Word is that House Republicans will attach an amendment to the latest federal spending bill that will cut-off funding for the health care bill.
The last Congress never finalized a budget for the current fiscal year—the feds have been operating under a series of continuing resolutions. The most recent one will expire on March 4th. If another resolution is not agreed to, much of the government has to shutdown.
House Republicans, under heavy pressure from their base, have decided to take the Democrats on over the new health care law by cutting all remaining funding for implementation of the law in the current 2010 fiscal year (October to October).
Democrats, under the same heavy pressure from their base to protect the bill, aren’t about to let them do that. While the Republicans can accomplish this in the House—and will next week—they don’t have the votes in the Senate and they don’t have the President’s pen.
Now, I know the Republicans won the last election and they control the House. But what is their end game here?
Shut the government down until the Democrats agree to suspend the health care law? With Democrats under the same intense pressure from their base to protect the new law at all costs, they aren’t going to agree to do that.
With the polls showing the country evenly split on this law, about the only political outcome either side will accomplish is to show their base just how macho they are.
Just where might a compromise occur? HHS can have half the money it needs? That won’t make the Republican base happy.
Where will this end?
As George W Bush used to say, don’t get into a war unless you have an exit strategy.
Wednesday, February 16, 2011
Alternatives to the Individual Mandate—Some Are A Lot Better Than Others
With Constitutional challenges to the individual mandate now threatening the very life of the new health care law, Republicans aren’t the only ones that would like to see it jettisoned and replaced with something better.
And it isn’t just the Constitutional challenges that are prompting a second look. The mandate doesn't work politically and it doesn't maintain the integrity of the market because either most middleclass families in the individual market would be exempted from it anyway or have to pay fines that are a small fraction of the cost of the insurance.
That has led to discussion of a number of alternatives:
The Medicare Part D Approach
Increase the premiums for people who sign up after they are first eligible for the rest of their life.
But I doubt this scheme has a lot to do with the success of the senior drug program. The drug benefit is a huge value and it only costs seniors about $25 per month. As a result most have signed up and the risk pool has been a good one—irrespective of the penalty for late enrollees.
The problem with this approach for comprehensive health insurance is that health insurance costs a great deal more—perhaps $1,000 a month for a family. How much of a penalty would you charge for the rest of the person’s life? An extra $100? That likely wouldn’t be enough of a penalty to encourage participation—especially if people can opt in and out of the system whenever they get sick. $500 for the rest of their life? Not practical.
Would you only charge the penalty for a few years? Even charging an extra $500 a month for a few years wouldn’t come close to off-setting the cost of a major claim—people would quickly calculate they could make money waiting and gaming the system.
The old underwriter in me will tell you that you can never charge enough of an anti-selection premium. The more you charge for the risk that you will only get the sickest people, the fewer and the sicker the people who will sign up. It just becomes one big game and a vicious cycle.
And, what would prohibit people from just getting in and out of the system every time they got sick? How would you even keep track of the penalties each time they reentered?
This has the potential to become a heavily gamed system that would only lead consumers to become cynical about the whole process.
Limited Open Enrollments
Allow people to sign-up for guaranteed issue health insurance only once a year—perhaps each January 1st.
The problem here is that a person who doesn’t sign up on January 1 and then gets sick in September has only a three-month wait for coverage. Knowing that the insurance is available each January 1 creates an inequitable, and likely, insufficient system to encourage participation. This system would be open to being gamed instead of being a real incentive to become part of the insurance pool.
Create an open enrollment every two years? That would be criticized as too long a wait to have any kind of insurance—both for pre-existing conditions as well as coverage for new conditions. Create an open enrollment period on the first anniversary of the first time a person is first offered insurance? That would be an administrative nightmare.
Voluntary Health Insurance and the Ability to Sign-up Whenever You Like—But With Responsibility
A Mandatory and Uniform Waiting Period Before Pre-Existing Conditions Are Covered for Late Enrollees.
I have suggested this approach before. My sense is that this is the simplest to understand, easiest to administer, and most effective in terms of creating the broadest possible insurance pool.
Simply, people could sign up for guaranteed issue health insurance when they first became eligible for it at work or in the exchange. Buying health insurance would not be mandatory—no individual mandate.
Besides being able to sign up for insurance when they were first eligible, people could sign up for it any other time they wished—a month later, a year later, whatever—and they would be covered at standard rates.
But if they did not sign up for insurance when they were first eligible, their pre-existing conditions would not be covered for a minimum period—perhaps one or two years. Such a system would also have the advantage of providing coverage for any new health problems and would cover all members of a family--neither of which would be immediately covered under the two alternatives.
Such a system would be easy to understand—you can sign up any time but if you don’t do it right away your pre-existing conditions aren’t going to be covered for a long enough time that you are better off entering the pool right away.
Such a system would be relatively easy to administer—the insurance industry already knows how to administer late enrollments and pre-existing conditions provisions.
Such a system could be completely voluntary—no individual mandate and no Constitutional challenge.
Such a system would be far more popular than the individual mandate because it wouldn’t be mandatory and it would be equitable—sign up whenever you like but you will be responsible for your actions if you later get sick and expect immediate coverage.
Some have argued, are even continuing to argue today, that only the individual mandate can force people to buy coverage--particularly younger people.
But that misses two critical points:
1. The individual mandate is in big Constitutional and political trouble--all of the academic arguments in favor of the mandate may not matter.
2. The way to get people covered is to provide affordable coverage--which the new act does not do for too many.
We really don’t need a mandate if health insurance is affordable for everyone. There are no mandates today that people buy coverage when it is offered at work and we have an excellent and efficient risk pool--and that is true for even the youngest consumers. But that is because the employer so heavily subsidizes the cost of coverage that it is a great deal for consumers.
The problem with the Affordability Act is that the coverage is not affordable for most middleclass families would have to buy it on their own.
So long as that is the case, there is no alternative but to have a strong incentive to buy the coverage. But it does not have to be an individual mandate.
And it isn’t just the Constitutional challenges that are prompting a second look. The mandate doesn't work politically and it doesn't maintain the integrity of the market because either most middleclass families in the individual market would be exempted from it anyway or have to pay fines that are a small fraction of the cost of the insurance.
That has led to discussion of a number of alternatives:
The Medicare Part D Approach
Increase the premiums for people who sign up after they are first eligible for the rest of their life.
