Public Funds Account for Over 70 Percent of Health Care Spending in California

By Andrea Sorensen, Narissa J. Nonzee, and Gerald F. Kominski
UCLA Center for Health Policy Research, Health Policy Brief, August 2016

Summary

In California, personal health care expenditures are estimated to total more than $367 billion in 2016. Approximately 71 percent of these expenditures will be paid for with public funds (i.e., taxpayer dollars). This estimated contribution of public funds to health care expenditures is much higher than estimates that include only major health insurance programs such as Medicare and Medicaid. Several additional public funding sources also contribute to health care expenditures in the state, including government spending for public employee health benefits, tax subsidies for employer-sponsored insurance and the Affordable Care Act (ACA) insurance exchange, and county health care expenditures. As health care reform continues to take effect, it will be important to monitor the public versus private contributions to state health care expenditures to ensure that funds are being distributed both efficiently and equitably.

Health Care Expenditures in California

In California, health care expenditures in 2016 are estimated to total more than $367 billion; our estimates suggest that 71 percent of these expenditures will be paid for with public funds. Medi-Cal/Healthy Families will comprise the largest proportion of total spending (27 percent), followed by Medicare (20 percent). Tax subsidies for ESI (12 percent); government spending for public employee insurance (4 percent); county health expenditures (3 percent); other government programs—Veterans Affairs (VA) health care, Indian Health Services, and Maternal and Child Health (3 percent altogether); and ACA marketplace exchange subsidies (2 percent) will account for the remainder of total expenditures. Private expenditures for covered benefits will comprise approximately 29 percent of total health care spending in California in 2016. These expenditures include employer share of premiums (16 percent), employee share of premiums (6 percent), out-of-pocket expenditures for covered benefits (4 percent), and premium contributions for individually purchased insurance (3 percent).

Conclusion and Recommendations

Public funds in California contribute to approximately 71 percent of total state health care expenditures. As an increasing number of individuals gain health insurance coverage under the ACA, as health care expenditure growth rates continue to increase, and as policy debates continue to mount around introducing a public insurance option, it is important that public funding for health care expenditures be monitored. Comparable to national-level analyses, these findings run contrary to the assumption that U.S. health care expenditures are funded primarily by private payers. If public funds continue to comprise the majority of total health care expenditures, it will be increasingly important for policymakers to consider whether these public funds are being distributed efficiently and effectively, and whether alternatives such as a state single-payer system would be a more effective use of public and private health spending.

http://healthpolicy.ucla.edu/publications/Documents/PDF/2016/PublicSharePB_FINAL_8-31-16.pdf

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Public money accounts for more than two-thirds of health care spending in California

By Gwendolyn Driscoll
UCLA Center for Health Policy Research Newsroom, August 31, 2016

Contrary to the notion that the country’s health care is primarily a privately funded system, 71 percent of health care expenditures in California are paid for with public funds, according to a new analysis by the UCLA Center for Health Policy Research.

In California, public funds will pay for 71 percent ($260.9 billion) of a projected $367.5 billion spent on health care in 2016, according to the study.

“The public sector is the primary player in health care spending,” said Gerald Kominski, director of the UCLA Center for Health Policy Research who led the study. “But monies are disbursed in a fragmented way through numerous different entities, each of which has their own system and way of doing things. The question for policy makers is, ‘does this fragmented approach make sense?’”

“For a majority of Californians, a public-run system is already the reality,” said Andrea Sorensen, a graduate student at the UCLA Fielding School of Public Health, who co-authored the study. “A single-payer system could unite all these various programs and expand them to the entire population, resulting in a more streamlined and cost-effective approach to health care spending.”

http://healthpolicy.ucla.edu/newsroom/press-releases/pages/details.aspx?NewsID=252

David Himmelstein and Steffie Woolhandler on the national taxpayer share of health costs:
http://ajph.aphapublications.org/doi/abs/10.2105/AJPH.2015.302997

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Comment:

By Don McCanne, M.D.

Over two-thirds of health care in California – 71 percent –  is paid for by the government, using our taxes. That is even greater than the national taxpayer share of health care – 64 percent (increasing to 67 percent in 2024) – as demonstrated by Himmelstein and Woolhandler.

