What’s Going On With Health Care Costs?


Posted by Joel Wittman

Egads!  Is it truly possible?  Has the increase in health care costs been at its lowest in almost four decades?  And this in spite of the Baby Boomer generation fast approaching retirement age?  What could account for such a phenomenon and is it sustainable?  All relevant questions that have health care experts scratching their heads in search of answers and have politicians scrambling to enact programs to further the slow down in the increase in health care costs.  But, perhaps inaction at this time is the appropriate response.  Can we afford to have the fractured political process impede the progress that has been achieved?  Eduardo Porter, in an article in his Economic Scene column in the New York Times, opines on his take on the subject.  The article is shown below.  I thought this would be of interest to you.  Comments, please.

 

Economic Scene

Medicare Needs Fixing, but Not Right Now

By EDUARDO PORTER

What’s the rush? For all the white-knuckled wrangling over spending cuts set to start on Friday, the fundamental partisan argument over how to fix the government’s finances is not about the immediate future. It is about the much longer term: how will the nation pay for the care of older Americans as the vast baby boom generation retires? Will the government keep Medicare spending in check by asking older Americans to shoulder more costs? Should we raise taxes instead?

Experiments by health care providers on cheaper and more efficient ways to deliver care appear to be helping push costs down.

Health Spending Slows

It might not be a good idea to try to resolve these questions quite so urgently. Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.

“We don’t have to solve this tomorrow; not even next year,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who worked on the design of President Obama’s health care reform.

More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem.

The growth of the nation’s spending slowed sharply over the last four years. This year, it is expected to increase only 3.8 percent, according to the Centers for Medicare and Medicaid Services, the slowest pace in four decades and slower than the rate of nominal economic growth.

Medicare spending is growing faster — stretched by baby boomers stepping out of the work force and into retirement. But its pace has slowed markedly, too. Earlier this month, the Congressional Budget Office said that by 2020 Medicare spending would be $126 billion less than it predicted three years ago. Spending over the coming decade, it added, would be $143 billion less than it forecast just last August.

While economists acknowledge that the recession accounts for part of the decline, depressing incomes and consumption, something else also seems to be going on: insurers, doctors, hospitals and other providers are experimenting with new, cheaper and more efficient ways to deliver care.

Prodded by President Obama’s Affordable Care Act, which offers providers a share of savings reaped by Medicare from any efficiency gains, many doctors are dropping the costly practice of charging a fee for each service regardless of its contribution to patients’ health. Doctors are joining hundreds of so-called Accountable Care Organizations, which are paid to maintain patients in good health and are thus encouraged to seek the most effective treatments at the lowest possible cost.

This has kindled hope among some scholars that Medicare could achieve the needed savings just by cleaning out the health care system’s waste.

Elliott Fisher, who directs Dartmouth’s Atlas of Health Care, which tracks disparities in medical practices and outcomes across the country, pointed out that Medicare spending per person varies widely regardless of quality — from $7,734 a year in Minneapolis to $11,646 in Chicago — even after correcting for the different age, sex and race profiles of their populations.

He noted that if hospital stays by Medicare enrollees across the country fell to the length prevailing in Oregon and Washington, hospital use — one of the biggest drivers of costs — would fall by almost a third.

“Twenty to 30 percent of Medicare spending is pure waste,” Dr. Fisher argues. “The challenge of getting those savings is nontrivial. But those kinds of savings are not out of the question.”

We could be disappointed, of course. Similar breakthroughs before have quickly fizzled. Just think back to that brief spell in the mid-1990s when health maintenance organizations seemed to beat health care inflation — until patients rebelled against being denied services and doctors dropped out of their networks rather than accept lower fees.

The Centers for Medicare and Medicaid Services already expects spending to rebound in coming years. Without tougher cost control devices, be it vouchers to limit government spending or direct government rationing, counting on savings of the scale needed to overcome the expected increase in Medicare rolls may be hoping for pie in the sky.

“It makes no sense,” said Eugene Steuerle, an economist at the Urban Institute, to expect the government will reap vast Medicare savings without having an impact on the quality of care.

The Affordable Care Act already contemplates fairly big cuts to Medicare. In its latest long-term projections published last year, the Congressional Budget Office estimated that under current law, growth in spending per beneficiary over the coming decade would be about half a percentage point slower than the rate of economic growth per person.

To understand how ambitious this is, consider that Medicare spending per beneficiary since 1985 has exceeded the growth of gross domestic product per person by about 1.5 percentage points per year. Slowing down that spending would require deep cuts in doctor reimbursements that, though written into law, Congress has never allowed to happen — repeatedly voting to cancel or postpone them.

Under a more realistic situation, the Budget Office projected that the growth of Medicare spending per capita over the next 10 years would be in fact 0.6 percentage points higher than under current law and accelerate further after that.

Yet despite the ambition of these targets, they would not be enough to stabilize future Medicare spending as a share of the economy. A report by three health care policy experts, Michael Chernew and Richard Frank of Harvard Medical School, together with Stephen Parente of the University of Minnesota, concluded that to do that would require limiting the growth of spending per beneficiary at 1.25 percentage points less than the growth of our gross domestic product per person.

“The Affordable Care Act places Medicare spending on a trajectory that is historically low,” Mr. Chernew said, noting his opinion was not an official statement as vice chairman of Medicare’s Payment Advisory Commission, which advises Congress on Medicare. “Could we do better? Of course. Will we? That requires a little more skepticism.”

Yet even if it is unrealistic to expect that newfound efficiencies will stabilize Medicare’s finances, the slowdown in health care spending suggests that politicians in Washington calm down. It offers, at the very least, more breathing room to carefully consider reforms to the system to raise revenue or trim benefits in the least damaging way.

There are many ideas out there — from changing Medicare’s premiums, deductibles and coinsurance to introducing a tax on carbon emissions to raise revenue. Some of them are not as good as others. Until recently, President Obama favored increasing the eligibility age for Medicare. Then research by the Kaiser Family Foundation concluded that raising the age would increase insurance premiums and cost businesses, beneficiaries and states more than the federal government would save. The nation would lose money in the deal.

“As we do this, there are smarter and dumber ways to do it,” Mr. Gruber said. “It would be a problem if we were to do things in a panic mode that set us backward.”

                                                                                                                                               

 Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Do Health Care and Profits Mix?


Posted by: Joel Wittman 

The debate continues: can a social service such as health care operate in a profit-generating mode?  Undoubtedly, there are fierce opinions on both the pro and con aspects of this question.  Those who support the notion that health care can operate as for-profit entities point out that the financial difficulties encountered by not-for-profit health care providers.  Their mantra is “No Margin, No Mission”; the patient population will receive fewer, or no, services if health care companies are not managed in financially responsible and profitable ways.  On the other hand, those who favor the realm of the non-profit universe contend that the quality of care is compromised and patients not receiving care because of the emphasis in the profit mentality.  So, who’s correct?  It’s a difficult conundrum to address.

