First posted 8/24/11 on the Health Affairs Blog
Copyright ©2011 Health Affairs by Project HOPE – The People-to-People Health Foundation, Inc.
Suppose, despite my good health and lifelong habit of avoiding doctors, I wanted to give you $1000 today in exchange for your agreement to cover the future cost for all my unplanned medical expenses in the next year? Your decision would be an exercise in classic “risk transfer,” in which parties simultaneously monetize ($1000) and transfer (agree to assume) risk. It’s also a gamble. I’m betting that the likelihood of an expensive illness, while low, could exceed $1000, while you are betting that my good health will continue and that you’ll get to keep most of that $1000.
Once risk is monetized, it also becomes possible to transfer fractions of it to other third parties. For example, if you accepted my offer, you could make a deal with another party to accept $100 in exchange for the lower risk of an unexpected diagnosis of cancer. You could give $150 to another party in exchange for “capping” your exposure to $2500 of medical expenses. You could also transfer some risk back to me in the form of deductibles (I pay the first $50 worth of doctor bills), co-insurance (20 percent of any bills) or limits (costs that exceed a certain threshold), all in exchange for a price lower than the original $1000.
Medicare is also a form of monetizing and transferring risk. My payroll taxes are transferring much of the risk of my health care costs, once I am older or if I become disabled, to the U.S. government. And, as this risk is also monetized, it’s also just as possible for Uncle Sam to transfer that risk – and some or all of the premium dollars that accompany it – to third parties or back to me.
Enter the Republican and Democratic battle over Medicare’s “unsustainable” costs, the debate over “the role of government” and the wrangling over “entitlement reform.” While it may appear that each political party is offering starkly different policy approaches, closer examination reveals that both are ultimately proposing the same solution: transfer substantial portions of Medicare’s monetized risk from the government to one or more third parties.
They only differ on where that risk should go.
Who Should Assume More Risk? Insurers And Seniors …
U.S. Representative Ryan’s (R–WI) “Roadmap for America’s Future” is an example of transferring some of the risk to commercial insurers in the form of “premium support vouchers.” Under Rep. Ryan’s current proposal, beneficiaries will use their vouchers to “shop” Medicare’s monetized risk around to insurers. What’s more, because the Ryan Plan will cap the vouchers, beneficiaries are also being asked to reassume a fraction of their monetized risk. As a result, it is likely that they will need to also transfer that to insurers in the form of additional out-of-pocket premium expenses.
… Or Providers?
In contrast, the more visible provisions of the Affordable Care Act (ACA) transfer substantial portions of Medicare’s risk to the providers of health care services. For example, in refusing to pay for “never events” and “hospital acquired conditions,” Medicare is forcing hospitals to assume the risks and costs of complications. “Bundled payments” transfer the risk for any deviation outside an expected course of treatment, such as open heart surgery. The Independent Payment Advisory Board will essentially transfer the risk of any treatments outside “evidence-based medicine” while, as currently proposed, Accountable Care Organizations (ACOs) will be formed for the purpose of assuming an assigned population’s down and upside risks of any health care expenses that fall outside actuarially determined projections. While all are cloaked in a mantle of “quality,” in the end it will be up to the providers to absorb much of Medicare’s risk under a variety of payment formats.
Parties on either size of a buyer-seller risk transfer ultimately have to agree on the size of the risk and its monetized value. This involves considerable financial acumen and a healthy dose of skepticism, especially if any party seems suddenly anxious to transfer its risk. Using the example above, you may worry about my sudden interest in unplanned medical expenses and demand more than $1000. I may argue that my good health warrants less than $1000. Third parties may wonder if you are trying to carve out any of the high risk at too low a price.
This underlying tension offers up four insights underlying the reform of Medicare:
1) Given Medicare’s looming insolvency, it is no accident that the U.S. government is intensely interested in transferring its risk and that it wants to do so at the lowest possible price. This undoubtedly accounts for lingering suspicions among patient advocates as well as health provider trade groups that that the current health reform proposals are attempting to transfer too much risk for too little money.
2) As risk is transferred, so is the responsibility for managing it. Whether it’s up to beneficiaries to find the best deal or providers to find the best cost-effective care paths, the end result for Medicare is the same. Despite partisan debate on the “role of government in health care,” everyone ironically agrees that CMS cannot price or manage risk and that its responsibility in a key dimension of health insurance – even if there are consumer protections and quality bonuses – is ironically destined to decline.
3) Since risk transfer is ultimately a gamble, acceptors of risk need to plan for the possibility that future costs will exceed today’s original price. For commercial health insurers, that has meant keeping a “surplus” in place to guard against this possibility. For providers assuming increasing levels of risk under the ACA, that will mean uncharacteristically keeping financial reserves, untapped beds and personnel on hand, just in case, despite their best efforts, there are greater than expected “never events,” hospital acquired conditions, or care deviations. How well providers will plan for or absorb the losses that could occasionally occur remains to be seen.
4) Finally, risk transfer has been the logic underlying the Medicare Advantage (MA) program, in which risk has been directly transferred to commercial insurers. Politics aside, critics charge that the Medicare beneficiaries that typically enroll in MA have lower than average risk at too high a price and that denials of health care services are all too common. While some of this may be true, it’s doubly ironic that the one policy option that is specifically configured to accept and manage risk is going largely unmentioned in the 2012 debates.
Since both sides in the health care debate seem to agree that expansion of MA is a non-starter, what’s left is either 1) keeping and managing the risk as well as increasing the premium income to cover future expenses, or 2) transferring that risk elsewhere. What has gone unsaid in the debate is that both sides have agreed on the latter strategy of risk transfer. The only disagreement is where.
Jaan Sidorov MD, MHSA is a general internal medicine physician with more than 20 years experience in primary care, disease management, health insurance medical informatics and population based care coordination.