What Did $80b Buy PhRMA?

On May 31 the Republicans on the House Energy and Commerce Committee released a report and associated emails reviewing the negotiations between the pharmaceutical trade group (PhRMA) and the White House in developing terms of the ACA. While the Republicans are trying to ‘count coup’ by pointing out the lack of promised transparency, what is more interesting is the business decision process by PhRMA.

What PhRMA Gave Up

The advertised number is that PhRMA agreed to $80b in rebates to provide ‘savings’ in the ACA. This a hard number, not a percentage, not changeable due to usage or pricing.

In addition, PhRMA agreed to helpful advertising, Harry and Louise are for reform this time.

What PhRMA Gained

In return, PhRMA got an agreement that the WH would not support price negotiation in Medicare Part D, and that the WH would block efforts to allow the importation of overseas drugs.

In short the WH agreed to no cost control for pharmacy expenses in healthcare in return for a number to claim savings in the ACA.

Best ACA Related Quote Ever

Quote from PhRMA VP Bryant Hall email (slightly expurgated):

“But the WH is f***ing this up. These guys deal w the numbers like they’re real. It isn’t smart”


The political calculation of this deal is interesting. Did PhRMA believe that if they didn’t support the ACA that is would pass anyway? And, if that happened they would be subject to price negotiation pressure fro CMS?

And regardless of the SCOTUS ruling on the ACA will PhRMA be under pressure from Republicans in Congress for the their support of the ACA?

ACA Employer Tax Incentive – Not Interested

A recent GAO report looked into the employer tax incentive program that was in the ACA to motivate more small employers to offer health insurance. The performance of the program fell short of expectations. Several interesting questions on reading the report:

170k Signed Up Out Of?

When a piece of tax credit legislation is proposed, there has to be an estimate of eligible recipients in order to quantify the budgetary impact. When the employer tax incentive was put into the ACA the estimates of the number of business that this could potentially help was between 1.4m and 4m. We’ll pass over what the extraordinary imprecision of this measurement says about the people framing this program and move onto the actual performance. Depending on what part of the range of eligible you want to highlight is, the take up rate was between 4% to 12%. Why the low level of interest?

How Hard Can It Be, the IRS is Involved?

Part of the GAO report looks at the IRS form and information needed to claim the tax credit. Quoting from the report:

“Any credit that needs a form that takes 25 lines and seven work sheets to build those 25 lines is too complicated” attributed to a tax preparer

Other complaints had to do with how to calculate FTEs and insurance premiums associated with those FTEs. Remember this tax incentive program was focussed on small employers with low wages, traditionally a higher turnover population.

We Get How Much?

Another problem with the employer tax incentive program was the amount of the credit itself and the the extent that it is available. In order that the credit was not used to over buy health insurance, the IRS used a credit cap of the average health insurance premium in each state. Several participants in GAO surveys questioned whether the IRS caps were too low. And finally, the tax credit itself has a phaseout provision, which means that from a planning perspective the small business has to estimate whether it can continue to afford health insurance when the credit expires.

* * *

The way that the employer tax incentive program in the ACA was written and operationalized once again points to the lack of understanding on the Federal level of the problems that small business faces in the health insurance market.

Provider Pricing Power and the Cost of Health Insurance

In an post discussing a recent Health Affairs paper, Avik Roy echoes our previous discussion about provider pricing and the tax treatment of employer based health insurance.

Worth the read.

Healthcare Spending and Provider Cost in the US

In a new report from The Commonwealth Fund comparing healthcare spending in the US versus 12 other industrialized countries (h/t HealthPopuli) it is striking how much more it costs in the US for the same sorts of procedures – and NO, quality is not that much better.

A few examples. The average income during 2008 for a primary care physician in the US was $186,582, in France it was $95,585. The average income during 2008 for an orthopedic physician in the US was $442,450, in France it was $154,380. The average hospital discharge cost adjusted for cost of living during 2008 in the US was $18,142; in Canada $13,483; and, in Australia $8,350. There are several other examples in the report of these sort of striking differences.

