Josh Elliott-Traficante

A recent study published in the New England Journal of Medicine suggests that the expansion of Medicaid, which is currently being debated in many states, including here in New Hampshire, does little to improve the health of the newly covered.

Several years ago, researchers were recently given the rare opportunity to study the effectiveness of Medicaid Expansion in Oregon. The state opted to expand its Medicaid program to include some low income, uninsured adults. However, funds were only available to enroll only a portion of those eligible, so roughly 10,000 individuals were chosen by random lottery to receive coverage. While unintended as such, these conditions laid the groundwork to conduct a scientific study of the efficacy of the program by creating a randomly selected sample (those chosen) with an established control group (those not chosen).

What makes this study so relevant in today’s discourse is that the population covered by Oregon’s expansion is the same population that will be covered under the expansion of Medicaid as part of Affordable Care Act in the other states. The study of nearly 12,000 individuals’ health outcomes grants rare insight into what the benefits and shortfalls of expanded Medicaid would be.

When comparing the newly covered and non-covered groups in Oregon two years out, the study found that there was little difference in health outcomes. The study concluded:

This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years…

The study did find that expansion increased the use of health services, diabetes detection and management as well as reducing financial strain, all of which would be expected. Surprisingly it did lower rates of depression by about 30%, which could be related to the reduced financial strain.

Some have argued that all that the study shows is that insurance is working because people are getting some chronic conditions taken care of, or that just by virtue of having insurance coverage does not make one healthier.

To some extent both are true, however, the gains seen in the Oregon study can be achieved by means other than the expansion of a very expensive program like Medicaid.

Charles M. Arlinghaus

 March 2012

Summary: New Hampshire should join the Health Care Compact to allow different states to try different health care reforms. The results of those reform pilot programs may give New Hampshire the opportunity to replicate better or more efficient programs here if we choose. The compact has no cost associated with it and doesn’t require New Hampshire to expend any money or assume any liability but has the long term potential to uncover cost savings measures.

On February 15, 2012, the New Hampshire House of Representatives voted 253-92 for HB1560 to join a national Health Care Compact[1] of states asking the federal government to play a role as the federal government considers plans to change, among other things, Medicaid and Medicare.  The vote sends a clear message that states should be consulted and states should have options. As the proposal is considered by a second committee, some details are worth addressing. While any new proposal is open to misinformation and demagoguery, this isn’t nearly as complicated as it sounds. Much of the criticism and even some of the support for a compact is based on misunderstanding, or in some cases misrepresentation, of the structure and language of a compact.

The Health Care Compact that has been ratified by four other states in the form being considered in New Hampshire would only happen if the federal government and the state government both agreed. Then, only if it so chose, the state would assume administration and direction only of the specific programs it felt it would manage more effectively than the federal government, quite likely a subset of all federal programs. Although states would receive grants equivalent to the specific funding for the programs it chose to administer, they would assume no long term liabilities for federal programs that currently have long term liabilities.

The Basic Structure of this Health Care Compact

At its most basic level, the Health Care Compact being considered in New Hampshire is a petition to the federal government asking them to allow states the opportunity to take federal health care spending for specific programs and craft a state specific program to replace the federally administered program.

The Compact is a group of states who essentially sign a request to the federal government to grant them (and any other state) that authority. Importantly, the program could not take effect without the federal government granting the authority and with the state opting to administer specific program or perhaps none at all.

To administer a specific program, states would be granted the authority to replace the federal laws regarding a program (Medicaid for example) with state laws. This provision has led to the most misunderstanding. The Compact would provide that a state may “Suspend by legislation the operation of all federal laws, rules, regulations, and orders regarding Health Care….”[2] Critics prefer to end the sentence there to misleadingly suggest Compact supporters are nullifiers. Instead, the sentence continues “that are inconsistent with the laws and regulations adopted by the member state pursuant to this compact.[3]” In other words, new state laws would take the place of previous federal laws under authority granted by Congress.

What’s more, all rules would remain in effect unless suspended by state action in specific areas and for any area not suspended the state will still be “responsible for the associated funding obligations in the state.” In other words, federal laws are not “suspended” except to the extent that the state chooses to act under a compact expressly agreed to by the federal Congress.

There are three steps before New Hampshire would administer any specific health care program.

Step One: States Agree:  Although a compact could technically start “on its adoption by at least 2 Member States and consent of the United States Congress,[4]” Congress will likely pay little attention until a dozen or more states adopt the Compact in their legislature demonstrating a critical mass of support.

Step Two: Congressional Approval and Amendment: Compacts do not become effective without congressional approval. In area like this – a bit more complicated than compacts on things like mutual recognition of drivers’ licenses – that congressional debate will be fairly involved. The compact document specifically anticipates give and take with the federal government by outlining the broad structure which should underlie the final agreement — the authority to use the current federal funds in each state guided by state not federal regulation.

Step Three – Evaluation: Although a Compact would give each state the authority to act, each state would undergo an evaluation process. Different states have different skill sets and few states would immediately take over administering all health care programs. The next step would to evaluate skill levels and decide where we would most likely be able to add value in a cost-effective way.

The Fiscal Impact of a Health Care Compact

The biggest question mark for any proposal is fiscal but joining the compact itself entails no financial obligation at all. Further participation by choosing to administer some program involves limited financial risk and the potential for significant savings.

One of the most significant errors opponents make is in regard to liability and whether or not a state would have to assume any and all health care operations. The question is “if we assent to a compact, would we then have to assume all health operations, and we would not then be liable for unfunded Medicare liabilities?”

First, signing on to the Compact does not obligate us to be one of the state with a good idea. We could, and probably should, wait for promising approaches to develop.

