Rising Health Insurance Premiums: Don’t Let Yourself Be Spinned

It’s not surprising that opponents of health reform are capitalizing on the rather surprising findings of the Kaiser Family Foundation’s Employer Health Benefits 2011 Annual Survey that the average annual premiums for employer-sponsored health insurance increased 8 percent for single coverage and 9 percent for family coverage from 2010.   These numbers don’t sound good.

But analysis by Jon Gabel, Senior Fellow at NORC at the University of Chicago, Roland McDevitt, Director of Health Research at Towers Watson, and Ryan Lore, Senior Associate at Towers Watson, which is summarized on the Commonwealth Fund Blog and will be detailed more fully in a forthcoming issue brief, shows that the vast majority of premium increases are not tied to health reform, and those that are relate to improved coverage.  As the authors summarize:

[Our analysis] attributes only 1.8 percentage points of the 8 percent to 9 percent rise in premiums to the insurance reforms. Moreover, this marginal increase as a result of the reforms also means that families have better coverage that protects them from catastrophic health care costs as well as lower out-of-pocket costs for preventive services like colonoscopies and mammograms. It’s logical that improvements in the quality of the product would increase the cost of premiums and lower out-of-pocket costs to some degree.

This is not to minimize the impact of these increases.  Any increase in premiums, especially in a challenging economy, warrants scrutiny.  But rather than rush to judgment on data taken out of context by spinsters with a political agenda, we must continue to carefully consider the full panoply of facts and how they interrelate.  While some premium increases in the group markets seem to be linked to health reform, are the benefits worth the costs?

For example, the study estimates that expanding coverage for adult children accounts for 0.9 percent of the premium increases and affects 91 percent of group policyholders; banning limits on lifetime maximum benefits is responsible for 0.5 percent in premium increases and impacts 53 percent of group policyholders; and requiring employers to offer certain preventive services without cost-sharing increases premiums by 0.4 percent and affects 24 percent of group policyholders.   The total additional annual cost of the increased premiums tied to health reform amounts to $167 per policyholder in the group markets.

It is critical to explore whether these enhanced coverage options warrant increased premiums.  While we do, we also should ensure the public is aware that there is more to the data than nearly 10 percent premium hikes so it does not get dizzy from the spin cycle.

Gregg Bloche’s The Hippocratic Myth

Georgetown law professor Gregg Bloche’s new book, The Hippocratic Myth, looks to be a major contribution to health policy debates. I haven’t had time to read it yet, but many reviews and radio shows give the impression of a rigorous work leavened with engaging narratives of individual patients and providers.

Bloche’s approach to rationing will rekindle many of the health care debates of 2010. A former advisor to the Obama health policy team, Bloche concludes the following:

Medicine’s therapeutic potential has surpassed our ability to pay for it, but our elected officials are afraid to tell us. The historic health reforms enacted last year will protect 30 million Americans from the Darwinian cruelty of lack of access to care. But contrary to much wishful thinking in Washington, these reforms do little to stave off looming medical cost catastrophe. Our future fiscal and social stability will turn on our ability to gain control of spending without imperiling patients’ trust in their caregivers.

Bloche also observes the importance of the medical profession in upcoming bioethical debates:

Medical judgment incorporates hidden political and moral beliefs, and doctors have become key political and legal decision-makers—on such matters as child custody, criminal punishment, access to performance-enhancing drugs, and the politics of obesity, abortion, and homosexuality.

Doctors and the rest of us will need to address the morality of innovations we never thought possible. Drugs that block—or boost—biological mechanisms of stress resistance, brain-scanning methods that read minds, and medicines that interfere with formation of traumatic memories are among the technologies that will soon be with us.

During his interview with NPR’s Leonard Lopate, Bloche mentioned an aspect of insurer practice that renders suspect many consumer-directed ideals of medical care. Many insurers’ care protocols are kept secret, as proprietary information. Bloche found the practice deeply troubling, and I agree. Insurers’ criteria for providing care are important aspects of the service they are providing. They should not be hidden from patients or doctors. In more encouraging news, Bloche notes that he has not lost an appeal of a medical coverage decision to an insurer.

Enforceable Contracts for Cheaper and More Limited Care

Bloche seems committed to permitting consumers to make enforceable contracts for lower levels of care. Tyler Cowen recently evoked that possibility of ala carte insurance in his evaluation of the recent Ryancare proposal:

Let’s say it’s 2027 and I’ve just turned 65. I fill out a Medicare application on-line and opt for a plan with superior heart coverage (my father died of a heart attack), not too much knee coverage and physical therapy (my job doesn’t require heavy lifting), no cancer heroics (my mother turned them down and I wish to follow her example), and lots of long-term disability. Is that so terrible an approach? Is it obviously worse than having the Medicare Advisory Board make all of those choices for me?

Cowen worries that “Perhaps an individual will choose ‘no coverage for lung cancer,’ but the government cannot precommit to the outcome of no coverage.” But Bloche makes a point in an NPR interview that suggests that a physician’s decision to withhold care in that instance would not violate the Hippocratic Oath:

The rationale there is that the doctor who stints on care three years later when you get really sick is acting in accordance with your preferences as you expressed them in the employee benefits office three years before. And therefore, the doctor is not violating the Hippocratic Oath. The doctor is merely complying with your preferences when you rolled the dice in the employee benefits office.

Of course, that is in the private insurance context, not Medicare, and I don’t know if that distinction would make a difference for Bloche. But it does help me see how the book attracted a blurb from a Heritage Foundation analyst. Contemporary conservative health policy experts are committed to giving individuals the chance to buy low-cost plans, and so far the Obama Administration has been quite accommodating in granting waivers for them. My sense is that Bloche is committed to a minimum essential benefits approach that would allow consumers to opt out of “cancer heroics” (perhaps defined as biotechnology drugs costing over $7 million over one’s lifetime?), but not to waive “lung cancer” coverage generally.