But I doubt this scheme has a lot to do with the success of the senior drug program. The drug benefit is a huge value and it only costs seniors about $25 per month. As a result most have signed up and the risk pool has been a good one—irrespective of the penalty for late enrollees.
The problem with this approach for comprehensive health insurance is that health insurance costs a great deal more—perhaps $1,000 a month for a family. How much of a penalty would you charge for the rest of the person’s life? An extra $100? That likely wouldn’t be enough of a penalty to encourage participation—especially if people can opt in and out of the system whenever they get sick. $500 for the rest of their life? Not practical.
Would you only charge the penalty for a few years? Even charging an extra $500 a month for a few years wouldn’t come close to off-setting the cost of a major claim—people would quickly calculate they could make money waiting and gaming the system.
The old underwriter in me will tell you that you can never charge enough of an anti-selection premium. The more you charge for the risk that you will only get the sickest people, the fewer and the sicker the people who will sign up. It just becomes one big game and a vicious cycle.
And, what would prohibit people from just getting in and out of the system every time they got sick? How would you even keep track of the penalties each time they reentered?
This has the potential to become a heavily gamed system that would only lead consumers to become cynical about the whole process.
Limited Open Enrollments
Allow people to sign-up for guaranteed issue health insurance only once a year—perhaps each January 1st.
The problem here is that a person who doesn’t sign up on January 1 and then gets sick in September has only a three-month wait for coverage. Knowing that the insurance is available each January 1 creates an inequitable, and likely, insufficient system to encourage participation. This system would be open to being gamed instead of being a real incentive to become part of the insurance pool.
Create an open enrollment every two years? That would be criticized as too long a wait to have any kind of insurance—both for pre-existing conditions as well as coverage for new conditions. Create an open enrollment period on the first anniversary of the first time a person is first offered insurance? That would be an administrative nightmare.
Voluntary Health Insurance and the Ability to Sign-up Whenever You Like—But With Responsibility
A Mandatory and Uniform Waiting Period Before Pre-Existing Conditions Are Covered for Late Enrollees.
I have suggested this approach before. My sense is that this is the simplest to understand, easiest to administer, and most effective in terms of creating the broadest possible insurance pool.
Simply, people could sign up for guaranteed issue health insurance when they first became eligible for it at work or in the exchange. Buying health insurance would not be mandatory—no individual mandate.
Besides being able to sign up for insurance when they were first eligible, people could sign up for it any other time they wished—a month later, a year later, whatever—and they would be covered at standard rates.
But if they did not sign up for insurance when they were first eligible, their pre-existing conditions would not be covered for a minimum period—perhaps one or two years. Such a system would also have the advantage of providing coverage for any new health problems and would cover all members of a family--neither of which would be immediately covered under the two alternatives.
Such a system would be easy to understand—you can sign up any time but if you don’t do it right away your pre-existing conditions aren’t going to be covered for a long enough time that you are better off entering the pool right away.
Such a system would be relatively easy to administer—the insurance industry already knows how to administer late enrollments and pre-existing conditions provisions.
Such a system could be completely voluntary—no individual mandate and no Constitutional challenge.
Such a system would be far more popular than the individual mandate because it wouldn’t be mandatory and it would be equitable—sign up whenever you like but you will be responsible for your actions if you later get sick and expect immediate coverage.
Some have argued, are even continuing to argue today, that only the individual mandate can force people to buy coverage--particularly younger people.
But that misses two critical points:
1. The individual mandate is in big Constitutional and political trouble--all of the academic arguments in favor of the mandate may not matter.
2. The way to get people covered is to provide affordable coverage--which the new act does not do for too many.
We really don’t need a mandate if health insurance is affordable for everyone. There are no mandates today that people buy coverage when it is offered at work and we have an excellent and efficient risk pool--and that is true for even the youngest consumers. But that is because the employer so heavily subsidizes the cost of coverage that it is a great deal for consumers.
The problem with the Affordability Act is that the coverage is not affordable for most middleclass families would have to buy it on their own.
So long as that is the case, there is no alternative but to have a strong incentive to buy the coverage. But it does not have to be an individual mandate.
Will the Congress Change the Health Care Law During the Next Two Years?
No. But I expect the Patient Protection and Affordability Act to be “relitigated” in 2013, to one degree or another.
I recently posted on the controversy over the individual mandate. I suggested a number of alternatives to the mandate—including my own ideas.
I was asked if I really thought the Congress would change the individual mandate in the short term.
As I have posted before, it will be the Democrats who will be calling for repealing the individual mandate and replacing it with an alternative—particularly the vulnerable Senators up for reelection in 2012.
Ironically, it will be the Republican opponents to the new health law and the individual mandate who will block them. The Republicans are not about to take the Democrats off the political hook the very unpopular individual mandate represents for them. Republicans are also not about to remove the potential ticking Constitutional time bomb the mandate presents—it could take the whole law down.
Until we hear from the Supreme Court and get the results of the 2012 elections we are going to hear a lot of rhetoric from both sides but I don't see any changes to core pieces of the legislation. Yes, the Congress will likely repeal the peripheral revenue raising 1099 provision and there could be some current budget cuts HHS is going to have to work around.
But the early provisions of the bill—things like keeping your kids on your policy until age-26—will continue until we at least here from the Supremes.
But in 2013, I see the potential to revisit the law:
* If the Supreme Court throws it all out—not likely but not impossible—we will have to start over.
* If the Supreme Court overturns only the individual mandate—not likely but very possible—the imperative to fix that will open the entire bill up to changes as part of the bigger deal that will be required for both sides to come to agreement. The conservatives would want more in exchange for their votes than to just fix this one piece.
* Even if the Republicans sweep the elections—the White House and both houses of Congress—I can’t see how they will have 60 Senate seats and compromise will be needed for some critical non-budget changes with or without a Supreme Court ruling.
* If the Republicans only make modest gains or even lose seats (this election shouldn’t be taken for granted by either side), Democrats will still be facing an unpopular individual mandate and at least have some political incentive to do some fixing—most of those polled believe the law at least needs some improvement. Although, a big Democratic victory would likely mean no incentive for them to open the law up again in 2013 to any fundamental change.
So, yes, I don't see any changes to the individual mandate or any other core element of the new health care law before 2013.
But it looks to me like we are only two years away from some critical Congressional votes on the new health care law. In that context, the debate has begun and it isn't just a theoretical exercise.
