Monday, February 3, 2014

New Republican health-care plan falls short

We have a guest blogger today. Rich Teets  is a retired automotive engineer with an
interest in health care policy. He is the chair of the healthcare task force for the Metro Coalition of Congregations, a group of faith based congregations joining together to advocate for the common good. 

By Rich Teets

 Republican senators Richard Burr, Tom Coburn and Orrin Hatch recently
provided a new health plan [1] which they claim is a good alternative to the
Affordable Care Act (ACA).

The new plan is the Patient Choice, Affordability, Responsibility, and Empowerment Act (CARE). The summary provided by these leaders is long on Republican trash talk about the ACA, and short on details. But the details provided suggest that this new plan would leave large holes in the healthcare safety net.

The first step of CARE is to repeal the ACA. It is replaced by relatively small vouchers to help low income people buy healthinsurance. The expanded eligibility for Medicaid that is
part of the ACA is replaced by a capped grant to the states and freedom to experiment.

The ACA requirements for quality standards in health insurance are eliminated. CARE includes some provisions to deal with pre-existing conditions, but it is unlikely these will
be acceptable to the insurance industry.

There are also suggestions to promote transparency
in pricing medical services and to reduce malpractice costs, both direct and indirect.

Consider first the subsidies offered to low income people
to help pay premiums. For people less than 200% of the federal poverty level (FPL) and ages 35-49, the suggested subsidy would be $2,530 for an individual and $6,610 for a family. A good
baseline for the premium cost for decent insurance is given by the average for employer provided insurance: $5,500 for an individual and $14,500 for a family.[2] So to buy
decent insurance, a low income individual would need to pay about $3,000 and a family would need to pay about $8,000.The FPL for an individual is $11,490 and for a family of 2 is $15,510. Clearly, this CARE plan would not allow these low income people to buy decent insurance. Even at 200% of FPL, people would not have enough disposable income to pay insurance premiums. In contrast, the ACA provides subsidies that allow an individual or a family of 2 living in metro Detroit and making just under 200% of FPL to buy good insurance for $1,000/year (with a deductible of $900 individual or $1,800 family).[3] These costs would still be challenging to a
low income family, but they are far more reasonable than the subsidies in the CARE plan.

Since the ACA subsidies are on a sliding scale, people making lower incomes would pay even less. This properly reflects the fact that people on very low incomes have almost no disposable income and little chance to build up savings. The CARE plan would repeal the expanded eligibility for
Medicaid, on the grounds that Medicaid is a “broken” system. Instead, the states would be given more freedom to innovate, and the growth in federal support for Medicaid would be capped at

In Michigan, it is expected that 400,000 people will qualify for the expanded Medicaid. It is not clear that the CARE plan would cover any of these people. In addition, health care cost inflation has usually been more than CPI+1. Therefore, over time the capped federal contribution would cover less and less.

Medicaid is far from ideal. In Michigan, Medicaid payment rates to doctors are about half the rates for  Medicare.[4] Consequently, many doctors will not take Medicaid. There are also
complaints by doctors that Medicaid red tape is burdensome. The main way to make Medicaid work better for the people it is supposed to serve is to increase payment rates to
providers. It seems unlikely this will happen. And the very low payment rates to doctors almost certainly mean that Medicaid is less costly to the federal government than
a comparable system based on private insurance.

Medicaid does have the advantage that the co-pays are very small (typically $1). Consequently, it is affordable to very low income people. It is hard to see how the CARE plan would adequately cover people in the 30-100% of FPL range that have been left out of traditional Medicaid. The ACA
extends full Medicaid to people making less than 138% of FPL. Unfortunately, about half the states have chosen not to extend Medicaid, even though the federal payments
would provide a strong net benefit to the state. Low income working people in these states are simply dependent on the generosity of strangers when it comes to healthcare,
and finding charity care is often a daunting task. This has real consequences. “Lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States”.[5]

The CARE program has two ways to deal with pre-existing conditions. One approach is to use high risk pools for people with serious and/or chronic illnesses. That has been used in the past, but in most cases the funding source was not adequate. Therefore, people who had to take advantage of these high risk pools faced very high costs. An unfortunate aspect of this approach is that people that are unlucky enough to have a serious illness must also incur very high costs.
Many people would say that insurance should spread those costs across the whole population. Some people believe that high-risk pools are a relatively low cost way to help people with pre-existing conditions. But, as discussed below, these people require a substantial fraction of the medical spending in the U.S.

The second way that CARE addresses pre-existing conditions is to prohibit underwriting for people who have insurance and want to buy some other insurance. This would mean that people who maintain insurance could never be discriminated against because of pre-existing conditions. This has two serious problems. First, it ignores the common problem that when people lose their job, they often do not have enough savings to continue to pay for insurance. Second, it is unlikely that insurance companies could live with this rule. Since CARE puts no requirements for quality on insurance policies, healthy people would tend to buy low cost, low quality poli
cies. Then, if they develop a serious illness, they could freely buy better insurance.

