Health “Reform” in Massachusetts

In case you missed it, the Massachusetts Taxpayers Foundation released a report this week claiming that the Commonwealth’s health plan has proved surprisingly affordable.  Of particular interest are the reasons why they claim health reform has been fiscally responsible:

1) Half of the budgetary costs (which they estimate at a net $700 million) have been passed on to the federal government through the Medicaid match;
2) Employers have extended coverage valued at a total of $750 million – more than the cost of the expansions of government-run care — due largely to the (unfunded) mandate on employers to provide coverage;
3) The “mandated substantial Medicaid rate increases to hospitals and physicians who had been underpaid for years” were “effectively eliminated” as a result of Fiscal Year 2009 budget cuts, thus preventing further cost overruns.

In other words, less than three years into the reform experiment, physicians are suffering from substantial under-payments, because the Legislature reneged on its 2006 promises due to political and budgetary pressures.

This case study serves as a cautionary tale on health reform, one that you and/or your boss may wish to share with providers in your district over the recess.  Likewise, Senator Baucus’ white paper on coverage proposed increasing Medicaid reimbursement rates, but the Massachusetts experiment begs a simple question: How long will those increases really last?

Rep. Gingrey Op-Ed: Government-Run Health Plan Would Backfire, Making “Public Option” the Only One

Former Democratic National Committee Chairman Howard Dean has recently inserted himself into the debate on health reform, creating a website and collecting signatures on a petition calling for a “public option” as part of any health reform bill. The action is unsurprising from an individual who previously called President Obama’s healthcare reform plan “perfect” and stated that “it’s ridiculous to say care would be inferior” in the government-run plan. But even as Governor Dean attempts to attract support for government-run healthcare, it’s worth pointing out that the facts—not to mention his own personal experience—don’t mesh with his rhetoric.

As Vermont’s governor, Dean aggressively pursued expansions of government-run health insurance—and bragged that doing so “was very cheap to do.” Unfortunately for beneficiaries on state-run Medicaid and children’s health insurance, that “cheap” coverage often came at a very steep price. Low reimbursement rates mean that few doctors actually participate in the government-run plan, so patients can’t see their personal physician—and may not be able to see any physician when they need one.

In Vermont, one of those physicians whom Medicaid beneficiaries couldn’t visit was Judith Steinberg—Howard Dean’s wife. In 1998, low reimbursement rates—coupled with the impact of additional regulations her husband signed into law—prompted Dr. Steinberg to end participation in the state’s largest Medicaid-managed care program. As a result, the residents of Shelburne in Vermont’s largest Medicaid plan lost access to the only primary care provider in town who would accept their insurance.

I don’t fault Dr. Steinberg for her decision—it may well have been the only rational business decision for her to make. But for Governor Dean to claim that a government-run plan won’t be “inferior” is to ignore his wife’s experience, and that of the many beneficiaries who lost access to their physician due to Medicaid bureaucracy and poor coverage. My fear is that creating a government-run health insurance plan wouldn’t guarantee quality care by physicians—in fact, it will not guarantee care at all.

The quality of care in a government-run health plan may seem irrelevant to those individuals who are happy with the coverage they currently have—after all, President Obama promised during his campaign that, “If you like the plan you have, you can keep it.” But most individuals don’t really have their own health coverage—they get it from their employers. And if the coverage provided in the government-run plan is cheaper than what employers are paying now, logic suggests that employers will drop their current plans and place their workers in the government plan.

Estimates from independent actuaries at the Lewin Group suggest that well over half of all Americans currently with employer-sponsored health coverage—nearly 120 million individuals—would lose their current coverage due to the creation of a government-run health plan. And the change in coverage would not be a “choice”—according to Lewin studies, employers would drop their plan options, dumping employees into the government-run health plan to save money.

So the end result of the “perfect” plan supported by Governor Dean would be most people losing the coverage they have, while ending up on a government-run plan that dominates the healthcare marketplace. Physicians would be forced to accept the government’s low reimbursement rates—but my experience, to say nothing of Dr. Steinberg’s, strongly suggests that many will not. Some baby boomer doctors may view a move to government-run health insurance as a reason for them to take early retirement. Some physicians may refuse all insurance entirely, relying solely on a “cash-and-carry” approach to treating patients. Other physicians may be forced to lay off staff to compensate for a sharp drop-off in income. And other would-be physicians may decide not to practice at all—forsaking medical school for other careers that could be more rewarding and less bureaucratic than government-dictated medicine.

Republicans believe that a government-run health plan that doesn’t guarantee access to care—like the Medicaid program in Governor Dean’s hometown—isn’t real coverage at all. That’s why House Republicans have formed a working group, on which I sit, to develop solutions that will expand access to affordable, quality healthcare. Our working group’s proposals will keep doctors and patients, not government bureaucrats, at the center of healthcare.

Governor Dean may claim that a government-run health plan would not provide “inferior” healthcare, but the citizens of his hometown—and even his wife—may disagree. Republicans believe that Americans deserve better. And we look forward to working to achieve that aim.

This post was originally published at US News.

Glossary of Key Health Care Terms

In anticipation of a debate on comprehensive health reform later this year, we have prepared a list of important terms surrounding the debate.

Administrative Pricing:  Reimbursement mechanisms for doctors and hospitals determined by legislative or regulatory fiat, rather than through the free market.  Critics of administrative pricing note that the “take it or leave it” philosophy imposed by Medicare and Medicaid results in numerous distortions within the health system—the price paid by the federal government has only a notional relation to the cost borne by the provider, often leading to cost shifting whereby individuals with private insurance end up offsetting the shortfalls in providers’ federal reimbursement levels.

Adverse Selection:  A phenomenon caused by a high proportion of sicker individuals enrolling in a particular insurance pool, often leading to higher premiums for all participants in the pool.  In extreme cases, a “death spiral” can result, whereby high premiums encourage healthy individuals to drop coverage—resulting in higher overall costs, yet more premium increases, and further lost coverage.  Economists have argued that guaranteed issue and community rating regulations—either without an individual mandate to purchase insurance, or with a poorly-enforced one—could result in significant adverse selection increasing the cost of coverage for healthy individuals.