Bloche argues in the book that:

[M]edicine’s capabilities and costs will inexorably grow. Increasingly, doctors will need to say no to care that’s technologically possible and that could prolong life, but that does so in competition with other national priorities. We must empower them to do so even when the consequences seem tragic. But we must give them this power without asking them to break faith at the bedside. To this end, the current regime of covert rationing, under cover of ‘medical necessity,’ should be supplanted by visible resource allocation rules–rules set for doctors and patients by social institutions. (58-9)

Transparency of this sort will compel us to come to terms the truth that insurers must say no to beneficial care to stay within the limits we impose when we seek low prices for products for products and services, elect politicians who promise low taxes, and choose cheaper health care plans for ourselves.

Though I hate to disagree with such an eloquent statement by so eminent a scholar, I am slightly troubled by that language. I think money saved from the health sector is more likely to go to new adventures in the Middle East or dot-com, housing, and commodities bubbles than it is to be allocated to “other national priorities.” Health care is only one of many sectors where US-style casino capitalism has seriously distorted capital allocation.

I also believe that the invocation of “we” here glosses over the moral role of redistribution in an extremely unequal economy. A privately insured person who really wants a procedure can spend himself down to bankruptcy, then apply for Medicaid. At that point, the government must make a decision. Given that “the government collected less in taxes in 2010 than it has in over three generations, and tax rates are at historic lows” for the very wealthy, I don’t think it is entirely fair to say “we” can’t afford certain care. Rather, those at the top of the income and wealth scale are increasingly supporting politicians who will not tax the wealthy. The current scarcity of care for the least well off is not a natural feature of the world; rather, it is epiphenomenal of repeated decisions not to impose certain tax burdens today even though they would have seemed perfectly fair 50 years ago. Since a “Wall Street transactions tax of only 0.50% on short-term speculation could raise up to $170 billion annually,” I fail to see an imperative to reduce incomes in the health sector until problems in much less socially productive sectors are addressed.

On the other hand, if our government “of the top 1%, by the top 1%, for the top 1%” continues, major cuts to the health sector are inevitable. If they must come, we need more trusted and fair voices like Bloche’s at the table. As Daniel Alpert has observed, “the U.S. has engineered a winner-take-all economy and indebted both the majority of its people and its government to keep a ‘don’t tax, but spend anyway’ consumerist fantasy alive.” Bloche helps us face the difficult task of unwinding the consequences of all those bad economic decisions.

Bloche is also admirably restrained in his sense of how much current law can do to rationalize health care spending. As he notes in a book excerpt:

30 percent of health spending [is] wasted on worthless care—about the price of the $700 billion mortgage bailout, squandered each year. . . [One study estimated that only] about 10 to 20 percent of medical procedures rest on “gold-standard” evidence — randomized clinical trials. . . . Risky and pricey therapies routinely make their way into common use without such studies. . . .

Change is looming. The 2010 health reform law created a “Patient- Centered Outcomes Research Institute,” funded by levies on Medicare and private insurers, to sponsor such research. But the funding level, less than a tenth of a percent of what Americans spend on health care each year, will do little to increase the fraction of medical decisions that rest on science. And the Institute’s governing body — composed mostly of representatives from the hospital, insurance, and drug and device industries, as well as physicians — seems almost designed to enable stakeholders to block studies that threaten their interests. Moreover, multiple provisions in the law (sought by providers and drug and device makers) hobble Medicare’s ability to base coverage decisions on research the Institute sponsors.

The mix of hope and realism in the paragraphs above reflects the judicious sensibility of the many Bloche articles I have had the good fortune to learn from. I look forward to reading his book.

Everybody in the Pool — High Risk That Is

By Labinot A. Berlajolli

Individuals with pre-existing medical conditions may now begin applying for the Pre-Existing Condition Insurance Plan. Under the recently passed health care law (PPACA), the government set aside $5 billion to fund the plan from July 1, 2010 through Jan 1, 2014. Money is expected to be allocated based on each state’s population as well as its costs. Although, HHS officials said they might shift funding among states if the new $5 billion program to cover the uninsured runs out more quickly in some states than in others.

To qualify for coverage, individuals must be U.S. citizens or legal residents, have been denied coverage because of a preexisting medical condition, and have been uninsured for the past six months.  Administration officials said people who apply by July 15 will begin receiving coverage by Aug. 1.   States were required to let HHS know by April 30 whether they wanted to use federal grant money to set up a high-risk pool.  As of now, 21 states have chosen to join the federal run pools and 29 states and the District of Columbia have chosen to go it alone.  The 21 states that have chosen to opt into the federal plan are: Alabama, Arizona, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Nebraska, Nevada, North Dakota, South Carolina, Tennessee, Texas, Virginia, and Wyoming.  Several of the largest states operating their own plans, including California, Illinois and New York, are not expected to begin enrollment until August. The administration expects that all states will begin enrolling people by the end of the summer.

Joining the plan will not be cheap. The Los Angeles Times reports that premiums, as well as benefits, are expected to vary greatly from state to state, with some plans charging as little as $140 a month and some as much as $900 a month. Independent experts, on the other hand, estimate premiums will average around $400 to $600 a month.

However, serious questions remain about the new risk pools.  Specifically, whether the $5 billion allocated will be enough. Many experts expect the $5 billion to run out well before 2014 because of high demand. The Centers for Medicare and Medicaid Services has estimated that the $5 billion will last for only two years. The Congressional Budget Office has estimated that the funding is not enough to cover all eligible participants, and that the administration will have to limit enrollment to only 200,000 people through 2013, though there are roughly 12.6 million with pre-existing conditions, according to the Miami Herald.   Others who advise Congress and the administration have warned the funds could be exhausted as early as the end of 2011.

Those interested in applying for the high-risk pools may visit the newly launched website, healthcare.gov, for more information and instructions on how to apply.

First Step in the Expansion of Medicare? Feds Assist Employer Health Plans for Retirees Age 55 +

During the Health Care reform debate, one of the many plans promulgated was to expand Medicare availability to persons aged 55 and up who are not otherwise insured. The argument on behalf of the initiative was simply that Medicare works, people like it, and it would not require the reinvention of the wheel. The system is already in place, we would just need to expand what is already there. In addition, even people who rail against “socialized medicine” seem to have an ideological (if not personal) soft spot for Medicare.

