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First wave of health-care changes will target insurers with new rules

By Alec MacGillis
Washington Post Staff Writer
Tuesday, March 23, 2010; A08

In affixing his signature Tuesday to comprehensive health-care legislation, President Obama will set in motion a fundamental shift across a sprawling industry, from insurers who will face an expanding list of restrictions to hospitals and doctors confronted with new incentives to practice more-efficient care.

The law will have a gradual impact on many consumers. In coming months, parents will be able to keep their children on their plans until age 26; people over 65 will get broader coverage from the Medicare drug benefit; and insurers will be barred from revoking coverage when people get sick and refusing to cover children with medical conditions.

The requirement that most everyone carry health insurance will not kick in until 2014, along with subsidies to help people pay for coverage.

But the law's impact will be more profound for the health-care industry in a country where one in six dollars is spent in that sector. Every part of the industry will be affected, with pharmaceutical companies, hospitals and makers of devices subject to new rules, billions of dollars in fees and relinquished reimbursements in return for the business growth that expanded coverage will bring.

By far, the most direct effect will be on insurers. Over the next several years, health insurance will evolve into something more closely resembling a publicly regulated utility: It will have a guaranteed base of customers, thanks to the coverage requirement, but it will be bound by much tighter restraints than today's individual insurance market, where regulations vary widely from state to state.

"This legislative force is significant," said David Cordani, chief executive of Cigna, a major insurer. "It will drive, over the next couple decades, unprecedented changes, all of which aren't really understood yet."

Starting this year, insurers will no longer be able to cap lifetime benefits, which will scramble the actuarial formulas many insurers use and potentially lead them to raise prices for individual policies. But their ability to raise rates sharply for individual insurance plans will be limited by a rule, to take effect next year, requiring insurers in the individual market to spend 80 cents of every premium dollar on claims, a higher "medical loss" ratio than many now adopt.

Some worry that there will be little to keep insurers from driving up their insurance rates for individual policies, which people without employer-based coverage can purchase on a new state-run "exchange" starting in 2014. Liberals argued unsuccessfully for a government-run plan, or "public option," to guard against such rate increases, and Obama proposed a new federal rate-oversight authority, but congressional rules kept it from being included in the final package.

But industry analysts predict that rate increases will be held in check somewhat by the new rules on medical loss ratios and by heightened competition for customers, who will have more choice of plans than they currently do in the individual market. "They're free to price themselves into oblivion if they choose to do so," said Sheryl Skolnick, an industry analyst with CRT Capital Group.

Taking a particularly big hit to their business model would be insurers who rely heavily on selling Medicare Advantage policies. The legislation sharply reduces federal subsidies for those plans, which analysts say will probably lead many smaller insurers to stop offering them.

Overall, industry analysts say that the growth in customers could come close to balancing the cost of the new regulations for insurers, with smaller profit margins on a broader base of business. Ana Gupte, an analyst with Sanford Bernstein, said insurance stocks held up Monday because most of the negative impact of the legislation had been priced in long ago. Insurers "come out a net negative, but not severely net negative," she said.

The impact on hospitals and doctors will be less immediate. Industry groups for medical providers agreed to several hundred billion dollars in reductions in Medicare and Medicaid reimbursements to help pay for the overhaul, on the theory that expanding coverage would mean that more patients would be paying for the care they get.

The cuts will be not be easy to absorb, but hospitals will have several years to prepare, said Thomas P. Glynn, chief operating officer for the Partners HealthCare hospital network in Massachusetts, where a universal coverage law was approved in 2006. "At least it was done in a way where we can know what it is upfront and can start managing against it," he said.

The legislation headed to Obama has an array of pilot programs and incentives for providers to work more cost-effectively, including basing Medicare payments on a patient's condition instead of on the number of procedures. But overall, analysts say, it will probably be a boon for most hospitals and doctors, because it will make it less likely that they will be faced with patients who cannot pay and show up too late for treatment.

"You don't pour nearly a trillion dollars into the health-care space without some of the money flowing down into the hospital system and other providers," said Skolnick, the analyst. "There will be more people getting care from the right channels at the right time, and more of the care will be compensated."

Some experts say a shortcoming in the legislation is that it does not have a deeper impact on medical providers. They predict that the government will have to take more action later to restrain the growth in health-care costs by holding down the prices charged by providers, whether through a public option or rate-setting.

But the new system at least creates more of an incentive for future cost control: Now that the government will be subsidizing people's coverage, it will have more of a stake in keeping medical costs in check.

"In terms of the way providers are affected, it's probably not as big a change as it should have been," said John Holahan of the Urban Institute. "But you have the structure to deal with that in place, going forward. . . . If premiums continue to skyrocket, even with subsidies, insurance will be deemed unaffordable, and the whole thing will unravel."

Although much of the attention has focused on the health-care industry, the law also will carry an immediate impact for many employers. Businesses with fewer than 25 employees will start receiving tax credits to help them buy coverage, and large employers who pay for retirees' drug coverage must immediately declare, for accounting purposes, whether they intend to keep the coverage. The other option would be to send their retirees into Medicare's drug benefit program by 2013, when the government cuts the subsidy employers receive to offer their coverage.

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