A Cadillac tax for Chevy health care

Posted by on Wednesday, Apr 8, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

‘Cadillac tax’ the next big Obamacare battle

By Brian Faler
Politico, April 6, 2015

A mix of business groups and labor unions are pushing to tee up the next big Obamacare fight: killing its so-called Cadillac tax.

Though the nickname suggests it will apply to a select few, experts say a majority of employers could eventually face the prospect of imposing what will be the first-ever tax on health care benefits.

At issue is a 40 percent excise tax on the health benefits companies provide their workers above a certain threshold. In 2018, the tax will hit insurance and related perks valued at more than $10,200 for singles and $27,500 for families. So for family benefits worth $30,000, the tax would apply to the $2,500 that’s above the limit.

Unions, which often have generous health benefits and have opposed the tax since the law’s inception, say the looming levy is already becoming a factor in their contract negotiations.

“Employers are coming to the table asking for cuts in benefits based on their preliminary projections around the tax,” said Shaun O’Brien, assistant policy director for health and retirement at the AFL-CIO, which backs repeal.

The National Education Association, which is also demanding the tax be rescinded, issued a report Thursday complaining it would disproportionately hit women and older workers.

Congress pegged the tax threshold to a relatively slow measure of inflation. It’s linked to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Private health care spending per enrollee will grow by an average of 5.6 percent annually over the next decade, according to the Congressional Budget Office, while inflation will increase by 2 percent per year.

About one-third of employers will be hit by the tax in 2018 if they do nothing to change their plans, according to a March survey by Mercer, a benefits consulting firm. By 2022, almost 60 percent will be facing the levy.

“‘Cadillac tax’ is really a misnomer,” said Beth Umland, Mercer’s director of research for health and benefits. “Potentially any employer could be hit by this tax.”

Former Obamacare adviser Jonathan Gruber, in one of the now-infamous videos that emerged late last year, said rising medical costs ensure the Cadillac tax will eventually all but eliminate the break companies get for providing health insurance.

Economists in both parties have been pushing the idea for decades as a way to slow health care costs, because it amounts to a cap on benefits.

That’s a good thing, many say, because overly generous insurance shields beneficiaries from costs, which encourages them to use more services, driving up prices for everyone else. It’s also a matter of fairness, some say, because forgoing taxes on health care benefits amounts to a major break for those with jobs offering coverage.

“Capping the tax benefit for employer-sponsored health insurance, I think, is a great idea,” said Len Burman, head of the nonpartisan Tax Policy Center. “Providing an open-ended subsidy for health insurance, which encourages people to get plans that do less to restrain spending, contributes to rising health care costs. Most economists who’ve looked at health care spending have concluded that.”

Congress’ independent budget scorekeepers have said Obamacare won’t add to the deficit, and why the tax will be tough to repeal. The levy, which is projected to generate $87 billion over a decade, ramps up slowly, but is estimated to eventually produce so much money that it alone will cover the cost of providing insurance subsidies through the program’s exchanges.



“What Does the ACA’s Excise Tax on High-Cost Plans Actually Tax?”: An NEA-Commissioned Report by Milliman

National Education Association (NEA), March 13, 2015

Why Did NEA Commission an Actuarial Firm to Assess the Excise Tax on High-Cost Plans?

Always suspecting the term “Cadillac Tax” to be highly misleading, NEA hired the actuarial firm Milliman to determine whether the excise tax on high-cost plans is really a tax on overly generous health plans. In addition, NEA has a much higher percentage of older and female workers than the national workforce, so we asked Milliman whether the tax corrects for the impact of age and sex on premiums.

What Does the Excise Tax Really Tax?

The actuaries found that “although the excise tax is often referred to as a tax on overgenerous health benefits, it is likely to be a tax based on factors other than benefit richness and beyond the control of health plan members.”

For example, Milliman tested the relative impact on premiums of plan benefits and other factors. The actuaries concluded that, compared to their benchmark, geography had a potential 69.3 percent impact on premiums, meaning that area-specific health care costs alone could boost a $9,189 premium in 2018 to $15,556. Among their other findings: Premiums could increase by as much as 15.7 percent for plans with provider networks that have low negotiated discounts for doctors, hospitals, and others. In contrast, plan benefits in the study only increased premiums by as much as 6.2 percent.

The excise tax was designed to push employers to cut employees’ health benefits, but with factors other than health plan generosity driving tax liabilities, the resulting benefit reductions will be arbitrarily damaging to millions of employees and their families.

What Role Does Geography Play in Generating Tax Liabilities?

Milliman concluded that geography-related premium differences will “lead to much higher premiums and substantial taxable costs in many parts of the country.” When the actuaries tested benefits typical of gold- level health insurance exchange plans, they found that plan members’ location alone would trigger the excise tax in many places, even when the same gold-level benefits in other places would not.

They found, for example, that the premium for a gold-level plan in San Francisco, California, would be 37 percent higher than the exact same plan’s premium if it were in Huntington, West Virginia. In fact, they found striking disparities all over the country.

Does the “Age and Gender Adjustment” Correct for the Impact of Age and Sex on Premiums?

Congress knew that the excise tax on high-cost plans could be unfair to women and older workers, but Milliman concluded that the tax’s attempt to fix the problem “fails to compensate for the impact on premiums of age and sex in many parts of the country.” As a result, health plan members’ age and sex could contribute to excise tax liabilities. It also means that women and older workers could be disproportionately hurt by tax-spurred benefit cuts.


Milliman – Full report: http://www.nea.org/assets/docs/Milliman–What_Does_the_Excise_Tax_Actual…

The Affordable Care Act’s “Cadillac tax” is a 40 percent excise tax on spending on employer-sponsored plans that falls above a given threshold. It has three primary purposes:

  1. As the revenues from this excise tax increase through the years, they will eventually pay much of the costs of the subsidies provided through the exchange plans,
  2. The tax should eventually displace much of the current regressive tax expenditures that subsidize employer-sponsored plans, and
  3. The tax should incentivize employers to reduce health benefits offered to their employees, thereby making employees better health care shoppers by increasing their exposure to out-of-pocket costs when accessing health care.

“Cadillac tax” is a label that creates the impression that the excise tax is applied primarily to plans with exceedingly generous benefits that only the wealthiest amongst us would purchase – a sector that could easily afford the excise tax. That is not true. According to the Milliman study commissioned by the NEA, the tax may apply to the baseline Blue Cross and Blue Shield standard benefit option offered through the Federal Employees Health Benefit Program.

What we have traditionally considered to be standard health plans – “Chevy plans” – are now considered to be “Cadillac plans.” These are plans that union members have paid for through forgone wage increases – wage concessions merely to maintain standard health care coverage, not “Cadillac” coverage.

This attitude that standard coverage is somehow a “Cadillac” plan shows how much the definition of standard coverage has deteriorated. Under the Affordable Care Act, the benchmark plans in the exchanges are silver plans with an actuarial value of 70 percent (patient pays 30 percent of costs) whereas standard employer-sponsored plans formerly had an actuarial value closer to 90 percent (patient pays 10 percent of costs).

What is particularly alarming about the Milliman study is that they show the tax will be applied inequitably based not only on the generosity of the benefits, but also based on factors over which employees have very little control such as age, sex, geographical location, the size of the risk pool, and the industry in which they work. Lower-income individuals with lower actuarial value plans under these circumstances could still be assessed the excise tax. That is really unfair. It is also possible that these factors could allow high-income individuals with very generous plans to escape the excise tax.

So let’s look again at the three purposes of this excise tax:

  1. An unfair tax is being used to fund administratively-complex subsidies in exchanges that were designed to revitalize the private insurance industry. Instead, the dysfunctional, inequitable, multi-payer system should have been replaced with an equitably-financed, efficient, publicly-administered single payer system.
  2. The regressive tax expenditures that subsidize employer-sponsored plans do need to be eliminated, but they need to be replaced with equitable progressive financing – the type of financing that characterizes a well designed single payer system.
  3. Requiring individuals to assume control of health care spending as a means of controlling costs has become a pathological obsession within the policy and political communities. Requiring patients to spend money that they do not have is a blunt instrument that prevents patients from receiving beneficial services that they should have. Costs can be controlled more effectively through an administratively efficient single payer system that provides prepaid health care with first dollar coverage.

There is growing bipartisan support to eliminate this unfair tax, but then what would happen? Both parties would search for new revenues to replace the tax while leaving in place this overpriced system that serves us so poorly that was perpetuated and expanded by the Affordable Care Act. What we really need instead is a single payer national health program.

