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HR-5 is a major reform of malpractice laws across the US. According to a recent Congressional Budget Office (CBO) assessment this legislation will lower health care costs in the US by 0.5%. A half a percent may not sound like a big number but multiplied by national spending on health care it’s a very big number. Since the US spends over $2.5 trillion each year on health care, that is a lot of money.  Ok, if you want to know, the potential savings in over $12,500,000,000 each year.   

In addition CBO estimates the legislation will lower the federal deficit by $57,000,000,000 in the next ten years and increase revenue by $10,000,000,000. How does reforming malpractice awards increase federal revenue? Because by lowering health care costs it lowers the tax-free premiums (tax-free income) in employer health benefit plans. There would be a decrease in federal spending of $48 billion over ten years on Medicare, Medicaid and federal employee health benefits.

Here is one of the major parts of the bill:

Authorizes the award of punitive damages only where: (1) it is proven by clear and convincing evidence that a person acted with malicious intent to injure the claimant or deliberately failed to avoid unnecessary injury the claimant was substantially certain to suffer; and (2) compensatory damages are awarded. Limits punitive damages to the greater of two times the amount of economic damages or $250,000

Capping non-economic awards and punitive damages and limiting attorney fees will not be popular in some quarters. There will also be the argument that victims of malpractice (generally known as mistakes, sometimes bad mistakes) deserve more and their payments should not be limited but rather left to juries (sometimes emotionally charged and nearly always unqualified).  The time for those arguments has past. This is all part of the shared sacrifice we hear so much about these days.

Frankly, beyond any cost savings, we should welcome the possibility that we will all undergo fewer tests and procedures (sometimes risky procedures) now done in the name of CYA.

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It always befuddled me how many of the New England states, the center of the American Revolution, the home of the tough, frugal, independent Yankee ended up some of the most liberal states in the U.S. Vermont is a good example, electing a self-proclaimed socialist to the U. S. Senate. I suspect I need to bone up on my history of the region. Liberal Vermont is leading the way on health care reform these days. It is about to enact a public option (a step back from what it really wants-a public universal health plan).

According to the governor,

“For Vermont, it’s all about containing costs.” The annual cost of health care in Vermont has doubled to roughly $5 billion a year over the past 8 years, and Shumlin contends that “it’s killing small businesses” and “kicking the middle class in the teeth.”

So the solution to rising health care costs is a public option we are told (again). Perhaps we should look at the best example of a public option and see how that controls costs. Medicare, while not truly an option, is a public program so it is the best example we have. How does Medicare control costs…it doesn’t!  How does Medicare propose to control costs? Well, we are told it will attack fraud and waste, it will cut physician fees by 30% and it will make health care more efficient by placing Medicare beneficiaries into Accountable Care Organizations.

Medicare has been in effect for forty-six years (46) and now it is attacking fraud and waste? If a public option is so efficient, how did fraud and waste get out of control in the first place? Could it have anything to do with bureaucratic bungling or Congressional meddling? Medicare is often touted as having much lower administrative costs than private insurance and to some extent that is true although the “much lower” part is questionable. On the other hand, what do we get for that lower administrative expense, we get virtually no review or management of claims and we get forty-six years of growing fraud and waste.

Medicare has been planning to cut physician fees for a decade and each time, including in 2010, Congress has stopped the cuts. Even the 2011 Medicare Trustee report notes that such cuts while assumed in their future expense projections, are unlikely ever to occur. Is that how you contain costs under a public health plan?

Of course there is the matter of profit; a public option will not have an insurance company’s profit factored into its premiums. Let’s say for a moment that all profit is done away with and not replaced by other government costs and inefficiency, then what? Initially you can claim that premiums are lower, but then what changes the growth of health care costs in the future? Under PPACA, Medicare has a new panel set up to address that issue, but since it is prevented from raising premiums or cutting benefits, exactly how will it lower costs? Vermonters should be asking the same question. If “For Vermont, it’s all about containing costs,” how will that be accomplished?

