Showing posts with label Medicare. Show all posts
Showing posts with label Medicare. Show all posts

Thursday, March 2, 2017

A Primer on Replacing Obamacare

“For every complex problem, there is a solution that is clear, simple, and wrong.” – HL Menken

“Nobody knew that health care could be so complicated.” – President Donald J. Trump

For the last six years, congressional Republicans have had a clear, simple, and wrong solution to fixing the Affordable Care Act (ACA or “Obamacare”). They voted umpteen times to repeal it and offered no measure to replace it.

The law, as many laws are, is a complex compromise between aspiration (mostly by Democrats) and legislative reality. It was not perfect at birth and, like a six-year-old car that has had no maintenance, is in worse shape today. Had Republicans spent the last six years fixing the problems in Obamacare, it would be in much better shape. But that is all past. We must look to the future.

With Trump’s election as president, Republicans suddenly became the dog that caught the Obamacare car. What do they do with the thing? In my Open Letter to President-elect Trump and the Members of the 115th Congress (on repealing Obamacare) I closed with these words:

If you do not have sufficient experience with the actuarial and underwriting principles that underpin the individual insurance marketplace, I urge you to work with the American Academy of Actuaries to understand how those principles relate to any proposed legislation before casting your vote.

Perhaps had President Trump reflected on my open letter he would not have been so surprised about the complexity of health care.

Fortunately, Congressional leaders recognized that the wrong approach of repealing without replacing a law that runs to 906 pages (and tens of thousands of pages of regulations) would lead to multiple disasters. With healthcare, even the minutia has minutia.

However, there are several broad truths about heath care that are important to keep in mind as we evaluate the Republican’s proposed replacement.

The total cost of medical insurance =
the total cost of medical benefits provided, plus
administrative costs, plus

To reduce the cost of medical insurance requires reducing some or all of its three components.

Reducing corporate profits is not part of the Republican (or Democratic) agenda.

Everyone would like to reduce administrative costs, which everyone agrees are too high. There are very few incentives in place to reduce administrative costs. Obamacare forced certain insurers to rebate to their policyholders a portion of paid premiums if overhead, including profits, exceeded 20% (15% in the large-employer market) of premiums collected. I received a rebate related to my premiums for 2015 from my large-deductible medical care policy.

Moving to a one-payer system would probably reduce administrative costs. It has for other countries; but the U.S. has its unique issues, so I am not making promises. Shifting policies to give consumers a larger choice of insurance options will not materially affect administrative costs—and may increase marketing costs.

Which leaves us with reducing medical costs as the only practical method to reduce overall premiums.

Reducing the cost of medical benefits provided can be achieved by
(a) reducing costs charged to patients or their intermediaries (insurance companies or the government),
(b) shifting the costs from covered insurance to some other source of payment, or
(c) eliminating utilization of the benefit.

Reducing Costs Charged: Competition without collusion usually reduces costs. Republican proposals to allow insurance carriers to operate over state borders could offer additional competition and marginally reduce administrative costs. (Insurance companies often must keep separate corporate entities and books for each state in which they operate.) Changing laws to provide greater competition on drug prices would address that aspect of cost. Three steps Congress could take to reduce drug costs incurred are to allow Medicare to negotiate costs with drug companies, to outlaw the ability of a drug patentholder from paying another company to withhold a generic from the market, and to allow the public to import drugs from other countries when they are the same drug sold at a lower price.

Regulating provider prices (as Congress has tried with Medicare reimbursement rates) often leads to shortages of providers when doctors make the economic decision to stop accepting Medicare patients and concentrate instead on private insurance payments.

Shifting Costs from Covered Insurance: One of the most popular approaches to reducing medical insurance premiums is to shift costs from the policy elsewhere. The two major approaches are to increase the policy deductible and to cap expense reimbursements.

Before I became Medicare eligible, I purchased high-deductible insurance. I was healthy and gambled that my out-of-pocket medical costs would be less than the insurance costs of a low-deductible plan. However, if something major happened, I didn’t want to pay for that out-of-pocket. My insurance costs were significantly reduced – BUT at the cost of taking on considerable risk. (My gamble paid off for the fourteen years I had individual coverage.)

My behavior was affected, however. I thought twice before going to a doctor or agreeing to a test or procedure. This is a double-edged sword. Because I had monetary skin in the game, I was a more careful consumer. However, studies have shown that when people defer routine healthcare, the long-term costs of chronic diseases increases because the individual enters the health care system at a more advanced stage.

