not-for-profit health plans in Massachusetts:

BCBS (including HMO Blue): 5.3% (in 2003), 4.8%, 4.6%, 3.5% and 3.9% (in 2007)

HPHC: 2.1%, 1.6%, 3.2%, 3.1% and 1.8%.

Tufts: 2.5% 1.0%, 4.0%, 4.8% and 4.4%

Fallon: 1.3%, 3.1%, 3.2%, 2.6% and 2.0%

Neighborhood: 3.2%, 5.7%, 2.8%, 4.6% and 5.3%.

In an industry that has no need to make significant capital investments, or to impress Wall Street or shareholders, these margins can hardly be called razor-thin. While Dr. Byse is right that plans need some surplus for solvency protection, the financial position of most of the state’s health plans is more than adequate to withstand sharing some of the additional financial contribution that’s required to ensure the continued success of health reform.

Do you think tha assessing your reserves is the wrong approach? Or do you think that the insurer “leg” of the stool should not contribute more?

What is your suggestion for how, and how much, insurers should contribute to making health care reform financially stable in the long run?

Dr Buyse and Celia, you both make some good points. Celia I disagree, however, when it comes to the cigarette tax. Although there will be a bump from the initial floor tax, there is no way that the increased cig sales tax will bring in the projected revenues.

Two Cigarette wholesalers packed it in this week alone–TBI and I forgot the name of the other South Shore Wholesaler. In essence the Commonwealth is done to maybe 4 wholesalers of cigs. Trust me if these wholesalers beieved in the future potential of the cigarette business they would not be selling out. Some will say that this is good that it indicates people are smoking less, but it means more then anything else that people will not buy cigs in Mass and will buy them in the border states or on black market.

Not only do we lose the cig tax revenues, but people will most likely buy other products (beer/liquor/lottery) and we will lose the taxes/revenues on those products. Convenience stores along the border are going to be killed and in the end,the Commonwealth will lose total tax revenues from this latest cig tax increase.

People who worry about cigarette sales escaping to other states are just, well, blowing smoke.

Every state that has raised their tobacco tax has seen increases in revenue. Raising the tax has a known impact in decreasing sales – about a 4% drop for every 10% increase in the retail price. But this drop in consumption particularly among teens, is not nearly enough to reduce the revenue from the increase.

Cigarette tax revenues are more predictable, and more stable, than the sales tax or the capital gains tax.

DOR’s revenue projections for the proposed $1/pack increase are conservative, and already assume some leakage due to black market purchases.

New Hampshire sales go up briefly when Massachusetts raises it tax, but then it settles down. In fact, following our last increase, tobacco sales licenses increased along the NH border.

DOR is cracking down on internet sales, and now collects the excise from many internet dealers.

People are willing to drive a distance to save on the sales tax when buying a refrigerator or computer, but not for cigarettes. Interestingly, because many smokers want to ration their supply (they know it’s bad for them), smokers generally don’t go out of their way to save money on cigarettes. With gas heading towards $4/gallon, the border impact will be reduced even more.

New York state is about to add $1.50 to their cigarette tax, making the combined rate in NY City $4.50 a pack. Every other New England state has raised their tax since our last increase, and today New Hampshire’s governor proposed an increase in his state.

So we can be confident that the tobacco tax increase will provide the expected revenues, as well as the health benefits from decreased smoking.

Increasing the “free care assessment” in its current form makes no sense. The assessment, as you point out, is passed on to the insured – the employers and individuals who already have health insurance. Why further “assess” employers and individuals who already provide/have coverage? Why not look for funds from the employers and individuals who do NOT already provide or directly purchase coverage? While this latter approach may be both politically and administratively more difficult, it is the only fair way to “share the responsibility.”

In addition, while I totally agree that insurers’ non-claims reserves (claims reserves of course need to be fully funded) should be assessed to provide more funding for health reform, the only appropriate way to do this is with a mechanism that ensures that the “assessment” or “contribution” or whatever it is called is not passed on to consumers, be they employers or individuals.

Brian:

States are not getting increased revenue with the additional taxes. I just read the other day that five states who increased their tax on cigs recently have actually received much less then expected. New Jersey, Tennessee and I forgot the other three states. In fact it was one of the reasons why the Governor of Florida just recently vetoed a bill to increase the tax of cigs.

