December 8, 2009

Excellent Health Reform Compromises Emerge

Imagine my surprise to see that 3 major compromises being worked out in health care reform all actually improve reform as it stands at the moment.

1. The excellent Federal Employees Health Benefits Program (FEHBP) will be used as the exchange model so that well-regulated private insurance in a FEHBP-like exchange with community rating will bring the far-superior Federal Employees types of insurance to the individual and small group market. This is a much better alternative than less-regulated exchanges with very weak public options.

2. The "health benefits ratio", aka "medical loss ratio" -- the portion of annual health insurance premium income insurers pay out for actual health care -- sounds like it will be regulated to be 90%. This is an excellent number. Vastly better than the 80% we heard only a week or so ago. Compare this ratio to the current average of 80% in the private market (and less in the individual market), and compare to average payout ratios that were above 90% during the 1990s.

3. Perhaps one of the most dramatic improvements possible: Instead of expanding the stigmatized Medicaid so broadly (as previously proposed to everyone up to 150% of poverty level), Medicare itself would be opened up for buy-in to everyone 55 and older (instead of only available at age 65 as now). Individuals age 55 to 64 could pay premiums to buy-in to Medicare coverage (with low-income people still receiving the previously proposed premium subsidies.) The significance? Medicare is highly cost-efficient, with a "health benefits ratio" between 94-97%. This means reform gets more bang for the buck, and thus the premium subsidies can be more sustainable.

These are just simply very, very good outcomes.

I would not have dared to hope for such good compromises.

Those who like to write Congress might find it a good moment to say "Yes!" to their representative and Senators on this compromise.


  1. Hal --

    Re: your first paragraph -- from what I've read, the FEHBP-like program is a substitute for the public option, consisting of several private, national non-profits regulated by the OPM. It seems like you're saying the progam represents ALL of health care reform.

  2. Richard, private insurance within the existing FEHBP acts the way we hoped the public option would act. Why? Because of the requirements imposed by the FEHBP. So the national non-profits would be only a bonus idea, not the real central value in this proposal. Getting the coming exchange(s) to act like FEHBP is the best possible possible scenario for the exchanges.

    This is almost overshawdowed by another big idea --opening medicare to buy-in for ages 55+.

    Not least is the very good improvement of regulating to 90% MLR.

    It's quite a set of ideas.

  3. Hal--

    I've done some further reading of the FEHBP proposal, and it appears it will not lead to the cost savings that will make the program a real viable alternative to the public option. An editorial in the NYT says the plans will have "great difficulty competing in states where they lack networks of doctors and hospitals and where entrenched insurers and hospital combines dominate the market." (But the NYT also said it would provide more choice for the consumer.)
    Several other sites ( also raising quetions about the effectiveness of FEHBP in negotiating prices among insurers.
    That being said, I still think this would be a good idea -- but perhaps it should be run out of HHS (or a joint HHS/OPM operation). Whaddya think?

  4. Sorry that last paragraph, I meant to say there are questions about the effectiveness of OPM in negotiating prices among insurers.

  5. No, FEHBP structure is not cost-control. Also, note that having a public option is unlikely to give much even in the one-time (initial) cost reduction that comes from insurers having a better MLR (due to competing with the PO).

    But...the proposed reform now has an idea of regulating the MLR to 90%!

    That would be better than even the very best scenario effects of any public option, of any kind.

    Neither of these is "bending the curve." Bending the curve is one of the major topic of this blog, and you can find much on it in the "favorites" in the right hand column.

    The advantage of FEHBP-type regulation of the exchange is mostly for clarity of consumer choice. In the actual FEHBP exchange, you know that every policy is sound, without tricky loopholes that will leave you facing crushing bills to your surprise in the event of a major illness. In the FEHBP exchange, you can compare policies easily. All of this is radically different from the current individual market, and having the exchanges regulated in a FEHBP manner is a guarantee they will be safe for consumers.

  6. Also, note that the idea of having the OPM "negotiate" prices seems of little value to me. This is only a variation on the MLR really. (What portion of premium income does the insurer pay out for claims) Far more effective to simply regulate the MLR to begin with.

    Further, in a safe marketplace (a FEHBP like exchange), then consumer choice itself could actually begin to spur improvement in insurance policies, including cost.

    But it's central to understand that every cost reduction that comes from having a better MLR is a one-time effect. For the initial year, you get better prices for insurance (than you would have). the meanwhile the medical inflation trend will continue of course, until the types of reforms that "bend the curve" have effect.

