Taxing Employer Sponsored Health Insurance?

Well, we’ve come to the end. This is the final post in the multi-part series on the Burr-Hatch-Upton proposal known as the Patient CARE Act. This one is all about taxes. Specifically, it’s about repealing all of the taxes introduced under the Affordable Care Act (ACA), and introducing new taxes to replace them. The focus of the proposal is on “a distortion in the tax code–the unlimited exclusion from a worker’s taxes of employer-provided health coverage.” The proposal underscores that this is “important because economists across the political spectrum largely agree that the current distortion in the tax code helps to artificially inflate the growth in health care costs.” They’re right. It does.

During the second World War, there was a shortage of workers, and Congress also enacted a wage freeze that made it difficult for employers to compete for the limited supply of employees by paying them more. They found a loophole though. By offering employees benefits, including health insurance coverage, firms were able to recruit good workers. After a few years, Congress passed a law making these health insurance benefits tax exempt for both the employee and the employer. Making employer-sponsored health insurance tax exempt is akin to subsidizing it (from the government’s perspective), and it resulted in people purchasing more health insurance than they might have otherwise. Then, having the additional insurance, they became more likely to utilize health care and utilize more of it, which fueled the increase in costs in two ways: First, insurance shielded people from actual prices, so prices increased more rapidly than they would have otherwise. Second, utilization increased. Health care expenditures are simply the product of prices and utilization.

To address this issue, the ACA instituted the so-called “Cadillac tax” which, as the Burr-Hatch-Upton proposal states “imposes an across the board 40 percent excise tax on the benefit plans above its stated limit regardless of an individual’s income.” This tax is charged to insurers (or employers in the case of self-insured firms) in hopes that they will stop electing to provide such generous health insurance coverage. Of course, there is nothing to prevent an employer from passing these costs on to their employees, but it seems like they’d probably not want to touch their wages and would first elect to scale back their benefits. By contrast, the GOP proposal “caps the tax exclusion for employee’s health coverage at $12,000 for an individual and $30,000 for a family.” These amounts are indexed to the consumer price index plus 1 percentage point to account for inflation.

So, looking at these two options side-by-side, we have the current law, which charges insurers a 40% tax for overly generous insurance plans to discourage their issuance, and we have a proposed law that would require any individual whose insurance coverage costs more than $12,000 (or $30,000 for family coverage) to pay taxes on the amount of coverage above those levels as if it were income. What this guarantees is a shift in the tax burden from the insurer to the employee. Therefore, the proposal’s claim that “middle-class families with employer-sponsored coverage would fare better under our proposal than under ObamaCare” is not true. In the worst case scenario, the Cadillac tax and the cap on tax exempt benefits are practically synonymous, with the primary difference being that the GOP proposal actually raises the level for tax exemption (or thought of differently, it keeps the Cadillac tax, but raises the threshold for what is defined as a Cadillac plan). The other distinction is that the Cadillac tax is a flat tax (40%) of the value of the plan–therefore it treats all expensive plans equally. Meanwhile, the GOP’s proposal taps into the progressive income tax structure of the United States. This means that on the one hand, wealthy individuals will pay a higher tax rate on the amount of their plan’s value above the threshold, but it also means that, on the other hand, they are getting a bigger tax break on the amount of the insurance that they are getting tax-exempt. The reality is that most lower income people will not likely have an individual plan that costs $12,000, whereas higher income earners very well could. Thus, you have a situation wherein the low income person gets a tax break on their $5,000 policy, which saves them from paying their lower marginal tax rate on that $5,000, while the high income person gets a tax break on their $12,000 policy, which saves them from paying their higher marginal tax rate on that $12,000. Which is a bigger benefit: 10% of $5,000 or 35% of $12,000? You do the math.

