One step closer?

Below is another posting by guest blogger on healthcare.

As promised, Max Baucus (D-Montana), chairman of the Senate Finance Committee, has released a draft bill today called America’s Healthy Future Act(http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20Americas_Healthy_Future_Act.pdf). The bipartisan support he has been promising for months, however, has not yet materialized. No Republicans have endorsed the bill and many Democrats are also criticizing the bill.

I have been reviewing the draft bill tonight and have highlighted major provisions below. I also refer you to the Congressional Budget Office (CBO) analysis for a more thorough overview of the major tenets and their budget impact (http://www.cbo.gov/ftpdocs/105xx/doc10572/09-16-Proposal_SFC_Chairman.pdf).

As I have repeatedly said, the devil is in the details and unfortunately, the details are looking devilish. The bill can be divided into three major categories: regulating health insurance, expanding coverage and reducing cost/paying for the expanded coverage.

Regulating health insurance
According to the draft bill, insurance companies cannot deny coverage based on pre-existing conditions. Premiums can be adjusted upwards based on smoking/tobacco use, geographic location, family size and age. No other demographic or health factors can be used to set health insurance premiums. Mr. Baucus’ draft allows for large variation in premiums based on age (up to 500% increase with increasing age). The age adjustment provision is likely to be unpopular, especially among baby boomers!

Expanding coverage
Overall the CBO estimates Baucus’ plan will increase health insurance coverage from 83% to 94% of the legal non-elderly population. Notably 25 million people will remain uninsured; up to 1/3 of the remaining uninsured will be undocumented residents. The Baucus plan explicitly excludes undocumented residents from any of the provisions of the bill. For comparison, the Democratic House bills are expected to reduce the uninsured to 17 billion people.

Medicaid
Baucus calls for expanding Medicaid to all individuals making less than 133% of poverty ($14,500 per person or $29,000 per family of four). This will account for 37% ($287 billion/$774 billion over 10 years) of the cost of Baucus’ bill and is projected to decrease the uninsured by 11 million. Notably in addition to the $287 billion cost to the federal government, expanding Medicaid will also increase costs to the states due to matching requirements. This cost to the states is projected to be ~$40 billion dollars over 10 years. This is the provision that will cover the neediest of America’s working poor and is also included in the other Democratic House and Senate bills.

Personal mandate
The bill includes a personal mandate to carry health insurance. A fine of $750-$900 per person per year will be charged to individuals not carrying health insurance. An economic hardship exemption is included for those who cannot find health insurance for less than 10-13% of their income.

Health insurance exchanges and subsidies
The bill establishes state-based online health insurance exchanges, Travelocity-like sites, where people can compare and purchase health insurance. The exchanges are meant to create competition and increase transparency. It is in the exchanges that a government or public health insurance plan might compete. The Baucus bill, however, does not include a public option. Instead it creates seed funding for the establishment of regional non-profit co-op insurance plans to serve as competitors to private for-profit insurance companies. The CBO and others do not believe these co-ops will have enough market share to actually decrease cost significantly.

In the bill individuals/families with access to an employer-sponsored health insurance plan will not be able to purchase insurance through the exchanges. Those who are 1. eligible to use an exchange and 2. whose incomes are less than 400% of poverty ($43,000 per person or $88,000 per family of four) will be eligible for government subsidies to offset insurance premium costs on an exchange. The subsidies will be set so that the cost of insurance premiums range from 3% to 13% of an individual’s/family’s income. These subsidies account for the largest portion (60%, ($463 billion /$774 billion) of the bill’s cost.

Employer mandate
The Baucus bill does not include an employer mandate. Instead, if an employer’s employees use the subsidies on an exchange, that employer can be charged a “free rider” fee, capped at $400 per employee per year (this fee will be indexed to the subsidy cost). Remember, however, the average individual health insurance plan in the US costs nearly $5,000 per year. It seems $400 would be a small price to pay in exchange for not offering a $5,000 health insurance plan!

Additionally, small businesses with less than 25 employees will be eligible for tax credits up to 50% of the cost of contributions to employee health insurance premiums. This tax credit, however, will only be available for two years per business.

Reducing cost/paying for expanded coverage
Paying for the program has been Mr. Baucus’ major focus, with the hope of getting Republicans on board with a less costly bill. According to the CBO analysis, Mr. Baucus’ bill will not add to the deficit over the next 10 years.

The CBO estimates the cost of the Baucus bill at $774 billion over 10 years (compared to ~$1 trillion over 10 years for the more liberal Democratic House and Senate HELP bills). I think this is a rather optimistic estimate for the Baucus bill. Below are the ways the Baucus bill plans to pay for the costs.

Fines
Personal fines for not carrying coverage are expected to raise $20 billion over 10 years. Similarly employer “free rider” fines are expected to raise another $20-30 billion over 10 years. This accounts for 6% of the total cost of the bill.

Health insurance tax
A large share of revenue will come from an excise tax on “high-cost” health insurance plans. Earlier in the year, Mr. Baucus had been in favor of taxing all employer-based health insurance plans. When that became politically untenable, he developed an alternative plan, taxing insurance companies directly on “high-cost” health insurance plans.

Currently the “high-cost” plans are defined as >$8,000 per individual plan or >$21,000 per family plan. A 35% tax is proposed. Notably the “high-cost” plans are indexed to general inflation, not healthcare inflation. Healthcare inflation has often outpaced general inflation by 300%. This means that with each passing year the 35% tax will encroach onto relatively lower cost plans.

The goal of the tax is to pressure insurance companies into lowering costs while raising revenue. I believe it will just result in cost transfer to all insurance consumers. Further, because it is not a direct tax, it distorts normal consumer behavior in the insurance market. This excise tax will account for a large revenue source, $215 billion over ten years or 28% of the projected costs.

Fees on industry
Fees on the pharmaceutical, medical device manufacturing, health insurance and clinical laboratory industries will raise $130 billion dollars over 10 years. Without strict regulation and competition (not included in this bill), these costs will be passed directly onto the consumers, increasing healthcare costs overall.

Reimbursement changes
Finally, savings in Medicare and Medicaid are slated to save $409 billion over 10 years or 53% of the proposed costs. These savings are to come from capping home health and rehabilitation reimbursement, limiting overpayments to Medicare Advantage plans (private insurance administered Medicare plans that cost 14% more on average than government administered Medicare plans) and reducing imaging and physician reimbursement. In fact, these proposed savings are dependent on a 25% physician reimbursement cut in 2011. Capping this spending is highly unlikely…
While it is a success to finally have a draft bill out of the Senate Finance Committee, I find this bill highly disappointing. It seems to satisfy no one. The bill’s shortcomings are that inadequate industry regulation, lack of significant insurance competition and unrealistic financing. If passed, this bill will be a boon for insurance companies, serving them up an expanded market, subsidized by the government. At the same time, minimal fees on employers may incentivize dropping employer-sponsored insurance.

To adequately control cost, we either have to regulate insurance profits or introduce a large non-profit competitor that will have enough market share to actively negotiate cost. This cost negotiation, however, has to be realistic (not dependent on a 25% across the board cuts on physician reimbursement in one year).

Amendments and discussion on the bill are set for next week. Stay tuned.