  7. Hal, I've done a little more reading on OPM's management of the national non-profits, and I'm feeling even more positive about the idea. Sen. Tom Harkin told Government ( last week that OPM limits the insurance cos.maximum profit margins to just 1.2 percent.
    Ed Kilgore over at Democratic Strategist says the non-profits could achieve economies of scale that would be just as effective as a negotiated public run plan,and would have an advantage over state-run plans because they'd be federally regulated. (It's the same conclusion WaPo's Ezra Klein came to in the blog post where you left your comment.)
    Time permitting today, I may call the Alliance for Advancing Nonprofit Healthcare and get their opinion on the idea.
    Anyway, I want to thank you for providing some POSITIVE, thoughtful analysis of the compromise, compared to the kneejerk negativity of our compatriots on the more visible blogs. Let's keep this dialogue going, okay?

  8. Hal-
    I've done a little bit more reading on the OPM/FEHBP non-profit proposal, and what I've seen gives me even more hope that it will succeed:
    Sen. Harkin told Government Executive ( OPM sets a maximum profit rate for its insurance companies at 1.2 percent;
    Ed Kilgore over at Democratic Strategist ( the nat'l non-profits "could achieve economies of scale" that could make them just as effective as a public option, especially since they'd be regulated. Ezra Klein had the same opinion in the WaPo blog post that you commented on.
    Time permitting, I'm going to contact the Alliance for Advancing Nonprofit Health Care to get their take on the compromise.
    Anyway, I just want to thank you for engaging with me on this, and for providing a thoughtful, positive take on this, compared to the knee-jerk reaction from our progressive brethren over at Daily Kos and elsewhere.

  9. There were problems with Google, and I thought my previous comment didn't go through, so I wrote another one. Oh well...

  10. I'd welcome having a national non-profit or two, but the real key idea is simply to have *national* plans (non-profit or for-profit, either one) that are required to meet high standards by the exchange(s) (standards created and regulated by OPM or whatever agency to a high-quality standard like the FEHBP; standards are about not using tricks and traps to bankrupt policy holders who get sick).

    I won't worry if a private insurer has a profit margin of 1.2% or 4.2%. That 3% difference isn't the real issue.

    Because it remains a constant.

    Just for 2010 alone small businesses are looking at an average health insurance premium increase (for the same policy) of about 15%!

    That's an inflation.

    See? The real issue isn't a constant skimming of a 3% in profits. It's the *growth* in health care costs over time.

    Let me offer an example:

    Let's start in year 2009 with total cost for a certain precise level of health benefits (a specific fixed insurance plan) that costs $10,000/yr. in premiums in a certain Universe let's call Universe A.

    Suppose in Universe A that insurers only make 1% profit, and the MLR ratios of all insurers are a high 90%. But medical cost inflation (the basic cost of actual medical treatment) is about 8%/year.

    Suppose a different Universe, Universe B, is identical to Universe A, except that insurers make more profit and have a lower MLR of about...80% (sound familiar? -- this is roughly our recent average in the U.S.).

    Now, let's also set the medical cost inflation in Universe B lower. Let's make it 4%/year.

    Since Universe B has a higher profit margin and a lower MLR, it's premiums for a policy that has the same benefits as the policy in Universe A cost more (initially). Doing the math, the initial year cost of Universe B premiums would be 90/80 * $10,000 or $11,250.

    Medical insurance in Universe B is more expensive, due to higher profits and administrative costs for insurers in Universe B. That is, the insurance is more expensive initially. But B does have a lower rate of medical cost inflation (due to moving away from fee-for-service for example)...

    Let's look at costs as they rise in both Universes over time for the exact same health benefits insurance policy:

    Year -- Universe A -- Universe B
    2009 --- $10,000 ---- $11,250
    2010 --- $10,800 ---- $11,700
    2011 --- $11,664 ---- $12,168
    2012 --- $12,597 ---- $12,655
    2013 --- $13,605 ---- $13,161
    2014 --- $14,693 ---- $13,687
    2015 --- $15,869 ---- $14,235
    2016 --- $17,138 ---- $14,804

    So, as you can see, the rate of medical cost inflation is *far* more important than the level of insurance company profits.

    This is the real issue -- bending the curve (reducing the rate of medical cost inflation). It's the issue that we ultimately must address.

    And the way to do it is to transition Medicare to begin to progressively (incrementally) move to paying-for-outcomes-over-time.

    Since we already are going to fix basic insurance regulation issues of insuring sick people, the only real question after getting that one-time benefit of regulating the MLR to 90% is the much larger issue (more important issue) of changing the rate of medical cost inflation.