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How to Save Individual ACA Market

Since its passage, the Affordable Care Act (i.e., ACA) has been a controversial law. From the time of its passage in March 2010 until U.S. House and Senate Republicans began their efforts to repeal and replace the ACA in the spring of 2017, support for the law has never exceeded 50%. The ACA’s lack of popularity is a function of the disruption it has caused in the Individual insurance markets and the premium increases passed on to policyholders. However, some provisions of the ACA are very popular. One aspect of the law that has significant public support is the protections it provides for persons with pre-existing conditions (i.e., guaranteed issue and modified community rating), with polls showing public support for these provisions at 78% or greater.

Protections for persons with pre-existing conditions and the lack of a strong Individual mandate are the main reasons for the high premium increases observed to date in the Individual ACA market. Simply put, high premium rates have caused younger and healthier consumers to forgo ACA coverage. This problem is exacerbated by the current 3:1 age rating restrictions, which result in younger consumers paying higher premiums compared with their relative risk. As premium rates continue to rise, this trend will escalate, which could lead to one or more the states finding their Individual ACA markets in an adverse selection spiral.

It is the opinion of the authors that persons with pre-existing conditions are not insurable risks, and that attempts to accommodate them in insurance market risk pools are bound to fail. Furthermore, we think that providing healthcare insurance coverage to persons with pre-existing conditions amounts to a necessary form of charity, and is therefore a public good. We believe that forcing responsibility for the funding and management of public services onto participants in private markets is neither fair nor prudent. Instead, we believe the cost of such mandates should be the responsibility of those who enact them, i.e., the general public through its elected officials and government agencies.

The authors agree that persons with pre-existing conditions should not be denied affordable health insurance coverage. However, we think the appropriate vehicle for covering these people is a high-risk pool attached to the Individual ACA market and funded by general tax revenues. We believe that a properly structured high-risk pool would greatly lower premiums in the Individual ACA markets, significantly reduce the number of uninsured, provide for better returns on investment for care management programs, would be relatively inexpensive to operate, and would provide for a strong and sustainable lasting Individual health insurance market in the U.S.

Policy Proposal

This section provides the details for our proposal for the establishment of a permanent high-risk pool to pay for the cost of members with pre-existing conditions in the Individual ACA market. To make our proposal as easily understandable as possible, please note that all rules, subsidies, and structures that currently apply to the Individual ACA markets would continue to do so unless stated otherwise. Here is our proposal:

  1. The federal government, through the Centers for Medicare & Medicaid, would administer a high-risk pool to cover people with pre-existing conditions who are seeking health insurance coverage in the Individual ACA market.
  2. The cost of the program would be funded by a combination of the insurance premiums paid by the members identified with pre-existing conditions and general tax revenue generated through an additional payroll tax.
  3. All member premiums in the Individual ACA marketplace would be priced assuming that no one in the risk pool has a pre-existing condition.
  4. The allowable age rates for adults would increase from the current ratio of 3:1 to 5:1.
  5. Members identified as having one or more pre-existing conditions would have their premiums and claim costs ceded to CMS. Members would continue to use their “insurer’s” networks and benefit plans as long as those members continued to pay their premiums to the insurance company. Insurers would forward providers’ bills for members with pre-existing conditions to CMS as they are received, and CMS would directly pay the providers within a set period of time (e.g., three to six months).
  6. To be defined as having a pre-existing condition, an applicant would be required to have a current diagnosis at the time of enrollment for one or more conditions from a pre-defined list of conditions. This means that a member who develops a condition that is on the pre-existing conditions list during a coverage period would be the financial responsibility of his insurance company not CMS until the beginning the of the next coverage period. Please note that the policy would allow insurers to underwrite new members entering the Individual ACA for the purpose of determining whether or not they have a pre-existing condition at the time of enrollment.
  7. CMS would establish care management programs (administered internally or externally through vendors) for members identified as having pre-existing conditions, and would work directly with providers to efficiently and successfully manage the care of those members.

