CBO Says House Bill Will Cost Under $900b, and Decrease Uninsured by 2/3

The Congressional Budget Office  has already weighed in on the impact of the House health care reform bill (HR 3962).  The CBO is a fast reader – the bill is 1990 pages.

The CBO concludes that the bill will come in at a whisker under the magic $900 billion over 10 years, and will result in a decrease of 2/3 in the number of uninsured adults in the US.  It includes a public option, which the CBO estimates would attract 9 million enrollees by 2019.

New spending:
Medicaid and SCHIP: $425 billion
Subsidies for poor to buy insurance: $605 billion
Primary care increases: $57 billion
Public health initiatives $34 billion

Offsetting savings:
Provider (nonphysician) fee cuts: $229 billion
Medicare Advantage cuts: $170 billion

New revenue
Individual penalties:  $33 billion
Employer penalties: $135 billion

Not considered:
Cost of reversing the dreaded physician’s SGR Sustainable Growth Revenue, which threatens to reduce physician payment by Medicare by 21% on January 1. The cost of reversing this would be $245 billion over 10 years.  

Can the Public Option Raise Costs?

The public option is reborn, with Harry Reid promising a public option in the Senate health care reform bill, and Nancy Pelosi committed to a public option in the House bill.  Progressives are jubilant – they feel that a government plan is an important counter to the influence of private, largely for-profit, health insurance plans.  They note how well Medicare runs, and say (correctly in my belief) that Medicare helps contain medical care unit price. Conservatives are aghast --  the government is already doing more than enough to disturb the free market, thank you very much.

What does a public option mean for health care costs?

It depends on the public option.

The Congressional Budget Office suggested that a public option would substantially lower costs.  There’s a big “if", though.  The public plan would lower costs not through administrative savings, but rather through deeper discounts by enforcing the Medicare fee schedule (or Medicare + 5%).   Here’s a link to a good diagram from the Blue Cross Blue Shield Foundation showing that currently  Medicare is a net deficit payer for hospitals, which “make it up” by extracting higher payment from commercial health plans.  If a substantial number of employed people were on a plan with Medicare or near-Medicare rates, either the extra costs passed on to remaining private insurers would escalate dramatically, or prices would come down.  And medical prices are higher in the US than in any other country

What if a public option had to play on a “level playing field?”  The level-playing-field public option would have

  • Higher costs for delivering care
  • A platoon of network contracting specialists across the country negotiating contracts
  • Difficulty convincing hospitals and physicians in rural areas to accept its preferred fee schedule
  • A much less complete network
  • A much larger challenge in marketing itself, which would lead to higher advertising and customer relations  costs

In some markets, the public option without leverage of enforcing Medicare-like prices or tying participation to Medicare eligibility might even raise unit prices.   This could happen because the new hobbled public option might actually fragment the insurer market further, in the context of a consolidated provider community.  Each of the insurers in this scenario has less leverage to demand price concessions, which could lead to prices for all insurers going up.

It would be ironic if the public option actually increased unit costs.

Background: A post in June about public option http://managinghealthcarecosts.blogspot.com/2009/06/public-plan-some-perspectives.html

Addendum: Nancy Pelosi has announced that the public option in the House bill will include a requirement to negotiate rates with providers. 

Are Health Plan Profits Obscene?

Nancy Pelosi says that health insurance company profits are “obscene.” An article in yesterday’s Washington Post (and elsewhere) lnotes that health plans are the 35th most profitable of  53 different categories of industry. 
Who’s right?

Total insurance company profits are serious money – and the big for-profit national health plans have substantial market capitalization (although the market thinks these five health plans are worth a bit less than half of what the market thought in December, 2007).

Mkt Cap
From 12/07
Down 59%
Down 55%
Down 48%
Down 51%
Down 49%


On the other hand, as the Washington Post notes, United made just barely more as a share of revenue than Jack in the Box!

Health insurers have two main businesses.  Some of their customers (employers) pay a premium, and the health plan pays about 85% of that premium out in fees to health care providers.  Other customers are “self insured.”  They don’t prepay for health care for their employees; rather, they pay an administrative fee to health plans, and the health plan pays claims on the employer’s behalf. 