Capitation:  A form of reimbursement that bases payment levels on a flat, regular (often monthly) payment, often risk-adjusted to reflect an individual’s health status.  Payments to Medicare Advantage plans are made on a capitated basis.  Supporters of capitation believe that it removes the perverse incentives present in fee-for-service reimbursement to over-bill for care, while critics voice concerns that capitation could encourage doctors and hospitals to under-provide care to save costs.

Comparative Effectiveness:  Research comparing the relative merits of two drugs or methods of treating an illness.  Of particular concern is the distinction between clinical effectiveness—which examines the merits of various treatment options without respect to their cost—and cost-effectiveness research.  Critics of government-sponsored effectiveness research have voiced concern that cost-effectiveness judgments could be used to determine reimbursement for government-funded health plans—leading to federal bureaucrats denying treatment options on cost grounds.

Cost Shift:  In health care, cost shift refers to two related phenomena—doctors and hospitals charging patients with health insurance to pay for uncompensated care provided to those without coverage, and providers charging those with private coverage more to pay for below-cost reimbursement by government programs.  With respect to the former issue, the Congressional Budget Office has testified that uncompensated care represents a minor fraction of total health spending, and its impact “appears to be limited.”  With respect to cost-shifting from public to private payers, CBO notes that reimbursement rates in Medicare and Medicaid are anywhere from 20-40% lower than rates paid by private payers.  One study estimates that, as a result of the low rates paid by government programs, families with private insurance pay approximately $1,800 per year more for their health coverage.

Crowd Out:  A phenomenon whereby individuals drop their private health insurance to enroll in government programs.  One recent example of crowd out occurred in Hawaii, where Governor Linda Lingle ended the Keiki Care program for children’s health coverage because, in the words of one official, “People who were already able to afford health care began to stop paying for it so they could get it for free.”  Due in large part to its expansion of government-run health insurance to higher-income families, the Congressional Budget Office found that the recent State Children’s Health Insurance Program legislation signed by President Obama would result in more than one-third of those children who would obtain government-run coverage—2.4 million of the 6.5 million newly enrolled—would drop private health insurance to enroll in the government program.

Delivery System Reform:  A general term for efforts to slow the growth of health costs by reforming the way health care is delivered in order to generate efficiencies.  Many of these proposals would leverage the federal government’s role in financing Medicare and Medicaid by linking hospital and physician reimbursement to certain behaviors or practices.  Critics of these proposals caution that they may not generate significant savings to the federal government, but will further entangle federal bureaucrats in the practice of medicine.

Employee Exclusion:  Dating from an Internal Revenue Service ruling during World War II, all health and related fringe benefits provided by an employer are excluded from income for purposes of both payroll and income taxes without limit. (Note however that for the employer, both wages and health benefits are tax-deductible business expenses.)  The Joint Committee on Taxation estimates that in 2007, the exclusion resulted in more than $246 billion in foregone income and payroll tax revenue to the federal government.  Many economists of varying political stripes argue that—because a marginal dollar of cash income is taxable to employees, while a marginal dollar of health insurance is completely tax-free—the exclusion encourages the purchase of overly generous insurance policies, and in turn leads to the over-consumption of health care.

ERISA:  Acronym describing the Employee Retirement Income Security Act of 1974, which enacted rules regarding employee benefit plans.  Section 514 of ERISA pre-empts “any and all State laws insofar as they…relate to any employee benefit plan,” permitting employers who self-insure their group health plans from complying with (potentially conflicting) State benefit mandates and other regulatory requirements.  Small employers who “fully insure”—that is, purchase coverage from another company without assuming insurance risk—remain subject to State regulatory requirements.

Exchange:  Also called a “Connector,” any of a variety of proposals designed to provide comparison shopping of health insurance products for individuals.  President Obama and Democrats in Congress have further proposed empowering an Exchange to serve as a “watchdog” on consumers’ behalf.  Supporters of Exchanges argue that they could enhance individuals’ plan choice as well as portability of insurance coverage from job to job.  While Exchanges can allow free markets for health insurance to flourish, they could also be used to impose price controls or other regulations, by restricting access to the Exchange for those companies who do not comply with bureaucratic mandates.

Fee-for-service:  A method of reimbursement that bases payment levels on a discrete episode of care—for instance, a single office visit or procedure performed.  Traditional Medicare and many forms of private insurance bill on a fee-for-service basis.  Critics of fee-for-service medicine argue that reimbursement policies discourage doctors to provide more efficient care—since physicians generally receive none of the savings resulting from procedures they did not perform.

Group Insurance:  Health coverage provided by employers—the largest source of coverage nationwide, with approximately 160 million individuals (more than 60% of the non-elderly population) enrolled.  Coverage is offered to all eligible employees within a given classification and can be self-insured or fully-insured by an employer—in the latter instance, the employer purchases coverage from a carrier and assumes no insurance risk.  States and the federal government also divide the group market into small and large groups, with the small groups classified as those with 2-50 employees.

Guaranteed Issue:  A requirement that insurance carriers accept all applicants, regardless of health status.  Generally coupled with community rating—a further requirement that carriers charge all individuals the same rates, with few variations.  Critics argue that the two policies, particularly when enacted in concert, encourage individuals not to purchase health insurance until they encounter significant medical expenses, and likewise—by raising premiums for all individuals—discourage young and healthy individuals from buying insurance.

High-Risk Pools:  A form of coverage for the medically uninsurable, currently offered in 34 States.  Coverage is generally extended to those rejected for coverage on the individual market.  Premiums are higher than rates for healthy individuals, but lower than the actual cost of most participants’ health care—State general fund appropriations, grants from the federal government, and/or surtaxes on insurance premiums finance the pools’ operating losses.  Supporters of these mechanisms believe that a more robust system of State-based risk pools could offer coverage to all medically uninsurable individuals, without the adverse market effects connected with a requirement that insurance companies accept all applicants (see Guaranteed Issue above).