An article in the January 8, 2013 edition of the New York Times focused on this issue.  The article appears below:

Health Care and Profits, a Poor Mix

By EDUARDO PORTER
Published: January 8, 2013

Thirty years ago, Bonnie Svarstad and Chester Bond of the School of Pharmacy at the University of Wisconsin-Madison discovered an interesting pattern in the use of sedatives at nursing homes in the south of the state.

Patients entering church-affiliated nonprofit homes were prescribed drugs roughly as often as those entering profit-making “proprietary” institutions. But patients in proprietary homes received, on average, more than four times the dose of patients at nonprofits.

Writing about his colleagues’ research in his 1988 book “The Nonprofit Economy,” the economist Burton Weisbrod provided a straightforward explanation: “differences in the pursuit of profit.” Sedatives are cheap, Mr. Weisbrod noted. “Less expensive than, say, giving special attention to more active patients who need to be kept busy.”

This behavior was hardly surprising. Hospitals run for profit are also less likely than nonprofit and government-run institutions to offer services like home health care and psychiatric emergency care, which are not as profitable as open-heart surgery.

A shareholder might even applaud the creativity with which profit-seeking institutions go about seeking profit. But the consequences of this pursuit might not be so great for other stakeholders in the system — patients, for instance. One study found that patients’ mortality rates spiked when nonprofit hospitals switched to become profit-making, and their staff levels declined.

These profit-maximizing tactics point to a troubling conflict of interest that goes beyond the private delivery of health care. They raise a broader, more important question: How much should we rely on the private sector to satisfy broad social needs?

From health to pensions to education, the United States relies on private enterprise more than pretty much every other advanced, industrial nation to provide essential social services. The government pays Medicare Advantage plans to deliver health care to aging Americans. It provides a tax break to encourage employers to cover workers under 65.

Businesses devote almost 6 percent of the nation’s economic output to pay for health insurance for their employees. This amounts to nine times similar private spending on health benefits across the Organization for Economic Cooperation and Development, on average. Private plans cover more than a third of pension benefits. The average for 30 countries in the O.E.C.D. is just over one-fifth.

We let the private sector handle tasks other countries would never dream of moving outside the government’s purview. Consider bail bondsmen and their rugged sidekicks, the bounty hunters.

American TV audiences may reminisce fondly about Lee Majors in “The Fall Guy” chasing bad guys in a souped-up GMC truck — a cheap way to get felons to court. People in most other nations see them as an undue commercial intrusion into the criminal justice system that discriminates against the poor.

Our reliance on private enterprise to provide the most essential services stems, in part, from a more narrow understanding of our collective responsibility to provide social goods. Private American health care has stood out for decades among industrial nations, where public universal coverage has long been considered a right of citizenship. But our faith in private solutions also draws on an ingrained belief that big government serves too many disparate objectives and must cater to too many conflicting interests to deliver services fairly and effectively.

Our trust appears undeserved, however. Our track record suggests that handing over responsibility for social goals to private enterprise is providing us with social goods of lower quality, distributed more inequitably and at a higher cost than if government delivered or paid for them directly.

The government’s most expensive housing support program — it will cost about $140 billion this year — is a tax break for individuals to buy homes on the private market.

According to the Tax Policy Center, this break will benefit only 20 percent of mostly well-to-do taxpayers, and most economists agree that it does nothing to further its purported goal of increasing homeownership. Tax breaks for private pensions also mostly benefit the wealthy. And 401(k) plans are riskier and costlier to administer than Social Security.

From the high administrative costs incurred by health insurers to screen out sick patients to the array of expensive treatments prescribed by doctors who earn more money for every treatment they provide, our private health care industry provides perhaps the clearest illustration of how the profit motive can send incentives astray.

By many objective measures, the mostly private American system delivers worse value for money than every other in the developed world. We spend nearly 18 percent of the nation’s economic output on health care and still manage to leave tens of millions of Americans without adequate access to care.

Britain gets universal coverage for 10 percent of gross domestic product. Germany and France for 12 percent. What’s more, our free market for health services produces no better health than the public health care systems in other advanced nations. On some measuresinfant mortality, for instance — it does much worse.

In a way, private delivery of health care misleads Americans about the financial burdens they must bear to lead an adequate existence. If they were to consider the additional private spending on health care as a form of tax — an indispensable cost to live a healthy life — the nation’s tax bill would rise to about 31 percent from 25 percent of the nation’s G.D.P. — much closer to the 34 percent average across the O.E.C.D.

A quarter of a century ago, a belief swept across America that we could reduce the ballooning costs of the government’s health care entitlements just by handing over their management to the private sector. Private companies would have a strong incentive to identify and wipe out wasteful treatment. They could encourage healthy lifestyles among beneficiaries, lowering use of costly care. Competition for government contracts would keep the overall price down.

We now know this didn’t work as advertised. Competition wasn’t as robust as hoped. Health maintenance organizations didn’t keep costs in check, and they spent heavily on administration and screening to enroll only the healthiest, most profitable beneficiaries.

One study of Medicare spending found that the program saved no money by relying on H.M.O.’s. Another found that moving Medicaid recipients into H.M.O.’s increased the average cost per beneficiary by 12 percent with no improvement in the quality of care for the poor. Two years ago, President Obama’s health care law cut almost $150 billion from Medicare simply by reducing payments to private plans that provide similar care to plain vanilla Medicare at a higher cost.

Today, again, entitlements are at the center of the national debate. Our elected officials are consumed by slashing a budget deficit that is expected to balloon over coming decades. With both Democrats and Republicans unwilling to raise taxes on the middle class, the discussion is quickly boiling down to how deeply entitlements must be cut.

We may want to broaden the debate. The relevant question is how best we can serve our social needs at the lowest possible cost. One answer is that we have a lot of room to do better. Improving the delivery of social services like health care and pensions may be possible without increasing the burden on American families, simply by removing the profit motive from the equation.

 

Granted this is one person’s view of the matter. What are your thoughts?  In my course, “The Business of Health Care”, this issue is a key component of the subject matter.  Care to learn more and hear both points of view?  Register for the class.  I look forward to meeting you.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public Service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Building a Health Exchange Strategy – Part III


Understanding Your Operational Readiness – Step 1
Posted by Errol Pierre

In Part I of Building a Health Exchange Strategy the discussion centered on how payers will have to be more consumer centric in their approaches to delivering health care. Part II focused on being aware of the political climate and how that will impact strategic decisions on whether to enter a Health Exchange market and upon entrance how to operate within one. Both dynamics, though critical, outlined external factors. Part III dives into internal factors; particularly around operational readiness.