I will try to find more detailed information and post later.

Lastly the DOR is not cracking down on internet cig dealers to collect the taxes. They are getting the names of people who have ordered cigarettes from the internet dealers along with their orders and are mailing them a bill in the mail.

Bill

Here is the exact line:

“A more foreboding scenario has played out in New Jersey which reported collecting $23 million less in cigarette tax revenue than before the state’s latest cigarette tax increase. Also, Arizona, Maine and South Dakota have reported budget shortfalls after raising the cigarette tax.”

In New Jersey they actually collected less then before the increase. The other four states collected less then their projected increases.

Ceila:

Focusing on health plan profit margins is misplaced. As the recent MassINC report, Point of Reckoning, noted, there is enormous risk in relying on capital gains and the stock market to fund programs, particularly at a time when there is increasing concern about the economy.

To get a better sense as to how the state’s not-for-profit health plans are performing, a more accurate reflection would be to look at their operating margins to see how much revenue they take in and how much they pay out in medical expenses and administrative costs. In 2006, the collective operating margin of the five local commercial MAHP member plans (Fallon Community Health Plans, Harvard Pilgrim Health Care, Health New England, Neighborhood Health Plan, and Tufts Health Plan) was 2.18%. In 2007 it was 1.19%, which is pretty close to break-even.

While you are correct that these plans do not need to impress Wall Street or shareholders, you are incorrect to assert that they do not need to make significant capital investments. In addition to meeting state solvency requirements, reserves are necessary to help fund improvements in health plan IT systems and other infrastructure investments that ultimately benefit consumers. For example, improvements in areas such as enrollment, billing and claims payment that improve the administration of health care can require extensive system and process changes and significant financial resources are needed to fund those improvements. Reserves are a way of helping to finance those upgrades.

Disease management efforts offer another example. Innovative programs introduced by health plans to help patients with chronic and acute conditions, such as congestive heart failure, diabetes and asthma, are now common practice. The investments Massachusetts health plans have made in these programs is one of the reasons why those plans consistently rate as the country’s best in clinical quality and member satisfaction measures. However, these programs require health plans to invest significant resources into the system to make these programs work.

Health plans already contribute $160 million every year to health reform through assessments. Instead of focusing on how much more any entity should contribute, we should be focusing on what is making coverage unaffordable – rising health care costs – and the steps necessary to getting a handle on those costs.

This might be a good time for an update from Attorney General Martha Coakley’s office on the investigation (reported in the Boston Globe some time ago) into the payout by MA Blue Cros and Blue Shield’s of $20Mil to their outgoing CEO Bill VanFaasen…

And what was it we taxpayers were told about our state legislature looking into that and other compensation packages of the CEO’s and other executives at the state’s supposed “not-for-profit / public charity” tax-exempt insurance companies?

Dr Buyse:

Very impressed.

How do you answer people who suggest that 30% of every healthcare dollar is wasted on administration and bureaucracy?

Thanks

Bill Randell

Dr. Buyse:

With all due respect, as Marcia points out, health plans do not pay the $160 million assessment: consumers do, through the premiums that they pay directly to health plans, and through the reductions in wages that occur to offset employer contributions to premiums. Health plans are merely a conduit. I believe that Ms. Wcislo’s point is that health plans have significant, and growing, net worth that could be used for the benefit of everyone in the Commonwealth, instead of mainly to generate more and more investment income to make health plan reserves grow and grow. This growth might benefit the investment firms that earn fees and commissions, but it’s not producing much for anyone else.

The money that health plans spend on medical management programs might improve quality (although the research is far from clear on that point) but it’s usually not funded out of reserves. Instead, the standard practice is to recoup these expenses through the premiums that employers and consumers pay. In addition, there is a whole other layer of profit-making and wealth accumulation that results from these programs since they are often run by investor-owned profit-making disease management companies. (Anyone who is interested in learning more about the disease management industry can read this article by Dr. Thomas Bodenheimer http://bmj.bmjjournals.com/cgi/content/full/320/7234/563). Health plans in Massachusetts contract with many commercial medical, pharmacy and behavioral health management companies (including Beacon Health, ExpressScripts, Health Dialog, and Healthways).

