Tag: Health

Health Reform and Skyrocketing Insurance Premiums

Family health insurance premiums surged 9% in 2011 according to new data from the Kaiser Family Foundation. That’s the fastest health insurance inflation since 2005:

Insurance premiums (in red) thus outpaced both general inflation (gray) and worker earnings growth (blue) by a wide margin.

That scary spike raises an obvious question: Is health insurance more expensive because of the health reform enacted last year?

Kaiser crunched the numbers and says yes, but only modestly:

The two provisions in the Affordable Care Act likely to have the greatest effect on the premiums for employer-sponsored health coverage in 2011 are allowing children up to age 26 to remain on their parents’ plans and requiring plans that are not grandfathered to provide preventive services with no patient cost-sharing. Our analysis, based in part on estimates provided by federal agencies when regulations implementing these provisions were issued, suggests that these provisions are responsible for 1-2 percentage points of the 9% increase in family premiums in 2011. (emphasis added)

Stripping out those two specific ACA effects, premiums would still have increased by 7-8% according to Kaiser’s estimates.

But that isn’t the end of the story. A remaining question is whether other aspects of the ACA might also have contributed to the premium increase. Kaiser argues, plausibly, that the two factors it considered were the most direct link between the ACA and 2011 premiums. But perhaps there were indirect links as well?

I expect we will hear critics of the ACA make exactly that argument in the days ahead. Somewhat surprisingly, though, the first example I found came from the Administration. Writing on the White House blog, health adviser and deputy chief of staff Nancy-Ann DeParle pins some of the blame for higher premiums on insurance companies overestimating what their costs would be:

[2011 health insurance] premiums were generally set in 2010, when insurance companies thought medical costs would be significantly higher than they turned out to be. The Bureau of Labor Statistics found that the health insurance employer cost index (a measure of the price of health care services) was the lowest it has been in over 10 years in the first half of 2011. Additionally, some insurers assumed  that the Affordable Care Act would dramatically raise their costs. In the end, both assumptions were wrong – but insurance companies still charged high premiums and earned impressive profits. Wall Street analysts’ review of results from the first quarter of 2011 found that 13 of the top 14 health insurers exceeded their earnings expectations, with profits that were over 45 percent higher than estimated. (emphasis added)

DeParle thus believes that the ACA did lead to higher premiums in 2011–beyond what can be explained by direct cost increases–but only because insurers overreacted. In other words, the ACA did cause premium increases beyond what can be explained by costs (since insurers would not have made the mistake about ACA costs otherwise), but the ACA doesn’t deserve the blame for those premium increases.

Without any numbers, we don’t know, of course, how much such misestimates might have contributed to the 7-8% rise that isn’t explained by the direct effects of ACA. Any such mistakes will, one hopes, be corrected in setting 2012 premiums. If so, that would soften health insurance inflation in 2012.

One Man’s Cost is Another Man’s Income

The latest must-read New Yorker piece by Atul Gawande describes recent efforts to cut costs and improve quality by coordinating patient care – in particular that of the most expensive patients. In “The Hot Spotter” (gated), he follows several innovators, including Rushika Fernandopulle, who directs a clinic-based program in Atlantic City, New Jersey. Fernandopulle and his team face many challenges in managing costs and improving the care of his patients. But:

Their most difficult obstacle, however, has been the waywardness not of patients but of doctors-the doctors whom the patients see outside the clinic. … The Atlantic City casino workers and hospital staff … had the best-paying insurance in town. Some doctors weren’t about to let that business slip away.

Fernandopulle told me about a woman who had seen a cardiologist for chest pain two decades ago, when she was in her twenties. It was the result of a temporary, inflammatory condition, but he continued to have her see him for an examination and an electrocardiogram every three months, and a cardiac ultrasound every year. The results were always normal. After the clinic doctors advised her to stop, the cardiologist called her at home to say that her health was at risk if she didn’t keep seeing him. She went back.