It is clearly recognized that Health Exchanges offer a tremendous opportunity for health insurance companies to broaden their consumer base and expand their market share. By making health coverage more affordable it is likely that 30 million of the 45 to 50 million uninsured Americans will enter the market and purchase coverage through a Health Exchange.  Despite this opportunity, there is a high degree of complexity behind implementing and operating a Health Exchange book of business. The work in 2012 and 2013 provides a barrier to entry for smaller firms who may not have the financial and human capital to build the necessary tools and operational foundation to effectively compete with the larger players. Additionally, there are many interdependencies that exist with heavy reliance on each individual state as well as select Federal agencies to coordinate the coverage and manage the financing of the Health Exchange. The three main areas of concern that health insurance companies are grappling with are (1) product and plan design, (2) subsidy calculations and premium collection, and (3) eligibility and enrollment. Today’s article, (Part III, Step 1) will focus specifically on products and plan designs.

Product and Plan Design
Health Exchanges require at a minimum four levels of benefit offerings; bronze, silver, gold, and platinum. The different metals denote the level of coverage each plan must provide. For example, a bronze plan must cover up to 58% and no more than 62% of the health care costs for the health benefits a state deems “essential “ for a health insurer to provide. Likewise, a platinum plan must cover up to 88% and no more than 92% of the health care costs. These plan designs may be dictated by the individual state depending on the type of Health Exchange the state decides to run. Active Purchaser states like New York would be more inclined to create standard plan designs while Facilitator state like Utah would allow health insurance companies to come up with products and plan designs independently.

Within the “Silver” plan offerings the Health Exchanges will require the reduction of cost-sharing levels such as deductibles, co-payments, coinsurance, and out of pocket maximums depending on the consumer’s federal poverty level (FPL). For example, a silver plan may have a $1,000 deductible before coverage from the health plan kicks in. However, if a consumer with a FPL below 250% purchases a silver plan, the $1,000 deductible would need to be lowered by up to $500. This provides a level of complexity for health plans that has not been seen before. Lowering the deductible actuarially increases the price of the plan since the plan will provide more coverage. However, that cost of lowering the deductible is returned back to the health plan by the Federal government and not the purchasing consumer.

Additionally, the silver plan created by a health plan will have to be replicated up to 4 times over to accommodate for the variations in cost-sharing reductions that change the plan design of the product for each FPL level. Operationally, this inevitably means multiple people can buy the same exact silver plan. However based on their income level, they will have very different plans and very different utilization trends. Accumulator calculators that help health plans count up health care dollars will be imperative to ensure that physicians, hospitals, health plans, and most importantly health care consumers know when they have reached their deductibles and coinsurance maximums. The costs of administering such a complex set of plan designs are still unknown to many health plans; however this has not deterred them from pursuing the Health Exchange opportunity. However, the bigger impact to the cost of administration is how it will work in parallel with minimum loss ratio requirements that mandate the percentage of health care revenue that must be spent on providing health care as opposed to administrative costs; particularly if administrative costs increase due to the complexity of administering these plans.  This undoubtedly eats away at the profit margins of health care plans that already operate with very low margins (2-4% on average).

Basic Health Option
In addition to the four metal plans a state may opt to offer a Basic Health Option. This basically extends the state’s current Medicaid plan eligibility from beyond the 133% FPL up to 200% FPL. It behooves a state to pursue such an option because the Federal government would reimburse 95% of the costs. Today, the Federal government only pays 50% of a state’s Medicaid costs. As a result, states could potentially realize huge savings by shifting a portion of its Medicaid population to this Basic Health Option.

However, this route is very complex. The nuances here are that the Basic Health Option must have the essential health benefits deemed by the state even though the current Medicaid plans do not. So the population over and above the 133% FPL level will have a similar product however the underlying benefits could be substantially different. This poses complexity to the providers with coding and claim submissions. The states will be free to choose the methodology for their essential health benefit package as long as it represents (1) the most popular small group health plan, (2) the most popular HMO health plan in the state, (3) the health plan offered by the State to its employees, or (4) the health plan offered by the Federal Government to its employees in that state. There is also added complexity to the Basic Health Option when it comes to cost sharing. Deductibles and coinsurance levels are regulated within the health care reform bill to be based on FPL as well. So a health plan would have to administer two different types of Basic Health Plans based on whether a consumer is 133% to 150% of the FPL or if they are 150% to 200% of the FPL. These intricacies cause added complexity when it comes to administering a health plan, accumulating consumers’ deductibles and out of pocket maximums, and ensuring the plan designs receive actuarially sound price increases and adjustments year to year.

Catastrophic Plan
Lastly, individual states will also have the ability to create catastrophic plans that can only be offered to health care consumers under the age of 30. Many industry insiders refer to this population as the “young invincibles”. These plans must also meet the essential health benefit requirements, however the deductibles and out of pocket maximums are allowed to be higher. As a safeguard against consumers forgoing care because of high out of pocket healthcare expense there are a number of protections put in place as well. For example, preventive care and particular routine care must be covered in full and not be subject to the deductible. Additionally, three to four primary care office visits must also be covered in full and not subject to the deductible as well. Pricing for these plans provides a unique opportunity for health insurers since the risk pool and experience of the population will reflect a younger demographic. This means that pricing should in theory be more affordable and subsidies from the Federal government potentially could go a longer way.

In the End
Health Exchanges present standardization of plan designs to the health care consumer market with the potential of commoditization of health insurers as they compete for market share. As a result, the emphasis on products and plan designs becomes imperative. How an insurer operationally administers health care products in this space will be the differentiator to the consumer. Innovation in finding the ability to be unique in a very regulated space produces an opportunity for insurers to make product development the focal point of their Health Exchange success strategy.

Errol Pierre is the Assistant Vice President of Product Management at a regional health insurance company focused on business development, sales, and strategy planning around Health Exchanges. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu


Free Market Lessons from Sweden’s Single Payer System


Posted by Errol Pierre

The United States with a population of over 313 million people spends over 17% of its GDP on health expenditures while over 14% of its population lack health insurance. This has led to runaway costs, access to care issues, and in the face of recent healthcare reform efforts, worries of severe physician shortages come 2014. On the contrary, Sweden, with a much smaller, homogenous population of 9.4 million people has been able to keep health expenditures less than 10% of its GDP while covering all of its population. If efficiency of health dollars were the metric to compare health systems internationally, Sweden would lead the U.S. in this regard for the last 30 years. Despite their successes, like all developed nations, Sweden faced threats of increasing costs in the 1990’s due to an economic downturn. Additionally, Sweden also saw an aging population with a longer life expectancy from advancements in technology and modern medicine. When healthcare is government run it inevitably will succumb to rationing when tax dollars are scare. However, Sweden has been able to achieve sustainable results through policy and market reforms focused on (1) the decentralization of healthcare management, (2) cost containment measures, and (3) physician and hospital competition.

Decentralization of Healthcare Management

While Sweden is a model for a single payer system, many of their reforms can be applicable to the United Stated. In Sweden the Health and Sickness Care Law of 1982 decentralized the Swedish government’s control of healthcare to keep it “accessible, efficient, and equitable.”  Counties within the country were given more autonomy to set up boards and administer health services. In turn, many of the national rules dissolved. This decentralization gave more power for regional decisions within the counties of Sweden. This is unlike America where the answer to the uninsured population in its most recent healthcare reform efforts was to use the national approach of health exchanges and essential health benefits rather than delegating the particular solutions to individual states and localities. For example the Department of Health & Human Services mandated that every state have a health benefit exchange by 2014 or the Federal government would create one within the state.