In an earlier post, I outlined a number of areas where I thought Democrats and Republicans could eventually come to an agreement:
I recently posted on the controversy over the individual mandate. I suggested a number of alternatives to the mandate—including my own ideas.
I was asked if I really thought the Congress would change the individual mandate in the short term.
As I have posted before, it will be the Democrats who will be calling for repealing the individual mandate and replacing it with an alternative—particularly the vulnerable Senators up for reelection in 2012.
Ironically, it will be the Republican opponents to the new health law and the individual mandate who will block them. The Republicans are not about to take the Democrats off the political hook the very unpopular individual mandate represents for them. Republicans are also not about to remove the potential ticking Constitutional time bomb the mandate presents—it could take the whole law down.
Until we hear from the Supreme Court and get the results of the 2012 elections we are going to hear a lot of rhetoric from both sides but I don't see any changes to core pieces of the legislation. Yes, the Congress will likely repeal the peripheral revenue raising 1099 provision and there could be some current budget cuts HHS is going to have to work around.
But the early provisions of the bill—things like keeping your kids on your policy until age-26—will continue until we at least here from the Supremes.
But in 2013, I see the potential to revisit the law:
* If the Supreme Court throws it all out—not likely but not impossible—we will have to start over.
* If the Supreme Court overturns only the individual mandate—not likely but very possible—the imperative to fix that will open the entire bill up to changes as part of the bigger deal that will be required for both sides to come to agreement. The conservatives would want more in exchange for their votes than to just fix this one piece.
* Even if the Republicans sweep the elections—the White House and both houses of Congress—I can’t see how they will have 60 Senate seats and compromise will be needed for some critical non-budget changes with or without a Supreme Court ruling.
* If the Republicans only make modest gains or even lose seats (this election shouldn’t be taken for granted by either side), Democrats will still be facing an unpopular individual mandate and at least have some political incentive to do some fixing—most of those polled believe the law at least needs some improvement. Although, a big Democratic victory would likely mean no incentive for them to open the law up again in 2013 to any fundamental change.
So, yes, I don't see any changes to the individual mandate or any other core element of the new health care law before 2013.
But it looks to me like we are only two years away from some critical Congressional votes on the new health care law. In that context, the debate has begun and it isn't just a theoretical exercise.
In an earlier post, I outlined a number of areas where I thought Democrats and Republicans could eventually come to an agreement:
Why the Republicans Lost
After six years of one-party government, things here in Washington were getting kind of boring.
That’s already started to change.
The November Election
In past years, I have told you that the chances the Democrats could capture the House of Representatives were low because of all the highly political gerrymandering of districts that took place in the wake of the 2000 census. That redistricting made the vast majority of House seats permanently safe for the party that controlled it. Because of all of this, perhaps only 45 seats would really be in play in any election year.
Those odds made the Democratic victory in the House this month all the more impressive.
But perhaps even more surprising is the Democratic sweep of Senate races giving them a one-vote advantage in that body.
The single issue that dominated the elections was Iraq but it goes even deeper than that.
Marlon Brando and the Republicans
There is this old Marlon Brando movie—“Zapata,” that’s the story of the Mexican revolutionary period at the turn of the 20th century. The movie starts out with the corrupt government shooting the peasants. The movie ends with Marlon Brando’s revolutionary character playing a key role its overthrow and with the new guys shooting the peasants.
The Republicans had their own revolution in 1994. They lost this election because they ended up shooting the peasants.
The Republicans forgot that 12 years ago the electorate threw the Democrats out because the swing voters came to the conclusion that after decades of control, the Democrats were out of touch (the Clinton Health Plan) and had been corrupted (the post office scandal, House Ways and Means Chair Dan Rostenkowski in jail, and various other problems) by their power after many years of unilateral control of the government.
In 2006, the Republicans got the boot because they were seen to be out of touch (Iraq) and corrupted (Folly, Abramoff, and “ear marks”) by the power coming from their almost complete control of the government.
In short, power did to the Republicans exactly what it had done to the Democrats by 1994, and the result was the same.
The toughest criticism of the Republicans has been coming from leaders in their own party:
• George Will on why Republicans lost the election in his weekly column on November 12: “Tuesday’s election results were fresh evidence that two events that profoundly shaped American politics during the last two presidencies were episodes of irrational exuberance unrelated to economic behavior.” Later in the piece, “The Democratic episode was the Clintons’ attempt to radically restructure and semi-socialize the 16 percent of the economy that is the health care sector. The Republican episode is Iraq.”
• Dick Armey, the former House majority leader and Gingrich chief lieutenant during the 1994 Republican takeover, in a October 29 op-ed in the Washington Post on why the Republicans were on their way to a loss: “The answer is simple: Republican lawmakers forgot the party’s principles, became enamored with politics over policy. Now the Democrats are reaping the rewards of our neglect—and we have no one to blame but ourselves.” Later in the same article, “Now spending is out of control. Rather than rolling back government, we have a new $1.2 trillion Medicare prescription drug benefit, and non-defense discretionary spending is growing twice as fast as it had in the Clinton administration.”
That’s already started to change.
The November Election
In past years, I have told you that the chances the Democrats could capture the House of Representatives were low because of all the highly political gerrymandering of districts that took place in the wake of the 2000 census. That redistricting made the vast majority of House seats permanently safe for the party that controlled it. Because of all of this, perhaps only 45 seats would really be in play in any election year.
Those odds made the Democratic victory in the House this month all the more impressive.
But perhaps even more surprising is the Democratic sweep of Senate races giving them a one-vote advantage in that body.
The single issue that dominated the elections was Iraq but it goes even deeper than that.
Marlon Brando and the Republicans
There is this old Marlon Brando movie—“Zapata,” that’s the story of the Mexican revolutionary period at the turn of the 20th century. The movie starts out with the corrupt government shooting the peasants. The movie ends with Marlon Brando’s revolutionary character playing a key role its overthrow and with the new guys shooting the peasants.
The Republicans had their own revolution in 1994. They lost this election because they ended up shooting the peasants.
The Republicans forgot that 12 years ago the electorate threw the Democrats out because the swing voters came to the conclusion that after decades of control, the Democrats were out of touch (the Clinton Health Plan) and had been corrupted (the post office scandal, House Ways and Means Chair Dan Rostenkowski in jail, and various other problems) by their power after many years of unilateral control of the government.
