Evidence Links Increases In Public Health Spending To Declines In Preventable Deaths

By Glen P. Mays, and Sharla A. Smith
Health Affairs, July 21, 2011

Public health activities in the United States are supported through a patchwork of funding sources and financing arrangements that vary widely across states and communities and that are relatively unstable over time. These arrangements result in large geographic differences in spending for public health activities, even among communities with relatively similar population characteristics and health needs.

At the state level, per capita public health spending varied by a factor of more than thirty in 2010, ranging from a low of less than $4 in Nevada to a high of more than $171 in Hawaii. Local variation in public health spending was even larger, ranging from less than $1 per capita to more than $200 per capita in 2008.

Communities with larger increases in public health spending experienced larger reductions in mortality from leading preventable causes of death over a thirteen-year period. This relationship was consistent across several different mortality measures, and it persisted after accounting for differences in demographic and socioeconomic characteristics, medical resources, and unobserved community characteristics that jointly influence spending and health.

Although our study does not establish a definitive causal link between spending and mortality because of the observational research design we used, it nevertheless provides compelling evidence that differences in public health investments may contribute to differences in community health outcomes.

http://content.healthaffairs.org/content/early/2011/07/19/hlthaff.2011.0196.abstract

This study is just a reminder that population health involves much more than just the interaction between patients and their health care professionals and institutions. The importance of the public role is undeniable. It’s too bad that our politicians don’t seem to understand that.

By Mark Merlis
Kaiser Family Foundation, July 2011

Among the many proposals under consideration to control the growth in Medicare spending is one that attempts to achieve savings by restricting coverage under Medigap plans to require enrollees to pay a larger share of the costs of Medicare-covered services.

Medicare by itself has relatively high deductibles, and imposes coinsurance for most covered services. Moreover, Medicare does not have any limit on total cost sharing, exposing some beneficiaries to large out-of-pocket (OOP) costs. Medigap policies help cover some or all of Medicare’s cost-sharing requirements. Some analysts contend that comprehensive “first dollar” coverage from Medigap leads enrollees to obtain unnecessary services, which results in excess Medicare spending.

This brief examines the potential effects of three different Medigap reform proposals on Medicare program spending and on beneficiaries’ out-of-pocket costs.

Medigap reforms would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization. Under all three options, a greater share of beneficiaries reporting fair or poor health than those in better health would experience an increase in total out-of-pocket costs, because their premium savings would not be enough to offset their new spending for direct cost-sharing. Under Options 1 and 2, more than one-third of all Medigap enrollees in fair or poor health would experience a net increase in premiums and other out-of-pocket costs for Medicare covered services, as compared to less than one-fifth of those in relatively good health. Because those in relatively poor health use more services than healthier enrollees, the increase in their direct cost-sharing expenses for Medicare-covered services would more than offset any premium reduction.

Enrollees facing higher net costs are disproportionately those in fair or poor health, those requiring inpatient hospital care, and those with modest incomes. Even enrollees who do not actually see an increase in their total costs could be thought of as suffering a “welfare loss.” Beneficiaries buy comprehensive insurance in part for the peace of mind of knowing that they are fully protected against unpredictable events. They may see the loss of this protection as outweighing any potential premium savings.

http://www.kff.org/medicare/upload/8208.pdf

Comment: 

By Don McCanne, MD

Two days ago we discussed the negative impact of requiring deductibles for Medigap plans – a proposal designed to reduce the moral hazard of insurance (the propensity to obtain more care if it is free at the time of access). This KFF study is timely because it confirms that requiring Medigap cost sharing “would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization.” Further, even if eliminating cost sharing does not have a net financial benefit, it does provide a “welfare gain” by providing beneficiaries with “the peace of mind of knowing that they are fully protected against unpredictable events.”

Medigap Reforms: Potential Effects of Benefit Restrictions on Medicare Spending and Beneficiary Costs

By Mark Merlis
Kaiser Family Foundation, July 2011

Among the many proposals under consideration to control the growth in Medicare spending is one that attempts to achieve savings by restricting coverage under Medigap plans to require enrollees to pay a larger share of the costs of Medicare-covered services.

Medicare by itself has relatively high deductibles, and imposes coinsurance for most covered services. Moreover, Medicare does not have any limit on total cost sharing, exposing some beneficiaries to large out-of-pocket (OOP) costs. Medigap policies help cover some or all of Medicare’s cost-sharing requirements. Some analysts contend that comprehensive “first dollar” coverage from Medigap leads enrollees to obtain unnecessary services, which results in excess Medicare spending.

This brief examines the potential effects of three different Medigap reform proposals on Medicare program spending and on beneficiaries’ out-of-pocket costs.

Medigap reforms would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization. Under all three options, a greater share of beneficiaries reporting fair or poor health than those in better health would experience an increase in total out-of-pocket costs, because their premium savings would not be enough to offset their new spending for direct cost-sharing. Under Options 1 and 2, more than one-third of all Medigap enrollees in fair or poor health would experience a net increase in premiums and other out-of-pocket costs for Medicare covered services, as compared to less than one-fifth of those in relatively good health. Because those in relatively poor health use more services than healthier enrollees, the increase in their direct cost-sharing expenses for Medicare-covered services would more than offset any premium reduction.