The initiative did not gain sufficient traction. There is, however, more than one way to skin a cat. The White House announced the other day that it would commence in helping to pay the medical bills for early retirees (55 and up) who have medical insurance through their former employers and are not yet eligible for Medicare.

The New York Times reports:

Under the program, the federal government can reimburse employers for 80 percent of the cost of claims from $15,000 to $90,000 a year for a retired worker who is 55 or older and not eligible for Medicare.

The primary goal it seems is to incentivize private employers to continue insuring retirees.  The Times quotes Valerie Jarrett, a senior advisor to President Obama:

“In 1988,” Ms. Jarrett said, “66 percent of large firms provided health care coverage to their retirees. Twenty years later, in 2008, the percent of firms offering coverage to retirees plummeted to 31 percent.”

Obviously, if one can indirectly continue private coverage for those over 55, one need not expand Medicare coverage to do so. But of course there remains those over 55 who are not fortunate enough, at present, to be covered by an employer retiree plan.

80 per cent of up to $90,000 is a large subsidy–by anyone’s standards. But the money will go to business which, for some reason, attenuates the subsidy sufficiently for the largesse to not be “socialism.” And businesses which benefit from such subsidies are not likely to complain–having now cultivated a personal, and thus ideological, soft spot for the program. Like Medicare.

Healthcare Reform and Excise, Part III, or: “Are You Sure That’s a Cadillac?”

Part II of this series described the general effects of the excise provision of the Senate’s Health Care Reform bill, the Patient Protection and Affordable Care Act (PPACA), as projected by CBO, JCT, and CMS.  The post concluded:  “The excise generates revenue, reduces affected premiums, and ‘bends the cost curve.’  So, what is the problem?”  Here, I will attempt to describe the problems with the excise provision as written in the Senate’s PPACA.

The most obvious flaw in the excise is its “kill-em all” approach to determining which plans would be subject to the 40% tax.  According to JCT, the excise would affect 27% of “single” employer-sponsored plans and 22% of “family” employer-sponsored plans by the year 2019.  It is hard for one to imagine that a quarter of all active employee health insurance plans are “Cadillac plans.”  Either the Senate was disingenuous in purporting to target “excess benefits,” or the excise provision was drafted in a grossly careless manner.  (Note:  The short excise provision in the PPACA uses the term “excess benefit” ten times.)

Simply looking at the text of the PPACA shows that the Senate failed to consider (or simply ignored the fact) that affected plans would be disproportionately composed of the following:

• Plans with large number of women and/or older workers
• Plans providing coverage in high-cost areas (as opposed to simply high-cost states)
• Plans negotiated through collective bargaining
• Plans covering those in high-risk professions that are not specifically exempted by the PPACA

The excise also works to disproportionately burden middle-class workers.  According the JCT, over 80% of the revenue generated by the excise from 2013-2019 would be in the form of additional taxable income from those enrolled in affected plans.  Such additional taxable income would come from the conversion of non-taxable healthcare benefits into cash compensation.  Simply put, health benefits would be reduced, wages would be increased proportionately (although some increased wages may be eaten-up by increased cost-sharing), and taxes would be levied on the increased wages.  By 2019, affected persons earning $20K – $100K would, on average, be paying an additional 1% – 2% in federal taxes.  However, affected persons earning $1,000,000+ would, on average, be paying only additional .1% in federal taxes.  Of course, this is assuming that in our current economy, employers will actually pass-on savings from reduced healthcare benefits to wage-earners.

These flaws garnered significant amounts of criticism, particularly from organized labor, whose members would be disproportionately affected by the excise.  During reconciliation of the House and Senate bills, labor unions achieved a tentative compromise with legislators regarding the excise, which would:

• Exempt collective bargaining contracts, state and local workers and VEBAs through January 01, 2018.
• Raise the threshold to $8,900 for single plans and $24,000 for family plans. (Taft-Hartley plans will be considered at the family rate.)
• Add adjustments for gender and age, raising the threshold for plans that have significant numbers of women and/or older workers.
• Raise the threshold for plans with workers in high-risk professions, affecting more than 9 million workers.
• Raise the threshold for plans with retirees age 55 and up.
• Exempt dental and vision costs beginning in 2015.
• Raise the threshold on plans further if health care costs grow faster than expected from 2010-2013.

Putting aside the massive political implications, the compromise merely puts lipstick on the pig.  What about other affected “non-Cadillac” plans not exempted under the compromise?  What about the lost excise and income tax revenue?  How much would the compromise “un-bend” the cost-curve?

Furthermore, if affected plans choose to increase-cost sharing to avoid exceeding the premium threshold, the excise could actually decrease health and increase health expenditures:

If the excise tax pressures people to purchase health plans with increased cost-sharing (e.g., higher copayments), consumers may very well respond to this effective price increase by haphazardly cutting back on medical spending.  However, many of the interventions that are avoided may turn out to be health-improving and/or cost-effective. This problem is especially true for vulnerable populations. Research has demonstrated that low-income and chronically ill populations are generally harmed by higher cost-sharing and may actually incur higher overall costs in response to the introduction of this cost-sharing, as they cut back too much on the cost-effective managing of chronic conditions.

Research has found that the optimal cost-sharing rate for many chronic conditions and large classes of prescription drugs is very low or even zero. This same research shows that increased cost sharing in certain areas (e.g., prescription drugs or primary care) can lead to higher overall costs due to increased utilization in other areas (e.g., hospitalization).

Bad ideas are Congress’ second-most abundant resource.  Really bad ideas are its’ first.  The excise on high-cost employer-sponsored insurance plans constitutes the latter.  I hope that continuing to discuss the excise provision may deter Congress from considering any similar provision in future legislation.