In 2006, the Republicans got the boot because they were seen to be out of touch (Iraq) and corrupted (Folly, Abramoff, and “ear marks”) by the power coming from their almost complete control of the government.
In short, power did to the Republicans exactly what it had done to the Democrats by 1994, and the result was the same.
The toughest criticism of the Republicans has been coming from leaders in their own party:
• George Will on why Republicans lost the election in his weekly column on November 12: “Tuesday’s election results were fresh evidence that two events that profoundly shaped American politics during the last two presidencies were episodes of irrational exuberance unrelated to economic behavior.” Later in the piece, “The Democratic episode was the Clintons’ attempt to radically restructure and semi-socialize the 16 percent of the economy that is the health care sector. The Republican episode is Iraq.”
• Dick Armey, the former House majority leader and Gingrich chief lieutenant during the 1994 Republican takeover, in a October 29 op-ed in the Washington Post on why the Republicans were on their way to a loss: “The answer is simple: Republican lawmakers forgot the party’s principles, became enamored with politics over policy. Now the Democrats are reaping the rewards of our neglect—and we have no one to blame but ourselves.” Later in the same article, “Now spending is out of control. Rather than rolling back government, we have a new $1.2 trillion Medicare prescription drug benefit, and non-defense discretionary spending is growing twice as fast as it had in the Clinton administration.”
The Democrats Will Change MedicareAdvantage
So, Now What?
Most observers don’t think the Democratic takeover will end up meaning a lot. It takes 60 votes do get anything done in the Senate, there is still a Republican presidential veto to contend with, and Democrats would be foolish to rollback the Republican tax cuts or repeal programs like the Part D Medicare drug benefit or the new private Medicare Advantage plans that now have millions of generally happy senior enrollees.
In fact, Goldman Sachs analyst Mat Borsch came out with a positive report on Humana, a company that has been particularly aggressive in the Medicare market. Borsch said that while it is possible Democrats would change the Part D program, “the odds of substantial change to the Medicare Advantage plan program (which is what really matters to Humana) are remote.”
Wrong.
Why Democrats Hate Medicare Advantage
Let’s review some of the history.
The profitability of MedicareAdvantage plans is what really matters not only to Humana but also to most major health players who have aggressively entered that business.
In fact, Humana’s government profit center reported that MedicareAdvantage enrollment grew to 993,000 from 489,000 a year earlier. Almost all of that growth was in the private fee-for-service product subset. Humana also reported a pre tax MedicareAdvantage profit of $207 million in the third quarter—up from $87.9 million in the same quarter of 2005.
Part D was always the thing the industry had to agree to in order to get the fantastic deal they have with MedicareAdvantage.
The Medicare Payment Advisory Commission recently said that private MedicareAdvantage plans get an average of 11% more for their seniors than the traditional Medicare plan gets for its enrollees. The Republican Congress did that intentionally in 2003 in order to attract private plans back into the private Medicare program after many either cut back or left it altogether in the wake of sharp cuts in the 1997 budget.
This “prime the pump” strategy made sense to Republicans who wanted to begin the reform of the traditional Medicare program by encouraging HMOs to bring market forces to bear on the exploding cost of the program.
But most Democrats hate the idea.
It gets down to a fundamental difference between the two parties. Republicans generally believe that a government-run plan and quality/efficiency are mutually exclusive and the value of market forces are at the core to any successful reform.
Democrats generally believe that Medicare has worked well and the market will only want to skim off the best risks and divide Medicare into two programs. They worry that the Republican “defined contribution” private market strategy will stratify Medicare enrollees by what they can afford to pay. Ultimately, they argue, the best quality plans will cost more and be affordable only by the well off. Those who won’t be able to afford premiums set by the market for the best plans will be forced to remain in what will become a second class Medicare plan, or plans that will look more like today’s Medicaid.
Many Democrats, and the House Democratic leaders in particular, believe that the universality of Medicare is absolutely critical. The logic is that you need to have the rich and powerful in the same pot as everyone else if you want to have equality in health care.
What many of these financial analysts on Wall Street don’t understand (Humana is trading at the highest price/earnings multiple in the HMO industry) is that, to the Democrats, this is not just about a fair funding level for private Medicare plans and whether they want to risk messing with them. It is about deep-seated ideological objections.
On top of all of this, just how Humana is making its extraordinary profits only compounds the Democrats’ ire. Almost all of Humana’s MedicareAdvantage growth this year has been in the Medicare fee-for-service product (MFFS). This is the product that does not allow insurers to negotiate lower provider reimbursement rates. To its critics, it is almost entirely an arbitrage play letting insurers take the 11% higher reimbursements, spend some of it on higher benefits for seniors to get them interested in the plans, and take the rest in profit. MFFS is hardly proof that the market can manage Medicare better than the government.
Industry logic that sees MFFS as a means to gradually transition seniors into more sophisticated products where insurers can apply medical management and provider negotiation hasn’t impressed the Democrats.
To a great many Democrats, and in particular their leadership, this is about throwing a wrench into the Republican vision of what Medicare will look like in the coming years—a vision that these Democrats see as a “Republican sell-out” of the longstanding Medicare entitlement promise and an “egregious example of taking care of their corporate friends.” They put Medicare fee-for-service right on top of their list.
To throw that wrench in the works, the Democrats don’t need to focus on a presidential veto threat or even worry about 60 votes in the U.S. Senate. They don’t even have to risk senior ire by outright trying to kill the new private Medicare plans.
They only have to look to Republican Newt Gingrich for their anti-market Medicare strategy. They just need to set it up to “whither on the vine.”
It’s the Budget, Stupid!
They can do that, rather easily as it turns out, in the budget process. A budget is not subject to the 60-vote rule in the Senate. A budget can be vetoed, but would Bush veto a gigantic budget bill over this issue? More likely he would compromise on the size of the cuts—not critical to a longer-term “wither on the vine” strategy.
The Democrats’ victory in the Senate turns out to be very important here. With just one slim vote, the Democrats now control the committees in both houses—and control any House/Senate conference on a budget.
Republicans used control of the conference structure to enable their leadership to dictate just what went on the table and which members got to be part of the conference. The minority party is almost always frozen out. Passing a bill in the House is one thing, passing a bill in the Senate is another, but controlling the conference, who gets to vote, and just what gets considered (even things that had not been passed in either house in the first place) is at a whole different level.