Individual Insurance:  Health coverage purchased for an individual (or family) outside the group setting.  Individual insurance is subject to State regulation (including benefit mandates), and must generally be purchased with after-tax dollars.

Mandates, Benefit:  Laws requiring all insurance policies sold to offer coverage for a particular treatment (e.g., in vitro fertilization, hair prostheses) or access to a particular type of medical provider (e.g., dentists, massage therapists).  One survey found that as of 2008, States had enacted nearly 2,000 discrete benefit mandates.  Critics of benefit mandates argue that mandates both individually and collectively raise the cost of health insurance, making coverage less accessible to individuals.  Federal group policies regulated under ERISA are exempt from State benefit mandates.

Mandates, Employer:  Proposals requiring employers to provide health insurance benefits to their employees, and/or pay a tax to finance their workers’ health coverage.  Also commonly called “pay-or-play,” after a requirement instituted as part of the Massachusetts health reforms that employers must “play” by offering health coverage to their workers or “pay” a tax to cover the costs of their employees’ uncompensated care.  Critics cite an NFIB study that an employer mandate could result in 1.6 million jobs lost as evidence that mandates would negatively impact the American economy.

Mandates, Individual:  A requirement that all individuals have health insurance, subject to some type of enforcement by the State.  Massachusetts’ health reform law required individuals to purchase health insurance or face penalties on their tax returns.  Critics argue that mandates are not easily enforced, could result in interest groups lobbying for an overly generous definition of “insurance” for purposes of compliance with the mandate, and may penalize individuals who cannot afford health insurance by taxing them for not buying it.

Medicaid:  A State-federal partnership providing health coverage to certain vulnerable populations.  Eligibility requirements vary by State, but often include low-income women and children as well as elderly and disabled populations.  The federal government finances Medicaid through the Federal Medical Assistance Percentage (FMAP), a match rate linked to States’ relative income level that has averaged 57% of total Medicaid spending in recent years.  While low-income individuals and children constitute the majority of Medicaid beneficiaries, most Medicaid spending funds long-term and related care to elderly and disabled enrollees.

Medical Loss Ratio:  A requirement that insurance carriers dedicate a minimum percentage of premiums to paying medical claims, in an attempt to restrict “excessive” administrative costs or profits by insurance companies.  However, the Government Accountability Office has noted that “there is no definitive standard for what a medical loss ratio should be,” and White House adviser Ezekiel Emanuel has previously written that “some administrative costs are not only necessary but beneficial.”  Critics of this approach argue that imposing de facto price controls on insurance companies will only exacerbate problems in the health sector, by discouraging carriers from monitoring their patients outside a hospital or physician’s office.

Medicare:  A single-payer (i.e. government-funded) health insurance plan that offers coverage to seniors over age 65, Social Security disability recipients (after a two-year waiting period) and individuals with end-stage renal disease.  Part A (hospital services) is mandatory for all seniors, while Part B (physician and outpatient services) and Part D (prescription drug coverage) are voluntary. (Medicare Part C is Medicare Advantage, an alternative to traditional Medicare described below.)  Medicare generally pays doctors and hospitals on a fee-for-service basis, reimbursing based on a discrete office visit, procedure performed, or hospital stay.

Medicare Advantage:  Health coverage provided by private insurance companies and regulated by the federal government, in lieu of the traditional Medicare benefit.  Plans receive capitated (per-beneficiary) payments from the federal government that are adjusted according to enrollees’ risk and based on their bids against a statutorily-defined benchmark.  Plans which bid below the benchmark may use the savings to provide extra benefits—reduced cost-sharing, lower premiums, and/or vision and dental coverage—to beneficiaries.

Medigap:  Insurance products designed to supplement the traditional Medicare benefit, offered by private companies according to standardized benefit designs implemented and regulated by the federal government.  Many economic analysts—including the Congressional Budget Office—have concluded that, by insulating beneficiaries from financial exposure to deductibles and co-payments, Medigap policies encourage seniors to over-consume health care, resulting in higher costs for the Medicare program.

Pay-for-Performance:  Proposals designed to increase or decrease Medicare or Medicaid reimbursement levels to quality outcomes.  Several programs exist linking incentive payments to reporting of selected quality measures, but reimbursement has yet to be directly linked with outcomes.  Critics of this approach argue that pay-for-performance could discourage providers from accepting patients with complications that could lead to poor outcomes.

“Public Option”:  An insurance plan run and/or funded by a governmental entity.  Democrats have proposed several different ideas as to how such a plan may be structured—a Medicare-like insurance plan operated by the Department of Health and Human Services, a more independent entity where a third-party administrator makes operational decisions, or State-based governmental plans, perhaps including a buy-in to State employee health insurance offerings.  Independent actuaries at the non-partisan Lewin Group found that a government-run plan reimbursing at Medicare rates would cause about 120 million Americans to lose their current health coverage.  Regardless of the particulars of its structure, opponents may echo the concerns of CBO Director Elmendorf, who testified that it would be “extremely difficult” to have a “public plan compete on a level playing field,” such that Democrats would create inherent biases in favor of the government-run plan.  Some may also be concerned that such a plan could exercise increasing control over patients’ health decisions, leading to delays in obtaining critical treatments or outright denials of care.

Sustainable Growth Rate:  A mechanism instituted as part of the Balanced Budget Act of 1997 regarding physician reimbursements, which calls for reductions in future years’ reimbursement levels if physician spending exceeds the SGR target.  Critics note that, because the target applies to aggregate levels of spending, individual physicians have a micro-level incentive to increase the number of services they perform in order to overcome a lower per-service payment under the SGR.  On the other hand, supporters of entitlement reform argue that while imperfect, the mechanism has forced Congress to find offsets to finance increases in the SGR, resulting in a higher level of scrutiny of the Medicare program than would otherwise have been the case.