Enrollees facing higher net costs are disproportionately those in fair or poor health, those requiring inpatient hospital care, and those with modest incomes. Even enrollees who do not actually see an increase in their total costs could be thought of as suffering a “welfare loss.” Beneficiaries buy comprehensive insurance in part for the peace of mind of knowing that they are fully protected against unpredictable events. They may see the loss of this protection as outweighing any potential premium savings.

http://www.kff.org/medicare/upload/8208.pdf

Two days ago we discussed the negative impact of requiring deductibles for Medigap plans – a proposal designed to reduce the moral hazard of insurance (the propensity to obtain more care if it is free at the time of access). This KFF study is timely because it confirms that requiring Medigap cost sharing “would have a disproportionately negative impact on enrollees with modest incomes, in relatively poor health, and those with any inpatient hospital utilization.” Further, even if eliminating cost sharing does not have a net financial benefit, it does provide a “welfare gain” by providing beneficiaries with “the peace of mind of knowing that they are fully protected against unpredictable events.”

Healthcare.gov, July 18, 2011

On July 18, the U.S. Department of Health and Human Services (HHS) proposed standards for establishing CO-OP health insurance plans.

A CO-OP is a private, nonprofit organization that sells health insurance coverage, like a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO), and will be subject to the same rules as other health insurers.

Unlike many health insurance companies today, a CO-OP:

* Gives its enrollees a say in their health plan. CO-OP members elect the board of directors, a majority of whom must also be enrolled in the CO-OP health plan.

* Uses profits to benefit enrollees. CO-OPs are required to use their profits to lower premiums, improve health benefits, improve the quality of health care, expand enrollment or otherwise contribute to the stability of coverage for members.

* Educates enrollees about the plan. Because a CO-OP relies on its enrollees to help decide the direction of the plan, communication about key features of the plan will be a high priority.

HHS is proposing standards for establishing CO-OPs, and for qualifying for $3.8 billion in loans to help start-up and capitalize these new health plans. All CO-OP loans must be repaid with interest and loans will only be made to private, nonprofit entities that demonstrate a high probability of becoming financially viable.

http://www.healthcare.gov/news/factsheets/2011/07/coops07182011a.html

And…

Establishment of Consumer Operated and Oriented Plan (CO-OP) Program

Patient Protection and Affordable Care Act
Department of Health and Human Services, July 18, 2011

Proposed rule.

Subpart F–Consumer Operated and Oriented Plan Program

§ 156.500 Basis and scope.

This subpart implements section 1322 of the Affordable Care Act by establishing the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as “CO-OPs.” Under this program, loans are awarded to encourage the development of CO-OPs. Applicants that meet the eligibility standards of the CO-OP program may apply to receive loans to help fund start-up costs and meet the solvency requirements of States in which the applicant seeks to be licensed to issue CO-OP qualified health plans. This subpart sets forth the governance requirements for the CO-OP program and the terms for loans awarded under the CO-OP program.

§156.520 Loan terms.

  (a) Overview of Loans.

    (1) Applicants may apply for the following loans under this section: Start-up Loans and Solvency Loans.

    (2) All loans awarded under this subpart must be used in a manner that is consistent with the FOA, the loan agreement, and all other statutory, regulatory, or other requirements.

    (3) Solvency Loans awarded under this subsection will be structured in a manner that ensures that the loan amount is recognized by State insurance regulators as contributing to the State-determined reserve requirements or other solvency requirements (rather than debt) consistent with the insurance regulations for the States in which the loan recipient will offer a CO-OP qualified health plan.

  (b) Repayment period. The loan recipient must make loan payments consistent with the approved repayment schedule in the loan agreement until the loan is paid in full consistent with State reserve requirements, solvency regulations, and requisite surplus note arrangements. Subject to their ability to meet State reserve requirements, solvency regulations, or requisite surplus note arrangements, the loan recipient must repay its loans and, if applicable, penalties within the repayment periods in paragraphs (b)(1), (2), or (3) of this section.

    (1) The contractual repayment period for Start-up Loans and any associated penalty is five years following each drawdown of loan funds consistent with the terms of the loan agreement.

    (2) The contractual repayment period for Solvency Loans and any associated penalty is fifteen years following each drawdown of loan funds consistent with the terms of the loan agreement.

    (3) Changes to the loan terms, including the repayment periods, may be executed if CMS determines that the loan recipient is unable to repay the loans as a result of State reserve requirements, solvency regulations, or requisite surplus note arrangements or without compromising coverage stability, member control, quality of care, or market stability. In the case of a loan modification or workout, the repayment period for loans awarded under this subpart is the repayment period established in the loan modification or workout. The revised terms must meet all other regulatory, statutory, and other requirements.

http://www.ofr.gov/OFRUpload/OFRData/2011-18342_PI.pdf

Comment:

By Don McCanne, MD

The proposed rule has now been released for the establishment of CO-OPs under the Affordable Care Act. The CO-OPs are private, nonprofit organizations that sell insurance, like HMOs and PPOs, under the same rules as the other private insurers. The most important difference is that a CO-OP is controlled by a board of directors that is elected by the individuals enrolled in the CO-OP.

These are new organizations, and, as such, require a new infusion of capital to meet the reserve requirements for future claims. These are the same requirements that have been established by the states for other private insurers already competing in the marketplace.

Private, for-profit insurers have the capability of establishing start-up costs and solvency reserves by selling shares of stock. Since the CO-OPs are nonprofit, they don’t have this resource to tap. Recognizing this, the Affordable Care Act included provisions for government loans for start-up costs and other loans for solvency (reserve funds for future claims). It is important to understand that these are not grants but are loans that must be repaid, with interest, within five years for start-up loans and fifteen years for solvency loans.

