THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE DEPARTMENT OF RISK MANAGEMENT

Transcription

1 THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE DEPARTMENT OF RISK MANAGEMENT APPLYING THE MEDICARE STARS SYSTEM TO THE PRIVATE INDIVIDUAL HEALTH INSURANCE MARKET UNDER THE AFFORDABLE CARE ACT ROBERT HEDGES SPRING 2016 A thesis submitted in partial fulfillment of the requirements for a baccalaureate degree in Risk Management with honors in Actuarial Science Reviewed and approved* by the following: Richard London Assistant Professor of Risk Management Thesis Supervisor Ron Gebhardtsbauer Clinical Associate Professor of Actuarial Science Honors Adviser * Signatures are on file in the Schreyer Honors College.

2 i ABSTRACT With the increased importance of health insurance for individuals under the Individual Mandate of the Affordable Care Act, this research applies a system used in Medicare in order to improve the current system for this type of insurance. The Affordable Care Act introduced a plan rating system that assesses Medicare Advantage plans on their quality of care and management of chronic conditions, to help push the idea of improved quality of care for patients. These ratings link directly with the financial payments from the government in order to incentivize companies to improve their health care services and achieve higher ratings. By using the Medicare system as a case study, this paper will examine the effectiveness of this system over the past five years for Medicare, and will determine if a similar system would be applicable and beneficial for the private individual health insurance market.

3 ii TABLE OF CONTENTS LIST OF FIGURES... iii LIST OF TABLES... iv ACKNOWLEDGEMENTS... v Chapter 1 Introduction... 1 Chapter 2 Medicare Prior to the Affordable Care Act... 3 Problems in Medicare... 5 Chapter 3 Changes to Medicare in the Affordable Care Act... 8 Star Rating System... 8 Benchmark Payments Chapter 4 Medicare after the Affordable Care Act Chapter 5 Individual Insurance Market Today Insurance Exchanges Metal System Chapter 6 Problems with the Current System Rapidly Increasing Health Care Spending Race to the Bottom Chapter 7 Application of the Stars System Financial Incentives Health Quality Focus Chapter 8 Conclusion Appendix A 2014 CMS Star Cut Points Appendix B Star Rating Calculation BIBLIOGRAPHY... 46

4 iii LIST OF FIGURES Figure 1: Bonus Payments for a 3-Star Plan Figure 2: Bonus Payments for a 5-Star Plan Figure 3: Medicare Advantage Plan Payments Compared to Equivalent Fee-for-Service Costs Figure 4: 2011 Star Rating Spread Figure 5: 2015 Star Rating Spread Figure 6: Map of Types of Public Exchanges Figure 7: Metal System Deductibles and Actuarial Values Figure 8: Graph of Health Care Spending Growth vs GDP Growth... 29

5 iv LIST OF TABLES Table 1: Star Rating Breakdown... 9 Table 2: Cut Points Example Table 3: Quality Bonus Payment by Star Rating Table 4: Rebate Percentages by Star Rating Table 5: Number of Policies with Lower Premiums, Deductibles, and Out-of-Pocket Maximums than the Cheapest Plans on the Exchange... 32

6 v ACKNOWLEDGEMENTS I would like to take the time to thank all of those that helped me complete this endeavor. First, I would like to thank my two readers, Richard London and Ron Gebhardtsbauer, whose insight and advice greatly aided me in the completion of this process. I also thank my mother, Deirdre Hedges, for always being there for me no matter the problem. Thank you for always listening to my stressed out phone calls and for reviewing all of my work. You have always been my biggest supporter throughout life, and I always know that I can count on your help and advice in my times of need. Finally, I would like to thank Nikki Cheshire, for being there for me and suffering through all of the stress with me. Having someone else working by my side kept me focused and productive during crunch time. I truly appreciate all the support that you and many others provided me over the past years, without which I would not be where I am today.

7 1 Chapter 1 Introduction The Affordable Care Act (ACA) changed the landscape of so many different areas of health insurance when it passed through Congress in The most well-known impact of the bill was the Individual Mandate, which requires that all eligible Americans have at least basic health coverage or pay a tax. 1 The Individual Mandate led to the creation of exchanges in order to meet this new demand for insurance, and made individual insurance a prominent part of healthcare in today s society. As with any new system, the first few years did not always work out as planned and some unforeseen issues arose. This thesis looks into whether or not the individual insurance market would benefit from a plan rating system similar to the stars system used by Medicare. The first half of the thesis uses the U.S. Medicare system as a case study to focus on the impact of a system that ties performance directly to government payments. Chapter 2 presents a brief history of Medicare prior to the passing of the Affordable Care Act in Problems in the prior system will be identified to see why there was a need for change under the ACA. Chapter 3 gives an overview of all the changes that the Affordable Care Act made in the Medicare market. It then explains the 5-star plan rating system in more detail, to show the factors upon which the Center for Medicare and Medicaid Services (CMS) evaluates each plan, how the star ratings are calculated, and how these ratings tie directly to financial incentives for the insurance companies. Chapter 4 looks at the current landscape of the Medicare Advantage 1 See [27]

8 market in the U.S., to determine what the effects of the changes to the system were and if they 2 actually solved the prior problems with Medicare. Through this process, the true value of this plan rating system for the Medicare market can be determined. The second half of the paper analyzes the individual insurance market. Chapter 5 gives an overview of the current system for individual health insurance. It discusses how the insurance exchanges work and the metal level system used to show plan costs. Chapter 6 discusses the problems with the current system in the individual marketplace, primarily providing the wrong incentives for insurers. Chapter 7 proposes an adaptation of the Medicare stars system for the individual system. The chapter discusses the similarities and differences in the problems that exist in the current individual insurance market and the pre-aca Medicare market, and how this system could address the problems with the individual insurance market. It then suggests possible adaptations to the star system to tailor it to fit the individual insurance market s needs. Chapter 8 offers an overall conclusion on whether or not the adaptation of Medicare stars is a good idea for the individual insurance market.