We have seen that the CARE program fails to provide a good safety net for low income people who need health insurance. It also fails to solve the problem of pre-existing conditions. The authors of the CARE program also make a number of statements that seem to show a lack of understanding of
the reality of health insurance in America. For example, they state that surveys show that 85-90% of Americans liked their insurance except for the cost.[6] But 50 million
Americans don’t have health insurance. This is about 15%. It is hard to believe that every American who has insurance likes it. Many of us know people who complain that their insurance doesn’t cover things they think it should. In addition to the 50 million uninsured, there are about
30 million who are underinsured.[7] Do all these people like
their insurance?

The CARE authors repeat a lot of Republican dogma about the ACA. Clearly the ACA can be improved and the rollout of the website was terrible. But as a Navigator, I have helped many people sign up for insurance, and many of them simply could not have afforded insurance before. The website is now working well enough that many people can complete the application without problems.

The ACA also has several features that Republicans usually endorse. In metro Detroit, there are more than 10 private insurance companies competing. The insurance generally has high deductibles, so consumers have “skin in the game” and are likely to be thoughtful about the cost of medical care and whether that care is necessary. Republicans usually say that this is the key to driving down health costs. In addition, the insurance companies are motivated to negotiate low
rates with the providers in their network, because this is the main way they can keep their premiums low (and thus compete for more customers).

The CARE authors repeatedly claim that the ACA is driving up insurance costs. This requires careful analysis. First, the news recently has been full of reports that the
recent increase in healthcare costs has been surprisingly small.[8]. Three common explanations are: the ending of patents on a number of expensive drugs, lingering effects of the recession, and the ACA. Second, the costs of ACA insurance are comparable to the costs of employer provided insurance. For example, in metro Detroit a 45 year old can by a Blue Cross Premier Silver plan with $1,400 deductible for $4,200/year. This is comparable to the premium cost for employer provided insurance with a similar deductible. Both of these facts contradict the Republican dogma that the ACA is causing a spike in health insurance rates.

There are several ways that the ACA may significantly increase the rates paid by some people who have been in the individual market. First, the ACA has quality standards that some older plans did not meet. In some cases, this is because the older plans had big holes in their coverage. Often people did not discover these holes until it was too late, and this accounts for a significant number
of bankruptcies. Some people believe that it is wrong for the ACA to require maternity coverage, pediatric coverage, and coverage for mental illness and substance abuse. If I don’t have kids, don’t intend to have kids, and have no mental or substance abuse issues,
why should I pay for insurance for these conditions? But many people believe that insurance should cover broad risk pools.

Every time one segments the risk pool, one creates winners and losers. A man will never have a baby, but a woman will never have prostate cancer. A lot of these costs tend to average out. And if people are allowed to buy insurance that is tailored to their needs, what happens to people with pre-existing conditions? They will have to pay very high costs, because they are bearing the full cost of the risk associated with their conditions. The point of insurance is to spread the risk broadly, so that the unlucky people who have health problems don’t also have to bear a
disproportionate financial burden. 
There is another way that the ACA can raise some people’s premiums, and the
explanation is somewhat complex. There are many anecdotes of people with decent
insurance whose premiums have gone up significantly under the ACA. To understand this, we must first understand the distribution of health spending.[9] In any population,
there will be many people who have relatively low medical spending – they are very
healthy. There will be some who have high spending because they have chronic or acute
illness or serious injuries. If we rank the whole U.S. population by medical spending (not including health insurance premiums) we find that half the population is quite healthy,
and only accounts for 3% of the spending, less than $850 per person. On the other
extreme, 20% of the population accounts for 80% of the spending. So in the past, the key
way for an insurance company to compete in the individual market was to sell to healthy
people and to avoid selling to unhealthy people. This was the reason for extensive
underwriting and emphasis on pre-existing conditions. Another way for insurance companies to reduce costs was to cap annual and lifetime spending on any one person. 22% of the total medical spending in this country is consumed by the sickest 1% of the population, with annual costs exceeding $52,000 per person. So capping the payments could significantly reduce a
company’s cost, but with serious consequences for the unlucky 1%.

Thus, people who had a pre-ACA insurance policy that cost much less than $5,000
for an individual or $15000 for a family were buying “healthy people’s insurance”. This
insurance was not sold to people who had pre-existing conditions. People who believe
this is a good system are saying there should be two risk pools – one for healthy people
and one for unhealthy people. [10] The healthy people will pay relatively low premiums.
The unhealthy people will not be able to afford insurance, unless the government
provides large subsidies. And since the least healthy 20% cover 80% of the medical
spending, it will take very large government subsidies to cover their costs. Many people
believe that insurance pools should be broad, so everyone shares the cost and the risk.
The ACA does this.