Please note that the above list is a general policy outline. We imagine that there could be ways to “game” this, and we reasonably expect that legislators and regulators will anticipate and react to attempts to circumvent the purpose and goals of the policy.

See also: What Trump Wants to Do on ACA  

Modeling Methodology for Claims Projections

The relative costs of Individual ACA members in 2015, with and without pre-existing conditions, were modeled using the 2014 and 2015 Individual ACA membership and claims experience Axene Health Partner’s proprietary experience database. The 2015 Individual ACA experience in AHP’s experience database included more than 2.5 million member months. Chronic conditions for these members were assigned using the University of California, San Diego’s Chronic Illness and Disability Payment System (CDPS) risk adjustment model. The CDPS model assigns one or more of 58 possible conditions based on ICD9 and ICD10 diagnosis codes.

To simulate the underwriting of pre-existing conditions, we defined two classes of members with pre-existing conditions: members with known conditions, and members with undisclosed conditions. Members with known conditions were identified by comparing the CDPS results for Individual ACA members in 2015 with the CDPS results for members with any eligibility in 2014 with this health insurer. Conditions for these members that existed in both 2014 and 2015 were considered to be pre-existing in 2015. Members with undisclosed conditions were, by definition, more difficult to identify. For members that had Individual ACA eligibility in 2015, but no prior eligibility with a health insurer in AHP’s experience data, we assumed that the member had an undisclosed pre-existing condition if claims incurred within the first month of a member’s eligibility, as well as the claims over the remainder of 2015, were for one or more of the listed CDPS conditions.

Because the CDPS model is intended to calculate the total relative risk of a given member based on all of a member’s conditions, the model can flag a member for multiple conditions. For our modeling purposes, we wanted to assign at most one pre-existing condition per member, because it was not necessary for us to split a member’s total claims cost across multiple conditions. In cases where the CDPS model assigned more than one pre-existing condition to a given member, only the most severe condition was recorded. Condition severity was based on the CDPS model’s risk weights, and all costs were assigned to the condition with the highest risk weight.

We did not consider all of the 58 conditions used in the CDPS risk adjustment model to be appropriate for the pre-existing conditions high risk pool. Approximately two-thirds of the CDPS condition categories were excluded due to their relatively low CDPS model risk weights. We tended to keep conditions with qualifiers of “High” or “Very High”, more often than qualifiers of “Medium” or “Low”. We also used some judgement to include certain conditions when other categories within a certain condition class were already included. In the end, 21 conditions for adults and 19 conditions for children were chosen as appropriate for the pre-existing conditions high risk pool. Members who did not have a pre-existing condition on the list of chosen conditions, or members with no conditions at all, were assigned a condition of “none” for our modeling purposes. Table 1 below provides a summary of the pre-existing condition categories chosen.

Member months, member counts, allowed claims, and paid claims from AHP’s experience database for 2015 were aggregated for each condition into seven age bands. From these summary statistics, the probability of a member having a given condition by age band was calculated. Average allowed and paid claims PMPMs were also calculated for each condition and age band.

Using the summary statistics developed from AHP’s experience database for 2015 Individual ACA experience data, we modeled the expected cost of each state’s 2015 Individual ACA market. The total Individual ACA population that would be simulated for each state, as well as the distribution of ages within a given state, were collected from CMS public use data. The total Individual ACA population of each state was modeled based on the total State Billable Members Months listed in Appendix A to the Summary Report on Transitional Reinsurance Payments and Permanent Risk Adjustment Transfers for the 2015 Benefit Year. Billable member months were grossed up by approximately 0.40% to calculate total member months. This gross-up factor is based on the ratio of total member months to billable member months that we have seen in our clients’ recent data. Where possible, the distribution of ages within a state were based on the 2015 Marketplace Open Enrollment Public Use File. This report only contains information for the 37 states that used a federally facilitated exchange in 2015. For the states not captured in that report, the distribution of ages in the 2017 Marketplace Open Enrollment Public Use File were used instead.

