HEALTH ECONOMICS AND POLITICS: A Historical Prospective

1. HEALTH ECONOMICS AND POLITICS: A Historical Prospective

2. Health Economics and Politics • Politics • Some history • Private Health Insurance • Medicare • Medicaid

3. The Politics of Health Policy

4. Past Attempts to ReformHealth Policy • President Truman and National Health Insurance • President Nixon’s offer • The Reagan era • President Clinton’s Health Security Act

5. Clinton Universal coverage through a mix of private and public insurance Individual mandate Employer mandate for large employers Refundable small business tax credits Refundable tax credit for lower income New Health Choices Menu thru FEHBP and state plans Expand Medicaid and SCHIP Health plan regulations Estimated costs $110 B/Yr. Obama Universal coverage through a mix of private and expanded public insurance Individual mandate for children Employer pay-or-play mandate Create a National Health Insurance Exchange where individuals and employers could buy coverage Federal income-related subsidies Expand Medicaid and SCHIP Price controls for health insurance Health plan regulations Estimated costs $50-$65 B/Yr. Two DemocraticProposals

6. McCain Reform the tax code Tax credits to all Individuals $2,500 Families $5,000 State risk-based adjustment for low income/high costs Allow interstate sales of health insurance Allow individual purchase from association health plans Payment to providers based on quality No estimate of costs One RepublicanProposal

7. Health Econ 101 • Prices matter • To buyers • To sellers • Insurance (Public or Private) • Lowers the perceived price to the consumer • Increases the volume demanded (moral hazard) • Supply of health care • Mostly services -- Is very labor intensive (income to people) • Medical products – innovation constantly changing • Facilities – long-term capital investments make adjustments difficult • Open-ended payment policies create strong incentives to increase spending • With weak incentives to seek value • Result is inefficient, flat-of-the-curve health care delivery

8. National Health Expenditures Projected to be $2.3T in 2007 12% 12% 15% 34% 20% 7% Source: CMS, NHE

9. The Private Sector Projected to be $1042 B in 2007 Source: CMS, NHE

10. Major Medical Innovations • 1929: Fleming publishes discovery of penicillin • 1935: Sulfa drugs • 1939: Prontosil • 1940-41: Penicillin developed and tested • 1944: Streptomycin developed • 1946: Large scale production of penicillin • 1950: Terramycin • 1952: Isoniazid; cardiac pacemaker • 1953: Open heart surgery; polio vaccine Jonas E. Salk, MD

11. Early History of Health Insurance • Early prepayment plans by hospitals • AHA organized these into Blue Cross plans • To assure hospital payment • “free choice” to reduce hospital competition • Physician prepayment plans developed into Blue Shield plans (AMA) • Commercial health insurance came later

12. Two programs to control wartime inflation Office of Price Administration (OPA) Price controls and rationing of consumer commodities (e.g., sugar, coffee, butter, tires) National War Labor Board (WLB) Control of wartime wages Settlement of labor disputes to assure wartime production WWII Wage and Price Controls

13. National War Labor Board • 1943: War Labor Board ruling that employer fringe benefits did not count as wages subject to controls • But could not exceed 5% of wages

14. The Post-War Period • 1954: Exclusion of health insurance from taxable income confirmed by the Congress • Post-war period • Medical advances increased cost of medical care and the demand for health insurance • Rapid growth in health insurance coverage

15. Growth in the Post-War Period Women in the Workplace Per Capita Disp. Income Population Up 69% Up 122% Up 54%

16. Private Hospital Insurance CoverageGroup versus Individual, 1940-1975 Note: Employer group is the total of persons covered by Blue Cross/Blue Shield plus insurance company group policies. Source: Historical Statistics of the United States – Millennial Edition, Series Bd294-305.

17. Growth in Third-party Payments, 1960-2000 Percent of NHE

18. Tax Expenditures from the Exclusion of Health Insurance from Taxes, 1969-2009 Sheils – Total Tax Expenditures from the Exclusion of Health Insurance from Federal and State Income and Payroll Taxes Treasury – Tax Expenditures from the Exclusion of Health Insurance from Federal Income Taxes Sources: OMB Special Analyses; John Sheils, The Lewin Group

19. Federal Tax Expenditures as a Percent of GDP, NHE, and Federal Entitlement Expenditures, 1968-2007 Federal Tax Exp As a % of Entitlement Exp Federal Tax Exp as a % of NHE Federal Tax Exp as a % of GDP

20. Effects of Tax Policy • Higher prices • Lack of access • Winners & Losers P S Higher Prices Increase In Demand D’ D Medical Technology Tax Policy Income Growth Q Higher Output

21. Effects of Tax Policy on Health Insurance • Intensified the effects of increases in income, population, and medical technology • Expanded employer-based group insurance relative to individual insurance coverage • Expanded insurance benefits – hospital, outpatient, mental health, dental, drugs • Reduced cost sharing • Induced a higher level of costs, prices, and expenditures – created winners and losers

