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Category: Economics

The Real Fix? The Exchanges Aren’t Working. Here’s Why …

Last week President Obama announced that he will try to keep his oft repeated promise to Americans in the individual market that they can keep their plans if they like them … for a year. The media have done an excellent job explaining why President Obama’s temporary patch to the ACA may endanger its existence; in the process the American public has learned more than it ever wanted to about adverse selection, cream skimming, and most importantly crass politics.

Though the full costs of adverse selection will be muted in the first year by risk corridors and reinsurance, it is clear that the failing website, the bad press, and the recently announced delay are placing maximal stress on even those backup provisions of the bill.

Even if the ACA survives this additional insult against the economics that support its very existence, we have witnessed yet another missed opportunity for positive reform to President Obama’s signature legislative achievement. And this time we can’t just blame intransigent tea-party Republicans and their quixotic efforts at repeal; here the buck stops at 1600 Pennsylvania Ave, NW.

While many of the plans that are affected by the President’s temporary patch might actually be plans that don’t qualify as “insurance” (i.e. they have low lifetime caps on expenditures or don’t cover hospital services), numerous others actually offer quite good coverage that just don’t meet the exceptionally high standards of the newly developed minimum essential health benefit (EHB).

In many ways, the first dollar coverage for preventive care and the wide ranging number of services covered by the ACA aren’t truly insurance either. Instead, these features amount to a very generous pre-payment plan for medical services supported by the United States treasury.

These elements of the EHB are too costly and unnecessary. Perhaps even more concerning, they are just the ante. As time goes on, vested interests for everything not included in the EHB will work tirelessly to insure that their favorite benefits are included. If you want evidence of this eventuality, you need look no further than the remarkably long and growing list of benefits mandated by most states.

Keep in mind that as the EHB grows more generous the premiums and subsidies on the exchanges will also grow. And we know who will pay their “fair share” of those increases.

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Will You Be Able to Keep Your Plan? The Economics Behind the Obama Administration’s Latest Problem

By now you’ve certainly seen the headlines: “Obama administration knew millions could not keep their health insurance,” or “Report: Millions will lose health plans as ObamaCare takes hold.”

This is not just the rumblings of right wing media outlets or scare tactics, it is now becoming clear that millions of individuals who used to buy their insurance in the individual market will not be able to keep their old plans. As a result of minimum standard for health insurance “quality,” between 50 and 75 percent of existing individual insurance plans will be canceled.

White House Spokesperson Jay Carney said that these cancellations will only affect “substandard policies that don’t provide minimum services.” But again, the devil here is in the undiscussed details. The “minimum services” bar for the Affordable Care Act is actually very high and as a result the new policies that replace those being canceled can be quite expensive.

For people who are in the unsubsidized portion of the exchanges, or even those who qualify for smaller subsidies, these minimum requirements are going to result in large premium increases. While many people might all believe that these individuals be buying better insurance, this is not the argument used to gain public support for the ACA.

We’ve both been vocal in our support of moving people onto the exchanges and away from employer provided coverage. One reason for that support has been that the exchanges allow a far better matching of individual preferences for health insurance and the products that people can purchase. Certainly that was our basis for our strong support of narrow network plans on the exchanges.

Beyond the size of the network, some people don’t want to pay for generous first dollar coverage. Instead, these consumers are willing to exchange lower premiums for higher deductibles or other forms of cost sharing. Others might not be interested in having coverage for every possible service, but instead might opt for a less generous set of benefits.

They will be thwarted by the ACA.

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The Opening Act

That past month of debate over the botched launch of the health care exchanges has brought the programming geeks, and their hired mouthpieces, out in the open to defend the indefensible. As painful as this has been for so many Americans, we cannot help but be amused to hear so many commentators doing their best impression of Captain Renault and expressing their shock that the federal procurement system could have produced such an outcome. Of course, most of this is a sideshow, the opening act to an even more serious drama in the making.

Let us be clear from the outset, the rollout of Healthcare.gov is an embarrassment. However, this only becomes a real problem if it dissuades enough people who were already marginal customers with respect to their purchase of health insurance on the exchanges to simply pay the penalty and avoid the hassle of staring at a computer screen, waiting on hold for hours, or refusing to try again once the geeks get this all sorted out.

