Another Health Care "Stealth Tax" On Small Businesses And The Middle Class

Okay, so with much hoopla and hyperbole, the Senate passed its version of a health care reform bill in the wee hours of Christmas Eve, just in time for Senators to declare victory and get out of town. (And for those keeping partisan score, the total process in both Houses garnered 278 "yes" votes from Democrats, 2 from Independents, and zero votes from Republicans).

Now the process will revert to a conference committee, which will try to reconcile House and Senate bills into a single piece of legislation.

I've been saying for a couple of months that it's been extremely difficult for me to decipher any element of bills passed in either House which suggest there's any hope for reducing the rise in health insurance costs for small businesses and individuals. It's much easier to see where the bills could lead to further and faster increases in the cost of health insurance. Several of the key funding elements of the legislation could easily fall directly on the small business owners and the self-employed.

That thought is echoed by New York Times columnist Bob Herbert, who writes today about the "middle class time bomb ticking in the Senate's of President Obama's effort to reform health care.' Read his column at http://www.nytimes.com/2009/12/29/opinion/29herbert.html?emc=tnt&tntemail1=y

The culprit is the so-called Cadillac tax on high-cost health plans. While the idea was born of grass-roots anger at the bankers and financial speculators who have continued to enjoy big salaries and bonuses even as they trashed the economy, the unintended consequence of such a tax is set up to have a big impact on working people, small business owners and their employees, and on the self-employed.

You may recall that the Senate bill imposes a 40% tax on the "excess value" of health plans which cost more than $8500 per year ($708 per month) for individuals and $23,000 per year ($1916 per month)for family coverage. The tax is projected to raise $150 billion over ten years, so it's a big element of the estimated $870 billion needed to fund the Senate's healrh care reform plan.

The tax has been hailed by numerous economists and talking heads as a cost-containment measure, presumably because companies and individuals would seek to avoid the tax by purchasing lower-cost health plans...which just goes to sow that those economists and talking heads haven't shopped for health insurance lately.

That's because the only way to purchase a lower-priced health plan is to reduce the level of benefits the plans cover. That merely passes a higher level of deductibles, co-pays and other out-of-pocket expenses on to the beneficiaries. And given that much of the health insurance reform fever began to spread due to outrage over higher deductibles and co-pays, this "stealth tax" would seem to run counter to what our political leaders say they want to accomplish with reform legislation.

The Congressional Budget Office estimates that the "Cadillac tax" would effect nearly 20 percent of workers, or some 31 million people. The primary opposition to the tax thus far is organized labor, and a big chunk of those affected by the tax would be union members with generous health plans they've negotiated with their employers. I suspect that those large employers savor the opportunity to place their unions over a barrel, using the tax as a possible means to negotiate benefits concessions from their workers. To them I say, "Let the games begin."

But the folks who will really take it in the teeth will be small businesses and the people they employ. It's taken as conventional wisdom that small companies pay 18-20 percent more for their health coverage than large companies do for comparable coverage. And those higher costs are due to the 25-27 percent of premium costs which have nothing to do with health care: insurer administrative costs.

I wrote a few weeks ago about my own attempt to shop for both group and non-group health insurance coverage. At my age (a factor in setting premium rates)and with my family, the best deal I could find was for a plan with a $3000 family deductible and a 10% co-pay...hardly a "Cadillac plan"...and that was for $1880 per month. That works out to $22,560 per year...in 2008.

Assuming a modest 10% increase per year (and most folks would consider a 10% increase a good deal), that same plan would cost $3027 per month, or $36,330 per year.

So the tax on the "excess value" of the plan, or $13,330, would be over $5,000.

If I raised my deductible to $6,000 per year, my premiums might be reduced by 20% or so...but that's STILL $29,064 per year. So I could reduce the tax liability to a mere $24,300.

And even though the politicians are touting an exemption from employer mandates or payroll tax penalties for nearly 90 percent of small businesses, there's simply no way to exempt small businesses form a "Cadillac tax" and still hope to generate enough revenue to meet their targets.

The geniuses who support this tax have suggested publicly that, in the face of such a disincentive, small businesses would buy less expensive coverage. If that's the case, of course, nobody pays the tax, and there's no revenue. But small business employees would see PLENTY of new expenses in the form or higher deductibles and co-pays.

I see two possibilities: either the policy "experts" are mistaken in their suggestion that the tax would create an incentive to buy cheaper policies, or they know their observation is wrong and are saying it anyway...in other words, they're lying. They know that health costs will be so high that it'll be impossible to avoid a tax on your health benefits, whether they're Cadillac plans, or just Chevys.

