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Gazing Into CBO’s Budget and Health Care Crystal Ball -
Jul 28, 2010
Last week, Peter Orszag, the president’s outgoing Director of the Office of Management and Budget, released updated budget projections on behalf of the Obama administration. The numbers are unsettling, to put it mildly, which probably explains why they were released late on a Friday afternoon.
The federal budget deficit is expected to set a record this year, at nearly $1.5 trillion, or 10 percent of GDP, and next year will be about the same, with a deficit exceeding $1.4 trillion for a third straight year. Over the period 2010 to 2020, the Obama budget plan would run up deficits totaling nearly $10 trillion. At the end of 2008, total government debt stood at $5.8 trillion. It is now expected to reach $18.5 trillion in 2020, or 77 percent of GDP.
Last month, the Congressional Budget Office issued its own set of updated projections, but the frame of reference was the long-term, and not just the next 10 years. Unfortunately, the farther out one looks, the worse the picture gets. CBO’s latest projections again make it clear that the nation is rushing headlong toward a fiscal crisis, and the health law does nothing to head it off.
According to CBO, Social Security costs will rise from 4.8 percent of GDP in 2010 to 6.2 percent in 2035. Over the same period, spending on Medicare, Medicaid, the state children’s health insurance program and the new premium subsidy entitlement created in the health law will increase from 5.5 percent of GDP this year to about 9.7 percent of GDP in 2035. In total, federal spending on the nation’s main retirement and health programs will jump by 5.6 percent of GDP over the next quarter century, and that assumes all of the Medicare cuts enacted in the health law go into effect as written.
But that is almost certain not to happen. Despite all of the talk of “reforming the delivery system,” the big savings in Medicare come from indiscriminate, across-the-board payment rate reductions that will hit all institutional providers of services proportionally, without regard to any metric of quality.
The biggest cut comes in the form of a “productivity adjustment” in the annual inflation updates applied to Medicare’s payment rates for hospitals, rehabilitation facilities, nursing homes, hospices and home health providers. Beginning as early as next year, these payments won’t be increased to fully reflect the rise in input costs. Instead, a “productivity adjustment” will reduce the inflation update by varying amounts, depending on the provider. In most instances, the “productivity adjustment” is not a one-time hit; rather, it is assumed to take place every year, in perpetuity. The compounding effect of reducing provider payment rates each and every year in this manner produces very significant Medicare savings--on paper, that is.
But it begs the question: if Medicare’s payment rates do not keep up with inflation, will those who supply services to Medicare’s patients continue to do so? Richard Foster, the chief actuary of the Medicare program thinks a large number of them won’t, predicting that about 15 percent of the nation’s hospitals would run into serious financial distress in just the first decade if they accepted such low reimbursement for caring for Medicare beneficiaries. Over the longer-run, the problem would of course become much more acute, which is why Foster has expressed serious doubts that the savings will materialize.
CBO did everyone a favor by producing an alternative baseline forecast which does not assume these Medicare reductions continue cutting deeper into rates after 2020. In 2035, in CBO’s alternative baseline, health entitlement spending including Medicare would reach 10.9 percent of GDP, or a full 1.2 percent of GDP higher than the baseline that assumes the unrealistic Medicare cuts will continue forever.
It is also clear from CBO’s forecast that the health law represents one of the largest tax increases ever enacted. By 2020, CBO estimates that the tax hikes in the new law will add 0.5 percent of GDP to federal revenue collection. By 2035, the tax hike will jump to 1.2 percent of GDP.
Like the Medicare cuts, however, those revenue projections are based on dubious assumptions. The health law imposed a Medicare payroll tax hike of 0.9 percent and a 3.8 percent tax on non-wage income. These new taxes would apply to individuals with incomes exceeding $200,000 per year and couples with incomes exceeding $250,000 per year. But those income thresholds are not indexed for inflation, so by 2035 the new taxes would be hitting a large portion of the American middle class, and more so with every passing year.
Similarly, the so-called “high cost” insurance tax will apply to family coverage plans in 2018--well after the president will have left office, by the way--with premiums of at least $27,500 per year. But once imposed, the tax would hit more and more households every year as the threshold would rise with general consumer inflation, not health costs. By 2035, it wouldn’t be just “Cadillac” plans bumping up against the premium threshold.
Unfortunately, there is also a strong possibility that the cost of the new premium subsidy entitlement program provided through the law’s “exchanges” will far exceed current projections. CBO’s estimate assumes that most low and moderate wage workers will continue to get their insurance on the job, and thus be ineligible for the new federal assistance program. But former CBO Director Doug Holtz-Eakin has estimated that some 35 million workers would be better off in the exchanges than in employer plans.
The history of federal entitlement programs is that potential beneficiaries eventually find their way to the money. One way or another, it seems likely that firms will adjust to make workers eligible for maximum federal assistance, especially over the long run. Holtz-Eakin estimates that migration of more low-income workers into the exchanges could add $500 billion to the new law's cost over the first decade compared to CBO's forecast, and much, much more over long-run.
The primary threat to the nation’s long-term prosperity is runaway federal entitlement spending. Entitlement costs are set to rise so fast and so quickly that the implications for federal deficits and debt are staggering. If allowed to stand, the health law has dramatically reduced the flexibility of the federal government to respond to the coming budget crisis. It locks in massive new spending commitments, and uses every trick in the book to make it look like those commitments have been paid for.
The truth is that the new law did not match the dead-certain new spending commitments with realistic and sustainable reforms, much less make a dent in the underlying problem of rising entitlement costs.
James C. Capretta is a Fellow at the Ethics and Public Policy Center. He served as an associate director at the White House Office of Management and Budget from 2001 to 2004.
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Where Are the Innovators in Health Care Delivery? -
Jul 23, 2010
Almost everyone believes there is an enormous amount of waste and inefficiency in health care. But why is that? In a normal market, wherever there is waste, entrepreneurs are likely to be in hot pursuit — figuring out ways to profit from its elimination by cost-reducing, quality-enhancing innovations. Why isn’t this happening in health care?
As it turns out, there is a lot of innovation here. But all too often, it’s the wrong kind.
There has been an enormous amount of innovation in the medical marketplace regarding the organization and financing of care. And wherever health insurers are paying the bills (almost 90 percent of the market) it has been of two forms: (1) helping the supply side of the market maximize against third-party reimbursement formulas, or (2) helping the third-party payers minimize what they pay out. Of course, these developments have only a tangential relationship to the quality of care patients receive or its efficient delivery.
The tiny sliver of the market (less than 10 percent) where patients pay out of pocket has also been teeming with entrepreneurial activity. In this area, however, the entrepreneurs have been lowering cost and raising quality — what most of us wish would happen everywhere else. For example:
- There are more than 1,000 walk-in clinics spread across the country today — posting transparent prices and delivering high-quality, low-cost services;
- Whole businesses have been created to provide people with telephone and e-mail consultations because third-party payers wouldn’t pay for them;
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Mail-order pharmaceuticals are a huge and growing market — one which emerged to offer price competition to consumers who buy their drugs out-of-pocket;
- Wal-Mart didn’t introduce the $4-a-month package price for generic drugs in order to do a favor for Blue Cross. It is catering to customers who pay their own way;
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Concierge doctors are also providing patients with innovative services — services that health insurers don’t cover.
With respect to medical care itself, the technological response has been much the same. Wherever there is third-party payment, the goal of innovation is to produce more products that qualify for reimbursement, even if the effects on patient outcomes are only marginal. Wherever there is no third-party reimbursement, innovators are focused on ways to lower cost and raise quality.
Take cosmetic surgery. Over the past two decades there has been an enormous amount of innovation in the field — all of the cost-lowering, quality-raising variety. That explains why the volume of cosmetic surgeries grew six-fold over the past 20 years, while the real price declined by more than one-third. Similarly, there has been remarkable innovation in LASIK surgery — another area where third-party payers are not. Yet the real price of LASIK surgery has declined by 25 percent over the past decade.
The same principle can be seen at work in the international marketplace. For example, India has a potentially huge market for medical care. But 80 percent of health care spending in that country is private and there is very little health insurance. So some of the companies that make expensive technology for the developed world are now finding ways to produce the same services for a fraction of the price.
GE Healthcare, for example, has introduced a portable electrocardiogram machine into the Indian market that will perform the heart exam for 20 cents (compared to a normal price of $50). Siemens (another maker of high-end, expensive equipment) has built mobile diagnostics units for the Indian market with X-ray, ultrasound and pathology systems.
As Sujay Shetty, leader of the pharmaceuticals practice at PricewaterhouseCoopers in India, explained, “In India we want first-world technology at third-world prices…India can also be a springboard for Africa and Latin America, which have similar needs.”
The bottom line: If we want more of the right kind of innovation in the United States, we must encourage arrangements (like Health Savings Accounts) that will give patients more control of their health care dollars.
John C. Goodman is the president and CEO of the
National Center for Policy Analysis President and the Kellye Wright Fellow.