While the self-appointed technology experts on both sides of the aisle have been debating the causes of the web site debacle, attention has been diverted away from the necessarily frank discussions we must have about the real potential benefits and looming costs of the exchanges.

In a valiant attempt to steer the conversation towards the benefits of the ACA, President Obama held a rose garden press event where he repeatedly claimed that the health insurance on the exchanges is good product. But as is all too often the case, the President talked about the benefits and side stepped the difficult conversation about the costs.

At least he is half right. If they can ever fix the web sites, people with pre-existing conditions who shop on the exchanges will gain access to insurance at a more affordable price. Enrollees may save thousands of dollars. But let’s not kid ourselves.

The exchanges do not reduce the cost of medical care; they only change who pays for it. And we all know who that is.

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How Naïve Can Democrats Get?

Beholding David H. Howard’s rendering of the crazy-quilt of financial sources that have been tapped by the designers of the Affordable Care Act of 2010 (hereafter ACA ’10) to finance the new entitlements they put in place – a little nuisance tax here, a little nuisance cut in other federal spending there – reminds me once more of the sincere, indeed touching, naiveté with which Democrats tend to go about enacting new entitlements.

It is a totally counterproductive and inelegant approach. To be sure, none of the added taxes or spending cuts in the bill seriously disrupt anyone; but they do spread a little pain all around. Therefore, it seems almost deliberately designed to maximize opposition to it from many quarters.

It also leads to acute embarrassments, such as having to postpone by a year (and perhaps more years) the unseemly penalty imposed on employers with 50 or more employees each working 40 your or more etc etc, even at the appearance of having broken the law – or so we are told.

When will the Democrats ever learn?

And from whom might they learn?

From the Republicans, of course.

Dream back to the good old days – 2003 – when the Bush Administration and the Republican Congress pushed through, with deft parliamentary maneuvering and some arms twisting, H.R. 1 (2003), the Medicare Prescription Drug, Improvement, and Modernization Act – hereafter the MMA ’03.

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When Talking About the Exchanges, It’s Probably a Good Idea to Look Beyond Opening Week Returns

It was an up and down week for supporters of the Affordable Care Act. Republicans appear to have stopped linking government funding with partial repeal of the ACA. And well-publicized software problems plagued the 36 federally managed exchanges, making it difficult for enrollees to complete the application process. Still, supporters could crow about the large number of insurers who are offering products and the millions of Americans who visited the online exchange enrollment sites as a clear sign of the success of the Affordable Care Act.

We should never confuse activity with accomplishment.

A few software updates will not be sufficient to assure the success of the exchanges. Two more important things must happen: Visits to web sites must translate into enrollments, and enrollees must represent the kind of cross-section of risks that will keep insurers in the exchanges in years to come.

Not surprisingly, enrollment figures vary considerably by state, with some states operating their own exchanges reporting some of the highest enrollments to date. But upon even minimal inspection, current enrollments leave much to be desired. In New York, 40,000 individuals completed applications in the first week, not bad until you consider that several million state residents are eligible for insurance.

Washington State has 1 million eligible residents and just over 10,000 applicants. Reporting that 29,000 California residents had completed their enrollment applications, exchange Executive Director Peter Lee stated that this “blew his socks off.”

Let’s put this in perspective.

With 7.1 million uninsured in California, an application pool of 29,000 shouldn’t knock any garments off of anyone!

These are the “success” stories. At the other end of the spectrum, at last count Maryland had a whopping 566 applicants. And lest we forget, applications are not the same thing as enrollments. Some insurers have claimed that applications are incomplete – potentially leading to a troubling situation where uninsured individuals may incorrectly think that they have secured insurance.

Before patting themselves on the back, exchange supporters should stand back and see what happens. Coming from the nation’s entertainment capital, California’s Mr. Lee should be especially aware of the dangers of judging success from opening week returns. Will the exchanges be like The Lone Ranger, which topped the box office in its opening week and then quickly faded away? Or will they be more like Argo, which gradually built its audience over time? Time will tell.

