9. Why a Public Plan Will Encourage Unfair Cost-Shifting

The second reason a public health insurance option is a bad idea is that it will encourage unfair cost-shifting.

Proponents of a public health insurance plan concede that Medicare and Medicaid pay much lower rates to providers than private insurers.  For example, on average, hospitals are paid 9% below the costs of care by Medicare and 15% under costs by Medicaid.  Similarly, Medicare pays physicians 22% less than they are paid by private insurers, while Medicaid pays 47% less.  Yet public plan enthusiasts do not view Medicare’s pricing power as a problem; instead, it is part of their publicly stated rationale for a public plan: to leverage purchasing power on behalf of members to get the best rates and lower premium costs. In fact, the House Tri-Committee bill explicitly ties provider payment rates to Medicare levels for the first three years and allows for nationally negotiated rates thereafter. While Senate bills do not legislate where to set rates relative to Medicare, there are likely to be strong political pressures to keep payment rates under new public plan as close to Medicare rates as possible.

However, while experts disagree on the amount, most evidence suggests that for hospitals and pharmaceuticals, at least some portion of the sizable discounts obtained by public plans such as Medicare and Medicaid are passed along to private health insurers. While some experts have suggested that there is no cost shifting of Medicare underpayments (or negligible amounts), the available evidence does not entirely resolve the issue. This claim contrasts with more than a half dozen empirical studies suggesting hospitals recover at least 28 cents of every dollar of Medicare underpayments in the form of higher prices for private patients (and a more typical figure may be closer to 40 cents). Similarly, there is good evidence that for every dollar saved by Medicaid due to mandatory price rebates, the savings are more than made up by increased prices for private patients. But by lowering its own costs at the expense of private plans, a public plan will amplify its competitive advantage unfairly.

By the very nature of the politics required to sustain it, a public plan also is likely to keep its true costs hidden by subtly shifting burdens onto its own members.  These are not hypothetical concerns.  They are based on decades of actual experience with the largest public plan ever run by the U.S. government: Medicare.  Medicare has grown increasingly stingy over time, with the consequence that the financial burden imposed on Medicare beneficiaries by medical expenses relative to their income has grown in the past and is projected to rise dramatically in the decades ahead.  Within 75 years, the premiums, deductibles and copayments that seniors will have to pay for their Medicare benefits will absorb 97% of the average Social Security check; for the average 85-year-old, the share will have risen to 117%. This reinforces the view that the federal government should focus its energies on fixing the public plans it already manages rather than taking on the responsibility of a new public plan.

Not convinced?  Here’s the evidence to support those conclusions.

Next Installment: 8. Why a Public Plan Will Have an Unfair Competitive Advantage

Facing the Abyss

Call it a “fiscal tsunami,” a “fiscal train wreck,” a “fiscal cancer,” a “frightful storm,” or just simply “a looming fiscal crisis.” What we call it matters far less than what we do about it. Projected spending on health care entitlements portends a crisis that without exaggeration has the potential to topple our republic.

• How Deep is the Hole? Twitter this: $104 TRILLION.  In policy-speak, the net present value of unfunded liabilities for Medicare alone now equals $88.9 trillion*–more than six times the annual output of the entire U.S. economy in 2009 (and, coincidentally, nearly six times the equivalent tab for Social Security, i.e., $15.1T). This unfunded liability is the amount that Medicare will cost U.S. taxpayers over and above what current revenues would provide assuming no statutory changes in the program. Essentially, it is the net amount of money Medicare would need today to cover the gap between all projected spending on future promised benefits and all projected revenues that are dedicated to Medicare (i.e., payroll taxes, Part B and D premiums, and interest earnings on the Medicare Part A Trust Fund). This unfunded liability would either have to be financed through general revenues (mostly income taxes) or future borrowing. [Note to Medicare-for-all enthusiasts: perhaps handing responsibility for the entire health care system to the same folks who created this Medicare fiscal mess is not such a good idea after all? When you're in a hole, aren't you supposed to stop digging?]