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Dispatch from Massachusetts: The Individual Mandate Is Working -
Jul 21, 2010
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Massachusetts Shows Federal Reform Headed For Trouble -
Jul 21, 2010
If Massachusetts is a harbinger – and all evidence indicates it is – the new federal health overhaul legislation is headed for serious trouble.
Massachusetts and the federal government built their reform efforts using similar architectural plans – strict regulation of health insurance, mandates on individuals and businesses, expensive new taxpayer-funded subsidies and a major expansion of Medicaid – and both share a central structural flaw in failing to address rising health costs.
Former Massachusetts Governor Mitt Romney sold his plan in 2006 with the promise that, "Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced.”
It hasn’t turned out that way. On average, health insurance now costs $14,723 for a family of four in the state, compared to $13,027 nationally -- nearly 12 percent more.
In fact, John Cogan of Stanford University and colleagues found that since the state’s reform initiative passed, premiums for private employer-sponsored health insurance in Massachusetts increased by an additional six percent in aggregate compared to the nation as a whole. It’s even worse for smaller firms: Their health insurance costs grew 14 percent more than in the country as a whole from 2006 to 2008.
Health insurers in Massachusetts are the messengers reflecting higher costs from providers, including the state’s powerful hospitals, and increased utilization of health care services. The insurance companies are battling with the government to allow them to increase their rates by seven to 34 percent because they say they are losing tens of millions of dollars.
Gov. Deval Patrick ordered his insurance commissioner to reject the rate increases. The governor lost the first round when an insurance appeals board overturned his cap on insurance premiums, but the very public battle continues between politicians and health insurance companies over costs.
Other factors are pushing up the cost of insurance: Reformers promised that covering everyone would eliminate the problem of uninsured people going to the emergency room for routine care and “free-riding” on paying customers. But the number of people visiting emergency rooms has increased, not decreased, new state data show.
One reason: More people may have health insurance but they can’t find a doctor to see them. Last year only 44 percent of internal medicine practices were accepting new patients, down from 66 percent in 2005, according to the Massachusetts Division of Health Care Finance and Policy.
But the distortions don’t end there: Some residents are gaming the system in ways that drive up costs for others. The Massachusetts Division of Insurance reported in June that the number of people who are buying coverage for short periods more than quadrupled in the three years since passage of the state’s reform law.
The incentives in Massachusetts invite this behavior: Insurance companies are required to sell policies to anyone who applies (“guaranteed issue”) at the same prices as other applicants who have maintained coverage (“community rating”). This gives short-termers a free ride but drives up the cost of insurance for people who maintain continual coverage.
Blue Cross and Blue Shield of Massachusetts reports that more people are jumping in and out of coverage as they need medical services. The typical monthly premium for short-term members was $400, but their average claims exceeded $2,200 per month. Other insurers have witnessed a similar pattern. "These consumers come in and get their service, and then they leave because current regulations allow them to do it," said Todd Bailey, vice president of underwriting at Fallon Community Health Plan, the state’s fourth-largest insurer.
Massachusetts says it has reduced the percentage of its citizens without health insurance to about three percent, but 68 percent of the newly-insured receive coverage that is heavily or completely subsidized by taxpayers. An infusion of federal Medicaid funds has allowed the state to increase eligibility for subsidized coverage to 300 percent of poverty, or more than $66,000 a year for a family of four. Without that money, the state would have had to rely on significant new taxes to finance its coverage expansion.
Employer coverage has increased largely because employers do not want to break the law requiring them to provide coverage or pay a fine. The percentage of firms with three or more employees offering health benefits has increased from 73 to 79 percent.
But now, some small Massachusetts employers are dropping employer-sponsored insurance and are instead sending their workers into the taxpayer-funded health insurance pool. They say they have no choice because of the relentlessly rising costs of coverage.
The Boston Globe reports that “Since April 1, the date many insurance contracts are renewed for small businesses, the owners of about 90 small companies terminated their insurance plans with Braintree-based broker Jeff Rich and indicated in a follow-up survey that they were relying on publicly-funded insurance for their employees.
This spells trouble for taxpayers. With more than two-thirds of the newly-insured receiving taxpayer-supported coverage, it will put additional pressure on the already burgeoning state budget if more employers opt to pay the $295 fine and instead send their workers to taxpayer-subsidized coverage.
Massachusetts residents are no different than people in the rest of the country: They respond to incentives.
Health reform in the Bay State has increased demand without increasing the supply of health care providers, it continues to keep people in the dark about the true cost of health care and health insurance, and has not changed incentives for people to seek more affordable options or for a truly competitive marketplace. Washington’s health overhaul law has the same structural flaws.
When President Obama told MSNBC's Chuck Todd in an interview last week that his new health reform law "not only makes sure everybody has access to coverage but is reducing costs," the quote was evocative of Romney’s promise. Washington’s reform effort doesn’t even pretend to achieve universal coverage, and Massachusetts’ experience shows the near impossibility of containing costs in a system where incentives go in exactly the opposite direction.
Grace-Marie Turner is president of the Galen Institute, a non-profit research organization focused on patient-centered health reform. She can be reached at
galen@galen.org
.
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When Bad News About Health Reform Isn't Bad -
Jul 18, 2010
This column is a collaboration between KHN and The New Republic.
The weekend’s newspapers included a pair of headlines about health care reform. And they were probably not the kind that reform advocates like to see.
One was in the Boston Globe: “Firms Cancel Health Coverage.” According to the article, a number of small businesses had recently decided to stop offering insurance to employees. In 2006, Massachusetts put in place a new health insurance scheme similar to the Patient Protection and Affordable Care Act, the federal law President Barack Obama and congressional Democrats passed earlier this year. If businesses in Massachusetts were now dropping coverage three years into that state’s reform experiment, people might conclude the same will happen across the country. And they probably wouldn’t like that very much.
The other headline was in Sunday’s New York Times: “Insurers Push Plans Limiting Patient Choice of Doctors.” As the story explained, insurers in three cities (Chicago, New York and San Diego) were testing new plans that offered beneficiaries significantly reduced networks of doctors and hospitals, in exchange for lower premiums. The target audience, again, was small businesses, but the insurers thought the new plans might appeal to some larger businesses as well.
This isn’t the first time insurers have offered plans with fewer treatment options. It happened most famously in the 1990s, when insurers first introduced the concept of “managed care” on a wide scale. Consumers didn’t like it then, and they might not like it now. But last time, most people blamed the insurance industry. This time, they might blame the government--in no small part because reform critics will use the occasion to say, “I told you so.”
Taking the blame for anything and everything that goes wrong in health care has always been the biggest political danger to reform, at least in the short term. The Obama administration and the Democrats now “own” health care just as surely as they own General Motors. But before Sean Hannity or the Wall Street Journal editorial page get their hands on these stories, let’s be clear about something: Those headlines don't highlight reform’s problems. They actually highlight its virtues.
Insofar as the articles report broader trends--and they may not--they actually chronicle the same basic process at work. Health care is getting more expensive; the economy is still sputtering. Employers who provide and help pay for employee coverage can react to this in one of two ways. They can stop offering insurance altogether, which is what the Globe reports some small Massachusetts firms are doing. Or they can simply offer less generous policies, which is what the Times suggest will happen in those three cities.
But employers were doing these things already, long before Obama and his allies came along. Firms have been walking away from coverage ever since the early 1970s, when rising health care costs first hit American business hard. The question is whether reform makes employers more likely to drop coverage. The answer seems to be no, at least for now. Reform includes a requirement that employers provide insurance or pay a penalty. Although the Globe story suggests a few firms are dropping coverage, the official data shows that, overall, the number of employers offering coverage actually increased after Massachusetts implemented its new scheme.
That doesn’t mean every company that offers insurance will keep doing it forever. Over time, some businesses will inevitably decide to drop coverage, just as they do now. But before reform, employees in such companies were frequently in big trouble, since they no longer had access to decent policies they can afford. In Massachusetts and, soon, the rest of the country, people without employer coverage will be able to get comprehensive policies through insurance exchanges--complete with subsidies to help pay for them.
But what about the people who watch as employers whittle down coverage, restricting which doctors and hospitals they can see? Again, this happened before and was bound to happen again--only now, thanks to health reform, the law will limit how plans can do it. They can’t impose cost-sharing for basic preventive care. They can’t impose annual or lifetime dollar caps on benefits. And while they can limit beneficiaries to certain doctors and hospitals, they have to offer beneficiaries the right to appeal treatment denials--and the right to get treatment out-of-network if it’s not available in-network.
These guarantees aren’t as strong as they could or should be. Future legislators, hopefully, will improve upon them. But they provide real security, the kind that didn’t exist before--and the kind that most Americans should appreciate, even if the critics of reform don’t.
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Behind The Scenes of Health Reform: The National Association of Insurance Commissioners -
Jul 14, 2010
The new health reform act has been widely criticized as a federal government takeover of the health care system. To a remarkable degree, however, the law actually relies on the states to reform health insurance.
