• Don’t blame Medicaid for most of the rise in state and local health care spending

    The following originally appeared on The Upshot (copyright 2015, The New York Times Company).

    Health care spending growth has moderated in recent years, but it’s still putting tremendous strain on state and local governments. A recent analysis by The Pew Charitable Trusts revealed that it consumed 31 percent of state and local government revenue in 2013, nearly doubling from 1987.

    But Medicaid — the state-based health care program for low-income Americans — is not the chief culprit.

    Health care benefits for public employees and retirees, not Medicaid, account for a majority of the growth in state and local health care spending. Adjusted for inflation, spending for those health care benefits rose 447 percent between 1987 and 2013. Medicaid spending rose a great deal as well, but not as much, 386 percent.

    Analysis by Donald Boyd of The Brookings Institution suggests that Medicaid will not be the main driver of state and local health care spending growth, despite expansion of the program under the Affordable Care Act. That’s because a large proportion of Medicaid costs is paid by the federal government, including 100 percent of the costs of the Medicaid expansion through 2016, trending down to 90 percent by 2020 and holding at that level thereafter. (And, despite what you may have heard, the findings of a recent report from government actuaries do not change this story.)

    Medicaid spending growth per enrollee is also much lower than that for private coverage. According to the Congressional Budget Office, per-person Medicaid spending growth has been below that of Medicare and other sources since 1975. Between 1990 and 2012, Medicaid spending outpaced the overall economy by only 0.1 of a percentage point, while overall health spending grew 1.1 percentage points faster than the economy.

    Medicaid is by no means a perfect system for delivering health care, but it is the cheapest source of coverage. It costs about $3,200 per year to cover an adult on Medicaid, again with the federal government picking up most of the tab. Private insurance, delivered through an employer, costs about$5,300 annually.

    Growth in health spending is crowding out state and local spending for other services. For example, in my home state of Massachusetts, between 2001 and 2014, government health spending grew 37 percent, while that for education and public safety declined 12 and 13 percent. In California, spending on health care is having the same effect.

    The main source of the problem is growing spending on health care for state employees. Health care spending for retired state employees and their beneficiaries grew 61 percent in the past six years. The Pew Charitable Trusts predicts that over the next 40 years spending on health care alone will surpass that for all other state and local government services. Coverage for public-sector retirees accounts for much of state and local health care spending, even though Medicare pays most of the costs once those retirees reach 65.

    In a recent paper in The Journal of Health Economics, Byron Lutz and Louise Sheiner estimated that state and local governments’ current liability for retiree health benefits is $1.1 trillion, or about one-third of total annual revenue. A vast majority — 97 percent — of the liability is unfunded, meaning it lacks dedicated trust fund dollars with which to pay benefits.

    Governments can either increase revenue or reduce benefits. But the Affordable Care Act offers a potentially attractive option. Instead of receiving retiree health insurance from their former state or local government employer, retirees who are not yet eligible for Medicare could buy coverage on an exchange, which would be subsidized with federal dollars for those with incomes below a certain threshold.

    This would shift the cost of coverage — and future liability for it — off the books of state and local governments. Of course, to the extent that retirees would have to pay higher premiums, the governments might have to compensate them, perhaps by increasing paychecks during their working years.

    Whatever states do, they won’t find a lot of help by skimping on Medicaid. It’s already cheap, and it’s not the biggest source of growth in health care spending.


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  • Do Medicare Advantage plans pay providers different rates than traditional Medicare?–ctd.

    I broached this subject before. Yesterday, in Health Affairs, Robert Berenson and colleagues offered some additional data. Long story short: Medicare Advantage (MA) plans appear to pay hospitals at or slightly above traditional Medicare (TM) rates.

    The finding comes from the authors’ interviews in 2014 with (mostly) CFOs of ten hospitals or hospital systems and (mostly) the heads of provider contracting or network management of eleven health plans. Though the investigators were careful to select hospitals and plans that varied in many important dimensions (like geography, size, profit status, vertical integration, etc.), not all findings may generalize to all of MA and the hospitals with which MA plans contract.

    My highlights follow.

