No Country for Old Men

As we enter summer, the health reform process is moving into its Newtonian phase: irresistible forces meeting immovable objects.   In both health cost and access, the trend is not our friend.  There is ample evidence not only of intolerable inequities, but also intolerable waste and inappropriate use of expensive clinical tools.  President Obama embodies the need for change. He has assembled a very talented and politically savvy crew of helpers.  He confronts the sternest test of any Presidency, fixing a poorly tuned and fragmented health system that is, by itself, larger than either the French or British economy.

In the course of dispatching two formidable election opponents, the President made a number of campaign promises:  cutting taxes for nearly everyone, raising them only for the “needlessly wealthy”, not taxing health benefits (since that was a central tenet of John McCain’s health platform, vigorously opposed by a core constituency, organized labor),  not changing the health coverage or providers of voters (93% of  whom already have health insurance), a new publicly sponsored plan for those under 65,  and, in the end,  covering 46 million people who presently do not have health insurance.

While these pledges are not as intractable as George HW Bush’s famous and politically costly: “read my lips, no new taxes” pledge, taken together, they create formidable barriers to a signable bill.   President Obama is now, under cover of Congressional negotiation, gingerly walking his way back from most of them.

The pledges not to change anything for those currently satisfied with their existing health insurance or providers, and to create  a new Medicare-like public plan may prove to be the most troublesome.  As it turns out, these two pledges work against one another.  The new public plan is supposed to offer an affordable alternative to private insurance by “using the purchasing power of the government” to achieve savings.   This offering is not targeted solely to the uninsured, but rather to anyone who wishes to sign up.

The political symbolism of the public plan is compelling, and 120 members of the House have told the President they will not vote for a bill that does not include one. The public plan is viewed, both by proponents and opponents, as the opening wedge of a gradual (or not so gradual) widening of the public role in health insurance provision, ending in a single payer government health plan.

Medicare is widely popular among current beneficiaries.  A major reason is that the program is massively subsidized by general tax revenues, (39% of total Medicare in 2008),  as well as by payroll deductions of non-Medicare users (including many uninsured younger workers)- another 40 % of total funding in 2008).

Thanks to supplemental insurance, 85% of Medicare beneficiaries are completely insulated from the cost of care, leaving them completely free to be “mined” by avaricious physician communities like those in McAllen, Texas (recently profiled by Atul Gawande in his widely read New Yorker article).   The largely open ended Medicare system has, by some estimates, left future taxpayers as much as a $50 trillion unfunded future liability.

So when the general public thinks of a “Medicare like” public plan, one can reasonably assume they think it is something that will be largely free to them.  A recent New York Times poll found that 72% of those polled approved of a “Medicare like” public plan. No wonder.  When an anonymous White House aide was asked to comment on the poll findings, they compared its popularity to that of “free ice cream and puppies”.  How people feel about the public plan when they realize that they might have to pay most of the costs themselves remains to be determined.

The idea that you can simply insert a new public plan into the existing insurance market without the presently insured noticing any difference is political fiction, not market reality.  Think of the private health insurance market as a $900 billion pool of money held back by a vast earthen dam consisting largely of provider/payer contracts.   This pool has shrunk by some estimates by as much as 9 million lives due to the recession, due to people losing employer provided coverage.

Obviously, some of those newly insured through health reform will choose private plans and the size of the lake behind the dam could thus grow. Even with no public plan, it is absolutely appropriate for health reformers to demand concessions from private insurers for creating all these new customers.

However,  if you also drill, say, a 3 foot wide hole in the dam, (the width of the hole depends on the cost difference between the new  public plan and existing private offerings) both lives and dollars will gush out.  Depending on the width of the hole, many previously private health plan enrollees will defect to the public plan, and the composition of the risk pool remaining behind the dam will change in completely unpredictable ways.  Health plans will have to lower their premiums to avoid being run out of business, and many will gush red ink until they can revise their existing network contracts, many of which contain multi-year rate guarantees.

At the risk of being washed away by the metaphor, the width of the hole has a major bearing on whether the dam merely leaks or simply gives way, and destroys the economic foundation of the health insurance industry.   This is Corps of Engineers big-league hydraulics we are discussing here.