22. MedicareProjected to be $448 B in 2007 Source: CMS, NHE

23. Medicare Expenditures 2007 Other 12% Hospital 46% Rx Drugs 11% Enrollment: FFS 82.4% MA 17.6% Home Health 5% Other Prof Care 3% Physician Services 23%

24. The 1965 Medicare Act PROHIBITION AGAINST ANY FEDERAL INTERFERENCE • Sec. 1801. [42 U.S.C. 1395]  Nothing in this title shall be construed to authorize any Federal officer or employee to exercise any supervision or control over the practice of medicine or the manner in which medical services are provided, or over the selection, tenure, or compensation of any officer or employee of any institution, agency, or person providing health services; http://www.ssa.gov/OP_Home/ssact/title18/1801.htm

25. Medicare Income and Expenditures Source: 2008 Medicare Trustees Report, Figure II.D2

26. Medicaid - Projected to be $191 B Federal + $146 B State in 2007 Source: CMS, NHE

27. FMAP Formula FMAP = 100% - • A lower income state will have a lower state share and a higher matching rate • Designed to: • Give the average state a 55% matching rate • Give lower income states higher matching rates • Give higher income states lower matching rates • Year-to-year changes a function of: • Relative changes in per capita income • Relative changes in a state’s population (State Per Capita Income)2 (Federal Per Capita Income)2 x 0.45 State Share

28. 12 States with 50% FMAPs California Colorado Connecticut Illinois Maryland Massachusetts Minnesota New Hampshire New Jersey New York Virginia Washington 10 States with highest FMAPs Mississippi 76.0% Montana 75.4% Arkansas 73.8% West Virginia 73.0% New Mexico 71.2% District of Columbia 70.0% (set by law, not by formula) Idaho 69.9% Louisiana 69.8% Alabama 69.5% South Carolina 69.3% Kentucky 69.3% Medicaid State Matching Rates, FY 2006 Source: KFF State Health Facts

29. Federal Medicaid Spending and PovertyAll States + DC, 2005 Northeastern States Katrina States Source: Calculations based on CMS Medicaid and Census Bureau data, 2005

30. Per Capita Federal Medicaid Expenditures to the States, FY2006 NE States CT MA NH AL

31. Cost of Entitlement Programs By 2050 19% of GDP 66% of federal spending Source: CBO Long Term Budget Outlook, 2007

32. The Politics of Health Policy

33. Assessments of Health Proposals • “The lesson of Clinton in 1993 and Kerry in 2003 is clear--slogans win campaigns, not policy specifics.” • Joe Antos, AEI, January 2008 • “. . .instead of running, we hit the ground thinking. And then rethinking. . . . that was our gravest mistake. We tried to do too much. . . . the proposal took on so much that it was too easy for opponents to find things that would make one constituency or another uneasy.” • Walter Zelman, Clinton health advisor, 1993-94, from Health Affairs interview, 1998. • “. . . the health insurance proposals were weak on practical details and generated considerable confusion, even among their supporters.” • Rosemary Stevens, health policy historian, referring to the reform effort in 1917-1919 following WWI.

34. “Politicians don’t want to face the political hard choices.” • Expanding coverage is very costly • Federal and state budget issue • Mandates impose costs on individuals or employers • Could have substantial employment effects, especially on small businesses • Medicare and Medicaid face substantial unfunded liabilities • Will require large tax increases to maintain current benefits • Price controls are difficult to enforce and cause shortages • Tax reform and tax credits reallocate income from higher income people (voters, party contributors) to lower income people (non-voters) • More competitive health markets threaten the income of established providers • Achieving reform through quality initiatives, IT, and comparative effectiveness is very difficult (but is good campaign rhetoric)

35. Looking Ahead: What Happens Without Health Reform? • Public programs: Short term budget cuts to balance state and federal budgets • Reduction in some benefits, but not likely explicit • Reduction in reimbursement rates • Access problems, especially for specialists • Reductions in quality and services (subtle changes) • Private sector: Reductions in extent of coverage • Some reductions in covered services • More restrictions on choice of providers • More emphasis on care management • Increase in premium payments from employees • Demand for quality care will not diminish

36. Advice from the Clinton Veterans • “Are there any lessons here for the next debate on health care reform?” • “Incoming presidents know that they have only a brief window of opportunity during which to enact their legislative agendas.” • “. . . the tendency is for experts to overestimate the willingness of middle-class Americans to sacrifice and risk the uncertain consequences of major changes in their lives.” • “If substantial reform is to be achieved during these windows of opportunity, the legislation must be more modest in its reach than many reformers may see as desirable.” • Blendon, Brodie, and Benson, Health Affairs, 1995.

37. The Politics of Health Reform “All the players in health care reform . . . came to the political process with strong convictions in support of their first-choice proposal. For each of these groups, their second-favorite choice was the status quo.” Stuart Altman, as quoted in Health Affairs, 2001.

38. What Kind of Health Reform? More Market Competition More of Both Status Quo (not an option) More Direct Regulation