Monthly Archives: August 2012

The Most Influential People in Healthcare

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The magazine Modern Healthcare came out with its list of the 100 most influential people in health care this week.  The list is dominated by politicians (understandable in this chaotic year of the ACA constitutionality battle and the presidential election).  Justice Roberts tops the list, President Obama is fourth, and HHS Secretary Sebelius is fifth (in my opinion she should be higher on the list).  Mitt Romney is 13th and his Vice Presidential running mate, Paul Ryan, is 24th.

Washington, DC, is the obvious epicenter of influence on policy, thus, the inordinate number from that area.  What’s more interesting is the significant number of hospital system and health insurance executives on the list from all over the country.  You see representatives from familiar organizations like Aetna, Kaiser Permanente, WellPoint, Humana, Mayo Clinic, Cleveland Clinic, and Geisinger Health System.

As important as these individuals and the organizations they lead and represent are, I’m glad to see leaders from organizations in my home state (Texas) who are not so well known are also on the list: Dan Wolterman of Memorial Hermann in Houston, Joel Allison of the Baylor Health Care System in Dallas, and Trevor Fetter of Tenet also in Dallas.  I’m familiar with these organizations and their fine work in the state of Texas.

Sometimes those of us in the “flyover country” go unrecognized and unrewarded.  I say, “A tip of the hat to my fellow Texans for the work you’re doing.”

By the way, there was only one health economist on the list, Jonathan Gruber of Harvard.  Seems that those of us toiling in academe have a long way to go before we’re perceived as having much influence on what we study.

Fact Checking Paul Ryan’s Speech

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I received an email this morning from Jim Messina, the President’s campaign manager, accusing Paul Ryan of lying in his acceptance speech last night.  “He lied about Medicare.  He lied about the Recovery Act.  He lied about the deficit and debt.  He even dishonestly attacked Barack Obama for the closing of a GM plant in his hometown of Janesville, Wisconsin — a plant that closed in December 2008 under George W. Bush.”

I write about health policy, so I’m not going to comment on all the accusations, but I will say this about the Janesville plant closing.  President Obama visited that plant during his 2008 campaign.  During that visit the President said: “I believe that if our government is there to support you. . . this plant will be here for another hundred years.”  Ryan’s comment:  “Well, as it turned out, that plant didn’t last another year.  It is locked up and empty to this day.”  Yes, the plant was scheduled for closure during the Bush administration, but I believe the point was not to blame President Obama for its closure, but to point out that promises are easy to make, but hard to keep.   And one of the themes of the speech was that we shouldn’t judge someone by their promises, but by their actions.  By the way, the Wikipedia account of the plant closing has already been edited to clarify the actual sequence of events.

Now let’s focus on the Medicare “lie.”  Ryan referred to the Affordable Care Act (out of concern for all those leftist pundits who are stroking out because they see racism in certain code words, I’ll refrain from calling the ACA, Obamacare) as the “coldest power play of all [coming] at the expense of the elderly.”  He went on to explain that “the planners in Washington … didn’t have enough money…. So, they just took it all away from Medicare.”  Ryan is referring to estimated $716 billion that is removed from Medicare to fund the expansion of Medicaid and the state exchange subsidies in the new law.  He concludes the Medicare portion of his speech by saying, “The greatest threat to Medicare is Obamacare.”

I’m assuming that the last statement is the “lie” that Messina is talking about.  So to what extent does the ACA threaten Medicare?  The obvious threat is the one to Medicare Advantage.  About 25% of the cut comes out of the Medicare Advantage program.  As a result the CBO estimates that about half of its enrollees will be forced out of the program and back into traditional Medicare.  It’s fair to ask the seniors who will lose their insurance of choice and are forced back into traditional Medicare whether or not that’s a threat.

Possibly the biggest threat to the program comes as a result of the creation of the Independent Payment Advisory Board (IPAB) and its control over payment rates to providers.  As I said in an earlier post (“The Obama Medicare Reform Plan,”  August 24, 2012) if historical growth rates prevail into the future, using the ACA formula, spending on physicians’ services will have to be reduced by almost 5% annually.  Ignoring the obvious threat to provider incomes, how are these spending cuts a threat to Medicare?  The obvious answer, they will affect patient access to medical services.