  • Comments Off

What do Americans really care about in their health care coverage?

Posted by on Monday, Apr 6, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Americans Don’t Feel the Slowdown in Health Costs

By Drew Altman
The Wall Street Journal, March 31, 2015

National spending on health care and insurance premiums has risen at historically low rates in recent years. But… even when spending and premiums experienced record-low growth in 2013, only 3% of Americans said health costs had been rising slower than usual, and 52% said they had been growing faster than usual. The American people are not out to lunch; their view of the problem of health costs is very different from that of experts.

In more than 20 years of regular polling on health-care issues by the Kaiser Family Foundation, I have found that Americans with coverage care about:

  • Their premium costs, or the share of premiums they pay if they have employer coverage;
  • Their deductibles and other forms of cost sharing, especially when deductibles have been rising steadily;
  • Their drug costs (this is particularly an issue for the chronically ill, who use a lot of drugs);
  • Whether their insurance covers the services they think they will need;
  • Whether they can go to the doctor or hospital they want without having to pay more. People are more willing to accept a lower premium for less choice if they do not have a regular doctor or hospital;
  • The hassle and red tape in health care and health insurance. Increasingly, people care about getting information to be informed about their health and make smarter insurance and health care decisions.

Two other things stand out:

  • Seniors care a lot about Medicare and sometimes vote on the issue.
  • And Americans overall don’t care as much as experts do about improving quality and eliminating unnecessary care. In general, people think that quality is good and they want more care not less.

Drew Altman is president and chief executive officer of the Kaiser Family Foundation.


People want health care coverage that works for them, but they are very concerned about their direct costs, including insurance premiums, deductibles and out-of-pocket expenses for their pharmaceuticals. They rightfully complain about these costs, yet how often do you hear them complain about their payroll deductions for Medicare? They want Medicare to be there when they retire.

They also want reasonably comprehensive benefits and they want to be able to select their own health care professionals and hospitals for their care without being financially penalized for doing so.

Yet the Affordable Care Act was designed not to cater as much to patients as it was to take good care of the private insurers. Other systems that spend much less than we do often eliminate deductibles and much of the other cost sharing. Instead of premiums, many systems use equitable taxes to fund the system. And most do not limit choices of physicians and hospitals to those selected by the insurer.

So the Affordable Care Act, along with the innovations of the private insurance industry and modifications that employers are introducing into their plans, brought people exactly what they do not want: higher premium payments, higher deductibles, and more limited choice of physicians. It is true that a minority of our population receives subsidies for premiums and deductibles for insurance obtained through the exchanges though with more limited choice, but for the majority, premiums, deductibles and choice are all worse.

About 60 percent of health care is already paid for through our tax system, and most of those taxes are not transparent. When we pay taxes for other important government functions we do not receive an itemized tax bill breaking out each tax expenditure. The amount over what we are already spending that would be required to fund a comprehensive system for everyone could easily be absorbed into the tax system.

People would be more satisfied if they received the health care that they need when they needed it, and they knew that it was being paid for through a tax system that was fair to everyone. Of course, that is the way a single payer national health program would work. Let’s start taking care of the health needs of the people instead of the business needs of the insurers.

  • Comments Off

AcademyHealth brief on the sad status of narrow networks

Posted by on Friday, Apr 3, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Health Plan Features: Implications of Narrow Networks and the Trade-Off between Price and Choice

By Laura Summer, M.P.H.
AcademyHealth, Research Insights


The use of narrow provider networks in health insurance plans is a cost containment strategy that has gained popularity of late. Network design features differ among plans, but insurers generally seek to offer lower premiums by limiting the group of providers available to plan enrollees. As interest in the use of narrow networks has increased, so have concerns about their effect on consumers’ choices, costs, and access to care. With the growth of narrow network plans, it is important to understand the effectiveness of existing and emerging network design strategies and the potential for policies to ensure consumer access to high-quality care.

This brief summarizes key points from an expert panel AcademyHealth convened in December 2014 to examine existing research on network design and use, to discuss the impact of narrow networks and tiered networks on consumers, to review policies and practices for ensuring that networks are adequate, and to identify areas for additional research. Research on the impact of narrow networks is limited, but early studies suggest that several factors affect whether narrow network strategies will succeed. These factors include the way networks are constructed, the characteristics of the broader market in which narrow network plans operate, and whether consumers have the knowledge and tools to make informed choices about coverage. Additional research is needed to help policymakers better understand how to define and develop enforceable standards to measure the adequacy of narrow networks. Research can also help identify the quality considerations to be incorporated into the network design process, the development of network adequacy standards, and the type of guidance that can help consumers understand plan differences when making choices among products.

Understanding narrow and tiered network strategies

In all cases, though, insurers’ primary goal in designing networks was to offer competitive pricing. Generally, quality was not a criterion for exclusion or inclusion in a network.

Practical considerations

Discussants… questioned whether consumers have the knowledge and tools they need to make informed decisions about choosing narrow networks or choosing among tiers.

A particularly serious concern raised by participants is that consumers are not aware that they may be financially responsible when out-of-network providers participate in episodes of care.

Researchers noted that, in thinking about how to provide information to help consumers make choices, it is important to remember that consumers will only act on information that comes from a trusted source and that consumers generally do not view health plans as trusted sources for identifying better providers.

Impact of narrow and tiered networks

Another important research question is whether access to care will diminish for consumers who enroll in health insurance plans with narrow networks. At this point, information about access is very limited.

Greater use of primary care and reduced use of specialty care occurred. Savings were concentrated among consumers who could keep their primary care provider.

Network adequacy

They suggested that, unless risk adjustment accounts for differences in patient mix and health status is employed and working well, the constructions of narrow networks could be used to discriminate against patients with complex conditions and greater needs. They also noted that questions about the effectiveness of risk adjustment remain unanswered.

Panelists agreed that measurement standards relating to the quality of network providers are desirable, but they acknowledged that more work is needed to develop and test quality standards and to encourage plans to make consistent use of such measures.

They also recognized that, in some cases, the level of available investment or resources might not be adequate to satisfy network requirements. For example, state Medicaid programs have developed some of the most stringent criteria regarding network adequacy, but having the regulations on the books has not guaranteed that enrollees have access to adequate networks.

Panelists suggested that more proactive monitoring of network adequacy is needed. They observed that current measures of network adequacy are weak and depend heavily on health plans’ self-reported data.


The AcademyHealth panel focused on the design and operation of narrow and tiered network plans and what early experience suggests about how the networks can become more effective. Participants acknowledged the importance of striking a balance between flexibility for insurers in designing networks while ensuring consumer access to high-quality care. They discussed the need for greater oversight of and better standards to measure network adequacy. Experts agreed that the long-term implications of narrow networks remain to be seen. In identifying areas for research on narrow networks, they emphasized that research should account for market factors, both in the study design and in interpreting the results. Given that the narrow network strategy relies on consumer behavior, a recurring theme was the need to educate and assist consumers in making informed choices. Panel participants emphasized the importance of considering quality as well as cost in the design, implementation, and evaluation of narrow network plans.


This nine-page brief from AcademyHealth provides an excellent summary of the status of the policy science behind narrow provider networks in health insurance plans. Since health care reform is about the patient – at least it certainly should be – it is helpful to read this while continuing to ask yourself how this helps the patient. Patient advocates will discover the shocking truth.

The complex policies behind narrow provider networks were not designed for patients. They were designed for the private insurance companies. To remain viable in an open market, insurance premiums must remain affordable. Narrow provider networks are only one more tool to reduce the cost of health care in order to keep their premiums competitive. As this report indicates, insurers select their network providers based on the lowest prices that they can negotiate – not on quality.

What do patients get when the insurers are trading away the patients’ choices of their health care providers? Quality? No. The only advantage that the insurers can tout is that patients allegedly are paying less in premiums and cost sharing because of the lower rates that insurers were able to negotiate on their behalf. But think about that. The private insurers are an intrusion that are responsible for not only their own expensive administrative excesses but also for the profound and costly administrative burden that they place on the health care delivery system.

Since these administrative costs are far greater than the negotiated discounts they receive from the providers, the insurers are actually increasing costs for the patients. Further, if the private insurers were replaced by a single public program, pricing in health care would be a fair bargain for us collectively, negotiated by our own public stewards, and thus would be serving the best interests of patients.