Lesson Learned: Place the burden of the uninsured into the hands of local governments to formulate strategies to address the issues that are sensitive to the local values.

For example, in the U.S. one third of the uninsured find insurance within 6 months. In Sweden, many counties pay for insurance costs for citizens up to 6 months until they find a new job. This would eliminate 15 million of the 45 million uninsured. Additionally, 50% of the uninsured work part-time. A U.S. state resolution would be a sickness fund (similar to Medicaid) that caters to individuals that work less than 40 hours a week with multiple employers, which would lower the uninsured rates to ~20 million. Lastly, 43% of the uninsured are located in only 4 states (New York, Florida, Texas and California). A focus on local initiatives to answer a national problem similar to Sweden could have potentially been a better use of resources and national funds than a Federal law impacting all 50 states.

Cost Containment

In 1984, with the passage of the Dagmar Reform of 1984, national revenues were divvied up and doled out to counties as block grants based on population size. As a result, private providers could no longer directly bill the national healthcare system for medical services rendered. This is very similar to how physicians who treat Medicare enrollees operate today. From 1984 to 1985 the count of practicing physicians went from well over 5,000 to just over 2,000 greatly controlling costs. Block grants also declined the percentage of GDP in Sweden spent on health expenditures. Sweden is one of the few countries that have been able to lower the percentage of health expenditures.

Additionally, as the economy worsened in the early 1990’s, the Swedish government froze taxes from 1991 until 1994. During this time 22% of the country’s beds for acute bed care were eliminated. Also self referrals received a higher copayment. This is very different in the U.S. where economic downturns cause private insurance enrollment decreases due to cost containments that occur in the private sector. However, since all health care cost controls are not vested in local state government, public spending and public health expenditures balloon during such times. For example, Medicaid spending increased by one third from 2000 to 2003 during the U.S. economic down turn. It grew by 10% between 2010 and 2011 representing 25% of all expenditures for states. U.S. healthcare reform efforts plan to reduce Medicare and Medicaid by 500 billion respectively which is likely to get caught up in the same political stalemate as the Medicare “doc-fix” since these decisions have not been decentralized and delegated to local governments. Since Sweden represents close to 80% of all health expenditures compared to less than 50% in the U.S., they are more sensitive to cost containment measures which lead to quicker reaction and better results.

The Federal government in the U.S. has continued to push off a fix to Medicare reimbursement reductions due to lobbying from physicians and trade groups. If these decisions were made at a local level to handle local concerns, States would have the ability to better control costs. Additionally, 50% of the Medicaid spend is handled by the states. This allows the states conversely to only handle 50% of the costs.

Lesson Learned: Medicare and Medicaid should be handled purely at the state levels since many states have balance budget amendments, cannot run deficits, and it is very costly for states to borrow funds.

Lastly, in 2002, Sweden introduced reference pricing and generic substitution for pharmacy coverage. This meant that when a drug was purchased, the health system would pick up 110% of the lowest priced drug. If a brand name drug was requested over a generic, the consumer would be responsible for the difference. From 2002 through 2005 Sweden realized $7 billion in savings which was close to 10% of total drug spend.

Lesson Learned: Adopt reference pricing and generic substitution in both Medicare and Medicaid programs across the U.S. to sharply cut pharmacy growth rates.

Physician & Hospital Controls

The United States is quickly facing a physician shortage when 20 million or more Americans will enter the insurance market in 2014 through Health Benefit Exchanges. In 1993 Sweden passed a law called The Point of Service Primary Care Reform which answered concerns of primary care shortages. The law made counties responsible for making sure every Swede had access to primary care. Additionally, it capped the amount of specialty training that occurred outside general medicine. It set ceilings and floors for the amount of patients treated by a single practice (1-3k patients per year). It provided credits and loan forgiveness to primary care doctors who started a new practice. And finally, the law allowed pay for performance measures that reduced the reimbursement to physicians who underperformed. Such controls including other initiatives has led to the use of electronic medical records for 94% of Swedish primary care physicians as compared to only 45% in the U.S. Additionally, 49% of Swedish physician practices have the capacity for advanced electronic health information compared to only 26% in the U.S. Lastly, 54% of Swedish practices will see patients after hours as compared to 29% in the U.S.

Lesson Learned: Strong controls on physicians at the local government level can greatly eliminate the potential of primary care shortages and improve the quality of care.

Conclusion

There are feasible lessons to be learned from recent healthcare reforms in Sweden particularly in the areas of decentralization, cost containment, and physician controls. In particular there are four lessons to be learned that are viable in the U.S. despite the current political climate and threat of the unconstitutionality of the Patient Protection and Affordable Care Act. Lesson 1: decentralize the burden of the uninsured to the individual states. Lesson 2: Allow individual states to budget for health care through block grants. Lesson 3: adopt reference pricing and generic alternative scripting. Lesson 4: place strong controls on physicians to eliminate shortages and increase access to care.

Despite America’s strong dislike for government run healthcare, roughly 40% of the population (125M Americans) is enrolled in a federally facilitated health program. Specifically there are 44M Medicare recipients, 62M Medicaid recipients, 10M Tricare recipients (health insurance for the U.S. military) , and 8M Federal Employee Health Benefit recipients. Sweden has been able to use free market principles within a government run system to manage care and cost. And yes, with any balance between quantity and quality, rationing of care does exist. But in a free market, when does rationing based on supply and demand not exist outside of anomalies like luxury and inferior goods?


What Will SCOTUS* Do?


Posted by Joel Wittman

After three days of hearing oral arguments on the legality of all, or parts, of the Patient Protection and Affordable Care Act (ACA), the Supreme Court is hopeful of rendering its decision in June.  Based on what we’ve heard so far, it doesn’t bode well for the ACA.  The primary issue of contention is the inclusion of an “insurance mandate” whereby citizens are required to purchase health insurance or pay a penalty.  The mandate seems to be the linchpin of the reform act; without this requirement will insurance premiums skyrocket and will access to health insurance be limited?  This also raises the question of severability.  If the mandate is struck down, will the entire ACA also be invalidated or can parts of it survive?  Will the law’s popular “guarantee issue” and “community rating” provisions survive without the mandate that virtually all Americans must have health insurance?  Guarantee issue prevents insurers from discriminating against people with pre-existing conditions and community rating standardizes insurance premiums for those living in the same area.  The states that have attempted to enact guarantee issue and community rating systems without instituting mandates saw their health reforms fail – insurance premiums skyrocketed, consumers had fewer choices and the number of uninsured went up.

