Consumer Power Report #173

Published April 10, 2009

Pretty long issue this week, so I’ll keep this introduction short. Have a joyous Easter.



I have been remiss in not reporting earlier on an important study by the actuarial form Milliman, issued in December 2008. This study tries to balance the hysteria about cost-shifting from the uninsured to people with private coverage with an analysis of how much cost-shifting is the result of underpayment by Medicare and Medicaid.

The answer, it turns out, is that underpayment by those two public programs dwarfs any problems created by the uninsured.

The study separates out payment to hospitals and to physicians. It does not attempt to tackle prescription drugs, home health care, nursing home care, or any of the other covered services. It finds that Medicare underpays hospitals by $34.8 billion and physicians by $14.1 billion, while Medicaid underpays hospitals by $16.2 billion and physicians by $23.7 billion. These amounts are made up for by commercial payers, resulting in 18 percent greater costs for private carriers for hospital services and 12 percent for physician services.

Of particular interest is a table showing the hospital operating margins by payer category. In 2006 hospitals lost:

  • $19.4 billion on their Medicare cases, for a negative margin of 9.4 percent;
  • $10.7 billion on Medicaid cases, for a negative margin of 14.7 percent; and
  • $12.7 billion on “other government and self-pay” for a negative margin of 25.1 percent.

This last category includes the uninsured, but also government programs such as workers compensation, the military, native Americans, and programs for the indigent. While the negative margin is very high at 25 percent, the actual dollar loss is small compared to Medicare and Medicaid–$12.7 billion vs. $30.1 billion.

Milliman does not separate out the uninsured self-pay population from those covered by other government programs, but if one-half of this loss is from the uninsured, we are looking at approximately $6 billion, one-fifth of the loss from Medicare and Medicaid!

Yet the issue of uncompensated care for the uninsured is one of the primary drivers of the current push for mandatory coverage and health reform. It has been called a “hidden tax” that we all pay for, and it is seen as justification for a massive reordering of the entire health care system. But hardly any attention is paid to underpayment by public programs, a problem that is perhaps five times greater.

And you wonder why public policy so often goes astray.

SOURCE: AHIP press release and link to study


It is worth keeping the Milliman study in mind when looking at the current dispute over a “public option” based on Medicare that might be included in a national health insurance exchange.

The Lewin Group has released a report that has stirred up a lot of controversy. It says, “The public plan is difficult to evaluate because no one has specified in legislation how it would work.” But if the public option uses Medicare payment levels, premiums should be 30 percent less than current private options, and if enrollment is open to all, 131 million people–119 million of whom currently have private coverage–would likely sign up for it.

Lewin makes a lot of assumptions in its calculations, including that the public option would have benefits similar to the standard Blue Cross Blue Shield option under FEHBP–which, of course, is nothing at all like Medicare. It also assumes all of the following:

  • There would be a mandate for children to have coverage;
  • Medicaid eligibility is expanded to include all adults living below 150 percent of the Federal Poverty Level (FPL), including able-bodied adults without custodial responsibilities for children;
  • Tax credits are provided to people purchasing private insurance who live between 150 percent and 400 percent of the FPL;
  • Medical underwriting and health status rating is eliminated in all insurance markets, but rating by age is permitted;
  • Large employers are required to offer insurance or pay a payroll tax; and
  • Tax credits are provided to small employers (fewer than 10 workers) with low-wage workers for up to 50 percent of employer spending for worker coverage.

I won’t go into any further detail. The paper is pretty short and well-illustrated, so you can read it for yourself.

I will say this, however. I’ve read a lot of Lewin studies over the years and it pays to keep a large dose of skepticism on hand. Lewin always manages to come up with exactly the results its funders are hoping for. In a case like this, where the parameters are anyone’s guess, it is impossible to say anything definitive one way or the other.

In this case, I think Lewin makes several important mistakes:

  • It overstates the administrative costs of private plans. For example, it assumes that private plans would continue to pay broker commissions as they do currently, but the whole point of the “health insurance exchange” is to get rid of brokers.
  • It understates the effect of Medicare payment on provider behavior. Faced with Medicare-level payments and restrictions for a large majority of their customer base, many doctors will stop accepting Medicare or go out of business entirely. If hospitals can no longer shift costs to the private sector, many will close their doors.
  • It also ignores the impact of government bureaucracy on patient behavior. It is almost impossible to get a customer service question answered from Medicare as it is. If the program triples in size it will be even worse. For that and many other reasons, most people would be loath to enroll in a Medicare-type program.

Lewin also assumes the number of uninsured would plunge by 28 million, whether the public plan is open only to individuals and small firms or open to all, so there would be a major decrease in uncompensated care. They assume the lower cost of coverage through a public plan would inspire many more people to become insured. I doubt it. We already have 15 million people who are eligible for completely free Medicaid or SCHIP and haven’t enrolled. And there are many millions more who decline employer coverage even though it is heavily subsidized.

At the risk of being burned at the stake for heresy, maybe having a public option wouldn’t be such a bad idea. Such a program would be clumsy and inefficient, featuring lousy customer service, disgruntled providers, and restrictions on access to care far beyond anything we saw with HMOs. If it replicated Medicare benefits, with no limits on out-of-pocket costs and such lousy coverage people would have to buy a second policy just to fill the gaps, who in the world would buy it? Maybe we should take the challenge–provided, of course, that people on Medicare and Medicaid also had the right to participate in all the choices available.



