On Sale: Your Health

By on January 7, 2014
Sally Watt in her shop in Lander. Watt is paying less for insurance than she expected.

Sally Watt in her shop in Lander. Watt is paying less for insurance than she expected.

JACKSON HOLE, WYO – Insuring more people may cut health costs in Cowboy State
A WyoFile story by Ron Feemster

Sally Watt, the owner of a picture-framing shop in Lander, Wyoming, expected the health insurance she purchased under the Affordable Care Act to be better and cheaper than what she could buy before. Even with her high expectations, Watt got a better deal than she expected.

“I followed the law very closely,” Watt said. “I used the subsidy calculator on the Kaiser Foundation site, so I knew it would be cheap. I didn’t know it would be as cheap as it is.”

Wyoming’s sky-high premiums do not prevent Watt from receiving a subsidy that puts health insurance among the smallest bills she pays each month instead of the largest. In addition to a discounted premium, the subsidy on her Silver plan also reduces out-of-pocket expenses. Her co-pay for doctor visits will be $10.

Until this month, Watt paid $277 per month for health insurance that she describes as nearly useless unless she suffers serious injuries in an accident. Her co-pay for some doctor visits was 95 percent. When she last went to a specialist for treatment, she paid $142.50 on a $150 doctor bill. Insurance covered $7.50. Under the new coverage, her portion of that bill will be $10, provided that the doctor is in her insurance company’s network.

Matt Mead press conference.

Matt Mead press conference.

Watt was diagnosed with a serious preexisting condition shortly after purchasing her old policy, so she was unable to shop for a better option until the Affordable Care Act came along. No company would have insured her at a price she could afford before the law eliminated discrimination and special premiums for preexisting conditions.

“I was stuck in that policy,” she said in an interview before Christmas.“ The premium [for the new policy] is so low I can’t really believe it. I am not really sure I’ll believe it until I hear from the insurance company.”

Subsidies for most
Anyone who earns less than 400 percent of the federal poverty level qualifies for a subsidy under the ACA. Because median incomes in Wyoming fall below that subsidy limit — 400 percent of FPL is about $46,000 for an individual and $94,000 for a family of four — most residents of Wyoming would qualify for a subsidy if they purchased insurance on the new federal marketplace.

However, residents with higher incomes than Watt may get a much smaller subsidy and pay significantly more for insurance. In fact, those paying full price for insurance will pay the highest premiums in the nation.

In Wyoming, where the Affordable Care Act has been nearly as unpopular as President Barack Obama, and where one of the state’s loudest critics of the law, Sen. Charles Scott (R-Casper), is drafting an Obamacare Relief bill for the coming legislative session, critics of the ACA have fought it from the moment it was passed. The state joined a failed lawsuit to overturn the individual mandate. State officials call the federal insurance exchange a failure, even though they declined to build or even study a state exchange to market policies to the state’s 85,000 uninsured people. Wyoming has so far turned up its nose at federal funding to expand Medicaid to cover the state’s poorest residents.

In a press conference on the Friday before Christmas, Gov. Matt Mead acknowledged that the state needs a plan to cover the 17,000 people who would be eligible for Medicaid but are too poor to buy insurance in the ACA marketplace. Mead says that so far the state does not have a “Plan B” for the poor. But the governor remains committed to the position that Medicaid expansion is not a good option, given what he calls the failure of the ACA to perform.

Sen. Charles Scott (R-Casper)

Sen. Charles Scott (R-Casper)

COST DRIVERS
“Insurance premiums are driven by health care unit costs,” said Michael J. McCue, a professor of health finance at Virginia Commonwealth University. “Drugs, medical devices and procedures in hospitals are the big cost drivers. Utilization has less effect than unit cost.”

So costs per procedure, not necessarily the number of procedures, are what keeps insurance premiums high. During the recent economic slowdown, hospitals treated fewer patients, which also drove up the cost of individual procedures, McCue said: “Hospitals saw lower volume and compensated with higher costs.”

According to McCue and other experts, a higher volume of health care services could drive down unit costs, especially under the ACA’s new regulations of insurance companies. One simple way to increase volume is to give more people affordable access to healthcare. So far Cheyenne has found reasons — critics say primarily ideological reasons — to try to thwart laws that would give more people in Wyoming the opportunity to seek medical treatment at attractive prices.

Scott’s Obamacare Relief may address some of the problems for people who may find the premiums on the ACA exchange too high to pay. But his plan to cover low-income residents seems to focus most on skirting Medicaid policies that offer care without premiums or work requirements. It is not clear that it amounts to much more than an incentive for single low-income adults to take on additional work until they earn 100 percent of the federal poverty level and qualify for insurance through the exchange. It is not clear how people who cannot or will not work might pay for treatment if they become ill.

SPENDING PREMIUMS
Insuring more people puts more premiums — more money — into the system, notes Rick Schum, the CEO of Blue Cross Blue Shield of Wyoming. The ACA’s “individual mandate,” the requirement that everyone have health insurance, is the law’s mechanism for driving more money into the health system. It went into effect this year.