It is true that most of the new Democrats are moderate or even conservative Democrats on many issues. However, the budget is where MedicareAdvantage and Part D payment levels and benefits are decided and that process is one big black hole that will be controlled by the long-time liberal Democratic chairmen who just literally hate these programs. That’s where the likes of powerful Democrats John Dingell, the longtime Democratic Chair of the House Energy and Commerce Committee the last time around; Henry Waxman, who will have government operations oversight; Charlie Rangel who will lead Ways and Means; Pete Stark, who will head-up the Ways and Means Health Subcommittee; and Ted Kennedy, who will again chair the Senate Health, Education, Labor, and Pensions Committee, will control the agenda.
And, don’t forget oversight. These Chairmen will have the ability to nitpick these programs to death with their influence over the regulation of these plans and things like benefit schedules.
The only friendly Democrat the health plan industry has to talk to is the incoming Senate Finance Chair Max Baucus (D-MT). He worked closely with his friend, outgoing Senate Finance Chair Chuck Grassley (R-IA), to pass the 2003 Medicare bill in the first place and has defended it ever since.
Sure President Bush would veto any bill that did away with Part D, or MedicareAdvantage, or cut their financing.
But there won’t be such a standalone bill.
There will be some giant spending bill that will have lots of gives and takes in it. Maybe, Bush would risk a veto of the whole thing if it cut MedicareAdvantage plans by that 11%. But would he risk a veto of a big budget bill if it cut the HMOs by 5% and upped the benefit schedule in Part D and MedicareAdvantage? Not likely.
Not only do Democrats want to cut the private Medicare funds because they don’t like them, they need to cut them to find money to do other things.
One thing that is certain about Congress—Democrat or Republican—is that when it needs money it always comes looking to take some from the Medicare providers. How many times have we seen Republicans and Democrats cut doctors and hospitals to balance the budget—especially when either was seen as well compensated?
Now, HMOs are Medicare providers too and they are seen as fat with lots of great reimbursement. Just listen to Humana’s CEO talking about his profits tripling in the third quarter, “This quarter’s biggest takeaway is that our Medicare strategy is working.” That sounds great in the investment community but he’s asking for trouble in Washington.
It may get even more problematic for the HMOs in a way I wouldn’t have predicted just a few weeks ago. The current Congress has not completed its 2007 budget for the Medicare program. There is talk that Republicans may not even try to finish it and instead punt it to the new Congress. That means that instead of Democrats getting their first Medicare budget in late 2007, they may get their first whack at the HMO Medicare payments in January!
The HMO Medicare business is seen as highly profitable just as doctors are in a bind. Because of the Medicare Sustainable Growth Rate Formula, Medicare physicians are scheduled for a 5% fee cut on January 1, 2006. They are scheduled for a total of 40% in cuts over the next five years. Democrats, like Republicans, want to help the doctors out, and they need a place to get the money.
Beyond that, there is a $3 billion shortfall that has been identified to pay for the Labor/HHS spending bill the 2006 Republican House passed. There is a $5.5 billion gap on all unfinished appropriations bills.
Then there is the cost of fixing the Medicare physician fee cuts. Before the Congress adjourned this month, they took $7 billion from the MedicareAdvantage stabilization fund and used it to offset scheduled Medicare physician fee cuts.
The Democrats made lots of other election promises that cost money and those profitable HMOs present one terrific target.
The good news for the health plan industry is that it’s making loads of money in the MedicareAdvantage business.
The bad news for the health plan industry is that the timing for a Democratic return to power couldn’t be worse for them.
The first budget target was the MedicareAdvantage stabilization fund—originally budgeted to be $10 billion. Since it hasn’t been necessary to stabilize anything so far, that is easy money for the industry to give back.
With $7 billion of that already gone (and it was the Republicans that gave that back!), any more givebacks are going to be real money.
Most observers don’t think the Democratic takeover will end up meaning a lot. It takes 60 votes do get anything done in the Senate, there is still a Republican presidential veto to contend with, and Democrats would be foolish to rollback the Republican tax cuts or repeal programs like the Part D Medicare drug benefit or the new private Medicare Advantage plans that now have millions of generally happy senior enrollees.
In fact, Goldman Sachs analyst Mat Borsch came out with a positive report on Humana, a company that has been particularly aggressive in the Medicare market. Borsch said that while it is possible Democrats would change the Part D program, “the odds of substantial change to the Medicare Advantage plan program (which is what really matters to Humana) are remote.”
Wrong.
Why Democrats Hate Medicare Advantage
Let’s review some of the history.
The profitability of MedicareAdvantage plans is what really matters not only to Humana but also to most major health players who have aggressively entered that business.
In fact, Humana’s government profit center reported that MedicareAdvantage enrollment grew to 993,000 from 489,000 a year earlier. Almost all of that growth was in the private fee-for-service product subset. Humana also reported a pre tax MedicareAdvantage profit of $207 million in the third quarter—up from $87.9 million in the same quarter of 2005.
Part D was always the thing the industry had to agree to in order to get the fantastic deal they have with MedicareAdvantage.
The Medicare Payment Advisory Commission recently said that private MedicareAdvantage plans get an average of 11% more for their seniors than the traditional Medicare plan gets for its enrollees. The Republican Congress did that intentionally in 2003 in order to attract private plans back into the private Medicare program after many either cut back or left it altogether in the wake of sharp cuts in the 1997 budget.
This “prime the pump” strategy made sense to Republicans who wanted to begin the reform of the traditional Medicare program by encouraging HMOs to bring market forces to bear on the exploding cost of the program.
But most Democrats hate the idea.
It gets down to a fundamental difference between the two parties. Republicans generally believe that a government-run plan and quality/efficiency are mutually exclusive and the value of market forces are at the core to any successful reform.
Democrats generally believe that Medicare has worked well and the market will only want to skim off the best risks and divide Medicare into two programs. They worry that the Republican “defined contribution” private market strategy will stratify Medicare enrollees by what they can afford to pay. Ultimately, they argue, the best quality plans will cost more and be affordable only by the well off. Those who won’t be able to afford premiums set by the market for the best plans will be forced to remain in what will become a second class Medicare plan, or plans that will look more like today’s Medicaid.
Many Democrats, and the House Democratic leaders in particular, believe that the universality of Medicare is absolutely critical. The logic is that you need to have the rich and powerful in the same pot as everyone else if you want to have equality in health care.
