Hypothetical Mean

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A Few Healthcare Financing Gimmicks

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You may love healthcare reform.  You may hate it.  Either way, there are some very troubling developments that we should be able to agree on.  Specifically, in order to achieve CBO scores that are politcally palatable, serious legislative gimmicks are being employed.  This post documents a few, focusing on the Manager’s Amendment of the Reid bill.

* The additional Medicare payroll tax is applied to anyone who earns over $200,000 a year.  That threshold amount is not indexed for future inflation.  If and when inflation happens, more and more people will pay this tax.  Why did the Senate do this?  Healthcare inflation threatens to outstrip CBO-scored revenues.  By not indexing the tax bracket, tax revenues will escalate at a faster rate, causing the bill to be estimated to pay for itself even in the second decade.  I strongly suspect the average person would not support this structure.

* The lower-income premium subsidies are designed to require ever-increasing premium payments, as a percent of income.  What this means is that even subsidized premiums become increasingly unaffordable in future years.  This was done to help limit the increased cost of subsidies.  Again, however, this is bad policy.  If someone can’t afford more than x% of their income as premium in 2014, what justification is there to presume that they can afford a higher percentage of their income in 2019?

* There are more than 125 million Americans living at between 100% and 400% of the federal poverty level.  Less than 20 million of those will receive the subsidies in the bill.  All others will be behind “firewalls” that are estimated to keep them from receiving the subsidies.  I doubt that these firewalls are sufficiently strong.  Aside from that criticism, however, this mechanism makes the bill seem much less costly than it truly is.

* CLASS Act revenues are scored during the budget window.  These revenues are dedicated to future benefits, but this liability is not scored during the budget window.  In other words, we are using the revenue from a new entitlement to pay for cost overruns in another entitlement.  Further, the CBO has to score the CLASS Act overall as not contributing substantially to the deficit because, according to the proposal, premiums will simply be increased to whatever level is necessary to pay for the ongoing costs of the program.  I trust that the deceit of this mechanism requires no further comment.

* The tax on “Cadillac” plans serves two purposes to help scoring that may or may not translate into true cost savings.  First, the number of plans that get hit by the tax are expected to increase because the threshold for what defines a Cadillac plan does not increase at the same rate as healthcare costs.  Secondly, the CBO likely overstates the revenue from this provision because it assumes that an employer that slims their healthplan to avoid this tax will give workers a dollar-for-dollar wage increase to compensate for the cut in health benefits.  Any leakage to profits, solvency, other non-taxable benefits is assumed to not exist in any substantial fashion.

* The Medicare in-patient cuts are assumed to happen as scheduled.  All experts are quite skeptical that this will happen.  These cuts are designed to be a crude function of economy-wide productivity.  This means that in an economic downturn, which typically has employment falling and productivity climbing, per-stay reimbursements are expected to be cut more heavily than during economic upturns.  The appropriate policy response for reform supporters was to delay the spending until *after* these cuts had happened, rather than commit ourselves to the spending on the hope that these cuts will happen.

* The Medicare physician cuts that have been over-ridden for almost 10 years in a row are assumed to be enforced through 2019.  This is almost guaranteed not to happen, and this is worth more than $200 billion.

* The Medicaid program itself is unsustainable, but this problem remains unaddressed in this bill.  In fact, Medicaid becomes stressed even more heavily as more people are placed onto that program.  Can states absorb these costs?  The CBO has to assume that doctors will serve the new Medicaid enrollees, and that states will find their share of the money and will cooperate in expanding enrollment.

* In general, there are only four full years of scorable expenditures on premium subsidies (2016-2019), but ten scoreable years as revenue.  The illusion that the bill pays for itself in the latter years is supported only by many of the aforementioned gimmicks.

It is our duty as private citizens to demand good government.  I don’t think anyone, regardless of whether they support reform, should support the fgimmikcs described above.


Written by Victor

December 20, 2009 at 8:27 pm

Do I want a fiscally responsible President?

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I think so.  But this article gives me pause.  It quotes Obama:

“Social Security, we can solve,” he said, waving his left hand. “The big problem is Medicare, which is unsustainable. . . . We can’t solve Medicare in isolation from the broader problems of the health-care system.”