9 3 Chapter 2 Medicare Prior to the Affordable Care Act When insurance companies decide whom to accept for health insurance coverage, they try to avoid people who are high risks and are more likely to have larger medical bills. Historically, this led to pricing and acceptance decisions based on variables such as applicants ages and prior medical conditions. Older populations are typically higher risks, as they either already have chronic conditions or are more prone to future medical issues than, say, a 20-year old. As a result, it became very hard for the older population, especially those 65 years and older, to obtain private health insurance. A survey done during the Kennedy Administration revealed that more than 56 percent of people over 65 years of age did not have private health insurance. 2 The lack of health insurance became a pivotal societal problem and a huge focus for several politicians. Despite the attention, it took several decades to establish a national plan. The initial push came under the Truman Administration in the mid 1940 s, but nothing came to fruition until In that year, the Johnson Administration passed a bill that created Medicare and Medicaid, creating the much-needed national health plan for seniors. 3 Over the past 50 years, Medicare has seen many changes and has evolved in an attempt to provide better coverage for older Americans. Initially, Medicare was only available for people over the age of 65 and consisted of two parts called Part A and Part B. Part A covers hospital insurance, which pays for inpatient care in 2 See [4] 3 See [16]

10 4 hospitals and other nursing facilities; Part B covers outpatient procedures, including ambulances, select transplant procedures, diagnostic tests, and screenings. 4 Between Parts A and B, seniors then had medical coverage for most inpatient and outpatient procedures that would have otherwise been very costly for them without insurance. The first expansion to coverage came in 1972 when President Nixon signed a bill making more people eligible for Medicare. People under the age of 65 who had either long-term disabilities or end-stage renal disease became eligible for Medicare coverage. 5 These people had the same difficulties as the over-65 population when it came to getting private health insurance. Their disabilities or disease created high medical costs, making them undesirable clients for insurers. By expanding Medicare eligibility, another large group previously unable to receive health care coverage was now able to do so. In the past 20 years, two different laws have created two new parts to Medicare in order to provide increased coverage for consumers. The first of these laws was the Balanced Budget Act of 1997 (BBA), which created Medicare+Choice plans. These plans are currently known as Medicare Part C or Medicare Advantage. 6 Medicare Advantage plans are private insurance plans sponsored by the Medicare Program. These plans typically cover all the services provided under Parts A and B, while also giving coverage for urgent and emergency care and other medical expenses such as vision and dental. 7 Since these plans get monthly per capita payments from the Medicare Program, most of the money to pay for medical costs comes from the Medicare 4 See [4] 5 See [4] 6 See [9] 7 See [4]

11 5 Program itself, so the cost of this medical coverage is still paid by the government. In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) was passed, which, starting in 2006, expanded Medicare coverage to include another optional part. This coverage is Medicare Part D; it provides seniors with prescription drug plans, which Medicare Parts A and B, and most Medicare Advantage Plans, do not cover. 8 Medicare Part D coverage lowered outof-pocket costs for a long list of covered drugs, some of which can be very costly. Through the addition of Parts C and D, Medicare was able to offer additional coverage to seniors in order to further reduce their personal medical costs and provide private options to enable customizable coverage to fit a person s specific insurance needs. Problems in Medicare Despite the changes made to Medicare over the past decades to make health coverage more accessible to the older population and to increase its scope of coverage, Medicare still faced several large problems. The primary problem was the large cost of medical coverage, coupled with the fact that medical costs were continuing to rise. In the several years prior to passage of the Affordable Care Act, the average plan payments for Medicare Advantage Plans were consistently greater than 110 percent of the fee-for-service costs, with that number reaching 114 percent in 2009, the year before passage of the Affordable Care Act. 9 Medicare fee-forservice plans are plans offered through the Medicare Program and provide coverage for Parts A 8 See [23] 9 See [26]

12 6 and B for eligible people. 10 This means the private Medicare plans were consistently spending a larger amount on health coverage than the government s plans. Ideally, these numbers would be closer since Medicare Advantage should be offering coverage similar to the government plans, and despite the additional coverage, would not need 10-15% additional spending to cover these costs since urgent care and prescriptions are less expensive than hospital care. This additional spending implies some waste and inefficiencies in the private Medicare programs. Since Medicare pays a benchmark fee to these plans, reducing costs to be more consistent with those of fee-for-service Medicare plans would be beneficial. In addition to the high medical costs, Medicare s long-term solvency is another primary concern. The current problem centers on the HI Trust Fund, one of the two trust fund accounts held by the U.S. Treasury to pay for Medicare Costs. The HI (Hospital Insurance) Trust Fund mostly covers Medicare Part A benefits (hospital insurance); payroll taxes provide the primary source of revenue for this fund. 11 When the fund was initially set up, the payroll taxes easily covered the Medicare expenses. However, the expenses have increased due to increasing Medicare membership and increasing medical expenses, leading to insufficiency of the payroll taxes. In 2008, hospital insurance expenses surpassed the income from payroll taxes, and this deficit was projected to continue indefinitely; by 2024, the reserves built up in the HI Trust Fund would have been depleted, making the fund insolvent. 12 The incoming payroll taxes would still account for about 75% of the costs for Medicare Part A, but there would still be a large deficit every year that would require government funding. Either increasing payroll taxes or cutting 10 See [22] 11 See [18] 12 See [25]