Tax Treatment of Health Insurance:  Health insurance provided through an employer is not taxable, while health insurance outside the employer group market generally must be purchased with after-tax dollars.  Three exceptions to this rule exist: 1) self-employed individuals may deduct health insurance premiums from their income (but not payroll) taxes; 2) Health Savings Account contributions may be deducted from income (but not payroll) taxes; and 3) health insurance expenses may be taken as an itemized deduction for income tax purposes, but only to the extent that total health expenses exceed 7.5% of adjusted gross income.  Critics of the current policy argue that individuals without access to employer-sponsored insurance have to pay 30-50% more for their coverage, resulting in more uninsured individuals.

Baucus White Paper on Financing Health “Reform”

Yesterday the Senate Finance Committee released its third white paper, this one outlining ways to finance comprehensive health reform.  The document highlights various reimbursement cuts and health tax-related provisions that can be utilized to achieve some budgetary savings, but admits that these changes ”may not pay for all of health care reform on their own.  Many proposals expected to reduce health spending in the long run may not produce sufficient savings in the short run to finance reform.  For this reason, ”other options” — i.e., tax increases — “may need to be considered.”

The following constitute brief highlights of the proposals outlined in the white paper, a copy of which is attached.

Provider Adjustments:  The white paper proposes many ways to achieve savings by cutting payments to various providers within the health care sector.  The list of specific cuts includes:

  • “Reducing or eliminating market basket updates in 2010 for any provider payment area recommended by MedPAC,” as well as lower differential updates for high-margin areas in future years;
  • Potential “re-basing” of home health payments “to take into account the relative margins related to specific conditions and service areas,” as well as provider-specific caps on outlier payments that home health agencies can be reimbursed for;
  • “Adjusting current GME and DSH payment levels to better reflect the actual costs hospitals currently incur in treating the low-income and uninsured and in training medical residents.”  The paper also proposes reducing DSH payments “over time as the need for these resources decrease as more individuals become insured” — even though the coverage paper released last week admits that undocumented aliens would not be subject to an individual mandate to purchase coverage, and therefore would be likely to remain uninsured;
  • “Options to make payments to [Medicare] Part B providers more rational through reforms that appropriately value services,” including a potential new expert panel to evaluate “potentially misvalued physician services;”
  • Better payment accuracy for durable medical equipment — though DME competitive bidding is not discussed;
  • Increasing the Medicaid drug rebate for brand-name drugs from 15.1% to 23.1%, and from 11% to 13% for generic drugs, while also extending the rebates that must be paid to Medicaid managed care organizations and new formulations of existing drugs;
  • “Requiring annual market basket adjustments for certain fee-for-service providers to be adjusted by some or all of the expected productivity gains;”
  • Reduction of variations in Medicare spending, either by imposing across-the-board reductions in Medicare Part A and B spending in high-spending areas, or more specific and targeted cuts to providers who exceed spending thresholds in high-spending areas.

Benefit Package:  The white paper also discusses the beneficiary side of Medicare, including simplifying the Part A and B structure of benefits offered to seniors — i.e., an out-of-pocket maximum on beneficiary cost-sharing, a combined Part A and B deductible, and cost-sharing within Medigap plans.  (Similar proposals have been discussed in CBO’s Budget Options book.)  The white paper discusses an expansion of Medicare means-testing to Part D, but also proposes that this savings could be used to finance expanded coverage in the Part D doughnut hole or expanded low-income subsidies.

Health Tax Provisions:  The white paper proposes various options for limiting the current tax-exclusion for employer-provided health insurance.  Ideas include a cap based on the value of plan benefits received (e.g., amounts in excess of the FEHBP standard option would become taxable benefits), income (e.g., adjusted gross income above $200,000), or a combination of the two.  Union-negotiated plans would be “grandfathered” for the length of any existing collective bargaining agreement under which current health benefits were negotiated.  Interestingly, the paper also notes that “the exclusion could be reformulated as a tax credit” — the basis of John McCain’s proposal from last year.

The white paper also proposes several other health tax provisions, including possible elimination of (or increased thresholds for) the 7.5% itemized deduction for medical expenses, and repealing special deductions for Blue Cross and Blue Shield organizations.  The paper also discusses codifying community benefit and other requirements related to the tax exemption for non-profit hospitals.

With respect to consumer-directed health options, the paper discusses limiting the maximum HSA contribution to an individual’s high deductible (effectively repealing the increase in the HSA maximum contribution limit enacted in December 2006), while also increasing the penalty for non-health withdrawals from 10% to 20%.  For Flexible Spending and Health Reimbursement Arrangements, the paper proposes limiting the amount of FSA withdrawals — as well as HRA reimbursements — excludable from gross income, without specifying a limit on same.  The paper also discusses restricting the definition of medical expenses allowable for use in FSAs and HRAs, such that (for instance) over-the-counter medications could not be reimbursed through either account.

Payroll Tax Provisions:  The paper proposes restrictions on the current exemption from payroll taxes for most college and university students, such that students receiving more than $1,090 in earnings from a higher education institution would be subject to payroll taxes (and colleges would be required to pay the employer share of payroll tax contributions for the first time).  The paper also discusses making Medicare payroll taxes mandatory for state and local government employees.

Food Taxes:  The paper proposes raising alcohol taxes to $16 per proof gallon, while providing a tax credit for small manufacturers of both beer and wine.  The paper discusses imposing a federal tax on “beverages sweetened with sugar, high-fructose corn syrup, or other similar sweeteners” — a level of tax was not specified, but “the tax would not apply to beverages sweetened with non-caloric sweeteners.”

Administration Offsets:  The document concludes by including a list of the various tax increases and other revenue raisers the White House proposed in its budget, some or all of which could be used to fund health reform.

Weekly Newsletter: May 18, 2009

Article of Note: Washington’s Health Care Takeover Confirmed

Writing in The New Republic this week, Jonathan Cohn provides some interesting insights behind health reform legislation.  Cohn reports that Democrat efforts to draft legislation have hit two snags.  First, the Congressional Budget Office (CBO) believes that, despite taxing both businesses who fail to offer and individuals who fail to purchase health insurance, the proposal as currently written will not achieve the “universal coverage” that has been the goal of many Democrat interest groups.

