Consumer Power Report #209

First, there is AARP. This whole bill is “paid for” through two sources–about half-a-trillion in tax hikes, and another half-trillion in Medicare cuts. AARP traditionally has been a vehement opponent of Medicare cuts of any kind, but not this time. Why? Because much of those cuts come from cutting Medicare Advantage.

Medicare Advantage enrolls 10 million elderly and provides such generous benefits that these folks do not have to buy “Medicare supplemental” coverage to fill in the many holes in regular Medicare. But AARP makes a fortune selling MediGap coverage–indeed, the whole organization is nothing more than a marketing scheme for selling this coverage. Getting rid of Medicare Advantage will create 10 million more people for AARP to sell coverage to.

So, who cares if the elderly are hurt? Who cares if their care is rationed and their benefits cut? Not AARP. In fact the less Medicare pays, the greater the need for AARP-endorsed Medicare Supplemental coverage. Take it to the bank.

Here again, the AMA has violated every principle it ever stood for. And not just principles, but the direct financial interests of its physician members. The official policy of the AMA is to fix the “Sustainable Growth Rate (SGR)” cuts in Medicare payments. The official policy is opposed to “Pay For Performance” schemes. The official policy is to protect the ability of physicians to practice medicine.

Yet all of these things have been thrown out the window, and the AMA still provides full-throated support to this legislation. Why? Well, for one thing the AMA’s membership is so reduced (it now represents only about 20 percent of all physicians) that the “real” doctors–i.e., the ones who actually see patients and rely on Medicare for part of their income–are no longer influential in the organization. The rest–corporate medical directors, professors in medical schools, medical students, etc.–aren’t worried that Medicare payments are scheduled for a 21 percent cut in a few months.

But there is a deeper reason, as well. As the Chicago Tribune reports, the AMA no longer gets most of its income from membership dues, but from having “the exclusive rights to the medical billing codes that doctors are required to use when they submit bills to insurance plans.” This is granted to it by the federal government and started with Medicare billing but was expanded to include private insurers as the result of the standardized billing required by HIPAA. So, the AMA is in fact a “partner” with the federal government. Any expansion of federal health care is a boon to AMA finances.

So, who cares if physicians are hurt? Who cares if their practices are dictated by bureaucrats and their pay is cut? Not the AMA. In fact, the more the federal government does, the richer the AMA gets. You can take that to the bank, too.

The Pharmaceutical Research and Manufacturers of America (PhRMA). In one of the most amazing turnabouts ever in Washington. PhRMA went from full-throated opposition to ObamaCare to full-throated support–in just a matter of months.

On November 14, 2008, just a week after the election, the Washington Times reported, “The nation’s largest pharmaceutical lobbying group is preparing a multimillion-dollar public relations campaign to tout the importance of free-market health care and undercut an expected push by the Obama administration for price controls of prescription drugs.” The article went on, “the stakes are especially high for drugmakers, which stand to lose as much as $30 billion in revenue if President-elect Barack Obama’s plan to let the federal government negotiate Medicare drug prices is implemented.”

Just nine months later, in August 2009, the publication Medical Marketing & Media was reporting just the opposite: “PhRMA will launch a big advertising push for healthcare reform later this week, with TV spots airing in key states and on cable channels nationally.” The story continues, “News outlets including The New York Times and the Associated Press put spending on the ads in the range of $150 million–a figure that PhRMA SVP Ken Johnson called speculative.”

What happened? The story quotes PhRMA president Bill Tauzin, “We were assured [by the White House]: ‘We need somebody to come in first. If you come in first, you will have a rock-solid deal.'”

Apparently, PhRMA agreed to $80 billion in cuts aimed at filling the Medicare drug program’s “donut hole” and to spend $150 million in advertising to support Obama in exchange for a pledge that the White House would oppose price controls and re-importing drugs. This was probably the best deal of the lot. There was a direct quid pro quo and each side got what it wanted–for now.

Problem is, of course, that these deals don’t last. Deals with the Devil never do. There is already pressure from the left to scuttle this one, as witnessed in a report that ran on Air America that called the deal the “absolute fascist nightmare.” And meanwhile, the rest of us are left in the dust, subject to all the mandates, taxes, and penalties of the rest of the legislation.

