CBO on Cost-Shifting in Healthcare

November 30, 2009

Here are some provocative comments from the Congressional Budget Office on the often-repeated health insurance industry claim that relatively low Medicare and Medicaid payment rates to providers result in high payment rates by private health insurers.  From the CBO analysis released today on the likely impact of reform legislation on commercial healthcare premiums:

The fact that private insurers pay providers higher rates, on average, than Medicare and Medicaid is not evidence that cost shifting occurs. For cost shifting to occur, a decline in the rates paid by some payers would have to lead to an increase in the rates paid by others; thus, for cost shifting from reductions in rates paid by Medicare to occur, providers would have to have initially been charging private insurers lower rates than they could have. Well-designed studies have found that a relatively small share of the changes in payment rates for government programs is passed on to private payment rates, and the impact of changes in uncompensated care is likely to be similar.  Overall, therefore, CBO’s assessment is that the legislation would have minimal effects on private-sector premiums via cost shifting.


CBO Analysis on Healthcare Premiums a Slam Dunk for Reform

November 30, 2009

I suppose that opponents of healthcare reform will focus on the one negative in the analysis released today by the Congressional Budget Office:  i.e., by 2016 individual health plan premiums would be 10% to 13% higher after reform than under current law.  To do so, however, would be a narrow and intellectually dishonest interpretation.  The CBO report in my view is the strongest statement yet on the cost benefits of reform.

First, the issue of individual premiums.  Yes, they would be higher on average, but that’s because people would be getting much better coverage.  Notes CBO:

The average insurance policy in this market would cover a substantially larger share of enrollees’ costs for health care (on average) and a slightly wider range of benefits.

Furthermore, even though premiums would be higher, most Americans wouldn’t have to pay the higher rates because of subsidies included in the reform legislation.  In fact, 57% of Americans would be eligible for subsidies, CBO notes; the amount these subsidized individuals would pay would be 56% to 59% lower than under current law.  Individual (or non-group) would account for 17% of the commercial market following reform or 32 million people — of which 18 million would be paying much less for much better health insurance.

Now here’s the big news.    According to CBO, premiums for large employers (i.e., more than 50 workers) would be unchanged or down as much as 3%.  Large employers make up 70% of the commercial market or 134 million people.  Small groups (up to 50 workers) would see premiums range from up 1% to down 2% (Note: about 12% of small groups would be eligible for subsidies; their premiums would fall 8% to 11%).  Small group makes up 13% of the commercial market or 25 million people.  

And what about all those fears of cost-shifting to the private insurance market?  CBO notes:

The effect of the proposal on premiums through changes in cost shifting seems likely to be quite small because the proposal has opposing effects on different potential sources of cost shifting, and the total amount of cost shifting in the current health care system appears to be modest relative to the overall cost of health insurance.

So to reiterate: under reform premiums for 134 million people in large groups would be flat to down, premiums for 25 million people in small groups would be flat to down, costs for 18 million people with subsidized individual plans would be down (a lot) — and costs for 14 million unsubsidized individuals would be up 10% to 13% because they’re getting much better coverage.

All of which is why the CBO analysis is a slam dunk for reformers.

Addition (Dec. 1, 9:47 a.m.):  Sorry, I failed to note that the CBO analysis specifically referred to the Senate bill.


Quote of the Day: Jeffrey Flier, Harvard Medical School

November 30, 2009

Jeffrey Flier, dean of Harvard Medical School, comments on healthcare reform in the Nov. 28 issue of The Economist:

While the legislation would enhance access to insurance, the trade-off would be an accelerated crisis of healthcare costs and perpetuation of the current dysfunctional system — now with many more participants. This will make an eventual solution even more difficult.


Venture Funds Flow to Healthcare

November 30, 2009

Dow Jones VentureSource reports that the healthcare industry attracted $2.23 billion in venture funds in 184 deals in the second quarter of 2009 — led by investment in medical devices and biotech.  While that was down 14% from a year earlier, the healthcare sector — for the first time — attracted more venture funds that the information technology sector, VentureSource says.  “Healthcare investment was the only sector to spring back to levels seen before the economic meltdown that began in the third quarter of 2008,” says Jessica Canning, director of global research for VentureSource.


NY Times on Public Plan

November 30, 2009

The New York Times had a reasonable editorial this past Sunday in support of a public health plan — while noting the very real limitations of the current proposals.

We wish the proposed public plan could be powerful enough to demand low rates from health care providers, charge much lower premiums than private plans and attract large numbers of enrollees. But neither the House nor Senate versions would have that kind of power.


Blues Feel the Blues

November 30, 2009

Carl McDonald of Oppenheimer writes of the not-for-profit Blue Cross Blue Shield plans:

While capital levels at the Blues have been fairly stable in the first half of 2009, underwriting margins have not, with the overall Blue Cross underwriting margin falling by 60 basis points, to 0.6%. Nearly half the Blues lost money on an underwriting basis in the first half of 2009. Things aren’t likely to get better in the second half of the year, either, since the Blues will be impacted by the same cost pressure hurting commercial plans right now, as well as the normal seasonality of high deductible products, while the Blues don’t have the same level of exposure to Medicare, which helped the publicly traded plans enormously in the third quarter.

McDonald projects continued rational pricing among not-for-profit BCBS plans in 2010.  He warns, however, that the proposed $6.7 billion industry tax that healthcare reform would impose on the health plan industry would wipe out all not-for-profit BCBS plan margins.


The Incredible Shrinking Managed Care Industry

November 30, 2009

There’s more bad news on the membership front for the managed care industry.  Enrollment among 19 of the nation’s leading managed care plans slid another 1% to 133.2 million in the third quarter of 2009, compared to a year earlier, according to a CRG tally.  Fully funded membership — which accounts for the bulk of health plan profits — made up about 46% of the total, down from 46.6%.  Among the various product categories, commercial PPO and fully funded HMO/POS were down, while HRA/HSA plan membership rose.  Healthcare reform should help on the membership front; although the gains are likely to come at lower margins.


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