Obamacare: change afoot

Over three years since the Patient Protection and Affordable Care Act was signed into law and with new provisions steadily becoming effective, HRMR asks how the insurance and reinsurance industry has responded to meet the challenges.

The most bold and sweeping reform of US healthcare since the passage of Medicare and Medicaid in 1965, the Patient Protection and Affordable Care Act (ACA, aka ‘Obamacare’) heralds a period of change, opportunities and more than a little uncertainty for the healthcare profession in the US.

A number of changes have revolutionised the healthcare landscape. Health exchanges promise health cover to the previously uninsurable; accountable care organizations (ACOs) bring a new structure to healthcare provision; healthcare providers are increasingly merging; and there is a growing focus on keeping patients from ever needing to be admitted into hospital in the first place—in fact, hospitals will be penalized when patients are readmitted.

Such dramatic changes, however, have also challenged the re/insurance industry to respond to what are new and rapidly changing insurance and risk management needs of healthcare institutions. Tasha Barbour, vice president, director, specialty medical programmes for PartnerRe, says the effects have been, and will be, wide-reaching.

“There are many aspects to how the ACA touches the insurance needs of healthcare organizations—for example, Medicaid expansion, ACOs and other shared savings and loss programmes; bundled payments; recovery audit contractor audits and readmission penalties,” she says. “At the end of the day, insurance reimbursement dollars are being squeezed out of hospitals’ and providers’ hands. These providers are looking for insurance mechanisms to assist them to protect their financial bottom lines.”

PAYMENT REFORM
One of the hottest topics stemming from the ACA is payment reform, which in this instance means paying for value instead of volume. That is being implemented with bundled payments, shared savings, and performance-based contracts between hospitals and payers—and in all of those contracts there is an element of risk, meaning that if you fail to meet a target or you do not meet some particular metric then you will not get additional money, or you will not get access to a bonus payment.

“Both of those elements introduce some risk and that’s what hospital systems and hospitals are facing today,” says Michael Taylor, senior vice president at Aon Hewitt. At present he believes this risk is not prevalent enough for hospital systems to completely rethink existing arrangements such as provider stop loss, provider excess coverage or a captive, but they are definitely thinking that over time this risk could potentially become meaningful.

“At that point they’re going to want to go out to the reinsurance market and the providers of financial mechanisms to offload some of that risk,” he says. “It’s early days yet but we think that over time as more and more of these hospital systems do this they’re going to want to potentially modify existing products or they’re going to want some new products presented to them that will help them manage that additional financial risk.”

He certainly expects that financial risk management is going to be a hot topic for hospitals and hospital systems. There is no magic bullet; instead they will have to work on their clinical process issues, their information systems (to avoid duplication) and managing their finances more efficiently.

“You don’t want to be paying too much for stop loss or reinsurance if there’s another financial mechanism that is more cost-efficient,” he says.

MERGERS AND ACQUISITIONS
Another effect of Obamacare is to drive an enormous amount of mergers and acquisitions within the healthcare system and hospital space as healthcare enterprises seek to merge with other healthcare organizations to achieve those cost savings.

“What that does of course is it makes these systems much larger, so the number of hospital systems that have between $3 and $10 billion worth of revenue is increasing as these hospitals buy out more hospitals. If you’ve got that much revenue and you do some kind of deal, the amount of money at risk becomes larger,” says Taylor.

A significant repercussion of the mergers could be excess capacity in the market and a softening of rates. “From our perspective the mergers and acquisitions have meant that there are fewer organizations to insure,” says Nat Cross, healthcare focus group leader at Beazley. “Many of our competitors are seeking to maintain their market share so it’s a very challenging environment for that.”

However, he perceives a slowing in the trend for mergers and acquisitions. “There was an initial flurry of merger and acquisition activity last year. That seems to have slowed down a little bit for the time being and some of those mergers have been called off by organizations that have looked at it and pondered whether they would really be able to deliver those savings by such activity,” he says.

ACOs
A hallmark of the ACA is the formation of ACOs. “One of the things that’s driving the hospitals to acquire physician practices or physician practices consolidating with each other is this coordinated care, ACO-type pressure,” says Iain Newton, research and business development manager for Beazley.

“They are following the way the money is going to flow ultimately, but because they’re in that process of experimentation we’re not sure what that landscape is going to look like and which structure is going to be successful.”

Nonetheless he believes that in the interim, while that process continues, these new structures and new organizations have a potential insurance need because a hospital is now aligned under a separate legal entity—the ACO—along with the likes of physicians, home help aids and nursing homes. As information on patients is shared, this will intensify the pressure points for data loss or data compromise.

“These pressures are probably greater now under the ACO structure, so an ancillary insurance need away from the medical malpractice is that data breach element,” says Newton. However, he adds that at this stage it is difficult to fully define what new insurance products will be required. “Many hospital and physician groups have established ACOs, but they are still very much in the experimental phase. At Beazley, we have spent considerable time assessing the potential insurance needs of ACOs (including management, regulatory and data breach/cyber liability, as well as medical malpractice) and we will need to adapt as the concept develops.”

