Confessions of an Insurance CEO Michael Turpin October, 2014 Houston, Texas
Confessions of an Insurance CEO • Michael Turpin | October, 2014 | Houston, Texas
Government health spending is devouring the budget Social Security is $8T underfunded. By comparison, Medicare is $50T underfunded. We are living well past actuarial assumptions for health premiums pricing in Medicare and consuming almost 3x the premium collected to cover the claims costs we are likely to generate. If the U.S. government was an insurer, it would be seized by regulators for inability to finance future claims obligations. What’s Next ? Retirement age of 70? Means testing for Social Security and Medicare? Further cuts to Medicare and Medicaid reimbursements? Demographics, social attitudes and consumption trends are working against us The average retiree lives on $22,000/year of income. The true cost of coverage is $22,000 a year. Seniors love Medicare because its unmanaged. The average U.S. household earns $44,000/year in income. The gross cost family coverage for an 80/20 out -of-pocket plan design is close to $22,000. Medicaid reimburses 60% on the dollar, Medicare reimburses 80% on the dollar and commercial insurance reimburses 122% on the dollar. People believe good healthcare equals open access, low out-of-pocket costs and “everyone in the waiting room looks like them.” Macro U.S. Healthcare Issues Psssst….It’s Not Going Away!!
Political Landscape Public exchanges are narrow network plans that reimburse doctors somewhere between Medicare and Medicaid payment levels. To date almost 10M people are purchasing through exchanges with 6M thought to be previously uninsured. That leaves 44M remaining uninsured. Obamacare sold by CBO as costing $800B while raising $900B in revenues to “reduce” the deficit over ten years by $140B. A large percentage of these revenues inure in later years and are driven by Cadillac tax assumptions where as many as 40% of employers may be hit with an excise tax. Third parties estimate the true cost of the ACA between 2020 and 2030 will add over $1T additional debt to our current $16T. 2018 will be interesting as “Cadillac Tax” begins to erode the deductibility of benefits for employers offering “rich” benefit plans Congress is deadlocked and there is no momentum or credible challenge to radically modify or change the legislation Hillary may not run in 2016 as she is rumored to be sick. If she does not run, it will be Andrew Cuomo taking on Joe Biden for the Democratic nomination. The GOP is a toss up. Charting A Social and Political Course Sorry….It’s Not Going Away!!
Public and Private Employers Are Poor Fiduciaries of Their Healthcare Spend Employers still don’t act like payers. They rely too much on their insurer and Human Resources Two groups whose incentives are not always aligned with the fiduciary obligations of business HR is overwhelmed, often under regarded and has no incentive to drive “disruptive practices” that could reform reimbursement and change the trajectory of their company’s medical costs. CFO’s have not focused enough on loss-control versus year-over-year costs. CEOs just want to know that Nexium is still on the formulary. The most engaged employers have achieved a CAGR of medical trend in low single digits over the last 3 years. They outperform peers by a full 10% each year as a result of their strategies to focus on reducing consumption and getting value instead of cost shifting by increasing contributions or devaluing the plan through benefit cuts. In the next 5 years, every employer will need to chart a course between: Offering a defined benefit plan design, Providing a defined contribution solution set through a private exchange, or Migrating subsidy-eligible employees to public exchanges. Charting An Employer Course Most employers have no strategy and don’t hold those in charge of their plans accountable for good and bad results.
Insurers Public insurer stocks are at all-time highs. Insurers were adroit in negotiating minimum Loss Ratio rules with government. Insurers profits are exceeding allowed limits simply through the process of redefining administrative charges as “medical claims” and moving into provider services such as pharmaceutical benefits management (PBMs), behavioral health services, care management, disease management, and administrative services. Non-profit Blues have been allowed to amass “war chests of reserves” well above statutory requirements on the assumption that reform creates uncertainty. This has retarded a traditional soft-market pricing cycle that has forced insured prices down as non-profits run down reserves and for-profits follow. Non-profits using excess reserves (profits from overpricing fully insured premiums) to finance acquisitions and market footprint expansion. Insurers rapidly expanding into Medicaid and Medicare -based markets looking to capture newly insured market share and position for possible future public policy changes. Insurers are working to repair a highly damaged consumer brand and are positioning themselves for a “defined contributions future” where consumers are more free to choose between insurers and products. Charting A Market Course Your insurer now administers 100% of your claims and delivers as much as 40% of your provider services through owned and affiliated third-party subsidiaries.