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Seeing Through the Patient CARE Act: Why Transparency Won’t Fix Our System

The Burr-Hatch-Upton proposal known as the Patient CARE Act would like us to move towards a system of transparency in health care that will “inform and empower patients.” The longstanding belief is that if we just give consumers more information about their health care, they will make more rational decisions, there will be increased competition, and the quality of health care will improve as the cost of health care comes down. A little over a year ago, I wrote about why I think this won’t work. A lot of things have changed since then, but my opinion on this issue is not one of them. I’m not suggesting that improved transparency in health care is a bad thing. Far from it. It can certainly help by putting pressure on providers to improve quality, and for some more elective procedures, it may even bring costs down, but it’s not going to dramatically change our health care system. The simple reason is that health economics is a field unto itself. The typical notion of a rational consumer, supply versus demand, and the market clearing price are not givens in health care. On the contrary, when you fall to your knees with chest pain, you go to the nearest hospital that will take you when the ambulance radios them. You don’t comparison shop and insist on being taken to the highest quality hospital. But this rational model falls apart without requiring an emergency. Thanks to the asymmetry of information that exists between your highly educated and skilled health care provider and yourself, you are quite likely to get the test they order, take the medicine they prescribe, or undergo the surgery they recommend. You may Google your symptoms or see an ad for Cialis on TV and ask your doctor some questions, but most of us still defer to the person with the medical degree.

What types of information does the proposal want to make more transparent? Here’s a list:

• “Require health insurance plans to disclose covered items, drugs, and services; any plan limitations or restrictions; potential cost sharing; the actual cost of services; the claims appeal process; as well as the providers participating in the plan”
• “Incentivize states with enhanced Medicaid grants if they establish and maintain requirements regarding the disclosure of information on hospital charges and make such information publicly available”
• “Require hospitals who participate in Medicare to provide to consumers the average amount paid by uninsured and insured patients for the most common inpatient and outpatient procedures”
• “Publicly post their charity care policies along with the amount of charity care provided”

Again, none of the things in the above list are bad. I would be generally supportive of requiring health insurers to spell out more details about their plans (although I’d argue that most of this information is already made available to beneficiaries). I also think it’s a great idea to document charity care provision by non-profit hospitals that are enjoying a rather sizable tax break. On the other hand, I’m not too keen on the “enhanced Medicaid grants” if only because I don’t agree with the idea of block granting Medicaid at all to begin with. And I also don’t think that hospitals making their prices (well, amounts paid) public will do that much to bring prices under control. Still, this is, on the whole, one of my favorite sections of the Patient CARE Act.

 

Jennifer Salopek’s Wing of Zock Health Wonk Review Is Up

Wing of Zock hosts the Spring Break edition of the Health Wonk Review. There’s stuff in there from Wright on Health and Health Affairs, and that’s just scratching the surface. Go check it out now!

 

Medical Malpractice Reform Just Won’t Go Away

We’re continuing along in our section-by-section analysis of the Burr-Hatch-Upton Proposal to replace the Affordable Care Act (ACA), and today’s topic is reforming the medical malpractice system. The goal, as is made evident by using the phrase 4 times in the course of 3 paragraphs, is the elimination of “junk lawsuits.” The basic argument is that physicians practice “defensive medicine” to protect themselves from frivolous lawsuits, and that this practice of defensive medicine results in overuse of healthcare, which is costly and perhaps even harmful. In fact, the proposal cites a report from the Pacific Research Institute, which claims that “America wastes $589 billion on excessive tort litigation” annually. Three things about that. First, that figure is not specific to healthcare related tort litigation, but encompasses all tort litigation nationally. Thus, the citation of that figure is a tricky way to overstate the size of the problem. Second, the Pacific Research Institute is a highly conservative think tank that believes that “public policy is too important to be left just to the experts.” That makes it a little bit ironic when their figures are being cited as an expert source.Third, there are significant issues with the way in which the number itself was calculated, as this working paper from faculty at Penn, Minnesota, and Duke outlines.

The proposed remedy is to place “caps on non-economic damages and limitations on attorney’s fees.” The idea is that this will ensure that in actual cases of medical malpractice, patients will be able to sue to recover damages, but that the amount of awards will be reduced significantly, removing an incentive for physicians “to order unnecessary tests.” Here’s the problem: This type of tort reform has been tried elsewhere and it hasn’t really worked. For example, I’ve written about the limited impact of tort reform in Texas. I’ve also written about studies that show that malpractice reform could reduce healthcare spending by as little as 1% or as much as 10%, the tremendous variation in malpractice insurance premiums (covered this twice actually), and that malpractice insurance costs don’t alter obstetricians’ practice patterns. The other thing is that the ACA already incentivizes a shift from volume-based payment to value-based payment through things like accountable care organizations, bundled payments, readmissions penalties, and public reporting of quality data. So eliminating our reliance on a fee-for-service system of reimbursement to one more focused on outcomes is likely to reduce unnecessary utlization absent any tort reform. That said, I’m not opposed to tort reform. I think it could be beneficial. I just don’t think it’s going to save the day (in a lowering healthcare cost sense) to the extent that some people think it will. With that, I leave you my favorite prior post on the issue of medical malpractice reform. Enjoy!