So, what is the insurance industry to do?  Insurers must prepare for a worst-case scenario – a ruling that the individual mandate is unconstitutional, but insurers still must provide policies for all people.  In that situation, insurers say premiums will rise sharply because of people with chronic illnesses and pre-existing conditions, for example, would buy health coverage, but healthy people would not.  Short of persuading Congress to write a new law, the insurers are considering certain contingencies including:

- Penalizing those who enroll outside of short annual windows

- Denying treatment for specific conditions, especially right after a policy is purchased

- Rewarding certain insurance buyers, such as offering much lower premiums for younger and healthier people

- Expanding employers’ role in automatically enrolling employees for health insurance

- Urging credit- rating firms to use health insurance status as a factor in determining individuals’ credit ratings.

There remains, however, a divided opinion about the exclusion or inclusion of the individual mandate in the health reform act.  Some believe that its exclusion will cripple the ACA and all of its proposed benefits, while others contend that the penalty associated with the mandate is not onerous enough to deter individuals from not purchasing health insurance.

Things are never as simple as they seem to be.  The good intention of the current administration to increase access to health insurance coverage for all individuals at affordable pricing may not be good enough to preserve the goals of the ACA.  Do you throw out the baby with the bath water if the entire plan is deemed unconstitutional?  Do you preserve part of plan and try to make the best of the remaining regulations?  Or, do you leave the ACA as is and have the first meaningful health care reform since the Great Society?  Only SCOTUS can let us know.

* Supreme Court of the United States

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University.  He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.


Building an Exchange Strategy Part II – Understanding Your Political Climate


Posted By  Errol Pierre

By 2014 there will potentially be a health benefit exchange in every state across the country. Like snowflakes no exchange will be alike and politics will play a pivotal role in the differences found between them. While the healthcare reform bill signed into law requires the establishment of exchanges, the details of operation have yet to be determined. In fact, in March 2012, the Department of Health and Human Services (HHS) provided 600 pages of additional guidance to the states. The guidance given was more of a framework while much of the particulars were purposefully left out. This has made the role of the individual State Governors ever important. They are now in a position of power and play a very integral role in bringing exchanges from a theoretical policy concept to a legislative and operational reality.

Right or Left
At a high level, left leaning blue states will design their exchange to be an active purchaser. This will allow the Governor to take an active role in the day to day exchange operations. Under the direction of an exchange board, most likely selected by the Governor, these states would choose precisely which insurance companies participate, the types of policies sold, the rates of the selected products, and how enrollment and eligibility of those enrolled would work. In some more aggressive instances, states could even negotiate pricings with doctors, hospitals and pharmaceutical companies in the very same ways insurance companies do today in the private sector. This is obviously foreign territory to many of the states pursuing such a model. Nonetheless, proponents of the model see value in such an approach believing more oversight will lead to more affordability and better health outcomes in the long run.

Right leaning red states on the other hand will opt for a facilitator model. The state will merely be a marketplace for health benefit transactions between consumers and insurance companies to occur. They will set the high level guidelines and guardrails and merely outline the rules of engagement. Much of the market dynamics will be left up to private insurance and market forces to sort out. Benefit design, rate approval, distribution strategy, the “off-exchange” marketplace, and pricing will all be left up to “the invisible hand” of Adam Smith’s market forces. The idea of competition lowering healthcare costs has been refuted by the likes of many including Alain Enthoven – the father of managed competition – and Kenneth Arrow – the pioneer in research on asymmetric information as a market failure in healthcare. Nonetheless, American capitalism seems to have trumped over such doubts in these states. As a result, the role of government in these exchanges will be as minimal as the healthcare reform legislation will allow. There are already mandates that must be in place for each exchange. For example there must be four benefit categories ranked by actuarial values labeled bronze, silver, gold, and platinum for simplicity. The legislation also caps insurance company profit at 20% before operating costs are factored in. Lastly, the legislation requires health insurance companies to accept all enrollees and requires that the ratio between the pricing of the healthiest and the sickest consumer not exceed a 3 to 1 ratio. All in all, governors of these red states feel too much regulation stifles competition and the reform bill already has enough rules. As such, they are reluctant to add any further requirements on top of the federal ones. In this role the state will play referee rather than player/coach.

Politics at Play
State by state, there will be different shades of blue as states consider the ramifications of building a health benefit exchange. Health insurers must be prepared to understand how these different shades will impact the development of health policy. Vermont, for example, will be one of those very bold blue states. On May 26, 2011, Governor Peter Shumlin signed into law a historic universal healthcare bill which would cover every citizen in the state under a single payer system called Green Mountain Care. It will be in place by 2017 and the state has been drawing down federal funds from the national health reform bill as it prepares.

Like blue states, there too will be shades of red. Arkansas is a perfect example of a bright red state. Legislative opposition to a state run exchange was so great, Jay Bradford, the State Insurance Commissioner, had to  start preparing for a federally run exchange. By law, when a state cannot come up with its own legislation to run an exchange, the federal government is required to step in and set one up. Ironically, legislators that are so vehemently against Obama’s healthcare reform legislation will end up with a federally run exchange led behind Kathleen Sebelius, the current Secretary of Health and Human Services and former democratic Governor of Kansas.

Understanding the political environment of your state of operation is paramount to assessing the viability of a successful exchange strategy for a private insurance company. An active purchaser model lends itself to be a market where the constraints may be too great to be successful and sustainable. If the market is too controlled, healthcare coverage quickly becomes a commodity and erodes the levers of differentiation used to be competitive. Health insurance companies could come to the conclusion that participating in such a state will not be viable and opt to stay on the sidelines. However, the state would technically have the right to mandate (either directly or indirectly) insurance company participation, which could turn the state into a defacto-single payer.

On the other hand, a facilitator model lends itself to be the more favorable for an insurance company to operate within. However, a state that has done everything to obstruct healthcare reform progress like Arkansas is just as dangerous. It most likely will end up with a federally run exchange which could potentially be more burdensome than a facilitated one a red state would have had the option to create.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu

 


It’s a Rotten Apple for NY’s Small Businesses: A look at health care regulations that uniquely contribute to high health insurance costs in NY


Posted By Errol Pierre

Want to start a small business and help our staggering economy? Think twice about NY. Studies continue to show that affordable health coverage is the top concern for small businesses in this state. Contrary to popular belief health insurance profits and administrative costs barely contribute to the rising cost of coverage representing only 6% of total health spending. Despite this reality, this is exactly where policy makers have focused their time and energy with a desire to rein in costs. Profit margin in the NY small business insurance market is among the lowest in the country. In fact, many health insurance companies in NY are losing money, barely breaking even, or attaining modest 2-3% margins. Instead, we should focus on the big ticket items. That is, let’s focus on the factors that are unique to NY that contribute the most to higher costs. If modified to match national standards, these factors could substantially reduce insurance rates in this state making affordable health coverage available to more small businesses and in effect, more New Yorkers. After all, small businesses are the engine of the NY economy and the catalyst for NY job creation.