Healthcare systems will continue to merge and integrate as reimbursement reforms shift from fee-for-service to value-based and bundled reimbursements. Hospitals must plan for Medicare as a basis of reimbursement and become Accountable Care Organizations (ACOs) willing to accept risk and becoming more like insurers. Hospitals will shift to outpatient care and seek to reduce operating costs by as much as 20% through technology adoption and process improvement. It will be almost impossible for small, unaffiliated hospitals to survive in a post-ACA world. Primary care physicians (PCPs) are selling their practices and affiliating with health systems as employees. The need for alternatives to in-facility care and a void of primary care is attracting private equity into including retail and on-site clinics, urgent care, and center of excellence disease specialty. Home health, telemedicine, nurse practitioners and physician assistants will serve as gate keepers to triage care. As new insureds enter the system, PCP shortages will occur in rural areas resulting in higher ER use and sparking investments in urgent care. As many as 90M Americans covered under Medicare, Medicaid and individual insurance will make new buying decisions. The next decade will be touted as “the decade of the consumer.” Charting A Provider Course Healthcare stakeholders are preparing for an explosion of consumerism and a contraction in margins and they are scrambling.
169M non-elderly Americans fall within these FPL boundaries. Over 75% are covered by some form of employer sponsored insurance Health Reform Will Fundamentally Alter Entitlements 2012 FPL for 48 Contiguous States and District of Columbia. Dept. of Health and Human Services http://aspe.hhs.gov/poverty/12poverty.shtml (as visited 11.7.12). See website for information on Alaska and Hawaii.
Strategy Drives Structure Your Financial Strategy Drives Your Benefits Structure – Whether You Admit it Or Not • Benefit Philosophies will be influenced increasingly by financial performance: • “No disruption”: Per capita medical spend < 20% of per capita profit • “We’re open to doing more”: Per capita medical < 50% of per capita profit • “We need to reduce costs”: Per capita medical < 75% of per capita profit • “We want out”: Per capita medical ≥ 100% of PEPY profit There is a growing tension between Finance and HR as the disruption and administrative hassles of engaging employees clashes with the financial realities of a low organic growth economy. What is the cost of not taking more aggressive action?
The Executive Dashboard HR Must Be “A Friend AND Fiduciary” Assumptions: • 1249 lives • Annual premium is fully insured
Health Plan Priorities Dashboard “Show Me on One Page”
Cost shift to employees through contributions, and/or benefit reductions – Over time most employers have eroded the actuarial value of their plans by cutting benefits at the same time they are raising contributions often adversely impacting younger employees and families. Reduce insurance cost through aggressive negotiations, financing and underwriting practices – It is cheaper to retain risk than to transfer it. Carriers love insured programs. Reduce unit cost of services – review network discounts, engage employees for elective services to become better consumers through use of high deductible plans, utilize cost transparency tools. Outsource and unbundle discreet services such as RX, Stop-loss and Care/Disease management.Carriers all use creative methods to estimate best discounts. Many misrepresent the truth. Reduce intensity of services during an episode of care through review and management (focus on reducing waste and overtreatment) – Insurers have not done a strong job at managing the intensity of services while individuals are hospitalized. Admissions are down but intensity will continue to rise. RX is a time bomb! Reduce consumption of healthcare by improving employee and dependent health – focus on promoting primary care, finding asymptomatic illness, reducing potential for at risk becoming chronically ill, stabilizing chronically ill through gaps in care management to prevent catastrophic claims. Adopt incentive-based biometric plans that includes health risk assessments. Healthy people have fewer claims. Five Levers to Manage Costs – The Path of Least Resistance? It’s harder to modify behavior than contributions. However, low single-digit renewals will only come from reducing consumption, which means “change” and “disruption” to employees – two words HR hates.
Many insurers maintain more than one PPO network. Some give their inferior economics to self-funded clients using third-party administrators or to smaller self-insured customers. How do you know you have the best economics? Narrow network plans should save more money. Criteria for high-performance networks vary based upon complex algorithms of optimization over an entire “service episode of care” and “unit cost.” Are higher unit cost providers in your High Performance Network? There is huge variability in PPO network provider pricing. Two in-network providers can have as much as 500% variance in their billed charges for the same services E.g. radiology, most elective procedures… Unit Cost Our PPO Network was more Expensive than You Think… Every insurer obfuscates their actual discount percentages and uses weaker networks to negotiate favorable hospital contracts. To quote a sage consultant: “The best disinfectant is sunshine!”