Why Angela Braly, CEO of the WellPoint Insurance Co., Deserves a Raise

Angela Braly, CEO of  health insurance giant WellPoint, deserves a raise. As regular readers of this column know, Ms. Braly did not make as much as Aetna’s Ronald A. Williams in 2008.

In a post written back in May of 2009 I noted of Insurance Company CEO Total Compensation:

Aetna’s Ronald Williams received $24,300,112 last year. That’s $467,309.85 per week. That’s a house. Maybe not a house that Mr. Williams would live in, but a house nonetheless. The man makes a house a week. And interestingly enough, if Mr. Williams were to eschew the purchase of a house on any given week and instead look to deposit the money in a bank– in order to remain FDIC insured (up to $250,000)– he would actually need to open more than one account–every week. Lest we lament the fate of the other CEOs on the list, in 2008 Ms. Braly had to get by on $189,311.76 per week….

Less than half of what Mr. Williams brought in, in 2008 Ms. Braly was forced to make ends meet on $9,844,212.

In 2007, her first year on the job: $9,094,271. Which, for those keeping score at home, is $174,889.83 per week. Her predecessor at Wellpoint, Larry Glasscock, received  $23,886,169 in total compensation in 2006. Again, in 2008 Ms. Braly had to get by on $189,311.76 per week. True, it was $14,421.93 more per week than she had made the year prior, but that won’t be nearly sufficient for this year.

So why does Angela Braly deserve a raise? Pay so high that the  FDIC limits on insurance (yes, it’s somewhat ironic) won’t work for her weekly paycheck? Because WellPoint subsidiary Anthem Blue Cross of California has found the audacity to raise individual insurance premiums in that state 39%. That’s right, 39%. This, according to Secretary of Health and Human Services Kathleen Sebelius, “as WellPoint Incorporated, has seen its profits soar, earning $2.7 billion in the last quarter of 2009 alone.”

Profits “soar,” raise rates. What more could Wall Street want?

Secretary Sebelius has demanded “justification” for the increase. In a letter sent to the Wellpoint subsidiary Anthem Blue Cross, she writes:

One of the biggest pressures facing families, businesses and governments at every level are skyrocketing health insurance costs.  With so many families already affected by rising costs, I was very disturbed to learn through media accounts that Anthem Blue Cross plans to raise premiums for its California customers by as much as 39 percent. These extraordinary increases are up to 15 times faster than inflation and threaten to make health care unaffordable for hundreds of thousands of Californians, many of whom are already struggling to make ends meet in a difficult economy.

Your company’s strong financial position makes these rate increases even more difficult to understand. As you know, your parent company, WellPoint Incorporated, has seen its profits soar, earning $2.7 billion in the last quarter of 2009 alone.

And there you have it, profits soar, raise rates, the stock soars–as will, presumably, Ms. Braly’s stock options. She won’t have “to get by on $189,311.76 per week” for all that much longer. With that kind of move it’s only a matter of time before she finds herself in Mr. Williams’ neighborhood.

Now that the healthcare reform debate awaits its Summit, from the vantage point of its nadir, one might imagine other Insurance Company CEO’s to embark upon a similar strategy. Good thing we jettisoned all those proposed pesky insurance regulations contained in the House & Senate bills.

Because it never gets old to me, here’s the list of Insurance Company CEO Total Compensation:

Res Ipsa Loquitur.

Ins. Co. & CEO With 2007 Total CEO Compensation

• Aetna Ronald A. Williams: $23,045,834
• Cigna H. Edward Hanway: $25,839,777
• Coventry Dale B. Wolf : $14,869,823
• Health Net Jay M. Gellert: $3,686,230
• Humana Michael McCallister: $10,312,557
• U.Health Grp Stephen J. Hemsley: $13,164,529
• WellPoint Angela Braly (2007): $9,094,271
  L. Glasscock (2006): $23,886,169

Ins. Co. & CEO With 2008 Total CEO Compensation

• Aetna, Ronald A. Williams: $24,300,112
• Cigna, H. Edward Hanway: $12,236,740
• Coventry, Dale Wolf: $9,047,469
• Health Net, Jay Gellert: $4,425,355
• Humana, Michael McCallister: $4,764,309
• U. Health Group, Stephen J. Hemsley: $3,241,042
• Wellpoint, Angela Braly: $9,844,212

See Nonprofit Health Related CEO Compensation Here.

Excise & Healthcare Reform, Part II, or: “What Overall Effect Would the Cadillac Plan Tax Have?”

Part I of this series provided an overview of the excise on high-cost health insurance plans contained in the Senate’s healthcare reform bill, the Patient Protection and Affordable Care Act (PPACA).  This part summarizes the projected general effects of the excise provision.  The final part of this series will address the problematic and controversial consequences of the excise and possible alternatives.

Three governmental agencies have been primarily responsible for calculating the effects of healthcare reform legislation for Congress:  the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and the Center for Medicare and Medicaid Services (CMS).  Both the CBO and JCT operate under the auspices of Congress, while CMS operates within the Department of Health and Human Services (HHS).

Additionally, numerous private entities separately analyze legislative language to ascertain its effects.  As expected, private entities often issue findings that differ, in varying degrees, from those provided by governmental entities.  This post focuses on the government findings regarding the excise provision, upon which the Senate relied (presumably) in passing the PPACA.  This post is summarized from information contained in the following documents:

JCT letter to Representative Joe Courtney, Dec. 08, 2009

JCT letter to Representative Joe Courtney, Oct. 16, 2009

CBO letter to Senator Bayh, Nov. 30, 2009

CBO letter to Senator Reid, Dec. 19, 2009

CMS memorandum “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as passed by the Senate on December 24, 2009,” Jan. 08, 2010

Present tax law allows for the exclusion of employer-provided health benefits from individual income tax and contributions made by employers from FICA (Federal Insurance Contributions Act) tax. The excise would generate approximately $148.9 billion dollars in revenue from 2010-2019.  The excise tax itself would not be deductible from Federal income tax.