A second part of the law, which went into effect in 2011, requires insurance companies to spend most of the money on direct patient care. Insurance companies must spend 80 percent of all premiums they collect in the individual market to pay for direct patient care.

If companies fail to pay out 80 percent, they must refund the difference to the customers who paid the premiums. The same rule holds in the small-group and large-group markets, except that companies must pay out 85 percent of their revenue for treatment. The enrollment and administration costs of group insurance are lower than in the individual market, so treatment payouts must be higher.

“If that money doesn’t go into funding care, it must be returned to the customer,” Schum said. “It’s a system of checks and balances. If the premiums turn out over years to be too high, they have to be lowered.” Schum forecasts that raising the number of insured people, especially the number of healthy insured people, would drive down premiums in the long run under these two provisions of the Affordable Care Act.

The Centers for Medicaid and Medicare publishes lists of companies nationwide that owe rebates to their customers. In Wyoming, three companies owed rebates totaling $1.2 million in 2011. Five companies owed rebates worth $1.48 million in 2012.

Neither WINHealth Partners nor Blue Cross Blue Shield of Wyoming, the two companies offering policies through the ACA marketplace, owed rebates in either year that the new ACA law has been enforced, according to the CMS figures. This indicates that the premiums charged by those companies, while among the highest in the nation, are in line with the high health care costs in the state.

As Schum is quick to point out, insurance premiums in Wyoming have always been high. The advent of the heathcare.gov site simply brought that fact to the public’s attention.

“We’ve known this for some time,” Schum said. “It was no secret in the insurance industry. What has changed is the level of transparency.”

COSTS AND TRANSPARENCY
The ACA has increased the cost transparency of health insurance, but it has not done the same for the cost of doctor fees and medical procedures. In fact, hospital pricing could hardly look less rational to businessmen who are used to costing out jobs and bidding on them. Steve Loftin, the owner of 71 Construction in Casper, sees wide and, to him at least, inexplicable differences in the cost of services at different hospitals.

Loftin also serves on the board of the Wyoming Business Coalition on Health, which advocates for an “accountable healthcare system that achieves better care, healthier people and competitive costs.”

When Loftin needed rotator cuff surgery, he approached four different hospitals to cost out the operation on his shoulder. That was more difficult than he expected. Instead of just asking what the surgery cost, he had to obtain the six different payment codes that went into the total package — all hospitals use payment codes set by the Centers for Medicare and Medicaid for the anesthesiologist, the surgeon, the surgeon’s assistant, the facility operating room, etc. Then he added up the costs for the six services at each hospital. The sum came to $19,000 at the least expensive hospital and $79,000 at the most expensive. Both of those hospitals were out of state. The two cost estimates in the middle were both in Wyoming. Loftin traveled to Fort Collins, Colo., for the $19,000 operation.

“It was hard to get all of that information,” said Loftin. “I’m not sure that every consumer would be able to do it. I could, because what I do for a living is add up costs. It would make more sense if every clinic had a price for each procedure — like rotator cuff surgery or joint replacement.”

Most providers of health insurance do not know how their costs stack up against the competition. Antitrust laws forbid hospitals from conferring on prices or negotiating together with insurance companies. And unlike consumer electronics stores or car dealerships or even real estate offices, hospitals do not publish their prices.

Loftin said that his surgeon in Colorado did not know that his hospital charged less than others, or that the highest price Loftin was quoted came in at four times the Fort Collins rate.

Vickie Diamond, president and CEO of Wyoming Medical Center

Vickie Diamond, president and CEO of Wyoming Medical Center

Vickie Diamond, president and chief executive officer of Wyoming Medical Center in Casper, understands that prices are high and not very transparent. Her hospital is working to set prices for procedures as a whole so that consumers like Loftin do not have to price them piecemeal.

“Getting bundled or fixed prices is the way to go,” Diamond said. A bundled price would be similar to the amount Loftin arrived at by adding up the various payment codes involved in each shoulder operation. Medicare pays bundled prices to hospitals for many common procedures, including some joint replacements.

Of course, the quality of care is also a big consideration for patients and insurance companies who negotiate prices.

Building transparent systems for tracking successes and adverse events at hospitals would help everyone put prices in perspective. But on a national scale, such efforts are just getting underway. Loftin likes the shape of the Leap Frog Group, a nonprofit that tracks hospital quality. But the system relies primarily on self-reported data, and hospitals can choose whether or not to participate.

A knee replacement in the United States costs about four times as much on average as the same operation in Europe.

A knee replacement in the United States costs about four times as much on average as the same operation in Europe.

HIP REPLACEMENT COST
If hospitals posted bundled prices the market might become more transparent, as the insurance marketplace is becoming more transparent through the exchange on healthcare.gov. The current lack of transparency contributes to highly uneven pricing, as Loftin learned, and to the highest health care prices in the world, according to studies by the International Federation of Health Plans. At the same time, the United States lags behind almost all other high-income countries in basic health outcomes such as life expectancy and infant mortality, according to data from the World Health Organization.

