Monthly Archives: September 2012

Broken Promises

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The Impact of the ACA on Middle-Class Taxes

“And I can make a firm pledge; under my plan no family making less than $250,000 a year will see any form of tax increase.”
    –Barack Obama, Sept. 12, 2008, Dover, New Hampshire

Now to be fair, Barak Obama is not the first president to break a promise, and he’s likely not the last either.  I remember in 1988 when George H.W. Bush pledged “read my lips, no new taxes” and eventually caved to Congressional pressure and broke that promise.  One of the big differences between then and now is the media’s virtually ignored Obama’s broken promise and never let us forget Bush’s. 

For of you who need a reminder of the new taxes on those of us who make less than $250,000, I’ll chronicle a few.  It didn’t take long for the President to break his promise.  On February 4, 2009, a mere 15 days after taking office, he signed legislation raising the federal excise tax on cigarettes by 158%.  By the way, this tax is one of the most regressive taxes we have and impacts the poor disproportionately. 

A year later, President Obama signed the Affordable Care Act, which by most accounts has at least 15-20 new taxes that affect Americans who make less than $250,000.  I’ll try to be brief. 

  • The first tax created by the act was the 10% excise tax on indoor tanning services (effective July 1, 2010). 
  • The individual mandate tax.  Is it a penalty?  Is it a tax?  The only reason it matters is that Justice Roberts said it is a tax, which makes the mandate constitutional.  Otherwise, we’re not having this conversation.  At any rate, by 2016 it will be a 2.5% income tax on anyone that does not purchase a qualified insurance plan. 
  • The employer mandate tax.  A business that employs more than 50 full-time workers must provide a qualified plan for its workers (not their dependents).  Failure to do so can result in a $3,000 penalty per worker, if even one worker receives a subsidy to purchase insurance from a state exchange.  As a result, fewer workers will have jobs and those who do will be paid less.  (This is great news in light of the recent news that median per capita income has fallen to $50,054, its lowest levels since 1995.) 
  • A 2.3% tax on medical device manufacturers.  This tax will make everything from hearing aids, motorized wheel chairs, and hip implants more expensive. 
  • A 5% tax on elective cosmetic medical procedures (whether paid for by insurance or out-of-pocket).  This will work like a simple sales tax. 
  • A health insurance premium tax will be levied on all insurance companies.  This is a tax that will be passed on to all purchasers of insurance in the form of higher premiums. 
  • The law creates a cap of $2,500 on the amount of pre-tax income you can put in your flexible spending account.  The result of this provision is you’ll have to pay your copays and deductible with before-tax dollars. 
  • Those of you with health savings accounts, health reimbursement accounts, and flexible spending accounts may already be aware that as of January 1, 2011, you can no longer use your account to purchase over-the-counter medications without a prescription. 
  • Cadillac tax on high-premium insurance plans.  Any insurance policy with an individual premium over $10,200 or a family premium over $27,500 will be taxes at a 40% marginal rate.  You may not think this provision affects you, but the cap is incremented annually by the CPI plus 1%.  Recently, premiums are increasing much more than that.  It may not be too long before your plan makes you a target for this tax. 

Another tax that affects everyone is the tax you pay every time you fill your car with gasoline.  When President Obama took office in 2009, the price of a gallon of regular gasoline was $1.84.  Since that day, the price of gasoline has risen to $3.86 per gallon, and in many parts of the US it’s approaching $4.  If you drive 12,000 miles annually and your car averages 20 MPG, you’re spending $100 per month more on gasoline than you did when Obama took office. 

At the same time, supporters of this policy are trying to convince us that it’s for our own good.  I’m sure George Harrison was thinking that the “Tax Man” never saw a tax he didn’t like.

If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold I’ll tax the heat,
If you take a walk, I’ll tax your feet.

Don’t ask me what I want it for
If you don’t want to pay some more
‘Cause I’m the taxman, yeah, I’m the taxman.

Beatle’s, Revolver, 1966.

Obama’s Medicare Cuts by Region

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There’s been a lot written about the $741 billion in spending cuts in the Medicare program that are used to finance insurance exchange subsidies and Medicaid expansion for younger Americans.  The reality of the cuts provides a powerful argument for the need to reform traditional fee-for-service Medicare to ensure its long-run viability. 

