ESSENTIAL BENEFITS: WHAT ESSENTIAL BENEFITS?

Last week’s announcement from the Obama administration that it would not now define a single uniform set of “essential health benefits” to be provided by all insurers undoubtedly took most health care policy observers by surprise.

The Department of Health and Human Services’ decision to allow individual states to specify benefits within broad categories means that there could be significant variations across the nation, and smacks more of election year political pandering than practical policy. Although criticism of the decision was relatively muted, it may be one that leaves both consumers and employers unhappy.

Implications of the state-by-state approach include the possibility that a state eager to please consumer and provider groups could create a benefit package so comprehensive that coverage would be prohibitively expensive for many employers, while other states might interpret “minimum benefits” so narrowly as to subvert the intent of the drafters of the Affordable Care Act. For example, under the latter scenario, a state could comply with the letter of the law by including just one or two mental health or maternity care visits—far less than advocacy groups recommend, but at lower cost.

Allowing states to use an existing major health plan as a benchmark, as the DHS announcement indicates, is likely to result in very different benefits between say, Massachusetts and Mississippi. Supporters of the DHS decision argue that this is a reasonable reflection of state residents’ and their employers’ ability to pay for coverage.

One detail of the DHS decision seems particularly likely to rankle conservative health care experts: existing state-mandated benefits, such a s chiropractic care or in-vitro fertilization, will essentially be grandfathered into the minimum benefits packages, since inevitably they are part of the plans that may be adopted as benchmarks.

Even allowing for some fairly significant state-to-state variations, the DHS interpretation of the ACA minimum benefits provision should move the nation a little closer to a single standard. For example, all those subject to the minimum benefits provision will have some level of prescription drug and maternity care coverage, benefits that millions currently lack.

On the other hand, while passing the buck to states may somewhat reduce conservative states’ resistance to the ACA, there will now be fifty-two potential battles between states and lobbyists of varying hues, while multi-state employers will continue to be faced with different regulations and standards in every state in which they do business.

And if the reaction to the announcement seemed somewhat muted, it may have been because the focus of both ACA advocates and opponents is now on the Supreme Court, whose summer 2012 ruling could make the entire issue moot.

AFFORDABLE CARE ACT: A DATE WITH DESTINY

The schedule for the Supreme Court to hear arguments on the constitutionality of provisions of the Affordable Care Act was announced this week. The following is the agenda.

On March 26, the Court has allotted an hour to hear arguments on whether the Anti-Injunction Act makes challenges to the individual mandate premature until 2015. With neither the government nor the ACA’s opponents pressing the point, the argument for the precedence of the Anti-Injunction Act—an argument that four appellate judges had earlier found convincing—will be presented by Washington attorney Robert Long as a “friend of the court”.

On March 27, two hours have been allocated to the most publicized issue, whether Congress exceeded its constitutional authority in requiring individuals to buy insurance or pay a penalty.

On March 28, the Court has allotted time to two issues. First, it will consider for up to 90 minutes whether the individual mandate provision may be severed from the rest of the statute, an issue that would become critical if the mandate is ruled unconstitutional. The 11th Circuit Court of Appeals ruled in favor of severability when it struck down the mandate earlier this year, but the Obama administration argues that the provision is so intertwined with two other parts of the law—one forbidding insurers to turn away applicants, and the other barring them from taking account of pre-existing conditions—that if the mandate falls, those provisions must fall with it. As with the Anti-Injunction Act issue, the court will hear arguments from a “friend of the court,” since again both parties oppose the severability argument.

Also on March 28, the Court has allocated an hour for arguments on whether Congress was entitled to expand the scope of Medicaid, an issue that initially was not expected to be addressed by the Court, since none of the appeals courts ruled against its constitutionality.

As with other Supreme Court hearings, the justices’ questions may provide clues to their leanings. However, surprises are entirely possible, and the Court’s rulings will not be known until—most likely—the latter part of June.

READING THE SUPREME COURT TEA LEAVES

The announcement on November 14 that the Supreme Court will review various aspects of the constitutionality of the Affordable Care Act has set legal experts to guessing possible outcomes.

The Court accepted just one of four Appeals Court decisions for review, but the one chosen, from the Eleventh Circuit, covered every major issue and included as plaintiffs twenty-six state attorneys general who oppose the ACA. The Eleventh Circuit ruled in August that the ACA’s individual mandate provision was unconstitutional, but ruled against the plaintiffs on all other issues.

It’s obviously naïve to think that the Justices haven’t already thought a great deal about the issues, and their thinking presumably influenced the decisions as to which questions raised in the lower courts they should address. So what can we guess from the four issues to be argued before the Court in the spring of next year?

The first issue, raised by two of the Appeals Court panels, is whether the Anti-Injunction Act dictates that no consideration can be given to other issues until the penalties associated with the individual mandate are enforced, assumed to be no earlier than 2015, after full implementation of the ACA. The Anti-Injunction Act essentially bans attempts to repeal new taxes until they are in the process of being collected, and its relevance to the ACA depends on whether the individual mandate penalties are interpreted as a form of taxation.

Even though both the Obama administration and the plaintiffs agree that the Anti-Injunction Act should not apply, it has clearly become an important issue since the Fourth Circuit cited the Act in throwing out the case filed by Liberty University, followed by one of the three appeals judges of the DC Circuit making a similar argument. While one or two commentators have suggested that the Justices might want to duck the entire ACA issue in an election year for fear of being accused of playing politics, the government’s apparent eagerness for a decision on the constitutionality question, combined with the chaos that would ensue if the ACA were determined unconstitutional after it was implemented may be effective practical constraints on a possible Anti-Injunction Act ruling.

The second issue—the surprise—is whether the ACA’s Medicaid expansion is unconstitutional because it forces states to increase their spending, an argument that the lower courts have all essentially rejected. One guess is that taking up the issue, which required four Justices’ votes to include, might be a sop to the most conservative members of the Court and those most concerned about the power of the federal government. Given the lower courts’ lack of support for the Medicaid unconstitutionality argument, it seems the odds for its gaining much traction from the full Court must be quite slim.

The third issue is the really big one, of course: is the individual mandate constitutional? How the Court will rule is anyone’s guess. Given the Court’s conservative reputation, the anti-ACA plaintiffs might have reason to feel optimistic. However, the opinions of two highly respected conservative judges in the prior Appeals Court hearings held that the mandate is constitutional—although without indicating enthusiasm for such a finding. Some legal commentators have suggested that with the four more liberal members of the Court almost certainly seeing the mandate as meeting the constitutionality test, and therefore only one of the five other Justices’ votes needed to uphold it, the Obama administration has the odds in its favor. On the other hand, the plaintiffs’ argument that the federal government should not be forcing citizens to make a purchase they don’t want is one that may resonate with the possible swing votes.

The final issue is one that will only be considered if either (or both) of the two preceding fails the constitutionality test: what other provisions of the ACA should also be thrown out? In effect, the Court is trying to second-guess the intent of the Congressional writers of the ACA. Which provisions were included only because of the belief that either the Medicaid expansion or the individual mandate would actually be implemented? Given the months of negotiation that led to passage of the ACA and the sheer size of the Act, it’s a difficult task that the Justices have set themselves. At the same time, it may prove to be an essential one; for example, if the individual mandate requirement is overturned, ACA provisions dictating benefits and eliminating medical underwriting could destroy the individual and small group insurance markets.