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Paying for the ACA: A Field Guide

Like many health policy experts, I’ve closely followed and participated in the debate over the Affordable Care Act. I’ve spoken at town hall events, fielded questions from reporters, and discussed the ACA with students, friends, and colleagues.I have been asked a wide range of questions about the ACA, but I am always amazed by the one topic that almost never seems to come up: how the deeply indebted federal government will pay the roughly $200 billion annual cost of expanding coverage.

The inattention to the financing of the ACA by the public, the media, and even Republicans is a testament to the skill of its drafters. The benefits of the ACA are highly visible, the costs are concealed.

Consider the ACA’s treatment of Medicare hospital reimbursements. Reimbursements to hospitals increase from year to year based on the projected increase in hospitals’ labor and capital costs. The ACA reduces the rate of growth in payments by 0.1 percentage points per year plus an additional factor based on projected economy-wide productivity growth. It is possible that the application of these factors will result in a net reduction in payments, but, more likely, payments will not increase by as much as they would have in the absence of the law.

This provision, which will raise $64 billion in 2020, may result in the closure of some hospitals and reduce quality in those that remain open. However, these effects are uncertain and difficult to summarize in a soundbite.

Other financing provisions are only slightly less obtuse. About one quarter of Medicare beneficiaries are enrolled in private health plans, the so-called Medicare Advantage plans. The ACA will revamp the formula used to set payments to these plans for a savings of $19 billion in 2020. The ACA will reduce subsidies to so-called Disproportionate Share Hospitals (hospitals that serve a large number of low-income patients) for a 2020 savings of $9 billion.

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How I Learned to Stop Worrying and Love Obamacare

There is an ancient Arabic proverb: “The enemy of my enemy is my friend.” With this in mind, I can’t help but think that whatever Senator and leading Tea Party blowhard Ted Cruz opposes must be good. When Cruz decided to try to shut down America because he opposes Obamacare , well that sealed the deal for me. I say “Obamacare forever.”

Readers know that I think Obamacare has too many rules that create problems for payers and providers alike, and relies on some questionable practices for funding. I don’t like the rush to form ACOs or the lack of serious cost-effectiveness analysis (admittedly a concession to Republicans.) But Obamacare beats the hell (sorry Ted) out of Cruzcare, which, as far as I can tell, goes something like this: “Didn’t put aside enough money for that life-saving operation? Here is a prayer that might help.”

I used to sort of be a Republican. I voted for Bush (I won’t say which one in order to avoid embarrassment) and voted against Obama more than once (living in Illinois I had several opportunities.) And I hate that Obama is playing at President like someone playing poker with a winning hand.

This isn’t supposed to be about which politician claims the biggest pot for himself. But I will take a selfish and somewhat scornful Obama over Ted Cruz and the Tea Cozies any and every day of the week. And I will work to find the best Democratic leaders if all the Republicans can offer is Cruz and his TCs.

Shut down the government to finally fund Medicare and Social Security? Maybe. Shut down the government to achieve a rational tax code? Sure. Shut down the government to balance the budget? Now we are talking. But shut down the government to block the opening of the health insurance exchanges? How absurd!

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Talmudic-Like Studies of Republican Health Reform Ideas

After doing Talmudic-like studies of the doctrines on health reform promulgated by Republican health-policy makers and the conservative economists who inspired them during the past two decades, I am devastated to discover that all of those studies have been for naught. We are now told, sometimes by the same prophets of yore, that these doctrines were not only wrong, but outright heretical, which in this context means un-American.

New doctrines are rumored to be in the making, but the first word on them has yet to be committed to new, sacred tablets, mainly because there have not yet emerged any new ideas worth committing to tablets.

Do not take my word for it. Newt Gingrich, one of the Grand Old Party’s aging prophets, said so himself in his recent speech to the Republican National Committee.

Comes now conservative commentator John R. Graham of the Pacific Research Institute, telling us that Republicans seem lost in the desert even in their hit-and-run insurgency against their sworn enemy, the Affordable Care Act of 2010 (ACA).