Robert Book and Michael Ramlet explore a different aspect of the cuts by estimating the regional impact of the Medicare spending reductions introduced by the Affordable Care Act (ACA).   Their study, a part of the University of Minnesota’s Carlson School working paper series, uses data from the analysis presented to Congress by the Congressional Budget Office (CBO) on June 24, 2012. 

According to CBO estimates the $741 billion cuts are achieved by reducing payments to hospitals ($260 billion), other providers except physicians ($155 billion), Medicare Advantage ($156 billion), disproportionate share hospital (DSH) payments ($25 billion), and miscellaneous other provisions ($114 billion).  Physicians don’t escape completely.  A 30% reduction in their payments is scheduled to go into effect on January 1, 2013, amounting to almost $250 billion over the next decade.  (To be fair, the physician payment cuts are not part of the ACA.) 

The reductions hit parts of the US where seniors congregate, including California, Texas, and Florida.  Combined losses in those three states represent 20% of the total, or $148 billion.  Pennsylvania, Illinois, Michigan, Ohio, New Jersey, North Carolina, and Massachusetts complete the top ten.  Their losses total $142 billion meaning that these ten states lose $290 billion, or approximately 40% of the total. 

Cuts are good right?  Remember that someone’s spending is someone else’s income.  These spending cuts represent cuts in revenues to hospitals, hospices, home health agencies, skilled nursing facilities, and private insurance companies.  To the extent that these payment changes result in greater efficiency in health care delivery, they are a good thing.  However, Medicare actuaries estimate that 40% of all US hospitals will face insolvency by the end of the decade because of these cuts.  They simply will not be able to adjust their practices quickly enough to avoid the consequences. 

Good luck in finding a provider all you seniors . 

Book and Ramlet’s study is available at http://www.carlsonschool.umn.edu/medical-industry-leadership-institute/publications/documents/BookandRamletpaperonMedicare.pdf.  The CBO report can be found at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.

Hypocracy? You be the judge

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If you’ve been following my blog, you know that one of the major critics of the Ryan Medicare plan is Harvard’s David Cutler.  Avik Roy revealed in yesterday’s Forbes online that Cutler along with Jonathan Gruber  (MIT economist) proposed a similar premium support plan for Medicare in 2010.  At the time the two were Obama advisers and recommended similar “privatization” for Medicaid and SCHIP.  It’s time for Obama to admit that the Ryan plan is a legitimate option that should be considered or just pretend that he didn’t read the memo.  You can read Roy’s article at http://www.forbes.com/sites/aroy/2012/09/13/top-obama-advisers-proposed-voucherizing-medicare-way-back-in-2010/.

A Closer Look at Ryan’s Medicare Plan

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Sgt. Pepper’s Lonely Hearts Club Band was released in 1967.  I was 19 years old then, and now, 45 years later, I too am 64.  The lyrics of one of the ballads on that album really sink in. 

When I get older, losing my hair, many years from now,
Will you still be sending me a valentine, birthday greetings, bottle of wine?
If I’d been out ’til quarter to three, would you lock the door?
Will you still need me; will you still feed me when I’m sixty-four?

I, along with millions of Baby Boomers, have a vested interest in the current Medicare debate.  How will changes to the program affect my wife and me?   Its cost to me, my continued access to provider services, and the quality of care are central to the debate.  As I peruse the partisan quarreling over the different plans for the program’s future, I am struck by the tone of the debate and the disregard by some of Medicare’s sustainability in its current form. 

In my last post I introduced you to a study (“Increased costs during retirement under the Romney-Ryan Medicare Plan”) by David Cutler and two colleagues who work for the organization that posted the report (Center for American Progress Action Fund).  It’s difficult to find a positive comment about the reform plan in its 10 pages.  Rather than address the criticisms point-by-point (that strategy would take up entirely too much space), I’ll comment on the overall approach that Cutler takes in his criticism. 

The study relies heavily on several reports released by the Congressional Budget Office (CBO) analyzing the Ryan budget proposal, Pathway to Prosperity, released last year.  It’s important to note that several aspects of Ryan’s proposed changes to Medicare have been modified as a result of further discussions with key stakeholders in the debate, most notably Alice Rivlin, former White House Budget Director and founding director of the CBO.  Rivlin who served with Pete Domenici on the President’s Debt Reduction Task Force was initially critical of several aspects of the plan that have now been modified.   I’ll comment further on the Rivlin-Ryan connection later. 

