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December 14, 2006

Wyden 3: Cost Containment Strikes Back

I need to spend some more time reporting out the cost containment provisions on the Wyden plan, but since that appears the primary objection, let me go into the underlying strategy of the legislation for a moment: As I explained in my last post, the legislation seeks to tame the insurance industry by imposing community rating, thus ending the competition for healthy individuals and the race to price out the unhealthy. That has a secondary, and possibly greater, impact than simply ending price discrimination. Indeed, it's the foundation of the plan's cost containment strategy.

You often hear that health insurance isn't a market. That's not true. It is a market, only the goods being sought are healthy individuals, and the efficiency gains are aimed at finding ever better methods for separating the well from the sick. The market works precisely as it's supposed to, creating an enormously effective conveyor for industry profits. What it doesn't do is construct a good or just system for health care consumers. The imposition of community rating and an individual mandate fundamentally restructures this market. Suddenly, there's no more competition based on health, no more money spent identifying those who will require care and avoiding them.

Yet the plans must still compete. Aetna still needs to attract customers -- 300 or so million of them -- away from UnitedHealthGroup, who needs to block Kaiser Permanente. So on what grounds do they compete? The easy answer would be they reduce services, offering ever barer packages, hoping to get the healthy applicants who want to pay less. Problem is, the plan mandates insurance packages with benefits that are actuarily equivalent to or greater than the Blue Cross Standard Plan offered to federal employees on January 1st, 2007. They can't reduce their benefit packages.

You know where this is going now: The grounds left for competition are price, benefits, and quality. The hope is that if insurers can no longer eke out advantages by denying or reducing health coverage, they will be forced into competing to offer the most comprehensive services at the lowest cost. If they can bargain down the price of care, offer more integrated disease management, or find efficiencies that allow them to lower deductibles below their competitors, they will attract the enrollees. In this way, the market will "work" for health consumers, not providers, and it will control costs in precisely the way other industries do.

I can tell you that efforts to restructure insurance provision around wellness and management programs have proven able to control costs. The CEO of Safeway Inc., who was at the Wyden event, explained how his company rebuilt their health insurance around those principles and, last year, amidst major health inflation, saw their plans drop in cost by 11 percent -- 7 percent of which they put towards lowering employee costs. Their projected cost growth this year is...nothing. So that, in essence, is the cost management strategy. It's not explicit, it's not a global budget or price controls, it's the hope that you can restructure the market into forcing competition on grounds that benefit the insured, the taxpayer, and the system.

And as a final point, one that the Wyden folks would almost certainly deny, it's my read that the plan enables more serious cost containment attempts in the future, if they prove necessary. If remaking the market doesn't work, the reorganization of health care provision into a coherent, government-provided system creates a structure within which drastic cost containment measures can be imposed, if necessary. That's not something you have in the current system, and it's not something, I predict, that you'll get as an explicit feature of any new system. Cost containment through rationing or price controls will trigger hostility and opposition on an epic scale, and getting there, if need be, sneakily, isn't a bad idea.

December 14, 2006 in Health Care | Permalink


Two questions - 1 major, 1 minor:

1) - Could they find subtle ways to do adverse selection . For example, these minimum coverage requirements: do they set minimums for provider compensation as well as what is covered. In other words can they pay really poor rates for specialists who deal with expensive patients, thus discouraging specialists from accepting the plan, thus driving those patients to other providers? Can they limit patients on some basis other than health? For example can they have plan especially for members of X health club (knowing that such members are healthier than the average bear.)

2) If you pay for health care directly, you can a much worse tax deduction than your boss does. Does this bill change that.

Posted by: Gar Lipow | Dec 14, 2006 12:20:48 PM

My biggest concern with this plan is that it could really screw over doctors. They've already been seriously squeezed by HMOs, and if insurance companies can only increase their profits by cutting reimbursement rates, that's what will happen. Whatever you think about doctor pay, many practitioners have racked up huge student loans under the reasonable expectation that they would be able to pay them back based on earnings in the current system, and it would be unfair to pull the rug from under them now. Furthermore, I find it morally wrong for insurers to profit at the cost of those who actually provide the care.

Posted by: Firebug | Dec 14, 2006 12:25:04 PM

How does this compare to the new California proposals?

Posted by: Stacy | Dec 14, 2006 12:38:35 PM

Your last paragraph is, I think problematic. You admit to (some) dishonest motives for promoting this plan.