The fully insured business is shrinking rapidly, and the self insured business is growing dramatically.  This is because federal regulations (ERISA – the Employee Retirement and Income Security Act) treats self-insured employers as their own health plan, as they are thus exempted from any state regulation.  Self-insured employers can put limits on coverage that would be prohibited by state regulators would not accept, and can arrange a specialized plan they judge more appropriate for their own employees.

For the fully insured business, the 3-5% return on revenues might be viewed as “obscene,” since 85% of these revenues are just “pass through.”  If all of an insurer’s business was insured, you might want to look at the return on the 15% of revenues that are dedicated to the running of the company, so a 3% return on gross revenues would be an effective 20% return on earned revenue.  For self-insured business, though, where the insurer is not taking in pass-through dollars, it’s not unreasonable for investors to expect a 3-5% or more return.  Remember, we even need nonprofit health insurers to have some profit to build up reserves to tide them over in the event of adverse experience - like for instance a severe swine flu epidemic.

Once again, a note about the fact that Medicare is able to do its administration with only 3% of premium – compared to 12-15% for other health plans. As you can see, profit doesn’t make up the delta. The largest portion of this difference is that Medicare premiums tend to be about $1000 per member per month, and premiums for younger enrollees in employer-based health plans are about a third of this.   Medicare does pay more claims per beneficiary – but comparing just percentages of premium for administrative costs is like comparing apples to skateboards.   

Screening, Uncertainty, and Health Care Costs

The other day, a clinician running a worksite health program told me how proud he was that his clinic had discovered three cases of prostate cancer over the last year.   Employers are increasingly providing incentives and even requirements that their employees undergo biometric screening, and in some instances this screening includes a prostate specific antigen (PSA) test.   It’s intuitive that screening to find prostate cancer early should save lives and should also save dollars, since early treatment must surely be less expensive than treatment of metastatic disease.

In fact, the weight of evidence appears suggests that PSA screening either saves no lives (large randomized American study), or saves a very small number of lives (large randomized European study ). The cost of PSA screening and the cascade of medical care exacts a high financial toll – and also a high toll in terms of medical complications for those found to have prostate cancer.  The slightly positive European study suggested that for every life saved 49 men would have to be treated; prostate surgery and radiation therapy very frequently lead to incontinence and erectile dysfunction.  A nonrandomized observational study comparing Medicare beneficiaries in Seattle (high rate of prostatectomy) and Connecticut  (low rate) for 15 years (1987-2001) showed higher prostate cancer mortality rate in Seattle.

This week’s JAMA   (Harvard Link)has a thoughtful review of the efficacy of both prostate cancer screening (PSA blood test), and breast cancer screening (mammography.)  Both are less effective at decreasing mortality than screening for cervical or colon cancer.  Gina Kolata reviews this in the New York Times on October 22. 

We Americans eschew uncertainty, and on my fiftieth birthday, a PSA test would reduce my uncertainty – and give me some directional information about whether or not I had prostate cancer).  However, doing this test increases overall cost without demonstrable increase in quality. Thus, performing this test actually destroys value.  We will have to give up value-destroying tests that happen to decrease uncertainty just a bit to control health care costs.

Here is the US Preventive Services Task Force report on PSA screening.  Conclusion: "Current evidence is insufficient to assess the balance of benefits and harms of screening for prostate cancer in men younger than age 75 years...Given the uncertainties and controversy surrounding prostate cancer screening in men younger than age 75 years, a clinician should not order the PSA test without first discussing with the patient the potential but uncertain benefits and the known harms of prostate cancer screening and treatment. Men should be informed of the gaps in the evidence and should be assisted in considering their personal preferences before deciding whether to be tested."

Five Months Later, a Report on the AdvaMed Six

It’s been a bit over five months since Advamed, the trade association of medical device companies, convened the health insurance lobby (America’s Health Insurance Plans, AHIP), the hospital lobby (American Hospital Association, AHA), physicians (American Medical Association, AMA), the pharmaceutical industry (Pharmaceutical Research and Manufacturers Association, PhARMA), and labor (Service Employees International Union, SEIU).  These combined groups promised to help shave $2 trillion off our health care bills over the  next ten years.  