The clinic encountered similar troubles with some of the doctors who saw its hospitalized patients. One group of hospital-based internists was excellent, and coordinated its care plans with the clinic. But the others refused, resulting in longer stays and higher costs.

Any guesses which internists were on salary and which were fee-for-service?

Commentators often worry that third-party payment leads to moral hazard and overconsumption by patients. That’s true, but we should also keep an eye on the providers. Payment reform is one of the key challenges in future health care reform.

What is Health Care Reform?

Health care reform increases the federal deficit over the next ten years. The health care reform legislation, however, reduces the deficit.

Greg Mankiw set off a vigorous discussion in the blogosphere (see, e.g., Ezra Klein, Clive Crook, and the Austin Frakt) with a provocative analogy about health care reform:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I read Greg as raising an important rhetorical / pedagogic question which, judging by some responses, may have been overshadowed by his satire.

That simple question is “what is health care reform?”

The policy community and commentariat often equate health care reform with the legislation (actually two pieces of legislation) that President Obama signed into law last year. As everyone knows, the Congressional Budget Office estimated that those two laws would, if fully implemented, reduce the federal budget deficit by $143 billion from 2010-2019. That’s the basis for the claim that “health care reform would reduce the deficit over the next ten years.” (CBO also discussed what would happen in later years, where the law, if allowed to execute fully, would have a bigger effect, but let’s leave that to the side right now.)

The complication, which Greg’s post partly addresses, is that the health care reform legislation included many provisions. Greg notes, for example, that some expanded health insurance, while others raised taxes. In his view, only the first part constitutes health care reform — an effort that by itself would widen the deficit — while the tax increases are what made the legislation deficit-reducing.

In fact, it’s more complicated than that. By my count, the two pieces of health care reform legislation combined seven different sets of provisions:

1. Expanding health insurance coverage (e.g., by creating exchanges and subsidies and expanding Medicaid)

2. Expanding federal payments for and provision of health care services (e.g., reducing the “doughnut hole” in the Medicare drug benefit)

3. Cuts to federal payments for and provision of health care services (e.g., cuts to Medicare Advantage and some Medicare payment rates)

4. Tax increases related to insurance coverage (e.g., the excise tax on “Cadillac” health plans)

5. Tax increases not related to insurance coverage (e.g., the new tax on investment income)

6. The CLASS Act, which created an insurance program for long-term care

7. Reform of federal subsidies for student loans

(The House Republicans’ effort to repeal health care reform would overturn 1-6, but leave the student loan changes in place.)

To capture these complexities, I occasionally refer to the legislation as the health care / tax / student loan / long-term care legislation. But whenever I write that for publication, my editors take it out. Although my lengthy description is accurate, it doesn’t work for friendly conversation. So the law (which again, was really two laws) gets called the health care reform law.

Greg’s point, I think, is that this rhetorical convention creates confusion when talking about the law’s budget impacts. To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.

I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.

However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.

Our current tax system provides enormous ($200 billion per year) subsidies for employer-provided health insurance. They should be viewed as part of the government’s existing intervention in the health marketplace. And rolling back those subsidies strikes me as essential to future health care reform. I would count any revenues raised from doing so as part of health care reform.

That didn’t happen, but the legislation did include a tax on “Cadillac” health plans as a partial substitute. That will clearly affect health insurance markets, and it offset a portion of existing tax subsidies. For both those reasons, it should be viewed as part of health care reform.

The key thing is not the difference between spending and revenues, but between provisions that fundamentally change the health care system and those that do not.

Happily, I am not alone in this view. Indeed, it has been endorsed by none other than the Congressional Budget Office. CBO grappled with this issue during the health care debate. And after much thought, it came up with a useful measure of the health care reform part of the legislation: the “Federal Government’s Budgetary Commitment to Health Care“. This measure combines the spending and tax subsidies that the government provides for health care.