If you are willing to promote this for 'sneaky' reasons, then why should we trust your analysis of it?

Posted by: Dave Justus | Dec 14, 2006 12:44:11 PM

Go try and falsify it, Dave. Indeed, I'm being more honest, not less. I'm saying that my analysis of this plan suggests it could open the door to further cost containment if the market path doesn't work. I could not mention that. But the idea that my increased transparency is somehow harmful to my integrity is very odd.

Meanwhile, I'm actually more optimistic than many others that the market path can work, when structure this way (or similarly). That said, it may not, and if not, we'll need to do something.

Posted by: Ezra | Dec 14, 2006 12:54:56 PM

Let me rephrase. You are willing to admit to 'sneaky' reasons here, where those motives are widely accepted, but apparently advocating that this aspect not be presented to the general public.

I am not saying that what you say isn't true, I worry that it is, 'cost containment' is not necessarily a feature in my book.

In general, I am at least moderately impressed with this plan, admittedly it is far from my ideological ideal, but so is our current system and I am perfectly willing to live within the possible. However, the idea that this will be a 'first step' to drastic cost containment does make me nervous about it. Especially when it is advocated that this should be a possible future 'benefit', but supporters shouldn't talk about that now.

Posted by: Dave Justus | Dec 14, 2006 1:14:14 PM

Posted by: Dave Justus | Dec 14, 2006 10:14:14 AM
Let me rephrase.

IOW, reformulate

You are willing to admit to 'sneaky' reasons here, where those motives are widely accepted, but apparently advocating that this aspect not be presented to the general public.

This message brought to you by, "Ezra=Wyden". Since if Ezra isn't Wyden, it holds no water.

That is, Ezra believes that it holds open the hope for more pro-active cost containment in the future. He also believes that if you ask Wyden's people, they'll say they aren't going down that road.

Ezra did not say that Wyden proposed it because it does not foreclose a more sensible policy option down the track, he simply points out that it doesn't.

In the open and with no sneakiness. Indeed, implicit in this critique is the presumption that a policy that forecloses the most future options is the best, because it is "sneakier". And that is perfectly Orwellian, since it is foreclosing future options that is the change in the status quo ante.

The presumption should be in favor of the policy that forecloses the fewest future policy options, not the one that forecloses the most. So "sneaky" would be trying to spread a deliberate misreading of what Ezra said to create a rationale for opposing it entirely based on what future choices it does not deny to us.

I'll add that neither does it foreclose the possibility of a government provided Universal package of basic and catastrophic health care and, presuming that the Universal coverage is a subset of the standardized mandate, the reorganization of the market from a market providing health care to the healthy into a market for the provision of health care, the Universal coverage package would be reflected in a reduction in the cost of all private health care plans which, in a market, would be passed on to those paying for the plans.

Posted by: BruceMcF | Dec 14, 2006 1:35:10 PM

Good analysis so far. This plan seems to tell the insurance companies that they can exist and make a profit, but only if they can provide good coverage at a competitive price for a cross-section of the population. If this plan were adopted and the insurers fail (in the public's opinion), then people might demand a single-payer or French type system. There may be some serious flaws with this plan but hopefully, the whole medical care discussion will be elevated to a more urgent status.

Posted by: MarvyT | Dec 14, 2006 1:38:33 PM

The market right now does less to generate huge profits than it does minimize huges losses liek the 1990's. United and Wellpoint made large amounts fo money, but as a percentage of their revenues it was pretty typical for insurers.

Community rating is just a transfer of risk. Some form of modified community rating or rate band should be considered instead. Adverse selction can and will still occur. I'll take the HSA that is actuarially equivalent to the BCBS plan.

Posted by: Alex | Dec 14, 2006 1:43:27 PM

I find it interesting that the main part of the discussion thread is about controlling costs, and there has been little said about medical care or health outcomes under the proposed system. But in the interest of consistency, I'll stay with the thread.

I tend to agree with the previous post by Firebug - insurance companies will reduce reimbursement to providers as a relatively easy method of cost control (or profit maintenance). That's not to say that doctors should be paid exorbitant salaries. We do that now, and by lots of measures, we aren't getting a good return on our investment. But if it is the case that physicians will face a reduction in reimbursement under the new system, expect that we (I'm a doc) will either increase the number of patient's seen per hour (5 minute follow up visits, anyone?) in order to keep up with our current commitments (office staff, loans, mortgage, etc) or get out of the profession. Or we will pass on costs in some other way (charge patients when they call in to ask a question, for example).