• Why Taxpayers Should Care. To fully address this unfunded liability so that everyone (including all future generations) could be certain of receiving promised Medicare benefits in perpetuity would require each of us to pony up $290,000. Today! [Yes, Scarlett, you can think about this tomorrow, but then the tab will be even higher. Did I mention that with Social Security included, the total actually comes to $339,000? Oh, you wanted to pay off the national debt too? Add another $30,000: for you and Rhett together, that works out to about $738,000. I may be wrong, but I don't think Uncle Sam takes VISA (or Confederate dollars, now that I think about it). Please makes checks payable to U.S. Treasury (and it might be a good idea if you got a receipt)]. That would be a cool $2.2 million for my family of 6 [Admit it: it would be pretty cool if I had that amount of spare cash sitting around to contribute to the cause: it would be even cooler if I had $1.75 trillion just to pay off this year's deficit.], though “only” $956,000 for a typical U.S. household. I can only speak for myself: even leaving aside willingness-to-pay, that greatly exceeds our family’s ability to pay [Note to self: if you would stop making bad "investments" in the Yankees and Blue Devils at Tradesports.com, you probably could afford your share of this tab]. “We have a huge implicit mortgage on every household in America — except, unlike a real mortgage, it’s not backed up by a house,” says David Walker, former U.S. comptroller general, the government’s top auditor. The magnitude of tax increases required to solve this problem is unprecedented, and perhaps politically impossible. But every promised dollar of benefits that we can’t bankroll somehow is going to have to be cut. What’s politically viable may simply be whatever path minimizes the collective screaming from those who have to pay more versus those whose benefits must be cut.
• Why Non-Taxpayers Should Care.   With policymakers caught between a rock and a hard place, there’s a serious concern that they might opt to press the Easy button by monetizing our debts.  The resultant price inflation will affect all Americans, not just the ranks of taxpayers.  Inflation effectively is a tax (albeit hidden) that hits poor and elderly families particularly hard.  Ironically, just the massive short-term deficits projected under the Obama administration budget (through 2019) are contributing to the perception that “government is now the most serious source of systemic risk.” Yet these additional deficits are a pittance compared to the entitlements deficits to come. What’s scarier is that even monetizing the debt won’t get us out of this hole.
• Why Young People Especially Should Care. In more concrete terms, absent reform, by 2078, the average out-of-pocket health expenses of a typical 65-year-old Medicare beneficiary–including premiums for Parts B and D of Medicare and the deductibles and copayments–will absorb 97% of the average Social Security check. For the average 85-year-old, that fraction would be 117%. [Note to GenX, GenY and Millenials: save early and save often. I realize President Clinton's claim that "young people in their twenties think it's more likely that they will see UFOs than that they will ever collect Social Security" may have approximately the same truth value as his assertions about a former WH intern. But for the brightest and best among you, a word to the wise is sufficient.]

The magnitude of this entitlements crisis will make today’s financial meltdown look like a tempest in a teapot, a molehill in a mountain or any other apt metaphor that springs to mind. This “domestic” policy issue also poses threats to our national security to the extent that spending on health care gradually squeezes out our capacity defend ourselves, much less maintain the umbrella of protection that has benefited literally billions of people worldwide.

Heck, I’m parochial and shameless enough to call it a global health crisis, to the extent that spending on this country’s own bloated health care system crowds out our ability to keep bankrolling initiatives such as PEPFAR or the billions we spend annually through USAID (President Obama has asked for $9.1 billion in spending on global health in 2010). This is a problem that should concern all of us regardless of what policy domains usually preoccupy our attention.

Because above all, it is a moral crisis: the “greatest generation” spawned a generation of Baby Boomers whose legacy in the worst case might be setting into motion the chain of events that led to toppling the greatest nation on earth. At minimum, i.e., even in the “best case” (should we lack the political will to address this), my generation is now on the road of engineering the greatest intergenerational transfer ever seen in the history of the world. “Leaving our children and grandchildren with a burden they cannot possibly manage” is unconscionable. Likewise, making promises to them that the government has no realistic hope of being able to fulfill is outrageous.

Is this what our Founding Fathers risked their lives, their souls, their fortunes and sacred honor to achieve? Would Lincoln think this was worthy of his efforts to save the Union and achieve “a just and lasting peace, among ourselves and with all nations”? We can do better. Way better. If we can’t, we are in deep doo-doo.**

_______________________________________________________________________________________________________________

* Lest I be accused of cherry-picking the evidence, let me stipulate that yes, yes, the $88.9 trillion figure is over an infinite time horizon. Over a 75-year time horizon, the Medicare hit is “only” $38.2 trillion (2009). ["I knew it!" some of you will shriek. "Figures lie and liars figure." While Mark Twain certainly said liars figure, he actually said figures don't lie, but that's a minor quibble].