The primary driver of high insurance premiums in NY is the unusually high cost of health care delivery. NY is one of two states (California being the other) that lead the nation in spending at $163 billion per year. Each New Yorker makes up about $8,300 in annual health care costs per year; 22% higher than the national average. However, NY’s high spending rates have not translated into healthier New Yorkers. NY is only in the middle of the pack when it comes to quality (21nd out of 50 states). The state comes in dead last (50th out of 50 states) when it comes to avoidable hospital use. Statistics continue to show that hospital care is the #1 contributor to total health care spending in the America and this is exactly where NY has its problems. As health spending increases in this state, the price to insure New Yorkers increases as well.

Why is this happening?

Here are several regulatory factors unique to NY that exacerbates the high cost of coverage listed in order of magnitude:

High Medicaid Enrollment – A huge detriment to the affordability of small business health insurance rates is the number of New Yorkers enrolled in Medicaid. Of the 10 states that lead the nation in health insurance rates, high Medicaid enrollment is a reoccurring theme among them all. 1 out of every 4 New Yorkers receiving Medicaid benefits making it the 6th highest of any other state. Despite not leading the country in Medicaid enrollment, NY is the highest spending Medicaid state in the entire country. This means we are paying more per person without offering better care. In its meager attempts to rein in these high rates of spending, NY continually cuts the payments given to hospitals and doctors that provide care to NY Medicaid enrollees. These cuts set off a chain reaction causing hospitals and doctors to subsidize patient revenue losses with income from patients that have private insurance. This disproportionately impacts small businesses because there are fewer tools at their disposal to combat cost shifts. As a result, NY is the 2nd most expensive state for small business health insurance in the country averaging $554 a month for an individual and $1,455 a month for a family. How does that compare to the rest of the country? NY rates are 30% higher than the national average.

SOLUTION:  NY should immediately implement the recommendations from the NY Medicaid Redesign Team formed under the leadership of Governor Cuomo. The #1 cost contributor to small business health insurance is its subsidization of Medicaid spending in the state. If NY wishes to attract and retain small businesses, it must enact legislation that stops it from being the highest spending Medicaid state in the nation.

Pure Community RatingNY stands alone as the only state that requires health insurance companies to charge all small businesses purchasing the same plan in a similar region the same price regardless of business size, demographic makeup, industry type, or health history. The other 49 states allow pricing to differ on a variety of factors which provide lower rates for healthier, younger, and even larger small businesses encouraging enrollment. Enrollment from diverse companies balances the insurance risk pool making coverage affordable for all. Inherent to the smallest of companies are higher operating costs and more fluctuations in health status and demographics which cause pricing for this population to be higher than average. However, because of this law, NY must charge all small businesses the same price regardless of size. This has caused NY to be the highest priced state in the nation for companies with 11-50 employees, which becomes a huge disadvantage for the NY economy.  Small businesses in this segment size represent more than 60% of the total small business workforce in NY making neighboring states like CT, NJ, and PA more attractive to larger small businesses. When fewer small businesses opt to offer coverage and the ones that do are smaller in size, the cost of insurance drives up at even faster rates than the normal health trend.

SOLUTION:  Adopt “modified community rating” as outlined in the federal health care reform bill which allows small business rates to vary by age and  tobacco use. This will allow more favorable pricing that will attract a both larger small businesses that employ more people and attract younger/healthier New Yorkers into the insurance risk pool.

Hidden TaxesThe single largest small business tax in NY is on private health insurance coverage. NY collected over $4.1 billion in revenue through these various taxes, fees, and assessments in 2011. Private health insurance has historically been targeted for solving state budget deficits. As such, these taxes have increased year after year adding more than $500 million to insurance costs since 2007. No other state has such an onerous tax burden and it is only likely to get worse as Federal health care reform is implemented. Both Health Benefits Exchanges and Market share assessments will result in more taxes imposed on the privately insured).

SOLUTION: Make New Yorkers aware of the taxes, fees, assessments hidden in health insurance rates. New Yorkers have a right to know where tax revenue for the state is generated.

o   $2.33B was raised by surcharges placed on hospital and health services given to consumers of private insurance

o   $1.16B was raised by an assessment based on a health insurer’s enrollment

o   $353M was raised by taxes placed on the prices commercial insurance companies charge their customers

o   $270M was raised by assessments on health insurance companies to fund running the Department of Financial Services

o   $240M was raised by an assessment based on a health insurer’s enrollment to specifically fill NY State budget shortfalls.

Benefit Mandates NY has a laundry list of over 40 specific conditions and treatments that all health insurance policies must cover by law, regardless of an employee’s health needs or preferences. Compared to states like Idaho (12 mandates) and Alabama (18 mandates), NY is one of the states that lead the nation in mandates. These mandates in many instances supersede Federal standards, increasing NY’s health care costs by more than a 12%. In fact depending on the mandate, insurance costs can increase between 1% and 5% for each additional mandate.

SOLUTION:  Change the current set of benefit mandates that exceed the Federal standards to be “made available for purchase” rather than being mandated for inclusion in all small business plans offered.  This will allow employers to choose the plan that best suit their business needs. Larger employers that self-insure have been able to free themselves of many burdensome and costly mandates through ERISA rules which have not created a level playing field and disproportionately impacted smaller businesses.

Health Insurance Rate Review (Prior Approval Law) In 2010, NY passed a law requiring all small business insurance rates to be approved by the Department of Financial Services. It also requires that $0.82 of every $1.00 in revenue be spent on medical care. As feared, this new rate approval process has become highly politicized rather than being a true actuarial exercise. First, $0.82 is higher than the federal requirement of $0.80 found in the recent health care reform legislation. Secondly, insurance companies in NY spend closer to $0.87 of ever $1.00 in the small business market and after operating costs, profit margins average only 2%. These actions create a hostile market place for competition and have led to fewer insurance companies offering coverage to small businesses in NY.

SOLUTION: Remove the onerous and political nature of rate increase reviews and improve the timeliness of state decisions

Individual Market FailuresHealth insurance coverage for an individual in NY exceeds $1,000 a month in most cases. These rates are almost 60% higher than those for small businesses, causing some individuals who are priced out of the marketplace to form phony small businesses to avoid the high costs and market failures of the individual market.  As a result, insurance companies inadequately price small business insurance coverage to properly reflect the risk.

SOLUTION: Enact a “facilitated model” for health benefit exchanges as outlined in the health care reform legislation. This will increase competition and fix the individual market by removing the restrictions of plan options that must be sold in the state. Today, NY requires all health insurance companies to offer basic HMO and POS products that costs more than $1,000 a month for an individual. Fewer regulations in the pricing and the plans offered to individuals would unleash the creativity and innovation found in products health insurance companies sell to larger businesses.

SOLUTION: Modify the NY “Young Adult Option” law that allows unmarried young adults through age 29 to purchase health insurance through their parent’s plan. This law should be modified to lower the cost of insurance to adequately reflect the health status of an average 29-year-old. Today, the pricing reflect the health status of the current population, which is much older and less healthy, making it unaffordable for many young workers in NY.

