Public Option? Medicare to Age 55 or 60? What's the problem?

THE COMPLETE STORY IN THREE PARTS.

Part 1: Background

Since early in 2013, American citizens who don’t get an offer of affordable health insurance through work (that’s about 10% of working adults) have had another significant coverage option.

They qualify to sign up for individual health insurance via healthcare.gov or the various state-run health insurance marketplaces scattered around the country.

In 36 states (Louisiana is one of them), that marketplace is operated by the federal government through www.healthcare.gov. Right now, we’re in the middle of a 90-day Special Enrollment Period on healthcare.gov.

Healthcare.gov has some historically unique features on the health insurance coverage it offers. They are:

1. Plans are sold and priced without regard to the buyers’ current health status and conditions. Neither will affect the rates they pay, nor their eligibility to apply and qualify to get covered. You may have heard this called coverage “without pre-existing conditions.”
2. Adult plan premiums are subsidized by the federal government for those with incomes between 139% and 400% of the Federal Poverty Level.
3. Plan allocation of costs and the breadth of coverage are determined by formulas the federal government controls, via an agency created 10 years ago, the Center for Consumer Information and Insurance Oversight (CCIIO).

A Shallow Risk Pool

As any self-respecting actuary will tell you, the only way for a risk pool under these conditions to survive would be for people who have few health needs and are relatively young to join the coverage pool at the same rate older and sicker people join. Historically, when the entire risk pool is composed mainly of older, sicker people, the costs have been so high that no one could afford the insurance. And that is essentially what has happened over the past seven years in the marketplaces. The ACA originally had several “fences” and “nudges” designed to keep individual risk pools stable and affordable. Most of those are now gone, either having been tossed out in the courts, by Congress, or by the unreality of their original creation.

So, where does that leave us?

With a shrinking individual risk pool that is aging rapidly, and medical costs that are the highest in any pool we cover. If you owned a small company in Louisiana right now and bought health plan “A” from Blue Cross for $500/person, you would find the same plan “A” offered on healthcare.gov costing north of $1,000 per person. For the exact same coverage.

So, how on earth does anyone purchase coverage at those prices?

Simply put, they don’t. The Advanced Premium Tax Credits written into the ACA are being poured into the marketplaces to help folks, based on their incomes, afford that coverage. How does that work?

Diving into the Pool

Imagine we take an average 50-year-old male buying a mid-level benchmark plan on healthcare.gov in Baton Rouge today. He’s single, employed and doesn’t get a health plan through work, so he’s shopping for individual coverage. What is his actual rate going to be?

Depends on his income. federal assistance grow rapidly as income shrinks, but even deductibles and coinsurance payments are reduced as lower income levels are reported. Also worth noting, the REAL cost for this health plan for a 50-year-old, once all the federal rules are applied, is almost $800 per month!

Things get even more interesting as we hold income steady and let AGE fluctuate from line to line.

Because the ACA rules that federal authorities enforce don’t allow pricing or eligibility to be determined by health conditions or status, all the emphasis in rate-setting falls on the cost-sharing built into a plan, and the age of the insured. But, the ACA authors required the ratios between the different ages be set based on a regulated formula that REQUIRES year-by-year rate setting and increases. This was done to ensure consistency, but it’s had expensive effects. Thus, the rates are not random. If any plan in any state set the 20-year-old rate at $422.30 , then their 64-year-old rate would HAVE to be $1,306.08, under the ACA’s terms. No exceptions. Rates increase each year; check out the table in this post for the exact factors.

So, how many 60-somethings do you know with an income around $55,000/year AND an extra $1,300/month in their pocket just to afford health insurance? Not too many, I’ll wager. The ease at which people move in and out of this coverage as their health and healthcare needs change has discouraged younger, healthier folks from joining these risk pools until after they get sick.

In a state where the average age of the entire population is about 35, the average age of a healthcare.gov marketplace member is holding near 50. You might ask how many 20-somethings would prioritize health insurance to the tune of $400+ a month? Not many, sadly. I mean, that’s a decent car note.

How Do We Get More People into the Pool?

So Mike, why are these prices so high? I mean, a $2,800 deductible is not exactly chump change, either!

Great questions. It’s important to understand that the rates are at LEAST 80% determined by the usage and cost of healthcare in the pool of people who buy coverage on healthcare.gov. So here at Blue Cross, we have around 70,000 people in our healthcare.gov risk pool, and their healthcare costs and usage are sky-high, especially when compared to folks who get their coverage through jobs. Even at the same ages. That sounds crazy the first time you say it, but if you’ve been at this awhile, it starts to make sense.

The healthcare.gov rates are so high because the people in the pools are using MORE healthcare than their friends and neighbors in other risk pools. They use more because they are less healthy and older. And, younger, healthier folks avoid healthcare.gov risk pools if they can get coverage ANYWHERE else. And now, kids up to 26 years old can be covered on their parents’ work policies. Kids up to age 19 in households earning up to 250% of the poverty line qualify for coverage through Medicaid. And, around 200,000 people under age 25 are uninsured completely, for a variety of reasons.

