Thursday, July 23, 2009


Health care reform looks like it’s stalled. And rightly so, based on the provisions of the House Democrats’ health care reform bill. The grossly misnamed America’s Affordable Health Choices Act (HR 3200) combines the worst of all possible worlds: high taxpayer costs, big increases in federal deficits, and disincentives for businesses to hire, while leaving up to twenty million individuals still uninsured and doing little or nothing to control runaway national health care expenditures.

Although the bill would make health care coverage available to many of the millions who currently cannot afford it, its provisions will potentially add some $200 billion a year to federal expenditures, make only miniscule reductions in Medicare cost trends, and impose play-or-pay provisions and a new surtax that could hurt smaller businesses just as they try to recover from the recession.

So, is there anything that can be done to fix HR 3200 so that it would provide affordable universal health care coverage without increasing federal deficits or halting the recovery from the recession?

The answer is that major changes—some paralleling those in the Wyden-Bennett Healthy Americans Act—are needed in four areas of the bill, those relating to the proposed insurance exchanges, the individual mandate, Medicare, and costs and financing.

The proposed insurance exchanges should be redesigned to maximize the size of the resultant pools and to achieve the benefits of price-competition. Insurers should be required to offer “best value” to the exchanges—with exchange participation a requirement for selling any insurance—to discourage “cherry picking” outside the exchanges through direct marketing to selected employers. Basic coverage should be set by a board independent of Congress to minimize the impact of provider lobbying. Insurers, in turn, should be protected from extreme adverse selection, through exchange-sponsored reinsurance or risk-adjustment. A public plan option should be implemented only in states where insurers fail to control the premium rates offered through the exchange.

The individual mandate should be changed from an after-the-fact penalty for non-insurance—an approach likely to result in both litigation and cheating—to advance selection from a choice of an ERISA-compliant employer plan, participation in an exchange, or a buy-in to a low-cost safety net option tied to Medicaid (the existing public plan). Those failing to make a selection—expected to be primarily the young and healthy—would be automatically enrolled in the safety net option. Premium collection would be simplified by combining it with income tax withholding, as proposed by the Wyden-Bennett bill. Lower-income individuals’ payments would be partially offset by tax credits or subsidies, but these should be tied to the safety net option buy-in rate in order to reduce costs to the federal government.

Medicare payment policy responsibility should be transferred to a board independent of Congress—as proposed by White House Budget Director Peter Orszag, with the grudging concurrence of some Democrats—with payment policy authority covering both rates and controls over some of the more egregious provider profit-maximizing practices.

Federal costs and financing needs should be considerably less onerous with these changes, although allowing buy-in to a safety net option tied to Medicaid implies more demand for already limited resources, so that higher payment rates for scarce providers may be necessary (as provided for in the present version of HR 3200). Although the concept of the play-or-pay mandate is fair in requiring all employers to contribute to the cost of coverage, the “pay” levy should be lower for small businesses. At the same time, two funding sources previously rejected by House Democrats should be tapped: employer-paid benefits above those guaranteed as “basic benefits” and available through the exchanges should be taxed, thereby also discouraging excessive demands for care, while “unhealthy consumption” should be restrained by taxes on certain soft drinks and candy and by higher levies on tobacco and alcohol.

Together these changes would rearrange and simplify the health care landscape, making affordable coverage more truly available while bending the cost curve. Universal coverage would be assured since anyone not making an insurance selection would be automatically enrolled in the safety net option. Issues of payment-avoidance or penalties for non-compliance would not arise, since coverage payment would be part of regular withholding. Major employers’ self-funded arrangements would be left in place, while other employers and their employees would have a new range of competitive options. Market competition would be maximized by the insurance exchanges’ large pools and limitations on cherry-picking and adverse selection. Consumer responsibility would be encouraged by the requirement to make choices of coverage to meet individual needs. Medicare payments and non-Medicare benefits would be freed from political interference. Costs would be more fairly distributed between employers, individuals, and government—without increasing the federal deficit or undercutting businesses’ ability to recover from the recession.