While investments in improving administrative and transaction-oriented processes in other industries generally lead to lower administrative costs (e.g., banking), that doesn’t seem to have been the case in insurance. In an earlier blog entry by Nancy Turnbull on administrative cost trends, she noted that per member per month administrative costs for health plans had increased dramatically in the last few years. Anyone who works in a provider setting can certainly tell you that it doesn’t feel like administrative processes, or the cost of complying with them, are getting much easier.

Finally, it’s worth noting that the high quality ratings and high member satisfaction of health plans in Massachusetts probably have as much, if not more, to do with the high quality of medical providers in the state, and with the fact that health insurance coverage here is more comprehensive than in most other parts of the country. Much harder to be happy about your health care, or to comply with guidelines about getting preventive services, if you have a high deductible health plan….

So, I’m still wondering, with Ms. Wcislo, why health plans need $3 billion in reserves?

Peter

Bill:

I don’t know where the 30% number comes from, but I’ve heard it used in two different contexts and in each instance I question the number. I’ve heard individuals claim that health plans’ overhead expenses (administrative costs and surplus levels) are roughly 30% of the premium dollar. In other instances I’ve heard that 30% of all health care spending goes towards administrative costs. I’ll start with the claim around health plan administrative costs.

According to the national health spending estimates from the Centers for Medicare and Medicaid Services (CMS), the administrative costs, taxes, profits, and other non-benefit expenses of private health plans have averaged about 12 percent of premiums over the last 40 years. This includes all types of health insurance purchased privately, ranging from employer-based coverage to individually purchased plans, Medigap, and long-term care insurance. That’s also consistent with what I stated earlier that among the five commercial MAHP member health plans, administrative costs and surplus levels accounted for 12.4% in 2007.

Some have argued that Medicare has lower administrative costs than private health plans. However, many of the elements that ought to be counted as part of Medicare’s administrative expenses – health and pension benefits for current and retired CMS workers, capital costs, IT expenses, customer service operations – are funded by other parts of the federal government. Further, Medicare contracts with health plans to process and pay claims, so it’s not counted as part of CMS’s administrative number, but is for private health plans.

With regard to the suggestion that 30% of all health care spending goes towards administrative costs, that seems a bit high when you consider everything that has taken place in recent years to reduce complexity in an effort to lower the amount spent on administrative processes. Health care is a heavily regulated industry and there are significant costs associated with complying with government regulations (state and federal) for all sectors of the health care industry. While there are certain regulatory and statutory requirements that are probably worth the cost, depending upon which segment of the industry you talk to, there are probably some requirements that ought to be reviewed to determine whether they still are relevant.

At the federal level, HIPAA established (among other things) requirements for transaction standards and code sets, resulting in uniformity for a variety of transactions that health plans, hospitals, and physicians utilize every day. This in turn has resulted in reductions in wait-times on various administrative functions, such as eligibility verification and claims submission and processing.

At the state level, in 2004 MAHP, along with the Massachusetts Hospital Association, Massachusetts Medical Society and Blue Cross Blue Shield MA worked together to streamline credentialing, the process health plans and hospitals use to verify that physicians’ admitting privileges and education are up-to-date. The four organizations agreed to a uniform credentialing application, so that physicians and their office staffs could utilize one form with the goal of reducing the amount of time they spend on credentialing. Credentialing is necessary to ensure quality care. While simplifying the credentialing process will help to reduce administrative expenses, there will still be some cost because someone has to verify the information.

Reducing administrative costs in health care is important, but if we want to talk about cost control and affordability, the focus needs to be on efforts to improve the cost and quality of health care, because the bulk of the health care dollar is spent on medical services.

Dr Buyce:

Very well said. I am confident, however, that I will read the statement numerous times from some that the number is 30% no matter what the facts show.

Thank you for your time on this matter.

Bill Randell

Bill,

I suspect that the 30% figure refers to total administrative costs, i.e. insurer, provider, employer benefits admin, etc.

We know most of those premiums are going into the pockets of the Health Insurance Companies and the Pharmaceutical Companies and the AMA make sure those profits continue to rise. Now you know who the true enemies of Universal Health Care. With their vast wealth they can manipulate public opinion rather easily to their advantage. They have a good track record of doing so.

James

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