Health Care REFORM UPDATE

ESSENTIAL BENEFITS: WHAT ESSENTIAL BENEFITS?

2011-12-22T15:46:00.000-08:00

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

2011-12-19T17:10:00.000-08:00

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

2011-11-18T13:51:00.000-08:00

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

2011-11-12T13:47:00.000-08:00

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

2011-10-25T08:48:00.000-07:00

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:

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.
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.
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.
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

2011-10-16T12:48:00.000-07:00

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!)

2011-10-11T10:26:00.000-07:00

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

2011-09-28T13:45:00.000-07:00

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?

2011-09-28T10:09:00.000-07:00

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?

2011-09-24T11:08:00.000-07:00

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

2011-09-12T11:34:00.000-07:00

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

2011-09-08T12:28:00.000-07:00

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

2011-09-06T09:55:00.000-07:00

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?

2011-08-22T09:39:00.000-07:00

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

2011-08-21T10:09:00.000-07:00

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?

2011-08-15T15:31:00.000-07:00

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

2011-08-14T15:17:00.000-07:00

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

2011-07-31T11:13:00.000-07:00

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

2011-06-30T10:52:00.000-07:00

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?

2011-06-13T09:24:00.000-07:00

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?

2011-05-21T12:12:00.000-07:00

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

2011-05-19T11:54:00.000-07:00

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

2011-05-15T11:54:00.000-07:00

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?

2011-04-28T10:05:00.000-07:00

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.

NEWS UPDATE April 25, 2011: STOPPED IN ITS (FAST) TRACKS

2011-04-27T10:01:00.000-07:00

It wasn’t a huge surprise, but it was—after quite a drought—slightly good news for advocates of health care reform as defined by the Affordable Care Act.

The Supreme Court on Monday rejected the State of Virginia’s request to put the State’s challenge to the ACA (one of several similar cases) on a fast track. The Court’s order provided no explanation, and there were no dissenting votes.

Virginia’s attorney-general had argued that an exception was justified to the usual process of a case moving from federal district court to federal appeals court on its way to an eventual hearing by the Supreme Court, because of the importance of the ACA case and the virtual certainty that it would eventually be heard by the Court. The government agreed with the importance, but proposed the usual more orderly approach, especially since the case is already moving towards appellate review.

Possibly more interesting and important than the Court’s actual decision was the absence of any indication that any of the justices had disqualified themselves from the case. Since the newest justice, Elena Kagan, was previously Solicitor General in the Obama administration, there had been some speculation that she might recuse herself, thereby potentially leaving the Court more heavily weighted towards its conservative wing. Meanwhile, the best guess is that the Virginia ACA case will be heard by the Court some time in 2012, but with a decision not being handed down until later in the year, possibly in time for the presidential election.

CONTROLLING THE MEDICARE BUDGET—TWO INFEASIBLE PROPOSALS

2011-04-23T09:16:00.000-07:00

How to slow Medicare’s escalating costs has been the big health care policy issue this month, with Republicans and Democrats offering competing proposals, each part of broader plans for reducing the federal deficit—projected to be $1.5 trillion this year, with the government borrowing 40 cents for every dollar it spends.

Unfortunately, neither the Medicare proposal of Representative Paul Ryan’s House Budget Committee, nor that offered in response by President Obama, can be considered realistic.

Both proposals do have some merits. Representative Ryan’s plan for switching Medicare to a quasi-voucher premium support program in which beneficiaries would pay part of the premium for their choice of health plan could make seniors more cost conscious and introduce more competition among insurers. President Obama’s proposed strengthening of the Independent Payment Advisory Board provision of the ACA by lowering the trigger point for IPAB action would force further efforts to reduce costs, while doing much to remove Medicare policy from lobbyist-vulnerable political considerations. Both, if implemented, would effectively guarantee that federal Medicare expenditures would drop dramatically from current projections.

Neither, however, has any chance of enactment. The Congressional Budget Office’s projection of the average 65-year-old paying more than two-thirds of the cost of Medicare coverage by 2030—and more than twice as much as under the present program—almost certainly dooms Representative Ryan’s proposal. (The CBO’s assumption of the continuation of the differential between traditional Medicare and insurers’ equivalent offerings can be questioned, but it’s the forecast of the unfortunate 65-year-old’s 68 percent share of the tab that will resonate for seniors, their lobbyists, and their political supporters.)

President Obama’s proposal is just as unlikely to succeed. Senior Republicans were scathing in their criticisms of the original IPAB provision, as further increasing bureaucratic meddling in seniors’ care, and can be assumed to be even more opposed to any strengthening of IPAB. Political considerations aside, the President’s plan faces practical problems. The ACA severely limits the scope of IPAB recommendations, specifically excluding increases in beneficiary costs, benefit restrictions, changes to eligibility criteria, or any “health care rationing.” Since the ACA also forbids most targeting of hospital and hospice rates before 2020, the major cost-control option remaining is a severe cut in physician payments (and even that is excluded if a permanent fix to the sustainable growth rate problem is enacted), something that—even if it were politically feasible—would almost certainly lead to a wholesale exit of doctors from the program.

Both proposals suffer from another problem: each would shift costs onto Medicare beneficiaries and onto non-Medicare private sector insureds, although in slightly different ways.

Representative Ryan’s proposal would require beneficiaries to contribute to the cost of insurance coverage in excess of the government voucher value. To the extent that insurers respond to beneficiaries’ expected increased cost consciousness by squeezing provider rates, it’s likely that providers will try to recoup by increasing their charges to private sector payers.

President Obama’s proposal would require IPAB to impose cost reduction strategies to meet the targets prescribed in the ACA. Whether these are simply cuts in rates or more stringent applications of “evidence-based” medical criteria, each almost certainly resulting in providers leaving Medicare, the result is likely to be many beneficiaries paying out of pocket to obtain care, and—just as for Representative Ryan’s proposal—providers increasing charges to other payers .

The two proposals have one other feature in common: they each ignore history. Representative Ryan’s plan ignores the total failure of Medicare Advantage’s insurer competition model to reduce expenditures. President Obama’s plan ignores the almost equally total failure of CMS and its predecessors to bring Medicare costs under control in any significant way, other than by reducing provider reimbursement (and anyone who believes the current proposals for Accountable Care Organizations will achieve this cost control miracle would do well to read recent critiques by Ron Klar and Jeff Goldsmith).

REPRESENTATIVE RYAN’S REFORM PLAN

2011-04-10T15:01:00.000-07:00

It’s not termed as such, but the 2012 Budget Resolution authored by House Budget Committee Chair Paul Ryan includes the most comprehensive effort so far to define a conservative Republican health care reform plan.

Representative Ryan proposes to attack the federal government’s ever-escalating expenditures on health care by repealing major sections of the Accountable Care Act and by making fundamental changes in the financing of Medicare and Medicaid. Medicare would become a quasi-voucher “premium support” program, with government contributions dependent on age and beneficiary income, as well as being modified to increase the age at which seniors become eligible. Medicaid would be transformed into a state block grant program and the expansions included in the ACA would be rolled back, as would the individual mandate, the requirements for insurance exchanges, and the subsidies for lower-income exchange enrollees.

On the one hand, Representative Ryan’s proposal offers an aggressive approach to cutting the federal deficit. On the other hand, it does so primarily by shifting costs from one payer—the federal government—to others—seniors, low-income individuals, and states. If there are resulting reductions in overall health care expenditures, they may come mainly from the inability of the new payers to afford coverage. Unsurprisingly, the proposal has immediately come under fire from Democrats, seniors’ organizations, and provider groups.

Although it stands no near-term chance of passage in the face of opposition from a Democratic-controlled Senate, Representative Ryan’s proposal should not be written off. The Medicaid recommendations will be welcomed by many state governors—struggling to reconcile federal benefit mandates with budget-squeezed state funding—as offering the chance to craft more affordable eligibility and benefit rules. The Medicare premium support approach is consistent with that recommended in 1999 by the bipartisan National Commission on the Future of Medicare (but quickly discarded by congressional leaders as too much of a political hot potato). Representative Ryan also has attempted to finesse seniors’ reactions by phasing in the Medicare changes so that neither the increase in eligibility age nor the premium support plan would affect any beneficiaries for at least ten years.

While the impact of the Medicaid block grant proposal cannot be evaluated without knowing how states might choose to run their programs, there are existing models for the Medicare premium support proposal. Both the Federal Employees Health Benefit Plan and California’s CalPERS (as well as other state employee programs) take similar approaches. CalPERS in particular is regarded by many health care economists as an exemplary competition model, in which a fixed employer contribution is applied to enrollees’ choices from a limited number of health plans offering similar benefits. However, unlike CalPERS, FEHBP, or the 1999 Medicare Commission’s recommendations, Representative Ryan’s proposal could require very significant beneficiary contributions. CalPERS employer contributions are typically between 90 and 100 percent of the cost of the lowest priced plan, while the Medicare Commission’s recommendation was for an average government contribution of 88 percent of premium. In contrast, the Congressional Budget Office analysis of Representative Ryan’s proposal projects that by 2030, it would result in the average 65-year-old beneficiary paying 68 percent of the total of premium plus cost-sharing (deductibles etc).

Perhaps the biggest problem with Representative Ryan’s approach is that it fails to recognize the “water bed syndrome” of health care costs, in which squeezing costs in one area causes increase elsewhere: reducing Medicare and Medicaid expenditures may be good for government budgets, but—absent even more sweeping changes—may simply result in increased cost shifting to the private insurance market.

Representative Ryan’s Budget Resolution is a much more conservative proposal than that included in his earlier Roadmap for America’s Future. In comparison, the Roadmap—originally published in 2008, with later revisions—differed in two very significant ways: it increased federal control over Medicaid, while giving eligibles credits and subsidies to purchase private insurance; and it replaced the tax exclusion for employment-based insurance by a refundable tax credit for the purchase of coverage, either through an employer or on an individual basis. While it is certainly possible to quibble with the details, these features could have achieved the mainstreaming of Medicaid eligibles into the general health insurance system, and provided the same incentives for cost-conscious purchasing for the larger employed population as for FEHBP and CalPERS enrollees. Applying similar enrollee-choice premium support principles to each of Medicare, Medicaid, and private insurance could have gone a long way to eliminating the inter-program inequities that result in cost shifting.

Whether or not Representative Ryan’s change of direction reflects the increasingly conservative Tea Party-driven philosophy of his party or not, it’s disappointing to see worthwhile ideas being abandoned. A more balanced Roadmap-based Budget Resolution proposal might have received the serious consideration it would have deserved.

REFORM AT ONE YEAR: HINDSIGHT—THE MASSACHUSETTS MISTAKE

2011-04-07T16:47:00.000-07:00

A year after the passage of health care reform, fewer than half of Americans support it, a similar percentage believe that it has already been found unconstitutional or soon will be, health care costs are continuing to rise far faster than the CPI, and the Republican Party has seized on the issue as a sure election winner.

The Obama administration and congressional Democrats, now thoroughly on the defensive, are clearly surprised at the public and political reaction. But should they be? This post—on the reliance on Massachusetts as a model—is the first of three that will look at some of the miscalculations—and sheer bad luck—that have helped to undermine reform.

When Governor Mitt Romney signed Massachusetts’ reform bill into law in 2006, it was widely regarded as a bipartisan political triumph, and one that was supported by the public and by most of the state’s insurers and providers. Massachusetts would be the first state to require virtually all legal residents to have coverage (with tax penalties imposed on those not complying), while providing subsidies for lower-income individuals not eligible for government programs, as well as to implement a state-administered brokerage function (the Connector) to allow competitive selection of health plans.

By the fall of 2008, as congressional efforts to design national health care reform moved into overdrive with the election of Barack Obama, the Massachusetts legislation was widely regarded as a success. Public reactions were generally positive, the numbers of uninsured had fallen, and there had been no dramatic increase in costs. It was scarcely surprising that the Massachusetts model emerged from the field of competing proposals as the favorite of most Democratic lawmakers.

Unfortunately, the elected officials in Washington DC failed to recognize that Massachusetts was an exceptional state in terms of health care. Even before the state’s reform bill was enacted, the percentage of uninsured was very low. It was also a socially very liberal state, far more likely than most to support reform efforts (in fact, Massachusetts had passed, but then revoked, a slightly different version of health care reform a dozen years earlier). And, of course, the economy was still in its boom period when the new law was passed.

Massachusetts had other advantages that would not transfer to national reform. As a small state, with only a small percentage of the population likely to be directly affected by reform, implementation could be much faster—less than a year for most provisions of the state’s new law. Similarly, interfaces between programs like Medicaid and the state subsidy program could be handled at the state level, without federal involvement.

In fact, even some of Massachusetts’ apparent success proved illusory or at least oversold, presaging criticisms that would later be leveled at national reform. Although Massachusetts does now have the highest rate of insured in the country, the goal of universal coverage has not been achieved, with some five percent of the state’s population still without insurance. The Connector has failed to influence costs for either public or private payers, and government program expenditures are creating an ever bigger hole in the state budget. The Connector also has had only marginal success in attracting non-subsidized enrollees (although a revamped small business offering is finally showing some gains). And, of course, along with the rest of the nation, Massachusetts has continued to suffer from the effects of the prolonged recession.

Massachusetts clearly has some value as a prototype for national reform, but the Accountable Care Act might have been very different if its authors had recognized just how small a percentage of the state’s population had gained coverage (and added to overall expenditures), or realized that the state’s efforts had had no discernable cost control effect.

MEDICAL LOSS RATIOS – AGAIN!

2011-04-04T10:12:00.000-07:00

A new study, reported in the American Journal of Managed Care, seems likely to add more heat to the continuing medical loss ratio controversy.

The Accountable Care Act effectively mandates that health insurers achieve MLRs of 85 percent for large group business and 80 percent for small group and individual business, with insurers not meeting these thresholds required to make rebates to affected policyholders. However, the ACA allows HHS to issue a waiver if the requirement would disrupt a state’s insurance market. So far, an individual coverage waiver has been granted to the State of Maine, with eight other states’ waiver requests being considered.

The study reported by AJMC examined individual coverage data from health insurer filings to state regulators, as reported to the National Association of Insurance Commissioners. For each state (except California, where most health insurers report to a state agency other than the Insurance Commissioner), the study computed the number of individuals with coverage (in terms of enrollee-years), the number of insurers offering coverage, and the medical loss ratios (recomputed to reflect differences between ACA’s definition of MLR and that used by the NAIC). Based on this data, the study went on to estimate the number of enrollees in plans failing the ACA’s 80 percent threshold, and the number of higher-risk individuals who might have difficulty in finding coverage if their insurer exited the market.

At first sight, the findings seem dramatic and very different from the expectations of the MLR provision’s Senate authors. The AJMC article estimates that in nine states (Arkansas, Illinois, Louisiana, Nebraska, New Hampshire, Oklahoma, Rhode Island, Wyoming, and West Virginia) at least half of the individual health insurers missed the 80 percent threshold in 2009, while in twelve states (Arkansas, Arizona, Florida, Illinois, Indiana, New Hampshire, Nevada, South Carolina, Tennessee, Texas, Virginia, and West Virginia) more than half of the enrollees were covered by insurers failing the standard, with some two million individuals nationally covered by such insurers. The study then projected that overall more than a hundred thousand enrollees (with more than ten thousand in each of Florida, Illinois, Texas, and Virginia) would find it difficult or impossible to find coverage if their non-MLR-compliant insurers exited the market.

If the study’s findings are accurate, somewhere between a dozen and twenty states could reasonably demand waivers of the individual market MLR standard. However, as the authors note, there were significant study limitations as well as possible source data inaccuracies. Enrollment in health plans offered by life insurers was generally omitted, as was all data from California. Additionally, the findings are dependent on state reporting to the NAIC, something that some of the data shown in the article suggests may be unreliable. For example, Maine—the only state so far granted an MLR waiver—is shown as having an average MLR well above the 80 percent threshold, while insurers in Michigan are shown as having an average MLR in excess of 1.0 in both 2002 and 2009—an unlikely consistently money-losing trend in a large state.

Given the apparent data limitations, what can be deduced from the study? In general—although not in the case of Maine—it supports the claims of the nine states that have so far submitted waiver requests. On the other hand, it appears that many insurers who in 2009 were below the 80 percent level were only just below, suggesting that they might be able to achieve the standard in the future, while in states with fewest consumer protections, the possible exit of some minimal benefit insurers may actually be beneficial. In addition, insurers failing the 80 percent standard will not necessarily exit the market; some may prefer to keep their policyholders in the hope that the potential implementation of the individual mandate and new benefit standards in 2014 will make the individual market profitable again.

None of this, however, is an argument for the ACA’s MLR requirements. Assuming HHS continues its recent generous waiver policy, the overall effect is likely to be the exit of a minimal number of low benefit carriers at the expense of cancellation of coverage for several thousand individuals, some imaginative manipulation of numbers by some insurers, some reductions in profit and administrative costs by others, and a substantial increase in bureaucratic oversight.

REFORM AT ONE YEAR: THE ECONOMIST’S VIEW

2011-03-31T11:00:00.000-07:00

Sometimes, in the middle of a hotly-argued partisan battle, it can make sense to look at the opinions of more distant and possibly more objective observers. When the battle involves American politics, the international press sometimes offers valuable—and possibly more realistic—perspectives than those available to readers and viewers of domestic media.

Accordingly, on the first anniversary of the enactment of the Affordable Care Act, it was particularly interesting to look at health care reform’s coverage in the influential Economist magazine.

The Economist, in its March 19-25 edition, was less than positive about the present status of reform or either the hopes of its backers or the allegations of its opponents.

In terms of current status, the magazine noted “the administration has rushed into force provisions affecting consumers directly, in an effort to win popular support…” and listed Medicare’s new preventive service coverage and drug “donut hole” rebates, as well as the new prohibitions on lifetime payout caps and on denying coverage to children with pre-existing conditions. (In fact, the implementation was “rushed” only to comply with the schedules built into the new law.) The magazine commented that while all this may seem impressive, one recent poll indicated that half of those polled believed that the entire ACA had already been repealed or at least could be unconstitutional.

The Economist went on to ask what the likely long-term impact of the ACA will be, and commented that both Democrats’ hopes for lower costs and Republicans’ forecasts of the destruction of employer-sponsored insurance are probably wrong.

As the magazine pointed out, forecasts of the death of employer coverage are countered by recent studies that project the opposite: many employees facing the individual mandate (if is not found unconstitutional) are likely to pressure their employers for tax-assisted coverage.

On the other hand, as the Economist notes, the Obama administration’s hopes for ACA-influenced cost control seem even more unrealistic, with Massachusetts, the prototype for ACA reform, now seeing cost control as the immediate urgent issue.

The bottom line, says the Economist: “America will soon have no choice but to come to grips with cost. Whatever one thinks of Mr. Obama’s reforms, there is no denying that they have brought that day of reckoning closer.”

But is the Economist correct? In a later post, we’ll look at proposals for health care cost control, and their chances of success.

MAINE WAIVER EXPECTED TO INCREASE INSURER PRESSURES ON STATES

2011-03-14T14:09:00.000-07:00

HHS’s bellwether decision of last week to grant the State of Maine a three-year waiver from the medical loss ratio provision of the ACA may lead to new efforts by insurers across the country to persuade states to demand similar waivers.

The HHS decision on Maine was not unexpected. The ACA language clearly allows for waivers when imposition of the MLR 80/85 percent threshold penalties would lead to disruption of a state’s insurance market. Maine, a state with very few major employers, has a higher than average percentage of small group and individual policies which typically provide higher out-of-pocket costs—and consequently higher administrative percentages. HealthMarkets, one of the two dominant insurers in Maine, had threatened to abandon the state’s individual market unless a waiver was granted. (According to a Bloomberg report, HealthMarkets, which is majority-owned by two large investor funds, was recently sued by the City of Los Angeles for selling policies with provisions that allegedly effectively eliminated needed coverage.)

Three other states (Kentucky, New Hampshire, and Nevada) have already filed waiver requests with HHS, and an additional eleven states are reported to be preparing waiver requests.

Almost certainly, every insurer with significant business in the small group and individual markets will be eying the Maine waiver decision with a view to applying pressure to those state insurance regulators who are not yet preparing waiver requests. While Maine appears to have had an unusually strong case for a waiver, the absence in the ACA of any specific measures for “market disruption” may make it difficult for HHS to reject such requests.

THE INDIVIDUAL MANDATE: ANOTHER LOOK AT THE PENALTY TRADE-OFF

2011-02-16T14:59:00.000-08:00

Most of the recent attention on the 2010 health care reform legislation has focused on the individual mandate. After two federal court rulings upholding the mandate, a third federal judge—in Virginia—ruled that the Constitution does not allow the government to require the purchase of insurance as part of regulating an interstate commerce market. Simultaneously, Congressional Republicans have reiterated their intention of preventing the individual mandate from being implemented, regardless of the constitutionality of the provision.

One interesting response to the resulting media coverage came in the form of a Kaiser Health News article [http://www.kaiserhealthnews.org/Columns/2010/December/121410laszewski.aspx] suggesting that the issue might be overblown since, even if the mandate were implemented, it would be relatively unsuccessful in leading the uninsured to purchase coverage. Unfortunately, the article misinterprets some of the legislative language, not entirely surprisingly given the complexity of the mandate provision. Following are clarifications of the mandate and associated requirements, and a somewhat more careful look at the mandate’s possible impact.

A Brief Summary of the Mandate

The individual mandate requires almost all legal residents of the United States to have at least a defined level of health care coverage. Those lacking such coverage will be subject to a penalty to be paid as part of tax filing. Exclusions are made for members of certain religious groups, Indian tribes, incarcerated individuals, and those whose income is below the tax filing threshold or inadequate to pay for coverage. To assist those with lower incomes but not eligible for Medicaid or SCHIP, the legislation provides for both premium credits and cost-sharing subsidies.

