An Overview and Thoughts on Healthcare Reform John Garen Gatton Endowed Professor of Economics University of Kentucky March 2013

Main Points of Discussion 1.The motivation for reform. 2.Contrasting visions for reform. 3.An overview of the fiscal impact of PPACA. 4.Some basic regulatory rules of PPACA. 5.Discussion of aspects of the healthcare reform law under contrasting visions. 6.Alternative reform approaches. 7.Where do things stand now?

Some Well-Known Issues Large number of uninsured; some with low incomes and serious health conditions. Estimates: 15-17%; million Growth in healthcare costs: premium increases, growth in spending. Share of GDP. 13.8% in 2000; 17.9% in Funding crisis in government-operated health plans. Medicare and Medicaid are now about 23% of federal budget, up from about 18% in More baby boomers coming.

One Vision For Reform Health care as a “quasi-right;” all are entitled. Supported heavily by tax dollars; any premiums are relatively uniform; not risk adjusted. Cost control from central authorities to adopt “best practices,” e.g., evidence-based medicine, accountable care organizations, electronic records.

An Alternative Vision Embrace of market-driven reforms combined with a safety net. Individual-based insurance; elimination of tax preference for employer-provided. Competition among insurers and providers; consumerism among patients, customers. Anticipated innovations: high deductibles, healthy lifestyle premiums, casualty-style “health status” insurance. Safety net. Premium assistance for low-income, poor health.

Overall Summary - Budgetary Sources for this and two following tables: Billion $ CBO, (March 2010) CBO, (July 2012) 10-Year Spending Projection $1,088$1, Year Projection on Deficit Reduction $143$109

Spending Billion $ CBO, (March 2010) CBO, (July 2012) Exchanges: start up, subsidies$358$798 Exchange premium credits$107$222 Small employer tax credits$ 37$20 Medicaid/SCHIP expansions$434$643 Other$30--

Spending Reductions; Tax Increases Billion $ CBO, (March 2010) CBO, (July 2012) Reductions in planned Medicare FFS updates $196$415 Reduction in Medicare Advantage Rates$136$156 Lower Medicare/Medicaid Hospital payments $ 36$56 Other Medicare/Medicaid reductions$ 87$114 Community Living Asst. (CLASS) net chg.$ 40$14 Subtotal$495$755 Employer and Uninsured penalties$ 65$161 Excise tax on high-premium plans$ 32$111 Fees on certain drug and device mfgs.$107$165 Additional Hospital Insurance Tax$210$318 Other taxes (incl. “payroll” tax on some interest/dividend income) $149$303 Subtotal$563$1,058

Some Initial Observations Note greater spending 10-year projection from 2012 than from Rising projections already. Can costs be contained? Adds to the entitlement spending of Medicaid. Medicare reductions. Are they feasible? Approximately $75 billion per year over 10 years spending: $480 billion. $75 billion out of $480 billion = 15.6% Method of reduction. Cuts in reimbursements; price controls. Reduced incentive to serve Medicare patients.

Fundamental Tenets of PPACA Stresses the importance of increased coverage with standardized policies and premiums. Guaranteed issue with prohibition on exclusion for pre-existing conditions. Community rating on premiums (with age, tobacco use differences allowed). Mandatory coverage. Designers of PPACA understand that these three operate together. Everyone is in the insurance pool; contributions and coverage are relatively equal. Similar to a government program.

In Practice: Aspects of PPACA health insurance exchanges where individuals can purchase insurance. coverage is mandated subsidies are available to buy insurance pricing of insurance is controlled; certain levels of coverage are required employer mandates on types of plans offered. employer penalties for no insurance plan. cost control initiatives: ACOs, IPAB.

The Conflict of Visions For PPACA approach to make sense, it must be that there are minimal incentive effects of health insurance and healthcare costs on behavior. I.e., health status is essentially fixed and is not altered by behavioral incentives. Similarly, it is important that incentive effects on providers and insurers are small. Also, the plans and practices (e.g., cost control) must be such that they are suited to the populace.

The Conflict of Visions -- cont’d. If behavior/incentives are important then problems emerge. Consider this regarding some major health issues: heart disease, cancer, stroke, respiratory diseases, diabetes, obesity, smoking, exercise. Similar comments apply to provider and insurer incentives. How important are knowledge, preferences, and treatments which are specific to the individual patient?

The Exchanges: Community Rating, Guaranteed Issue, and Incentive Issues Those in poorer health pay less; the healthier pay more. An implicit tax and spending plan. Insurance companies make money from the healthy and not from those in poor health. Who will be sought as customers and be well-served? Uniform pricing of insurance regardless of risk works against providing incentives for healthy behaviors. No scope for lower premiums as an incentive for healthy behavior. Bad health habits are, in effect, rewarded

Effects of Minimum Loss Ratio Rule Minimum required percent of claims payouts to premiums. High deductible plans have lower premiums but not proportionately lower administrative costs. Will virtually eliminate “consumer-directed” plans with high-deductibles and catastrophic coverage. These are viewed by some as an important path to efficiency in health care provision. Consumers pay everyday, anticipated expenses out of pockets. Insurance is reserved for significant medical expenses.

The Individual Mandate – Limiting Choices, Poorly Targeted Minimum loss ratio rule limits availability of high- deductible plans. “Minimum essential coverage” rules required coverage for such items as mental health and substance abuse treatments, wellness services, dental and vision care for children, birth control, and a number of other items. Subsidies to purchase phases out at 400 percent of the poverty level. For a family of four, this is approximately $88,000.

The Employer Mandate The 50 employee limit. Penalties for not offering a qualified plan. For many workers, the penalty is small relative to the subsidy that the worker can obtain. Drop coverage and “pay” the worker for the subsidized coverage. More people on the subsidized exchange. More people on Medicaid.

An Uncomfortable Spiral? More use of the subsidized exchange, Medicaid Growth in Medicare Increased budgetary pressure. The public’s limit on taxation is reached. “Cost containment” becomes more onerous, e.g, rationing.

An Uncomfortable Spiral? – cont’d. Independent Payment Advisory Board-type outcomes more likely? Witness the Massachusetts experience with cost containment.

The “Incentives Matter” Approach Paints an Unfavorable Picture... And Points to Alternative Reforms Policies to move to: individual-based health insurance consumer choice competition (in insurance and healthcare provision)

Policy Alternatives – cont’d. Remove the tax preference for employer- provided insurance. Enable interstate competition for insurance. Remove mandates (state and federal) on insurance policies. Examine and remove unwarranted impediments to provider competition, e.g., onerous scope-of-practice laws, certificate of need laws.

This View Anticipates... Competition lowers prices and increases availability and quality. Reduces the need for a public program. Indiv. policies: no loss of insurance with job loss, retirement; choices of plan, providers, treatments Types of insurance options likely to emerge: - high deductible, consumer-directed plans - guaranteed renewable and casualty-style plans – no future “pre-existing conditions” problem; - Safeway-style plans. Premiums based on individual health habits; tobacco use, weight, blood pressure, and cholesterol For those in true need – poverty, very poor health, “legacy” health conditions – provide voucher-style assistance to purchase insurance.

Where Do Things Now Stand with PPACA? Passed the Constitutionality test... though in an odd way. The president was reelected. But...

... continuing issues State or federal operation of health insurance exchanges. Will states establish them? If not, are state residents eligible for subsidies; state employers required to pay penalties? Will states expand Medicaid? The Medicaid program has problems, e.g., under-reimbursement. Will states take the federal support or coalesce to oppose what a number think is bad policy? What will happen to private premiums? Insurers will likely have to cross-subsidize the exchanges via higher rates elsewhere.