For each year after 2013, the actual excise tax collected would account for a smaller percentage of the total revenue collected as a result of the excise provision.  This would be the result of an increase in wages following shifts away from the high-cost insurance plans.  The JCT provided the following explanation:

[T]he Joint Committee on Taxation estimates that the excise tax would be mainly passed along [to consumers] through increases in premiums and that many consumers respond by reducing their demand for insurance above the excise cap.  As described above, because health insurance premiums are a component of compensation, which is not likely to fluctuate due to the excise tax, as consumers spend less on tax-excluded benefits, their taxable cash wages will increase.  Therefore, as the value of health insurance plans decline, the income tax base will increase in the long run.

The total number of health plans affected by the excise would increase from 2010-2019 due to the compounding difference between the inflation rate applied to the premium threshold and medical cost inflation.  The percent of active plans affected by the excise tax would increase during the 2013-2019 period from 14% to 27% and 9% to 22% for single plans and family plans, respectively.  The average premium for those affected plans would actually be lowered.  How?  CBO provides:

For policies whose premiums remained above the threshold, the tax would probably be passed through as a roughly corresponding increase in premiums.  However, most employers would probably respond to the tax by offering policies with premiums at or below the threshold; CBO and JCT expect that the majority of the affected workers would enroll in one of those plans with lower premiums.  Plans could achieve lower premiums through some combination of greater cost sharing (which would lower premiums directly and also lower them indirectly be leading to less use of medical services), more stringent benefit management, or coverage of fewer services.

The excise certainly generates a significant amount of revenue to fund other aspects of healthcare reform.  However, the excise is also expected to decrease the overall national health expenditures (NHE).  According to CMS, the excise “…would have an initial, significant impact on the overall level of expenditures.”  Furthermore, “In 2019, these impacts would reduce the total NHE by an estimated 0.3 percent.”   The current NHE projection for the year 2019 is $4.7 trillion.  That puts the savings at $14.1 billion.

The excise generates revenue, reduces affected premiums, and “bends the cost curve.” So, what is the problem?

Excise & Health Reform, Part I, or: “What is an Excise & How Would this Tax on Cadillac Plans Work?”

[Ed. Note: We are very pleased to introduce James Christiano to the blog. He is a law student here at Seton Hall Law and, after receiving his B.A. in psychology in 2002, worked from 2003 to 2008 as a District Adjudications Officer for the United States Citizenship and Immigration Services (USCIS), an agency within the Department of Homeland Security.  During his time with USCIS, James was primarily responsible for adjudicating applications for immigration benefits, including naturalization, lawful permanent resident status, and work authorization. As you might imagine, James has an eye for regulatory analysis, and will be offering a series of posts (to start) on provisions in the health reform bill regarding  "excise" along with analysis as to their potential impact.]

One of the many controversial aspects of healthcare reform is the Senate’s proposed excise on high-cost health insurance plans.  Such high-cost plans have often been referred to, arguably inappropriately, as “Cadillac plans.”  This post provides an introduction to the proposed excise on high-cost plans as provided in the Senate Bill.  Subsequent posts will address the ramifications and controversies of the excise.  (Note: The Senate Bill contains other excise provisions, including a 5% excise on elective cosmetic surgery procedures, which this post does not discuss.)

What is an excise?

Black’s Law Dictionary defines excise as “[a] tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).”  Excises are commonly, and redundantly, referred to as “excise taxes.”

A quick skim of Subtitles D and E of Title 26 of the United State Code provides one an idea of the types of goods and activities that Congress has deemed deserving of an excise.  A few examples are luxury passenger automobiles, certain vaccines, communications services, authorized and unauthorized wagers (i.e., gambling), petroleum, firearms, cigarettes, and “excess expenditures to influence legislation.”

Excise currently imposed on group health plans

Federal law already subjects group health plans to an excise under certain circumstances.  For instance, 26 USC § 5000 imposes an excise on certain group and large group health plans deemed “nonconforming” — i.e., those that do not comply with the requirements of particular subsections of 42 USC § 1395y(b)(1) and (2).  Additionally, 26 USC § 4980B and D impose an excise (as a form of penalty) on group health plans that fail to meet HIPAA and COBRA requirements.

Excise on high-cost plans in the Senate Bill

The Senate Bill includes a provision imposing a 40% excise tax on high-cost, employer-sponsored health insurance plans.  High-cost plans would include those costing $8,500 for individuals and $23,000 for those other than self-only, beginning in the year 2013.  Starting in 2014, the threshold for high-cost plans would be increased annually by the change in the Consumer Price Index (CPI) plus 1%.  These thresholds are further increased for individuals employed (or previously employed) in certain high-risk professions or the repair or installation of electrical or communications lines.  Also, residents of states that rank in the top 17 among the highest-costing average employer-sponsored health insurance plans would be subject to more lenient thresholds for the years 2013, 2014, and 2015 (120%, 110%, and 105% of the threshold, respectively).

For each given high-cost plan, the coverage provider would be responsible for paying a 40% tax on the amount equal to the cost of the coverage exceeding the threshold.  For example, a coverage provider would be subject to an excise of $400 for a plan costing $24,000 in 2013 ($24,000 – $23,000 = $1,000; $1,000 x 40% = $400).  A coverage provider may be the insurance issuer, the benefits plan administrator, or the employer, depending on the coverage arrangement.

Preexisting Conditions & Wellness Incentives: A Horse of a Different Color?

The Washington Post has an interesting article which covers an aspect of pending health reform legislation that hasn’t received much attention as of late: wellness incentives tied to premium rates. As I have noted on this blog before, Senators Harkin and Baucus were both as of late said to have been considering legislative provisions which would enable employers to both reward and punish employees who fail to meet certain health goals. In pending legislation (and its practical application) it would seem the line between reward and punish has begun to blur.