Here’s why the infinite horizon figures are the most “fair and balanced” assessment of our plight. If we entirely paid off the $38.2 unfunded liability in Medicare through 2083, we would indeed get through that year without having had to raise payroll taxes or Parts B & D premiums above current statutory levels. The problem is that we will have used the lifetime payroll tax contributions of new retirees in 2083 to help cover all Medicare expenses up to that point. So looking forward to the next 75 years, we would face another mountain of unfunded liabilities representing the mis-match between projected spending and revenues for this new group.

So the only practical way to address this “bear went over the mountain” feature of Medicare (and Social Security) funding is to bite the bullet and pay the $290,000 per person that would eliminate the mismatch between revenue and costs forever, not just 75 years. [Note to Bernie Madoff: your only mistake was trying to do what you did as a private citizen. We should have had the good sense to exploit your unique Ponzi scheme skills by appointing you Social Security director (a win-win situation for all concerned and arguably less of a drain on taxpayers than your jail term is likely to be).]

**Watch the 30-minute video IOUSA for a history of how we got into this mess. Watch this shorter video of just how quickly we are speeding towards fiscal insolvency.

Nerd Alert: Mind-Glazing Health Policy Wonkery Ahead
For those wishing to do their own calculations (or completely skeptical about whether a self-professed health policy skeptic could or should be trusted not to bend the truth):

• U.S. Population and Households. For simplicity I project the U.S. resident population for July 1, 2009 at 306.9 million based on Bureau of Census monthly estimates from July 1, 2008-April 1, 2009.  In the 2000 Census there were 2.59 persons per household, so I used this to calculate debt burdens for the average household.
• Unfunded Liabilities, Infinite Horizon. The infinite time horizon estimates of unfunded liabilities for Medicare all are reported in the latest Trustees Report.  Medicare Hospital Insurance, i.e., Part A=$36.4T (Table III.B10); Medicare Supplemental Medical Insurance (SMI), i.e., Part B=$37.0T (Table III.C16); Medicare Prescription Drug, i.e., Part D=$15.5T (Table III.C23).  Total=$88.9T [check my math]. The parallel figure for Social Security is in a different Trustees Report ($15.1T).
• Trust Fund Balances. Note that NCPA uses a figure of $106.8T, but that’s because they do not subtract the existing trust fund balances: strictly speaking, our future liabilities do not become “unfunded” until we first use up these amounts.  Admittedly, these are just paper promises, so we still would have to resort to raising taxes or borrowing to “pay ourselves back.”  Hence the rationale for ignoring such balances. But from an accounting point of view, that $2.8T is not an unfunded liability. Medicare/Social Security at one time really did collect this amount of funds to cover its future expenses, and those payroll taxes (even if now disappeared) should be counted as income which in a perfect world would have been used or available to pay for projected expenses. It’s just that policymakers grabbed this surplus and long ago spent it, leaving only IOUs behind.
• Unfunded Liabilities, 75-Year Horizon.  The estimates of unfunded liabilities over a 75-year horizon can be derived from the same tables cited above (Part A=$13.4T; Part B=$17.2T; Medicare Prescription Drug=Part D=$7.2T), for a grand total of $37.8T. For the morbidly curious, the 2007 figure was $34.1T according to the Peter G. Peterson Foundation (the $3.7T increase amplifies why waiting to fix this problem is not a good idea). The figure for Social Security is $5.3T.
• U.S. GDP.  As of March 2009, the Congressional Budget Office estimates 2009 GDP at $14.0T.
• U.S. Net Worth.  The Federal Reserve Bank releases these statistics quarterly. At the end of June 2009, the net worth of U.S. households and non-profit organizations was $53.1T (Table B.100).
• Current U.S. Debt. The U.S. Treasury conveniently reports The Debt to the Penny and Who Owns It. I used their figure of $11.3T for the U.S. debt as of May 11, 2009.  But this figure only includes total liabilities of the federal government and fails to account for its assets.  According to the U.S. Treasury Department, these assets amounted to $1,974.7B at  (p. 39) , so I used a net figure of $9.3T.