The health overhaul does establish new national requirements that insurers must meet. It also establishes a federal program for subsidizing the purchase of private health insurance. It imposes nationwide requirements that individuals be insured and that employers that do not offer health insurance help cover the cost of public subsidies for their employees.
But the jobs of enforcing the insurance regulations, of operating the health insurance exchanges and generally of regulating insurance are left to the states. Indeed, the health overhaul leaves state insurance law in place, only preempting laws that prevent its application.
To help coordinate state regulatory efforts, health reform looks to the National Association of Insurance Commissioners. The NAIC has for nearly 140 years orchestrated the efforts of the state insurance commissioners. Until 1944, states exclusively regulated insurance. But in that year the Supreme Court decided that the business of insurance was within the regulatory purview of Congress. The following year, however, Congress passed the McCarran-Ferguson law, handing responsibility for insurance regulation back to the states.
Although federal regulatory authority has expanded over the decades, the states have by and large continued to be the primary regulators of health insurance. The NAIC coordinates their efforts to sustain a national insurance market and to assure the efficient use of state resources.
In 10 provisions, the new health law explicitly assigns reform responsibilities to or requests help from the NAIC. One section requests the NAIC to amend its Medigap plan standards; another asks the NAIC to establish definitions and methodologies to be “certified” by the Department of Health and Human Services for determining whether insurers pay out enough of their premiums for claims or quality improvement costs (the “medical loss ratio” requirement). A number of other provisions require HHS to consult with the NAIC or to take its advice into account in drafting implementing regulations.
The NAIC website explains, “A state regulator's primary responsibility is to protect the interests of insurance consumers, and the NAIC helps regulators fulfill that obligation.” The NAIC has 29 consumer representatives this year, 18 of whom are “funded representatives,” for whom the NAIC covers the expenses of participating in NAIC proceedings. They represent groups like the cancer and diabetes societies, the heart and multiple sclerosis associations, Consumers’ Union and state-based insurance consumer advocacy organizations.
Regulators are often accused of being influenced by the industries they regulate, and the NAIC has also been criticized for being too close to the insurance industry. It’s true, the industry is a continual presence at all NAIC proceedings. But as a funded consumer representative actively participating in the NAIC health overhaul implementation process, I have been impressed with the transparency and participatory nature of that process to date and the seriousness with which the NAIC has taken its responsibility to implement the new health law.
There are several reasons why the NAIC was singled out for a key role in implementing the legislation. Most obviously, the federal government needed its expertise. Although the Departments of Labor and Treasury regulate some health insurance plans and HHS has partial responsibility for administering the Health Insurance Portability and Accountability Act, the federal government has had little experience with regulating the individual and small group insurance market, the primary concern of the health overhaul. The NAIC is the repository of state expertise in regulating these markets.
Second, the NAIC is the ideal partner for coordinating federal laws across states. No other institution has as much experience or expertise in coordinating insurance regulatory efforts among the states or between the states and the federal government.
Finally, the state insurance commissioners, the NAIC’s constituent members, are natural partners for the federal government in implementing the new law. While the political grandstanding that attended Congress’ enactment of health reform has continued unabated at the state level, the insurance commissioners have approached reform as a practical, not a political, challenge.
Even in states whose governors have vociferously opposed the health overhaul, insurance commissioners are quietly working together with the NAIC to fulfill their obligation to implement the new law of the land.
The NAIC has been hard at work implementing health reform since it was signed into law in March. Working groups and committees have held hours of conference calls and already drafted a complex form needed for the medical loss ratio instructions and another for justifying unreasonable premium increases. An NAIC committee that is working on the health insurance exchanges will hold hearings on July 22 and 23.
As implementation proposals adopted by the working groups are passed on to be voted on by all the commissioners, the NAIC process seems to be coming under increasing political pressure. I hope and trust, however, that the NAIC will fulfill the expectations of Congress; that it will prove a worthy partner in the task of reforming the health insurance industry to better serve American consumers.
Timothy Jost is the Robert L. Willett Family Professor of Law at Washington and Lee University School of Law.
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High-Risk Pools: A Rare Opportunity For Bipartisanship -
Jul 02, 2010
This month a key program created by the new health overhaul law, the Pre-Existing Condition Insurance Plan, becomes operational in many states. Over the next 40 months, this high-risk insurance pool will provide $5 billion to cover Americans who face the dual challenges of chronic illness and uninsurance. (The government's new web portal healthcare.gov provides specific information for people wishing to apply for coverage.) The high-risk pools are a temporary measure that will operate between now and 2014, when health insurance exchanges, affordability credits and the other pillars of health reform become operative.
As the high-risk pool program goes live, Republicans and others have been asking pointed questions. Senator Michael Enzi and 30 of his Republican colleagues recently sent Health and Human Services Secretary Kathleen Sebelius a sharply-worded letter regarding the high-risk pool roll-out, design and operation, and the adequacy of the initiative’s funding.
Sen. Enzi and his colleagues cite estimates from the Congressional Budget Office and the chief Centers for Medicare and Medicaid Services actuary Richard Foster suggesting that the high-risk pool funding cannot reach the full population of the medically uninsured. The letter goes on to ask whether the new program will be implemented on schedule, how many people the high-risk pools will serve, how soon states will receive funds and what happens to these participating states if the pools are oversubscribed or run out of funds. Finally, it rather darkly suggests that Democrats have "attempted to disguise the true cost of the proposals."
By any reasonable account, two things are true.
First, the high-risk pools will indeed serve a small minority of the medically uninsured. In a recent conference call for reporters, Richard Popper of the HHS Office of Consumer Information and Insurance Oversight suggested that the high-risk pools will cover roughly 200,000 individuals at any given point in time, and roughly 350,000 individuals over the life of the program.
Popper's estimates, which match those developed by others, indicate that program will serve perhaps 10 percent of uninsured Americans diagnosed with serious and costly health problems. Many low-income people in this group are unlikely to enroll because of the required premiums and out-of-pocket costs. This problem has received less attention; some of these patients may be helped by the new law's strengthened investments in community health centers.
Second, it seems that Enzi and his colleagues are rather disingenuous about both the purposes of the high-risk pools and the legislative history of health reform. The Obama administration has consistently presented the risk pools as a stopgap measure that provides some relief before 2014. But they have real shortcomings. These arise from the back-loaded, financially constrained structure of the final health reform legislation.
Perhaps Republicans were concerned by these underlying dilemmas. If so, there is little evidence of that concern in the legislative record. There is especially little evidence if one examines Republicans' own proposals for high-risk pools rather similar to those created by the health overhaul law. These pools were not intended to be a stopgap measure. Rather, they were a permanent component in Republicans' proposed health reform. Over the same 2010-2014 period, Republicans would have allocated even less than the $5 billion that the new law allocated for the high-risk pools. Given such low proposed funding, the very same access problems noted in Enzi's letter would have been more acute had Republican proposals become law.
The high-risk insurance program does not rely on budgetary chicanery or unfunded mandates. It was designed and was funded to roughly double the population served by state high risk pools. That's what it will do, providing welcome assistance to 350,000 people. The health overhaul law grants HHS Secretary Kathleen Sebelius broad authority to control many program details to honor the $5 billion funding constraint. Officials hired to implement the high-risk pools rank among the nation's most experienced government and academic experts in this area.
Yet Enzi is right that there are real problems here. The new high-risk program lacks the resources to insure every uninsured American who suffers from a costly illness or injury. Implicitly or explicitly, needy people will likely be turned away. That's not right, particularly in the wake of a historic debate which established the principle of universal access to affordable health insurance coverage.
The Obama administration will be understandably tempted to dismiss this letter as partisan posturing. I hope they greet it as an opening bid in constructing a bipartisan bill. Enzi said: "Given the importance of the high risk pool program and the reliance on this program of millions of Americans with pre-existing conditions and life-threatening diseases, it is crucial that this program be fixed and fully funded.”
Although HHS officials have been reticent to request more money, they would surely welcome additional resources. Governors—particularly Republican governors, who have conspicuously declined to set up their own risk pools, instead ceding the task to HHS—may have other interests of their own that might be addressed.
In a different political moment, these concerns might be addressed through bipartisan legislation. In our own moment, such a compromise seems a heavy lift. After all, Enzi himself was part of the unsuccessful "gang of six" negotiations that never panned out.
But there’s still a possibility for compromise. Now that the fundamental ideological issues were debated and health care reform has passed, there may be more scope for bipartisanship to tidy things up. The at times bipartisan Obama should give Sen. Enzi a ring. It's worth a try.
Harold Pollack is a public health policy researcher at the University of Chicago's School of Social Service Administration, where he is faculty chair of the Center for Health Administration Studies
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Back To The Future: CBO Budget Predictions and Health Reform -
Jul 05, 2010
This column is a collaboration between KHN and The New Republic.
Here we are again, arguing about whether health care reform will make the government’s balance sheet better or worse. The occasion for this latest round of debate is a new report by the Congressional Budget Office--one that predicts what the entire federal budget will look like several decades into the future. Critics of health care reform say the report backs up what they’ve been saying all along--that, because of reform, tomorrow’s budget deficits will be even worse than they are today. But CBO’s conclusion was a lot more complicated and at least a little more encouraging.