So, we’ll have to wait a while. The Court is expected to hear oral arguments in March of next year, and to issue its decision some time in early summer. It will be a decision that could change the direction of the 2012 presidential election.

YET ANOTHER APPEALS COURT HEARD FROM

The final federal Court of Appeals decision on the constitutionality of the Affordable Care Act, before the Supreme Court meets to decide which cases to consider, was issued this week. It includes some interesting twists.

The DC Circuit upheld the law’s requirement that nearly all Americans must have health care coverage in a 2-1 ruling. However, the minority vote was cast not because of the constitutionality issue, but because the dissenting judge, Brett Kavanaugh, a George W. Bush appointee, considered that—under the Anti-Injunction Act, which limits attempts to strike down proposed taxes—no ruling was appropriate at this time. Judge Kavanaugh’s citing of the Anti-Injunction Act echoed an earlier decision by the full Fourth Circuit that imposition of the individual mandate’s penalties could not be considered until they were implemented and individuals had been forced to pay them, in effect interpreting the penalties as a form of taxation.

While it was clear that the two majority judges took Judge Kavanaugh’s argument seriously, the odds seem to be against the Supreme Court agreeing when faced with both supporters and opponents of the Affordable Care Act in agreement that the Court should rule on the constitutionality issue as soon as possible, not some time after January 2014.

The second interesting twist was that the majority decision was written by a highly regarded conservative appointee, Judge Slberman, whose opinion indicated some dislike for legislative attempts to dictate individual behavior such as purchasing insurance, but also a recognition that this was consistent with other governmental authority already upheld by the courts. Judge Silberman noted: "The right to be free from federal regulation is not absolute, and yields to the imperative that Congress be free to forge national solutions to national problems, no matter how local--or seemingly passive--their individual origins."

The DC Circuit is now the second apppeals court to uphold the health care reform law's individual mandate, with a third appeal court's having ruled against the mandate, and others rejecting cases on jurisdictional or other grounds. The ruling came just a couple of days before the Supreme Court was expected to decide, in a private conference, whether to take up the issue--and, if so, which specific appeals court rulings would be considered--with a decision that could be made public as soon as Monday.

ACOs: THE GOOD AND THE BAD

To muted applause and some sighs of relief from providers, HHS released the final ACO regulations last week.

The final version superseded the much-criticized draft regs published several weeks earlier. This previous draft was widely regarded as imposing overwhelmingly complex rules for the chance of sharing in any gains. As one commentator noted: “The promise of integrated, coordinated and cost-effective care provided by hospital-physician networks had run into the reality of having to invest millions dollars with a questionable ROI, a complex maze of up and downside risk calculations, reams of burdensome quality measures and overlawyered antitrust regulations.”

So the final less-unwieldy rules have been relatively well-received. On the other hand, fundamental questions about the viability and impact of ACOs remain:

1. Will the potential “bonuses” justify the financial investments?  Major hospital systems (likely to be the primary ACO sponsors) seem to be willing to play so long as the regulations are not too onerous. And as with other HHS initiatives, those willing to participate are likely to be those who are most confident that they can readily cut costs and gain the savings bonuses. On the other hand, ACOs that aren’t able to do a much better job of coordinating care will be unable to recoup their investments.     
2. Will there be losers? Physicians and hospitals who don’t participate in ACOs may find HHS squeezing rates to be in line with costs of competing ACOs. And even in successful ACOs, hospital staff and individual physicians may be in danger of losing their jobs as the ACOs try to reduce variable costs in order to achieve the “bonus-eligible” level.
3. Why are hospitals so interested in ACOs? It’s a great opportunity to tie physicians more tightly, thereby guaranteeing referrals and admissions and strengthening the hospitals’ rate negotiating positions.  At the same time, the hospital risk is small; the ACO component is expected to be tiny relative to the size of the Medicare program, and with beneficiary assignment made prospective in the final rules, the costs and risks for participating providers are even less.
4. Will ACOs really enhance cost-effectiveness? In some cases the answer will be yes, with the ACOs achieving the objectives of their government designers. In other cases, however, the pros of better integrated care will be more than outweighed by the cons of quasi-monopolistic hospital systems able to dictate their terms to insurers and other payers.

There is one more fundamental problem with the present ACO design: by randomly assigning Medicare beneficiaries to ACOs, much of the opportunity to impact the highest cost cases may be lost. A more targeted approach might begin to show the savings that the Medicare program desperately needs. On the other hand, HHS’ track record of success with its chronic care demonstrations gives little confidence that the government could indeed achieve these potential savings.

The bottom line seems to be: ACOs will generally demonstrate the virtues of integrated care (something that was known already), while—in too many cases—encouraging monopolistic hospital systems to become even more entrenched.

IT’S OFFICIAL: CLASS IS DISMISSED

It happened in the usual Washington way: first, the rumor, then the denial, and then (on a Friday, so as to miss the weekday press), the official admission. The Affordable Care Act’s Community Living Assistance Services and Support program (the CLASS Act) has been abandoned by the Department of Health and Human Services.

CLASS’s demise was foreshadowed several days ago by comments by the program’s departing actuary, but HHS refused to admit it was being scrapped until Secretary Sibelius’s Friday announcement that she had concluded that premiums would be so high that few healthy people would sign up.

CLASS, the brainchild of the late Senator Edward Kennedy, was intended as a specialized long-term care insurance program to provide assistance to those with chronic illnesses or severe disabilities. It would have been financed with premiums paid by workers, through voluntary payroll deductions, with no federal subsidy.

According to Secretary Sebelius, actuarial studies showed that the program would suffer from severe adverse selection, with insufficient numbers of younger, healthier enrollees, leading to a vicious cycle where premiums would have to be set higher and higher to cover the likely costs of benefits.

Not mentioned in Friday’s announcement was the effect of the CLASS abandonment on government health care costs over the 2010-2019 decade. Prior Congressional Budget Office projections of the impact of the ACA showed a net deficit reduction, in part because CLASS funding required front-loading of premium revenues. Scrapping CLASS will eliminate $70 billion in net receipts over the decade, approximately half of the previously estimated ACA deficit reduction effect.

PAUL RYAN IS RIGHT! (EVEN THOUGH HE’S WRONG!)

Having cost the Republican Party a Congressional seat earlier this year with his plan to turn Medicare into a voucher program, House Budget Committee Chair Paul Ryan is back with an even more sweeping health care proposal.

Ryan’s latest offering, unveiled in a speech a week ago at Stanford University’s conservative Hoover Institution, is nothing less than a blueprint for replacing the Affordable Care Act with a consumer-driven model that would eliminate the current tax-exempt treatment of employer-paid health insurance. Is Ryan right? Or wrong?

Ryan believes that exempting health care benefits from employee income tax leads to insurance choices that are unnecessarily costly (since they are effectively subsidized), insufficiently tailored to employee needs (since few choices are offered), inadequately valued (since the employee isn’t paying), and unreasonably tie employees to their jobs (since they may not be able to move without switching insurance). He also believes the present system is unfair: higher-paid employees get a greater tax advantage, while employees of smaller businesses have fewer (or no) options at higher prices than their peers in larger corporations.