Mistaken or lying. Who'll get to the bottom of that Hobson's Choice? You may want to ask your Congressman or Senators.

Senate Health Bill Can Pull 60 Votes...The Easy Part's Over...

A key procedural vote in the wee hours this morning has given Democratic Senate leaders confidence that they've found the 60 votes necessary to pass a health insurance reform bill with no support from Republicans.

The vote followed two weeks of intramural bloodshed among Democrats, and featured the sort of politics which gives politics a bad name.

Senator Joseph Lieberman of Connecticut proved it's possible to do the right thing, even for the wrong reasons, when he went to bat for the hometown insurance industry in refusing to vote for any bill which contained a public option. He won no friends among the Democrats (with whom he caucuses) by refusing to support a trial balloon Medicare "buy-in" for Americans between 55 and 64.

Senator Ben Nelson of Nebraska held the Senate hostage on principle, refusing to vote for any measure which did not prohibit the use of any public funds for abortions. In the end, he got some "fig leaf" legislative language punting responsibilities to the states...and some extra Medicaid money for Nebraska.

Apparently a half-dozen key Senators held their votes till they received the same sort of deal, which will provide additional Medicaid subsidies for their states to cover the extra cost of the bill's expansion of Medicaid.

The Senate expects a vote on this "historic" measure by Christmas Eve, so everybody can go home for the holiday.

Then the REAL bloodletting will begin, as negotiators try to reconcile a Senate bill with three others passed by the House. At issue are "irreconcilable" differences on issues like the public option, Medicare cuts, taxes on the rich, taxes on "Cadillac" health plans, and a whole range of funding issues.

Maybe we'll learn a little more about the Senate bill's particulars before they pass it.

Capping Insurer Administrative Costs: Good Intentions, Unintended Consequences

As the debate over health insurance reform plods along in the Senate, there are reports that Senators are considering a measure which would cap insurer administrative costs at about 10 percent of premium. The stated purpose of the proposal is to limit insurer profits, and to assure that 90 percent of premium dollars go to covering the cost of medical care and improved health.

Insurers are undoubtedly making defiant noises about such a proposal, but would accept it in a minute. Because doing so would require few changes in their actual behavior, nor would it impact how much money they make, in all but the most egregious circumstances.

Why? Because insurers play games with "averages." Most insurers will tell you that their administrative costs average 10 percent of premium or less. And strictly as a factual matter, that's accurate.

But it's not truthful.

Insurers typically provide services to individuals and to companies of various sizes. The larger the group, the lower the administrative cost ratio. Most state regulators currently exempt insurers selling individual (non-group) coverage from any regulations governing pricing, which is how insurers manage to sell individual coverage with administrative cost ratios of 30-40 percent of premium. It's why insurers have made such a big "bet" on non-group coverage.

In the group business, insurers can average the 5 percent of claims costs the charge to administer large, self-insured group plans with what they earn to run Medicare supplemental business, and with the 25-27 percent they charge small groups, and produce a "weighted average" of 10-12 percent of premiums.

If you're going to hammer down administrative costs, don't count on averages. Approach the problem by business segment, and include large group, small group, and individual coverage segments.

And when you're shopping for coverage, ask your insurer or agent specifically about the administrative costs they assign to your market segment (individual, small group, mid-size group, etc.). You'll usually get an assurance that your insurance company's administrative costs typically "average" 9-10 percent of premiums. Ask what percentage they charge for your segment, and you won't get an answer. Because by and large, agents don't know. And insurers don't tell.

Premium Increases, Administrative Costs, Pooling Risks...A Little Third-Party Validation

Toiling in the small group health insurance reform vineyards can be lonely work. In feverish debate over the "macro issues," very little attention is usually paid to the realities of the small business marketplace...even though it's widely agreed that small companies pay more money for less coverage, and for fewer of their employees, than do larger employers.

So it's interesting (though not always comforting) to see one's assumptions validated by outside experts. Here are three examples from over the past week or so...from a couple of authoritative sources.

I wrote last week that there was very little in current heath insurance reform legislation which provided much hope that small businesses might expect to see the prices they pay for small group health coverage go down, or even see the rate of increase in their premium costs go down over time.

Last week Robert Pear, the veteran health policy writer for the New York Times, reported on the findings of the Congressional Budget Office (CBO) regarding the Senate's health care reform bill. You can read the article by clicking here:http://www.nytimes.com/2009/12/01/health/policy/01health.html?th&emc=th.

