Kaiser Daily Health Policy Report
June 18, 2003
House Ways and Means Panel Approves Medicare Reform Bill

The House Ways and Means Committee on June 17 voted 25-15 to approve an approximately $413 billion, 10-year bill (HR 2473) that would attempt to increase participation of private plans in Medicare and offer all beneficiaries a drug benefit, the Wall Street Journal reports (Rogers, Wall Street Journal, 6/18).

The bill also would establish direct price competition between traditional Medicare and private health plans beginning in 2010.

The House bill includes a provision that would increase payments to existing Medicare+Choice health plans up to 3% to 16% above fee-for-service payments in their area, the Journal reports. The increased payments would take effect before 2006, creating an “investment window” in which Republicans believe private plans could compete profitably but also use the increased subsidies to reduce premiums or increase benefits packages to make them more attractive to beneficiaries, according to the Journal.

http://www.kaisernetwork.org/daily_reports/rep_hpolicy_recent_rep.cfm?dr_cat=3&show=yes&dr_DateTime=18-Jun-03

Comment: The fundamental principle that competition reduces costs applies only to a truly free marketplace. Medicare and the private Medicare options do not adjust their costs based on free market forces. In this legislation, the Republicans are suggesting that a free market is created by offering more private plans, and, especially, by requiring the traditional Medicare program to compete with the private plans. But they apparently don’t really believe it.

Even the Republicans seem to understand that market competition isn’t working. Otherwise, why do they have to offer Medicare + Choice HMOs payments that are 3% to 16% above the fee-for-service payments? Every study has confirmed that the private Medicare options have cost more than the traditional program when corrections are made for the fact that the private plans have been successful in selectively marketing to a comparatively healthy subset of Medicare beneficiaries. Efforts to set up competitive Medicare models failed when no insurer would agree to participate. The reason for reinforcing the private options with larger payments is to create a larger private sector that would eventually replace the traditional program. At the current level of funding, the private Medicare sector is shrinking, rather than growing.

Why should we be concerned about giving the traditional Medicare program a stimulus to become “more efficient” by forcing it to compete with private plans? The answer is quite complex, but briefly, healthier patients would end up in the private plans, leaving chronically ill, high-cost patients in the traditional program. These higher costs, in the Republican competitive model, would be passed on to the beneficiaries in the traditional program in the form of higher premiums. This premium “death spiral” would force them out of the traditional program, destroying Medicare as we know it. A private plan Medicare system would deprive patients of choice of their physicians and hospitals, would waste resources in administrative excesses, and, perhaps worst of all, would be subjected to the political forces that would result in diminution of the public funding component of Medicare, severely impairing the equitable nature of this system. For low-income individuals, the inevitable result would be inadequate benefits and unaffordable cost sharing.

Families USA has posted an explanation of the how forcing Medicare to compete would result in the death spiral for the traditional program:

http://www.familiesusa.org/site/PageServer?pagename=Medicare_Central_private_example&JServSessionIdr007=t1imducywy.app5b

Kaiser Daily Health Policy Report
June 18, 2003
House Ways and Means Panel Approves Medicare Reform Bill

The House Ways and Means Committee on June 17 voted 25-15 to approve an approximately $413 billion, 10-year bill (HR 2473) that would attempt to increase participation of private plans in Medicare and offer all beneficiaries a drug benefit, the Wall Street Journal reports (Rogers, Wall Street Journal, 6/18).

The bill also would establish direct price competition between traditional Medicare and private health plans beginning in 2010.

The House bill includes a provision that would increase payments to existing Medicare+Choice health plans up to 3% to 16% above fee-for-service payments in their area, the Journal reports. The increased payments would take effect before 2006, creating an “investment window” in which Republicans believe private plans could compete profitably but also use the increased subsidies to reduce premiums or increase benefits packages to make them more attractive to beneficiaries, according to the Journal.

http://www.kaisernetwork.org/daily_reports/rep_hpolicy_recent_rep.cfm?dr_cat=3&show=yes&dr_DateTime=18-Jun-03

Comment: The fundamental principle that competition reduces costs applies only to a truly free marketplace. Medicare and the private Medicare options do not adjust their costs based on free market forces. In this legislation, the Republicans are suggesting that a free market is created by offering more private plans, and, especially, by requiring the traditional Medicare program to compete with the private plans. But they apparently don’t really believe it.