What many of these financial analysts on Wall Street don’t understand (Humana is trading at the highest price/earnings multiple in the HMO industry) is that, to the Democrats, this is not just about a fair funding level for private Medicare plans and whether they want to risk messing with them. It is about deep-seated ideological objections.
On top of all of this, just how Humana is making its extraordinary profits only compounds the Democrats’ ire. Almost all of Humana’s MedicareAdvantage growth this year has been in the Medicare fee-for-service product (MFFS). This is the product that does not allow insurers to negotiate lower provider reimbursement rates. To its critics, it is almost entirely an arbitrage play letting insurers take the 11% higher reimbursements, spend some of it on higher benefits for seniors to get them interested in the plans, and take the rest in profit. MFFS is hardly proof that the market can manage Medicare better than the government.
Industry logic that sees MFFS as a means to gradually transition seniors into more sophisticated products where insurers can apply medical management and provider negotiation hasn’t impressed the Democrats.
To a great many Democrats, and in particular their leadership, this is about throwing a wrench into the Republican vision of what Medicare will look like in the coming years—a vision that these Democrats see as a “Republican sell-out” of the longstanding Medicare entitlement promise and an “egregious example of taking care of their corporate friends.” They put Medicare fee-for-service right on top of their list.
To throw that wrench in the works, the Democrats don’t need to focus on a presidential veto threat or even worry about 60 votes in the U.S. Senate. They don’t even have to risk senior ire by outright trying to kill the new private Medicare plans.
They only have to look to Republican Newt Gingrich for their anti-market Medicare strategy. They just need to set it up to “whither on the vine.”
It’s the Budget, Stupid!
They can do that, rather easily as it turns out, in the budget process. A budget is not subject to the 60-vote rule in the Senate. A budget can be vetoed, but would Bush veto a gigantic budget bill over this issue? More likely he would compromise on the size of the cuts—not critical to a longer-term “wither on the vine” strategy.
The Democrats’ victory in the Senate turns out to be very important here. With just one slim vote, the Democrats now control the committees in both houses—and control any House/Senate conference on a budget.
Republicans used control of the conference structure to enable their leadership to dictate just what went on the table and which members got to be part of the conference. The minority party is almost always frozen out. Passing a bill in the House is one thing, passing a bill in the Senate is another, but controlling the conference, who gets to vote, and just what gets considered (even things that had not been passed in either house in the first place) is at a whole different level.
It is true that most of the new Democrats are moderate or even conservative Democrats on many issues. However, the budget is where MedicareAdvantage and Part D payment levels and benefits are decided and that process is one big black hole that will be controlled by the long-time liberal Democratic chairmen who just literally hate these programs. That’s where the likes of powerful Democrats John Dingell, the longtime Democratic Chair of the House Energy and Commerce Committee the last time around; Henry Waxman, who will have government operations oversight; Charlie Rangel who will lead Ways and Means; Pete Stark, who will head-up the Ways and Means Health Subcommittee; and Ted Kennedy, who will again chair the Senate Health, Education, Labor, and Pensions Committee, will control the agenda.
And, don’t forget oversight. These Chairmen will have the ability to nitpick these programs to death with their influence over the regulation of these plans and things like benefit schedules.
The only friendly Democrat the health plan industry has to talk to is the incoming Senate Finance Chair Max Baucus (D-MT). He worked closely with his friend, outgoing Senate Finance Chair Chuck Grassley (R-IA), to pass the 2003 Medicare bill in the first place and has defended it ever since.
Sure President Bush would veto any bill that did away with Part D, or MedicareAdvantage, or cut their financing.
But there won’t be such a standalone bill.
There will be some giant spending bill that will have lots of gives and takes in it. Maybe, Bush would risk a veto of the whole thing if it cut MedicareAdvantage plans by that 11%. But would he risk a veto of a big budget bill if it cut the HMOs by 5% and upped the benefit schedule in Part D and MedicareAdvantage? Not likely.
Not only do Democrats want to cut the private Medicare funds because they don’t like them, they need to cut them to find money to do other things.
One thing that is certain about Congress—Democrat or Republican—is that when it needs money it always comes looking to take some from the Medicare providers. How many times have we seen Republicans and Democrats cut doctors and hospitals to balance the budget—especially when either was seen as well compensated?
Now, HMOs are Medicare providers too and they are seen as fat with lots of great reimbursement. Just listen to Humana’s CEO talking about his profits tripling in the third quarter, “This quarter’s biggest takeaway is that our Medicare strategy is working.” That sounds great in the investment community but he’s asking for trouble in Washington.
It may get even more problematic for the HMOs in a way I wouldn’t have predicted just a few weeks ago. The current Congress has not completed its 2007 budget for the Medicare program. There is talk that Republicans may not even try to finish it and instead punt it to the new Congress. That means that instead of Democrats getting their first Medicare budget in late 2007, they may get their first whack at the HMO Medicare payments in January!
The HMO Medicare business is seen as highly profitable just as doctors are in a bind. Because of the Medicare Sustainable Growth Rate Formula, Medicare physicians are scheduled for a 5% fee cut on January 1, 2006. They are scheduled for a total of 40% in cuts over the next five years. Democrats, like Republicans, want to help the doctors out, and they need a place to get the money.
Beyond that, there is a $3 billion shortfall that has been identified to pay for the Labor/HHS spending bill the 2006 Republican House passed. There is a $5.5 billion gap on all unfinished appropriations bills.
Then there is the cost of fixing the Medicare physician fee cuts. Before the Congress adjourned this month, they took $7 billion from the MedicareAdvantage stabilization fund and used it to offset scheduled Medicare physician fee cuts.
The Democrats made lots of other election promises that cost money and those profitable HMOs present one terrific target.
The good news for the health plan industry is that it’s making loads of money in the MedicareAdvantage business.
The bad news for the health plan industry is that the timing for a Democratic return to power couldn’t be worse for them.
The first budget target was the MedicareAdvantage stabilization fund—originally budgeted to be $10 billion. Since it hasn’t been necessary to stabilize anything so far, that is easy money for the industry to give back.
With $7 billion of that already gone (and it was the Republicans that gave that back!), any more givebacks are going to be real money.