Narrow networks are an insurance industry construct that have been designed to serve their own interests at a significant cost to patients in choice, quality and value. We need to replace the insurers and their despicable policies with our own single payer national health program – a system designed from the beginning to better serve patients.

  • Comments Off

What impact do consumer-directed health plans really have?

Posted by on Thursday, Apr 2, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Do “Consumer-Directed” Health Plans Bend the Cost Curve Over Time?

By Amelia M. Haviland, Matthew D. Eisenberg, Ateev Mehrotra, Peter J. Huckfeldt, and Neeraj Sood
National Bureau of Economic Research, March 2015, NBER Working Paper 21031


“Consumer-Directed” Health Plans (CDHPs) combine high deductibles with personal medical accounts and are intended to reduce health care spending through greater patient cost sharing. Prior research shows that CDHPs reduce spending in the first year. However, there is little research on the impact of CDHPs over the longer term. We add to this literature by using data from 13 million individuals in 54 large US firms to estimate the effects of a firm offering CDHPs on health care spending up to three years post offer. We use a difference-in-differences analysis and to further strengthen identification, we balance observables within firm, over time by developing weights through a machine learning algorithm. We find that spending is reduced for those in firms offering CDHPs in all three years post. The reductions are driven by spending decreases in outpatient care and pharmaceuticals, with no evidence of increases in emergency department or inpatient care.

From the Introduction

At the firm level, we find that CDHP offer is associated with an approximately 5 percent reduction in total health care spending in each of the three years after CDHPs were introduced relative to cost growth observed for non-offering employers. The long term decreases in spending are focused in outpatient care and drugs and there is little impact on inpatient or emergency department spending. If these effects are due only to changes in health care spending among those enrolled in CDHPs, they imply local average treatment effects for those enrolled in CDHPs of an approximately 15 percent reduction in total spending in each the first three years. Differences in impacts by CDHP plan structure are not statistically significant. However, consistent with our hypotheses, the pattern of the point estimates suggests that the impact of CDHPs is greater when paired with HSAs (versus HRAs) and when employers make smaller account contributions.

From the Summary and Discussion

This study substantially adds to our knowledge on the long term cost impacts of CDHPs. We estimated spending trends for three years across over 13 million people across the country in an analysis estimating CDHP impacts without the threat of individual level selection bias. We find that health care cost growth among firms offering a CDHP is significantly lower in each of the first three years after offer. This result suggests that, at least at large employers, the impact of CDHPs persists and is not just a one-time reduction in spending. However, an important caveat is that the decrease in spending may be smaller in year 3 compared to year 1 post-offer. Recognizing that the differences are not statistically significant, these results are suggestive and consistent with a decreasing impact of CDHPs over time.

The decreases in total spending growth observed are primarily due to reductions in spending on outpatient care and pharmaceuticals. In contrast, by the third year there are no differences in either emergency department or inpatient spending.

The results presented here are limited to large employers and therefore may not extend to Medicaid beneficiaries, the individual or small group market, or to the health insurance exchanges where, on average, deductibles and out of pocket maximums are higher and/or enrollees have fewer financial resources. While the firms in this study were specifically selected to have lower income employees, all families had at least one adult working full time with benefits so they are typically better off than families not offered employer sponsored insurance.

In summary, in the first large multi-employer study to investigate long term CDHP spending impacts we find reductions in health care cost growth in all three years post CDHP offer and do not detect increases in any component of health care spending. These findings do not support either the concern that decreases in spending will be a one-time occurrence or that short-term decreases in spending with a CDHP will result in increases in spending in the long term due to complications of forgone care. We cannot rule out either of these concerns developing over an even longer time frame.


This study will no doubt be used to claim that high deductible health plans with health savings accounts (CDHPs – consumer-directed health plans) are effective in reducing health care spending without causing any harm. However, the conclusions that can be drawn are far more limited.

The observed reductions of spending by those offered CDHPs by their employers were in outpatient care and drugs. The nature of these services may enable shopping for lower prices, but they also are services that frequently are used for medical problems of lower acuity which enables patients to make decisions as to whether or not they will forgo the medical services and/or prescriptions offered. These services may be for important interventions that could improve quality of life or even longevity, or they could be for interventions that would have no significant impact on health, or they could be for interventions in between these extremes that might have only a modest beneficial impact such as transient symptom relief. From other studies it is known that patients decline not only care that they perceive to be of little value, but when faced with deductibles, they often do decline care that is clearly beneficial.

Those who would claim that this study shows that no harm was done after enrolling in a CDHP point to the observation that being in a CDHP did not increase hospitalizations nor increase the use of emergency departments during the first three years of enrollment.

The reason this conclusion should be challenged is based on the fact that the population studied was the relatively healthy workforce and their healthy families in healthy years of their lives. It is highly unlikely that a very modest decline in outpatient visits and prescriptions would have directly resulted in crisis care requiring emergency department visits or hospitalizations during the first three years on the program, and thus these outcomes were an insensitive indicator of harm. The rate of these interventions in the relatively healthy control group was the same, as would be expected. Also, by limiting the outcomes studied to only these two, the study remained insensitive to other potentially beneficial results of obtaining health care, if nothing more than relief on receiving reassurance over concerns that patients may have had about their health.

This study has the same limitation of the oft-cited RAND Health Insurance Experiment which also studied a healthy population for a limited time in healthy years of their lives. These studies may have intrinsic validity for the populations studied, but they do not have extrinsic validity, particularly for an older, sicker population that also has been shown to forgo care when faced with deductibles.

This study asked if CDHPs bend the cost curve over time (title). The study showed that spending by employers was reduced 5 percent in each of the three years following the introduction of CDHPs. Since not all employees were enrolled in CDHPs, they theorized that the reduction in spending for those in CDHPs was about 15 percent. Even there, a 15 percent reduction in spending on a population that has minimal need for hospitalization and emergency department visits – where much of our total health care spending lies – certainly does not equate to anywhere near a 15 percent reduction in our total health care spending.

Remember that 80 percent of health care is used by the 20 percent of people with serious health problems. Almost all of that spending is well in excess of the deductibles and thus is not sensitive to consumer shopping.

Further, since employers insure the healthiest and least costly sector of our population, the 5 percent savings that they gained is only a drop in the bucket of our total national health expenditures. You won’t see much bend in this cost curve, especially if you alter policies so that patients do receive the beneficial services that they should have, but might otherwise forgo.

If we are going to bend the cost curve, let’s not do it through methods that reduce beneficial health care services. Let’s do it though ways that eliminate wasteful spending, such as the administrative excesses imposed on us by the private insurers and public payers operating in a fragmented, dysfunctional system. Let’s enact a single payer national health program instead.

  • Comments Off

Massachusetts’ reform failed to reduce racial and ethnic disparities

Posted by on Wednesday, Apr 1, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Effect of Massachusetts healthcare reform on racial and ethnic disparities in admissions to hospital for ambulatory care sensitive conditions: retrospective analysis of hospital episode statistics

By Danny McCormick, Amresh D Hanchate, Karen E Lasser, Meredith G Manze, Mengyun Lin, Chieh Chu, Nancy R Kressin
The BMJ, April 1, 2015


To examine the impact of Massachusetts healthcare reform on changes in rates of admission to hospital for ambulatory care sensitive conditions (ACSCs), which are potentially preventable with good access to outpatient medical care, and racial and ethnic disparities in such rates, using complete inpatient discharge data (hospital episode statistics) from Massachusetts and three control states.


After adjustment for potential confounders, including age, race and ethnicity, sex, and county income, unemployment rate and physician supply, we found no evidence of a change in the admission rate for overall composite ACSC (1.2%, 95% confidence interval −1.6% to 4.1%) or for subgroup composites of acute and chronic ACSCs. Nor did we find a change in disparities in admission rates between black and white people (−1.9%, −8.5% to 5.1%) or white and Hispanic people (2.0%, −7.5% to 12.4%) for overall composite ACSC that existed in Massachusetts before reform. In analyses limited to Massachusetts only, we found no evidence of a change in admission rate for overall composite ACSC between counties with higher and lower rates of uninsurance at baseline (1.4%, −2.3% to 5.3%).


Massachusetts reform was not associated with significantly lower overall or racial and ethnic disparities in rates of admission to hospital for ACSCs. In the US, and Massachusetts in particular, additional efforts might be needed to improve access to outpatient care and reduce preventable admissions.