Second, and perhaps more importantly, CBO may in fact consider health insurance premiums paid by individuals “on-budget,” meaning that health insurance would therefore become an inherent part of the federal government’s ongoing fiscal obligations.  In other words, because low-income subsidies will only be provided through a government-sponsored Exchange, and because the federal government will impose taxes on those who do not accept their “shared responsibility” to purchase insurance, CBO analysts believe that such proposals would effectively federalize the entire health insurance industry—and America’s $2.2 trillion health care sector with it.

Many Members may be concerned about the implications of such a ruling by CBO, as it would confirm fears that the majority is about to embark upon a Washington takeover of a health care sector that constitutes more than one-sixth of the American economy.  Just as important, some Members may believe that the increasing involvement of government in health care will necessarily result in bureaucrats gaining additional power over patients’ health care decisions, potentially leading to delays in obtaining critical treatments or outright denials of care.

Baucus Proposes Taxing Americans Who Cannot Afford Insurance…

Last week marked the release of the second of three intended white papers by Senate Finance Committee Chairman Baucus about his intended goals for health reform legislation—this one focused on expanding health coverage.  One of the central components of the coverage paper is the so-called “shared responsibility” of an individual mandate to purchase insurance.  The paper proposes that individuals who do not obtain health coverage—as defined by the federal government—would pay a “surtax” on their income tax returns as a penalty for non-compliance.  The tenor of the paper implies that such a tax increase will be included in any bill considered by the Finance Committee; while the paper discussed including or excluding a tax on employers, the health insurance tax on individuals was presumed as a given.

Some Members may be concerned by this development, as imposing new taxes on individuals will do nothing to help those people who cannot afford coverage currently.  Moreover, Members may be concerned about the resulting intrusion of the federal government—and by extension lobbyists representing the health sector—in defining the adequacy of health coverage for all Americans, as special interests will push to create an overly rich “mandated” benefits package.  Such efforts may not just not lower health costs nationwide, but actually raise them—resulting in tax increases for more Americans who cannot afford coverage.

…While Restricting Subsidies to “Bureaucrat-Approved” Health Plans

Buried in the midst of Sen. Baucus’ white paper were two critical details exposing the fallacy of Democrats’ mantra that, “If you like your current coverage, you can keep it.”  First, the paper calls existing coverage options “grandfathered plans”—a term that hardly connotes a desire to maintain current plan offerings—and further notes that “no low-income tax credits would be provided to those enrolled in grandfathered plans.”  Second, the proposal designates that tax credits would only be provided to health plans offered through a government-run Exchange—and proposes bureaucracies that would impose—and remove—a “seal of approval” on plans to allow them to participate in said Exchange.

Given these developments, some Members may question how Sen. Baucus can credibly claim that his plan does not represent a “big government” solution, since the only way individuals can receive assistance in purchasing health coverage is to abandon their current plan and join a bureaucrat-approved health offering.  Some Members may also be concerned about the implications of ceding such power to unaccountable bureaucrats.  Government care means government control and could well lead to delays in obtaining important treatment or outright denial of care.

Fuzzy Math?

In addition to the release of the Finance Committee white paper, another health-related statement was released last Monday—although both press reports and later quotes by its signatories indicate its implications remain unclear.  While the White House on Monday released a letter signed by six umbrella groups pledging to reduce health spending by a total of $2 trillion over ten years, participants later said the purported agreement created “a lot of misunderstanding.”  The head of the White House Office of Health Reform admitted that “the President misspoke” by overstating the implications of the agreement—only to retract that very admission an hour later.

Amidst all the claims and counter-claims, many Members, while supportive of voluntary efforts to slow the growth of health care costs, may wonder where precisely $2 trillion in savings would be achieved, particularly given the lack of detail in the statement released on Monday.  Some Members may also be concerned that what one White House source called a “business decision” by the associations to endorse the savings goal could eventually result in reimbursement reductions or creation of new government bureaucracies to regulate health care and micro-manage decisions made by doctors and patients—a result that would harm not only American patients, but many of the members whom the trade associations purportedly represent.

The Numbers Behind Health “Reform”

This article by Jonathan Cohn of The New Republic provides some interesting insights behind CBO scoring of health reform legislation.  Cohn reports that Democrat efforts to draft legislation have hit two snags: 1) CBO believes that, despite taxing both businesses who fail to offer and individuals who fail to purchase health insurance, the proposal as currently written will not achieve the “universal coverage” that has been the goal of many Democrat interest groups; and 2) Because of the inter-connected nature of low-income subsidies provided through a government-sponsored Exchange, and the mandates/taxes associated with not purchasing health insurance, CBO may in fact consider health insurance premiums paid by individuals “on-budget,” meaning that health insurance would therefore become an inherent part of the federal government’s ongoing fiscal obligations.  Such a judgement, which similarly helped to doom the Clinton reform initiative in 1993/94, would confirm Republican fears that the majority is about to embark upon a Washington takeover of a health care sector that constitutes more than one-sixth of the American economy.

The article goes on to place much implicit blame on CBO for having “incorrect” or outdated scoring models, similar to the complaints made earlier this month by Finance Committee Chairman Baucus about the difficulty of finding “scoreable savings.”  While none of the sources discussing the behind-the-scenes machinations made comments on-the-record, and the situation could well change in the coming weeks, these are two noteworthy developments as Democrats try to craft a formal legislative proposal.

2009 Medicare Trustees Report

“The real problem with our long-term deficit actually has to do with our entitlement obligations…The big problem is Medicare, which is unsustainable.”

—President Obama, Interview with Washington Post editorial board, January 15, 2009

The following brief summarizes the annual Medicare trustees report on the state of the program’s financing.

Insolvency Date:  The trustees project that the Medicare Hospital Insurance (Part A) Trust Fund will become insolvent by 2017—two years earlier than last year.  This deterioration in the program’s financing is due largely to the economic slowdown, and a concurrent reduction in payroll tax revenues, during calendar year 2008.