As Himmelstein and Woolhandler have stated previously, U.S. taxpayers are already paying for a national health program, but not getting it. And that is even more true for Californians.

California has previously made efforts to adopt a single payer program, but they have failed – in the election booth, in the state legislature, and on the governor’s desk. As we continue to shift more of health care costs to the government, we have brought along our terribly wasteful, fragmented health care financing system. The California taxpayers are getting a bad deal, and a very expensive one at that ($261 billion for 2016 in public spending alone).

Without enabling federal legislation, states are limited in how close they can come to a much more efficient single payer system, but that does not mean that we should not proceed with whatever is possible now.

California, and every other state for that matter, should do two things simultaneously: 1) Advocate vigorously for a national single payer program – an improved Medicare for all, and 2) Move forward on a state level with improving the health care financing system so that eventual transition to a national program will be that much simpler, not to mention providing some limited interim relief.

Healthy Indiana 2.0 Is Challenging Medicaid Norms

By Seema Verma and Brian Neale
Health Affairs Blog, August 29, 2016

Last year, the State of Indiana launched the latest version of the Healthy Indiana Plan (HIP), made possible through a series of Medicaid waivers sought by Governor Mike Pence and approved by the Obama Administration.

HIP 2.0’s approval ignited a national conversation about the implications of its consumer-driven design for able-bodied adults in Indiana and potentially other reform-minded states. Having served as Governor Pence’s main advisors throughout the waiver’s development, negotiation, and implementation, we understand the crucial role states play in driving sensible Medicaid reforms.

HIP’s consumer-driven design familiarizes its members with the concepts of commercial health insurance and encourages them to be prudent consumers, comparing cost and quality of health care services. In light of the “churn” present in the Medicaid program, HIP’s policies are structured to be as consistent as possible with standard provisions found in commercial health plans, including Marketplace plans.

In line with commercial market consumer-driven plans, HIP members receive a $2,500 deductible health plan (HDHP) paired with a $2,500 “POWER” account, similar to a health savings account (HSA). The POWER account is HIP’s paramount feature. It acts as both a payment mechanism and a terminal through which HIP’s incentive structure flows. Members use the POWER account to pay for health care services until the deductible amount is met, at which point the HDHP becomes solely responsible for paying any further claims. Preventive services are provided outside the deductible and members do not face any barriers to seeking these services.

Contributions To Savings Accounts

HIP members begin coverage in HIP Plus, which offers benefits similar to those found in the commercial market and also includes modest dental and vision coverage. To maintain enrollment in HIP Plus, members are required to make monthly contributions in the amount equal to 2 percent of their income, comparable to the Marketplace’s premium formula. Unlike premiums, members own these contributions and are refunded their pro-rata share when they leave the program. The member’s pro-rata share is also rolled over from one plan year to the next, thereby reducing the contribution amount required for the upcoming plan year. Rollover amounts are increased for members who complete requisite preventive care services.

HIP respects the dignity of each member by setting a fair expectation of personal investment and engagement in his or her own well-being. Contributions are a way for members to demonstrate personal responsibility, but they also encourage members to stay engaged with their health plan, providers, and overall personal health. Because HIP Plus members’ own dollars are at stake, they have “skin in the game” and therefore an incentive to make cost-conscious health care decisions.

HIP Plus members who fail to make contributions within a 60-day grace period are terminated from the plan. Terminated HIP Plus members below the poverty line are transferred to the HIP Basic plan, which offers a more limited benefit package that excludes dental and vision coverage. HIP Basic members also are subject to co-payments for services, which can easily wind up being costlier than the contribution amounts required to maintain HIP Plus enrollment. Because HIP Plus represents the superior value proposition, members have a strong incentive to avoid falling back into HIP Basic. Terminated HIP Plus members above the poverty line must wait six months to re-enroll, with a few limited exceptions.

The delivery system functions more effectively when people seek and receive care in the right setting, as HIP incentivizes its members to do. When members choose the emergency room (ER) for care that could have been more appropriately provided in a primary care setting, they are subject to an $8 co-pay, which rises to $35 dollars for each subsequent inappropriate use of the ER.