Definition of “Income”

The penalty and premium credit (and cost-sharing subsidy) provisions are each tied to “income.” The legislative language defines household income (which may be that of an individual or several family members) to be “modified adjusted gross income.” Adjusted gross income is that normally reported at the foot of the first page of a Form 1040, before subtraction of personal exemptions; the modifications add non-taxable interest and excluded foreign income to this number. Thus, “income” may be more or less than paycheck earnings.

Taxpayer versus Individual versus Family versus Household

Although income is derived from tax return data and therefore may relate to multiple household members, the penalty for non-compliance is applied per individual. The reform legislation uses all of the following terms: taxpayer, household, family, and individual, creating potential problems of interpretation, for example, where multiple returns are filed within a single household. Although penalties apply to individuals, they must be paid as part of a tax return, raising questions of taxpayer responsibility for other household members.

Percentage versus Fixed dollar Penalty

The penalty is the greater of a fixed dollar amount or a percentage of income above the filing threshold. An individual’s taxable income is the household income divided by the number of household members, as reported on the tax return. The fixed dollar penalty is set at $95 in 2014, $325 in 2015, $695 in 2016, and indexed to inflation thereafter (but with the amount halved for under-18-year-olds, and capped for a family at 300 percent of the individual amount). The percentage of income penalty goes up less rapidly than the fixed dollar amount, from 1 percent in 2014, to 2 percent in 2015, and to 2.5 percent in 2016 and after, and is capped at the national average premium for Bronze coverage.

Low Income Exclusions

Individuals in households with income below the tax filing threshold are excluded from the minimum essential coverage requirement.

Also excluded are individuals whose “required contribution” exceeds 8 percent of the individual’s household income. Where employer-sponsored coverage is available, the required contribution is the amount the employee would have to contribute. Otherwise, the required contribution is the premium for the lowest cost Bronze plan available, less the premium credit that would have been available had coverage been purchased. However, the premium credit effect means there are likely to be few, if any, families for whom their required contribution would exceed 8 percent of income.

Premium Credit Calculation

Premium credits, paid directly to insurers by the Treasury, are offered to those with incomes below 400 percent of Federal Poverty Level and without other coverage options, and also to individuals eligible for employer-sponsored coverage where the coverage is below 60 percent actuarial value or the employee premium share exceeds 9.5 percent of income. The credit is the lesser of the actual premium and the amount by which the second lowest exchange Silver plan premium exceeds a defined percentage of family income. The percentage is tied to the ratio between family income premium and applicable FPL.

Cost-Sharing Subsidy

In addition to premium credits, the legislation provides for subsidies of cost-sharing. However, unlike the premium credits, the cost-sharing subsidy is available only to those actually enrolled in Silver plans. The subsidy is calculated on a sliding scale from one-third to two-thirds of the out-of-pocket limit, depending on income relative to FPL.

Effect of Non-Payment of Penalty

The legislation requires that the penalty, if any, be reported on federal income tax returns, and paid at tax filing time. However, individuals who fail to pay the penalty will not be subject to criminal penalties, liens, or levies.

Premium Payment versus Penalty Trade-offs: Revising the Conclusions of the Kaiser Health News Article

Based on the preceding discussion, it is apparent that the KHN piece overstates the percentage-of-income penalties; these are applied to income in excess of the filing threshold, not just to income. More significantly, the KHN piece fails to recognize that although the premium credit calculation is based on the cost of Silver coverage, people will be able to purchase Bronze coverage (or even, if eligible, catastrophic coverage) and receive the same credit.

Three examples, reflecting the distribution of the currently uninsured (assumed to be those most likely to choose to pay a penalty rather than purchase coverage) show the combined effects. The premiums and credits shown are based on Kaiser Family Foundation’s Health Reform Subsidy Calculator, with premium estimates reduced to reflect lower actuarial values of Bronze and catastrophic coverage. The penalties are calculated at the 2016 rate, and the mainland FPL schedule is assumed.

Example 1: A young adult with $25,000 income could have "catastophic" coverage for an estimated premium of $2,500, offset by a $1,664 credit for a net premium of $836--compared with a potential penalty of $695.

Example 2: A family of four with two children under 18 and $55,000 income could have Bronze coverage for an estimated premium of $9,500, offset by a $6,969 credit for a net premium of $2,531--compared with a potential penalty of $2,085.

Example 3: A family of four with two children under 18 but with $85,000 income could have Bronze coverage for an estimated premium of $9,500, offset by a $3,029 credit for a net premium of $6,471--compared with a potential penalty of $2,085.

Of the approximately half of the currently uninsured who will not be eligible for Medicaid or CHIP under reform, some 20 percent are young adults who will be able to choose catastrophic coverage for little more than the potential penalty cost. Approximately 50 percent are in the 133-250 percent of FPL range, where a family earning $55,000 would be typical and could purchase Bronze coverage for a few hundred dollars above the penalty rate. Approximately 25 percent are in the 250-400 percent of FPL range, and would face premiums several thousand dollars more than the non-compliance penalties. The 20-25 percent above 400 percent of FPL will face even larger premiums or penalties. (Percentages do not total to 100 because the young adults are also counted in the other groups.)

Based on these estimates, it appears that a substantial majority of the non-Medicaid-eligible uninsured should find subsidized coverage attractive, especially as the penalties increase from 2014’s minimal levels. Only for incomes above 250 percent of FPL does the penalty begin to be significantly less costly than buying Bronze coverage, and at these levels families may have rather more disposable income.

The conclusion? Although there will undoubtedly be those who choose the risk of penalties over the cost of coverage, and while there will certainly be regional variations in premium costs relative to penalties, it seems inappropriate to conclude that the individual mandate will be ineffective if it is found to be constitutional.

SO, ARE EHRs A WASTE OF TIME AND MONEY?

2011-01-14T15:21:00.000-08:00

The 2009 Health Information Technology for Economic and Clinical Health Act (HITECH) authorized incentive payments, potentially totaling some $27 billion over ten years, to clinicians and hospitals when they implement electronic health records in such a way as to achieve “meaningful use,” in terms of advances in health care processes and outcomes.

But, are EHRs really “meaningfully useful” or are they more likely to be costly and ineffective?

The latter seems to be one possible interpretation of a recent RAND study of EHR adoption in US hospitals.

The RAND study statistics are impressive: five study authors tallied 17 “quality measures” for three medical conditions against three possible levels of EHR capability (no EHR, basic EHR, advanced EHR) for more than two thousand hospitals for each of 2003 and 2007. They then related changes in quality over the four year timeframe against changes in EHR status (for example, from no EHR to an advanced EHR).

The reported results were disappointing to EHR proponents. Among the hospitals whose EHR capability remained unchanged over the four years, there was no statistically measurable difference in quality improvement between hospitals with EHR capability and those without. For hospitals which upgraded their EHR capability, the performance improvement was generally less than for those who didn’t change, including those with no EHR at all.

So, should we forget about EHRs? Maybe defund HITECH?

Not necessarily.

As the study’s authors point out, there are a several possible explanations for their results other than ineffectiveness of EHRs. Implementation of an EHR—a very demanding effort—might temporarily disrupt other quality improvement efforts. Hospitals with EHRs typically had higher quality measures to begin with, and—like trying to catch up with the speed of light—would likely find improving quality more challenging as 100 percent quality is approached. Results might have been different for other medical conditions. And the timeframe of the study may have been inadequate to measure the impact of new EHRs, some of which may have been implemented only just before the end of the time period.

It can also be argued that the measurement methodology was flawed. Using simplistic indicators of quality like whether or not aspirin was dispensed on arrival or discharge instructions were provided is a little like judging the quality of a meal by whether or not there was a caterpillar in the salad. Presence of a caterpillar definitely indicates a problem, but its absence says nothing about other aspects of the meal. The study authors indicate their awareness of this limitation in stating “we are concerned that the standard methods for measuring hospital quality will not be appropriate for measuring the clinical effects of EHR adoption.”

Perhaps most importantly, as with other IT systems, EHR success depends on the competence of the implementers and the willingness of the users to accept change, with poorly managed projects more likely to foul up existing processes than improve them. The RAND authors praise programs initiated by the Office of the National Coordinator for Health Information Technology to improve EHR implementation, and comment—in spite of the inconclusive results of their study—that “We believe that these programs are well conceived and anticipate that they will lead to more effective use of EHRs, which will in turn lead to improved quality in US hospitals.”

EHR systems are no panacea, and clearly there have been both successful and troubled EHR implementations. What is needed now is a closer look at what works and what doesn’t, how well EHRs perform over a longer timeframe than the RAND study, and a much less simplistic look at what is really happening to clinical quality as a result.

CLUELESS IN UTAH?

2011-01-07T10:09:00.000-08:00

The trials and tribulations of Utah’s much-touted Health Exchange continued in December, with the announcement that yet another chief executive had quit, along with the admission that very few eligible employer groups had signed up for the exchange.

The Utah exchange differs from that of Massachusetts in that it currently focuses on coverage for small employers offering defined contribution plans, a policy that was hoped to demonstrate the effectiveness of such plans. However, so far enrollment has been far too low to test the merits of this approach.

The Salt Lake Tribune reported in late December that a new executive director had been appointed to head the exchange, which is administratively located in the Governor’s Office, making the third director in just over six months.

The Tribune went on to compare the expectations of State officials, who had anticipated enrolling 3,000 small employers with an estimated total of 40,000 employees, with the current reality. As of late December, with coverage scheduled to start on January 1, 2011, just 43 of the State’s estimated 50,000 small businesses had signed up and been determined eligible.

Back in September, when the Utah exchange started to accept coverage applications, Utah’s Governor Gary Herbert was quoted as saying: “[the exchange] is quickly becoming a model for the rest of the nation when it comes to health care reform."

Hopefully not.

2009 HEALTH SPENDING REPORT RELEASED—AND OPEN TO INTERPRETATION

2011-01-06T16:29:00.000-08:00

The New York Times headline was “Health Spending Rose in ’09, but at Low Rate,” but it could just as appropriately have been “Health Spending in ’09 Took Biggest Jump Ever in GDP Share.”

The computers in the CMS Office of the Actuary have finally quit grinding away and disgorged their findings for US health care spending for 2009. Total spending did rise at the lowest rate in fifty years—just 4 percent over 2008—but health care’s share of the economy jumped from 16.6 percent to 17.6 percent—the highest rate of increase in fifty years—as the economy shrank. In other terms, 2009 saw US health care cross another half-trillion dollar threshold—to $2.5 trillion for total expenditures—and pass yet another thousand dollar per capita marker—to just over $8,000 a head.

As the economy started to emerge from the recession, federal spending on health care accelerated, but many individuals deferred or declined medical care. Medicare expenditures rose to $502 billion, an increase of almost 8 percent, while Medicaid expenditures jumped to $374 billion, an increase of 9 percent, fueled by a 22 percent increase in federal support that was only partially offset by a drop of 10 percent in state funding. In comparison, in the private insurance sector, total premium dollars paid increased by just 1.3 percent to $801 billion, with an average premium increase of 4.6 percent.

In terms of population, Medicare enrollment rose by about 2 percent to 46.5 million, Medicaid enrollment rose by 8.3 percent to 48.6 million, and private insurance enrollment fell by more than 6 million—3.2 percent—to around 197 million.

What does this imply for the next two to three years, until the scheduled 2014 date for full implementation of health care reform? Will we revert to pre-recession increases in expenditures?

It seems highly possible.

Assuming the current economic pattern of a very slow recovery from the recession, enrollment increases in Medicaid and decreases in private insurance should indeed return to earlier trends—close to stable for Medicaid and a slow erosion for private insurance—while Medicare enrollment will continue to grow with the number of older Americans.

In terms of expenditures, a slowly improving economy may result in more use of medical services as some families have more household income while others who deferred care in 2008-2010 now find it necessary. Providers and insurers may be tempted to build “war chests” in anticipation of the impacts of reform, with Medicare spending in particular jumping ahead of the uncertain potential impacts of the Independent Payment Advisory Board and accountable care organizations, as well as reductions in Medicare Advantage spending. Even ahead of 2014’s big expansion, Medicaid will continue to grow, with some possible face-offs over funding between the federal government and those states in the most serious financial straits. The one area of slight statistical improvement is likely to be in health care’s share of GDP, with the annual increases back below half a percentage point—but still pushing health care rapidly towards a fifth of the economy, and with an even bigger increase expected with reform implementation in 2014.

HAPPY NEW YEAR!

2011-01-03T11:52:00.000-08:00

A very happy New Year to all readers of Health Care REFORM UPDATE!

And, also, some happy New Year gifts from the Obama administration, by way of the Affordable Care Act… January 1, 2011 is the date that a number of the ACA changes designed to make health care coverage more attractive become effective, along with a few that will be less popular—notably to insurance companies.

Most Medicare beneficiaries will indeed be beneficiaries of the ACA changes. The Part D doughnut hole will effectively shrink, with 50 percent discounts on brand-name drugs for those whose expenditures put them “in the hole.” All Medicare plans, including traditional fee-for-service Medicare, will also cover all preventive care with no out-of-pocket charges (although many Medicare Advantage plans already provided this benefit). Meanwhile, physicians may bail out of the program less rapidly as a new ten percent bonus is added to payments to primary care docs and general physicians. On the other side of the ledger, however, wealthier beneficiaries will see lower subsidies and the beginning of higher Part B premiums.

Also on the negative side, it will no longer be possible for individuals with HRAs or HSAs to treat reimbursement for over-the-counter medications in the same way as prescription drugs. Only if prescribed by a physician will OTC items be eligible for HRA or HSA tax-free reimbursement.

Finally, insurers will take some more hits. New “fees” will be levied on drug companies based on their sales of brand-name pharmaceuticals. The much-debated medical loss ratio restrictions [see earlier REFORM UPDATE posts] will also take effect, while the “confess and explain” rule for premium increases over ten percent will be effective upon final rulemaking. And, going back to Medicare, insurers with Medicare Advantage plans will have their 2011 payments frozen at 2010 levels, with a start also being made on reducing the excess of Advantage payments over FFS costs.

THE “UNREASONABLE” PREMIUM INCREASE RULE

2010-12-29T12:54:00.000-08:00

HHS has now released its final set of draft regulations for provisions of the Affordable Care Act scheduled to go into effect early in 2011. This last regulatory publication—actually a “notice of proposed rulemaking” inviting comments prior to implementation—provides proposed rules for disclosure and justification of “unreasonable” premium increases.

The proposed “confess and explain” regulation requires insurers to publicly disclose rate increases in the individual or small group markets of ten percent or more in 2011, or above individual state-by-state thresholds starting in 2012. The thresholds will be set by HHS, presumably in conjunction with the states.

Although the proposed rules require review either by HHS or, if a state has an “effective rate review system,” by the state, no authority is provided for the rejection or modification of rate increases. Apparently, the Congressional drafters of the ACA language—which the proposed rule generally follows—felt that the threat of a premium increase being called unreasonable would have an adequate sentinel effect. However, insurers who show a “pattern or practice of excessive or unjustified premium increases” can also be excluded from insurance exchange participation.

In summary, the process proposed by HHS would require insurers requesting premium increases exceeding the thresholds to disclose their justification either to the appropriate state regulator or—if HHS has determined that the state does not have an adequate rate review procedure—to HHS itself. If the state (or HHS) then decides that the increase is excessive or unjustified, it is expected to make this decision public, with HHS then posting the determination on its website. The hope, obviously, is that an insurer will want to avoid such negative publicity and will trim or abandon the increase.

Reform advocate Timothy Jost has posted a lengthy critique of the HHS proposal in the Health Affairs Blog. He expresses concern that the rule would not apply to the large group market, that by tying the proposed rule to so-called “products” individual groups could face increases much higher than the nominal thresholds, and that the information that insurers would be required to disclose would be too limited (and could be further limited by recourse to protestations of trade secrets).

In a comment on Jost’s critique, Jeff Goldsmith questions the capability of HHS in evaluating a requested increase—and notes the potentially substantial effort involved—given that it might be driven by risk selection or the actions of monopolistic providers or other factors that may be difficult to determine. Goldsmith comments: “it’s a charter for arbitrary ‘jawboning’ of the industry, not an explicit charter for actually regulating it.”

HHS provides some statistics that help provide an estimate of the amount of effort that insurers, states, and HHS may incur as a result of the proposed rule. Based on HHS’ numbers, it seems likely that somewhere between 500 and 1000 premium increases a year could be subject to the disclosure and review processes, with the number gradually increasing as groups lose their grandfathered status, and with each review requiring hundreds or thousands of man-hours. How many of these reviews might result in insurers trimming their increases is anyone’s guess, but Goldsmith’s expressed preference for market competition over HHS rules may well be justified.

WHAT ‘S THE MISSION OF INSURERS?

2010-12-21T10:54:00.000-08:00

Included in the latest Benefits Package blog carnival (see previous post) is a piece from Joe Paduda’s Managed Care Matters, criticizing health plans and their industry groups for their contradictory attitudes to escalating hospital costs and government involvement in the health care system. On the one hand, Paduda comments, health plans are looking for help from the government in controlling health care costs, while on the other hand fighting any government intervention in their own industry. Paduda complains: “health plans have not fulfilled their primary mission – [to] control costs and deliver quality care.”

This produced the scathing comment from one reader to the effect that insurers perceived their mission very differently; it was simply to extract profit from the system.

Therein lies one of the major reasons for the public’s dissatisfaction with the insurance industry. The public believes that insurers exist to control the costs of health care for consumers, while for-profit insurers, like other businesses, believe that their primary responsibility is to their shareholders. This doesn’t mean that insurers don’t try to negotiate affordable provider rates or limit their networks, but it does mean that they are much less hard-nosed than if consumer cost were the only criterion.

Like other businesses, insurers succeed by giving their consumers what they want—and it turns out that for the majority of Americans whose coverage is being paid for in large part by their employers, lower cost is less important than access to the most prestigious hospitals or being able to keep the same providers. Only when employees have to pay significantly more for these benefits do they decide that lower cost is truly important.

If the public really wants insurers to control health care costs more aggressively, there are a couple of options. One is to go beyond the “confess and explain” premium increase provision of the Accountable Care Act to impose absolute limits on increases—a crude tool that fails to consider individual insurer circumstances, and that could prove counter-productive. The other is to eliminate the tax break for employer-paid coverage in order to raise employees’ cost-consciousness—an increasingly popular idea on Capitol Hill but one that would face enormous opposition from unions and from many employers.

Health Care REFORM UPDATE FEATURED IN BENEFITS BLOG CARNIVAL

2010-12-20T12:02:00.000-08:00

The second Benefits Package blog carnival is out, including a piece (on the Virginia individual mandate decision) from Health Care REFORM UPDATE.

With an emphasis on health care and other employee benefits, the Benefits Package carnival includes some interesting pieces from a slightly different viewpoint than other blog collections. Take a look!

THE VIRGINIA DECISION: WHAT DOES IT MEAN?

2010-12-15T14:55:00.000-08:00

Notwithstanding the dramatic headlines in the New York Times and elsewhere, no-one should have been surprised by Federal Judge Henry Hudson’s decision this week on the constitutionality of health care reform’s individual mandate.

Judge Hudson ruled against both of the Obama administration’s primary arguments: that the Commerce Clause of the Constitution allows the government to require the purchase of insurance as part of regulating an interstate commerce market, and that imposing a penalty for noncompliance with the mandate is within the government’s taxing authority.

Judge Hudson, described by the NYT as having “a long history in Republican politics in northern Virginia,” had provided enough clues during the hearing and in preliminary opinions that the Obama administration (and the media) must have been expecting the decision he handed down, at least in terms of support for or opposition to the mandate.

While Judge Hudson’s decision must have disappointed reform advocates, whether they expected it or not, it’s important to remember—as administration officials were quick to point out—that two other federal judges had previously issued opinions supporting the mandate. Meanwhile, at least one other federal case is pending, in Florida, with—as in Virginia—the judicial decision being handed down by a Republican appointee who has already expressed skepticism about the government’s arguments.

It’s clear, and without implying strictly partisan thinking to the judges involved, that judicial conservatives are going to find it much more difficult than their moderate or liberal counterparts to stretch the Commerce Clause to allow the mandate.

However, there’s obviously a long and bumpy road ahead for mandate opponents—and proponents—as suits continue to be filed and heard in federal district court, and then in federal appeals court. Lawyers for and against the mandate will be modifying their arguments to reflect the various judges’ opinions—and to try to demonstrate for the appeals courts how they may or may not be in error.

Supreme Court rulings have, over sixty years, stretched interpretation of the Commerce Clause to include decisions such as preventing farmers from growing wheat for their own consumption (since this would mean they didn’t have to buy it, thereby depressing retail prices), and allowing Congressional regulation of the growing of marijuana personal use (since it is a form of economic activity). Such rulings certainly suggest that a ruling in favor of the individual mandate wouldn’t be outlandish. On the other hand, the government may have to work very hard to persuade the present Supreme Court’s conservatives that the non-purchase of insurance by an individual has a measurable impact on the cost of insurance for others.

Finally, it’s important to emphasize that it may be as much as two years before the Supreme Court hears individual mandate arguments (assuming it chooses to hear the case at all) and that the Court’s make-up may have changed by then.

MINI-MEDS: THE SAGA CONTINUES

2010-12-14T14:18:00.000-08:00

It’s amazing how much trouble a couple of hundred inexpensive health insurance policies can cause.

Up until a few weeks ago, few people were aware of the existence of so-called mini-med policies. Marketed primarily by for-profit insurers Aetna and Cigna, they are designed to provide bare-bones coverage to employees of low-wage low-margin service companies. Unlike other approaches to affordable insurance that emphasize catastrophic coverage, mini-meds typically keep premiums affordable (some as low as $15 a week) by imposing very low annual benefit limits, although with no medical underwriting or pre-existing condition provisions and with fairly generous benefits up to the limits.