There is one other aspect of the pre-ACA insurance environment that deserves
consideration. Many people think that insurance companies could cancel policies for
people who became sick. That could happen if there was a lifetime maximum for
payments or if the company was able to claim the consumer had an undisclosed pre-
existing condition. But federal law forbids indiscriminate canceling of policies.
However, the natural functioning of the market may have gradually eliminated unhealthy
people from the market. Many consumers change insurance every few years. This is the
main reason why most current plans were not grandfathered from 2010 – they did not
exist in 2010.[11]

Insurance companies have an incentive to offer new plans at low cost in order to attract the healthy consumers. The high cost of insurance motivates consumers to look for lower cost plans. Thus, healthy consumers were likely to move into new, relatively low cost insurance. The unhealthy people were prevented from buying the new plans, so they were stuck in their old plan, in a risk pool that became increasingly unhealthy. This caused the rates for the whole pool to go up rapidly, and
eventually many of the people in the unhealthy risk pool were no longer able to afford
insurance. In addition, some people enter the individual market when they lose a job.
Again, only the healthy people in this pool are able to buy insurance in the low cost plans
on the individual market.

Thus, much of the increase in cost for individual insurance related to the ACA is
due to a transition away from insurance that was either low in quality or limited to
healthy people. We have seen that in metro Detroit, the unsubsidized cost for ACA
insurance is about the same as for a comparable policy in the employer-provided
insurance market. Employer-provided insurance does not discriminate between healthy
and unhealthy people. Thus, it does not have the distortions that were common in the
pre-ACA individual market.

The CARE plan has some discussion of the relative costs for young vs. old
consumers. In the ACA, premiums can only vary by a factor of 3 based on age from age
21 to 65. Republicans have criticized this, saying this overcharges the young. Some
have even encouraged young people not to sign up for insurance, in order to protest this
inequity. Continuing this argument, the CARE plan suggests a factor of 5 range in
premium vs. age would be more appropriate. Reference [12] shows that the medical
costs for 65 years olds are more than 3 times the costs for 21 years old. Given that young
people may earn much less than older people, one might think the ACA should have a
much bigger factor than 3 in age-adjusted premium costs. However, there are other
important considerations.

First, the ACA has good tax credits to help low income people pay insurance premiums and to reduce their deductible and out-of-pocket maximum. Thus, 20 year olds with modest income will pay much less than 1/3 of the premium cost compared to an older person with a high income. [13] Because the insurance will likely be affordable for many young people, it seems unethical to
encourage them not to buy insurance. Also, even the factor of 3 causes premiums for people in their 60s to be relatively high. For example, in metro Detroit, a 63 year old would pay $8616 for a Blue
Cross Premier Silver plan with a $1400 deductible (without tax credits). An individual
earning $46,000 per year makes too much for a premium tax credit. It will be difficult
for such an individual to afford $8616 per year. It doesn’t seem wise to increase this cost
by going to a factor of 5x for age rating.

The CARE plan also includes some ideas on increasing transparency in medical
costs. And it suggests some ways to improve malpractice issues. Both of these seem
worth pursuing.

In conclusion, the CARE plan would be interesting if it is a starting point for an
honest discussion on ways to improve health care in the U.S. It will almost certainly be
necessary to modify the ACA as we learn more about specific issues. For example, the
rule for affordability of employer-provided family insurance needs changing the “family
glitch”[14]). But the CARE plan seems to be a significant step backward from the ACA
in terms of proposals to cover low income people.

Republicans often complain about the transfer of wealth from rich to poor that is intrinsic
to the tax credits that make ACA insurance affordable. But health care costs in the U.S. are clearly too high for low income people to afford without substantial help. If one believes
that low income people should have health insurance, then it seems necessary for upper
middle class and wealthy people to help pay the cost. 

1. The Patient Choice, Affordability, Responsibility,
and Empowerment Act

2. U of M Center for Healthcare Research and Transform
ation: premium costs in Michigan for 2012
(report dated Sept. 2013)

3. Premiums and other insurance costs under the ACA can
be determined by using the “See plans before I apply” button on

4. Medicaid-to-Medicare Fee Index (Kaiser Family Foundation)

5. “Insuring America's Health: Principles and Recommendations”, report of the Institute of Medicine, Jan. 13, 2004. This is part of the National Academies, the top medical research people in the U.S.

6. The Patient Choice, Affordability, Responsibility, and Empowerment Act – Frequently Asked Questions

7. Commonwealth Fund National Scorecard on U.S. Health System Performance, 2011. chart 49

8. For example: Medical-Price Inflation Is at Slowest Pace in 50 Years (Wall Street Journal 9/17/13)

9. Health Care Costs, A Primer (Kaiser Family Foundation, May 2012)

10. “ObamaCare's Plans Are Worse”, Wall Street Journal
editorial (11/29/13)
The editorial claims that average costs for a pre-ACA individual policy
was $2280 per year. The authors argue that the ACA insurance costs much more, because it is too good (first class). But they don’t mention that average employer-provided insurance costs about $5500 per year (for the employer and employee shares of the
premium). (see ref. [2]). Why should the pre-ACA individual policy be so much cheaper? Either because
it is much lower in quality (has major coverage gaps) or, more likely, because it is only sold to healthy
people. The employer-provided insurance cannot discriminate between healthy and unhealthy employees;
it must cover the whole risk pool.


12. “The Lifetime Distribution of Health Care Costs”, Berhanu Alemayehu and Kenneth E Warner, Health
Serv Res. 2004 June; 39(3): 627–642.

Implications of Limited Age Rating Bands Under the Affordable Care Act

14. Consumer Reports – the “family glitch”

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