How wide the hole in the dam will, in turn, depend on the rates paid to providers by the new public plan.  Achieving significant savings over private insurance would require the public plan to exploit the government’s unparalleled ability to set unit prices below the cost of caring for government funded patients.  Medicare has excellent control over unit payment rates, and virtually zero control over healthcare utilization (where  most of the present cost problem resides).

As the controversial Lewin study established, if the public plan pays prevailing private insurance rates, it would not  attract enough new enrollees to justify the political costs of creating it in the first place.  Achieving a significant cost advantage over private insurers could require the new public plan to compel hospitals and physicians who do business with Medicare to accept Medicare rates to provide care for those who choose the new public plan.

In the inelegant lingo of the business world, this is called a “cramdown”.   The cramdown would be needed because relying on voluntary sign-up by hard pressed primary care docs and hospitals serve a large new segment of below-cost customers would likely be unsuccessful.   Selling the original Medicare program to hospitals and doctors in 1966 actually required paying them on a cost-plus, not cost-minus basis.

Hospitals are already losing some $30 billion treating publicly funded patients, and have been hammered by investment losses (which markedly reduced their capacity to subsidize those losses).  To force them to widen those losses in exchange for more publicly funded patients would engender loud and broad based political opposition to the public plan from hospitals  and physician groups (which has, interestingly, yet to materialize).

The more serious problem is on the physician side.  Some 36% of the physicians in the United States are over age 50.   About 18% of them have closed their practices to new patients, including Medicare patients.  Appeals to patriotism will not suffice to re-open their practices to public plan enrollees.   Something like one-third of physicians over fifty would retire tomorrow if they could afford to do so (which they are presently unable to do owing to massive damage to their retirement portfolios).

My forecast is that as the economy and, more importantly, the stock market recovers, we will see a rapid exodus of boomer docs from practice across clinical disciplines, and a wave of further practice closures to new patients, as those patients displaced by practice closures cascade down on the docs who remain in practice (more hydraulics, I’m afraid).

If the experience in Massachusetts is any guide, the creation of 400 thousand newly insured people led to immediate increases in waiting times to see a doctor across the state, principally because of a shortage of primary care doctors and the fact that many existing primary care practices were already closed to new patients.  A recent Merritt Hawkins survey revealed that wait times to see a physician in Boston  (49 days) were almost double those of the next closest city, Philadelphia.

There is an excellent chance that even without the new public plan or accompanying Medicare payment reductions, we will have a crisis of access to physician services in the next five to ten year as boomers flood onto the Medicare program and boomer doctors retire.

Unless it is handled carefully, this looming physician access problem will be blamed on health reform.  The campaign promise that “you can keep your doctor if you choose” will be meaningless if  exhausted and disillusioned physicians retire in large numbers, as I expect they will.   Many of their retirement letters could well blame
a poorly conceived reform plan passed by Congress and signed by President Obama for problems which, in reality, pre-dated health reform.

From the employer side, it is worth remembering that the majority of employers offer employees only a single choice of health plan.  If a new public plan is offered that is, for argument sake, 30% cheaper than the local Blue Cross Plan, employers will switch to the public option in a New York minute, leaving their employees in the new  Medicare-like public plan with a bunch of angry hospitals and doctors.  Small employers, including this writer, who are most disadvantaged by the present health insurance market, will be gone from their current coverage in sixty seconds.   So the campaign promise that “you can keep your existing health plan if you like it” will also be meaningless if peoples’ employers decline to continue to provide it.

Many policy advocates who argue that we need a new public plan to “discipline the market” do not appreciate that  Medicare already functions as the price benchmark for private insurers.   When Medicare cuts its payments, as it last did most vigorously in the Balance Budget Act of 1997, private health plans experience a surge in costs from providers attempting to recover their losses, and then have to respond by tightening utilization controls and/or negotiating lower rates of increase in costs.