Mini-meds first hit the news in September, when McDonalds reportedly threatened to stop offering this coverage to its employees in response to Affordable Care Act rules that set annual benefit limits at $750,000—far, far higher than mini-med limits, and potentially turning mini-med coverage into typical high cost insurance.

With insurers and employers reminding the public of President Obama’s campaign promise to allow Americans to retain their existing coverage, HHS Secretary Kathleen Sebelius quickly backed away from the language of ACA. Early in October, HHS announced the granting of one-year waivers of the ACA benefit limit provision for McDonalds and several other employers, a number that has now climbed to more than 200.

The next mini-med problem to find the spotlight was ACA’s medical loss ratio provision, requiring at least an 85 percent MLR for large group coverage, but with mini-meds’ very low benefit payouts relative to administrative costs making the threshold impossible to achieve. Insurers with only a very small percentage of mini-meds might still be able to meet the MLR threshold, but companies with substantial mini-med business would find achieving the 85 percent target impossible.

One reaction to the mini-meds’ difficulties came from Senator Jay Rockefeller, a key backer of the MLR rules. The Senator quickly convened committee hearings on the issue, and was able to hear testimony from a parade of witnesses who had discovered too late that their “affordable coverage” covered almost none of the costs of any serious illness or accident. In contrast, insurer and employer representatives touted the pluses of offering at least a minimal level of coverage to as many as a million workers, until the premium subsidies of ACA are scheduled to become effective in 2014.

Trapped in a kind of Bermuda triangle between the threat of insurers’ abandoning the plans, Senator Rockefeller’s determination to stamp down on them, and the possibility of a million workers losing their insurance—however inadequate—HHS demonstrated some fancy footwork.

In the MLR final interim regulations released at the end of November, HHS included separate rules for mini-meds, essentially allowing insurers to inflate benefit expenditures in computing MLR percentages in order to have a chance of meeting the ACA thresholds.

Then, last week, HHS issued additional transparency rules for mini-meds: insurers must notify consumers if their health care coverage is subject to an annual dollar limit lower than what is required under the law. Specifically, the notice must include the dollar amount of the annual limit along with a description of the plan benefits to which the limit applies. These latest rules also limit new sales of mini-med plans, including restricting such sales only to insurers who already have obtained waivers of the annual limit provision.

Reactions from insurers have been muted, presumably indicating that the industry believes it can live with the new rules, at least until Republican-dominated House committees can further erode HHS’ implementation of ACA.

CREATING INSURANCE EXCHANGES: A RACE WITH NO FINISH LINE?

2010-11-19T09:52:00.000-08:00

State governments, like California’s, that are already well into the efforts involved in establishing insurance exchanges meeting ACA requirements, may be starting to worry after the mid-term election results.

With Republican politicians apparently unified in their determination to roll back health care reform, is there a risk that come 2014 there will be neither a statutory requirement nor any funding to support exchanges? Could states’ efforts to build exchanges be in vain?

About-to-be-Speaker Boehner is promising a House bill to repeal ACA early in 2011. It’s likely to pass, but then will almost certainly die in the Senate. In the highly unlikely event of a repeal bill passing the Senate, it will then certainly be vetoed by President Obama.

In the cynical world of politics, of course, having Democrats kill a reform repeal bill is exactly what Republicans are aiming for, so that it’s almost certain that the Boehner bill will be little more than a simple repeal, rather than any attempt to restructure reform in accordance with conservative principles. Having watched the Democrats tie themselves in knots during the 2009 reform debate, no sensible Republican politician will want to risk the same by proposing anything much more specific than a simple rollback.

All of this is part of the prologue to the 2012 election, when Republicans—still playing on public confusion and dissatisfaction with reform—hope to capture the Senate and the White House. And that’s really the big worry for states trying to implement ACA.

President Palin (h-m-m, maybe) will certainly make repeal of ACA a priority. So where does that leave state exchanges, which even under the current reform legislation don’t have to be implemented until 2014, but for which planning and implementation efforts may take three or more years?

One problem that President Palin will face is that, after four years of unrelenting Republican criticism of ACA, people will expect the new administration to have an alternative. And with unrelenting premium increases continuing and perhaps as many as sixty million uninsured, this expectation will be accompanied by considerable public pressure. In other words, a simple rollback of ACA isn’t in the cards.

A second problem for President Palin is that her own party (Republican, not Tea) will be less than unified in their opinions. In fact, some of the pre-ACA proposals for insurance exchanges came from the GOP side of the aisle. This shouldn’t be too surprising, since it was the conservative Heritage Foundation that was an early backer of the exchange concept, while key congressman Paul Ryan is a strong supporter of a voucher approach, something that needs an exchange in order to be effective.

So, will our first female president dump the insurance exchange model along with the parts of reform she really hates? Probably not. Aside from the likelihood of outcries from states who will already have made major investments in their exchanges, it’s a model that could support a conservative rewrite of ACA.

What’s a reasonable conclusion? While there will continue to be plenty of uncertainty about implementation of many details of reform, the states that have already indicated their intent to establish exchanges probably will continue to have federal support. After all, what could be more Republican than effective market competition?

NEWS UPDATE 11/18/2010: LOOKING AHEAD?

2010-11-18T15:46:00.000-08:00

A combination of commission reports and announcements from individual senators this week points to efforts to think beyond the current provisions of the Affordable Care Act, although with varying motivations.

On the surface, the release of draft recommendations from the co-chairs of the National Commission on Fiscal Responsibility and Reform, set up by President Obama earlier this year, would seem to be the most likely to lead to change. The Commission’s charge is a challenging one: “to identify policies to improve the [nation’s] fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” It’s also one that inevitably includes some emphasis on health care expenditures, especially Medicare and Medicaid.

With the Commission’s final report due on December 1, the co-chairs’ draft might be expected to be both detailed and politically realistic. However, the almost universally negative reaction to the draft from Commission members, politicians, and interest groups, suggests that neither is the case and that the likelihood of a final set of recommendations gaining majority approval is very slim indeed.

For Medicare and Medicaid the co-chairs’ draft might be summarized as “everyone pays a little more, everyone gets a little less.” Medicare and Medicaid cost-sharing would be increased, fraud would be reduced (as usual), adopt tort reform (as usual), expand successful cost containment demonstrations (if there are any), and cap Medicaid long-term care payments (that should improve nursing home conditions), etc, etc.

Meanwhile, elsewhere in the DC swamp, a second commission just released its deficit reduction recommendations. This “unofficial” commission, created by the Bipartisan Policy Center and co-chaired by former Senator Pete Dominici and Alice Rivlin (also, oddly enough, a member of the President’s National Commission) produced much more aggressive recommendations for health care than the “trimming the undergrowth” approach of their cross-town rival.

The BPC commission’s proposals include phasing out the tax exclusion for employer health benefits, hiking Medicare premiums, and gradually moving Medicare to a partial voucher program, and imposing big taxes on sweetened drinks. It’s a package that, were it to be implemented, stands a much better chance of bending the health care cost curve. Implementation, however, seems as unlikely as for the “official” commission co-chairs’ draft, with liberals and conservatives alike already raining objections on the recommendations.

Meanwhile, individual senators are tossing out ideas.

Very-vulnerable-to-defeat-in-2012 Senator Ben Nelson, actually isn’t so much tossing out ideas as soliciting them. He’s desperate to find an alternative to the ACA individual mandate (not a big winner in the Senator’s home state of Nebraska) and has asked the GAO to come up with suggestions. Stay tuned…

One proposal that stands a better chance has come from Senators Ron Wyden (D) and Scott Brown (R). They want to move up to 2014 the possibility of states’ being granted ACA waivers. This is something that vulnerable senators like Ben Nelson (and maybe Scott Brown, too, by 2012) could find very appealing: potentially it offers states the opportunity to try to achieve what reform was intended to do, but without the unpopular ACA. The downside is that passage of the proposal could result in having fifty health care systems with different rules (not to mention the effects of the uncertain future in every state); the upside is that there might be one among them that is effective.

Or maybe, all these ideas will die an early death…

ABOUT THOSE REGULATIONS, MS SEBELIUS…

2010-11-13T15:13:00.000-08:00

American businesses spend a lot of time complaining about overregulation, but with the passage of the Affordable Care Act now some eight months in the past, it’s the lack of regulations that is becoming a problem.

The most obvious and urgent area concerns the medical loss ratio provisions of ACA. With just six weeks left before the MLR rules will be imposed on insurers who must decide whether to remain in certain markets, the Secretary of Health and Human Services still has not released final regulations.

It’s not all the fault of HHS. The core definitions and computations of MLRs were entrusted to the National Association of Insurance Commissioners, who initially promised delivery by the end of May, then delayed, and delayed, and delayed, before finally submitting their proposal to HHS in late September. Given the likely impact of the NAIC proposal on some insurers in the individual market (and on their consumers), and the certain Republican response to their problems, it’s not surprising that Secretary Sebelius is hesitating.

HHS has already backpedaled on MLR rules for mini-med policies like those offered to McDonalds’ employees, and supposedly is now trying to craft “special rules” for calculating these plans’ administrative costs for MLR purposes, presumably in an effort to allow them to pass the ACA ratio test. The trouble is, creating special rules for the plans that would otherwise fail the MLR test by the widest margin opens up a major can of worms. Why not have special rules for more generous plans? Why not have special rules for every type of high-deductible plan? How can the dilemma be solved without rejecting the regulatory language that ACA delegated to the NAIC?

Meanwhile in an another part of the insurance swamp, it’s state governments who may be starting to be anxious about the lack of ACA regulations. Those states, like California and Washington, that are moving fastest towards implementation of insurance exchanges, are about to discover that vague and contradictory language in ACA is going to make policymaking hazardous and IT design of dubious value. Without at least having draft regulations, states will find it hard to make critical policy and procedural decisions. Republican state governors may shed few tears over the problem, but unless the GOP succeeds in rolling back reform, even they may prefer to implement their own exchanges rather than yield to federal control—and that means having regulations sooner, not later.

A GOP HOUSE: WHAT NOW FOR HEALTH CARE REFORM?

2010-11-03T11:51:00.000-07:00

Having pulled off a very big win in the House of Representatives and substantially reduced the Democrats’ majority in the Senate, Republicans are now faced with deciding just what strategy to adopt towards health care reform.

GOP leaders are already promising a bill to repeal reform early in the new session, but with the Senate and the White House in Democratic hands, this is political posturing. Almost certainly there will be a repeal bill offered, and the odds are that it will pass the House, only to die or be vetoed in the following weeks. Given the huge amount of public confusion about the contents of the Affordable Care Act, much of it created by commentators on the right, the best guess is that the Republican bill will be a simple one, intended just to roll back most ACA provisions. The real objective, however, given its certain fate, will be to reemphasize how out of touch Democrats are with the “will of the people.”

More realistically, Republicans will then turn to their alternative strategy, of trying to starve reform of funding by voting against the budget. This is a risky strategy, as Newt Gingrich discovered in the time of the Clinton administration, but with Democrats having just a half-dozen majority in the Senate, it could be one that forces some compromises by the Democrats.

What might such compromises look like? It may be too late for the much-debated medical loss provision to be eliminated, although many Dems would surely be glad to offer this embarrassment up as a sacrifice. Medicare changes are an obvious area, since the program is dependent on the federal budget. Insurance exchanges could also be a victim, perhaps being reduced to a series of demonstrations, for example only in states where governors are actually eager to put them in place. Given the Tea Partiers’ emphasis on slashing expenditures, some of the subsidies and credits in ACA may also see some cutbacks, although neither party’s leaders will want to be accused of taking away individuals’ entitlements. There may also be a few areas, like the opt-out provision for lower-income group plan enrollees, that would simplify ACA without significantly generating political opposition on either side of the aisle. One last possibility, given the Democrats’ small Senate majority, is a revival of some of the features of last year’s bi-partisan Wyden-Bennett bill, like changing the tax treatment of employer premium payments, although the tempting threat to union negotiating power may not be enough to offset other employee and employer concerns.

One area where a compromise will not happen is the individual mandate. The White House will not give on something so fundamental to universal coverage—or so necessary to spread insurance risk and premium dollars—while many Republicans may feel confident that the Supreme Court will find it unconstitutional and be willing to wait for that ruling.

Finally, it’s also possible that Republicans may really not worry too much about repealing reform. With the majority of state houses in GOP hands, and given the inherent difficulties of implementing insurance exchanges and expanding Medicaid, there may be political advantages to waiting for the inevitable problems to start to become apparent in the fall of 2012, just in time for the next presidential election.

FINALLY! NAIC SENDS MLR PROPOSAL TO HHS

2010-10-28T10:29:00.000-07:00

Many weeks after its original target date, the National Association of Insurance Commissioners sent its proposed regulations for computation of medical loss ratios and associated rebates to HHS Secretary Kathleen Sebelius yesterday. Secretary Sebelius must now decide whether or not to accept the proposal (ACA provides no other option) for inclusion in the full set of federal MLR regulations.

The NAIC cover letter forcefully reemphasizes state regulators’ concerns about the MLR provisions: “We continue to have concerns about the potential for unintended consequences arising from the medical loss ratio. As we noted in our letter of October 13th, consumers will not benefit from higher medical loss ratios if the outcome is destabilized insurance markets where consumer choice is limited and the solvency of insurers is undermined. This is of particular concern in the period before guaranteed issue and exchanges are implemented in 2014, as those who lose coverage may be unable to find or afford other coverage.”

The letter goes on to remind Secretary Sebelius of NAIC’s earlier point that state regulators are better able than HHS to determine if waivers are necessary: “We reiterate our request that your Department give deference to the analysis and recommendations of state regulators when determining how the new requirements will be implemented in a destabilized market.”

Finally, the cover letter reiterates NAIC concerns that insurance agents and brokers will be hard hit by the MLR provisions, since their commissions are counted as insurer expenses in the proposed MLR computation, and insurers will presumably be unwilling to cover these costs in future.

Whatever HHS’ response is to the NAIC comments, federal officials and state regulators will have very little time to prepare for their implementation on January 1, 2011, and—if there are further changes— health insurers will have even less time to decide how to respond, including whether to remain in existing markets.

REFORM LIMBO: INSURERS WAIT FOR REGULATIONS, ELECTIONS, AND WAIVERS

2010-10-28T09:42:00.000-07:00

One expectation in the wake of the passage of the Affordable Care Act seven months ago was that it would lead to major changes in the health insurance industry.

Throughout the reform debate, insurers were painted as the “bad guys” of the American health care system, guilty of egregious policy cancelations, huge premium increases, heartless rejections of applications for coverage, and overly generous executive compensation, all in the context of an inefficient and ill-structured industry.

Not surprisingly, insurers became the primary targets of the new law. ACA will prevent insurers from imposing annual and lifetime benefit limits, arbitrarily canceling policies, denying coverage to children with pre-existing conditions, imposing copayments on preventive care, excluding necessary services, and basing premiums on health status or gender. ACA will also force far more open competition though insurance exchanges and limit insurer administrative expenses and profits.

So far, though, in spite of a steady stream of complaints from America’s Health Insurance Plans, the industry lobbying group, there has been little apparent impact on the health insurance industry.

Many insurers have increased premiums to compensate for ACA’s increased benefits, and some have decided to no longer offer “child only” policies, to avoid the risk of accepting children with very costly pre-existing conditions. In terms of the overall market, however, these are very small blips.

There have been a few other blips. Following national publicity over McDonalds’ threat to cancel its min-med employee insurance plan, HHS granted waivers of the annual benefit provision to the burger chain and some thirty other employers. A couple of small insurers have withdrawn from the health insurance market and transferred their policies to larger competitors. And three states have applied to HHS for waivers of the MLR provisions.

Overall, however, there has been a remarkable absence so far of change in the health insurance industry. Given all the potential threats of ACA, why do insurers seem to be in some kind of limbo?

There are three reasons: delay in finalizing medical loss ratio regulations; uncertainty about HHS’ approval of waivers; and the November mid-term election.

ACA’s medical loss ratio provisions offer a huge threat to smaller insurers, especially those specializing in “affordable” high-deductible policies which typically have high administrative expenses relative to benefit costs. The National Association of Insurance Commissioners has finally—after several delays—completed its proposal for MLR computation, but until this is accepted by HHS Secretary Sebelius and incorporated into regulations, insurers will continue to be unsure of its impact.

Secretary Sebelius also must decide how to rule on MLR waiver requests already submitted by a handful of states, and on the larger issue raised by NAIC of how to measure the potential market destabilization that ACA requires to trigger a waiver. Again, this is an issue with huge ramifications for many insurers. A rigid interpretation by HHS of waiver requirements could lead to a wholesale insurer exit from the individual market.

Finally, the November election is seen by insurers as providing the chance to squeeze the Obama administration’s implementation of ACA. With a strong enough showing by Republicans, the insurance industry hope is that threats of a funding cut-off by the new Congress will lead to dilution of many of the more onerous or profit-crippling ACA provisions.

And if insurers don’t get everything they are hoping for? Starting in January 2011, when the new MLR regulations are scheduled to be effective, we can expect to see three things: insurers dumping their small group and individual business, replacing high-deductible policies by more costly coverage with lower limits, and the wave of consolidation in the industry that executives from the largest carriers have been forecasting for several months.

PPACA PREMIUM SUBSIDIES—THE GOVERNMENT IS HERE TO HELP YOU!

2010-10-21T10:56:00.000-07:00

If anyone ever doubted the extent to which Congressional committees could turn good intentions into a bureaucratic nightmare, they need only to look at PPACA’s premium subsidy provisions and their potential impact on insurance exchanges.

PPACA offers premium and enrollee cost-sharing subsidies for lower-income people not eligible for Medicaid or SCHIP as one of the three key components—along with liberalizing Medicaid income restrictions and requiring everyone to have coverage—of reform’s attempt to solve the affordability problem that’s resulted in fifty million Americans being uninsured.

How will the subsidy process work? It takes up 25 pages of the final reform legislation, so the following is a vastly simplified description. It’s also one that assumes that the final regulations will not deviate significantly from the law itself.

First, anyone wishing to be eligible for a subsidy must submit an application to an exchange. The application must include all information necessary to determine if the applicant is eligible for Medicaid or SCHIP, as well as for the PPACA subsidies. (Massachusetts’ Connector—the prototype exchange—requires a 12-page page form to convey this information.)

Second, the exchange transfers the applicant’s information to the state Medicaid and SCHIP agencies to determine possible eligibility for those programs. If either is the case, and depending whether all or just some family members are affected, the applicant must be notified, and may no longer be eligible for exchange enrollment.

Third, assuming no eligibility for Medicaid or SCHIP, the exchange must determine if the applicant’s income appears to meet PPACA subsidy rules. If not, the applicant must be notified that no subsidy is available.

Fourth, the applicant’s information is forwarded to HHS, which will—in conjunction with the IRS and other federal agencies—verify the submitted information. (The Congressional Budget Office estimates that the cost to the IRS of implementing the eligibility determination, documentation, and verification processes would be between $5 billion and $10 billion over 10 years.)

Fifth, HHS will notify the exchange of the results of verifying the submitted information. The exchange must then notify the applicant, including whether any discrepancies were found and must be corrected.

Sixth, assuming the application meets PPACA subsidy rules, the applicant can finally select an insurance plan from the exchange. However, in order to receive a cost-sharing subsidy as well as a premium subsidy, only Silver plan selection is allowed. Thus, lower-cost Bronze plans cannot be chosen by anyone wanting to reduce their out-of-pocket costs. The exchange must also notify the applicant of the reduced premium amount and the impact of any reduced cost-sharing.

Seventh, the exchange must notify HHS of the applicant’s choice of plan.

Eighth, HHS must notify the Treasury Department, which will then make the monthly premium subsidy and reduced cost-sharing payments to the selected insurer.

Of course, the above describes the most straightforward situation in which a well-organized individual applies for subsidies well ahead of the start of coverage deadline, during an annual open enrollment period, with timely and accurate communication among the various agencies involved.

Unfortunately, there are likely to be many cases when a subsidy application is incomplete or inaccurate, or when it is submitted only just before a deadline, or when information supposed to be forwarded from one agency to another goes astray, or when an individual moves from one state to another in mid-year, or when any of the myriad of other problems occur associated with 11 million people (CBO’s premium subsidy population estimate for 2015) encountering a new government program on January 1, 2014, the same date that an estimated 15 million others will become newly eligible for Medicaid or SCHIP, with every one of these 26 million individuals’ applications being processed by the same state agencies.

Could it be that reform’s attempt to solve American’s health care problems by applying a giant Band-Aid to the existing system is going to lead to an even more incomprehensible muddle?

THE MASSACHUSETTS CONNECTOR: LESSONS FOR PPACA EXCHANGES

2010-10-18T13:30:00.000-07:00

Massachusetts’ Connector, operational since 2006, is the prototype for PPACA’s insurance exchanges. Connector boosters have claimed it is a vital and successful part of Massachusetts’ health care reform; its critics have noted its failure to influence either benefit or administrative costs or to attract significant enrollment. However, whether success or failure, the Connector offers lessons for other states.

LOW ENROLLMENT MEANS FAILURE

As Massachusetts discovered, it’s impossible for the exchange to influence premium rates without a significant share of the small group and individual markets. Massachusetts succeeded with its subsidized plans, where it was the dominant purchaser, but not with its unsubsidized plans. Insurers will see no reason to risk cannibalizing their non-exchange business by offering especially competitive rates within the exchange if the potential enrollment is too low to be attractive.

Low enrollment also means high per capita administrative costs. Implementation expenses ($25 million for the Connector) will be politically unacceptable unless substantial enrollment can be guaranteed, while ongoing operating costs spread over too few enrollees could make the exchange noncompetitive with non-exchange offerings—resulting in even lower enrollment.

Massachusetts attempted to make individual coverage less costly (and therefore more attractive) by combining individual and small group markets. This creates a larger enrollee risk pool, and greater per plan enrollment, but results in higher small group rates.