The two ways of limiting reimbursement is to impose a lifetime maximum or reimburse fixed amounts for a particular benefit (for example $200/day in the hospital). As costs increase and reimbursement does not, more of the total costs are shifted from the plan to the covered individual. (The same will happen to states if they receive block grants. Unless Congress continues to increase the block grants to match cost increases, the states must either pick up the tab or cut benefits to those covered.)

Eliminating Benefit Coverage: There are multiple ways to decrease benefits and reduce costs. Health care policies could exclude certain procedures now covered. They could decide to eliminate coverage for organ transplants, or abortions and birth control, or sex-change procedures, or wellness exams, or any drug that costs over $1,000 a year, or whatever was deemed legal. The United States could effectively ration health care by limiting the number of procedures performed each year. This is the approach Canada has taken to reduce costs: fewer procedures equals lower costs.

Reducing the number of covered individuals: Finally, the easiest way to reduce costs is to reduce the number of individuals covered. Increase Medicare’s eligibility age to seventy from sixty-five and you’ve eliminated five years of costs. Eliminate medical coverage for Medicaid-eligible individuals, and cut those costs.

Obamacare increased overall covered costs by including additional benefits in plans, decreasing the acceptable size of deductibles in order to avoid a tax-penalty (I had to pay a penalty the first year because my high-deductible plan did not qualify), and significantly expanding the number of individuals covered under medical insurance by allowing children to remain much longer under their parents’ policy and expanding Medicaid edibility for those states who accepted it.

Republicans currently claim their proposal will decrease medical costs. The question that we need to answer is how will they do it? What are the tradeoffs they are proposing? Whose ox is gored?

The truth about pre-existing conditions

I pay house insurance every year and I hope to lose money every year because I don’t want my house to burn down just so I can win. Even though I have “lost” money on my housing insurance every year, it’s reasonably fair. Actuaries and underwriters price my insurance based on my house’s size, structure, safety measures, type of wiring, how far it’s away from a fire hydrant and fire station, and so on. They can reflect all the pre-existing conditions of my house in determining the premium.

In the past, we have done the same thing with individual medical insurance. If you are a young, healthy male, don’t smoke, do drugs, or engage in risky avocations (motocross racing, for example), your medical insurance can be inexpensive. Your biggest risk is from accidental injury; you rarely get sick. And you don’t get pregnant, which is why individual insurance for women used to cost more than for men.

Until as a society we decided that wasn’t fair, and eliminated sex as a basis for determining premiums. Men now subsidize women in this regard.

Many group medical insurance plans charge the same premium regardless of age. Older folks have more medical issues than younger ones. The young subsidize their elders. This is also the case for Medicare. Young(er) beneficiaries generally cost less than their older compatriots, yet premium costs are the same.

Even where plans reflect age in their premiums, they may not reflect health status. All Medicare beneficiaries pay the same premiums (ignoring extra premiums paid based on income status). Healthy beneficiaries subsidize sicker ones.

When we turn to the individual insurance market, healthy people think premiums should be based on their age and health. Why should they pay to cover someone who is older, or overweight, or has diabetes? It’s a fair question and one that needs an answer.

Under Obamacare, the answer was essentially that the young and healthy had to join plans and pay more than their fair share as part of a societal good. The same extra costs that are buried in group plans now became embedded in individual plans. Younger individuals either joined and paid these extra costs through their premiums or chose not to join and paid the costs through a tax. Because Obamacare provided a financial mechanism for supporting the extra costs of those with pre-existing conditions, they could require insurance companies to provide coverage for those sicker people. It was up to insurance companies to enroll enough of the younger, healthy individuals to break even on the deal.

What happens under such a system? The sick sign up in a New York minute: it’s a great deal for them. It’s up to insurance companies to enroll enough healthy folks to pay the tab for the sick ones. Insurance companies set rates based on an assumption of how many sick and healthy people they could attract. Where they were unable to enroll as many younger healthy individuals as they planned, they lost money. To make up for those losses, they raised premium rates. In those areas of the country where states supported the new marketplaces, lots of younger people joined the plans. Competition remains and premiums increases are moderate. Where states did not support the new marketplace, enrollment was well below expectations, resulting in subsequent huge rate increases and carriers dropping out of the market.