One thing that is clear, he says, is that the end game for ACOs is to get a certain amount of money per member of the population that they treat, and achieve savings to be able to sustain their enterprise.

“That is a new type of financial risk for these organizations and we have been in the process of developing an ACO product. However, we have paused because we ourselves do not have a full understanding of what this new landscape is going to look like and in actual fact when we reach out to our insureds, they say they’re not sure either.”

DEMAND FOR EXISTING PRODUCTS
Cyber liability products are just one of several products that could enjoy increased popularity under the ACA. The act provides an opportunity for health plans to delegate medical risk to the provider community, reversing the flow of the risk that has previously occurred over the years.

“That risk has traditionally rolled up to the health plans especially if they have swallowed up smaller health plans over the past five years—so the delegation of risk is a reverse flow of expense back to the provider community,” says Richard Chiocchi, managing director of Aon Risk Solutions and managed care practice leader.

“In essence, what they’re stating to the provider community is that you now need to be both clinically and financially responsible for the healthcare you’re delivering. Most of the care is fairly consistent and predictable, but there will be unpredictable cases that are random events and have nothing to do with their clinical expertise. Some insurance protection will need to be purchased to protect the provider community for these events.”

Chiocchi says that this will drive demand for provider excess of loss programmes that provide protection for catastrophic cost events that exceed a certain dollar threshold. “These products have been available for many years, but there’s a significant belief from many of the underwriters that this product will grow in popularity. Additional capacity is being thrown at it by the reinsurers so they can address the anticipation of increased volume in this area,” he says.

Chiocchi adds that another significant shift relates to the growth of insurance exchanges. These are being offered by health plans or some of the provider organisations as well, as well as co-ops that have been granted as part of the act.

Many of these parties are looking to purchase insurance that will protect them above the limits that the government provides today: the government will effectively provide within the exchange programme a stop loss between $60,000 and $250,000. After $250,000 there is no protection available from the government’s insurance programme, so now many reinsurers are looking to develop products that will attach at the $250,000 level where the government programme stops and provide coverage to the exchange product up to whatever level the insured wants to purchase.

“These too are not necessarily new products, but how they are being treated by the underwriters is considerably different since the risks are not well known,” says Chiocchi. “There are significant risk factors that are being incorporated by reinsurers developing premiums. There is also a major concern that many of the potential 30 million uninsured people who will enrol within these exchanges over the next five years are currently uninsurable in the eyes of the insurance companies.

“These will be significant risks for reinsurers to take on, therefore the initial rates are not very competitive—in reality, they’re actually very high at this point.”

ADDITIONAL OPPORTUNITIES
Under the act, there is a new focus on rewarding good patient outcomes, and there is a much greater focus upon incentivizing performance against quality of care measures (rather than the mere reporting of such results).

“Insurers should therefore gain access to a greater trove of quality of care data and will be able to use this more extensively in their underwriting,” says Newton. “As well as using incentives to reduce healthcare costs, the Obama administration has focused heavily on much greater regulatory scrutiny of billing, not just in terms of fraud, but also overpayments and miscoding,” he adds.

“Alongside the exposures created by the various structural changes, this scrutiny has heightened interest in regulatory and management liability products, to which (some) insurers have responded.”

So what lies ahead? The one thing everybody seems to agree on is that it’s hard to say. “The short answer is we’re not sure what’s going to happen,” says Taylor. “We need to wait to see what happens with the enrolment in the public exchanges, as many large employers are contemplating private exchanges, so again there will be quite a bit of movement of the commercial population.

“I think 2014 is going to be the seminal year. We need to wait and see—but really once we know how the commercial population is moving that will knock on to hospitals and hospital systems around risk-based contracting. Once that gets clear that will increase the pressure on the insurance and reinsurance market to see whether we are reaching a scale where new products need to be introduced into the marketplace.”

Much of Obamacare is an exercise in experimentation, says Newton; it seeks to identify the most effective and cost-efficient modes of delivering healthcare. “We expect to see an even greater push towards the coordination of care as the best structures and payment incentives are identified. We also expect there to be further consolidation as a result,” he says. He believes that providers will need to work even harder to create and entrench a culture of quality of care or suffer greater financial and reputational consequences. There is also likely to be greater interest in medical expense and capitated products, particularly stop loss products.

Barbour’s view is that things will remain unpredictable for some time yet. “The ACA has gradually been expanding the coverages and medical risk: for example, no medical underwriting, unlimited limits for annual and lifetime, experimental treatments, pre-existing conditions without limitations, uninsured and previously uninsurable individuals now being covered,” she says. “Reinsurers are trying to predict what these new sets of claims will look like, as the past is not a good predictor for the future. The future looks unlike it ever has before. This unpredictability is the biggest challenge for reinsurers.” 