Obama Care: A Very Convenient Pinata

Have you ever grabbed a stick and taken a swing at a pinata? They are the colorful, decorative containers of sweets that hang from ceilings at children’s parties. Blind folded guests swing wildly at the dangling targets, and if they manage to strike the containers squarely, candy pours out and cascades across the floor.

Apparently, the Affordable Care Act (ACA) has become a pinata for every individual who has a complaint about the American health care system. Even those with liberal and progressive beliefs have begun to take wild swings at this target with the hope of generating sympathy for their own positions and opinions.

Consider, for instance, the Human Resources Department of Harvard University. In order to defend its decision to require Harvard employees to pay for more of their health care benefits, it published a 2015 Benefits Guide that blamed the ACA by noting that: “the Affordable Care Act (imposes) added costs to plan sponsors like Harvard.”

After reviewing the Benefits guide, faculty members condemned the University’s decision to increase their share of health care costs. Their vote, in turn,  drew the attention of conservative and progressive news organizations that noted that a liberal bastion of support for universal health care was turning against the ACA.

But those news organizations might have read the Harvard 2015 Benefits Guide more closely. After blaming the ACA for the “added costs” of employee health care, the Guide listed four illustrative bullet points to support its statement.

So why are those four points so news worthy? To put it simply, they don’t support Harvard’s assertion that the ACA has “added costs” to its benefit plans. The first point, in fact, fails to account for a significant countervailing trend. The second point fails to address cost levels from an incremental perspective. The third point is vague and unsubstantiated. And the fourth is irrelevant.

What, specifically, are these four points? The first one asserts that the ACA requires all employers to extend “coverage for children (of employees) up to the age of 26.” That is indeed true. Harvard undoubtedly employs people with adult children younger than 26 who need health insurance from the university; this coverage requirement does indeed drive up the institution’s benefit costs.

However, prior to the passage of the ACA, all universities provided health care benefits to their full-time students and graduate assistants below age 26. A university as large as Harvard undoubtedly provided coverage to hundreds (or perhaps even thousands) of individuals in this age group.

So, in order to quantify the net incremental cost of this ACA requirement to Harvard, the number of “adult children of employees below age 26 who now require Harvard to extend coverage to them” would need to be off-set by the number of “graduate students and other employees below age 26 who no longer need health benefits from Harvard because they can now obtain such benefits from their parents’ employers.”

It is, in fact, possible that the second number is larger than the first number. And if that is true, then this first bullet point may actually represent a “cost saver,” and not a “cost driver,” for Harvard.

And what is the second bullet point of the four in the Benefits Guide? It is a statement that the ACA requires “preventive care (to be) fully paid by the University.” Indeed, if Harvard had not been paying for their employees’ preventive care services prior to the implementation of the Act, this ACA requirement would indeed represent a new cost burden for the institution.

Nevertheless, it is safe to assume that Harvard’s health care plan has always covered such costs. Thus, this ACA requirement cannot now be generating an incremental cost burden for the University, above and beyond what Harvard would have expended without the passage of the ACA.

And what of the third and fourth bullet points? The third makes note of unspecified “additional taxes and fees that began in 2012, and (that) are ongoing.” And the fourth refers to “a potential 40% excise tax … which is scheduled to go into effect in 2018.”

How do these points support the notion that the ACA significantly impacted Harvard’s health care cost structure? The third point, being vague and unsubstantiated, does not appear to do so at all. In regards to the fourth point, why would cost levels in 2015 (i.e. today) be impacted by a potential tax that does not take effect until 2018? The notion appears to be implausible.

So if none of Harvard’s four points actually supports its assertion that the ACA is driving up its employee benefit costs, why did the University’s Department of Human Resources make that assertion in the first place? Perhaps because Obama Care, in essence, has become a very convenient pinata for every individual who is unhappy about a feature of the health care system in the United States, such as decisions by employers to increase the cost sharing burdens of their employees.

Obama Care: Did The President Lie?

Do you remember the first time that a representative of America’s Republican Party accused President Obama of a lie about the Affordable Care Act?

It was a fairly spectacular setting. The President was delivering his first ceremonial State of the Union speech to a joint session of Congress. When Obama declared that his health care reform proposal would not extend medical services to illegal residents, Republican Congressman Joe Wilson interrupted the speech by screaming “You Lie!”

He later apologized for his severe breach of decorum, but today, Republicans are no longer apologizing for accusing the President of telling lies about the Affordable Care Act. So did Obama lie to the American people when he claimed that “if you like your (health) plan, you can keep your (health) plan”?