Cottage Industries – 70% of employers are handled by broker/advisors whose benefits revenues are less than $5M in revs. Smaller brokers tend to pick one favored carrier and work very hard for favored nation status. Boutique benefit shops may favor fully insured, packaged products that represent the highest margin for insurers and the largest compensation. Lack of Transparency – Most clients do not know how much they pay their advisor and do not review 5500 filings each year to relate costs to program outcomes. Outcomes / Cost = Value Insurers see intermediaries as “too big to ignore,” “loyalists” and “competitor advocates” When an advisor is small, they ask for favors. Favors create goodwill, which can be called upon at later dates. Margin is made in small and mid-market - Insurers make 2-3x the profit for insured business than for self funded business. Insurers purposely try to steer clients and brokers from being self-insured using a variety of tactics. HR is often scared by self-insurance administration and Finance is worried about cash flow and maximum liabilities in the event of a bad year. Target Marks We loved small brokers and insured, smaller employers We liked a huge distribution of brokers and worried about the consolidation occurring in the intermediary community. We would protect small, less sophisticated brokers because they were loyal and could sell increases.
Nickel and Diming– Insured quotes had risk and profit charges of 5% built in to rates. However, we would also receive rebates from RX contracts, margin from pooling charges and capitation charges as well as charge you a percentage of claims every time a member went out of network. We’re betting against HR– We believed that HR could sell higher cost increases in an attempt to limit the disruption of a carrier change. We would delay delivering increases until the last possible period unless the broker required early renewals. My stated desired target loss ratio is 82%-85% on insured programs. My actual loss ratio at 85% was closer to 78%-80%. This is due to hidden margin in other areas. I could make money on a 92% loss ratio renewal. Insured Underwriting Death By A Thousand Cuts Carriers depend on opaque pricing practices and hidden margin to achieve profits that exceed reported margins. Nationally, carriers have found a way to not rebate any profits from premiums that exceed the ACA loss ratio requirements.
Cost-Shifting Cost-shifting will be more prevalent under insured plans • Self-insurance could significantly grow in popularity as employers seek: • Greater transparency of claims • Question bundled insurer practices • Capitation payments to subsidiaries such as pharmacy and • behavioral health • Capitation payments to providers • Efficacy of disease management and medical management • Discounts • Avoidance of fees passed on by insurers • Avoidance of state premium taxes • Avoidance of state mandates • Ability to contract directly with ACO’s? The simple act of self insurance may reduce fully insured costs by as much as 10% by 2014. Employers need to get over their fear of financing their own risks.
Stop Loss: Games People Play • Insurer profits exceed those profits made by mono-line stop loss carriers who compete for business. Carriers will try to argue that bundling stop-loss makes more administrative sense. It does not. • Don’t get distracted by maximum liability and do not compare carrier quotes by comparing aggregate stop-loss. A decent actuary can predict claims within 3%-5% of expected costs. Maximum liabilities are almost statistically impossible to be reached – which is why aggregate stop-loss premium is so low and treated as a commodity. • Individual stop-loss is key. Be sure to negotiate out: • Specific lasers on large ongoing claims • Non renewal for bad claim experience • Immature Aggregate/Specific (12/12) written in consecutive years • Pharmacy excluded from specific stop loss coverage • Layering – Who really holds the risk on your large claims?
RX Economics: A Prescription for Profit • Opaque Pricing Rules Most RX Plans: The amount the PBM pays the pharmacy for a drug is lower then what is charged as a claim to the employer. The discount off avg. wholesale price (AWP) from the PBM determines the spread made by the pharmacy manager. • Focus should be on lowest net cost per script, not rebates. Getting a rebate check is the equivalent of habitually overpaying the IRS each year and then expressing delight with your refund. Many RX purchasing co-ops include non disclosed fees and rebate based reimbursement. Employer fixation with rebates has led to mark-up/discount sleight of hand. • Talk About Heartburn: $ 260 per script Proton Pump Inhibitor cost of “Nexium” versus over the $15 over the counter “Omeprazole” • Your insurer will use RX rebates to “buy-down” administrative fees to give the appearance of competitive pricing – essentially using your money to appear more aggressive. Insured employers typically cannot unbundle RX. • Employers should utilize a PBM with pass-through pricing that includes no spread.
