Friday, June 19, 2009


With the Washington insiders at reporting this weekend that health care reform appears to be in “real jeopardy,” and the Senate Finance Committee so uneasy that they have decided to delay reform bill markup until after the July Fourth recess, it’s increasingly clear that an approach of layering more and more fixes onto the present system isn’t going to work.

In a previous post, I suggested that reform should be guided by seven principles:

1. Affordable basic benefits
2. Fairness of tax treatment
3. Price competition without “cherry picking”
4. Individual choice, individual payment responsibility
5. Restrictions on monopolies
6. Realistic funding
7. Freedom from politics

With these as a starting point, this may be a good time to look again at Senators Wyden and Bennett’s Healthy Americans’ Act.

The Wyden-Bennett bill is unique in two respects: it is co-sponsored by Democrats and Republicans, and it doesn’t assume that major changes can’t be made to our present way of financing health care.

The bill doesn’t completely match the seven principles, but it does some critical things:

1. It establishes community rated basic benefits, with a ban on medical underwriting.

2. It levels the playing field for all Americans by eliminating the tax exemption for employer-paid insurance.

3. It moves the responsibility for choosing—and paying for—coverage to those who will use the care, but provides subsidies for the lower-income, as well as tax deductions to offset premium costs

4. It provides real competition among insurance plans, including plans offered by employers, and specifically bans insurer “cherry picking” of the best risks.

5. It mandates universal coverage, while limiting taxpayers’ liability.

6. It changes Medicaid into a wrap-around program accessing the same insurers as other individuals, potentially reducing some of the financial burden on states, and eliminating the “Medicaid program stigma.”

The bill is not beyond criticism, but anyone reading Senator Wyden’s speech on the Senate floor this past week on the challenges of health care reform, will be struck with how much closer he seems to be to addressing the key issues than the proposals that have been emerging from various congressional committees over the past month.

Thursday, June 18, 2009


The current congressional approach to health care reform of adding ever more fixes without changing the underlying system looks increasingly shaky.

What are the some of the indications?

1. The public plan has generated enormous opposition—and not just from insurers. Whether anyone believes that a Medicare clone would reduce under-65 health care costs or not, it is unlikely that a final reform bill will include anything other than a weak compromise.

2. The health care industry “promise” of $2 trillion in savings was withdrawn almost as soon as it was made. Only the truly naïve believe that the industry would willingly reduce its revenues.

3. Employer mandates face a “heads we lose, tails they win” dilemma. Mandating that every employer pay a substantial part of employee premiums won’t fly, but imposing only a nominal levy on non-payers will result in many employers abandoning existing coverage.

4. Individual mandates face the same problem as for employers. They may work where pre-reform uninsured numbers are low, but imposing them on states like Texas and Florida with more than 20 percent uninsured looks overwhelmingly difficult.

5. The Congressional Budget Office analysis of the draft Senate Health, Education, Labor, and Pensions Committee bill estimates that it would cost more than a trillion dollars over ten years and still leave 37 million Americans uninsured.

The shakiness of the present congressional approach was underlined this week by CBO Director Doug Elmendorf. In a letter to Senators Conrad and Gregg, Elmendorf emphasized: “large reductions in spending will not be achieved without fundamental changes in the financing and delivery of health care.”

And that’s exactly the issue.

If we want to achieve something close to universal coverage without bankrupting the nation (although this may happen anyway, without health care reform), we have to rethink our approach.

So here are seven principles to consider:

1. Affordable basic benefits – Everyone should be guaranteed basic coverage, but we can’t afford Cadillac-level (or possibly even FEHBP-level) insurance. Ultimately, funding availability must dictate basic benefits, not the reverse.

2. Fairness of tax treatment – Employers should have the option of providing supplemental coverage, but this should not be subject to an inequitable tax exemption, available only to some.

3. Price competition without “cherry picking” – As in other industries, competition should be fostered by transparent pricing of basic benefits (e.g. through an insurance exchange), with supplemental benefits separately priced. Insurers should be restricted from selling directly to employers whose employees are able to buy coverage through an exchange.