What is a befuddled immigrant to the United States like me, eagerly trying to become a right thinking American, to make of it all?

My early introduction to the texts coming from conservative thinking on health reform was the Heritage Plan of 1989, Viewed through the prism of the ACA of 2010, its language seems eerily familiar. One provision, for example, proposed a:

“[m]andate all households to obtain adequate insurance. Many states now require passengers in automobiles to wear seatbelts for their own protection. Many others require anybody driving a car to have liability insurance. But neither the federal government nor any state requires all households to protect themselves from the potentially catastrophic costs of a serious accident or illness. Under the Heritage plan, there would be such a requirement” (p.5).

The Heritage Plan also called for income-related, refundable tax credits toward the purchase of private health insurance. Although it did not call for community rated premiums, it proposed means-tested public subsidies and toward high out-of-pocket expenses of individuals and families. It did not spell out the daunting administrative apparatus that would entail. But one can imagine the required new bureaucratic apparatus, replete with auditors to prevent fraud and abuse. Presumably, income-related subsidies would have involved the Internal Revenue Service (IRS) in some ways as well.

Next came a text put forth by conservative economist Mark V. Pauly and like-minded colleagues in Health Affairs. It is worth a reading again. Here’s the core of these prophets’ proposal:

“In our scheme, every person would be required to obtain basic coverage, through either an individual or a family insurance plan. …All basic plans would be required to cover specified health services; plans could, however, offer more generous benefits or supplemental policies. The maximum out-of-pocket expense (stop-loss) permitted would be geared to income, with more complete coverage required for lower-income people, to ensure that no one faced the risk of out-of-pocket expenses that were catastrophic, given their income.” Again, lots of government intrusion into health care, along with links to the IRS.

There then followed a real life health bill based on these ideas, the late Republican John Chafee’s antidote to the emerging Clinton plan. It was called the “Health Equity and Access Reform Today Act of 1993” and had an impressively long list of Republican co-sponsors, among them Senator’s Orrin Hatch (R-Utah) and Charles Grassley (R-Iowa), now fierce opponents of the ACA. As the folks at the Kaiser Family Foundation have shown, many of its provisions of Chafee’s bill have a striking similarity to provisions in the ACA of 2010 and comparing.

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Beyond the Affordable Care Act: A Framework for Getting Health Care Reform Right

The following was drafted quite a few months ago, and had its genesis in a list of recommendations for improving the health care system that David Dranove solicited from a number of academics for an issue of Health Management, Policy and Innovation. I’ve dawdled in finishing and polishing it up, but seeing the stimulating reform proposal posted  recently by Jay Bhattacharya, Amitabh Chandra, Mike Chernew, Dana Goldman, Anupam Jena, Darius Lakdawalla, Anup Malani and Tom Philipson motivated me to return and finish it; so here it is finally.

Introduction

One can hardly say that there’s been too little discussion of health reform recently. However, much of the discussion is focused on the ACA and its details. That’s fine, but we’ve gotten very far away from thinking about overarching principles that we think should guide the design of a health system, and what that implies for what it would look like [1]. What follows are some thoughts on what such a health reform might look like. They are informed by my read of the research evidence, and my observations of the U.S. health care system over a long period of time, but should be understood as representing only my personal opinions.

This is not intended as a criticism of the ACA. While the ACA certainly isn’t perfect, in my opinion we’re better off as a country with it than without it. However, there will be modifications to the ACA and other changes to the health system as we move forward, so having a framework to structure our thinking will be useful as we consider these inevitable changes.

Guiding Principles

What I propose below is guided by the following. First, economic efficiency is a goal. This simply means avoiding waste, i.e, trying to generate the maximum benefits net of costs. The second goal is that no American is exposed to excessive risk to their health or finances due to medical expenses. Last, the overarching design principle is to create basic ground rules for the system and then let the system run, avoiding heavy handed regulation or micro management. The key objective of these ground rules is to give participants the right incentives insofar as possible, while achieving insurance objectives. With that in mind, compassionate, efficient health reform would do the following.