The report actually contains two different projections. The first and more optimistic is the “current law” scenario. In it, the CBO assumes that laws now on the books will remain on the books and that, over time, these laws will take effect as planned.
As far as health care is concerned, that means the government implements the Patient Protection and Affordable Care Act. It spends a lot of new money on Medicaid, drug assistance for seniors and subsidies for less affluent people buying private insurance. But it also saves a lot of money (by, for example, paying less money to hospitals that see Medicare patients) and raises some new taxes (most notably, through a tax on expensive private health insurance plans).
Add it all up, as the CBO did, and the budget deficit actually gets a little smaller. The emphasis is on “little,” since the net reduction is actually pretty small. Instead of running really really really big deficits, the government ends up running really really big deficits. Still, it’s an improvement--and maybe even a bigger improvement than the CBO predicts.
When calculating the current law scenario, CBO decided that reform would generate no new savings after 2030. In fact, many experts expect that reform’s greatest potential to generate savings lie in the medium- to long-term, as systems for reducing wasteful care become more adept. More important, health care reform includes myriad changes to the medical delivery system--everything from creating an electronic medical record system to scrutinizing new drugs and devices for effectiveness. CBO does not anticipate these changes saving much money. But if they do--as respected experts, like Harvard economist David Cutler, claim they will--then the savings could actually be substantially larger than CBO has allowed.
Of course, none of these means anything to the critics, who could care less what it looks like on paper. They insist the real problem with health care reform is that it will never be fully implemented. As this argument goes, policy-makers will chicken out when it comes time to impose cuts that affect powerful industries or enact taxes that might affect some constituents.
The CBO sketches out a possibility along those lines with its “alternative” scenario--a world in which the government refuses to impose various policies that might be politically unpalatable. In this scenario, health care reform doesn’t reduce the deficit. It causes the deficit to rise, although, again, not by that much.
Could this, more dour prediction prove correct? Absolutely. All of these projections--the good ones and the bad ones--are possible. But it’s wrong to assume the more pessimistic scenario is more likely.
During the 1990s, policy-makers passed--and then implemented--a set of tax and spending changes that eventually balanced the budget and actually led to budget surpluses. Among these were cuts to Medicare actually more severe (as a percentage of total Medicare spending) than the ones health care reform anticipates.
The next decade’s policy-makers might not be as responsible as the last decade’s. But if not--if they want to abandon the commitments of the new health reform law--it won’t be easy. If, for example, a new president and Congress decide in 2017 they don’t really want to impose the new tax on health benefits, they can rescind it. But then they'll have to come up with something to replace the anticipated revenue--or willingly run up even higher deficits. And, given the political consequences of either move, they might very well decide to stick with the tax after all.
If that all sounds fanciful, consider what is happening right now on a related issue: Planned reductions to physician payments in Medicare. The cuts are the product of a poorly designed payment formula from the 1990s. But calls to rescind the formula have gone nowhere this year, because doing so would mean running higher long-term deficits and there’s no political appetite for that. Faced with this dilemma, Congress has instead resorted to passing a temporary stay, good for just a few months and paid for by money already set aside for other purposes. In this political environment, getting a “permanent fix” of the formula seems highly unlikely until somebody figures out how to pay for it.
True, political environments change. Two, five, or 10 years from now, politicians might decide to be careless with taxpayer dollars--and taxpayers might let them get away with it. But that’s always true. Today’s lawmakers can’t force tomorrow’s to be fiscally responsible. All they can do is pass fiscally responsible laws and hope future generations carry them out. With health care reform, they’ve done just that.
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The Medicare 'Doc Fix': How to Make Political Lemonade -
Jun 25, 2010
The mechanism that governs the growth rate of Medicare spending on physician services isn’t working. The Sustainable Growth Rate put in place in 1997 is supposed to keep total Medicare physician costs from growing faster than the overall economy. When costs do grow too quickly–and they always do–the law demands that prices be cut commensurately.
But it doesn’t work. The SGR target is too low. Medical inflation is perennially above the growth rate of the economy. So Congress always overrides those mandated cuts, and the gap between spending dictated by the SGR and actual spending grows. Most recently it stood at 21 percent.
This is no way to run a health care system. The SGR may make 10-year budget projections look good, but that’s only because it’s based on an unrealistic assumption that the mandated low growth rate can be sustained. By now we know that it can’t.
The solution is not to let the 21 percent cut go into effect. That’s too deep a cut and would devastate physician practices and severely restrict beneficiary access to care. Nor is the solution to keep patching the problem with interim over-rides. That’s what Congress did last week. It’s a stop-gap and doesn’t address deeper problems. Instead, a systemic “doc fix” is required.
The first step toward a solution is a fuller understanding of the problem. Costs are the product of payments and volume. Growth in Medicare physician payments are constrained by the relatively small updates Congress allows in its over-rides of SGR dictated cuts. Last week Congress voted to replace the 21 percent payment cut with a 2.2 percent increase, for example.
With such small increases, payment levels are below those in effect in early in the decade, adjusted for medical inflation. (This is, by the way, a cost-control virtue of the SGR. There’s nothing like the threat of a double-digit percentage payment cut to make a one or two percent increase look large.) But the volume of health care services remains unconstrained. As it grows, so do costs.
Controlling volume is a challenge, one Congress has never met. It’s too easily defeated by charges of government rationing. Of course, markets ration, too, based on prices. In a market, higher prices lead to lower volume. But Medicare is not a market. Congress – not beneficiaries -- pays most of the bill. Congress can’t dictate prices and turn a blind eye toward volume and expect costs to fall.
The SGR problem is now so large it offers an opportunity for political leverage on the issue of volume. The American Medical Association and other physician groups may want it fixed badly enough that they’ll accept some payment system changes in return. And, in the current anti-deficit climate the cost of a full fix–estimated at $245 billion over 10 years–must be partially offset with some kind of savings. As an illustration of the political power of a full SGR fix, the AMA supported health reform on the promise of one.
What should Congress seek in exchange for scrapping the SGR methodology? At the top of my list would be to base some of physician payment on quality improvement. Aligning payment incentives with quality and not quantity will strike at the heart of the cost growth problem. Also high on the list should be reducing payments to specialists and increasing those for primary care physicians.
Specialists are responsible for hundreds of billions of dollars of unnecessary care annually and primary care doctors are predicted to be in short supply as more Americans obtain coverage under the new health reform law. Finally, payments should be adjusted to account for geographic variation in costs that are reasonable and related to appropriate care.
The SGR system was flawed from the start and should have been fixed years ago. But now we have an opportunity to make necessary systemic changes. This lemon really can, and must, be turned into lemonade.
Acknowledgment: Aaron Carroll (physician, Indiana University professor, and
blogger
) provided valuable feedback on an earlier draft.
Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at The Incidental Economist.
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About Those Presidential Promises -
Jun 23, 2010
Over the past three years, President Barack Obama made many promises to the American people about his health care plan. Among other things, he said it would reduce the federal budget deficit in coming years, promote better quality care and improve access to physicians.
But two promises stood out in the sales pitch because they were aimed at assuaging the deepest fears of a broad cross-section of the electorate: those who already have good health insurance today.
First, during the presidential campaign, Obama promised on numerous occasions that families with existing coverage would see their annual premiums fall, on average, by $2,500 per household. Jason Furman, an adviser to candidate Obama and now an economic aide in the White House, even said that the Obama campaign team believed this level of premium savings could be fully achieved, or nearly so, by the end of an Obama first term.
Second, throughout the campaign and many times since taking office, the president has promised to let Americans stay with the health insurance plans they are enrolled in today if they want to. In other words, the changes he favors in health care arrangements would not force anyone out of something they find entirely satisfactory.
These promises were not throwaway lines. They were often repeated because they were instrumental in making the case for the legislation.
The truth is that the vast majority of working-age Americans and their families find the coverage they have today to be more than acceptable. Yes, they see problems in health care that need fixing, which is why they are inclined to favor some kind of reform. But that doesn’t mean they don’t like their own plans, because most often they do. And why shouldn’t they? In the main, job-based insurance is fairly generous, with low cost-sharing and expansive coverage. Moreover, it usually provides access to the best doctors and hospitals in town. Firms often have little choice but to offer such coverage in order to attract the kind of workers they need to compete.
Consequently, there was very little Obama could do to make health care better for these people, and much he could do to make matters worse. Which is why he promised them that his overhaul would essentially leave them alone — and cut their costs. What’s not to like about that?
The problem, of course, is that the reality of the new law differs markedly from what was promised — something that is becoming increasingly clear by the day.
A recent story in the New York Times reported that employee benefit professionals expect the health law’s new insurance requirements will add 2 to 3 percent to job-based premium costs next year. One way or another, firms will pass on these added costs to their workers, in higher premiums, higher cost-sharing requirements or reduced cash wages. With the cost of family coverage at about $14,000 per year, that means the new law will cost households $400 or more in 2011. And that doesn’t yet account for the new taxes on the health sector that will get passed on to consumers, or the large premium increases expected to be imposed on younger and healthier people from the more sweeping insurance changes coming in 2014.