He’s right! Common sense says that people are likely to choose the most generous coverage available if it is free or offered at a very low price, while employers—especially those who must negotiate union contracts—see tax-subsidized health insurance as a “better buy” than salary payments.

Ryan proposes to tackle the issue in dramatic fashion, discouraging employer-paid health insurance by taxing it as ordinary income and balancing this with new tax credits to offset individuals’ own purchases of coverage, in the belief that this will result in greater sensitivity to health care costs, more cost-effective insurance purchasing decisions, more portability of coverage, and a more equitable system than today’s.

He’s wrong (at least as indicated by the details in his Stanford speech)!  While his proposal has a certain elegant simplicity, there’s no certainty that employers would replace health care benefits by pay increases to cover the employees’ costs of coverage. Tax credits, presumably funded by taxing wage increases to replace employer-paid insurance, won’t cover more than a fraction of the cost of individual coverage. Many employees would likely fail to purchase insurance and potentially create huge debts for themselves, while marginal small businesses will find themselves pressured to increase wages so that their employees can pay for coverage.

Even with these problems, Ryan’s proposal is an interesting starting point. One intriguing comment in his Stanford speech characterized it as a defined contribution plan. If this was simply a way of describing tax credits, the “contribution” is sadly inadequate by typical benefits standards. On the other hand, a true defined contribution version of Ryan’s proposal could avoid the risks of employers failing to compensate their workers for their increased expenses and of employees failing to purchase coverage.

Here’s one way in which this might work. Employers above a certain size would be required to contribute a fixed dollar amount for employees to use to buy coverage through an employer plan (if offered) or from an exchange. This basic contribution would be enough to purchase relatively modest coverage and would be tax-free to the employee and a pre-tax deduction for the employer. Any employer contributions above this level would be taxable to the employee. Tax credits would be available to smaller businesses and to employers with high percentages of older workers. Employees could “trade up” to more generous coverage by adding their own money to the employer contribution, but no tax advantage would result. Individuals who failed to purchase coverage would simply be assigned to the lowest cost available health plan.

This true defined contribution approach may have less appeal to the red-blooded Darwinians in the Ryan camp, but it would far better protect employees from being shortchanged by their employers—or themselves. And, like Ryan’s version, it puts responsibility for coverage choice where it belongs—with the individual insured—something that is more likely to lead to better-value choices.

(In a recent blog post Beltway consultant Bob Laszewski slams defined contribution plans as having failed to control costs over the past twenty years. However, Laszewski lumps the typical percentage-of-premium plans into the “defined” category, thereby confusing plans in which there is little cost incentive for the employee to choose “value” with those where the entire excess of premium over a defined dollar amount must be paid out-of-pocket.)

None of this discussion is relevant, of course, unless Republicans are able to win the presidency and control both houses of Congress. However, if we do find ourselves with a Republican administration determined to scrap the Accountable Care Act, it might be an advantage to have a proposal that would work and actually benefit both employers and employees.

SOONER IS BETTER, DECIDES THE ADMINISTRATION

Hot on the heels of Monday’s news that the Obama administration had decided not to ask for a re-hearing of the Eleventh Circuit Court’s ruling that the individual mandate is unconstitutional, came today’s announcement that the Justice Department had asked the Supreme Court to hear the case.

Given that other Appeals Court decisions may also be forwarded to the Supreme Court, it is not certain which case or cases the Court will decide to hear. However, a request by the administration is almost sure to be granted.

While the rationale for the Justice Department decision cannot be known, it seems that the administration believes that it has a better than evens chance of prevailing.

The critical issue now is timing, with a hearing most likely in the spring, and a decision—in the middle of the presidential election campaign—in June 2012.

MANDATE ON ITS WAY TO THE SUPREME COURT?

It may have looked like a non-event, but it was a significant one.

Monday September 26 was the last day on which the Obama administration could ask the Eleventh Circuit Court of Appeals to reconsider its three-judge panel’s ruling that the Affordable Care Act’s individual mandate was unconstitutional. The fact that the Justice Department took no action almost certainly means that its intent is to ask the Supreme Court to decide the issue.

The administration’s thinking was most likely dependent on three factors. First, given that the full Eleventh Circuit is considered even more conservative than the three-judge panel that struck down the mandate, the only advantage of a second hearing would have been to delay consideration by the Supreme Court. Against this was presumably factored the political risk of a further well-publicized rejection of the mandate providing additional ammunition for opponents of reform.  

Second, the administration may still be able to delay a Supreme Court decision either by filing its request for a hearing at the last possible moment in November, or even by asking for a filing extension—something that the Court might be willing to consider, given the potential impact of a decision in the middle of a presidential election.

Third, the administration may feel that the odds are somewhat in its favor. Although the current Supreme Court is usually regarded as having a conservative majority, the Justice Department will have analyzed prior decisions favoring federal powers by, for example, Chief Justice Roberts and Justice Alito. As a result, the administration may feel more confident of winning than many observers might expect.

Meanwhile, it’s unlikely that we will know more about timing until November, but the most likely—but by no means certain—schedule is for a hearing in early 2012 followed by a decision around the end of the 2011-2012 term in June 2012. Just in time for the election!   

CURTAINS FOR CLASS?

Several news reports this week indicate that the Community Living Assistance Services and Support program (CLASS Act), enacted last year in conjunction with the Affordable Care Act, may be about to succumb to political and financial pressures.

The CLASS Act was the brainchild of the late Senator Edward Kennedy, intended to help cover home care costs for the disabled and those with long-term care needs. Because it was designed as a voluntary enrollment insurance plan, it has generated concern that it would experience serious adverse selection problems as it attracted those most likely to need home care in subsequent years.

This week’s news focused on HHS’s explanation of reductions in CLASS development staffing, including the departure of the program actuary. An HHS announcement denied that the program was being abandoned, but included words that may sound CLASS’s death knell:   “As we have said in the past, it is an open question whether the program will be implemented. A CLASS program will only be implemented if it is fiscally solvent, self-sustaining, and consistent with the statute.”

Because premium collections would be much greater than expenditures in the initial years of the program (individuals must be enrolled for five years before they can claim benefits), CLASS was a major contributor to the CBO’s 2010 estimate of ten-year “savings” for the Affordable Care Act. The front-ended projected cash flow was estimated by the CBO as resulting in a $70 billion deficit reduction for the 2011-2020 decade. However, as critics pointed out, as insurance payments exceeded premiums in future years the planned program would eventually add to the deficit.

So, while HHS is denying that CLASS will be closed down, its insistence on fiscal solvency and self-sustainability indicates that the program is now on life support, and—in spite of its short-term positive cash flow—may not survive Congressional and administration deficit reduction efforts.

PLAN B: IF THE MANDATE IS OVERTURNED

Kaiser Health News has an interesting piece in which it quotes the answers of six health care system “experts” to what happens if the Affordable Care Act’s individual mandate is found unconstitutional. (The GAO posed a similar question to a wider group earlier this year, and published its much more extensive findings in a February 25 letter to a Senate Appropriations subcommittee.)

