The Real Arithmetic of Health Reform

Below are excerpts from a former director of the CBO who lays out the math in a NYTimes Op-Ed:

THE REAL ARITHMETIC OF HEALTH REFORM

"On Thursday, the Congressional Budget Office reported that the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but it would also lower federal deficits by $138 billion.  In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line. Could this really be true? [Not according to Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO) and president of the American Action Forum.]

How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years? The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges:

The health care reform legislation would raise, not lower, federal deficits by $562 billion," says Holtz-Eakin.

"...The bill front-loads revenues and backloads spending...(meaning) the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending."

"...To operate the new programs over the first 10 years, future Congresses would need to vote for $114 billion in additional annual spending, but this so-called discretionary spending is excluded from the CBO's tabulation."

"...In perhaps the most amazing bit of unrealistic accounting, the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies, but Medicare is already bleeding red ink and the health care bill has no reforms that would enable the program to operate more cheaply in the future..."

"The bottom line is that Congress would spend a lot more; steal funds from education, Social Security and long-term care to cover the gap; and promise that future Congresses will make up for it by taxing more and spending less," says Holtz-Eakin.

Excerpted from: Douglas Holtz-Eakin, "The Real Arithmetic of Health Care Reform," New York Times, March 20, 2010.
For full text of article: http://www.nytimes.com/2010/03/21/opinion/21holtz-eakin.html

Social Safety Nets with Growing Holes

After much hoopla, Congress finally began its Christmas vacation last week.

House or Senate plan, public or private, it really doesn't matter - what the politicians seem to have forgotten is that any plan must be underwritten correctly and with the appropriate safeguards or it won't be solvent. For some reason, beneficiaries tend to get upset there is no money to pay claims.

The CBO takes a snapshot in time approach to financial analysis. This static accounting approach does not account for the way human beings react in the real world, a fact they readily admit with multiple disclaimer footnotes in all their reports. Rather, what is needed is an underwriting analysis of the proposals. Underwriters try to predict the future given past behavior, human nature, changing market conditions and nature of the risk pool. The fact that accountants rather than underwriters are determining the feasibility of our social welfare programs may explain why Medicare, Medicaid and Social Security are projected to have a combined deficit of well over $100 Trillion into the future.

Underwriting isn't sexy enough for the politicians, which is no doubt why they ignore it entirely. Underwriting is risk assessment, and sometimes risk management; the very words convey dullness and boredom. No, it's much more exciting for Democrats to accuse Republicans of wanting you to die, and die quickly, and for Republicans to say that Democrats want to kill Granny. But where does this leave the American people? Don't we deserve better?

Medicare, Medicare Supplemental & Medicare Advantage: Part II

Congress is planning on making big cuts to the Medicare Advantage program claiming that it is subsidizing the private insurers for this program. Is this true? The answer is yes, it is subsidizing the health plan; but it is really subsidizing the beneficiaries, not the insurers. People saw value and as a result the number of people in these plans has grown. The payments/expenditures for beneficiaries are higher on average than traditional Medicare.

The reason lies in how Medicare Advantage plans are paid. The Medicare Modernization act of 2003 set into place the present system of payment. A private insurer places a bid for what price per person it is willing to offer Part A and Part B services in a given geographic area. If it is under the government’s benchmark rate that it is willing to pay in that geographic area, they split the difference. Under the rules, the government keeps 25% of the savings, and the insurer must provide the beneficiary with additional benefits or a rebate equivalent to 75% of the difference. For example, if Medicare is willing to pay $500 per person per month to the insurer and the insurer has bid $400 per person per month, there is a $100 difference. Of that amount $25 in savings goes back to the government and $75 goes to the beneficiary in the form of a Part B or D premium rebate or additional services. Medicare pays out $475 in benefits. As you can see, the amount of additional benefits or rebates enrollees are offered makes one plan more attractive than another.

The heart of the problem is the benchmark rate calculation. By law, it must be at least as high as high as what the government would pay on average per person in the traditional Medicare fee for service (FFS) arena. Remember, Medicare pays 80% of the allowable payment rates. There are risk adjustments fir areas of the country where patients are “sicker.”

According to the Congressional Budget Office, for 2007 the “benchmarks are 17% higher, on average than projected per capita FFS expenditures nationwide.” [Note: This CBO report was released in 2007, yet proposals to fix the problem are just now coming forth.]

