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Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE.

Senate Health Care Reform: Two Huge Problems, One Giant Red Herring

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

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

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The Chairman’s Mark – Good Ideas, Potentially Fatal Flaws

Roger Collier

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

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

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Happy Trails, Trigger

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

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

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

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

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Time for a Closer Look (and Lower Costs)

By ROGER COLLIER

Democrats-cap-and-trade-bill-house-renewable

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care Reform Update.

More on health care reform by this author:

Can HR 3200 Be Fixed?

Health care reform looks like it’s stalled. And rightly so, based on the provisions of the House Democrats’ health care reform bill. The grossly misnamed America’s Affordable Health Choices Act (HR 3200) combines the worst of all possible worlds: high taxpayer costs, big increases in federal deficits, and disincentives for businesses to hire, while leaving up to twenty million individuals still uninsured and doing little or nothing to control runaway national health care expenditures.

Although the bill would make health care coverage available to many of the millions who currently cannot afford it, its provisions will potentially add some $200 billion a year to federal expenditures, make only miniscule reductions in Medicare cost trends, and impose play-or-pay provisions and a new surtax that could hurt smaller businesses just as they try to recover from the recession.

So, is there anything that can be done to fix HR 3200 so that it would provide affordable universal health care coverage without increasing federal deficits or halting the recovery from the recession?

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Has Harry Reid Torpedoed Reform?

Health care reform ran into new BIG trouble this week with a series of comments from Senate Majority Leader Harry Reid.

On Tuesday, Reid leapt into the middle of reform negotiations, telling Senate Finance Committee Chairman Max Baucus that Democratic leaders had major concerns about the draft Senate Finance bill’s proposed taxation of some health benefits and the exclusion of a strong public plan.

The immediate result was the effective suspension of bipartisan negotiations on the Senate Finance draft, with Republican Senators Chuck Grassley and Orrin Hatch both saying that bill markup would have to be delayed indefinitely until the conflict was resolved.

Yesterday, Reid tried to soften his comments in conversation with Senate Republicans, but later indicated that taxing health care benefits was still unacceptable, leaving Senate Finance members wondering how else to help pay for the trillion dollars (or more, perhaps much more) that they estimate as the ten-year cost of reform.

Reid’s comments reflect the findings of a series of straw polls in which various senators’ constituents were asked if they supported taxing health care benefits (Surprise! They didn’t want any new taxes), as well as an aggressive union-led campaign against the idea.

Reid’s intervention may very well have torpedoed reform. It leaves Senate Finance with few choices for funding reform, and virtually none that are likely to attract any bipartisan support.

Even if Senate Finance members are able to find other funding solutions, killing taxation of health care benefits will remove from the Senate Finance draft one of the very few provisions that might have resulted in slowing of overall health care cost increases. Leaving tax deductibility of benefits in place will continue to encourage the belief in those lucky enough to have generous employer coverage that health care is “free,” and in turn pander to providers eager to invest in high-priced resources that increase costs for everyone else. Meanwhile, Reid’s insistence on a strong public plan as an alternative cost control mechanism is likely to end support from moderate Republicans and centrist Democrats and to generate huge (and well-funded) opposition from insurers and providers. And, as the Clinton administration discovered sixteen years ago, any slowing of legislative momentum can be fatal to reform.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE.

HELP! This is Unbelievable

Key members of the Senate Health, Education, Labor, and Pensions Committee announced on Thursday what they claimed were dramatically improved cost and coverage estimates for the latest version of their health care reform bill.

Headed by Democratic Senator Christopher Dodd, HELP members (in a Muzak-marred conference call with reporters) stated that the revised bill would cost only $611 billion over ten years, a figure apparently computed by the CBO, and that with a further expansion of Medicaid would provide coverage for 97 percent of Americans.

Key features of the bill provided during the conference call included a public plan option, subsidies for lower-income individuals buying insurance through an exchange mechanism, and a play-or-pay employer mandate.

Sounds good? We’ll have to wait for details, but two big problems are already apparent.