Second, if we do opt to implement a better idea, we do not have to administer all currently federal programs. We can choose ones that make the most sense for us. For example, we might decide that since we currently administer Medicaid, we could craft our state specific rules in exchange for a block granted federal funding. This is essentially a version of how Rhode Island and Florida operate under a Medicaid waiver. Rather than the one set of rules and regulations designed to fit fifty states, they forego the regulation in exchange for a block grant.

Were we to choose to administer Medicaid, we would not also be compelled under the Compact to administer other programs (like Medicare). The federal program as it exists then would remain in effect

The False Liability Issue

If our pilot program didn’t work or didn’t yield the results we wished for, we could “withdraw from this Compact by adopting a law to that effect….[5]” The withdrawal would be effective six months after we gave notice of our intent to suspend. If we were able to administer the program more efficiently than the federal government had, we would benefit from the savings realized. On the other hand, if we discovered we were in over heads, or the program didn’t work as well as the pilot we’d observed in another state, our financial risk would be minimal because of the ability to stop with six months notice.

The liability language in the withdrawal mechanism, though, has led to some confusion. The compact provides “a withdrawing state shall be liable for any obligations that it may have incurred prior to the date on which its withdrawal.[6]

The liabilities mentioned are not long term liabilities of the kind associated with Medicare. They are the typical liabilities associated with any program of this sort. For example, an insurance company would still have an obligation for covered procedures that occurred prior to the termination date of a policy. Similarly, a state would not be able to walk away from bills already incurred but not yet reimbursed. New Hampshire’s own self-insurance plan for state workers includes a similar accounting provision.

In fact, the long term obligations associated with a program like Medicare are exactly what an approach like a Compact is designed to address. Nationally, many competing proposals are being considered. Allowing many states many different options allows greater experimentation with potential long-term solutions. That experimentation will allow states to learn from each with some states acting early and some watching the various pilot programs before deciding whether or not to act.

The Virtue of Doing Nothing

In fact, in New Hampshire’s case we should move cautiously forward. We should petition the federal government to give states authority if they choose to exercise it and then wait and see what other states do. Even though all fifty states would be granted the choice by Congress, only six or eight would exercise that choice but each of those states would amount to a pilot program – and very different pilot programs that should teach us something.

In fact, this is the whole point of a compact that gives each state the authority to try different things. “Laboratories of democracy” has become one of the most hackneyed phrases in American politics but Louis Brandeis’ original thought is at the heart of a health care compact. Brandeis said “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.[7]

New Hampshire may well not yet be up to the task of coming with useful reforms in all areas but other states may well be. Texas would probably try something more market-oriented, Vermont would almost certainly create a single-payer plan and become a teeny version of Canada.

Perhaps Vermont or Oregon or whoever tried single payer would prove it a failure but perhaps they would not. On the other hand, the New Hampshire way is to watch carefully what other states do and then import the best pieces into our system. Allowing other states to pilot innovative programs – only if they choose to do so –will help us all.

Who Decides What is a Good Idea?

Some will worry that nothing in a compact prevents states from doing something stupid but that’s just the point. We want to allow states to craft their own pilot program with as much latitude as possible. They should use their judgment to replace Washington’s. And New Hampshire should watch the results to reap the benefits.

Today, the federal government decides collectively what is and what isn’t a good idea. They then impose on all states that idea which might be good for New Jersey but not for New Hampshire. Under a multi-faceted approach, different states will evaluate what each other state does. The best experiments will be adopted by many other states. The less promising idea will be abandoned after a year or two. But those pilot programs which Brandeis anticipated are not possible under the current system without a Compact being adopted.

New Hampshire should join in a compact with other states to at least allow the potential for any state which thinks it might have a better idea to experiment with it. There’s certainly no risk to our fiscal order by letting Texas or Vermont try something. At the end of the day, that’s the only commitment we make when we join a compact.

 


[1]This paper capitalizes Health Care Compact when referring to the specific proposal that is being considered in New Hampshire in 2012 as House Bill 1560, and has been passed in substantially similar forms by four other states as of this writing.

[2] Text of proposed HB1560 (2012) proposed RSA 137-L4

[3] Text of Proposed HB 1560 (2012), proposed RSA 137-L4, emphasis added

[4] Proposed HB 1560 (2012), proposed RSA 137-L7

[5] Text of proposed HB1560 (2012), RSA 135-L9

[6] Text of proposed HB1560 (2012), RSA 135-L9.

[7] Interestingly Brandeis never used the phrase laboratories of democracy. The quote is from the end of his dissent in the 1932 Supreme Court Opinion in New State Ice Co. v. Liebman. Brandeis would have allowed a state to keep Mr. Liebman from selling ice without a license.

Charlie Arlinghaus

February 22, 2012

As originally publish in the New Hampshire Union Leader

Contrary to some of the misinformation circulating in Concord, a state-run health insurance exchange bureaucracy operating on behalf of the federal government is a bad idea, is not required by any federal regulation, and would be an expensive strain on our state budget.

At the centerpiece of President Obama’s health care legislation is a mechanism known as an exchange — i.e., a new federal or state bureaucracy to be set up to administer the rules and regulations regarding health insurance under the so-called Affordable Care Act (ACA).

The ACA included hundreds of new regulations and federal mandates to govern health insurance once the law takes full effect. In addition, federal agencies are in the process of issuing thousands of new rules to implement the myriad provisions of the law. To administer those rules, there will be a state-level exchange in each of the 50 states.

The federal government had hoped each state would set up its own exchange and manage the regulations for it while assuming the operating costs of the new regulatory agency.

The law can’t require states to set up an exchange. It provides that the federal government will set up and fund a state-level exchange if the state government chooses not to. The majority of states around the country have balked.