PPACA exchanges should gain from being the only sources for those receiving premium subsidies, with subsidized and unsubsidized enrollees expected to choose from the same menus of plans (unlike the Connector). However, competition from non-exchange plans may be significant since PPACA puts few limits on such offerings, other than to require that premiums be the same if the identical plan is offered through the exchange, and to require that exchange and non-exchange enrollees be part of the same risk pool.

ENROLLMENT MUST BE ATTRACTIVE, EASY, AND FAST

To maximize enrollment, exchanges must compete successfully with individual insurers. To overcome the government agency stigma, exchange enrollment processes must be exceptionally well-designed to attract potential enrollees (and supported by advertising), be easy to navigate (while providing the information needed by enrollees), and fast (so enrollees don’t quit before enrollment is completed).

Massachusetts’ Connector website provides a good model for plan selection and enrollment by non-subsidized individuals, but could require considerable modification for a state with more plans, and to attract small employers (few of whom have chosen to use the Connector).

PPACA’s subsidized enrollees will present problems because of the need to review income and other details. Exchanges will have an effective monopoly of this group, but enrollment will be a two-step procedure, as in Massachusetts, separated by a—possibly lengthy—state and federal subsidy determination process.

PRICE COMPETITION IS ESSENTIAL

Massachusetts’ Connector (and also California’s 1.3 million enrollee CalPERS public employees exchange) shows that people tend to choose lower cost options IF they can easily compare premiums and benefits. Such comparisons are essential to controlling the costs of coverage and—eventually—medical care.

The Connector (and also CalPERS) offers limited menus of plans, with benefits defined by the exchanges. This reduces the complexity of plan choice and—in theory—means that enrollment isn’t spread so thin that it becomes insignificant to individual plans.

PPACA exchanges may encounter pressure to include the products of every licensed insurer in the state or region, and to allow variations from standard benefits. Insurers may also attempt to cherry pick outside the exchanges by offering products aimed at the best risks, while trying to finesse PPACA’s risk-pooling provisions. Allowing such flexibility would undermine any potential that exchanges have for controlling health care costs.

EXCHANGES MUST BE ACTIVIST

Massachusetts took an activist approach to exchange operation, including specifying allowed coverage options and providing a website that readily allows price comparison. Similarly, CalPERS has worked closely with insurers to provide affordable and comparable options. (In contrast, Utah’s so-called exchange offers little more than would be provided by a Google search on “health insurance.”)

PPACA gives exchanges a lengthy list of responsibilities, including requiring that an exchange provide “standardized comparative information on plans,” and that it assign a “quality and price rating.” However, the law is silent on key issues like the exchange’s ability to determine which insurers and which products are to be included, or exactly how they are to be compared, or whether restrictions could be imposed on competition between exchange and non-exchange products.

Without a strong activist approach, exchanges will provide no incentive for insurers to control their own costs or the costs of their contracted providers—and their success will still be dependent on meeting enrollment and price competition goals.

NEWS UPDATE 10/15/2010: STATE INSURANCE REGULATORS APPLY PRESSURE TO HHS

2010-10-18T13:24:00.000-07:00

Having a-l-m-o-s-t completed the final draft of the medical loss ratio calculation rules for approval by the Department of Human Services (a responsibility delegated by PPACA), the National Association of Insurance Commissioners is now pressing for a more generous waiver policy for the individual market than envisioned by Senate proponents of the MLR requirements.

In an October 13 letter to HHS Secretary Kathleen Sebelius, NAIC officers ask that HHS “give deference to” state regulators’ determinations of whether imposition of the MLR and rebate provisions would destabilize individual markets.” The letter lists a series of factors that state regulators would consider, including possible impact on insurer solvency and the ability of policyholders to find alternate coverage if waivers were not granted. In other words, the NAIC is requesting that HHS grant waivers to states with a minimum of argument. As the letter says, “State regulators are most familiar with local health care and health insurance markets.”

The NAIC letter emphasizes the importance of a smooth transition to fully implemented reform, and points out that while the MLR provision is scheduled for 2011, the major components of PPACA will not be effective until 2014. (The letter fails to note that, starting in 2014, the MLR calculation must be based on a 3-year rolling average, so that even with waivers prior to 2014 it may be impossible for insurers to meet the 80 percent individual market threshold in 2014.)

The underlying threat, of course, is that unless state regulators’ requests for waivers are granted, HHS will become the whipping boy for every individual policy that is canceled, and for every departure of an insurer from a state market. Democratic insurance commissioners may not complain too loudly, but the Republican majority certainly will.

What is Secretary Sebelius likely to do? Given the rapidity with which HHS folded in the face of concerns about mini-med policies, it’s a reasonable bet that the final federal regulations will require HHS to consider state regulators’ determinations, at least through 2014. It’s also likely, given that the MLR provisions become effective in just a few weeks, that the waivers already requested (from Iowa, Maine, and South Carolina) will be quickly granted.

BURGERS AND BRONZE: MORE MEDICAL LOSS RATIO PROBLEMS

2010-10-09T11:35:00.000-07:00

PPACA’s medical ratio loss rules continue to generate problems. Mini-med health plans, providing extremely modest coverage with low premiums, have been in the news this past week, with HHS’ announcement that plans offered by McDonalds and other low-wage employers will receive waivers from PPACA’s annual benefit limit provision to avoid potential termination of these plans. Given the need to maintain insurance market stability (and avoid the politically embarrassing contradiction of President Obama’s campaign promise that anyone with existing coverage could keep that coverage), it’s easy to see why HHS Secretary Kathleen Sebelius granted the waivers. However, the annual limit provision is only one of the mini-med problems.

Mini-med plans also run afoul of PPACA’s medical loss ratio rules. Because administrative costs are high compared with premium, even a highly efficient, non-profit mini-med plan will fall below the MLR thresholds. Again, HHS has indicated that it will allow some form of waiver for mini-meds. However, an MLR waiver faces two obstacles. First, the NAIC draft regulations for MLRs are based on reporting by legal entity, rather than specific product, implying that a waiver would somehow have to exclude mini-med data from the entity’s MLR calculation. Second, insurers marketing conventional high-deductible plans may reasonably argue that they also should be granted waivers—why should HHS waive a plan that offers almost no coverage, but not a plan that offers much more generous coverage (but less than needed to pass the MLR test)?

There is another potential MLR problem, but it’s one that may not be apparent until closer to 2014. Starting in that year, insurance exchanges will offer up to five levels of coverage (Platinum, Gold, Silver, Bronze, and catastrophic. The problem is that, if past exchange experience is any guide, the less expensive coverage levels (Silver and Bronze) will be most popular—and that will mean MLR trouble for insurers offering these levels.

For example, at the Bronze level, and assuming that exchanges will, as in Massachusetts, fund their operations through a premium levy of 4-5 percent, insurers will find it almost impossible to meet the MLR threshold of 80 percent for individual plans. Currently, the most efficient large group plans have MLRs of around 88 percent, indicating non-benefit costs of some $600 for typical single coverage (roughly equivalent to PPACA’s Gold level). With the addition of a 4 percent premium levy, non-benefit costs increase to $800, enough to cause almost all Bronze plans and many Silver plans to fail the MLR test. Only if insurers enroll startlingly large numbers at the Gold level will they be able to avoid the requirement to offer rebates—and that’s unlikely to happen.

NEWS UPDATE 10/8/2010: INDIVIDUAL MANDATE UPHELD IN MICHIGAN

2010-10-08T10:23:00.000-07:00

Health Care reform supporters won a victory this week in Michigan, when a federal judge in Detroit rejected an attempt to overturn the individual mandate provision of PPACA.

Judge George Steeh ruled that Congress did not exceed its authority in requiring that almost all Americans have health insurance by 2014, or pay a penalty.

The plaintiffs, from the Thomas More Law Center, had argued that the individual mandate violated the Commerce clause of the Constitution in attempting to regulate an “inactivity” (the non-purchase of insurance).

The Judge cited Supreme Court rulings in which the Commerce clause had been extended to the growing of both wheat and marijuana for personal use, finding that such cultivation impacted the larger market, and also noted that the failure of some to purchase insurance inevitably resulted in higher costs for others. Interestingly, he also found that the issue was “ripe” for judicial determination, even though the mandate does not come into force until 2014, apparently accepting the plaintiffs’ argument that they would have to make financial decisions considerably before that time.

While Judge Steeh’s ruling is definitely a victory for reformers, it may be a short-lived one. Similar cases in Florida and Virginia are about to go to trial, possibly with judges less inclined to take a broader view of the extent of the Commerce clause. Ultimately, however, it will be up to the Supreme Court to rule on the individual mandate—and that may be two or more years in the future.

MORE THAN YOU WANTED TO KNOW ABOUT THE MLR PROVISION

2010-10-07T10:52:00.000-07:00

PPACA's medical loss ratio rules, to be implemented effective January 1, 2011, are causing more current heartburn to insurers and employers than any other aspect of health care reform. Previous REFORM UPDATE posts have discussed some of the issues involved, with new wrinkles becoming apparent almost every week.

The release of draft MLR regulations by the National Association of Insurance Commissioners last week eliminated much of the uncertainty, especially concerning the inclusion or exclusion of federal and state taxes from the MLR computation. With the NAIC drfat in hand, and assuming that it will be accepted by HHS Secretary Kathleen Sebelius, it's become a lot easier for insurers and employers to figure out how they may be affected, and what kind of strategic response is most approriate.

BNA's Pension and Benefits Daily asked REFORM UPDATE Editor Roger Collier to provide a detailed review of the issues facing employers and insurers. It was published on October 6 as a BNA Insight article and is available to BNA subscribers.

NEWS UPDATE 10/8/2010: INSURANCE EXCHANGE STRUCTURES START TO TAKE SHAPE

2010-10-07T10:19:00.000-07:00

Two big steps were taken this week towards creating the insurance exchanges called for by PPACA. The State of California enacted legislation establishing a state health exchange, followed just a couple of days later by the National Association of Insurance Commissioners issuing its draft of a model state statute for insurance exchanges.

California’s new statute was signed into law by Republican Governor Arnold Schwarzenegger in the face of fierce opposition from the Chamber of Commerce, NFIB, and Anthem Blue Cross—but apparently after a nudge from President Obama. The law creates an independent statewide exchange authority, effective January 1, 2011 (but not providing exchange services until 2014), with responsibilities for determining eligibility and enrollment requirements under qualified carriers. The new entity will be headed by a five-member commission.

Opposition to the exchange legislation centered around two issues: funding and authority. Taxpayer and business groups argued against the use of premium levies to fund the exchange, while major insurers (but not Blue Shield or Kaiser) vehemently opposed giving the exchange the power to negotiate benefits and rates and to require that the coverage offered to exchange enrollees also be offered in the general individual market. Other insurers expressed concern that small plans could be effectively shut out of the exchange.

The NAIC draft issued just after the California signing is intended to be a template for state exchange legislation and, accordingly, is far less specific about funding, responsibilities, and authority. It is, however, a useful starting point, especially for states still confused about how to approach PPACA’s exchange provisions. The draft includes clauses covering all essential exchange functions, reflecting the PPACA requirements, together with discussions of how to put various state options into statutory language. States are not required to utilize the NAIC language (like California, they can choose to develop their own statutes), but the NAIC draft clearly is a valuable source.

THE MASSACHUSETTS CONNECTOR: SUCCESS OR JUST A PR COUP?

2010-10-06T09:57:00.000-07:00

With the passage of insurance exchange legislation in California, and the release of a template for state exchange statutes by the National Association of Insurance Commissioners, many state eyes are turning towards the only existing exchange comparable to that required by PPACA: Massachusetts’ Connector.

The Connector, which offers Commonwealth Care subsidized coverage for those with incomes below 300 percent of FPL but not eligible for Medicaid, and Commonwealth Choice private plans for other families and individuals and small employer groups, has been touted as a major success by current and former Commonwealth officials and many national reform advocates.

But, after four years of operation, just how successful has the Connector really been? Has the Connector simplified health plan choice and enrollment, increased the number of insured, reduced marketing costs, created competition, or driven down premiums? It turns out that the answers are far less positive than the Connector’s boosters have admitted.

HAS THE CONNECTOR SIMPLIFIED PLAN SELECTION AND ENROLLMENT?

For some, at least.

For the 33,000-enrollee unsubsidized Commonwealth Choice program the answer is yes. Health plan selection and enrollment for CommChoice’s seven plans (with six levels of benefits each) is directly available via the Connector website, with simple well-designed screens and navigation, and easy comparison of alternatives. However, in spite of the ease of use, only half of Massachusetts’ post-reform non-subsidized insured have chosen coverage via CommChoice.

For the 155,000-enrollee subsidized Commonwealth Care program, enrollees face enough complications that a 13-page booklet is necessary to guide them through the process. Plan selection and enrollment for CommCare’s five Medicaid managed care plans (with multiple benefit levels depending on income) require applicants to first complete a benefit request form with income and other details; only after eligibility is determined by the state Medicaid agency is plan selection possible, either on-line or, for those without convenient web access, through submission of a paper form. Not only can this be a time-consuming process, but it’s one that is explained on the Connector website in language that may require a higher level of education than many potential applicants possess.

HAS THE CONNECTOR INCREASED THE NUMBER OF INSURED?

Only marginally, at best.

A few CommChoice enrollees may have purchased coverage as a result of the easy-to-use Connector enrollment procedures, but—given the pressures of the individual mandate and its associated penalties—most would otherwise have bought insurance through brokers or directly from carriers.

CommCare enrollees are even less likely to have acquired coverage because of the Connector’s capabilities. Most CommCare enrollees pay no premiums and presumably would have submitted applications for coverage regardless of the Connector.

Overall, although the Connector provides a useful source of information, most of Massachusetts’ post-reform insured were probably influenced more by media coverage of the individual mandate and other reform details than by the Connector. In fact, neither the media nor the Connector has persuaded all eligibles to become covered. The latest Census Bureau figures show Massachusetts—while having the lowest uninsured rate in the US—still with five percent uninsured, while a 2010 Robert Wood Johnson Foundation study estimates that almost half of these uninsured are eligible for either CommCare or Medicaid.

HAS THE CONNECTOR REDUCED MARKETING AND ENROLLMENT COSTS?

Probably not.

For CommChoice, the Connector’s costs (funded by a 4.5 percent levy on premiums, roughly equivalent to broker commissions) are additive to health plans’ own administrative costs. Although the plans presumably incur somewhat less enrollment effort as a result of the Connector, the volume of enrollees gained (less than 5 percent of total enrollment) isn’t large enough to influence plan costs significantly.

For CommCare, the Connector’s costs (funded by a 4 percent levy on premiums) also are additive to plans’ administrative costs. However, because the Medicaid managed care plans contracted by CommCare have cost structures that assume enrollment is a state function, plan costs are not affected by use of the Connector.

Connector administration costs to date are actually significantly higher than the premium levy amounts indicate, since initial implementation efforts were funded by a one-time $25 million appropriation.

HAS THE CONNECTOR CREATED A COMPETITIVE MARKET FOR COVERAGE CHOICES?

Only to a limited extent.

The Connector website allows applicants to compare costs of plans with similar benefits—essential for a competitive market. Initially, the Connector allowed choices between “actuarially equivalent” plans, but more recently has switched to offering plans whose benefits are almost identical in order to facilitate price comparison.

For CommChoice, price seems to have played a significant role in plan and benefit choice: most enrollees have chosen the lower Bronze or Silver benefit levels, with less costly plans being most popular. However, with CommChoice enrollees representing fewer than five percent of the individual and small group market, the Connector’s price-comparison capability is unlikely to have influenced overall market competition.

For CommCare, most enrollees pay no premiums so that price comparisons are meaningless. For the remaining CommCare enrollees, premium differences between plans are small and seem not to have been a major influence on plan selection.

HAS THE CONNECTOR RESULTED IN LOWER PREMIUMS?

Possibly, for the subsidized CommCare plans, but not for CommChoice.

Connector administrators have taken activist roles in attempting to control premium increases, especially for CommCare, rejecting plan proposals until lower rates have been offered. For CommChoice (whose plans are available in the general market), Connector administrators supported the state insurance regulators’ rejection of rate hikes that led to a brief “insurance strike” in the spring of 2010 and ultimately to reduced increases. What is not known for either program is the extent—if any—to which state pressures on individual market premiums may have resulted in cost shifting elsewhere.

Although Connector officials have claimed in Congressional testimony that CommChoice’s creation led to a dramatic drop in non-group premiums, the reality is that this was primarily due to the state’s combining of the small group and individual markets, something that also resulted in premium increases for small groups. The very small CommChoice enrollment is simply too little to influence the overall Massachusetts market (which has the highest health insurance premiums in the nation): the tail does not wag the dog.

SO, DOES THIS MEAN PPACA INSURANCE EXCHANGES WILL BE EQUALLY UNSUCCESSFUL?

In a sense, the very existence of the Connector—a pioneering state effort to offer truly competitive—and easy—health plan selection—represents a success. However, this success is due in part to the factor that undermines the Connector’s effectiveness: the very low enrollment numbers. Establishing the Connector would almost certainly have been much more difficult and faced far stronger opposition if Massachusetts had had more pre-reform uninsured, especially those above the 300 percent FPL level, as will be the case in most other states who must establish PPACA insurance exchanges.

The real value of the Massachusetts experience is likely to prove not to be to the Commonwealth itself, but to other states. Whether they can achieve greater success, and the lessons they can learn from Massachusetts, will be the subjects of a subsequent article.

CLUELESS: MANIPULATING NUMBERS TO MAKE A POLITICAL POINT

2010-10-02T09:13:00.000-07:00

Anyone interested in the politically-biased interpretation of numbers should take a few minutes (but not longer) to read a recent post on the otherwise-reputable Health Affairs blog. The post is by Thomas Miller and a young colleague at the conservative American Enterprise Institute, titled “Out-of-Pocket Theory for Health Spending Cutbacks is Clueless.”

Starting with a snide comment about a New York Times article that quotes a study by the prestigious National Bureau of Economic Research on the effects of the recession on medical care usage in different countries, the post goes on to attack the study itself. Miller’s complaint is “the NBER study assumed facts that were not in evidence—that Americans face significantly higher OOP costs for health care than people in other comparable nations. It confused absolute dollar totals (in a larger health economy) with the more decisive “share” of health spending that is paid OOP.” Miller criticizes the NBER study for using OECD nations’ OOP percentages of GDP without adjusting for the much higher share of GDP for health spending in the US, and accuses the NBER authors of “detaching the numerator from the relevant denominator, to make the former look larger compared to another less-related one.”

Who’s clueless here? It seems as if it’s the Health Affairs blog post’s authors who are having the most denominator trouble.

If it’s their intent to show that OOP reductions in the US have less impact on consumers than in nations with “socialized” medicine, perhaps they should have surveyed US users of medical care. If so, they would have discovered that few, if any, Americans evaluate their OOP costs in terms of national spending on health care, any more than they consider the cost of a new automobile in terms of national costs of vehicle production.

And if the Health Affairs blog authors were trying to show that OOP reductions in the US are small in overall terms compared with those in other OECD countries, they have succeeded only in showing that almost any expenditure is small compared with the United States’ bloated health care costs. Using the post authors’ rationale—and their denominator—it seems there’s nothing like out-of-control total spending to make our OOP cutbacks look good (at least, in percentage terms).

NEWS FROM THE MEDICAL LOSS RATIO FRONT

2010-09-24T16:26:00.000-07:00

Having originally hoped to publish its proposed PPACA medical loss ratio regulations by the end of May, then having slid the date, first to the end of July, then to mid-August, and finally to the “end of summer,” the National Association of Insurance Commissioners released its proposal late yesterday, September 23, the day of the autumn equinox.

Insurers and their lobbyists were quick to complain about the proposed regulations, although they must have been relieved to see that they had succeeded in their goal of getting almost all federal and state taxes and fees excluded from the MLR computation. The NAIC followed a “letter of the law” approach in interpreting the PPACA language exactly as written, rather than accepting the claimed intent of the law’s primary Congressional drafters that only new PPACA-specific taxes and fees should be excluded. The impact of the NAIC interpretation is significant, especially for investor-owned insurers: excluding all taxes but those on investment income will boost their MLRs by some two or three percentage points.

The day before the release of the NAIC’s proposal, three dozen of the state insurance commissioners met with President Obama, HHS Secretary Sebelius, and other administration officials. The key issue: whether the new MLR rules could be gradually phased in, rather than being fully implemented on January 1, 2011. Although PPACA allows the HHS Secretary to grant temporary waivers to states where requiring health plans to meet an 80 percent MLR could result in disruption of the individual market, many NAIC members would prefer much greater flexibility for both the individual and small group markets.

So far, only Maine and Iowa have formally requested waivers of the individual market requirement, but other states are expected to follow. PPACA does not allow for waivers of the 80 percent threshold in the small group market (or the 85 percent threshold in the large group market), and some state commissioners are anticipating that insurers currently offering “affordable” coverage with substantial deductibles and other consumer contributions may be forced to drop such policies (which typically result in lower MLRs) or leave the market altogether, leading their policyholders with higher premiums or problems getting insurance. However, the administration has so far given no indication of such flexibility and clearly is unwilling to start weakening the reform law.

COULD THE NEW MEDICAL LOSS RATIO PROVISIONS INCREASE PREMIUMS?

2010-09-23T14:46:00.000-07:00

One of the most significant—and hotly debated—parts of the new health care reform law is scheduled to come into effect on the first day of 2011. It’s one that’s likely to impact insurers, employers, and individual consumers.

The medical loss ratio provision, intended to limit the amount of premium spent on other than medical care, will require large group health plans to spend at least 85 percent of premium on medical care and related health quality efforts, and small group and individual plans to spend at least 80 percent. Plans failing to meet these thresholds will be required to offer rebates to enrollees.

The Senate backers of the MLR requirement, notably Jay Rockefeller and Al Franken, obviously hoped that it would force insurers to be more efficient, and specifically to cut their administrative costs and profit. In the case of some insurers, the Senators are likely to be successful, as I noted in an article by Reed Abelson in today’s New York Times, if only by slashing broker commissions. However, as I also remarked to Reed, in other cases the new rule could lead to policy cancellations or even higher premiums.

