Policy Documents

Consumer Power Report #205

Greg Scandlen –
December 3, 2009

Hoo, boy. Every day brings more surprises. Reading the House bill I came across a peculiar provision I haven't seen mentioned anywhere. As part of Title II, Subtitle C, "Standards Guaranteeing Access to Essential Benefits" there is this:

"In establishing cost-sharing levels for basic, enhanced, and premium plans under this subsection, the Secretary shall, to the maximum extent possible, use only copayments and not coinsurance." (page 108)

For some reason the House of Representatives believes that co-payments are good and coinsurance is bad. It's not that one is more affordable than the other. All "cost-sharing" is limited to $5,000 per individual and $10,000 per family per year.

Most corporate HR people are trying to move away from co-payments in favor of coinsurance after many years of experiencing each. Coinsurance reveals to the consumer the underlying cost of the services consumed, while co-payments hide that knowledge.

And maybe that's the point. The legislation is already hiding the cost of the insurance coverage by providing income-based subsidies. What a consumer will pay for coverage has no relationship to the cost of the coverage. It is institutionalizing ignorance.

And now it seems that the cost-sharing within the insurance will bear no resemblance to the cost of the service. The "price" people pay will be just what we say it is, no more and no less.

If information is power, this is a deliberate effort to keep citizens powerless and enhance the power of the elite. Only the elite will know the real cost of anything and the citizenry will be dependent on their good will for the prices we pay.

-- Greg Scandlen



The CBO has released a letter to Sen. Evan Bayh estimating the effect on premiums of Harry Reid's legislation. This review has revealed yet more puzzlements to ponder.

CBO actually projects premium increases of 22 percent to 30 percent, which are reduced to increases of 10 percent to 13 percent because of other savings n the non-group market. And this is without any consideration of moral hazard, which CBO declines to project.

This 10 to 13 percent increase is net of a savings of 7 percent to 10 percent due to lower insurer cost in "delivering the coverage." It finds those savings in things like standardizing benefit design and prohibiting underwriting. It does not mention what is happening with agent/broker commissions. This is a key issue because the Senate bill requires states to allow employers with up to 100 employees to purchase coverage through the Exchange. I have not yet been able to find anything in the bill that says what happens to commissions when a buyer uses the Exchange. I must assume they disappear until I get other information. I hope the broker community is paying attention.

It also says there will be 7 percent to 10 percent lower per-person costs due to lots of healthy youngsters entering the insurance pool. CBO seems to think the mandate will be effective. This assumption is dubious since the penalty for noncompliance is a mere $750 and young people will not get much of a break on their premiums. The allowable spread for age is only two-to-one.

It offsets these premium increases with the subsidies available to some, but this is a pretty hollow calculation. Subsidies don't change the additional cost of the coverage. They only change who pays the additional cost.

In the large group market CBO is projecting zero to negative 3 percent effect on premium, but it says it excludes the effect of the excise tax, and I'm not sure what that means. It says 19 percent of all workers would be affected by this tax, but it expects most to avoid the tax by lowering their coverage and hence their premium.

This seems like an odd calculation. Of course we can reduce our premiums by lowering our coverage, but the costs those premiums were paying don't disappear. They are just switched from covered to OOP. Now, I am a big fan of raising OOP and reducing premium, but this 40 percent excise tax that only kicks in at $23,000 is a pretty crude way to do it.

CBO finds the "public option" would attract a higher-risk population than private plans, mostly because of a wider provider network and not doing much to manage benefits. It thinks that risk-adjusted premiums would do a poor job of balancing that selection problem. This raises a couple of things. First, it is interesting the CBO recognizes that plans can direct selection independently of underwriting, by tweaking internal practices. Second, I am curious about the reliance on risk-adjusting premiums. Last time I looked most people agreed there was no very good way to do this.

CBO supposes the "fee" on Rx companies would not be passed on to private plans since the fee is imposed only on drugs sold in government programs. How can this be? The government imposes a tax on the drugs it buys, and then pays the higher cost resulting from that fee? What is the point? More likely the fee is imposed and the government program does NOT pay the higher cost, resulting in higher costs to the private payers.

Overall, the CBO report raises many more questions than it answers. And if this thing becomes law, it is just the beginning. Implementing this monster will be impossible.

SOURCE: CBO on premiums


The Heritage Foundation has published a short paper by Dennis Smith and Ed Haislmaier suggesting that cash-strapped states might drop Medicaid entirely rather than having to endure new spending requirements and loss of control over their own programs. The authors write, "The health care legislation currently in Congress not only imposes new costs on states through expansion of the Medicaid program; it also preempts state authority in management of the program. Faced with becoming merely an agent of the federal government, states will likely take the rational and reasoned approach of simply ending the state-federal partnership known as Medicaid."

They estimate the states could save more than $1 trillion over a 10-year period by doing so.

This seems like a pretty shocking thought, but consider that almost every state is currently slashing spending on education, law enforcement, infrastructure maintenance, prisons, and virtually every other state function. Meanwhile, the federal government may provide extremely generous subsidies to low-income people who are not on Medicaid, as much as $20,000 for a family of four. But for a family on Medicaid, the state pays almost half of the costs of its coverage. So it is not unreasonable for a state to think about how much money it could save by dropping its program and letting those people sign up for the new 100 percent federal subsidy. Doing so would enable almost every state to avoid all those other cuts, balance its budget, and still pay for the long-term care portion of Medicaid.