Even the Republicans seem to understand that market competition isn’t working. Otherwise, why do they have to offer Medicare + Choice HMOs payments that are 3% to 16% above the fee-for-service payments? Every study has confirmed that the private Medicare options have cost more than the traditional program when corrections are made for the fact that the private plans have been successful in selectively marketing to a comparatively healthy subset of Medicare beneficiaries. Efforts to set up competitive Medicare models failed when no insurer would agree to participate. The reason for reinforcing the private options with larger payments is to create a larger private sector that would eventually replace the traditional program. At the current level of funding, the private Medicare sector is shrinking, rather than growing.

Why should we be concerned about giving the traditional Medicare program a stimulus to become “more efficient” by forcing it to compete with private plans? The answer is quite complex, but briefly, healthier patients would end up in the private plans, leaving chronically ill, high-cost patients in the traditional program. These higher costs, in the Republican competitive model, would be passed on to the beneficiaries in the traditional program in the form of higher premiums. This premium “death spiral” would force them out of the traditional program, destroying Medicare as we know it. A private plan Medicare system would deprive patients of choice of their physicians and hospitals, would waste resources in administrative excesses, and, perhaps worst of all, would be subjected to the political forces that would result in diminution of the public funding component of Medicare, severely impairing the equitable nature of this system. For low-income individuals, the inevitable result would be inadequate benefits and unaffordable cost sharing.

Families USA has posted an explanation of the how forcing Medicare to compete would result in the death spiral for the traditional program:

http://www.familiesusa.org/site/PageServer?pagename=Medicare_Central_private_example&JServSessionIdr007=t1imducywy.app5b

Los Angeles Times
June 18, 2003
CalPERS Members Object to Rate Hike
By Debora Vrana and Ronald D. White

The California Public Employees’ Retirement System is facing a growing member revolt as the giant pension fund Tuesday approved a nearly 17% rate increase in health insurance payments for next year.

Although rising health-care costs are straining many employees and employers nationwide, the situation at CalPERS is especially dire. As one of the nation’s largest buyers of health care, CalPERS for many years used its clout to obtain favorable rates from insurance carriers.

But now its members are balking at escalating costs, and some of the public agencies they work for – already under stress because of the state’s budget problems – are privately threatening to pull out of CalPERS health plans and find cheaper medical coverage on the open market. Those agencies, most of which are clustered in Southern California, tend to have relatively younger and healthier workforces than others.

In turn, any exodus from CalPERS’ health plans would leave those left in the system vulnerable to ever bigger rate increases in the future – a scenario that analysts call “the death spiral.”

http://www.latimes.com/business/la-fi-calpersmo18jun18,1,3674659.story?coll=la-headlines-business-manual

The Orange County Register June 18, 2003 PacifiCare goes after CalPERS members By Nancy Luna

PacifiCare Health Systems launched a campaign Tuesday to woo a large chunk of public agencies in the California Public Employees’ Retirement System, which could raise premiums today by 18 percent.

The Cypress-based health- care organization was dumped last year when CalPERS raised premiums by 25 percent.

http://www2.ocregister.com/ocrweb/ocr/article.do?id=44166&section=BUSINESS&subsection=BUSINESS&year=2003&month=6&day=18

Comment: CalPERS has not only had to face the general increases in health care costs, but it also covers a population that has greater health care expenses because of increasing age and a greater incidence of chronic disease. Last year, in an attempt to reduce the scale of cost increases, CalPERS terminated more expensive contracts, including PacifiCare’s. Now PacifiCare is back with a vengeance, attempting to cherry pick the portion of CalPERS’ contracted agencies that have lower costs because of regional market and other demographic differences. Removing lower cost beneficiaries from CalPERS can only result in even greater premium increases, threatening the affordability of CalPERS’ plans.

