Yes We Can…Afford Rising Healthcare Costs

December 18, 2012

The Cost Disease: Why Computers Get Cheaper and Heath Care Doesn’t
by William Baumol
Yale University Press, 2012

Reviewed by Carl Mercurio

Worried about rising healthcare costs?  Rest easy.

William Baumol argues in The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t that healthcare costs will always increase at a faster rate than the overall economy because like many services industries healthcare is labor intensive–i.e., it resists the type of productivity growth found in sectors like manufacturing and agriculture.

That’s the bad news.  The good news, Baumol says, is that we can afford to pay more for healthcare because we are paying less for everything else.  Baumol is a professor at NYU Stern School of Business.

It’s an interesting argument that reminds me of comments from Douglas Elmendorf, director of the Congressional Budget Office, at a 2010 healthcare conference in Washington, DC: “We simply don’t have the ability…to change the growth rate.”  Instead of using the phrase “bend the curve,” he said, CBO tends to talk about ways “to reduce spending without hurting health.”

Baumol lists all the usual suspects for outsized healthcare costs in the U.S., including waste, medical errors, unnecessary or inefficient treatments, fee-for-service payments, the emphasis on medical specialists, and medical liability.  A variety of innovations, technologies and management initiatives can address these issues and reduce overall healthcare costs, he suggests, but it still won’t necessarily slow the rate of increase.

Now here’s a counter argument from Austin Frakt of The Incidental Economist: systematically addressing the use of inefficient treatments (i.e., interventions and technologies that are inappropriately applied or aren’t as effective as cheaper ones) will reduce the rate of growth in healthcare spending.  Frakt also argues that Baumol too readily dismisses other potential cost drivers, like provider market concentration.

I don’t know who’s correct.  (I struggle when the economic models come out).  But even Frakt agrees that Baumol “has illustrated that it is at least possible that rapid growth in healthcare costs need not be viewed as the central problem or even a problem at all.”

If current trends continue, Baumol projects that by 2105 healthcare will account for 62% of gross domestic product per capita, compared to 15% in 2005.  It sounds scary, but Baumol argues, “The only thing that will change, in terms of the cost to us, is how we will have to divide our money among these items.”

That said, Baumol offers a variety of caveats and hints at the type of profound policy implications the cost disease will pose.  For starters, the cost disease disproportionately affects the poor, Baumol says.  Furthermore, as government spending on services like healthcare rises, so does the threat of ill-advised calls for budget cuts and lower taxes–an approach Baumol says will needlessly cause society to suffer from self-inflicted wounds.

“Improvements to healthcare and education are hindered by the illusion that we cannot afford them,” Baumol writes.  Or as he quotes from a Washington Post editorial: “The country has a lot of money.  It’s only a question of how we choose to spend it.”


Aetna Before and After Coventry Acquisition

December 14, 2012

From the company’s annual investor conference presentation.  Note the limited exposure to individual and small group.  Individual alone (before the Coventry acquistion) accounts for just 400,000 members and $1.3 billion in revenues with a 3% to 4% pretax operating margin.  Small group has 1 million members and $4.3 billion in revenues with a 5% to 6% margin.


HHS Says No to Partial Medicaid Expansion

December 11, 2012

HHS has said no to states wondering if ObamaCare would allow a partial expansion of Medicaid, noting that the law doesn’t allow for a phased in approach. 

In other words, a state must expand Medicaid eligibility to 133% of the poverty level in 2014 if they want the federal government to pay the entire cost of covering the additional members (i.e., the enhanced 100% reimbursement level).  In 2017, however, states can ask for a waiver for a partial expansion at the enhanced level, which will drop to 90% at that time.

The law may indeed be as confining as HHS says.  But it’s also true that the Obama Administration has the upper hand.  Despite the rhetoric from hard-line Republican governors, it’s not clear to me how many will decline the expansion when all is said and done.

ObamaCare Health Plan Taxes and Premiums by State

December 10, 2012

Individuals in New York will  pay $439 more per year in health insurance premiums from 2014 to 2023 because of the ObamaCare tax on health plans, according to research commissioned by America’s Health Insurance Plans as part of the association’s efforts to have the tax repealed.  That’s the most of any state.  Individuals in Arkansas would pay $167 more, the least of any state. 

The analysis, by Oliver Wyman, assumes the tax is entirely passed along to consumers–raising premiums not just in the individual market, but in large group, small group, Medicare and Medicaid as well.  In a prior analysis, Oliver Wyman said the tax would increase overall premiums at least 1.9% in 2014 and 2.8% in 2023. 

Of course, if it’s not passed along, then it will hurt health plan profit margins instead. 

