OBAMACARE: FLAWED FROM ITS INCEPTION

Remember when Nancy Pelosi said, “But we have to pass the [health care] bill so that you can find out what is in it.”  Well, they passed it.   We’re finding out what’s in it.  And there’s a lot not to like.  This sentiment is not based on my ideological stance against big government.  This legislation is flawed and Republican opposition or not, it needs to be fixed if there is any chance of a successful outcome.  It is understandable that there are problems.  The bill was cobbled together in the first place to ensure the required votes for passage (220-215 in the House without a single Republican vote).  The House had to accept the Senate version in its entirety because of the loss of the Massachusetts seat to the Republicans.  What we have is a document with 8 glaring problems that will be its undoing unless they are addressed. 

  1. Weak individual mandate.  The tax penalty is small relative to the premiums.  The mandate lacks a strong enforcement mechanism: no garnishing of wages, no attaching assets, no jail time.  The only hammer is a lien on over-withholding.  The lesson here is don’t expect refund if you don’t have insurance.  If you plan to forego insurance, make sure you withhold only what you will owe in taxes.   The result is an incentive to game the system.  In other words, don’t buy insurance until you absolutely need coverage and then drop it when you don’t.  This will create adverse selection in insurance pools with only sick people purchasing insurance and premiums will continue their upward march. 
  2. Disruptive employer mandate.   Firms with more than 50 full-time workers (defined as those who work more than 30 hours per week) are required to provide affordable insurance for their employees.  Those that don’t are subject to a $2,000 fine per worker.  The incentive exists to reduce current workers to part-time status, and only hire part-timers in the future.  Fully, one-third of the restaurant and hospitality industry (with unskilled, low wage employees) will make the shift to part-time labor.  Papa John’s, Carl’s Jr, Olive Garden, Red Lobster, Kroger, Hampton Inn, Sheraton, Holiday Inn, and even the College of Allegheny County have already announced their intentions to limit worker hours.  Welcome to the era of the 28-hour workweek. 
  3. Ambitious Medicaid expansion.  The legislation makes Medicaid eligibility uniform across the country at 138% of the federal poverty level (approximately $30,000 for a family of four).  Because establishing eligibility standards has historically been a state’s responsibility, they vary wildly from a low of 17% of FPL in Arkansas to as much as 285% in Minnesota.   The impact of the expansion would have relatively little impact in some states and result in significant increases in state spending in others.  Texas, for example, would see about a billion dollar per year increase in state obligations to the program.  The Supreme Court ruled that the expansion was voluntary, so as many as 17 states may choose to forego expansion.  Instead of covering an additional 18 million nationwide, the expansion will add only about 11 million. 
  4. Complex insurance exchange rules.  States were expected to set up and finance their own insurance exchanges to provide coverage for uninsured residents.  These exchanges require a massive amount of information to verify user identity, certify health plans, and provide a platform for individuals to shop and purchase plans.  The systems must be able to access employment information and IRS files to determine an individual’s eligibility for subsidies.  The complexity is enormous and states do not have to comply.  They can simply sit back and let the federal government do it for them.  Sixteen have already said that they will follow that route.  There is a potential problem if the states don’t act.  The subsidy is clearly available if insurance is purchased from a state-level exchange.  Any mention of subsidies in federal exchanges is glaringly omitted from the legislation.  Expect litigation. 
  5. Medicare spending cuts.  The Congressional Budget Office (CBO) reports that the law will cut Medicare spending by $741 billion over the next ten years.  This “savings” will be used to fund the Medicaid expansion and the state-level exchange subsidies.  CBO scoring of the law indicates that these same dollars will also be used to shore up the Medicare Trust Fund.  But as any first year economics student knows, every dollar has an opportunity cost.  If spent on Medicaid coverage, it can’t be spent to save the Medicare Trust Fund.  In other words there is no “savings.”  The result will be that by the end of the decade, 1 in 7 hospitals will drop Medicare and more physicians will refuse to take new Medicare patients (already 1 in 3 do not). 
  6. Spending continues to rise.  A bill that was promised to “bend the cost curve” falls woefully short.  Currently, health care spending at 17.6% of GDP will approach 20% by the end of the decade.  Premiums will continue to rise, especially for the young who will be pooled with their elders and pay substantially more for their insurance than is actuarially fair.  Many will opt out, choosing not to buy insurance, but rather pay the tax penalty (or not), and insurance premiums for everyone who does buy insurance will be higher. 
  7. Not universal coverage.  The CBO estimates that at least 30 million will not have insurance coverage, about 10% of the non-elderly population.  States opting out of Medicaid, the problems with subsidies in the federal exchanges, and widespread gaming are likely to drive that number up substantially. 
  8. Does not improve access.  Nothing in the legislation addresses the current and future physician shortage.  Basic economics tells us that when you increase demand and do nothing to supply, prices go up or if they don’t, availability lags.  The law has a backup plan for Medicare when this happens.  It’s the Independent Payment Advisory Board (IPAB).  With Medicare price controls as their only tool, seniors can expect at best bottlenecks in their access to care.  At worst, the low hanging fruit is end-of-life care.  (If you want to read more on this topic go to https://blogs.baylor.edu/jimhenderson/2012/10/15/will-obamacare-lead-to-death-panels/). 