While most large group plans are expected to be able to meet the new requirements, many small group and individual plans may have problems. In some small states—for example, Maine—there may be only one insurer (or none) whose MLR is above the PPACA threshold. Small group and individual plans will experience most difficulty for two reasons: higher administrative costs, resulting from higher marketing expense per enrollee, and less generous benefits, resulting from the need to offer affordable policies.

Although the regulations for enforcing the MLR provision have not yet been finalized, insurers are urgently trying to figure out how best to deal with the expected requirements, as reported in the New York Times article. In some cases, especially where plans are already close to the MLR thresholds, insurers are working on staff cuts and other expense reductions such as reducing or eliminating broker payments. However, others are considering either abandoning the market or extensively restructuring their coverage offerings. Restructuring coverage to increase benefits—for example, by lowering deductible limits—will increase a plan’s MLR, but will also increase premiums, hardly likely to be popular in the present economy.

So, the bottom line (for the moment) seems to be that some policyholders will gain from the MLR provision (although the gain may not be readily apparent as medical costs continue to grow), while others will find themselves facing higher premiums or needing to seek other coverage.

And those will be the ones that reform opponents will make sure we read about.

INSURERS QUICK TO RESPOND TO REFORM’S CHANGES

2010-09-11T10:23:00.000-07:00

Hot on the heels of the most recent REFORM UPDATE post comes a series of news items reported by Kaiser Health News. If anyone doubted that (a) insurers would fight back against the coverage requirements of PPACA or (b) that those being regulated will always have the advantage over the regulators, or (c) there’s no free lunch, these items should rapidly dispel the illusion.

The Wall Street Journal reports that several insurers, including Aetna and a number of Blue Cross and Blue Shield plans are asking for premium increases ranging from 1 to 9 percent “to pay for extra benefits required under the [new] law.” The increases apply primarily to small group and individual coverage, with large groups escaping so far, either because their coverage already includes PPACA mandates such as no-co-pay preventive care or because they are shielded by PPACA’s grandfathering provisions. The Los Angeles Times reports larger increases in the California individual market, with HealthNet, Blue Cross, and Blue Shield each gaining approval for up to 16 percent premium hikes.

In Texas, meanwhile, Grand Prairie-based National Health Insurance is telling policyholders it won’t renew individual policies. The Dallas Morning News notes that National Health has been experiencing financial problems for some time, but also manages to suggest that reform is to blame ("The cancellation highlights one way the new law is reshaping the health care landscape in North Texas and elsewhere. Some health economists say more small insurers may soon buckle under the weight of the law's mandates...").

And, finally, in Colorado, it’s reported that five insurers will no longer offer health insurance to children whose parents are not also covered by their plans. The Colorado Independent says: “The insurers say offering child policies made business sense when they could just cover healthy kids but that since federal law now requires them to offer insurance to all kids, including kids with pre-existing medical conditions, they are withdrawing from their child-only plans."

SURPRISE! REFORM GROWS MORE UNPOPULAR

2010-09-06T11:01:00.000-07:00

The latest Kaiser Family Foundation poll, conducted in August, shows public support for health care reform falling. After two monthly polls in which reform was viewed increasingly favorably, the new poll shows a sharp decline in public backing for the new law.

Kaiser polls in the first couple of months after enactment of PPACA showed more confusion than clear support or opposition, but by June favorable views gained an edge, with 48 percent supporting reform and 41 percent opposed. The July results continued this trend, with opposition falling to just 35 percent, and support continuing to gain, implying that Obama administration efforts to build support were paying off.

The August poll, then, came as a shock to reform advocates. The percentage of those viewing reform favorably slumped to 43 percent, while the unfavorable number rose to 45 percent. Why? Some part of the change can be attributed to growing disenchantment with the White House and government in general, while anyone whose coverage was renewed during the summer saw premium increases that could readily, if not necessarily accurately, be blamed on reform. At the same time, conservatives maintained a barrage of criticisms that appeared to be more persuasive than reform supporters’ promises that better times were coming (but mostly not until 2014).

Is the downward trend in reform support likely to continue? The positive publicity associated with the $250 Medicare D doughnut hole rebate checks and the ending of most pre-existing condition limits for children has faded, but many individuals will gain from other PPACA provisions being implemented this year. Most annual and lifetime benefit limits will be eliminated, children can be added to their parents’ coverage, preventive care will be available to most without out-of-pocket payments, federally subsidized high-risk pools will be created or expanded, and credits will be available for some small businesses. However, whether this collection of goodies will be enough to reverse the public’s unfavorable view of reform remains to be seen.

While it’s clear that reform provisions implemented in 2010 will benefit many, they will have to be paid for, and those changes without specific federal funding will result in premium increases—something that insurers and reform opponents will be quick to emphasize. For all its opposition to PPACA, the health care industry now has the perfect whipping boy for every escalation in costs and—in conjunction with political conservatives—will make sure reform takes the blame for each dollar of increased premium.

Meanwhile, the really major reform provisions remain in the future, with each carrying its own public relations risk. The potential downside of “health care for all” (or, at least, most) is the threat of penalties for those unwilling to obtain coverage (assuming the coverage mandate is not rejected by the courts). The potential downside of the insurance exchanges is that their implementation will be chaotic, at least in some states. The potential downside of enrolling into Medicaid those who cannot afford insurance is that Medicaid is still viewed by most as a welfare program—and most people don’t want to be on welfare.

For all its positives, PPACA merely redistributes the costs of coverage, meaning inevitably that many people will pay more. And—unless reform advocates can be far more persuasive than they have been so far—it will be these folk who drive the unfavorable public view of reform.

IMPERFECT TIMING, INTERESTING FINDINGS

2010-08-09T10:20:00.000-07:00

The Committee for Economic Development, one of the less doctrinaire business research groups, recently released a paper that should give health reform advocates (and opponents) some food for thought.

The undated paper, “Health Care in California and National Health Reform,” authored by distinguished health care economist Alain Enthoven and CED’s Joseph Minarik, seems to have been written during the course of the lengthy debate on reform, with editorial updates inserted after passage of PPACA. With an emphasis on CED’s own earlier proposals for reform, rather than on the new law, much of the paper elicits a “but the train’s already left the station” reaction. Nevertheless, the findings, especially some of those embedded in the reports of interviews with major employers, are worth examining.

The scope of the paper is limited to California, with a focus on large employers who offer a range of coverage options. Although California is clearly not a typical state, given its considerable HMO enrollment and per capita health care spending 12 percent below the national average and close to 30 percent below New York and Massachusetts, many of the findings could be extrapolated to other states with large employer groups. Of particular interest in the context of reform, California has the largest existing non-federal employer insurance exchange (CalPERS, the state employee benefit system), and the largest delivery system HMO (Kaiser), both of which have made considerable efforts to make health care more cost-effective.

Perhaps inevitably, given that they would be quoted in a published paper, the employer interviewees expressed satisfaction with their approaches to employee coverage, even while noting their concerns about the continued escalation of health care costs. Also perhaps inevitably, none of the interviews produced any comparative quantification of achievements: for example, employer premium increases versus state averages. The reader must take on trust satisfaction with the managed competition model adopted by CalPERS, the University of California, Wells Fargo, Stanford University and others, although each of these clearly believes that this model is superior to their prior approaches.

Given these limitations, the interviews indicate some significant findings:

1. The largest and most cost-conscious employers interviewed (notably CalPERS and the University of California) have, as remarked above, each settled on versions of the managed competition model, with fixed dollar employer contributions and choice of coverage from among a limited number of competing options.

2. Particularly for the large public and academic employers, the less costly options have been the most popular with employees, in spite of their more limited choice of providers. However, even with less costly options available, many employees choose more expensive (typically PPO) coverage, most likely because of greater flexibility of provider choice or because of existing provider relationships.

3. Activist exchange administration can reduce costs, as CalPERS has demonstrated in pressing their major carrier to create a “value network,” in sponsoring a quasi-ACO, and in weeding out less popular plan options. It is also possible that competing with less costly HMO options forced otherwise more costly plans to lower their rates.

4. While carrier (network-type) HMOs have the advantage of flexibility over delivery system HMOs like Kaiser, they usually suffer from the disadvantage of sharing with PPOs the same physicians, who may be unwilling to change their approach to care (including controlling hospital admissions and drug use) to accommodate the HMO risk structure.

5. In spite of its reputation for innovation in care coordination and IT, Kaiser’s premiums are only marginally lower than those of competing carrier HMOs (and, in one case, are slightly higher) suggesting that attempts in PPACA to simulate features of delivery system HMOs may yield smaller savings than hoped. (It is also possible that Kaiser could reduce its large group premiums further but sees no business reason to do so. On the other hand, especially in CalPERS, which does not risk adjust, Kaiser might be expected to attract healthier—and therefore less costly—enrollees than its competitors.)

6. Hospitals can be key to health plan costs, with the most prestigious (and typically most expensive) often essential to the marketability of an HMO or PPO network. Hospitals have recognized this, with the most aggressive showing unwillingness to negotiate rates and—in the case of the Sutter group—insisting that all hospitals in the chain be included. (In California, physicians have been equally aggressive in stifling competition by such approaches as backing a legal ban on physician hiring by corporations—such as hospitals.)

7. In spite of the apparent success of managed competition in the largest employers interviewed, the California market remains dominated by what the CED paper’s authors call “cost-unconscious demand,” in the form of a single FFS plan or a choice of plans with the employer paying a percentage of the premium (as opposed to a fixed dollar amount).

One question the CED paper suggests is: if a managed competition exchange is the optimum approach, why haven’t large employers successfully grouped together to form their own exchange(s)? While small group exchanges have failed because of adverse selection, large groups should be able to avoid this problem. Possible answers include: unwillingness to cooperate with competitors, preference for self-insurance (avoiding state regulations and mandates), union refusals to modify coverage to fit a larger system, and a desire on the part of human resources executives to control their own benefits.

What does the CED paper imply for PPACA health care reform? Not a lot that’s truly encouraging, beyond the apparent success of the CalPERS exchange model. Exchanges are most efficient with a limited number of options; cost consciousness depends on individual subsidies (if any) being in the form of fixed dollar amounts; anti-monopoly measures may be needed to avoid creation of cost-effective networks being stymied by dominant hospitals or physician groups; and exchange administrators must be activist to minimize costs. Unfortunately, PPACA provides few incentives that might lead to any of these being achieved. Also, discouragingly, the experience of the largest California groups suggests that innovations in payment methodology, care coordination, and IT, expected to be implemented for Medicare and then disseminated through the health care system, may produce only marginal savings.

VIRGINIA WINS FIRST SKIRMISH IN THE MANDATE WAR

2010-08-03T10:28:00.000-07:00

The Commonwealth of Virginia won the first round this week in its challenge to PPACA’s individual mandate provision.

Federal Judge Henry Hudson refused to dismiss the suit by Virginia’s attorney-general that argued that the individual mandate went farther than the Commerce Clause of the US Constitution allows, while also violating the Commonwealth’s own Health Care Freedom Act (passed earlier this year in an attempt to derail health care reform).

The Virginia suit is the first state suit against PPACA provisions to have any kind of judicial ruling, but Judge Hudson’s decision merely allows the suit to proceed, while also having no direct impact on any of the other state suits. Nevertheless, Judge Hudson’s comments indicate considerable sympathy for Virginia’s arguments. “This notion that the government’s authority could include ‘the regulation of a person’s decision not to purchase a product’ was new to the federal courts,” the Judge wrote, and so the state’s protest was “legally viable” and could not be dismissed outright. Judge Hudson also noted that the PPACA mandate provision “literally forges new ground and extends Commerce Clause powers beyond its current high watermark,” and that: “unquestionably, this regulation radically changes the landscape of health insurance coverage in America.”

Opponents of the mandate seized on the judge’s opinion as undermining the new reform law, while reform advocates emphasized that this was no more than a procedural opinion.

As Judge Hudson commented: “While this court’s decision may set the initial judicial course of the case,” he wrote, “it will certainly not be the final word.”

MLR REGS PROCESS: LOBBYING, LOBBYING, AND MORE LOBBYING—AND SLIDING

2010-08-01T11:28:00.000-07:00

Recent stories in the New York Times and CQ give some clues about the insurance industry’s efforts to soften the medical loss ratio rules required by PPACA, with estimates of close to 200 comment letters already submitted to the National Association of Insurance Commissioners working groups preparing the draft regulations for HHS.

Insurers are fearful of the PPACA language that would require rebates to enrollees from plans whose MLR falls below 85 percent for large groups and 80 percent for small groups and individual plans, effective January 2011—and with states having the latitude to increase these ratios.

PPACA requires the new regulations to be in place by the end of 2010, but NAIC had hoped to provide their draft to HHS by the end of May. That date continues to slide, first to the end of July, most recently to mid-August, and with individual insurance commissioners (an eclectic mix of elected and appointed Democrats and Republicans) suggesting publication could be later still.

None of this should be surprising. A rigid interpretation of the PPACA language—including in the numerator only medical expenses, reinsurance, and “quality improvement”—could mean the end of many insurance plans. Accordingly, insurance lobbyists have been pressing for the definition of quality improvement to cover not only disease management, care coordination for patients with chronic conditions, 24-hour support for those with chronic conditions, and health and wellness activities, but also claims processing, IT, network development, and fraud detection. So far, given NAIC’s unwillingness to be characterized as a health plan killer, it looks as if all but the last three may be included, and even, possibly, some aspects of fraud detection.

A second set of issues revolves around the definition of a health plan. For example, will an insurer be able to segregate high administrative expense groups into separate “plans,” in order to insulate other business from the possibility of rebates? Complicating the entire process is the PPACA requirement that NAIC consider the “special circumstances of smaller plans, different types of plans, and newer plans.”

Meanwhile, aside from the lobbyists, NAIC is facing political pressures from liberal Democrats eager to see insurers forced to trim their expenses—and profits.

Finally, whatever NAIC recommends, the lobbyists will have an opportunity to continue their efforts in the individual market area next year, trying to take advantage of a PPACA clause that allows HHS to adjust the 80 percent target downward for a state if “the application of the 80 percent minimum standard may destabilize the individual market.”

Pity the elected NAIC commissioners who must go back to their states and justify the final regs.

DO STATE HEALTH CARE COST ESTIMATES AFTER PPACA DEPEND ON POLITICS?

2010-07-30T11:01:00.000-07:00

A couple of states have just released their estimates of the effect of PPACA on state health care expenditures over the next ten years or so. Democratic Maryland sees significant savings for the decade, while Republican Virginia forecasts huge cost increases over the next thirteen years. Is this political bias or just state-to-state differences?

The Baltimore Sun reports that Maryland’s Health Care Coordinating Council estimates that reform will save the state $829 million between now and 2019 and provide coverage to half of those who would otherwise be uninsured. The report also notes that the savings will peak by 2019 and then start to reverse to become expenditure increases.

In contrast, Virginia’s recently filed lawsuit challenging PPACA claims that the commonwealth would incur $1.1 billion in additional Medicaid costs over the 2015-2022 period.

So, is either estimate realistic? Why are they so far apart?

While there may well be some political bias—conscious or unconscious—in the estimates, and especially in the figures accompanying Virginia’s Republican Attorney-General’s lawsuit, there are also reasons why the numbers are very different in spite of the two states being close in population and geography. First, the Maryland forecast includes only “good years,” in terms of federal funding, while the Virginia estimate also includes three ”bad years,” in which additional costs most outweigh increased federal funding. Second, Maryland’s Medicaid program is currently more generous than Virginia’s and will not require the additional expenditures to meet PPACA’s expanded eligibility levels. Third, Maryland’s unique all-payer hospital reimbursement system means that costs will be reduced for Medicaid (and other payers) as the number of uninsured shrinks.

Perhaps more important than whether or not Maryland’s estimates are optimistic or Virginia’s are pessimistic, the comparison points out that health care reform is going to have a significantly greater impact on some states—those with the least generous Medicaid and state-only health care programs—than others.

THE COST (AND BENEFITS) OF PREVENTION

2010-07-25T10:06:00.000-07:00

One of the less controversial provisions of PPACA is the requirement that preventive services be covered by most health plans, generally with no patient cost sharing, for new and renewed enrollment after September 23, 2010 (the six month anniversary of the signing into law of the new act).

All plans other those grandfathered under PPACA must offer coverage of a list of preventive services based on recommendations from the United States Preventive Services Task Force, the CDC’s Advisory Committee on Immunization Practices, and HHS’ Health Resources and Services Administration.

Although grandfathered plans are excluded from the prevention requirement, many large group plans already cover some preventive services at no cost. As large groups modify their coverage and lose grandfathered status, they will become subject to the prevention provisions.

The interim final regulations just published jointly by HHS and the Departments of Labor and the Treasury are accompanied by a list of expected benefits including improved health from prevention or delayed onset or earlier treatment of disease, lower absenteeism and increased productivity, and lower health care costs due to avoidance of later more expensive treatment.

Also included is an estimate of the impact that the prevention coverage provisions will have on premiums. Not too surprisingly, adding coverage of preventive services with no patient cost sharing is going to result in premium increases. These are likely to be highest for those with individual coverage since these plans typically offer fewer preventive services today, and lowest for large groups which typically already include preventive care.

The average premium increases (due to a combination of increased demand for “free” services and transfer of some coverage costs from patients to insurers) is estimated to be about 1.5 percent, or around $200 a year for family coverage, an amount that reform advocates will likely claim is miniscule and opponents will trumpet as outrageously expensive in the middle of a recession.

PUBLIC OPTION REDUX!

2010-07-23T10:52:00.000-07:00

Just when we thought it was dead and buried, our old friend the public option has been resurrected by a trio of Democratic congressmen, headed by Representative Pete Stark.

HR 5808, introduced in the House this week with support from some 120 congressmen, would establish a national public health insurance plan to be offered though the new insurance exchanges. This public option would pay providers at rates tied to Medicare, but with physician payments detached from the SGR formula. Providers would not be required to participate in the public plan in order to participate in Medicare.

The CBO estimates that the public option’s premiums would be 5 to 7 percent lower than private plans offered through the exchanges, and that by 2019, some 13 million individuals would be enrolled through exchanges—if the public option were available. The CBO also estimates that while some providers would decline to participate, many would in the expectation that a plan administered by HHS would attract a considerable population of enrollees (and—not mentioned by the CBO—would probably be administered more loosely than a commercial plan). The CBO’s bottom line is a projection of a reduction in federal deficits through 2019 of about $53 billion, due to lower exchange subsidies and increased tax revenues.

So, is there really any life in the public option? Although the positive CBO scoring will give it some appeal, it seems very unlikely that many in Congress—even supporters of reform—will want to revisit the reform battlefield, especially in an election year. (Actually, some Republicans might be delighted to extend the reform debate to include such a socialistic concept.) So, Representative Stark and his fellow liberals will gain a little political traction, but—whatever its merits or otherwise—the public option is likely to quickly find itself returned to the tomb.

WELCOME TO THE PPACA COST (OR SAVINGS) DARTBOARD

2010-07-21T14:08:00.000-07:00

One thing about a democracy, everyone is entitled to publish their predictions about the future, and on the costs (or savings) of the Patient Protection and Affordable Care Act over the 2010-2019 decade, there are enough to cover the dartboard. Whether any have hit the bull’s-eye is another question.

The two most authoritative darts so far are those of the CBO and CMS’ Office of the Actuary. Each assumes that reform will be implemented exactly as stated in the new law, with no successful legal challenges and with legislated cost reduction targets achieved. The CBO forecast is limited to federal spending, while the OA projections cover both federal and overall national expenditures.

The CBO’s well-publicized (by reform advocates, anyway) dart hit the board immediately prior to passage of PPACA with an estimate of federal savings of $86 billion (excluding advance premiums from the new CLASS long-term care insurance program), or slightly less than one percent of projected federal health care spending.

The OA dart, thrown a month later and applauded by reform opponents as contradicting the CBO forecast, landed on the $289 billion number for increased federal spending (prior to CLASS premium collections), and on $310 billion for increased national health care expenditures.

Other darts have been tossed from the left and right of the board by health care economists, including—from the left—David Cutler, and—from the right—Douglas Holtz-Eakin. Not too surprisingly, their darts hit far apart, with Professor Cutler and his co-authors (of a Commonwealth Fund paper) forecasting federal savings of $400 billion and national spending reductions of some $590 billion, and Holtz-Eakin and his co-author (of a Health Affairs article) projecting increased federal costs of a horrendous $554 billion (possibly along with the end of American civilization).

What are we to make of a dartboard spread of more than a trillion dollars?

Let’s start with the CBO and OA numbers.

Trying to reconcile the two governmental forecasts is impossible without more detail of their respective models, although it is apparent that assumptions about individuals’ coverage choices vary significantly. Even approaches to counting the covered population are different: CBO uses an FTE approach, while OA counts enrollment, so that, for example, dual eligibles are counted under both Medicare and Medicaid, leading to total insured enrollment appearing to exceed the entire US population. One common feature of the two forecasts, however, is the very limited savings each believes will be achieved by health care system “modernization,” such as use of ACOs, more effective IT, new payment approaches, and increased emphasis on quality and effectiveness.

Moving on to the health care economists, the range of scores across our dartboard is truly startling.

Professor Cutler and co-authors Karen Davis and Kristof Stremikis start with CBO’s estimate of federal savings, modify this to include all newly covered individuals’ spending, then adjust the result to reflect their estimates of savings from “modernization” and use of exchanges, to give reductions of $590 billion in national health expenditures and $400 billion in federal spending.