Let’s examine the current state of the Advamed constituents, and where they stand on health care reform.   I’ll also examine the implications of this for cost savings as part of the forthcoming health care reform package.

The medical device company is lobbying furiously against proposals that would levy $40 billion in taxes on its products over the next ten years.   CEOs and spokesmen from medical device companies have bemoaned the potential loss of innovation, and congressional delegations from Minnesota (Medtronics)  and Indiana (three large orthopedic implant manufacturers)  and New Jersey  have already signaled their opposition to this tax.   The tax might not be a good idea – it doesn’t really “save” money, unless it would result in lower utilization.  It also looks like a political loser, with Al Franken and Tim Pawlenty both opposing it.

American Hospital Association
The AHA has been generally quiet, but the Senate Finance Committee (Baucus) bill has some terrible news for hospitals.  Hospitals had agreed to “give back” dozens of billions of dollars in potential future spending growth in exchange for assurances that there would be few uninsured for them to subsidize in the future.  The Baucus bill leaves 25 million without insurance.  This happened in Massachusetts, and the result is that “safety net” hospitals are in real financial trouble.  I’d expect volleys of opposition from the for profit and nonprofit hospital sectors if there are not more subsidies to increase the percentage of Americans with coverage.

American Medical Association
The AMA has a single dog in this hunt – to abolish the “sustainable growth revenue” targets that force Congress each year to roll back potential cuts in the physician fee schedule.  For instance, physician Medicare payments would be cut by 21% in January, 2010 if the SGR target was not overturned.  Two of the House bills do abolish the SGR, but they don’t have a clear source of funding.  The Senate bill does not.   The AMA has asked its physicians to “call their representatives.”

The health insurance lobby released what it believed would be a damning Price Waterhouse Cooper report on the potential for health care reform to raise insurance costs substantially on the eve of the Senate Finance Committee vote.  The report raises some legitimate, serious concerns,; in my mind the most serious is that lower penalties might hobble the individual mandate, and we might end up with more uninsured and more adverse selection.  However, PWC did not evaluate some of the bill’s provisions that could cut premium costs – such as increased government subsidies and an “exchange” to allow individuals to purchase insurance as part of a larger group.  

AHIP is now in the administration’s cross-hairs, and Obama railed against it in his Saturday radio/web address.    The health insurance industry made “nice” early on in this process, but serious health insurance industry opposition to health care reform has just begun.  Harry and Louise, however, have already been enlisted to support health care reform.

PhARMA came to the table early with its $80 billion in foregone future increases, and it looks like the administration is not pushing hard for deeper cuts.  PhARMA continues to support health care reform.

The labor movement wants to be sure that its negotiated “Cadillac” health plans are not subject to an excise tax – and the Baucus bill dutifully met this need.   Labor continues to support health care reform, and is pressuring Democrats to include a public option in the final bill. Health care reform, and an effective government option,  would clearly decreaes health care employment growth. This is another paradox – we have to cut the cost of health care, and this might decrease job creation in… health care.   It reminds me of that Council of Economic Advisors report suggesting that “health care is forecasted to remain a large source of job growth in the labor market” 

So, where are the Advamed Six?   Besides for PhARMA, none appear to be clearly “on board.”   Or you might say that they are all still on board, as long as their individual preferences are added to the bill.  Where is the $2 billion?   The $2 billion was never clearly spelled out, and seems more likely it will be extracted through Congressional action rather than offered up by these diverse interest groups.

Would a billboard sway your surgery?

We all know that a rush to embrace new technology is part of the reason why health care costs continue to increase.  We also know that new technology is not always better than the ‘tried and true.’

This week’s JAMA  has an article reviewing complications from prostate surgery, the newfangled often ‘robotic’ minimally invasive surgery, as well as the terrifyingly-  named “radical” prostatectomy.   I mean, who would want to have radical surgery if there was a less-invasive alternative.  Further, I pass a billboard on the Mass Pike every day on my way to work proclaiming the benefits of robotic prostate surgery.  Minimally invasive robotic surgery was under 1% of prostatectomies in 2001, and over 40% in 2006.   Harvard Link

It turns out that the minimally invasive surgery is better (in some ways)– patients spend less time in the hospital, get fewer transfusions, and have fewer postoperative pneumonias.  However, the rate of incontinence and erectile dysfunction (ED) is statistically significantly higher.  This is not a perfect study – the authors used medical claims to ascertain incontinence and erectile dysfunction. In fact, actual rates of complications are dramatically higher if an investigator asks patients directly, rather than relying on physicians to code ED or incontinence for billing purposes.