In many ways, the risk pools in the ACA-created, individual marketplace called healthcare.gov are failing to control costs. Nearly all (90%) of the participants are getting federal money to help pay their premiums. Left out of this largesse is a very vocal, very influential, very angry group of people ages 55 to 64 who either are self-employed, have retired from their jobs, or are no longer working, but earn too much to qualify for tax credits. As you can see from our charts above, that price can get pretty high.

Now, this very vocal group of people ages 55 to 64 is lobbying Congress HARD for a solution to this problem. Some of the solutions look pretty good on paper but have dire consequences for the younger folks who are still shopping for coverage. And, implementing them would require a ton of new federal borrowing.

Part 2: Changes Being Proposed

The Biden Administration has taken office and Congress has approved another borrowing package to the tune of $1.9 trillion. This package is labeled for COVID relief, although only roughly 45% of the spending could be generously attributed to actual COVID relief.

Buoyed by this success, Democrats in the House of Representatives immediately re-introduced their “Medicare-for-All/Public Option” package. All indications are they are pushing a government-funded insurance package to compete directly with private insurance companies. This new plan would be modeled on a version of Medicare but sold to people younger than 65. It could perhaps be sold to employers for their employees as well. The plan is specifically designed to compete with, and ultimately replace, all the private carriers already on board at Healthcare.gov and potentially in the employer market, too.

There are a variety of problems with this proposal, some of which are very scary to discuss. But here at Straight Talk, we have a no-fear attitude about such things. Achieving universal coverage – where every person in the U.S. has health insurance – is a goal we share, but there are different ways to achieve it. I’m going to talk about this new proposal in in some detail in terms of what it will do to the individual and ultimately the group insurance marketplaces. This will be a tad more technical than the average Straight Talk piece, but the impact could be vast and bad for healthcare nationwide, so I think we need to just wade on through the data. Ready?

What’s Does Public Option/Medicare-For-All Look Like?

The proposed health insurance product will have the following characteristics, as far as we know today:

1. Modeled on Medicare coverage
2. Will reimburse providers at Medicare rates
3. Any provider in the U.S. who accepts Medicare patients will be REQUIRED to accept this new insurance
4. Will compete directly against private insurance companies that cannot use Medicare rates to reimburse their network providers
5. Will presumably be in all 50 states, starting in counties where only a single carrier remains in the marketplaces
6. Will be VERY heavily subsidized by the federal government
7. Will require the federal government to outsource almost all functionality

It’s important to understand that when a law is passed requiring federal agencies to create such a plan, they will have a significant amount of discretion in how they carry that out. If there are people in those agencies who are ardent single-payer/government-payer advocates (and there are lots now), they will likely not be upset if they crowd out private insurance or even make it disappear.

I want to reiterate that we all want universal coverage for everyone in our nation. But, to me, there are clearly less disruptive and better ways to achieve this than this proposal. So, let’s talk about why in a bit more detail.

Taking a Drive Through the Pitfalls

Imagine you own a car dealership, “Josephine’s Primera.” Your best-selling car is the Primera Model S, a new and very fancy car that you buy for $30,000 from the Primera factory and sell it to your customers for about $35,000. At these prices, your customers are buying them as fast as you can get them in. Primera’s factory can build the car for $25,000, so they are making a little profit as well. There are several similar cars on the market being sold for similar prices and margins, each with their own strengths and weaknesses that consumers really appreciate. People car shopping in this situation have lots of choices, and manufacturers have a ton of incentive to continually improve their products to compete with each other. Safety and features increase every single year.

Now, imagine the federal Department of Transportation orders Primera to sell the Model S to them for $20,000 (which is below the factory’s cost to build the car) and they open a chain of “DOT Primera” dealerships, selling the Primera Model S to any customer who comes by for just $25,000. This spawns some important questions:

1. How long will your dealership stay in business?
2. How long will the Primera factory still be in business?
3. What incentives do the other manufacturers have to improve a car’s safety or quality?

It’s clear that since the government has “stomped” the free market in our example, your dealership is doomed. Not only that, but competing models are also doomed. As the government orders grow (and they will, since everybody can buy Primeras at the DOT Dealerships MUCH cheaper than anywhere else), the other dealerships will fold. IN addition, competitors can’t sell their product below cost for very long. Eventually, the Primera S will be the ONLY car you can buy, it’s not getting any safer or adding any new features, and the factory that builds them is shedding employees, production capacity and quality. Once the government steps in and dictates prices, essentially “stomping” a market, there is no room for anyone else. Consumer choice and incentives to improve vanish.

Mike, what’s your point?