One way to take pressure off of physician income (for future physicians) would be to make medical school free (med school tuition is, on average, a small percentage of the incomes received by a med school). While I don't think that such a move would increase the numbers going to med school, I believe that it would have a HUGE impact on specialty choice and the kinds of salaries that doctors could live with coming out of med school [fyi: service on my med school debt is 13% of my net income each month].

I like this proposed legislation - despite my criticisms - because it seeks to do something great. However, it won't be pain free.

Thanks, Ezra, for getting the conversation started!

Posted by: DanL | Dec 14, 2006 1:55:51 PM

DanL -

No solution to the healthcare crisis will be pain free. Kind of like no solution to social security reform will be pain free. The advantage of this plan is that it answers a lot of issues both sides of the UHC debate have. It's far from perfect, but sounds better than most proposals I've heard.

I am also a supporter of subsidising med school. Though I would argue that those who get the government to pay for med school should be required to spend a certain amount of time after med school, working in less desirable locations that need doctors. But then, I am a fan of doing that with a lot of professions - teachers jump to mind.

Posted by: DuWayne | Dec 14, 2006 2:20:35 PM

Besides, it would be almost impossible for this system to result in worse health outcomes than the current system. The current system provides disincentive for preventive care and leaves 45,000,000 Americans out in the cold.

As for reducing the cost of Med School, I'd rather see people who want to become and OB/GYN or an internist/PCP have to pay less for Med School than people who want to become dermatologists or other less-needed specialists. Then, the government could assess needs and provide discounts to other specialties as they become more needed.

This plan is good in that it keeps a lot of the infrastructure in place, but it's kind of scary because my employment depends on the existence of Medicaid and there are plenty of other people who work for companies that depend on the fragmented system we currently "enjoy" for their survival. There would still be a ton of upheaval if this plan went through. However, given that there are hundreds/thousands of companies like mine that profit off the fragmented system, it's easy to see just how much money could be saved by moving to a system that is more stream-lined with fewer payers, more standardization, etc.

Posted by: spike | Dec 14, 2006 2:52:51 PM

I'll repeat a suggestion I made to Ezra's post at Tapped:

One way to help keep the insurers honest would be to allow individuals the choice of either one the the community-rated (I assume this means the entire state of residence, not some city/county or other subdivision) plans, or to buy into Medicare Part A (Hospitals), Part B (Medical Providers) and a reformed Part D (Drugs) at a fee set nationally (like Medicare).

This would provide another cost/coverage benchmark in addition to the Blue Cross/Blue Shield minimum-coverage provision in Wyden's plan. It would also be the step toward single payer that many want and a fallback position if the insurers don't play fairly - we could all just join Medicare. Insurers would hate the competition from Medicare, but how can they logically complain. Private generators of electricity don't like competing against the Columbia River hydro or TVA, but that is just what we should demand: competition between public and private insurance. If private health care is so great, then they should be able to compete nicely and still make a profit from whatever economies they can achieve - but not by reducing coverage.

So, I'm for Wyden Plus (individual choice of public Medicare or private insurance carriers).

By the way, noone has focused on a key feature of Wyden's plan: you take it with you from job to job. It is your policy, not the employers policy. And it can't be terminated nor increased in price for major illnesses or disability.

Another key Wyden feature (it seems to me) is that workman's compensation insurance could be eliminated, since everyone has health coverage for whatever happens. This should be a major benefit to employers of all sizes and another reason for them to support this idea.