Welcome to the Land of Unintended Consequences.

SOURCE: Heritage Foundation


The policy world is abuzz this week with talk of two new studies that find using electronic medical records does not save any money in hospitals.

The New York Times sums up the implications of one of the studies this way: "The nation is set to begin an ambitious program, backed by $19 billion in government incentives, to accelerate the adoption of computerized patient records in doctors' offices and hospitals, replacing ink and paper. There is wide agreement that the conversion will bring better care and lower costs, saving the American health care system up to $100 billion a year by some estimates. But a new study comparing 3,000 hospitals at various stages in the adoption of computerized health records has found little difference in the cost and quality of care."

The article goes on to say that the estimates of cost savings that drove the legislation were based on "an elite group of large, high-performing health providers that have spent years adapting their practices to the technology." But this experience does not translate well across the board. While the facilities with the most sophisticated records technology performed slightly better than those without, the differences were "really, really marginal," according to one of the study's authors. Plus, there apparently were no before and after comparisons, so it is possible that the hospitals with faster rates of adoption were already performing better.

SOURCE: New York Times

The other study was by our friends David Himmelstein and Steffie Woolhandler at the Harvard School of Public Health. Reuters reports, "New electronic record systems installed in thousands of U.S. hospitals have done little to rein in skyrocketing healthcare costs, Harvard University researchers said in a study released on Friday. A review of roughly 4,000 hospitals from 2003 to 2007 found that while many had moved away from the paper files that still dominate the U.S. healthcare system, administrative costs actually rose, even among the most high-tech institutions."

You get the drift. Of course the HimmelHandler team concludes that the answer to this, in fact the answer to everything, is a single-payer system. So they would replace one simple-minded panacea with another even more simple-minded.

SOURCE: Reuters; Health Leaders


While all this centrally planned chaos ensues, out in the real world health savings accounts keep growing and growing and growing. Robert Hopper wrote a fascinating article that uses the "diffusion of innovation" curve to plot the growth. He says, "when a new innovation enters the market, there are five stages of adoption: innovators (first 2.5 percent of the population), early adopters (13.5 percent), early majority (34 percent), late majority (34 percent) and laggards (the last 16 percent)." He writes that we already have passed the "innovator" and "early adopter" phases and in 2010 will enter the "early majority" stage of market adoption. He notes General Motors is putting all of its white collar employees in HSAs and BCBS of Florida will rely solely on HSAs for its own employees in 2010.

He adds that if Congress goes through with creating a public option, "premiums for these [public option] plans will be more expensive than plans from private insurance companies (according to CBO). Once people understand that these government plans will be expensive, and that HSA-based plans will be affordable, we will breeze through the early majority phase and into the late majority somewhere after 2013."

SOURCE: Producers Web

And John Torinus, chairman of Serigraph, Inc. in Wisconsin, notes in the Journal Sentinel that, "small businesses in Wisconsin are getting notices of premium increases that are the biggest in memory. Scott Fuller, a consultant with Associated Health Group, called it 'the worst year I have ever seen.'" He adds that current Congressional proposals will only make things worse, raising premiums by another 17% according to an actuarial analysis by BCBS of Wisconsin.

Torinus goes on to argue that, "Three platforms for real reform of costs and care in the private sector have demonstrated that costs not only can be contained, but also lowered. They are:

"Consumer responsibility. High-deductible plans with offsetting health accounts get people's heads in the game. With the right tools in consumers' hands, like price and quality transparency, costs drop 20% to 40%.

"Primacy of primary care. Put care in the hands of family doctors -- who stress prevention, wellness and chronic disease management as a matter of course -- and costs drop by as much as one-third. Holistic care at the primary level keeps people out of the hands of expensive specialists and hospitals except when necessary.

"Centers of value. Hospital corporations that practice lean disciplines are shown to reduce errors sharply and provide prices that are one-third lower than organizations that aren't lean. Smart payers steer their business to those value-based centers."

In his own business, Torinus has begun offering "concierge medicine" coupled with an HSA and a high-deductible health plan. The company pays the full annual fee for the concierge physician. He says, "David Kracht, an Associated Health Group consultant, calls it 'bikini coverage' that provides essential coverage at the bottom (primary care) and top (catastrophic). The skimpy in-between is where health savings accounts take over."

Torinus concludes, "Congress thinks top-down mandates. The private sector thinks innovation. The former seldom works in an affordable manner over the long term. The latter always works."

SOURCE: Journal Sentinel

Writing in Employee Benefit News Lydell Bridgeford says HSAs are "reigning over CDH plans." He cites recent research by Aon Consulting and the International Society of Certified Employee Benefit Specialists that found, "From 2006 to 2009, the number of employers providing HSAs jumped from 48% to 56%, while companies offering health reimbursement arrangements dropped from 43% to 35%. Overall, 56% of employers that implement a CDH plan use HSAs, 35% prefer HRAs and 9% use both models."

He goes on to cite Bill Sharon of Aon as saying, "Although only 17% of employers offer a total replacement CDH program, we expect that number to increase next year. In response to the economic downturn and double-digit health care cost increases, employers are becoming more aggressive in managing their health care costs. Implementing a total replacement CDH program is one of the leading health care strategies available to employers."

SOURCE: Employee Benefit News