Taking all the health care provisions into account, CBO concluded that the health care reform legislation would increase the federal government’s budgetary commitment to health care. But not as much as many critics suggest. Adding together items (1) through (4) on my list, CBO concluded that the health care reform parts of the legislation would increase the deficit by about $400 billion over ten years. That would then be more than offset by the other provisions — primarily taxes but also the student loan provisions and the CLASS Act. (In later years, by the way, CBO projects that the legislation would actually reduce the federal commitment to health care.)

Bottom line: Health care reform increases the federal deficit over the next ten years, but the health care reform legislation reduces the deficit. What could be simpler?

P.S. I hope it goes without saying–but will say it anyway–that one should not evaluate the health care reform legislation on its fiscal impacts alone … or even predominantly. The legislation has a wide range of benefits (e.g., 32 million more people with health insurance) and costs. The key question is how they net out.

Why Does It Cost $230 Billion to Repeal Health Reform?

Last spring, the Congressional Budget Office estimated that the new health legislation would reduce the deficit by $143 billion over ten years. Yesterday, CBO estimated that repealing that legislation would increase the deficit by $230 billion over ten years.

What gives? Why would it cost $87 billion more to repeal the law than was saved by enacting it?

The main reason is that the 10-year budget window moved. The health debate started in 2009, so CBO used a 10-year window that ran from 2010 to 2019. It’s now 2011, so the repeal law will be judged against a 10-year window that runs from 2012 to 2021. The $230 billion figure reflects that longer window. Through 2019, the cost would be $145 billion.

The second reason is that the legislation President Obama signed last spring wasn’t the final word on health reform. In December, Congress was struggling to find a way to pay for the infamous Medicare “doc fix”, which now runs through the end of 2011. To do so, Congress decided to cut $15 billion from the subsidies created by the health legislation. Because those cuts reduced future subsidies, it is now $15 billion more expensive to repeal the overall health reform.

The third reason is that the original health legislation wasn’t just about health policy. It also included fundamental reforms to the way the government subsidizes college loans. The repeal bill wouldn’t undo those changes, which resulted in budget savings of $19 billion over 2010 to 2019.

Finally, the original health reform included about $7 billion in net budget costs during 2010 and 2011. It’s unlikely (to say the least) that the health repeal bill would be enacted in time to avoid those costs.

Bottom line: CBO estimated that the original legislation would reduce deficits by $143 billion over 2010-2019. CBO now estimates that repeal would increase deficits by $145 billion over the same period; the slight difference reflects the education provisions in the original legislation, the 2010 and 2011 costs that can’t be avoided, and the December 2010 changes to the law. The jump from $145 billion to $230 billion then reflects the addition of two years to the budget window.

P.S. The $230 billion figure is preliminary and subject to change once CBO has an opportunity to update its calculations to reflect the latest information about the economy, health care markets, etc.

P.P.S. Aficionados of the health debate will recall that many differences of interpretation surround CBO’s cost estimates for health reform. You can see some of my discussion here.

The Budget Uncertainties of Health Reform

Back in March, the Congressional Budget Office (CBO) estimated that the new health legislation would reduce the federal budget deficit by about $140 billion over the next ten years and by about 0.5% of gross domestic product in the decade after that. Ever since, analysts have been debating whether we should believe those estimates. Some say the legislation will deliver much larger budget savings than those modest estimates suggest, while others insist it will greatly increase future deficits.

That debate reflects two types of uncertainty about the legislation’s fiscal impact.

The first is technical. As physicist Niels Bohr (not Yogi Berra) once said, prediction is difficult, particularly about the future. CBO had to make hundreds of educated guesses about future health costs and how consumers, employers, providers, insurers, state governments, and federal officials will respond to dramatic changes in the insurance market. Some of those assumptions will be wrong. But observers disagree on which ones and in what direction.

The second uncertainty is political. The new law will change the landscape for future health policy debates. Those changes (which rightly fall outside the scope of CBO cost estimates) may make it easier or harder for future policymakers to address our long-run budget challenges. I suspect that these political uncertainties are the main reason that optimists and pessimists disagree so strongly on the law’s budget impact.