A Monte Carlo simulation was performed in order to create a simulated Individual ACA market for each state. A set of random numbers was generated for each member in each state. These random numbers were used to assign the member’s age band by comparing the random number to the age distribution of members for a given state. A second set of random numbers was generated for each member and used to assign a condition by comparing the random number to the distribution of conditions for each age band. PMPM costs for each condition within each age band were scaled so that the expected total paid PMPM for each state tied to the state’s Average PMPM Claims reported in the 2015 Paid Claims Cost by State Report, produced based on data submitted to the EDGE server for purposes of the reinsurance program.

Please note, we believe the actual population of people with pre-existing conditions that would obtain coverage through the above defined high-risk pool would be essentially unchanged from the 2015 Individual ACA members who we have identified as having a pre-existing condition from our list. This is because the ACA premiums and subsidies are very attractive to those with pre-existing conditions, and we do not expect that our proposal would make the Individual ACA market more attractive to people with pre-existing conditions in any meaningful way.

Using the above methodology and data sources, we were only able to model the costs of the Individual ACA markets in 48 states. Excluded from our analysis were Massachusetts, Vermont, Washington D.C., and other U.S. territories such as Puerto Rico and Guam, due to a lack of publicly-available information necessary to model the costs of their Individual ACA market participants in 2015.

The results of our modeling provided us with average paid claims and “sustainable market premium” PMPMs for each of the 48 states. These metrics were calculated both including and excluding members with pre-existing conditions. We defined the average sustainable market premium as the premium that would result in an average loss ratio of 82% in each state’s Individual ACA market. Our last step was to develop aggregate results for each of the four metrics across all 48 states.

Modeling Results

Table 2 below provides a summary of the results of the 2015 Individual ACA markets in the 48 states we modeled.

Ceding members with pre-existing condition to CMS would have decreased the size of the 2015 Individual ACA markets in the 48 states in our analysis by approximately 3.1%, lowered total paid claims by approximately 23%, and decreased sustainable market premiums by almost 21%.

In total, health insurers in the 48 states in 2015 would have ceded $14.3 billion in claims and $1.84 billion in premium to CMS (leaving a net unfunded program cost of $12.5 billion) under our proposed high-risk pool program. Assuming that program expenses are 5% of total costs results in net program costs of $13.1 billion a year in 2015 dollars for the 48 states. Scaling this result to account for all 50 states, Washington D.C., and U.S. Territories would increase net program costs to $13.6 billion a year in 2015 dollars, which we rounded to $14 billion to provide some conservatism in our estimate.

By ceding members with pre-existing conditions to CMS’ Individual ACA high-risk pool, we have shown that insurers could lower sustainable market premium rates by more than 20%. A reduction in Individual ACA sustainable market premiums of 20% would make future premiums rates much more attractive to younger and healthier people who would otherwise forgo health insurance coverage.

Similar to the manner in which members with pre-existing conditions can cause premiums rate increases to compound due to adverse selection, removing those members from the Individual ACA pool could have a favorable compounding effect on rates as a healthier average risk pool causes premiums to drop, thereby attracting additional healthy members who have an additional favorable impact on premiums.

See also: 10 Ideas That Could Fix Healthcare  

Additionally, by resetting the age curve from 3:1 to 5:1 (i.e., the maximum ratio of premiums paid by members age 65 to premiums paid by members age 21), allows for a further decrease in required premiums for younger and healthier members.

Table 3 shows that removing members with pre-existing conditions from Individual ACA risk pool and resetting the premium age curve from 3:1 to 5:1 allows for decreases in required premium rates for all ages of at least 5%, while decreasing rates for the youngest members over 40%. These premium decreases are before the impact of the positive selection spiral. With the lower rates attracting more younger individuals into the risk pool, the premiums for older individuals will decrease accordingly.

