The Ryan plan

April 13, 2011

WASHINGTON, DC - APRIL 05:  U.S. Rep. Paul Rya...

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At my company, we’re confident that given knowledge and a transparent, competitive marketplace people will be empowered to find and purchase the right insurance for their needs. That’s why we think that Representative Paul Ryan’s proposal to make Medicare a voucher system isn’t necessarily a bad idea, since it puts a lot of power into the hands of consumers — but such a system has to be calibrated right if it isn’t going to shift too much of the cost of health care onto the shoulders of seniors.

And that’s why we think this analysis provided by the Bipartisan Policy Center is a must-read for anyone who wants to understand how the Ryan proposal would work out over the next 40 years.  Ryan’s plan is compared to the BPC’s own Domenici-Rivlin Debt Reduction Task Force plan, which is also premium support based but maintains traditional Medicare, and allows support to grow at a rate that more closely approximates the actual projected rate of growth in medical costs for Medicare beneficiaries.

Visit Extend Health – the nation’s largest private Medicare exchange.

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The Jan – Feb Harvard Business Review contained an interesting article entitled “Created Shared Value” written by Michael Porter and Mark Kramer. Porter is revered in both corporate strategy and health care circles — which is why  I was surprised that he didn’t use health care as the prime example of a sector of the economy where corporations can  embark on a new mission to create shared value — with far reaching, long term potential impact.

Creating Shared Value Forum 2010

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In health care, the provider sector wants more procedures at increased prices in order to be profitable. Self-insured payers (American corporations) want cost control, price transparency and employee engagement. It is the most inherently conflicted sector of the U.S. economy and one ripe for the creation of shared value across providers, payers and American health care consumers.

One month after this article appeared, in the March edition of HBR, loyal readers criticized Porter’s piece as being “cheerleading” and unrealistic given our capitalist economic system. Porter responded saying (I’m paraphrasing), “The key is to harness the connection between shared value and the core economic principles of competition.” We see this happening today on our Medicare exchange. Shared value is being created through hundreds of plan selections and enrollments.  Here’s why and how.

Before the advent of Medicare exchanges, employers only knew one way – a group Medicare wrapper plan — for their post-65 retirees. These group plans were underwritten by one of five major health plans in the US. There really isn’t any competition in the group market; as the former EVP of sales for the largest national health insurance carrier once said to me, “Bryce, all the large health plans do is trade each other’s pissed off corporate customers every three years via a predictable RFP process.” Medicare exchanges allow employers to cancel shoddy group plans, and as a result, create consumerism by giving their retirees a subsidy and allowing them to buy their own plan from an exchange featuring many carriers and thousands of plans.

When real apples-to-apples plan pricing and competition happens, an interesting dynamic occurs. The employer can pay less for the same or better benefits. This is where the “shared value” effect emerges. Employers contribute less because individual competition holds down plan prices. Retirees benefit because they buy only the plan they want or need, not a plan chosen for them back at headquarters that may not be competitive in their zip code and may not even have their doctors and hospitals “in network.”

When we installed a Medicare exchange at the Ford Motor Company, the average retiree household received $500 a year more in benefits, at a lower cost to Ford.

Because an individual (not a group) plan is personalized to the recipient’s needs, it is far more efficient. Only benefits needed are bought and used. This is especially true when matching seniors to the right Part D drug plan. In addition, now that the retiree is paying for the plan with a fixed subsidy, they become better buyers. Every day in our call center, retirees ask “Is this plan the best deal for my dollars?” That conversation is not occurring in many places in the health care ecosystem today. Why? Because traditional group plans obscure real health care costs from the end user.