13 7 medical costs could diminish this deficit. 13 Of the two options, cutting medical costs made more sense, due to the existing concern over rapidly rising medical costs. The HI Trust Fund solvency issue made reducing medical costs a more pressing matter. Medicare also lacked incentives for improving quality of care. The payments for Medicare were determined based solely on the quantity, not quality, of care that a person received. 14 This formula may have led to some healthcare providers not prioritizing the quality of care that they were providing for their patients. There were no incentives for creating better procedures, so there was no need to spend the money to improve the quality of care. Ideally, healthcare providers should strive to provide the best possible care for their patients and continually improve their systems and practices to achieve this goal. As the current payment system was not supporting improved quality of care, it became a big emphasis in the changes to Medicare under the Affordable Care Act. 13 See [25] 14 See [2]

14 8 Chapter 3 Changes to Medicare in the Affordable Care Act In March 2010, Congress passed the Patient Protection and Affordable Care Act (ACA), bringing changes to all aspects of the health insurance industry; one large area of focus of the ACA was the Medicare Advantage Program. 15 The government realized that the problems mentioned in the prior chapter needed to be changed in order for Medicare to keep running effectively and to improve patient care for senior citizens. The two main changes provided by the ACA were creating the star rating system and reduced Medicare benchmark payments. The star rating system addressed the quality of medical coverage, while the benchmark payments dealt with the unfair subsidies being paid to the Medicare Advantage plans. 16 Star Rating System A primary goal of the ACA was to shift the focus of medical plans to quality of care. In order to do this, the ACA created a star rating system to grade each plan on quality; financial incentives were tied to the star ratings to achieve the desired results. 17 The system works by 15 See [26] 16 See [26] 17 See [26]

15 9 rating each Medicare Advantage contract on a scale from 1 to 5, at half-star increments. 18 CMS defines the star ratings according to the following scale: Table 1: Star Rating Breakdown 19 The final star rating is determined from a weighted average of individual measures. These individual measures for Medicare Part C span five larger domains of quality: (a) staying healthy (screening, tests, vaccines); (b) managing chronic (long-term) conditions; (c) ratings of plan responsiveness and care; (d) member complaints, problems getting services, and choosing to leave the plan; and (e) health plan customer service. 20 Staying healthy includes measures on whether members got various screening tests; managing chronic conditions includes measures for members with a given condition getting the necessary tests and treatments to manage their condition. 21 Different measures are given different weights depending on how important CMS determines the area to be. For example, outcomes and intermediate outcomes are weighted at three times the value of process measures. 22 Each individual measure receives a rating of 1 to 5; these ratings are determined by comparing data for a particular plan to a series of cut points, or thresholds, which determine what 18 See [21] 19 See [21] 20 See [6] 21 See [31] 22 See [6]

16 constitutes the minimum for each star level for each measure. A sample table of cut points for 10 breast cancer screening is shown in Table 2, and a more detailed example can be seen in Appendix A. Table 2: Cut Points Example 23 Measure Name Breast Cancer Screening Measure 2014 CMS Cut Points Type 1-Star 2-Star 3-Star 4-Star 5-Star Process <50% 50% 63% 74% 81% To determine a plan s individual rating for breast cancer screening, the raw score for the plan is calculated. The raw score is defined by the ratio. For example, if a Medicare Advantage plan has 100,000 female members who are in the suggested age range for breast cancer screening, but only 70,000 of those members have the screening done in the given year, that plan would have a raw score of 70% for the breast cancer screening measure. The plan s raw score of 70% is compared to the cut points to determine the plan s rating for breast cancer screening. The raw score of 70% is greater than the 3-star cut point of 63% but is less than the 4-star cut point of 74%, so this plan would get a score of 3 for the breast cancer screening measure, as individual measures only use whole number values for their ratings. The same process is followed for all the individual measures to get a rating of 1 to 5 for each measure. 23 See [30]

17 11 In addition to the individual measures, two other statistics become part of the final star rating calculation: quality improvement and reward factor. Quality improvement rewards plans that show statistically significant improvement in their star ratings, coinciding with the goal of improving the quality of care each year. The reward factor rewards contracts with high mean scores and low variances across all measures to promote consistently high quality health care across the plan. 24 Quality improvement is treated as another individual measure and is averaged into the weighted average calculation; afterwards, the reward factor is then added to the weighted average. The resulting number is rounded to the nearest half and becomes the overall star rating for the plan. Appendix B shows this process in more detail. Benchmark Payments The benchmark payment rate is the maximum that CMS will pay an organization to provide traditional Medicare benefits in a given county. 25 In order for companies to receive money from CMS to cover their Medicare costs, they submit a bid amount, which is a projection of the plan s cost to provide Medicare benefits to its members relative to their health status. This bid is compared to the benchmark in order to determine the amount the provider receives from the government. If the bid is under the benchmark, the insurer receives the bid plus a portion of the difference between the two as a rebate to provide further benefits or cost-savings to its 24 See [6] 25 See [6]

18 12 members. If the bid is above the benchmark, the insurer only receives the benchmark from the government and has to charge the extra amount to its members in the form of a premium. 26 The Affordable Care Act changed how the benchmark is determined and the bidding process itself. Since Medicare Advantage plan payments were consistently higher than fee-forservice costs, the ACA tried to close the gap between the two costs by basing the benchmarks on fee-for-service costs in a given county. Counties are now separated yearly into four quartiles based on their fee-for-service costs, and each quartile takes a different percentage of its fee-forservice. The quartiles receive 95%, 100%, 107.5%, and 115% of the fee-for-service costs, respectively. 27 By directly basing the benchmark rates on fee-for-service costs, the gap between the two Medicare costs should close. The bid process was also changed by linking the star rating to the process. Plans now receive a quality bonus payment if their star rating exceeds a certain value. The bonus increases the benchmark rate by a certain percentage for each of the higher star ratings, allowing insurers to submit larger bids and get more money back from rebates for bids under the benchmark. 28 Additionally, the rebate percentage was changed to directly reflect the star rating rather than the flat 75% rebate that existed prior to the ACA. 29 The following tables show the percentages for the quality bonus payments and rebate percentages over the years they were phased in after the ACA was passed. 26 See [6] 27 See [26] 28 See [21] 29 See [26]

