Health Reform: It's All About What Happens in 2014

Dr. Robert E. Hertzka, who has a long history of working in the area of healthcare access, including being the chair of San Diegans for Health Care Coverage for the past 10 years (California’s largest bipartisan coalition supporting increased healthcare access), has been closely following the process that led to the passage and now initial implementation of the Patient Protection and Affordable Care Act, or PPACA. Dr. Hertzka recently sat down to discuss PPACA with San Diego Physician — the following is the transcript of that discussion. The opinions expressed by Dr. Hertzka do not represent the opinions of the San Diego County Medical Society (SDCMS) or of the California Medical Association (CMA). SDCMS invites physicians to participate in this discussion by submitting their comments to Editor@SDCMS.org for possible publication in a future issue of San Diego Physician.

San Diego Physician: Everyone agrees that PPACA is a broad and sweeping piece of legislation — in fact, the most comprehensive health reform measure since Medicare and Medicaid in 1965. Everyone also agrees that, just like Medicare and Medicaid, it will need to be amended and adjusted over the years. Nothing special about that. So why should people, and, in particular, why should physicians be concerned?

Dr. Hertzka: Those who have been involved in the health reform efforts of the past 20 years or so — I go back to the Prop 166 Steering Committee of 1992 — know that there are certain principles to follow if one is to be successful in expanding healthcare access. Chief among those is financial soundness: Does the program pencil out? Government programs that are overpromised and underfunded are hard to sustain, but, more significantly, they end up putting a particular burden on physicians because we are the ones who pick up the pieces when these programs fall short.

This is not just theory; just look at all the programs around us. Medicare has kept physician reimbursement essentially frozen for 10 years, while threatening ever-increasing cuts — the latest being in the 30–35 percent range at the end of 2011. Medicaid in California has also been essentially frozen for most everyone, other than obstetricians and pediatricians, for 25 years. And, at the same time, enrollment and eligibility for both of these programs has expanded. Much the same for healthcare for military dependents; when I started in practice, what was then CHAMPUS was a good payer, but now the new version (TRICARE) is linked directly to Medicare. All of this is an overpromise/underfund phenomenon that has meant that the “books” for these programs are “balanced” on the backs of physicians. And, after a careful review of PPACA, many believe that it could easily end up being more of the same.

San Diego Physician: Points well taken. But, obviously, the Obama administration and the Democrats in Congress who voted for PPACA disagree with you. They say that in 2014 PPACA will provide health insurance to 32 million of the currently uninsured in a financially sound manner. What could be wrong with that?

Dr. Hertzka: Clearly, on the face of it, expanding access to 32 million people in 2014 is wonderful. But, in fact, the reality of that “32 million newly covered” statistic is the heart of the problem. As proposed and touted, approximately half of those newly covered will be in an expanded Medicaid, and the other half will obtain coverage from the new health exchanges in the context of an individual mandate. Even putting aside the very serious constitutional issues that have been raised about both the Medicaid expansion and the individual mandate, both of these access expansions, as currently structured, are at best highly problematic, if not likely to fail.

San Diego Physician: How so?

Dr. Hertzka: Let’s look at the Medicaid expansion first. Most people, including physicians, are not aware that Medicaid, which was originally designed in 1965 to cover all low-income people, has actually evolved into a program largely for low-income pregnant women, low-income children, AIDS patients, and a smattering of other eligibility categories, including low-income parents in some states. Contrary to popular belief, there is no inherent eligibility for non-elderly, childless adults — as many as 32 million of the currently 50 million uninsured are in fact such childless adults.

And while some low-income adults do get some kind of coverage (in California through a County Medical Services program), they find themselves in a program that pays at abysmal Medicaid rates. So while “covered,” they find that their access is limited to a smattering of primary care doctors and community clinics; specialty physician access for Medicaid patients, at least in California, is virtually zero. The combination of this limited access to physicians with the nature of very low-income adults is that we see this population frequenting the emergency room at a rate far in excess of otherwise uninsured individuals.