Much of the information in this debate is easily misunderstood. One particular piece of information exists only in New Hampshire and is incorrect. Our HHS commissioner mistakenly claimed that not running the exchange ourselves will cause us to lose our federal Medicaid funding, decimating the state budget.

This claim has not been made in any other state. The Obama administration, which has been eager to have every state establish an exchange, has never alleged any such thing.

It seems unlikely that there is a condition attached to Medicaid that no one else in the country knows about except one lawyer in Concord.

The Cato Institute has published a more authoritative legal analysis to show why this claim just isn’t true. The misunderstanding stems from a problem with the original draft of the state bill. The debate in New Hampshire centers on Rep. Andrew Manuse’s House bill prohibiting a state-run exchange.The original version included language that could have cost significant Medicaid dollars based on requirements that new information be able to interface with the state exchange whether federally or state-run.

Rep. Manuse quickly changed the language to make the bill simply a prohibition on the state setting up an exchange, whether by itself or through contract. That’s a very sensible compromise.

Another big question mark has been the financing of a state-run exchange. While federal grants would cover the setup, no one is quite sure how much an exchange would cost the state to operate. The final rules haven’t come out. However, we have some hints in that the Massachusetts version costs $29 million to operate.

New Hampshire’s costs are likely to be in the neighborhood of $10 million annually.

Exchange supporters have taken to saying we pay either way. What they mean is that they believe that the federal government would likely tax participants (fees on insurance plans, brokers, insurers and businesses related to their policies) and that states, if forced to fund a program this expensive, would have to look at similar fees.

Although local exchange supporters believe the federal government can impose these taxes already, the federal government itself doesn’t agree with them. In the President’s budget proposal, he asked Congress for $860 million for the express purpose of funding federal exchanges. Mind you, the start-up money for state-established exchanges is elsewhere in the budget so the $860 million is just for the 20-30 states not creating a state bureaucracy.

So the administrative function of the federal health law isn’t funded unless we fund it for them.

They haven’t finished the rules, but they want us to create the administrative agency. They don’t have the money or the authority to raise it, so they want us to assume the financial cost.

I think Rep. Manuse has things about exactly right.

Charles M. Arlinghaus is president of the Josiah Bartlett Center, a free-market think tank in Concord. His email address is [email protected].

This is our dedicated page to information on healthcare exchanges, which are a centerpiece to the Patient Protection and Affordable Care Act, more commonly known as ‘Obamacare’

It will be periodically updated.

JBC President Charlie Arlinghaus on Healthcare Exchanges and why they are bad for NH

Cato’s Director of Healthcare Studies Michael Cannon and John Adler on the all important Obamacare Glitch

Also from Michael Cannon, his article in the National Review on how Obamacare can’t be fixed

The New Hampshire House  Bill: HB1297, which seeks to ban the state from setting up a healthcare exchange

JBC President Charlie Arlinghaus on why HB1297 is a good idea

 

By Grant D. Bosse

Summary: Certificate of Need laws, or CONs, have been set up across the country under the assumption that rationing hospital construction and expansion would limit increases in health care costs. Four decades of experience have shown that CONs do not control costs, but do provide a significant barrier to entry to innovative health care facilities and limit competition in the health care marketplace. Faced with this evidence, CON supporters have created novel arguments to justify them, but these new rationales also fall under close scrutiny. New Hampshire should end its thirty-year experiment and repeal its Certificate of Need Law.

Click here to download a copy of the study

[pdf http://www.jbartlett.org/wp-content/uploads/2012/02/Irrational-Certificate-of-Need-Laws.pdf]

 

Charlie Arlinghaus

February 1, 2012

As originally published in the New Hampshire Union Leader

MOST PROPOSALS on health care are part of a highly charged ideological debate. One exception this year, the health care compact, is not a short-term solution but a longer-term project that will allow New Hampshire to benefit by letting other states craft proposals on the right and the left.

A health care compact is a proposal in the Legislature to have New Hampshire join with other states (four have already passed the compact language) to petition the federal government to grant states the authority to take federal health care spending in their state and craft their own program as a replacement for the federal program.

This is not some wacky theory like nullification, but rather states coming together and asking Congress to vote to give states an option. One option would be to stay in whatever system is created by reforms in Medicare and Medicaid.

Another option would be for an individual state to create its own reform. Very few states will undertake their own reforms, but we could all benefit from giving those few states that option.

We know that change is coming to the biggest federal health care programs. Rep. Paul Ryan, the leading conservative on health care issues, and Sen.

Ron Wyden, one of the leading liberals on health care issues, have put forth a compromise proposal. The merits of the proposal don’t matter for this discussion. When the leading liberal and leading conservative on health care both agree that change is coming — amid a half dozen other proposals floating around Washington — we know change is coming.

A health care compact would let states, if Congress agreed, craft their own experiments instead of accept whatever new federal proposal emerges in the next few years. Some states will do things that I support, others will do things that different people support and then we’ll see how each works.

At a hearing on the compact, Rep. Gary Richardson asked me what I actually wanted to see happen. The implication is that I have an end game in mind and want the federal government to let us make that happen in New Hampshire.

What I really want is for New Hampshire to wait. I want us to petition the federal government to give states authority if they choose and then wait and see what other states do. Even though all 50 states would be granted the choice by Congress, only six or eight would exercise that choice, but each of those states would amount to a pilot program — and very different pilot programs that should teach us something.

“Laboratories of democracy” has become one of the most hackneyed phrases in American politics, but Louis Brandeis’ original thought is at the heart of a health care compact.

Brandeis said “one of the happy incidents of the federal system is that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

I don’t think New Hampshire is currently up to the task of coming up with useful reform but other states are. Texas would probably try something more market-oriented, Vermont would almost certainly create a single-payer plan and become a teeny version of Canada.