Is this a well-aimed dart, or merely a triumph of hope over experience? Certainly, Cutler et al seem cavalier about costs; in comparing their estimate of spending before adjustments with OA’s $311 billion higher figure, they comment: “$30 billion a year is very small on the scale of health expenditures…” (It’s tempting to ask Professor Cutler for the loan of a quarter; with this casual attitude to money, he’ll probably offer his wallet.) Aside from this modest $311 billion item, the major differences between Cutler et al ‘s numbers and those of the CBO and OA are in savings from exchanges and “modernization.” Cutler et al believe that use of exchanges will reduce average insurer administrative costs by three percent, compared with the CBO’s estimate of just 0.4 percent, and that system “modernization” will trim medical costs by one percent a year, each year after 2014, compared with the CBO and OA projections of close to zero.

Meanwhile, on the right-hand side of the dartboard, Douglas Holtz-Eakin and co-author Michael Ramlet also start with the CBO numbers, but reject almost all federal spending cuts as politically infeasible, then add in $260 billion for health grants and physician reimbursement not mentioned in PPACA, to give their estimate of a monster federal spending hike of $554 billion.

So, who is closest to the bull’s-eye? Of the governmental forecasters, OA has the advantage of more detailed federal spending data, so that its estimates for Medicare and Medicaid may be the more credible. On the other hand, one area where OA diverges most from the CBO numbers—by some $330 billion—is in projected revenue from drug manufacturer fees, hospital insurance taxes, and other provisions, which might be more within CBO’s budgetary forecasting capabilities. Inserting the CBO estimates into the OA forecast would give a net reduction of federal spending of $40 billion—reasonably close to the CBO savings of $89 billion.

In contrast to the conservative approaches of CBO and OA, the economists’ darts seem to have been thrown somewhat wildly. Cutler et al’s projection of exchange administrative savings is surely too high given that two-thirds of those privately insured are in large groups, whose costs will be little affected by the exchanges, while their estimates of savings from “modernization” assume a remarkable degree of provider cooperation in revenue reduction. These optimistic forecasts aren’t infeasible, but they assume a degree of behavioral change by insurers and providers that seems unlikely without a major restructuring of the health care system.

The Holtz-Eakin forecast is as overly pessimistic as Cutler et al’s is optimistic. The contention that virtually every PPACA spending cut will be rejected as politically infeasible seems close to absurd, given both political parties’ promises to cut the deficit. Almost certainly, there will be some yielding to lobbyists, but a more likely effect will be modest shortfalls in savings from, for example, IPAB-recommended payment changes.

The conclusion? While both the CBO and OA darts look to land somewhere close to the target in terms of federal expenditures (except for the difference in revenue estimates), the path to the national spending bull’s-eye is much more uncertain. Some of the reform law’s changes are likely to result in insurer industry consolidation, which could begin to change the balance between providers and insurers and lead to lower medical costs. At the same time, providers’ revenue expectations may—in the face of Medicare cuts—result in further cost shifting to the private sector. Basic economic theory may also play a major part: reform-driven demand will increase much faster than supply, implying further increases in medical prices (as appears to have happened in Massachusetts). And, finally, the individual mandate may be overturned by the courts, undermining much of the foundation of PPACA outside of Medicare and Medicaid.

PLANNING FOR MLR REGS—AND CONTINUED RECESSION?

2010-07-14T09:54:00.000-07:00

The regulations for PPACA’s limits on medical loss ratios have not yet been published, but faced with declines in enrollment due to the recession, insurers are busy making plans to slash administrative costs.

Just in the past couple of days, Blue Plans in North Carolina and Oklahoma have announced cuts of up to twenty percent in administration, and other plans are expected to follow. Marketing is one obvious target area, as this will be most affected by the implementation of insurance exchanges for individual and small group business.

While reform is expected to increase insurer enrollment and more than balance recession losses, the imposition of the MLR limits (85 percent for large groups, 80 percent for small groups and individual plans) is likely to force further cuts in administrative costs, especially for plans with the least large group business (in which typical MLRs are already above the 85 percent level).

PITFALLS OF PPACA #7 – THE INDIVIDUAL MANDATE

2010-07-06T09:43:00.000-07:00

The individual mandate is the single most controversial feature of the Patient Protection and Affordable Care Act. Everyone who can afford coverage—unless an undocumented immigrant or exempted on religious grounds—is required to have it or pay a penalty of $695 or 2.5 percent of income.

The rationale is straightforward: without a mandate, many people would wait until they needed care before buying insurance, driving up premiums for those with ongoing coverage, and potentially creating an “insurance death spiral” as the higher premiums lead to increasing numbers simply dropping their coverage. (This last part is basically what we have today, but will be magnified by PPACA’s ban on preexisting condition exclusions.)

The individual mandate was preferred for obvious reasons over the alternative of a general tax offset by credits for premiums paid. Democratic lawmakers had no wish to be blamed for imposition of a new tax—no matter how reasonable the arguments in its favor. In fact, as President Obama made clear in an ABC television interview: “I absolutely reject that notion [that the penalty is a tax].”

The individual mandate has now become the centerpiece in Republicans’ legal fight against reform. Suits challenging PPACA have been filed by the attorneys general of nineteen states (with the first, in Virginia, already being argued), with the constitutionality of the mandate a key issue in every case.

The latest Health Affairs includes articles affirming and denying the mandate’s constitutionality, by Timothy Jost and Ilya Shapiro respectively. Jost argues that the mandate is covered by the commerce clause of the Constitution, allowing the government to regulate interstate commerce—broadly defined as all economic activity—since a decision not to buy insurance has an economic impact on those who do have coverage. Shapiro argues that the government’s constitutional power cannot extend to a non-activity, like not buying insurance. Both authors also discuss whether or not the mandate penalty is really a tax and, if so, whether the government can impose it. Not surprisingly, Jost concludes that the penalty is a legitimate tax, and Shapiro concludes the opposite.

The Supreme Court’s eventual response is anyone’s guess, although reform advocates might well worry about the Court’s present conservative leaning. The timing of a Court ruling is equally uncertain; Jost notes that the Court might find the issue premature until the government attempts to impose the mandate penalty on specific individuals, something that will not happen until 2015 at the earliest, while Shapiro suggests that the Court may try to find a way to duck the constitutionality issue entirely.

All this uncertainty has important implications. States involved in the various legal challenges may drag their feet in setting up the insurance exchanges, possibly leaving the federal government to step in at the last minute. Insurers, already faced with actuarial problems, will face even more uncertainty in estimating enrollment from the currently uninsured (and typically healthier) population. And individuals, of course, will have their own gamble: risk the penalty or not.

What would be the possible impact of a Supreme Court finding of unconstitutionality? The federal government will lose anticipated penalty revenues of some $10 billion a year. Insurance premiums for individuals and small groups will rise with the loss of enrollment of many younger and healthier individuals. Most important of all, the number of uninsured will be significantly higher than if the penalty were in force, somewhere between the CBO estimate (assuming mandate penalties) of 22 million and today’s 50 million.

The reactions of individual states to an unconstitutionality finding would presumably reflect their politics, with states to the right of center being able to claim a fundamental failure of reform, especially as premiums increase in the absence of new healthier enrollees. Left-leaning states might take the option, however, of imposing their own individual mandates consistent with their state constitutions—much as Massachusetts did in 2006, although possibly with a different, more effective structure that would further lower the number of uninsured. And that might make for some interesting comparisons.

A LITTLE GOOD NEWS—WELL, SORT OF…

2010-07-06T09:35:00.000-07:00

Those who hate big insurers won’t be happy, but recent comments by Wellpoint’s VP for investor relations at an investment conference in Boston suggest that some details of health care reform may be more effective than expected in reducing administrative costs. The combination of the medical loss ratio rules (still to be defined by HHS), limits on premium increases (also awaiting final rules), and insurance exchange competition is expected—at least by Wellpoint—to cause a number of smaller insurers to drop out of the market or be acquired by larger firms.

This forecast is supported by comments from a Sanford Bernstein analysis that projects that at least one hundred insurers with 200,000 enrollees or fewer will be pushed out of the health insurance market by the effects of reform.

These estimates also won’t please those who believe that “if some competition is good, more is better.” On the other hand, having insurers with high administrative costs leave the market will lower average costs and—presumably—premiums, as well as strengthening the remaining companies’ negotiating position in setting provider payments.

DOC FIX FIXED TEMPORARILY—AGAIN. NOW WHAT?

2010-06-28T10:15:00.000-07:00

As expected, the House fell into line last week with the Senate’s six-month extension of the delay in imposing SGR-based Medicare physician payment cuts, just in time to prevent docs from getting checks 21 percent smaller than a month earlier.

Congress has been ducking the payment cuts almost since the SGR mechanism was put in place in 1997, fearful of offending physicians and fearful of reducing access as docs quit Medicare in disgust. Time may be running out, however, with the passage of health care reform with its own increases in coverage and potential Medicare payment restrictions. It’s no coincidence that Congress is getting closer and closer to the brink of letting the cuts take place, and imposing shorter and shorter delays in their imposition.

So, having bought themselves another six months, what should our elected representatives do?

Simply leaving the SGR process in place is less and less an option. After thirteen years, and with a potential thirty percent payment cut in 2011, SGR is an increasingly hot political potato. On the other hand, proposing any change is politically risky, and no change is likely before the November 2010 election. After that, Congress may get serious.

One politically courageous approach then would be to tie physician payment updates to hospital region cost increases, reflecting the Dartmouth Atlas findings of wide variations in Medicare costs and cost growth. (Take that, New York Times reporters!) Regions with highest physician costs per beneficiary and highest cost growth would be granted smallest physician payment increases. Docs in the high cost regions would undoubtedly shrilly object, with some abandoning Medicare (not necessarily bad, given that more docs leads to more utilization), while their peers in lower cost areas would look on in amusement. Worth trying? It might be a lot quicker and easier than waiting for the Independent Payment Advisory Board to make its recommendations.

PITFALLS OF PPACA #6 – PROBLEMS OF PILOTS AND DOUBTS ABOUT DEMONSTRATIONS

2010-06-25T10:27:00.000-07:00

As might be expected of reform legislation, the Patient Protection and Affordable Care Act places a lot of emphasis on innovation. Reasonably enough, most of the potential changes—at least in Medicare—are to be preceded by pilot or demonstration projects designed to test their feasibility. In fact, according to one health care blogger with time on his hands, PPACA includes no less than 312 mentions of demonstrations and 80 mentions of pilots.

Just how important are all these pilots and demos? Harvard’s David Cutler, who served as a key advisor to the Obama administration in developing the reform strategy, clearly believes they are vital. Writing in the June Health Affairs, he stresses the need for rapid implementation of the pilots and demonstrations in order to help achieve eventual savings of “enormous amounts of money while simultaneously improving the quality of care.”

How realistic are Professor Cutler’s expectations?

CMS’ Medicare chronic care demonstrations provide some clues. With data showing that the costliest 25 percent of beneficiaries account for 85 percent of total Medicare spending and that 75 percent of the high-cost beneficiaries have one or more major chronic conditions, the demonstrations were expected to show big benefits from care coordination—the major theme of PPACA’s proposed demos.

The outcomes were decidedly discouraging, as noted by MedPac’s 2009 report to Congress: “Results suggest that some of these programs may have modest effects on the quality of care and mixed impacts on Medicare costs, with most programs costing Medicare more than would have been spent had they not been implemented….In almost all cases, the cost to Medicare of the intervention exceeded the savings generated by reduced use of inpatient hospitalizations and other medical services.”

What went wrong with such a promising effort? And what are the implications for PPACA’s pilots and demos?

The simple answer is that few providers will participate in a pilot or demonstration if it’s likely to cause their income to drop. As a result, CMS must attract “volunteers” with generous promises of shared savings or payments for additional services–essentially, bribes to compensate for lost revenue and the time-consuming process of dealing with CMS bureaucracy. So far, the bribes have outweighed the savings in almost every case. Worse still, and often overlooked in evaluations of pilots, participating providers are likely to be those most able to achieve savings—the “good guys,” rather than the typical—with resultant optimistic skewing of the results.

Will the PPACA projects be more successful? Even assuming that the heavy hand of government can be lightened to speed up project implementation and minimize the oversight burden, the picture is gloomy. PPACA includes four main categories of pilot and demonstration projects: bundling, accountable care organizations, pay-for-performance, and coordinated care. Of these, only some aspects of pay-for-performance avoid the problems of trying to tie together activities of multiple providers—exactly the problems that sank the chronic care demos.

While new IT systems might facilitate coordination of care, the jealously guarded independence of providers (and their jealously protected incomes) will continue to be a huge obstacle. Theoretically, the Independent Payment Advisory Board could recommend implementation of some changes (for example, bundling) without the PPACA pilots and demos, but this could leave IPAB without the required actuarial justification for such recommendations.

The bottom line? Trying to fix our fragmented and unorganized health care system from the bottom up, through pilots and demos, probably isn’t going to work, at least in any acceptable timeframe—and certainly isn’t going to lead to Professor Cutler’s hoped-for savings of enormous amounts of money.

NO SURPRISE! MANDATE ROLLBACK FAILS

2010-06-19T10:53:00.000-07:00

No one was astonished this week when a Republican effort to repeal the individual mandate in the Democrats’ health care overhaul failed Tuesday afternoon on a largely partisan vote.

A procedural motion to roll back the individual mandate was defeated 187-230, with essentially the same ayes and nays as for the final House vote on the original reform bill.

Republicans apparently pushed for the vote in order to be able to reiterate their opposition to—and Dems support for—a law requiring individual Americans to purchase health insurance. However, given the almost total lack of media coverage, the vote may have aroused interest only in the respective caucuses.

PITFALLS OF PPACA #5 – THE EFFECTIVENESS OF IPAB—MAYBE?

2010-06-19T10:39:00.000-07:00

For the first time, the Department of Health and Human Services may be able to sidestep Congress and impose its own Medicare cost-containment policies. At least, that’s what Section 3403 of the Patient Protection and Affordable Care Act promises in creating the Independent Payment Advisory Board.

The action, so far as the public is concerned, will begin in 2014. On January 15, 2014, and annually thereafter, IPAB will make recommendations to Congress for cutting Medicare spending growth if the CMS Chief Actuary projects that per capita spending will grow faster than the average of the medical services CPI and the overall urban consumer CPI (or, after 2019, the GDP growth rate plus one percent). If Congress doesn’t pass either IPAB’s or its own legislation to meet the IPAB spending reductions within six months, HHS must implement the recommendations. IPAB may also make non-binding recommendations relating to other aspects of Medicare and to overall national health care costs.

The IPAB process for recommending and imposing changes to Medicare straddles three years. A determination in the first year (starting in 2013) by the Chief Actuary that growth will exceed the CPI targets is followed, in the second year, by IPAB submitting recommendations—which must reflect specific spending reduction targets—to Congress, and, in the third year, by HHS’s implementation of the recommendations (assuming they have not been blocked by Congress passing its own legislation).

At first sight, the IPAB process, in depoliticizing much of the authority for payment policy, seems like a huge step towards controlling the cost growth of Medicare (and of overall national health care, of which Medicare is a large component). However, IPAB’s ability to constrain spending may be limited by factors beyond its control, including:

1. Hospitals and hospices are placed “off limits” for IPAB cost cutting recommendations (other than via changes to Medicare Advantage) until 2020.
2. Changes that might raise revenues or premiums, increase beneficiary cost-sharing, restrict benefits, modify eligibility criteria, or “ration healthcare” are also excluded from IPAB’s purview.
3. The growth rate reduction percentages that will be invoked are less—at least in the earlier years—than the expected rate by which Medicare growth will exceed CPI targets.
4. Some providers may take a “first strike” approach to the threat of IPAB spending cuts (for example, by increasing utilization) in the period before the first determination by the Chief Actuary that target rates have been exceeded.
5. There is no guarantee that IPAB recommendations will succeed in reducing growth by the required amount, especially in later years when few “low-hanging fruit” remain. There could be a significant “bubble effect” as cuts in one area are balanced by increased growth elsewhere.
6. In election years, Congress may be particularly unwilling to approve IPAB recommendations, especially if they can be characterized by lobbyists as threats to beneficiary care.
7. Congress may, at any time, make changes to Medicare that increase spending growth.

One big unknown is the resolution of the “doc fix.” If Congress fails to permanently resolve the SGR issue, and physician payments are slashed by 20 percent or more, medical service costs will increase more rapidly in following years as physicians attempt to recoup lost income by driving up utilization (and intensity, too, through some diligent upcoding).

A New England Journal of Medicine article by Timothy Jost raises additional concerns. Jost notes the contradiction between PPACA’s emphasis on IPAB members being nationally recognized experts and the executive grade salaries they will receive. Certainly it’s hard to see a major league health care expert giving up speaking and writing fees to become one of a panel of eighteen that emerges once a year. Although IPAB should attract competent individuals, it will be weakened in dealing with Congress by the lack of big name credibility.

Jost also worries that the annual growth reduction targets will lead to short-term fixes, rather than longer-term changes that would bend the cost curve. Given that Medicare cost growth in the next few years is likely to exceed the CPI rates, almost regardless of policy changes, a series of one-off reductions is more likely to comply with the targets than more far-reaching changes in payment methodology.

What’s likely to be the result of IPAB’s efforts? The CBO—assuming that reduction targets would be hit—estimated Medicare spending reductions of $15.5 billion over ten years, approximately 0.3 percent of projected costs . The CMS Chief Actuary, however, has expressed skepticism, noting that history suggests that the target growth rates may be unachievable. Conservative economist (and former CBO director) Douglas Holtz-Eakin, writing in Health Affairs, dismisses IPAB’s impact out of hand on the grounds that Congress will find its recommendations politically infeasible.

A more probable result than that forecast by the CBO or Holtz-Eakin is that IPAB will be optimistic in its forecasts of spending reductions, and that Congress will turn a blind eye to this optimism while also occasionally loosening payment restrictions as beneficiaries find access to care increasingly difficult—a scenario that might produce some fraction of the CBO savings estimate.

NEW FED REGS MAY SLASH GRANDFATHERING

2010-06-16T10:52:00.000-07:00

The Department of Health and Human Services has issued its regulations defining what health plans may be “grandfathered” under reform, along with estimates of the percentage of plans likely to be affected.

The regulations will surprise those who took a broad interpretation of President Obama’s promise that anyone who likes their current plan can keep it. While the new regs don’t contradict the president’s promise, they do reflect a narrow reading of it. Changes that would result in a plan being no longer grandfathered (and therefore subject to all the provisions of reform) include:

· Reductions in benefits
· “Significant” increases in co-payments
· Any percentage increase in coinsurance
· “Significant” increases in deductibles
· “Significant” reductions in employer contributions
· Reductions in annual payment caps
· Changes in insurance companies (excluding self-funded administration)

However, it appears that any increases in coverage would not trigger exclusion from grandfathering.

The effect of the new regs will vary according to the size of plan. HHS estimates that large group plans (with over 100 employees) will see fewest changes to their grandfathered status, since these are the most stable types of plan, with more than 80 percent still grandfathered in 2011, and more than half still grandfathered in 2013, immediately prior to the establishment of insurance exchanges and most other reform provisions. HHS also estimates that smaller group plans will see a much faster move out of their grandfathered status as they attempt to control costs by tightening benefits; 70 percent are projected to be grandfathered in 2011, but only a third will retain their grandfathered status by 2013. Individuals will be most impacted by the new regs: because of their typical plan “churn,” almost all will switch from a grandfathered plan over the next three years.

HHS cautions that the estimates will depend on medical inflation and other factors; higher medical costs will likely cause more employers to seek to cut benefits and therefore lose their plan grandfathering. It is also possible—but not considered by HHS—that insurers will make extra efforts to minimize benefit changes in order to avoid what they may perceive as the more intrusive aspects of reform.

A very rough guess—since the HHS estimates reflect numbers of plans rather than numbers of insureds—is that three-quarters of those currently covered will be in grandfathered plans in 2011, but only around half will still be grandfathered in 2013.

PITFALLS OF PPACA #4 – ACCOUNTABLE CARE ORGANIZATIONS: HIT OR MYTH?

2010-06-14T11:55:00.000-07:00

In addition to Medicare Advantage payment cuts and potential reductions in fee-for-service payment updates, PPACA includes various provisions intended to facilitate ongoing Medicare cost containment, notably creation of the Independent Payment Advisory Board and the Center for Medicare and Medicaid Innovation. In addition to CMI’s broad scope, PPACA requires specific pilot projects, including (in Section 3022) demonstration of accountable care organizations (ACOs).

What does PPACA mean by an ACO? Dr. Elliott Fisher of Dartmouth Medical School, a primary originator of the concept, defined it as “a provider-led organization whose mission is to manage the full continuum of care and be accountable for the overall costs and quality of care for a defined population” and listed several provider groupings that could form ACOs. PPACA provides additional criteria, including having a formal legal structure and administrative systems, meeting CMS requirements for quality assurance and reporting, and serving at least 5000 Medicare beneficiaries. PPACA also specifies a deadline for the ACO pilot: “Not later than January 1, 2012, the Secretary shall establish…a program…”

The goal of an ACO is to reduce costs and improve quality of care through cooperation and coordination among providers, similar to that achieved by integrated delivery systems like Geisinger, HealthPartners, and Intermountain Health Care, but within what may be essentially a virtual organization superimposed on a loose network of providers and covering only a subset of patients.

The ACO concept has been enthusiastically supported by an impressive list of health care experts, plus Dartmouth and the Brookings Institute, but not by Jeff Goldsmith, the author of a critical piece posted on the Health Affairs blog. Goldsmith is particularly skeptical about the difficulty of getting providers to work together, noting “a thundering absence of collegiality – in my view, the central precondition of assuming risk and managing care…” Goldsmith is also doubtful about economic aspects of ACOs: “40% of physicians no longer have any Medicare hospital-related fee income. So squashing hospitals and physicians back together into economic interdependence in a joint hospital/physician economic pool makes no real-world sense.” In a rebuttal piece, Brookings’ Dr. Mark McClellan and others defended ACOs as a critical step away from volume-based health care payment and toward better care at lower cost, but provided no examples of successful implementations.