HIP 2.0 Is Just The Beginning

HIP has been successful in meeting its policy objectives, but it also continues to demonstrate the potential for consumer-driven health care as an alternative to the traditional Medicaid model. While HIP has never touted itself as some sort of national silver bullet, it continues to serve as an example for states having similar interest in re-aligning Medicaid with the broader objective of individual empowerment.

http://healthaffairs.org/blog/2016/08/29/healthy-indiana-2-0-is-challenging-medicaid-norms/

Indiana Q&A on HIP 2.0:
http://www.in.gov/fssa/hip/2445.htm

Lewin Group evaluation of HIP 2.0:
https://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Waivers/1115/downloads/in/Healthy-Indiana-Plan-2/in-healthy-indiana-plan-support-20-interim-evl-rpt-07062016.pdf

Center on Budget and Policy Priorities critique:
http://www.cbpp.org/research/health/indiana-medicaid-waiver-evaluation-shows-why-kentuckys-medicaid-proposal-shouldnt-be

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Comment:

By Don McCanne, M.D.

Health savings accounts (HSAs) have been touted by conservatives as a way of placing the health care consumers (i.e., patients) in control of their health care spending. As they say, “having skin in the game” (cringe) makes the patients more efficient health care shoppers. But it is not the HSAs, rather it is the very high deductibles of the associated insurance plans that cause patients to forgo often beneficial health care services because of the lack of affordability, thus reducing total health care spending.

With high deductibles, patients have to use their own funds before the deductible is met whether those funds come out of their pockets or out of designated HSAs. The HSA is merely a tax advantaged account that favors the healthy and wealthy. Tax expenditures are applied regressively with the wealthy receiving considerable taxpayer support and lower income individuals receiving little or nothing in the way of tax advantages.

Also the healthy who do not spend down their accounts can use the HSA funds as additional retirement benefits – benefits of which those with greater health problems are deprived. Thus HSAs represent the opposite of public policies that we should be pursuing since they disfavor the sick and poor to the benefit of the healthy and wealthy. It is perplexing how officials in Indiana ever conceived the idea that HSAs – know there as POWER accounts – would benefit low-income Medicaid patients with their higher than average medical needs.

So how do the POWER accounts work? First it is important to understand the complexity of the establishment and administration of these accounts because there are so many variables depending on whether the recipients are above or below 100 percent of the federal poverty level (FPL), which plan they participate in (Regular Plus, Regular Basic, State Plus, State Basic, plus HIP Link), whether or not they are classified as medically frail, whether they are Native Americans, whether or not they use preventive care services, and so forth. The description that follows applies differentially depending on these variables but will be presented as if it were a uniform program since these features represent the general drift of HIP 2.0. The actual details can be found in the Lewin Group report (link above).

The POWER accounts are funded mostly by the state with a contribution from the patient amounting to about 2 percent of income, up to a combined maximum of $2500 (mostly from the state). They are used to pay for the first $2500 of care (except for preventive services) and then a managed care plan begins paying. The payment by the patient is so small that it has very little impact on the government’s share of the costs. But most of these patients have no discretionary income thus even these small payments can be a financial burden to them, having to displace spending on other essentials.

If the individual uses no medical services, their contributions can accumulate in their POWER accounts and they can take their funds with them when they leave the program. But the maximum in the account can be only $2500, and their contribution is only a fraction of that. It is obvious that the meager amount that would be returned in no way could be used as an additional retirement benefit – defeating one of the purposes of HSAs.

If the patients fail to contribute to the POWER account, and their income is over 100 FPL, they completely lose their coverage and cannot reapply for a minimum of 6 months. If their income is under 100 FPL and they fail to contribute to the POWER account, they are shifted to the Basic plan and then are exposed to copayments, and they lose services such as dental and eye, and are limited in their prescription benefits.

These accounts are supposed to increase consumer awareness, but many of the participants do not know that the accounts exist, and many of those who do don’t really understand them. This hardly advances the conservative concept of consumer-directed health care.

