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Using the IRS to Tame Healthcare Costs

As I approach the eve of receiving results from our 19th annual Iowa Employer Benefits Study©, a survey that was on sabbatical in 2017 to accommodate our Iowa Patient Safety Study©, I am waiting in great anticipation as to the status of employer benefits in Iowa after this one-year hiatus.

From this latest study, we will be learning quite a bit regarding many key components found in health and dental insurance, life and disability coverages, retirement, and a multitude of paid-time off components that are extremely important to employees.

But as in previous studies, I will be highly focused on health insurance components, such as premiums, employee contributions and out-of-pockets expenditures. As we are all painfully aware, the cost of health insurance, although experiencing relative tepid growth in the past few years, continues to outpace inflationary costs. In May, the Milliman Medical Index was released showing that, on a national average for 2018, the total cost of insurance for a family of four exceeded $28,000 (it was $23,215 in 2014). As we know, the rising cost of health insurance and medical care alters purchasing behaviors – rational or not.

A recent commentary written in the Wall Street Journal, “The IRS Can Save American Health Care,” by Regina Herzlinger (professor at Harvard Business School) and Joel Klein (chief policy and strategy office at Oscar Health) piqued my interest. Now it must be noted that Dr. Herzlinger is a huge proponent of “consumer-driven healthcare,” while Oscar Health is a technology-focused health insurance company that primarily focuses on individuals purchasing health coverage through designated state marketplaces. Oscar would presumably benefit greatly from what these authors have proposed.

The Existing Problem

Thanks to a 2017 Kaiser Family Foundation report, the authors make a point that eight percent of employers offer a choice of tighter provider networks for their employees to use. Tighter networks restrict the number of providers that can be covered in a geographical location, but in return, providers concede on price, making the plans’ cost more competitive. By abdicating the important choice to exclude higher-cost providers, the authors argue that large hospitals that are dominant in local markets are able to charge higher prices without facing much backlash.

Employers benefit from using pretax dollars when they purchase insurance on behalf of employees, who understandably, are unsure about the true cost of health insurance as this tax exemption greatly distorts and conceals this cost. As a result, employees are likely to believe that someone else is paying the majority of the cost and may not feel as compelled to discern the charges they rack up. If employees work for employers who don’t offer health insurance, they can buy policies on their own through the individual markets, however, they will not benefit from the same tax breaks allowed to employers.

According to the authors, it is who pays for the coverage that ultimately impacts healthcare costs.

Proposed Approach to Put Employees in Charge of Health Costs

Herzlinger and Klein are advocating the IRS to adjust its technical definition of Health Reimbursement Arrangements (HRAs) so that they can be used to pay insurance premiums to satisfy the ObamaCare employer mandate. How could this happen? Employers would simply fund a fixed amount of money into each employees’ HRA, and then have the employee buy the best health plan for their families in ACA-exchanges. Employees would now have tax-free money to purchase health insurance, and if any money is left after the purchase, they can pocket the savings as taxable income. This provides an economic incentive to employees to become thrifty with their money.

The thought process is that employees would now have the appropriate tax break to induce buying cheaper, more-tailored policies – rather than receive a standard plan offered by their employer. The theory is that having more workers purchase coverage through the individual marketplaces would “drive down premiums.” Workers may be more inclined to select a scaled-down provider network that would have fewer providers, but in return, the insurer would be empowered to negotiate lower prices with hospitals and physicians. Such activity would eventually break the stronghold that dominant health providers have in their markets. A 2017 McKinsey analysis suggests that tighter provider networks can be at least 18 percent cheaper (and still achieve similar outcomes).

With this IRS adjustment, the authors feel the Department of Health and Human Services – and Treasury – could work with states and employers on offering HRAs to employees. There would be no act required by Congress to make this happen, bypassing the common gridlock found in Washington.

Will This Be Successful?

This approach is simple in concept and may have some merit of pushing workers to become better healthcare ‘consumers.’ However, expecting a new insurance approach – even through different tax advantages – to overcome the myriad of twisted, inefficient, and opaque incentives that mold how providers and other stakeholders behave is, I’m afraid, mere wishful thinking.

I do consider myself to be an advocate of ‘market-driven’ forces to make healthcare more efficient, safe and affordable, however, it will take a carefully-crafted menagerie of both public-private approaches to ‘tame’ this beast and eventually alleviate runaway health costs.

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Single-Payer Debate: Gaining Traction?