Who Is Really Disrupted When You Make Change? 20% of employees drive 80% of claims. 70% spend less than $500. If you need to find savings, what’s more disruptive – firing workers or focusing on reducing claims consumption by changing behavior? Your large claims will arise out of: Asymptomatic illness going undetected Chronically ill employees not receiving treatment to stabilize their conditions At-risk employees continuing lifestyle decisions that deposit them into chronically ill bucket What is More Disruptive: Engaging Employees or Firing Them? In a period of low organic growth and double digit profit expectations, expenses will be realized through lower per capita healthcare spend or lower FTE counts.
Strategic HR/Finance Planning Questions • Does ACA represent a Challenge or an Opportunity for our organization? • Will ACA require us to make significant changes? • How we offer benefits? • To whom we offer benefits? • What benefits we offer? • How much the benefits cost? • How we administer benefits, payroll, employee communication...? • How will our employees and families be affected? • How do the revisions required by ACA fit within our own benefits philosophy/ • strategy? How does the rate of growth of healthcare track with our pro forma • revenue and EBITDA assumptions? • 4. What do we expect other players in our industry will do with respect to ACA? • What impact will there be to our competitive position? • Should we consider changes to our benefits strategy and overall compensation • model? • 6. Are we prepared internally to support the changes needed? • 7. Do we understand how public exchanges will develop in our state and for all our locations? Will plan designs vary dramatically from current commercial plans?
Private Exchanges Consultants becoming brokers, brokers becoming consultants. Dogs and cats living together… • Consultants and national houses all launching private labeled exchanges. Public companies got market uplift from expectation that exchanges would supplant employer defined benefit (DB)designs. Pressure mounting in consulting firms to convert traditional clients to owned platform creating channel conflict and objectivity issues • 2015 will be disappointing enrollment statistics for active employee exchanges beyond those employers that needed to adopt a design. Conversely, exchanges represent perfect fit for retiree medical outsourcing. • Belief is employers will not want to drop coverage and push people into public exchanges but “cap” expenditures and tie future contributions to profits. As DB pension plans became 401k, DC plans may penetrate a large percentage of employer traditional benefits plans Employers will have to try to navigate a crowded floor of self interested advisors and vendors – all wanting to promote their B2B2C purchasing facility. The term “exchange” will become a confusion of meanings.
Defined Contribution and Private Exchanges A Trend or Hype Cycle? An exchange is the nail, your strategy is the hammer – not the other way around. Source: Gartner Group Hype cycle indicators model adapted to exchange cycle.
Resources Required to Run the Race Things just got more Complicated… • Communications – SBC requirements, exchange notification, reform education, plan changes -- what is your theme? • Employee advocacy, engagement and education – Enrollment, plan changes, issue resolution and support – Who will intervene on their behalf? • Actuarial / Underwriting – Contribution setting for plan options, scenario modeling, plan option forecasting, budge assumptions and funding analysis – Do you know what your trend goals are and how costs impact profits? Do you understand self insurance? • HR Administration – Do you want to outsource, co-source or contract elements of HR administration to third parties – Are you stuck being tactical when you need to be strategic? • Pharmacy – Carrier and large PBM models are broken. Insurers using rebates to offset their own administration costs – What is your true Rx trend?
Resources Required to Run the Race Things just got more Complicated… • Compliance – HR and employment laws will continue to become more complex. ERISA will change and be challenged – Who is your legal resource? • Healthcare reform modeling and scenario planning – Discovery of risk exposures, review of financial exposures, modeling based on employment and design changes – Will reform happen to you or for you? • Clinical – What are the controllable utilization trends in your health plans? Is your carrier fulfilling their administrative duties to impact consumption trends? What current and forecasted cost arising from? • Population health – Premium differentials, incentive plans – Can I change behavior? First quartile employers who desire low single medical digit trends will need to redefine terms like “disruption”, “value”, “social contract” and “loyalty”…
HR and Finance: Hang Together or Hang Separately • Align incentives and people - Force your C-Suite to sit through a whole healthcare strategy meeting. Pay HR to achieve better results. Communicate to your entire senior management team on what you are doing as they are often your biggest consumers, complainers and point of contact for employees • Don’t waste a crisis – use the ACA and reform as air cover to drive fundamental changes necessary to “preserve” your ability to offer employer sponsored benefits • Create a roadmap and set goals: • Question the value of your vendors and hold them to measurable standards. In a period of low healthcare consumption, a 6% increase is nothing special. Your goal should be zero trend! • Your rate of healthcare cost growth cannot increase faster than your revenues • If your organic growth is flat and margins are under pressure, remind HR that it is more disruptive to fire employees than it is to make changes to your plans that will force employee engagement and overdue accountability for better consumerism