It’s important to emphasize that KHN’s question was not what kind of coverage incentives should have been in the ACA, something that a number of the interviewees apparently didn’t understand, but what happens if the individual mandate is overturned.

In fact, if the mandate is thrown out, a couple of things are certain. First, many of those who would otherwise have acquired coverage will not do so as penalties for non-compliance are eliminated. Second, there will be an immediate jump in individual and small group premium rates, since the effects of the ACA provisions proscribing medical underwriting and pre-existing condition limitations will no longer be offset by an influx of new healthy insureds.

What happens next? The political finger-pointing is likely to be nicely balanced. Republicans will blame the ACA for the increase in rates. Democrats will blame Republicans for fighting the one provision of the ACA most likely to hold down premiums.

While proposals like restoring pre-existing condition exclusions or imposing penalties on late enrollees or extending the time between open enrollment periods could help mitigate the problem, neither party will hurry to push for solutions. Democrats will be unwilling to renege on their promises to eliminate all forms of medical underwriting, while Republicans will be just as unwilling to do anything that might make the ACA effective. And with the two chambers of Congress in opposing hands, an impasse seems more likely than not.

Is there room for a compromise? Given politicians’ propensity for buck passing, perhaps giving states authority to change open enrollment periods or to allow pre-existing condition exclusions after 2014 might find bipartisan support. State governors and insurance commissioners might welcome the opportunity to leave their mark on federal legislation, or at least to take credit for limiting premium increases.

One thing seems sure: overturning the mandate while leaving all other ACA provisions unchanged would provide a huge accelerant for the individual and small group insurance death spiral.

WINS NUMBER TWO AND THREE FOR THE OBAMA ADMINISTRATION

The Obama administration won a pair of modest victories today when the Fourth Circuit Court of Appeals in Richmond, Virginia, threw out a lower court ruling that the Affordable Care Act was unconstitutional.

The first decision by the Fourth Circuit provided only a small—and anticipated—win for the Administration, although it was an embarrassment for one of the most outspoken foes of the ACA, Virginia’s Attorney General Ken Cuccinelli. The Court rejected Virginia’s case on the grounds of lack of standing, stating that the ACA imposed no specific obligation on the Commonwealth itself, shooting down Cuccinelli’s argument that a Virginia statute protected its citizens against the ACA’s individual mandate clause.

In the second decision, the Court ruled that Liberty University’s case against the ACA had come too soon, and that it could not be brought until the law was in effect. This somewhat unexpected ruling reflected the Court’s interpretation of the individual mandate’s penalties as taxes, which under federal law cannot be legally challenged until they are in force.

The Fourth Circuit panel was the first group of three judges appointed solely by Democratic presidents to hear cases on the ACA’s constitutionality. It also was the first to characterize the mandate penalties as taxes, an interpretation that Administration lawyers have argued, and that would fit Congress’s authority under the Constitution.

Aside from the tax interpretation issue, today’s rulings don’t mean very much for ACA supporters or opponents. Neither ruling examined the merits of the ACA, and with opposing decisions from two other appeals court panels, the constitutionality argument is almost certainly going to the Supreme Court. The major question is when; the Administration may be able to delay a high court decision by appealing the prior Eleventh Circuit appeals panel ruling to the full court of sixteen judges, but this could result in another ruling against the ACA, and still leave the Supreme Court to rule before the 2012 election..

THE LIMITS OF COMPETITION

For those of us with a touching faith in the ability of competition to control health care costs, a dispute in Pennsylvania provides a sobering warning, and a reminder of the power of near-monopoly in health care.

Pittsburgh-based Highmark Incorporated, the regional Blue Cross and Blue Shield parent, announced in June its intent to acquire the West Penn Allegheny Health System, a five-hospital system that is the second largest in Western Pennsylvania. The acquisition, which would depend on regulatory approval, would presumably give Highmark more control over hospital costs and help in limiting premium increases, as well as recapitalize a hospital group with serious financial problems.

What happened next is instructional but depressing. The University of Pittsburgh Medical Center, the region’s largest hospital group, announced that it would end its in-network relationship with Highmark as soon as its present agreement expires next year. The result would be a potential tripling of rates to Highmark for services at UPMC’s twenty hospitals as Highmark is forced to pay “retail” prices.

Testifying that the Highmark deal with West Penn Allegheny Health System would make Highmark a direct competitor, UPMC’s President made the issue very clear to a state legislative committee: “[this was] an inevitable decision dictated by the realities of competition.”

What lessons can be learned from this? First and most obvious is that major hospital groups are increasingly in control of the health care marketplace (UPMC has an extensive physician network and—ironically— also operates its own insurance plan) and will be ruthless in protecting their position.  Second, as a result of the first, it’s going to be very difficult for insurers to control the costs of care through the acquisition of providers—as UnitedHealth and others are attempting—unless the acquiree is dominant in its area.

There are implications for the move to ACOs, also. Encouraging tighter associations between physicians and hospitals may make for better coordination of care, but it will also lead to increasing numbers of medical center “fortresses,”  for which there is little or no competition—and no chance of future competition—and in which physicians and hospitals have the same interest: to maximize their joint billings.

AND WHAT HAPPENS IF THE INDIVIDUAL MANDATE IS STRUCK DOWN?

An alarming article in Politico.com looks at what could happen if the Supreme Court determines that the Affordable Care Act’s individual mandate provision is unconstitutional—something that the current conservative leaning of the Court seems to indicate is somewhat more likely than not.

Assuming that such a possible decision by the Court follows that of the Eleventh Circuit Court of Appeals in ruling that the mandate is unconstitutional but the remainder of the ACA may stand, the Politico.com article anticipates some potentially disastrous consequences.

The provisions of the ACA—some of them already in force—include guaranteed issue, elimination of annual and lifetime limits, and a ban on basing premiums on health status, essentially decoupling coverage and premiums from insurance risk. Without the requirement for almost everyone to have coverage, there will be nothing to ensure that the risk pool contains a large percentage of individuals in good health as well as those with medical problems, and nothing to stop anyone from waiting until they’re sick or injured to demand coverage.

Without a subsequent change to the ACA, the consequences of full implementation in 2014 with no individual mandate would be dramatic jumps in premium rates in the individual and small group markets. These, in turn, would lead to further drops in enrollment, especially by those least in need of coverage, leading to additional premium increases as all but the sick retreat from the insurance market—the classic adverse selection-fueled death spiral.

As premiums for all but major employers shoot through the roof, those unfortunates who work for marginally-profitable small businesses or, worse still, pay for their own coverage will find insurance either unobtainable—as insurers exit the small group and individual markets—or unaffordable.

In a more politically rational world, a possible high court ruling against the mandate would be followed by Congressional action to modify other parts of the law—for example, by modifying the guaranteed issue provision. However, no-one who watched the cliff-edge battle over the debt limit can be confident that extremists in either party would compromise on any reasonable solution. What’s to stop lawmakers from continuing to refuse to modify their positions regardless of the impact on the insurance market? After all, the ACA is anathema to Republicans, while there are plenty of Democrats who despise the private insurance industry and who might be happy to see it close to collapse.