4. Individual choice, individual payment responsibility – With the exception of existing government programs and self-insured groups (which, with no insurer risk or profit involved, are assumed to provide better value), individuals should have the responsibility for choosing coverage that best meets their needs and, subject to subsidies for the lower-income, their budgets.

5. Restrictions on monopolies – There should be effective constraints on insurer monopolies, as well as on provider monopolies in which specialists in an area group together to control prices.

6. Funding – Just as with Medicare and Social Security, there should be specific guaranteed sources of funding for basic benefits, rather than continuing to rely on the goodwill of employers and the financial abilities of individuals.

7. Freedom from politics – As proposed by Tom Daschle and others, health care policy should be set by an independent board. Consideration should also be given to moving Medicare payment policy to the same board.

The Senate Finance Committee’s decision this week to delay reform bill markup until after the July Fourth recess is a strong indication of their own unease with the current direction of reform. Perhaps they could use the holiday to consider these principles.

Tuesday, June 16, 2009


Can price competition cut health care costs? There are lessons to be learned from the airline industry.

Over thirty years, per capita health care costs, adjusted for inflation, have increased two and a half times. In the same period, despite a doubling of fuel prices, airline fares have fallen by more than half.

Why the five-fold disparity?

It’s obvious the two industries have followed very different paths. While airline travel has become an experience of packed planes, crowded airports, and peanuts (or less) meal service, health care has seen dramatic advances. Treatments that a few years ago seemed unimaginable are now commonplace: heart transplants, anti-depression drugs, artificial joints, laparoscopic surgery using miniature television cameras, and—of course—Viagra.

That’s only part of the story, though. While air travel is now safer and more convenient, with more frequent flights to more destinations, health care in some communities is so inadequate that morbidity and mortality rates are comparable to those of third world countries.

Why have airlines been apparently so much more successful in giving value for money?

Led by Southwest, the airlines that sprung up after deregulation recognized that individual flyers were price-sensitive, and cut their costs accordingly. They faced barriers, though, many of them analogous to those in today’s health care system. Business travelers flying on their employers’ nickel resisted efforts to move them to crowded peanut-only flights, frequent flyers resisted having to switch from their favorite mileage plan to that of another airline network, and travel agents much preferred to send their customers on airlines paying higher commissions.

Southwest and its peers succeeded by marketing directly to the public, through relentless emphasis on lower fares, and by maintaining standards that were, if not luxurious, acceptable to travelers. Few businesses are now sympathetic to employees’ preferences for more comfortable higher-cost flights, frequent travelers have adapted to low-cost airlines’ mileage programs, and travel agents and their commissions are almost a thing of the past.

And now, just as Southwest Airlines travelers found that they reached their destinations as reliably—if not quite as comfortably—as before, so recent studies have shown that there is little or no relationship, within the range of acceptable medical standards, between health care costs and quality.

So, what must health care reform do to emulate Southwest Airlines’ effect on fares?

First, just as deregulation ended most legacy airlines’ government subsidies, the tax exemption for employer-paid insurance should be reduced or eliminated. Not only is the $300 billion a year tax subsidy needed to help pay for reform, but cutting the exemption will discourage overly-generous coverage and remove the inequity between employer-paid and individual-paid insurance.

Second, just as travelers can compare airlines’ fares for the same itinerary using Orbitz or Expedia, insurers should be required to price the same basic benefits, perhaps through insurance exchanges. Supplemental benefits could be offered and separately priced, but being able to compare prices for the same basic coverage is essential.

Third, just as individuals purchase most airline tickets, so individuals should be responsible for choosing insurance to meet their own needs. In practice, this implies subsidies for the lower-income, and perhaps also some form of voucher model to facilitate the process. It may be appropriate, also, to allow self-insuring companies to continue to provide employee coverage since, with no insurer risk or profit involved, they typically provide better value.

Fourth, just as airlines’ pay is negotiated only with their own unions—not every other union in each airport—so there should be more effective constraints on provider monopolies in which specialists in an area group together to control prices.

Emulating Southwest Airlines won’t result in the cost of health care falling by half, but it offers a far more promising approach to cost control than the expensive band-aid solutions, superimposed on the worst features of our present system, apparently preferred by congressional committees.