Additional Considerations

Done correctly, we believe the creation of a high-risk pool of Individual ACA members with pre-existing conditions would result in a better return of investment for care management programs for these members. Given that members are allowed to change insurance carriers, persons with pre-existing conditions are as likely as any other market participants to shop for better plans and rates for the coverage they require. Care and disease management programs often require long time horizons to bear results. This means that insurers are less likely to implement cost-saving programs when members who benefited from the programs could change insurers before the full impact of the members’ claims cost savings are realized. By moving a large percentage of those with high-cost conditions to care management programs administered by a single entity (i.e., CMS), the return on investment of these programs is likely to be higher and results of the programs are likely to be more impactful for all insurers participating in the market.

Due to the large volume of claims for members with pre-existing conditions, CMS would have the ability to review clinical practices, related costs, and outcomes for the services provided to these members. This information could be used to develop approaches to improve the effectiveness and efficiency, while lowering the cost of the care provided to these high cost claimants. Using evidence-based targets, CMS could then enter into gain and/or risk-sharing arrangements to help improve the quality and lower the cost of care provided.

Conclusion

In this paper, we have introduced a straight-forward and workable policy proposal that would continue to provide health insurance coverage to people with pre-existing conditions, significantly lower premiums in the Individual ACA insurance markets, reduce the number of uninsured, and allow for the creation of care management and risk-sharing arrangements with providers that would could greatly improve the quality and lower the cost of care. The annual price of this proposal would be approximately $14 billion in 2015 dollars, and represent an approximately 0.38% increase in the federal budget. Considering the importance that voters place of health care cost, quality, and access, we believe that our policy proposal would provide a popular and effective change to this critical component of the U.S. health care system at relatively small price.

So Here’s an Idea on Healthcare Reform

If you spend any time writing or speaking about healthcare reform, eventually you’re asked the magic wand question: What would you do? Well, there’s an idea I’ve been thinking about. It’s not a Big Fix. It’s merely something that would improve whatever system is in place – I think – by making the system more simple and transparent. I’m sure it’s riven with problems. And maybe it’s a hot topic, but I’ve missed those articles. In any event, here it is. Please let me know what you think I’m missing.

The Mechanics

The idea is to have providers (physicians, hospitals, clinics, laboratories, etc.) publicize what they charge using a multiple of what Medicare pays. If Medicare pays $100 for a procedure and a doctor charges $300 for the same procedure, this doctor is a 300% provider.

Carriers, meanwhile, will set what they reimburse providers as a percentage of Medicare, as well. If an insurance policy pays as much as $250 for this same procedure, it’s a 250% policy.

See also: The Math of Healthcare Reform  

The key is that this percentage doesn’t vary based on the procedure. Once a provider or carrier sets its multiple, that figure defines the cost for all treatment and services. Consumers gain two bits of information they lack today: what their provider is charging (300% of Medicare in this example) and what their health plan pays (250% of Medicare here).

There’s two advantages to using Medicare as the benchmark for pricing. First, it’s already in use today. Second, it assures both providers and payers are using the same measurement. When you say “300% of Medicare,” doctors and insurers know what you mean whether they’re in San Francisco or San Antonio. (If you’re from elsewhere, it means take the Medicare rate, and multiply it by three).

Compare this with today, when all they know is that the carrier pays in-network services on a mysterious discount and out-of-network services based on an unknowable formula. What is reasonable and customary? Under my proposal, however, consumers know what the carrier will pay and what they’re responsible for before they walk through the door for medical care.

If the proposal were implemented today, a number of things would remain unchanged. Deductibles, co-insurance and co-pays: still allowed. The Affordable Care Act’s essential benefits: covered. Preventive care: not subject to deductibles and co-insurance.

How emergency treatment is reimbursed will need to change to a standard multiple of Medicare for all payers regardless of the facility’s usual percentage so consumers aren’t subject to balance billing.

