Non cost-shared services and cost shared services

Jay Ackroyd at Eschaton is looking at an insurance grid and is trying to analyze costs for people buying a Bronze plan in New York State.  He is making a serious error in what he is analyzing.  Benefit grids are not legally binding documents; they are short hand to describe the rough characteristics of a plan.  If one wants to be able to analyze possible cost-sharing responsibilities, you have to use the schedule of benefits for a particular plan.  Cost sharing is an insurance industry term for payments of deductibles, co-pays and co-insurance by the individual member. 

This is always important, but it is more important in a PPACA world because numerous common services are considered “non-cost share” services.  This means the insurance company pays 100% of the service’s contract price if the service is performed in-network.  Secondary items that result from a non-cost shared service such as lab work from the annual PCP visit may be cost-shared which means the doctor’s visit is free but the blood work is something that you have to spend deductible dollars on is common.  If the blood work comes back with a problem that needs to be treated, the follow-up treatment is cost shared. 

PPACA mandates non-cost shared services for annual PCP and OBGYN appointments, well-child visits, preventative vaccinations, birth control and a few other things.  Additionally three sick primary care provider visits are limited cost-sharing services in that a co-pay can be charged but deductible does not have to be met.  So the first three sick PCP visits may have a $40 co-pay per visti but no additional cost while the 4th sick PCP visit may cost $107 that is applied to the deductible.  Read more

Network manipulations

Networks are a key feature of all insurance plans as every provider has a network. A network is a group of providers who have contracted with an insurer to get paid a certain set of rates for a certain set of services performed on the people who are insured by the company. Networks can be manipulated for positive public gains and for evil.

Networks are regulated at the state level for most insurance products and have some federal guidance for Medicare, Medicaid and Exchange products. The regulations are rather loose. In PPPACA, the networks for the Exchange must have significant concentration of providers in a wide variety of specialties so that residents of a county where a network is sold has “reasonable” access. This is a very soft definition because assembling a rule that makes sense for Loving County, Texas and Cook County in Illinois is extremely difficult. States will define network adequacy differently. Most states will have multiple standards depending on population density as urban areas will require more providers that are closer to the average resident while rural areas will allow long drives.

When networks are working for the public good, they provide a means of cost control as an insurance company will include in a network a provider who will take 120% of Medicare while it may exclude a provider who wants 220% of Medicare.  This works because an insurance company can guarantee volume of patients at the lower rate.  Networks are also a quality control metric.  For instance, insurance companies may refuse to contract with providers who are not board certified or who have multiple large malpractice settlements against them in the past ten years.  Contracts can be terminated for the loss of licensure or large malpractice settlements as well.

However, networks can be used against the public interest as well.

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FI or ASO, I don’t know

When an employee group goes to insurance company to cover its members, it has two basic types of contracts it can buy. The bells and whistles will change dramatically within the type, but there are only two types.  The first type is a full insurance model where the insurance company takes on the medical cost risk.  The insurance company defines the network, it defines payment rates, it defines the deductible amounts and co-pays (if the group is sufficiently large, there is a lot of wiggle room here, but Al’s Autobody with 3 employees will only get the standard otpions), and it defines the premiums.  Those premiums are expected to be sufficient to cover the actual cost of care, overhead and kick into the general pool to cover the high cost individuals in a product line.  The other type is a self-administered plan where the insurance company has far less say as it works primarly as an extension of the buyer’s finance/accounting and HR departments.  The buying company takes on the medical risk, it takes on some network decisions, and it takes on benefit and cost configuration decisions.  The insurance company handles regulatory compliance, customer services and claims payments.

Why the split and what are the advantages of each model?

The split is a function of the law of large numbers. 

Full insurance models work well for small companies that are operating on thinner margins of error.  If Al’s Autobody is hit with a $500,000 bill because Al Jr. has cancer, there is no where near enough cash flow through Al’s Autobody to make paying that bill anything other than a macabre fantasy.  A full insurance model allows Al’s Autobody to absorb some of the cost of that $500,000 bill while also providing coverage to Florence the Florist and her 3 employees and Ronnie the Restauranter and her five employees.  Full insurance spreads risk across a pool and this is neccessary when the individual groups of members that comprise a pool are small.  A full insurance model is the basic model that is being used for all of the Exchange/Obamacare products.  (and yes, Kid #1 had career day yesterday at pre-school)

Larger companies have different dynamics.  Big companies with large employee bases have the ability to function as decent risk pools.

Initech with its 1,250 employees can spread the cost of a $500,000 bill across its population base and not go bankrupt.  It can spread several quarter million dollar bills across its employees and still come out in decent shape.  A self-insured model allows Initech to pocket the difference on most years when it does not have outlier expenses.  It also allows Initech to include the CEO’s cardiologist and the development neurologist that treats the kids of the CFO when both of those specialists would normally be out of network.  This is because the insurance company has to process payments to those out of network providers but the insurance company does not actually have to foot the bill, so it does not particulary care that both of those providers are getting two or three times the standard rate.  The insurance company in this case works to pay claims, apply negoatiated discounts to regular network providers, and take care of the mundane tasks of insurance.  The company gets a regular fixed fee per member per month to handle the back-end tasks. 