Obviously these POWER accounts are not based on any sound health policy science, but they are merely a fabrication of ideologically-driven bureaucrats who want to pretend or maybe have fooled themselves into believing that they have created a poor man’s version of health savings accounts. HSAs actually provide benefits, albeit primarily for the healthy and wealthy. Medicaid was designed as a prepaid health care system for those with low incomes. The Medicaid Power accounts do the opposite of HSAs in that they penalize those who do not participate, taking away traditional Medicaid benefits, thereby adversely affecting particularly those with the lowest incomes.

This is a perverse program designed to satisfy the ideology of the Indiana stewards. (Kentucky is next.) One of the Indiana stewards and a strong supporter of POWER accounts – the governor – is currently a candidate for the vice-presidency of the United States. Programs like this expose the souls of those who support them.

First in a new series on healthcare delivery reform

By Steffie Woolhandler, MD, MPH
Adam Gaffney, MD
David U. Himmelstein MD
MedPage Today / USC Gehr Family Center for Implementation Science, August 26, 2016

The Gehr Center/Slow Medicine series “Disruption or Distraction: A Critical Look at Healthcare Delivery Reform” unpacks the data behind healthcare delivery system interventions, highlighting well-intended reforms that have yet to achieve the impact many have assumed. The series is edited by Slow Medicine columnists Pieter Cohen, MD, Michael Hochman, MD, MPH, and Rachael Bedard, MD. This first article in the series is written by three prominent experts in healthcare financing and offers a counterpoint to President Barack Obama’s recent article describing the benefits of the Affordable Care Act.

In the current overheated political climate, the Affordable Care Act (ACA) has garnered harsh criticism from some quarters and extravagant praise from others. Both miss the mark.

Critics from the political right seem to ignore the fact that the law has substantially reduced the number of uninsured, and propose alternatives that would sharply increase uninsurance, underinsurance, and healthcare inequality.

On the other hand, President Obama’s recent defense of the ACA in the Journal of the American Medical Association papered over its flaws — notably the fact that 29 million remain uninsured, a figure that the Congressional Budget Office predicts will not change much in the years ahead, even if all states were to accept the ACA’s Medicaid expansion.

While persistent uninsurance is the ACA’s most glaring deficiency, it has other shortcomings: failure to slow the hollowing out of already inadequate coverage; further stimulation of the already overgrown healthcare bureaucracy; lack of effective cost controls; and Medicare payment reforms that tilt the playing field towards giant corporate organizations and have triggered a surge of mergers and acquisitions.

(Twelve paragraphs discuss the specific deficiencies of the Affordable Care Act – link below)

In sum, the ACA was a useful but inadequate step forward for American healthcare. Tens of millions remain uninsured, and at least as many others have grossly inadequate coverage. Costs are again rising rapidly, and the corporate takeover of care proceeds apace. By any reasonable measure we remain in last place among wealthy nations for coverage, and an outlier for our high costs. The need for more fundamental reform is clear.

Steffie Woolhandler, MD, MPH, is a primary care physician at the CUNY School of Public Health at Hunter College. Adam Gaffney, MD, is a research fellow at Massachusetts General Hospital. David Himmelstein, MD, is a professor at the CUNY School of Public Health at Hunter College. Woolhandler and Himmelstein are co-founders of Physicians for a National Health Program.

http://www.medpagetoday.com/Blogs/SlowMedicine/59887#

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Comment:

By Don McCanne, M.D.

As the first in a series on healthcare delivery reform, this article sets the stage by describing the profound deficiencies that remain after implementation of the Affordable Care Act. Although ACA did improve coverage and access, the authors note, “The need for more fundamental reform is clear.”

This article was merely to assess ACA in the “political fog” and not to suggest solutions. But the problems presented are not amenable to mere tweaks and patches. Since the authors are the nation’s leading experts on single payer reform, we can assume that the fundamental reform they would call for would be single payer. And they would be right since anything less, such as adopting a public option, would leave in place most of the deficiencies.

Why Are Private Health Insurers Losing Money on Obamacare?

By Uwe Reinhardt, PhD
JAMA Forum, August 25, 2015

The report last week that Aetna, one of the major US health insurance companies, would leave most of the health insurance exchanges established under the Affordable Care Act (ACA) of 2010 follows similar accounts the media that Anthem,  Aetna, and other large private health insurers are contemplating withdrawing from the so-called ACA marketplace. The companies say the reason behind these actions is they are losing hundreds of millions of dollars on the business coming to them from these exchanges. To make up for the losses, some insurers, though by no means all, have quoted premium increases in excess of 25% for 2017.