I think Vermont or Oregon or whoever tried single payer would prove it a failure, but it is possible that I’m wrong (unlikely, to be sure, but within the realm of possibility). On the other hand, the New Hampshire way is to watch carefully what other states do and then import the best pieces into our system. Allowing other states to pilot innovative programs, only if they choose to do so, will help us all.

Some will object that nothing in a compact prevents states from doing something stupid.

But that’s just the point. We want to allow states to craft their own pilot programs with as much latitude as possible. They should use their judgment to replace Washington’s. And New Hampshire should watch the results to reap the benefits.

Make no mistake, this is a long-term, cautious project. It won’t go before Congress until many states have joined together to ask. Even then, it will require debate and congressional approval. Even at that point, New Hampshire should let other states lead the way and watch cautiously. But their pilot programs will teach us lessons and teach the federal government lessons. This is a health care proposal that doesn’t presuppose a program or an ideology. It will be a tool for liberals and conservatives alike. The longterm future of health care will demand more than just yes or no answers to the question of the month. We should put other states to work for us.

Charlie Arlinghaus

January 25, 2012

As originally published in the New Hampshire Union Leader

 

At the center of the debate over the federal law known as ObamaCare is a debate over whether or not states should administer the federal rules and regulations in a supposedly state-run Exchange. New Hampshire would make a mistake with significant financial consequences if it allowed itself to be seduced into this foolish idea.

When the federal government adopted health care reform known as ObamaCare or the Affordable Care Act (ACA), the rules and regulations included a plan that each state should set up an Exchange, a new bureaucracy to administer the significant rules already adopted and the forthcoming regulations envisioned by the bill. States are encouraged to set up their own federally regulated bureaucracy – the state as federal extension agents – or else the federal government will administer an exchange itself.

As details have become apparent over the last year or so, it is clear that whether the federal government runs the exchange or the state administers its rules for it amounts to the same thing, that the costs of running an exchange will impose a significant burden on the state, and that not setting up a state-based exchange is likely to force the law to be re-opened and hence renegotiated.

In early days, some opponents of Obamacare nevertheless thought perhaps states themselves could blunt its impact by setting up their own exchanges. The Heritage Foundation, opponents of the federal law, had helped Massachusetts establish its pre-ObamaCare exchange called the connector and initially thought maybe other states should follow suit. After a few months looking into the rules and regulations, they concluded “a state would now have no more real control over an exchange it set up than one HHS established.”

The conclusion is obvious and at the heart of the exchange debate. Whether run directly by the federal government or mandated by the federal government and carried out by local agents is immaterial. The regulations and decisions come from Washington with perhaps a few window dressing exceptions. As such, we are not deciding between regulation and autonomy, we are deciding whether or not we want a puppet government.

If it’s all the same, why not run our own exchange even for those few admittedly insignificant rules we can control? The difference is money. The Massachusetts connector, although the prototype, administers a less complex system than the new federal law and its annual budget is $29 million. No one knows what a New Hampshire exchange would cost but it would be somewhere between $10 and $20 million.

Federally collected tax dollars would pay for the start up costs but after start up the state would pay for the exchange itself. With state government on the hook, the federal regulations would pay less heed to their costs so there would be more of them. With a federally run exchange, the federal government – which hasn’t the budget authority for them yet – would have to weigh financial costs.

I have written often of the folly of a federal bailout of state governments. I don’t think any of us wants to see a state bailout of the federal government.

By the way, the obvious decision to hold our fire on establishing an exchange is not irreversible. The state may at any point if it so chooses reverse course and implement one.

The last reason to avoid a state run exchange is what’s known as The Glitch. Michael Cannon and Jonathan Adler writing in the Wall Street Journal discovered that the health law provides for premium assistance programs in state run exchanges but not federal ones. This was an error drafting a bill which requires the bill to be reopened to correct. If only 20 or 25 states adopt exchanges, as looks likely, the law would have to be opened up if it isn’t repealed next year.

By not adopting an exchange, we increase the pressure to open the law to fix the glitch. We also increase the financial pressure on a law that counted on passing the cost of running the exchanges to the states.

But regardless of the pressure we may wish to exert, setting up a state exchange is a bad idea. A state exchange is a fig leaf layer of bureaucracy between us and the people who really make the rules. Setting up a puppet government to put a happy face on federal regulation does no one any favors, and it would cost us tens of millions of dollars each year that we don’t have.

 

UPDATE: Attached below is a letter from HHS Commissioner Toumpas to House Commerce Chairman Hunt, which lays out his objections to HB1297.

HB1297 would ban the State of New Hampshire from setting up a healthcare exchange.

Toumpas Letter to House Committee on Exchanges

By Charles M. Arlinghaus

September 2007

Too much of the discussion of the increase in health care costs implicitly views consumers as unchanging commodities and tries to shift costs for a fixed set of events from one set of payers to another. But just as tax policy must consider the dynamic effects of economic growth and changing incentives, health policy too must have a dynamic, pro-growth (or pro-health) component.

Ultimately people are not unchanging commodities who “get sick” a set number of times. The bulk of health care spending – 75% of the total and as much as 96% of Medicare spending – is spent not on a patient with a fixable episode or two but people with long term chronic conditions that in many cases can be controlled to both keep the patient healthier but also to reduce the overall cost of health care. Policy leaders should move beyond static analysis and cost-shifting plans to a system that can manage costs by managing disease and the chronic conditions that dominate health care spending.

There are literally dozens of changes that can and should be made to the health care system to reduce costs, increase responsibility, and lead to greater health. Nothing that follows is intended to discourage those other good ideas or suggest they are a waste of time. However, too little attention is paid to the construct of systems, whether privately paid or supported with tax dollars, that focus on an archaic notion of episodic care when the evidence suggests that chronic, longer term conditions contribute to the lion’s share of spending and hold the greatest potential for cost savings for all participants. Already, some programs are beginning that encourage cost savings by creating incentives for healthier consumers who then save the company or taxpayer money by spending less on health care.