Pessimists argue that to pay for coverage expansions, the legislation ate up budget savings that could otherwise have been used to address our long-run fiscal challenges. By “emptying the quiver” of some desirable policy options, the health law thus indirectly worsened the long-run budget outlook in a way CBO could not capture.

The pessimists also predict that future Congresses will water down or eliminate some budget savings. To make the budget numbers work, lawmakers combined a large helping of dessert (most notably health insurance for an additional 31 million Americans) with a large serving of spinach (for example, a new excise tax on “Cadillac” insurance plans and cuts in Medicare provider payments). History suggests, however, that policymakers often lose their appetite for the greens (see, for example, physician payments in Medicare).

The optimists believe that the fiscal impact will turn out better than CBO predicted. They note the law includes numerous experiments aimed at uncovering ways to rein in health costs while maintaining or improving quality. Among them: restructuring provider payments, increasing funding for comparative effectiveness research, and creating a new independent board to review Medicare payments. We don’t really know how to reduce medical costs today, but by trying many different approaches and learning from their results, the law will eventually enable future Congresses to adopt the most promising reforms.

Successful health reform may also improve future budget politics. Some past proposals to reduce federal involvement in health care – such as increasing the Medicare eligibility age or rolling back the enormous tax subsidy for employer-provided health insurance – have foundered on fears that some people would lose insurance. But by covering millions of uninsured, the health law reduces that risk, and policymakers may be able to take hard steps that until now have been politically impossible.

It’s hard to know how these political uncertainties will balance out. The law did indeed remove some arrows from the policy quiver, and it is easy to imagine policymakers backing down from scheduled spending cuts or tax increases. So the pessimists have a strong case. But the optimists are also right that if the new law succeeds, it will open new ways to rein in federal health spending. I certainly hope so.

This post first appeared on TaxVox, the blog of the Urban-Brookings Tax Policy Center.

The Second Rule of Hospitals

The first rule of hospitals is to try to stay out of them. Unfortunately, that rule must sometimes be broken. So let me suggest a second rule: no one should be alone in a hospital.

Hospitals can work miracles, saving lives and improving quality of life. But they can still be dangerous and (ironically) inhospitable places. Patients need someone by their side not just to provide comfort, but often to monitor their care and act as their advocate.

A natural corollary is that patients should be free to choose as their companions and advocates whomever they most trust in those roles.

I thus find it astounding that, at least until last night, hospitals could refuse to honor advance directives in which a patient had specified who they wanted to have visitation rights and the power to make decisions on their behalf. As President Obama wrote in a memo to HHS Secretary Sebelius:

Yet every day, all across America, patients are denied the kindnesses and caring of a loved one at their sides — whether in a sudden medical emergency or a prolonged hospital stay. Often, a widow or widower with no children is denied the support and comfort of a good friend. Members of religious orders are sometimes unable to choose someone other than an immediate family member to visit them and make medical decisions on their behalf.

Also uniquely affected are gay and lesbian Americans who are often barred from the bedsides of the partners with whom they may have spent decades of their lives — unable to be there for the person they love, and unable to act as a legal surrogate if their partner is incapacitated.

The President’s executive order forbids this conduct for any hospitals that receive Medicare or Medicaid money:

It should be made clear that designated visitors, including individuals designated by legally valid advance directives (such as durable powers of attorney and health care proxies), should enjoy visitation privileges that are no more restrictive than those that immediate family members enjoy.

You should also provide that participating hospitals may not deny visitation privileges on the basis of race, color, national origin, religion, sex, sexual orientation, gender identity, or disability. The rulemaking should take into account the need for hospitals to restrict visitation in medically appropriate circumstances as well as the clinical decisions that medical professionals make about a patient’s care or treatment.

Sounds right to me.

Tax Loopholes, Wealth Destruction, and Health Reform

AT&T, Caterpillar, Deere, and Verizon garnered headlines last week (and an unwelcome summons to Capitol Hill) for announcing that a provision in the recent health care legislation would result in substantial accounting write downs. AT&T, for example, told the SEC that it expects to take a $1 billion charge in the first quarter because the law eliminates a tax subsidy for providing prescription drug coverage to retirees. According to the Wall Street Journal, Credit Suisse estimates that the total accounting hit for corporate America will total $4.5 billion.