From the Introduction

The Massachusetts reform was designed to achieve “near universal” coverage, to improve access to care, and to decrease racial and ethnic disparities in both coverage and access that are well documented within the US healthcare system. In addition to extending coverage to the lowest income individuals — disproportionately comprising racial and ethnic minorities — the Massachusetts reform made reducing disparities an explicit goal.

From the Conclusion and policy implications

Why might Massachusetts health reform have failed to affect preventable admissions or narrow pre-existing racial and ethnic disparities in this outcome? First, although estimates vary somewhat, the absolute decline in the number of uninsured residents was about 6% of the non-elderly population; this still left 6% of the non-elderly population uninsured after full implementation of the reform. While gains were larger for racial and ethnic minorities, so too was the proportion of uninsured after reform. Second, before reform, Massachusetts had a robust healthcare safety net system that provided free care to many of the uninsured, who were disproportionately from minority backgrounds, through the state’s Uncompensated Care Pool program. Third, the public insurance (Medicaid) and publicly subsidized (Commonwealth Care) and unsubsidized (Commonwealth Choice) exchange based private insurance that residents received under the reform might not have provided optimal access to outpatient care because patients had to share costs or of because of low provider reimbursement. In 2009 the Massachusetts Medical Society found that only 60% of internist physicians in Massachusetts accepted Medicaid and 40% accepted Commonwealth Care, and anecdotal evidence suggests that finding a physician after reform became more difficult. Lastly, there could have been insufficient capacity of outpatient primary care providers to fully accommodate the influx of newly insured residents, irrespective of insurance type.

In addition to being a key measure of access, preventable admissions represent a clinical failure for patients and a needless expenditure of scarce healthcare resources. Our findings therefore have important policy implications. A large body of evidence suggests that insurance substantially improves access to care across many settings, medical conditions, and populations. In fact, recent US longitudinal studies provide strong evidence that acquiring public forms of insurance such as Medicaid and Medicare improves a broad array of health outcomes including mortality. The fact that we found no evidence that the Massachusetts reform diminished either preventable admissions or disparities in such admissions, suggests that particular features of the Massachusetts reform might need to be optimized to realize improvements in access to outpatient care that can prevent admissions. Although our results do not point to specific modifications, they might include continued expansion of insurance to the remaining uninsured, reduction in cost related barriers to outpatient care among those with insurance, and more comprehensive outreach efforts to the insured and uninsured to ensure adequate knowledge of the processes for applying for and effectively utilizing insurance, particularly among residents with limited proficiency in English language and low health literacy. Future studies will need to define which of these or other improvements will maximize outpatient access to care. While healthcare delivery systems vary substantially internationally, our results could provide insight into reforms of healthcare financing built on a mix of private and public funding and individual mandates that both wealthy and less wealthy countries could contemplate.


Goals of Massachusetts health care reform included extending coverage to low-income individuals (disproportionately comprising racial and ethnic minorities) and to reduce disparities in care. How well these goals have been achieved is particularly important since it can predict how effective the Affordable Care Act (ACA) – the same model as the Massachusetts plan – will be in achieving these goals.

So how has Massachusetts done? This study looked specifically at the rates of admission to hospitals for conditions that are sensitive to ambulatory care. With better access to outpatient care hospitalization rates should be lower, with racial and ethnic disparities diminishing. These did not happen. The admission rates did not decrease and the disparities for both blacks and Hispanics were unimproved.

Although many factors contribute to the disparities, insurance should reduce financial barriers and thus improve access. Why didn’t that happen here? Some blame should lie with the model of reform selected. In spite of mandates for coverage, many people still remain uninsured. Also the cost sharing associated with health plans erect financial barriers to care. Further, both narrow networks of the plans and the lack of willing providers reduce access. These factors can be enough to explain why there was no improvement in spite of the full implementation of the Massachusetts reform. We can anticipate the same disappointing results nationally in the years following full implementation of ACA since it incorporates the same policy deficiencies.

As a remedy, the authors suggest more of the same. They would try to expand coverage to the remaining uninsured – a very difficult feat in a multi-payer system with varying qualifications for public assistance in financing the care. They would reduce cost related barriers for those with insurance, but not eliminate them. They would increase outreach efforts to assist patients in negotiating the administrative quagmire of the various insurance plans. They provide no suggestion for expanding the networks of eligible providers. In their call for “reforms of healthcare financing built on a mix of private and public funding and individual mandates,” they are explicitly endorsing the same model that has already failed to reduce these disparities.

In a press release, one of the coauthors stated, “But we are more likely to improve access to care and reduce preventable hospitalization rates if we focus on offering residents insurance plans that minimize cost barriers and are widely accepted by doctors.” The problem is that the ACA model of reform is driving the shift to ever greater cost barriers and much narrower networks of physicians.

Instead of an individual mandate, everyone should be covered automatically. Instead of erecting financial barriers to care, the health care system should be fully prepaid with first dollar coverage. Instead of perpetuating the administrative complexity of a multi-payer system of public and private insurers, one single simplified system should be put in place. Instead of separate restricted networks of providers, all professionals and institutions should be covered by one single program. Yes, the important model that they failed to mention is a single payer national health program such as an improved Medicare that covers everyone. That’s what we need.

Addendum (4/2/15): My comment that the “authors suggest more of the same” is not correct since they do recommend policies that would improve functioning of the financing system. My negative tone rests on the fact that when policy studies demonstrate the clear need for single payer reform, the current political environment within the academic policy and publishing communities results in the suppression of discussions of the single payer concept. That is a shame, especially when the need is so great.

  • Comments Off

England’s NHS provides starter lessons on improving value

Posted by on Tuesday, Mar 31, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

English National Health Service’s Savings Plan May Have Helped Reduce The Use Of Three ‘Low-Value’ Procedures

By Sophie Coronini-Cronberg, Honor Bixby, Anthony A. Laverty, Robert M. Wachter and Christopher Millett
Health Affairs, March 2015


The pressure to contain health expenditures is unprecedented. In England a flattening of the health budget but increasing demand led the National Health Service (NHS) to seek reductions in health expenditures of 17 percent over four years. The spending cuts were to be achieved through improvements in service quality and efficiency, including reducing the use of ineffective, overused, or inappropriate procedures. However, the NHS left it to the local commissioning (or funding) organizations, known as primary care trusts, to determine what steps to take to reduce spending. To assess whether the initiative had an impact, we examined six low-value procedures: spinal surgery for lower back pain, myringotomy to relieve eardrum pressure, inguinal hernia repair, cataract removal, primary hip replacement, and hysterectomy for heavy menstrual bleeding. We found significant reductions in three of the six procedures—cataract removal, hysterectomy, and myringotomy—in the program’s first year, compared to prior years’ trends. However, changes in the rates of all examined procedures varied widely across commissioning organizations. Our findings highlight some of the challenges of making major budget cuts in health care. Reducing ineffective spending remains a significant opportunity for the US health care system, and the English experience may hold valuable lessons.

From the introduction

The global financial crisis of 2008 has led to the tightening of health budgets, and spending is flattening or declining in real terms in many countries. Simultaneously, soaring demand for health care in the United States and the United Kingdom, exacerbated by aging populations with increasingly complex morbidities; the spiraling cost of health technologies; and growing patient expectations mean that the pressure to contain expenditures is unprecedented.

Health care inefficiencies cost the United States $750 billion annually. This has led to initiatives such as the grassroots, nongovernmental Choosing Wisely campaign, which seek to reduce the usage of overused or ineffective treatments. The return on investment could be substantial. However, disinvestment is difficult, since it is hard to define clinical interventions that are always inappropriate. And, like many other countries, the United States has underdeveloped systems and mechanisms to guide disinvestment strategies.

The NHS is a national single-payer system with one of the most developed centralized systems for assessing clinical and cost-effectiveness in the world. Thus, it should be well placed to achieve efficiency savings more rapidly and consistently than other health systems can. However, the 151 local commissioning organizations (funding organizations known as primary care trusts)—which until March 2013, as explained below, were responsible for purchasing health care for their resident populations—received little disinvestment guidance from the Department of Health or the National Institute for Health and Care Excellence (NICE). NICE primarily provides guidance on which treatments should be offered; it offers much less guidance on which procedures to remove or restrict funding for.