 

Health Insurance in New Hampshire

The rapidly increasing cost of health care and insurance premiums has driven health care costs to the forefront of both state and national policy debates. In recent years, New Hampshire has led the nation in the cost of insurance. The average cost of a private family health insurance policy in New Hampshire rose from $6185 in 1998 to $11,835 in 2005,[1] an annual increase of an average of 9.7%. The national average has also increased by about 9.7% per year, from $5590 in 1998 to $10,728 in 2005.

For state workers, the increases have been significantly worse and New Hampshire has been worse than the rest of the country.  According to the National Conference of State Legislatures, family coverage for a state employee in the United States increased from $5,589 in 1999 to $12,152 in 2006, an average increase of $11.7% each year. According to the same study, from 1999-2006, New Hampshire’s costs rose from $5,945 to $22,634, an annual increase of an astounding 21%.[2] In 1999, New Hampshire spent 6% more than the national average. Seven years later, family coverage for state employees costs 86% more than in the average state.[3]

In seven years, the cost of an employee with family coverage increased by $16,700. That’s an additional $16,700 that went into health care benefits rather than increased salaries or hiring more employees. It is simple economics that an increase of $16,000 in benefit costs leaves $16,000 less available for raises. For the employer, whether the cost is paid as salary or insurance is all the same. But many employees are unaware of the cost or value of their benefit package and first notice the increased health costs as their potential take home pay diminishes.

Across the country, the amount of wages that is paid in the form of insurance premiums instead of traditional salary is rising. According to the Kaiser Foundation’s annual studies of health insurance premiums and workers’ earnings, from 2000 to 2006 health insurance premiums increased by a total of 86.5% while nominal earnings increased 19.6%.[4]

 

The Cost of Health Care

The cost of insurance has been an election issue in each of the last three elections. In many political debates, the discussion resorts to finding a new scapegoat and looking for blunt instruments not to deliver better care more efficiently but to apply price controls or ration care. More directly, costs are an issue for every business during annual insurance renewals and in the negotiation of a new state employee contract. Unfortunately, most of those discussions take the form a debate over cost-shifting.

 

The Increasing Burden

Insurance costs reflect a variety of costs but nothing impacts them as much as the total cost of health care. Both nationally and in state, the total cost of health care has been increasing significantly faster than the rate of inflation. From 1984 through 2004, the total cost of personal health care[5] in the United States rose from $338 billion to $1,551.3 billion.[6] The annualized rate of increase is 7.9% per year.

New Hampshire’s expenditures have grown a bit faster, probably because of greater than average population growth. From 1984-2004, New Hampshire’s spending grew from $1.15 billion to $7.01 billion, an annual rate of 9.4%. In New Hampshire,[7] growth was 11.3% annually from 1984-94 but has slowed to 7.6% from 1994-2004.[8]

Unsustainable growth

The federal government projects total health care spending to increase from$1,858 billion in 2004 to $3,628 in 2014, about 7% each year. If New Hampshire’s personal health care costs increase at a similar rate, our costs would rise from $7.1 billion today to $13.8 billion in 2014.[9]

As we’ve seen, regular insurance premium increases that far exceed the rate of inflation eat into workers visible wages and will drive up the cost of hiring new workers. But perhaps more alarming is the huge burden rising health care costs place on state and federal budgets. Annual increases of 21% for seven years in the costs of state employee insurance is the tip of the iceberg.

Health insurance growth rates have slowed somewhat but are still rising faster than the rate of inflation and historical growth in tax collections, the money available to be spent. As baby boomers age and move toward retirement, they also move toward the age when they consume more health care dollars, most of which are paid for by tax dollars in the Medicare and Medicaid programs.

New Hampshire economist Brian Gottlob of Polecon Research has studied the demographic trend looking toward the future. Medicaid vendor payments currently consume about 40% of the state budget. If no changes to eligibility were made and if government revenue grew at its historic average, an aging population would drain the state budget. In about fifteen years, Medicaid payments would consume the entire state general fund budget. While such a scenario would never literally happen, it illustrates how an unchecked rise in Medicaid spending would crowd out other state priorities and force significant spending reductions or tax increases.[10]

What drives spending?

Many reform efforts focus on dividing up total spending and reducing certain categories. The federal statistics upon which almost all analysis is based divide health care spending into categories based largely on type of service or provider. So total spending on hospitals or on prescriptions or medical devices are broken out.[11] While this information can be useful, it leads to a focus not on causes but on provision and location of care. Data categorized in such ways tells us little about whether one form of care replaced another or is more cost effective. For example, someone with asthma who significantly increases prescription spending for an antihistamine or an inhaler but avoids increased emergency room spending is difficult to tease out of the costs. In that case, prescription drugs are not driving up the cost of health care, asthma is.

New Hampshire has first hand experience with the limitations of such analysis. Concerned about growing prescription drug costs in the 1980s, New Hampshire placed a three prescription reimbursement limit on Medicaid patients with schizophrenia. The cap effectively controlled prescription costs for those patients. However, those patients also experienced a significant rise in emergency mental health services and health clinic visits. According to a study in the New England Journal of Medicine, the increased health care costs were 17 times the amount saved on prescription use.[12] There are few better illustrations of the phrase “penny-wise, pound foolish.”

Chronic care management not independent episodes

Too many discussions of health care costs tend to think of health care consumers as patients who experience an illness episode and then get fixed. We get sick, go to the doctor, get cured or break a leg and have it fixed. Under that way of thinking health care costs are independent transactions. Cost management focuses on reducing transactional costs.