Citing these impacts, a Wall Street Journal editorial denounced the provision as “a wholesale destruction of wealth and capital.” White House Press Secretary Robert Gibbs, in contrast, praised it as “closing a loophole.”

Who’s right?

To figure that out, I spent a lovely Saturday afternoon tracking through the intersection of health policy, tax policy, and financial accounting and emerged with a clear verdict: Gibbs is right. The provision does indeed close a tax loophole.

But the WSJ isn’t completely wrong. The first law of loopholes is that every loophole benefits someone. If you close a loophole, someone will be hurt. That’s what’s happening here. The extra subsidy for retiree prescription drug coverage provided an extra financial boost for AT&T, Caterpillar, et al. Eliminating the loophole will thus reduce the value of the companies and the wealth of their shareholders, just as the WSJ alleges. But it’s hard to get too teary-eyed since that value and wealth were created by the loophole in the first place.

And now to the details:

Continue reading “Tax Loopholes, Wealth Destruction, and Health Reform”

About that Government Takeover of the Student Loan Business …

Health care understandably dominated the headlines leading up to — and beyond — yesterday’s historic House vote. It’s important to remember, however, that the reconciliation legislation also includes major reforms in the way that the government supports student loans.

Under current law, federally supported loans are made both direct from the government and through private lenders. The government loans are direct loans (i.e., the government lends directly to students). The private loans are guaranteed by the government (i.e., private organizations lend to students and the government guarantees the lenders against the risk of default). The health/revenue/education legislation will eliminate the private lending channel. (The market for non-government private loans will continue to exist.)

Opponents have denounced this change as a government takeover of the student loan market. That makes for a great soundbite, but overlooks one key fact: the federal government took over this part of the student loan business a long time ago.

In a private lending market, you would expect lenders to make decisions about whom to lend to and what interest rates to charge. And in return, you would expect those lenders to bear the risks of borrowers defaulting. None of that happens in the market for guaranteed student loans. Instead, the federal government establishes who can qualify for these loans, what interest rates they will pay, and what interest rates the lenders will receive. And the government guarantees the lenders against almost all default risks.

In short, the government already controls all of the most important aspects of this part of the student loan business. The legislation just takes this a step further and cuts back on the role of private firms in the origination of these loans.

That step raises some interesting questions about the costs of the current system (see this post), possible benefits of the current system (some colleges and universities appear to prefer working with private lenders), and the potential budget savings of cutting out the middle man (which appear to be large but somewhat overstated in official budget analyses).

But it hardly constitutes a government takeover.

One Last (?) Health Cost Estimate

On Saturday, the Congressional Budget Office released its complete cost estimate for the health/revenue/education legislative package that the House is expected to vote on later today.

The good news: The combined package would reduce the deficit by slightly more over the next ten years ($143 billion) than previously estimated ($138 billion). And nothing has changed about the projected increase in insurance coverage. CBO still expects that the legislation would increase the number of people with health coverage by 32 million in 2019.

The interesting news: A few months ago, CBO invented a particularly useful measure of the federal government’s commitment to health care. This measure combines federal spending on health care and federal tax subsidies for health care. If you view many tax subsidies as close equivalents to spending (as I do), this is a very important metric. It would indicate, for example, that if you increase health spending, but decrease tax subsidies by the same amount, that the federal commitment to health care is not increasing, even though both spending and taxes would be rising. I think that’s a useful way to look at things.

So how does the legislative package line up on this measure?

CBO estimated that H.R. 3590, as passed by the Senate, would increase the federal budgetary commitment to health care over the 2010–2019 period; the net increase in that commitment would be about $210 billion over that 10-year period. The combined effect of enacting H.R. 3590 and the reconciliation proposal would be to increase that commitment by about $390 billion over 10 years. Thus, the incremental effect of the reconciliation proposal (if H.R. 3590 had been enacted) would be to increase the federal budgetary commitment to health care by about $180 billion over the 2010–2019 period.