From the discussion

Our analysis shows that the first fiscal year of a major efficiency savings program in the English NHS was associated with significant rate reductions in three of the six low-value procedures assessed. This included a reduction in one relatively ineffective procedure (myringotomy, which declined by 11.4 percent) and reductions in two procedures that are effective only in certain circumstances (cataract removal, which declined by 4.8 percent, and hysterectomy for heavy menstrual bleeding, which declined by 10.7 percent). Comparable reductions in clinically effective benchmark procedures were not evident.

Despite the existence of well-developed mechanisms to guide purchasing decisions in England, there is still a lack of consensus on which procedures to target for disinvestment. Since its inception, NICE has produced abundant guidance to inform the adoption of new technologies in the NHS, but NICE’s contribution to disinvestment decisions is less well developed.

In an effort to address this issue, NICE has established a “do not do” database to support the more efficient use of health resources. However, the database has had a limited impact on purchasing activity because recommendations are limited in their scope, often focusing on the use of specific technologies; are not well publicized; and remain discretionary.

Perhaps reassuringly, our results do not show a clear association between changes in procedure rates and either neighborhoods’ socioeconomic status or commissioning organizations’ financial status. This suggests that there is no particular pattern of inequity. Unlike in the United States, where a person’s ability to pay (through health insurance or out of pocket) primarily dictates the level of access to health care, in England the relationship among finances, neighborhood deprivation, and access to health services is more complex. For example, poorer commissioning organizations in England often receive additional government funding to help address health inequalities.

As more data become available in both the United States and England, it will be interesting to compare the success of the different approaches being taken to reduce low-value care. In England the approach is top-down and specifies the magnitude of savings. In contrast, the United States has embraced new pricing models such as bundled payments and the nongovernmental Choosing Wisely campaign to reduce costs. A grassroots initiative, Choosing Wisely is particularly interesting since it puts a patient-doctor conversation about unnecessary tests and procedures at its heart.

From the conclusion

Our analysis suggests that in a single-payer health system with well-developed centralized mechanisms to assess clinical effectiveness, it is possible to quickly reduce the rate of some ineffective procedures. However, significant variations in reductions were found across local commissioning organizations. This both reinforces the view that disinvesting in low-value health services is a complex process involving several factors and highlights the ongoing challenge of creating affordable and effective health care systems worldwide.


Right now in the United States there is an intense campaign to control health care spending by changing payment systems to reward value over volume even though the knowledge of methods and effectiveness of doing this is quite primitive. This study from England’s National Health Service provides some limited insight on this approach.

Two of the factors in determining value are price and how beneficial the services are. Regarding price, single payer systems relying on a greater role of government are more effective in establishing appropriate pricing. In the United States, our fragmented system of financing health care not only fails to provide us optimal pricing, but, as this article reminds us, it dictates the level of access to health care based on ability to pay through insurance or out-of-pocket. In England, under the National Health Service, price is not a factor at the time patients access services, thus inequity based on price is essentially eliminated in their public system (though their private system does introduce an element of inequity).

On the other hand, whether or not services are of benefit can be much more difficult to determine. A Merit-based Incentive Payment System (MIPS) and Alternative Payment Models (APMs) are being initiated or expanded under the Medicare Access and CHIP Reauthorization Act of 2015 (H.R.2), and yet evidence to date indicates that they have had a variable and largely only negligible benefit in improving value.

The Choosing Wisely campaign being advanced voluntarily by numerous professional organizations seems to be effective in selecting services that are not of adequate benefit. Although admirable, its effectiveness seems to be restrained by the paucity of procedures and services selected and by the lack of authoritative oversight of compliance.

In England, the National Institute for Health and Care Excellence (NICE) has provided much better guidance on which treatments should be offered, but it has not been as effective as it could be since its recommendations are only discretionary as to which procedures should have restricted funding or be disallowed altogether.

Although both England and the United States struggle with ensuring value in health care, the fact that the U.S. pays more than twice per capita than England is related to a greater role of government though their NHS. An example is found in the conclusion the authors offer in this report: “Our analysis suggests that in a single-payer health system with well-developed centralized mechanisms to assess clinical effectiveness, it is possible to quickly reduce the rate of some ineffective procedures.”

Instead of moving forward with our feeble efforts at improving value, we should immediately enact a single payer national health program. Then we will have a framework in which better value can be attained through improved pricing and through a system that would actually be effective in reducing or eliminating spending on some services that lack clinical effectiveness.

But we should not expect dramatic reductions in spending changes based on effectiveness since this study shows that the process is complex. In no small part that is due to the fact that there is considerable low-value care that is not no-value care and thus would be difficult to eliminate.

This is why it is even more imperative that we move to a single payer system. It would immediately give us the increased value we are seeking by eliminating hundreds of billions of dollars in administrative waste.

  • Comments Off


This is a dangerous time for Medicare. The bill passed by the House on March 27, by a surprising bipartisan majority of 392-37—H.R. 2, the Medicare Access and CHIP Reauthorization Act of 2015—threatens to end traditional Medicare as a social insurance program that protects seniors in a single large risk pool. The Senate is set to vote on the bill in two weeks.

The timing could not be more ironical. Medicare was passed 50 years ago by overwhelming bipartisan support in Congress—by votes of 302-116 in the House and 70-24 in the Senate. Since 1965, it has provided a set of comprehensive benefits as an earned right without regard to health conditions or income, with all beneficiaries paying into the program through mandatory contributions from individuals and/or employers. (1) For the last 50 years, Medicare has been a solid rock of coverage in a shark-infested sea of unstable and expensive private plans.

But all that can go away if Republicans (and many Democrats) recklessly pass H.R. 2 without concern for its long-term implications. There are many problems in this bill, crafted as it is to serve the agenda of politicians waving the false flag of “entitlement reform” and lobbyists for organized medicine, private insurers, the drug industry, and other corporate stakeholders in the medical-industrial complex. As is typical in a large legislative package that is difficult to understand, and many legislators have not read, the devil is in the details.

H.R. 2 does have one useful goal—to replace the flawed Sustainable Growth Rate (SGR) formula for setting Medicare payment rates for physicians. The SGR formula was set in 1997 in a deficit-reduction law that ties payment rates to economic growth, which since then has led to recurrent last-minute budget crises, known as the “doc fix” over cuts in physician reimbursement. There have been 17 short-term “fixes” over the last ten years, each time kicking the can down the road without resolving how to proceed.

H.R. 2 eliminates the SGR formula, and proposes different ways to pay physicians, including expanded use of capitation, accountable care organizations, bundled payments, and various ways to implement “pay for performance” incentives. These are all supposedly aimed to improve quality of care and contain costs through a “merit-based incentive payment system” (MIPS). But are all untested, unproven, and unlikely to either increase quality or contain costs while adding greatly to administrative complexity. In his 2014 Health Affairs blog, Jeff Goldsmith warned us about this approach:

“With this legislation, Congress is preparing yet again to enshrine in statute another payment strategy that is both unproven and highly controversial. The proposed legislation casts in concrete an almost laughable complex and expensive clinical record-keeping regime, while preserving the very volume-enhancing features of fee-for-service payment that caused the SGR problem in the first place. The cure is actually worse, and potentially more expensive, than the disease we have now.” (2)

Among the many structural changes in this massive bill are two that, if adopted, will seriously undermine the future integrity of Medicare: (1) its limits on first-dollar supplemental Medigap insurance coverage, and (2) introduction of means testing whereby higher-income Americans would pay more for their Medicare coverage. (3)

The first will hurt the approximately 12 million of the 50 million Medicare enrollees who rely on Medigap. Based on the already disproven premise that “more skin in the game” reins in unnecessary health care, the bill would prohibit plans from covering Part B deductibles. That would transform the whole concept of comprehensive, universal coverage of seniors over 65 with a consumer-directed approach to financing that care, thereby enabling further privatization of Medicare. Medicare patients could expect to face ever-higher deductibles, unaffordable for many, who would end up forgoing necessary care. The Medicare Rights Center, a national, nonprofit organization, has this to say about H.R. 2: “[it] does not represent a fair deal for people with Medicare—expecting too much from beneficiaries in return for too little.” (4)

The second big change—means testing—may seem innocuous, or even a good idea on first blush, but has the potential to unravel the large Medicare risk pool, leading to higher prices, further privatization, and fewer benefits. H.R. 2 would increase payments, permanently, that higher-income seniors would pay for their Medicare coverage, thereby establishing a precedent for future increases. But that could have detrimental impacts on the overall Medicare risk pool, thereby threatening the coverage of lower-income beneficiaries. Jacob Hacker and Theodore Marmor, who have studied the Medicare program over many years, tell us that affluent Medicare enrollees account for only about 1 or 2 percent of Medicare’s total costs. But with this change, affluent seniors would likely shift over to private programs that they could easily afford, thereby breaking up the Medicare risk pool and compromising the universality of Medicare coverage. The end result of that, of course, is increasing costs of coverage by adverse selection, a downward spiral of coverage, and erosion of broad political support for Medicare. (5)

Conservatives have pushed for privatization Medicare as an “entitlement program” for many years, by shifting it from a defined-benefits program to one with defined-contributions. As new Speaker of the House in 1994, Newt Gingrich famously declared that this “could solve the Medicare problem and cause it to wither on the vine.” (6) Recent years have already seen continuing privatization of Medicare—including the Medicare + Choice HMOs in the 1990s (discredited by excesses of managed care), its sequel, Medicare Advantage, and the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). Each of these have benefitted insurers, drug companies and other corporate stakeholders more than patients.