The scenario I just described is EXACTLY what the proposed “public option/Medicare-For-All” plans will do to healthcare and health insurance in general if it gets big and popular enough. Forcing doctors to accept Medicare rates (below wholesale) and allowing a government-owned competitor to come in and compete with private insurance companies using artificial prices dictated by federal authority will collapse the market and drive them all out. Private companies do not have the authority or leverage to dictate to doctors and hospitals that they must lose money when treating their patients. Only the government can do this. This means companies that sell health insurance will disappear, replaced with only ONE government-run plan.

In other words, a public option that pays Medicare rates, coupled with a federal order to all doctors and hospitals that they MUST accept this below-wholesale-cost reimbursement, will rapidly erase all competition from Healthcare.gov. If the so-called “public option/Medicare-For-All” is allowed to be created in the form being considered today, it will rapidly become the ONLY option for health insurance. But that’s just the beginning…

The Full Cost of a Public Option, Part 3 | The End of The World as We Know It

And Mike doesn’t feel fine.

In part 2 of this three parter, I laid out how government involvement in any industry affects all of the people in and out of that industry. Today, we’ll look at what happens in the private healthcare industry when the government requires providers to take lower payments than it costs to provide care.

Imagine a World…

Imagine you are running a business. You have 100 employees and you are a bit profitable, turning 2-3% of your sales every year into bottom-line profit. Now, imagine a government agency comes in and demands that you sell them your product for 10% less than you can create it yourself. You only have two choices in that scenario:

1. Get out of the business while you still have a few bucks in your pocket; or
2. Figure out a way to deliver the product at a cheaper cost (automation, layoffs, get out of some lines of business, etc.).

Forgetting option #1 for the moment, let’s focus on option #2. Imagine the business at hand is a hospital. The most expensive thing on any hospital’s expense list is labor costs. You know, doctors, nurses, technicians, maintenance staff and the same people you see in any other company like accountants, marketing folks, IT people, the works. It’s not unusual for your local hospital to run 60% of their costs as strictly labor. SO, if they are going to have to drastically lower their costs, the first thing they are going to have to do is lay people off. We are ALREADY in the grips of a flight from medical careers, as we lost 3.5% of our healthcare workforce last year due to COVID-19. Imagine that effect times 10.

And let’s not forget, in the hospital world today, around 60% of their existing beds are full of people who are already costing hospitals money (Medicaid/Medicare reimburse providers for the care their members get at rates lower than the provider’s break-even point). So, the so-called “public option/Medicare-For-All” would add yet another layer of people paying below costs to reimburse those hospitals for treating patients.

How will your local hospital respond?

Well, the American Hospital Association has done a vast amount of analysis on a “Medicare-for-All” and “public option” scenarios, and the results were not pretty. Their research showed that EXISTING Medicaid/Medicare patients are driving $55 BILLION of below-cost care in the hospital world. That is, if public health plan patients simply paid enough to cover their medical costs, hospitals would be receiving another $55 BILLION a year.

That same research showed that a vast expansion of a “Medicare-for-all/public option” plan would lower overall revenue in the hospital world by 40%. That would lead to the closure of HALF of all rural hospitals as a start. Yep, half!

Now, let me ask you, if you had the choice, would you want to be treated at a hospital that just had to cut its total spending by 40%? Or a hospital that is staffed up to today’s levels?

Would you rather have the closest hospital 50 miles away? Or closer to your home?

These are just some of the choices we must face to embrace these “Medicare-For-All/Public Option” type plans.

Here’s What I Think Will Happen

My personal estimate is if Medicare became the standard rate across the board in the U.S., we would lose a third of our medical capacity. And where would that capacity go? Into private, non-insurance-accepting hospitals and clinics, and cash-only medical businesses where they could be free from government shackles. We are already seeing this trend in primary care, it’s called “Concierge Medicine” or “Direct Primary Care”. In fact, other countries where this public option scenario already exists typically OUTLAW PRIVATE CARE and health insurance so that money keeps flowing into the government-run system. You know, so everyone is equally miserable. And the waiting lists for treatment are very, very long. Years, in some cases.

Is that what you want from your healthcare? No thank you.

I know healthcare is expensive and downright unaffordable if you don’t have a third party to cover you when you get really sick. But is the solution throwing up our hands, shoving the whole pile to Washington, D.C. and saying “YOU take care of it!”? Not at the expense of losing a third of our medical capacity.

Straight Talk is, allowing a “Medicare-for-all/public option” to flourish in the U.S. would be so disruptive to our healthcare system, it would make COVID-19 look like a walk in the park. Pull 40% of the funding of ANY organization and you would damage it severely, if not shut it down completely. And then, without that money in the system, why would any young man or woman go through the aggravation and expense of becoming a doctor or a nurse? We lost 3.5% of our healthcare workforce last year alone! We’re already importing docs and nurses from all over the world because of our existing medical school or clinical program enrollment shortages. Will there be enough clinicians left to treat all the patients if it gets radically worse?

This is life-or-death stuff, this “Medicare-for-all/public option.” Don’t let it slip under your radar.