Learning from the Massachusetts experiment in universal coverage

We’re learning a lot from Massachusetts’ experiment in universal coverage – and some of the lessons are rather enlightening.

According to Bestwire, Lora Pellegrini, president of the Massachusetts Association of Health Plans, said something along the lines of “That’s the problem with the new U.S. health care reform law … it offers millions of uninsured Americans access to health insurance but doesn’t address underlying medical costs, which are contributing to costly premiums.” [not a direct quote]

Wait.

Isn’t that your job? In return for getting millions of new members, aren’t health plans supposed to figure out how to manage care and control costs?

If health plans rely on the government to help control costs, exactly what value do they deliver?

In fairness, Ms Pelligrini noted the market share of some provider groups is a significant factor in insurers’ inability to negotiate favorable rates. There’s no question negotiating power has shifted back towards providers, and that shift is contributing to higher costs for health plans.

Doesn’t seem to be hurting profits, though; the industry is enjoying a stellar 17.4% return on equity after seven publicly traded health plans reported earnings above expectations.Try as I might to sympathize with insurers, their complaints are besides the point.

Suppliers in any business seek to maximize profits. Smart buyers will figure out how to find more cost-effective suppliers, develop alternative supply chains, or in very tight supply markets even resort to vertical integration, setting up their own suppliers.

I see no reason health plans can’t do the same. There’s far too much ‘old thinking’ among health plans; they remain overly concerned with the size of their network directory, believing large provider networks are essential to success.

Clearly, nothing could be further from the case. Some health plans are beginning to experiment with smaller, more exclusive networks, and I have no doubt the lower costs will make them much more attractive than the ‘old school’ huge networks with high costs due to broad access. No, success will come to those payers who creatively figure out how to work closely with selected providers, establishing partnerships, paying fairly, sharing information, and providing feedback.

Otherwise they’re just administrators, and not very efficient ones at that. If health plans are going to rely on the government to control costs, what, precisely, are health plans for?

Joseph Paduda is the principal of Health Strategy Associates, and blogs at Managed Care Matters.

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  • gzuckier

    “17.4% return on equity”? Odd choice of measure for what you are arguing. Return on equity is net income divided by total assets, a measure of efficiency/productivity of investment, i.e. “for every buck I invest in this company I can make 17 cents” which reflects more than anything that the insurance biz isn’t one where companies have a lot of expensive assets. To illustrate it another way, if a company takes on a huge amount of debt, risking bankruptcy, the total assets goes down, and the return on equity goes up, which wouuld not fit with your hypothesis of healthy and wealthy insurers. 17.4% isn’t particularly high for ROE; investors look for ROE in the 15-20% range.

    You seem to be looking to say something about excess profits, i.e. net income divided by total revenue; “Suppliers in any business seek to maximize profits”. As it happens, the article cited has a table showing revenue and net income for the 7 insurers, and it is simple to calculate that the profits for this period ranged from a high of 5.75% down to 0.03%.

    Which, ironically enough, supports your main point; insurers have not got a good handle yet on how to control the basic health care expenditures that bring down their profits. And, if they can’t do that, “Otherwise they’re just administrators, and not very efficient ones at that. If health plans are going to rely on the government to control costs, what, precisely, are health plans for?”

  • r watkins

    Isn’t the point that insurers have no real motivation to hold down spending right now? They just pass costs along to subscribers, and would much prefer to make 4% in profits (industry average, I think) on 2 billion in revenue than on half that amount.

  • Dr.Z

    @gzukier… great reply. Glad you lead off.

    Paduda as the principal of a company called Health Strategy Associates didn’t do much for his strategic management credibility with his metric choice and explanation.

    You are right … with enactment of MLR carriers margin is defined so there is no incentive for them to be any more efficient.

  • http://www.mindcheese.com Jay

    When gauging amounts to pay medical providers, how do insurance companies (or governments) factor out their own influence on the marketplace? It seems in order to make insurance more fair in its societal distribution we have to interfere with its market efficiency.

  • gzuckier

    @rwatkins;
    no, in fact insurers are pretty much the only players in this game who compete on the basis of lowest cost. Employers selecting a health plan for their employees very much are going for the lowest bidder, especially these days, which is obviously more influenced by the insurer’s ability to squeeze the 70% or so of the insurance cost that represents actual medical expenditures than by any waste in the 30% or so that represents the insurer’s overhead. The idea behind this bill is that if we just reduce the 30% down to 20%, it won’t matter how high the denominator of the 20% becomes. I disagree.