And that’s the problem. Like some mythical medieval creature, the ACO has not been sighted, other than within existing formal organizational structures in which providers are subject to centralized management—and payment.

This doesn’t mean that we won’t be reading about some ACO successes. The Brookings-Dartmouth ACO Learning Network has attracted an impressive list of interested provider organizations and is assisting in pilot implementations. However AultCare and Carilion Clinic—the Network’s first pilot sites—both have existing health plans and have much in common with integrated delivery systems. Even so, efforts to revamp IT and financial systems have been substantial, with key details—like how to reward providers for cost savings—still to be worked out, according to a recent article in Modern Healthcare.

Prospects for the virtual forms of ACOs seem much less promising, given the need to create, more or less from scratch, the support systems necessary to make the concept feasible, plus the extreme difficulties of changing the mindset of providers who may demonstrate Goldsmith’s “thundering lack of collegiality.” Vermont—where the ACO concept has been studied since 2008, and where the schedule for pilot project start-up has already slipped a year, to 2011—provides a measure of the time and effort involved, with a recent Commonwealth Fund report providing a lengthy list of “lessons learned” (so far, that is).

An even greater obstacle than lack of provider collegiality may be provider fear of loss of income. Physicians used to having control over their own fee-for-service world may well hesitate to sign up for a “share of savings” that is dependent on reduced billings by ACO providers, especially if the share will be net of the administrative costs necessary to support the ACO.

None of this means that Dr. Fisher and his colleagues are wrong in their objectives. If the health care “waste” identified by the Dartmouth Atlas project and other studies is to be reduced, providers must work cooperatively. It may even be that successful implementation of ACO concepts, first by formal integrated delivery systems, and then by less tightly organized systems with existing central management, will start to put enough pressure on other providers they too begin to look beyond billings to better integrated patient care.

Or more likely not, at least in the near term, given the practical and behavioral problems involved. ACO principles of a continuum of care, resource planning, and performance measurement represent huge challenges to all but centrally managed systems. Unless the CMS ACO pilot is to be based on such a system, its deadline seems unlikely to be met, and yet its objective—to use another medieval analogy—of finding a way to turn the leaden dross of health care waste into the gold of high performance care depends on making the ACO concept work in much looser networks —and CMS has shown very little talent for alchemy.

ROLLBACK RHETORIC—BUT WHO’S NOTICING?

2010-06-14T11:52:00.000-07:00

Politico.com has a couple of related stories about the ongoing Republican opposition to health care reform.

The first is about lack of media interest in the GOP’s latest bill to repeal reform—a non-starter, obviously, but designed to capture public attention in the run-up to the November elections. Politico.com’s headline says “Spill Drowns Out GOP Health Message,” and notes that with public attention on the BP oil spill, there’s not much interest in an issue that’s starting to be old—except for the effective PR value associated with the mailing out of $250 checks to seniors whose drug expenses fell into the “donut hole.”

The Medicare D check mailing is part of the second story, too—a report of President Obama’s speech to seniors at a nationally televised town hall meeting that focused on the GOP threats of repeal of the benefits of reform, including—as well as the $250 checks—free preventive care, and new protections for the insured.

Expect to see plenty of Democratic ads featuring those checks as we get closer to November!

DEMOCRATS PREPARE TO SPEND BIG $ ON REFORM SUPPORT

2010-06-08T11:03:00.000-07:00

According to politico.com, Democratic allies are about to initiate a huge publicity campaign—the Health Information Center—to defend health care reform.

The estimated $125 million campaign is expected to be co-chaired by former Senate Majority Leader Tom Daschle and by Victoria Kennedy, the late Senator’s widow.

Funding is already being raised from unions, businesses, and foundations, with a budget target of $25 million a year to cover the five years through the implementation of the bulk of PPAC’A’s provisions.

PITFALLS OF PPACA #3 – INSURANCE EXCHANGE ISSUES

2010-06-07T09:26:00.000-07:00

(This is the third of a series of commentaries on details of the 2010 health care reform legislation.)

Although the Patient Protection and Affordable Care Act incorporates numerous health care system fixes, including new regulations to protect consumers, new rules for insurers, expansions of existing programs, new payment incentives and subsidies, and penalties for non-coverage, it mandates almost no structural changes, with one big exception: establishment of insurance exchanges in each state.

Insurance exchanges, designed to facilitate enrollees’ coverage choices within a competitive market, are not new. Exchange mechanisms have been used for several years for employee coverage selection by the federal government and by many states. And, since 2007, Massachusetts has operated what is probably closest in design to the PPACA concept—the Connector.

What’s been the experience so far?

The Federal Employees Health Benefit program provides by far the largest existing exchange, used by eight million government employees and retirees. Although employee surveys show that the FEHBP model works well in facilitating coverage choice, its market competition effect is limited. With no standard benefit package, apples-to-apples comparisons of coverage value are impossible, while with the government picking up some three-quarters of premium costs, employees may be relatively insensitive to price differences. While FEHBP presumably gains the lower premium advantages of large groups, the rate of premium increases has been close to that of the non-exchange private sector, according to a 2006 GAO report. (Premiums for California’s CalPERS, the largest state exchange, rose slightly faster than the private sector’s, according to the same report.)

Efforts have also been made by states and business groups to create exchanges for private sector employee coverage but, almost without exception, these have failed. In most cases, the primary problem was adverse selection: insurers marketing outside the exchange cherry-picked the best risks, leaving older and sicker groups to seek coverage via the exchange, which inevitably found itself in a death spiral as premiums rose and the better risks found coverage elsewhere.

So what about Massachusetts?

Although Massachusetts’ Connector is the prototype for the PPACA exchanges, extrapolating from the Connector experience requires caution. The state reform law that created the Connector was enacted in a strong economy, in a state with an exceptionally low level of uninsured, and with bipartisan political support and the backing of providers, consumers, and businesses, a combination unlikely to be true when the PPACA exchanges are rolled out. The Connector has two components: a subsidized program for lower-income individuals who do not qualify for other government coverage, and a much smaller (only 20,000 participants) unsubsidized program for small groups and individuals. As with FEHBP, the Connector seems to have functioned well in helping consumers choose health plans, but has had little success in controlling premium costs—perhaps because enrollment is low relative to the overall market. The Connector board has rejected most plans’ premium proposals for the next year and insurers are currently threatening to withdraw from the exchange.

Does PPACA adequately consider the experience of other exchanges? The regulatory details of PPACA’s exchanges are yet to be determined, but the legislative language implies some potential problems:

1. Enrollment numbers will depend on consumers’ acceptance of the individual mandate. (The CBO estimates 24 million exchange enrollees, assuming the mandate is found constitutional.) Massachusetts’ mandate was imposed pre-recession, but even so, the uninsured rate has only been halved, indicating that some states—Texas and Florida, for example—may continue to have large numbers without coverage.

2. Exchange participation by insurers will be voluntary, suggesting that some plans may prefer to focus entirely on their grandfathered business. Any insurer will be able to offer non-grandfathered coverage outside the exchanges (but must offer similar benefits), potentially offering cherry-picking opportunities to carriers who avoid the exchanges and the single risk pool for exchange participants.

3. Some smaller states, and others with low percentages of uninsured, may find that the number of exchange options results in insufficiently diverse risk pools, in which older and sicker individuals may dominate. PPACA provides for the option of separate pools and exchanges for individuals and small groups (Massachusetts combined them), as well as Co-Op plans (a sop for public plan advocates) and Multi-State plans (to be established by the federal Office of Personnel Management, FEHBP’s parent), each with up to four benefit levels, plus a young adult catastrophic coverage plan, plus an under-21 plan. While PPACA includes some risk-sharing provisions, this elaborate structure seems sure to present some actuarial challenges.

4. The flexibility (or vagueness) of benefits required to be offered seems likely to make value comparisons difficult. PPACA includes only a generic list of covered services, with specific benefits “to be determined by the Secretary of HHS and equal to the scope of benefits under a typical employee-based plan,” and also allows additional benefits to be offered beyond these. (In contrast, Massachusetts initially required plans to provide similar “actuarial values,” but recently decided to mandate identical benefits to make price comparison easier.)

5. Some state governors have indicated that they will not comply with the requirement to establish an exchange. While PPACA would then require the federal government to create an exchange, the lack of state support could be problematic, especially since the legislation provides only twelve months for federal implementation.

So, how likely are the new exchanges to succeed? Much depends on the extent to which the final regulations can bridge the gap between the PPACA provisions and experience. In most states, the exchanges should be effective in facilitating coverage selection, although the efforts that Massachusetts found necessary to establish and maintain an exchange serving a very small population imply that a large state with many currently uninsured could find this a big task. The exchanges should also reduce administrative costs for participating plans as broker commissions and some marketing and enrollment costs are eliminated. (The CBO estimates reductions of 1 to 4 percent in small group premiums and 7 to 10 percent for individual premiums for exchange participants.)

The bigger problem may be that of increased medical costs, as relatively static provider supply is faced with demand increased by the previously uninsured. (Even with only a small percentage increase in the number of insured, Massachusetts health care costs have increased faster than most other states since reform was implemented.)

Insurance exchanges do have considerable cost-containment potential, but if experience is any guide, the PPACA versions will fall short unless their enrollment numbers are large enough to attract competitive rates from insurers and provide risk pool diversity, and unless competing plan benefits are sufficiently comparable that consumers can determine best value—and even then, exchange savings may be offset by the effects of reform-driven imbalances between consumer demand and provider supply.

THE BERWICK NOMINATION – REFORM RHETORIC REDUX

2010-06-01T15:42:00.000-07:00

Politico.com, Kaiser Health News, The Health Care Blog, and other on-line health care news and opinion sources all have lengthy pieces on Republican threats to derail Dr. Donald Berwick’s nomination as Administrator of the Centers for Medicare and Medicaid.

Dr. Berwick’s specific sins, according to the GOP, relate to his work for—and admiration for—Britain’s National Health Service, which gained him an honorary knighthood in 2005.

A l-e-n-g-t-h-y piece in THCB by Maggie Mahar on Dr. Berwick’s nomination is titled “Support for Berwick to Head Medicare Grows,” and emphasizes the apparently almost unanimous support (so far) for Dr. Berwick from medical groups around the country, including the American Hospital Association. This support is obviously vital to the nomination, but it could be swamped in the rapids of political rhetoric.

Given Dr. Berwick’s exemplary career experience, it seems highly unlikely that he will fail to be confirmed. What is certain, however, is that the confirmation hearings—tentatively scheduled for late June, but with the possibility of delay—will serve as an opportunity for opponents of health care reform to revisit the entire reform debate. Dr. Berwick’s hearing will provide a national stage—four months or less before the November election—for concerted attacks on the Democrats’ reform legislation, attacks that Senate Republicans will make every effort to prolong. And that could have a very big impact on reform, as some of its Congressional supporters are defeated and others suddenly discover that they really weren’t as enthusiastic as they said they were back in 2009.

PITFALLS OF PPACA #2 – THE GRANDFATHERING PROBLEM

2010-05-27T10:32:00.000-07:00

(This is the second of a series of commentaries on details of the 2010 health care reform legislation.)

Throughout his election campaign and his subsequent efforts to achieve passage of health care reform, President Obama assured Americans that anyone with existing coverage could keep that coverage. Consistent with the president’s promise, Democratic lawmakers worked to include language guaranteeing continuation of coverage in the reform legislation.

They may have been too successful.

Section 1251 of the Patient Protection and Affordable Care Act provides assurances that nothing in the Act requires that an individual terminate existing coverage, excludes many of the provisions of the Act from applying to existing coverage, and goes on to guarantee that existing coverage can be extended to new employees (in a group plan) and additional family members (if allowed by any plan).

On the one hand, these provisions counter some concerns about reform (at least for those who understand them). On the other hand, the grandfathering of existing coverage undermines much of the intent of other parts of PPACA. Grandfathered plans are exempt from each of the following reform requirements (and others):

(1) Elimination of cost-sharing for preventive care
(2) Elimination of annual limits (individual plans only)
(3) Elimination of preexisting condition exclusions (individual plans only)
(4) Provision to consumers of “plain language” plan information
(5) Availability of a standard appeals process
(6) Limitation on premium variations by age and other factors
(7) Guaranteed availability of coverage
(8) Guaranteed renewal of coverage
(9) Prohibition on discrimination based on health status
(10)Provision of comprehensive health care coverage

In other words, grandfathered plans will be able to continue most of the practices that have angered consumers—and discriminated against those most in need of coverage.

There’s another problem, too. In the small group market—and possibly also in the individual market in some states—the effect of grandfathering may be to reduce the diversity of the insurance exchange risk pools. Insurers will be eager to perpetuate their current plans and avoid most of the new regulatory requirements, while employers with younger and healthier employees will want to retain their prior lower-cost coverage, leaving older and sicker groups to migrate to the exchanges, with regulations and rates more favorable to them. The effect in states currently with high numbers of uninsured—and therefore potentially with the most exchange enrollees—may be minimal, but in others the result may be that premiums are higher for plans available through exchanges than for those outside, while many insurers may decide to focus on their present less-regulated business and simply avoid the exchanges.

ACCELERATING (SOME PARTS OF) REFORM

2010-05-26T10:53:00.000-07:00

According to Politico.com, the Obama administration is making a very big push to increase awareness of some of the most attractive aspects of health care reform and ensure that their implementation is a success.

Even though PPACA was structured so that the most politically attractive provisions would come into effect early (starting in 2010), while more controversial (and costly) provisions are mostly delayed until 2014, the public view of reform remains negative.

The administration’s efforts to change public opinion include accelerating the comment process for regulations providing for addition of young adults to parents’ coverage, disseminating information to small businesses about potential breaks on this year’s taxes, and (mostly successfully) pressuring insurers to drop their most egregious rescission practices, and to allow this summer’s college graduates to stay on their parents’ policies even though the corresponding PPACA provision is not effective until September.

With spending on anti-reform advertising currently running at close to twice that of pro-reform, we can probably expect to see even greater efforts by the government to publicize the short-term benefits of reform, especially among seniors who will gain from gradual elimination of the Medicare D “doughnut hole”.

THE PITFALLS OF PPACA #1 – THE MEDICAL LOSS RATIO RULE

2010-05-23T12:43:00.000-07:00

(This is the first of a series of commentaries on details of the 2010 health care reform legislation.)

The Patient Protection and Affordable Care Act, signed into law by President Obama in March, is in many ways a significant step towards a more equitable health insurance system in the US, potentially making coverage available to millions of the currently uninsured. Unfortunately, health care reform’s political strategy of let’s-just-apply-lots-of-bandaids-to-the-present-broken-system is likely to produce some major disappointments.

Positive changes like assuring coverage for children with preexisting conditions are likely to be overshadowed by others that are equally well-intentioned but fatally flawed—like PPACA’s limits on insurers’ medical loss ratios.

Beginning in 2011, unless medical loss ratios (the percentage of premiums paid out for medical care) are at least 85 percent for large group health plans, and at least 80 percent for small group and individual plans, insurers will be required to offer rebates to enrollees.

Given that the MLRs of the ten largest for-profit health insurers dropped from 95 percent in the early 1990s to around 80 percent today (or, put another way, administrative expenses, overhead and profit jumped fourfold from 5 percent of premium to 20 percent in just over 15 years), it’s easy to see why this provision seemed so attractive to its principal backer, Senator Jay Rockefeller.

Unfortunately, as with other reform issues, the politicians’ understanding is proving incomplete. Two weeks after enactment of PPACA, the Federal Register invited comments on how the new MLR requirement should actually be interpreted. The 70-page response (including appendices) from the National Association of Insurance Commissioners demonstrates just how complicated the issue really is. (A separate response from AHIP, the insurers’ lobbying group, argues for treatment of almost anything that reduces medical expense as part of the MLR “medical care” numerator.)

PPACA’s (imprecise) MLR definition is quite different from that currently used by state insurance regulators, but NAIC does estimate that most large and small group health plans will meet the new requirement, thanks to the exclusion of state and federal taxes from non-medical costs (and implicitly assuming that the impact on MLRs of the currently uninsured will not be significant). In other words, most group plans are likely to be unaffected—and if AHIP is at all successful, may even be tempted to increase their profit percentages while boasting compliance with the PPACA limits.

Individual plans present a very different case, and one where the political cure may be much worse than the disease. NAIC comments “Some issuers would likely have aggregate MLRs below 80% in at least some states even after the adjustments...” The reasons for individual plans’ possible MLR problems include the higher administrative costs of such plans, the typically more restricted benefits (thereby reducing medical care costs relative to non-medical costs), and greater year-to-year volatility. So, are plans with MLRs below the 80 percent threshold going to pay rebates to enrollees or, alternatively, slash administrative costs or profit?

Probably not. No insurer will want to pay rebates, not only for the obvious reason of not wanting to see dollars going out the door, but because this will be perceived by consumers as a signal that premiums are too high. Equally, cutting profit for investor-owned plans will cut share value, something that insurance executives with stock options will certainly resist. Administrative costs could be cut by reducing care management and fraud detection efforts (assuming AHIP fails in its lobbying to include these as medical expenses), but doing so would simply increase the costs of care—and premiums.

Insurers are going to be left with a couple of strategies. One is to increase both benefits and premiums in order to reduce the impact on the MLR percentage of non-medical costs, an actuarially risky approach that could result in plans attractive only to high utilizers. The other is simply to withdraw from the individual market—one that plans like American National Insurance are already starting to choose.

It’s easy to criticize the shareholder profits and CEO incomes of investor-owned insurers (and the inefficiencies of some of their non-profit competitors), but this kind of political micromanagement isn’t the answer. While there is certainly a case for consumers knowing how their premium dollars are being spent, legislating expense ratios—rather than encouraging effective market competition—is more likely to lead to loss of coverage than to lower premiums.

BACK IN BUSINESS!

2010-05-23T12:39:00.000-07:00

Health Care REFORM UPDATE came to a screeching halt late last fall when I left for a trip to Southeast Asia, and discovered just how difficult posting comments on reform bills could be from small towns in Laos and the mountains of northern Vietnam.

By the time I returned, in December, it was clear that the details of reform legislation were not going to be influenced by anything other than political expediency.

Now, we have reform legislation (although no regulations as yet), and it’s time to look at how its implementation may work—and maybe, influence the regulatory process. Over the next several weeks Health Care REFORM UPDATE will provide a series of commentaries on details of the legislation, along with news relating to implementation of the new law.

SENATE HEALTH CARE REFORM: TWO HUGE PROBLEMS, ONE GIANT RED HERRING

2009-10-27T20:26:00.000-07:00

Pity poor Senator Harry Reid. Not only is he facing an uphill reelection fight in Nevada, but as Majority Leader, he must reconcile the health care reform bills from the Finance and the Health, Education, Labor and Pensions committees so as to attract sixty Senate votes. He’s guaranteed support from the more partisan Democrats, but to attract Democratic and one or two Republican centrists without losing liberals, he has to find ways to deal with two huge problems with the bills—and one giant red herring.

The giant red herring is the public option, THE big stumbling block for reform, mostly thanks to the efforts of lazy-thinking doctrinaire politicians of both parties—especially in the House. (Yes, Speaker Pelosi and Minority Leader Boehner, I mean you.) The reality is that for a public option to provide an adequate network, its payments to hospitals and physicians must be at least at Medicare levels. As experience with Medicare Advantage shows, this means its costs will be close to those of private coverage or higher, especially if it adopts Medicare’s uncontrolled fee-for-service structure and attracts the least utilization-conscious providers and patients. All this makes nonsense of liberal claims that the public option is necessary to control costs, and equally, of conservative allegations that it will destroy the insurance industry—and leaves Senator Reid’s “opt-out” solution looking merely perverse.

Unfortunately, the quasi-religious war over the public option has taken attention away from the two huge real problems with the Senate bills.

Huge Problem #1 is the conflict between mandated coverage and consumer affordability. Even with penalties of $750 or more per person, and with subsidies that limit premiums to 13 percent of income, the Congressional Budget Office estimates that 16 million eligible individuals will fail to be insured. (Rather than paying $4,000 for coverage, a $750 penalty may seem a good risk for someone earning $30,000 a year.) Since those taking the non-insured gamble are most likely to be young and healthy, the result will be a huge adverse selection impact on insurers required to guarantee issue—followed by the giant jump in premium costs that insurers (reasonably, for once) are forecasting.

With the Senate Finance Committee insisting on its approach of grafting more and more new rules onto the present health care system (remember, these are the guys who brought you the United States tax code), is there any way to deal with Huge Problem #1? Aside from big increases in penalties (politically unacceptable) or major increases to the subsidies (unaffordable), possible approaches include exceptions to guaranteed issue for those who fail to acquire coverage (the insurers will like this), allowing buy-in to Medicaid (a better deal than private insurance, so long as you don’t need care), and tying coverage selection to tax return filing (a pre-emptive strike approach that conservatives will erupt over). None of these, however, seems likely to appeal to sixty senators.

Huge Problem #2 is the need to slow the rate of increase of national health care expenditures. The Senate Finance bill assumes that slashing Medicare expenditures is the primary way to do this—ignoring the likely resulting cost shift to private payers. Can we do better? With Democrats unwilling to offend supporters by proposing real penalties for excessively generous employee coverage (unions will fight this) or nationwide tort reform (trial lawyers will resist), or effective limits on provider resources (the Obama administration has cut deals with docs and the drug industry) the best bet ought to be the insurance exchanges. Unfortunately, the Senate bills allow insurers to continue to sell directly to any employer, with all the potential for cherry picking (and resultant adverse selection and ultimate bankruptcy for the exchanges) that this implies. It’s not surprising that the insurance industry has been relatively subdued in its comments on the Senate’s efforts to date.

The sad conclusion: even IF Senator Reid manages to cobble together a reform package that attracts sixty Senate votes AND can be made acceptable to the House, we should be prepared for more of the same: lots of uninsured, skyrocketing premiums, a continuing exodus of providers from Medicare, bigger deficits (remember those premium subsidies), and a series of defeats for the party in power—but the Dems, this time.