Republicans have attached the above two “poison pills,” plus other changes not being reported, to a goal that both parties support—eliminating the unworkable SGR formula. But H.R. 2 will continue the unraveling of traditional Medicare, and lead to higher costs that will be unaffordable for many seniors and disabled enrollees. Both parties are congratulating themselves on bipartisanship as they oversell the SGR part of the problem. It is unfortunate and misguided that Democrats are taken by this SGR ruse to transform Medicare. They are seeming to cave to the Republicans without concern for the bill’s long-term implications. They need to read the bill and stand up in defense of traditional Medicare. It is inappropriate for them to congratulate themselves on a “transformative” success that is such a long-term threat to the most vulnerable among us.

H.R. 2 will go to the Senate, which returns from recess on April 13th. While it is expected to pass there, there is a big risk that its poison pills will not be recognized and dealt with by legislators. It may well be acted upon quickly as the Senate decides what to do with the austere conservative budget passed by the House that would repeal the Affordable Care Act, cut Medicaid, food stamps, and other safety-net programs.

House Republicans want to convert Medicare into a voucher program, and would like to see the Senate concur. All this ties together as the biggest threat to health care for seniors and the disabled that we have yet seen. Democrats need to discover their spine!


1. Study Panel on Medicare’s Larger Social Role, Final Report. Washington, D.C.: National Academy of Social Insurance, 1999, pp. 1-2.

2. Goldsmith, J. Primum non nocere: Congress’s inadequate Medicare physician payment fix. Health Affairs blog, January 24, 2014.

3. Editorial Board. The House may be about to finally fix the ‘doc fix.Washington Post, March 25, 2015.

4. Response to House Legislative Package to Repeal and Replace the Sustainable Growth Rate (SGR) Formula (H. R. 2). New York. Medicare Rights Center, March 26, 2015.

5. Hacker, JS, Marmor, TR. Medicare reform: fact, fiction, and foolishness. Public Policy & Aging Report 13 (4): 1, Fall 2003.

6. Gingrich, N., as cited by Smith, DG. Entitlement Politics: Medicare and Medicaid 1995-2001, New York. Aldine de Gruyter, 2002: 71, citing Congressional Quarterly Almanac, 1995, pp. 7-13.

Uwe Reinhardt’s timely comments on ACOs and P4P

Posted by on Monday, Mar 30, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Pay for Performance Extends to Health Care in Experiment in New York

By Anemona Hartocollis
The New York Times, March 30, 2015

(A)ccountable care organizations are appearing around the country for Medicare recipients, with mixed results. New York, which has the country’s largest Medicaid budget, is committing more than $1 billion a year for five years to the experiment.

“If we succeed, patients will be more likely to get the right tests and medicine, doctors will benefit as we simplify the business side of their practices, and businesses will benefit as we hold down health-care cost growth,” Sylvia M. Burwell, secretary of the federal Department of Health and Human Services, said this month in New York City, during a visit to promote accountable care organizations.

In the future, if the experiment works, providers may be paid solely based on outcomes rather than volume of services, with better-performing groups earning more than those whose patients are in worse shape.

Perhaps the most unusual alliance is one that brought together more than 1,000 primarily Hispanic doctors serving Upper Manhattan and the South Bronx and Asian doctors working in the Chinatowns of Manhattan, Brooklyn and Queens; and North Shore-Long Island Jewish Health System, a hospital chain that serves a largely middle-class population. The nonprofit venture they formed, called Advocate Community Providers, counts more than 770,000 patients, by far the most of the 25 groups taking part in the program.

The force behind this group is Dr. Ramon Tallaj, a former health official in the Dominican Republic who moved to the United States in 1991.

But some of the Medicaid panel members questioned the logic of having such a large, diverse group of doctors and patients like Dr. Tallaj’s, without any obvious connections among them.

“What’s the glue that holds them together?” asked Stephen Berger, a panel member and investment banker.

The sheer size of the group could also make it complicated to track patients and determine who deserves credit for any improvements in their health. Patients may continue to see any doctor they wish, even if that doctor is not in the group.

Likewise, Dr. Tallaj acknowledged that if his patients did well, he could reap the benefits even if he had not seen them, though he said that was not his motivation.

Uwe Reinhardt, a health economist at Princeton, thought the idea was not as promising as some had hoped. “People thought there was maybe more waste than there actually really is,” he said.

Dr. Reinhardt was also dismissive of performance bonuses for doctors. “The idea that everyone’s professionalism and everyone’s good will has to be bought with tips is bizarre.”


Value rather than volume. Quality rather than quantity. Paying for performance. Reducing costs by eliminating wasteful services. Making providers accountable and rewarding them based on the value of their services. These concepts have become memes in the political and policy communities yet with very little in the health policy literature to confirm that these should be the driving principles behind health care financing reform, though there are quite a few studies that confirm that these concepts lead to mediocrity, at best.

It is urgent that we reconsider these concepts since in two weeks the Senate is expected to pass H.R. 2 which is designed to change payment methods from fee-for-service to models of payment that instill these ideas that are more rhetoric than science-based policy. Yet the rhetoric is leading to implementation of the Merit-based Incentive Payment System (MIPS) and Alternative Payment Models (APMs). These will have a major impact – more negative than positive – on the actual delivery of health care services.

Who is behind this meme-driven revolution in health care? Much of the academic policy community. Legislative and administrative staff members. Politicians. Representatives of vested interests that will benefit from these changes. Well-meaning consumer organizations. Although some are driven by greed, most are on meme-fed autopilot and have gathered in lemming fashion charging forward to a goal in which utopian perceptions will be dashed by the reality of plowing into the shoals of flawed policy.

Although it is quite disconcerting to read the meaningless rote responses of some of the more noted representatives of the policy community, we do have the comfort of of being able to hear from some of that community who bring us reality by questioning these conclusions that are based more on wishes than on objective evidence.

One of those on whom we can rely is Uwe Reinhardt. His brief comments in this article should give the Senate pause as they consider H.R. 2. Current political activity seems to be based on the concept that these flawed policies can eliminate much of the wasteful health care services provided. As he tells us, the problem with that rationale is that there is not nearly as much waste as has been thought. The initial results of experimentation have confirmed that there just is not that much recoverable by attempting to reduce or eliminate care that is not beneficial.

Perhaps Uwe Reinhardt’s most important lesson is in his comments about paying for performance: “The idea that everyone’s professionalism and everyone’s good will has to be bought with tips is bizarre.” What could be more fundamental than the ethical foundations driving the practitioners of the healing arts? The policy people have it all wrong, and they do not seem to understand why.

  • Comments Off

Integrated Delivery Networks: In Search of Benefits and Market Effects

By Jeff Goldsmith et al.
For the National Academy of Social Insurance, February 2015

Advocates believe that IDNs [Integrated Delivery Networks] should be structured like large prepaid group practices such as Kaiser [Permanente]…. Those advocates believe that as IDNs assume more economic risk, either delegated risk through capitated payments from health plans or actual insurance risk through “captive” health plans, IDNs will evolve into Kaiser-like entities, with compelling incentives to control costs. [p. 5]

Because there are so few organizations like Kaiser, there is naturally little comparative data on its performance. There are occasional books and articles extolling the virtues of the Kaiser model, often written by Kaiser-affiliated researchers (Enthoven and Tollen, 2004; Crosson, 2005). There are also some consulting firm reports that suggest the superiority of the Kaiser model (Aon-Hewitt, 2011). Otherwise, there is no evidence that we know of that documents the competitive efficiency of the Kaiser model.