Funding Warning:  For the fourth straight year, the trustees have issued a general revenue funding warning, noting that general revenue spending on Medicare—that is, Medicare spending not funded by payroll taxes or beneficiary premiums and co-payments—is expected to exceed 45% of all Medicare spending within the next seven fiscal years.  As a result, “trigger” provisions enacted as part of Title VIII of the Medicare Modernization Act require the President to submit, and Congress to consider, legislation remedying the funding warning on an expedited basis.  Note that while the rules package for the 111th Congress turned off the expedited parliamentary procedures in the House, that action did not repeal the requirement on the President to submit Medicare reform legislation to the House and Senate.

Unfunded Liabilities:  Medicare’s overall unfunded liabilities also increased when compared to last year’s report, using both the 75-year budget window and “infinite horizon” projections.  Note however that while unfunded obligations for the government-run Parts A and B have increased in both dollar terms and as a percentage of economic GDP, projected liabilities for the privately-provided Part D prescription drug benefit continue to decline:

 Unfunded Obligation Projections for 75-Year Budget Window (2009-2083)

2008 Trustees’ Report

(in trillions of dollars)

2009 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $12.4 (1.6% of GDP) $13.4 (1.7% of GDP)
Part B (Obligations less beneficiary premiums) $15.7 (2.0% of GDP) $17.2 (2.2% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $7.9 (1.0% of GDP) $7.2 (0.9% of GDP)
TOTAL $36.0 (4.6% of GDP) $37.8 (4.8% of GDP)

Unfunded Obligation Projections for Infinite Horizon

  2008 Trustees’ Report

(in trillions of dollars)

2009 Trustees’ Report

(in trillions of dollars)

Part A (Hospital Insurance) $34.4 (2.6% of GDP) $36.4 (2.8% of GDP)
Part B (Obligations less beneficiary premiums) $34.0 (2.6% of GDP) $37.0 (2.8% of GDP)
Part D (Obligations less beneficiary premiums and state “clawback” payments) $17.2 (1.3% of GDP) $15.5 (1.2% of GDP)
TOTAL $85.6 (6.5% of GDP) $88.9 (6.8% of GDP)

Recent Events Not Included:  The economic “stimulus” legislation included more than $30 billion in incentive payments to medical providers designed to encourage adoption of electronic health records.  Some of these payments include incentives to hospitals provided through the Medicare Part A Trust Fund.  Informal staff conversations with actuaries at the Centers for Medicare and Medicaid Services (CMS) indicate that this spending would accelerate the insolvency date of the Part A Trust Fund by about six months.  However, as the “stimulus” passed during calendar year 2009, it is not reflected in the insolvency projections included in this year’s report—thus the short-term funding problems facing the Part A Trust Fund are in reality more serious than even the trustees report indicates.

Unfunded Obligations Understated:  In arriving at their long-term projections, the Medicare trustees may actually be underestimating the program’s shortfalls, for two prime reasons.  The Medicare trustees’ report admits that the unfunded obligation projections “are understated as a result of the substantial reductions in physician payments that would be required under current law.”  One estimate found that reversing those current-law reductions would increase Medicare’s 75-year unfunded obligations by as much as $3 trillion.[1]  Second, in arriving at their estimate of unfunded obligations, the Medicare trustees assume that cost growth will decline much more rapidly than the Congressional Budget Office predicts; using the CBO model, former Medicare public trustee Tom Saving obtained a 75-year estimate more than 25% greater than the official trustee’s estimates ($36 trillion vs. $43.8 trillion in 2008).[2]

Cost of Reform:  Two projections made in recent years have attempted to quantify the amount of revenue needed to fill Medicare’s shortfall given its current course.  In 2005, the Heritage Foundation projected that the Medicare payroll tax would need to nearly quintuple, increasing from 2.9% to 13.4%, where it would remain for 75 years—lowering real GDP by nearly $200 billion per year, and reducing total employment by 2.3 million during the first decade of the tax increase alone.[3]  Likewise, Tom Saving found that, were seniors’ Medicare premiums used to fund the full share of the shortfall, these premiums would need to rise to between $3,100-$5,600 per month in year 2008 dollars.[4]

Conclusion:  Given the dire long-term projections for the Medicare program—and this year’s news that the near-term situation has deteriorated appreciably—many Members may agree with President Obama on the need to reform “unsustainable” entitlements.  However, some Members may also believe that in the current discussion surrounding health reform, action to slow the growth of current entitlement programs should receive precedence over creating a new government-run health plan resulting in as many as 120 million Americans losing access to their current coverage.


[1] J.D. Foster, “Medicare’s Financial Woes: Bigger than Official Estimates,” (Heritage Foundation Backgrounder #2174, September 2, 2008),, Footnote 10.

[2] Andrew Rettenmaier and Tom Saving, “Medicare’s Future Burden: Trustees versus CBO Estimates,” (College Station, TX, Private Enterprise Research Center, Texas A&M University),, pp. 16-17.

[3] Tracy Foertsch and Joe Antos, “The Economic and Fiscal Effects of Financing Medicare’s Unfunded Liabilities,” (Washington, DC, Heritage Foundation Center for Data Analysis Paper CDA05-06, October 11, 2005),, Table 1, p. 12.

[4] Rettenmaier and Saving, “Medicare’s Future Burden,” p. 8.

On Saving Medicare, Democrats Stand as the “Party of No”

Today’s release of the annual Medicare trustees report paints a stark picture of the entitlement “time bomb” facing American seniors—the trustees project total unfunded liabilities of nearly $38 trillion, and project that the Hospital Insurance (Part A) Trust Fund will be exhausted in 2017, two years earlier than last year’s estimate.  But while President Obama speaks of reforming entitlement programs, the actions of the President and Democrats in Congress have not solved Medicare’s shortfalls—and could increase them.