The death spiral of individual plans

Those of us involved in employer group medical insurance saw this death spiral when employers first introduced optional higher-deductible plans in an attempt to lower their insurance costs. Back in the 1970s and early 1980’s, most plans had no or very small ($100 individual/$300 family) deductibles. Increasing the deductible to $250 or $500 produced significant savings relative to the costs at the time. Employees chose the plan that made the most economic sense to them. Healthy individuals and families rushed to the higher-deductible plans. Older and sicker individuals stayed with the old no-deductible plans.

At the same time, companies first introduced Flexible Spending Accounts, seeding them with money for those employees choosing the higher-deductible plans and allowing employees to set aside tax-free money to pay for the costs they would now need to pay out-of-pocket.

Note what employers did: they lowered plan costs and provided “tax credits” to help pay for the plans. The very same elements Republicans currently promote (although we do not yet know the details). How did that work?

The next year, the costs of the no-deductible plan increased significantly. It included sicker folks after all, and in the second year, those on the margin dropped their expensive coverage and selected the higher-deductible plan. Those folks in the high-cost plan were on average even sicker. In a short time, the high cost plan had astronomical premiums and the companies dropped those plans altogether.

Deductibles for everyone have continued to increase, as have premiums, but at least under the group plan concept, those with pre-existing conditions can still receive coverage, and that coverage is subsidized by their fellow employees.

Take the same scenario to the individual market and no such protection will exist for those with pre-existing conditions. With multiple insurance plans to choose from, the healthy will make economic decisions that will cause people with pre-existing conditions to experience that same cost death spiral. Sure, they won’t be denied insurance, but they won’t be able to afford it.

Squeeze the Balloon

Visualize medical costs as a balloon. Each new drug, each new treatment, each new test, each new procedure, each administrative change either blows more air into the balloon or lets a little out. Total U.S. medical expenses only decrease if we find ways to let air out of the balloon. Squeezing the balloon simply shifts who pays for it and makes the one doing the squeezing “good” by pushing costs away from their sector of the balloon.

Propositions such as changing Medicare from a single-payer system to a system in which all covered members receive a credit grant to allow them to shop for their own insurance does not affect the size of the balloon. It will affect who pays the costs, and, depending on its implementation, may create its own death spiral similar to the corporate experience of the 1970s and 1980s. Block grants shift responsibility and burdens from the Federal government and introduce additional inequities between states.


Above all, ignore the pretty words (and titles) politicians use to describe their laws.

When evaluating health care proposals, consider the specifics: how costs are being reduced, who will subsidize whom and by how much, and what incentives will counteract the inherent inequities in paying for medical plan costs.

~ Jim

Friday, May 20, 2011

Solving the Budget Deficit—Step Four: Repairing Social Security and Medicare (Part II)

There is no way to sugar-coat the solution to Medicare, so here’s the brutal truth that no one wants to say or hear: We cannot afford all of the benefits that medical, technological and pharmacological advances can provide. We have learned to delay death, but with a huge economic burden attached.

Yes, the system is inefficient and changes, especially to claims processing, will free up billions of dollars. Yes, doctors perform too many tests because we are a litigious society. Yes, doctors have a tendency to prescribe the latest (and therefore most expensive) drug therapy because some salesman touted a study (paid by drug company dollars) that showed a miniscule improvement over a generic.

Yes, Congress has put fetters on the Medicare system by not allowing it to negotiate drug costs, which any private insurance company can do. We can remove those restraints and save money.

We should make all of those changes, but even if we do, spiraling health care costs that we cannot afford will still confront us.

The conversation that we must have in the United States is this: what level of care shall we provide to all comers regardless of age or income level?
Study after study shows that preventative care for children pays for itself in reduced medical costs as the children become adults. Study after study documents the huge costs we incur extending the life of those who are terminally ill.

Economically, funding life-extending “therapies” but not funding preventative care makes absolutely no sense—there must be some other reason we make these decisions.
In part we make them because no one is paying for them—except future generations through our current borrowing. We make them because we each want the best for our loved ones and when ours are the ones dying, any cost seems justified. We make them because no one has asked us to answer the hard questions with sober minds.

We can either cut benefits or raise taxes to pay for the benefits we currently have. The way to address benefit cuts is not through the false promise of Paul Ryan’s privatization wherein the poor and sick are slowly squeezed out of the marketplace.

We need to be honest and make decisions—tough decisions—about what benefits we will provide our poor and elderly and what benefits we will not provide. If they are rich enough, they can still obtain these benefits privately; taxpayer money is no longer involved.