There is a mild hybrid in self-insured companies can buy a second level of protection against outlier expenses in the form of stop-loss insurance.  Stop-loss insurance is a type of reinsurance that we discussed a while back.  The self-insured company would buy a policy where the self-insured company is on the hook for the first $500,000 of expenses per member but the reinsurance pays 80% above that OR if there was a series of outliers that pushed total costs to two standard deviations above projections, the reinsurance policy would kick in.  These types of policies provide protection against a cancer cluster or an employee going postal or just plain bad luck.


Where grandfathers go to die

President Obama’s claim that if an individual likes their health care coverage in 2009 or 2010 is technically true but misleading.  It is  true that if there has been no plan changes in benefits, network, tiering or basic eligibility, a plan that does not meet PPACA requirements for life time limits, coverage of essential health benefits and community underwriting can continue to go forth in the marketplace for as long as someone will buy it but the practical impact is that there are very few stable plan designs of more than a few years.

The grandfather regulations and definitions are at the link below.  I’ll summarize before most of the readers here fall asleep.


Plans are grandfathered past some Obamacare regulations for plans that had membership before PPACA was signed into law and the following items were not significantly changed:

  • Out of pocket limits, co-pays, deductibles and co-insurance levels
  • Covered services
  • Eligibility requirements for members
  • Employee contributions to premiums if group coverage, or total premium for individual coverage

Grandfather plans were destined to die rather quickly due to underlying trends in the insurance market.  Over the past twenty years, deductibles have increased, co-insurance has increased, out of pocket maxes have increased, and employee contributions to the premiums have increased.  This was trend and it would have continued even if the firebaggers were successful in killing the bill.

In year 1, most plans were grandfathered but some plans became PPACA compliant as deductibles increased, co-pays increased and employee contributions increased as employers sought to decrease the amount of increase that they paid in health benefits.  In year 2, fewer plans were grandfathered as more benefit design and payment design changes occurred.  Now, in year 3, there are still a few grandfathered plan designs available, but most plans and employer sponsored groups are using PPACA compliant designs.

It is quite possible for a plan to stay grandfathered for a decade.  I will be shocked if my company has no grandfathered plans in 2020; we won’t have many, but we’ll have at least one or two groups clinging to their 2009 plan design.

So, it is true that if you liked your 2010 insurance plan AND there were no material changes to it, you can keep it.  It is just extremely unlikely that there are no material changes to your plan.

What’s in the 3%

Most people are minimally impacted by Obamacare as they already get their insurance through an employer, through the government or have solid individual coverage. The next largest group of Americans are impacted by Obamacare as they’ll be gaining access to coverage.  They’re better off.  Then there are two small groups.  The first is a group who has decent individual coverage but may or may not be better off with the improved coverage mandates of Obamacare.  These situations will vary by individual income and thus subsidy status, state and health status.  The other group are the clear losers of the policy changes.  They have individual coverage that is being cancelled and Exchange coverage is more expensive.

blog_obamacare_winners_losersSo what types of plans are in the “Potential Loser” bucket?


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Medicaid Expansion (Pt. 1)

Right now Medicaid expansion is going fairly well. People who were previously eligible but not enrolled are signing up, and people who are newly eligible in the non-stupid states are signing up.  States with Democratic control have overwhelmingly expanded Medicaid eligibility and states with Republican control where the faction of Republicans who can count to eleven with their shoes on are the dominant players are expanding Medicaid.  Arkansas has pioneered the “private option” for Medicaid enrollment, and they look like they should be good to go on Jan. 1, 2014.

States have a variety of options as to how they manage their Medicaid programs.  States can either act as an insurance company by setting up provider networks, paying claims, researching denials and appeals, and providing member service or they can set up a series of  non-state managed care organizations.  Most states have gone the managed care route.  Expansion quality will vary across states.  The states that have been planning for expansion the longest should have the easiest time.  Ohio will most likely have a rough kick-off because they decided to expand only a few weeks ago. Michigan was also a late decider, but they are not expanding until April 1, 2014 so they should have a smoother launch than Ohio.

The managed care organizations have a significant number of tasks that need to be done for a successful expansion.

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Playing games in the corridors

Where I live, there are six health insurance entities offering Silver plans on the Exchange.  They can be divided into two groups.  The first group contains local, regional and national players who all have a history of offering large network commercial products.  Their Silver products are split between general networks and narrow networks that usually contain 50% to 60% of the general network’s providers.  The narrow networks all contain the regional high end specialty hospitals.  If I had to buy insurance from the Exchange for my family, I would expect to pay $650 to $700 per month for a narrow Silver before subsidy. 

And then there is a single insurer in the second group. It has a long history in the region selling large network commercial products.  If I had to buy their narrow Silver Exchange product, I would be looking at $447 or $463 a month as they offer two slightly different flavors of narrow Silver.  The second narrow Silver plan sets the subsidy rate in the market.  Their broad Silver price point is within a couple bucks of everyone else’s broad Silver. 

$100 of the differential can be explained by the super-narrow network that is being offered.  None of the regional specialty hospitals are in the network, most of the central city hospitals are out of the network, and the individual providers are extremely thin as well.  Reimbursement rates are similar to everyone else’s.  The remaining one hundred dollars in differential looks odd to me.  This non-obvious price differential suggests the possibility of a loss-leader strategy Read more