Understanding Healthcare in a Post-Healthcare-Reform-Act World Edward J. Schumacher

1. Understanding Healthcare in a Post-Healthcare-Reform-Act World Edward J. Schumacher Trinity University

2. Outline • Justification for the Current Legislation • The Affordable Care Act • The Future of Healthcare Delivery

3. A Two Headed Monster • Access • 50+ million or about 19 percent of the non-elderly population do not have health insurance • What do we do with this diverse group of individuals? • Costs • Too much insurance? The wrong kind of insurance? • Technology – who has access, how do we adopt? • What are we willing to pay for? When is it not worth it? • Role of Incentives

4. Nonelderly Americans’ Source of Health Insurance Coverage, 2009

5. Access • Who Are the Uninsured? • Lower than average income – 2/3 have income below twice the poverty line • 20% are in families with incomes above 50k • 61% work in families with one or more full-time worker but are not offered insurance or do not take it up. • Modal uninsured is “working poor,” below median income but not among the poorest. • Roughly 30% are eligible for free or highly subsidized care. • About 63% have no education beyond high school. • 81% are native or naturalized US citizens.

6. Access • Who Are the Uninsured? • 34% of Hispanics and 23% of African Americans are uninsured, compared to 14% of whites • Young adults (aged 19-29) have the highest uninsured rate of any age group at 32%. • The uninsured tend to be in worse health. • More than 70% of the uninsured have gone without health coverage for more than a year.

7. Uninsured Rates Among Nonelderly by State, 2008-2009 NH VT WA ME MT ND MN MA OR NY WI SD ID RI MI CT WY PA NJ IA NE OH NV IN IL DE UT WV VA MD CO CA KS MO KY DC NC TN OK SC AR AZ NM GA AL MS AK TX LA FL HI <14% Uninsured (13 states & DC) National Average = 18.1% 14 to 18% Uninsured (20 states) >18% Uninsured (17 states) SOURCE: Kaiser Commission on Medicaid and the Uninsured/Urban Institute analysis of 2009 and 2010 ASEC Supplements to the CPS., two-year pooled data.

8. Access • Why Are they Uninsured? • Too expensive • Administrative costs • Irregularities in insurance markets (small families subsidize larger ones) • Adverse selection – California’s “Death Spiral” • Implicit insurance through uncompensated care • Over insurance – most insurance is too generous (moral hazard). No smooth gradient in generosity

9. Explanations • Offset hypothesis • Tax Subsidy • Regulation • Psychological motivation

10. Access • Why Do We Care About the Uninsured? • Market failure of individual market • Externalities • Physical • Financial – imposed on the insured through uncompensated care. “only” $57.4 billion in 2008. • Labor Market Inefficiencies – job lock • Competitiveness of US Labor Market • Paternalism • Redistribution

11. Access • Two Types of Solutions • Sweeping Universalism or Incremental Universalism? • 163 million insured individuals mostly happy with their current situation • 50 million uninsured who are not happy • Private insurance industry of $950 billion in annual claims

12. Change in the Distribution of Political Opinion

13. 3 Issues with Incremental Universalism • Pooling • If pools are too small or attract high risk, insurers will be reluctant to offer – fear of adverse selection or high cost exposure • Currently we have large pools for Medicare/Medicaid and large employers. Most without insurance do not work for an employer that offers insurance • Solving the problem of the uninsured requires developing some new pooling mechanism

14. 3 Issues with Incremental Universalism • Affordability • Insurance is expensive! The average cost of employer sponsored family coverage in 2009 was $13,400. For those without a large pool, it was much higher • A family of four at 200% of the poverty line earns $42,400 per year. Insurance would be more than ¼ of before tax family income. • Even if those without insurance with low incomes had access to large pooling arrangement, they would still need subsidies.

15. 3 Issues with Incremental Universalism • Mandates • Full insurance requires a mandate • Even large subsidies will not be sufficient – many of the uninsured are eligible for free public insurance or highly subsidized employer-provided and still do not take it up. • Mandates provide more effect risk pooling – the transfer from those who are currently healthy to those who are currently sick. • Mandates are crucial if we want to limit pre-existing condition clauses.