The Senate Health, Education, Labor, and Pensions Committee’s 700-page draft reform bill ran into unexpected trouble today with the release by the Congressional Budget Office of a preliminary analysis of the bill.

According to the CBO, the HELP bill—as currently drafted—would cost more than a trillion dollars over ten years, but leave as many as 37 million still uninsured.

The CBO analysis found that while subsidies proposed by the bill would make insurance more affordable for many, with some 39 million individuals moving to insurance exchange coverage, 15 million would lose their employer-sponsored coverage and another 8 million would leave government programs.

Responding to Republican criticisms, Senate Democrats emphasized that the bill was still a work in progress, and that the draft reviewed by CBO did not include any form of employer (or individual) mandate, or a public plan, or an expansion of Medicaid. Collectively, these would be expected to substantially reduce the number of uninsured, but could also increase the total cost.

Monday, June 15, 2009


HHS Secretary Kathleen Sebelius was in first-class waffling mode on CNN on Sunday, telling John King that the United States is not ready to mandate that every individual have health care coverage, but—in true politician speak—that a mandate might work if “the rules” were changed, thereby carefully not closing the door on the concept.

Since AHIP has stated that its agreement to eliminate medical underwriting and guarantee issuance is dependent on everyone having insurance, Sebelius may have few choices. Either health care reform must include an individual mandate, or it must create essentially an entitlement program like Medicare (as in Fuchs and Emanuel’s proposal). Any other solution gives AHIP an excuse to back out of their agreement.

Thursday, June 11, 2009


If health care reform legislation is passed, it will almost certainly include provisions for insurance exchanges. Theoretically, these could be key to controlling costs and expanding access to coverage. In practice (and in addition to assumptions about guaranteed issuance, community rating, and the elimination of medical underwriting) these goals will be achieved only if exchange design adheres to five basic principles:

1. Exchanges must be the only source of private coverage for individuals and small businesses.

Without this rule, insurers will be free to “cherry pick” the best risks, abandoning the less attractive to the exchanges and driving up the costs of exchange coverage. Conversely, a very large “unselected” exchange pool will reduce insurers’ risks, enhance competition, and result in lower premiums. Ideally, if we are really serious about maximizing price competition, all but self-insured and other large employers should utilize the exchange.

2. Insurance choices should be made by individuals, not employers.

Employees (and other individuals) are likely to be wiser consumers of care they have chosen to fit their own needs. In contrast, employer choice will tend to result in a “one size fits all” approach, increasing costs for the young and fit and possibly creating dissatisfaction among the less healthy, and potentially requiring employees changing jobs also to change providers—thereby disrupting continuity of care—as they switch to new insurers’ networks.

3. Exchange offerings must separately price basic benefits and any supplemental coverage.

The key to price competition is to have comparable products explicitly priced. Allowing insurers to offer differing benefits will undermine consumers’ attempts to determine best value. However, to avoid instability of enrollment that could result from large numbers of enrollees switching to a new lowest bidder at annual enrollment time, basic benefits below the median price should be listed at the median.

4. Exchanges should be state-based.

While state-based exchanges imply some administrative duplication, they offer three potential advantages. They would facilitate oversight of participating insurers, they would make possible the use of a state “trigger” to implement some form of public plan if insufficient or ineffective insurer competition is available, and they would allow subsequent optional inclusion of Medicaid eligibles.

5. Exchanges should protect insurers against the effects of adverse selection.

Insurers will not willingly participate in an exchange system that guarantees issuance, without protection against high-risk or high-cost individuals. This means that the exchange design must include either exchange-sponsored reinsurance or some form of risk adjustment.

So, are we likely to see reform legislation that includes insurance exchange design that adheres to these five principles?

Unfortunately not, based on what appears to be the reform approach being taken by congressional committees—applying a massive series of band-aids to the present system. And unfortunately not, if exchange design mimics that of their prototype, the Massachusetts Connector, which takes the same approach. If the only draft bill that has emerged so far from committee (Senate Health, Education, Labor and Pensions) is any guide, reform will replicate many of the worst features of Massachusetts’ system, allowing insurers to continue to market whatever they want to whomever they choose, and leaving the insurance exchange as the coverage source of last resort for those few who fail to be marketing targets for insurance salesmen.