Even leaving political adversarial issues alone, Democrats will not be eager to renege on their promise that health insurance will be available to anyone, while many Republicans may also hesitate to revoke such an apparently attractive provision for fear of a subsequent electoral backlash.

The Politico.com article doesn’t try to guess the outcome, but it’s hard to be optimistic. A reasonable supposition—given the current inflexible mood in Congress—is that there will be no compromise until the insurance market is on the edge of disaster—or maybe already slipping over that edge. Insurance industry lobbyists are likely to find few votes for a rational solution until there is sufficient public outcry over skyrocketing premiums and cancellations of coverage by carriers abandoning the market to put politicians’ reelection chances at risk.

MEDICAL LOSS RATIO WAIVERS: AN UPDATE

The Affordable Care Act’s medical loss ratio issue (requiring insurers’ administrative and other non-medical costs to remain below prescribed percentages) has dropped out of the limelight recently, but that doesn’t mean that it’s been forgotten.

Up until last week, the Department of Health and Human Services had approved three MLR waivers (for Maine, Nevada, and New Hampshire) and rejected none, leaving some observers anticipating approval of all waiver requests. It’s now apparent that that isn’t going to happen.

North Dakota became the first unlucky state last week, when HHS rejected its waiver request on the grounds that the state’s three largest insurers are already meeting, or are very close to, the target MLRs, and that accordingly the MLR provision would not disrupt the state’s insurance market (the requirement for a waiver to be issued).

HHS also showed that it is willing to issue partial waivers. Both Iowa and Kentucky were given waivers allowing them to apply lower thresholds than those specified in the ACA, and only for a limited time.

The MLR requirement has continued to result in insurers leaving marginal markets, especially for individual coverage. Aetna has announced it is leaving the individual market in Colorado and also in Indiana, where it becomes the fifth carrier to depart while the state’s waiver request is being considered by HHS. So far, however, none of the exiting insurers in any state could be considered a major player in that state, so that the number of policyholders required to switch coverage is small.

Meanwhile, in addition to that of Indiana, waiver requests from Georgia, Louisiana, Michigan, Kansas, South Carolina, and Florida remain on the HHS desktops awaiting resolution.

ATTACKS ON IPAB GATHER STRENGTH—AND WASTE ENERGY?

The Washington Post reports that the Affordable Care Act’s Independent Payment Advisory Board, intended to constrain Medicare spending increases, is under increasing pressure from Republicans, health care lobbyists—and a significant number of Democrats.

As specified by the ACA, the IPAB will consist of fifteen health care “experts” to be appointed by the president and confirmed by the Senate, with authority to make cuts to Medicare if spending exceeds specified targets, starting in 2015. Congress could overrule the panel, but only by mustering a super-majority in the Senate or by creating an alternate plan to save the same amount.

The ACA imposes narrow limits on the IPAB. By law it cannot ration care, cut benefits, change eligibility rules, or raise revenue by increasing beneficiary premiums or cost-sharing, nor can it—until 2020—reduce payments to hospitals. This means that the brunt of any IPAB-proposed savings will fall on physicians and drug and medical device companies.

Not surprisingly, the targeted provider groups are lobbying fiercely against the IPAB’s powers. As the Post reports, the AMA and dozens of other industry groups are actively fighting the IPAB in Washington, while a series of national TV ads denouncing it is to air starting this week. Congressional Republicans—eager to attack any part of the ACA—have jumped on the bandwagon and, with the support of a handful of Democratic House members dependent on provider financial contributions, have introduced a bill to eliminate the IPAB.

There are some ironies in all of this frantic activity—along with indications that everyone involved may be wasting their energies:

1. The IPAB is likely to have far less impact on Medicare physician payments than any possible reworking of the Sustainable Growth Rate formula, and be considerably less broad than anything the newly-named bipartisan deficit super-committee may propose.

2. Given that its fifteen members are subject to Senate confirmation, Republicans can probably prevent the IPAB from ever convening.

3. The Congressional Budget Office estimated in March that, in part due to other cuts to Medicare in the health-care law, spending will be within the ACA’s targets for the next 10 years, thereby eliminating the need for the IPAB to make any recommendations at all.

APPELLATE COURT SETBACK FOR AFFORDABLE CARE ACT

The second of three federal Appeals Court decisions on the constitutionality of the Affordable Care Act was handed down on Friday, and it was a defeat for the Obama administration.

The Eleventh Circuit three-judge panel in Atlanta ruled 2-1 that the individual mandate violated the Constitution. The majority opinion described the administration’s argument for the ACA’s constitutionality as a “wholly novel and potentially unbounded assertion of congressional authority.” The opinion went on to state: “What Congress cannot do under the Commerce Clause is mandate that individuals enter into contracts with private insurance companies for the purchase of an expensive product from the time they are born to the time they die,” and commented scathingly: “We are unable to conceive of any product whose purchase Congress could not mandate under this line of argument.”

The Atlanta appeals panel did provide ACA advocates with a few crumbs of good news. In spite of a reputation as a conservative court, the panel ruled unanimously against a lower court decision that the entire ACA should be struck down because its various components were so intertwined with the individual mandate requirement. It also produced a minority opinion from the third judge that “Congress’ commerce power has grown exponentially over the past two centuries, and is now generally accepted as having afforded Congress the authority to create rules regulating large areas of the economy.”

The White House now has the option of appealing the three-judge panel’s decision to the full Eleventh Circuit Court. While the conservative reputation of the full court suggests that no different decision would result, the potential advantage of an appeal is that it could delay the inevitable Supreme Court hearing and ruling until after the 2012 election.

INTERPRETING THE DRAFT INSURANCE EXCHANGE REGULATIONS

The Obama administration’s progress—with just a few stumbles—towards health care reform implementation took another major step this month. In a carefully chosen small business setting—a Washington DC hardware store—HHS Secretary Kathleen Sibelius released draft regulations for the health benefit exchanges called for by the Affordable Care Act.

The exchanges, required to be established for every state, are predicted to serve some 24 million consumers by 2019 (provided that the ACA is neither significantly changed nor found unconstitutional), with the majority receiving federal subsidies to help pay for coverage. So far, a dozen states have enacted bills to create exchanges, while in nine states such legislation has failed.

Responding to strident opposition to the ACA requirements from conservatives and from many business owners, Secretary Sibelius emphasized the flexibility of the draft regulations, which would allow considerable variation among states, give participating businesses considerable latitude in coverage selection, and interpret states’ readiness for exchange operation more loosely than implied by the ACA itself. In describing the intent of the exchanges, she stated that they will “offer Americans competition, choice, and clout.”

Well, maybe, depending on one’s interpretation of the draft regs.

Here’s one assessment of the impacts of the draft:

Despite the efforts of the administration to compromise with ACA critics, the draft is unlikely to sway politicians in the most conservative states. It’s not the exchange concept that’s anathema to the right, it’s the idea that the federal government can impose any rules at all—and, even more, that legislation that overcame conservative opposition only through procedural tactics should be successfully implemented. Don’t expect states like Florida, Arizona, Louisiana, and others to suddenly discover that exchanges aren’t so bad after all.

