Health Care Reform and the Marketplace

1. Leonard J. Nelson, III HEaL Conference April 12, 2013 Health Care Reform and the Marketplace

3. Markets • Competition at two levels • Among health care plans • Among providers

4. Employer Sponsored Health Insurance (ESHI) • ESHI has been encouraged through favorable federal tax treatment: compensation in the form of wages to employees is treated as taxable income under federal regulations while compensation in the form of payment of premiums for employer provided health insurance is not taxable compensation. • Federal policy has also encouraged collective bargaining by Unions on behalf of their members to achieve more generous health insurance coverage in lieu of additional compensation in the form of higher wages.

5. ESHI • Competition among insurers and providers may be undermined by ESHI because the choices of private health insurance plans for employees have been limited, and employees have generally been insulated from information on both the costs of insurance and costs of treatment. • The prevalence of over- insurance coupled with the lack of competition among providers on the basis of price and quality may have contributed to unacceptably high levels of cost inflation in the health care sector.

6. Conservative View of Health Insurance • Conservatives view health insurance as true insurance and as such to be used to cover large and unpredictable costs rather than routine and predictable costs. • Under this view, health insurance should not provide first dollar coverage for routine expenses that could be paid for out-of-pocket because of efficiency concerns, i.e., it increases costs for such care by adding unnecessary administrative overhead. • In addition, providing this coverage exacerbates moral hazard and reduces competition among providers. • Starr, Remedy and Reaction at 259.

7. Liberal View of Health Insurance • Liberals view health insurance as prepayment for medical care and favor first dollar coverage. • They fear that limiting coverage to catastrophic care will reduce the utilization of primary and preventive care thereby increasing costs by failing to ameliorate preventable health problems until such time as treatment requires hospitalization and resort to more expensive, high technology methods. • They believe first dollar coverage for preventive care saves money in the long run. • Starr, Remedy and Reaction at 259.

8. Federal Health Policy • There has not been a consistent national health policy in the United States. • Instead, the goals and methods of federal health policy have changed over time due to the development of new problems to be addressed, and the policy preferences of those in power.

9. Federal Health Policy • Sometimes the emphasis has been on egalitarianism and expanding access • During these times policymakers have focused on reducing the role of private insurance and expanding the role of government.

10. Federal Health Policy • At other times federal health policy has focused on empowering consumers and controlling costs. • At these times preserving private insurance and enhancing consumer choice have been important values

11. Competing Paradigms • Government Model (Liberal) • Government as insurer • Government as Provider • Regulated Market (Conservative)

12. Government Model (Liberal) • Treats health care as a public good (i.e., health care is special) and thus favor government financing and/or government delivery • Right to a decent minimum level of health care and duty of state to provide • Defined Benefit Approach • Use of bureaucratic mechanisms rather than price mechanism for allocation (may prefer cost effectiveness but difficult to do ) • Use of planning to prevent duplication of services and limit supply (e.g., CON) • Price controls or Rate Regulation • First Dollar Coverage (free preventive care seen as cost saving )

13. Government as Insurer: Medicare and Medicaid-1965 Bill Signing.- July 30, 1965

14. Medicare • Medicare provides benefits to those aged 65 and older, disabled workers under 65 years old (an expanding category), and certain people with end-stage renal disease (ESRD).

15. Medicare • Medicare’s peculiar financing Scheme • Part A funded by trust fund-payroll taxes paid into trust during working years • Parts B and D funded by Federal government through premiums and taxes and are voluntary

16. Medicare Wilbur Mills, Chairman of the Powerful House Ways and Means Committee

17. Medicare • “...Mills was ‘probably the only man out of the five hundred and thirty-five people in Congress who completely understands the actuarial basis of Social Security.’” • Robert Helms, The Origins of Medicare, AEI online, March 1991, http://www.aei.org/issue/10089, quoting Wilbur Cohen, architect of Medicare and HEW Secretary

18. Medicare • Johnson administration initially proposed paying for hospital care out of the Social Security Trust Fund, but Wilbur Mills, powerful chairman of House Ways and Means, was concerned that Medicare would threaten the fiscal solvency of Social Security. • In order to protect Social Security, Mills believed that Medicare should have its own separate trust fund financed by an addition to the payroll tax for social security. • Robert Helms, The Origins of Medicare, AEI online, March 1991, http://www.aei.org/issue/10089