Simplicity and Transparency

As noted, this idea overlays the current system; it’s not a substitute. This is an overlay, however, that delivers substantial simplicity and transparency. Consumers know up front which providers they can afford. There would be no networks, so there would be no surprises from out-of-network charges, Consumers choose any doctor fully aware of how much of their bill is covered by their health insurance. If they want more covered, they simply choose another provider.

Physicians wouldn’t have to guess what carriers will pay them. They’ll reduce their costs as a lot of unnecessary paperwork goes away. However, they’ll also have to compete with other providers in their community. If a doctor is going to charge a lot more than everyone else, she better have a good reason.

Hospitals could no long hide behind their charge masters– a menu of prices they charge for services that no one ever sees and few hospitals can explain or justify. These inflated costs are the starting point for pricing negotiations with carriers, so few people ever see them. (Steven Brill wrote a special report for Time magazine in 2013 that explains charge masters and should be required reading for anyone attempting to reform American healthcare).

Consumers and their brokers will be able to compare the value of plans on an apples-to-apples basis. If a 400% policy is more expensive than a competitor’s 500% policy, the carrier better be able to explain why. Consumers won’t face unexpected charges, either. They’ll know if their policy will cover all of a given provider’s expense or if they’ll need to pay a portion of the costs. And they can choose their providers accordingly.

Carriers benefit from this proposal, too (unless you’re employed in the networking department). Actuaries will have more certainty in determining the reimbursement required under each plan, regardless of whether the provider is in- or out-of-network. With better information on their exposure, carriers can price more accurately. The simplicity of the system will also reduce operating costs, and that’s critical for carriers needing to meet a legally required medical loss ratio.

An Improvement, Not a Revolution

I know this idea doesn’t fix America’s healthcare system. The goal is to inject greater simplicity and transparency into whatever system is in place. If transparency advocates are right, this will revolutionize healthcare. I’m not sure I buy into the idea that transparency is all that game-changing, but, to the extent it is, this proposal dramatically increases transparency throughout the healthcare system.

Single-payer advocates will not be impressed by this idea. However, I believe, in spite of its current momentum, single payer is a long way away. Single-payer proposals cost too much, impose too much centralized control and are too disruptive. The ACA cost Democrats Congress (and arguably the White House), and Obamacare is far less radical than any single payer plan out there. Imagine the political blowback at a government-run insurance program by voters already fearful of death panels and distrustful of Washington?

See also: A Way to Reduce Healthcare Costs  

ACA supporters should like my approach. A common criticism is that the ACA doesn’t do enough to make healthcare or healthcare coverage affordable. Simplicity saves money. Transparency empowers consumers to reduce their healthcare costs. The ACA plus a Medicare-pegged healthcare system will help the ACA keep its affordability promise.

Advocates of reference-based pricing should also be happy. I’m proposing reference-based pricing on a nationwide scale with everyone using the same reference: the Medicare reimbursement schedule. This goes further than most of the reference-based pricing proposals or implementations I’ve seen, but it’s a logical expansion of the concept. And because both the provider and the payer are referencing the same benchmark, litigation — a too-common result of current reference-based efforts — is unnecessary.

This proposal isn’t a panacea. The question is, is it a practical improvement? Please let me know what you think – and what I’m missing here – in the comments.

This article first appeared on the Alan Katz Blog

Can Trump’s Math Work in Healthcare?

When it comes to healthcare reform, it’s all about the math.

The First Element: Trump and Winning

President Trump hates to lose. He’s about winning until we’re all sick of winning. (His words, not mine.) The American Health Care Act, Republicans’ attempt to replace the Affordable Care Act, also known as Obamacare, failed. Support was so scarce that Speaker of the House Paul Ryan and the president didn’t even bring it to a floor vote in March.

The press said Trump lost. Given his vocal support and strong lobbying for the bill, this assessment was accurate, but one the president cannot, and, apparently will not, accept. He sent his team to try to salvage the bill before the April recess. They failed. Which was a bit surprising given that Trump seems more focused on passing a bill – any bill – than on the substance of legislation.