The Affordable Care Act was about giving people access to health insurance with little thought to providing access to medical services.  Too many physicians do not accept new Medicare patients now.  How will payment cuts affect future access?  How will the Act affect access to hospitals?  Only about 12% of all community hospitals make enough on Medicare to cover their expenses.  Without the ability to shift costs to privately insured patients, an out-of-date financial model, those who can’t at least break even on Medicare will only accept Medicare patients in emergency situations.  Seniors will simply receive their medical care at hospital emergency rooms.

Is this a threat?  I’ll let you answer that question.

Private Medicare that Works

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I told my undergraduate health economics class today that only members of Congress read the New York Times.  Well, for the second day in a row I’m writing about a Times article.  I’m not a member of Congress so I must be wrong about the newspaper’s readership.  I’ll admit that I’m not in agreement with much of the editorial content of the New York Times, but when I do agree I should acknowledge that fact.

Robert Pear writing this past weekend (“Despite Democrats’ Warnings, Private Medicare Plans Find Success”) looks at the success of Medicare’s two privately-run programs, Medicare Advantage and its out-patient prescription drug program, Part D.  Both have proven quite popular and relatively successful in controlling spending.  Medicare Advantage provides primary insurance coverage to over 12 million enrollees, over 25% of the eligible population.  The competitive bidding process for 2013 recently concluded and for the third consecutive year premiums remained constant.  Similarly, Part D, which is exclusively private coverage, provides drug coverage for a premium that is 30% lower than predicted when the program began.

Competition and choice are powerful partners providing incentives to improve efficiency and hold down spending.  These are the same incentives that Paul Ryan believes can accomplish similar results for the rest of Medicare.

But Ryan has his doubters.  When Part D was being debated in the House 10 years ago, then Speaker Nancy Pelosi said: “Most seniors will be worse off.  This is the beginning of the end of Medicare as we know it.”

In the same vein Democrat Senator Tom Harkin said: “We hear the claim that private-sector competition will drive down costs and save Medicare.  Nonsense!”

I don’t give much credence to bloviating, partisan politicians.  I tend to agree with serious scholars like Roger Feldman, University of Minnesota health insurance professor, when he said: “Competitive bidding could save a substantial amount of money, helping solve Medicare’s fiscal crisis.”

Ryan’s premium support plan to reform Medicare is based on competitive bidding.  Instead of relying on the US taxpayer to shoulder the entire financial risk associated with the growth in Medicare spending (the case with traditional Medicare), why not let private insurers share in that risk (like in Medicare’s Advantage and Part D programs)?  Maybe Paul Ryan is on to something.

Note to self: Don’t be so hard on the New York Times.  Occasionally, they get it right.

I wish they would have read it first

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Remember when House Speaker Nancy Pelosi said that “we have to pass the bill so that you can find out what is in it?”  As you are aware, they passed the bill and now we’re finding out that there are problems with it.  The New York Times calls the recent discovery “A glitch in health care reform” (see August 25, 2012 edition).

Workers making less than 400% of poverty level income (about $90,000) are eligible for subsidies to purchase their own insurance if they can’t afford the policy available to them through their work.  The “glitch” comes because of the law’s definition of the “affordable” policy.  The employer’s obligation to provide insurance only applies to individual coverage.  For example, a worker making $50,000 can qualify for a subsidy if his or her share of the insurance plan costs more than 6.77% of income, or $3,385.  If the worker pays 25% of the total $4,500 premium, or $1,125, there is no subsidy and the worker pays $1,125.

The problem arises if the worker is looking to insure a family of four.  The typical plan costs $12,130 and the employer is only obligated to provide an individual plan.  The worker is covered, but the family is not.  Remember the worker is eligible for a subsidy only if his or her share is over $3,385.  The worker’s share of the premium for the required plan is still $1,125.  Thus, if family coverage is desired, the worker pays the difference between the cost of a family plan and that of an individual plan.

More proof that it would have been nice if we had known what’s in the law before they passed the law.  The Kaiser Family Foundation has estimated that as many as 3.9 million dependents may be affected by this “glitch.”

The Kaiser Family Foundation Subsidy Calculator can be found at http://healthreform.kff.org/Subsidycalculator.aspx.