Part D Profits––Not Yet the Great Results the Industry Hoped For
Part D—Some Results Starting to Come In
To say the Part D business has been controversial this year would certainly be an understatement. It’s not news that many in the industry have questioned its sustainability as a business—including me.
During 2006, the profitability data hasn’t been credible. In fact, it will likely be another year before we get a good sense for what’s really going on. While the players had to bid their 2007 rates earlier this year, most of what they based them on was pretty soft.
However, the third quarter was supposed to be the quarter that Part D profitability would spike as the sickest seniors would be in the gap and Part D claim levels would therefore decrease for the rest of the year. There is evidence that is happening. But, is it happening enough?
The biggest Part D player is UnitedHealth. In the second quarter, they said, “The Part D business is well on track to provide positive contributions to earnings on a GAAP basis in the third and fourth quarter and meet its full-year operating margin target of 3% to 4%.”
But their outlook was less specific in the third quarter, “On a full year basis, management estimates that Medicare Part D will generate a positive operating margin, however as a result of the benefit design, generated a slightly negative margin during the first three quarters of 2006.” No more specific earnings estimates and no report of big Part D profits in the third quarter.
The second largest Part D insurer, Humana, was less oblique about its Part D results. Given that the third quarter was supposed to be the quarter that the “gap” turned Part D profits around and produced a profit, their results are somewhat startling. Humana reported that, The MER [medical expense ratio] for the company’s PDP [Part D] business was 93.0% for 3Q06, primarily driven by an MER of 133.0% in the company’s Complete [“gap” plan] PDP offering.” The expense factor for Part D plans is likely about 15%. That means that Humana’s Part D combined ratio in the third quarter, the quarter the profits were supposed to show up, was likely 108%!
It is clear that Humana blew it on its “Complete” plan that provides brand name drug coverage in the “gap.” It gets back to the anti-selection argument. Seniors had the ability to pick the plan they could make the most money on, and hundreds of thousands zeroed in on Humana’s rich offering.
Humana’s response has been to double the 2007 senior premium for this plan and stop covering name brand name drugs in the “gap.” They will continue to cover generic drugs in the “gap.” However, with a monthly price of about $80, seniors can find competing generic “gap” plans for about half of that price. Humana clearly intends to blow these much higher utilizing seniors not only out of this losing plan but also out of the company all together. Remember, I told you that the Democrats now have “oversight” powers? This one is going to be the subject of oversight hearing number one.
The great majority of the Part D renewal process appears to be running well. Most plans are increasing their premiums by less than $5 per month and most seniors are happy with their plan and will stay put.
But the Humana “Complete Plan” is going to get the attention. Any Democrat that wants point to some market warts on the way to justifying more regulation and lower payments to private Part D plans is going to point to Humana—a company that tripled its profits by getting into MedicareAdvantage and then used its price strategy to churn the sickest people out of its Part D program.
The longer term Part D concern for the health plan industry has to be that, in the first year, it is turning out to be marginally profitable at best (United) and a real profit loser at worst (Humana). Looking ahead to at least two years of Democratic budgets and oversight, it can only go downhill from here.
To say the Part D business has been controversial this year would certainly be an understatement. It’s not news that many in the industry have questioned its sustainability as a business—including me.
During 2006, the profitability data hasn’t been credible. In fact, it will likely be another year before we get a good sense for what’s really going on. While the players had to bid their 2007 rates earlier this year, most of what they based them on was pretty soft.
However, the third quarter was supposed to be the quarter that Part D profitability would spike as the sickest seniors would be in the gap and Part D claim levels would therefore decrease for the rest of the year. There is evidence that is happening. But, is it happening enough?
The biggest Part D player is UnitedHealth. In the second quarter, they said, “The Part D business is well on track to provide positive contributions to earnings on a GAAP basis in the third and fourth quarter and meet its full-year operating margin target of 3% to 4%.”
But their outlook was less specific in the third quarter, “On a full year basis, management estimates that Medicare Part D will generate a positive operating margin, however as a result of the benefit design, generated a slightly negative margin during the first three quarters of 2006.” No more specific earnings estimates and no report of big Part D profits in the third quarter.
The second largest Part D insurer, Humana, was less oblique about its Part D results. Given that the third quarter was supposed to be the quarter that the “gap” turned Part D profits around and produced a profit, their results are somewhat startling. Humana reported that, The MER [medical expense ratio] for the company’s PDP [Part D] business was 93.0% for 3Q06, primarily driven by an MER of 133.0% in the company’s Complete [“gap” plan] PDP offering.” The expense factor for Part D plans is likely about 15%. That means that Humana’s Part D combined ratio in the third quarter, the quarter the profits were supposed to show up, was likely 108%!
It is clear that Humana blew it on its “Complete” plan that provides brand name drug coverage in the “gap.” It gets back to the anti-selection argument. Seniors had the ability to pick the plan they could make the most money on, and hundreds of thousands zeroed in on Humana’s rich offering.
Humana’s response has been to double the 2007 senior premium for this plan and stop covering name brand name drugs in the “gap.” They will continue to cover generic drugs in the “gap.” However, with a monthly price of about $80, seniors can find competing generic “gap” plans for about half of that price. Humana clearly intends to blow these much higher utilizing seniors not only out of this losing plan but also out of the company all together. Remember, I told you that the Democrats now have “oversight” powers? This one is going to be the subject of oversight hearing number one.
The great majority of the Part D renewal process appears to be running well. Most plans are increasing their premiums by less than $5 per month and most seniors are happy with their plan and will stay put.
But the Humana “Complete Plan” is going to get the attention. Any Democrat that wants point to some market warts on the way to justifying more regulation and lower payments to private Part D plans is going to point to Humana—a company that tripled its profits by getting into MedicareAdvantage and then used its price strategy to churn the sickest people out of its Part D program.
The longer term Part D concern for the health plan industry has to be that, in the first year, it is turning out to be marginally profitable at best (United) and a real profit loser at worst (Humana). Looking ahead to at least two years of Democratic budgets and oversight, it can only go downhill from here.
The 2007 Congressional Health Policy Agenda
The Congressional Agenda—Old Business
The current Congress is leaving a lot of work undone:
• A Health Information Technology (HIT) Bill – The old Congress will not be able to complete work on the House and Senate versions of a HIT bill. Before the election, they had hoped to be able to finish it during the “lame duck” session. It is now clear that won’t happen and the new Congress will start from scratch on the issue next year.