19. Medicare Chairman Mills stated: “The central fact which must be faced on a proposal to provide a form of service benefit-as contrasted to a cash benefit-is that it is very difficult to accurately estimate the cost. These difficult-to-predict future costs, when such a program is part of the Social Security program, could well have highly dangerous ramifications on the cash benefits proportion of the Social Security system” (Congressional Quarterly Almanac 1964: 232). • Eric Patashnik & Julian Zelizer Paying for Medicare: Benefits, Budgets, and Wilbur Mills's Policy Legacy, 26 JHPPL 7

20. Medicare • The proponents of Medicare designed the program to encourage participation by physicians and hospitals. • To that end, the provider reimbursement model originally used in the Medicare program was based on the Blue Cross/ Blue Shield model: cost based reimbursement for hospitals and reimbursement for physicians on a fee for service based on prevailing rates

21. Medicare • These reimbursement methods tended to be highly inflationary and were later modified. TEFRA 1983 adopted prospective payment for hospitals based on DRGs. • Physicians participating in traditional Medicare are still paid on a fee for service, but the payment levels are determined by the RVU formula. • At the time Medicare was adopted the focus of its proponents was on increasing access and little thought was given to costs.

22. Medicare • It now also includes Medicare Advantage, a program that relies on competition among managed care plans to provide coverage for Medicare Parts A and B. • And Medicare Part D, a program that relies on competition among private health plans to provide drug coverage.

23. Medicare Trustees 2006 projections HI Deficit=Shortfall in Part A Trust Fund Source: Michael Morrisey, Health Insurance from Palmer and Savings (2006), A Message to the Public, Chart D, http://www.ssa.gov/OACT/TRSUM/tr06summary.pdf

24. From: James Lubitz, The Effects of Longevity on Spending for Acute and Long-term Care, http://www.mcgill.ca/files/management/longevity.pdf

25. Federal Payments-Medicare

26. Paul Ryan Throwing Grandma Off the Defined Contribution Cliff

27. Medicaid • Medicaid as enacted in 1965 was a government insurance program for the poor that was administered at the state level and supported by federal matching funds. • It built on Kerr- Mills, a program enacted in 1960 that provided federal funding to assist the states in paying vendors for services provided the indigent elderly. • Medicaid was added to the legislation by Chairman Mills to provide coverage for the low income elderly in nursing homes, low income mothers and children, and the disabled. • It was a voluntary program for the states, but there were strong incentives to participate because federal payments under the Kerr-Mills program would cease. • Starr, Social Transformation at 369; Judith D. Moore and David G. Smith, Legislating Medicaid: Considering Medicaid and Its Origins ,HEALTH CARE FINANCING REVIEW ,Winter 2005-2006/Volume 27, Number 2http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/HealthCareFinancingReview/downloads/05-06Winpg45.pdf

28. Medicaid • Medicaid has become the single largest component of most state budgets. • Many states now contract with private managed care plans to provide coverage for Medicaid beneficiaries. • Alabama is considering shifting to Medicaid to a managed care model. • Michael Cooper, Bigger Share of State Cash for Medicaid, N.Y. Times Dec.13,2011, http://www.nytimes.com/2011/12/14/us/in-downturn-medicaid-takes-up-more-of-state-budgets-analysis-finds.html?_r=0Kim Chandler, Gov. Robert Bentley backs changes for state's Medicaid program, http://blog.al.com/wire/2013/03/gov_robert_bentley_backs_manag.html

29. Government as Direct Provider • In this model, the government owns hospitals and clinics and employs individual providers for the purpose of directly delivering health care services to beneficiaries. • Examples at the federal level include the Veteran Administration health system and the Indian Health Service. • There are also thousands of federally supported public and private Community Health Centers located in Medically Underserved Areas to provide primary care services based on ability to pay.