Think about that. The CO-OPs are required to compete with the private insurers under the same terms, while having the additional requirement of paying back these loans. Since their only revenue source is premiums for the insurance they are selling, these loan costs that their competitors don’t have will have to be recovered through higher premiums. Under these terms, how could they possibly compete with the private insurers? It is no wonder that HHS anticipates a default rate of 35 or 40 percent on these loans.

There are many other issues. How long would it take to establish a critical threshold of enrolling enough members to create a viable entity? Since it is likely that the CO-OPs would be subject to adverse selection (enrolling a larger share of patients with greater health care needs), there would be further upward pressure on their premiums (death spiral) since current risk adjustment tools do not recover the full excess losses (as if health care is a “loss”).

There is also the possibility that states will rule that a reserve fund established by a loan does not qualify as a capital reserve, and for good reason. Another problem is that an unstable system of private and public plans with varying and ever changing eligibility requirements would make it very difficult for a CO-OP to maintain a stable patient population, sacrificing much of the benefits of the CO-OP model.

It’s too bad. CO-OPs should have offered us the opportunity to establish altruistic health care organizations. Instead, the politicians bent over backwards not onl
y to keep the government out of these programs, but also to protect the private insurers’ marketplace by being sure that the CO-OPs were not allowed a fair playing field by saddling them with insurmountable debt.

We needed a seat at the table.

CO-OP Health Plans: More Competition, New Choices for Consumers and Small Business

Healthcare.gov, July 18, 2011

On July 18, the U.S. Department of Health and Human Services (HHS) proposed standards for establishing CO-OP health insurance plans.

A CO-OP is a private, nonprofit organization that sells health insurance coverage, like a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO), and will be subject to the same rules as other health insurers.

Unlike many health insurance companies today, a CO-OP:

* Gives its enrollees a say in their health plan. CO-OP members elect the board of directors, a majority of whom must also be enrolled in the CO-OP health plan.

* Uses profits to benefit enrollees. CO-OPs are required to use their profits to lower premiums, improve health benefits, improve the quality of health care, expand enrollment or otherwise contribute to the stability of coverage for members.

* Educates enrollees about the plan. Because a CO-OP relies on its enrollees to help decide the direction of the plan, communication about key features of the plan will be a high priority.

HHS is proposing standards for establishing CO-OPs, and for qualifying for $3.8 billion in loans to help start-up and capitalize these new health plans. All CO-OP loans must be repaid with interest and loans will only be made to private, nonprofit entities that demonstrate a high probability of becoming financially viable.

http://www.healthcare.gov/news/factsheets/2011/07/coops07182011a.html

And…

Establishment of Consumer Operated and Oriented Plan (CO-OP) Program

Patient Protection and Affordable Care Act
Department of Health and Human Services, July 18, 2011

Proposed rule.

Subpart F–Consumer Operated and Oriented Plan Program

§ 156.500 Basis and scope.

This subpart implements section 1322 of the Affordable Care Act by establishing the Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as “CO-OPs.” Under this program, loans are awarded to encourage the development of CO-OPs. Applicants that meet the eligibility standards of the CO-OP program may apply to receive loans to help fund start-up costs and meet the solvency requirements of States in which the applicant seeks to be licensed to issue CO-OP qualified health plans. This subpart sets forth the governance requirements for the CO-OP program and the terms for loans awarded under the CO-OP program.

§156.520 Loan terms.

(a) Overview of Loans.

(1) Applicants may apply for the following loans under this section: Start-up Loans and Solvency Loans.

(2) All loans awarded under this subpart must be used in a manner that is consistent with the FOA, the loan agreement, and all other statutory, regulatory, or other requirements.

(3) Solvency Loans awarded under this subsection will be structured in a manner that ensures that the loan amount is recognized by State insurance regulators as contributing to the State-determined reserve requirements or other solvency requirements (rather than debt) consistent with the insurance regulations for the States in which the loan recipient will offer a CO-OP qualified health plan.

(b) Repayment period. The loan recipient must make loan payments consistent with the approved repayment schedule in the loan agreement until the loan is paid in full consistent with State reserve requirements, solvency regulations, and requisite surplus note arrangements. Subject to their ability to meet State reserve requirements, solvency regulations, or requisite surplus note arrangements, the loan recipient must repay its loans and, if applicable, penalties within the repayment periods in paragraphs (b)(1), (2), or (3) of this section.

(1) The contractual repayment period for Start-up Loans and any associated penalty is five years following each drawdown of loan funds consistent with the terms of the loan agreement.

(2) The contractual repayment period for Solvency Loans and any associated penalty is fifteen years following each drawdown of loan funds consistent with the terms of the loan agreement.

(3) Changes to the loan terms, including the repayment periods, may be executed if CMS determines that the loan recipient is unable to repay the loans as a result of State reserve requirements, solvency regulations, or requisite surplus note arrangements or without compromising coverage stability, member control, quality of care, or market stability. In the case of a loan modification or workout, the repayment period for loans awarded under this subpart is the repayment period established in the loan modification or workout. The revised terms must meet all other regulatory, statutory, and other requirements.

http://www.ofr.gov/OFRUpload/OFRData/2011-18342_PI.pdf

The proposed rule has now been released for the establishment of CO-OPs under the Affordable Care Act. The CO-OPs are private, nonprofit organizations that sell insurance, like HMOs and PPOs, under the same rules as the other private insurers. The most important difference is that a CO-OP is controlled by a board of directors that is elected by the individuals enrolled in the CO-OP.

These are new organizations, and, as such, require a new infusion of capital to meet the reserve requirements for future claims. These are the same requirements that have been established by the states for other private insurers already competing in the marketplace.