The answer depends on what the President meant by the word “plan.” If he meant “health insurance policy,” then he didn’t lie. Health organizations are now cancelling “plans” that don’t meet the minimum definitions of “insurance policies.” Indeed, these companies are not cancelling insurance policies at all, but instead are cancelling more limited types of health plans.

What is the difference? Well, insurance policies are designed to cover consumers against catastrophic losses. The plans that are now being cancelled, though, often feature benefits that are limited at extremely low levels, or that permit companies to cancel coverage or drastically increase premiums once consumers become ill and need to claim benefits. Such plans are actually designed to avoid coverage for catastrophic illnesses, not to insure for them.

This is why Aetna’s home page, for instance, carefully differentiates between “health plans” and “insurance solutions” to consumers. The firm refers to “plans” and “insurance” as distinct and separate services because they design and sell them as uniquely different types of contracts.

If President Obama was thinking of “comprehensive health insurance” when he said that “if you like your plan, you can keep your plan,” then he was indeed telling the truth. If that was what he had in mind, then he wasn’t referring to the types of contracts that are now being cancelled by companies.

But if he was thinking of the types of low benefit, easily cancellable contracts that the Affordable Care Act explicitly deemed insufficient for insurance purposes, then he was not speaking truthfully. After all, the Affordable Care Act was designed to require Americans to purchase full insurance policies that provide coverage far superior to the terms of these meager plans.

So did the President lie? Reasonable people may differ; you are certainly free to decide what you will. Perhaps we can all agree, though, that it would be helpful for our political leaders to use more precise language in the future … beginning, for example, with a clear definition of a “health plan.”

America and Europe: Trading Places

One society is a melting pot of different cultures and constituencies, embracing a philosophy of personal responsibility and limited government. The other is a homogenous society, placing emphasis on social and governmental support systems.

Which one is America? And which one is Europe?

The conventional wisdom is that the first description defines the United States, and the second one defines the European Union. Recent events, though, have turned conventional wisdom on its ear.

All societies, of course, undergo extended periods of evolution and transition. Interestingly, the American and European cultures now appear to be engaging in a game of trading places.

Tolerating Unemployment

Last week, American investors punished their domestic equity markets for an economic employment report that under performed their expectations. Although the unemployment rate in the United States has now declined from its recent peak of 10.2% to a far more moderate 7.6%, many pundits believe that this rate remains intolerably high, and thus investors sold shares in response to the news.

And yet any job growth at all, in contrast, would undoubtedly thrill European investors. Last week, the unemployment rate in the euro zone climbed to 12%, a record high. And in nations such as Spain and Greece, as well as among young workers, the rate is more than double this level.

In the past, unemployed European workers could rely upon a sympathetic citizenry and a generous social safety net to guide their way through economic down turns. In the current era of recessionary Europe, however, such levels of social goodwill and governmental support appear to be unavailable to them.

Building The Safety Net

Consider, for instance, the European system of health care services. In Greece, the birthplace of European democracy and a core member of the euro zone, the public health system is nearing collapse. The medical crisis has become so severe, in fact, that Doctors Without Borders — a nonprofit organization that usually focuses on providing care to residents of emerging nations — has begun to deliver charitable services in the country.

On the other hand, despite a contentious and deeply controversial development and approval process, the Affordable Care Act of the United States — a.k.a. “Obama Care” — is on track to launch a national marketplace of health insurance exchanges in January 2014. Although not a universal program of medical services per se, the new American system will provide for a level of access to health coverage that will far exceed levels found in nations like Greece.

Comprehensive health care coverage in the United States … but not in the cradle of European democracy? It’s a surprising sign that the two societies are in the process of trading places.

Forming Social Cohesion

Furthermore, the economic hardships of the European Union are generating levels of social strife that haven’t been experienced since the darkest days of the Second World War. Protestors are routinely comparing German Chancellor Angela Merkel to her infamous predecessor Adolph Hitler, and her Christian Democratic Union political party to his notorious Nazi movement.

Meanwhile, back in the United States, what are demonstrators chanting on the streets of America’s great cities? Slogans in favor of universal marriage! Apparently, political support for the extension of marriage rights to gay citizens has soared among American citizens during the past decade, including among many relatively conservative demographic groups.

