What’s inside managed care’s black box?

By Jonathan Nelson

As the sun sets on the Texas Department of Insurance, opportunities abound to sneak a peek at how health insurers do business

Here’s a story that hits close to home. In December of 2007, TAFP received notice from its health insurance carrier that premiums for the Academy’s 11 employees would increase by 23.5 percent for 2008. For several years, the Academy had provided its employees with a small-group PPO plan and each year, the premiums had gone up. From 2003 to 2007, the cost to insure each employee increased by 41.6 percent. It would have cost even more, but the Academy opted to double the employees’ deductibles along the way to keep the rate increases somewhat sustainable.

The quoted price for 2008 was too much to bear and the Academy’s leaders had to make a tough decision. TAFP changed carriers and opened a high-deductible plan that requires employees to spend $2,500 out of pocket before insurance kicks in. The plan includes a health savings account that allows employees to set aside tax-free money to pay for qualified medical expenses.

“We are not about to throw our employees overboard to swim in the state’s ocean of working uninsured, but it’s easy to understand why Texas leads the country in this appalling category,” wrote TAFP President Linda Siy, M.D., in an opinion article published by several Texas newspapers.

Employers large and small face these same decisions as health costs consume more of their budgets. According to Families USA, health insurance premiums for Texas families in employer-sponsored plans increased by 79.7 percent from 2000 to 2006, while median earnings for Texas workers increased only 10.8 percent. Small businesses feel the health insurance squeeze the most. A recent national report by the Kauffman-RAND Institute shows that in 2005, firms with fewer than 25 employees spent 11 percent of their payroll on health insurance.

With no end in sight to the annual premium hikes, more small employers choose to drop coverage each year. In 2001, 69 percent of firms with 10 to 199 employees provided health benefits, according to the Mercer Survey of Employer-sponsored Health Plans. By 2007, that number had fallen to 61 percent.

Short of dropping coverage altogether, employers try to stanch the bleeding by shifting health costs and responsibility to their employees through defined-contribution plans, raising co-insurance and co-pay amounts, or offering high-deductible or consumer-driven plans. In their annual employee-benefits survey, Cowden Associates reports that the number of firms offering high-deductible plans tripled last year, and while those firms still represent less than 9 percent of the market, expect that number to grow.

As employers like TAFP continue to be hit with double-digit premium increases, the inevitable question is why? What is the justification for increases that outpace medical inflation every year? What portion of those premiums pays for medical services and what portion goes to administrative costs and profits for the carriers?

Because of a law passed in 2007, employers can now request information from their health plans about how much of their premiums are spent on medical care. When TAFP made such a request, Academy staff and leaders were shocked by what they found. Only 74 percent of TAFP’s premiums was spent on medical care, leaving 26 percent for the carrier to spend as it pleased. Insurers call this difference the medical-loss ratio, and the more they can grow that pot, the greater their profits will be.

“Something is seriously wrong with our health care system,” Siy wrote in her opinion article. “In a time of record health insurance profits and obscene executive compensation, how are these health insurance costs justified?”

Insurance companies keep their underwriting and rate-setting practices closely guarded in a “black box,” out of view from employers and regulatory agencies. As TAFP wrote in testimony to the Senate State Affairs Committee this spring, “Texas’ oversight of the health insurance industry is at best tepid, and most carriers claim they are federally exempt from state regulations. Their methods of calculating premiums are esoteric, actuarial voodoo—anything but transparent.”

The underlying causes and possible remedies for the state’s health insurance crisis have long been matters of dispute between competing interests. The next iteration of this debate will be initiated by the Sunset Commission’s review of the Texas Department of Insurance and by Texas House and Senate interim committee studies and public hearings. TAFP CEO Tom Banning says lawmakers will likely explore market-based strategies to harness ever-increasing health care costs and transition Texas to a less regulated health insurance market.

But TAFP and other state physician organizations believe the state lacks appropriate oversight of the rate-setting and underwriting practices of managed care organizations. “As employers continue to shift insurance responsibility and costs to their employees, state regulators must provide appropriate consumer protections to guard against predatory underwriting practices and ensure actuarial soundness of health insurance premiums,” TAFP wrote in its testimony.

The Sunset Commission that will examine TDI over the legislative interim is comprised of five members of the Texas House, five members of the Texas Senate and two citizen members, one appointed by the speaker and one by the lieutenant governor. As Sen. Robert Deuell, M.D., says, the sunset process allows state government to assess the efficiency and relevance of the agency’s objectives and methods “without having to do it in a crisis.”

Deuell, a family physician in Greenville who serves on the Sunset Commission, expects the group to consider whether TDI needs more regulatory powers over the health insurance market. “I think I’d like as much transparency for health insurance companies as they seem to want for the doctors. They want to know everything about us and yet they don’t want us to see their information and their profits and how much money they’re actually spending on patient care.”

Deuell is quick to point out that he’s not for bigger government, but he says TDI should be more involved in the business practices of health insurers. “We regulate other insurance industry rates—auto, homeowners. Why aren’t we regulating the insurance that’s going up higher than any of them?” he says. “I’m not anti-insurance but given to their own devices, they rape the system, and I think health insurance companies now are raping the system. They are taking more and more dollars out of the health-care pie and putting less and less into patient care.”

As a practicing physician, he sees firsthand the onerous administrative burdens physicians endure to secure payment from managed care organizations. “Under the guise of cost savings, they impose all these restrictions on our practice,” Deuell says. “It just costs us more money to provide care.”