I agree with Professor Porter that shared value is a great vision on which the “new” corporate America should set its sights. I suggest that health care is the largest sector of the economy where this concept is sorely needed. As exchanges, both public and private, replace the obfuscation of group coverage, I predict that competition will drive massive shared value. Extend Health has saved its clients more than $1 billion in just five years, and we only work within the post-65 retiree market. The shared value revolution will be led by the most powerful force in any capitalist society: a consumer empowered with choices, transparent cost information and the radical notion of a person with self-interest in getting the best deal. Imagine that.

Visit Extend Health – the nation’s largest private Medicare exchange.

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I’m on the road so only a quick note today. IndustryWeek just published a piece I wrote about keeping retiree health care costs in line for manufacturing companies. Manufacturing has a long tradition of generous benefits for retirees, and has been hit hard in recent decades with the rising cost of retiree health care. There is a solution that allows them to continue to provide benefits while making the cost sustainable.

Visit Extend Health – the nation’s largest private Medicare exchange.

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In the 1980s and 90s, the uber dry-witted comedian Steve Wright tickled audiences on the Tonight Show with thoughts such as “I received a package of powdered water today, but I’m not sure what to mix it with.” I saw him recently on the Craig Ferguson Show and it reminded me of one of his best jokes from his heyday:

 “Why don’t we make the entire airplane from the stuff the “black box” is made of?”

 Of course, he is referring to the fact that after every major airplane crash, the NTSB finds the “black box” flight recorders intact and usually in perfectly good working condition. The plane, of course, no longer exists – along with the dozens of unfortunate passengers who happened to be aboard.

 It doesn’t take long to note that airplanes are made of aluminum (and not steel, as is the “black box”) for one simple reason: weight. Aluminum in structured form is relatively strong and only a fraction of the weight of steel.  It is not a strong as steel, but it doesn’t need to be. Aluminum does the job. Of course, this allows the airplane to fly. In contrast, an airplane made of “black box” materials has a big problem: It won’t fly. It probably wouldn’t even get to the end of the runway as the landing gear would buckle at the first turn onto the active taxiway.

As HHS looks at creating the definition of “essential benefits package” required by PPACA, word came last month that over 300 lobbying groups and health care special interests had submitted their “issue/condition/solution” for consideration in the definition of “essential benefits package.” If HHS includes even a small fraction of “The 300,” it will build a plane made of “black box” material. It won’t fly; even the basic bronze plan will be so unaffordable as to be a non-starter.

It would be disastrous to see the linchpin of the new exchange benefit delivery system fail before take off. But there is an interesting idea that might appeal to both parties – and cause the exchange concept to flourish in earnest in both Republican- and Democrat-led states.

 President Obama recently issued a waiver giving states more flexibility in designing, launching and managing their exchanges. This was a good start. State leaders worried about “ObamaCare” in general, and the “black box” problem in particular, should ask that the waiver be expanded to allow states to define “essential benefits” as meaning their current individual plan mandates.

 This should work for everyone. The Federal government wants to cede more health care control to the states. The states don’t want Washington telling them what to offer. This change would make plans in states like Idaho (with only eight coverage mandates) attractive to Idaho residents, and potentially all Americans, due to their “aluminum” design that gets the job of health care coverage done at less cost.

 Next, the 29 states with GOP governors and/or state house leadership should bring back one of their better health care ideas and allow individual plans to be sold across states lines subject only to the home state’s mandates and resulting product design. Almost every state requires today that an individual plan provide a minimum $5 million of lifetime coverage – not a bad deal at all, especially if all plans in the USA are guaranteed issue. PPACA will require that all plans have unlimited lifetime caps. This sounds expensive. It really isn’t. The bulk of claims in health insurance happen in the $0-$10,000 amounts and the $100,000 to $1 million range.

 Requiring unlimited lifetime maximums, when spread across a large guaranteed issue individual pool, won’t impact plan pricing in a material way. Having up to 300 “conditions” included in an “essential benefits package” is the real problem. We will be buying coverage for conditions very few people will contract – exploding the cost of even the most basic health plan and therefore the entire PPACA bill as we expand coverage to tens of millions of new entrants.