By the way, this goes against a prevailing wisdom among the public that it is the uninsured who are the ones who crowd our emergency rooms. In fact, many of the uninsured shun the emergency room — the waits are long and the bills are huge. But once very low-income individuals are given Medicaid eligibility and realize that they are essentially immune from being billed for any healthcare expense, study after study shows that relatively few establish any kind of steady, cost-effective primary care access; rather they tend to seek episodic care in expensive emergency rooms at a rate two to three times that of the uninsured.

Effective Jan. 1, 2014, PPACA declares that all those below 133 percent of the federal poverty level (FPL, currently $11,000 for an individual, $14,000 for a couple, and $22,000 for a family of four) are immediately eligible for Medicaid. Most people would be shocked to realize that as many as 16 million people at or below that income level, if not more, make up such a large proportion of the uninsured.

But, more importantly, in the context of no real effort to improve primary care access other than a) a two-year increase in primary care payment rates in 2013 and 2014 (really only one year because the eligibility increase does not occur until 2014); and b) a series of threats to deputize nurse practitioners as primary care providers equivalent to physicians, it is predictable that we will see a flood of new emergency room visits and very little new comprehensive care.

Bottom line: A major new adult Medicaid expansion (unlike pediatrics, which has adapted and adjusted to Medicaid over decades) is not real healthcare access, but yet it is fully half of what PPACA purports to provide.

San Diego Physician: OK, but what about the other half? Those +/- 16 million are going to get solid, fiscally sound private insurance, yes?

Dr. Hertzka: Frankly, that looks problematic as well. Unlike the arguably blind hope and faith that went into the proposed Medicaid expansion, the underlying principles here are OK. The idea is to give uninsured individuals above 133 percent of FPL purchasing power by letting them buy partially subsidized private insurance through an insurance exchange, much like 5 million federal workers currently do. These many millions of people will now have the purchasing power of a large group and cannot be discriminated against for any preexisting conditions.

It all looks great in theory, combining the “carrot” of subsidized healthcare premiums with the “stick” of a penalty if insurance is not purchased.

But, as can be seen in Figure 1, the reality of the choices that people will probably make is different from what the Obama administration would lead us to believe. Insurance subsidies will lower the cost of insurance for very low-income people to just 4 percent of income, but only to 8.05–9.5 percent for low to moderate incomes, and not at all for those above 400 percent FPL (currently $44,000 for an individual and $88,000 for a family of four).

FIGURE 1: 2014 / 2016 PENALTIES AND PREMIUMS FOR THE INDIVIDUAL

• $16,000 (150% FPL): Penalty = $160 / $400 • Premium = $640 (4% of income)
• $28,000 (250% FPL): Penalty = $280 / $700 • Premium = $2,254 (8.05% of income)
• $44,000 (400% FPL): Penalty = $440 / $1,100 • Premium = $4,180 (9.5% of income)
• $45,000 (>400% FPL): Penalty = $0 / $0 • Premium = Market Rate

FIGURE 1: 2014/2016 PENALTIES AND PREMIUMS FOR THE FAMILY OF FOUR

• $33,000 (150% FPL): Penalty = $330 / $825 • Premium = $1,320 (4% of income)
• $55,000 (250% FPL): Penalty = $550 / $1,375 • Premium = $4,400 (8.05% of income)
• $88,000 (400% FPL): Penalty = $880 / $2,085 (max) • Premium = $8,360 (9.5% of income)
• $90,000 (>400% FPL): Penalty = $0 / $0 • Premium = Market Rate

Meanwhile, the penalties paid by individuals will only be 1 percent of income when this rolls out in 2014, rising to 2.5 percent of income by 2016. This may sound substantial, but it is in fact far below the levels seen in the successful individual mandate models of the Swiss and the Dutch, where the penalties for not obtaining health insurance exceed the cost of the subsidized premium. Furthermore, under PPACA, those who do not purchase insurance and then become ill can buy the same subsidized insurance at that time.

