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The Obama Health Care ReformProposal

Bill EvansDepartment of Economics and

Econometrics

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Three topics in this topic

• What issues must comprehensive health care reform confront?

• Outline the Obama proposal

• Suggest some likely consequences

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Confusing at the moment

• Campaign proposal but no legislation yet

• Some parts adopted in stimulus plan

• HealthCare Dialogue Coalition (18 groups) will release their recommendations Monday

• But, everything is up in the air as a result of the economy

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Kaiser FF Tracking SurveyWhat two issues you would most like to hear the

presidential candidates talk about?

Issue June 07 March 08 Oct 08

Iraq 43% 32% 13%

Health care 21% 28% 12%

Immigration 18% 7% 2%

Economy 12% 45% 62%

Gas Prices 12% <1% 5%

Terrorism 7% 6% 7%

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What issues must health care reform address?

• Access

• Cost (both the level and rate of change)

• Medicare

• Tax equity

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Access

• Uninsurance is a persistent issue

• Dimensions of the problem (2007)– 45.7 million people– 9 million children

• Fraction uninsured increasing– 12.6% in 1987– 15.3% in 2007

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What issues must health care reform address?

• Access

• Cost (both the level and rate of inflation)

• Medicare

• Tax equity

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Expenditures on Medical Care

• Data for 2007

• $2.2 trillion on HC

• $7,400 per capita

• 16.2% of GDP

• Projected, 2018

• $4.4 billion

• $13,100 per capita

• 20.3% of GDP

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$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000

FinlandJapan

ItalyUK

IrelandDenmarkSweden

AustraliaNetherlands

AustriaCanada

BelgiumFranceIcelandNorway

SwitzerlandLuxembourg

US

Per capita spending on health care

90% more thanCanada

145% morethan the UK

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Average Annual PremiumsCovered Workers, 2008 (KFF)

• Individual plan

– $4,704 total

• Family plan

– $12,690

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Price Changes, 1999 to 2008

29% 34%

119%

0%

40%

80%

120%

160%

Overall inflation Earnings Healthinsurancepremiums

Pri

ce C

han

ges

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Are high expenditures a bad thing?

• A key driver of health care costs is technology

• MRIs/CT scans, angioplasty, anti-psychotropic drugs, hip/knee replacements, neo-natal intensive care, treatments for AIDS, statin drugs (Lipitor)

• All not available 20-30 years ago. Now, commonplace

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If you want to cut costs, where do you look?

• Administrative/overhead– 3% in Canada (single payer)– 1.5% in Medicare– 30% in US system in total

• Chronic conditions

• Unnecessary care

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Percent of Total Health Care Expenses by Different Percentiles of Population, 2002

22%

49%

64%

80%

97%

0%

20%

40%

60%

80%

100%

1% 5% 10% 20% 50%

Percentiles of population

% o

f to

tal e

xp

end

itu

res

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Per Capita Medicare Spending by Hospital Referral Region, 2006

$9,000 to 16,352 (57)8,000 to < 9,000 (79)

7,500 to < 8,000 (53)7,000 to < 7,500 (42)

5,310 to < 7,000 (75)Not Populated

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17

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What issues must health care reform address?

• Access

• Cost (both the level and rate of inflation)

• Medicare

• Tax equity

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Medicare

• 2007

• 44.1 million recipients

• $432 bill. exp.

• 3.2% of GDP

• 16% of fed. budget

• 2040

• 86 million recipients

• 7.6% of GDP

• 30% of fed. budget

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Future problems

• Funding– Medicare trust fund– General revenues (75%)

• Medicare Trustees predict – Costs > revenues by 2011– Trust fund exhausted by 2019

• Declining ratio of workers/enrollees means taxes must be raised

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What issues must health care reform address?

• Access

• Cost (both the level and rate of inflation)

• Medicare

• Tax equity

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Tax System Equity

• EPHI health insurance is a tax-free fringe benefit

• Greatly reduces the cost to consumers of purchasing insurance

• Has encouraged the growth of EPHI

• Most people w/ private insurance get is through their employers– 170 million have EPHI

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Inequalities

• Tax break only available to people who receive insurance from their firm

• Higher income families have higher tax rates so the tax benefit to them is greater

• Costs Fed. Govt. over $243 billion/year

• Regressive tax

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Tax Benefit of EPHI

• A family w/ $70,000 in income

• 36.4% marginal tax rate– 25% federal– 3.4% state (Indiana)– ~8% Social Security and Medicare

• Want to purchase $12,000 policy in AFTER TAX DOLLARS

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Without tax advantage:

• Receive $18,897 in income

• Pay 36.4% or $6,897 in taxes

• $12,000 left over for health insurance

• Net benefit of tax deduction is $6,897

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Obama/Biden Plan for a Healthy America

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Overview

• Plan builds out from existing EPHI

• Tries to fill in the gaps in coverage

• Heavy emphasis on trying to reduce costs to make health care more affordable

• Plan has not been formally proposed so some details sketchy

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Access

• Expansion of SCHIP/Medicaid

• Must provide HI for children– No enforcement specified

• Tax credits for small businesses that provide EPHI

• “Pay or play” for businesses– Must spend minimum fraction of labor costs

on HC or pay that amount as a tax (5 or 6%)

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Access (continued)

• National Health Insurance Exchange– Similar to MA connector– Policies similar to those offered to congress

and federal employees– Available to individuals, small businesses,

self-employed

• National Plan– Offered by the Federal government– Designed to provide competition to pvt. ins.