Half a century ago, the assassination of an American president on the streets of Dallas, Texas touched off a firestorm of racial and ethnic strife that plagued the society of the United States for three full decades. Today, Europe appears to be entering a similar period of social disunion, at the very time that American society continues to heal itself.

Choosing Priorities

In the meantime, what are the priorities facing American politicians? Are they focusing on goals and objectives that are likely to bring even greater cohesion to the nation and its citizens? Or do they intend to focus on issues that may tear the nation apart?

A brief review of the political headlines appears to indicate that the former, in fact, is true. Apparently, a bipartisan group of lawmakers is negotiating to guarantee the permanent assimilation of illegal immigrants. Meanwhile, President Obama has invited a group of Republican senators to dinner to discuss a “grand bargain” that ensures the long term stabilization and funding of Social Security, Medicare and Medicaid.

Conversely, European leaders continue to argue about the wisdom of forcing bank depositors to share the fiscal burdens of banking bailouts. And national leaders like David Cameron of Great Britain are authorizing referenda that raise the possibility of the dissolution of the European Union.

One political union is clearly a collection of socially cohesive individuals, whereas the other is (in reality) an assortment of combatively warring interests. Who could have ever predicted that the first is the United States of America, while the second is the European Union?

The Evolving Economics of Health Care

When President Obama and the Democratic Congress passed the Patient Protection and Affordable Care Act last year to reform the nation’s health system, they didn’t schedule all of the transformational regulations to take effect immediately. For instance, the central innovations of the plan — a legal mandate to purchase health insurance, paired with the development of state-based insurance exchanges — were assigned full implementation dates in the year 2014.

In the meantime, though, the economics of the American health care industry aren’t just sitting idly by, waiting for the legislation to take full effect. Instead, as economic conditions evolve, organizations are making plans and taking steps to position themselves to exploit the terms of the new law.

Regrettably, from the perspective of American consumers of medical services, these steps are driving the costs of health care into the stratosphere. And if the process continues to play out in accordance with current trends, there may not be much of a competitive, free market health care system left to regulate by the year 2014.

Fewer Insurers

Let’s begin by considering the number of insurance companies that are now competing with each other to offer health care policies to consumers. Because we allow these firms to eliminate their competitors by simply acquiring them, the competitive market continues to shrink into smaller and smaller clusters of firms.

Furthermore, these insurance companies are focusing more intensively on providing services to enrollees in federal government programs. That’s why Cigna paid $3.8 billion to buy Healthspring, for instance, and why Humana acquired MD Care. In each case, a huge insurer became even larger by purchasing a potential (or actual) competitor in the field of government services.

A health care industry with very few insurers simply doesn’t function in the same manner as a competitive market place. Firms in such industries are relatively less likely to compete based on factors like quality, innovation, and superior service; instead, they are relatively more likely to focus on strategies like maximizing prices and passing along the costs of medical care to customers. With fewer competitors to challenge them on the first set of factors, firms enjoy the freedom to focus instead on the second set of factors.

Fewer Payors

Of course, if the market were to be dominated by large numbers of strong payors — such as employers or trade associations, entities that purchase health care benefits on behalf of their employees or members — one could rely on the payors themselves to compel insurers into competing on the basis of quality. Unfortunately, though, the American health insurance industry is losing payors, not adding them.

Consider Walmart, for instance. The largest employer in the United States has shaken up many industries with its mammoth purchasing power, and could conceivably play the same role in the health insurance industry. But the firm appears to be more interested in driving employees out of its health plans than aggressively purchasing health insurance policies on their behalf, as evidenced by their recent increases in employee health premiums, as well as their refusal to cover certain part time employees.

Some commentators have voiced concern that the implementation of a national network of state-based health insurance exchanges, given its ability to serve as an alternative to employer based health insurance coverage, would result in employers dumping their health benefits benefits entirely and driving their employees onto the exchanges. In fact, some believe that Walmart is planning to execute that very strategy, and is now driving up the employee costs of health care to unaffordable levels in pursuit of this goal.

On Their Own

Even the most avid supporter of a single payor program, financed and managed by the federal government, would likely concede that a truly competitive free market health care system would be highly beneficial to consumers. Imagine a city filled with thousands of insurers and payors, of every conceivable shape and size, eagerly searching for any strategic advantage that could differentiate them from their competitors and help attract new consumers.

Now that’s a fairly compelling scenario, isn’t it? With thousands of competitors occupying each segment of the market, no single party could possibly exert control over the entire system. And consumers could continuously “go shopping” for coverage, forcing each organization to compete with multitudes of others for their loyalty and premium dollars.

