Health Care Reform Memo: October 19, 2009

The health care reform memos are issued on a weekly basis, highlighting news from the previous week's activities in the new administration and implications for the C-suite and various stakeholder groups.

Senate Finance bill passes committee 14-9 with Senator Snowe’s support

Tuesday, the Senate Finance Committee passed its reform bill (“American Healthy Future Act of 2009”) with Republican Senator Olympia Snowe (R-ME) voting with the committee’s 13 Democrats. The Congressional Budget Office (CBO) scored the bill’s price tag at $829 billion over ten years with a deficit reduction of $81 billion forecasted. As expected, the bill included an individual mandate, a “free-rider” charge on certain employers, a 40 percent excise tax on “Cadillac” employer-sponsored plans, insurance industry reforms and a co-op instead of public plan option. Beginning last Wednesday, its major sponsor, Sen. Max Baucus (D-MT) began meetings with Senators Tom Harkin (D-IA) and Chris Dodd (D-CT), and White House officials to expedite integration with the Senate Health, Education, Labor, and Pensions bill (S.1679) with the goal of a full Senate vote by the end of October.

$1.4 trillion deficit for FY09

Friday, the Treasury Department released the results from fiscal year 2009, ended September 30, indicating a $1.4 trillion deficit compared to $459 billion in FY2008. At 10 percent of the overall economy, it is the highest since 1945, though $200 billion less than an earlier CBO had forecast. As a result of the slower-than-expected economic recovery, the administration has revised upward its goal of keeping the deficit at 3 percent of the economy by 2013 to 4.6 percent. A quarter of the deficit is the result of the Troubled Asset Relief Program (TARP) for financial institutions and the $787 billion stimulus package passed February 17 according to Treasury.

In last month’s Deloitte Center for Health Solutions Pulse survey of 1,000 U.S. adults, 54 percent did not believe a health reform bill would be passed in 2009, and 51 percent thought health reform should not wait until the economy is better vs. 47 percent who thought it should wait.

Studies analyze financial impact of Senate Finance bill

Results of two new studies were released last week: Monday, before the Senate Finance Committee vote, a study for America’s Health Insurance Plans (AHIP) predicted overall premium increases of 18 percent under the Finance Committee reform plan (“Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage” PricewaterhouseCoopers, 2009). Wednesday, the Blue Cross Blue Shield Association released a study concluding that a “weakly-enforced individual mandate, coupled with requirements that insurers sell to all applicants, would lead to premium increases of $3,300 for family coverage” (“Insurance Reforms Must Include a Strong Individual Mandate and Other Key Provision to Ensure Affordability,” October 14, 2009, Oliver Wyman). Both studies drew strong reaction from health reform proponents who said that the studies did not consider the entirety of the reform effort.

Separately, the Congressional Joint Committee on Taxation issued its analysis of the Cadillac plan provision (40 percent surtax on self-insured employers/health plan insurance programs that exceed $8,000 for individuals, $21,000 for families) predicting that 14 percent of family health plans and 19 percent of individual policies would be subject to the tax in 2013, increasing to 37 percent and 41 percent respectively in 2019. In its analysis, $142B of the $201B treasury receipt would be from increased payroll taxes based on assumptions of employee wage increases by employers who spend less on health benefits during the period. Critics observed that the studies did not consider potential savings from reforms that might reduce overall costs, such as efforts in preventive health, health information technology and performance-based payments to providers. The timing of the releases coincided with the Senate Finance Committee’s vote Tuesday and the discussions among conferees of the White House, Senate Finance and Senate Health, Education, Labor, and Pensions (HELP) committees who began sessions to integrate the bills toward an anticipated late October vote in the full Senate.

NOTE: The reactions to each of these studies illustrate the difficulties faced as interested parties seek to understand the effects of reform on the future of health care. Disagreement can emerge not only over the meaning of various proposals and facts but also over whether, or to what extent, each should be taken into account.

SGR fix proposal: S.1776 to be voted separately next week

In HR 3200, a permanent fix to the sustainable growth rate (SGR) model was included, costing $245 billion over ten years resulting in a $1.04 trillion cost estimate by the CBO. In the Senate Finance bill, a one year fix was proposed so the full cost of the SGR was not included in its price tag. To expedite passage of an SGR permanent fix via a full Senate vote this week, Majority Leader Reid (D-NV) began a series of procedural maneuvers last week to get the Medicare Physician Fairness Act of 2009 (S. 1776) to the floor. A series of three Senate votes each requiring 60 votes will be used: a cloture vote, a budget point of order because the measure is not offset and a motion to proceed to the bill.