The NY Dilemma

Based on a 2010 AHIP study below, NY health insurance pricing is more attractive to the very small businesses that cause rates to sky-rocket. This is an unsustainable state of affairs that only hampers NY’s ability to have a strong and fast economic recovery.

Premiums by State, 2010 (Top 5 Most Expensive States)
       
Small Employers w/ 26-50 employees Avg. Monthly Premium
  State

Single

Family

1. New York

$565

$1,485

2. New Hampshire

$512

$1,345

3. Nebraska

$443

$1,164

4. Illinois

$435

$1,147

5. California

$428

$1,125

Avg. United States

$406

$1,065

   

Small Employers w/ 11-25 employees Avg. Monthly Premium
  State

Single

Family

1. New York

$577

$1,514

2. New Hampshire

$523

$1,374

3. Nebraska

$449

$1,179

4. Massachusetts

$439

$1,153

5. Illinois

$438

$1,151

Avg. United States

$419

$1,100

   

Small Employers w/ 10 or fewer employees Avg. Monthly Premium
  State

Single

Family

1. Nebraska

$579

$1,519

2. Massachusetts

$545

$1,430

3. New Hampshire

$539

$1,415

4. New York

$536

$1,408

5. Florida

$489

$1,283

Avg. United States

$446

$1,172

AHIP Small Group Health Insurance in 2010: A Comprehensive Survey of Premiums, Product Choices, and Benefits, July 2011

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu


SOTU: What Obama Didn’t Say


Posted By Errol Pierre

President Obama filled up close to 90 minutes of TV airtime giving his 3rd State of the Union Address last week. With 6,953 words (about 12 pages) to choose from political pundits filled the airwaves all across the country with animated reactions commenting on everything from the details of his plans to his tone, his demeanor, and overall performance. But all too often we forget that with great orators, it is more important to focus on the words that were not said than the ones that were….

Here are the facts:

- “Health” was used only 7 times during his speech (roughly 0.001% which takes up less than 1 line on a page).

- His comments regarding Healthcare made up only 332 words. That represented 4.7% of his speech (about a page and half). A little better but still severely lacking in substance.

How can that be?

- Health expenditures in this country represent more than 16% of our GDP while the average percentage among high income nations is roughly 10%.

- 13.1 million Americans lack a job but more than 50 million Americans in this country lack health insurance. Doesn’t healthcare deserve more attention?

- Since inauguration, he has spent 60% of his time in office getting what he called his #1 domestic policy agenda, healthcare reform, passed through Congress. If you recall, he entered office on January 20, 2010 and healthcare reform was passed on March 23, 2011. So 15 out of his now 25 months were dedicated to the pursuit of universal healthcare.

- Lastly, most of the popular provisions of the law have already been instituted. Millions of young adults in their twenties have been able to get insurance through their parents. And even more promising, no child under 18 can be denied coverage for pre-existing conditions.

So why were there so few words on healthcare? Discussing income inequality yet avoiding healthcare is not having an honest discussion about the problem. America spends more money on healthcare than any country on the planet. What is not widely known are the percentages spent by the government versus the private sector and how that impacts the American pocketbook. This country is actually on par with other high income nations spending 7.4% of their GDP on government health expenditures like Medicare, Medicaid, and Veteran healthcare. For a comparison, countries like France (8.7%) and Germany (8.1%) are at higher levels with government run universal healthcare. However, when it comes to expenditures from the private sector, America spends an additional 8.5% of its GDP representing almost half (52.2%) of total health costs for the entire country. That is 4 times higher than most like nations. In fact those private sector figures put us in 50th place between Rwanda (49th) and Gambia (51st) according to the World Health Organization.

WHY IT MATTERS

Most Americans get health insurance through their employer leaving American businesses on the hook for large portions of the country’s private health expenditures. It’s been the catalyst for corporations moving jobs overseas. It’s why the United States Postal Service is teetering on the edge of insolvency. It’s why America bailed out General Motors and restructured their Union contracts to be the #1 car company in the world again.

Most Americans work for businesses with 200 or more employees. According to the Kaiser Family Foundation, 99% of the time these businesses are offering health insurance to those employees. The foundation goes on to highlight that the cost of these employer health plans have gone up by 113% over the past 10 years with employers paying close to 73% of those costs on behalf of their employee population. As a result they have shielded much of the exorbitant healthcare increases from their employees. This has had grave repercussions to the average American salary. You cannot talk about income inequality and ignore non-salaried benefits like health insurance. These increases have poked huge holes in the bucket of funds that corporations use to payout employee compensation. You also cannot blame health insurance companies for these increases either. Their profit margins barely surpass 4% compared to pharmaceutical companies that enjoy 15% margins. The blame really goes to the actual cost of providing healthcare.

The U.S Social Security Administration has tracked the national average wages in this country since 1951. In 2001 it was $32,921. In 2010 it is $41,673. So despite the increases in health insurance costs, wages have still gone up 27% in the past 10 years. American employees however have seen 131% growth in the amount of money they must contribute to their health plan. It has gone from $1,787 in 2001 to $4,129 in 2010. So Americans have literally went from paying 5% of their salary on health insurance to 10% in 10 years not even accounting for the increase in co-payments, deductibles, and out of pocket costs.

If you truly want to tackle income inequality, look no further than tackling the increases in healthcare spending. Healthcare reform did not go far enough on this issue. It increased access via health exchanges, protected more patients via insurance regulations like profit ceilings and mandated benefits. But it did nothing to tackle costs. Even worse, our healthcare system will continue to shield costs from the consumer by giving subsidies to lower income Americans so that insurance can be more affordable. But these subsidies are paid for by taxes and fees levied on health insurance companies ($60 billion), on Americans with rich “Cadillac” type health plans ($32 billion), on pharmaceutical companies ($27 billion), and on high income earners use of hospitals ($210 billion). The only problem with these types of revenue streams are the laws of economics. Since individual Americans and large businesses will be required by law to purchase insurance by 2014, they as consumers will be more inelastic than their suppliers. In the end most of these taxes and fees will be passed on to the most vulnerable consumers further eating away at their hard earned income.

President Obama concluded his healthcare remarks conceding that he was “willing to look at other ideas to bring down costs, including one that Republicans suggested last year — medical malpractice reform to rein in frivolous lawsuits.” The only problem is here is the sad reality. According to the Kaiser Family Foundation only 11,000 malpractice claims were paid in 2009 amounting to $3.6 billion. That sounds like a big number but it is only 0.2% of total U.S. health costs. So the only question left is how much medical malpractice reform could help to actually close the income inequality gap. Well, the average malpractice suit is only $11.99 per capita, putting $12 bucks back in everyone’s pocket. I guess the good news is this kind of policy change would help fight the common cold giving every American the extra disposable income to buy a bottle of Robitussin from CVS.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu

 


The Curious Case of Kansas


Posted by Errol Pierre

On April 28, 2009, Kathleen Sebelius joined the Obama Administration as the Secretary of the Department of Health and Human Services (HHS). It was one month and five days after the President signed his landmark healthcare legislation into law. Sebelius’ primary task would be to lead the massive implementation effort of a very complex bill with multiple phased in milestones that run through 2018. Throughout her first two and half years she has been vocal about her commitment to transparency and affordability for the American healthcare consumer. She is no stranger to the underlying issues in our system. In fact her dealings with healthcare started in America’s heartland way before this cabinet appointment. It started in Kansas; the Sunshine state. Ironically, the same state where President Obama’s mother grew up.