Look carefully at Figure 1 and ask yourself if an uninsured individual scraping by on $16,000/year will really pay $640 for health insurance if the penalty for not doing so is only $160, and they can get the insurance later if they need it anyhow? Or better yet, they can just work a bit less or report less income and get into the newly expanded Medicaid for free.

How about an uninsured individual living on $44,000/year? Will that individual really pay $4,180 for health insurance if the penalty for not doing so is only $440 and they can get the insurance later if they need it anyhow? Most think not.

San Diego Physician: OK, maybe the whole individual mandate/insurance exchange model is a bit shaky. But for the working uninsured, whose only current option is to buy insurance as an individual and thus be subject to individual underwriting, isn’t this still a major improvement?

Dr. Hertzka: Maybe so. But the authors of PPACA were so obsessed with this population and how they might or might not respond to various incentives and penalties that they forgot everyone else, namely the 170 million currently insured through their employers, the vast majority of whom are in a secure if increasingly expensive situation.

To get all the votes they needed from more centrist Democratic House and Senate members, PPACA’s authors limited the penalty on medium and large employers for failing to provide health insurance to only $2,000/employee, far less than what most currently pay to provide it. This has created a huge incentive for employers who currently provide insurance to stop doing so and just pay the fine, while sending their employees — by the millions — to the subsidized exchanges. Same for new and expanding companies: Their incentive is to never start providing health insurance in the first place. By 2014, many now believe that the number of people in the exchanges will not just be the 19 million projected by the Obama administration (the vast majority of whom will have been previously uninsured), but more like 55 million, raising the cost of the necessary subsidies by an additional $1 trillion.

This alarm bell is being rung all over the country, as even a senior health policy analyst at the left-of-center Urban Institute has labeled this arrangement “unworkable and unfair.” And two-term Tennessee Governor Phil Bredesen — a Democrat no less — has published a detailed analysis of how Tennessee will be able to cut its health benefit costs for its state workers by as much as 40 percent. In this analysis, state workers are actually kept whole by having their state benefit costs replaced by some increase in wages, but, most importantly, by access to the substantial federal subsidies shown in Figure 1.

And it gets worse. Given the new projections of the additional tens of millions of workers — many of whom will be low-wage workers — being directed to the exchanges in combination with the weak penalties for not obtaining insurance (see Figure 1 again), the future of all this actually looks more than a bit scary. A recent nonpartisan analysis by McKinsey and Co., an international consulting company, whose Center for U.S. Health System Reform is actually headed by a former special assistant to President Obama, suggested that after PPACA’s implementation, we may still have as many as 40 million uninsured. This, combined with as many as 20 million in a likely ineffective Medicaid expansion, gives us 60 million with little to no coverage — no better than where we are today — and after spending as much as 2 trillion dollars!

San Diego Physician: As of today, the Congressional Budget Office (CBO) maintains the position that PPACA actually saves money, even releasing a new report that concludes that repealing PPACA would cost taxpayers over $200 billion over the next 10 years. Why such a discrepancy with what you seem to be saying, which is that keeping PPACA in place is what would be costly?

Dr. Hertzka: The CBO has been and continues to be a reputable source of information, even if its director is chosen by partisans, most recently Democrats. But what the CBO is most known for is making projections based on assumptions that are provided to it. In the case of PPACA, when it came time to project the costs, the CBO was instructed by the Democrats in Congress to accept a long list of dubious assumptions, including that a) all physician reimbursement under Medicare would drop by 40 percent and stay there (actually making Medicare in the aggregate a worse payer than Medicaid); and that b) a wholly unprecedented $500 billion in cuts to other Medicare services, including $398 billion from hospitals, would be identified and successfully implemented. And, of course, they were directed to factor in 10 years of taxation but only six years of subsidy payments. All that taken into account, the CBO was then able to project $143 billion in "savings" over 10 years and thus, of course, at this point an even larger “cost” should PPACA be repealed. And don't forget, PPACA includes about half a trillion dollars in tax increases on various sectors of the health industry that are supposed to help pay for all that will occur in 2014 and beyond — repealing all those taxes adds to the deficit.