 

JP Morgan Healthcare Conference Becomes A Shopping Mall For Wall Street

The past week, San Francisco was overrun with more neckties than the city has ever seen at one time. In customary form, the annual JP Morgan Healthcare Conference kicked off a global, multiday shopping spree and advertising expo for large and small, traditional and boutique, biotech and life science companies, and the investors who love them. It even draws thousands of entrepreneurs who head to San Francisco in spite of not gaining entry to JP Morgan, in the hope of rubbing some meaningful elbows at the numerous after-parties.

Like malls need big name department stores to anchor the venue and draw not only shoppers but also complementary retail and boutiques, JP Morgan has turned the once small and focused Hambrecht & Quist (H&Q) conference into a shopping center of options.  Anchor companies such as AbbVie, Pfizer, Merck and Johnson & Johnson support and aid in building a sustainable market around Union Square, while small and trendy events pop up in every nook and cranny in the city limits. One can even book a coffee shop table beginning at 6:00am for a meeting.

Billions of dollar under management, pensions, endowments and foundations – with mandates to invest in life science, biotech and health companies – are in one mall-like area to gather insights on market dynamics, hearing firsthand from the movers and shakers that claim to impact the market. Strategic meetings are arranged, CEOs spread the word, and new technology licensing deals are showcased as the next big thing.

“However, over the years, CEOs have found that they are not always satisfied with the audience for the presentations, which generally consisted of their own competitors, often trying to assess IP and third party service providers aiming to sell the CEO their services. Therefore, this year saw a plethora of new entrants,” says Dennis Ford, President and CEO of Life Science Nation (LSN), who joined the mix for the first time in 2015. LSN, whose conferences have previously existed in Boston, accelerates the funding of early stage life science firms via a Match.com-like sourcing platform for private investment, likely making CEOs more efficient in their capital raising efforts.

At the same time, major investment firms and marketing firms bought entire hotels for the week to host meetings on each floor, in each room, where beds were removed and folding tables set up in their place like Halloween pop-up stores.  The Trout Group did this on several floors of a hotel, hosting 1×1 off-the-record Management Access meetings with more than 70 companies. This year AirB&B also made a strong presence, as homes were rented for the same purpose due to lack of space in the hotels.

In it’s 33rd year as a conference, the only noticeable thing missing from the shopping spree were women and minorities, who seemed to be primarily concentrated in certain sectors and at certain events. One in particular was the Biotech Showcase, launched seven years ago by Demy-Colton Life Science Advisors and EBD Group. Their creation was in response to a demand from investors for a venue that showcased innovative private and public therapeutic companies, specialty pharma, platform and molecular diagnostic companies as investment opportunities. This year’s event had 230 presenting companies.

“We are seeing a strong uptake, especially with public companies. With more than 2,000 attendees, Biotech Showcase has become the place where innovative small to mid-sized public and private life sciences companies tell their stories to the investor community and build their profiles in order to attract funding and strategic partners,” says Sara Demy of Demy-Colton. Anna Chrisman, Group Managing Director of EBD Group added, “We are thrilled to provide a platform for investors and R&D companies to collaborate and pleased to see Biotech Showcase play a role in the growth of the industry.”

As the city of San Francisco takes back its casual demeanor, and the suited men of Wall Street head home, two things are for sure, there appears to be optimism and excitement for the year ahead in health investment, and the shopping center’s hotel bookings for 2016 are already getting slim.

 

A Medicaid Block Grant By Any Other Name Would Stink

The Burr-Hatch-Upton proposal to replace the Affordable Care Act (ACA) calls for a “transition to capped allotment to provide states with predictable funding and flexibility.” The focus of this section of the proposal? To fix an unsustainable Medicaid program. How do they propose to do this? By rolling back the Medicaid expansion and converting the Medicaid program to a block grant.