Medicare will inevitably cut  payments to hospitals and doctors to fund health reform, as well as to reduce future year federal deficits.   Further payment reductions from the public plan could force private health plans to make even deeper cuts in  payments to doctors and hospitals (to avoid ruinous losses in their core enrollment).  These twin pressures could create a nuclear winter in a provider community already struggling through the recession with diminished assets and patient volume.

In a 25 June New York Times Op-ed piece,  Alain Enthoven, a health policy veteran, argued persuasively that the ability to set health insurance market groundrules through a national health insurance exchange already hands the government sufficient power to curb private health costs, as well as to make covering the newly insured more affordable. This power, properly employed, makes the public plan completely unnecessary.

Enthoven is exactly right.   He proposed merely setting the maximum amount of tax-free pass through of health insurance premium costs to employers and employees at the amount of the least expensive exchange offering (a familiar remedy for those who have followed his work). People who want more expensive plans will be free to pay for them with after-tax dollars.    Since the exchange will also constrain underwriting practices and set minimum benefit levels, meet that price challenge by marketing only to the healthy or offering a stripped benefit will not be possible.

While health insurers and providers and the commentariat are engrossed in the contentious public plan debate, attention has been distracted from the crucial decisions regarding the shape of the federal regulatory regime embodied in the health insurance exchange.  This exchange will have immense power.  Health plans which do not adhere to its rules will be unable to serve their customers through the exchange and be locked out of access to a large fraction of their current market, as well as to the newly covered.

The exchange’s rules will likely include underwriting standards that limit pre-existing conditions exclusions, recissions of coverage, requirements of guaranteed issue, limits on the mark-ups for older and more costly patients, as well, crucially, the minimum benefit package and cost sharing provisions plans must meet.

These latter issues – benefits package and cost sharing- are both highly political and extremely important, as an excessively generous benefits package (containing ever-popular service mandates for chiropractic care, in vitro fertilization,  acupuncture, you name it) or elimination of high-deductible plans (another thing that happened in Massachusetts) could markedly increase employer costs, as well as the federal subsidies required to permit employers to participate.

While they made historic progress in reducing the number of insured citizens, Massachusetts health reforms have made a major contribution to the state’s $5 billion budget deficit by leaving intact an absurdly generous benefits package, and a highly concentrated provider market, while relieving patients of the need to manage their own costs more thoughtfully.

The real political problem for Congress and the Administration will be with self-funded employers (e.g. most everybody who has more than 200 employees), not with a politically weakened health insurance industry. If Congressional drafters aren’t careful, the blanket ERISA pre-emption which has protected self-funded employers from state service mandates and premium taxes could be replaced by a politically defined benefit package that relieves employees of cost-sharing liabilities, opening the door to future ruinous increases in their benefits costs, which under an employer mandate, they would be required to pay.  Employers large and small will fight that form of mandate until the last dog dies.

For what it’s worth, Tom Daschle saw far enough down the road to realize that employer trust of the political system was so low that unless you removed decisions about the benefits package and coverage/payment policies for specific services from Congress, business would never support health reform.   That was the genesis of his suggestion for a National Health Board that insulated benefits and payment policy from Congressional micromanagement.    Letting Daschle go has been the only visible mistake Obama has made so far in this remarkable process.  His leadership would have been immensely valuable this summer.

Most of the key Congressional leaders have spent anywhere from twenty to, in Ted Kennedy’s case, an unimaginable 45 years wrestling with this issue. Even if they get past the public plan, they’ve still got a long way to go to get this horse in the barn.  Congressional leadership more than a little resembles Tommie Lee Jones’ world-weary sheriff in the recent, bleak Coen Brothers film, a tired good guy facing a resourceful and implacable foe.   Health reform is no country for old men.

It is possible that, for the second time in fifteen years, divisions inside the Democratic Party might doom health reform.   President Obama will need all his skills and persuasive powers to save his Congressional party from itself.   Rather than wasting scarce political capital on the public plan, health reformers need to focus on hospital and primary care physician payment reform, expanding Medicare coverage for the almost 11 million uninsured boomers and sensible design of a federal health insurance exchange.   It isn’t going to take a miracle to get this important public task done, just focus and discipline.

Originally published on The Health Care Blog.