The new Obamacare insurance is looking more like Medicaid

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  • Obamacare is looking more and more like Medicaid. @ScottGottliebMD

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  • The higher costs of taking care of the Medicaid population haven’t been made up with more funding, but fewer services.

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  • With fewer out-of-pocket costs, consumer will also have far less skin in the game. #Obamacare #healthcare

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There’s an astute article in today’s edition of the Wall Street Journal by veteran healthcare reporter Anna Mathews. It outlines the scope of health plans that will be offered on the new exchanges taking shape this fall. And why Obamacare is looking more and more like Medicaid.

Mathews notes that hospitals are giving up discounts to the new exchange-based health plans. In turn, the hospitals plan to make up these discounts through the narrow networks of providers that consumers will be able to choose from. The bet that these hospitals are making is that they can offset the discounts by getting more volume. They can then limit what they pay for services by getting better control over the providers through the same sort of narrow contracting. In other words, if the health plans and hospitals contract with fewer providers, they can exert more leverage on doctors to limit services and keep costs down.

Ideally, plans would be able to compete on a range of things, with network design being just one variable. But Obamacare largely prescribes the benefit design and limits cost sharing, leaving networks one of the few levers that plans have to manage costs and competition.

The article plays off of news that hospital chainTenet Healthcare (NYSE: THC) made earlier this week on its earnings call. Tenet announced that they had signed exchange-related contracts covering about 15 of their existing hospitals (about 30 percent of the chain’s portfolio). The contracts reportedly pay Tenet at about a 10 percent discount to traditional commercial contracts. In exchange for the discount, the contracts are offering narrower networks to the plans’ members — ostensibly to send incremental volume Tenet’s way. In other words, the members will be steered to the Tenet hospitals.

By way of background, a 10 percent discount off of commercial hospital rates would be better than Medicaid in most markets. It is also somewhat better than Medicare in many markets. These discounts are real.

This is a risky bet for Tenet, because it’s not clear what the exchange-based clientele will look like. Beneficiaries, who are sicker than folks in an average insurance pool, could dominate the exchanges. Such adverse selection would increase costs to Tenet.

This is exactly what has happened with Medicaid, which treats many indigent Americans who are in poor health. Yet the higher costs of taking care of the Medicaid population hasn’t been made up with more funding, but fewer services that these patients are able to get access to. The same thing is likely to hold true in the exchanges. If the exchanges are favored by sicker patients, this outcome will occur even sooner.

Medicaid pays the full freight for most healthcare services (with few out of pocket costs) but compensates by sanding down the rates paid to providers. The result is that the Medicaid benefit has been hollowed out over time. Fewer doctors are willing to see Medicaid patients, making it hard for patients to get appointments and schedule needed services. The Medicaid benefit is great on paper, but often stingy when you try to use.

This similarity between the exchange coverage and Medicaid was highlighted by another point made on the Tenet call, first noted by UBS analyst A.J. Rice. Tenet said that co-pays and deductibles associated with buying insurance through the exchange are going to be substantially less than is the case for traditional commercial health insurance. The hospital chain said that since the provider will be responsible for collecting a much smaller portion of the bill from the patient directly (and risk not getting paid), the net effect of the 10 percent discount from traditional commercial rates may be fully mitigated. This is even before taking into consideration the question of whether Tenet has picked up any incremental share from the arrangement. The upshot was that the financial impact of these reduced co-pays may be part of Tenet’s business gamble.

If Tenet’s analysis is right, it underscores the magnitude and the impact of reductions in out of pocket costs under Obamacare. But with fewer out-of-pocket costs, consumer will also have far less skin in the game. In turn, they will have less incentive to constrain their demand for services.

That constraint will instead, be applied by the providers themselves, through the limitations that they place on access. Not by outright denying care, but by funneling patients into overworked networks that make it much harder to actually get appointments and schedule needed services. This is exactly how rising demand is managed under Medicaid. It’s one more reason why Obamacare coverage is likely to resemble Medicaid over time.

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About the Author


  • Scott Gottlieb, M.D., a practicing physician, has served in various capacities at the Food and Drug Administration, including senior adviser for medical technology; director of medical policy development; and, most recently, deputy commissioner for medical and scientific affairs. Dr. Gottlieb has also served as a senior policy adviser at the Centers for Medicare & Medicaid Services. 

    Click here to read Scott’s Medical Innovation blog.

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