Third Party Out of Pocket assistance

The Pittsburgh Post Gazette has a nice deep dive into the financial implications of the ACA for hospitals. As expected, more people with insurance means less bad debt and less charity care.

One of the promises made by the Affordable Care Act appears to be coming true: U.S. hospitals spent less on charity care for uninsured and underinsured patients in 2014, the first year of the health care law’s implementation.

The drop in charity care — as well as a stabilization of bad debt expenses — was revealed after the Post-Gazette analyzed federal data from the Centers for Medicare and Medicaid Services, which has been collecting data from about 5,000 general acute care hospitals since 2011 as part of the ACA law.

The Post-Gazette analyzed data on charity care and bad debt for the 4,509 hospitals that reported data all four years. For those hospitals, charity care dropped 13 percent, from 1.81 percent of net patient revenue in 2013 to 1.59 percent in 2014.

They also found that Medicaid expansion was a big driver of the decline as states that expanded Medicaid eligibility saw significantly greater declines in bad debt and charity care. If that holds up, then we should continue declines from 2015 and 2016 as more states expanded Medicaid.

More interesting to me was a discussion about how hospitals, especially non-profits, will use the freed up charity care funds.

Though the tradition has been that people with insurance — even inadequate insurance — would not qualify for hospital charity care, some hospitals are already covering deductibles and co-pays under their charity care policies. For some hospitals that was necessitated by some of the ACA marketplace insurance policies with deductibles as high as $5,000.

Low actuarial value coverage is a problem. But I am not sure where charity care from hospitals comes into play with this equation and what the policy implicatiosn are. I want to walk through two examples of how insurers would react to hospitals paying an individual’s deductible as their reactions differ.

Scenario 1:

An individual buy a catastrophic plan as they are subsidy ineligible but they want to be responsible as they can afford. During the middle of the year, the person’s liver fails and needs an immediate transplant. Luckily a donor liver is found. The person is looking at their finances and they can not handle a $6,500 deductible. The hospital offers to cover 95% of the deductible with charity care dollars.

In this scenario, the insurer would probably be okay with a third party writing a check for the deductible. The care is medically neccessary and there are no other viable options available. If the third party does not write the check, the insurer is still writing the same size check as it would if a third party is covering the deductible.

It is merely a reallocation on the hospital books of a highly probable bad debt over to the charity care account.

Scenario 2
An individual bought a Silver plan on Exchange. Part of the reason why the plan was affordable was that it was a Value Based Insurance Design where low cost and high efficiency treatments had to be tried first for some conditions before higher cost treatments would be authorized. She hurt her back lifting her Chunky Monkey of a nephew into the air. Her insurance would fully cover the consultation with a specialist and three days a week of physical therapy for six weeks before re-evaluation. If there was no improvement, then surgery would be authorized and covered with deductible applying. The PT would be fully covered and cost $1,800 and the entire bundle on the value profile would cost $2,400. Surgery would cost $10,000. If she goes to surgery immediately without medical authorization, she is on the hook for her full deductible of $3,500.

This scenario where there is a value based insurance design is where insurers would throw the most obvious fit if third parties routinely paid for members’ out of pocket expenses. We know that when there is unspecified back pain that physical therapy is as effective as back surgery and it is a whole lot cheaper. The VBID design goal is to get people to try the effective and low cost option first by increasing the relative price gap between the two options significantly. A third party out of pocket payment system would go against this design intent as it would make the relative price of physical therapy and surgery the same to the patient.

This would be an attempt by hospitals and other providers to steer patients to procedures whose reimbursements are significantly above the marginal cost of performance even after the charity are write-off.

Similar logic has been at play with the debate on whether or not third parties, especially private third parties, can pay premiums. Right now CMS is reluctant to go that route as it would create an adverse selection shock to the risk pool. An analysis from March 2016 lays it out:

In its NBPP for 2017, CMS finalized three areas of substantive clarification regarding the interim final rule. First, not only must QHP issuers accept premium and cost-sharing payments for QHPs from the enumerated entities and programs, but so must the issuers’ “downstream entities,” such as pharmacy benefit managers, to the extent that those downstream entities routinely collect premiums or cost-sharing payments from enrollees. Second, issuers must accept premium and cost-sharing payments made on behalf of QHP enrollees by “local” government programs, including county and municipality programs, in addition to state and federal programs. And, third, the requirement applies to grantees of local, state, or federal government programs only when those grantees are directed by the government program to make payments on the program’s behalf…..

CMS had noted in its proposed NBPP for 2017 that it was considering whether to expand the list of third party entities from which QHP issuers must accept premium and cost-sharing payments “to include not-for-profit charitable organizations in future years, subject to certain guardrails intended to minimize risk pool impacts, such as limiting assistance to individuals not eligible for other minimum essential coverage and requiring assistance to the end of the calendar year.” Although several commenters urged that CMS move forward immediately to do just that, as well as to provide a list of not-for-profit foundation types that would satisfy the parameters set forth in the February 7, 2014 FAQs, CMS declined to do either at this time.

Insurers believe that third parties, especially medical provider connected charities, would create an adverse selection shock as they would make sure that their sickest currently uninsured patients would be covered. They would spend $10,000 on an individual who routinely generated $300,000 in charity care expenses and then get the insurer to pay them $300,000 over the course of the year. That is the fear. Out of pocket third party assistance is a modification of that fear but it would be an adverse utilization event.