The administration and its allies argue that the other provisions of the bill will somehow bring about offsetting cost reductions too. But how?
The two main cost-cutting ideas were so violently opposed by congressional Democrats that they don’t kick in for many years. The tax on “high-cost” plans was delayed until 2018, and the Independent Payment Advisory Board won’t be issuing binding recommendations until 2015.
In the meantime, the only plausible cost-cutting ideas are the “delivery system changes” promoted through Medicare. The law’s proponents are especially keen on the potential of Accountable Care Organizations.
Under the new law, ACOs are a concept to be tested, starting in Medicare. The hope is that they will induce physicians and hospitals to practice less expensive managed care through payment incentives. But it’s far from certain that the provider community will embrace them, given the inevitable red-tape that comes with government-initiated “reforms.” Moreover, Medicare’s enrollees may rebel when they find out that the test allows the assignment of Medicare patients to ACO networks without their consent or even their knowledge. Banking on big savings from something with so many question marks and implausible assumptions is wishful thinking in the extreme. At best, it will be many years before ACOs make a difference, and there’s a good chance they never will at all.
In a nod toward the other key presidential promise — that you can keep what you have today — the new law includes a provision that allows “grandfathered” plans to remain in place even as new sweeping insurance regulations impose requirements, and costs, on other insurance products. But the Department of Health and Human Services has wide discretion to define what constitutes a qualified grandfathered plan under the law. And last week, HHS Secretary Kathleen Sebelius used that discretion to essentially make it impossible for most job-based plans to qualify for the designation. Small changes in benefits and cost-sharing -- the kinds of changes most employers are forced to make every year to address changing circumstances -- will disqualify those plans from the grandfather designation. That means virtually all job-based health insurance will be forced to comply with the federal government’s new regulatory requirements in just two or three years -- something the administration has all but admitted was their intention all along.
The president and his team understood early on that they could not pass a sweeping health care bill without promising those with good insurance that, at a minimum, their coverage wouldn’t be harmed and their costs would not go up. Despite the relentless sales pitch, there was always a lot of skepticism among voters that such a government-heavy plan would leave them alone and be cost-free. Now, of course, their skepticism is being validated. Yes, the bill has passed. But a price will be paid for muscling it through to passage based on promises that are being broken just a few months after enactment.
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Even With The ‘Grandfather Clause’ Protection, Change Is Coming To Most Health Plans -
Jun 21, 2010
Now that Karl Rove doesn't have a Republican president to advise anymore, he's been picking up some new hobbies. One of them is health care policy. In a recent column for the Wall Street Journal editorial page, Rove made the latest in a series of attacks on the new reform law. Rove offered a number of familiar conservative allegations: Reform would bankrupt employers, stick people with lousy coverage, etc. But my personal favorite was his reaction to new regulations the Obama administration had issued just a few days before.
Health care reform includes a "grandfather clause." Basically, an insurance plan that existed before reform became law won't be subject to many of the law's new regulations on benefit design and company behavior. But under the new regulations the administration just unveiled, plans lose this exemption if their coverage changes substantially for the worse. For example, if an employer offering insurance to employees decides to hike deductibles or stop covering a major disease, the grandfather clause would no longer apply. The plan would become subject to the full array of reform's requirements, which include everything from full coverage of preventative care to the right of appeal for treatment denials.
This horrified Rove. Among other things, he noted, a plan could lose grandfather status if employers decided to switch carriers--"a common practice when employers shop for lower prices." Well, yes. So what? The grandfather clause is there to let you keep your current insurance, assuming you like it and that it remains available to you. But if your employer is switching carriers, then it's not really the same plan anymore, is it? You've already lost your insurance. Obama didn't take it away from you. Your employer did.
And that's really the broader point to keep in mind--not just in the debate over this particular regulation, but in the debate over health care reform that's going to continue over the coming months and beyond. Rove and other Republican leaders have been making a lot of noise about the fact that, within a few years, the vast majority of Americans with private health insurance will have different health insurance arrangements than they do today. The new motto for health care reform, according to House Minority Leader John Boehner, R-Ohio, "should be 'If you like your health care plan, too bad.' "
To hear these Republicans talk, you'd think insurance arrangements never change--that people are walking around with the same generous policies they had 20 or 30 years ago. Of course, nothing could be further from the truth, as anybody who pays attention to their coverage can tell you.
Insurance changes all the time. And it's not usually for the better. In recent decades, as the cost of health care has skyrocketed, millions have become uninsured while additional millions have become under-insured. The point of health care reform is stop and, eventually, reverse this trend--to make sure everybody has access to an insurance policy, to make sure insurance policies actually provide adequate protection, and then to make sure coverage is affordable both for individuals and the country as a whole.
The most logical way to do this, arguably, would have been to blow up the existing insurance system and just start over--perhaps by giving everybody a basic, government-provided benefits package through something that looks like Medicare, and then introducing system-wide reforms to make health care less expensive overall. But that would have meant changing everybody's coverage right off the bat. And that's too big a jolt for the political system to handle. Just ask veterans of the Clinton Administration, whose tried their own, similarly ambitious scheme--only to have it fail, in part because too many insured Americans feared it would instantly take away what they already had.
Instead, Obama and the Democrats have opted for a more gradual transition. As long as existing policies are still available--as long as employers and insurers continue to offer something as good as what they offer today--people can continue to buy them. That's the reason for the grandfather clause. But if an employer or insurer diminishes some existing coverage, then the protections of health care reform kick in--the guarantees that all policies will include basic benefits, the limits on out-of-pocket spending, and so on.
Even with this slower approach, will most people's health insurance still change? Absolutely. But change was coming no matter what. With reform, it's likely to be change for the better. If Rove and his Republican friends had their way, it'd likely be for the worse.
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Market-Based Reform Initiatives Are Key To Health Law Success -
Jun 16, 2010
Consumer-directed health plans have been useful in controlling the rise of health costs over the last several years, but the survival of these plans is threatened by the new health overhaul law.
Mercer’s latest National Survey of Employer-Sponsored Health Plans found that major employers held total health benefit cost increases per employee to 5.5 percent in 2009 – the lowest increase in a decade (see chart below). Participation in consumer-directed health plans, as well as health management programs, has been growing over the last few years as companies sought ways to successfully engage employees as partners in managing costs and care.
Source: Mercer's National Survey of Employer-Sponsored Health Plans; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April) 1990-2009; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April) 1990-2009.
Enrollment in consumer-directed plans grew to an estimated 23 million people in 2009, up from 18 million people in 2008—a 27% increase, according to an April report by the American Association of Preferred Provider Organizations.
Among the most notable is the growing adoption of Health Savings Accounts. Ten million Americans now are covered by HSA-qualified health plans, up from eight million last year, according to the latest survey by America's Health Insurance Plans. To open tax-free health savings accounts, people first must be enrolled in high-deductible health insurance plan.
Unfortunately, ObamaCare threatens to render these plans a thing of the past. Until now, employers have had the flexibility to tailor benefit and cost structures to fit their budgets and corporate cultures, but the new health overhaul law will limit their options in the future.
Under the new law, the Department of Health and Human Services will make the ultimate ruling on HSAs when it decides how to calculate the actuarial value of the high-deductible health insurance policies that must accompany health savings accounts.
The health law requires also that all insurance policies will be required to provide a minimum actuarial value of at least 60 percent for the benefits covered. If HHS allows contributions by individuals and employers to health savings accounts to “count” as part of the actuarial value, then HSAs and other account-based plans would likely meet the test. But if contributions are not included, the plans likely would not qualify, removing an important tool to hold health costs down.
HSAs couple a tax-favored savings account used to pay medical expenses with a high-deductible health plan that meets certain requirements for deductibles and out-of-pocket expense limits. Most cover preventive care services, such as routine medical exams, immunizations and well-baby visits, without requiring enrollees to first meet the deductible. The funds in the HSA are deposited tax free, interest earned is tax free, and the account is owned by the individual and may be rolled over from year to year.
The new AHIP study underscores the value of consumer-directed plans in achieving key goals of the health reform effort. Here are some highlights of the AHIP survey of people enrolled in HSA-qualified health insurance:
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Lower premiums: Monthly premiums for individuals aged 30 to 54 averaged $2,465 a year ($205 a month) and $5,335 for a family ($445 a month) – less than half the average costs of traditional plans.
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Larger companies: The fastest growing market for HSA/HDHP products was large-group coverage, which rose by one-third, followed by small-group coverage, which grew by 22 percent.
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PPOs preferred: Overall, preferred provider organizations (PPOs) were the most popular insurance type, with 88 percent of enrollees. They generally have access to negotiated discount arrangements with health care professionals when paying bills from their HSA accounts.
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More consumer information: More than 90 percent of responding companies reported offering access to HSA account information, health education information, physician-specific information, and personal health records as consumer decision support tools for their members.