Private, for-profit insurers have the capability of establishing start-up costs and solvency reserves by selling shares of stock. Since the CO-OPs are nonprofit, they don’t have this resource to tap. Recognizing this, the Affordable Care Act included provisions for government loans for start-up costs and other loans for solvency (reserve funds for future claims). It is important to understand that these are not grants but are loans that must be repaid, with interest, within five years for start-up loans and fifteen years for solvency loans.

Think about that. The CO-OPs are required to compete with the private insurers under the same terms, while having the additional requirement of paying back these loans. Since their only revenue source is premiums for the insurance they are selling, these loan costs that their competitors don’t have will have to be recovered through higher premiums. Under these terms, how could they possibly compete with the private insurers? It is no wonder that HHS anticipates a default rate of 35 or 40 percent on these loans.

There are many other issues. How long would it take to establish a critical threshold of enrolling enough members to create a viable entity? Since it is likely that the CO-OPs would be subject to adverse selection (enrolling a larger share of patients with greater health care needs), there would be further upward pressure on their premiums (death spiral) since current risk adjustment tools do not recover the full excess losses (as if health care is a “loss”).

There is also the possibility that states will rule that a reserve fund established by a loan does not qualify as a capital reserve, and for good reason. Another problem is that an unstable system of private and public plans with varying and ever changing eligibility requirements would make it very difficult for a CO-OP to maintain a stable patient population, sacrificing much of the benefits of the CO-OP model.

It’s too bad. CO-OPs should have offered us the opportunity to establish altruistic health care organizations. Instead, the politicians bent over backwards not only to keep the government out of these programs, but also to protect the private insurers’ marketplace by being sure that the CO-OPs were not allowed a fair playing field by saddling them with insurmountable debt.

We needed a seat at the table.

By Julie Appleby
Kaiser Health News, July 15, 2011

What is Medigap and why do people buy it?

Unlike most job-based health insurance, traditional Medicare does not include “catastrophic” coverage, an annual maximum upper limit on the amount beneficiaries could pay. So enrollees can be liable for thousands of dollars each year, including: $1,132 per-episode deductible for hospital admissions; hundreds of dollars in daily charges for hospital stays of longer than 60 days; a $162-a-year deductible for doctor care, plus 20 percent of charges for office visits or equipment like wheelchairs.

Ten standardized types of supplemental plans offered by private insurers – including AARP’s UnitedHealthcare policies  – cover all or most of such deductibles and copayments.  Some employers also pay all or part of such costs for their retirees.

What changes are under consideration?

It is not clear exactly what’s on the table in the negotiations between congressional leaders and the White House.  But the charts  released show that one such proposal under consideration would bar insurers from offering supplemental policies unless the policies came with an annual deductible. People who didn’t want a deductible could pay $530 a year in additional premium to ensure that they won’t be hit with costs before their coverage kicks in.

What about people who don’t have a Medigap plan?

Only about 10 percent of seniors don’t have some sort of supplemental coverage. Some people have military/VA benefits, others are in Medicaid, and some have coverage through Medicare Advantage plans, which are insurance policies offered by private insurers as an alternative to traditional Medicare.

Would changing supplemental coverage save money?

Some economists and policy experts say that supplemental coverage insulates beneficiaries from medical costs, driving up demand for unnecessary care. A study done for MedPAC in 2009 found that beneficiaries with supplemental insurance used more care and cost the program more money. The increased spending wasn’t for emergency hospitalizations, but for other services such as elective hospital admissions, preventive care, doctor office visits and some types of tests.

What else do people say about the idea?

Advocacy groups like the Medicare Rights Center oppose restricting Medigap plans, saying it would simply shift more costs from the government to elderly and low-income people who can least afford it. “Some in government feel people in Medicare don’t have enough ‘skin in the game,’” says Ilene Stein, federal policy director for the center. In fact, she says, people on Medicare already pay 15 percent of their incomes for health care, well above the level paid by non-Medicare households. While the proposals would cap maximum annual spending per enrollee to $5,500 or $7,500, “that’s a lot of money for someone making $22,000,” the median household income for those on Medicare, she says.

http://www.kaiserhealthnews.org/Stories/2011/July/15/medigap-medicare-supplemental-faq.aspx

And…

Exploring the Effects of Secondary Coverage on Medicare Spending for the Elderly

Study by Direct Research, LLC
For the Medicare Payment Advisory Commission (MedPAC)
June 2009

Our results show that secondary insurance has a substantial impact on Medicare spending, consistent with the prior literature in this area. After removing beneficiaries with any VA use and adjusting for differences in health status, income, education, and demographics, individuals with Medigap coverage had Medicare costs 33 percent higher than those with no secondary insurance. Other private secondary insurance was associated with smaller increases in spending. There was no statistically significant difference in Part A spending, but a large and statistically significant increase in Part B spending.

Out-of-pocket payment reduced spending largely by suppressing elective care (broadly defined) as opposed to emergency care. In particular:

* Emergency care (ambulance use, emergency room visits, emergency and urgent hospitalizations) appeared unaffected by the presence of secondary insurance.

* Elective admissions, preventive care, minor procedures and endoscopies were strongly affected by secondary insurance coverage, with substantially higher use among those with private secondary insurance.

It is not possible to use observational (non-experimental) data to prove beyond a doubt that a causal relationship exists between secondary insurance and spending. For several reasons, however, this analysis strongly suggests secondary insurance (reduced out-of-pocket costs) genuinely causes higher spending, and is not merely associated with secondary insurance due to some other factors affecting both insurance demand and health care use. The following factors suggest that this is a causal relationship. First, beneficiaries themselves report that out-of-pocket costs are a significant reason for delaying care. Nearly 20 percent of beneficiaries without secondary insurance reporting delaying care due to concerns over cost, versus 5 percent of beneficiaries with private secondary insurance. Thus, survey data provide direct evidence that out-of-pocket cost is a mechanism by which secondary insurance increases demand for care.