I suspect this quote reveals that he and I view these programs from fundamentally opposite perspectives.  I see Medicare causing broader problems in the healthcare system and rarely suffering from them.  The fundamental Social Security problem is how to maintain the program’s popularity with ever-declining benefit-to-contribution ratios.  Both contibute to the overarching problem of how to manage the overall impact of these programs on the general finances of the US government.

I am not particularly concerned, per se, about the long-term projected deficit in Medicare, and am only moderately more concerned about Social Security’s actuarial deficit.  I fear “solutions” to these problems that emphasize policy options that exploit weaknesses in the assumptions and calculations rather than focusing on the fundamental issues.  Saying we can “solve” Social Security suggests to me a very narrow version of what that “problem” really is.  Saying that we must reform the private healthcare market to reform Medicare is tantamount to avoiding the tough healthcare financing issues facing that program.

I’m not unhappy yet.  He vagueness leaves much to the imagination.  But I am becoming concerned.  Tyler Cowen is much happier.

Written by Victor

January 16, 2009 at 6:09 pm

Why oh why can’t we have a better press corps? Medicare Edition

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I have been very disappointed in the press coverage of HR 6331 — the Medicare Improvements Act recently passed over Bush’s veto. (CBO scoring) The storyline is that physician payments will not be cut, with the funding coming from cuts in Medicare Advantage plans. This is woefully incomplete.

Additional storylines that should have received greater coverage:

1) What is the Medicare Improvement Fund? It is the single largest expenditure item in this bill, topping out at close to $25 billion. It is to receive disbursements from the HI and SMI Trust funds beginning in 2014. Despite this fact, it has gone unmentioned in every article on the bill, and is not mentioned in the Baucus’ bill summary.  I’ll cover this item in a future post.

2) What is the impact of this bill on senior payments? Seniors will bear the largest burden of this bill through increased premiums and increased coinsurance amounts. How large are these increases expected to be? Again, I’ll address this in  a future post.

3) What is the impact of this bill on Medicare solvency? Is this bill solvency neutral? I am concerned that it is not.

4) What is the impact of this bill on the deficit? For 2008-2009, this bill increases payments to physicians; for 2009-2010, this bill increases payments to Medicare Advantage plans; through 2011, the CBO estimates that this bill will increase the deficit by more than $12b. This bill is “paid for” by long-run changes to the Medicare Advantage program, only some of which are traditional spending “cuts”. Therefore, this bill pays for short-run, certain payments with long-run, uncertain offsets. In what sense is this “paid for”?

Written by Victor

July 20, 2008 at 8:11 pm

Posted in Healthcare, Medicare

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Health Care Data Cleaning becomes Big Business

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The WSJ blog details how Athenahealth is hoping to earn profits by helping doctors comply with arcane insurance company, Medicaid, and Medicare data processing requirements. They present this as entirely wasteful. It’s not. If, like all health policy wonks and politicians, you want analytically useful healthcare data, someone has to force data compliance at the point of service. This means burdening doctors. How else will you get data on disease management practices and effectiveness? Or to evaluate physician quality? (note: all insurance companies are being required to do this)

Clean data is incredibly expensive.

Since the movement for clean analytic data began, Medicare, Medicaid and insurance companies have built claim systems to make sure that submitted claims have sensible diagnostic and procedure codes associated with them. If the claims are unusual, they will generally deny in part or in total and, at a minimum, force a manual review process. This ensures a minimum standard of cleanliness in the data. This, in turn, forces doctors to increase their data sophistication.

Is all of this effort worth the cost? I have no idea; but we shouldn’t pretend that we aren’t buying something with all of this money spent on IT. You can’t simultaneously argue that this administration expenditure is worthless while at the same time demanding that people engage in ever-more-detailed disease management, wellness programs, or even purely academic analyses.

Written by Victor

September 28, 2007 at 3:31 am

Selective Perspectives on Fiscal Responsibility

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Econbrowser‘s Menzie Chinn writes critically on the sudden and arguably selective fiscal restraint of the Bush II administration. Chinn argues that a $5 billion per year SCHIP expansion is small potatoes compared to Part D and other fiscal ills of the current administration.