First, the proposal describes the fact that, under the ACA, the federal government pays 90% of the costs of the Medicaid expansion population (in states that have opted to expand). While that is totally accurate, what is less clear is why the proposal says that this financing arrangement is “unfair to the low-income mother with children or the elderly blind person–the kinds of individuals who Medicaid was originally designed to help.” It’s true that these are examples of individuals eligible for Medicaid pre-expansion, but it’s also true that the expansion doesn’t affect their Medicaid eligibility in any way. So it really isn’t clear what’s happening in this paragraph, other than an attempt to gain support by holding out two examples of “deserving” populations and claiming that Medicaid expansion harms them somehow.

Importantly, the GOP’s proposal would take away Medicaid eligibility from any low-income person who is not also a child, pregnant woman, family with children, elderly, or disabled. This is the world before the ACA–and the world that still exists in states that refused to expand Medicaid. A world where a person working full-time, but earning barely enough money to get by, does not qualify for Medicaid unless they happen to get pregnant. Later in this section of the proposal, it says: “These reforms would replace the outdated maze of confusing, burdensome, and costly rules with clear reporting standards.” Let me get this straight: Changing Medicaid eligibility requirements from “anyone earning below 138% of poverty” to “anyone who’s on this list of certain types of people and whose income falls below the specific income threshold corresponding to that particular type of person” is less confusing and burdensome? Oh, yeah, and remember those tax credits the proposal wants to offer people? They’re also going to allow people who qualify for Medicaid to opt-out of that program and use the tax credits to purchase private insurance. This is clearly a much more streamlined approach.

Second, the proposal outlines the GOP’s desire to convert Medicaid into a block grant. They use a variety of phrases like “capped allotment”, “taxpayer-provided pass-through health care grants”, and “defined budget”, but what they mean is “block grant.” What this means is that, rather than Medicaid being a program where your benefits never run out, Medicaid will be a program that ends when the money the federal government has decided to give the states runs out each year. For details, the block grant is to be based off the amount of federal spending on Medicaid from last year, allocated to states based on the size of their population below 100% of poverty, and adjusted for inflation by tying the grant to the consumer price index + 1 percentage point. The plan sells this as a way to “provide states with financial predictability and flexibility in designing and operating their programs…” Indeed, it would do that. But, you could also say it is a way to put states in the terrible position of having to suspend their Medicaid programs and deny benefits to their most vulnerable residents on a regular basis. There is little question that this would be an effective tool to control health care costs. The only question is at whose expense?

 

Health Wonk Review: Spring Forward Edition

This has been a record-setting winter, and not in a good way (Here’s looking at you, New England). It’s also been a volatile time in the world of health policy–and the ACA in particular. We’ve had the second open enrollment period come and go, the Supreme Court has heard oral arguments around the provision of federal subsidies to health insurance exchanges not run by the states, and three Republican members of Congress have come out with a proposal to repeal and replace Obamacare. With much of the country still blanketed by snow, and the fate of the ACA up in the air until the Court’s expected ruling on King v. Burwell in June, let me assure you that there is a light at the end of the tunnel. We’ve just moved our clocks forward one hour this week, which will usher in the longer days and warmer temperatures that so many of us desperately await. As the mercury climbs higher, the snow begins to melt, and policy wonks ramp up their prognostications, I offer this Spring Forward edition of the Health Wonk Review. I hope that it will help you shake off the winter blues and be better informed about current developments in the world of health policy.

It should come as no surprise that the overwhelming majority of submissions for this edition are focused on the Supreme Court and King v. Burwell. Writing at the Healthcare Economist, blogger Jason Shafrin does a good job of presenting an overview of King v. Burwell for those who are not thoroughly familiar with the case, what’s being argued, and what’s at stake. As such, this seemed like a fitting piece to lead things off.

A close second, thanks to its comprehensive tackling of the case, is the Health Affairs Blog. While they have an entire set of posts on the topic, I’m linking solely to a post by Tim Jost, which in turn links to all the others. Tim’s post delves into the nuances of the oral arguments, looking specifically at the doctrine of constitutional avoidance raised by Justices Sotomayor and Kennedy. Lest you think that means they were suggesting that the ACA is unconstitutional, it doesn’t. Rather, it means that they were suggesting that the ACA be interpreted in such a way as to “avoid any constitutional issues.”