Is it likely to happen? Probably not, any more than the provisions of the Wyden-Bennett bill are likely to be adopted. And the result that we will have to face? A choice between unaffordable “reform” that sabotages the economy, and no reform at all.

Tuesday, July 14, 2009


After some frantic last minute political gyrations and a lot of pressure from the President, House Democrats have announced details of their draft health care reform bill.

Much as expected, the 852-page bill emerging from three House committees would impose a mandate on larger employers to provide insurance, impose a second mandate on individuals to obtain coverage, prohibit medical underwriting by insurers, establish a government-administered public plan to compete with insurers’ offerings through insurance exchanges, offer subsidies to lower-income individuals, and expand Medicaid. The target ten-year trillion-dollar (or more) price tag would be funded through a combination of taxes on high income individuals and reductions in some Medicare and Medicaid payments.

So, is this the answer to the nation’s health care crisis of sky-rocketing costs and growing millions of uninsured?

Probably not.

The bill does make a serious effort to cut the numbers of uninsured. As Massachusetts’ experience has shown, a combination of Medicaid expansion and subsidies for other lower-income folk, combined with mandates on employers and individuals, can significantly increase the numbers of those with coverage. However, this is an expensive approach, as Commonwealth taxpayers can attest. It is also one that is likely to be less effective on a national scale during a recession than when implemented in one wealthy state during better economic times.

Both the employer and individual mandates have weaknesses. The employer mandate, with its option of a modest levy instead of paying directly for insurance, could lead to firms currently providing coverage choosing the less expensive levy, while the exclusion of smaller firms from the mandate could result in restructuring of businesses into multiple pseudo-independent units. The individual mandate suffers from similar weaknesses: penalties may be insufficient to force the young and healthy to obtain coverage, while the application of penalties to only those for whom “affordable” coverage is available provides an obvious loophole.

A big reduction in the number of uninsured with no new controls over costs carries its own risk. As Massachusetts—even with only a modest percentage increase in its covered population—discovered, making health care more accessible means a jump in demand, but with no corresponding increase in supply. The predictable results: higher prices and disenchanted consumers unable to obtain care.

While the House bill’s approach to reducing the numbers of uninsured seems at best problematic—and in which failure to achieve almost universal coverage may undermine attempts to impose restrictions on insurers’ medical underwriting practices—the much bigger failure is the absence of changes necessary to bring health care costs under control.

For larger businesses and their employees, already facing higher than CPI annual premium and out-of-pocket cost increases, the bill provides little help. In fact, the increase in demand for care resulting from expanding coverage is likely to mean—in accordance with normal economic laws—even higher premiums.

For government budgets, the draft bill implies ever-increasing crises. If Medicaid eligibility is expanded to all those with incomes below 150 percent of FPL, the ten-year cost will exceed $500 billion—even assuming implementation is not immediate—to be financed somehow by cash-strapped states and the federal government, on top of expenditures that are already growing far faster than revenues. And while the draft bill includes numerous provisions relating to Medicare, the CBO scoring of an earlier draft concluded that only a $160 billion reduction would be achieved over ten years—a very small bite out of a projected growth in expenditures of over $2.2 trillion (and with the Medicare Trust Fund exhausted by 2017).

Perhaps not surprisingly, the House Democratic leaders in their Capitol Hill announcement chose not to address either the direct cost of the draft bill’s provisions or—the real elephant in the living room—the continued enormous growth in government and private health care expenditures that the bill would do so little to control—and that seem likely to bankrupt us all.

The sad conclusion—notwithstanding the howls from business groups— is that the bill’s Democratic drafters have chosen to duck the really tough decisions (and the Republican opposition has succeeded in being both evasive and intransigent in trying to protect the profit interests of its own financial supporters). So, politics as usual.

Thursday, July 9, 2009


Health care reform ran into new BIG trouble this week with a series of comments from Senate Majority Leader Harry Reid.