Indeed, during the 1980s and 1990s, Kaiser had difficulty exporting its own model to other parts of the U.S. beyond its native Pacific Coast market (Gitterman, Weiner, Domino et al., 2003). [p. 16]

The latest growth spurt in IDN formation has been stimulated in major part by the quasi-risk contracting model embodied in ACOs. If the intended end state for regular Medicare payment is full-risk contracting with IDNs, and present day IDNs do not display either increased operating efficiency or lower total cost of care compared to community-based alternatives, policymakers need to find another payment approach. [p. 29]


For nearly a half century now, the holy grail of the managed care movement has been the consolidation of the nation’s insurance companies, hospitals and clinics into large “Kaiser-like” entities. The name used by managed care proponents for these entities has changed over the years. First it was “HMO,” then it was “integrated delivery system” (IDS), and now it’s “accountable care organization”(ACO), but Kaiser Permanente always remained the movement’s poster child. Now comes a study that says there was never any evidence for the claim that Kaiser, HMOs, and IDSs cut costs. The authors predict the same will turn out to be true for ACOs.

The study was commissioned by the National Academy of Social Insurance, an organization supported by much of the health policy establishment, including AARP, United HealthCare, the Centers for Medicare and Medicaid Services, the Robert Wood Johnson Foundation, and Kaiser itself.  The lead authors, Jeff Goldsmith and Lawton Burns, are prolific writers who are well known in the health policy world. The study consists of a literature review and an examination of the finances of 15 IDSs.

The authors make it clear they understand they are criticizing the most fundamental belief in managed care theology. In a blog essay about the study, Goldsmith and Burns state:

For the past four decades, there has been one dominant theme in healthcare delivery-system reform: Hospitals and physicians must transform themselves into comprehensive-care enterprises to be paid a population-based global budget. In the vision of pioneering health policy researchers Paul Ellwood Jr. and Alain Enthoven, consumers should choose among multiple Kaiser-like entities competing based on premium (e.g., total cost of care).

Ellwood, Enthoven and their disciples claimed, without evidence, that subjecting insurance-hospital-clinic conglomerates to a “global budget” – which means shifting all or much of the insurance risk traditionally borne by insurance companies onto hospitals and clinics – would create the best of all possible worlds. It would lead hospitals and clinics, with helpful instructions from the insurance component of the conglomerate, to reduce costs and improve quality. Exactly how the Kaiser-like entities were supposed to do this has never been clear.

The study found that evidence supporting the claims made by Ellwood, Enthoven and others for HMOs/IDSs/Kaiser-like entities has never existed:

What we found was, frankly, disappointing. We reviewed more than 30 years of academic literature on vertical integration and diversification in healthcare, and found virtually no measurable benefits … of putting health insurance, hospitals and physician services under the same structure.


The study concludes, “there is no evidence that we know of that documents the competitive efficiency of the Kaiser model.” (p. 16)

The study in fact presents some evidence indicating “integrated delivery networks” (IDNs, Goldsmith et al.’s label for IDSs) are driving prices up. Goldsmith and Burns summarized this portion of the study as follows:

[W]e found that IDNs’ flagship hospitals … were more expensive than their direct in-market competitors…. Further, the size of the IDN (measured either by hospital bed count or total revenue) did not correlate with profitability…. Neither scale nor scope economies could be detected.

Perhaps most importantly, the authors found evidence indicating that IDN’s that subject their flagship hospital to risk-sharing make those hospitals more expensive:

What we found was that flagship hospitals within IDNs that have no revenue at risk are on average 6.8 percent less expensive than their in-market competitors, while flagships within IDNs that have some revenue at risk are on average 20 percent more expensive than their competitors. This finding is similar to one found in the literature review. If there is a cost of care advantage conferred on IDN hospitals by their owner operating a health plan, it was not apparent from this analysis. (p. 24)

The authors suggest profits for the provider components of IDNs fall. They state, “From the provider perspective, the available evidence suggests that the more providers invest in IDN development, the lower their operating margins and return on capital.” But what about non-provider investors in IDNs? Do they ultimately suffer lower returns too, or do they enjoy higher profits because the insurer component of the IDN sucks more money out of clinics and hospitals than it returns? The authors do not attempt to offer an answer. They report that IDNs are so “inscrutable” it is impossible to tell how money moves among the three components of IDNs.

Finally, the study found no differences in quality between the IDN flagship hospitals and their nearest competitor.

Goldsmith et al. assert that a “major reason” why the merger of insurers, hospitals and clinics into one entity raises costs and fails to improve quality is that the new entity is more difficult and expensive to manage than the individual components were by themselves. The authors observe that this explanation is consistent with the larger economic literature on mergers of firms selling different products or services. “[T]he unrelatedness of the new businesses” (p. 15) now under the control of one set of managers makes the managers’ job far more difficult and expensive, the authors argue.

To translate into plain language that will resonate with critics of managed care, Goldsmith et al. are saying:

• insurance companies don’t know how to practice medicine,
• doctors and hospitals don’t know how to run insurance companies, and,
• when insurers, hospitals and clinics are thrown into the same entity, the management of the new entity is forced to spend more on administration than the components of the entity did prior to the merger because the new entity is so much more complex than any of the three components were operating alone.

This explanation will not surprise single-payer proponents. Since the birth of the American single-payer movement in the late 1980s, the movement has been highly critical of the cost of administering America’s increasingly consolidated, increasingly micro-managed, multiple-payer system. PNHP founders David Himmelstein and Steffie Woolhandler greatly enriched the study of administrative costs, and arguably invented the field, with their 1991 paper documenting the high administrative costs of the US system. That paper and subsequent research has shown that US administrative costs have risen from about one-fifth of total spending in the 1980s to one-third today. The period since the 1980s is, of course, the period in which managed care ideology and IDSs became widespread.

If it’s true that Kaiser-like entities incur higher administrative costs and ultimately save no money for anyone, why have mergers among insurers, hospitals and clinics become so common? The answer hinted at by the authors is the that economic forces set loose by the rise of the managed care movement gave first movers – the early consolidators bent on “managing care” – an advantage over the later movers. As the myth that insurance companies should micro-manage clinics and hospitals spread among the insurance industry’s most powerful customers (large employers and the politicians who control Medicare and Medicaid), insurers rushed to consolidate with each other and with providers to enhance their power to control clinics and hospitals and to extract discounts from them.

Anecdotal evidence indicates the advantage gained by the early consolidators was enormous. In an interview published in Health Affairs, Thomas Pyle, the former CEO of Harvard Community Health Plan (an HMO) observed that the most important “lever” the HMO used to control its costs during his tenure was to cut a deal with Brigham and Women’s Hospital in which the hospital agreed to give the HMO a 42 percent discount. “When we made that deal, we closed our own hospital down,” said Pyle, “and we gave the Brigham almost all of our business, in return for which we got a 42 percent discount off rate card. It was the first time that a Harvard hospital had really broken on rate cards.”  This ability to destroy hospitals and build up others by “giving all their business” to one hospital at the expense of others gave the early HMOs a significant advantage over insurers that did not have that ability.

Similarly, the discounts HMOs extracted from Twin Cities hospitals soared during the 1980s, from 9 percent in 1981 to 38 percent by 1990. (The 1981 figure is from Allan N. Johnson, “Cost-shifting: The discount dilemma,” Journal of Health Politics, Policy and Law, 1984;2:251-260. The 1990 figure is from Katherine Hiduchenko, “Do Health Maintenance Organizations control costs or shift costs?” New England Journal of Medicine, 1993;328:971.)

But that advantage acquired by the early consolidators was reduced, and for some eliminated, as the provider sector responded in kind. As the insurance industry’s game plan became clear to providers, providers rushed to merge with each other to create countervailing bargaining power. As Goldsmith et al. put it, “The rise of managed care, and the perceived threat posed by the rise of capitated contracting, created anxiety among providers that fueled their efforts to form IDNs.” (p. 10)

This dynamic resembles the arms race among nations. No nation can afford to stop the race by itself and so the race goes on. Similarly, because American politicians and the intellectuals who influence them encourage merger mania within the healthcare system with their celebration of “integrated care,” and because state and federal anti-trust authorities don’t have the resources to bring the race to an end, no insurance company, hospital or clinic can afford to “disarm” unilaterally – to stay out of the race to get big and complex. Thus, even though the race to bigness and complexity ultimately benefits no one because it drives up administrative costs by more than it reduces medical costs, the race goes on. And it will go on as long as the managed care ideology which sparked the race in the first place holds a firm grip on the minds of large employers, policy-makers, and other members of the health policy elite.