The WaPo article relates how provisions passed by the Senate finance and health committees could more than double the allowable insurance premium increases tied to various conditions–or more precisely, to employee medical evaluations which fail to meet proscribed guidelines regarding weight, glucose and cholesterol levels, and other biometrics in addition to smoking cessation. Read more

What Health Care Costs

In light of reports of a recent rising clamor to not enact comprehensive Health Care Reform, in our last post we noted that the total U.S. health care expenses for 2008 was $2.4 trillion or, if written out: $2,400,000,000,000. In an attempt to contextualize that number we noted that to count to 2.4 trillion would take 228,000 years; and that if we piled thousand dollar bills $2.4 trillion would rise 151,200 miles into the air (significantly more than half the distance to the moon) or more than 6 times around the circumference of the earth at the equator.

We also noted that:

If, for the sake of even numbers a family is four people and a house costs $250,000, then $2.4 trillion would be enough to buy 9,600,000 houses, or  a house for every single family in New York City, Los Angeles, Chicago, Houston, Philadelphia, Phoenix, San Francisco, Baltimore, Boston, Denver, Milwaukee, Seattle, Atlanta, Cleveland, Miami, Omaha, Raleigh, Oakland, Kansas City, Mo., Tulsa, Portland, Or., Albuquerque, San Antonio, San Diego, Dallas, Detroit, Indianapolis, Jacksonville, Memphis, Virginia Beach, Honolulu, Tulsa, Minneapolis, Arlington, Tx, and Washington, D.C. combined. That’s only one year of health care expenses.

And that

$2.4 trillion is 4.3 times the amount spent on defense; 17% of the GDP and that the number–if we do nothing–is expected to rise to $4.3 trillion by 2016– close to double the incomprehensible $2.4 trillion we spent last year in a mere 7 years and enough thousand dollar bills stacked atop each other to get us to the moon.

Today we take a little closer look at that $2.4 trillion in the life of the economy at large and people at home.

$2.4 trillion equals $7,900 per person. Although this chart below from Kaiser Health only goes up to 2007, look closely at the rising percentage of health care expenses to Gross Domestic Product. GDP (as per the Dogs of the Dow), “is defined as the value of all goods and services produced within the geographic territory of an economy in a given interval, such as a year.” Roughly speaking, that’s the value of everything we make or do. We’re at 17% of GDP for 2008. That’s one out of every six dollars. In 1970 it was 7.2%; about one out of every 14 dollars.

Again, 2008′s percentage is roughly 17%; the Centers for Medicare and Medicaid Services (CMS) projects that health spending will be a little more than 20% of GDP  by 2018.

According to Kaiser, “Over the last four decades, the average growth in health spending has exceeded the growth of the economy as a whole by between 1.3 and 3.0 percentage points. Since 1970, health care spending has grown at an average annual rate of 9.6 percent or 2.4 percentage points faster than nominal GDP.”

In looking at dollar amounts over time, one may, and should, consider inflation– as a rising tide lifts all boats, so to speak– and an expense of $1.00 in 1970 is equivalent, because of inflation, to an expense of $5.55 in 2009. One must account for that.  But in considering expenses relative to GDP over time the rate of inflation is less significant as it is, in a sense, already factored in–as we are speaking in terms of percentage of the whole of all we make or do from one year to the next. The whole is the whole, regardless. From one in fourteen to one in six is, to say the least, significant.

But having said that, it may be worth taking a quick look at inflation, wages and the cost of health insurance premiums over the last 10 years– if you receive your health benefits through your employer, the chart below should make it clearer where the bulk of that raise you thought you had coming went.

According to National Coalition on Health Care the annual premium for an employer health plan covering a family of four in 2008 averaged nearly $12,700. The annual premium for single coverage averaged over $4,700. That’s over $1000 per month ($1058) for the family of four; nine dollars shy of $400 per month for an individual. The average 30 year fixed mortgage rate for this week is 5.29%. For the sake of even numbers, if a house costs $250,000, the monthly mortgage payment on that house would, at 5.29%, be $1387. Which is to say that the average cost of health insurance for a family of four in 2008 was a scant $329 less than the monthly mortgage for a house. For renters, according to the Census Bureau’s most recent report, the median monthly housing cost– rent, utilities: gas, electric, water, and garbage– was $755 per month.

Importantly, the insurance premiums above: $1058 and $391, do not include co-pays and deductibles– an expense increasingly borne by consumers of health care. And in 2009 both the premiums and the employee contributions rose significantly.

In a post a few months back we noted that HealthCare Finance News reported that according to the Milliman Medical Index (MMI) the average medical bill for a typical family of four covered by an employer-sponsored preferred provider organization (PPO) program rose 7.4 percent from 2008 to 2009. In actual dollars:

The total 2009 medical bill for a typical American family of four is $16,771, compared with the 2008 figure of $15,609. The $1,162 increase is the highest measured by the MMI since the 2006 increase of $1,168, when cost trends were at 9.6 percent.

The MMI found that employers are expected to pay $9,9947, or 5.4 percent more than in 2008, while employees are expected to contribute $4,004 toward their health costs, an increase of 14.7 percent, and pay $2,820 in out-of-pocket expenses, an increase of 5.4 percent.

As we pointed out then, one should note that the employers’ contribution is nearly $10,000 per year, or $833.33 per month. Together, with employee premium contributions and out-of-pocket for deductibles, co-pays and the like– the actual total is $16,771 or $1397.59 per month. Which is to say that the average expense for medical for a family of four is now greater than the $1387 per month it would cost them in mortgage for that $250,000 house.

It is also worth mentioning, as we have before,  that in 2008  Ronald A. Williams, the CEO of Aetna, received $24,300,112 in total compensation. That’s $467,309.85 PER WEEK.

Competition among private plans: Who is served?

Our private health insurance marketplace works poorly.  Commentators including Jacob Hacker, and many Democratic legislators, argue that the creation of a public plan to compete with existing private plans will assist in the dual tasks of improving quality and reducing cost inflation.  Responding today to these assertions in a NYT Op-Ed, David Reimer and Alain Enthoven argue that there is a role for government in a reformed health finance system, but not as a market participant.  Rather, they argue, it is as a regulator that government can cure the ills of our poorly functioning insurance marketplace.  Implementing their vision might or might not benefit well, low-cost workers; it would not, however, help those with chronic illness and other high-cost insureds — those who need coverage the most.