19 Table 3: Quality Bonus Payment by Star Rating Table 4: Rebate Percentages by Star Rating 31 As the system was very drastically changed, the first few years were considerably generous in their quality bonus payments and rebate percentages. The idea behind the scaling back was that insurers would see the results in the first year and be able to adjust in the following years to improve their star ratings and thus the quality of their health care. The 2015 quality plan bonus reflects the definitions of the different star ratings; 4-star and above is considered above average, so above-average plans are now rewarded for their better quality. The rebate percentages follow a similar pattern, where all star ratings received similar rebates in 2012, but, as the years progressed, the benefits for below-average plans decreased. From 2014 onward, plans receive an increase in rebate when they achieve 3.5 stars, or are average, and then again if they achieve 4.5 stars, which is above average. The quality bonus payment and rebate percentages tied to star ratings give insurers a financial incentive to achieve higher ratings. The following figures 30 See [6] 31 See [6]

20 14 demonstrate the financial impact of achieving higher star ratings and the changes brought by the ACA. Figure 1: Bonus Payments for a 3-Star Plan See [21]

21 15 Figure 2: Bonus Payments for a 5-Star Plan 33 In each figure, the left side shows the benchmark without the quality bonus payment, and the right side shows the benchmark with the bonus. The black dotted line denotes the bid that the insurer submits, and the orange dotted line shows how much the insurer would receive after the rebate but without the quality bonus payment. The orange bar on the right side shows the additional money that the company earned due to the increased benchmark from the bonus payment. As indicated by its size, the additional money is a significant amount and represents a large financial incentive for insurers to receive better star ratings. Furthermore, the difference between getting 3 or 5 stars in 2012 was also financially significant. 33 See [21]

22 16 Chapter 4 Medicare after the Affordable Care Act It has now been five years since Congress passed the Affordable Care Act, and all the new initiatives have completed their progression to desired levels. This five-year period is ample time to determine if the intended effects of the Affordable Care Act are becoming reality and the pre-aca problems are diminishing. To assess the success of the Affordable Care Act, this chapter explores the issues of rising medical costs and plan quality in further detail. One of the biggest problems with Medicare Advantage prior to the ACA was the large difference between Medicare Advantage costs and similar fee-for-service costs. The main initiative intended to solve this problem was the benchmark payment rate changes discussed in Chapter 3. Overall, this initiative was very successful. The following graph shows Medicare Advantage costs as a percentage of fee-for-service costs for the past ten years.

23 17 Figure 3: Medicare Advantage Plan Payments Compared to Equivalent Fee-for-Service Costs 34 Prior to the Affordable Care Act, Medicare Advantage plan payments were at least 12% higher than fee-for-service costs. Over the past five years as the new benchmark plan was phased in, this excess has dropped to only 2% in Its goal was to bring Medicare Advantage plan payments closer to fee-for-service costs, and it is clear that the ACA has had success toward that goal. A 12% decline in 6 years is a very good indicator of the law s success. These levels will most likely stay very similar in future years, as Medicare Advantage costs will always be higher than the fee-for-service costs due to the system described in Chapter 3. Half of the counties in the country receive more than 100% of the fee-for-service costs, a quarter receives less than 100% of the fee-for-service costs, and the final quarter receives the exact fee-for-service costs. The given percentages will always average out to be more than 100%, so the Medicare Advantage costs will always be higher than the fee-for-service costs. Nevertheless, a 2% increase in costs is an acceptable level and should be a goal going forward. 34 See [26] 35 See [26]

24 Under the ACA, Medicare Advantage plans receive less money from the government 18 than before the law passed to cover their medical costs, so insurers have to adjust accordingly to remain profitable while also staying competitive and retaining their members. The primary way companies deal with medical costs is to achieve a higher star rating. CMS ties large financial incentives to achieving a higher star rating, and companies with above-average plans are eligible for more money from the government. Insurers began to understand the importance of the star ratings and, therefore, began to focus on it as a primary business goal. The following charts show the plans that fall under each star rating level in 2011 and Figure 4: 2011 Star Rating Spread See [26]

25 The star rating program began in 2011, and the graph in Figure 4 shows the quality of care 19 provided by Medicare Advantage plans at that time. That year, CMS rated 60.1% of the plans to be average in their coverage and another 15.8% of plans as below average. 37 These numbers give a good picture of the lack of good-quality Medicare Advantage plans when the ACA passed through Congress and the need for improvement concerning quality of care. Four years later, the percentage of plans in each star rating level is drastically different from the levels shown in Figure 4. Figure 5: 2015 Star Rating Spread See [26] 38 See [26]