These benchmarks are determined by statutory rules. It requires an act of Congress to make any changes. This is the similar to the way the Medicare physician payment formula [SGR] is set. Do you see a pattern here? There is a problem anytime an act of Congress is required to make should be a common sense business decision - namely to fix the formula. Government bureaucracy seems to preclude it from making the necessary adaptations to respond in a timely manner to save money or prevent potential disruptions in service.

The next question is what will happen to current Medicare Advantage enrollees? Who will be most affected? We will try to tackle that tomorrow -

Co-ops: Real or Phoney?

In addition page 4 of the October CBO letter to the Senate Finance Committee Chair states the Baucus Bill will “provide start-up funds to encourage the creation of cooperative exchange plans (co-ops) that could be offered through the exchanges; existing insurers could not be approved as co-ops.”

Let’s think about this for a minute. Present day insurers are entirely shut out of the game. (You can almost hear the politicians say, “We showed them.” ---but is it a pyrrhic victory?)

Whatever you think about insurers, these are the people who actually know how to do the job. They have the systems and processes in place to service the needs of their customers, send them insurance cards, provide a network of providers and pay claims. This little provision means a lot of “newbie” nonprofit companies will be popping up, by necessity.

Who are these companies? Are they reputable? Do you believe your claims will be paid in a timely manner? What is their track record? Will you get the service you expect? What assurances do we have that they will be there tomorrow to pay claims after giving them your premium dollars? Do you think this opens the public up to a lot of potential fraud? Are state regulators going to be able to handle the job, given the number of new entities that will no doubt arise due to the amount of money at stake?

Of course, we can rely on the government to protect us from the hucksters, can’t we?

Baucus Bill Part III: Will it really be cheaper?

The CBO believes that employer provided plans will be “more expensive that the low-cost plans available in the exchanges, because healthcare services in those exchange plans would be more tightly managed.” [September CBO letter, page 4]

Administrative costs for all health plans, both for-profit and nonprofit, have averaged about 11% of premiums. The BCBS family of companies average about 10%. In fact, Highmark BCBS, a nonprofit insurer, in PA specifically states that their goal is for 90% of premiums to go toward paying medical expenses (aka medical-loss ratio) for enrollees. To more tightly manage the plan requires higher administrative costs, not less. And what does more “tightly managed” mean to the doctor and patient? You can bet there will be stricter standards for ordering tests/procedures, more “red-tape” and more non-certifications of coverage. There is simply no other way to make up for the added administrative costs, pay claims and still be competitive with the private sector marketplace, let alone be more affordable for individuals or small businesses.

Key Issues Not Addressed by the Baucus Bill: Part II

Continuing our look at the Baucus Bill based on the CBO Analyses of September 22 and October 7, 2009...

• The fees and taxes this bill imposes on insurers, medical device makers, clinical laboratories and drugmakers will be considered a “pass-through;” that is - passed through to consumers! It seems the CBO recognizes this on page 2 of the September letter which states those fees “will ultimately raise insurance premiums by a corresponding amount.” This is a tax on every person. It further raises medical costs. It’s counterproductive.
  
• The CBO admits on page 3-4 that comparing costs of coverage to the present system is difficult “for many reasons, including the extent of the coverage…;the rates and methods used to pay providers…; the quantity and intensity of services used; the insurer’s administrative costs; state regulations of the insurance market; employment status and employers’ decisions about offering coverage and the underlying health of the enrollee pool.” It seems that these are huge gaps in analysis that simply cannot be overlooked if this report is to be taken seriously.

Key Issues Not Addressed by the Baucus Bill: Part I

Let’s take a closer look at what wasn’t included in the bill. Since there is no actual written version of the bill, we will look at the CBO Analyses of September 22, 2009 and October 7, 2009:

• The CBO bases its analyses on the low-cost “silver” plans which will be offered in the exchanges. It is reasonable to think if there are silver plans, there are also gold plans. It begs the question, what package of benefits will be covered under either plan? Apparently the bill does not enumerate them. Federal subsidies are tied to the premiums on the ‘silver’ plans. Unlike the Medicare program which covers 80% of approved charges, the Baucus silver plans will only cover 70% of those charges, with the rest still owed by the patient. It seems there will still be a need for supplemental plans to cover the difference, as with Medicare. This appears an incomplete solution. For those with incomes under 200% of the federal poverty level [$23,600(projected for 2016)] there would be a sliding scale to assist in payment. However, for individuals making $14,700 annually (pre-tax), the premiums plus cost-sharing payments the patient is expected to pay would equal $1,200. This burden still seems quite high for our poorest people. It seems likely they will forgo coverage to save what little they have.
• Premiums are still allowed to vary by age. This is problematic because it fails to address the 13% of those aged 55-64 who are uninsured. Because of their age, these people are the most likely to have accumulated chronic conditions and need insurance coverage to optimally manage their care.