The main difference between the US and the other countries is the strong use of government price controls to control healthcare spending. In the US there are some soft price controls through Medicare and Medicaid, however these are subject political pressure. Many observers would say that only through a single payer system would price controls be effective because the private health insurance system has been unable to accomplish cost control.

However, I contend that the real crux of the problem is the tax deductible nature of employer based health insurance. The US market based system is ineffective in controlling healthcare spending when the purchaser of the product is relatively price indifferent (as opposed to an individual health insurance purchaser who gets no such tax break). The removal of the employer health insurance tax break would go a long way towards forcing price discipline without resorting to overt government price control.


CBO and the ACA – New Estimates of Costs and Employer Compliance

The CBO this week released a couple of updates to it’s budget scoring for the ACA.

New CBO Cost Estimates

For anyone who is not aware, the standard CBO process of estimating cost and budget impact for any proposed program is to estimate over a 10 year period. That is why there were many provisions in the ACA that started with premium collection in within the initial 10 year period, but did not start paying benefits until after the the initial 10 year period had expired. Using these budget games, the initial bill was scored at costing less than $1 trillion. Needless to say, that number is now over $1 trillion.

Peter Suderman on the Reason.com site has a good write up of the math involved and and where the true end number may end up for a full decade of the ACA. In addition, a quick review of the CBO note does not mention the effect of not implementing the CLASS Act. As we have discussed before, that program seems to have served a budgetary service only, and the refusal of the administration to agree to rescind it keeps it in the budget for now.

New CBO Estimates of Employment Based Health Insurance

The original CBO estimate was that about 3 million people getting insurance through their employer would end up migrating to Medicaid and the insurance exchanges. The CBO now estimates that number at 3 to 5 million. In reading the CBO report however, it is clear that this is all guess work at this point. Another interesting point in the report, is that it estimates that budgetary impact of more people losing their employer based coverage and being potentially subsidized through Medicaid or the insurance exchange is minimal. This is based on the assumption that most employers will raise taxable wages to the extent that they remove premium payments from the employee’s benefit package. That seems to be a rather large assumption. See Avik Roy, for a discussion of this.

More Money For Health Insurance Exchanges

Avik Roy notes yesterday that the administration has raised the budget request by $111b for the insurance exchanges needed in the ACA to provide premium subsidies. You will remember that last summer when the McKinsey report came out predicting that more employers would dump their health insurance plans than assumed in the original budget proposals that the administration attacked this prediction. This additional budget request for the insurance exchanges would seem to give more credence to that expectation.

What might be the drivers for employees dropping health insurance plans leading to increased demand in the exchanges? They come from the ACA itself.

Benefit Requirements in the ACA will Raise Premiums

In order to meet minimum benefit requirements for credit as a qualifying health plan, many small employers will need to purchase  a more expensive health plan than they do now.

Loss of Agent’s Compensation in the MLR

In deciding what was included in the medical loss ratio targets for health plans, agent compensation was not included. This means that agent compensation will begin the decline, leading to less service per client than now from those agents that stay in business. The role of the agent, especially for small businesses, as an unofficial HR consultant has been overlooked by many commentators. In house insurance company service providers cannot provide the level of service that the agent provided to the employer. This will cause the employer to have to deal with with more insurance related problems on a day to day basis.

In the end, the small employer will realize that it is much easier to simply write the penalty check for not offering health insurance than to deal with the inevitable bureaucracy, the higher cost, and the non-business related problems.

As more employers drop their plans, any stigma associated with not offering a health insurance plan to potential employees will fade away.




ACOs and the Bureaucratization of Care

In an interesting post at the Health Affairs blog Abdulrahman El-Sayed looks at the similarities of the No Child Left Behind attempt at education reform and CMS regulations concerning ACO scoring. While El-Sayed’s concern is with potential equity issues being exacerbated by the ACO rules, I’d like to focus on process effects.

The No Child Left Behind effort was criticized as incentivizing schools to teach to a standardized test. And, finally, fraud crept into the system as some schools were caught ‘adjusting’ test results.

Will something like that happen with ACOs. Given the amount of money involved – yes!