The most politically correct response will be by creating competition in the insurance market. That assumes that insurance companies do not need to be competitive today. However, the real fallacy is that competition among more insurers is counterproductive because under a system that relies on negotiated discounts with health care providers, the greater leverage fewer insurers have over the marketplace the higher discounts they can demand. What will a public option do, set physician fees and require all providers to participate and accept the fees with no balance willing? I assume if that is the case, the citizens of Vermont know that and have considered the unintended consequences.

The health care system needs competition, but not between more insurers but rather health care providers. Competition based on quality, efficiency and cost. Will the addition of a public option accomplish that? What has Medicare done about that in the last forty-six years?

The fact is that insurers and third-party administrators for self-insured employer plans have led the way in trying to bend the cost curve. They have initiated case management programs, nurse help lines, disease management, medical necessity review, quality initiatives, tight claim adjudication, wellness programs, extensive education programs and more. Have they worked, to some extent, but on the other hand many patients and doctors see these programs as intrusive and interfering between patient and doctor and thus avoid participation whenever possible (just as happened with HMOs).

The above programs cost money and that expense is reflected in insurance company premiums. If they were eliminated, premiums would reflect that lower expense but premiums would also reflect higher claims costs, more fraud and waste…just like Medicare.

So I ask again, how will a public option control health care costs?

Liberal politicians have an easy time attacking insurance company profit as a bad thing, especially “record profits.” However, profit motivates efficiency, innovation, competitiveness, concern for costs, customer service, etc. I submit that bureaucracy does none of that. Just look at the history of Congressional interference in Medicare, the virtual non-existent scrutiny of claims under Medicare (ignoring audit reports going back twenty-years questioning this practice) and the administration of Tricare (a program that has not raised premiums for retirees in over fifteen years despite out of control costs). Look at the management of health benefits in the various states where many are on the verge of bankruptcy in large part because of mishandling, caused largely by political interference, of health care benefits for active and retired workers.

A lot can be improved in the private health insurance industry (and yeah, some CEO salaries are outrageous although insignificant when reflected in premiums), far more efficiency is possible as is the case with the health care industry, but for those Americans and even Vermonters who think that a public option or a single payer system will control health care cost, the question remains…how?

If you know the answer and are okay with it, fine and dandy, please tell the rest of us.

One thing most people agree on is that Medicare is a major portion of government spending and its costs are out of control.  Beyond that, on the surface at least, there appears to be a great deal of disagreement on how to fix the problem. The Ryan plan has drawn a great deal of attention and criticism.  The Obama plan is less controversial, and likely less effective.  However, in the final analysis both plans are quite similar, they both will shift costs to Medicare beneficiaries while limiting what Medicare spends.  You cannot limit what Medicare spends without shifting costs to someone and that includes health care providers, beneficiaries and the general public.  If anyone tells you otherwise they are…well let’s say they don’t know what they are talking about (or they are a politician).

An excellent analysis of this situation written by Professor Laurence Kotlikoff  appears on Bloomberg.com   I urge you to take a close look. 

Medicare beneficiaries, both current and future are going to pay more for their health care through a combination of higher premiums for both basic Medicare and supplemental coverage and higher out-of-pocket costs as well.  Physicians and other providers are going to receive less in payments and be squeezed to provide fewer health care services (as I have said many times before, not necessarily a bad thing). This means more cost-shifting to non Medicare patients and payers.

Whether it is a Ryan type change in the structure of Medicare or an Obama type less transparent reduction in coverage, Medicare is going to change.  The real question is which approach (or some other) most fairly distributes the burden among all stakeholders both present and future…and of course, which approach is truly effective.