Second, there was a clear dose-response relationship between depth of insurance coverage and increased spending. Those with first-dollar or nearly first-dollar coverage had much higher spending than others, regardless of secondary insurance status.

Third, only the depth of coverage mattered, not the type of secondary insurance. When a flag for (nearly) first-dollar coverage was included in the regression, the individual types of secondary insurance were no longer statistically significant determinants of spending. Low out-of-pocket cost was a sufficient explanation for all of the observed increase in demand, regardless of the source of the secondary insurance.

This finding of a universal effect of first-dollar coverage regardless of insurance type weakens any alternative explanation based on the specifics of insurance ownership (described below). Ultimately, it did not matter whether beneficiaries chose to purchase coverage or not, or earned coverage as a retirement benefit or not. The only factor that mattered was whether or not their Part B care was free or nearly free. There are two generic counter-arguments that can be used to explain the results of a regression analysis as something other than a causal relationship. The first is omitted variables bias. This is the possibility that some unobserved factors are strongly correlated with insurance and are strong determinants of spending. This could be some unobserved difference in health status, or merely a systematic difference in beneficiaries taste for or preference for health care use. If such factors exist, then the apparent relationship between insurance and spending shown by the regression is merely proxying for these unobserved factors. The second counter-argument is self-selection, for the types of insurance that are individually purchased. If beneficiaries bought secondary coverage in anticipation of having higher spending, then the causality runs from spending causing insurance coverage, and not the other way around.

Unobserved health status differences cannot plausibly explain these results. Any hypothesized health status differen
ces would have to be highly selective and secretive. They would only affect the need for Part B services but not Part A, only require elective care but not emergency care, and would only affect those who have near-first-dollar coverage and not others. Such factors would also have to be undetectable both by physicians (reporting diagnoses used in risk adjustment) and by beneficiaries (in their own self-reported health and functional status). to be strongly correlated with ownership of secondary insurance. That combination is implausible enough that we can reasonably dismiss it from consideration.

Unobserved differences in taste and preference for health care are impossible to rule out as an alternative explanation of the results. It is possible that, on average, beneficiaries who ended up with nearly-complete secondary coverage, regardless of the source of that coverage, had developed a taste for higher levels of health care use prior to becoming eligible for Medicare. Whereas beneficiaries with the same class of coverage, but paying at least 5 percent of costs, did not. We could think of no obvious mechanism that would generate such a strong correlation across all types of secondary coverage. But tastes and preferences are idiosyncratic and unobservable, so there is no obvious data-driven way either to rule that out or to test it as an alternative.

Self-selection as an alternative hypothesis could only apply to individual purchase insurance, not to employer-sponsored coverage. If self-selection is offered as an alternative explanation, it has to be paired with some alternative explanation of higher costs for those with employer-sponsored coverage. Moreover, any self-selection of insurance based on observable factors – observed health status, income, education, or demographics – should largely be accounted for by the regression analysis. For example, any connection between good health and unwillingness to purchase secondary insurance should be captured by the presence of health status measures in the regression analysis.

Finally, we appeal to Occam’s Razor (a principle that generally recommends selecting the competing hypothesis that makes the fewest new assumptions, when the hypotheses are equal in other respects) to argue that the lack of copayment causes the higher spending by those with secondary insurance. On the one hand, one simple explanation – those who receive nearly free care use much more of it – provides a simple, universal explanation for the higher spending by beneficiaries with all types of private secondary insurance. On the other hand, alternative explanations are a hodgepodge of factors that only apply to some types of insurance (self-selection) and unobservable taste and preference factors that (through some unexplained mechanism) apply only to a subset of persons with secondary insurance (those with near-first-dollar coverage). Clearly, lack of copayment is the simpler explanation of what we have observed.

In summary, the evidence is reasonably clear that secondary insurance raises Medicare costs. After eliminating persons with VA use and adjusting for covariates (health, income, education, demographics), beneficiaries with secondary insurance use much more health care than those who have no secondary insurance. The effect is due solely to those with near-first-dollar coverage (defined here as paying less than 5 percent of Part B costs). Beneficiaries without such coverage, by contrast, appear no different from those with no secondary insurance. The differential impact by service type – more on Part B than Part A, more on elective care than emergency care – also suggests that the out-of-pocket cost causes the lower use of care. When asked, beneficiaries themselves say exactly that – those without secondary insurance are far more likely to report having delayed care due to cost. Taken together, this provides a coherent picture that out-of-pocket costs matter significantly to Medicare beneficiaries, and that eliminating those costs raises health care spending.

This analysis does not address whether the increased spending is desirable or undesirable, or whether reduced spending leads to poorer outcomes. That question — whether the value of additional care exceeds its cost – cannot be answered from the analysis of spending data alone, if it can be answered at all. Instead, this analysis merely shows that beneficiaries in fee-for-service Medicare will tend to use much more health care when each additional service is free (to them) than they would if they had to pay a significant portion of the cost of each additional service.

http://www.medpac.gov/documents/Jun09_SecondaryInsurance_CONTRACTOR_RS_REVISED.pdf

Comment: 

By Don McCanne, MD

Although this excerpt from the 44 page MedPAC report on secondary insurance for Medicare beneficiaries (Medigap, etc.) is more than most people want to read, it really is important because this report is being used to try to expand policies that would reduce the moral hazard of insurance. The theory is that people use too much health care if it is “for free” (no deductibles, copayments, or coinsurance), and that they would access only the care that they really needed if they had to pay for at least a portion of it. Is this theory valid?