Even one of the nation’s largest purchasers of health plans is not immune to the death spiral. Although PacifiCare has become a vulture, this is not to criticize it for seeking revenge at having been cancelled, but rather it is to recognize that this smart move in the marketplace enhances investor value at the cost of patients being dumped into the swirl of the death spiral.

Splitting patients into separate pools, even very large pools such as CalPERS, will always result in inequities. Only a single, universal pool can prevent adverse selection, cost shifting, and the other inequities of multiple plans and programs, public and private. Establishing a monopsony (single purchaser) would not only end these inequities, but it would also establish a mechanism of effective negotiation for fair payment for the providers. We can control costs while making certain that an adequately funded health care system is there when we need it.

Institute of Medicine
The National Academies Press

Hidden Costs, Value Lost
Uninsurance in America

The best available estimate of the value of uncompensated health care services provided to persons who lack health insurance for some or all of a year is roughly $35 billion annually, about 2.8% of total national spending for personal health care services.

The Committee’s best estimate of the aggregate, annualized cost of the diminished health and shorter life spans of Americans who lack health insurance is between $65 and $130 billion for each year of health insurance forgone.

Estimates of the cost of the additional health care that would be provided to the uninsured once they became insured range from $34 to $69 billion per year, assuming no structural changes in the systems of health care financing or delivery, average scope of benefits, or provider payment.

Conclusion

This report and the work of the Committee on the Consequences of Uninsurance not only provide information about the costs resulting from the lack of coverage and some of the costs and benefits of expanding it to everyone, it also presents us with an ethical dilemma. In light of the information and analyses that the Committee has developed about choices we have not made as a society, as well as those we have made to invest heavily in health care, we cannot excuse the unfairness and insufficient compassion with which our society deploys its considerable health care resources and expertise. Providing all members of American society with health insurance coverage would contribute to the realization of democratic ideals of equality of opportunity and mutual concern and respect. By tolerating a society in which a significant minority lacks the health care and coverage that most Americans enjoy, we are missing opportunities to become more fully the nation we claim to be.

http://books.nap.edu/books/030908931X/html/index.html

(The legislative alert appears at the end of this message.)

The Henry J. Kaiser Family Foundation June 2003 Medicare Prescription Drugs Through Private Drug-Only Policies: A Discussion with Actuaries By Health Policy Alternatives, Inc.

… the Kaiser Family Foundation contracted with Health Policy Alternatives, Inc. to convene a panel of health actuaries familiar with the Medicare program and the prescription drug debate.

The objective was to explore the implications of providing prescription drug benefits to Medicare beneficiaries through private, drug-only plans from the perspective of the insurance industry and other potential plan sponsors such as PBMs (pharmacy benefit managers).

… there was consensus among the actuaries interviewed for this project that certain features of a Medicare stand-alone prescription drug proposal would be important to attracting the participation of insurers or PBMs.

1. Freedom to set premiums without arbitrary government limits.

2. Government subsidies of beneficiary premiums that do not erode over time.

3. A one-time beneficiary enrollment opportunity, with aggressive government marketing and beneficiary information efforts to achieve maximum beneficiary participation.

4. Shared risk with the government, at least in the initial years, preferably through risk corridors.

5. Ability to price premiums locally and not nationally.

6. Flexibility to exit the market (no guaranteed renewal as exists for Medigap insurers).

7. Some benefit flexibility, especially with respect to cost-sharing.

8. Flexibility to use cost containment measures, including formularies.

9. Preemption of most state laws and regulations to reduce costs of compliance and make it easier to market on a multi-state or national basis.

10. Government collection and distribution of premiums to reduce the administrative burden of plans, and maximize retention of enrollees.

Whether a Medicare drug-only product would be sustainable as a line of business would depend on plan experience and future government policy, especially maintenance of adequate government subsidies and limited enrollment opportunities.

http://www.kff.org/content/2003/6086/6086.pdf

Comment: In order for this program to work, our government must bear most of the risk, must provide administrative functions and marketing, and must grant flexibility and relief from regulations. The plans must also have the right to shift costs to the Medicare beneficiaries and limit or even deny benefits.