No to Spending Restraint:  President Obama’s budget actually proposed an overall increase in Medicare spending—by failing to find any offsets for increases in physician reimbursement levels that Congress has frequently paid for in the past.  Particularly given the program’s unfunded obligations, Members may agree with Senate Budget Committee Chairman Conrad that “It’s very hard for me to understand why the answer is to put more money into the system.”

No to Saving Medicare First:  While the President’s budget did propose some reforms to the Medicare program, every penny of these savings—much of which are derived from cuts to Medicare Advantage plans popular with seniors—are re-directed into a “reserve fund” designed to pay for expanded entitlement coverage for younger Americans.  Some Members may question both the wisdom and fairness of re-directing money designed to bolster Medicare—including the use of a fund designed specifically “to make improvements under the original Medicare fee-for-service program”—to create new federal entitlements of undetermined cost.

No to Solving the Problem:  President Obama’s full budget submission to Congress did not include legislative proposals on how to address Medicare’s funding shortfalls—even though according to the Medicare Modernization Act, the President is required to submit such legislation every year the Medicare trustees have issued a funding warning for the program.  Some Members may question the level of the President’s commitment to Medicare reform if he failed to comply with a law designed to accomplish that very purpose.

No to Letting Others Solve the Problem:  The first action taken by Speaker Pelosi and the Democrat majority in the 111th Congress was a procedural vote turning off the expedited procedures under which a Medicare reform bill could be considered in the House of Representatives.  Some Members may be concerned that the Democrat leadership’s inaction not only does not fix Medicare’s funding shortfalls, it hinders those Members of both parties who wish to make a serious effort at entitlement reform from doing so.

No to Admitting the Scope of the Problem:  Although President Obama has paid lip service to the idea of reforming entitlements like Medicare, many Democrats in Congress have made statements indicating that the program does not need changes.  Responding to last year’s Medicare trustees report, Ways and Means Health Subcommittee Chairman Pete Stark asserted that “I don’t think it makes any difference what [the trustees] say” and that “Medicare is not in crisis.”  Similarly, last July Rep. Alcee Hastings (D-FL) noted that “the perceived problem with Medicare funding has already been addressed.”  Given these and other similar statements, some Members may question how high Medicare’s unfunded obligations must rise before Democrats in Congress begin to take them seriously.

While Republicans have offered a budget alternative that fully resolved Medicare’s long-term funding shortfalls, Democrat proposals for “entitlement reform” have thus far focused around spending over $1 trillion to create a new government-run health plan.  Given this record, and the warning issued by the Medicare trustees today, some Members may therefore believe that Democrats should spend more time solving America’s current health entitlements rather than creating a new entitlement that will cause as many as 120 million Americans to lose their current health coverage.

Baucus White Paper on Coverage Expansions

Yesterday the Senate Finance Committee released its second white paper, this one on health coverage options.  The document is attached, and below is a summary of the highlights of same.

Federal Regulation of Insurance:  The paper proposes federal regulation limits on premiums and benefit designs for both individual and small group health insurance plans.  Federal rating rules would mean carriers could only vary premiums based on tobacco use, age, and family composition, and could not vary premiums by more than a 7.5:1 ratio overall.  The proposal would establish a nationwide Exchange — individuals could purchase outside the Exchange, but tax credits/premium subsidies would only be available to individuals using the Exchange.  State insurance commissioners would be required to ”develop a plan to decertify and remove the seal of approval from certain health benefit plans.”

Health insurance plans would be required to cover “a broad range of medical benefits,” could not impose either annual or lifetime limits on benefits (as many currently do), and would only be permitted to charge nominal cost-sharing amounts for preventive services.  The paper proposes four actuarial levels of benefits, based on the amount of annual health expenses paid by the plan — the levels range from 76-93%.  (By comparison, the Blue Cross Blue Shield Standard Option in FEHB pays for 87% of health expenses.)

Tax Credits/Subsidies:  The paper proposes refundable, advanceable tax credits/premium subsidies to individuals making between 100-400% FPL, with the amount of the credit tied to both premium levels and income.  (In 2009, the federal poverty level is $22,050 for a family of four.)  While individuals technically will not be forced out of their current coverage, ”no low-income tax credits would be provided to those enrolled in grandfathered plans” under the old (i.e. existing) regulatory regime.  The paper also includes a tax credit — this one not advanceable or refundable — for small businesses equal to 50% of total premium cost for full-time employees; the full credit would be available to businesses with 10 or fewer workers where average wages are less than $20,000.

“Public Option”:  On the government-run plan, the paper does discuss omitting this element entirely, but also lays out three scenarios for this “public option” — one where the plan would be directly administered by HHS, one with a third-party administrator that negotiates rates, establishes provider networks, and holds reserve funds, and a third allowing for states to create their own “public” plans.  Note that the first scenario for a “Medicare-like” plan administered within HHS calls for provider reimbursement rates of “Medicare rates plus 0-10%” — which the Lewin Group has already stated will result in 120 million Americans losing their current coverage.

Medicaid Changes:  The paper proposes both new incentives to and unfunded mandates on states.  States would be required “to raise income eligibility for pregnant women, children, and parents…up to 150% FPL,” and to expand eligibility to childless adults (generally not eligible for Medicaid coverage under existing law) up to perhaps 115% FPL.   While these expansions  would be fully paid for by the federal government through 2015, states would gradually assume responsibility for these new populations thereafter.  The paper also discusses a new requirement that Medicaid reimbursement rates not fall below 80% of Medicare payment levels — which could require states to spend more to pay providers than under their current plans.  The paper would prohibit asset tests from being imposed on acute care Medicaid applicants, which could increase beneficiary rolls, and would require states to make prescription drug benefits available to all Medicaid beneficiaries (an expansion from current law).

The white paper also calls for changes to the Medicaid match (FMAP) formula, such that one-third of the formula would be based on states’ relative poverty levels, with two-thirds based on states’ relative per capita income levels. (Currently, the entire formula is based on income.)  The FMAP formula would also be increased automatically whenever at least 23 states report a 10% increase in the quarterly unemployment rate (i.e. from 5% to 5.5%) when compared to two years previously; increases would be provided based on the increased Medicaid costs associated with increases in the unemployment rate.  The proposal also includes several provisions relating to Medicaid waiver authority and eligibility.