Relatively speaking, I agree. However, he mixes and matches time horizons, thereby making his suggested comparison flawed.

David Walker from the GAO has been on a Fiscal Wake-up Tour. Here’s his latest chart.

David Walker's 2007 Fiscal Wake-up Tour

Notice that the implicit exposures are actually the present values of 75-year liabilities. For example, the Medicare Part A liability of $11.3 trillion comes from the 2006 Medicare Trustee Report (Table III.B9).

On a 75-year present-value basis, what is a better estimate for the cost of SCHIP expansion? My quick answer is $439 billion. This would be the apples-to-apples comparison. This is still dwarfed by the size of Part D. However, it is also not small potatoes, to mix my fruit metaphors.

Lastly, although all of these numbers are shockingly large, it is important to remember that they may occur over a very long period of time. The collective resources available to the American economy over the next 75 years are likewise immense. Therefore, perhaps the best practice is not to mix 75-year cost projections into the SCHIP argument at all.

Regardless, if anyone wants more details on my calculations and assumptions, see below the fold.
Read the rest of this entry »

Written by Victor

September 27, 2007 at 6:08 pm

ESRD: A Case Study in Single Payer Health Insurance

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Medicare’s struggles with End-Stage Renal Disease (ESRD) provide insight into government provided healthcare.  In 1972, President Nixon signed a bill that provided universal coverage for all Americans who have ESRD.  At the time, there were 7,000 people with ESRD on dialysis.  It seemed a managable socialization.

Now, we have more than 300,000.  In 2002, ESRD represented more than 6.7% of all Medicare expenditures.  We have discovered new drug treatments like Epogen which help fights anemia for those on dialysis.  Government payment structures have lagged technology. From 1983 to 2003, when the infamous Medicare Modernization Act was passed, government paid providers for a bundle of services via something known as a composite fee. Now, we are trying to do something about it.

There is a war on for how to pay for ESRD treatments. This WSJ article ($$) details the complex political issues involved. One way to trim costs is to eliminate “overprescription” of Epogen, which may ultimately be harmful for those receiving the higher doses. But what is overprescription? It turns out that African Americans receive more Epogen, perhaps because of a higher incidence of related complications. So far, Congressional Democrats have been undeterred in their attempt to save money by limiting Epogen prescriptions. However, the racial overtones of these decisions are now being looked at, and the Congressional Black Caucus may be break with Democrats, stalling funding reform. We’ll see.

The politicization of medicine is just one of the problems we are facing with ESRD. The government’s virtual monopoly on ESRD treatments plays havoc with traditional government methods for determining fair levels of remuneration. This is especially true for valuing a drug like Epogen. Bruce Steinwald’s GAO congressional testimony described the impact of the current method, which takes the Average Sales Price (ASP) from the manufacturer and arbitrarily adds 6%:

… certain unknowns about the composition of ASP and the ASP-based payment formula make it difficult for CMS to determine whether the ASP-based payment rates are no greater than necessary to achieve appropriate beneficiary access. For one thing, CMS has no procedures for validating the accuracy of a manufacturer’s ASP, which is computed by the manufacturer. For another, CMS has no empirical justification for the 6 percent add-on to ASP. Regardless of how payment for these drugs is calculated, as long as facilities receive a separate payment for each administration of each drug and the payment exceeds the cost of acquiring the drug, an incentive remains to use more of these drugs than necessary.

Epogen is the only product available in the domestic ESRD market for anemia management. However, the ASP method relies on market forces to achieve a favorable rate for Medicare. When a product is available through only one manufacturer, Medicare’s ASP rate lacks the moderating influence of competition. The lack of price competition may be financially insignificant for noncompetitive products that are rarely used, but for Epogen, which is pervasively and frequently used, the lack of price competition could be having a considerable adverse effect on Medicare spending.

The result: two billion dollars spent on Epogen per year, and a lot of chaos.

Written by Victor

September 12, 2007 at 1:43 pm