Ryan’s original plan called for full privatization of Medicare.  Instead of traditional fee-for-service Medicare, all participants would receive premium support (what the President refers to as a voucher) for a specified amount of money.  Seniors that chose a more costly plan would be responsible for the difference.  The benchmark premium would grow at the rate of inflation as defined by the Consumer Price Index.  This is the Medicare plan that was analyzed by the CBO and served as the target of the Cutler criticism. 

At best what Cutler has done is set up a straw man to shoot down because that plan is not the Ryan plan.  Ryan made several critical changes in his plan that make Cutler’s Medicare remarks irrelevant.  Under the modified plan Medicare is only partially privatized.  Seniors over that age of 55 are not affected and future participants will always have traditional Medicare as an option.  For all practical purposes, the Ryan plan establishes a Medicare exchange similar to the state exchanges created by the Affordable Care Act with one exception, a traditional Medicare is available as the public option. 

A second major difference in the modified plan is that the benchmark premium is determined by competitive bidding (a reverse auction where the second lowest premium becomes the benchmark).  The plan has an important a safety mechanism for those who want the standard features of traditional Medicare (assuming that it is not one of the two plans available at a premium at or below the benchmark).  A plan with the benefits and out-of-pocket costs of traditional Medicare will always be available at a premium that does not exceed the required premium for Part B.  Additionally, overall program spending is not limited by the growth in the CPI but by the growth in GDP plus 0.5% (which by the way is the proposed growth rate in the President’s budget plan). 

Why doesn’t the CBO analyze the current Ryan plan?  Simply put, the CBO doesn’t have the tools to evaluate the impact of choice and competition in the market.  CBO Director Douglas Elmendorf admitted when testifying to Congress that there is a “gap in the toolkit” when it comes to analyzing competitive reforms.  It seems that the benchmark premium in the Ryan plan is not set at a fixed amount, but determined by competitive bidding. 

So when the President says that seniors will have to pay an extra $6,400 per year for Medicare under the Ryan plan, he’s talking about a nonexistent plan.  He can’t make those claims based on CBO data because the CBO can’t score the new Ryan plan. 

 Does competitive bidding work to lower the cost of medical care?  Our experience with competitive bidding in the Medicare Advantage program provides evidence that it can lower costs.  Ironically, Cutler’s own study in The New England Journal of Medicine (August 2012) estimates that in 2009 the second lowest Medicare Advantage bid in Massachusetts was 9% below traditional Medicare.  Feldman, Coulam, and Dowd also examined competitive bidding in their American Enterprise Institute paper (“Competitive bidding can help solve Medicare’s fiscal crisis”).  Their estimate closely mirrors Cutler’s with a 9.5% savings. 

Cutler’s concern that the cost of traditional Medicare may rise is totally understandable.   Critics of Ryan’s plan are simply too pessimistic about the prospects of competitive bidding along with premium support in Medicare.  Our experience with the prescription drug benefit program reflects the likely outcome of more competition in Medicare.  Part D premiums have not changed appreciably for the past several years and Medicare Advantage premiums actually fell from last year’s levels.  Finally, those individuals who would pay premiums that exceed their support payments to keep traditional fee-for-service Medicare always have the option of choosing a more affordable plan that has the same actuarial benefits.   

I am extremely fortunate in that my personal concern is not whether I’m need and fed when I’m 64, but how will I receive medical care when I’m 65.  I’m not just getting older; I’m moving up a step on Maslow’s hierarchy.

Fact Checking the President

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In a campaign stop in Florida this weekend, the President discussed Medicare reform, or at least the Republican version of it.  Citing a new study from the progressive Center for American Progress Action Fund, tied closely to the administration, the President claimed that the Romney-Ryan reform proposal “would mean as much as $16-26 billion in new profits for insurance companies.” Continuing his criticism he said: “Your costs would rise by the thousands and the insurance companies’ profits would rise by the billions.” Just how accurate is this study cited by the President? 

First of all the authors (well at least one of them) are heavyweights in the health policy debate.  David Cutler, Harvard economist and former Obama adviser, is the lead author in this Internet hit piece.  Second, the study purports to analyze the Romney-Ryan plan using data from several reports provided by the Congressional Budget Office (CBO) examining the impact of Ryan’s 2011 budget plan as it pertains to Medicare and Medicaid (without its most recent revisions).  In other words, Cutler’s analysis does not take into consideration of recent changes in the Ryan approach. 

