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How Health Insurance Firms -- and Doctors! -- May Game Healthcare Reform

Starting in 2014, the healthcare reform law requires insurers to accept everyone who applies for coverage, regardless of health status. Yet a couple of bloggers point out that insurance companies have been very adept at managing health risk in the past, despite government regulations that prohibit them from cherry-picking healthy patients. This is true, but the incentives the plans provide to physicians may be just as potent as their own policies in this respect.

Aaron Carroll at The Incidental Economist calls attention to a 1997 study that showed that Medicare HMOs were not only attracting healthier-than-average patients, but were also apparently shunting sicker -- i.e., more expensive -- patients to the conventional Medicare program. Specifically, the researchers compared the hospital admission rates of Medicare patients who enrolled in HMOs, those who disenrolled from HMOs and returned to fee-for-service Medicare, and those who remained in the latter program all along. They found that patients who joined senior HMOs had an admission rate during the prior year that was 66 percent that of fee-for-service Medicare enrollees. But those who left the HMOs were subsequently hospitalized at a rate that was 180 percent higher than that of people in traditional Medicare.

To Carroll and to Kevin Drum of Mother Jones, this finding simply means that, despite regulations forbidding the Medicare HMOs from cherrypicking healthy seniors, they were finding ways to do so and to encourage sick people to return to the fee-for-service Medicare program. Noting that the senior HMOs were functioning in a government-run market not dissimilar from the future state insurance exchanges, Carroll writes:

So we had a system where plans were in an exchange-like environment. Regulations prevented cherry-picking. And yet, the insurance companies figured out a way to preferentially cover healthy people. And this was competing with a giant government program.

Drum disputes Carroll's analogy to the insurance exchanges: He suggests that it was relatively easy for the plans to "dump" the sicker patients back in the public system, because Medicare didn't "fight back." Hence the situation will be very different when the plans are duking it out among themselves, he says. In other words, private insurers will treat the sick people badly and compete for the healthy patients. He doesn't say where that might lead; but as I've suggested before, it could motivate some insurers to offer cheaper, lower-benefit plans outside of the exchanges that would primarily attract the healthy.

Yet there's something else in the study of Medicare disenrollment that begs our attention. The researchers note:

The substantial increase in use of inpatient services by [Medicare] beneficiaries after their disenrollment from HMOs suggests that they move into the fee-for-service system in order to obtain needed services, returning to Medicare HMOs after they have obtained these services.

A bit further on, the authors observe:

Alternatively, the pattern of care seeking we have identified may be influenced by the providers. In particular, the independent-practice-association (IPA) model, which dominates the southern Florida HMO market, lends itself to this pattern of use, since most physicians who participate in IPAs work with a variety of payment mechanisms. Thus, patients do not necessarily have to switch providers in order to move from an IPA to the fee-for-service system.

I'd go further than that. As past history shows, some of the physicians whose practices have both prepaid HMO contracts and fee-for-service business will try to convert HMO patients to fee for service plans, which enable the providers to earn more in most areas of the country. In the case of Medicare patients, that means returning to conventional Medicare. For younger patients, it means switching from HMOs to PPOs.

Not that insurance companies don't have their own insidious methods of making it difficult for patients to access care, especially in HMOs. But how they pay providers is equally important in determining how people with serious illnesses are treated.

Image supplied courtesy of Wikimedia Commons.

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