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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

Is the CBO being Overworked?

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Another embarrassing gaffe has surfaced in this memo from the over-worked health staff at the CBO.  The problem is the parenthetical after the opening sentence:

(A medical loss ratio, or MLR, is the proportion of premium dollars that an insurer spends on health care; it is commonly calculated as the amount of claims incurred plus changes in reserves as a fraction of premiums earned.)

Ahem.  The medical loss ratio is simply the amount of estimated claims incurred as a fraction of premiums earned.  They are getting way too clever by half.  What they suggest is a meaningless calculation.

One typical way you calculate incurred claims is to take paid claims and then add the change in reserves.  That would result in an estimate of claims incurred which could be used in the loss ratio calculation.  But if you already have claims incurred, there’s no point to adding the change in reserves.

Regardless, putting the CBO nonsense on an actuarial exam would warrant a failed paper and a well-deserved one year delay on the road to Fellowship.

My lesson is not that they are ignorant, but that they need more sleep.  After missing the CLASS Act premiums by 20-ish percent, and other recent problems, I think we have sufficient reason to be worried that they are being over-worked.

(note: they might be referring to active-life reserves.  This would not be something I would get into in a parethetical to talk about what is “typical” in healthcare, however, also suggesting overwork)

Written by Victor

December 19, 2009 at 2:40 am

Political Predictions on Healthcare Reform

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Just for fun predictions for the healthcare bill that Reid is set to unveil at 6:30 AM tomorrow.

* It will not have any substantive “public” option and will make some headway on the abortion issue;

* It will have significantly reduced individual mandates, but the CBO models will not have those result in significantly higher uninsurance rates;

* It will have woefully insufficient levels of subsidies for poor Americans, and will limit their growth in future years.  I define “woefully insufficient” as subsidy levels that will not reduce Exchange premiums for a family at 200% of poverty to lower levels than premiums available today in non-guaranteed issue states (like Arkansas).  As a rule of thumb, a 40-year old man can get an 80% actuarial value plan for under $100 per month today in Arkansas.

* It will not have the CLASS Act;

* There will be some sort of trigger that states can pass to “opt-in” to the Medicaid and other provisions of the bill;

* This bill will garner 60 votes for the 1 AM cloture vote on 12/21, and all subsequent cloture votes through the 12/24 vote.  This will be a straight party-line vote;

* This bill will be virtually impossible to reconcile with the House’s bill;

* The CBO will again fail to offer a final score, and will fail to offer any of the following:

* Estimated premium and uninsured impact by state, considering the rate regulations currently in place in each state;

* Estimated total subsidies by state;

* Estimated impact on national health spending;

* Exchange-only premiums, as opposed to average individual premiums which include grandfathered plans;

* Estimated impact on labor-force participation rates (and therefore Social Security) of the near-elderly;

* A result that has a reduction in grandfathered individual membership from 2014 through 2019;

* US Senators will be asked to cast deciding votes without knowing whether this bill will help their state, specifically, or by how much.  This damaging information will trickle out from 2010-2014, if this bill can be reconciled and signed by the President.

Written by Victor

December 19, 2009 at 2:25 am

Posted in Politics

CBO weirdness with HR3962

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Compare and contrast Table 2 from the CBO analysis of HR3962, the new House healthcare bill.  Specifically note that non-group /other net enrollment increases from 24 million to 30 million between 2015 and 2019.  Now compare this to the bill itself, Title II, Section 202, Page 94:

Individual health insurance coverage that is not grandfathered health insurance coverage under subsection (a) may only be offered on or after the first day of Y1 as an Exchange-participating health benefits plan.

How can enrollment go up if new enrollment is disallowed outside the Exchange?

The problem is further exacerbated when you realize the new dependents born after “Y1” (A-1-B, page 91) are not allowed onto their parents’ plans and that individual business generally has a 30-40% lapse rate annually.  Granted, people may not be willing to part with the relatively cheaper grandfathered plans, so the lapse rate is likely to fall.  But it can’t go negative.

Perhaps the circle is squared by the ephemeral “other” category in the analysis.  But I doubt it.  Compare the HR3962 score with the Baucus bill score, which separated “other” from “non-group”.  In that score, those two categories moved in tandem under “current” law, and it seems reasonable to presume that the “other” category is mostly unaffected by reform (I presume it is Medicare disability, etc.).

There are many such examples like this, where you just want to shake the CBO and ask “What are you smoking?  And … Can I have some of that?”  I think I’ll need it.

Written by Victor

October 30, 2009 at 1:50 am

Adventures of an Actuarial Therapist

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It was a dark and stormy night.  I was closing up my office, and this scraggly old man in a red, white and blue top hat came scrambling in.  He called himself Sam.

Sam: Hey doc, you gotta see me.  My fiscal situation is a “ticking time bomb”.  We’re racing toward financial ruin, and I need to talk.

Me: Take a seat on my couch.  Tell me more.

Sam: Let’s talk Medicare.  In the near-term, the aging of the population is estimated to explode its costs beyond our means.  In the longer-term, medical innovation and utilization patterns threaten to bankrupt the country.

Me: Sounds rough.  Any ideas on how to fix the problem?

Sam:  I thought I’d start by offering somewhere between a $1 trillion and $2 trillion entitlement to help working age people get insurance.

Me: I think I missed something.

Sam: No, you didn’t.  I think that if we can wring a trillion dollars of revenue and cost savings out of the American public and Medicare, then we can give that extra entitlement and not speed up our impending fiscal disaster.  If we are lucky, we can put private insurance companies into the same situation I am.

Me: You mean fiscally insolvent?

Sam: Don’t worry.  We’ll set up a public option that will always be there if private insurance can’t survive under our new mandates.

Me:  I’m still stuck on how you are going to help Medicare or your fiscal situation.

Read the rest of this entry »

Written by Victor

July 18, 2009 at 2:08 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