To take one example from the International Federation of Health Plans’ study, the average cost of a hip replacement operation in the United States is about $40,000, around four times the cost in most western European countries.

For most common medical procedures, the United States’ prices are two to three times those in the developed world, according to the study.

FORCING PRICES DOWN
Dr. David Nash, a medical doctor with an MBA who lectures widely on lowering healthcare costs, suggests that the government could reduce Medicare’s bundled prices to force hospitals to think more carefully about the cost of treatment.

Dr. David Nash

Dr. David Nash

At a lecture in Casper last July, Nash said he could increase hospitals’ reflection on pricing if he were allowed to reduce the Medicare payment for three common procedures: congestive heart failure, community acquired pneumonia and myocardial infraction. The change in pricing would force hospitals to evaluate and compensate different departments in the treatment of disease.

To be fair, some of this reflection is going on now, without the incentive of reduced Medicare payments.

Diamond says her hospital managed to cut costs by 2 percent this year, even though the cost of products and supplies she must purchase rose by 4 to 6 percent. Savings frequently stem from tracking patients better. Transitional nurses help educate patients and their families about serious conditions to keep them out of the hospital. And the hospital has expanded its role in community centered wellness programs, which Diamond says have proven to reduce claims for the hospital’s employees, too.

“We want to find ways to reduce expenses so that we can survive on Medicare rates,” Diamond said.

A problem underlying the cost issue is the prevailing payment model throughout American medicine. Fee-for-service payments create an incentive for doing more procedures, not fewer. The more billing codes doctors and hospitals submit, the more they get paid. Wyoming Medical Center, like many hospitals around the country, is exploring a payment structure that offers incentives to physicians who keep patients healthy and bill for fewer procedures.

“The idea is to have a contract with providers. You meet the quality standard and we give you a bonus,” Diamond said. “The doctors are willing to work with us.”

UNCOMPENSATED CARE
Among the greatest drivers of healthcare costs in Wyoming is the ongoing expense of charity care and bad debt. Some of the 85,000 Wyoming residents who lack insurance get sick every year. Many of those are seriously ill and cannot pay their hospital bills. The Wyoming Hospital Association says that such uncompensated care costs state hospitals about $200 million a year. Wyoming Medical Center accounts for about one fourth of that total.

“If I can lower my $55 million in charity care, uncompensated care and bad debt, I can do a lot to lower costs,” Diamond said.
The easiest way to reduce uncompensated care, Diamond says, would be to expand Medicaid and offer the federally subsidized coverage to all Wyoming residents who earn less than 138 percent of the federal poverty level. But in the decision that affirmed the individual mandate, the Supreme Court left the decision to expand Medicaid up to the states. And as it has since the ACA was passed in 2010, the state has fought the law, even when it appears to be against the interest of the state budget and the state’s poor.

“Wyoming is one of the states that will wait a year,” Diamond said. “In Colorado they are saving money. But the more red states will be more hesitant.”

Diamond, like analysts across the political spectrum, expects Wyoming residents to be slow to sign up for insurance on the ACA exchange. In particular, the young and healthy people needed to keep premium dollars flowing, will be slow to sign up.
“We haven’t seen them signing up nationally yet,” Diamond said. “In Wyoming, we expect people to wait and pay the penalty [for not having insurance] the first year.”

Like Scott, the state senator who has led the fight against Obamacare, Diamond expects the first people to sign up for insurance to be those who need coverage but were denied or charged extremely high premiums before the ACA was passed. But while Scott sees this adverse selection as one of the reasons the ACA will fail, Diamond views it as a temporary setback.

“We are going to see adverse selection in the beginning,” Diamond said. But in her mind, that was priced into the market. “The insurers planned on that.”

Watt, who signed up in time to be insured this month, could be viewed as a case of adverse selection. She was unable to shop for a better policy until now because of a preexisting condition.

But as it turns out, she is not planning to use her insurance often. She treats her condition with non-traditional medicine, which neither her old nor new plans cover. She orders one pharmaceutical drug from a Canadian supplier who was recommended by a Lander physician. If she does not suffer an accident or a major illness, the cost of her treatment is sure to fall well below 80 percent of the premiums that she and the government pay to WINHealth.

In that case, Watt and others like her will be part of the market mechanism that helps reduce health care costs in Wyoming. If she does need the coverage, she will be among the low-income Wyoming residents who do not need to worry about oversize medical bills. And with that she will be one of the patients that hospital administrators like Diamond need not write off as bad debt.

Either way, insuring Watt and many like her could, in the long run, lower insurance premiums in the state.

“Where health care unit costs are lower, insurance premiums are lower,” said McCue, the health finance researcher at VCU. “In general, whatever reduces costs reduces premiums.”


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