ObamaCare is a flawed document.  The Democrats were in such a hurry to pass it that they forgot the fundamental tenant of medical care: First, do no harm.  Well, we’re stuck with it, so what do we do?  The current makeup of body of lawmakers does not bode well for compromise.  All too often with the leadership we have, it’s either “my way or the highway.”  They say that we deserve the leaders we elect.  If that’s true, I’m fearful for the Republic. 

The opinions expressed in this blog post are mine alone, and do not reflect the opinions of Baylor University.   Baylor is not responsible for the accuracy of any of the information provided in this post.

The 1st Presidential Debate

Wednesday night 58 million television viewers watched presidential hopeful Mitt Romney square off against President Barak Obama in the 2012 campaign’s first presidential debate.  By most accounts Romney won the contest hands down.  But in my opinion the real winner was the American voting electorate.  Romney was clear and decisive.  He did not look or sound like the caricature portrayed by the Democrats and the lapdog media.  At the risk of being redundant, I’ll add my insight to the growing commentary. 

Healthcare overall and Medicare specifically was appropriately emphasized in this domestic policy debate.  What I found interesting was Romney’s command over the topic and Obama’s lack of command.  Romney’s thoughts were organized and he showed a command of the facts.  Obama was disjointed and relied on overused sound bites describing his plan and Romney’s approach to Medicare reform. 

Obama actually made the first reference to health care; describing the “$716 billion we were able to save from the Medicare program by no longer overpaying insurance companies by making sure that we weren’t overpaying providers. And using that money, we were actually able to lower prescription drug costs for seniors by an average of $600, and we were also able to make a — make a significant dent in providing them the kind of preventive care that will ultimately save money throughout the system.” 

Romney was quick to reply that Obama had just described a savings of “$1 for every $15 you’ve cut. They’re [seniors] smart enough to know that’s not a good trade.  I want to take that $716 billion you’ve cut and put it back into Medicare. By the way, we can include a prescription program if we need to improve it.  But the idea of cutting $716 billion from Medicare to be able to balance the additional cost of Obamacare is, in my opinion, a mistake.” 

Romney referred to the $716 billion four more times, explaining that it’s not savings at all, if it’s spent to fund provisions in Obamacare.  Wisely, the President never mentioned the number again.  Obama talked about the popular insurance provisions in reform plan: no lifetime limits, dependents up to age 26 remaining on their parents’ insurance plans, elimination of pre-existing conditions exclusions, the 85% minimum for insurance plan spending relative to the premium, and that’s about it. 

Romney accepted these provisions as part of the replacement pledge (of course after the repeal).  These are provisions that are in the Massachusetts plan passed when he was governor of that state, emphasizing the bipartisan nature of that legislation and the strictly partisan process that led up to the passage of Obamacare.  After possibly his best public defense of Romneycare to date, he quickly moved on to a description of the Independent Payment Advisory Board, the 15-member unelected board of experts that will make important decisions on pricing and spending that will affect access to medical care in both the public and private sectors. 

President Obama’s response to IPAB was bringing up the cost-saving success of the Cleveland Clinic and its integrated approach to medical care delivery.   In his mind the success is somehow an example of what IPAB is all about.  “Now, so what this board does is basically identifies best practices and says, let’s use the purchasing power of Medicare and Medicaid to help to institutionalize all these good things that we do.”  Romney was quick to counter with a devastating retort “ In my opinion, the government is not effective in — in bringing down the cost of almost anything.  As a matter of fact, free people and free enterprises trying to find ways to do things better are able to be more effective in bringing down the cost than the government will ever be.  Your example of the Cleveland Clinic is my case in point, along with several others I could describe.  This is the private market. These are small — these are enterprises competing with each other, learning how to do better and better jobs. I used to consult to businesses — excuse me, to hospitals and to health care providers. I was astonished at the creativity and innovation that exists in the American people.” 

Romney concluded by saying that “in order to bring the cost of health care down, we don’t need to have a board of 15 people telling us what kinds of treatments we should have. We instead need to put insurance plans, providers, hospitals, doctors on target such that they have an incentive, as you say, performance pay, for doing an excellent job, for keeping costs down, and that’s happening.  Innermountain Healthcare does it superbly well, Mayo Clinic is doing it superbly well, Cleveland Clinic, others.”  OUCH!

All in all, it was a good night for Romney and a shot of adrenaline for his campaign.  The President will obviously rethink his strategy for the next two debates.  It will be interesting to see how many will view the next debate between Vice President Biden and Congressman Ryan.  This may turn out to be the best reality TV of the season.

A Closer Look at Ryan’s Medicare Plan

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

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.

Fact Checking Paul Ryan’s Speech

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.