If that’s not enough for you, I encourage you to check out a post by Billy Wynne of the Healthcare Lighthouse. Billy’s reading the tea leaves from the oral argument and offers up his top 6 most pivotal moments during King v. Burwell. Some developments that have flown under the radar are Justice Alito’s assertion that the decision could be stayed to allow time for Congress or states to respond, if necessary, and the challengers’ concession that the context of the operative provision of the ACA is important to interpreting it. Ultimately, the post suggests that it was a better day for the Administration but warns against drawing strong conclusions from oral arguments.

After something of a hiatus, Maggie Mahar is back blogging at Health Beat. In a post asking “Will the Supreme Court Scuttle Subsidies?” she takes a clear stance. The rest of her post’s title is: No. (What Can’t Happen Won’t). Her reasoning? Legal precedent doesn’t support cherry-picking from the text of the law out of context, the Court would undermine its integrity if it sided with the plaintiffs, and the political fallout would hurt Republicans.

By contrast, John R. Graham, a senior fellow of the National Center for Policy Analysis, anticipates that the Court will find for the plaintiffs and that millions of people who are suddenly without subsidies will drop their coverage. According to Graham, however, that is not the cause for alarm that many policy wonks are suggesting. Rather, this will simply be an opportunity for Congress to work with the President to fix the various elements of the ACA that nobody seems to like. The idea is that rather than making a simple fix, Congressional Republicans can use this as an opportunity to make more significant changes to the law.

One such proposal is that put forward by Senator Burr, Senator Hatch, and Representative Upton. They proposed what they are calling the “Patient CARE Act” and I have been writing about that plan extensively of late. I encourage you to read about starting with this overview before proceeding to learn about what the GOP would like to do that will lessen consumer protections, make life more difficult for people with pre-existing conditions, reduce the amount of federal subsidies for health insurance, give more power to the states at the expense of the people, and provide more tax shelters for the wealthy under the label of consumer-directed health savings accounts.

Regardless of the outcome of the case, Wendell Potter isn’t optimistic. In a recent piece for the blog at healthinsurance.org he writes: “Regardless of how the Court eventually rules in King v. Burwell, your premiums will likely go up next year simply because the justices agreed to take the case in the first place.” He goes on to explain how the case has introduced uncertainty into the rate setting process, and how insurers tend to hedge their bets against such uncertainty by raising rates. Under that logic, you can thank those who are trying to get rid of Obamacare for raising your insurance premiums.

Fortunately, for some states that have decided to run their own exchanges, like California, King v. Burwell is irrelevant. As Anthony Wright (no known relation–although maybe he and I share consider partnering up at Wright on Health) writes at the Health Access Blog: “We have our own state exchange, and while some worry about the political fallout, I have a hard time believing the President (or for that matter, Pelosi and Reid from CA and NV) would accept a compromise that undid coverage in the states that did the right thing, like California and Nevada. With a new President, all bets are off, but that was always true.”

And, while we’re talking about the states, it’s worth noting that many states are creating special open enrollment periods for residents who are just finding out about the individual mandate (and the associated tax penalty) when they go to file their taxes this year. The issue, of course, is that open enrollment ended February 15th, while the tax deadline isn’t until April 15th. Rather than penalize people for two years, states came up with the idea to let these individuals purchase coverage if they attest that they only learned about all these requirements to have insurance or pay a tax when they went to pay their taxes. But Louise at the Colorado Health Insurance Insider tells us that this won’t be happening in Colorado. According to the state’s insurance commissioner, Marguerite Salazar: “After considering all the factors and consulting with Connect for Health Colorado, the Division determined that the negatives of starting up another enrollment period outweighed the positives.”

Of course, not all wonks lead to SCOTUS. We also have a number of wonderful submissions on a variety of topics. Among these are David Williams’ piece on emulsifiers in the Health Business Blog. He highlights an intriguing and plausible new study in the journal Nature that suggests synthetic emulsifiers that are common in processed food could be a key cause of the obesity epidemic and a trigger for ulcerative colitis and Crohn’s Disease. He says that his family is avoiding emulsifiers as much as they can, and that food companies should develop emulsifier free products now in anticipation of rising demand.