Do you really want the insurance policy your employer chooses for you?

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One of the President’s promises when he was promoting the Affordable Care Act was the now infamous “If you like your health insurance, you will be able to keep your health insurance.” Soon after he made that statement, the Congressional Budget Office (CBO) provided an analysis of the legislation and estimated that 6-7 million Americans would lose employer sponsored insurance (ESI) and instead receive coverage from one of the insurance exchanges.  After the June SCOTUS decision on the Act’s constitutionality, the CBO revised that number and now estimate that it will be more like 20 million.  Other analyses (McKinsey) estimate that the number losing ESI could run as high as 80 million.

I’m not sure whose estimate is closer, but let’s consider the incentives.  Using the table below let’s look at it from the employer’s perspective.  Working with the column on the left, suppose a worker is paid $50,000 in salary and has a generous family insurance plan with the employer paying 75% of the $13,375 annual premium. The total compensation cost of hiring the worker is $41,335 (the employer pays FICA and gets a tax deduction equal to 35% of the before tax expense).  Instead the employer could forego providing insurance and instead choose to pay the penalty ($2,000) for failure to do so.  In that case, the employer could pay the worker an additional $6,200 and still end up with a total compensation cost of $41,335.

With Insurance

Employer

Without Insurance

50,000

Salary Paid

56,200

10,025

Family Premium (75%)

            0

60,025

Salary + Insurance

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

63,595

BT Personnel Expense

60,500

22,260

Tax Deduction (35%)

21,165

41,335

AT Personnel Expense

39,335

            0

Penalty

   2,000

41,335

Personnel Expense AT &   Penalty

41,335

Examine the table below to understand how will the employee might respond to this situation.  With insurance the employee receives $50,000 (enjoys a $43,086 before-tax take-home) and a generous insurance policy provided with a generous subsidy from the employer.  Without insurance the worker receives $56,200, pays the FICA tax, a 2.5% penalty for not having insurance, and still has $50,600 to take home before-taxes.  Should the worker seek insurance through an exchange, there is no penalty and the maximum premium of 7.7% of income.  Bottom line, the worker has comparable insurance and $47,573 after paying for health insurance (a 10% increase in take-home pay).

With Insurance

Employee

Without Insurance

50,000

Salary Paid

56,200

   3,344

Family Premium (25%)

            0

46,656

Medicare Salary

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

43,086

BT Take Home

51,900

            0

Penalty (2.5%)

   1,300

43,086

BT Take Home less Penalty

50,600

 

Maximum Exchange Premium

   4,327

 

BT Take Home with Insurance

47,573

With the prospects of insurance and an additional 10% take-home pay, workers have an clear incentive to request (no, demand) the additional income and seek their own insurance through the exchange.  Employers would be indifferent.  How many will pursue this option?  Six million, 20 million, 80 million.  What would you do?  The choice seems obvious, 10 percent more money and the ability to choose my own insurance policy – personal, portable, and designed to fit my needs.  I know which one I’m choosing.

The Obama Medicare Reform Plan

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I recently had lunch with several of my colleagues and the topic of the Ryan-Wyden plan came up in the conversation.  The question was asked “Is it fair to judge the Ryan plan against traditional Medicare? Shouldn’t we be comparing it with the Obama plan?  Fair question.  But what is the Obama plan for Medicare?  It’s more than simply cutting $716 billion from Medicare and redirecting it to cover Medicaid expansion and the exchange subsidies.  The President’s plan creates the Independent Payment Advisory Board whose 15 members are tasked with reducing the growth in Medicare spending.

Appointed by the President and confirmed by the Senate, IPAB has the power to cut Medicare payments to providers and the private insurers that participate in the Medicare Advantage and prescription drug programs.  Hospitals and hospice payments are exempted from IPAB oversight until 2020.  The board can also change the payment structure from fee-for-service to capitation or some hybrid form to achieve its targets.

Over the period 2013 through 2018 per capita Medicare spending is targeted to grow at a maximum rate equal to the average of the Consumer Price Index (CPI) and the Medical CPI.  Annually the board is responsible to develop a plan to keep Medicare spending below the target.  Not a problem, you say?  Over the past decade the CPI has grown at an annual rate of 2.66% and the Medical CPI 4.53%.  At the same time per capita Medicare spending grew 6.51% annually.  If these results continue into the future, the IPAB would have to cut Medicare spending 2.91%.  But with hospitals and hospices exempt (37% of Medicare spending), spending on physicians’ services and other nonexempt categories would have to be cut 4.62%.