In subsequent years, the effects of the provisions of the two bills combined that would tend to decrease the federal budgetary commitment to health care would grow faster than the effects of the provisions that would increase it. As a result, CBO expects that enacting both proposals would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window—which is the same conclusion that CBO reached about H.R. 3590, as passed by the Senate.

In short, the reconciliation package increases the federal commitment to health care over the next decade (e.g., by rolling back the excise tax on expensive insurance plans that’s in the Senate bill) but then brings it down in the future (e.g., by ramping up the excise tax beyond the ten year window).

From a budget point of view, the basic structure of the legislative package is thus: Expand the commitment to health care in the next decade, pay for that expansion using other revenue sources, and then reduce the overall health commitment in later years. It’s that structure that leads to disagreement among budget experts about the long-run effects of the legislation. If the legislation executes as written, it will reduce future deficits substantially. If future Congresses flinch on the future budget savings (without flinching on the continued new spending), it will increase future deficits.

The shout-out: Long-term readers of CBO cost estimates know that they traditionally end with a sentence identifying the one or two people most responsible for the analysis. Given the importance of this cost estimate, however, the letter takes a different approach, identifying several dozen dedicated analysts who have been doing their best to provide Congress (and the American people) with as much information as possible about the legislation. They all deserve our thanks:

David Auerbach, Colin Baker, Reagan Baughman, James Baumgardner, Tom Bradley, Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, Noelia Duchovny, Sean Dunbar, Philip Ellis, Peter Fontaine, April Grady, Stuart Hagen, Holly Harvey, Tamara Hayford, Jean Hearne, Janet Holtzblatt, Lori Housman, Justin Humphrey, Paul Jacobs, Deborah Kalcevic, Daniel Kao, Jamease Kowalczyk, Julie Lee, Kate Massey, Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, Andrea Noda, Sam Papenfuss, Lisa Ramirez-Branum, Lara Robillard, Robert Stewart, Robert Sunshine, Bruce Vavrichek, Ellen Werble, Chapin White, and Rebecca Yip.

How Much Does Health Reform Cost?

It figures that CBO would release its much-awaited score just as I was boarding a plane to go to a conference. So apologies for being slow to the party.

The headlines are reporting that CBO scored the health reform effort as costing $940 billion over the next ten years. Readers of this blog know that isn’t correct. The $940 billion figure refers only to the coverage expansions in the legislative package. There are also many other health reform initiatives–e.g., filling the “doughnut hole” in Medicare’s prescription drug benefit and increasing funding for community health centers and prevention efforts–in the legislation. Add it all up and the ten-year cost of health reform is about $1,072 billion.

Bonus question: How much does health reform reduce the budget deficit?

The headline claim is that CBO says the health reform package will reduce the deficit by $138 billion over the next ten years. That’s not right either. First of all, the health reform has now been stapled together with student loan reform in order to deal with some of the specifics of reconciliation. The student loan package accounts for $19 billion of the ten-year savings. So at best health reform should get credit for $119 billion in deficit reduction. But then there’s the CLASS Act gimmick. Lop that off and health reform really should be credited with $49 billion in deficit reduction. And even then it isn’t really health reform that’s creating those reductions. The health policy changes are actually expanding the deficit over the next ten years; other, non-health tax increases offset those increases and provide some deficit reduction.

Lest I be viewed as relentlessly beating on the package, let me offer a second bonus question:

Does the package generate budget savings only because it’s using ten years of taxes to pay for six years of benefits?

This appears to be a common refrain among opponents of the package. But it doesn’t hold up either. It is true that the new health benefits don’t start in earnest until 2014; that helps keep the ten-year sticker price down. But those six years of costs are offset by a combination of spending cuts and tax increases during those years, even if you strip out the CLASS Act gimmick. And in the second decade, CBO tells us that the bill reduces the deficit significantly more if–and this is a huge if–it executes as written.