Although many proposals to reduce the government component of Medicare spending would do so by transferring government costs to the beneficiaries, this proposal to require cost sharing in Medigap plans is quite different. Since Medigap plans are privately funded, the reduction in premiums due to increases in cost sharing would accrue to the beneficiaries and not to the government. The reduction in government spending occurs only indirectly by not having to pay the government’s share of that care which was not received because of the patients’ own concerns about out-of-pocket costs.

The authors of the MedPAC report do confirm that individuals without supplementary coverage (without Medigap) use less care and therefore cost less. Policymakers using this report seem to be extrapolating the conclusion that eliminating cost sharing creates an increased demand for care that patients can do without, even though the authors clearly state that “this analysis does not address whether the increased spending is desirable or undesirable.” Nevertheless, the authors do seem to demonstrate some bias as they dismiss alternative explanations.

A few observations are warranted:

* Above all, the greater amount of care obtained by those with first dollar coverage cannot be dismissed as being excessive or wasteful. Although predominantly elective, these included preventive services and services that may reduce symptoms and improve quality of life. Preventive services were used only half as often by those with no supplemental coverage compared to those with additional coverage. A health care system should provide affordable access to more than just emergency services.

* Only about 10 percent of Medicare beneficiaries have no supplemental coverage, and it was this group that used fewer services. The authors seem to dismiss the facts that these individuals may not be culturally attuned to freely using the health care system, and many would self-select to not purchase additional coverage. They may decide that premiums for the plans are not worth the cost, or they may simply not like doctors and want to avoid all of the health care that they can.

* The fact that those receiving supplemental plans from their employers used less care than those purchasing their own Medigap plans suggests that the former group was diluted with individuals who would not have purchased plans had their employers not provided them. Again, this suggests that individuals averse to health care and not wanting to pay for it should not be used as the standard for the proper level of care.

* An observation buried
in this report is that mortality was higher in those who had no supplemental coverage. Although the authors were not able to explain precisely why, they did state, “In summary, the importance of this finding comes down to a judgment. On the one hand, the finding of excess mortality is based on a single year’s experience, and is inconsistent with the other measures of population health status. On the other hand, it is not explained by demographic or other factors, and it is not obviously an artifact of the methodology used. Finally, excess mortality would be a reasonable outcome from deficiencies of care, for example, from the lack of preventive care for this population.”

* Whether or not increased utilization by those with supplemental coverage provided a medical benefit, the plans clearly provided financial security for users of health care. How could anyone consider that to not be of benefit?

* This report remains silent on the issue of the profound administrative waste in providing plans that supplement the traditional Medicare program. The savings achieved by rolling the benefits of the supplemental plans into Medicare would likely offset much of the cost of services declined because of perceptions of affordability. Of course, once we fix Medicare, we should provide it to everyone.

Blaming our high health care costs on the moral hazard of having free access to health care at the time of need has got to end. Several nations that spend half of what we do nevertheless provide comprehensive health care services with free access. The real moral hazard is not that people might use more health care that they don’t have to pay for at the time of services, the moral hazard we should be concerned about is that people might not get the care that they should have because of financial barriers to that care.

That turns the moral hazard argument upside down, but that’s where it belongs.

For more on cracks in the foundation of moral hazard, citing the work of John Nyman:

https://pnhp.org/news/2007/september/cracks-in-the-moral-hazard-foundation

FAQ: Seniors May See Changes in Medigap Policies

By Julie Appleby
Kaiser Health News, July 15, 2011

What is Medigap and why do people buy it?

Unlike most job-based health insurance, traditional Medicare does not include “catastrophic” coverage, an annual maximum upper limit on the amount beneficiaries could pay. So enrollees can be liable for thousands of dollars each year, including: $1,132 per-episode deductible for hospital admissions; hundreds of dollars in daily charges for hospital stays of longer than 60 days; a $162-a-year deductible for doctor care, plus 20 percent of charges for office visits or equipment like wheelchairs.

Ten standardized types of supplemental plans offered by private insurers – including AARP’s UnitedHealthcare policies  – cover all or most of such deductibles and copayments.  Some employers also pay all or part of such costs for their retirees.

What changes are under consideration?

It is not clear exactly what’s on the table in the negotiations between congressional leaders and the White House.  But the charts  released show that one such proposal under consideration would bar insurers from offering supplemental policies unless the policies came with an annual deductible. People who didn’t want a deductible could pay $530 a year in additional premium to ensure that they won’t be hit with costs before their coverage kicks in.

What about people who don’t have a Medigap plan?

Only about 10 percent of seniors don’t have some sort of supplemental coverage. Some people have military/VA benefits, others are in Medicaid, and some have coverage through Medicare Advantage plans, which are insurance policies offered by private insurers as an alternative to traditional Medicare.

Would changing supplemental coverage save money?

Some economists and policy experts say that supplemental coverage insulates beneficiaries from medical costs, driving up demand for unnecessary care. A study done for MedPAC in 2009 found that beneficiaries with supplemental insurance used more care and cost the program more money. The increased spending wasn’t for emergency hospitalizations, but for other services such as elective hospital admissions, preventive care, doctor office visits and some types of tests.

What else do people say about the idea?