26 The 2015 data shows a drastic improvement in star ratings. CMS only rated 2.7% of plans as 20 below average, a large decline from 15.8% in Furthermore, over 60% of the companies achieved above-average or excellent ratings, whereas in 2011 only 24.1% of the plans achieved a 4-star rating or better, also showing the large push for better quality health care. 39 With the stars program fully implemented, only 4-star or better plans receive the 5% quality bonus payment, so getting a 4-star rating should be the goal for all Medicare Advantage plans. 61.4% of plans are meeting this goal, which is an impressive number, considering a plan has to be better than average to receive the bonus. It is reasonable to expect similar results in future years as insurers have now fully adapted to the star system. As companies achieve higher results, CMS will be able to elevate the threshold for what is considered average, and continue to push companies to improve the quality of their medical coverage. Overall, the Affordable Care Act and the star rating system have been very beneficial for the Medicare Advantage market. Although government payments to plans were reduced, most companies were able to save costs in different places. Companies sought higher star ratings to receive more money from the government, but also found ways to cut costs through methods such as managing administrative costs, improving coding to capture all patient chronic conditions, and decreasing profit targets. 40 The financial implications did lead to a reduction in the number of Medicare Advantage contracts by 10% and the number of plans by 30%, but the declining number of plans did not inhibit Medicare enrollment. Medicare Advantage enrollment has increased more than 40% since the passing of the ACA, and is expected to continue its 39 See [26] 40 See [26]

27 21 growth in future years. 41 A lot of this future expected growth is attributed to the aging babyboomer population, who will become eligible for Medicare in the next 5-10 years. Despite the reduced government payments, the changes made by the ACA have definitely benefitted the Medicare Advantage market and appear to have fixed the major problems that existed prior to the passing of the law. 41 See [26]

28 22 Chapter 5 Individual Insurance Market Today The current structure of the private insurance market for individual consumers is also a direct result of the Affordable Care Act. The Affordable Care Act s Individual Mandate required that all eligible Americans have at least basic health coverage or pay a tax. 42 Furthermore, the Affordable Care Act prohibits insurers from denying coverage or charging higher premiums based on a person s pre-existing health conditions. 43 This new regulation brought in many people who had previously been unable to get health insurance, either from being unable to pay the high premium costs due to their health status or from insurance rejection due to their pre-existing conditions. Both of these factors led to a large increase in demand for health insurance from those previously uninsured. The need to meet this new demand in an effective manner led to the creation of insurance exchanges. Insurance Exchanges The government created insurance exchanges that could be used to buy health insurance. An exchange is an online marketplace allowing shoppers to research and purchase various health insurance options. 44 The exchanges allow potential customers to find many options in one place 42 See [27] 43 See [15] 44 See [15]

29 23 and make searching for, and buying, health insurance much easier. These exchanges are of two types: public and private. Under the Affordable Care Act, every state is required to offer an exchange to its residents. The responsibility for creating and running the exchange can be left to either the individual state, the federal government, or a partnership of the two. Figure 6 shows the type of exchange that each state employs; federally-run exchanges are currently the most popular. Figure 6: Map of Types of Public Exchanges See [34]

30 Since the government runs these exchanges, they are called public exchanges. 46 The public 24 exchanges also include a metal system, which splits plans into groups based on their level of coverage. This information makes it easier for people new to health insurance to shop for plans that fit their needs. 47 This system is discussed in more detail later in the chapter. The other type of exchange is the private exchange. Although they are not a direct part of the Affordable Care Act, they were created to serve the same purpose as the public exchanges described above. These exchanges are created by the private sector, whether by health insurance companies or consulting firms, and offer insurance to both individuals and small employer groups. Private exchanges offer a way for employers to give employees a fixed amount to spend on health insurance, and then let them shop on a private exchange with insurance options selected by the insurer. 48 This gives employers a cost-effective way of providing health benefits to their employees. The main functional difference between private and public exchanges is that public exchanges offer subsidies to low-income individuals to make insurance more affordable for them. This leads to many individuals purchasing insurance from the public exchanges, especially if they are eligible for the subsidy. Employers tend to favor the private exchanges, as they are more cost-effective for their insurance needs. 46 See [15] 47 See [15] 48 See [15]

31 25 Metal System Currently, the private individual insurance market uses a metal rating system to inform consumers of the benefits and coverage of a particular plan. There are five levels of plans: catastrophic, bronze, silver, gold, and platinum. 49 The costs that a plan will cover are the main determinant of which level a given plan is in. Bronze plans typically cover 60% of medical costs, silver plans cover 70%, gold plans cover 80%, and platinum plans cover 90% of costs. 50 The lowest level, catastrophic, is specialized inexpensive insurance for people under the age of 30 who cannot find coverage for less than 8 percent of their income. 51 These plans cover only a very limited scope of medical costs, so typically they will cover less than 60% of all costs. Monthly premiums are determined based on the amount of medical cost coverage, so the higher level plans, gold and platinum, will have higher monthly premiums than bronze and silver plans. The individual is responsible for paying the not-covered medical costs out-of-pocket, so the bronze plans will have the highest out-of-pocket costs. 52 Overall, the different tiers represent a trade-off that consumers have between higher monthly premiums and higher out-of-pocket costs. The following graph is a good depiction of the trade-off between plans. 49 See [1] 50 See [36] 51 See [1] 52 See [36]

32 26 Figure 7: Metal System Deductibles and Actuarial Values 53 As the plan increases in actuarial value, or percentage of average costs covered by the plan, the average deductible decreases, so consumers must find a plan that suits their coverage and cost needs. People with less income, such as young adults, will tend to select the bronze and catastrophic plans due to their low premiums along with their own health being typically in good condition, so they will not need large coverage. 54 On the other hand, people with medical conditions that require many medical visits will have high medical costs, so a plan with a larger coverage would probably be better. Despite the cost differences, plans in different metal levels, including catastrophic plans, all offer the same essential health benefits. All plans are required to provide a minimum level of coverage, or essential health benefits, for ten categories of medical coverage: prevention and 53 See [29] 54 See [1]