30. Regulated Market (Conservative) • Health care as a commodity subject to market forces • Limited role of government in financing and delivery of health care • Regulated Private Insurance Markets to encourage competition among health plans based on price and quality (regulation used to reduce risk selection)-FEHBP as model • Defined Contribution approach • Use of managed care techniques to reduce costs • Use of selective contracting to stimulate price competition among providers • Move away from FFS to Prepaid Plan model • Change current tax treatment to discourage over-insurance (refundable tax credit) • Incentivize purchase of high deductible plans as opposed to first dollar coverage thereby decreasing utilization and increasing price competition among providers

31. HMO Act 1973 • In the 1970s, prepaid group practice became part of the Nixon Administration’s strategy for health care reform of controlling health care costs while avoiding direct government intervention. • Starr notes: “In a stunning reversal, what conservatives had once denounced as socialized medicine they now hailed as a capitalist solution.” • Paul Ellwood, a Minneapolis physician and policy advisor to the Nixon Administration who coined the term Health Maintenance Organization (HMO), viewed prepaid practice models as alternatives to both fee for service and government financed health care. • Starr, Remedy at 55; Starr, Social Transformation 395; Starr, Remedy and Reaction at 55.

32. Nixon Health Plan 1974 “ --Employee Health Insurance, covering most Americans and offered at their place of employment, with the cost to be shared by the employer and employee on a basis which would prevent excessive burdens on either; --Assisted Health Insurance, covering low-income persons, and persons who would be ineligible for the other two programs, with Federal and State government paying those costs beyond the means of the individual who is insured; and, --An improved Medicare Plan, covering those 65 and over and offered through a Medicare system that is modified to include additional, needed benefits. One of these three plans would be available to every American, but for everyone, participation in the program would be voluntary. “Nixon's Plan For Health Reform, In His Own Words, Kaiser Health News, Sept. 2009, http://www.kaiserhealthnews.org/Stories/2009/September/03/nixon-proposal.aspx

33. Managed Competition • Managed competition is a concept that was developed by Alain Enthoven in the 1970s and 1980s. • Enthoven’s concept of managed competition was based on the Federal Employees Health Benefit Plan. • The Federal Employees Health Benefits Plan (FEHBP) provides coverage to government employees through private insurers. • In the FEHBP, a defined contribution approach is coupled with an insurance exchange.

34. Managed Competition • Managed competition served as a blueprint for the Clinton Health Care proposals in 1993. • Medicare Part C, Medicare Part D and Paul Ryan’s proposals for Medicare reform are based on a managed competition model • The 2006 reform of the Dutch system that served as a model for US health care reform in 2010 was based on Enthoven’s managed competition model. • Certain Aspects of Romneycare and Obamacare are also based on the managed competition model. • John K. Iglehart, Managed Competiton, N Engl J Med 1993; 328:1208-1212 (1993)

35. Managed Competition • The competitors under this model are health plans that integrate financing and delivery of health services rather than individual providers. • As long as price competition is maintained among health plans, managed competition is compatible with providing government premium subsidies to achieve universal access to health care. • One of the most critical aspects of managed competition is that is based on a defined contribution approach rather than a defined benefit approach. Thus Enthoven proposed that “the sponsor’s contribution to the premiums must not exceed the price of the lowest price plan.”

36. Managed Competition • The rules for managed competition are to be set by the government or some other sponsoring entity to foster price and quality competition among health plans. • Benefit packages are standardized to facilitate price competition. • Limits are placed on medical underwriting and insurance reforms such as guaranteed issuance and renewal and limitation on pre-existing condition exclusions are implemented. • Availability of quality-related information is also a necessary component. • Alain Enthoven, The History and Principles of Managed Competition, Health Affairs Supplement 1993 at 31.

37. Managed Care • Managed care emerged in the 1980s a means for employers to reduce health care costs. • Managed care entities could include traditional staff model HMOs, group or network model HMOs, IPA model HMOs, PPOs, or traditional insurance plans with added features to reduce utilization. • Managed care plans used a variety of utilization management (UM) techniques to reduce costs(e.g., gatekeeper, preadmission certificate, concurrent review, mandatory second opinion). • As a result of the managed care backlash in the 1990s many plans dropped the more unpopular UM techniques. • Mark A. Hall, Mary Anne Bobinski & David Orentlicher, The Law of Health Care Finance and Regulation 143 (2005); Michael Morrisey, Health Insurance 158-159 (2008).