    • “[W]e found that respondents from MA plans reported that they were currently paying at or slightly more than 100 percent of the traditional Medicare payment for hospital services. […] Currently, 110 percent of traditional Medicare seems to be the rate
      ceiling in markets with powerful hospitals that use ‘more of their muscle’ to get the higher payments, while 100 percent of traditional Medicare is generally the floor, with the majority reporting in the 100–105 percent range.”
    • “Commercial insurance rates for hospitals are much above those of MA. With one exception of a hospital reporting being paid commercial rates of 105–112 percent of traditional Medicare, commercial rates were reported to be at least 130 percent those of Medicare Advantage. Commercial rates averaging 175 percent, 250 percent, 300 percent, and even 350 percent of the MA rate are cited.”
    • What keeps MA rates down to about 100% of TM?
      • “Most prominently mentioned was section 1866 of the Social Security Act and CMS’s implementing regulation (42
        CFR 422.214) that stipulate that providers must accept payment for out-of-network hospital care for MA plan members at the rate applicable under traditional Medicare. Thus, […] most respondents thought that hospitals have little bargaining power to obtain negotiated rates above 100 percent of traditional Medicare.”
      • “MA plans effectively operate with fixed budgets constrained [by Medicare payments].” In other words, they simply cannot pay much more.
    • What keeps MA rates up to about 100% of TM?
      • “MA network adequacy requirements, which specify criteria, such as a minimum number of providers and maximum travel time and distance for beneficiaries, that MA plans’ networks must meet. These requirements provide a counter source of leverage for hospitals.”
      • I did not see it mentioned in the paper that, except in the few markets where MA both predominates overall and enrollment in it is highly concentrated in one carrier, hospitals could refuse MA payments and focus on TM patients, which obviously come with 100% of the TM price. Where there are multiple competitive carriers (in the sense of all having large market share), hospitals can more easily negotiate for higher payments. Both factors would tend to keep MA payments up to at least 100% of TM. Finally, in any market a hospital could refuse participation in an MA plan’s network and when its enrollees visit it, they come with a 100% TM out-of-network price.
    • Is it really 100% anyway? Hospitals argue that MA payment is effectively below 100% because of the additional costs MA plans impose. It makes it sound like hospitals would prefer to be rid of MA.
      • “Medicare Advantage more frequently than traditional Medicare rejects payment for stays on the grounds that the stays are
        not medically necessary; […] downgrades stays to ‘observational’ status, with payment at lower outpatient hospital rates; […] requires hospitals to incur increased administrative expenses because of the separate information requirements of each
        separate MA plan, compared to the unitary requirements of traditional Medicare; […] do better prehospital screening and prior authorization than traditional Medicare to limit hospitalizations—thus, within any DRG category, MA inpatients are sicker than traditional Medicare patients and require more resources; the costs of collection from patient cost-sharing
        obligations are higher in Medicare Advantage; often there is no ‘back end’ reconciliation such as traditional Medicare conducts, providing additional payments for bad debt, graduate medical education, and disproportionate-share hospital
        payments; and traditional Medicare typically pays more promptly than MA plans.”
      • On the other hand, “Since both star-rating and risk-adjustment calculations depend on data from providers, contracts can include incentives for more complete data submissions, resulting in payment of slightly more than 100 percent of traditional Medicare.” You can smell the upcoding vector here.  (More from me about upcoding is forthcoming.)
    • The “it’s all a big bucket of money” theory: “[H]ospitals are able to trade off the lower-than-desired payments in Medicare Advantage for substantially higher rates on commercial insurance.” This is closely related to the cost shifting theory, which is mentioned in the paper. Don’t get me started. Anyway, MA/commercial market plan payment trade-offs are plausible, given how negotiations tend to be conducted. (There’s a research study to be done here.)
      • “Negotiations between hospitals and health plans over MA contracts most often take place as part of negotiations
        over the full range of health insurance products, including commercial insurance.”
      • “Hospital systems predominantly negotiate as a system on behalf of all the system’s constituent hospitals at once, instead of hospital by hospital.”
      • “For health plans with a broad geographic scope, including national insurers, MA negotiations typically are conducted regionally or locally, with central office oversight. Most MA contracts extend two to three years. But a few run up to ten years or are ‘evergreen’ (automatically renewed) with annual inflators and ‘material impact’ language to open them up for renegotiation.”
    • Pay-for-volume still predominates. “By far the most common payment method used in MA plans is traditional Medicare’s diagnosis-related group (DRG) system, or MS-DRGs, for inpatients and traditional Medicare’s ambulatory payment classification for hospital outpatients.”