Scott Fidel of Deutsche Bank assumes a little bit of pass-along and a little bit of negative impact to net margins among commercial and Medicare plans.  For Medicaid plans, he expects the tax will be fully built into state capitation rates since margins are already razor-thin in the Medicaid market and plans can’t charge supplemental premiums or reduce benefits on their own.

As previously discussed on this blog, a variety of offsets are expected to temper premium hikes.  And CBO has been projecting for some time higher premiums in the individual market (sticker shock for some, subsidies for others, better benefits for most), but essentially no increases in the rest of the commercial market.

So what does the AHIP/Oliver Wyman analysis add to what hasn’t already been said?  The data on health plan premiums and taxes by state and segment are interesting.  So is the chart showing share of fully funded vs. self-insured membership by state (national average: 46.5% fully funded vs. 53.5% self-insured).  Best of all, the report uses the word seriatim, which inspires my inner nerd.

Medicare Advantage is Working, Studies Suggest

December 4, 2012

Good news for Medicare Advantage plans from two Health Affairs studies.  The first suggests that members of Medicare plans “might use fewer services and be experiencing more appropriate use of services than enrollees in traditional Medicare.” 

The second suggests that the government has succeeded over the past decade in reducing the type of favorable risk selection historically enjoyed by Medicare Advantage plans by introducing diagnosis-based risk adjustment, a lock-in period for members, and an expanded array of plan types.

In short, the studies suggest that Medicare Advantage plans may be doing a better job than traditional Medicare at controlling costs without necessarily serving only the healthiest members.

HHS Regulations and Thoughts on Individual Premiums

December 3, 2012

How will ObamaCare impact individual health insurance premiums?  That was a big question during the debate over reform–and it’s a big question now that HHS has released a slew of proposed regulations (here and here) regarding the 2014 implementation of the law.   

The general feeling seems to be that individual premiums will rise in 2014 because the law requires guaranteed issue with a weak mandate (i.e., a formula for adverse selection), eliminates setting rates by gender, and limits how much more plans can charge older people.  HHS acknowledges there could be some rate disruption, but overall seems to think that these price drivers will be largely mitigated:

While eliminating gender rating and the limitations on age ratios could affect premium rates for some in some markets, this will be largely mitigated for most people by the availability of premium tax credits, by increased efficiencies and greater competition in the individual market, by measures such as the transitional reinsurance program and temporary risk corridors program to stabilize premiums, and by expected improvements in the overall health status of the risk pool.

Carl McDonald of Citi fundamentally disagrees with HHS’ assessment, noting that average underlying individual premium rates will increase by 20% in 2014.  Along with adverse selection and limits on rates for older members, he cites new industry taxes and assessments.  Conservative blogger Avik Roy translates the above HHS statement as follows: “We will drive up the cost of health insurance for most people, and spend lots more taxpayer money in order to hide that fact from voters.”

What might be helpful at this juncture is to recall CBO’s November 2009 scoring of the Senate version of reform—the bill that essentially became ObamaCare.  CBO projected at the time that individual premiums would rise 10% to 13% by 2016. 

CBO also projected that premiums for large employers (i.e., more than 50 workers) would be unchanged or down as much as 3%, while premiums for small groups (up to 50 workers) would see premiums range from up 1% to down 2%.  Those two categories cover about 160 million people. 

Unsubsidized individuals—about 14 million people—would pay more largely because they would be getting much better coverage, CBO said.  Subsidized individuals—about 18 million people who need help from taxpayers to pay for insurance—would see premiums fall by a lot.

Meanwhile, Justin Lake of J.P. Morgan notes that elements of the proposed regulations may serve to mitigate both rate increases and the risk to health plans of under-pricing and incurring heavy losses.  These include government-backed risk corridors, industry-backed reinsurance cross-subsidization and risk adjustment mechanisms to offset plan-specific adverse selection. 

Lake estimates that reinsurance cross-subsidization (funded by the entire commercial insurance market) will provide a 10% individual market pricing cushion during the shift to guaranteed issue and community rating in 2014.  “Pricing will be buffered here somewhat” by the cross-subsidization, Lake says, “meaning that the end consumer will see more modest rates than they would have otherwise.”

Finally, HHS points to another likely offset—a reduction in uncompensated care for the uninsured, the cost of which is typically shifted to health plans in the form of higher provider rates.  Fewer uninsured “would reduce the amount of uncompensated care and could lead to a decrease in private health insurance rates,” HHS says.

Bottom line: the ultimate impact of ObamaCare on individual premium isn’t completely clear; what is clear is the government is aware of the risks inherent in reform of this magnitude and is taking steps to mitigate the disruption.  Meanwhile, tens of millions more people will benefit from good, basic health insurance.

There’s a word for all the give-and-take I’m outlining above.  It’s called compromise.

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