What do the terms ‘Single-Payer’ and ‘potato’ have in common?

The English language can be confusing at times. For example, the words, ‘either’ and ‘neither’ can be pronounced two different ways. What about ‘tomato’ and ‘potato?’ Yep, even song lyrics from ‘Let’s Call the Whole Thing Off’ described the pronunciation conundrum of potato, potahto, tomato and tomahto.

But there’s another problem with words. We sometimes use different words or phrases interchangeably. This is certainly the case in healthcare. Many times, politicians and the media will use ‘health,’ ‘healthcare,’ and ‘health insurance’ as if they mean the same thing. Although they’re inter-related, they have different meanings.

Another healthcare issue that appears to be gaining some traction is the ‘Single-Payer’ debate. But what does ‘Single-Payer’ actually mean? Is it synonymous with ‘Universal Healthcare’ or ‘Medicare for All?’ These terms are thrown around quite loosely as we debate our country’s future on how to deliver and pay for the healthcare we consume. Do all three represent a ‘government takeover’ of our healthcare delivery and payment system?

Here is a primer of the three aforementioned terms:

Single-Payer

This plan creates a single source of payment to healthcare providers, typically through a state or federal program. Financed by taxes, a single-payer approach would cover basic healthcare costs for all residents regardless of income, occupation, or health status. It is important to note that single-payer systems may contract for healthcare services from private organizations (similar to Canada) or may own and employ healthcare resources and personnel (as found in the United Kingdom). ‘Single-Payer’ describes the mechanism by which healthcare is paid for by a single public authority, but not the type of delivery for whom physicians and providers work. The U.S., by contrast, uses a multi-payer approach that includes a mixed public-private system.

Universal Healthcare

This plan is often used interchangeably with ‘Universal Health’ and ‘Universal Care.’ This is a broad term for a program that makes some level of basic coverage available to everyone (most likely through a government program), but can also allow for private insurance. Universal Healthcare will typically refer to a healthcare system that provides healthcare and coverage (health insurance) to all citizens of a particular country. Such coverage provides a specific package of benefits to all members of a society with the goal of providing financial risk protection, improved access to health services and improved health outcomes. Contrary to detractors of Universal Healthcare, it is not one-size-fits-all and does not imply total coverage. In short, Universal Healthcare can be determined by three dimensions:

  1. Who is covered
  2. What services are covered
  3. How much of the cost is covered.

Usually some costs are borne by the patient at the time of consumption, but the bulk of costs come from a combination of compulsory insurance and tax revenues. In some cases, government involvement includes directly managing the healthcare system. However, many countries with Universal Healthcare use mixed public-private approaches to deliver this care.

Medicare for All

This is a universal system in which the basic coverage would be provided by an expansion of the federal Medicare program, but would still allow citizens to purchase private insurance (supplemental plans). It is a single-public or quasi-public agency that organizes healthcare financing, but the delivery of care remains largely in private hands. As we know, Medicare is a federal health insurance program (administered by privately-contracted organizations) for people who are age 65 or older and certain younger people with disabilities, including those with End-Stage Renal Disease. According to the Kaiser Family Foundation and other sources, the administrative costs under Medicare are lower compared to private plans. Bernie Sanders famously argued that correcting the inefficiencies within our current system would actually pay to expand coverage for all Americans. In lieu of designing a whole new healthcare system in the U.S., Medicare-for-All proponents suggest that disruption would be minimal to stakeholders and citizens by merely embracing a program that we already use for a segment of our population.

The nuances of all three approaches can vary immensely, even within each of the above healthcare categories. No two countries with single-payer systems are alike. As we all know, the devil will be in the details on who pays for the program, how will payments be determined (taxes vs. premiums), who will administer the health plan(s), and how will health providers be allowed to practice – either privately or government-employed.

As Senate Republicans attempt to cobble together 50 votes to “repeal and replace” Obamacare, a handful of legislators in Democratic states have proposed some variation of single-payer bills – California, Massachusetts, New York, New Jersey and Rhode Island. The likelihood of these states passing such measures are quite remote at this time, primarily due to divided political ideologies and funding estimates that wreak havoc on fragile state budgets. Not to be outdone, 112 of the 193 U.S. House Democrats are positioning themselves for the 2020 national elections by supporting a broader version of public health coverage – endorsing the “Expanded and Improved Medicare for All Act.