Both Joe Paduda of Managed Care Matters and Tom Lynch of Workers’ Comp Insider are focused on the topic of workers comp. Joe explains that NPR and ProPublica have published the first in what will be a series of articles on workers’ compensation. What’s striking about the reportage, he says, is how misguided, misinformed, and just plain distorted it is. Tom explains that, by law, workers’ comp is the exclusive remedy for workers who are injured on the job. He underscores that, in exchange for relinquishing the right to sue, the employee receives employer-paid medical care and temporary wage replacement, but he also asks: Is they system fair? Some new research suggests maybe not.

Over at Health System Ed, Peggy Salvatore writes about health IT, exploring the disconnect between the cutting edge technology we’re developing and our ability to implement more basic technology throughout the healthcare delivery system. The result is likely to be a lot of wasted money. As she puts it “Our society and its component businesses are financing an infrastructure that serves the needs of people who live to be 100 in a time when babies are born who will live to see 2515.”

Friend of the HWR and InsureBlog author, Hank Stern, is also exploring some of the issues with healthcare delivery systems. In particular, he’s exploring the problem of nationalized healthcare schemes and economic inelasticity. SPOILER ALERT: Every nation rations healthcare.

At Health Care Renewal, Roy Poses explores what the recent U.S. experience with Ebola–and the fiascoes at one Texas hospital in particular–can teach us about another type of disconnect: that between the preparedness of our hospitals and health systems to respond to such threats and the public relations managers that paint an undeniably rosier picture. Hospitals managers are eager to maintain their pay and privileges, he says, especially when events lead to questions about them.

And speaking of hospitals, Bradley Flansbaum of The Hospital Leader, offers some thoughtful commentary on the limitations of using mortality rates as an outcome indicator of hospital quality. It might be easy to measure, but he argues it doesn’t provide us with the whole picture.

In an interesting post on the Population Health Blog, Dr. Jaan Sidorov applies the lessons of Joel Kotkin’s book on “The New Class Conflict” to health reform. He leaves it to readers if this paranoid perspective has an element of truth or if he’s being a right wing nut job. At the very least, you’ll learn about an obscure word: “clerisy.”

Finally, it is my pleasure to welcome newcomer Al Lewis to the Health Wonk Review. Al submits two posts for your consideration. The first, co-authored by Vik Khanna, focuses on Healthcare’s Biggest and Most Expensive Urban Legend. The second, co-authored by Vik Khanna and Jon Robison, examines how Weight Loss Fines are Discriminatory and Counterproductive. I encourage you to show him some love so that he’ll continue submitting to HWR.

Well, that’s it, folks. I hope you’re now up to speed on the latest and best health policy blogging, and I trust that this edition has prepared you to go outside and enjoy the better weather. If it hasn’t reached you yet, don’t despair. It will arrive soon enough. Up next: Jennifer Salopek at Wing of Zock will host on March 26th.

 

 

 

 

Consumer-Directed Tax Shelters

Many readers will be familiar with–and in fact may even have–health savings accounts (HSAs), health reimbursement arrangements (HRAs), Archer medical savings accounts (MSAs), or flexible spending accounts (FSAs). While this may seem like a bunch of alphabet soup, the basic thing to understand is that these are different types of tax-advantaged accounts a person can have that help them to pay for health care costs. The IRS has the official definitions here, although a more user-friendly comparison table exists here.

These accounts differ in who contributes to them, how much they can contribute, what the funds can be used for, and the specific nature of the preferential tax treatment they offer, but the bottom line is that these are all mechanisms by which money can be set aside tax-free–and can in some cases even earn a rate of return–all under the guise of helping to pay for healthcare expenses.

Under the ACA, the funds in these various types of accounts can no longer be used to purchase over-the-counter medications. There is an exception to this, however. If your healthcare provider writes you a prescription for an over-the-counter medication, it can still be reimbursed using funds from one of these types of accounts. As an example, instead of buying a bottle of Aleve, your doctor can write you a prescription for naproxen sodium.

The Burr-Hatch-Upton proposal isn’t satisfied with this, and wants to revert to allowing over-the-counter medications to be reimbursable expenses without a prescription. While that may encourage some wasteful spending, I don’t have a huge issue with that. Likewise, the GOP proposal wants to expand individual’s “eligibility for and use of health savings accounts for consumers.” This would include things like allowing funds from HSAs to pay COBRA premiums when an employee loses or changes jobs. I don’t have an issue with that either, per se. What I have an issue with are two closely related things.