Reimer and Enthoven argue that government-run exchanges can adequately address market failure in the health insurance market, allowing well-regulated private insurers to compete in terms of price and quality.  The exchange would ease consumer comparisons of insurers by limiting incentives (tax or otherwise) to a benchmark created by reference to the lowest-price qualifying plan.  As consumers would then be required to pay any excess out of pocket, plans would be incented to stay at or close to the benchmark price, driving cost pressure down to providers, thereby reducing health inflation.  At relatively uniform prices, plans would presumably distinguish themselves by putting together “good, economical plans.”

The argument over whether the market for purchasing health insurance could operate in a classically efficient manner, at least absent distorting outside influences, is long-running.  Enthoven has argued the affirmative vigorously and ably for decades.  Tim Jost and others have argued that classical economic analysis is largely inapplicable to the market for health insurance because the timing of the purchasing decision confounds consumer decision-making, and because health care is a sufficiently special good that we are unlikely to hold people to their restrictive ex ante decisions as to coverage.

Let us for the present accept that a market for health insurance, well-regulated as Reimer and Enthoven suggest, can produce “good, economical plans” for the average consumer.  This would occur because insurers would seek to enroll as many of these average consumers as possible, and to maintain good service and low pricing to keep them enrolled.  But, as I described previously,  there is a class of people insurers would not welcome.  Health care costs are heavily concentrated in the sickest 10% of consumers, and many of the most expensive users are easily identifiable in advance because they have chronic illnesses.   Rational, self-maximizing insurers would shun these consumers absent some risk-adjustment payment Reimer and Enthoven do not mention, and that indeed appears not to exist to an extent adequate to reasonably combat insurers’ selection bias.  Insurers can be required to offer them coverage, even to provide coverage for chronic care services.  But will rational, self-maximizing insurers serve them well, left to their own devices?  Why would they, if they could discourage their patronage by providing lackluster care coordination, home care, physical therapy, and other services that are markers for expensive chronic illnesses?  We ought not rely on self-interested market participants and expect them, all else being equal, to act contrary to their own self-interest.

Competitive private markets for health coverage might make sense if health costs were homogeneously spread, or even if high costs occurred unpredictably.  In a world where a large number of Americans are predictably poor bargains for insurers due to known chronic conditions, we need, as an option, an entity whose sustainable, reliable mission is to provide good, economical coverage for those who most need care, and who incidentally represent a substantial portion of our health care budget.  If committed public plans show the way to excellent chronic care coordination, we will be able to judge the efforts of private insurers in this important regard; otherwise, the needs of the chronically ill can too easily be swept under the rug.

Medical Expense for a Family of Four Rises

Yesterday we took a look at Health Insurance CEO pay, and noted that Mr. Ronald Williams of Aetna made $467,309.85 per week in 2008, while Ms. Braly of Wellpoint was left to make ends meet on $189,311.76 per week, and Mr. Hemsley of United Health was forced to manage on  $62,327.73 per week (though one might hope that Mr. Hemsley had the presence of mind to put a little something away the year prior when he had made $253,164.02 per week).

Today we take a brief look at how the other half lives. HealthCare Finance News reports that according to the Milliman Medical Index (MMI) the average medical bill for a typical family of four covered by an employer-sponsored preferred provider organization (PPO) program rose 7.4 percent from 2008 to 2009. In actual dollars:

The total 2009 medical bill for a typical American family of four is $16,771, compared with the 2008 figure of $15,609. The $1,162 increase is the highest measured by the MMI since the 2006 increase of $1,168, when cost trends were at 9.6 percent.

The MMI found that employers are expected to pay $9,9947, or 5.4 percent more than in 2008, while employees are expected to contribute $4,004 toward their health costs, an increase of 14.7 percent, and pay $2,820 in out-of-pocket expenses, an increase of 5.4 percent.

According to Health and Human Services: “The estimated median income for a four-person family living in the United States is $70,354 for FFY 2009″ (slightly more than Mr. Hemsley’s weekly paycheck). According to the MMI, of that $70,000, nearly $7,000 in employee wage goes to healthcare expense. That’s 10 per cent or $583.33 per month. That’s more than enough to make the payment on a brand new Cadillac.

In addition, one should also note that the employers’ contribution is nearly $10,000 per year, or $833.33 per month. Together, the actual total is $16,771 or $1397.59 per month. Which is to say that the average expense for medical for a family of four is $1400.00 per month. According to the Census Bureau, the average price of a house in the U.S. in March of 2009 was $201,400.00.

According to CNNMoney.com the current average for a 30 year fixed rate mortgage is 5.24% but rates are “all over the map.” We’ll use 7%. The monthly mortgage payment on $201,400 for a 30 year fixed rate at 7% is $1339.92. The average monthly medical expense amounts to $1397.59.

That’s a house. The average monthly medical expense for a family of four amounts to a house, maybe not one that Mr. Williams, Ms. Braly or Mr. Hemsley would live in, but a house nonetheless. Oh, and there’s still $57.67 left over– enough to catch the earlybird special at the Family Buffet.

Health Insurance Administrative Costs to Doctors = $31 Billion Per Year

Back in January, in a post titled Health Care and Productivity, a National Cost, I had occasion to write a line or two about the affect of insurance paperwork upon my family physician, whom I had just seen. I ventured then in a roughshod way (I was sick), that such would impact his productivity, and consequently that of the nation:

…if my family physician and his staff of two are grudgingly forced to devote numerous hours to a maddening array of paperwork and phone calls (“it gets worse every year”) in an attempt to navigate the various streams of insurance authorizations and payments (“some of it seems designed solely to frustrate and slow or prevent payment”) -he will not be seeing patients. Tomorrow, he will not be seeing patients; he will be trying to catch up on paperwork–as will his staff.

