Nearly six months after healthcare reform was signed into law, insurance companies, local businesses and hospitals are starting to figure out what it really means.
The reform, which President Obama signed into law in March, is considered the most sweeping change that Orange County and the country’s modern healthcare industry have seen.
It’s likely to mean more business for the county’s hospitals, medical device makers and drug companies—among others—which will see demand for products and services as more people become insured.
For health insurers, reform’s expected to be a boon because people who previously were unable to get insurance will have access to it.
“We would hope and expect that the good work that’s been done from the administration and the collective bodies is really intended to get more uninsured covered,” said Jim Elliott, a Costa Mesa-based vice president and general manager of large group business for Blue Shield of California, a San Francisco health insurer with nearly 244,000 local health maintenance and preferred provider organization members.
OC itself is not home to any big insurer. But most of the major providers are represented locally, including United HealthGroup Inc. of Minneapolis with about 3,800 workers here, Stamford, Conn.-based Aetna Inc., Philadelphia’s Cigna Corp. and WellPoint Inc. of Indianapolis.
At Cigna, which has about 36,000 HMO and PPO members in OC, the top reform-related question from members is “can I keep what I have?” when it comes to insurance, said Chris De Rosa, the Philadelphia insurer’s president and general manager for Southern California.
Cigna has advised its employer clients to reassure workers that reform doesn’t necessarily mean their benefits will be changing, according to De Rosa.
“People are so worried about it,” De Rosa said.
Reform has resulted in changes in how insurers do business, including bans on denying coverage for pre-existing conditions, expanding preventive healthcare benefits and ending lifetime coverage limits.
“What we know is that if we continue to escalate our costs year over year, as has happened, it’s just unsustainable. I think that’s what originally everyone was trying to address with healthcare reform,” said De Rosa, who’s based in Irvine.
Insurers will have to take the lead on cost issues because the reform law is mainly focused on expanding coverage, observers said.
“We’re clear that it’s going to require us to redouble our efforts to find efficiencies and compete on cost and quality,” Blue Shield’s Elliott said.
There still is more to come, such as subsidies and the creation of health insurance exchanges, according to Julie Roberts, Blue Shield of California’s executive driver of health reform.
Her role is to “get things moving” in terms of preparing her company to respond to reform.
“The big changes will happen in 2014, where we see being able to, hopefully, insure many more people,” Roberts said.
Mitch Morris, an OC-based principal in Deloitte Consulting’s life sciences and healthcare practice, said as many as a third to half of the estimated 500,000 uninsured in OC could receive coverage by 2014, once reform is fully implemented.
Another game-changing aspect of healthcare reform involves a requirement that insurers must spend 85% of the premium dollars they collect for large groups and 80% of those dollars from small groups and individuals on medical care.
Large insurers, like UnitedHealth, are expected to adapt to these requirements by leveraging their size and potentially charging their clients more.
UnitedHealth didn’t respond to a request for comment.
Many critics of the health insurance industry charged that insurers were spending portions of premiums collected on marketing, executive salaries and other overhead costs.
“The fact that we’re a not-for-profit, in this case, doesn’t get us off the hook,” Roberts said.
Blue Shield is close to meeting the 85% medical care standard on its group side, but “we’ll have to do some tweaking of our business” to meet the 80% requirement for medical care spending on the smaller group market, she said.
The tweaks are expected to involve lowering costs that the insurer incurs other than medical care, such as commissions paid to brokers, Roberts said.
Overall, observers say the full effect of healthcare reform still will be several years out because many of its parts aren’t taking full effect until 2014.
“It will take years before it can be determined whether healthcare reform will be as momentous as Medicare,” said Paul Feldstein, a professor of healthcare economics at the University of California, Irvine’s Paul Merage School of Business.
The reform theoretically will start penalizing people who don’t have health insurance in 2014.
Those who choose not to have coverage will pay a $95 annual penalty that would increase in subsequent years.
Because the penalties aren’t high, younger, healthier people could opt to pay it instead of paying $200 to $400 in monthly premiums for individual health insurance policies.
“Even employers who today do provide insurance are looking at whether or not it makes sense,” Morris said.
Impact on Business
Health reform also has new requirements for businesses.
Companies that have 50 or more employees will have to either provide insurance to their workers or pay into a government-backed pool starting in 2014. The fine is $750 a year per full-time worker if the employer declines to do so.
Generally speaking, the coverage mandate on businesses doesn’t mean much for OC’s larger private-sector and government employers, most of which already offer insurance. But they could see health insurance rates rise faster than they have been as insurers deal with mandates being placed on them.
By contrast, small businesses won’t be forced to provide healthcare, but will be able to pool together with similarly sized companies to collectively buy insurance.
The coverage mandate could cause some companies, particularly those that employ lower-wage workers, to reach a point where fines for not proving coverage become cheaper than offering healthcare, said Michael Fox, a managing consultant who works for consultancy Towers Watson in Los Angeles.
Employers in that case could shift workers into the government-backed pool.
But Fox said that may not be an option for employers in competitive fields where healthcare benefits are important for attracting and retaining workers.
“We see some themes. There are different groups that will say, ‘Maybe I’ll just take the penalty and run into the protection of the exchanges,’” Elliott said.
But other—mainly larger—groups look at healthcare insurance as an almost “paternalistic” way to take care of their employees.
Effects on Hospitals
Reform’s effects on hospitals are expected to include decreased reimbursement from commercial insurers and Medicare, according to Deloitte consultant Morris.
Hospital officials have “got to do a much better job with efficiency. Hospitals are thinking, ‘How can I make money if all I’m (getting) paid are Medicare rates?’” Morris said.
California hospitals will be challenged in terms of boosting efficiency because a lot of them already have gone through the rounds of cost-cutting and reducing employee headcount in recent years to withstand the bad economy, Morris said.
“There’s not that much more to cut,” he said.
Hospitals are limited in terms of cutting jobs because of strong healthcare unions and ratios that require a certain amount of nurses to give patient care, Morris added.
Morris said he also expects hospitals to try to diversify into other areas of healthcare such as ambulatory treatment centers, reference laboratories, diagnostic imaging centers and medical office buildings in order to gain revenue to offset payment cuts.
The reform stands to have varied effects on doctors.
Doctors are expected to seek closer affiliations with hospitals or combine into larger groups as a way of insulating themselves from “the economic fluctuations of being a one- or two-person practice,” Morris said.
Doctors who see an influx of patients with government-backed insurance may see less reimbursement from those federal and state programs than they would from private insurers.
Some doctors may even refuse to see patients that have government-sponsored insurance, such as Medi-Cal, to avoid the issue.
“Underpaid government programs, like Medi-Cal, do not provide access to a broad base (of doctors), period, because they can’t afford to take patients at those payment rates,” said J. Brennan Cassidy, a Newport Beach doctor who is president of the California Medical Association. n