This is the first number in our healthcare reform equation: Trump wants to win and doesn’t care how.

The Second Element: Divided Republicans

It takes a simple majority to pass a bill out of the House. With 434 current members (the elevation of Jim Price to Secretary of Health and Human Services leaves one seat vacant), 218 votes are required to pass legislation. There are currently 246 Republicans in Congress. Having already shut Democrats out of the process, Trump needs all but 28 members of the GOP caucus to pass a bill; a 29th Republican “no ” vote, and the bill fails.

There are about 40 members of the House Freedom Caucus, a group of the chamber’s most conservative lawmakers. The majority of the caucus united in opposition to the AHCA. In March, Trump blamed them for the bill’s defeat. In April, he sent his emissaries to get their votes.

The Freedom Caucus demanded elimination of some of the ACA’s most popular provisions as the price of their support. These provisions prevent carriers from excluding coverage for pre-existing conditions and require health plans to include certain essential benefits, like maternity coverage. The White House reportedly considered acquiescing to these demands.

The problem, however, was that accepting the Freedom Caucus’ demands resulted in (relatively) moderate GOP members abandoning the AHCA. Gaining conservatives votes doesn’t help if the cost is an equal number of moderate votes. There may be a path to pass the AHCA solely relying on solely on Republican votes, but, given the divide between conservative and mainstream Republicans, it’s hard to find it.

Which provides the second number for our equation: Republicans can’t pass healthcare reform on their own.

See also: The Math of Healthcare Reform  

The Third Element: Democrats Want Repair

Democrats believe the ACA has been good for America, especially for those who, but for the ACA, would have no healthcare coverage. Most liberal Democrats think the ACA doesn’t go far enough. They won’t be satisfied with anything less than a single-payer system.

Many Democrats, however, think the ACA is generally fine, but in need of critical tweaking to keep it working. Some liberals will hold out for their dream of “Medicare for All,” but even many in their ranks will take a repaired ACA over a broken system or what Republicans are offering.

Which is why Democrats united against the Republican plan. Not that it mattered. Republicans never sought Democratic votes for the ACA.

Democrats want to fix the ACA. That’s the third and final number in our healthcare reform equation.

The Math of Healthcare Reform Compromise

If Trump wants to win, he needs to move beyond a purely Republican formulation. Otherwise, as shown above, the math doesn’t work. Republicans need the larger numbers that Democrats provide to pass healthcare reform legislation.

How does this math work? Let’s say a healthcare reform package reaches the floor of the House that attracts 164 Republicans – just two-thirds of their caucus. However, it gains support from 54 Democrats – only one-third of their caucus. The bill moves on to the Senate. In short, it’s easier to find 218 votes among 434 members than from among 246.

This path makes the challenge before the president straightforward, if difficult: find a legislative package that attracts enough Democratic votes to offset the Republican votes it loses. In the old days (before Washington because hyperpartisan), pragmatists from both parties would meet and hammer out a compromise. That’s what’s needed now. Significantly, there’s plenty of common ground to be found.

There are ACA taxes that neither Republicans and Democrats like. Eliminate them. The Shared Responsibility Payments that penalize Americans for going without coverage are universally acknowledged to be ineffective. Fix it. Both Democrats and many Republican want to keep the ACA’s Medicaid expansion. Preserve it.

The path to a compromise won’t be easy, but the equation is simple addition: Trump wants to win and doesn’t care how PLUS Republicans can’t pass healthcare reform on their own PLUS Democrats’ want to fix the ACA. The result: compromise.

See also: Stigma’s Huge Role in Mental Health Care  

Political Cover

The biggest obstacle to achieving healthcare reform is not the math, it’s the politics. Incumbents in both parties dread being “primaried” – Republicans fear being challenged from the right, Democrats from the left.