At the other end of the spectrum, more liberal administrations like those in California, Washington, and Maryland are already well into the detailed planning phases and are likely to be unaffected by the draft regulations—especially given the level of flexibility that they allow—while Massachusetts’ existing Connector already meets almost all the requirements (unsurprisingly, since it served as the primary model). Only a very few wavering states may be comforted by HHS’s willingness to compromise and will now take the plunge, rather than being forced to accept an exchange implemented by the federal government, as the ACA requires for states unwilling or unable to create their own models.

HHS’s new flexibility (or possibly frantic backpedaling) in defining operational readiness may lead to some interesting implementation problems. While the ACA implied that HHS must determine no later than January 1, 2013, whether or not each state’s exchange would clearly be ready for operation on January 1, 2014, otherwise forcing HHS to implement its own exchange(s), the draft regulations offer a fair amount of wiggle room (or possibly confusion). “Conditional approval” will be granted to states that persuade HHS that they are in “advanced preparation.” How these terms will be interpreted is unclear. So also is what will happen if it subsequently becomes apparent that a state with conditional approval proves unable to meet the January 2014 date. The best guess seems to be that HHS would—to avoid implementation chaos—allow the state to slide the deadline, perhaps to January 1, 2015. However, this would leave HHS with the problem of trying to plug the gap at the last moment with its own system, or waive mandated coverage requirements for the states’ businesses and individuals.

And, if HHS does have to step in and implement an exchange itself, what notice will it have? In states like Florida that have refused to participate, HHS will—at least in theory—have adequate time to implement a federal exchange (but possibly little state cooperation). The more difficult situations will occur in states that have committed to implementation but whose efforts are discovered to be behind schedule or failing to meet HHS rules. Assuming that at least a dozen states will either refuse to implement exchanges or—deliberately or not—stall their efforts, and that several other states will encounter serious development or implementation problems, HHS is likely to have its hands very full indeed.

Aside from providing a substitute for state exchanges, HHS will also have its own development responsibilities to worry about. The ACA requires that state exchanges interface with HHS and other federal agencies to confirm legal residency and potential eligibility for other programs such as Medicaid and CHIP.

Making matters even more complicated, the draft offers states the opportunity to “partner” with HHS, conceivably using components of a federal system to accelerate IT implementation. While this flexibility of approach could perhaps be helpful, it also should create plenty of opportunities for mutual finger-pointing.

The flexibility of the draft regulations in allowing insurer representation—short of a majority— on exchange governing boards is clearly intended as a sop to the industry, but it’s one that comes with some risks. Consumers hoping for lower premiums may find that industry representatives’ persuasion has resulted in inclusion of every possible health plan—hundreds in large states—and eliminated the chance to create effective price competition.

It’s also uncertain whether or not Secretary Sibelius’ attempts to mollify small business owners will be rewarded. The so-called SHOP exchanges have been granted design flexibility, and clearly have potential to lower premiums by creating larger risk pools. However, the lack of success of existing small business exchanges—including those in Massachusetts and Utah—suggests that many businesses will be very wary indeed of such exchange participation, and may choose simply to terminate existing coverage.

The conclusion: fuzzying the rules may be good short-term politics (is there any other kind?), but could lead to chaotic implementation problems. Changing the definition of “ready” won’t cause an IT system to be suddenly bug-free or result in millions of consumers being enrolled overnight. And, while greater flexibility may be helpful to states still debating exchange issues, HHS managers may feel as if they are trying to herd cats as they deal with the problems of different design rules for each of up to fifty states.

OBAMA ADMINISTRATION WINS FIRST ACA APPEALS ROUND

The first of three anticipated federal Courts of Appeals decisions on the constitutionality of the Affordable Care Act was handed down yesterday by a Sixth Circuit panel in Cincinnati—and it was a win for the Obama administration.

The three judge panel ruled two to one against an appeal by the conservative Thomas More Law Center of an earlier federal District Court finding that the ACA does not violate the Constitution. The ruling was especially notable as the first in which a Republican judicial appointee supported the constitutionality of the ACA’s individual mandate.

The majority opinion emphasized that the case should not hang on distinctions about whether the failure to buy insurance should be defined as activity or inactivity, a question the Supreme Court has never considered. “The constitutionality of the minimum coverage provision cannot be resolved with a myopic focus on a malleable label,” the opinion stated, but also noted: “The activity of forgoing health insurance and attempting to cover the cost of health care needs by self-insuring is no less economic than the activity of purchasing an insurance plan.”

Judge Jeffrey Sutton, appointed to the Court by President George W. Bush, added: “Inaction is action, sometimes for better, sometimes for worse, when it comes to financial risk. Whether an individual buys an insurance policy or not, each requires affirmative choices; one is no less active than the other, and both affect commerce.” In contrast, Judge James Graham, the second Republican appointee on the panel, countered that if the mandate was allowed, “it is difficult to see what the limits on Congress’s Commerce Clause authority would be.”

The majority emphasized its belief that health care is a unique market because most providers are required to treat people—a critical piece of the government’s argument. As Judge Sutton wrote in concurring: “A mandate to purchase health insurance does not parallel other settings or markets. Regulating how citizens pay for what they already receive (health care), never quite know when they will need, and in the case of severe illnesses or emergencies generally will not be able to afford, has few (if any) parallels in modern life.”

The ruling by the Cincinnati court is the first of three opinions to be delivered by separate Courts of Appeal. Opinions are expected soon from panels in the Fourth Circuit in Richmond, Va., and the Eleventh Circuit in Atlanta.

It is expected that the Supreme Court will take one or more of the cases, perhaps as soon as its coming term, which starts in October. The speed of the Sixth Circuit ruling could help ensure that timing.

ANOTHER LEGAL ROUND—WITH A MAJOR MISSTEP?

The past week’s appellate court hearing in Atlanta on the constitutionality of the Affordable Care Act, one of a series along the inevitable road to the Supreme Court, showed that the opposing legal arguments are beginning to be firmly established—with each seeming to confuse the purchase of health insurance with the purchase of health care.

The Atlanta panel of three judges, with both Republican and Democratic appointees, heard arguments for and against the earlier ruling by Judge Roger Vinson in Pensacola that the individual mandate was unconstitutional and so central to the ACA that the entire act should be invalidated, and specifically that while the Commerce Clause of the Constitution gave the government authority to regulate interstate commerce, it did not allow Congress to penalize people for the “inactivity” of declining to buy a commercial product.

Former Bush administration Solicitor General Paul Clement, arguing in support of the Vinson decision, agreed that while it could be permissible for Congress to require insurance or other payment by those being treated in an emergency room, because they would already be in the “stream of commerce,” it was a very different matter to require them to pay prospectively for future care.

Acting Solicitor General Neal Katyal, presenting the government’s case, urged the judges to see the ACA requirement not as a mandate to buy an insurance policy, but as a regulation of the payment for care that individuals would inevitably consume. He argued that Americans would not be “conscripted” into the market because the uniquely unpredictable demand for health care would have already placed them there, thus “it’s all about financing, it’s about regulating whether people are paying cash or credit.”