33 wellness, outpatient care, laboratory services, emergency care, hospitalization, maternity and 27 newborn care, pediatric care, mental health and substance use disorder services, prescription medications, and rehabilitation and habilitation. 55 There are slight differences in coverage for catastrophic plans beyond the essential health benefits. All metal plans cover their respective percentage of health care costs and preventative services for the monthly premium. Catastrophic plans cover specified preventative services and three primary care visits, after which a deductible of $6,600 for an individual or $13,200 for a family must be exceeded for the plan to cover additional costs. 56 Using the metal tier system, consumers can determine which metal level best fits their budget, allowing them to compare plans with similar coverage. Knowing that these plans provide roughly the same benefits, the consumer can focus on other aspects, such as the network of providers in each plan, to determine the most appropriate plan. 57 If two plans offer the same benefits, but one has a more convenient health network, the consumer will likely choose the plan with better local coverage. 55 See [28] 56 See [1] 57 See [28]

34 28 Chapter 6 Problems with the Current System Like any new system, the exchange system has not worked out as well as planned. After five years of existence, several problems with the system have become quite clear. These problems, discussed in this chapter, need to be addressed if the system is going to work well in future years. Rapidly Increasing Health Care Spending One of the biggest problems in all of healthcare, not just the exchanges, is the rapid increase in health care spending over the past decades. From , the average annual real GDP growth for the U.S. was 2% whereas the average annual real health care growth rate was 5.1%. 58 This means that health care spending was increasing about 2.5 times as fast as total national spending over the course of the 32-year period. This trend continued in the past decade and is still a problem in the U.S. today. Figure 8 below illustrates the overall effect of this trend. 58 See [14]

35 29 Figure 8: Graph of Health Care Spending Growth vs GDP Growth 59 After 50 years of growth, health care expenditures are now 8 times the amount they were 50 years ago. Contrasting this with GDP, which is less than twice what it was 50 years ago, and wages, which only grew 16% in 50 years, the financial implications for families is obvious. 60 The more rapid growth in health care spending means that it will keep taking a larger portion of the family budget with each passing year, so less money will be available for other consumption. 59 See [10] 60 See [10]

36 30 Although this spending problem is not a direct result of the Affordable Care Act, the law has restricted our ability to address this problem. Under the law, there are restrictions on the consumer s ability to choose fewer benefits, so they have to spend money for benefits they may not necessarily want, and more cost sharing by the insured party, further increasing out-of-pocket expenses. 61 Furthermore, the global budgets in the ACA place restrictions on what the government can spend to cover health care costs. Concerning the insurance exchanges, the ACA will restrict the growth of federal tax subsidies after At that point, these subsidies can have a growth of no more than 0.5% larger than the growth of real GDP per capita. 62 However, health care spending is growing faster than real GDP, so that as costs continue to rise in the future, people will receive proportionally less financial aid from the government, further increasing future health care costs for families. The large growth in health care spending is a big problem for the entire industry, but the burden may be greatest for the exchanges, since the exchanges focus on the people who cannot afford an increased financial burden. Race to the Bottom Another large problem with the exchange system under the Affordable Care Act is the fact that it incentivizes insurers for the wrong reasons. Under the Affordable Care Act, insurers have to charge the same premium to all its enrolled members in a specific plan, regardless of their health status. Since people with poor health status will require more health care, their costs will be higher and need to be accounted for by higher premiums to all members. As a result, the 61 See [13] 62 See [13]

37 31 insurers have to over-charge healthy members to offset some of the costs from the sick members, who they effectively under-charge. 63 In this system, insurers make a profit on the healthy members, but can face large losses from the sick members; therefore, there are natural incentives leading insurers to attract healthy members and push away sick members. These natural incentives have led to insurers tailoring their plans toward healthy members. The Affordable Care Act mandates the benefits insurance plans must cover, but it leaves the premiums and the access to providers up to the insurer. According to conventional wisdom, only sick people focus on the network of providers that an insurance plan covers, as they will need to go frequently to the providers for treatment. On the other hand, healthy people tend to focus on the price of the plans, as they do not need frequent treatment. 64 Therefore, insurers try to keep the premiums on their plans as low as possible in order to attract the highest number of healthy consumers. In order to make premiums lower, insurers make their plans have very narrow networks and high deductibles, neither of which appeals to the sick population. These features result in the insurance company getting more healthy members and avoiding large numbers of sick members. This results in a phenomenon known as a race to the bottom (in this case, a race to the bottom of health care access), where insurers try to cut their premiums as low as possible in order to attract the largest number of healthy members. 65 In most markets, a race to the bottom will not occur, but it is possible in the insurance market due to the incentives for buyers. Healthy members do not need the wide range of coverage that high-premium plans provide, so they can buy on price and pick plans with the lowest premiums. If healthy members 63 See [13] 64 See [12] 65 See [13]

38 32 become sick, they can then switch to a higher-premium plan providing the best coverage for their specific sickness. However, since insurers cannot charge more for sick members under the ACA, newly sick persons will essentially receive a discount for the coverage they need. 66 Since insurers have an incentive to price low, and healthy members can buy at a low price until they need expanded coverage, the race to the bottom becomes possible within this system. In 2013, the National Center for Public Policy Research performed a study on the effects of ACA regulations coming into effect that year on the health insurance exchanges. The following table from that study shows the number of policies in 10 major cities throughout the country that offered lower premiums and lower deductibles and out-of-pocket maximums when compared to the least expensive plans on the exchange. Table 5: Number of Policies with Lower Premiums, Deductibles, and Out-of-Pocket Maximums than the Cheapest Plans on the Exchange 67 Table 5 focuses on 27-year olds, as this age group is a large player on the exchange. Under the Affordable Care Act, family insurance plans are able to cover children until the age of 26, after 66 See [13] 67 See [17]