Background: The SGR model used to set physician payments would have cut physicians 21.5 percent in January, then 5 percent annually for five years. Under S.1776, physician payments will increase 0.5 percent in 2011 and be set according to a different formula thereafter. Since 2004, Congress has circumvented the SGR model and increased payments to physicians 1-3 percent annually using a combination of inflation, cost trends, and efficiency factors in the model. Physicians have argued it is unfair by including costs of drugs in the formula and other factors out of their control.

NOTE: The SGR “fix” is one of two major priorities for the AMA along with liability reform. It is likely the House will follow suit in pulling the SGR cost from its $1.14 trillion bill (HR 3200), bringing it more in line with the administration’s goal. By contrast, in the Senate bills now being integrated, the SGR fix was not in the Finance Bill but is included in the HELP bill.

Quotable

“We just finished the first quarter. There are three quarters to play. The bench is worn out. The quarterback keeps getting sacked. And the crowd has about had it, too.” 

- Sen. Ben Nelson (D-NE), Politico

State tax collections in Q2 09 drop 16.6 percent from year earlier

Facing deficits already, the news for states is dire. Tax collections were down by $63 billion for the fiscal year ended June 30, and for the Q4, down 16.6 percent from the prior year. Funds from the stimulus package for Medicaid programs ($87 billion 2010-2011) will help but fall short of Medicaid obligations.

AAFP predicts 40,000 shortage of PCPs; reform bills include ten percent bonuses

The American Academy of Family Physicians (AAFP) forecast that the shortage of family doctors will be 40,000 of the overall shortage of 160,000 by 2025 suggested by the Association of American Medical Colleges (AAMC). In the House and Senate HELP reform bills, 1,000 unfilled primary care residencies would be filled by redistribution to teaching hospitals that agree to create more slots. The Senate Finance bill would give 15 southern and western states preference for those positions due to acute PCP shortages. All major bills include a ten percent bonus for PCPs for five years and expansion of medical home pilot programs but leaders of the primary care specialty societies say ten percent is inadequate. PCPs earn $173,000 (median) compared to double for specialists. Advocates for PCP reforms suggest a 30 percent increase is necessary to attract physicians to primary care.

Senate Finance bill expands health information technology provisions to assist consumers, business, providers

In the Senate Finance bill, strengthened health information technology provisions are prominent including creation of Web-based health insurance exchanges, incentives for electronic health records (EHRs) and increased use of quality measures derived from clinical data warehousing.

For providers, Medicare payment incentives for the use of certified EHRs included in the stimulus bill (ARRA) are made permanent and additional bonuses would be created for adherence to evidence-based practices (requiring use of EHRs) and participation in value-based purchasing programs geared to optimal outcomes.

For consumers and employers, the insurance portals would offer standardized enrollment applications, standard forms to compare coverage from various plans, a call center for customer support, tools for calculating their eligibility for tax credits or subsidies, and the Small Business Health Options Program to facilitate plan comparisons.

Paying for reform likely focus of next round of debate

With the price tag for each of the three bills approaching $900 billion, a likely focus in coming weeks will be reconciliation of the payment mechanisms that differ widely between the major bills.

* There still is no one single House bill, but three different versions reported by the committees of jurisdiction.

NOTE: A major point of consideration is timing: most industry fees and surtaxes begin in fiscal year 2011, while the individual mandate begins in 2014. High participation in the individual mandate is viewed by industry leaders as key to reform:

• For hospitals and doctors, it means lower uncollected payments and reduced bad debt.
• For plans and self-insured employers, it means a larger risk pool to buffer increased health costs and anticipated premium increases.
• For labs, medical device makers, health insurers and life science organizations targeted for $13 billion in annual fees starting in 2011, the offset benefit of increased access to an insured market lags the payment of the fees.

Carper alternative proposal gets attention; gives states greater role

The public plan option included in the Senate HELP and House Tri-Committee bills is a concern to those who fear it would result in excessive government control of the health care industry by competing unfairly in the private insurance market. A growing number are leaning to a compromise alternative proposed by Sen. Thomas R. Carper (D-DE) to allow states to create their own insurance plans or join neighboring states to provide coverage in a regional collaboration with neighboring states. Other proponents of state-led initiatives have suggested giving states the option of implementing a co-op plan in lieu of a public plan. Another option expected to be in the coming Senate debate is the prospect of a triggered public plan option at the discretion of states—an idea advanced by Sen. Snowe.

NEW! Special feature in the Monday Memo

Each week the Monday Memo will feature a special focus area to provide deeper background on special topics related to health reform.

Rate banding proposals under health reform

Background
Some states, such as Maine, Massachusetts, New Jersey, New York, Oregon, Vermont, and Washington, have eliminated underwriting, a method used to assess how much risk an applicant brings to the health insurance pool, by imposing “guaranteed issue” and “community rating” laws. This applies to individual market coverage.