As required by law the 2011 Medicare Trustees Report is required to project its costs based on current law, including the health care reform law.  That leads to some interesting conclusions and savings projections.  Those optimistic figures lead to good press and PR for the Administration.  What you don’t often see in the paper is what is behind the assumptions along with the reservations expressed by the Trustees.  Following is an excerpt from the introduction of the 2011 Trustees Report.  I provided the highlighting.  As with many assumptions required by Congressional action, the reality of the impact of PPACA on Medicare is likely to be much different from advertised.

As was the case with the 2010 Trustees Report, this report reflects the effects of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. This legislation, referred to collectively as the “Affordable Care Act” or ACA, contained roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and reduce its costs to Medicare.

Although the long-term viability of some of these provisions is debatable, the annual report to Congress on the financial status of Medicare must be based on current law. In this report, the various cost-reduction measures—most importantly the reductions in the payment rate updates for most categories of Medicare providers by the growth in economy-wide multifactor productivity—are assumed to occur in all future years, as required by the Affordable Care Act. In addition, an almost 30 percent reduction in Medicare payment rates for physician services is assumed to be implemented in 2012 as required under current law, despite the virtual certainty that Congress will override this reduction.

In view of the factors described above, it is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report. We recommend that the projections be interpreted as an illustration of the very favorable financial outcomes that would be experienced if the physician fee reductions are implemented and if the productivity adjustments and other cost-reducing measures in the Affordable Care Act can be sustained in the long range—and we caution readers to recognize the great uncertainty associated with achieving this outcome. Where possible, we illustrate the potential understatement of Medicare costs and projection results by reference to an alternative projection that assumes—for purposes of illustration only—that the physician fee reductions are overridden and that the productivity adjustments are gradually phased out over the 16 years starting in 2020.

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Today many Americans are obsessed with the mandate under the Affordable Care Act to carry health insurance. However, there are forty-five million or so Americans who should see it as no big deal. The penalty for not enrolling in health insurance is insignificant when compared with the penalty that seniors who want to drop out of Medicare face. That penalty is loss of ones Social Security benefit. Yikes, that hurts.

But the issue is moot because the law prevents anyone from selling insurance to replace Medicare. So, unless you are super wealthy or just dumb, it is unlikely you want to drop Medicare anyway.

The rule causing loss of Social Security was promulgated in 1993 under Clinton administration … did you ever hear of it?

There are other mandates too. If you are 65 and still working with health insurance, your employer plan (more than 20 employees) is mandated as primary over Medicare. In others words, you don’t use Medicare until you actually stop working. The benefit to the seasoned citizens is they don’t need to enroll in Medicare Part B while working and suffer no penalty for late enrollment when they enroll after stopping work.

Does the phrase “much ado about nothing” ring a bell? It seems the mandate to carry health insurance left the station long ago. Lets worry more about the cost and quality of health care, I sure do.

 ”The rule requires insurance companies to provide consumers with easy to understand information about the reasons for unreasonable rate increases and post the justification for those hikes on their website as well as on the HHS Affordable Care Act website, www.healthcare.gov .”

Who but the government could write something like the above? Let’s see, the reason we are asking for an unreasonable rate increase is so that we can drive away customers, report outrageous profits and pay our executives pensions in line with government workers. That should cover it.

For now, unreasonable means anything above 10% . In typical fashion the following press release links premium increases to “highest profits in years.” The logic that one of the reasons for high profits is that medical care costs have not risen as much as projected sounds good until you think about it carefully. 2011 premiums (established in 2010 based on historical data) are designed to cover the cost of health care throughout all of 2011 and obviously we don’t know now what those costs will be. We don’t know what insurance company profits will be either at this point. Let’s say the last half of 2011 turns out to be a very bad year. When that happens 2011 premiums that were deemed unreasonable, may end up being too low or 2012 premiums will be substantially higher than “reasonable” just to make up the difference. The point is that there is a lot more to setting premiums than maximizing profits not to mention that some insurers are non-profit entities.