This is not paranoia. The extremes of both parties will seek vengeance on their less pure teammates. Party leaders and the administration will need to give these members extensive cover in terms of messaging, campaign money and resources to beat back these attacks. Or they will need to convince the public that failing to achieve healthcare reform is a worse outcome than the compromise.

This is where Trump proves he deserves to win. He must demonstrate his self-proclaimed negotiating prowess and his proven marketing acumen to create a political environment where compromise on healthcare reform doesn’t doom incumbents.

In other words, for Trump to win he needs to make sure that members of Congress win, too.  Otherwise, he loses. That’s politics—and math.

For curated articles on healthcare reform, check out the Alan Katz Health Care Reform Magazine on Flipboard.

Is U.S. Healthcare Ready for ‘All Payer’?

Congress is debating the American Health Care Act, the first of three steps in Republicans’ march toward repealing and replacing the Affordable Care Act. Things are not going smoothly. GOP conservatives, which have considerable clout in the House of Representatives, want the bill to repeal more and replace less. More moderate Republican Senators, of which there are enough to block any legislation, argue the legislation goes too far in some respects. Attempts to mollify one side hardens opposition on the other. And so far, no real effort has been made to entice Democrats to do more than watch Republicans fight one another.

It’s possible President Trump, Speaker Paul Ryan and Senate Majority Leader Mitch McConnell can corral enough votes in each chamber to push the AHCA through Congress. It’s possible, but I’m skeptical. And what if they can’t?

See also: What Trump Wants to Do on ACA  

Well, they could do nothing, leaving enough uncertainty lying about that the individual market, at least, collapses. That could make 2018 a tough election year for Republicans. Or they could offer AHCA version 2.0 and hope for better results. Wishful thinking is a great pastime but hardly a vehicle for making public policy.

All of which argues for doing something outside the proverbial box. Maybe Congress could even address the core problem facing America’s healthcare system: the cost of medical care. What might that look like? One option would be to look at an idea that’s been around since the 1990s, if not longer: an all payer system. It would certainly be an interesting debate.

To oversimplify, under an all payer system, providers and payers (usually the government) establish a price for each medical treatment and service. Every provider accepts this rate as payment in full, and every payer (government, private insurance, self-funded plans and individuals) pays this rate.

As noted by The Hill, several states experimented with one version or another of all payer systems in the 1990s, although today only Maryland’s remains. As recently as 2014, academics at Dartmouth proposed using 125% of Medicare reimbursement rates for a national all payer program. Pricing transparency advocates like all payer systems because everyone knows the cost of care – the ultimate transparency. And this system eliminates the wide variance in pricing for identical treatment so prominent today.

A pure all payer system would be difficult to pass, however. Free market Republicans will not accept the government setting the price for all medical care payments. And pharmaceutical companies, doctors, hospitals and other providers are not going to take kindly to having anyone set a one-size-fits-all cost structure. But there are variations on the all payer theme that might make such a system more palatable — and allow for a healthy (and entertaining) debate..

For example, consider an all-payer system in which Medicare reimbursement rates are simply a starting point — the benchmark used by all providers in setting their costs and all payers in determining their reimbursement levels. No more Alice in Wonderland pricing by hospitals and other providers. Each service provider would describe its fees as a multiple of Medicare. Insurers would offer plans that cap reimbursements at different multiples of Medicare. If the doctor’s charges are at a lower or the same multiple as an insurance policy’s, that provider would be fully reimbursed by the carrier, and no charges beyond co-payments, deductibles and co-insurance (if any) would be required of the patient. If the practice has set a higher Medicare multiple than a patient’s policy covers then the patient is liable for the additional cost. The key, however, is that the consumer would know this before incurring the charge. (Which is why emergency care would be treated somewhat differently).

See also: Letter to Congress on Replacing ACA  

An all payer system requires higher cost providers to justify the extra expense. It eliminates the helter skelter of ever-changing networks. Health insurance premiums would reflect reimbursement rates and would correlate with the number of providers whose services would be covered in full.