If market forces unleashed by the rise of managed care are responsible for the race to gigantism and complexity, and the race is generating more expense than it is saving, then the most important question before us is: How did managed care ideology become so powerful and what can be done to reduce that power? That, ultimately, is the most important question raised by Goldsmith et al.’s study. Goldsmith et al. give a nod to the problem. They observe that “IDNs have … operated under a halo of presumed societal benefits (quality, efficiency, care integration, etc.) for the better part of four decades with remarkably little evidence that these benefits in fact exist.” (p. 29) Where did this “halo” come from?

Goldsmith et al. make no attempt to answer that question. That’s understandable. The topic they bit off was large enough for one paper, and they analyzed that topic well. By demonstrating the gaping chasm between the claims made by Ellwood et al. and reality, Goldsmith et al. have performed a valuable service. But the research must not stop there. We badly need studies of the etiology of groupthink within the American health policy establishment.

Kip Sullivan, J.D., is a member of the board of Minnesota Physicians for a National Health Program. His articles have appeared in The New York Times, The Nation, The New England Journal of Medicine, Health Affairs, the Journal of Health Politics, Policy and Law, and the Los Angeles Times.

  • Comments Off

Two week ‘doc fix’ reprieve gives us time to protect Medicare

Posted by on Friday, Mar 27, 2015

This entry is from Dr. McCanne's Quote of the Day, a daily health policy update on the single-payer health care reform movement. The QotD is archived on PNHP's website.

Senate to Take Up Medicare ‘Doc Fix’ Bill After Recess

By Siobhan Hughes
The Wall Street Journal, March 27, 2015

The Senate will take up legislation to replace a formula for reimbursing doctors who treat Medicare patients when the chamber returns from a two-week recess, Senate Majority Leader Mitch McConnell (R., Ky.) said early on Friday.

The House had one day earlier passed the bill in an overwhelming 392-37 vote. Supporters had hoped the Senate would take up the measure before a two-week spring that begins once the chamber adjourns Friday.

“We’ll turn to this legislation very quickly when we get back,” Mr. McConnell said. “There’s every reason to believe it’s going to pass the Senate by a very large majority.”

Dr. Robert Wah, the president of the American Medical Association, said his group was “extremely disappointed” that the Senate vote was delayed and said that physicians would face a “devastating” cut when the current patch expires just days from now.

The Centers for Medicare and Medicaid Services has said that it takes a minimum of 14 days to pay claims from doctors. Lawmakers expect that if Congress acts soon enough the government would be able to make payments without imposing the pay cuts.

One possible wrinkle is that Mr. Reid appeared to request votes on a limited number of amendments related the legislation. Mr. McConnell said that he would “be discussing the way forward” with Mr. Reid.



AARP Statement on House Passage of Medicare SGR Reform Bill

AARP, March 26, 2015

AARP applauds the House for its bipartisan work on the Medicare Access and CHIP Reauthorization Act of 2015 (H.R. 2) that permanently replaces the Sustainable Growth Rate (SGR) formula. However, we remain concerned that Medicare beneficiaries are unfairly shouldering more than their fair share of the cost of the SGR “Doc Fix,” and we urge further improvements as the bill moves to the Senate.

While AARP commends the House of Representatives for working together in a bipartisan fashion on this SGR bill, we are concerned that Medicare beneficiaries will now face higher out-of-pocket costs, including higher premiums and reduced coverage through certain Medicare Supplemental (Medigap) plans. The typical senior on Medigap is not wealthy—nearly half have annual incomes of less than $30,000.

AARP wants a permanent solution to the SGR formula, one that achieves a balanced and fair solution for all stakeholders—Medicare beneficiaries, physicians and other health care providers, insurers, and drug companies. AARP is ready to work with the Senate to improve this important bill.



Letter to Speaker John Boehner and Democratic Leader Nancy Pelosi

From Joe Baker, President
Medicare Rights Center, March 25, 2015

We are grateful to the House Republican and Democratic leadership for working to develop an SGR compromise. The SGR formula is fundamentally flawed, and permanent changes to the Medicare reimbursement system are long overdue. Yet, H.R. 2 does not represent a fair deal for people with Medicare—expecting too much from beneficiaries in return for too little.

We are concerned with the offset provisions in H.R. 2, including proposals to scale back comprehensive Medigap coverage and to increase costs for those already paying higher Part B and Part D premiums. The clients we represent include those beneficiaries whose Medicare cost sharing will be altered by the offsets included in H.R. 2. In particular, we are most troubled by the provision to prohibit Medigap plans from covering costs up to the Part B deductible, starting in 2020 for newly eligible Medicare beneficiaries.

We fundamentally disagree with the premise that Medigap “first-dollar” coverage should be undone as a means of controlling health care service utilization. Decades of empirical research consistently demonstrates that, while higher out-of-pocket costs certainly deter health care utilization, it deters utilization of needed care as well as unneeded care indiscriminately. Additionally, research consistently supports what we know to be true through our experience serving people with Medicare: health care providers—not beneficiaries— order services and ultimately drive utilization trends.

Medigap provides health security and peace of mind to beneficiaries living on fixed incomes. The value of Medigap to people with low- and middle-incomes is its predictability. Planning for the expense of a monthly premium is doable, but the same is not true for the unexpected cost of a deductible. This security is critically important to the 40% of Medigap enrollees with incomes below $30,000. We believe comprehensive, “first-dollar” Medigap plans should remain available to future retirees.

At the same time, additional income-relating of Part B and Part D premiums concerns us. These provisions in H.R. 2 represent a sizable cost shift to select Medicare beneficiaries, and half of the total offsets included in the legislative package.



H.R. 2 – Medicare Access and CHIP Reauthorization Act of 2015


Subtitle A–Medicare Beneficiary Reforms

Sec. 401. Limitation on certain medigap policies for newly eligible Medicare beneficiaries.

Sec. 402. Income-related premium adjustment for parts B and D.


The decision of the U.S. Senate leadership to delay consideration of H.R. 2 (the SGR repeal bill) until after they take a two week recess provides us with an opportunity to join with others in demanding removal of two provisions that would be very harmful to our traditional Medicare program – means-tested premiums for Medicare Parts B and D, and imposing deductibles for beneficiaries of Medigap plans.

Although some might argue that these changes are comparatively trivial, make no mistake about the intent of these measures. Speaker John Boehner stated on the House floor that H.R. 2 is the beginning of the process of entitlement reform. In stating that this is “about strengthening and saving Medicare,” he really means that it is about reducing the government funding of Medicare by shifting more of the responsibility of payment to the Medicare beneficiaries, eventually culminating in the premium support (voucher) model of privatizing Medicare.

Recent Quote of the Day messages have sounded alarms about two major concerns of the “doc fix” legislation: (1) the administrative burdens that will be placed on health care professionals by the Merit-based Incentive Payment System (MIPS) and the Alternative Payment Models (APMs), and (2) the efforts to push the traditional Medicare program in the direction of privatization.

Of these two, the administrative hassles of MIPS and APMs are the less urgent since precursors of these programs already exist. The existing Medicare reporting programs include PQRS, Meaningful Use, and Value Modifier. Alternative Payment Models include accountable care organizations (ACOs), patient-centered medical homes, and others. Merely eliminating MIPS and APMs from H.R.2 will not adequately address these problems. They require much more work for a later date, hopefully leading to a single payer national health program.

On the other hand, eliminating means-tested premiums and mandated Medigap deductibles from H.R. 2 is an extremely urgent problem. We cannot allow incremental steps that shift more of the responsibility of paying for Medicare to the beneficiaries. AARP and the Medicare Rights Center agree. Sections 401 and 402 must be eliminated from H.R. 2.

Contact your Senators and urge other individuals and organizations to do likewise. Make telephone calls. Write letters. Send emails. Do it now.

  • Comments Off

About this blog

Physicians for a National Health Program's blog serves to facilitate communication among physicians and the public. The views presented on this blog are those of the individual authors and do not necessarily represent the views of PNHP.

News from activists

PNHP Chapters and Activists are invited to post news of their recent speaking engagements, events, Congressional visits and other activities on PNHP’s blog in the “News from Activists” section.