So – the billboard on the Mass Pike is not the source of truth about advances in surgical therapy.

On another note about medical marketing, NPR had a good piece on direct-to-patient advertising by the pharmaceutical industry.   Most of us have forgotten Seldane, a withdrawn non-sedating antihistamine that skyrocketed from sales of under $40 million to sales of over $800 million - and this was before the manufacturer could even use the name of the prescription medication on TV!

It’s been a good day of reminders that direct-to-patient advertising generally indicates high margin – as opposed to high value.

This American Life: The Health Care System Delivers What it is Designed to Deliver

Public radio's "This American Life" spent an hour this weekend explaining underlying motivations that drive the health care system (and its costs).  The show includes a dining room conversation with John Wennberg, who pioneered small area variation analysis and whose institute at Dartmouth has shown that areas with higher costs have lower quality.  There are also post-malpractice reflections of a resident who offered informed consent rather than simply ordering a PSA, a screening test for prostate cancer, and an emergency department physician's frustration at pushy parents' demanding inappropriate and potentially dangerous tests.  The show discusses the BCBS California- Sutter showdown -- showing that insurance plans often have less leverage than on might think.   A former insurance company executive who was denied his request to move closer to home for rehab after a severe head injury concludes that this was the "right thing to do," but notes how different this is viewing it from the patient perspective and the health plan perspective.  

The show is available for download or listening at this link.  Next week's TAL is about moral hazard -  how insurance coverage by "other people's money" increases cost.

Malpractice Reform and Health Care Costs

Some weeks, I feel like this should be the Congressional Budget Office blog. The CBO is playing a major role in analyzing health care reform, and it published estimates of health care cost savings from malpractice reform on Friday. 

CBO estimates that malpractice premiums represent about 2% of all health care expenditures, and projects that malpractice reform (combination of caps for noneconomic damages, statue of limitations, offsetting awards with other coverage, attributing penalties fairly) could cut this expense by 10%. Thus, malpractice reform could be worth a recurrent savings of 0.2% of annual health care expenditures. (A small percentage of $2 trillion is $4 billion – nothing to sneeze at.

Further, the CBO estimates that a decrease in defensive medicine might additionally reduce medical spending by 0.5%.  Again, the fraction is small –but this is $10 billion.

The CBO’s simulation also demonstrates increased tax revenues as some commercial premium reductions are transferred to (taxable) earnings. Thus, malpractice reform decreases the deficit two ways –by decreasing Medicare and Medicaid spending and by increasing tax revenue.

The published evidence historically has been equivocal about the cost impact of malpractice litigation.  Physicians, predictably, suggest that the secondary costs are huge.  Lawyers, predictably, suggest that the threat of malpractice litigation helps insure quality; some have estimated that malpractice reform could increase national mortality!   Other researchers disagree.

True health care reform will require many significant concessions from providers – who are most aggrieved by current malpractice rules. Given the CBO conclusion that malpractice reform could save as much as $14 billion in health care costs annually, adding federal malpractice reform to health care reform looks attractive.

The Baucus Bill: Where's The Money?

The Congressional Budget Office  says that the Baucus plan, as newly marked up, will cost under $900 billion over 10 years, insure an additional 29 million Americans. Of the 25 million Americans who would remain uninsured, 1/3 are illegal immigrants.  The bill as written (and interpreted) would also decrease the federal deficit by $83 billion.

Sounds like a trifecta.  But if more people are covered, the health care system is not transformed, and the deficit goes down, someone is paying more!


Here’s how this works out (all figures over 10 years – cost in parentheses)

Net Costs
Net Savings
Tax Increase
Medicaid CHIP

Subsidies for Low Income

Tax Credit for Small Employers

Tax on High Cost Plan

Penalties on Uninsured

Penalties on Employers

Other tax effects

Fee For Service Reductions


Medicare Advantage reductions


Reduce safety net payments


Other direct spending cuts


Medicare Commission


Other savings


Impact on Deficit


I want to focus on a few elements of this bill that are likely to cause implementation trouble.