The analysis suggests that, while individuals purchasing coverage could see their premium expenses go down due to the bill's new federal subsidies (at a 10-year cost to taxpayers of over $450 billion), "for most people who get health insurance through employers — five-sixths of the total market — the budget office concluded that there would be little change in their premiums relative to the amounts projected under current law."

While the article touts this as a victory for supporters of the legislation, it just confirms the belief by many small business owners that, for all the furor about reducing health costs, the legislation before the Congress will have the net effect of, at best,costing them no more than if the Congress did nothing.

And the existence of new federal subsidies to enable some individuals to buy coverage 1) won't reduce the actual cost of their health coverage, just push some of the cost on to taxpayers, and 2) will have to be paid for somehow.

But, however nasty the reality of the situation might be, the analysis does validate my sense, from way over here in The Grass Roots Of America, that small business owners looking for benefits from this legislation will be waiting for a long time.

High among the many "opportunities for improvement" for real health insurance reform is a focus on reducing insurer administrative costs which, for small businesses and individuals, can run between 25 and 40 percent of premiums. The complexities entailed in dealing with the patchwork of private insurance plans and procedures is one of the issues discussed by leaders of the Cleveland Clinic in an article in the December 7th edition of Newsweek. Dr. Delos (Toby) Cosgrove, the Clinic's CEO, discusses the difficulties entailed in billing for procedures and wrestling with insurers to get paid. Though Dr. Cosgrove doesn't say so, Newsweek suggests that much of the complexity arises from the fact that "insurers count on rejecting a proportion of claims the first time they're submitted, delaying as long as possible the disbursement of actual cash."

The article says,"...if you're looking for "waste" in the health care system...defined as expenses which do not contribute directly to medical outcomes...a good place to look is the nation's cobbled-together system of competing private insurers." And Clinic Doctor Steve Nissen says simply, "the overhead for private insurers is 29 percent. For Medicare, it's 3 percent. If what's left over is what you can spend on patients, I think 97% is a much better deal."

Even if you don't buy the notion that Medicare administration is only 3 percent of claims costs (and for a number of government-accounting-related reasons, the number is low), the point should be well-taken. Small business owners and individuals are getting screwed on both ends: high administrative costs put a strain on the ability to pay for coverage, and the administrative cost burden gets passed along to hospitals and physicians, which raises the cost of health care for everyone.

As I've repeatedly written in this space, perhaps the only way to get control over administrative costs, and use those cost controls to combat the trend in premium increases, is to take steps to encourage the formation of large purchasing pools, which could negotiate with insurers on behalf of their participating members. With that in mind, it was encouraging to read this op-ed by Paul Starr, A Princeton professor of economics and public policy, who argues that the only real hope for substantive health insurance reform is to move up the reform timetable and take aggressive steps to create larger risk pools, within states if necessary, but preferably on a national scale, through the accelerated development of health insurance exchanges which are contained in both House and Senate bills. Read the article here: http://www.nytimes.com/2009/11/29/opinion/29starr.html?_r=1&emc=tnt&tntemail1=y. Starr says, among other things, "accelerating the timetable of reform ought to be a priority. Although the legislation calls for some important interim measures, the Senate bill defers opening the exchanges and extending coverage until 2014. By comparison, when Medicare was enacted in 1965, it went into effect the next year."

Skeptical small business owners need to hold their elected officials accountable, and have every right to ask the question of how all this sturm und drang will benefit them, specifically. And we can't afford to wait until governments to get around to developing co-operative approaches to reducing the cost of health insurance through group purchasing and administration. We know it works. We know it will be hard. But doing hard things is what entrepreneurs do.

Teeing Up (And Teeing Off On) The Senate's Health Bill

While I was down with H1N1 flu last week with the rest of my family, I read an excellent column by Newsweek's Robert J. Samuelson which very directly spoke to why many Americans are skeptical about health care reform legislation. You can access the article here: http://www.newsweek.com/id/222795.

Back in the days of ClintonCare, health care policy experts would say that there are three major components of health care reform: Cost, access, and quality. Most policy changes can touch successfully on any two of them, but it's hard to do all three without creating chaos in the health care market.

The Senate's health care reform legislation, like its counterpart in the House, sacrifices both cost containment and quality improvement to the expansion of access for those currently uninsured and subsidies for those struggling to maintain their coverage.

And as is the case with Samuelson's article, many Americans (not just Republicans) have begun to question very loudly whether the reforms contained in the legislation are worth the cost, and if there might not be a more effective, or at least more honest, way to achieve the goal of expanding access.

As was the case with the House bill, I'm hard-pressed to point to many elements of the Senate's bill which hold out much hope of "bending the curve" on health care expenditures for the upcoming decade. But it's unfortunately pretty easy to identify provisions which will increase cost both to the federal government and, importantly, to the private sector (increases in private sector costs are never considered in CBO analyses).