First, these accounts are being pushed in connection with a broader effort to “empower” individuals to buy only the coverage they think they need. Conservative ideas to control healthcare spending tend to revolve around traditional market mechanisms. Thus, they want consumers to have more “skin in the game” and better access to information on the price and quality of healthcare. Together, they envision that leading to more competition between both insurers and providers, which will ultimately drive down the cost of care. If health economics worked like that, they’d be onto something, but it doesn’t–at least not well. So, while I’m all for the idea of HSAs and the like, I don’t see them as a viable alternative to a robust health insurance policy.

Second, these accounts accrue tax benefits and they accrue them disproportionately to individuals with higher incomes, because these individuals are in a higher tax bracket, and because these individuals can afford to put away more money into such accounts. Said another way, if a person makes $200,000 a year, every dollar they put into an HSA tax-free lowers their taxes more than that same dollar would if the person made just $35,000 a year. And, on top of that, the person making $200,000 could well max out their contribution to the $5,650 federal limit, while the person making $35,000 a year would be hard-pressed to set that much aside. So, I’m not a fan of trying to grow a program (or set of programs) that accrue more benefits for the wealthy when there are so many other people–the working poor in particular–who are still unable to get access to affordable health insurance. You can call it consumer directed health care if you want to, but at the end of the day, it’s still a tax shelter.

 

Hospital Cost Reduction Efforts Benefitting From New Tech

According to the Centers for Medicare & Medicaid Services (CMS), almost one out of the every five dollars in America is spent on health care, resulting in close to $3 trillion spent in 2014. Of that, an estimated $765 billion was lost to waste in inefficiency, redundancy, errors, overutilization and unnecessary variation in clinical practices. In addition to revenue loss from waste, hospitals are simultaneously confronted with payments that are not rising as fast as costs, and in many cases, payments that are actually declining. The American Hospital Association even contends that one-third of hospitals presently have a negative operating margin.

Because of these troubling trends, it is no wonder that reducing the total cost of care ranks as the number one overall strategic concern for hospital leadership. Reducing cost is any industry is a difficult task, but in health care, the difficulty is compounded by the need to maintain, or in many cases, improve the quality of care, health outcomes, and patient satisfaction.

Given the difficulty and complexity, it is also not surprising that hospital executives often turn to expensive consultants for answers, only to hear the same “one size fits all” solutions to drive cost savings, that are often unattainable or unsustainable.

Hospitals Are Failing To Meet Their Targets

A July 2014 independent survey of hospital finance professionals by Strata Decision Technology concluded that 88% of hospitals claimed to have cost-saving strategies in place. However, only 17% of hospitals were able to realize their targets. Another 70% achieved “some savings,” but not the level they needed to hit financial targets.

Health care organizations cited that cost reduction efforts often fell short because they were too time-consuming and data intensive. Additionally, while some were able to “identify savings opportunities,” they found that the actual savings realized was much less than expected because ideas could not be put into action and there was a lack of accountability for results system-wide. Hospitals also cited that accurately tracking “hard dollar” cost savings was too labor intensive since they had no technology to rely on, aside from messy, overgrown excel spreadsheets.

As large health systems across the country – especially those serving large Medicare and Medicaid populations – focus on identifying in-house savings that don’t sacrifice quality or patient satisfaction and meet ACA requirements, financial executives must take the lead for their organizations, but they can’t do it alone. The most successful cost-saving strategies are those that are grounded in a meaningful collaboration among finance, operational leaders, and physicians. The process should be informed by finance, but led by operational and clinical leaders. Reducing cost is not just a ‘finance problem’ as it was considered in the past.

The Cost Of Savings Costs

Liz Kirk, Vice President for Cost Improvement Solutions at Strata Decision Technology, drove a major cost improvement initiative in her prior role at Northwestern Memorial Hospital. Under her leadership over a two-year period, Northwestern reduced their cost per case mix index (CMI) adjusted case by over 15%. However, Kirk also learned that there is cost for taking out cost. She estimates that Northwestern’s cost improvement initiative ran the organization about $11 million, in terms of staff time.