Perhaps then, when we consider that Health Care costs amount to 16% of the GDP, we might also consider that this number does not take into account the difficult to gauge loss of national productivity. And although the sickness of one can be the work of another, the exchange does not seem to be an even one as it relates to national production: the doctor functioning, in a sense, as a support and enabler to the productivity of others. Having said that, if that doctor is unavailable (through lack of insurance or remoteness) to remedy the ills of the now unproductive (or the less productive) the nation suffers for it. If the doctor is needlessly enmeshed in tasks, inefficient and ancillary to patient treatment, the nation suffers for it.

A portion of the suffering has been gauged: L. P. Casalino, S. Nicholson, D. N. Gans et al., “What Does It Cost Physician Practices to Interact with Health Insurance Plans?” Health Affairs Web Exclusive, May 14, 2009, gives us numbers–and they agree with my doctor.

Key Findings

• Physicians, on average, spent 142.3 hours per year interacting with health plans, or 3.0 hours per week and 2.7 physician work weeks per year. Primary care physicians spent significantly more time (164.9 hours per year) than medical specialists (123.7 hours) or surgical specialists (100.3 hours).
• Nursing staff spent an additional 23 weeks per year per physician interacting with health plans, while clerical staff spent 44 weeks and senior administrators spent 2.6 weeks doing so.
• Compared with other interactions, physicians, on average, spent more time dealing with formularies (78.2 hours for primary care doctors, for example), and the least on submitting or reviewing health plan quality data (1.9 hours annually for all physicians).
• Converted into dollars, practices spent an average of $68,274 per physician per year interacting with health plans; primary care practices spent $64,859 annually per physician, nearly one-third of the income, plus benefits, of the typical primary care physician.

The authors further note that “the estimated $31 billion in costs physician practices incur in their interactions with health plans comprises 6.9 percent of all U.S. expenditures for physicians and clinical services. That is six times the amount the federal government spends annually on the Children’s Health Insurance Program (CHIP).”

The study also notes that “Primary care physicians, especially those in small practices, spend larger amounts of time interacting with plans than those in other specialties.”

My physician and his staff of two devote an entire day every two weeks, and his staff devotes a great deal of the time in between to this “maddening array of paperwork and phone calls (‘it gets worse every year’) in an attempt to navigate the various streams of insurance authorizations and payments” –some of which “seems designed solely to frustrate and slow or prevent payment.” The study estimates that expense for a primary care physician (though more for those “in small practices”) at $64,859 annually.

For more details you can read a brief Commonwealth Fund article on the report  here
or the Health Affairs article with the report here.

Senators Harkin & Baucus Considering Enabling Employers to Punish Employees for Failure to Address Health Issues

In Self Reliance Emerson states that “Society everywhere is in conspiracy against the manhood of every one of its members. Society is a joint-stock company in which the members agree for the better securing of his bread to each shareholder, to surrender the liberty and culture of the eater.”

If Tom Harkin has his way, in addition to liberty, you may find yourself surrendering your cheeseburgers as well. The New York Times reports that Mr. Harkin and Max Baucus have proposed that in order to lower the costs of health care, employers be given the ability to reward and punish workers according to their relative health. Such rewards and punishments will be meted out in accord with measures such as cholesterol readings, blood sugar, weight, smoking, etc…

I would suggest that to reward is one thing, to punish is another. To John Stuart Mill is attributed the statement at the heart of classical liberal notions of ordered liberty: “The rights of your fist end at my nose.” I believe Mr. Harkin and Mr. Baucus have forgotten where their noses end and mine begins.

Employees, Fearing Increased Cost-Sharing and Loss of Benefits, Utilize Current Employer-Based Health Plans More

The Kaiser Family Foundation reports that a recent survey reveals that employees are utilizing employer-based health plans more in fear that their plans will increase cost-sharing or dissolve altogether.

KFF reports:

U.S. workers are making more use of their employer-sponsored health insurance benefits because of concerns that employers could cut benefits or increase costs during the economic recession, according to a survey released Friday by the International Foundation of Employee Benefit Plans, the Milwaukee Journal Sentinel‘s “Dollars & Sense” blog reports. IFEBP surveyed its members between March 30 and April 6 and found that one-third reported an increase in their workers filling prescription medications or undergoing costly medical procedures before their insurance runs out, the study found. Sally Natchek, senior director of research for IFEBP, said, “Plan participants are feeling anxious about the possibility of increased cost-sharing and a reduction in benefits due to the financial crisis.”

The International Foundation reports that:

[W]hile few plan sponsors (3.6%) are cutting or considering cutting health care benefits altogether, many are ramping up their cost-sharing approaches.  Thirty-five percent of plan sponsors are increasing employee deductibles, coinsurance or copays due to the financial crisis.  Nearly the same proportion are also increasing employee premiums.  Other cost-sharing actions that plan sponsors are taking include adding consumer-driven health plans as an option (12.8%), replacing a current plan with a consumer-driven plan (9.6%) and instituting spousal charges (10.8%).

The Foundation report confirms that more employers are using consumer-directed health plans in an attempt to rein in the cost of health benefits.

Perhaps the silver lining of this survey, though, is that there was also found to be “a heightened focus on wellness programs.  Eighteen percent of the respondents have introduced or are considering introducing wellness initiatives due to the economy (Foundation).” In a recent post, we noted that Kaiser had reported that

Eighty percent of large U.S. companies this year are offering chronic disease management programs for workers in an effort to reduce health care costs, up from 51% last year, according to a new survey by Hewitt Associates, the Houston Chronicle reports.

At the confluence of unfavorable economic conditions, rising health care and insurance costs and an administration which has vowed reform, these burgeoning trends may be only the forward guard in changes to employer-based plans. Driven by economic concerns, there seems to have been generated among employers an understanding that one way of avoiding the high costs associated with acute and/or catastrophic health care, is simply to help employees to avoid becoming sick (it may be only a matter of time before employers begin handing out “an apple a day.”) Unfortunately, with increasing frequency employers also seem to be learning that another means of avoiding the costs of  health care is to simply discontinue,  decrease, or “shift” the costs of health benefits. The numbers seem to suggest that employees have read the writing on the wall, and are visiting their doctors while they still can.

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