It should be easy for a layman to understand that one cannot reasonably 1) increase the number of people receiving health benefits, 2)enhance the benefits people receive and 3) directly subsidize those benefits without increasing overall benefits costs. So it's reasonable that regular folks should question how their Members of Congress or their Senators would miss out on that little fact. And yet, those saluting the "historic importance" of this legislation seem to be missing that point entirely.

It is also quite easy for regular people to understand that we cannot reasonably expect to reduce the growth in hospital, drug, equipment and physician costs in any meaningful way, while still giving those players a virtual pass on reform, save a little token trimming.

The recently-documented rush to increase prices on the part of drug manufacturers in order to get ahead of health insurance reform may place a little more focus on the bill's lack of meaningful provider cost containment elements.

Congress' recent efforts to forestall efforts to reduce physician reimbursements under Medicare in a separate bill, so its $200 billion- plus impact on the deficit won't be "recognized" as part of the health reform bill, is both an exercise in political cynicism and an example of the difficulty entailed in holding Congress to any promise to reduce costs in the face of influential lobbies.

I wonder how the President and his Congressional colleagues feel now about the soaring rhetoric of the 2008 campaign, and the sense of urgency they sought to instill for comprehensive reform, in the face of such an ugly bill? Surely they can't just hope Americans hope to forget the President's promises to 1) leave people who like their current insurance alone, 2) not add one dime to the federal deficit, and 3) bring down the cost of insurance premiums. As Samuelson says, "The disconnect between what Obama says and what he's doing is so glaring that most people could not abide it. The president and his allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both."

And yet, for all its ugliness and cynicism, the reform, debate has had some value. After over fifteen years (under both Democrat and Republican Administrations) of being virtually ignored, health care reform is back at top-of-mind with many Americans.

And we are reminded that there's a cost to doing nothing. For those who decry "government-run" health insurance, consider that Medicare, Medicaid, The Veterans Administration, and the Federal Employees Health Benefit Plan (FEHBP) will spend one trillion dollars on health care this year. Left alone, by 2020 those plans will double in costs, to over two trillion dollars.

And consider that private-sector health premiums have also more than doubled in the past ten years, and premium costs for small businesses and individuals have more than doubled. Maintaining the status quo will result in their more than doubling again.

I haven't seen any independent analyses which project the costs of this version of health care reform against the cost of doing nothing. That's often a weakness of CBO-type analysis.

While making the sausage has proven to be quite a bit more difficult than Our Leaders may have anticipated, the fundamental rationale for their actions has remained pretty sound. The nation's health care expenditures are on an unsustainable course, both in the private sector and in the government. And for all the resources, public and private, which we direct to health care, Americans are not appreciably healthier or more secure in their coverage than residents of other countries spending half as much.

That's why it's important for those wailing and gnashing their teeth to remember that for all the energy invested in the early stages of the debate, the real debate is just beginning. And things can change dramatically.

I've been saying for several months that, once enacted (and something called health care reform will pass), the actual reforms enacted into law will cost more and do less than meets they eye. The Senate's big financing tool, the "Cadillac Plan" tax, will be out the window, because labor unions (including government workers) won't stand for it. That's $450 billion Congress will have to find elsewhere. A "soak the rich" tax as proposed by the House is probably a non-starter in the Senate, and raises less than the Cadillac Tax anyway.

When the debate is over, we'll likely see insurance reforms (phased in over 10 years for small businesses) and some subsidies, Medicaid expansion, and a few other experiments in cost containment, and not much else.

And unfortunately for Democrats, Americans are likely to get well into 2010 feeling as though all the sturm und drang invested in the health care reform debate over the previous year won't have helped them at all, and that their own health insurance premiums have continued to increase. And that will be bad for the democratic majority.

Insurance Reforms Are "Up Front" In House Health Bill: How Will Insurers Respond To The Challenge?

Think a 1000-page health care reform bill is hard to digest? Well, the latest House version is currently 1900 pages long...before manager's amendments, before any real public debate begins. It's a foregone conclusion that there's much to dislike; it's also a foregone conclusion that much will change.

It is significant, though, that the first three big sections of the bill focus on health insurance reform. There's a basketful of "immediate reforms," a series of required changes in insurer behavior, and a section dealing with insurance exchanges, co-ops, and the public health plan.

We'll try to digest this a piece at a time over the next few days. But overall, it's clear that Our Friends In Congress (majority Democrats, at least) expect to see major changes in the health insurance market, some coming from changes in insurer behavior, and some, at least nominally, from changing the nature of the "risk pool" by encouraging the formation of large purchasing groups, whether public or private.