Advocacy groups like the Medicare Rights Center oppose restricting Medigap plans, saying it would simply shift more costs from the government to elderly and low-income people who can least afford it. “Some in government feel people in Medicare don’t have enough ‘skin in the game,’” says Ilene Stein, federal policy director for the center. In fact, she says, people on Medicare already pay 15 percent of their incomes for health care, well above the level paid by non-Medicare households. While the proposals would cap maximum annual spending per enrollee to $5,500 or $7,500, “that’s a lot of money for someone making $22,000,” the median household income for those on Medicare, she says.

http://www.kaiserhealthnews.org/Stories/2011/July/15/medigap-medicare-supplemental-faq.aspx

And…

Exploring the Effects of Secondary Coverage on Medicare Spending for the Elderly

Study by Direct Research, LLC
For the Medicare Payment Advisory Commission (MedPAC)
June 2009

Our results show that secondary insurance has a substantial impact on Medicare spending, consistent with the prior literature in this area. After removing beneficiaries with any VA use and adjusting for differences in health status, income, education, and demographics, individuals with Medigap coverage had Medicare costs 33 percent higher than those with no secondary insurance. Other private secondary insurance was associated with smaller increases in spending. There was no statistically significant difference in Part A spending, but a large and statistically significant increase in Part B spending.

Out-of-pocket payment reduced spending largely by suppressing elective care (broadly defined) as opposed to emergency care. In particular:

* Emergency care (ambulance use, emergency room visits, emergency and urgent hospitalizations) appeared unaffected by the presence of secondary insurance.

* Elective admissions, preventive care, minor procedures and endoscopies were strongly affected by secondary insurance coverage, with substantially higher use among those with private secondary insurance.

It is not possible to use observational (non-experimental) data to prove beyond a doubt that a causal relationship exists between secondary insurance and spending. For several reasons, however, this analysis strongly suggests secondary insurance (reduced out-of-pocket costs) genuinely causes higher spending, and is not merely associated with secondary insurance due to some other factors affecting both insurance demand and health care use. The following factors suggest that this is a causal relationship. First, beneficiaries themselves report that out-of-pocket costs are a significant reason for delaying care. Nearly 20 percent of beneficiaries without secondary insurance reporting delaying care due to concerns over cost, versus 5 percent of beneficiaries with private secondary insurance. Thus, survey data provide direct evidence that out-of-pocket cost is a mechanism by which secondary insurance increases demand for care.

Second, there was a clear dose-response relationship between depth of insurance coverage and increased spending. Those with first-dollar or nearly first-dollar coverage had much higher spending than others, regardless of secondary insurance status.

Third, only the depth of coverage mattered, not the type of secondary insurance. When a flag for (nearly) first-dollar coverage was included in the regression, the individual types of secondary insurance were no longer statistically significant determinants of spending. Low out-of-pocket cost was a sufficient explanation for all of the observed increase in demand, regardless of the source of the secondary insurance.

This finding of a universal effect of first-dollar coverage regardless of insurance type weakens any alternative explanation based on the specifics of insurance ownership (described below). Ultimately, it did not matter whether beneficiaries chose to purchase coverage or not, or earned coverage as a retirement benefit or not. The only factor that mattered was whether or not their Part B care was free or nearly free. There are two generic counter-arguments that can be used to explain the results of a regression analysis as something other than a causal relationship. The first is omitted variables bias. This is the possibility that some unobserved factors are strongly correlated with insurance and are strong determinants of spending. This could be some unobserved difference in health status, or merely a systematic difference in beneficiaries taste for or preference for health care use. If such factors exist, then the apparent relationship between insurance and spending shown by the regression is merely proxying for these unobserved factors. The second counter-argument is self-selection, for the types of insurance that are individually purchased. If beneficiaries bought secondary coverage in anticipation of having higher spending, then the causality runs from spending causing insurance coverage, and not the other way around.

Unobserved health status differences cannot plausibly explain these results. Any hypothesized health status differences would have to be highly selective and secretive. They would only affect the need for Part B services but not Part A, only require elective care but not emergency care, and would only affect those who have near-first-dollar coverage and not others. Such factors would also have to be undetectable both by physicians (reporting diagnoses used in risk adjustment) and by beneficiaries (in their own self-reported health and functional status). to be strongly correlated with ownership of secondary insurance. That combination is implausible enough that we can reasonably dismiss it from consideration.

Unobserved differences in taste and preference for health care are impossible to rule out as an alternative explanation of the results. It is possible that, on average, beneficiaries who ended up with nearly-complete secondary coverage, regardless of the source of that coverage, had developed a taste for higher levels of health care use prior to becoming eligible for Medicare. Whereas beneficiaries with the same class of coverage, but paying at least 5 percent of costs, did not. We could think of no obvious mechanism that would generate such a strong correlation across all types of secondary coverage. But tastes and preferences are idiosyncratic and unobservable, so there is no obvious data-driven way either to rule that out or to test it as an alternative.

Self-selection as an alternative hypothesis could only apply to individual purchase insurance, not to employer-sponsored coverage. If self-selection is offered as an alternative explanation, it has to be paired with some alternative explanation of higher costs for those with employer-sponsored coverage. Moreover, any self-selection of insurance based on observable factors – observed health status, income, education, or demographics – should largely be accounted for by the regression analysis. For example, any connection between good health and unwillingness to purchase secondary insurance should be captured by the presence of health status measures in the regression analysis.