Posted by: JimPortlandOR | Dec 14, 2006 2:54:38 PM

I agree with Ezra that no one is going to pass legislation that moves directly to single payer--doing away with the health insurance industry in a single stroke.
But if a plan like this forces insurers to actually compete on quality--without cherry-picking patients--it could ultimately case the for-profit insurance industry to "wither away."
It's very hard to turn a profit on health care without cheating (whether you're an insurer cherry-picking patients or a for-profit hospital performing unncessary procedures, and overcharging Medicare in order to pad your earnings).
Keep in mind that the big for-profit insurers did not get into the health care business until the early 1980s. Up until then, Washington gave non-profit managed care plans financial incentives (tax breaks etc.) that were not available to for-profit managed care plans--so there were very few for-profits.
Then Reagan did away with the financial incentives for not-for-profits, and Aetna, et. al., joined the game.
At the time, it was not at all clear that this would be a profitable business--but they learned how to produce earnings, not just by cherry-picking, but by making it very difficult for a consumer to compare insurance plans.
Usually you can't figure out precisely what your plan covers until you submit a claim.
If, under the Wyden plan, insurers are going to be forced to compete on quality of coverage and cost then the folks who help consumers pick a plan are going to have to be very careful to force insurers to make the plans very transparent.
If that happens, then I predict that for-profit insurers may voluntarily begin to back out of the business.
The question of cost-containment is a separate one and needs to be addressed by Medicare and the FDA--or a new independent agency that oversees both. FDA needs to be much stricter about approving new drugs and devices and Medicare needs to be much stricter about covering them unless the manufacturer can show both Medicare and the FDA that the new product is more effective and safer OVER THE LONG TERM --and that if it is more expensive (which it alway is) that the higher cost is justified by a greater benefit. If not, Medicare should negotiate a lower price (or refuse to cover). Insurers will follow Medicare's lead.

Posted by: Maggie Mahar | Dec 14, 2006 2:59:23 PM

Subsidizing medical school (more than we do already) will result in exactly what subsidizing undergraduate education has done. Tuition will just go up and higher ed will remain totally unaccountable. Much of medical school, like much of law school, is worthless. It's expensive and tough to get into because the AMA wants it that way.

Posted by: Alex | Dec 14, 2006 3:01:00 PM

Alex - I am curious about your assertion that much of med-school is worthless. I don't neccesarily dissagree, I really have no way to judge. I am just curious what makes you believe that.

I would counter that tuition is going up anyways, subsidies have little to do with it. And higher education is far from unnacountable, it just isn't entirely accountable to government, which I would argue is a good thing. Colleges and universities are already perilously close to making higher education a glorified primary education. Standardised curriculum and the like defeats the whole purpose of higher education. Bad enough that primary public schools have to teach the test, do you really want higher ed to be more of the same?

Posted by: DuWayne | Dec 14, 2006 3:25:24 PM

Subsidizing medical school (more than we do already) will result in exactly what subsidizing undergraduate education has done. Tuition will just go up and higher ed will remain totally unaccountable.

So what you're saying is that tuition has increased because the subsidies paid to state universities has gone down, right?

And by "unaccountable," you mean "state legislatures fight over university funding every single year, with every available statistic and anecdote possible dragged out by university critics and aired in newspapers," right?

'Cause otherwise your statement makes no sense.

Posted by: Stephen | Dec 14, 2006 4:41:11 PM

DanL--but if you think about it, even at reduced payments, insurers would need *many more* doctors...thus increasing demand. If all the uninsured could now get treatment, we're going to be building hospitals and clinics at an insane rate. Not to mention how many Americans underutilize their care because of high deductibles.

Posted by: emjaybee | Dec 14, 2006 5:11:35 PM

I think if utilization increases that much that new doctors are needed and new facilities have to be opened, then the plan will be qualified a failure. The idea is to reward preventive care and lower total utilization.

In reading about it, though, they do have some very smart plans. The income qualifications will be done through the IRS, so you don't have to do a separate qualification like for Medicaid. That will determine how much of a premium the person has to pay. And the IRS collects the premium payments and distributes it to the HHAs, who then pay the healthplans the appropriate amount per member.

And for small businesses, there's a sliding scale based on company size and revenue per employee which dictates how much each company has to give to the healthcare program. (2% of the average premium per employee if the company is fewer than 50 employees and less than $18,000 revenue per employee all the way up to 25% if the company has more than 200 employees with revenues of over $220,000 per employee). Very smart, though meeting some of the administrative requirements could be a burden on companies, it's better than picking a healthplan and managing that relationship.

The only question I have is how they administer copays and deductibles for the poor. Is there a separate benefits package for them? Other than that, the more you dig into it, the better it looks.

If only it had a prayer of passing.

Posted by: spike | Dec 14, 2006 5:28:56 PM

JimPortlandOR said:

"Another key Wyden feature (it seems to me) is that workman's compensation insurance could be eliminated, since everyone has health coverage for whatever happens. This should be a major benefit to employers of all sizes and another reason for them to support this idea."

I believe workman's comp covers more than medical expenses. Also the current system provides incentives to keep work places safe. So I don't see a case for eliminating it.

