Health Care and Jobs

Today’s Managing Health Care Costs Indicator is 430,000

Click image to enlarge.  Source

That’s how  many jobs were created in the health care industry during the recent recession, while 7.5 million jobs were lost in the overall economy.    This was reported on the front page of the business section of last Thursday’s New York Times. 

I’ve written about this phenomenon before. Earlier this month , I pointed to the increase in health care jobs in July.  In June, I talked about the pain of hospital closings. A year ago I noted the pain of hospital cuts.  .  In late 2009, I talked about the disconnect between growth in health care jobs and controlling health care costs. Health care jobs are good for local economies, although if we have robust growth in health care jobs, we aren’t going to “bend the cost curve.”

This week, the Center for Study of Health System Change released an excellent monograph detailing the reasons for our ambivalence about creating more jobs in health care.   They point out that the costs of some expansions of health care are borne by the local economy (individual and small business  health insurance), while other expansions of health care (like Medicaid and much of Medicare) are funded from outside of the local economy.  The sum of the costs of health care expansions funded from outside of the local economy is between 57-75%.  Hence, even as Washington wants to cut Medicare expenditures, local governments and hospitals push to expand health care, knowing that the bill is being funded by others.  

The Commonhealth blog  has an excellent meditation on capital expenditures at Partners Health Care here in Boston, with a thoughtful interview with CFOPeter Markell .   Bottom line – we all want more capital investments so that we can get the latest and best medical care, which we truly value.  Further, more capital investments in health care, unlike many other industries, have usually been associated with higher employment.  The ugly underbelly of capital investment, though, is that new investments mean higher operating costs and higher debt service that will require higher medical bills in the future.

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Health Care Cost Containment in Massachusetts

 The battle continues to be sure that close-to-universal health care doesn’t break the state budget and the budget of small businesses –and there have been three interesting developments over the past week.

1. The state Division of Insurance, which rejected proposed rate increases for dozens of small group policies, is playing hardball.  It threatened fines if health plans did not return to writing small group and individual policies at 2009 rates – and a judge rejected the health plans’ request for an injunction.   Most of the health plans have complied – although Harvard Pilgrim and Fallon  again submitted rates higher than the state wants (stating that other policies with these rate increases had been approved earlier in the year.   

The DOI is in a bind – if it is successful at forcing these lower rates on the health plans, they will lose substantial amounts of money – and the DOI’s other job is to be sure the health plans are adequately capitalized so there is no risk they will collect premium revenue and not be around to pay for related claims.   The health plans are in a bind, because they’ve negotiated multi-year deals that lock in their unit costs in fee for service contracts – so they’ll need lower utilization and/or concessions from providers on unit price to make this sustainable.

2. Partners (Mass General, Brigham and Womens and others) announced that it would give insurers rebates of a total of $40 million  this year to support selectively lowering rates for small business.   Interestingly, Children’s Hospital did something similar – announcing a price rollback in exchange for some up-front payment to build infrastructure, in fall, 2009.   Other hospitals  are figuring out their next steps – Partners and Childrens are both paid rates higher than other providers – so these rebates probably still don’t level the playing field, and it will be hard for the lower-paid facilities to match this.

3. State Senate President Therese Murray  outlined her plan to control health care costs, with initiatives including

·         Insurers would gain approval of their proposed rate increases as long as they pledged  to have “medical loss ratios” of at least 90%.  This means that 90 cents of every dollar would go to paying medical claims – the other 10% would include all administration costs including marketing and profit  (or reserves for nonprofits).

·         Allowing insurers to change rates based on age (rather than 5 year age group), which will mean no huge rate increases when someone turns 50, for instance).  Also, allowing insurers to increase base rate if necessary to prevent a “rate shock” to a specific subgroup

·         Annual enrollment (to prevent people from coming into the insurance system for an elective procedure, and then leaving again)

·         Prohibiting those eligible for employer plans from entering the individual market (to avoid adverse risk selection)

·         High risk reinsurance pool

·         Require narrow network products with lower cost. 

·         Give a 5% discount to employers who establish a wellness program

·         Ask for $100 million in contributions from providers in good financial shape

·         Establishing a purchasing coalition for small groups through the Connector

·         Review all mandated benefits every four years

In my opinion, the most important effort here is the narrow network option.   This has the potential to substantially lower unit cost – in part because narrow networks encourage providers to compete on price (There is no reason for providers to try to deliver a lower price to an all-inclusive network, as they maintain very high leverage when every health plan needs every provider).  The Globe today  offers some evidence that narrow networks are starting to gather some momentum.

Avoiding adverse risk selection is critical (article in tomorrow’s NYTimes shows what happens if the healthy opt out of  purchasing insurance.)  Therefore, it’s important to require an  annual enrollment only, as well as to guard against employers sending a few sick individuals into the small group market.

Small businesses overestimate the savings they’ll get from group purchasing – the larger groups are less expensive because there are genuinely lower administrative expenses for insurers to enroll 25,000 covered lives all at once, rather than as 1000 separate 25 person companies, and because there is less opportunity for adverse selection in a large company than with multiple small companies.  I did a more complete review of the reasons why small companies pay more in Fall, 2009. 

Wellness programs are not likely to save 5% in the first year or more when they are implemented. Therefore, a mandate to offer small businesses with wellness programs a 5% discount will raise the cost of health insurance for all.  It’s not a bad idea – and might lead to better, healthier lives.   However, this is not going to help us control health care costs over the next 1-3 years.

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Will Shaving a Half Trillion Dollars from Medicare Save Money?

It depends.

The Medicare cuts will certainly save the federal government money – that’s why the Senate and House health care reform bills cut the deficit over the next ten years.   However, whether they lower the overall cost of health care really depends on whether resource costs are diminished, or whether costs are just shifted from Medicare to other payers.

Here’s a graphic from Tom Bodenheimer seven years ago, showing that Medicare has been very effective at lowering rate of health care inflation – a contrast to the sustained high rate of inflation of private health insurance premiums .

 Abstract 

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Here is the counterpoint, also a graphic from Health Affairs, showing the estimated cost shift from Medicare (and Medicaid) to private payers. 

Abstract 

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So – will the half trillion in Medicare cuts lead to cost shifting to other payers?

David McGuire, VP for Contracting at Partners, is quoted in today’s Boston Globe  that low Medicare rates are the cause of high prices for non-Medicare patients. 

The Medicare cuts (from a memo from the CMS Actuary)

- Medicare Advantage Plans ($201billion)

- Provider payment cuts – adjusting for productivity increases over time ($282 billion)

- Pharmaceutical cuts ($129 billion)

Medicare Advantage cuts will likely lead to lower enrollment in the private plans, and increases in premiums and cuts in benefits for some beneficiaries.  This is not likely to create much cost shifting.

Provider payment decreases could mean increased cost shifting to the private sector.  It’s likely that this will lead to some substantial efforts to lower the cost of care delivery.  Note also that some provider fee cuts might just not happen.  The AMA has successfully pressed for reversal of physician fee cuts each year, and hospitals are now complaining that their agreed-to lower increases were contingent upon a more substantial decrease in the uninsured than would be accomplished under the current Senate bill.

Pharmaceutical cuts  are likely to lead to higher utilization – so overall costs might not decrease.  Assuming that the higher utilization is for cost-effective medications, we could be purchasing high value from the increased drug spend (but we probably won’t save money).

Health care cost increases are complex and multifactorial.    Large Medicare cuts could lead to higher value from health care delivery – but are not likely to lead to dollar-for-dollar decreases in overall health care costs.

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