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

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

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

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

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

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

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

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

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

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

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

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

SOONER IS BETTER, DECIDES THE ADMINISTRATION

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

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

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

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

MANDATE ON ITS WAY TO THE SUPREME COURT?

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

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

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

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

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

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

CURTAINS FOR CLASS?

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

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

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

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

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

PLAN B: IF THE MANDATE IS OVERTURNED

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

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

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

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

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

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

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

WINS NUMBER TWO AND THREE FOR THE OBAMA ADMINISTRATION

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

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

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

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

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

THE LIMITS OF COMPETITION

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

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

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

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

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

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

AND WHAT HAPPENS IF THE INDIVIDUAL MANDATE IS STRUCK DOWN?

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

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

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

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

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

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

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

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

MEDICAL LOSS RATIO WAIVERS: AN UPDATE

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

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

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

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

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

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

ATTACKS ON IPAB GATHER STRENGTH—AND WASTE ENERGY?

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

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

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

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

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

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

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

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

APPELLATE COURT SETBACK FOR AFFORDABLE CARE ACT

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

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

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

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

INTERPRETING THE DRAFT INSURANCE EXCHANGE REGULATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OBAMA ADMINISTRATION WINS FIRST ACA APPEALS ROUND

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

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

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

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

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

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

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

ANOTHER LEGAL ROUND—WITH A MAJOR MISSTEP?

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

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

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

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

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

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

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

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

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

MUCH MORE REFORM NEEDED FOR MEDICARE?

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

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

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

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

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

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

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

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

REFORM CHALLENGES GRIND ON

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

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

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

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

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

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

SINGLE PAYER IN VERMONT? WELL, NOT EXACTLY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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!

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

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

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

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.