Mandates:  The paper includes discussion of both individual and employer mandates, and tax increases associated with same.  On the former, the paper proposes various open enrollment periods, and reporting to the IRS that individuals obtained health coverage.  Penalties would eventually include a tax equal to 75% of the cost of the lowest plan available through the Exchange.  Individuals with income below the poverty line would be exempt from penalties, as would those who could not find a plan costing under 10% of the person’s income.  Notably, undocumented aliens would also be exempt from the mandate.

On employers, the proposal discusses a “pay-or-play” option that would impose taxes based on the firm’s total payroll — firms with payroll under $500,000 would be exempt.  Tax penalties would range from $100-500 per employee per month, or from 2-6% of payroll, with firms having payroll over $1,500,000 subject to the highest penalty levels.  The paper does leave open the option of excluding the employer mandate (whereas the individual mandate is presumed as a given).

Other Provisions:  The paper includes a variety of other proposals for health coverage reform or expansion, including:

  • “Temporary” Medicare buy-in for individuals aged 55-64, until such time as the Exchange was established – premiums would equal expected costs plus 5%.
  • Elimination of the five-year waiting period for legal immigrants to apply for Medicaid.
  • Conversion of SCHIP into a “wrap-around” program, providing supplemental cost-sharing coverage (consistent with Medicaid rules) to children who purchase coverage through the Exchange — eligibility would be reduced to 275% FPL, with no income disregards permitted.
  • Expansion of family planning services within Medicaid, with a new requirement that all states include family planning services.
  • Reduction or elimination of the current 24-month waiting period for disabled individuals to become eligible for Medicare.
  • Incentives related to long-term care, and specifically the promotion of home and community-based services, including expanded waiver authority, a 1% increase in the federal Medicaid match for home and community-based services, relaxation of Medicaid asset tests for long-term care eligibility, and new grant proposals.
  • Various incentives (including lower or waived co-payments in Medicare and Medicaid) for preventive services, as well as new programs of grants to states for wellness programs and credits to employers providing wellness programs.
  • Enhanced data reporting and grants regarding health care disparities, and an increase in the federal Medicaid match for translation services.

Weekly Newsletter: May 11, 2009

A “Public” Plan by Any Other Name Is Still the Same

This week marks the release of the second of three intended white papers by Senate Finance Committee Chairman Baucus about his intended goals for health reform legislation—this one focused on expanding health coverage.  Press reports over the weekend indicated that the report would set out several possible approaches to constructing a “public option” health plan to compete with private insurance: a “single-payer” system open to all, a government-funded plan administered by an outside party, or state-designed insurance plans for individual states’ residents.

Some Members may believe the three plans represent a distinction without a difference, as any government-run plan is unlikely to remain at arm’s-length when many Democrats want to leverage the so-called “option” to create a single-payer system.  Just as Democrats claimed to establish a “level playing field” between government-run student lending and private lenders—only for President Obama to reverse course and propose the abolition of all private student lending—some Members may agree with CBO Director Elmendorf that it will be “extremely difficult” to design a government-run plan to “compete on a level playing field”—not least because Democrats will work to shift individuals from their current coverage on to the government-run plan.

Democrats Focus on Expanding Coverage—Not Saving Medicare

The release of Sen. Baucus’ plans on coverage coincides with the publication of the final volumes of President Obama’s budget submission—as well as the issuance of the annual Medicare trustees report.  Even as Sen. Baucus discusses significant expansions of government-run coverage, the Medicare trustees are likely to report a significant deterioration in the program’s trust funds.  However, in releasing his budget, President Obama proposed diverting hundreds of billions of dollars in proposed Medicare savings to pay for expanded coverage elsewhere—not to improve the solvency of a program facing increasing financial peril.  In addition, the President has yet to comply with the statutory requirement that he submit legislation to Congress addressing Medicare’s funding shortfalls—suggesting that his definition of “entitlement reform” consists largely of spending as much as $1.5 trillion to create a new government-run health plan.

Some Members may be concerned by the Democrat focus on creating new health care entitlements and its impact on the nation’s fiscal future.  The impact of any actions taken to slow the growth of health costs will not be known for several years—and Members may believe that new government health care bureaucracies will be far from an ideal place to save costs, except by denying patients needed life-saving treatments.  Therefore, some Members may believe that Democrat plans for health reform could well result in the scenario envisioned by Senate Budget Committee Chairman Conrad, who recently spoke of his fear “that we put in a boatload of additional money and don’t bend the cost curve…the worst possible outcome”—one that would jeopardize both today’s Medicare beneficiaries, and the future generations who will have to finance the country’s growing debts.

Clip of the Week: A License to Steal

Amidst Sen. Baucus’ focus on creating a new government-run health plan, the Senate Aging Committee held a hearing last Wednesday examining rampant fraud within current government-run health plans—namely, Medicare and Medicaid.  Witnesses testified about the many ways in which fraud and improper payments permeate government-run health care—from the Brooklyn dentist who billed Medicaid for 991 patient visits in the same day to South Florida home health claims billed for dates when hurricanes were hitting the Miami area.

Some Members may not be surprised by these reports, as Medicare and Medicaid have primarily focused on paying health claims—regardless of merit, or lack thereof—rather than serving as good stewards of taxpayer dollars.  While Democrats focus on Medicare’s purported low administrative costs relative to private health insurance, both Medicare and Medicaid have been designated “high-risk” programs by the Government Accountability Office for years—largely as a result of fraud estimated as in the tens of billions of dollars each year.  Some Members may therefore question how many additional taxpayer funds will be lost to fraud as a result of a government-run health plan that will lead to as many as 120 million individuals losing access to their current health coverage.

ABC News presented a report on the hearing, and Medicare fraud generally, which can be found here.