* Tax on high cost plans: Sentiment is already building against this, and some “Cadillac plans” negotiated by labor have been removed.  The tax on high cost plans is likely to lower the number of Americans offered such plans (the CBO has considered this).  High cost plans are geographically situated in states with large Democratic majorities (Massachusetts, New York, California), and congressional representatives from these states probably will be heard from further.

* Penalties on uninsured and business: Massachusetts’ experience is that the amounts collected were far smaller than expected (and recent evidence suggests that compliance is lower than was first reported).  It looks like the CBO has discounted these receipts already

* Fee for service reductions: Note that there are not physician office visit reductions here (which is good, given the AMA’s recent success at overturning the “sustainable growth revenue” cuts each year.  Of course, those whose fees are to be cut will be advocating caution, raising the specter of access trouble and plunging quality

* Medicare Advantage cuts:  Health plans will oppose these cuts, and will be maneuvering behind the scenes to remove them.  I’m fearful that cuts here might force some of the better-integrated groups taking Medicare Advantage plan capitation to dismantle some of their care management infrastructure even as we start “medical home” models to encourage provider-based care management.

* Disproportionate Share cuts: These are payments to safety net hospitals to care for the uninsured.   It makes sense that these payments can go down as more of the population is insured.  However, the Massachusetts experience is that the cost of caring for the uninsured has not diminished as rapidly as this subsidy, and our major safety net hospitals (Boston Medical Center and Cambridge Health Alliance) are in serious financial distress.

I note there is little delivery system transformation in this bill. The headline on Ezra Klein’s column in the Washington Post tells the story “Meet the New Health-Care System, Not That Different From the Old Health-Care System.”   This might be the health care reform that is possible today.  We will need much more in the way of savings to make this sustainable.   

Those Who Lacked Insurance Are More Expensive When They Qualify For Medicare

Annals of Internal Medicine reports in the December 1 issue (now on the web) those with prolonged periods of uninsurance in late middle age have substantially higher Medicare costs when they become eligible for Medicare at age 65.    The researchers interviewed individuals in the early 1990s, and tracked most of them down after they turned 65 and ascertained insurance coverage history. They then procured and analyzed Medicare claims for each study subject.

The uninsured were, predictable, different than those with continuous insurance even at the start of the observation period. They were less white, had lower educational levels, had lower incomes and were more likely unemployed. They were less likely to be married, had more functional impairments, were more likely active smokers, and were more likely diabetics.   When this group turned 65, those with previous periods of uninsurance had more hospitalizations than those with continuous insurance, especially for cardiac disease and diabetes and joint replacement.

The authors calculate that while providing insurance for such enrollees would be expensive (almost $200 billion for four years that they were uninsured on average), the savings in Medicare from having these people insured prior to turning 65 might fund half of this cost. 

That’s optimistic. In fact, the group lacking insurance had such fundamental differences from the insured group at the outset that merely giving them insurance wouldn’t likely make their future medical costs equivalent.

Still, the authors demonstrate that the needs of those with periods of continuous uninsurance are real and large.  Those lacking insurance didn’t get treatment for their diabetes – and thus had more hospitalizations after they finally became eligible for insurance. The uninsured lived with the pain of “bone on bone” joints, and suffered unnecessary disability.

I am skeptical of the authors' conclusion that we could fund half of the cost of insuring these patients  from future Medicare savings.  I’m certain that the personal and societal cost of this delayed care is a substantial moral issue, and one of the reasons we miss many opportunities to deliver optimal care to Americans.

MA Hospitals in a Huff about Bundled Payments

Hospitals are incensed at plans in Massachusetts to move from a fee for service payment system to a bundled payment system according to today’s Boston Globe.   Paul Levy of Beth Israel Deaconess worries that such a move will lock in the high reimbursement of Partners HealthCare (Mass General and Brigham and Womens Hospitals and others);  Ellen Zane of Tufts Medical Center worries that such a change could “kill the industry.”

Should the hospitals be worried?
And if they are worried, is that good?