On Tuesday, Reid leapt into the middle of reform negotiations, telling Senate Finance Committee Chairman Max Baucus that Democratic leaders had major concerns about the draft Senate Finance bill’s proposed taxation of some health benefits and the exclusion of a strong public plan.

The immediate result was the effective suspension of bipartisan negotiations on the Senate Finance draft, with Republican Senators Chuck Grassley and Orrin Hatch both saying that bill markup would have to be delayed indefinitely until the conflict was resolved.

Yesterday, Reid tried to soften his comments in conversation with Senate Republicans, but later indicated that taxing health care benefits was still unacceptable, leaving Senate Finance members wondering how else to help pay for the trillion dollars (or more, perhaps much more) that they estimate as the ten-year cost of reform.

Reid’s comments reflect the findings of a series of straw polls in which various senators’ constituents were asked if they supported taxing health care benefits (Surprise! They didn’t want any new taxes), as well as an aggressive union-led campaign against the idea.

Reid’s intervention could very well have torpedoed reform. It leaves Senate Finance with few choices for funding reform, and virtually none that are likely to attract any bipartisan support.

What may be even worse is that potentially killing taxation of health care benefits removes from the Senate Finance draft one of the very few provisions that might actually have resulted in some slowing of overall health care cost increases. Leaving tax deductibility of benefits in place will continue to encourage the belief in those who are lucky enough to have generous employer coverage that health care is “free.” Meanwhile, Reid’s insistence on a strong public plan as an alternative cost control mechanism is almost certain to end any support from moderate Republicans or centrist Democrats and to generate huge (and well-funded) opposition from insurers and providers.

Saturday, July 4, 2009


In a THCB comment on my previous post on the Senate Health, Education, Labor, and Pensions reform bill, tcoyote explained some of the political thinking behind what seem like totally spurious cost projections. While I can readily accept tcoyote’s explanation of the pols’ efforts to ignore reality, I’m still innocent enough to want to know what the HELP bill might really cost. So I spent some time looking at the Congressional Budget Office report on the bill.

Here are a few things I noticed:

1. The “ten-year projection” starts in 2010, although the bill does not require insurance exchanges to be implemented until 2014. The result is that the projection includes only six years of reform (plus a lengthy transition period), NOT ten years.

2. The CBO projections include a $58 billion “credit” for the impact of the HELP bill’s proposed new long-term care program (the so-called CLASS Act). However, the “credit” accounts for the difference between premiums and benefits over the 2010-2019 period on a cash basis only. If conventional accrual accounting were used, CLASS would show a net cost for the period.

3. The number of individuals eligible for the proposed Medicaid expansion is projected to be 26 million, not the 20 million implied by Senator Dodd in his news conference on behalf of the HELP Committee.

4. The CBO estimates include no allowance for medical inflation, except in terms of increased subsidies for lower-income exchange participants.

5. The CBO assumption that the absurdly low levy for play-or-pay “payers” will not cause any significant migration from employer sponsorship to the exchanges seems wildly unrealistic (as I’ve already commented).

The bottom line is that a realistic ten-year projection of the costs of the fully-implemented HELP bill plus Medicaid expansion would be somewhere between one and a half trillion and two trillion dollars. (And still with eight million or more uninsured).

It’s disappointing to see the CBO apparently getting suckered into putting a favorable slant on the numbers (Senator Dodd noted that he’d put a lot of pressure on CBO Director Doug Elmendorf). Hopefully, CBO’s subsequent scoring of the HELP Committee’s efforts (along with Senate Finance’s Medicaid expansion) will provide a more realistic picture.

Meanwhile, how about looking at ways to control costs other than the public plan (which as envisioned by the HELP bill will depend on the willingness of providers to participate, at government-set payment rates, potentially creating another version of Medicaid)?

Thursday, July 2, 2009


Key members of the Senate Health, Education, Labor, and Pensions Committee announced on Thursday what they claimed were dramatically improved cost and coverage estimates for the latest version of their health care reform bill.

Headed by Democratic Senator Christopher Dodd, HELP members (in a Muzak-marred conference call with reporters) stated that the revised bill would cost only $611 billion over ten years, a figure apparently computed by the CBO, and that with a further expansion of Medicaid would provide coverage for 97 percent of Americans.