The first BIG problem is that the ten-year cost estimate of $611 billion excludes the cost of Medicaid expansion. With Senator Dodd’s admission that the HELP Committee expects this to provide coverage for 7 percent of Americans (the difference between the 97 percent coverage with Medicaid expansion and 90 percent without it), the total cost balloons to far more than a trillion dollars. A rough calculation of Medicaid costs for 20 million Americans at present funding levels gives a total of $80 billion a year – or $800 billion just for Medicaid expansion, presumably to be shared with state governments already on the verge of bankruptcy.

Even assuming that Senator Dodd misspoke, and the at he intended his percentages to apply only to under-65 Americans, the ten-year estimate for Medicaid expansion is still over $700 billion—with no provision for medical inflation. And, given the financial condition of most states, most of this cost would have to be borne by the federal government.

The second BIG problem is the absurdly modest levy—$750 for businesses with more than 25 workers and $375 for businesses with fewer than 25—to be imposed on employers not providing employee coverage. It’s hard to believe, in the middle of a deepening recession, that many employers will not choose to pay the $375 or $750 levy rather than buy insurance at $3,000 or more (just for the employee, with no family coverage), with additional government subsidies needed to bridge the funding gap.

The CBO has apparently assumed in its estimates that there will not be a big change in the extent of employer-sponsored coverage over the ten-year period, but this seems unrealistic. While we have not seen a “rush to the exits” in Massachusetts so far, the longer-term experience of Hawaii may be more meaningful. Immediately after Hawaii passed its mandated coverage law, the uninsured rate was below 5 percent, but as a series of recessions hit Hawaii’s economy, the rate increased to 8 percent in 1998, and close to 10 percent today. Only the truly naïve can believe that numerous US employers won’t either choose the far cheaper levy option or—as in Hawaii—find other ways of ducking the employer mandate.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE [reformupdate.blogspot.com].

We Need Southwest Airlines!

Roger Collier

Can price competition cut health care costs? There are lessons to be learned from the airline industry.

Over thirty years, per capita health care costs, adjusted for inflation, have increased two and a half times. In the same period, despite a doubling of fuel prices, airline fares have fallen by more than half.

Why the five-fold disparity?

It’s obvious the two industries have followed very different paths. While airline travel has become an experience of packed planes, crowded airports, and peanuts (or less) meal service, health care has seen dramatic advances. Treatments that a few years ago seemed unimaginable are now commonplace: heart transplants, anti-depression drugs, artificial joints, laparoscopic surgery using miniature television cameras, and—of course—Viagra.

That’s only part of the story, though. While air travel is now safer and more convenient, with more frequent flights to more destinations, health care in some communities is so inadequate that morbidity and mortality rates are comparable to those of third world countries.

Why have airlines been apparently so much more successful in giving value for money?

Led by Southwest, the airlines that sprung up after deregulation recognized that individual flyers were price-sensitive, and cut their costs accordingly. They faced barriers, though, many of them analogous to those in today’s health care system. Business travelers flying on their employers’ nickel resisted efforts to move them to crowded peanut-only flights, frequent flyers resisted having to switch from their favorite mileage plan to that of another airline network, and travel agents much preferred to send their customers on airlines paying higher commissions.

Southwest and its peers succeeded by marketing directly to the public, through relentless emphasis on lower fares, and by maintaining standards that were, if not luxurious, acceptable to travelers. Few businesses are now sympathetic to employees’ preferences for more comfortable higher-cost flights, frequent travelers have adapted to low-cost airlines’ mileage programs, and travel agents and their commissions are almost a thing of the past.

And now, just as Southwest Airlines travelers found that they reached their destinations as reliably—if not quite as comfortably—as before, so recent studies have shown that there is little or no relationship, within the range of acceptable medical standards, between health care costs and quality.

So, what must health care reform do to emulate Southwest Airlines’ effect on fares?

