Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Public be damned: testimony on managed care improvement legislation

Your bill, The Managed Care Public Choice and Improvement Act, reflects growing concern about the techniques and effects of HMOs and other forms of so-called managed care. It has been said that managed care stands convicted in the court of public opinion. That's about right, but it may miss the whole point. Let me explain.

Ordinarily, when a commercial product for sale has annoyed and frightened great masses of the public, it is unnecessary, and may even be counterproductive, to pass laws about it. The public will simply stop buying the obnoxious product, and the vendor will then either change his ways or go out of business. The customer is always right, we say, and businesses which do not acknowledge the reality are soon part of history. I'm afraid, however, that health insurance is a different sort of product.

In the first place, it has been given an almost unique income tax advantage. It is tax exempt as a business expense for the employer, it is not taxed as income to the employee, and it is not taxed when you use the insurance. This bizarre feature was created during World War II when we had wage and price controls, and it was never repealed. After the war, the IRS attempted to have the tax shelter repealed, but Congress lacked the political courage to change the law and it persists, now fifty years after the end of the war which was its excuse. This tax feature is the reason that almost everyone tries to have the employer buy it for them since it is about 30% cheaper that way. I buy it for my secretary and it gets the tax dodge, but when I buy it for myself, it does not get the tax credit because I am self-employed, not working for a salary. You might think this obvious unfairness was an accident, but the events of the recent Kennedy-Kassebaum bill prove it was not accidental at all. The K-K bill granted me and other non-salaried people 40% of the salaried exemption and gradually increased it to 80% of the salaried situation in ten years. Even this grudging concession to fairness was qualified by a clause which states even partial exemption is not available to anyone eligible for insurance to be bought through employer plans, I Make the strong surmise that insurance industry lobbyists must have been fluttering around the door of the House-Senate conference committee which enacted it.

So, the customer isn't always right, the customer must take what the employer chooses to give him. Managed care would have been history two years ago except for this tax provision. Now, there exists a second quirk of managed care which helps it persists in spite of public hostility. Public reaction quite naturally supposes that the high-handed and impertinent to save money. I doubt that. There has been enough experience with this matter to demonstrate that the high costs of this intrusive administration eat up most or all of the savings to the employer. The best that can be claimed is the rather weak argument that costs might have been even higher without managed care. Since the larger health insurers are currently before the Pennsylvania Insurance Commissioner requesting a 23% rate increase, it is far from certain just who is cheaper than whom on a five-year basis, regardless of appearances in any singer year.

If managed care doesn't save money, why do it? Weel, the central profit center in health insurance today is "adverse risk selection." If an HMO achieves a mixture of clients who are mostly healthy, its costs will be far less than with a mixture of clients who are sick. Healthy people don't get hassled by managed care; for them, the HMO is just a card in their wallet. The people who are getting hassled are sick, using the system, and generating the costs. Since the insurance company makes a considerable profit if such people get discouraged and choose another insurance, you can see there is actually a financial incentive to be obnoxious. The fact that the public doesn't like it is not a handicap, it is an asset. Therefore, this may be one of those peculiar situations where people like me, who dislike governmental intrusions, began to turn to the government for relief.

On a philosophical level, I am consoled by the fact that it was a government which started this mess, by creating the tax dodge which forces people to surrender their health care choices to their employers. In that sense, the government created this mess, and perhaps only the government can solve it.

This situation is far more serious than it has been portrayed to be. What the Health Care providers are doing to themselves to combat managed care is, in my opinion, more damaging and likely more permanent than what the HMOs are doing to providers. A central feature of this financial war is the aggressive assault by insurers on hospitals, to force them to reduce prices. In responding to this assault, hospitals have attempted to band together to resist demands for discounts. The usual method is for a nonprofit hospital to create a for-profit subsidiary and then sell it. That leaves a nonprofit shell with a lot of money, and no fixed mission to spend it on. In the Philadelphia region alone, I am aware of for-profit conversions foundations which have as much as $280 million in assets, and it seems likely the aggregate is nearly 4 billion dollars in what was once the community's reserve for charity, teaching, and research. That buffer is now out of the hands of the hospital operating units but remains threatened by potential claims of bondholders of municipal bonds sold for the original purpose of building hospital structures. If managed care finally succeeds in causing a train wreck of the community health delivery system, this reserve is going to be unavailable.

Hospitals are not the only entities which are merging in response to the managed care threat. Indemnity health insurance companies, or insurance with minimal managed care, may be defined in the present environment as providing "generous" health insurance. However, these generous health plans are being driven out of the marketplace by a quirk known as "adverse risk selection." Whatever an employer provides a choice of several health insurance options with fixed dollar employer contributions, it is well recognized that this system will quickly destroy the most generous options. Persons who perceive they will have significant health costs next year will tend to select the most generous plan, thus driving up its premium. On the other hand, people who perceive they will have little or no health costs next year will select the cheapest plan regardless of its benefit provisions, since they see it as buying nothing but a card in the wallet. And with a disproportionate number of clients who make no health claims, the premium of the cheapest plan is driven down even further. The adverse risk selections process will thus send the most generous plan into a "death spiral", and the following year the process will be repeated with the next most generous plan until eventually nothing but managed care is left, the more obnoxious the better from the insurer's point of view. The health benefits provided by Harvard University to its employees experienced this death spiral, in which the most generous plan went from being the most popular choices to having zero clients, in three years after Harvard instituted a fixed contribution system, while the other Boston employer plans showed no such tendency. I imagine that many faculty members of Harvard would claim to believe that healthy people should help share the costs of people who are sick. However, their own behavior seems to show that in fact, they are quite unwilling to pay their own actual costs, once the subsidy by well people are removed.

Hospitals are not the only ones merging. The statewide Blue Shield plan (which pays doctors) is involved in a contested merger with Western Pennsylvania Blue Cross (which pays hospitals), within a resulting combined entity called Highmark. Highmark is requesting a 22% rate increase, reflecting a loss of about $300 million last year by the Western Pennsylvania Blue Cross. Since no similar loss by Blue Shield is known, a concern must be expressed that premium payers in Central and Eastern Pennsylvania will be in effect subsidizing losses in Pittsburgh. This disturbing development can be ultimately traced to the destructive effect on Blue plan indemnity insurance by HMO managed care; the Blues are on the edge of an insurance "death spiral," which they are attempting to stop by engaging in managed care themselves. any number of innocent bystanders are liable to be hurt in the process.

The one legislative charge which would probably correct the whole managed care mess is to extend equal tax exemption for health insurance purchased by individuals. That change is only possible for the United States Congress. It was well on its way toward passage in the Kennedy-Kassebaum bill when it suddenly got limited in a variety of ways. I happened to meet one of the authors of the bill at a social function and asked why it happened. The answer was, "I was afraid I might hurt the insurance companies."

I hope you find these remarks useful. I would happily answer any questions.

Originally published: Thursday, February 21, 2019; most-recently modified: Thursday, May 02, 2019

 

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