In a broader context, it needs to be noted that an equally reputable source, the truly nonpartisan Medicare actuary, quietly issued a report just a few weeks after PPACA was passed and signed last March that was quite damning, concluding even then that PPACA would add to our overall national health expenditures by some $311 billion over 10 years, and also that, if successful, the proposed cuts to hospitals could cause at least 15 percent of them to stop accepting Medicare patients in order to remain solvent.

So, as the “repeal” debate rages, we are left with two starkly different estimates: one that says that keeping PPACA in place will save us about $200 billion, and another that says that Medicare will not cut physician reimbursement by 40 percent, will not cut hospitals by $398 billion, and that many millions of the currently insured will end up seeking care from the exchanges, ballooning the cost of the federal subsidies by an additional $1 trillion between 2014 and 2019. Under that latter analysis, which actually makes more sense to me, repealing PPACA will actually save as much as $2 trillion over the next 10 years while leaving Medicare in better financial shape.

San Diego Physician: You have to admit that your take on all this is pretty negative. Do you have anything good to say about PPACA?

Dr. Hertzka: Of course. First let me emphasize with enthusiasm that most of the various reforms to the private health insurance industry read like a CMA policy recommendation manual. In addition, on a conceptual level, subsidized high-risk pools for people with preexisting conditions, tax credits for small businesses to incentivize them to provide insurance to their employees, and additional relief for seniors with high drug costs are all good things.

But remember, PPACA was written by politicians, not policy people, so it was designed to front-load as many “goodies” as possible to give its proponents things to crow about. Many of those “goodies” are fine concepts and would likely be preserved in some form in any eventual “Repeal and Replace” effort. But the core of the bill and its $1 trillion cost ($2 trillion-plus if the critics are correct) is all about what happens in 2014.

And even in 2014, some people will derive great benefit from the new health insurance exchanges, and even some of the new Medicaid patients will find themselves in a much better situation. Unfortunately though, as PPACA is more thoroughly analyzed with each passing week, it appears that these people will be the exception more than the rule.

The bottom line about how to think about PPACA is that it may end up being a brick that is just smothered with tasty frosting, but the American people are being told that it is cake. All we hear from the proponents of PPACA is about how tasty and great the frosting is, and it is. But come 2014. we may find out that what is under that frosting is no cake at all, and, if so, it will be physicians who once again bear the brunt of yet another round of well-intentioned government miscalculation.

San Diego Physician: What do you think is behind the public’s mood about PPACA, as every single survey done since last March shows that the number of those who favor repeal outnumbers those who favor keeping PPACA as is (or expanding it)?

Dr. Hertzka: It is hard to really know because the public knows almost nothing about the various policy points that I have just laid out in this interview, but think of what the percentage favoring “repeal” would be if they did: probably 60–70 percent.

What the public does know is that despite nonstop cheerleading from the White House and from many Democrats in Congress, nothing about PPACA is turning out as advertised. Only in the bubble of Washington, DC, can otherwise intelligent individuals believe that if we can just put “15 really smart people” together in a room, they could figure out — with precision — how 308 million people will respond to a dizzying array of new taxes, mandates, and regulations.

As just one recent example, it was estimated by the CBO — and even the truly nonpartisan Medicare Actuary — that by December 2010, some 375,000 people would have enrolled in the new subsidized high-risk pools for the uninsured that were launched in June. However, the actual number was only 8,000, meaning that the projection was off by nearly 98 percent!

Beyond that general distrust of government, my sense is that, at a gut level, most people realize that there is probably not much in PPACA for them, and, in fact, the majority of people will actually end up paying more for the same, or less, coverage than they have now.

Consider the various insurance reforms, most of which have been and remain quite popular. Having your uninsured children still living at home stay on your policy until age 26 is a very reasonable idea, but it is projected to increase the cost of a family policy by $135/year. Perfectly acceptable to most, but when you then add the ban on preexisting conditions for children, the removal of lifetime payout limits on policies, the ban on rescissions, and all the other reforms, we will have increased the cost of a family policy by about $1,000/year. That is probably still worth it, but I would guess that 70 percent or more of those currently insured believe that they will never derive much benefit from any of this.