That means the Congress has not implemented a requirement that payers and providers will have to use the new ICD claim-coding system by 2010. It also likely means Democrats will be more worried about privacy protections and less worried about giving hospitals more control over the development and financing of the new systems as the Republican House bill would have done.
The new Congress will start from scratch on a new HIT bill.
• Medicare Physician Fee Cuts – Republicans had hoped to find the money to waive the 5% physician fee scheduled to take place on January 1. Helping the docs out before January 1st is likely another casualty of the election. That is not to say the Democrats don’t want to help the physicians—they do. But the Democrats can’t get to it until early next year and when they do, it will be private Medicare plans that will likely produce the needed cash.
New Business in a New Congress
The old Republican favorites—expansion of health savings accounts, Association Health Plans, and medical malpractice reform—are out and new Democratic agenda items are in.
This is where many of the analysts are right—with a Bush veto and the 60-vote rule in a Senate that has 51 Democrats—it will be very difficult to do more than tread water on new non-budget health care proposals.
Here’s a look at the new agenda:
• Medicare and the Drug Companies – House Democrats say they will pass legislation enabling Medicare to negotiate drug prices directly with the drug companies in the first 100 hours of the new Congress. They will. And then the bill will likely languish in a more divided Senate. If it does get past the Senate—which is not likely but not impossible either—Bush will veto it.
• Drug Reimportation – This was a big Democratic issue during the election. I wouldn’t be surprised to see the Democrats couple drug reimportation and giving Medicare the power to negotiate drug prices into one bill all designed to attract a Bush veto for what are popular—if not controversial—proposals.
• A Patients’ Bill of Rights – You read it correctly. House Energy and Commerce Committee Chair John Dingell has this one on his list of things to do next year. Apparently, he didn’t get the memo this one is off the voters’ list of worries. It probably won’t get very far but there might be some HMO bashing hearings—perhaps focused on Part D issues.
• The Uninsured – Now up to 46 million, look for the Democrats to tackle this issue more directly. That effort was helped by a health insurance industry proposal from America’s Health Plans (AHP) that called for the expansion of Medicaid for the lower income (which the Democrats liked) and the creation of tax credits to help others (which the Republicans liked).
However, the AHP proposal has a $300 billion price tag and no strategy for cost containment.
While that specific proposal won’t likely go very far in the near-term, the AHP did itself well by jump-starting a discussion about incremental solutions that combine both a private and public effort.
By being incremental and building on existing programs and ideas that both sides can embrace, the insurance industry proposal may become the seed that started a constructive discussion for the longer term.
• Medicare Reform – The “Part A,” hospital portion, of Medicare is expected go into negative cash flow in just three years as the baby boomers begin to be eligible for the program.
Under Republican leadership, the likes of House Ways and Means Chair Bill Thomas have dominated the discussion with his market-based proposals and the 2003 Medicare bill.
Now, it will be the Democrats who will dominate the Medicare discussion with their agenda setting committee chairmanships. They give every indication of wanting to dive into the program and its various challenges from provider reimbursement to private plan payments.
The current Congress is leaving a lot of work undone:
• A Health Information Technology (HIT) Bill – The old Congress will not be able to complete work on the House and Senate versions of a HIT bill. Before the election, they had hoped to be able to finish it during the “lame duck” session. It is now clear that won’t happen and the new Congress will start from scratch on the issue next year.
That means the Congress has not implemented a requirement that payers and providers will have to use the new ICD claim-coding system by 2010. It also likely means Democrats will be more worried about privacy protections and less worried about giving hospitals more control over the development and financing of the new systems as the Republican House bill would have done.
The new Congress will start from scratch on a new HIT bill.
• Medicare Physician Fee Cuts – Republicans had hoped to find the money to waive the 5% physician fee scheduled to take place on January 1. Helping the docs out before January 1st is likely another casualty of the election. That is not to say the Democrats don’t want to help the physicians—they do. But the Democrats can’t get to it until early next year and when they do, it will be private Medicare plans that will likely produce the needed cash.
New Business in a New Congress
The old Republican favorites—expansion of health savings accounts, Association Health Plans, and medical malpractice reform—are out and new Democratic agenda items are in.
This is where many of the analysts are right—with a Bush veto and the 60-vote rule in a Senate that has 51 Democrats—it will be very difficult to do more than tread water on new non-budget health care proposals.
Here’s a look at the new agenda:
• Medicare and the Drug Companies – House Democrats say they will pass legislation enabling Medicare to negotiate drug prices directly with the drug companies in the first 100 hours of the new Congress. They will. And then the bill will likely languish in a more divided Senate. If it does get past the Senate—which is not likely but not impossible either—Bush will veto it.
• Drug Reimportation – This was a big Democratic issue during the election. I wouldn’t be surprised to see the Democrats couple drug reimportation and giving Medicare the power to negotiate drug prices into one bill all designed to attract a Bush veto for what are popular—if not controversial—proposals.
• A Patients’ Bill of Rights – You read it correctly. House Energy and Commerce Committee Chair John Dingell has this one on his list of things to do next year. Apparently, he didn’t get the memo this one is off the voters’ list of worries. It probably won’t get very far but there might be some HMO bashing hearings—perhaps focused on Part D issues.
• The Uninsured – Now up to 46 million, look for the Democrats to tackle this issue more directly. That effort was helped by a health insurance industry proposal from America’s Health Plans (AHP) that called for the expansion of Medicaid for the lower income (which the Democrats liked) and the creation of tax credits to help others (which the Republicans liked).
However, the AHP proposal has a $300 billion price tag and no strategy for cost containment.
While that specific proposal won’t likely go very far in the near-term, the AHP did itself well by jump-starting a discussion about incremental solutions that combine both a private and public effort.
By being incremental and building on existing programs and ideas that both sides can embrace, the insurance industry proposal may become the seed that started a constructive discussion for the longer term.
• Medicare Reform – The “Part A,” hospital portion, of Medicare is expected go into negative cash flow in just three years as the baby boomers begin to be eligible for the program.
Under Republican leadership, the likes of House Ways and Means Chair Bill Thomas have dominated the discussion with his market-based proposals and the 2003 Medicare bill.
Now, it will be the Democrats who will dominate the Medicare discussion with their agenda setting committee chairmanships. They give every indication of wanting to dive into the program and its various challenges from provider reimbursement to private plan payments.
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