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Not just for the young: Fifty-two percent of all individual market enrollees -- including dependents covered under family plans -- were aged 40 or older so they clearly are not just for the young, as critics claim.
The charts below tell the story of success:
Indiana Gov. Mitch Daniels, a Republican, says providing the HSA option to state employees will save the state at least $20 million this year, and employees will save $8 million compared to their coworkers in traditional health plans. More than 70% of Indiana’s 30,000 state employees have selected the HSA option.
Gov. Daniels says that employees become more active participants in their health care, making smarter and more cost-effective decisions – visiting hospital emergency rooms 67% less often and using generic drugs more than those in conventional plans, for example. An independent survey by Mercer found no evidence that HSA members are deferring needed treatment or preventive care.
Many companies, such as Whole Foods, offer another form of CDHC plan called Health Reimbursement Arrangements. HRAs give employers more flexibility in shaping their health benefit packages, including the ability to offer account-based plans and provide incentives for prevention and wellness activities. But, unlike HSAs, HRA account balances generally are not portable after employees leave the company. Both products are helping to make health insurance more affordable and are helping companies to lower health costs.
Competition works when consumers are engaged in getting better value for their health care dollars. Policymakers would be well-advised to make sure that these consumer-friendly plans remain as an option for both individuals and employers so they can continue to have these tools to engage employees as partners in managing health costs.
Grace-Marie Turner is president of the Galen Institute, www.galen.org, a non-profit research organization focusing on patient-centered health reform initiatives. She can be reached at gracemarie@galen.org.
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Medicare Advantage: You Get What You Pay For -
Jun 11, 2010
The Obama administration seems worried. In an election year, any change to Medicare that adversely affects beneficiaries is a political liability for incumbents. And big changes to Medicare are coming, beginning with Medicare Advantage, the program that provides private insurance alternatives to traditional fee-for-service Medicare, the program’s public option.
Last Monday, private insurers that offer Advantage plans submitted their 2011 bids, estimates of the cost of providing a fixed set of basic Medicare benefits next year. It is through this annual bidding process that the generosity of coverage and level of cost-sharing for each plan is established. With 2011 government payments to plans fixed at 2010 levels by the new health overhaul law, it is likely that beneficiaries will pay more to get less from Advantage plans next year. The bids will reveal how much.
According to the Wall Street Journal, in advance of the bid deadline, Department of Health and Human Services Secretary Kathleen Sebelius sent a letter to insurance companies warning them not to dramatically increase premiums or cost-sharing of Advantage plans. If they do, they run the risk that Sebelius will reject their proposals.
Despite the secretary’s threat, it’s inevitable that Advantage plans will adjust their premiums and cost-sharing upward in the long run, if not in the short run. Over the next few years, the new health law gradually reduces Advantage payments from today’s generous levels that are about 15% above fee-for-service costs. The lower levels will depend on local costs and plan quality.
That’s good news for taxpayers, even if it isn’t welcome news to Medicare beneficiaries. According to the Congressional Budget Office, the reduction in plan payments is expected to save over $100 billion in the next decade. The lower spending on Advantage plans inevitably will lead to reductions in plan availability. Some beneficiaries will have access to fewer plans, some to none at all, a fact illustrated by a Health Care Financing Review paper I co-authored.
Our earlier paper in the International Journal of Health Care Finance and Economics indicates that even where plans continue to be offered, their benefits will be less generous as government payments decrease. Though beneficiaries will object to the loss of benefits, they actually don’t value those benefits anywhere near their full cost to taxpayers. In a study published last year, also in the International Journal of Health Care Finance and Economics, we found that for the benefits provided by each additional dollar paid to Advantage HMOs since 2003, beneficiaries would have paid just $0.14 out of their own pocket. In monetized terms, a dollar saved makes a Medicare beneficiary worse off, but by far less than one dollar.
This relatively poor return of value on taxpayer dollars is why I support reductions in Advantage payments. The administration and congressional Democrats have chosen the right path for Advantage payment policy. Having done so, they are now faced with a political problem. How can they avoid the potential ire of disgruntled Medicare beneficiaries? It will be hard, if not impossible.
Sebelius’ letter is a good try. It’s an attempt to bully plans into self-subsidizing their products or finding creative ways to hide the reduction in generosity this year. If she succeeds, then she’ll have achieved a short-term political victory. But she’s facing an uphill battle.
In the long run, there’s no getting around the fact that Advantage plans will shrink in generosity and availability. Anything else would defy a fundamental law of economics that also happens to be a fundamental law of politics: you get what you pay for.
Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at The Incidental Economist.
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Reform Whiplash -
Jun 04, 2010
This column is a collaboration between KHN and The New Republic.
Will health care reform reduce spending on health care too little? Or too much? Over the last several days, one respected authority made a version of the former argument while another made a version of the latter--offering a reminder of why reform is so complicated and why the new law, for all its imperfections, is still an important step forward.
The first argument about spending came from Douglas Elmendorf. Elmendorf is director of the Congressional Budget Office, making him Washington's official accountant and among the most influential voices on all matters relating the federal budget. During a conference presentation, he announced that the Patient Protection and Affordable Care Act won't significantly reduce what the government spends on Medicare and Medicaid.
This wasn't exactly news. Elmendorf and his staff had produced official cost estimates for the new health overhaul bill in the spring, just before the final debate and vote. Those projections showed that the initiative would reduce net government spending by only a modest amount.
Of course, the fact that reform would reduce net government spending at all represents a major achievement. The new health law includes expansions of Medicaid, additional drug assistance for seniors on Medicare and new subsidies for poor and middle-class people that buy private health insurance-that's how it makes sure all Americans (or most of them, anyway) can actually afford their own medical care. But those efforts require the federal government to spend large sums of new money. Only by coming up with an even larger set of cuts to existing programs, along with new revenues, could the law result in actual savings.
And yet Elmendorf was right about the long-term picture: The projected reduction in health care spending is small relative to what the government is likely to spend over the next few decades, given the aging population and the development of expensive new medical technologies. Or, to put it more simply, even with the reform law's projected reductions in government spending, Washington remains on the hook for spending more on Medicare and Medicaid than it is currently prepared to take in.
So the government needs to find even more savings. And there are savings to be had, Elmendorf suggested, since the best available evidence suggest a lot of what the government spends on Medicare and Medicaid doesn't actually leave beneficiaries better off.
That evidence includes, first and foremost, a famous series of studies that researchers at Dartmouth have produced over the last 30 years. Their research shows that spending on medical care varies wildly from community to community-with no apparent effect on the quality of care people receive. Seniors in Miami, for example, get way more treatment than seniors in Minneapolis. But they don't seem to end up healthier afterward.
To say that reformers have read and been influenced by the Dartmouth research is an understatement. President Barack Obama and his supporters cited it repeatedly over the last year. But a front-page story in the New York Times-the type of story that, by design, gets Washington's attention-suggested the Dartmouth research is full of ambiguity. One implication of the story was that overly severe cuts in medical spending would deprive people of necessary and appropriate medical treatments.
Sources for the Times story, including one of the Dartmouth researchers, claim (persuasively, from what I can tell) that the Times reporters either took quotes out of context or made errors. But the idea that cutting health care spending too crudely or severely will harm patients is credible.
The question isn't so much whether the waste exists. The question, rather, is whether reform can pinpoint and excise that waste-whether it can cut out the bad medical care without removing the good.
Go back to that Miami versus Minneapolis contrast: To what extent are the Miami seniors getting too much care and the Minneapolis ones getting too little? To what extent does the disparity reflect other factors for which the Dartmouth studies and other related research may not fully account?
Different people will give you different answers to those questions. My own view is that over-treatment (i.e., too much care in Miami) is more of a problem than under-treatment (too little care in Minneapolis) and that, in an ideal world, the health overhaul law would have reduced spending more severely. It would have implemented many of the same reforms it does already-like applying scrutiny to new drugs, imposing penalties on hospitals with high rates of infection and so on. But it would have done so more quickly and more severely.
Still, providers and producers of medical care--all of them well represented in Washington--don't like anything that might reduce their incomes. And, as a recent survey in Health Affairs showed, the public continues to equate more care with better care. The reform law includes as many, or close to as many, cuts as these groups would tolerate. And it enacts reforms that can be strengthened over time, through some combination of administrative rulings, congressional action and intervention from a new advisory board whose sole purpose is to control Medicare spending.
Over time, we can see which cuts reduce spending without harming quality--and which ones don't. We can then double-down on the former while minimizing or eliminating the latter. It's not an ideal solution or even an elegant one. But given how health care costs are projected to rise, it's what we have to work with.
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The Decline Of Employer-Sponsored Coverage Under Health Reform: Good, Bad Or Ugly? -
May 26, 2010
One of the latest criticisms of the new health overhaul law is that it will encourage employers to stop offering health insurance. In fact, it will.
We should welcome this, provided the decline in employer coverage is gradual and good alternatives exist. There are several advantages to the way in which the new law promotes severing the connection between employment and health insurance. One of them is that it will make more visible the biggest looming health care problem: costs.