All the measures we have tried in the past to control medical costs have been like squeezing a balloon at its current bulge. The bulge disappeared from the one spot, but appeared somewhere else. We need to untie the balloon’s knot and let out some air. Late in 2010, Arizona decided AHCCCS (its Medicaid-equivalent program) would no longer fund all lung and some heart and bone-marrow transplants. By April this year the pressure was too much and the new budget restored those cuts.

I don’t know what the right answers are, but as a nation we need to make some really difficult decisions. Should we cover liver and heart and kidney transplants? Should we cover drugs that cost tens of thousands of dollars a year? Should we cover premature babies who cost over a million dollars just to bring to term and who will have increased medical expenses throughout their lives? Should we replace knees and hips and corneas?

Your answers may differ from mine, but if we want to solve the Medicare problem we need to collectively answer those questions, weighing what our hearts and wallets say.

I have great faith in Americans. IF we are asked to make hard decisions we will make them. Now we just need politicians willing to do the same.

~ Jim

Monday, April 18, 2011

Paul Ryan’s Medicare Proposals

First the kudos to Paul Ryan. He is correct that unless we address Medicare we have little hope of addressing the Federal Government’s long-term structural deficits. Now the slam on two fronts:

1. His plan is a wolf in sheep’s clothing regarding the long-term viability of Medicare, and

2. He puts the primary burden of the fix on future generations of retirees.

Wolf in Sheep’s Clothing

In essence Ryan’s plan is to change Medicare from providing benefits to providing a subsidy for health insurance. Today’s Medicare offers an array of benefits eligible participants receive, subject to deductibles and co-pays. Participants pay no premiums for Medicare Part A, and pay highly subsidized premiums for Medicare Parts B and D. Only about 5% of participants pay increased Part B and Part D premiums because of their higher income levels.

Ryan’s proposal seems innocent enough. To understand how it would work, let’s say benefits cost $1,000 a year and are provided “free” by the government. Step one is to credit each participant with $1,000 and let them buy the equivalent benefit from a private insurance company. This will “get the government out of the medical insurance business.” Right?

Not so much. Government will still need to develop a whole set of regulations because it will cost a lot more to insure my parents than to insure me. Credits will need to be age-adjusted and perhaps, health-adjusted, to be fair. But let’s ignore that little issue. Let’s say they manage to get the credits and regulations right.

Why would an insurance company want to take on these plans? To make a profit—a profit not extant under the current system. Who will pay for that? The plan’s participants—unless the insurance companies are more efficient than the government in administering the plan. From your experience in dealing with insurance companies, what do you think? I’m not convinced. I think the approach will add Insurance Company profit to Medicare costs and will exacerbate the cost structure.

Additionally, the government does not need to charge a risk premium because if benefits are greater than expected, the government is on the hook. Not so with an insurance carrier. If its actuaries guess (oh, I mean misestimate) wrong about the level of costs, the insurance company is on the hook. They will want compensation to accept that risk. More added costs.

Now for a history lesson, which I think should be remembered in order to understand how Ryan’s plan will likely work in practice.

Let’s revisit the corporate world of medical plans during the 70s, 80s & 90s when I was consulting on plan design. The 70s began with employer-pay all plans (or plans with very modest employee contributions). Enter HMOs (Health Maintenance Organizations), which corporations first fought because it meant lack of control and then embraced because they promised lower costs.

For a fixed fee these entities would cover employees for all the basic medical services, but you had to receive care “in network” or be charged a premium. For a short period, medical costs stabilized before rocketing again. Then came insurance-company-sponsored PPOs (Preferred Provider Organizations). Same thing: an initial decline in the rate of cost increases before reverting to continued acceleration. (Note: there was never a decline in costs, just in the rate of increases.)

Corporations gave employees the choice to maintain their current plan, but with increased contributions, or take a lesser plan at little or no increase in their costs. Healthy employees took the new plan; those more likely to use benefits stayed with their dinosaur plan. This adverse selection drove traditional plan costs through the roof until no employees could afford them and employers dropped that choice.

During any of these changes did you notice your recordkeeping or dealing with insurance companies became easier? Me neither and I’ve been very fortunate to be healthy.