Conservatives can’t claim all payer systems is a government takeover of healthcare. On the contrary, the only role Medicare plays is providing the baseline for reimbursement … a common language all providers and payers speak. What they do with that baseline is up to them. Liberals won’t like that insurance companies remain in the healthcare system and will object to limiting, as a practical matter, poorer Americans to low reimbursement policies.

Right now, all attention is on the American Health Care Act. That’s as it should be. After all, it’s not dead yet. But, given that there’s a good chance the legislation will crash and burn, there’s no harm in thinking about what could come next. I’m rooting for something that isn’t just a rehash of the 2009 debate, but rather something bolder. An all payer proposal is just one idea, and there are no doubt many better ones.

What’s your favorite?

This article first appeared at the Alan Katz Blog.

The Math of Healthcare Reform

The House Leadership’s plan for repealing and replacing the Affordable Care Act is now public for all the world to describe, dissect and debate. For articles on what it does, please check out my Flipboard magazine.

To call the legislation dead on arrival is unfair. However, the proposal is looking under the weather.

See also: What Trump Wants to Do on ACA  

As I’ve posted previously, what Speaker Paul Ryan and the Republican leadership put forward is highly unlikely to be what emerges from Congress … assuming healthcare reform does emerge from Congress.

Which may be a good thing. Because the American Health Care Act fails to address in any meaningful way what should be a critical goal of any healthcare reform proposal: making health care affordable. Washington is fixated on how Americans get health care coverage. Should there be government exchanges? Should premiums be subsidized? Should there be restrictions on how insurers set premiums for coverage? And so on. All of these are vital issues. But they’re playing around the edges of public policy when the real solution is at the core.

This isn’t just opinion. It’s math. Consider: The Affordable Care Act requires carriers to spend the vast majority of every premium dollar they collect for medical care. In the individual and small group markets, 80% of premiums must go to cover medical care, or carriers must refund enough premium to reach that level. For larger employers, the medical expense target is 85% of premium. The remaining premium dollars are what carriers can use for paying claims, customer service, negotiating discounts with medical providers, advertising, legal expenses, staffing, HR departments, distribution costs, profit (or retained earnings for non-profits) and any other administrative costs. (Incidentally, I don’t see any reference in the new proposal to these provisions of the ACA, which, I assume, means they stay in place. If I’m wrong, please let me know in the comments section.)

If lawmakers want to make health insurance coverage affordable, they’re going to have to make medical care affordable, because that’s where the money is. Zero out insurers’ operational expense, and overall premiums would go down less than 20%. That’s a sizable amount. However, in three or four years we’re back where we are today thanks to medical inflation. And there’s no way to eliminate all administrative costs. Someone has to process the claims or answer consumers’ questions. And those people expect to get paid. And someone has to pay for their phone, desk and computers. And someone has to support their equipment. And so on.

Medical care represents 80% to 85% of health insurance premiums. Reduce this side of the ledger by 20%, and premiums fall 17% — roughly the same as eliminating 100% of insurers’ operational costs.

See also: Letter to Congress on Replacing ACA  

If President Trump and Congress are serious about reducing the cost of health insurance, they need to figure out how to reduce the cost of medical care. There’s plenty of ideas out there (a topic for a future post). And, to be fair, they’ve mentioned a few. But there’s a political reality that explains why most of the rhetoric around Pennsylvania Avenue concerns the cost of coverage: No one has lost an election by attacking health insurance companies. They’re one of the safest pinatas in American politics. On the other hand, doctors and hospitals are politically dangerous to take on. Voters actually like them.

Regulating health insurance so consumers get a fair deal is important. Lowering the cost of medical care is critical. It will also reduce insurance premiums. It’s just harder. Perhaps that’s why the Republican proposal is called the American Health Care Act. It would be wrong to use the word “affordable.”

This article first appeared at the Alan Katz blog.