Finally, we appeal to Occam’s Razor (a principle that generally recommends selecting the competing hypothesis that makes the fewest new assumptions, when the hypotheses are equal in other respects) to argue that the lack of copayment causes the higher spending by those with secondary insurance. On the one hand, one simple explanation – those who receive nearly free care use much more of it – provides a simple, universal explanation for the higher spending by beneficiaries with all types of private secondary insurance. On the other hand, alternative explanations are a hodgepodge of factors that only apply to some types of insurance (self-selection) and unobservable taste and preference factors that (through some unexplained mechanism) apply only to a subset of persons with secondary insurance (those with near-first-dollar coverage). Clearly, lack of copayment is the simpler explanation of what we have observed.

In summary, the evidence is reasonably clear that secondary insurance raises Medicare costs. After eliminating persons with VA use and adjusting for covariates (health, income, education, demographics), beneficiaries with secondary insurance use much more health care than those who have no secondary insurance. The effect is due solely to those with near-first-dollar coverage (defined here as paying less than 5 percent of Part B costs). Beneficiaries without such coverage, by contrast, appear no different from those with no secondary insurance. The differential impact by service type – more on Part B than Part A, more on elective care than emergency care – also suggests that the out-of-pocket cost causes the lower use of care. When asked, beneficiaries themselves say exactly that – those without secondary insurance are far more likely to report having delayed care due to cost. Taken together, this provides a coherent picture that out-of-pocket costs matter significantly to Medicare beneficiaries, and that eliminating those costs raises health care spending.

This analysis does not address whether the increased spending is desirable or undesirable, or whether reduced spending leads to poorer outcomes. That question — whether the value of additional care exceeds its cost – cannot be answered from the analysis of spending data alone, if it can be answered at all. Instead, this analysis merely shows that beneficiaries in fee-for-service Medicare will tend to use much more health care when each additional service is free (to them) than they would if they had to pay a significant portion of the cost of each additional service.

http://www.medpac.gov/documents/Jun09_SecondaryInsurance_CONTRACTOR_RS_REVISED.pdf

Although this excerpt from the 44 page MedPAC report on secondary insurance for Medicare beneficiaries (Medigap, etc.) is more than most people want to read, it really is important because this report is being used to try to expand policies that would reduce the moral hazard of insurance. The theory is that people use too much health care if it is “for free” (no deductibles, copayments, or coinsurance), and that they would access only the care that they really needed if they had to pay for at least a portion of it. Is this theory valid?

Although many proposals to reduce the government component of Medicare spending would do so by transferring government costs to the beneficiaries, this proposal to require cost sharing in Medigap plans is quite different. Since Medigap plans are privately funded, the reduction in premiums due to increases in cost sharing would accrue to the beneficiaries and not to the government. The reduction in government spending occurs only indirectly by not having to pay the government’s share of that care which was not received because of the patients’ own concerns about out-of-pocket costs.

The authors of the MedPAC report do confirm that individuals without supplementary coverage (without Medigap) use less care and therefore cost less. Policymakers using this report seem to be extrapolating the conclusion that eliminating cost sharing creates an increased demand for care that patients can do without, even though the authors clearly state that “this analysis does not address whether the increased spending is desirable or undesirable.” Nevertheless, the authors do seem to demonstrate some bias as they dismiss alternative explanations.

A few observations are warranted:

* Above all, the greater amount of care obtained by those with first dollar coverage cannot be dismissed as being excessive or wasteful. Although predominantly elective, these included preventive services and services that may reduce symptoms and improve quality of life. Preventive services were used only half as often by those with no supplemental coverage compared to those with additional coverage. A health care system should provide affordable access to more than just emergency services.

* Only about 10 percent of Medicare beneficiaries have no supplemental coverage, and it was this group that used fewer services. The authors seem to dismiss the facts that these individuals may not be culturally attuned to freely using the health care system, and many would self-select to not purchase additional coverage. They may decide that premiums for the plans are not worth the cost, or they may simply not like doctors and want to avoid all of the health care that they can.

* The fact that those receiving supplemental plans from their employers used less care than those purchasing their own Medigap plans suggests that the former group was diluted with individuals who would not have purchased plans had their employers not provided them. Again, this suggests that individuals averse to health care and not wanting to pay for it should not be used as the standard for the proper level of care.

* An observation buried in this report is that mortality was higher in those who had no supplemental coverage. Although the authors were not able to explain precisely why, they did state, “In summary, the importance of this finding comes down to a judgment. On the one hand, the finding of excess mortality is based on a single year’s experience, and is inconsistent with the other measures of population health status. On the other hand, it is not explained by demographic or other factors, and it is not obviously an artifact of the methodology used. Finally, excess mortality would be a reasonable outcome from deficiencies of care, for example, from the lack of preventive care for this population.”

* Whether or not increased utilization by those with supplemental coverage provided a medical benefit, the plans clearly provided financial security for users of health care. How could anyone consider that to not be of benefit?

* This report remains silent on the issue of the profound administrative waste in providing plans that supplement the traditional Medicare program. The savings achieved by rolling the benefits of the supplemental plans into Medicare would likely offset much of the cost of services declined because of perceptions of affordability. Of course, once we fix Medicare, we should provide it to everyone.

Blaming our high health care costs on the moral hazard of having free access to health care at the time of need has got to end. Several nations that spend half of what we do nevertheless provide comprehensive health care services with free access. The real moral hazard is not that people might use more health care that they don’t have to pay for at the time of services, the moral hazard we should be concerned about is that people might not get the care that they should have because of financial barriers to that care.

That turns the moral hazard argument upside down, but that’s where it belongs.

For more on cracks in the foundation of moral hazard, citing the work of John Nyman:

https://pnhp.org/news/2007/september/cracks-in-the-moral-hazard-foundation