About the only power IPAB has to fulfill its mission is cutting payments to providers.  It may not propose any real reforms to the program (such as a premium support mechanism like the Ryan-Wyden plan).  It also cannot ration care, restrict benefits, modify eligibility rules, or make changes in cost sharing.

Ewe Reinhardt, Princeton economist, says its the “only hope to restrain Medicare spending.”  Peter Orszag, former director of the Congressional Budget Office under Obama, says its the “most important aspect of the Affordable Care Act.”  Regardless of those claims, Paul Ryan calls it a “rationing board” and Jeremy Lazarus, president elect of the American Medical Association says it “would have too little accountability and the power to make indiscriminant cuts that adversely affect access to health care for patients.”

Does the rationing claim stand up to careful scrutiny?  Despite the language of the Act, rationing is inevitable.  The board can set prices for specific services so low that no provider will offer them, or at least fewer will offer them.  Many physicians already refuse to see new Medicare patients and as payment rates fall below those of Medicaid, more will follow.  While hospitals escape the wrath of IPAB until 2020, they too will find it more difficult to remain solvent because of low payment rates.

If economics teaches us anything, it teaches us that price controls create shortages.  And if we refuse to ration via prices, we’ll have to find another mechanism to ration.

Note to self: Another reason to delay retirement.  Keep your job so you can keep your private health insurance.  Delay Medicare’s control over your access to medical care as long as possible.

The Ryan-Wyden Medicare plan

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A lot has been said about the Ryan-Wyden plan to reform Medicare.  Much of it is exaggerated, some just downright false.  It’s a voucher plan.  Seniors will have to pay $6,400 more for their health care.  The plan will make Medicare beneficiaries responsible for solving Medicare’s fiscal crisis.  Is all this true?  How could Ryan be so callous?

A limited number of factual studies have emerged analyzing the workings of a premium support system for Medicare.  (The best label for the Ryan-Wyden plan.)  One of the most recent (coauthored by Harvard economist and Obama healthcare adviser, David Cutler) looks at the competitive bidding in the Medicare Advantage program (in practice since 2006).  Plans across the country submit a premium they are willing to accept to cover seniors in a specific region.  Ranking premiums mirrors the results of a “reverse auction.”  Under the Ryan-Wyden plan, the second lowest premium establishes the “benchmark” payment rate.  Seniors could choose any plan they preferred and receive the benchmark amount to help them pay the premium.  If they choose the lowest cost plan, they keep the savings.  If they choose the benchmark plan, they pay nothing out-of-pocket for their insurance.  If they choose any other plan, they pay the difference.

Using data from Massachusetts, Cutler and his colleagues (“Potential consequences of reforming Medicare into a competitive bidding system,” Journal of the American Medical Association, August 1, 2012) found that in 2009, the benchmark plan bid was 9% below the cost of traditional Medicare.  In fact, traditional Medicare had the tenth-lowest bid.  Let’s be clear about this hidden nugget.  There were 9 private insuance plans available to Massassacusetts seniors that were cheaper than traditional Medicare.  Seniors choosing any one of these plans would have received the same benefits as traditional Medicare (and in some cases more benefits), and saved the taxpayer money.

Would such a plan force seniors to solve Medicare’s fiscal crisis?  As someone who reaches the magic threshhold of 65 within the year, I’m more than happy to do my part in helping to solve Medicare’s fiscal crisis.  What’s the alternative plan?  More on that tomorrow.

What can the Cheesecake Factory teach us about health care?

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Atul Gawande has come out with another health care piece in The New Yorker.  “Big Med” asks the question “Can health care look like the Cheesecake Factory?”  Once again he seems to miss the most important point.  The interesting question is “What if the Cheesecake Factory looked like health care?”  John Goodman answers that question in his insightful post in today’s NCPA Health Blog.  You can find it at http://healthblog.ncpa.org/what-can-a-restaurant-teach-us-about-health-care/?utm_source=newsletter&utm_medium=email&utm_campaign=HA.