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Controlling Cost

• $50 billion in IT for health care sector

• Expand use of preventive services and disease management

• Increase competition in insurance industry

• Allow Medicare to bargain Part D prices

• Catastrophic reinsurance through the Federal government

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Medicare

• Reduce expenditures for Medicare Advantage

• Prevention/Disease Management

• Greater bargaining over health care costs

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Tax equity

• Subsidies for small business who offer EPHI

• Some talk on Capital Hill of eliminating tax-preferred status of EPHI– Obama railed against McCain for proposing– White House has signaled they will support

but cannot propose

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• "And this is your plan, John," he said at one debate. "For the first time in history, you will be taxing people's health-care benefits." Mr. Obama added that the McCain proposal was "radical," "the biggest middle-class tax increase in history," "out of line with our basic values" and that "the choice you'll have is having your employer no longer provide you health care."

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What has been adopted?

• $19B to encourage health IT investment

• Additional $10B over next 2 years for NIH

• $1.1B for effectiveness research (AHRQ)

• $85B for states to help finance Medicaid

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• $25B -- 65% of COBRA for unemployed– 9 months– Laid-off between 9/1/2008 and 12/31/2009– Had insurance– Worked for company >20 employees– Income < $145,000/adult

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Incentives/Fines for EMR Investment

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Proposed: 2010 Budget Downpayment on Reform

• $630 billion over time years

• Cost savings– Reduce payments for Medicare Advantage– Increase rebate from pharma. to Medicaid

• Higher taxes– Reduce tax rate on itemized deductions for

families w/ taxable income >$250,000

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Is it enough?

• Cost estimates– Vary from $1.2 - $1.7 trillion over 10 years

• Big unknowns– Take up rates on new programs– Subsidy for government insurance– Health care costs

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Estimated impacts – Access(Lewin Group, 2008)

• Cut number uninsured by 26.6 million– Primarily from expansion of Medicaid/SCHIP

• Shift 28.7 million onto federal insurance– Companies drop coverage

• Those on federal rolls will increase by 48.3 million – roughly 50% increase

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Does Preventive Medicine save $?

• Intuitively appealing – detect disease before it becomes expensive

• Problem: with low incidence rates, screening is costly and low # of cases detected

• Cohen et al., NEJM, February 14, 2008– Reviewed 599 published articles on cost-

effectiveness of preventive care

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• Our findings suggest that the broad generalizations made by many presidential candidates can be misleading. These statements convey the message that substantial resources can be saved through prevention. Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not.

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Disease Management?

• Again – intuitively appealing

• Reduce discretion in use, standardize care, eliminate unnecessary treatment

• Lots of experience with DM in managed care

• Has DM reduced costs?

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• American Journal of Medical Care (2007)

reviewed 317 studies about DM

“there was no conclusive evidence that disease management leads to a net reduction of direct medical costs.”

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Health IT/EMR?

• Great promise– Reduce paper work/time/medical errors/unnecessary

diagnostic tests

• Savings alluded to in plan based on RAND estimates

• RAND estimates that IT has the potential to reduce costs by $80 billion/year– Only considered studies that showed cost savings– Best case scenario – if it does what is promised

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CBO (2008)

• In general, investment in EMR is “generally not sufficient to produce significant cost savings”

• Significant cost savings have “tended to be connected to relatively integrated health care systems” which the US health care system is not

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Summary

• Will reduce uninsurance but– Will do so by shifting a lot more onto public programs

• Cost savings are greatly exaggerated– Investing heavily in proposals that to date have not

demonstrated much savings

• Tax equity has been suggested – nothing concrete

• So far, the administration is punting on Medicare

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My opinion

• Must control costs first

• Benefits never decline, they only increase

• Enacting universal coverage or a massive expansion will generate cost that will never be controlled or cut

• To control cost – must deal with Medicare first

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MA Reform: Romney (2006)

• Most ambitious state reform to date

• Many features but…..

• Most striking component: Individual mandate– Required by law to carry insurance

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MA Reform

• If you require insurance, you need to make it affordable

• State subsidizes purchases for poor

• Firms must establish Section 125 plans

• Established the “Connector”

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Connector

• Merge of individual and small group market

• Market maker in insurance

• Community rating

• Requirements on what plans must have

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Connector

• Cheapest individual plans cost about $200/month

• 40-60% lower than average plan

• Was achieved primarily by higher cost sharing

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Results from MA -- Access

• # with insurance increased by 430K– 60% went to public plan– Uninsurance rate now only 2.6%– MA far and away had the lowest uninsurance rate

going 2006

• State underestimated – Number uninsured– Uninsured eligible for subsidized care

• No one opted for the cheap low cost/high cost sharing option

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Problem

• State’s contribution is rising much faster than anticipated

• Minor cost control options• Costs are rising very fast

– MA now spend 33% more per capita than national average

– State has $4b deficit– State costs on health care have increased

42% since 2006

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NYT

• To make it happen, Democratic lawmakers and Gov. Mitt Romney, a Republican, made an expedient choice, deferring until another day any serious effort to control the state’s runaway health costs. The day of reckoning has arrived. ….government and industry officials agree that the plan will not be sustainable over the next 5 to 10 years if they do not take significant steps to arrest the growth of health spending.

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Options

• "exclude coverage of services of low priority/low value."

• "limit coverage to services that produce the highest value when considering both clinical effectiveness and cost."

• "a limitation on the total amount of money available for health care services," i.e., an overall spending cap.

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Exporting MA Plan?

• Plan is being studied extensively by – Other states– Presidential candidates

• MA is very unique so it might not travel– Lower uninsurance rate (9%)– Unique fiscal situation that was used to

finance the law