The health insurance industry has become the poster child for everything that is wrong in American health care. This is not fair, but it is not entirely wrong, either. It is true that third-party payment is the cause of most of the problems we have. This underlying reality was aggravated in the 1990s with the industry’s misadventure with managed care. The industry squandered any good will it might have had with the public by becoming the force that stepped between patients and doctors. It quickly became the most-reviled industry in the country.

So it did not have a lot of cards to play when this new challenge came along. It has been trying to cut deals to survive. It has offered to give up most of its controversial practices in exchange for a guarantee of new customers. But like most political deals this does not result in very good public policy.

In fact, most of what the industry does is entirely defensible. Risk-based rating and medical underwriting are important tools in this business. The real problem for the industry is that it has become too intrusive in medicine. Insurance is a financial service, not a medical service. But the people who run the companies have gotten confused about their mission. This is the lingering effect of managed care.

There was hope that, with the advent of consumer-driven care, the industry would return to its core competency: pooling risk and adjudicating claims. But that would have required a considerable downsizing of the companies. They might have been smaller, but more efficient and more profitable. But power is hard to surrender once you have it. The industry was not willing to step away from managing care to focus on financing care.

So now it has surrendered. It is content to become a highly regulated public utility as long as it gets to stay in business. It has already given up on underwriting and has even accepted price controls and minimum loss ratios. In return it wants no “public option” and a strict mandate on individuals to buy what it sells. But it has already lost on the strict mandate. The Senate bill has a weak mandate that will invite the young and healthy to stay out of the insurance market until they become sick.

It is certain that this legislation will dramatically raise premiums and will fail to cover many more people. So, in a few years the stage will be set for a complete government takeover. The argument will be that we tried using the private sector and it failed. But by then AHIP leaders will be retired and living in luxury in Italy, so who cares?

The biggest puzzle of this season is NAHU. Now, many agents and brokers have been saying for many years that people should be required to buy coverage and that insurers should stop denying applicants. It is an understandable sentiment, It would certainly make the job of an agent easier. But there is a price to be paid.

Whenever reformers talk about cutting administrative costs, what they really mean is cutting out the middleman. That is the low-hanging fruit of administrative costs. In this case, with the loss ratio requirements and the insurance exchanges, there is virtually no role for agents and brokers (known collectively as “producers’) and no money to pay them. Indeed, the job of the producer has been made so easy, there is no longer a need for them.

NAHU has sacrificed a lot to get its seat at the table. But it has very little influence, so I’m not sure what good it has done. On the eve of the Senate cloture vote, NAHU President Janet Trautwein sent a strongly worded letter to the Senate complaining about what is in the bill. This was literally just hours before the vote. Kind of late in the game.

One of her biggest complaints was that the bill was insufficiently punitive! She wrote, “Under this legislation, millions of healthy individuals will likely find it more financially advantageous to forgo coverage until they are sick and then utilize the guarantee-issue protections to temporarily obtain coverage and then drop it again.” That is undeniably true. It is in fact exactly what I plan to do if this thing ever goes into effect. But her remedies are draconian. She would:

• Make financial penalties “in line with the actual cost of coverage.”

• Apply late-enrollment fines “in addition to other penalties for those who have more than a 63-day break in coverage.”

• Have an annual open enrollment period so people cannot just come in and out at will.

• Require employers to help with enforcement through automatic enrollment.

• Require employers to reveal to the government anyone who opts out of the employer’s plan.

• “Requir(e) coverage verification as a condition of receiving services at facilities like the state department of motor vehicles, schools and hospitals.”

Now this is a peculiar way to represent the interests of one’s clients. But NAHU doesn’t like to be criticized. The last time I questioned its strategy, they complained to my employer, and then told me to stop sending this newsletter to anyone employed by NAHU.

It’s a pity. I have always supported the role of brokers and defended them against attacks by single-payer advocates, over-zealous regulators, physicians, hospital administrators, and other critics. I think they serve an important role, especially with small employers who don’t have the time to become well-informed about their coverage options. I think it’s tragic that NAHU is letting them down.