The goal of moving from fee for service to bundled payments is to provide incentives for better coordinated, less fragmented, and less resource-intensive care. See my previous post about the importance of this transition.  Part One Part Two  Part Three   To the extent that hospitals today benefit financially from more fragmented and resource-intensive care, this move is a real threat.   Adapting Massachusetts hospitals for capitation (or one of its cousins) will take some work – but there are opportunities for hospitals to improve quality and reduce costs.

* Massachusetts consistently ranks in the bottom half of US states for preventable hospitalizations. 
* America’s Health Rankings ranks Massachusetts #29
Commonwealth Fund  ranks Massachusetts #35 for preventable hospitalizations – noting
- 19.8% Medicare readmission rate (#41)
- 29% of those getting home services with an admission during the year (#48)
- The highest Medicare Part A+ Part B  reimbursements per enrollee of any state (#50).
(In fairness, I’m being selective here; Massachusetts’ asthma rate of hospitalization is in the best quartile, and we’re in the top sixth of states for low nursing home admission rate)

Truth is, the problem in Massachusetts is not hospitalizations –  the ambulatory charges rendered by hospitals for outpatient services have been rising at a rapid rate, while hospital inpatient costs have not risen much at all.  We have 2.6 hospital beds per thousand in Massachusetts, compared to a national average of 2.7. .  On the other hand, we have 494 emergency department visits per thousand, compared to a national average of 401. This is despite the fact that we have the largest number of primary care physicians per thousand.

Ellen Zane is right, though; it won’t be easy to transition from fee for service to bundled payment.  Hospitals are already receiving bundled payments (DRGs, otherwise known as diagnostic related groups) for inpatient care.  Implementation of this payment methodology in the early 1980s led to substantially shorter hospitalizations and dramatic innovation in care delivery.  Bundling payments on the ambulatory side can do the same thing if this is implemented carefully and deliberately.

I’m reprinting my suggestions from March about steps we can take to make it more likely that a transition from fee for service will be successful. The entire post is here.http://managinghealthcarecosts.blogspot.com/2009/03/moving-beyond-fee-for-service-part-two.html

1)      Encourage consolidation of ambulatory practices, so that there are the critical mass of physicians more likely to be able to accept bundled payments.  Current efforts to encourage or even force adoption of electronic medical records has the impact of discouraging solo or small independent practices, for which these systems are usually unaffordable.   Government can do this through differential payment to those providers who have greater infrastructure (which are more likely to be larger practices). 
2)      Not offer “cost of living” increases in fee for service reimbursement, making bundled payment more attractive to providers.
3)      Continue to invest in robust risk adjustment – so that the sickest patients are not harmed by a transition away from fee for service
4)      Fee for service generally increases access, so efforts to move to a bundled system will need to measure impact on access and incorporate incentives to maintain or improve access.
5)      For bundled payment to have a substantial impact on the delivery of care, bundled payment must represent a critical mass of total reimbursement. That’s a challenge, since for many adult physicians Medicare is the largest payer, and there are structural impediments to Medicare offering payment other than fee for service.
6)      To protect patient access, I believe that it’s optimal for bundled payments or capitation to represent less than the entire practice revenue stream. My experience in a multi-specialty group with about half capitation and about half fee for service was excellent – the group did not try to “churn” or increase rate of service because of the large capitated base, but strived to increase access to benefit from fee for service patients.  Patients individually went back and forth between capitated and fee for service plans, so there was no practical way to discriminate.  I don’t know what the optimal mix is, but policy-makers shouldn’t fret about a portion of ambulatory revenue remaining in fee for service.
7)      Any type of bundled payment will need to be a work in progress.  Standardization will be required, but we will need flexibility for bundled payments to change as we gain experience with them.  We will also need to change payments with the advance of medical knowledge.  We wouldn’t want to retain elements that encouraged delivery of certain services by carving them out of a capitation, for instance, if the medical literature revealed that those services did not benefit patients.  
8)      It will be critical to avoid imposing large income losses on physicians immediately.  This will constrain the cost savings possible, but will make it les likely that providers who would be net losers would sabotage the transition.
9)      The new payment system should be simple enough that it can be explained in a paragraph or less.  Payment methodologies that require hundreds of pages of rules are not likely to be transparent.  There is a tradeoff here;  a simple payment system will not include all the different adjustments that many would like.