Given the inability of Congress to come to a consensus on replacing Obamacare, will a single-payer or some hybrid-approach ultimately emerge as an alternative? A January study published by the Pew Research Center indicated that a sizeable majority – about three in five Americans – said the government had a responsibility to ensure everyone had healthcare (compared to 38 percent who said it is not the government’s responsibility). A few influential business leaders, such as Warren Buffett and Charles Munger, appear to have some interest in the idea of a single-payer approach, primarily because health costs continue to be a drag on the economy.

As I write this blog about single-payer nuances, the three approaches appear to be synonymous with one another. Any future state and national proposals will no doubt be a hodge-podge of all three approaches.

When that time comes, it will most likely become one hot potato!

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Senate GOP Healthcare Plan – Comparing Two Iowa Counties’ Health Insurance Premiums

The 2017 blizzard continues this summer, not with blowing snow, but with political maneuvering taking place in Washington on ‘healthcare reform.’ For the record, it is really not ‘healthcare’ that is being addressed by the Republicans, but a ‘health insurance’ makeover – specifically for non-employer coverage purchased by individuals and Medicaid (for low-income Americans).

Real ‘healthcare’ reform would aggressively attack the root causes that make insurance grossly expensive. Instead, the political insanity continues by focusing on the symptoms of the core problems – the exorbitant health insurance premiums we pay. In lieu of reducing the enormous waste built into American healthcare (waste that is an unnecessary cost to many of us but an entitled revenue to entrenched players in the healthcare arena) we continue to confront the never-ending battle downstream of “who should pay and how much?” This problem will continue to persist because of the unwillingness to confront the brutal facts about waste. Einstein’s definition of insanity fits this issue remarkably well.

But I digress…

After Senate Republicans test-launched their trial balloon on June 22, also known as the Better Care Reconciliation Act (BCRA), we now have a better understanding of the impact it will have on each state regarding insurance premiums, the number of those who will be insured and uninsured, and, to a lesser extent, the financial tension on state budgets. Additionally, insurance companies, health providers and other stakeholders have watched with bated breath on how their business world will be impacted by political alterations to health coverage.

After scoring the BCRA, the most notable news coming from the Congressional Budget Office (CBO) report was the projection that 22 million people would lose health insurance by 2026, in addition to millions more seeing increased out-of-pocket costs. (The Urban Institute projects that Iowa will have 232,000 more uninsured by 2022.) The national increase in the number of uninsured equates to the combined populations of Kansas, New Mexico, Nebraska, West Virginia, Idaho, Hawaii, New Hampshire, Maine, Rhode Island, Montana, Delaware, South Dakota, North Dakota, Arkansas, Vermont, Wyoming and the District of Columbia. Given the recent backlash to the CBO score, Senate Republicans have delayed their vote on this legislation until sometime after the holiday break.

A new Kaiser Family Foundation map compares county-level projections of premiums and tax credits for marketplace enrollees under the Affordable Care Act (ACA) in 2020 with estimates for the BCRA. Both the ACA and BCRA include tax credits that factor in family income, local cost of insurance and age. Eligible enrollees pay a certain percentage of income towards the cost of a benchmark plan, while tax credits cover the remainder of the premium. Further assumptions of the map are explained in the Kaiser link above.

Using the Kaiser map, the following slides suggest that coverage losses would be borne disproportionately by people with low-and-moderate incomes and by older people who purchase their own coverage – prior to becoming eligible for Medicare.

As an example, under the ACA, a 60-year-old enrolled in a silver-level marketplace plan in Polk County with an income of $20,000 has an average premium of $8,600. His tax credit covers all but $950 of his costs. Under the BCRA, the premium for this same person would be almost $3,000 higher than it is under the ACA. And, even after receiving the tax credit, he would be paying $2,340 – an increase of 246 percent over the ACA plan. If he lived in Appanoose County, he would be paying $3,520 more under the BCRA plan versus the ACA plan – an increase of 371 percent.

Below are two other summaries of how people compare based on age (27, 40 and 60), income ($40,000 vs $60,000) and location (Polk and Appanoose counties). Generally speaking, the comparisons suggest that as income increases, the younger people will pay less premium under the BCRA when compared to being enrolled in the ACA. Older enrollees, especially those in higher-cost counties, will pay more under the BCRA plan.

Below is the comparison for individuals earning $40,000.

Below is the comparison for individuals earning $60,000.

As the summer continues to heat up, so too will the blizzard of activity toward fixing the symptoms of a much bigger problem.

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