But the true cost drivers in health care are not the increased transactional costs of a series of independent episodes. The bulk of health care costs come from patients with chronic conditions that rather than being “cured” or fixed require regular care management over a long period of time, often the duration of the patient’s life.

The impact of chronic disease on health costs has been publicized by the Partnership to Fight Chronic Disease and much of the analysis of chronic care costs that follows is influenced by their work and the research of its executive director, Kenneth Thorpe of Emory University.

According to recent research, the bulk of health care spending and the lion’s share of the increased cost of health care comes from patients with chronic disease and the increases in those disorders.

According to the US Center for Disease Control, at least 75% of the cost of health care in the United States comes from chronically ill patients who need regular and ongoing case management.[13] A report from Johns Hopkins University estimated the cost closer to 80%.[14]

In addition, much of the increase in health care costs isn’t just more spending on an unchanging set of conditions, chronic or otherwise. In fact, most of the increase in health costs can be traced to increased cases of the conditions driving spending. A study by Kenneth Thorpe in the journal Health Affairs found “nearly two-thirds of the rise in health care spending is linked to a rise in treated disease prevalence (for example, diabetes) and innovations in medical treatment” for chronic conditions.[15]

For the largest taxpayer-funded health programs, the impact of chronic disease is even greater. According to the same Johns Hopkins study, chronic conditions account for 83% of the total spending in Medicaid and about 96% of the costs of Medicare.[16]

Kenneth Thorpe’s study of Medicare spending found that not only was almost all of Medicare spending related to people with multiple chronic illnesses but the entirety of the increase in Medicare spending was the result of the treatment of multiple conditions. “Virtually all of this spending growth is associated with patientswho are under medical management for five or more conditions.This is traced to both a rise in true disease prevalence andchanges in clinical treatment thresholds.” Further, total spending is influenced not just by people with one condition requiring care management but by multiple conditions: “in 2002, 92.9 percent of health care spending was incurred by beneficiaries with three or more conditions during the year.”[17]

 

Why Does Chronic Care Matter?

It matters whether spending is the result of chronic conditions or episodic care because of the difference in treatment and expense. A “chronic disease” is an ongoing condition like asthma or diabetes which rather than being cured is managed to keep complications from being too expensive and too incapacitating. A broken leg is an event that happens, is fixed, and goes away. Chronic disease is a condition that requires ongoing care.

Asthma is one of the less expensive examples. Someone with asthma can be treated on a regular basis with antihistamines and a prescription inhaler to manage the symptoms that lead to more serious problems. Managing the illness with less expensive prescriptions allows a patient to avoid a visit to the emergency room that costs him time and trauma and costs the insurance company of public provider much more money.[18]

Another example is New Hampshire’s experience with mental health prescription drug limitations outlined above. The state didn’t save money because the spending was for an ongoing illness. After the prescription spending cap was repealed, spending on both prescriptions and mental health clinics reverted to previous levels. Because the condition was being managed, the payer, in this case state taxpayers, spent a little more on prescriptions but saved 17 times as much on the more expensive emergency care.

 

Obesity

Although costs are rising, are there really savings to be found? To begin with, any improvement with individual patients with asthma add up bit by bit. But there are clear examples of some conditions and areas where larger savings could be found.

The Thorpe and Howard analysis of trends in Medicare spending tried to isolate some trends and found one. “What accounts for these trends? Clearly, increases in obesity levels play a role. Many obese people have multiple morbidities such as hyperlipidemia, diabetes and hypertension.” For the period studied, 1987-2002, the share of patients with obesity more than doubled.[19] What’s more, the share of total Medicare spending by obese patients increased from 9.4% to 25%.

It would be unrealistic to make projections about eliminating human nature and thinking that no one would ever be obese but a more realistic improvement might also save money. Many studies have attributed being overweight to health costs like a greater risk of diabetes and greater health care spending. A study by Thorpe and Howard and two other colleagues found that health spending on obese Americans accounted for almost one-third of the increase in health care spending from 1987-2001, finding that health care costs were 37% greater among the obese than among “normal weight” patients.[20]

We know that some portion of the population will always be obese so the increased spending level matters only if there is a realistic chance to lower that percentage and if it would affect spending. In fact, Thorpe has looked at precisely that question. The obesity study decomposed spending growth to determine spending levels if obesity rates – and the chronic conditions associated with those increased rates – had remained unchanged at their 1987 levels.

According to the authors’ calculations, obesity accounted for almost 30% of the overall increases in total health care spending from 1987-2001. While all 30% of that increase could not have been avoided, had obesity levels remained at their 1987 levels, overall health spending would have been about 10% less, a potential savings of almost $200 billion.[21] The equivalent savings in the state of New Hampshire would be about $700 million.

The size of potential savings from reducing obesity levels to those of the not-distant past helps explain the recent focus on weight-loss efforts. For example, in New Hampshire, Dr. Susan Lynch, the wife of the current governor has focused most of the public affairs effort of her position on childhood obesity.

 

Trend-setting by Medicare

Medicare, the government’s health care program that covers everyone over 65, has traditionally been a bastion of old episodic care thinking about health care. The cost-drivers in Medicare are patients with multiple conditions who seek care from a variety of providers working on a fee for service cost structure. The result is a system that doesn’t promote efficient care or serve the needs of the patients. According to the Institute of Medicine of the National Academy of Sciences, “the system provides few disincentives for overuse of often high-cost and does little to encourage coordinated, preventive, and primary care that could save money and produce better health outcomes.”[22] The IOM’s critique might just as well have been of the entire health care system.