The erosion of employer-sponsored health insurance is not new. Employers have been dropping coverage for years. According to the 2009 Kaiser/HRET Employer Health Benefits Survey, over the last decade employer offers of health insurance have declined by 10 percent. That’s been a problem because affordable coverage has not been readily available for many consumers outside of employer groups. For far too many, the only viable alternative to employer-sponsored insurance has been no insurance.
That will change in 2014 when coverage becomes available on exchanges, along with federal subsidies – depending on income – to buy it. That same year, Medicaid will expand to cover all individuals with incomes below 133 percent of the federal poverty level. As these non-employer options become available, the incentive and need for employer-sponsored insurance will decline.
A few years later, in 2018, another incentive for employer-sponsored health insurance – its preferential tax treatment – will begin to erode. A 40 percent excise tax (the “Cadillac tax”) will be levied on a gradually increasing portion of employer-based premiums. Right now, in contrast to insurance bought by individuals, premiums on employer-provided coverage are not taxed. That tax subsidy causes employer plans to be about 40 percent cheaper than they otherwise would be and encourages 26 percent more health spending than would otherwise occur. The excise tax will gradually recapture the foregone tax revenue, reduce the health care costs encouraged by the tax subsidy and drive down the incentive for employees to seek employer-sponsored coverage and for employers to offer it.
So, the deck is stacked against employer-sponsored coverage. The only things in the new health care law that encourages it are small-business subsidies for offering coverage and large-employer penalties for failing to do so. The former are scheduled to sunset after 2016 and the latter are small relative to a typical insurance premium. In the long run, they’re no match for the forces against employer-sponsored coverage.
But we need not fear the loss of employer-sponsored insurance if good, reasonably-priced options exist in the individual market. It’s essential that exchanges with fair subsidies to purchase coverage function properly.
Breaking the connection between insurance and employment solves other labor market problems too. It would reduce “job lock” (keeping a job for the insurance only) and enhance employment mobility. It would increase the insurance options available to most workers, an effect estimated in a recent National Bureau of Economic Research working paper to be valued at over $2,000 for a family of four. And, it would permit the reallocation of dollars spent by employers on health care premiums to wages, giving workers greater control over how the money is spent.
Meanwhile, as our health care system undergoes this change, health care costs will continue to rise faster than GDP, a clearly unsustainable rate. This isn’t a result of the new health care law (health care costs would soar nearly as rapidly without it), and it isn’t likely to be fully resolved by it (despite some provisions that can help).
One thing the new health care law will do is make us more aware of those costs. The same features that will contribute toward reduction in employer-sponsored coverage will also more fully reveal the cost of care.
A growing portion of largely obscure employer-based insurance tax subsidies will be replaced with explicit income-based subsidies. Higher-income individuals who switch from employer-sponsored to individually-purchased coverage will directly pay the full cost of premiums. For such individuals the hidden contribution their employers had made toward premiums as well as their own implicit payments via payroll deduction will be fully revealed. No longer will health insurance premiums be out of sight, out of mind. Cost increases will be easy to observe and harder to accept.
As the full impact of those cost increases becomes apparent, there may be a temptation to interpret them as a consequence of the erosion of employer-sponsored coverage. That would be a mistake. Some will likely confuse the distributional consequences of the new law with the absolute changes in underlying costs. That would also be incorrect. There may be calls for rollbacks of the high-premium excise tax, reductions in low-income subsidies, or higher employer penalties. Providers and the insurance industry may encourage such measures as means of putting off painful changes to their business models. That would be a shame.
The mechanisms that will contribute toward reduction of employer offers will make costs more visible and play a role in the redistribution of their burden, but they will not be responsible for cost increases. Weakening those mechanisms may temporarily push cost increases back below the radar, but it will do nothing to reduce them.
The ultimate consequence of the decline of employer-sponsored insurance depends on how we respond. Good, bad or ugly? It’s up to us.
Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at
The Incidental Economist
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London Fog: Berwick and Britain's NHS -
May 21, 2010
This column is a collaboration between KHN and The New Republic.
He’s a socialist! He’ll redistribute wealth! He wants to pull the plug on grandma!
That’s what Republicans said about President Barack Obama back in 2009, while he was trying to make health care reform bill law. Now they’re saying it about Donald Berwick, the man Obama has appointed to help make health care reform work.
Who is Berwick? He’s one of the nation’s well-respected and best-known authorities on our health care system. A Harvard-trained pediatrician, Berwick has spent the last two decades studying how to make medical care more efficient, then spreading the word on how to do it. That work took him across the country and, sometimes, across the ocean.
Among the places he visited was Britain. Two years ago, he spoke at a 60th anniversary celebration of Britain’s National Health Service. And that’s where he got himself into trouble.
Berwick made the great error of declaring himself a “romantic” about the NHS. He praised Britain for making health care a right, rather than a privilege--and bemoaned the fact that the U.S. had not done the same. He talked up the British focus on primary care--and applauded its willingness to scrutinize technology for effectiveness rather than to simply pay for anything the drug or device industry conjures up.
You might think these are perfectly sensible positions. You would be right. In fact, most respectable health care experts would say the same thing, whether they are liberal or conservative.
Mark McClellan and Gail Wilensky both praised Berwick’s nomination. McClellan ran Medicare and Medicaid under President George W. Bush. Wilensky held the same position during the administration of Bush’s father. That's the same position for which Obama nominated Berwick, so you might think their opinion counts for something.
Evidently, it doesn't. Senate Minority Leader Mitch McConnell, of Kentucky, said he was "alarmed" by Berwick's admiration of the NHS. Senators Jon Kyl of Arizona and Pat Roberts of Kansas say Berwick advocates the “rationing” of care. Of course, as Berwick pointed out, our system already rations care by income and medical status. Apparently this is not so alarming to McConnell and the rest of the GOP.
Even if these Republicans can’t stop Berwick’s confirmation, they can delay it. And the longer it takes Berwick to take that job, the more difficult implementing the new health care law will be. Remember, taking the helm at Medicare and Medicaid isn’t simply about running those two government insurance plans--although, to be sure, that’s a hugely important job by itself. It’s also about using the government’s insurance plans to induce system-wide changes in the way doctors and hospitals do business. It's these changes, in theory, that will eventually make medical care less expensive over time.
But delayed implementation isn't the only reason the campaign against Berwick is worrisome: It's also yet another troubling sign about our public discourse.
The strengths Berwick saw in the NHS are real, particularly when it comes to primary care. On a visit I made to London a year ago, a family doctor demonstrated to me how the NHS used information technology to make sure diabetics get proper routine care. It was light years ahead of what I’d seen in the U.S.--and not atypical. A 2009 survey from the Commonwealth Fund (which also underwrote my reporting trip to England) found that 89 percent of British doctors have advanced electronic medical record capability in their offices, compared to just 26 percent in the U.S.
Still, the NHS has some real flaws. Relatively low cancer survival rates trouble patients, physicians and policymakers. Waiting times for specialists have come down in the last few years, but they remain higher than much of the country would like. Berwick actually mentioned this in his speech. You wouldn’t know it from listening to Fox News, which has replayed excerpts of the speech, but the tribute he gave was nuanced--not to mention smart. A lot of the advice he gave the Brits would work here, as well.
That’s not to say Berwick is right about everything--whether the subject is British health care or its American counterpart. I'm sure McClellan and Wilensky have their differences with him, as do their more liberal associates.
A confirmation process that aired out this debate, both to educate the public and hash out some of the finer points of implementation, would be a true public service. But such a debate seems unlikely now. It's hard to have a serious conversation on policy when one side refuses to be serious.
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The Prevention Dilemma -
Apr 22, 2010
If given the choice to spread prevention money around or to concentrate it to make a profound, historic and measurable impact, what would you do? That’s the question raised by the new health law. Secretary of Health and Human Services Kathleen Sebelius must soon respond to a congressional mandate to spend millions of dollars on a potentially endless array of worthy projects, ranging from bike trails and community gardens to local public health departments and obesity prevention.
There will never be enough federal money to address every prevention need. What the secretary needs to decide is whether there is sufficient political courage to concentrate early prevention funding to deliver a knockout blow to the leading cause of premature death in the country: tobacco.
The health reform law includes a first-of-its-kind public health fund. This year’s first payment is $500 million. Next year, the annual payment increases to $750 million, and by 2015 will rise to $2 billion.
Congress considers this fund to be an investment toward the goal of transforming our “sick care” system into a true health system. It has provided minimal guidance to the Secretary - instructing her to spend the funds “to improve health and help restrain the rate of growth in private and public health care costs.”
The catch is that Sebelius must spend the fiscal year 2010 funds--$500 million--as quickly as possible. This rush will create a powerful temptation to distribute the money through another round of stimulus bill-like “prevention grants” or to backfill shortfalls in core public health programs.