This development seems puzzling, as it comes in an era of historically low growth in total national health spending. The latest estimates published by the Centers for Medicare & Medicaid Services (CMS), which provides estimates of current and projected national health spending, indicate that spending growth at only 4.8% in 2016 and project health care spending growth to be only 5.8% per year for the decade 2015-2025.

Furthermore, as a report published by the Urban Institute notes, even in 2010, the year the ACA became law, its impact on total national health spending was estimated to be an increase in annual spending of only 2.5% above what would have been spent anyway. In addition, the report also notes that the CMS now projects that total US national health spending during 2014-2019 will be $2.5 trillion lower than projections made in 2010.

Why, then, in the face of these historically low growth rates, have premiums on the ACA health-insurance exchanges for 2017 increased at such high rates?

The core of the answer to this question can be read in the chart (at the link below), showing the highly skewed distribution of per capita health spending across the US population. The phenomenon is known as the “80-20 rule,” indicating that 20% of any large insured populations tends to account for 80% of all health care spending on that population.

Individuals in the high spending categories typically have multiple health problems requiring expensive treatments. A question that has troubled US health policy for decades has been what kind of health care these individuals with multiple conditions should receive and who should pay for it, assuming that only few very well-to-do US residents could afford to purchase their health care with their own resources. Here, it is helpful to remember that the US median disposable family income is only about $54 000, not even enough to cover the annual cost of some effective specialty drugs.

The contributions individuals make out of their paychecks toward employer-sponsored health insurance are community rated, which means that they are the same for all employees of the firm, regardless of their health status and even age. So healthy employees are forced to subsidize less healthy colleagues through the premiums they pay. With the ACA, the Obama administration sought to provide the same deal for US individuals purchasing health insurance in the individual market.

For health insurers, however, this approach can be called an unnatural act, because it forces them knowingly to issue policies to very ill people at premiums evidently far below these individuals’ likely claims on the insurer’s overall risk pool. Actuaries and health policy analysts understand that this approach can work only if all individuals, healthy and ill, are mandated to purchase coverage for a defined, basic package of benefits, at the community-rated premium—thereby forcing young and healthy individuals to subsidize with their premiums the health care of individuals with medical conditions in the insurer’s risk pool.

However, for purely political reasons, the ACA mandate for all persons in the United States to be insured was rather weak, leading many younger or healthier individuals simply to forgo purchasing health insurance and paying the relatively low fines for doing so. Over time, this practice naturally will drive up the community-rated premiums, inducing even greater numbers of young and healthy individuals to forgo insurance coverage, leaving private insurers with ever-more expensive risk pools.

The result of this adverse risk selection (the scenario in which sicker-than-average people purchase insurance while young and healthy people do not) has been that some private health insurers underpriced their policies on the ACA exchanges, perhaps to gain market share early on or because they simply did not anticipate quite the adverse risk selection that occurred.

It is hard to see a way out of this dilemma, given the current political climate. The task is doubly difficult in the United States, because the health care system is structured to yield prices for health care products and services that are twice as high or higher than the prices of identical items in other countries, driving US per capita health spending also to be twice as high as in many other developed countries. Thus, it is much more expensive in the United States than in other countries to provide health care to all residents, especially those who are ill and poor.

If health care costs in the United States were lower, most people would probably agree that ill, low-income citizens should receive the needed health care that is available to better-off individuals. The problem is that our health system is in danger of pricing kindness out of our souls.

https://newsatjama.jama.com/2016/08/25/jama-forum-why-are-private-health-insurers-losing-money-on-obamacare/

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Comment:

By Don McCanne, M.D.

Although many readers are quite familiar with the concept of adverse selection presented here, the take-home message today is contained in the last three paragraphs of Uwe Reinhardt’s article. By relying on private insurers to control spending, we have driven per capita health care spending up to twice the average of nations with far better health care financing systems. According to Reinhardt, “The problem is that our health system is in danger of pricing kindness out of our souls.”