If the plans are insisting that we, as taxpayers, accept the risks and bear the administrative functions normally provided by insurers, and that we, as beneficiaries, grant the plans flexibility to significantly reduce our plan benefits in order to embellish their profits, then what function are they serving other than interjecting themselves as superfluous middlemen? Why on earth do the Republicans and the “bipartisan Democrats” continue to insist that we must use private insurers to administer our own Medicare program? This question should be asked not only of the proposed prescription drug benefit, but also of the private Medicare “carrier” HMOs and the proposed Medicare PPO programs.

Another quote from the report is instructive:

“Even the more enthusiastic of our participants had reservations, however, about participating in a government sponsored program. Based on their experiences with M+C and Medigap, they regarded the government as an unreliable business partner and worried that they could not count on ‘the rules of the game’ remaining constant.”

Which is the “unreliable business partner” here? The health plans promised higher quality at a lower cost. They delivered higher costs while failing to deliver on quality. And now they claim that the government is an “unreliable partner” because of the reluctance to increase funding of the wasteful administrative excesses of the plans.

The plan actuaries are correct. Without taxpayer funding of plan excesses, and without the “flexibility” to adjust profits by denying patients their benefits, the plans cannot justify their existence. So what justification can the politicians provide?

*** Legislative Alert ***

Last night the Senate Finance Committee approved legislation that “would offer Medicare beneficiaries a stand-alone prescription drug benefit delivered through private insurance companies. And they also would offer a new Medicare option that would use preferred provider organizations (PPOs) to deliver comprehensive health coverage.”

http://www.washtimes.com/national/20030613-124454-9969r.htm

Opponents of privatization have indicated that they will accept this compromise in order to deliver on the promise of prescription drug coverage. But this is “barn door” privatization legislation that will not be readily amenable to future legislative correction. Privatization of Medicare is too great of a price to pay for an inadequate and highly defective prescription benefit. We need health policies that protect patients, not insurers.

We must now make every effort to defeat this legislation on the Senate floor, and then go to work to elect legislators who will protect, improve and expand our single payer Medicare program. Affordable, comprehensive health care for everyone is a goal that we must not surrender.

Don McCanne, MD President, Physicians for a National Health Program www.pnhp.org

Mercer Risk, Finance & Insurance
Prepared for: National Small Business United
June 2003
Impact of Association Health Plan Legislation on Premiums and Coverage for
Small Employers
By Beth Fritchen FSA, MAAA & Karen Bender FCA, ASA, MAAA

National Small Business United (NSBU) engaged Mercer Risk, Finance &
Insurance (Mercer) to analyze the “Small Business Health Fairness Act of
2003” (H.R. 660 and S. 545). This legislation would encourage the formation
of federally certified Association Health Plans (AHPs) by exempting these
plans from various state laws that govern health insurance sold to small
employers today.

Proponents of H.R. 660 and S. 545 argue that federally certified AHPs would
expand access to affordable health insurance for small employers and reduce
the number of uninsured. Opponents believe the legislation would have the
exact opposite effect – that is, it would cause premiums to rise and the
number of uninsured to increase.

In brief, we found that once federal AHP legislation was fully implemented:

* Health insurance costs would increase significantly for small businesses
in the state-regulated insurance market.

* AHP legislation would increase, not decrease, the number of uninsured.

* Federal AHPs would gain a pricing advantage through risk-selection, not
greater administrative efficiency.

* Federal AHPs would insure the healthiest small employers.

* Small employers would face higher premiums overall.

These results indicate that AHP legislation is not a solution to rising
health care costs for small employers. While some firms obtaining coverage
through AHPs may see lower premiums, firms with higher-cost employees would
see their premiums increase. Overall, small employers would pay higher
premiums and the uninsured population would increase if this legislation
were enacted.

http://www.nsbu.org/files/mercer_ahp_report.pdf