“Guaranteed issue” obligates insurers in the individual market to accept all applicants regardless of health status and allows buyers to acquire health insurance at any time. This is likely to cause people to wait until they are sick to purchase health insurance which leads to pools getting smaller and premiums going up.

“Community rating” laws are price controls which restrict the ability of an insurer to price health insurance based on the risk an applicant brings to the pool by removing factors such as age, gender, geography, as well as family status. Everyone in the “community” or pool pays roughly the same price for a health insurance policy. This higher premium decreases the value of insurance to younger, healthier people, potentially leading them to drop out of the pool. As the pool gets smaller, the composition changes, premiums go up, and people are forced out of the insurance market.

Proposals and their Effect
A common theme across all major bills is an effort to regulate the health insurance industry’s business practices related to the pricing of premiums and factors used to assess eligibility and denials. The industry generally agrees with changes to (1) limit premium rating to age, geography and household size, (2) waivers of pre-existing condition as factor in eligibility and (3) the use of the health insurance exchange model to provide health insurance plans to low income families and individuals—all predicated on the assumption that bills would include an individual mandate with penalties that would encourage participation (thus increasing the pool of insureds thereby spreading risk across a bigger population).

The America’s Healthy Future Act of 2009 includes health insurance reform that would discontinue rating on health status, eliminate gender and several other rating factors, and would set limits based on age.

In the revised Senate Finance Committee Chairman’s Mark, age bands were limited to a 4:1 ratio, meaning that the rate for the oldest person in the pool would be no more than 4 times higher than the rate for the youngest person.

The following table illustrates the rate banding proposals outlined by the various committees:

One study commissioned by Blue Cross Blue Shield and conducted by Oliver Wyman, estimates that in most states, premiums for the youngest 30 percent of the population will increase by 69 percent under a 2:1 age band, as proposed in the Senate HELP and House Committee bills compared to a 5:1 age band. Under a 3:1 age band, premiums for the youngest age group will increase by 35 percent.

If the ratio is compressed to 2:1, younger, healthier members would experience very high premiums, forcing them to exit the market. As premiums increase, the value of insurance to younger, healthier people decreases, leading to them to drop out of the pool. As the pool becomes smaller and contains a disproportionate number of older and sicker individuals, premiums further increase, forcing even more people out of the insurance market.

Currently, 42 states permit health plans to vary premiums based on age by 5:1 or more. New York, Massachusetts, Maine, and Vermont have age banding of 2:1 or less in the individual market. The Senate Finance Committee proposal of 4:1 will create a strong disincentive for young and healthy people to purchase health insurance.

A study by the Urban Institute, using the House Tri-Committee health reform proposal as the basis of comparison, estimates that the affordability of health care for older Americans (premiums and out-of-pocket expenses after any government subsidy) will be strongly related to age based premium rating. Based on this study, the age 55-64 group would be more likely to be uninsured under 5:1 or 2:1 rating, than under pure community rating. In the 18-24 group, the rate of uninsured would be greater under pure community rating versus a 2:1 or 5:1 rating.

Source: The Urban Institute’s Health Insurance Simulation Model (HIPSM), 2009

The following data from the Council for Affordable Health Insurance illustrates the effect a narrowing of the age band ratio to 2:1 would have on individual premiums:

Without an effective mandate with meaningful penalties, younger, healthier people will be less likely to purchase insurance, leaving older, sicker people, with higher utilization more likely to purchase insurance at higher premiums, with little cross-subsidy of premiums.

Key takeaway

Absent other mechanisms, a narrow risk band will likely increase premiums significantly for each age group in the insured population.

Next week’s Snapshot: Individual mandate penalty trade-off

Join us Tuesday, October 20 at 2pm ET for a 90-minute Webcast: 

“Health Care Reform: What the Latest Developments Mean for Your Organization”

With a number of health care reform proposals on the table and a significant level of debate about what the ultimate reform package will include, no one can predict the final outcome of negotiations in Washington. What will last-minute developments reveal? We'll discuss:

• Recent activities within key House and Senate Committees and the major proposals under consideration.
• Potential roadblocks to adoption.
• Likely short-and long-term implications for key stakeholders, including health care providers, health plans, life sciences companies, employers, consumers, and government stakeholders.
  Join us for the latest pulse check on health care reform. Click here to learn more and register (free; registration required).

Related Content

Library: View all Health Care Reform Memos
Debate: The Public Plan Option on Health Care: Holy Grail or Pandora’s Box 
Report: Reducing Costs While Improving Care in the U.S. Health System: The Health Care Reform Pyramid
Report: Health Care and Public Policy: What Do Americans Want?
Resource: Administration of Change - The Obama Impact on Health Care Policy
Overview: Deloitte Center for Health Solutions
Overview: Health Sciences

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