The secretary could follow bureaucratic tradition and spread the funding broadly among numerous initiatives that would satisfy many interests. Unfortunately, that would achieve little in the way of measurable public health impact. A bolder, but less traditional, approach would be to use the funding to target a single public health threat and attack it on a national scale, utilizing programs that have been proven to improve public health and reduce the cost of health care.
The criteria for prioritizing this specific funding should be simple: what are the evidence-based programs that are primed and ready to go, that are proven to work, that we know will move us toward a healthier society and that we can be sure will deliver a large, measurable return on investment?
By these criteria, the top priority for prevention spending should be tobacco control.
Tobacco control programs are ready to go. Decades of rigorous study have proven that tobacco control programs can reduce smoking and improve public health.
The need is great. Despite our success in cutting the smoking rate roughly in half over the last 50 years, tobacco use remains our leading preventable cause of premature death. It kills over 400,000 Americans a year, drives huge increases in chronic disease rates and $96 billion in health care costs. And the Centers for Disease Control and Prevention estimates that states are currently spending only a fraction of what is needed to reap the maximum value in public health benefit.
A bold effort to meet the mission of this new public health fund would include three main components:
1) Nationwide public education campaign modeled on the highly successful Truth® campaign that dissuades thousands of young people from initiating tobacco use and encourages smoking cessation;
2) Fully funding quit lines that provide direct cessation services and significantly improve quit rates efficiently and effectively, especially among disadvantaged populations served by Medicaid; and
3) Support for existing state and community-based tobacco control programs that reach people where they live, work, play and worship.
The American public wants and deserves a health system that sets a priority on keeping people healthy, not just treating them once they are ill. If community-based tobacco control programs could be brought to scale nationally, we have a genuine opportunity to drive smoking rates into single digits. The rapid and enduring payoff, in lives and money saved, is there for the taking. It’s a rare opportunity. I urge Secretary Sebelius to seize it.
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The Health Care Cost Problem We Refuse To See -
Apr 22, 2010
I agree with those who think the Patient Protection and Affordable Care Act doesn’t do enough soon enough to control the rate of increase in health insurance premiums. But I disagree that the solution is simply to pass more laws that regulate health insurance rates (as suggested in a May 9 New York Times editorial) or just to increase competition in the health insurance industry (as suggested in a May 6 Washington Times commentary). Such measures would be insufficient on their own and could even do some harm.
Our frustration with the soaring cost of health care is like a mother upset with the increasing price of bread. When her son returns from the market with another high-priced loaf she hatches a plan. The following week, when bread costs $5 a loaf, she attempts to control the price by sending him to the market with only $4. The family spends less on bread that week, but they also don’t eat any since the boy couldn’t find a merchant willing to sell below the market price.
The next week bread is selling at $6 a loaf, and the mother tries another plan. Thinking her son lazy, she attempts to discipline him with competition. She sends her daughter with him to the market. Whichever of the two can obtain the lowest bread price will win the family’s respect. The winning price, paid by the daughter, is $7. She and the boy competed, but the additional competition on the buyer side sent the price up, not down (as one should expect).
What the mother isn’t noticing about the bread market, and many don’t recognize about health care, is that suppliers (bread sellers, health care providers) play a role in establishing prices. Regulating the price paid by buyers or the level of competition among them isn’t likely to produce the outcomes we might hope for without parallel action on the provider side of the market.
Take increasing insurer competition, for example. Results presented in two papers in the International Journal of Health Care Finance and Economics and another in Health Affairs indicate diluting insurers’ market power would cause prices to rise, not fall. The reason is that hospitals maintain such high degrees of market power that high concentration in the insurer market is necessary as a counterweight. Weaker insurers would be less able to counteract the market clout of hospitals at the bargaining table. Clearly just decreasing concentration among insurers while ignoring that of hospitals is unlikely to be the solution to escalating health care premiums.
If concentrated insurers negotiate lower prices, what compels them to pass the savings on to consumers? Here, regulation can help, and it is already in place. The Patient Protection and Affordable Care Act regulates medical loss ratios (MLRs), the proportion of premium revenue that must be spent on health care claims, as opposed to administration and profit. Specifically, it requires insurers to spend 80% and 85% of premium revenue on claims in the individual/small and large group markets, respectively. That puts a cap on what insurers can retain for non-medical expenses.
If MLRs are computed fairly and regulated adequately (things to watch), the only source of health insurance rate increases would be medical costs. In principle one could regulate medical costs themselves by blocking insurers’ proposed rate increases if they were deemed excessive. Once insurers have already negotiated prices down as far as their market power will allow, and with the MLR minimums in place, the only substantial remaining driver of premiums that insurers can do anything about is utilization volume. The last time insurers made a serious effort to control that was during the era of managed care in the 1990s. We all know how much consumers loved their mid-90s HMOs (not very). Therefore, rate regulation above and beyond MLR minimums isn’t likely to get very far on its own.
At this point, we’re in the same position as the mother who wished to pay less for bread. Pressuring and regulating buyers (her children or our insurers) alone isn’t fruitful. To make headway, some attention must be paid to the seller side of the market. In the case of health care, changing how providers are paid–more on quality, less on volume–is a sensible idea. In fact, there are provisions in the Patient Protection and Affordable Care Act to do just that (e.g. payment bundling, accountable care organizations), but they won’t kick in for years, a political concession.
Our greatest hope for lower premiums is for those provider payment reforms to be allowed to work. Rather than continue to throw stones at insurers (or, at least in addition to doing so), we should be supporting political leaders who will not cave in to what is likely to be heavy industry pressure to weaken those reforms. The mother in the parable of bread prices kept proposing doomed solutions because she didn’t recognize the problem, dominant seller power. Are we any different?
Austin Frakt is a health economist and an Assistant Professor of Health Policy and Management at Boston University’s School of Public Health. He blogs at The Incidental Economist.
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Rescissions: Much Ado About Nothing -
May 12, 2010
How many times have you heard President Obama say, “Health insurers won’t be able to drop your coverage just because you get sick?” Or Kathleen Sebelius? Or the Democratic leadership in Congress? Or the mainstream news media?
You would think that the private health insurance industry was being revolutionized.
In fact, it has been illegal since 1997, under the Health Insurance Portability and Accountability Act, for insurers to drop coverage because someone gets sick. And even before then, the practice almost never happened.
Think of it this way: Do you think there would be a vibrant, active, ongoing life insurance industry if insurers could renege on their part of the contract after someone dies? How many of us would buy fire insurance if the insurers could change their minds and refuse to pay after our house burns down? Would you buy auto insurance from Allstate if the “good hands” could disappear after a collision occurs?
These things do not happen because
1. Insurers are contractually obligated to keep their side of the bargain and courts enforce these obligations just like any other contract;
2. Regulatory agencies enforce good behavior, quite apart from any lawsuit, and;
3. An insurer that routinely refused to pay claims would lose customers and go out of business.
So what’s the fuss all about?
It’s about rescissions. This occurs when an insurer cancels a policy and returns the premiums to the policyholder, thus voiding the original contract. It almost always happens because the insurance application form is discovered to have fraudulent, misleading or simply wrong information on it.
Rescissions are very rare. They apply only to the individual market (less than 10% of private health insurance) and even then they occur less than 4/10ths of 1% of the time. Even when it does happen, there is almost always an appeals process where the decision is reviewed by an internal committee and often submitted to outside reviewers. Further, when insurers are wrong – as they may sometimes be – it is the job of state regulators to correct this injustice.
This has not stopped the Obama administration from demagoguing the issue, however. Based on a Reuters story, Secretary Sebelius accused WellPoint of targeting thousands of female policyholders for rescission after they were diagnosed with breast cancer, and President Obama repeated the charge in his weekend radio address. WellPoint’s response: The insurer paid for 200,000 cases of breast cancer last year and rescinded exactly four policies for fraudulent or misleading statements.
Even though such instances are rare, they can provoke differences of opinion on the proper response. Some cases are fairly straightforward. Suppose on my insurance application I say I am in good health when in fact I have chronic renal failure. Should the insurance company have to pay for my kidney dialysis? Obviously not.
Other cases get murky. Most life insurers will not sell to someone who is obese (girth measurement is often the test). Suppose I lie about this information, then get hit by a truck and killed. Should the insurance have to pay off?
On the one hand, you could argue that the lie I told about my obesity was irrelevant. Yes, I lied. But the lie had no material impact on the cause of my death. On the other hand, my lie was not innocuous. It allowed my family to reap a cash benefit it otherwise would not have been entitled to. It caused the insurer, and therefore the policyholders, to incur a cost they otherwise could have avoided.
Regardless of how you come down on this case, if you find the discussion to be one worth having it is probably because you believe there is economic value in a market for risk in which competition tends to price risk accurately.
Yet this White House does not believe in a market for health care risks. It certainly does not believe in pricing risk accurately. Indeed, they tend to think that the only legitimate function of health insurance companies is to pay medical bills. The reason they think ideal health insurance is a single-payer public plan is because they think government can write checks with less administrative hassle than private companies.
And if the truth were known, I suspect that these views are not confined to health care. I suspect they don’t really believe in a market for any kind of risk.
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