Cutler’s angst is primarily focused on Romney’s promise to repeal the Affordable Care Act and not the long-term sustainability of traditional Medicare.  (In all but one week since passage of the ACA, Rasmussen’s tracking poll reports that at least 50% of those surveyed favor repeal of the legislation.)  There are several obvious omissions in Cutler’s analysis.  Looking at the reference section of the report, there are two obvious omissions that stand out.  He cites several points made in a paper by Ezekiel Emanuel in the August 2012 New England Journal of Medicine (“A systemic approach to containing health care spending”) without citing the counterpoint paper in the same publication by Antos, Pauly, and Wilensky (“Bending the cost curve through market-based incentives”).  In addition he failed to cite his own paper in the August 1, 2012, Journal of the American Medical Association (“Potential consequences of reforming Medicare into a competitive bidding system”).  I guess Cutler doesn’t like alternative views, even if they are his own. 

The viability and acceptance of any premium support plan depends critically on the type of coverage available in the plans offered and the adjustments to the premium support levels.  Ryan’s most recent plan requires that a traditional Medicare option is always offered and that at least one of the plans available at the benchmark premium has traditional Medicare benefits.  The target for spending growth is set at the growth in GDP plus 0.5% and not the CPI as reported by Cutler.  In fact, if spending exceeds the target, Congress is required to act in much the same way that the Independent Payment Advisory Board does to curb spending growth.  To date I haven’t seen Cutler lashing out at the IPAB. 

The basis of the CBO report on the Ryan plan are simply too pessimistic.  Self admittedly “CBO does not have the capability at this time to estimate such effects [of a competitive bidding process] for the specified path of Medicare spending”(CBO, “The long-term budgetary impact of paths for federal revenues and spending specified by Chairman Ryan,” March 2012).

I’m currently working on a more detailed critique of the Cutler report and hope to have it available shortly.

The impact of the ACA on young Americans

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“Young Americans,” the classic David Bowie song repeats these lyrics:

“We live for just these twenty years
Do we have to die for the fifty more?
All night
He wants the young American.”

I know I show my age by citing a Bowie song, but he was an icon of my generation.  And I liked his music (and still do).  The lyrics have more meaning for me today as the Democrat’s nominating convention winds down.  I see them as reflective of our government’s view of young Americans:  “You’re only young once (and for a very short time) and then you die.  We’d better get as much out of them while we can because the dying process begins all too soon.” 

The cornerstone of the Affordable Care Act is the individual mandate, declared constitutional not by the commerce power of the federal government, but because it is viewed (at least by one person) as a tax.  Why do we need a mandate in the first place?  Now that coverage is available, won’t everyone want to have it?  Not by a long shot and let me explain why. 

Before implementation of the act, approximately one-half of all uninsured people in the US were between the ages of 18 and 34.  Now several million under the age of 26 are receiving coverage through their parents’ policies.  Will the rest purchase insurance when the ACA is fully implemented?  First, understand that about one-third are offered insurance through their jobs but refuse to participate because of it costs too much.  Their share (averaging 25% of the total premium) is too much.  Second, they’re young and healthy and don’t think they need it.  Has anything changed? 

These are people who on average have about $800 in annual medical expenses.  Ignoring administrative costs and profit, the actuarially-fair premium would be $800 (about $67 per month).  A 75/25 split between employer and employee would result in a net monthly premium of about $16.  This result would require homogeneous risk pooling with only adults age 18-34 in the pool. 

In contrast, people 35-64 years old spend on average 6 times the amount of those 18-34, or about $4,800.  The same homogeneous risk pooling will require they pay their own way and not rely on younger Americans to subsidize them.  Thus, their annual premium is $4,800 (or $400 per month).  A similar agreement with their employer would result in a worker share of the premium of around $100 per month, roughly 6 times that of their younger co-workers. 

How does the Affordable Care Act affect this result?  Well, the ACA only allows a premium differential of 3 to 1.  Let’s see what this does to premiums.  According to the 2010 US Census, there are approximately 2 times as many people in the older age category.  Assuming that the risk pool has twice the number of 35-64 year olds and 18-34 year olds and that the older group’s premium is only 3 times the younger group, the annual premium for the young American will be $1,480 and that of the older co-worker will be $4,440. 