The result? A triumph for the insurance industry—but not for consumers.

Tuesday, June 9, 2009


Two big political battles are going on in Washington over details of health care reform. With more to come.

The public plan fight continues to dominate health care policy news, and was fueled this past week by a letter from President Obama, to Senate committee chairs Baucus and Kennedy, expressing his strong support for a public plan option.

How to pay for reform is the second and more fundamental fight. With current cost estimates of a trillion and a half dollars over ten years, and the President promising revenue neutrality, the pressure is on to find a credible and acceptable combination of savings and new revenues.

Both these fights continue to generate visible heat with television commercials from conservatives attacking the public plan (“the government is going to control your medical care”) and unions attacking proposals to tax health benefits (“the government is going to slash our paychecks”). Neither issue will be settled soon, although much of the public plan controversy is political posturing, with a compromise approach (for example, applying a trigger to the plan, as I suggested in a post some weeks ago) seeming most likely.

The next battle—also anticipated in the President’s letter— is likely to be over coverage mandates, imposed on individuals or employers or both.

There were hints of the upcoming clash in recent comments by Senator Baucus, in which he estimated that only 94 to 96 percent of Americans would be covered under reform, then was forced later to amend his remarks to “as close [to 100 percent] as we can.” The gap between Baucus’ two estimates could be critical, since health insurers have agreed to eliminate medical underwriting only if universal coverage is achieved—and mandates are the obvious approach.

Whether imposed on employers or individuals, or both, mandates will be a political hot potato. Small businesses will fight a play-or-pay mandate, while conservatives will battle any attempt to require individuals to carry a prescribed level of insurance. The bigger problems are likely to be more practical than philosophical, though.

To appease small businesses, an employer play-or-pay mandate will have to involve only very modest “pay” requirements (as in Massachusetts) and perhaps exclude the smallest employers (also as in Massachusetts). The first would put a hole in reform funding, the second could threaten the universal coverage goal.

Individual mandates face other problems. Tying them to income tax filings will not make them more attractive, and will raise questions of how to determine compliance, what penalties to impose for non-compliance, and how to relate a retroactive process (tax filing) to a current requirement (insurance coverage). States like California and Texas, with far larger numbers of uninsured than pre-reform Massachusetts, will present particular difficulties in requiring individuals to obtain coverage.

Together these difficulties imply an inherently weak and “leaky” system, with many individuals failing to be covered, in turn leading to insurers backing away from their promises of guaranteed issuance and elimination of pre-existing condition exclusions, and to higher costs for those who do have insurance—in other words, perpetuating today’s big problems.

An alternative to mandates is some form of tax-funded voucher, with funding shared by employers and employees. The Wyden-Bennett Healthy Americans Act proposed a version of this, while the concept of shared employer-employee levies that guarantee benefits is common to Medicare and Social Security. Guaranteeing coverage to everyone who files a tax return is simpler administratively than a mandate-penalty model, would spread costs more equitably, and would reduce insurance risk.

As in the Wyden-Bennett bill, a tax-funded voucher model could allow exceptions for self-insured or other large businesses. It could also—if employer tax payments are tied either to revenues or net income—similarly allow exceptions for non-profit and governmental entities. Otherwise, the model is vastly simpler and results in lower insurer risk and enhanced price competition.

The concept of a health care “tax” is obviously politically unappealing, but only the most naïve will believe that a mandate is much different in its effect. The issue that congressional health reform designers should be considering is whether pretending that mandates are not taxes—and so can be sold somehow to the American public—is worth risking health care funding viability and universal coverage.

Monday, June 8, 2009


It’s hard not to be impressed.

The effort to enact national health care reform legislation has become a massive political crusade.

Starting even before the 2008 election, dozens of Senate and House committee members, along with scores of congressional and administration staffers, have been working to identify elements of a reformed health care system. A parade of experts from academia, business and the health care industry have testified before congressional committees. Senate and House and administration staffers have developed hundreds of pages of proposals for change. The Congressional Budget Office has weighed in with its own hundred-plus options for improvement. Thousands of hours have been spent in meetings in Washington and across the country to consider what reform might look like. And now President Obama is becoming increasingly personally involved.