Or, perhaps Senate Democratic leaders will suddenly see the wisdom of what CBO Director Doug Elmendorf told them in July: to control the costs of United States health care (and begin to make it affordable to individuals) will take fundamental change.

But don’t hold your breath.

UPDATE 10/22: BAD NEWS FOR REFORM?

2009-10-22T10:11:00.000-07:00

Hopes for Senate passage of a health care reform bill were further dented last night when the Democratic leadership’s proposal for eliminating the Medicare physician fee reductions required by the sustainable growth rate formula was soundly defeated.

A dozen Democrats and one independent senator joined Republicans in opposing the change proposed by Senate Majority Leader Harry Reid, which would have cost an estimated $247 billion over the next ten years. Backers of the change had hoped that it would be possible to treat the increased costs as a simple addition to the deficit, separate from other health care reform costs, but opponents refused to allow it without offsetting savings or increases in revenue.

The vote sends an ominous message to health care reform advocates: Democratic senators are unwilling to hang together behind their leadership just to facilitate the passage of reform. At the same time, since physician groups had considered passing the “doc fix” vital to their support of reform, it must be assumed that they will now shift more visibly into the opposition camp, making reform supporters’ efforts even more difficult.

UPDATE 10/8: GETTING CLOSER TO A SENATE FINANCE BILL

2009-10-08T09:38:00.000-07:00

Publication of the CBO’s scoring of the final Chairman’s Mark version of the Senate Finance Committee’s draft reform bill at $829 billion over ten years, while covering some 94 percent of American residents, has given a big boost to Chairman Baucus’ efforts.

The CBO number is rather better than expected, and well below the $900 billion figure set by President Obama as a maximum acceptable amount. The CBO forecast that the draft bill would reduce the federal deficit by some $81 billion over the next decade, also a better-than-expected number, and one that has left Republican opponents struggling to find persuasive arguments against the bill. The CBO also estimated that the deficit would be further reduced over the subsequent decade (starting in 2020) at a rate of between one-quarter and one-half of GDP, as reform-related revenues and savings continue to exceed expansion costs.

A number of caveats are included in the CBO scoring letter and accompanying tables, including the effect of the proposed Medicare Commission’s efforts and that the forecast is based on an “English-language” version of the Finance Committee draft bill, rather than on actual legislative language. Other important cautions not specifically stated are the validity of assumptions about national health trends and the overall economy.

Chairman Baucus has now scheduled a vote on the legislative-language version of the draft bill for Tuesday, October 13. Assuming that the Democratic-majority Finance Committee votes to approve this version, it will then be combined with the version already created by the Senate Health, Education, Labor and Pensions Committee—a process that will involve some fierce horse-trading over inclusion or exclusion of a public option. Meanwhile, House Democrats are working to finalize a single version of the bills that emerged from the three House committees with responsibility for government health care programs—a version that will definitely include a public program option.

UPDATE 10/2: A FIRST FOR BAUCUS (ALMOST)

2009-10-03T12:08:00.000-07:00

Skeptics (like this blog author) were dumfounded last night when—for the first time in the excruciatingly drawn-out health care reform saga—the Senate Finance Committee came close to meeting a deadline set by Chairman Max Baucus. The deadline—completion of markup of the Committee’s draft bill—wasn’t quite met, but missing it by a mere couple of hours seemed like a major achievement given the more than five hundred amendments that had been proposed.

Of the changes to Baucus’ original draft, most are tweaks, with the most notable being reductions in penalties for non-compliance with the individual mandate (intended to gain support from Senator Olympia Snowe)—along with (thanks to Senator Charles Grassley) a requirement that members of Congress get their own coverage through insurance exchanges.

The next step will be a formal vote next week by the full Finance Committee—with the big question being which way Senator Snowe will go.

And then, the Finance and HELP bills must be merged prior to Senate floor debate—something that will tax Senate leadership, who must struggle to reconcile the public option preferences Absolutely NO versus absolutely YES) of the two committees.

And then, if it survives, the bill faces reconciliation with the House versions…

UPDATE 10/1: “A BILL BY NIGHTFALL” (BELIEVE IT OR NOT)

2009-10-01T12:08:00.000-07:00

In the latest of a long series of optimistic pronouncements, Senate Finance Committee Chairman Max Baucus stated this morning that he wanted to complete markup of the Committee’s health care reform bill “by nightfall” today.

If the Committee were indeed to meet this schedule, the next move would be up to Senate Majority Leader Harry Reid, who would work to combine the Finance Committee and Health, Education, Labor, and Pensions (HELP) Committee bills into a single bill to be brought to the Senate floor for debate, a process that could take weeks, and one that Senator Reid is already shifting recess schedules to allow for.

More realistically (and reflecting Senate Finance’s failure to meet any of Senator Baucus’ previous timing hopes), markup will take at least a couple more days, followed by review of the CBO’s preliminary scoring of the bill, followed by a final Committee vote.

Best guess? A combined bill will reach the Senate floor in two or three weeks’ time, to be followed by a multi-week debate.

THE SENATE FINANCE CHAIRMAN’S MARK – GOOD IDEAS AND POTENTIALLY FATAL FLAWS

2009-09-16T13:53:00.000-07:00

So, at long last, Senator Max Baucus has released his Chairman’s Mark draft health care reform bill for discussion by the full Senate Finance Committee. The 223-page draft bill is generally consistent with the “Framework for a Plan” document that Senator Baucus issued last week. So, no big surprises. But can it make coverage more accessible and affordable? Can it put the brakes on skyrocketing health care costs? Is it likely to help or hurt the economic recovery?

Accessibility and affordability are the main thrusts of the draft. As with the other Senate and House bills, an individual mandate would be imposed and the insurance market would be reformed to assure coverage on a guaranteed issue basis. Also as with the other bills, Medicaid would be expanded to cover anyone below 133 percent of FPL (but with the federal government picking up more of the tab), while subsidies would be available to other lower-income individuals who buy coverage through an insurance exchange. Additionally, benefit standards would be set for the individual and small group markets, with limits on cost-sharing.

Overall health care costs are the focus of other provisions. The biggest target area is Medicare, where Medicare Advantage “excess payments” would be slashed, a variety of other cost containment measures would be implemented (but not a reduction in physician fees), and a new Medicare Commission would be charged with making cost control proposals to Congress that would be subject to straight-up-or-down votes. Other cost containment provisions are less direct: “overly generous” employee benefits would be subject to a tax to be paid by insurers, while the insurance exchanges are presumably intended to engender price competition.

In terms of the impact on the economy and on taxpayers, the draft is projected to have a ten-year cost of some $850 billion, less than other current reform bills, but with many of its costly provisions deferred until three or more years into the decade. The bill is, however, claimed to be “fully paid for,” with new revenues and savings balancing new expenditures. New revenues would come from insurers and from certain providers, and so would presumably result in higher premiums; others would come from small employers as a result of “free rider” penalties imposed when employees utilize exchange subsidies. The biggest savings would come from Medicare Advantage payment reductions. Large employers would be minimally affected, but some smaller employers would see increases in premiums as a result of new benefit standards—although in some cases these would be partially offset by tax credits.

The political reactions to the Chairman’s Mark have been predictable. Liberal Democrats are distressed that no public plan is included (even though such an option is more likely to increase costs than decrease them), while Republicans have either issued blanket condemnations of the increased federal expenditures (while also criticizing the Medicare Advantage cutbacks) or have focused on hot buttons like abortion and care for illegal immigrants.

A more balanced verdict is that the draft is an uneasy compromise between the political poles. It doesn’t do enough to slow the rate of increase of national health care costs because to do so would result in concerted opposition from both insurers and providers. It doesn’t shift more responsibility for obtaining optimal coverage onto most of the currently insured, because this would alienate employee unions. It doesn’t prevent insurers from cherry-picking the best risks, because this would contradict earlier political promises that “everyone can keep the insurance they have.”

In addition to these “big picture” criticisms, some features are reasonable in intent but seriously flawed as currently proposed.

The penalties to be imposed on those without coverage look to be a classic “gotcha” approach that will have lawyers rubbing their hands in glee as they visualize subsequent court fights. A better approach might be to incorporate coverage selection as part of annual tax filing, permitting a choice of employer coverage, individual exchange coverage, or Medicaid.

The subsidies for low-income individuals above the proposed 133 percent cutoff, combined with Medicaid expansion, are the major reason for the draft’s price tab. With subsidy costs in many cases above Medicaid costs—while still failing to cover total premiums— it would make sense to give lower-income individuals the option of buying into Medicaid.

The almost unlimited latitude for insurers to market directly to groups with the best risks will drive up costs for everyone else and potentially lead to the failure of the insurance exchanges. Instead, insurers should be required to offer their lowest rates to exchange participants, thereby essentially putting all non-ERISA groups and individuals in the same pool.

The multiple benefit options and wide rate range allowed between younger and older insureds seem likely to encourage risk manipulation by insurers and drive up costs for older individuals. Reducing the number of benefit options and shrinking the allowed rate range would simplify choice and enhance affordability.

Overall, the draft moves the debate forward, but perpetuates today’s ineffective and expensive combination of paternalism and the free market. Few employees have many coverage choices, but their “paternalistic” employers have limited interest in tight budget control because of the tax exemption and the assumption that reducing benefits leads to demands for increased pay. Meanwhile, the “free market” for insurers gives them enormous latitude to cherry pick risks and price selectively. Senator Baucus’ draft trims insurer sails somewhat and slightly reduces taxpayer-subsidized employer paternalism—but not enough.

UPDATE 9/13: ANOTHER PROMISE FROM MAX BAUCUS

2009-09-12T10:30:00.000-07:00

Politico reports that Senate Finance Committee chair Max Baucus is now promising that his committee’s reform bill will be released on Tuesday September 15.

Since Senator Baucus previously promised, prior to the summer recess, that the “Gang of Six” was already at the point of agreement and would be releasing a bipartisan bill imminently, some caution is indicated about this latest date.

Even more caution is indicated about the level of bipartisan support for the promised bill. On the positive side, the Gang of Six are still meeting and seem to be close to agreement on three sticky issues: malpractice suits, abortion funding (or not), and coverage of both legal and illegal immigrants (or not). On the negative side, at least two of the three Republican members of the Gang of Six (Senators Grassley and Enzi) may have made such intransigent statements during the summer recess that they now cannot support any compromise reform bill without losing political face, while the third Republican member (Senator Snowe) is clearly still undecided.

UPDATE 9/9: THE BAUCUS COMPROMISE

2009-09-09T11:25:00.000-07:00

Senate Finance Committee Chair Max Baucus has returned from his summer break with a new proposal for his Gang of Six—the three Democrats and three Republicans charged with negotiating details of the Committee’s reform bill.

Baucus has tried to craft a compromise that will attract at least a handful of Republican votes without alienating his own fellow Democrats. Accordingly, the 18-page proposal, described as “a framework of a plan” excludes the controversial public option and also any direct employer mandate. Instead, it proposes a network of insurance cooperatives, with federal start-up money, and a “free rider” levy on employers whose workers purchase government-subsidized coverage through an insurance exchange.

Other details that reflect Baucus’ attempt to walk the political tightrope include a levy on health insurer revenues and requirements for transparency of insurer costs as a condition of exchange participation, but also more limited Medicaid expansion and less generous subsidies for other lower-income individuals. In addition, a low-cost catastrophic coverage plan would be incorporated, available to those under 25 years old. Together, these provisions are expected to reduce somewhat the total reform cost from earlier estimates.

The Capitol Hill reaction so far seems to be closer to yawns than enthusiasm, with Baucus’ Democratic colleague Ron Wyden quick to point out any final Committee bill would depend on other members also.

HAPPY TRAILS, TRIGGER?

2009-09-05T14:24:00.000-07:00

Okay, my apologies to Roy Rogers, but I was pleased to see in the New York Times that the idea of a public plan trigger is finally getting serious consideration by the White House and by Senate Finance Committee members.

I proposed the trigger concept in a piece that ran in The Health Care Blog back in March. It was clear then that a nationwide public plan faced very considerable political obstacles, and I suggested that a more acceptable approach might be to establish a public plan option that would be implemented only where and when private plans failed to meet predetermined cost control targets.

Senator Olympia Snowe proposed the trigger approach to fellow members of Senate Finance some weeks ago, and the NYT reports that the White House—desperate for at least one Republican vote in the Senate—is now analyzing its political feasibility and practicality.

Senator Snowe’s approach, reflecting the situation in her home state of Maine, where the market is dominated by a single insurer, would tie the trigger to affordability, rather than to cost control. This approach has political advantages, but could be labeled as unfair, since it includes a factor that private plans cannot control—individual incomes—in the trigger comparison. It also has the disadvantage of focusing on individuals who are just above the Medicaid income threshold. To achieve affordability for this lower-income group could mean a public plan network virtually identical to that of Medicaid, raising the question: why not just allow this group to buy-in to Medicaid?

However, any trigger is probably better than the nationwide public plan option. It’s also more realistic than Senator Conrad’s proposal for health cooperatives, a concept that has never been successfully implemented (Seattle’s Group Health Cooperative, despite its name, is a Kaiser-type HMO). The experience of Medicare Advantage, in which the private plans with most enrollees cover the basic benefits at lower cost than the government-administered FFS plan, suggests that a trigger approach could provide the best of both worlds. In most areas, especially with real price competition through an exchange, the private plans would compete only with each other, while in those areas in which private plans failed to meet established benchmarks, the trigger would result in public plans being created to provide additional competition.

There is a precedent for a trigger approach. As the NYT points out, the legislation creating the Medicare drug program included a provision for establishing a government drug plan in any area with fewer than two private plans. This hasn’t happened, of course, because competition for Medicare D business has been fierce—and has probably contributed to program costs far below the projections of CMS actuaries.

TIME FOR A CLOSER LOOK (AND LOWER COSTS)

2009-08-29T14:16:00.000-07:00

One of the effects of the exaggerations, misinterpretations, distortions, and downright lies about Congressional health care reform proposals—mostly from far-right politicians and their hangers-on—has been to deter more objective analysis.

In fact, two key features of the current Senate and House bills—the insurance exchange structure, and the controversial public plan option—need much closer examination, and possibly considerable revision.

FIRST, the insurance exchange structure. It’s a reasonable concept: if insurers were to compete via an exchange for individual and small group business, they would offer highly competitive rates to attract as much business as possible.

Unfortunately, as a Health Affairs blog piece by the former managers of the PacAdvantage exchange makes clear, it isn’t as simple as that. PacAdvantage, which served some 150,000 California small business employees, ultimately collapsed and closed its doors in 2006, a victim of adverse selection. As the PacAdvantage managers explain, having insurers also marketing directly to small groups allowed them to cherry pick the best risks, leaving the less-good risks in the exchange. As adverse selection continued its work, the exchange went into a death spiral with worsening exchange risk leading to higher rates, leading to the least-bad risks leaving the exchange, leading to even higher exchange rates, and so on.

The obvious way to avoid this problem in national reform is to require that ALL individuals and ALL small group employees be included in each regional exchange. Unfortunately, health reforming politicians have adopted “you’ll be able to retain your existing coverage” as part of their reform pitch. It’s understandable, since forcing groups to switch to an exchange is not going to help the prospects of legislation that’s already in trouble, but it instantly opens the door to cherry-picking by insurers, with the prospect of failure of every exchange.

Is there a solution? Rather than imposing an additional mandate on businesses, current bills could be modified to require that all insurers participate in the exchange, and that their exchange rates be no higher than those offered directly to any insured group, thereby forcing insurers to treat exchange and non-exchange insureds as part of the same pool and avoiding the adverse selection effect.

SECOND, the public plan option. So far, the political controversy has focused on the obvious arguments for and against the public plan: it would force insurers to offer better rates, but it could push millions of Americans out of private coverage into a government program.

A close look at data from Medicare Advantage, in which private plans compete with the traditional government option, indicates that both arguments are questionable.

MA’s private coverage alternative is indeed more costly than traditional Medicare, by some 13 percent—more than $11 billion in 2009. However, most of the difference is due to the additional benefits offered. The private plans’ 2009 base bids to CMS—excluding the cost of additional benefits—averaged 102 percent of FFS rates, with HMO and PPO bids averaging just 99 percent of FFS.

These base bid rates include profit and administrative costs, in contrast to the FFS rates which exclude both administration and financing costs. Even the most conservative estimate of these additional costs would put fully-loaded FFS rates above those of the average private plan.

The comparison of Medicare FFS and MA plans is further skewed by the MA bid process. Not only do the ridiculously high “county benchmarks” used in payment setting favor high bids, but the payment formula (which discounts the difference between the base bid and the benchmark, but not the base bid itself) encourages excessive loading of profit and administration into the base bid. In other words, in a more rationally designed competitive environment, average private plan costs should be significantly below those of traditional Medicare.

In terms of the current Senate Health and House bills, with proposed payment rates higher than Medicare, the public plan looks even less competitive. While there would undoubtedly be some who would opt for a government program over a private plan, the vast majority are likely to choose the lower cost option, with the public plan more likely to increase health care costs than decrease them.

Are there compromises that might satisfy liberal politicians’ desires for a public plan? One possibility is to build a “trigger” into the bills that would allow creation of public plans only where private plans fail to meet cost control benchmarks.

Another possibility is to build on the existing public plan for the non-elderly: Medicaid. Congressional committees are already proposing Medicaid expansions, while simultaneously proposing subsidies to make exchange participation more affordable for non-Medicaid eligibles, leading to an anomalous situation in which one family may receive free Medicaid coverage, while a second family whose income is only a few dollars greater is forced to pay a significant part of the exchange premium in order to comply with an individual coverage mandate.

A less costly and unfair approach might be to allow individuals to buy-in to Medicaid. Since average per capita Medicaid costs are approximately $2000, compared with estimated subsidy costs of close to $4000 (based on CBO estimates, in 2009 dollars), this would eliminate both the anomaly and the need for subsidies, with a potential dramatic reduction in the ten-year cost of reform of some $770 billion.

UPDATE 8/6: STATE OF PLAY

2009-08-06T10:59:00.000-07:00

Five congressional committees and their staffs, plus numerous Obama administration officials, have been working on health care reform for more than three months, with no immediate end in sight. Is health care reform legislation getting closer, or is its likelihood actually receding? What’s the state of play?

In the House, three versions of HR 3200, “America’s Affordable Health Choices Act,” have been passed by the three responsible committees (Ways and Means, Education and Labor, and Energy and Commerce). The Energy and Commerce version differs significantly from the other two in several respects following the refusal of Blue Dog Democrats to support the original version: it reduces Medicare payment disparities between urban and rural areas, it modifies the public plan provision to require that payments be negotiated with providers rather than tied to Medicare rates, and it shifts some of the cost of Medicaid expansion to states. Preliminary CBO scoring puts the ten-year federal cost of the various versions of HR 3200 in the $900-$1,100 billion range, with minimal impact on overall national health care cost trends.

The next step, following the August recess, will be for the full House to debate the various versions and then to vote on a single bill. Given that conservative Democrats have insisted on the public plan payment negotiation provision, while liberal Democrats have been equally vehement in condemning the requirement (and no Republican support is expected for any version), the bill’s fate is uncertain. However, since any possible final legislation will also depend on Senate action (and therefore can be blamed on the other chamber), a compromise seems probable.

In the Senate, a draft bill—the Affordable Health Choices Act—has emerged only from the Health, Education, Labor and Pensions Committee. Generally, this bill follows the pattern of HR 3200 (insurance exchanges, insurance reform, individual and employer mandates). The CBO has estimated that the ten-year federal cost of this bill would be some $600 billion, but this number excludes the cost of Medicaid expansion. (Note that the CBO’s ten-year estimates include only about six years of full implementation.)

The Senate Finance Committee is attempting to craft a bill to attract some bipartisan support, with committee negotiators from the two parties continuing to meet. Whether the negotiators will be able to resolve their differences is far from certain, especially with the Republican members of the group coming under fire from their own party for trying to work with the Democratic majority.

With the House already enjoying the August recess and the Senate also closing down for the remainder of the month, what’s likely to happen next?

A lot depends on Senate Finance. A breakthrough in negotiations there would presumably produce a bill that could attract at least the magical sixty votes (despite their nominal sixty members, the critical illnesses of Senators Kennedy and Byrd make it unlikely that Democrats could produce a filibuster-proof majority without some Republican support). In turn, Senate Finance’s actions will influence House members. A bipartisan Senate bill will likely encourage Blue Dog Democrats to push hard for inclusion of its more conservative provisions in the House bill. Alternatively, failure of Senate Finance negotiations may result in a more liberal House bill, since Democrats will see less reason for compromise. Also, without a bipartisan agreement in the Senate, Democrats may be forced to use the reconciliation process in order to sidestep the need for sixty votes.

Assuming that reform bills do reach the point of a vote in each chamber, what are the chances of passage? It looks like a toss-up. On the one hand, Democrats—liberal and conservative—have expended enormous energy in pushing for reform; failure to pass any reform legislation would be a huge defeat for the party, and a threat that might cause even the most doctrinaire members to compromise. On the other hand, momentum has been lost, opponents are energized, the public is confused, and—given the difficulty of making changes to our complex health care system—health care costs will continue to increase and the number of uninsured will continue to rise for some time even after passage of a bill before any improvement becomes apparent. At least some erstwhile supporters of reform may choose to avoid being blamed for voting for something that is going to take even longer than the economic stimulus to produce results.

CAN HR 3200 BE FIXED?

2009-07-23T11:28:00.000-07:00

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.

HOUSE HEALTH CARE REFORM: IGNORING THE ELEPHANT?

2009-07-14T16:43:00.000-07:00

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.

NEWS UPDATE 7/9: HAS HARRY REID TORPEDOED REFORM?

2009-07-09T14:25:00.000-07:00

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.