Baucaus Plan's Impact on Insurance Premiums

The big controversy today is whether or not the Baucus Bill will actually be a solution to higher health insurance premiums. Politicians claim the Price Waterhouse Coopers report commissioned by America’s Health Insurance Plans (AHIP) is alarmist and self-serving in stating that insurance premiums will be higher in the proposed health insurance exchanges. However, it seems this report confirms the Congressional Budget Office’s letter to Senator Max Baucus dated September 22, 2009. It explicitly states on page 6 “…premiums in the new exchanges would tend to be higher than the average premiums in the current-law individual market – again with all other factors held equal – because the new policies would have to cover pre-existing medical conditions and could not deny coverage to people with high expected cost of healthcare. (CBO has not analyzed the magnitude of that effect.)…People with low expected costs for healthcare, however, would generally pay higher premiums.” The CBO admits it has not analyzed the effect of the no-prexisting condition policy mandate. And, it seems the CBO agrees with the PWC report.

The plan is written to fail because healthy small employer groups and individuals will go to the private sector for insurance. When they are ill, they will switch to a relatively “lower” cost co-op plan. Since pre-existing condition exclusions are outlawed, this co-op will be a magnet for the high-risk individuals or employer groups, either because of sickness or age. Since there is not a mandate for continuous coverage to be maintained, some individuals may choose to “save” money, by paying the federal fine and purchasing coverage only when they are ill. From an underwriting standpoint, there is nothing to protect the financial integrity of the Baucus plan.

Senate Finance Committe Approves Baucus Bill

What exactly was voted on yesterday? The Senate Finance Committee refused to post a copy of the proposed bill online for Americans to read. It appears that the reason why may more likely be found in the CBO's October 7, 2009 letter to the Chairman of the Senate Finance Committee, Sen. Max Baucas, page 8 which states that "The Chairman's mark, as amended, has not yet been converted into legislative language. The review of such language could lead to significant changes in the estimates of the proposals effects on the federal budget and insurance coverage."

The CBO goes on in that letter to state (page 9) that "Federal spending that would be funded by future appropriations is not reflected in these estimates. For example, implementation costs for operations of the Internal Revenue Service and the Centers for Medicare & Medicaid Services are not included." Any business must count the costs to implement an idea before it can determine whether or not there will be a positive return on the investment. How is government any different?

It seems the rules of order are now disregarded in the Senate, committees are now passing what is at best the notion of a bill/plan as opposed to a definitive plan. How can such a bill/plan be responsibly administered? A health plan requires a written contract to administer it. Apparently, Americans are now discovering not only is Congress too lazy to read the bills presented for a vote, Congress is now too lazy to even write the bills it passes! Are notions of legislation all we need now? Are we now making it all up, after the fact? This is a travesty of democracy. Americans work hard, pay their taxes and deserve far better treatment than this from their elected officials.

The Baucus Bill & Physician Reimbursement

The Baucas Bill [America's Healthy Future Act of 2009] does not eliminate the flawed physician reimbursement formula [Medicare SGR (sustainable growth rate)]. It allows for the .5% increase Congress appropriated for 2010; however, it does not eliminate the scheduled 25% cut in 2011. It is assumed that reimbursement rates will remain at current low levels (as specified by the SGR) for the subsequent years through 2019.

Historically, Congress has made adjustments annually to this "flawed" reimbursement formula which rises significantly slower than the rate of medical inflation. By cutting reimbursement rates in 2011 by 25% and keeping them there, there will be far fewer providers willing to provide services to Medicare patients. On the other hand, if Congress continues the annual adjustment process, the projected Congressional Budget Office "savings" in the bill begin to evaporate.

The bill does little to address the current high costs of providing actual care, which someone must pay. Physicians will not be able to sustain a 25% pay cut to provide care for Medicare patients. Those that do, will not be able to continue such services in subsequent years without any inflation adjustments. Apparently, a significant portion of the expense of providing care for the elderly in the future is expected to be born by physicians.

The projected "savings" of this bill are dubious at best; it is really cost-shifting. It seems a bit premature for the Senate Finance Committee to be patting itself on the back, given that this is not actually a viable solution.