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The final version superseded the much-criticized draft regs published several weeks earlier.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.