Key features of the bill provided during the conference call included a public plan option, subsidies for lower-income individuals buying insurance through an exchange mechanism, and a play-or-pay employer mandate.

Sounds good? We’ll have to wait for details, but two big problems are already apparent.

The first BIG problem is that the ten-year cost estimate of $611 billion excludes the cost of Medicaid expansion. With Senator Dodd’s admission that the HELP Committee expects this to provide coverage for 7 percent of Americans (the difference between the 97 percent coverage with Medicaid expansion and 90 percent without it), the total cost balloons to far more than a trillion dollars. A rough calculation of Medicaid costs for 20 million Americans at present funding levels gives a total of $80 billion a year – or $800 billion just for Medicaid expansion, presumably to be shared with state governments already on the verge of bankruptcy.

Even assuming that Senator Dodd misspoke, and that he intended his percentages to apply only to under-65 Americans, the ten-year estimate for Medicaid expansion is still over $700 billion—with no provision for medical inflation. And, given the financial condition of most states, most of this cost would have to be borne by the federal government.

The second BIG problem is the absurdly modest levy—$750 for businesses with more than 25 workers and $375 for businesses with fewer than 25—to be imposed on employers not providing employee coverage. It’s hard to believe, in the middle of a deepening recession, that many employers will not choose to pay the $375 or $750 levy rather than buy insurance at $3,000 or more (just for the employee, with no family coverage), with additional government subsidies needed to bridge the funding gap.

The CBO has apparently assumed in its estimates that there will not be a big change in the extent of employer-sponsored coverage over the ten-year period, but this seems unrealistic. While we have not seen a “rush to the exits” in Massachusetts so far, the longer-term experience of Hawaii may be more meaningful. Immediately after Hawaii passed its mandated coverage law, the uninsured rate was below 5 percent, but as a series of recessions hit Hawaii’s economy, the rate increased to 8 percent in 1998, and close to 10 percent today. Only the truly na├»ve can believe that numerous US employers won’t either choose the far cheaper levy option or—as in Hawaii—find other ways of ducking the employer mandate.

Wednesday, July 1, 2009


Three news stories this week seem to suggest that health care reform is getting closer. Cynics may have some doubts, however.

In the first story, the pharmaceutical industry announced a $80 billion proposal to help pay for health care reform, a proposal that could reduce net reform costs and encourage other provider-side offers to control costs (like a revival of the health care industry’s on-again, off-again $2 trillion offer to President Obama a month ago).

The cynics’ view: This was good PR for Big Pharma, still worried by congressional threats to allow drug importation. However, most of the $80 billion is based on percentage discounts from current prices. Could it be that drug manufacturers might feel that their responsibility to their shareholders will force them to increase prices as soon as the discounts become effective? (And, just maybe, universal coverage might see more drugs being sold?)

In the second story, Wal-Mart – along with the SEIU and the Center for American Progress – announced its support for an employer mandate. Given Wal-Mart’s past unwillingness to offer more than limited health care coverage to just some of its employees, this seemed like a huge change in direction, and one that did much to undercut the US Chamber of Commerce’s opposition to a mandate.

The cynics’ view: Good PR for Wal-Mart, too, to offset earlier criticisms. More to the point, Wal-Mart –which has improved its employees’ coverage after extensive public censure -- does NOT want any form of reform that leaves smaller competitors with no requirement to provide coverage.

In the third story, White House advisor David Axelrod sent clear signals that President Obama would not insist on a public plan option or strongly resist taxing employee benefits, in spite of his earlier statements.

The cynics’ view: The President is so determined to achieve health care reform that he is willing to abandon any of his previous positions. This also means that he can not only leave all the heavy lifting to the Congress, but can divorce himself later on from reform’s problems (which will inevitably happen, regardless of the details of the legislation). So, reform still depends primarily on the Senate Finance Committee’s being able to find a formula that won’t bankrupt us all.