And that is just the start. Let’s list just a few of the ways that PPACA provisions will increase the cost of existing private insurance:

The various cuts and freezes in Medicare and Medicaid will accelerate what has already been substantial cost-shifting by physician and hospital providers to private payers.

The weak individual mandate, even if not struck down by the courts as constitutionally excessive, will boost private premiums as all of those with major medical conditions will buy insurance (no more discrimination against those with preexisting conditions) while many millions of the healthy will wait until they get sick.

As a perk for (high-propensity voting) seniors, some $80 billion in mandated price reductions for brand-name drugs will go toward shrinking Medicare Part D’s so-called “donut hole.” Great for seniors, but the rest of us will all pay that through our private premiums as Big Pharma will just cost-shift that $80 billion over to private plans.

Various new direct taxes on the healthcare industry are also part of PPACA, including a tax on health insurers ($14 billion per year by 2017), a tax on pharmaceutical companies ($4 billion per year by 2017), and a new 2.3 percent tax on all medical devices. All of these costs — more than $20 billion per year — will again just be cost-shifted over to private plans.

Finally, contrary to conventional wisdom, the proposed transition of the healthcare system to one based on so-called Accountable Care Organizations (ACO’s) may not save money, at least initially. The Obama administration has a documented obsession with blaming the health system’s ills on fee-for-service physicians — in nationally televised appearances, the president himself cited first ENT surgeons taking out tonsils on a whim for cash, and then later blamed physicians as a class for “amputating the limbs of diabetics for $30,000” rather than managing their disease. This obsession is driving a hasty and frenzied consolidation within the healthcare world, as hospital systems are growing and physicians are aligning with them. The problem is that there is plenty of evidence that the larger the health system, the harder bargain they drive, particularly with private insurers. Once again, this raises the cost of private insurance.

By the time all this kicks in, the average currently covered American, some 170 million people — still the majority of the country — will likely see their annual premium for family coverage go up $2,500/year or more just from PPACA provisions. Notably, CBO does not “score” this because none of this is government expense.

And so to sum up, in a political context, we are looking at the signature issue of a president who ran in 2008 on the promise that electing him would result in family premiums going down by $2,500, not up by $2,500. No wonder that repeal remains popular, and the Republicans picked up 63 House seats.

San Diego Physician: So what next?

Dr. Hertzka: In the big picture, not much right away.

By the time people read this, the House of Representatives will have repealed PPACA by a wide margin, including the votes of some House Democrats. But the Democratically controlled Senate will do little for now and wait, hoping that all this hoopla is just “Tea Party passion” that will settle down over time.

But if public opinion stays negative, they will have to do something, as many of the current Senate Democrats were either elected in 2006 as a protest of the Iraq War or in 2008 as part of the Obama wave election. They will face the voters again in 2012 and 2014 respectively and will need to show that they know that their constituents are concerned about PPACA.

The courts will weigh in at some point in the next two years, as the Supreme Court will likely opine on two separate issues: the constitutionality of the mandated Medicaid expansion and the constitutionality of the individual mandate.

Should PPACA be upheld, the 2012 presidential election will then likely be decisive, as the Republican nominee will run against President Obama on a platform of “Repeal and Replace.” And by that 2012 election, there will be a much more significant emphasis on the “Replace,” as voters will want to keep several of PPACA’s early provisions, in particular the private insurance industry reforms.

If Republicans retake the White House in 2012, the House of Representatives will almost certainly remain Republican, and the Senate will likely flip over to the Republicans as well, making it likely that PPACA will be replaced or significantly altered before the critical date of Jan. 1, 2014, which is when the Medicaid expansion, the mandate to buy insurance, and the substantial subsidies would all begin.

But if President Obama is reelected, PPACA will stand, and we will all watch what happens in 2014: Will PPACA shock its detractors and work successfully? Or will it be the reckless social experiment that its detractors believe it is, leaving us with a health system that is acutely destabilized and thus even more problematic than what we have now?

Stay tuned.