Health Care Reform & Our Future

Larry Van Horn, Ph.D, MPH, MBAAssociate Professor of Management & Economics

Executive Director for Health AffairsThe Owen Graduate School of Management

A Divided America

This is important because American’s appear unwilling to take on financial liability for this program extension.

My 25 minute objective

• Give you some perspectives on how to think about health care reform.– Based on immutable laws of

economics• Give you my thoughts on what

impact the changing political landscape will have.

• Cover what this may mean for providers

• Not make you cry.

A disclaimer– things you need to know about me

• “A bitter evil little man” • Just a simple country economist• My political agenda is simple. Pay

for what you consume.• My belief: the topic of health care

reform is clarified when you focus on the math.

Health Care Reform

• Most substantive piece of legislation to affect the health care industry since the passage of Medicare in 1965.

• Goal: Increase the scope of insurance coverage and access to a greater number of Americans and reduce cost.

The Problem – the Uninsured

• About 45 – 47 million uninsured– 11 million have income below the

poverty line.– 12 million have incomes in excess of

300% of the FPL ($66,000).– 5 million have incomes in excess of

500% of the FPL ( $110,000)– 10 million are not US citizens.– 25% are eligible for Medicaid but

haven’t signed up.Source: http://aspe.hhs.gov/health/Reports/05/uninsured-cps/index.htm

The Problem - Cost

• Health care is currently around 17.5% of our GDP and forecast to grow to 25% by 2025.

• We spend about $8000 per person.• Rate of growth in health care costs

has outstripped other goods and services most every year for the past 25 years.

Sovereign Debt

MEDICARE is everything!

• The current Medicare trustees report states that we are currently 37 TRILLION dollars short on our current obligations.– Since 2001 Benefits have increased by

15.5%• Add Medicaid and other

entitlements and we end up 54 TRILLION dollars short.

• To put this in perspective the US GDP is about 14 trillion.

August 2010 CMS Trustee Report

• Medicare is now projected to be solvent for an additional 12 years.

• Long Run shortfall now only $30T.• BUT:

– CMS Chief Actuary Richard Foster

“(T)he financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range. . . or the long range. . . . I encourage readers to review the ‘illustrative alternative’ projections that are based on more sustainable assumptions for physician and other Medicare price updates.”

CMS Actuary Report on Health Care Reform: Richard Foster

• Yes it will “cover” an additional 34 million people.• It will increase spending by $311B• About 14 million people would lose their employer coverage by

2019 as smaller employers terminate coverage and workers who currently have employer coverage become enrolled in Medicaid;

• The estimated reductions in the growth rate of health spending "may not be fully achievable" because "Medicare productivity adjustments could become unsustainable even within the next 10 years, and over time the reductions in the scope of employer-sponsored health insurance could also become an issue

• New fees and taxes on medical device makers will "generally be passed through to health consumers in the form of higher drug and devices prices and higher premiums

• It is reasonable to expect that a significant portion of the increased demand for Medicaid would be difficult to meet, particularly over the first few years"

April 22, 2010

What is in the bill

• Medicaid: Increased enrollment by 16 million with eligibility at 133 percent of the FPL and essential benefits defined by Secretary of HHS.

• Federal subsidies for increased insurance coverage for 16 million adults via subsidies up to 400 percent of FPL.– 65% of US population

What is in the bill - cont.

• Basic benefits: Requires the Secretary of Health and Human Services to define and annually update the benefit package through a transparent and public process services considered essential to basic health that would be required in all health insurance plans offered through health exchanges and commercial plans targeting the individual and small group markets.

The secretary shall appears more than 1,000 times in the bill

What is in the bill - cont.

•  – Annual fees on health insurance sector:– $8 billion in 2014;– $11.3 billion in 2015-2016;– $13.9 billion in 2017;– $14.3 billion in 2018– For subsequent years, the fee shall be

the amount from the previous year plus the annual rate of premium growth for each plan.

The Insurance Industry

• The administration and congress hates the insurance industry & the principle of insurance– No ability to limit coverage based on pre-

existing conditions.– Limitations on the ability to underwrite

• Age 3x, smoking 1.5x– Federally determined scope of benefits– Federally determined MLR.– Cap on deductibility of executive

compensation as a business expense.

Summary Comments on Bill

• Will increase access / perceived access (and expectations).

• Does little to address cost at the micro level (affordability to patients).

• Does little to address cost at the macro level.– 57 Trillion debt due to Medicare /

Medicaid– Does not break the trend of healthcare

cost inflation outstripping other goods and services.

Where we go from here4 problems.

• Political problem• Legal problem• Cost problem• Cultural problem

The political problem

• Repeal – No– There will be a house vote next week– It will not be brought forward in the

senate• The Gabrielle Giffords effect

– An air of conciliation– Will temper partisan positioning

• John Boehner is not Newt Gingrich

The political problem

• GOP efforts to defund provisions– Most components don’t kick in until

2014

• Expensive political posturing in preparation for 2012.

The political problem

• Items likely to draw attention– 1099 reporting provision– FSA use for over the counter

medications– Elimination of the funding for CLASS– Restriction of funds for abortion

The Legal Problem

• We have seen a number of federal rulings questioning the constitutionality of the individual mandate– Some have argued that these judges

have ruled consistent with the political party which appointed them.

– This will be settled years from now in the Supreme Court.• Will hinge on the interpretation of the

commerce clause

The Cost Problem

Holtz-Eakin and Ramlet, Health Affairs June 2010

The cultural problem

• We feel comfortable consuming healthcare and miraculously having “insurance” [other people’s money] pay for it.

• We don’t value much of what we consume in excess of the cost.– Consider the well child visit.

• We don’t feel comfortable making cost part of the conversation around tradeoffs.– If we increase quality cost will

magically drop.

The TruthA Math Problem

• Current law will raise outlaysfrom 20% GDP to 30-40% GDPover 30 years,

BUT: • Long-term normal tax rate

yields revenue of 18-22% GDP

• In 2020 the deficit will be 5.6%of GDP – roughly $1.3T, $900B of that will be interest.

We as a country can’t seem to handle the truth

CBO Analysis

Number needed to pay– my dear mom

• Knee Replacement

• Cost $20,000• Aetna Medicare

Advantage Cost to mom = $0, $45/ visit

Number of Median worker’s total Medicare payroll deductions required to pay for my mom’s knee? PRICELESS? NO – 23 Median working American’s entire Medicare payroll tax deduction necessary to fund.

What does the future hold?

• “Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, People have to decide what level of pain they are willing to accept to have a healthy economy.” –– Moody's managing director of sovereign

risk Mar 15, 2010

So what does that mean?

• Can’t close budget shortfalls through reducing prices paid to providers.

• Can and probably will change eligibility criteria for public programs but we must …..

• Ration scope of benefits and take costs out of system– Acute v. Chronic– Elective v. Emergent

• Significantly increase productivity of medical practice.

• Significantly reduce the intensity of medical treatment

• We will end up paying more for healthcare services, higher taxes, for fewer benefits.

Next few years

• Focus in health care going forward is on taking out cost out of the system

• Declining reimbursements, and shifting payor mix.– Commercial book of business will erode as employers

move to exchange and pay penalties.• Stronger hospitals will get stronger, weak will

get purchased• All providers will seek cover, hedge risk, through

employment.• CMS will tinker with alternative payment models.

– ACO models and bundled payment place a premium on continuum of care.

• “In the United States, we don’t seem to me to share the same sense of urgency” as countries such as Ireland. The time we have is growing short” and “there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs.”

May 19, 2010-- Former Federal Reserve Chairman Paul Volcker, a top outside adviser to President Barack Obama,