First, just as deregulation ended most legacy airlines’ government subsidies, the tax exemption for employer-paid insurance should be reduced or eliminated.  Not only is the $300 billion a year tax subsidy needed to help pay for reform, but cutting the exemption will discourage overly-generous coverage and remove the inequity between employer-paid and individual-paid insurance.

Second, just as travelers can compare airlines’ fares for the same itinerary using Orbitz or Expedia, insurers should be required to price the same basic benefits, perhaps through insurance exchanges. Supplemental benefits could be offered and separately priced, but being able to compare prices for the same basic coverage is essential.

Third, just as individuals purchase most airline tickets, so individuals should be responsible for choosing insurance to meet their own needs. In practice, this implies subsidies for the lower-income, and perhaps also some form of voucher model to facilitate the process. It may be appropriate, however, to allow self-insuring companies to continue to provide employee coverage since, with no insurer risk or profit involved, they typically provide better value.

Fourth, just as airlines’ pay is negotiated only with their own unions—not with every airline union in each airport—so there should be more effective constraints on provider monopolies in which specialists in an area group together to control prices.

Emulating Southwest Airlines won’t result in the cost of health care falling by half, but it offers a far more promising approach to cost control than the expensive band-aid solutions, superimposed on the worst features of our present system, apparently preferred by congressional committees.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies. He is editor of Health Care REFORM UPDATE [reformupdate.blogspot.com].

The Great $2 Billion Cost Cut “Promise” Meets Another Obstacle

By ROGER COLLIER

Roger collier

It turns out that the hospital, insurance and pharmaceutical organizations who announced with great  fanfare a couple of weeks ago their plan to cut/maybe think about cutting* $2 trillion/maybe nothing* from their costs may have been even more devious/disingenuous/stupid* than was apparent at the time.  [*choose one]

The New York Times pointed out yesterday that any such organized effort to reduce prices could face antitrust charges. In the Times’ words: “Antitrust lawyers say doctors,  hospitals, insurance companies and drug makers will be running huge legal risks if they get together and agree on a strategy to hold down prices and reduce the growth of health spending.”

The drug manufacturer lobbyists who so eagerly participated in the May 11 meeting with President Obama should have been especially aware of the issue. Back in 1993, it was their trade group that, in an effort to soften the threat of Clintoncare, offered to limit pharmaceutical price increases to the CPI rate, then were told by the Justice Department that this would violate antitrust laws.

And, again according to the Times, it was the AHA who complained recently to the Federal Trade Commission that antitrust laws make it difficult for providers to collaborate and lower costs.

So, first these organizations promise to cut costs by $2 trillion, then they say they didn’t really mean it, and now it turns out that it would probably be illegal (which they should have been fully aware of, anyway). Who’s trying to fool whom?
Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.  He is editor of Health Care REFORM UPDATE [reformupdate.blogspot.com].

The Path of Five Fallacies

Roger collierNo, it’s not one of those Chinese operas from the Chairman Mao years, but rather my reaction to a recent  report from the prestigious Commonwealth Fund.  “The Path to a High Performance US Health System,” and its accompanying technical documentation, forecast savings for a “comprehensive set of insurance, payment, and system reforms that could guarantee affordable coverage for all by 2012, improve health outcomes, and slow health spending growth by $3 trillion by 2020.”

On a positive note, both the report and the technical documentation are well worth reading.  The report assembles in a single “system” most of the proposals currently being talked about by HHS Secretary-nominee Kathleen Sebelius and senior staff in the White House Office of Health Reform, while the technical documentation provides a comprehensive analysis of costs and savings that might result from these changes.

So, should we have confidence that the proposed “system” can get us close to universal coverage and make a $3 trillion dent in health care costs? Unfortunately not.

While the Commonwealth Fund report contains many sensible ideas, the conclusions are undermined by five major fallacies.

Fallacy Number One:  Small businesses will accept a “play-or-pay” proposal that forces them to pay a minimum of seven percent of payroll for health care.