The Medicaid Payment Advisory Commission found that patients aren’t getting the care needed for their condition largely because the structure of the system doesn’t support care management: “care coordination is more difficult to do in the fee for service program because it requires managing patients across settings and over time, neither of which is supported by the current payment methods or organizational structures.”[23]

Dr. Mark McClellan served as director of the Center for Medicare and Medicaid Services and helped bring Medicare into the 21st century by beginning a program to move toward a modern vision of health care. He helped create the Medicare Advantage program. “Increasingly, efficient healthcare is about prevention, personalization and coordination of service around the needs of an individual patient.”

To begin to move toward disease management, the new program was created as a voluntary option. The Medicare Advantage programs are administered by private providers and include more case management, patient education for self-care and disease management.

According to McClellan, the disease management approach is the beginning of a needed transformation in healthcare, especially in taxpayer funded plans: “If our nation is to close the huge gap in prevention and in quality of care for chronic diseases, it is essential that we promote access to coverage like that available in most MA plans, which emphasize preventing illness in the first place, avoiding preventable complications of chronic diseases, and using health care more efficiently.”[24]

Ultimately, health care costs will be addressed by multiple providers competing with each to provide better care and better quality of life for patients while reducing their total health care costs over a long period of time rather than responding to expensive emergencies.

The rapid rise in insurance costs had led both insurers and business providers of insurance to look for ways to save money not just through cost-sharing but by creating incentives for a healthier lifestyle.

 

New Hampshire Action

The State of New Hampshire has not been as helpful as it might be in this respect. The most recent health insurance “reform” in the small group market had at its center eliminating the ability to consider health factors in insurance. Proponents of such reform were concerned about the ability to adjust rates for health conditions but allowed significant variations for age. Previously health factors could create differences of up to 25% in premium. As a proxy, age variances of up to 350% are now allowed. Because of the reform, non-smokers may not be charged lower rates nor may the insurance premium be lowered for any other healthy lifestyle choice.

Despite that limitation on building incentives into premiums, companies are still working to promote care management and create incentives for improved health to decrease costs.

Consumer-driven health care plans. Recent innovations in plan design attempt to make the health care consumer both cost conscious and health conscious by making him a partner in sharing savings and controlling costs. National evidence suggests this approach has the potential to lower costs but only recently has there been any New Hampshire experience to judge. Cigna, the state’s second largest insurance company, studied a year of claims for 38,200 enrollees in their consumer-driven insurance plans and found costs were 16 percent lower and use of medications for chronic conditions had increased.[25]

Care Management. Insurance companies can determine which of its members receive some care for chronic conditions and are now reaching out to consumers to manage that condition. If a customer with asthma manages his treatment to avoid high cost emergencies, it improves his health, reduces health costs and saves the insurance company money as well.

Financial Incentives and Penalties. Larger employers aren’t affected by the state small business regulation and rewards for a healthier lifestyle are becoming more common.

  • A southern New Hampshire employer offers rewards for healthy choices that improve the employee’s health and saves the company money. Non-smokers, regular exercise, or routine physical are all rewarded with cash payments. In addition, the company pays for free gym memberships.[26]
  • Twenty years ago, when state employees had multiple health insurance choices, the insurance companies competed annually to earn business. One choice was free health club membership, continued so long as an employee made a certain number of visits.
  • One company adds surcharges of $15-$75 each month based on body-mass index. Employees who improve their weight and health earn rebates. Others offer rebates to employees who complete health risk assessments and offer financial incentives to act upon the findings.[27]

A combination of incentives and penalties turn the employee into a partner in lowering health costs and keeping insurance affordable. Both the employee and the company have an incentive to reduce costs and improve health and both share the financial results.

 

Conclusion

The cost of health is growing much more rapidly than wages, the economy, and the ability of governments to afford it. We have no choice but to work to reduce the cost of health care for individuals, for companies and for governments. But the true drivers of spending demand we change our thinking about health care from the transactional cost independent episodes to ongoing care management and avoided costs.

About 75% of the total cost of health care and 96% of Medicare comes from patients with chronic conditions who require ongoing management of their care but often don’t receive it. Most of the increased health care costs over the last twenty years come from increased prevalence of chronic conditions, many of which can be controlled like obesity.

The potential to save billions and significantly slow the increase in health costs and therefore insurance premiums comes, in Mark McClellan’s words from “preventing illness in the first place, avoiding preventable complications of chronic diseases, and using health care more efficiently.”

Nothing in changing our paradigm in favor of chronic care management demands we accept or reject other reforms, prefers the agenda of one political party over another, or demands that the effort be carried forth solely by the government or solely by the private sector.

On the contrary, there are dozens of initiatives that can dovetail nicely with a focus on chronic care management. Some of them, like Medicare Advantage, may be government initiatives. Others may take the shape of business and insurance company initiatives to promote health among employees.

What is certain is that there is no one magic solution to health costs. We spend a lot of money as a society on perhaps the best health care system in the world. A less desirable way to reduce those costs is to ration care by one system or another. A better solution will focus on a growth strategy to improve health and eliminate complications by managing the chronic conditions and health risks that drive almost all the system costs.


[1] The data is taken from the U.S. Department of Health and Human Services Agency for Healthcare Research and Quality (AHRQ) at http://www.meps.ahrq.gov/mepsweb/. The Medical Expenditure Panel Survey (MEPS) is published annually although state specific data for New Hampshire was not compiled annually until 2002. New Hampshire’s average premiums have been about 10% higher than the national average for the last decade.

[2] The National Conference of State Legislatures annually compiles the cost of state employee health benefits. The NCSL uses family coverage and there are some slight variations with state sources. Their table is used a consistent standard to compare one state to another and generate a comparative national average. NCSL: State Employee Health Benefits, 2007 edition

http://www.ncsl.org/programs/health/stateemploy.htm.

