Thursday, June 10, 2010

Paper: Employer-Based Health Care Confronts Big Questions

In a recent briefing paper on health care reform, the actuarial consultancy Milliman offers various strategic considerations for employers as they approach the year 2014, and the choice of continuing coverage:

If a suitable individual market emerges through the American Health Benefit Exchanges (beginning in 2014), employees will have an alternate source of coverage that will essentially compete with employer-sponsored plans. Employers will need to analyze the value of continuing to directly offer healthcare benefits compared to offering cash to employees to purchase coverage on their own or simply discontinuing the benefit

This decision is similar to employer decisions to provide defined benefit plans (e.g., pensions), defined contribution plans such as a 401(k) plan, or some combination of both types of plans. However, active employee healthcare programs differ in many aspects from retiree income benefit programs. The awareness and immediate use of healthcare benefits must be considered in the decision-making process. This decision could represent a fundamental change in the employer-employee relationship.

Read the Milliman Briefing Paper here (PDF).

The paper goes on to list several questions for consideration, including:
  • Will employees understand the importance of purchasing coverage? What assistance will they need from their employees?
  • What is the (selection) impact on the remaining covered population of employees who elect to change coverage from their employer plans to exchange plans?
  • What is the post-tax impact to employees of any change to the health care benefit program?
  • How would discontinuing traditional defined-benefit health care benefits affect attraction, retention, and productivity?
  • How would the employer's competitive position be affected by discontinuing traditional benefits (or by continuing to offer continuing benefits)?
Other legislation provisions that may affect employer costs include:
  • Minimum loss ratio requirements for insured plans
  • Increased prescription drug costs stemming from 12-year patent protection of biologics
  • Increase in taxes paid by insurers passed through to employers and individuals
  • Ban on physician-owned hospitals which could limit unnecessary care prescribed
  • Increase in Medicaid provider reimbursement (to primary care physicians) may decrease cost-shifting to employer-sponsored plans
  • Success, or failure, of various efficiency initiatives in wellness, provider reimbursement, cost control, and quality of care
If legislators don't increase penalties for not offering coverage (now at $2,000 per employee), large employers may face a relatively straightforward cost-benefit decision. Politics, however, may complicate that decision, if employees buckle at having to pursue their own health care choices, and the state insurance exchanges fail to become viable structures.

Expect an already uncertain employer-based marketplace to weigh heavily on corporate strategy, especially if health care costs continue to escalate and economic recovery slows or falters.

Tuesday, June 8, 2010

Health Care M&A

On June 22nd, Lyceum Associates is pleased to present the first installment of a roundtable series exploring health care M&A and corporate strategy.

Practitioners and experts unanimously expect reform legislation to alter the value chain, though not exactly how or to what effect. At the same time, capital markets are also transforming, and forcing corporate management to negotiate new challenges, including access to and cost of capital.

The combined effects could contribute to radical corporate realignment. Our series will anticipate these shifts, and provide 360-degree snapshots of an industry in transition.

June 22nd focus questions will include:
  • How are payers and providers adjusting to regulatory compliance? How might differing speeds shift balances of power?
  • What are strategic opportunities in pharmacy life-cycle management?
  • How is cost of capital affecting corporate positioning?
  • Which components of the value chain are most likely to experience business model shifts? Which are least likely?
  • Are consumers likely to force greater accountability?
  • Where does information technology have the biggest impact?
  • How will the health care consulting marketplace evolve?
Learn more and enroll here.

Monday, June 7, 2010

Buffett Contradicts Himself

Of the different players contributing to the 2008 financial crisis, many would place the credit rating agencies at the top of the list. So why does Warren Buffett defend Moody's and its CEO, Raymond McDaniel?

The simple answer may be to protect his investment. Berkshire Hathaway controls 13% of the company. His June 2nd testimony before the Financial Crisis Inquiry Commission in New York, however, suggests a more problematic mindset, and points to striking contradictions in his otherwise logical thought process.

The latest article in the Lyceum newsletter Perspectives considers Mr. Buffett's disappointing testimony. Read it here.

1. As Mr. Buffett indicates, he does not personally rely on credit ratings, but his ability to pick mispriced stocks does depend on everyone else relying on them. Does his own fortune, then, excuse the agencies for being wrong?

2. Raymond McDaniel was just one more "among many who missed warning signs of the crisis”. It would be unfair to single him out for blame. Okay, if that's the case, then we should blame no one, and completely dismiss the notion of 'risk'.

3. “I’m not arguing that this is a perfect model [the rating agency model, paid for by the issuers]. It’s very difficult to think of an alternative where the user pays." Hmm, what about the analysts Mr. Buffett pays for research? Isn't this an alternative?

4. 90% of Moody's 2007 investment grade ratings became junk twelve months later. Still Mr. Buffett does not view McDaniel and his firm as erring.

At issue here, as with financial reform itself, is the question of risk and return. If lawmakers and regulators continue to shield certain individuals and institutions from risk, then they force all of us pay a social tax in higher risk premiums, to compensate for inappropriate risk-taking.

And the more the shield is extended, the greater the cost we bear in market inefficiency.

Thursday, June 3, 2010

Hospital Consolidation Does Nothing to Fix the Problem

Hospital consolidation maximizes the same bet on a failing business model, according to Stephen Hyde in his latest Lyceum Perspectives article, "'Patient Value' and a Better Business Model for Hospitals".

Since the year 2000, 2000 hospitals have been involved in nearly 1000 M&A transactions. But while health care has come to emphasize scale (not business innovation)—big carriers, big hospitals, big pharma, etc.—health reform is likely to upend the traditional payment model, and starve the system of reimbursement.

Scale, now, just means bigger costs and greater inefficiency. No one is truly thinking through the underlying business model.

Instead of the same old thing, Mr. Hyde challenges hospitals to develop an entirely new model:

Consolidation and integration can be fine ideas (when properly structured and executed), but neither is focused on producing a survivable business model. Getting that will require a laser focus on one thing—the only thing—that can permanently make hospitals financially and competitively invincible: patient value.

Maybe the best solution would be for hospitals and health insurance companies to come together and develop local-based plans that emphasize quality and competitive pricing.

Read Mr. Hyde's article here.