Perhaps I am unique or just strange, but if I received an unreasonable premium increase from my auto or home owners insurance I would shop around for a better deal. Given the elimination of virtually all underwriting for health insurance under PPACA, making changes in health insurance is just as possible. With all the regulation now in place eliminating denial of coverage, requiring who to cover and for how long and defining the coverage to be offered, the real question to be asked is why is any government agency regulating premiums. Let the efficient, customer focused insurers thrive and the others fall by the wayside. Put the customer in charge.

A lot of the things we pay for seem unreasonable, $7.99 for a hot dog at a Disney resort is fresh in my mind. Is the profit a small physician group makes unreasonable? Is the cost of a cat scan unreasonable? Press releases such as the following seem an obsession with this administration which from the start tried to focus public attention on insurance companies rather than the cost and utilization of health care. These pronouncements are not helpful, perhaps are politically motivated and certainly do not give the full story or present all the facts.

To better understand premium increases you might want to read Anatomy of  a Thirty Percent Premium Increase.   And if medical costs are expected to rise by 9% in 2011, is a 10% premium increase unreasonable? 

HHS NEWS
 
FOR IMMEDIATE RELEASE                                                               Contact:  HHS Press Office
Thursday, May 19, 2011                                                                                           
 
 
Affordable Care Act helps fight unreasonable health insurance premium increases
 
New rules bring transparency, lower costs to consumers by requiring review of large insurance rate hikes
 
Today, The Department of Health and Human Services (HHS) issued a final regulation to ensure that large health insurance premium increases will be thoroughly reviewed, and consumers will have access to clear information about those increases. Combined with other important protections from the Affordable Care Act, these new rules will help lower insurance costs by moderating premium hikes and provide consumers with greater value for their premium dollar.  In 2011, this will mean rate increases of 10-percent or more must be reviewed by state or federal officials.
 
“Effective rate review works – it does so by protecting consumers from unreasonable rate increases and bringing needed transparency to the marketplace,” said HHS Secretary Kathleen Sebelius.  “During the past year we have worked closely with states to strengthen their ability to review, revise or reject unreasonable rate hikes.  This final rule helps build on that partnership to protect consumers.”

Starting September 1, 2011, the rule requires independent experts to scrutinize any proposed increase of 10-percent for most individual and small group health insurance plans.  States will have the primary responsibility for reviewing rate increases.  While most states will take on this responsibility, HHS will serve in a backup role in states that don’t have the resources or authority to review rates. HHS has awarded $44 million in Affordable Care Act grants to states to help strengthen their oversight capabilities. An additional $200 million will continue to be available to states under the Act.

Starting September 2012, the 10-percent threshold will be replaced by state-specific thresholds that reflect the insurance and health care cost trends in each state.  The final rule clarifies that HHS will work with states in developing these thresholds. 

Publication of the final rule comes as health insurance companies have reported some of their highest profits in years.  One cause for these profits is that actual medical costs are growing more slowly than what insurance companies projected when they set their 2011 rates last year.  However, many of the rates consumers and small employers pay today don’t reflect these lower costs. 
 
The rule requires insurance companies to provide consumers with easy to understand information about the reasons for unreasonable rate increases and post the justification for those hikes on their website as well as on the HHS Affordable Care Act website, www.healthcare.gov . 
 
 “Strong and transparent rate review processes are necessary to help bring down costs for consumers,” said Steve Larsen, director of the Center for Consumer Information and Insurance Oversight. “Rate review will ensure that increases are based on reasonable estimates and real-time data on medical cost trends and health care utilization.” 
 
The regulation issued today finalizes proposed rules issued in December 2010. The final rule has several additions to the proposed rule, including a requirement that states provide an opportunity for public input in the evaluation of rate increases subject to review.  This will strengthen the consumer transparency aspects of the new rule.  HHS is also requesting comment from the public on applying the rule to individual and small group coverage sold through associations, which is sometimes exempt from state oversight.
 
For more information about recent trends in health insurance rates and the final rule, visit: http://www.HealthCare.gov/news/factsheets/ratereview05192011a.html.
 

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