Vice chair of the Sunset Commission, Sen. Glenn Hegar of Katy, also questions whether health insurance premium rate increases are justified. “You really can’t get the information as to why, or specifically what you can do as the purchaser of insurance—how do you change your health habits or how do you change your behavior to allow those rates to go down?” Hegar says it would be good for Texas if there were more transparency in the way health insurance companies conduct business.

In speaking with physicians, he says he’s grown concerned about the physician rating systems health insurance companies have introduced to determine which doctors will be included in so-called “high-performance” networks. “The problem is the average consumer, user of the insurance who’s trying to go out and find a doctor, they have no clue. They think [the ratings] may be based on their ability to perform as a doctor. They may think it’s based on medical complaints. I mean they have no idea it’s really cost-driven. And the problem is that every insurance company has a different formula and no one know what those formulas are,” Hegar says.

Lewis Foxhall, M.D., associate vice president for health policy at the University of Texas M.D. Anderson Cancer Center and former president of TAFP, has been appointed to chair the Texas Medical Association’s Ad Hoc Committee on Insurance/Managed Care, which was established to focus on the sunset of TDI. “One of the things that every physician in the state ought to be concerned about is the degree to which the department provides oversight and regulation to the health plans,” he says. “There are many issues that impact physicians’ cost of doing business and additional administrative overhead that in many cases should be regulated by the department.”

He’s also concerned about what happens when insurance premiums increase so much that employers decide to stop offering coverage to their employees, many of whom join the swelling ranks of the state’s uninsured. When they get sick and show up in emergency rooms, the hospitals and local taxpayers foot the bill. Hospitals charge more to paying customers to cover the costs of uncompensated care, which means insurers pay more for services, so they raise premiums and more employers drop coverage. It’s called the cost-coverage trade-off, a health economics axiom that says as health costs climb, the population carries less insurance coverage. Families USA reports that the cost of uncompensated care adds an extra $1,500 each year to health insurance premiums in Texas.

What about the people who lose coverage through their employer and purchase individual policies? The cost-coverage trade-off still holds true. Those policies typically don’t offer the same level of coverage as group policies, and many are fraught with spending limits and care restrictions that leave patients with huge medical bills.

Linda Carter, a benefit consultant with Texas Benefit Solutions, says people seeking policies in the individual health insurance market have a difficult task in finding affordable plans offering comprehensive coverage. “I’m seeing tons of limitations that you don’t see on a group basis because [insurers] don’t have to take you. They don’t have to offer coverage.”

Many plans cap lifetime benefits so low that patients with serious diseases or major trauma could exhaust their coverage quickly. Plans often cap hospital room and board payments at a few hundred dollars a day, leaving patients with thousands of dollars in charges after several days of hospitalization. Many individual plans offer no pharmaceutical benefits, no mental and nervous system coverage, and hardly any cover obstetrical care. Limits on office visits, annual caps of around $300 for X-rays and lab work, and bare-bones preventive coverage are all common in the individual market.

“People just sort of assume that coverage is coverage and don’t really delve into it to see what’s going on,” Foxhall says. “So there may be some big holes in those policies.”

“I’m sure these carriers can say, ‘Oh, it’s out there if people want to read,’” Carter says. “The problem is people aren’t going to read.” The contracts for these policies are dense and can be difficult to understand. “I’m an educated insurance professional supposedly, and I have no clue what it means if my chemotherapy is limited to ‘average wholesale price plus $150 per day.’ What is that? How will that cover me?” she says.

Of course the biggest limitation in the individual health insurance market is the plans’ ability to exclude pre-existing conditions. For people with a chronic disease or other ongoing health problems who don’t have insurance through an employer, there is no coverage in the individual market.

Foxhall calls it cherry-picking, finding ways to only insure healthy people, and it exists in the small-group insurance market as well. If one person in a small-group plan gets sick, you can bet next year’s premiums will go through the roof. “Insurance is a great business if you can pretty well assure yourself that you’re not going to have any losses,” Foxhall says.

Physicians often find themselves in the awkward position of trying to help patients understand the limits of their coverage. But physicians don’t have any way to know for sure whether a particular service is covered while the patient is in the office. There’s no mechanism for discerning how much the policy will pay, what the patient’s financial responsibility is and if the patient has met his or her deductible. And if the health plan determines later that the patient was not covered for a service, the plan can retroactively deny payment and recoup the money from future claims payable to the physician.

“Are the plans playing fair with the public and with physicians and hospitals in those situations?” Foxhall says this is part of what the Sunset Commission needs to determine.

Whether the Sunset Commission itself initiates statutory changes that address physicians’ concerns or whether it serves as the stage for debates that result in legislation from other committees, a wealth of opportunity exists during this interim term to make changes that will benefit all Texans. The Sunset Commission will hold its first public discussion of the TDI review in late June. Now is the time to present TAFP staff with recommendations for improvements to the health insurance market and the practice environment.

As long as health plans can hide their rate-setting and underwriting processes in their black box, they will continue to raise rates while offering less coverage and fatten their medical-loss ratios through any means possible. It’s true that having health insurance is not the same as getting health care. But for many, good health insurance is the key to accessing the right care at the right time without going broke in the process. As employers shift more of the cost and responsibility of health insurance to their employees, the state has a chance to open the black box, allowing individuals, employers, physicians and insurers to enjoy the benefits of a free and fair insurance market.