There are practical reasons why play-or-pay won’t be effective, but the biggest obstacle is political feasibility. While a seven-percent levy might seem modest to businesses that currently pay much more for coverage, it’s inconceivable that such a proposal in the middle of a recession would produce other than fierce opposition from NFIB and its allies. Unless health care reform is incorporated in a budget reconciliation bill—unlikely since it would upend the Senate tradition of compromise—it will require sixty yea votes, something that small businesses can pretty much guarantee to prevent. (The Commonwealth Fund seems to have forgotten that business lobbyists helped defeat California’s reform bill that called for just a four percent levy.)

Fallacy Number Two:  The insurance industry will allow the creation of a “public plan” to compete with their own offerings—a plan that the Commonwealth Fund estimates will drive provider payments down by as much as thirty percent compared to traditional FFS insurance, and attract up to two-thirds of the individual and group markets.

Oh, s-u-r-e! Given that for most insurers this is a bigger threat even than the 1993 Clinton bill (where at least insurers had the possibility of turning themselves into managed competition entities), the reality is that the public plan proposal is even less likely to succeed than play-or-pay. The assumption that it would be the only FFS plan sold through the proposed insurance exchange is especially likely to leave AHIP leaders foaming at the mouth. Providers are unlikely to be too eager to go along with a proposal that slashes payment rates by thirty percent, either. (And, as I’ve noted previously it’s not that certain that public programs are superior to private coverage.)

Fallacy Number Three:  Government spending on IT of $120 billion over ten years will yield savings of almost $200 billion.

A huge coup for IT lobbyists! There are certainly strong arguments for electronic medical records (no one wants to be on the receiving end of one of those nasty drug-drug interactions), but the forecast savings are unlikely to be anything but illusory. Integrated health care systems like Kaiser may be able to achieve savings (hopefully, given the $4 billion that Kaiser has sunk into its own IT project), but the great majority of US providers have neither the same level of integration nor the same incentives. A more realistic view is found in last year’s Congressional Budget Office report on health care issues, “By itself, the adoption of more health IT offers many benefits, but it is generally not sufficient to produce substantial cost savings because the incentives for many providers to use that technology to control costs is not strong.” (By the way, did anyone in the White House think to ask their own Budget Director, Peter Orszag, who oversaw the preparation of the CBO report, before deciding to spend $19 billion on health care IT?)

Fallacy Number Four:  Establishment of a “Center for Comparative Effectiveness and Health Care Decision-Making” will cut expenditures by more than $600 billion over the next decade.

H-m-m-m. While it’s hard to argue against something that seems so sensible (we’d all prefer our docs to know what works best), the savings projection seems wildly optimistic. The $600 billion estimate assumes that more intrusive (but unfunded) public program claims processing procedures will dramatically change provider behavior. We all know from the Dartmouth Atlas reports that there’s lots of room for improvement, but without the control over resources that the UK’s NICE enjoys, it’s hard to believe that those high-cost providers in Miami (and elsewhere) will go along with slashing their incomes (see Fallacy Number Five). And as the CBO report notes: “it would probably take several years before new research on comparative effectiveness could reduce health spending substantially.”

Fallacy Number Five (perhaps the biggest fallacy of all): Providers and patients will behave the way the Commonwealth Fund (and most of the rest of us) would like them to.

Unfortunately, this piece of wishful thinking is at odds with the incentives in our current supply-driven health care system. Outside of entities like Geisinger, Kaiser, and the Mayo Clinic, improvements in provider efficiency are likely to cut incomes, not increase them. It’s no coincidence that areas with the greatest physician and hospital densities have the highest health care costs. In a health care version of Parkinson’s Law (“Work expands so as to fill the time available for its completion”), availability of resources—whether high-tech imaging equipment or physician time—means that the resources will be utilized in patient care. Unless we can change the incentives—or control the introduction or distribution of new resources—we will never solve the health care cost problem.

Roger Collier was formerly CEO of a national health care consulting firm. His experience includes the design and implementation of innovative health care programs for HMOs, health insurers, and state and federal agencies.