    The bottom line is that MA prices to hospitals basically follow TM’s. Hence, in contrast to the commercial market, MA network contracting is more focused on quality than price, where I speculate that “quality” also includes the willingness and ability of providers to work with MA to maximize government payments and minimize cost (e.g., upcoding and utilization management).

    I further speculate that the small deviations from 100% TM price (i.e., to 105%) are to incentivize or select for hospitals that do more of this non-TM stuff. In other words, MA plans are not just paying for care, the way TM does, but also for some degree of cooperation in their ambition to maximize revenue and minimize costs. If I’m right, and it could be teased apart, maybe MA plans don’t even pay 100% TM prices for the “care” portion. (More fodder for research, if feasible.)


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  • They eat lard

    Via Hend:

    lard eaters


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  • The policy impact of health economics

    In a well-referenced paper, Sherry Glied and Erin Miller summarized the history of health economics research and its policy impact, with emphasis in the second half on the Affordable Care Act.

    The tl;dr version is that the Congressional Budget Office’s bill scoring role is the institutional mechanism by which health economics research affects policy. Without it, it’s not evident how health econ would matter. Not mentioned by Glied and Miller, is that the Office of Management and Budget’s evidence-based budgeting initiative is another mechanism by which health economics, as well as other social policy research, could affect policy. Glied and Miller’s unstated implication (or, my own inference) is that without a fairly explicit institutional role for research—like CBO’s bill scoring or OMB’s evidence based budgeting—it won’t reliably affect policy. All the stomping up and down about how research should inform policy won’t do much. It has to be institutionalized. Exceptions are possible, but rare.

    One passage from the paper, about the ACA’s Cadillac (excise) tax:

    As President Obama and Congress began debating health care reform in 2009, 32 prominent health economists sent the President a letter stating, “This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers” (Rampell, 2009). The excise tax incorporated in the ACA directly addressed the tax treatment of health insurance. The new tax had no political constituency whatsoever—not unions, not business, not conservative taxpayers, not liberal taxpayers. It was a victory only for health economists.

    The victory is both fragile and partial. The Cadillac tax isn’t yet implemented (still 2.5 years to go), it could still be repealed, and its design is imperfect, even ham-handed, for political reasons. But, w00t, health econ!

    The paper is interesting throughout.

    Related, this interview of Daniel Hausman by Gary Gutting on the limitations of economics is also worth your time.


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  • Recently read, recently resolved

    Read, or nearly:

    • Sapiens: A Brief History of Humankind, by Yuval Noah Harari—At over 400 pages, it’s not that brief, but it’s worth it. It’s my kind of history book, light on details, heavy on concepts. The big one: civilizations are built on myths or mental constructs (religion, culture, class, rights, justice, money, etc.). It’s the only way to achieve a scale of organization (e.g., millions of people) beyond what biology would facilitate on its own (e.g., hundreds). Here’s an interview with the author, which inspired me to read the book. (In truth, I’ve not yet finished it.)
    • All the Light We Cannot See, by Anthony Doerr—I may not yet have read a more beautiful book. It’s a novel, not a physics book, but there is some light (in two senses) physics in it. Delightfully, there are even a few equations (trigonometry), but one need not understand them. I will read it again, which I almost never do of any book. What it taught me: the (biological?) drive for a meaningful life is so easily co-opted by civilization, even a grotesquely destructive one like the Third Reich. Harnessing the ambition of millions of people—or even a few—is a remarkable thing. Do we slip on the clothes or are we dressed by others? “Isn’t life a kind of corruption? A child is born, and the world sets upon it. Taking things from it, stuffing things into it. Each bite of food, each particle of light entering the eye—the body can never be pure.” Here’s the NY Times review.
    • What If?: Serious Scientific Answers to Absurd Hypothetical Questions, by Randall Munroe—Highly entertaining and a not bad review of some science. If there isn’t yet a physics course designed in this style, there should be. Not addressed: How much more of the electromagnetic spectrum would we need to see before we couldn’t see an object (like a computer screen) two feet from our face? Quoting All the Light We Cannot See again: “Torrents of text conversations, tides of cell conversations, of television programs, of e-mail, vast networks of fiber and wire interlaced above and beneath the city, passing through buildings, arcing between transmitters in Metro tunnels, between antennas atop buildings, from lampposts with cellular transmitters on them, commercials for Carrefour and Evian and prebaked toaster pastries flashing into space and back to earth again […] and ten thousand I miss yous, fifty thousand I love yous, hate mail and appointment reminders and market updates, jewelry ads, coffee ads, furniture ads flying invisibly […] over the scarred and ever-shifting landscapes we call nations.”