The 3:1 ratio in premiums results in the younger group paying 85% more than the actuarially-fair premium so the older group can pay about 8% less.  Remember in my last post I noted that Jonathan Gruber failed to take adverse selection into consideration in his predictions on the ACA’s impact on premiums?  How does adverse selection affect my example?  I’ll tell you how.  Young people won’t buy the insurance.  There will be fewer in the pool to subsidize their older co-workers and premiums will rise for everyone. 

If half of the young refuse to purchase insurance, the premium will rise another 4% to $1,540 for young people and to $4,620 for everyone else.  In economists’ lingo, this is the beginning of the death spiral.  More young Americans will drop out and premiums will rise for everyone.  Soon 35-44 year olds will resent paying the same premiums that 45-64 year olds pay and demand separate pooling.  If they don’t get what they want, they too will drop out of the pool and premiums will continue to rise.  Soon insurance for the older group costs more than $4,800 and even those with chronic medical conditions will consider the prospects of dropping insurance.  Drop the insurance, pay the penalty, and re-enroll when you need medical care.  The structure of the act encourages this type of gaming. 

Our problem is that “we live for just these twenty years,” the time of our lives when we do not have much money.  There are demands on our money other than the purchase of insurance.  And the last thing we want to do is subsidize a bunch of older, sick co-workers who make more money than we do.  Even though we too will one day be old and sick.  But as Scarlett O’Hara said: “I can’t think about that right now.  If I do, I’ll go crazy.  I’ll think about that tomorrow.”

Let’s hear from the Democrats

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The DNC begins its convention in Charlotte today, one week after a reasonably successful Republican convention in Tampa.  (That is if you measure success by a 6-point bump in the polls.)  A stark difference between the two parties will be their approach to President Obama’s signature domestic policy achievement, the Affordable Care Act.  The Republican mantra “Repeal and Replace” was repeated frequently.

 Preconvention comments indicate that the Democrat’s talking points will focus on 3 points: dependents will be able to stay on their parents’ insurance until age 26, contraceptives will be available without copay, and insurance cannot be denied due to pre-existing conditions.  You probably won’t hear much about $716 billion in cuts to Medicare, the individual mandate and tax to ensure participation, or the billions in other taxes to pay for it all.  You will hear about Paul Ryan’s plan to change Medicare as we know it, but you probably will not hear that the Dem’s own Ron Wyden of Oregon is a cosponsor of the legislative proposal. 

You also won’t hear much from Jonathan Gruber, Harvard economist and expert on health policy matters.  You see, in 2009 Gruber using his own micro-simulation model predicted that by 2016 premiums in the individual insurance market would be 13% lower for young people and 31% lower for older Americans.  At the same time the consulting firm PriceWaterhouseCoopers came out with a study that reached far different conclusions.  Instead of lowering premiums, they predicted that those same premiums would be 47% higher.  It was widely publicized that the PWC study was funded by the American Health Insurance Plans.  Waffling members of Congress were appalled that AHIP would resort to such underhanded tactics in their opposition.  Little did they realize that Gruber was not as “objective” as they thought.  He actually served as an outside adviser to the President.  Gruber carried the day and the legislation passed. 

Fast forward to today and Gruber is telling a different story.  Consulting for state legislatures in Wisconsin, Minnesota, and Colorado, his simulation model now seems to indicate that premiums in the state exchanges will rise, not fall.  In Wisconsin they will go up 30% because of the ACA, in Minnesota it will be a 29% increase, and in Colorado the increase will be a modest 19%. 

Why the different conclusions?  Adverse selection will be a bigger problem than originally thought.  Actually, PWC took it into consideration in their study in 2009, but Gruber did not.  During the reform debate, the President stated repeatedly that annual premiums for the average family would fall $2,500.  This will not happen.  More liberal benefits, lower out-of-pocket spending requirements, and generous subsidies serve to increase demand.  Those who qualify for expanded Medicaid will benefit as will low income workers who qualify for subsidies.  But as we’re used to hearing: “There is no such thing as a free lunch.”  Somebody will pay and in this case it will be US taxpayers.   

All week I plan on considering the ACA’s impact on different aspects of the economy and the various stakeholders.  Summarizing the impact on health insurance premiums is easy, they will increase.