Posted by: James B. Shearer | Dec 14, 2006 5:32:23 PM

Missed that one Jim -

Workmens comp also covers living and other expenses in some situations. The other problem with eliminating workmens comp, is that it is an enforcement mechanism for worker safety. OSHA, even in states that have their own, is underfunded for full enforcement. It relies in part, on insurance premiums to enforce safety standards. The safer the workplace, the lower the rates. That, and the taxpayer should not be required to subsidise unsafe workplaces.

Don't get me wrong, workmans comp insurance is prohibitive. I can't afford to have pay-roll employees. The only people I can hire to work with me on jobs are people that do what I do and carry their own insurance. I pay them at their rates, or trade hours, either way, it stays equitable. The downside is, that I can't hire a grunt. Most of the time I need help, anyone with a pulse and moderate strength will suffice.

But workmans comp has too many advantages to throw away. One of the more important being the coverage of catastrophic injury. There are plenty of healthcare expenses outside the workplace, the tax payers don't need to pay for injuries in the workplace too. That should be the responsability of the employer - providing serious incentive for worker safety.

Posted by: DuWayne | Dec 14, 2006 6:04:53 PM

Funding for higher ed has skyrocketed. It just doesn't keep up with the insane tuition increases. You can pump as much money as you want into subsidizing higher ed, but it won't do anything to control the cost.

If you think higher education is accountable, then you know less about it than you do insurance, which is tough to do judging from your posts. Higher education is the biggest gravy train in state budgets.

Duwayne, I have no desire to see government regulate higher education the way it does other entities and no desire to see a standardized curriculum. But if we're going to put the kind of money into it that we do, then there has got to be some accountability. Graduation rates at some of these universities are staggeringly low and there are never any repercussions. We've got a university in Texas that has a graduation rate of 4%. Yeah, 4%. We're not the only state either.

Medical school isn't worthless, that was an overstatement. The current medical school regimen, however, can be traced back to the AMA and their desire to limit the number of MDs.

Posted by: Alex | Dec 14, 2006 6:19:31 PM

If you think higher education is accountable, then you know less about it than you do insurance, which is tough to do judging from your posts. Higher education is the biggest gravy train in state budgets.

Care to back it up? Do you know what percentage increase in tuition results in a 2-3% bump in pay for faculty and staff at subsidized private schools? Are you now or have you even been on the faculty at a university?

Here's some facts about the University of Kansas:

-Kansas provides $240 million, KU over $700 million.

-For 2007, KU got an increase of 2.6% over FY2006! That's some gravy train.

Could you also tell me which state has licensed you to sell health insurance?

One of the reasons that us old farts try to teach you kids to respect your elders is because it saves you embarassment - if you're self-aware enough to feel that.

Posted by: Stephen | Dec 14, 2006 6:48:21 PM

Ezra answered my question offlist. Under this plan, there is no minimum reimbursement rate for practitioners. Thus, it leaves in place one of the primary means by which adverse selection takes place. You want to squeeze X type of patient out of your plan? Cover the care X needs, but reimburse practitioners at a very low rate. Doctors, therapists and so on will refuse to accept your plan. Patients will choose another plan. Presto! You have driven your most expensive patients away. Adverse selection remains.

Note that a plan can do this while duplicating *exactly* the coverage of a better plan. You only drive away providers directly. You drive away patients indirectly.

This will need to be fixed for this plan to work. Of course, that would require negotiating minimum reimbursement rates with providers. Once they agree to this, most insurers will have no reason to pay more than this, other than for enhanced services. So you are setting rates for the overwhelming majority of medical services, pharmaceuticals, supplies, and equipment in national negotiations. It may not be "single payer". But it is "single plan" insurance. And I wonder whether it would really be politically easier to win that some form of single plan insurance that cuts private insurance companies out of the deal. Their whole business model is, as you said, based upon adverse selection. I suspect they will fight as hard against any legislation that eliminates it as they would against single payer.

Posted by: Gar Lipow | Dec 14, 2006 6:56:24 PM

Gar, can you provide an example of a service that would fall into the category you're speaking of? The most expensive illnesses are asthma, diabetes, heart disease, and cancer, not necessarily in that order. Would anyone join a plan that didn't have pulmonary specialists, endochrinologists, cardiologists, and oncologists on its provider panel? Would they just reimburse low for particular services? Would any provider sign a contract that only underpaid on chronic services?

It just seems weird to think that entire specialties would be cut out of a provider panel, which is what would have to happen for your scenario to happen, right?

Posted by: spike | Dec 14, 2006 8:50:53 PM

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