39 which they are required to purchase their own health insurance. 68 The exchanges offer an 33 inexpensive and subsidized way for young people, no longer eligible under their parents insurance, to obtain coverage for themselves. Places with large numbers have more polices deemed to be of better quality than the lowest-cost policies on the exchange. 69 Overall, these areas had an average of 33 policies that were better for each metal tier than the exchange s policies. 70 It is clear that the Affordable Care Act caused the plans on the exchange to have less financial quality than before the law. Furthermore, the types of plans available changed considerably after the new regulations. The two most common types of health insurance plans available today are HMO plans and PPO plans. HMOs (health maintenance organizations) are more restrictive plans where the insured has a primary care physician through whom all health care services go. Whenever members have health problems, they first visit their primary care physicians, who will then refer them to an innetwork specialist. 71 PPOs (preferred provider organizations) offer more flexibility since they do not have primary care physicians. Under this plan, a member can go to any healthcare professional without a referral, but has lower costs and more coverage by going to professionals within the network. 72 PPOs offer coverage that is more complete and have a broader network when compared to that of HMOs. However, PPOs are the less common plan on the exchange. In 2013, the private market offered, on average, 32 more PPO plans for 27-year olds than the public 68 See [19] 69 See [17] 70 See [20] 71 See [37] 72 See [37]

40 34 exchanges. 73 In order to keep costs and premiums lower, insurers started to offer narrow network products (HMOs), despite the decrease in health care accessibility and coverage. Coupled with the previous study, this data shows that the quality of plans decreased due to the Affordable Care Act regulations. These incentives can actually drive insurers away from creating the best possible coverage for their members, which is counterproductive. There are some insurance plans on the exchange that do not provide good coverage for its members and are not quality products; rather they seem to be tools for insurers to make money from a flawed system. 73 See [17]

41 35 Chapter 7 Application of the Stars System The big question with the individual insurance market is how to fix the problems discussed in the prior chapter in order to make the system more effective. Although rapidly rising health care costs are a large problem affecting the individual insurance market, the problem affects the entire healthcare industry, so a change just to the individual insurance market will not solve the whole problem. On the other hand, the race to the bottom is a localized problem for this market, so a change to the individual insurance market system could successfully solve this problem. In order to stop the race to the bottom and improve the quality of health care plans, the root of the problem needs to be addressed: the misaligned incentives for insurers and consumers. Under the current system, the insurers have no incentives to focus on the quality of health care that their plans provide, which allows the healthy consumers to focus only on price when they are buying insurance. To fix this problem, insurers need to be given a reason to focus on the quality of their plans, rather than just offering the cheapest possible premiums. The individual insurance market should look toward Medicare and its star rating system as an example of how proper financial incentives can lead companies to perform desired actions. After just five years in existence, the quality of plans in Medicare has increased substantially, with 61.4% of plans now providing above-average coverage to its members, as opposed to just 24% in the first year of the stars rating system. 74 This improvement was possible because firms 74 See [26]

42 had a significant financial gain if they achieved a higher star rating. The additional payments 36 from the government in terms of increased benchmark payments and rebates could offer a firm millions in additional income, so they did everything possible to improve the quality of their plans in order to gain this additional income. The individual insurance market needs similar financial incentives to convince firms to focus on the quality of the plan, rather than just the premiums. Medicare s star rating system could be applied to the individual insurance market; however, it would need to go through several adjustments to tailor the system to fit the different market. The most important aspects to address are the financial incentives and the specific health quality focuses. Financial Incentives The financial incentives for the individual insurance market will have to be completely different from that of Medicare s star system due to the funding for each system. Medicare pays insurers to provide coverage to the elderly who opt out of Medicare, so it is easy to alter the amount that firm receives depending on the quality of the plan it is providing. However, for individual plans there is currently no monetary transfer between the government and insurance companies, so the financial incentives will have to come in a different form, such as a monetary penalty or a tax break. Several government agencies use monetary penalties to make companies pay for substandard level of quality or performance in various areas. A proponent of this type of financial incentive is the Environmental Protection Agency (EPA). The EPA addresses different

43 aspects of the environment, including air, water, waste, and chemical disposal. It creates 37 regulations defining how much of a certain type of waste a company can produce and/or how it should dispose of such waste. If companies fail to meet the minimum requirements established by the EPA, they can face a variety of different penalties. These penalties often involve payments in the form of settlements or civil penalties to cover the cleanup costs of their mistakes and to take away the economic benefit the firm received from failing to comply with EPA regulations. 75 The threat of financial penalties and settlements from the EPA tends to keep companies in line with the regulations. If healthcare wanted to follow this path, it could have financial penalties for firms that fail to meet an acceptable level of quality for its health care plans. Like the EPA penalties, these financial penalties could take away the economic benefit of creating poor quality, low cost health plans by penalizing firms who cut quality below a designated threshold, therefore incentivizing plans to push for higher quality over lower premiums. The alternate to financial penalties would be positive reinforcement through some kind of financial gain. A common example of this is a tax break. The U.S. government offers various tax breaks for companies in order to entice them to perform certain actions. For example, there are tax credits for the production of ethanol and other alcohol-based fuels, in order to encourage the production of alternative forms of energy to imported oil. 76 Another large tax break is a deduction on manufacturing activities performed within the United States. The goal of this tax break is to encourage companies to keep manufacturing within the United States rather than 75 See[7] 76 See [32]