Kirk describes undergoing cost savings initiatives at hospitals today, as being a lot like ice fishing. “Organizations tend to go to the tried and true fishing holes to find savings. Then, it requires a lot of hard work to drill into the cost savings idea to determine how much can be saved, if anything at all,” explains Kirk. “After all that hard work, there may be a big fish. Or there may not be any fish, or maybe just a small fish. Unfortunately, to find more cost savings, you have to try another fishing hole and go through the same, arduous manual process, again and again.”

For the last 15-20 years, hospitals have focused on growing their top line revenue through technology to maximize reimbursement and decrease uncompensated care. Cost is rarely scrutinized and managed to the same level of detail as revenue has been. Strata Decision’s StrataJazz Continuous Cost Improvement potentially changes that for entire systems. The application contains pre-built algorithms that identify and quantify opportunities to eliminate waste, inefficiency, and variation across the organization, then provides on-going tracking and workflow to build accountability for results.

Rather than ice fishing, cost savings becomes more like net fishing – hospitals can choose the best opportunities to pursue for their organization, then actually spend time designing improvements, rather than doing math.

Health Systems And Strata Join Forces

Although physicians are often rightly skeptical when financial leaders share data on practice variation, patient interactions and cost per case, the new world of health care reform demands that the two sides learn to work together. To remedy this at Yale New Haven, the leadership developed a common language with the clinicians that uses agreed upon metrics that they call quality variation indicators (QVIs), in which speaking the same language can help hospitals redesign practices and improve quality.

Yale New Haven partnered with Strata and achieved great success at driving out costs because each step of an encounter could be recognized and tracked, creating an accurate picture of an entire episode of care. Yale primarily focused on reducing variation in clinical practice that may result in adverse outcomes, which resulted in an estimated $125 million cost savings – or about a 20% reduction in cost per case.

Another Strata client is CentraCare, a five-hospital system based in Minnesota. The health system recently deployed Continuous Cost Improvement for one of its 500-bed hospitals. Leveraging just one module of Continuous Cost Improvement, CentraCare was able to identify supposed $11.3 million in potential cost savings for the one hospital.

 

The Tale of the Three Clerks

Once upon a time, there was a Supreme Court Justice. This Justice had three clerks. Their names were Will, Elizabeth, and Amanda. One day, the Justice instructed Will to write a memo by the end of the week and instructed Elizabeth to edit Will’s memo when he was finished writing it. The Justice also instructed Amanda to write the memo on Will’s behalf if he was too busy to complete it by the deadline. The next morning, when Will woke up, he wasn’t feeling well. In fact, he had a high fever and was terribly achy all over. It turned out he had the flu, so he called in sick for the rest of the week, and let Amanda know that she would need to write the memo for him as the Justice had instructed. But Elizabeth wasn’t sure what she was supposed to do under the circumstances. All she knew was that the Justice had instructed her to edit Will’s memo. Elizabeth had a choice to make. She could edit the memo that Amanda wrote on Will’s behalf–as if it were essentially Will’s memo–or she could take the more literal position that she had only been asked to edit Will’s memo, and since this was clearly a memo written by Amanda, she was not obligated to edit it.

Think about it for a moment. Put yourself in Elizabeth’s shoes and imagine that you have a personal interest in keeping your boss, the Justice, happy. Do you edit Amanda’s memo or not?

This is a loose adaptation of a hypothetical example raised by Justice Kagan during yesterday’s oral arguments in King v. Burwell. It shows up beginning on page 9 of the transcript. The bottom line is that the plaintiff’s argument that the health insurance subsidies should be made available only on exchanges operated by the state is a literal interpretation that would be the equivalent of Elizabeth opting not to edit Amanda’s memo, then, when confronted by Justice Kagan as to why she didn’t edit the memo, proceeding to say “Well, you only told me to edit Will’s memo, not Amanda’s.” To which Justice Kagan would likely respond “I wanted you to edit the memo. I thought you’d be able to figure out that if Will was unable to write the memo and Amanda had to do it for him, I still wanted you to edit the memo. In either case, you should have edited the memo.” That’s basically the government’s position in King v. Burwell. We intended to provide subsidies. We intended to provide subsidies if the states ran the exchanges, and we made a provision for the federal government to run the exchanges if the states failed to do so, but we still intended to provide subsidies. In either case, we intended to provide subsidies. Case closed.