16. 3 Issues with Incremental Universalism • Any policy change needs to address all three of these issues • Pooling without mandates creates adverse selection • Tax credits to purchase insurance from private vendors address affordability but not pooling or mandate issues

17. Bang for the Buck • Targeting • The extent to which new spending is directed to those who would otherwise be uninsured • As opposed to buying out the base or crowding out

18. 50 Million Tuna Swimming with 200 Million Dolphins Health Insurance Coverage of the Nonelderly by Poverty Level, 2009

19. Patient Protection and Affordable Care Act (ACA) • Key Provisions • Expand Medicaid to nearly all individuals under 65 with incomes up to 138% of the federal poverty level • Health Insurance Exchanges • for small employers and individuals • Premium subsidies for incomes from 138 to 400% of FPL ($43,400 for an individual, $88,200 for a family of four in 2010). Sliding scale • Out of pocket subsidies for incomes up to 250% of FPL • Changes to Private Insurance • Prevents insurers from denying coverage for any reason, including health status and from charging more to people who are sick. • Requires all new plans to meet minimum thresholds of coverage, and annual out of pocket spending

20. Patient Protection and Affordable Care Act (ACA) • Key Provisions (continued) • Employer Requirements • Employers with more than 50 employees will be assessed a fee up to $2,000 per fulltime employee if they do not offer affordable coverage and if they have at least one employee who receives a premium credit through an exchange • Individual Mandate • Beginning in 2014 most individuals will be required to have health insurance. • Only for those for whom insurance will cost no more than 8% of the individual’s family income.

21. Massachusetts • Early Results – successes • Reduction in number of uninsured: 2.7 percent uninsured in 2009 -- about a third of where it was. • Employee response to insurance has gone up. Not crowding out, but “crowding in”. Reform seems to be supplementing the private sector rather than displacing it. • Approval rating initially was at about 75%, in the recession it is down to 60% • Market for those above 300% seems to be working. A typical policy in the non-group market costs half its previous level and is more comprehensive. Overall premiums in the connector plans rose by 5% in 2009, lower than the national rise.

22. Massachusetts • Costs • Originally projected to cost $750 by FY 2009, now budgeted at $1 billion – higher than projected enrollment in the highly subsidized portion of the Commonwealth Care Program. Undercounted the uninsured and over-counted their incomes. • But 450,000 new insured for $1 billion is about $2,222 per person. Medicare Part D, cost about $4,000 per elder just for drug coverage.

23. Massachusetts • Gaming the System • Some individuals buy insurance only when they are sick, then dump their coverage. • The number of people dropping their coverage within the past 6 months jumped from 3,508 in 2006, when the law was passed, to 17,177 in 2008. • Estimated to add $300 million to cost • Provider Capacity • ER visits increased 7% between 2005-2007 in Mass, higher than average. • shortage of primary care physicians. • 10 percentage point decline in physicians accepting new patients • 22 percent of residents said they had trouble obtaining healthcare despite having insurance. • Increase in preventable trips to the ER

24. Massachusetts • Cost Containment • Round II of reform was passed in 2008 and attempted to deal with cost containment • Move towards episode-based payment system • Create incentives for more efficient and high-quality care • Address inequities in market power that are driving up health care costs (perhaps through a single-payer rate-setting system) • Expand the adoption of health information technology

25. The Future of Healthcare Delivery “Prediction is difficult, particularly of the future” Niels Bohr • In the long run, markets will clear. Hospitals, physicians, other providers will earn enough income to survive. • The short run is much trickier to predict. • The current reform is not an isolated event. • Two Headed Monster

26. Health Care Spending and the Budget Deficit Center for Economic and Policy Research http://www.cepr.net/calculators/hc/hc-calculator.html

27. US Healthcare Spending

28. US Healthcare Spending • On the Demand/Financing Side • Moral Hazard in Insurance • The Incentives of Insurers • The Role of the Employer • On the Supply/Provider Side • Fragmented Care • Asymmetric Information • Defensive Medicine • Fee for service • No one has an incentive to keep patients healthy

29. Geographic Variation in Spending

30. Spending and Quality

31. Potential Solutions • Managed Care? • Lowered spending, through lowered prices and fewer services. • Little evidence of reduced quality • But at a loss of trust • Medical Home • Managed care redux? • Accountable Care Organization • Hybrid of capitation and fee-for-service • Attempt to align incentives • Pay for Performance

32. Bending the Cost Curve • To control costs society will need to be willing to deny care that does little for health but consumers nevertheless want. • It is also clear that reimbursements will decline to both hospitals and physicians. • The next round of “reform” is likely to be informal rather than legislative. • Trial and error by CMS (bundled payments, ACO, PFP, never events, other experiments) • Innovation in the private insurance market? • Entrepreneurialism in the private sector • Physicians, hospitals, large employers, information technology

33. Horizontal and Vertical Integration • The days of the small physician practice are likely numbered • Larger practices both within and across specialty. • Stronger ties to hospitals • Employees, contracting, accountable care • Economies of scope and scale • Alignment of incentives

34. Physicians and Reform • Movement towards standardization • Clinical pathways and care protocols • Evidence based medicine • Reduced geographic variations • Decreased liability risk to the physician • Information technology • Physician leadership