Health Insurance Reform

First, eliminate the tax exclusion of employer sponsored health insurance. The exclusion of employer sponsored health insurance from income taxation distorts the demand for insurance. This leads to people with employer sponsored health insurance holding excessive coverage, which drives up medical spending and thus insurance premiums. Ironically, not taxing health insurance ends up making both health care and health insurance less affordable. Eliminating the tax exclusion of employer sponsored health insurance will eliminate a major distortion in health insurance, health care, and labor markets. It can generate substantial tax revenues (it’s estimated that the value of the state and federal income tax exclusion for 2009 was $260 billion[2]), while potentially allowing for lower income tax rates. It’s also worth pointing out that the subsidy is biggest for those who face the highest marginal tax rates, i.e., it’s regressive.

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Is Health Industry Price Inflation Really At a Historical Low?

One hesitates to make too much of a single report, but the Altarum Institute’s July Report, “Health Care Price Growth at 20+ Year Low,” certainly commands one’s attention.  According to Altarum’s analysis, the health sector pricing trend ran at a 1.0 percent annual rate in May 2013, lowest since January of 1990.  What is striking about Altarum’s health care pricing trendline is that it has declined for the last three years in spite of an alleged economic recovery.

It also runs parallel to a subsiding utilization trend, suggesting that the health sector has been unable to offset reduced utilization with price increases.  Since the beginning of the recession, pricing has subsided from double the rate of the GDP deflator to parity, and it has closely tracked the deflator with only two deviations for more than eight years. Clearly, something more than the recession is at work here.

These trendlines confirm what this observer sees from his contacts in multiple sectors of the health industry:  a widespread and durable “top line flu”.  The growth in enterprise revenue for most health providers and manufacturers has been static (e.g. very low single digits or actually declining) over the last two years.  Most investor-owned hospitals, pharmaceutical companies, device manufacturers, and physician practices (pretty much everyone except the consultants and IT vendors) have reported both revenue stasis and earnings compression.

My economist friends point to rising consumer copayments as inhibiting price increases.  The Kaiser Family Foundation has reported almost a quadrupling of the number of covered workers in high deductible health plans (from 5 percent to 19 percent) since the end of the recession.  It is also possible that a disinflationary mindset has inhibited providers and suppliers from seeking outsized price increases to compensate for lost sales volume.  For suppliers, the marked decline of “physician preference” marketing has also hurt both sales and margins.

Hospital pricing. Performance of hospital prices will provide more fodder for those concerned about hospital consolidation pushing prices up.  On the one hand, overall hospital prices rose an annualized 1.8 percent for May 2013, fractionally higher than the consumer price index (CPI) at 1.4 percent.  However, when one strips out the “administered price” portion (Medicaid and Medicare), hospital prices to privately insured patients rose 4.8 percent annualized in May, nearly five times rate of health prices as a whole.  Altarum suggests that cost shifting might explain this significant disparity.  However, even this increase to private patients was not enough to raise overall health costs significantly.

Government payment to hospitals has trended lower for multiple reasons.   Many state Medicaid plans have cut hospital rates in the past several years to help balance state budgets.  And in addition to the ACA’s mandated reductions in hospitals’ disproportionate share payments and DRG updates, the sequester took a significant further bite out of DRG payments during the winter.

Since most hospital contracts with private insurers are multi-year, it’s difficult to argue that compensating upward revisions in private health insurance contract rates would yet be reflected in national economic statistics.  Moreover, not all hospitals are part of systems capable of exerting pricing power on private health plans.  Have-not hospitals have had their prices constrained by payer contracts, compensating for the effect of leverage by market hegemons.  We’ll have more evidence in a year to confirm or disconfirm the cost shifting/pricing power hypothesis.

There’s another indicator of a tougher hospital pricing environment.  According to the Advisory Board’s Dan Diamond, hospital employment has actually contracted in one-quarter of the monthly jobs reports from the Bureau of Labor Statistics since January 2009, including a 6000 person force reduction in May, 2013.  On balance, hospital executives would much rather raise rates than lay off staff, so the fact that the nearly unbroken decades-long expansion of hospital headcounts is faltering suggests a very difficult pricing environment for hospital services.

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