So, why might the end result be a disappointment?

The staff issue papers from the Senate Finance Committee and the Senate Health, Education, Labor, and Pensions (HELP) Committee provide a clue. Three hefty papers from Senate Finance spell out in a hundred and fifty detailed pages scores of possible changes to our present system, while Senate HELP has released its own dozen-page issue paper and is circulating a 171-page draft bill.

The focus in each issue paper is on repairing what (in the opinion of the authors) is wrong with today’s system. In fact, the HELP Committee paper is subtitled “Strengthening What Works and Fixing What Doesn’t.What’s missing? Not one of these papers provides a vision of what we’d like our health care system to be—the system we’d like to have if we could forget some of our current dysfunctional model.

Why is such a vision so important? Without it, like physicians treating a sick patient without ever having seen a healthy one, we run the risk of just applying band-aids to something fundamentally diseased. We’re not going to get our ideal system—there are too many entrenched interests to allow that—but starting the design process by defining what we want is essential to creating a system that does more than just limp along until the next crisis hits.

It’s not that such visions can’t be found, even ones that retain the traditional roles of insurers, business, consumers, providers, and government. The Dutch health care system is a prime example of a cost-effective universal coverage system. Nearer home, Fuchs and Emanuel have proposed a comparable system, but with radically different financing. Senators Wyden and Bennett have written a bill that includes similar elements. The common feature of each of these is a simple cohesive competitive approach –not a multiplicity of discordant elements patched together in an attempt to please as many constituencies as possible.

There are other perils to the Senate Finance and HELP committees’ starting-at-the-wrong-end approach. The more complex the system—and imposing layer on layer of band-aid repairs will make it very complex indeed—the more opportunities there will be for manipulating it. If there’s one thing we’ve learned, it’s the health care system balloon effect: squeeze costs in one area and they are likely to explode in another.

There’s another problem with the band-aid approach. Complexity is a hard sell to the public.
As the Clinton administration discovered, the more complicated reform becomes, the less likely it is to gain public support. Sadly, there are few signs among the various congressional papers that the authors understand this. The 150 pages of detailed proposals from Senate Finance for “fixing the system,” but leaving almost every present feature in place, epitomize the problem (perhaps not surprising given that these are the folk who brought us the United States tax code) but hardly give hope for a cost-effective future for American health care.

Saturday, June 6, 2009


The past couple of days have seen some of the veils lifted from congressional health care reform proposals.

In the Senate, the Health, Education, Labor and Pensions Committee is now circulating a 171 page draft of its proposed bill. In the House, the Energy and Commerce Committee (one of three House committees with health care legislative responsibilities) is close to releasing its own version, with some details already being publicly discussed.

Neither bill contains big surprises (although both include proposals certain to infuriate various groups), and neither deals in any detail with reform funding issues.

The Senate bill, from the ailing Senator Ted Kennedy’s HELP Committee, includes the expected public plan provision—an expansion of Medicare, but one in which providers would be paid ten percent above standard Medicare rates—along with requirements for individuals to have insurance (with subsidies for lower-income individuals) and for businesses to provide employee coverage or pay a fee to the government. The bill provides standards for guaranteed issue and rating of insurance, and provisions for helping states establish insurance exchanges (referred to as health benefit gateways). It also proposes expansion and some standardization of Medicaid, and provides for a new long-term care program, Community Living Assistance Services and Supports (under the heading of the CLASS Act!).

The House bill, from Representative Henry Waxman’s committee, is expected to include many provisions similar to those of the HELP bill, including requirements for individuals to purchase insurance and for employers to help cover the cost, for establishment of insurance exchanges, and similar insurance market rules to the HELP bill. The big unknown—until a draft becomes available in the next few days—is the approach to a public plan.

An equally big unknown is the shape of the draft Finance Committee bill, with Democrats and Republicans still battling over the public plan issue, but other details (insurance market reform, individual and employer responsibility, insurance exchanges) looking likely to parallel the other bills. The even bigger question, though, for Senate Finance is: how to pay for it all?