The contrary scenario, though, is the one that currently exists, and that is becoming more and more entrenched with every large insurance acquisition and every dramatic employer decision to shift the costs of providing access to health care onto employees. Indeed, such actions provide consumers with fewer and fewer choices of payers, who in turn must choose from fewer and fewer choices of insurers.

The results? Ultimately, the economics of the industry will inevitably dictate the outcomes. Costs will continue rising, service levels will continue shrinking, and consumers will continue to be left on their own to fend for themselves.

The Mini-Med: Our New Health Reform Threat!

Runaway cost inflation. A stagnant bureaucracy. Mind numbing complexity.

These are the monumental challenges that are confronting America’s federal government during the implementation period of its new system of universal health care. Though regulators certainly don’t need any additional headaches, last week we learned of an entirely new problem, one with a deceptively innocuous name: the mini-med!

Like Dr. Evil’s tiny clone Mini-Me in the Mike Myers comic film series Austin Powers, the mini-med health plan is a diminutive version of a full fledged insurance plan. Yet, despite its meager dimensions, it poses a sizable threat to the government’s program of national health reform.

Aflac! Aflac!

What, exactly, is a mini-med? It’s a tiny health plan that costs very little and thus delivers very little in exchange. It is sold directly to individuals by insurance companies, although businesses often help insurers to market these policies to their employees.

Aflac, for instance, offers a health policy that pays $1,000 for an initial hospitalization stay resulting from an accident, and an extra $1,000 for an admission to an intensive care unit. The insurer pays these amounts to individual policy holders, i.e. not to medical providers.

Are there any “catches” to this Aflac plan? Well, for a start, its coverage is limited to one hospital admission per year. Perhaps more importantly, its $1,000 or $2,000 stipend barely begins to cover the cost of a single day in most American hospitals, let alone the total cost of a typical multiple day stay. If we consider the additional costs of ambulance and other ancillary services as well, we can understand why insurers refer to these contracts as “mini” plans.

Nevertheless, companies as large as McDonald’s offer such plans to part time employees and other workers who would otherwise receive no employer health benefits whatsoever. Many of these companies are now complaining that new government health regulations may prevent them from helping insurers market these policies at all.

Making Business Difficult

How is the federal government making business difficult for insurers that offer mini-med plans? One new legal restriction is a requirement that all plans spend at least 80% to 85% of their revenues on medical care. Many mini-med insurers spend far less than this percentage on health care services; they explain that their average policy payment tends to be relatively small, while their administrative costs in total are large and fixed in nature. Thus, on a percentage basis, they assert that far more than 15% to 20% of their total revenue must inevitably be dedicated to paying administrative costs.

Another new legal restriction prohibits insurers from placing certain limits or “caps” on payments over specific periods of time. Coverage limits such as “one hospitalization per year” run afoul of this prohibition; mini-med plan providers are now arguing that unlimited or “uncapped” exposure to multiple claims would drive them out of business.

Such concerns have led supporters of mini-med plans to request waivers of these new regulatory requirements. Although McDonald’s publicly denied that it explicitly requested such a waiver, the Wall Street Journal reported last week that the firm indeed did so. Then, on Friday, HHS formally confirmed that it is evaluating a number of such waiver requests.

Is It Really Insurance?

There is, of course, an underlying question whose answer may determine how HHS establishes health policies for the mini-med industry sector; namely, is a mini-med plan actually a health insurance policy at all? If it is, then the new health insurance regulations may inevitably apply to it. But if it isn’t, then regulatory waivers or exemptions may indeed be granted by HHS.

On the one hand, any health cost reimbursement contract that pays a mere flat fee of $1,000 for a multiple day hospitalization cannot rationally be considered a comprehensive insurance policy. Aflac itself acknowledges this fact on its home web page, stating that “Aflac is not major medical insurance. Aflac pays you cash benefits when you are sick or hurt to use however you want.”

In other words, Aflac is disclaiming any responsibility for covering the full costs of health care. To the contrary, the firm urges individuals to spend their proceeds however they want, and not to rely on its payments exclusively to finance health care costs.

Nevertheless, the page title of Aflac’s internet home page is “Supplemental Insurance for Individuals, Insurance Coverage.” And the page title of its employer business web page is “Health Insurance Policies, Employee Benefits Program.” In other words, while Aflac disclaims any responsibility for paying “major” insurance claims, the firm does refer to its own products as “health insurance policies.” And it is explicitly positioning its program as an employee benefit.

