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.  

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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. 

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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 35^th 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).

Company	Stock	Mkt Cap	From 12/07
Aetna	$26.18	$11.43B	Down 59%
United	$26.50	$30.80B	Down 55%
Wellpoint	$46.70	$22.19B	Down 48%
Humana	$37.47	$6.36B	Down 51%
Cigna	$28.63	$7.81B	Down 49%
Total		$78.59B

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.   

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