38. Selective Contracting • “The claims experience of managed care plans tends to be lower than that of indemnity plans. Recent empirical work suggests that perhaps half of that difference is due to favorable selection, whereby younger and healthier cohorts are attracted to managed care plans. However , perhaps 45 percent is due to selective contractingwhereby managed care plans pay lower prices for services.” • Michael Morrisey, Health Insurance 146(2008)

39. Consumer Directed Health Care • Developed in 1990’s after managed care backlash (John Goodman at NCPA). Patterned after Singapore’s health system. • Recognizes need to ration and reduce waste resulting from providing health care free at the point of delivery • Q: Who should chose between health care and other uses of money? A: Patient • High Deductible Health Plans coupled with Health Savings Account (self-funded; employer contribution; government contribution) • Patients self insure for routine health expenses while insurance used for catastrophic care • The influence of this model is seen in the HSA legislation passed in 2003.

40. Obamacare • Obamacare is an amalgamation of the conservative and liberal approaches. • Starr sees the conservative approach evident in such provisions as the benchmark plan to which subsidies in the exchanges are pegged (the Silver plan with 70 percent of actuarial value), the minimum plan necessary to satisfy the individual mandate (the Bronze plan with 60 percent of actuarial value), and the excise tax on Cadillac plans. • He sees the liberal approach in the requirement of coverage for essential health benefits and preventive care. • Starr, Remedy and Reaction at 260.

42. Obamacare • This mix of approaches is not surprising because Obamacare is largely based on Romneycare, a plan that was developed by a conservative think tank for a Republic Governor in a state with a legislature dominated by the Democratic Party. • Moreover, both Romneycare and Obamacare were developed in the context of an existing health care system that includes a peculiar mix of private and public insurance programs that are based on these conflicting approaches. • Obamacare essentially doubles down on this complex and incoherent mixed system.

44. “The Three Legged Stool” • Insurance Reforms • Individual Mandate • Premium Subsidies • http://theincidentaleconomist.com/wordpress/stools-need-more-than-two-legs/

45. Insurance Exchanges • States to establish exchanges to facilitate purchase of “qualified health plans” by individuals and small businesses • If State doesn’t, then Federal Government will set up exchange

46. Essential Health Benefits Package • “Qualified Health Plans” must include an essential health benefits (EHB) package • States will define EHB under federal guidelines (i.e., benchmark plan) • Except for “grandfathered” plans , all small group and individual plans offered both within and outside exchanges must offer at least EHB • Self Insured Plans not required to offer EHB

47. Benefit Tiers • In the Exchanges-Four Categories (all providing essential benefits package) plus separate Catastrophic plan • Bronze: covers 60% of the standard benefits cost • Silver: Covers 70% of the standard benefits cost • Gold: covers 80% of the standard benefits cost • Platinum: covers 90% of the standard benefits cost • Catastrophic: • Only available for those age <30 • Only available in the individual market

48. Nationwide Plans • Although there is not a public option in the ACA, there is a provision for two nationwide insurance plans to be offered on the insurance exchanges by the federal government through contracts with private entities. • “Premiums and benefits for the multistate insurance plans will be negotiated by the United States Office of Personnel Management, the agency that arranges health benefits for federal employees.” • Robert Pear, U.S. to Sponsor Health Insurance Plans Nationwide, N.Y. Times, Oct. 27, 2012, http://www.nytimes.com/2012/10/28/health/us-to-sponsor-health-insurance-plans-nationwide.html

49. ESHI • Employment based insurance is retained with some changes such as the standardization of benefits going forward and potential fines for employers with 50 or more employees that fail to provide “minimum essential coverage.” • The tax treatment is also largely unchanged excepted for a “Cadillac tax” on high value plans.

50. Medicaid Expansion • Expand Medicaid eligibility to all <age 65 w/ incomes below 133% FPL (actually 138% because of 5% income disregard) • All newly eligible adults to get at least essential benefits package • Originally states had to expand eligibility if they participate in Medicaid (but see SCOTUS opinion holding this condition is unconstitutional)