The politics are far from over, but regardless of the specifics of the outcome, insurers are going to be under great pressure to reduce administrative costs and simplify their marketing, sales, and business processes. It's interesting to wonder whether, somewhere behind the curtain of political opposition, some health insurance industry leaders are thinking about how they'll have to become more efficient and transparent, either to compete effectively against a public option, or to forestall one.

Wouldn't want to bet on it, though...

Small Group Health Insurance Rates To Spike In 2010...And A Bunch Of Nonsense From The Insurance Industry

I recently had a long chat about health insurance reform with the former CEO of one of the nation's leading non-profit health plans. We were sharing our frustration at the behavior of the health insurance industry's lobbying group, America's Health Insurance Plans (AHIP) in the face of increasing pressure from the White House and Congress to clean up its act. My companion said, "It's as if the insurance industry is crying out, 'Please, please regulate us! Protect us from ourselves'!"

Certainly there is no clearer evidence of this (in the past week or so, anyway) than in this story, which appears in today's New York Timeshttp://www.nytimes.com/2009/10/25/business/smallbusiness/25health.html?th&emc=th. It reports that 2010 will see health insurance premium increases for small businesses which are twice as high as the previous year's. Brokers are projecting an average increase of at least 15% in small group health insurance premiums.

Typically, spokesmen for the health insurance industry blame the rise in premiums on rising medical costs. And one AHIP spokesman, who doth protest too much, says quite clearly (and with a straight face), "profits are not responsible for increased health care costs."

Nonsense....

Certainly there is a component of these projected increases which relates to inflation in medical costs. If you want to know how much, look at the year-over-year increases in costs for large, self-insured employers. Because they mostly self-fund their employees' medical expenses, their cost increases are usually pretty close to the increase in the cost of health care. A good estimate would be about five percent.

The rest?...

2009 was a bad year for health insurers. Typically (and where the AHIP flack's statement is at least partially true), a health insurer's underwriting profits...the difference between premiums collected, claims paid out, and administrative expenses...would be about 2 to 3 percent of premiums.

But the majority of those insurers' income is based on investment returns...income derived from taking premium income and investing it, usually for the short term. And when the stock market crashed, many insurance companies' portfolios took it on the chin.

How much of insurers' profits come from investment income? Unless the insurers are publicly traded, it's impossible to say. Most insurers file their financial reports with state insurance commissions, and State Approved Accounting Principles (special reporting rules for insurance companies, different from the Generally Accepted Accounting Principles most businesses must adhere to) do not require insurers to report income from investments, or from "non-insurance-related activities," such as providing administrative services to self-insured companies.

Small group health insurance rates are increasing to help insurers polish up their balance sheets after a bad year for investments. But they're also increasing due to an old-fashioned phenomenon called "featherbedding." Insurers fear that future health insurance reforms may put pressure on their rating structures, so they're getting what they can now. An actuary might call it "a strategic recalibration of rates."

And of course, as we've pointed out before, when insurers raise their rates 15%, the percentage of those rates which are attributable to administrative costs...which make up 25-40% of small group and individual health insurance rates...tends to go up 15% as well...the equivalent of giving your insurer a 15% raise for doing no extra work.

The Times article points to the underlying truth to these rate increases: small employers have very little marketplace leverage in a small group market which is highly concentrated and in which competition is constrained. They pretty much have to take the rate increase or buy coverage elsewhere.

During my time at COSE in the olden days, our small business members enjoyed premium rates which were as much as 30% lower than rates on comparable plans, and which grew at less than half the rate of small group insurance rates generally. When we once asked our insurer's chief actuary where the differences came from, he said, "COSE can negotiate; the other guys can't."

There is fairly little in any of the current House or Senate bills which would really change that negotiating balance. There is slight hope that a "public option" would develop the leverage to be competitive with health insurers for many years...at least until the public option amasses 10-15 million customers. Health insurance exchanges might help, but if they're constrained by the same rules governing private insurers (which insurers will certainly insist on), they'll have a hard time differentiating themselves in a competitive marketplace. COSE-type co-ops could, but only if they're run correctly (COSE's no longer is), and if they're given time to grow to scale.

We've written here before that there's fairly little in existing health insurance reform legislation which has much apparent promise to reduce even the rates of increase in small group and individual health insurance premiums. And despite broad promises or speechifying, our public officials can offer no solid evidence that small group premiums will do anything but escalate. Which may be a reason that small employers continue to be skeptical about the government's efforts to help them.