Clement’s characterization of health insurance as a type of prospective payment for service fits neatly into ACA opponents’ argument that if the federal government can require Americans to buy such insurance, there are no effective constitutional limits to prevent it from mandating any other purchase or activity. On the other hand, Katyal’s use of the cash or credit analogy—similarly implying that health insurance is a form of payment for care—may have been a serious misstep.

While the government apparently hopes to build on two precedent Supreme Court decisions that (separately) defined wheat growing and marijuana cultivation for home consumption as falling under the purview of the Commerce Clause, the government case that medical care is an inevitability and so puts every American in the stream of commerce is undermined by the facts: some people never receive care, while others willingly pay for care out of their own pockets at the time they need it.

The problem is in characterizing insurance as a form of prospective payment. An alternative—and probably more accurate—view is that insurance is the sharing of risk, and that the purchase of insurance is payment for participation in the risk pool. In fact, without the sharing of risk, the concept of insurance is meaningless. While the underlying reality may be the same, the practical difference between the two perspectives is that risk is current, universal, and certain; payment for care is not necessarily any of these.

The risk model makes the government’s case for constitutionality of the individual mandate considerably stronger, since it is the failure of the non-insured to participate in the sharing of risk that immediately increases the costs for the insured—something that experience shows very clearly. Moreover, it emphasizes the uniqueness of insurance: although it is clearly a commercial activity, it offers neither a tangible product nor a service activity, only a transfer of risk—thereby helping to counter the “if Congress can require insurance purchase, is there no purchase they could not compel?” argument.

Would the Supreme Court find this interpretation helpful in judging the constitutionality of the individual mandate? Prospectively, it’s impossible to say, but regarding insurance purchase as payment for risk sharing—and therefore something that applies to all Americans, since even those who fail to purchase insurance affect the costs of others—seems more consistent with the intent of insurance than the advance purchase concept offered by both parties to the Atlanta court.

MUCH MORE REFORM NEEDED FOR MEDICARE?

Last week’s startlingly gloomy annual report from the Trustees of the Medicare Trust Funds lent new urgency to the need for further Medicare expenditure reforms. Whether Washington DC politicians will respond with more than sound bites is less likely.

The Trustees’ report shows a dramatic deterioration—even based on the most optimistic assumptions— in the financial position of the Part A Trust Fund, along with expectations of continued faster-than-GDP growth for Parts B and D.

Compared with the prior year’s Trustees’ report, which forecast that the Part A Fund would run out of money in 2029, the latest report estimates that the fund will dry up in 2024—five years sooner. The reasons for the sudden acceleration of financial disaster include a significant drop in revenues from taxes on workers’ earnings due to the ongoing recession, and new forecasts of longer life spans for beneficiaries.

The report also includes new forecasts for Medicare Part B and Part D, which operate on a pay-as-you-go basis using mixes of beneficiary premiums and general federal monies. While Parts B and D will not exhaust their respective trust funds, they will have increasing impacts on the deficit as their federal subsidies are forced to increase. Medicare B costs are projected to grow at a 4.7 percent annual rate (based on current law), and Medicare D at a 9.7 percent rate through 2020, compared with forecasts of 5.2 percent annual GDP growth.

Unfortunately, the preceding estimates are optimistic ones, and assume both the imposition of the physician rate cuts required by the 1997 Balanced Budget Act, and the implementation of all cost controls included in the Affordable Care Act.

No-one, and obviously not the Medicare Trustees, believes that Congress will allow the impending 30 percent slashing of physician fees to take place. Far more probable is that Congress will—as it has every year since 2003—choose to duck what would otherwise be a draconian reduction, one that would lead to a wholesale exodus of doctors from Medicare. Assuming that Congressional behavior does not suddenly change, Part B cost increases will jump to a 7.5 percent annual rate, not the wildly optimistic 4.7 percent.

Almost as unlikely is that the Part A cost controls included in the Affordable Care Act will all be implemented. The primary mechanism—the Independent Payment Advisory Board—is already under fierce political fire from Republicans. Even if the IPAB survives, both its appointees and its recommendations depend on approvals by a Congress that has shown no willingness to make difficult cost-cutting decisions.

And that’s the problem. House Budget Committee Chair Paul Ryan’s proposal for shifting much more of Medicare’s costs to beneficiaries has been disowned by his Republican colleagues—and given Democrats a huge political gift. The IPAB is under fire and could be dumped. Earlier, more nuanced proposals, like those from the co-chairs of the 1999 Bipartisan Medicare Commission, have died for lack of political support. With an election beginning to loom, and both parties looking to the senior vote, the chances of responsible bipartisan solutions seem far, far, away. Meanwhile, Part A and the federal deficit are rushing towards their respective precipices. It’s political bankruptcy in every sense.

REFORM CHALLENGES GRIND ON

Last week saw more legal activity around challenges to the Affordable Care Act, with a hearing in Richmond, Virginia before three appeals judges on the constitutionality of the individual mandate.

In a statistical surprise, the three judges drawn randomly from the Fourth Circuit Court’s panel of fourteen judges equally divided between Democratic and Republican nominees were all from the former group.

The judges heard arguments appealing two lower courts’ contradictory decisions in Virginia. In Richmond, the federal district court had found that the individual mandate was unconstitutional. In Lynchburg, the federal district court had upheld the individual mandate as falling within “well settled principles” set by the Supreme Court.

The three Democratic nominees fired questions at the opposing lawyers for more than two hours, but with rather more skepticism being shown to the arguments of the ACA opponents. The key issues for the judges were whether, in the Richmond case, Virginia’s attorney general had legal standing to challenge the federal ACA, and, in both cases, how to define the choice not to buy health insurance: as commercial activity that the Supreme Court has ruled can be regulated, or as inactivity that is beyond Congress’s reach.

Two additional cases will be heard by federal appeals courts in the next three weeks. On June 1 in Cincinnati, the Sixth Circuit Court will hear arguments in the appeal of a ruling upholding the law. On June 8, in Atlanta, the Eleventh Circuit will hear the Obama administration’s appeal of a Florida judge’s ruling that the entire act was unconstitutional.

Although it’s generally assumed that the constitutionality issues will lead eventually to a decision by the Supreme Court, the timing and path to the Court remain uncertain. The Court might take any one or more of the various cases, depending also on the preferences of opposing lawyers and on the decision by the Fourth Circuit as to Virginia’s legal standing to challenge the law. It is also possible that one or more of the cases being heard by the three-judge appeals panels could be referred to the respective full fourteen-judge circuit panel. In general, though, it appears that both sides are interested in moving fairly expeditiously towards the Supreme Court. However, there may be some attempts to finesse the timing to fit the schedule of the 2012 presidential election. The best guess: a Supreme Court hearing this fall with a decision in the first quarter of 2012.

SINGLE PAYER IN VERMONT? WELL, NOT EXACTLY

In just a few days, Vermont’s Governor Peter Shumlin will sign into law what the media is calling “single payer health care reform.” But is it?

Vermont has certainly demonstrated more enthusiasm for a single payer approach than any other state. The Governor and key Democratic legislators have supported the concept, the state has a well-organized lobbying group in Vermont for Single Payer, and a state-funded study earlier this year estimated that a single payer approach could dramatically reduce health care costs. The major result has been passage in the past month by both of the state’s legislative chambers of the bill that Governor Shumlin indicates that he will sign.