The U.S. Economy And Changes In Health Insurance Coverage, 2000-2006

John Holahan and Allison Cook. The U.S. Economy And Changes In Health Insurance Coverage, 2000-2006
Health Affairs Web Exclusive, February 20, 2008. Abstract

The number of uninsured Americans increased by 3.4 million between 2004 and 2006, despite improving economic conditions. In the first four years of the decade, during a period of economic recession, the number increased by 6.0 million. The dominant factor in both periods was a decline in employer-sponsored insurance coverage. Although the recent decline was less than that experienced from 2000 to 2004, growth in public coverage was small, and the number of uninsured people increased by 1.0 million children and 2.4 million adults. Employer coverage declined most for self-employed or small-firm workers, in the South, and among noncitizens.

The Impacts of Health Insurance and Child Care on Job Retention and Mobility among Low-Income Mothers

Sunhwa Lee. Keeping Moms on the Job: The Impacts of Health Insurance and Child Care on Job Retention and Mobility among Low-Income Mothers. Washington, DC: Institute for Women’s Policy Research, 2007.

Building on prior research, this report examines factors related to job retention and labor market advancement among low-wage workers, and suggests effective policy strategies for improving their labor market outcomes. Using data from a national longitudinal survey, The Survey of Income and Program Participation, the report assesses the importance of various factors that facilitate or hinder job retention among low-income mothers. It also investigates what happens when they leave a job: are they moving to a better job, and if so, what helps or hinders their move to a better-paying job? Since a majority of welfare leavers and low-wage workers are women, particularly single mothers, the study pays special attention to work supports that can be important for job stability among working mothers, such as employer-provided health insurance, child care subsidies, and child care arrangements. Other major factors considered in the study are: personal/family characteristics (race/ethnicity, education, marital status, health status, presence of young children, etc.) and job characteristics (full-time status, occupation, hourly wages, union membership, etc.). Full report (pdf)

Health Literacy Practices in Primary Care Settings: Examples from the Field

Sharon E. Barrett, Jennifer Sheen Puryear, and Kathie Westpheling. Health Literacy Practices in Primary Care Settings: Examples from the Field. New York: Commonwealth Fund, January 2008.
Low health literacy is widespread among U.S. patients, yet limited research has been done to assess the effects of health literacy practices designed to combat the problem, particularly among safety-net providers in primary care settings. This report presents findings from a 2005 study in which the Association of Clinicians for the Underserved first did an online survey of health care facilities across the country and then followed it up with visits to five selected sites for staff and patient interviews. The study identified five health literacy practices that staff considered especially valuable for their group’s patients and potentially applicable to other clinics: a team effort, beginning at the front desk; use of standardized communication tools; use of plain language, face-to-face communication, pictorials, and educational materials; clinicians partner with patients to achieve goals; and organizational commitment to create an environment where health literacy is not assumed. Full report (pdf)

Health Care Opinion Leaders’ Views on the Presidential Candidates’ Health Reform Plans

K. K. Shea, S. R. Collins, and K. Davis, Health Care Opinion Leaders’ Views on the Presidential Candidates’ Health Reform Plans, The Commonwealth Fund, January 2008.

The 13th Commonwealth Fund/Modern Healthcare Health Care Opinion Leaders Survey asked a diverse group of experts for their perspective on the health care reform proposals of the 2008 presidential candidates. Survey participants strongly support reform proposals that applied a mixed private–public market approach. Additional favored policy strategies for reform include a requirement for individuals to obtain health insurance, new private market regulations, and a requirement for employers to provide coverage or contribute to a coverage fund. Alternatively, respondents think proposals that focus on tax incentives to purchase individual private health insurance are not an effective method for controlling the rising costs of health care or achieving universal coverage. Health care opinion leaders call for the next president to simultaneously address universal coverage and quality, efficiency, and cost containment policies to move our health care system toward high performance. Links to full Data Brief, Chartpack (pdf and PowerPoint), Tables and Full Methodology here.

Doctors Give Massachusetts Health Reform a Failing Grade – Poor Early Outcomes Raise Red Flags

Over 250 Massachusetts doctors have signed an open letter to the country warning that the health reform model enacted by Massachusetts is failing and that a single payer program is the only alternative.
“It is urgent that the rest of the country know that Massachusetts is a living laboratory for the health care reforms being pushed in California and by the Obama/Clinton/Edwards campaigns. Right now the Gov. Romney/Massachusetts’ plan gets a failing grade on the ground,” said Dr.Rachel Nardin, Assistant Professor of neurology at Harvard Medical School. Full text of letter.