You can hear the consultant’s pitch now, “using our proven system, we can maximize your reimbursement” etc. While the reformer will argue that it is just a matter of designing the right measures, we all have seen how government programs work. Inevitably, protocols will be adjusted to maximize the score regardless of the underlying health status of the patient. That’s how bureaucracy works.

Free Contraceptives – Paid for by Thee and Me

The ‘compromise’ announced by the administration last week on the contraceptives issue is another example of the politicization of healthcare and health insurance driven by the ACA. The semantic dodge of making all health insurers provide coverage for contraceptives instead of employers needing to provide coverage does nothing to change the effect and actually broadens the expense that all policy holders will have to pay. Regardless of your personal needs or situation, you will now be paying for contraceptives through the premiums in your insurance policy.

The key here is the movement of contraceptives into the category of preventive care.

What will be the effect of this policy on the contraceptives market? As John Cochrane points out in his WSJ editorial,  the secondary effect of this move is that incentives for pharmaceutical companies to develop cheaper versions of birth control has vanished, as well the incentive for male centered non-prescription birth control. In short, the cost of contraceptives will never go down, they will probably go up. So much, for cost savings.

Other questions have been raised about whether or how this policy would be applied to self-funded employer plans, that technically don’t use insurance to cover their health benefit expenses. Since the majority of US employees covered through their employer are in these sort plans, that would put the onus of the expense on individual and small employers that cannot self-insure.

However, the real issue here is the use of the preventive care approach to legislate any number of favored benefits or tests into insurance plans. Every disease interest group will want their special pleading included as a preventive care measure (e.g. testing for autism, dementia, etc.). The cost of the preventive care portion of any insurance policy will necessarily go up.

Just another reason for any small to medium sized employer to get out of providing health insurance benefits to their employees.

CLASS Act – Zombie Legislation

The dysfunctional piece of legislation known as the CLASS Act has been recognized by the administration as being financially unsustainable and as such HHS Secretary Sibelius declared last October that it could not be implemented. As we have discussed earlier the intent of this portion of the ACA seemed more for biased budget scoring than for anything else.

The House of Representatives, in a rare move with some bipartisan support actually voted to repeal the CLASS Act on Wednesday, February 1. However, the Democratic controlled Senate and the President have stated that they will not support this repeal action. Why not? It seems that this will be used as another political example of the House of Representatives denying help to some needy portion of the population.

Is there a problem with a piece of legislation that cannot be implemented, but remains in force? As Avik Roy has pointed out there are dangers to this, pointing out that the Congressional Research Office sees the possibility of the courts ordering implementation even though it isn’t financially sustainable as written.

Undead legislation is always a horror movie waiting to happen.


CLASS Act – Was it just a budgetary gimmick?

Friday (10/14/11) afternoon, the traditional government embarrassing news dump time, HHS Secretary Sebelius announced that the CLASS Act portion of the ACA would not be implemented because it could not be made to be financially self-sustaining. That this would happen should not have been surprising to anyone.

The program was originally proposed as a tribute to the late Senator Edward Kennedy who had championed a long term care program of sorts being incorporated into Medicare.

From the beginning, critics pointed out that a voluntary program, such as this, was actuarially unsound. The only people that would sign up for the program would be those that anticipated a need for it – the definition of anti-selection in insurance parlance. In order to get this portion of the legislation inserted into the ACA, the supporters of it agreed to a formulation where the HHS had to prove that it would be actuarially sound before implementation could begin. That is why Secretary Sebelius had to make her announcement.

Since the announcement, there has been minimal defense of the CLASS Act with the exception of those that stood to gain from implementation work. Republicans have floated the idea of formally repealing this part of the ACA and the White House has given a half hearted defense with a suggested veto. Considering that this was a major piece of the ACA it is curious the low level of attention this has received.

It appears that the major benefit of the CLASS Act to the entire ACA was its contribution to the budgetary scoring done by the CBO. CBO scoring is done over a 10 year period. The way the CLASS Act was written, it was to be implemented 5 years after the passage of the ACA, and was to collect premiums for 5 years prior to paying out any benefits, i.e. income only for the scoring period. This amounted to $86b of the scored $210b savings attributed to the ACA.

So the question remains, has the CLASS Act already done its work by inflating the savings claim to gain support for the ACA?