 A state mandate and interstate competition model could also start a massive job-creating cottage industry. We envision this happening in smaller states willing to offer more basic plans at a better price. Don’t believe me? Look at what happened when South Dakota changed its banking laws to entice Citibank and others to move all retail credit card operations to their state in the 1980s: unemployment in South Dakota in those years was practically non-existent. The same would happen in Idaho and other states unwilling to allow their health care airplane to be built of steel.

During our discussions with dozens of states about powering their insurance exchanges, we also talk to state development officers, and they tell us there is a fierce battle being waged for corporations and jobs. This dynamic of state vs. state competition is happening now as states seek to attract corporations with low personal and corporate income taxes.  What would it mean to the great State of Nevada if health plans based there were to enroll 20 million lives across America over the course of the next 10 years in individual health plans with manageable “essential benefits” at a lower cost than other states? It turns out it would mean a lot. Becoming the leading provider of individual health plans could mean 20,000 jobs in Nevada – making a huge dent in its high current unemployment rate.

 One would think that the federal government and Democrat-led states would be in favor of this also. There is going to be a firestorm when the “essential benefits package” is published for comment and the word “essential” gets abused by special interests and lobbyists who insert their motorized scooter or [name another benefit] in the definition of “essential.” Voters wrath will know no limits when they find out the plane we thought we were all building together won’t fly because the designers forced the use of steel when aluminum was available and more than good enough.

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State-run exchanges are central to the reforms promised by PPACA. Lately, a number of Republican governors have indicated they may not move forward with an exchange in their state. They don’t like the Patient Protection and Affordable Care Act (PPACA) on principle and they’ve taken Florida judge Roger Vinson’s recent ruling that the bill is unconstitutional as justification for a wait-and-see policy. This stance is understandable, but it’s short-sighted and could lead to bigger problems down the road.

From my experience at Extend Health, a well-run exchange is one of the most powerful tools for top-down control of health care costs, as well as for empowering and educating people to be smart consumers of health insurance. More practically, any delay in implementing an exchange will only increase the cost of standing up an exchange later. Building an exchange is not trivial, and while the bill provides guidelines and some requirements, many key decisions are left up to states.

If the Supreme Court doesn’t affirm Judge Vinson’s ruling that the mandate and the rest of the legislation are “inextricably bound” and throw out the entire bill, states will have to make a mad dash to build their exchanges or allow the Federal government to build one for them.

If you’re following developments in this area, you’ll know that legislatures in every state are debating this issue, making critical decisions that could have a serious negative impact on your ability to find and purchase health insurance at an affordable cost. They need to hear from their citizens that exchanges are a good idea.

Visit Extend Health – the nation’s largest private Medicare exchange.

Barack Obama signing the Patient Protection an...

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A prime example of the need for citizens to understand what’s in the health care reform bill is the controversy over the individual mandate.  A majority of those polled say they approve of many or all of the bill’s provisions –except for the mandate.

But I don’t think the mandate is critical to the success of PPACA. There are other ways to incentivize people to buy health insurance, and our experience running a large exchange is informative on this issue too.

Why do so many people buy Medicare supplemental insurance? Two key reasons: guaranteed issue and standardized plan designs. With guaranteed issue, they know they can’t be turned down, and standardized plans offered on an exchange make it easy to compare benefits and find plans that fit their needs.

If you add an annual enrollment period (AEP) to PPACA — which already includes guaranteed issue, standardized plans, and exchanges — you’ll have something that looks a lot like Medicare. People will enroll during the AEP because they won’t want to risk getting sick without coverage – no mandate necessary.

Informed citizens who understand what’s in PPACA can debate my argument and lobby their representatives for or against provisions of the bill – in short they can help shape the future of reform, and make sure it does what it was meant to do: provide health insurance for more citizens of the United States.

Visit Extend Health – the nation’s largest private Medicare exchange.

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