Regardless of HHS’s pending policy decision, certain constituencies will clearly be dissatisfied with the direction of health insurance reform. But who could have predicted that one source of this dissatisfaction would be the smallest health insurance policy of all: the mini-med?

Health Systems and the Public Interest, Part II

You lie!

That’s the shout that rang out across the venerable chamber of the United States House of Representatives last week. It was hurled across the room by an angry politician at the President of the United States during a nationally televised speech at a joint session of Congress.

No such brazen heckling had ever occurred in the history of the republic. After being chastened by members of his own Republican Party about his grievous offense, the Congressman issued an immediate apology to President Obama. Nevertheless, commentators across the nation decried the coarsening of our social and political discourse.

But let’s consider the condition of our society for a moment. In retrospect, isn’t it a bit surprising that it actually took so long for this to happen? Politicians have been demonizing each other for many years, and have watched their supporters attend and disrupt the public events of their opponents. Sooner or later, it was inevitable that such incivility would seep into the hallowed halls of Congress.

So what has protected our federal government from such unruly outbursts until now? Most likely, it has been sheer institutional inertia that has protected our government from the coarsening effects that have plagued our society, inertia that is also impeding – and perhaps protecting as well – our health care system from the upheaval of massive reform.

Government Inertia

Last week’s Part I of this column concluded by noting our public consensus that the federal government should play some role, even if just a limited one, in ensuring health care access for all Americans. It explained that such a consensus places politicians squarely in the midst of all reform efforts, which proves to be both a blessing and a curse to innovators who are seeking to improve the system.

On the one hand, intense government involvement is a mighty force that applies the powers of legal regulation and budget spending to enact sweeping change. But on the other hand, such involvement is also a deadening force that buries the possibility of change under a blanket of feasibility studies, public feedback meetings, and arcane parliamentary activities.

Our government is indeed a massive bureaucracy that, like any huge organization, struggles to adapt to changing conditions across numerous sectors. Financial service industry reform initiatives, for instance, are now stalled despite the recent bank-induced economic collapse that almost plunged the world into a Second Great Depression. And although scientists agree that global warming will dramatically affect future climate conditions, a national plan that effectively addresses the challenge remains elusive.

National Health Care: How Did We Get Here?

Our entire national health system, of course, can be characterized as a haphazard collection of programs that were originally created under social conditions that are now obsolete. The programs, though, have never been modified to adapt to contemporary conditions because of government inertia.

Consider, for instance, the motley assortment of health programs that cover the majority of working adults in this nation; namely, plans offered by for-profit insurers. Why are employers involved with their employees’ personal health insurance policies at all, as opposed to their personal property or liability insurance policies? Well, they only began offering health insurance as a fringe benefit when the government temporarily placed price controls on wages, and simultaneously made business expenditures for employee health insurance contracts tax deductible.

Health benefits were then viewed as a simple avenue for modestly increasing employee compensation at a time when wage increases were prohibited. Today, of course, wage increases are commonplace … and yet the government regulated system of health insurance remains rooted in place.

A similar situation exists in Medicare, the federal program that insures all citizens over 65 years of age. It was originally created during the Johnson Administration’s War on Poverty to provide an affordable and relatively inexpensive array of medical services to seniors in the final few years of their lives.

Today, of course, it covers an overwhelming array of incredibly costly services. And many seniors now live well into their 80s, 90s, and even their centenarian years, relying on Medicare to finance their care for many decades. And yet the government system of insurance for such individuals remains rooted in its original form.

What Comes Next?

President Barack Obama entered public office with a promise to enact Change We Can Believe In. And citizens across the ideological spectrum agree that change is indeed required to address the various failings of our national health system. But can we actually believe that our government possesses the will and the ability to enact such change?

In today’s volatile social and political environment, it is undoubtedly a fool’s game to undertake predictions about any proposed legislative initiative. Nevertheless, considering the government’s longstanding condition of institutional inertia, it may be unrealistic to hope that truly universal coverage will become a reality in the near future.

Insurance reform? Yes, that is realistic … and in fact is likely. An expansion of new initiatives to serve the uninsured? That too is realistic … and would actually represent a continuation of trends that have promoted programs such as Medicaid and CHIP.

But government legislation that would provide every legal resident with universal health care? Though we can always hope for such an outcome, it may be unrealistic to expect one any time soon.