The Heritage Foundation published a “Web Memo” by Robert Book that anticipates many of the problems with government control, either through a public option or a single payer. He says federal domination of health care payment would do all of the following:

  • Result in substantially lower payments to physicians and other health care providers compared to a multiple-payer system;
  • Reduce the quality of care by limiting the ability of physicians to invest in advanced medical equipment that takes advantage of new technology;
  • Limit access to care in the near term, as current physicians and other professionals retire earlier or otherwise leave the profession;
  • Limit access to care even more substantially in the long term, as the prospect of lower lifetime earnings reduces the incentive for talented people to choose careers in health care; and
  • Reduce the rate of medical progress, because fewer talented people receiving medical training decreases the supply of talented medical researchers.

SOURCE: The Heritage Foundation

Grace-Marie Turner of the Galen Institute agrees in an op-ed in the Modesto Bee headlined, “Health care reform will raise costs, reduce quality.” She points out, for example, that, “The president is working with congressional leaders to write legislation that would require companies to provide a rich health benefits package–one more expensive than most can afford today. Companies that don’t comply would pay heavy fines. This is hardly a prescription for reducing costs.”

SOURCE: Modesto Bee

Devon Herrick of the National Center for Policy Analysis wrote a Brief Analysis on “The Folly of Health Insurance Mandates.” The piece summarizes the drawbacks to all the different approaches to mandatory coverage. There was one mistake in the analysis, however, one that is shared by a lot of people–the scope of ERISA. Mr. Herrick asserts that ERISA pre-empts mandatory coverage only for self-insured employers. In fact, ERISA’s preemption applies to all private employers, insured or self-insured, large or small. It gets confusing because ERISA allows the states to regulate insurers, so employers who are too small to self-insure are indirectly affected by insurance regulations like mandated benefits (coverage of psychiatric social workers, for example.) States can tell insurance companies what to do. They cannot tell employers what to do.

SOURCE: National Center for Policy Analysis

Mr. Herrick also had fun at a conference on health reform at Susquehanna University recently. He did battle with a bunch of single-payer advocates and got a nice write-up in the local paper.

SOURCE: Daily Item

I was quoted in an article in the Denver Post on pill-splitting. I made the point that if consumers are going to be asked to go to the trouble of splitting their pills, they should be rewarded with the savings. Obviously with an HSA they get 100 percent of the benefits, but even without an HSA the insurer should send them half of the money saved.

SOURCE: Denver Post

News Blaze published an op-ed I wrote on how often we have been through all this before. Once a bill is passed, “bells will ring, flags will fly, and bands will play for the signing ceremony. Grand speeches will be made about how ‘we have given you health care.’ But in the end it will never be implemented, or it will solve nothing and may even make the problems worse than they were before.”

SOURCE: News Blaze


Now, here is an odd story from the Boston Globe. The article by Kay Lazar is headlined, “State Mandate Not Driving Health Coverage Costs.” This, even though health care spending in the state rose 23 percent from 2007 to 2008. The story argues this huge increase is not because of the state law, since “employers, consumers, and state government paid the same, proportionately, for health coverage after 2006 as they did the year before the initiative started.”

It quotes a Michael Widmer, president of the Massachusetts Taxpayers Foundation, as saying, “With all the criticism from the left and the right before health reform started–that individuals will have to pay more or that government will have to pay too much–this says both of the concerns are unfounded.”

I guess it’s okay that costs have risen 23 percent in one year because everyone is paying 23 percent more.

The article also says, “Sixty percent of the rise was due to healthcare inflation unrelated to the law.” Yet no other state is seeing this magnitude of increase, so how in the world can they separate out the new law from everything else? The article also says, “another 31 percent was linked to new enrollment in already-existing programs, such as employer-paid healthcare or Medicaid.” But this isn’t attributed to the new law … even though the law requires people to enroll in whatever coverage they can find?

Man, talk about desperate rationalizations. Ms. Lazar also needs to be reminded that every penny that is spent on health care comes from the consumer. If government is paying 23 percent more, that means taxpayers are paying 23 percent more. If employers are paying 23 percent more, that means employers have 23 percent less to pay in wages.

SOURCE: Boston Globe


Ian Duncan of Solucia Consulting writes that the Commonwealth of Pennsylvania has issued an RFP for disease management services for its Medicaid program. So far, so good. But the RFP is 433 pages long! He says, “That’s 433 pages of fine-print and rules that bureaucrats set up to manage the relationships between patients and their doctors–and this is just the RFP! I despair, I really do, because coming soon to a National Health service near you is the same kind of thing on a national scale.”

Bill Boyles of Health Plan Wire writes, “A spot survey of health IT vendors at the biggest IT trade show Monday found common agreement that about 60 percent of companies hoping to bid for federal funding under the new economic stimulus bill are already obsolete and may not survive.” He says doctors offices, hospitals, and clinics have been and will continue to buy systems that will be obsolete within 12 months when the new federal IT standards come out.

He adds, “A second category is venture capital firms and banks, which still have not realized they are backing IT startups which are already obsolete and cannot possibly compete under new federal benchmarks without re-writing the entire application at great cost.”

He quotes Kaiser’s George Halverson as saying, “It would be breathtakingly stupid to put health care data on the computer and end up with the same sets of isolated, inaccessible, non-interactive information silos we have now with paper medical records. We need all of the information about each patient. We need that information all of the time–whenever and wherever care is being delivered.”

He adds, “CIGNA health IT guru Paul Oates complained at one session that the federal IT blueprint released so far does not interact properly with 170 million private health plan records. The panel said they will try to work on that but would press ahead with statutory deadlines.”