Now let’s peer into the future. In year two, what happens under Ryan’s proposal? From the sketchy details I’ve read, it will work like this: Your voucher grows with CPI, which let’s say increased 3%. Your new voucher is $1030. Good deal, until the insurance company mentions that medical inflation ran at, say, 15%. Now, the same benefits will cost you $1150. You can personally pay the $120 difference, or you can enroll in a less generous plan that just happens to cost $1030. It provides almost as good benefits—you’ll hardly notice the difference—or so they say.

The poor have no choice and must migrate to the reduced plan unless they know they are going to need the better benefits of the original plan, in which case they find some way to pay up. The rich pay the extra $120.

After a few years of this, an interesting trend arises. Three kinds of plans emerge. The lesser plan annually cuts benefits to match what the voucher provides. The well-off pay for benefits similar to those originally provided by Medicare except they are purchasing those benefits through voluntary associations. To participate, you had to be a professional of some sort, or earn a PhD or be a member of some other affinity that insurance company underwriters can use as a proxy for well off. In the meantime a third group has arisen. These people need the better benefits because they use them. They don’t qualify for the affinity plans and their costs escalate out of sight.

Ultimately this third group cannot afford the coverage because of pre-existing conditions, although they are never denied coverage because of that. They are the last ones in the original pool. Everyone else swam away.

Nothing in this process I have described addressed spiraling medical costs. The medical system is privatized (a Libertarian goal), but the voucher covers fewer and fewer benefits each year. Benefit cuts are implemented through the mechanism of having vouchers that do not keep up with the cost of benefits.

The system quickly bifurcates into haves and have nots. The haves can still get liver transplants; the have nots will not be covered and will die.

Ryan would undoubtedly object and state that because he has put consumers in charge, they will be able to change the trajectory of medical costs. Consumers with skin in the game will decide to go to cost-efficient providers, etc. etc. and the cost of delivering medical care will decline because of the competition.

Let me ask this: if the largest US employers with all of their bargaining power have been unable to put a dent in long-term medical cost increases, why should we think 300 million individual consumers each scrambling on his own will succeed?

They will not succeed. If anyone has a chance to put a lid on cost increases it would be the Federal Government IF and ONLY IF Congress did not fetter it as it currently does by refusing to allow the government to negotiate deals directly with medical providers, drug manufacturers, etc.

Ryan’s plan will not solve the problem, because it does not address the causes of the problem.

The Burden on future generations

Anyone currently over fifty-five is exempt from the structural changes Ryan requires for those younger. I am in this protected class and I object on several counts. First, we citizens of the United States must be required to make shared sacrifices to solve our problems. Seniors vote; seniors are generally more conservative. Ryan’s cynical approach of not asking anyone close to Medicare eligibility to make sacrifices exacerbates the "us versus them" schisms politicians utilize to get elected.

Second, this approach of grandfathering seniors does not address the question of which cohort of taxpayers caused the Medicare problem. My children did not cause the imbalances in the system. Medicare came into existence in 1965. When I first started working full-time in 1972, I paid 0.6% of wages up to $9,000 toward Medicare. It wasn’t until 1986 that the current 1.45% rate went into effect and only in 1994 was the income limit removed.

Increases in medical costs have been significantly greater than increases in wages, which means if 1.45% was the correct rate in 1986, it is guaranteed to be woefully inadequate now. My father paid Medicare taxes for about 20 years, almost all before the 1.45% rate went into effect. My parents have both benefited from Medicare for over twenty years and (thankfully) appear to have many more years ahead of them. During their retirement, Medicare benefits continued to expand. Only in the last few years have those with higher incomes (over $85,000 for an individual) paid greater Part B premiums than the standard 25% of the cost of the benefits charged other participants.

This has been a great deal for my parents, and while not quite as great a bargain for me, I expect a financial analysis would show it will take me very few years to “earn” back my contributions into the system.

Medicare’s problem doesn’t start in 2021 when the first people currently under age 55 will start to receive Medicare. It is a current problem and to solve it means a shared sacrifice by those presently receiving benefits, those soon to receive benefits and those much farther away from receiving benefits.

The solution is to deal with the underlying cost structure of our medical system (everyone agrees it is broken) and the terms and conditions for receiving benefits under Medicare. That means we need to honestly move away from thinking it is government’s responsibility to give everyone over age 65 an almost unlimited right to whatever care might extend their life.

That’s a harder issue for us Americans, but if we don’t have that honest discussion, we will never address the underlying cost structure of our broken medical system in these United States.

~ Jim