So does this mean that Vermont is ready to upend its existing health care financing system and replace it with a French or British-style system? Not exactly.

The versions of the bill passed by Vermont’s House and Senate are each far, far more tentative than committed single payer advocates would wish, and have already been subject to scathing criticism by national single payer advocates. The bill provides for the creation of the legal framework of a public insurance program, to be called Green Mountain Care, but includes no funding mechanism, defines no benefit standards, is vague on the future roles of private insurers, and is silent on exactly how existing federal programs are to be incorporated.

What the bill does do is to establish the state exchange required by the Accountable Care Act, encourage experimental capitated payment structures, and create a Board for Green Mountain Care with responsibility for examining funding, benefit, and other issues, with recommendations to be submitted to the state legislature in 2013.

Even if the Board’s proposals are very strongly in favor of a single payer system, they will face some considerable obstacles to implementation.

Because the present bill’s approach to creation of a new system is to allow two years for development of recommendations, any implementing legislation will be delayed until 2013 at the earliest, giving opponents considerable time to organize and fund their fight. At the same time, whatever funding structure the Board recommends will inevitably result in some winners and some losers—who will almost certainly oppose the proposal—even if the net result is a gain for Vermont’s citizens.

While small businesses are expected to get coverage through the state’s planned exchange, and thus could be forced to participate in a future state-controlled single payer plan, larger employers present more of a problem. If a single payer plan could be shown to be less costly, such employers would presumably be willing to participate. If they are not persuaded of the merits of single payer, however, they could rely on ERISA law to keep their employees out of the new program.

The bigger obstacles, however, are likely to be at the federal level. The Accountable Care Act allows states to opt out of federal reform starting in 2017, but not before. (Although an earlier date has been proposed, it has limited support). The pooling of federal funds envisioned by Vermont’s single payer advocates would require negotiations with Medicare, Medicaid, TRICARE, and Public Health administrators, all in the face of opposition from lobbyists for insurers, providers, and businesses who fear the impacts of a single payer structure on their revenues and profits. And who would be willing to guess whether or not in 2013 the administration in Washington DC is favorable towards any kind of health care reform?

CONTROLLING THE MEDICARE BUDGET—TIME TO FAST FORWARD TO 1999?

The Congressional Budget Office estimates that the government deficit will exceed one and a half trillion dollars this year, with federal health care annual expenditures expected to hit the trillion dollar mark by 2012. The largest federal health care program is, of course, Medicare, with costs projected to be close to $600 billion in 2012, and growing at around seven percent a year thereafter, although forecast to drop to a mere six percent annual increase if and when the Affordable Care Act is fully implemented.

Republicans and Democrats have each offered proposals to reduce projected Medicare expenditures, Republicans by shifting much of the cost of the program to beneficiaries, Democrats by passing responsibility to the already hobbled and politically endangered Independent Payment Advisory Board. Neither proposal has any realistic chance of passage.

Maybe it’s time to blow the cobwebs off the 1999 proposal from the National Bipartisan Commission on the Future of Medicare.

The Commission, co-chaired by Democratic Senator John Breaux and Republican Representative Bill Thomas, was created by Congress as part of the Balanced Budget Act of 1997, back when bipartisan cooperation was still sometimes possible. The Commission spent nine months examining Medicare’s program structure and costs and alternative approaches to reform, with the two co-chairs issuing their joint recommendation in March 1999. The co-chairs’ recommendation was, however, supported by only ten of the seventeen Commission members, one short of the number required for formal adoption, with the more liberal members generally opposed to the proposal’s cost control approach. Ironically—in the light of subsequent economic events—one key reason for the failure of the co-chairs’ proposal to gain more support was the booming economy of the later Clinton years, combined with the success of already enacted program changes dictated by the Balanced Budget Act.

Despite its failure to achieve the two-thirds majority needed for adoption, the 1999 proposal includes some recommendations that together look more practicable and potentially more politically acceptable than those of either Representative Ryan’s Republican plan or President Obama’s Democratic proposal:

1. Medicare would become a premium support program, with federal contributions of 88 percent of average premium cost (and with subsidies for low-income seniors) – Like Representative Ryan’s 2011 plan, the 1999 proposal recommended a voucher-type approach in order to encourage beneficiary cost-consciousness, but with considerably less of a potential financial burden on beneficiaries.

2. Traditional fee-for-service Medicare would remain as an option along with insurer offerings – Unlike the Ryan plan, the three-quarters of seniors enrolled in traditional Medicare would not be forced to switch to an insurance company plan. However, the FFS program would have to be self-funded and self-sustaining and meet the same requirements as private plans, including standards for actuarial soundness, adequacy of reserves, and performance capacity.

3. Medicare program administration would be transferred from HHS to a government-chartered Medicare Board, free of civil service restrictions – Key functions of the Board would include negotiation with health plans, risk adjustment, and premium collection and disbursement, but with the standard Medicare benefits still determined by Congress.

4. The traditional FFS program would have some power to contract with individual providers in order to control costs – Rather than a one-size-fits-all reimbursement approach, the FFS program would have some flexibility of payment methods and would be able to contract selectively in areas where otherwise it would be uncompetitive with insurance plans.

5. Parts A and B would be combined into a single program – With close to 95 percent of beneficiaries enrolled in both Part A and Part B, with the blurring of lines between inpatient and outpatient services, and with the recommended changes in funding, combining Parts A and B seems a logical step.

6. The Medicare eligibility age would be the same as for Social Security – As with Representative Ryan’s plan, the 1999 Commission saw increasing the eligibility age as a reasonable reflection of demographic trends. Tying Medicare eligibility age to Social Security would be a rational approach.

Could the 1999 proposal be the optimal solution for Medicare? Probably not, but with finding an approach that could gain enough votes to reduce the deficit increasingly urgent, it seems more realistic than the recent political offerings, provided steps are also taken to minimize cost-shifting to the non-Medicare market.

The Bipartisan Commission’s proposed average 12 percent beneficiary contribution (roughly equal to today’s Part B premium) would not result in immediate federal savings. However, as the experience of the Federal Employees Health Benefit Plan and state employee plans like California’s CalPERS has shown, a premium support model can result in much greater consumer awareness of coverage cost, without imposing undue financial burdens on beneficiaries. Retaining the traditional FFS Medicare program as an option, but with real price competition with—and between—private plans, would alleviate many seniors’ concerns, while forcing both the private Medicare insurers and the government plan to press their providers to be more cost-effective.

How far could such an approach go towards reducing the deficit and enhancing the financial viability of Medicare? The 1999 Bipartisan Commission’s staff analysis estimated that it would reduce the growth of Medicare spending by approximately 1 percent a year, once fully implemented, or—based on current CMS projections—some $60 billion annually. Given that the 1999 projection was made at a time when Medicare growth was slowing significantly, a new cost analysis might show a bigger potential reduction, while a slightly higher beneficiary contribution would obviously increase the federal savings. What’s needed now is to do that updated analysis—preferably without the pressures of partisan politics—in the hope of finding an acceptable bipartisan solution, before the deficit crisis dictates a more desperate and draconian approach.