[3] The total cost of state employee health coverage is 86% higher. The discrepancy to state budgets is even worse. Most states pay only a portion of the premium cost reducing the state obligation to about $9800, less than half the cost to the state in New Hampshire.

[4] The numbers are calculated from The Kaiser Family Foundation and Health Research Educational Trust, Employer health benefits 2006 Annual Survey, p. 19. http://www.kff.org/insurance/7527/upload/7527.pdf.

[5] The national health statistics include “total national health expenditures.” The category “personal health care” is a subset that does not include capital investment, research, public health or plan administration. In some ways the broader category is better because it includes other components that drive insurance costs. The narrower category may be a more direct measure of health and its costs but the two have very similar rates of increase. The state level statistics are maintained by personal health care expenses.

[6] See US Department of Health and Human Services Centers for Medicare and Medicaid Services National Health Expenditure Accounts

http://www.cms.hhs.gov/NationalHealthExpendData/downloads/nhestatesummary2004.pdf

[7] Although the trends are useful, the state specific data represents spending not by residents of New Hampshire but rather spending inside the borders of New Hampshire by whomever. So, a resident of New Hampshire served at a Boston hospital shows up as Massachusetts spending while a Vermonter going to a New Hampshire hospital counts toward the New Hampshire total.

[8]New Hampshire’s spending growth has declined in each five year period of the 20 years mentioned. From 1984-89, growth was 14.5% annually; 89-94 was 8.5%, 94-99 7.65% and 99-2004 was 7.57%.

[9] Author’s calculation assumes a growth rate of 7%, just slightly higher than the national projected 6.92%.

[10] Brian Gottlob, Polecon Research, “Demographic Myths and Realities, Challenges and Opportunities in New Hampshire,” presentation to the Stratford Regional Planning Commission, 31 May 2007, p. 13.

[11] A useful compilation of all the National Health Expenditure Accounts data for New Hampshire and a comparison to the state’s economy is contained in Doug Hall, “16 cents of Every Dollar: Health Care Costs in New Hampshire (2004-2005),” The New Hampshire Center for Public Policy Studies, March 2007. http://www.nhpolicy.org/16centsperDollar2007.pdf.

[12] Soumeria, S.B., McLaughlin, T., J., Ross-Degnan, D., Casteris, C.S., and Bollini, P. “Effects of Limiting Medicaid Drug-Reimbursement Benefits on the Use of Psychotropic Agents and Acute Mental health Services By Patients with Schizophrenia.” New England Journal of Medicine, 331: 650-655; 1994.

[13] The U.S. Centers for Disease Control and Prevention has an overview of chronic disease statistics available on its website at http://www.cdc.gov/nccdphp/overview.htm.

[14] “Chronic Conditions: Making the Case for Ongoing Care” September 2004. The Partnership for Solutions. http://www.rwjf.org/files/research/Chronic%20Conditions%20Chartbook%209-2004.ppt.

[15] See Kenneth E. Thorpe, “The Rise in Health Care Spending and What to Do About It, “ Health Affairs, November/December 2005.

[16] Gerard Anderson, “Chronic Conditions: Making the Case for Ongoing Care,” page 19. Partnership for Solutions, Johns Hopkins University, September 2004. The presentation is an update of a 1996 study by Catherine Hoffman and Dorothy Rice, “Chronic Care in America: A 21st Century Challenge.” http://www.partnershipforsolutions.org/DMS/files/chronicbook2004.pdf.

[17] Kenneth E. Thorpe and David H. Howard, “The Rise in Spending Among Medicare Beneficiaries: The Role of Chronic Disease Prevalence and Changes in Treatment Intensity.” Health Affairs, Web Exclusive, 2006. http://content.healthaffairs.org/cgi/content/abstract/25/5/w378.

[18] The scenario outlined is based on the author’s recent experience with his own asthma condition, management plan, and emergency room episode.

[19] Obesity levels are calculated using the body-mass index (BMI). BMI is calculated as weight in kilograms divided by the square of height in meters. Normal weight is defined as a BMI from 18.5 to 24.9, 25 is “overweight” and 30 is “obese.”

[20] Kenneth E. Thorpe, Curtis S. Florence, David H. Howard, and Peter Joski, “The Impact of Obesity on Rising Health Care Spending,” Health Affairs, web exclusive, 2004. http://content.healthaffairs.org/cgi/content/full/hlthaff.w4.480/DCI.

[21] For a more basic and less academic explanation of potential cost savings, see Kenneth Thorpe’s short piece “Potential Savings Under the AdvaMed Plan Associated with Health Reforms Focusing on Chronic Care Management, Prevention, and Health Information Technology,” 14 June 2007, p.1-2. http://www.

[22] The Institute of Medicine, “Rewarding Provider Performance: Aligning Incentives in Medicare,” September, 2006. http://www.iom.edu/CMS/3809/19805/37232.aspx.

[23] Medicare Payment Advisory Commission, “Medicare Advantage Benchmarks and Payments Compared with Average Medicare Fee for Service Spending,” June 2006. http://www.medpac.gov/document_TOC.cfm?id=421.

[24] Mark McClellan, “Testimony on Medicare Advantage and the Federal Budget,” June 28, 2007. http://www.aei.org/publications/filter.all,pubID.26413/pub_detail.asp.

[25] see Kathi Ragsdale, “Prescription for Savings,” Business NH Magazine, September 2007.

[26] Kathi Ragsdale, “Prescription for Savings,” Business NH Magazine, September 2007.

[27] Lisa Cornwall, “Companies Linking Benefit Charges to Health Risks,” Associated Press, 17 September 2007 http://www.burlingtonfreepress.com/apps/pbcs.dll/article?AID=/20070917/BUSINESS/709170309/1003