    Maybe some of us are already seeing way too much of this light, in a way. I’ve decided I am and have resolved to implement a new approach to work and life: I am only reading email, news, and checking Twitter a few, set times on weekdays and even less on weekends. Alerts are off, always. Expect less responsiveness. I’ll get to everything, just not right away. This will allow longer stretches of time to focus, something I’ve denied myself for too long, possibly deteriorating my ability to concentrate as I once did (or is that aging?). This is a common complaint. See this Note to Self episode; this one is also relevant.


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  • Hospitals’ Medicare margins

    Brad Flansbaum drew my attention to this testimony before the House Ways and Means Committee by Mark Miller, Executive Director of the Medicare Payment Advisory Commission (emphasis added):

    However, hospitals’ overall Medicare margin—a measure of the relationship between Medicare payments for, and hospitals’ costs of, providing care to Medicare patients—is negative. In 2013, the median hospital margin was –5.4 percent. Relatively efficient hospitals (i.e., hospitals with lower costs and better quality over three years) had a median margin of 2 percent in 2013.

    Part of the reason Medicare margins are low is that hospitals have high costs per case driven in part by lack of fiscal pressure from private payers. The Healthcare Cost Insitute reports that payment rates from private insurers have grown at an average of over 5 percent annually from 2011 through 2013. Commercial rates, on average, are about 50 percent higher than hospital costs and over 50 percent higher than Medicare rates. For example, Aetna and Blue Shield of California pay hospitals rates that are often 200 percent of Medicare’s rate for inpatient care and 300 percent of Medicare’s rate for outpatient services in California (California Department of Insurance 2014a, California Department of Insurance 2014b). In 2013, hospital all-payer margins were a record-high 7.2 percent.

    The Commission has shown that higher payments from private insurers allow hospitals to have higher costs which, in turn, makes Medicare margins more likely to appear inadequate. There is evidence that higher private insurer payments result from hospital consolidation—that is, hospitals have gained greater market power relative to private insurers. When financial resources are abundant hospitals spend more—increasing their number of inputs and cost per input. All else equal, higher costs per case result in lower Medicare margins.

    Of course, hospitals vary in their circumstances. Some hospitals have market power, a higher percentage of private payer patients, and stronger revenue from investments and donations. These hospitals tend to have higher costs. Hospitals without these characteristics have lower costs. Put differently: hospitals with the most revenue have the highest costs per admission. For example, we found that hospitals with low private payer profits from 2008 to 2012 had a median standardized Medicare cost per case in 2013 that was about 9 percent less than the national median, and generated a median overall Medicare profit margin of 4 percent. In contrast, hospitals with high private payer profits over the same period had higher costs per case (3 percent above the national median) and lower Medicare margins (–9 percent). This analysis suggests that hospitals can constrain their costs, but the lack of pressure from private payers is discouraging them from doing so.

    This is main, modern “it’s not cost shifting” argument, and it has been offered by MedPAC before.


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  • Canadian sanity

    Via Seth Trueger:

    canadian sanity


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  • AcademyHealth: Savings associated with consumer directed health plans

    (I should have posted this days ago. My fault! -Aaron)

    Pop quiz: How much do consumer-directed health plans reduce health care spending?

    (a) 6.6%

    (b) 4.3%

    (c) 3.4%

    (d) all of the above

    Find out if you’re right in my latest AcademyHealth post.



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  • Silly string prohibited

    Via Terri:

    silly string


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  • I’m outta here, among other odds and ends

    Nine days or so, no internet, no screens: that’s how I self-medicate once, per year. This year, those days start tomorrow.

    This annual break, away from it all, is always a special time for me. Almost no matter what I do, I find it meaningful. It was on this vacation that last year I reread To Kill a Mockingbird, which is easily meaningful. This year, if I happen to get my hands on Harper Lee’s “newer” book Go Set a Watchman, I might read it.

    Somewhat related, but only coincidentally, I recommend Ta-Nehisi Coats’ recent Fresh Air interview. I don’t have time to comment on it, but it is worth your time.

    Lastly, if you’re not offended by profanity, you might enjoy this “guided meditation.” I shared it with two people, both of whom, independently, replied that they laughed to tears. It may be just what you need. (h/t friend of TIE, Bradley Flansbaum)


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