44 38 outsourcing internationally. 77 The health sector could be modeled after such policies and provide a tax break for companies who produce high-quality health plans. If the potential savings from the tax break are larger than the potential savings from making cheap, narrow-network plans, more firms will focus on creating high-quality health plans in order to receive the financial benefits of the tax break. Depending on the type of reinforcement the government wants to give to firms, there are possible ways to provide the financial incentives in order to make the stars system work. They can either go the route of punishing those failing to meet the standards through sanctions and monetary penalties or they can reward plans who achieve high quality by awarding them a tax break. The method chosen should be determined based on the costs of each system and the potential financial implications for firms. The other aspect of the financial incentives that needs to be addressed is who would manage these incentives. Medicare has its own government agency, Centers for Medicare and Medicaid Services (CMS), which creates and manages all the financial incentives of the stars program. 78 CMS adjusts all the criteria of the star ratings each year and pays the insurers the money that they qualify for based on their bids and star ratings. This streamlines the process of regulating Medicare quality of care, as the whole process is governed by a single government organization. If the stars system were to be adapted to the private individual health insurance market, the easiest way to manage the system and the chosen financial incentives would be for one central government agency to run the system, just like CMS does for Medicare. However, there is currently no such agency in place for the private individual health insurance market. 77 See [32] 78 See [16]

45 Therefore, a new agency would have to be created in the Department of Health and Human 39 Services in order for this system to work effectively. Currently, the Department of Health and Human Services only has eight public health agencies, and the majority of them have been around for over 30 years, with the most recent agency being created in This shows that the government only creates agencies when it feels there is an overriding need for one. In order to create a new agency, a law outlining its purpose would have to be passed by Congress, which would take time and would have considerable opposition, as it would be expanding the power of the government. Another option would be to pass legislation expanding CMS to include the private individual markets. This would allow for a smoother implementation of the new stars system, since CMS has experience with how such a system can work. Although either of these options would require time and effort to adopt, if this star system concept were seen as a worthwhile idea to pursue, it is feasible for this system to be put into place. Health Quality Focus The second area of major change to the star system if applied to private health insurance would revolve around what aspects of healthcare are evaluated. Since the stars system is currently designed for people above 65 years old, it focuses on common health problems for people of that age. The quality incentive program for Medicare focuses on preventive treatment and management of common conditions such as breast and colorectal cancer, diabetes, and 79 See [36]

46 osteoporosis. 80 Appendix A contains a comprehensive list of these measures. What measures 40 should be a emphasized if a stars system were put in place for the individual insurance market? As a starting point, the government could establish a prevalence level for different chronic conditions in the given population, and if any condition is above the prevalence level, it should become a focus of health plans. Most of the chronic conditions followed in Medicare are common for people in their 50 s as well, so many of these measures should be included for members of a certain age. For example, the American Cancer Society recommends that men and women above the age of 50 should get a colonoscopy every 10 years, so colorectal cancer screening should be a measure for members over the age of 50 but not for younger members. 81 A similar procedure should be followed for all Medicare measures to determine the applicable ages for the new population. Several autoimmune diseases are more prevalent in young adults, so they are not included in the Medicare measures. For example, lupus is a chronic autoimmune condition for which 90% of the cases are found in women ages Patients with lupus typically treat the disease with a regiment of various anti-inflammatories, corticosteroids, and immunosuppressives. 83 As a result, a measure on adherence to a lupus medication regiment for those young adults with the condition would be a good addition to the list of measures used in Medicare. Other diseases that are more prevalent in young adults include other autoimmune diseases such as Crohn s Disease, 80 See [30] 81 See [3] 82 See [11] 83 See [35]

47 Celiac Disease, Graves Disease, and psoriasis. 84 Measures for detecting these diseases, and 41 managing them for patients with them, could be created accordingly. Another important area of preventative medicine for younger populations is vaccinations. The Center for Disease Control (CDC) recommends certain vaccinations on a regular schedule for people between the ages of For example, the CDC recommends that people get a tetanus booster vaccine every 10 years in order to prevent contracting this disease. Similar recommendations are made for vaccinations dealing with hepatitis, human papillomavirus, meningitis, and measles. 85 Vaccinations are a large part of preventative care in the U.S. today, so they would be a good measure for the adapted stars system. These measures would be similar to the breast and colorectal cancer screenings, where plan members would need to get the vaccine once every recommended period in order to count positively for the plan measure. The measures focused on by CMS for the Medicare population is a good start for a list of measures for the individual insurance market. With the addition of diseases more prominent in younger people, and other preventative measures such as vaccinations, the new system can provide a comprehensive evaluation of the quality of care provided to the younger population. 84 See [11] 85 See [33]

48 42 Chapter 8 Conclusion The Affordable Care Act brought significant changes to all parts of the health care system in the United States. With many new ideas and systems being implemented under the law, it is not surprising that not all of the changes went as smoothly as planned. The individual insurance market became a more prominent part of the health care landscape after the introduction of the individual mandate. Under its current structure, the incentives for insurers lean in favor of cutting quality in order to reduce premiums, but the reduction of quality goes against the purpose of the Affordable Care Act. The individual insurance market would benefit greatly by looking at Medicare for a solution to this problem. The Affordable Care Act created the star rating system for Medicare in order to tie financial rewards to better quality health plans, and the results make it clear that insurers are encouraged by the financial gain to produce better quality plans for consumers. A similar system tailored to the cost-structure of the market and the health problems of the insured population would greatly benefit the individual insurance market and correct the current issue of misaligned incentives for insurers. If the government believes that it would be a beneficial system to pursue, it could undertake the politically difficult challenge of establishing an agency to oversee the new system. Although it would take some work to accomplish, it is possible to adapt the Medicare star rating system to benefit the private individual health insurance market.

49 43 Appendix A 2014 CMS Star Cut Points Source: See [30]

50 44 Appendix B Star Rating Calculation Source: See [24] Star Ratings were randomly given for each measure Let w i = the weight for each measure, x i = the star rating for each measure, and n = the total number of measures Mean: and Variance: Quality Improvement: o For each measure, calculate the change from last year s score to this year s score o If change/standard error of improvement > 1.96 then measure saw significant improvement o If change/standard error of improvement < then measure saw significant decline