There’s No Place like Home

After receiving a Masters in Public Administration from the University of Kansas, Sebelius moved to Kansas and pursued politics. This led her to an eight year stint as the state’s Insurance Commission from 1995 to 2003. It was historic for Kansas. Sebelius was the first woman to ever hold the post. She was later profiled as a public official of the year in 2001 noted for her balance between tough regulations and her promotion of business. In full manifestation of her principles, she publically battled healthcare giant, BlueCross BlueShield of Kansas. She successfully blocked the sale of the company to an even larger out of state insurance conglomerate noting her determination to keep healthcare costs low for Kansans. The move was unprecedented and proved to be very timely. It happened one year before the Kansas gubernatorial election of 2002. Sebelius would win that election handedly with 53% of the vote.
Despite her victory, she was a Democrat governing in a bright red Republican state. Nonetheless she reached across the aisle and signed several bipartisan healthcare reform bills in her first two terms. Her work increased the number of health professionals in underserved areas, expanded health coverage for children, and relaxed Medicaid eligibility rules covering more Kansan families. She also established the Kansas Business Health Policy Committee which found ways to the lower the number of the uninsured and increase the number of businesses that offered health benefits to their employees. The committee’s most important work however was the creation of a program that provided health premium assistance to low and modest waged employees ensuring affordability.

We’re not in Kansas Anymore

The Governor’s work on healthcare quickly caught national attention. She also publically supported Obama’s healthcare legislation prior to her cabinet post noting benefits the bill would have on her state. 13% of Kansas lacked health coverage but she believed those 360,000 Kansans could be covered through Obama’s bill. So it made perfect sense for Obama to have Sebelius continue her work on healthcare but on a much larger stage. Rather than worrying about the coverage of 2.8 million Kansans, as head of HHS, she now worried about 49 of the 308 million Americans that lacked insurance and the 40 or so insurance companies across the country she now had the power to regulate.
Sebelius brought along her expertise. Kansas had the prelude to health exchanges – the staple of the healthcare reform legislation. Health exchanges create a marketplace where individuals and small businesses can shop for coverage similar to the way they purchase airplane tickets from online websites. Subsides are also made available through these exchanges to anyone who cannot afford coverage. Exchanges must be in place by 2014 and will be equipped with navigators and a toll-free support line to assist with enrollment questions. HHS recently launched a 50 state version of such a website on November 21st (www.HealthCare.gov). As a former Governor, Sebelius realized that execution of exchanges would be a huge undertaking for the states though. So to nudge tem along, her office provided grants to states that act early. More than $241 million was awarded to seven states that were called early innovators. Secretary Sebelius’ own home state of Kansas was one such recipient; winning a $31.5 million grant

Ding-Dong Reform is Dead

After Sebelius’ departure from Kansas though, things quickly began to change. Her successor, Mark Parkinson, indicated he would not run in 2010. Sam Brownback, a Kansas household name, won the election convincingly with 63% of the vote. As a Republican Senator for Kansas prior to winning, Brownback was one of the strongest challengers to federal healthcare reform not only voting against the bill but calling for its repeal.  One of his first acts as Governor was a very public and symbolic gesture. He returned the $31.5 million grant Kansas received from Sebelius’ office prior to his election.  It was a politicized move that reiterated his firm belief that healthcare reform placed a heavy financial burden on states just like Kansas. The reasons are surprising.

Mandates Are Costly - Kansas already requires thirty seven different health benefits be added to every health plan sold in the state regardless if the consumer wants it or will use it. Mandates like the coverage for Alzheimer’s disease regardless of a person’s age, or the coverage of child annual check up’s for policy holders without children, increase the cost of healthcare for everyone. Additionally, in 2014 when exchanges are implemented; Kansas will not receive federal funds for any mandated benefits that exceed the federal ones. This could potentially be a budget crisis for Kansas if not managed properly. Brownback would prefer to have consumers build their own health plans allowing the free market to dictate what sells and what does not.

Subsidies Shift Costs to the States – Brownback also fears that exchange subsidies will spur employer ‘dumping’. There are about 70,000 businesses in Kansas but the healthcare reform law only requires that roughly 7,800 of them offer health coverage because they are considered large employer. The remaining smaller employers representing close to half a million Kansas workers will not have to offer coverage even though their employees will face financial penalties if they are uninsured. Since these employees will receive lower prices through exchanges, the incentive for small employers to offer insurance in the state will naturally decline, a worry for the Governor. Kansas already has one of the lowest unemployment rates in the nation at 6.2%. Yet the uninsured rate in the state is more than double that.  Kansans are already working for employers that do not offer insurance and exchanges have the potential to widen that gap.

As a result of these issues, Brownback has yet to introduce a health exchange bill for his state; but he’s not alone. Only 14 states currently have legislation passed. However inaction by a state could prove to be costly. Kansas runs the risk of defaulting to federally facilitated exchange which would essentially give power to Sebelius to create an exchange in his state. Brownback acknowledges this ironic twist of events in a letter sent to Sebelius’ office with signatures from 19 other governors stating that unless he receives complete flexibility in handling healthcare reform, he vows to not to act at all.
Brownback has even questioned whether the healthcare bill infringes on the rights of the people of Kansas. In another letter signed by 27 other governors, Brownback strongly requested President Obama to speed up the ruling from the Supreme Court on the constitutionality of the healthcare reform law. The court is due to make its ruling by next summer, but in the meantime the Governor has has taken matters into his own hands. On May 26, 2011, he signed bill HB 2182 into law. The bill created the Kansas Health Care Freedom Act which sets out to protect the rights of Kansas citizens to either participate (or not participate) in any healthcare system freely. It is clearly a preemptive move attempting to block the portion of the healthcare reform law that would require citizens of his state to purchase health coverage from a private insurance company.  Despite all these actions, Kansas has made some progress with regard to healthcare reform. A sanctioned work group of leaders from government and the private sector discuss the implementation of several provisions of the reform bill monthly.  Their work thus far can be view at http://www.ksinsurance.org/consumers/healthreform/hcr.htm.

Errol Pierre works at a large insurance company focused on business development, sales, and strategy for employee benefits. He is currently pursuing a degree in Health Policy and Management with a specializing in health finance. He can be reached at errol.pierre@nyu.edu