Affordable Care Act – Table of Contents

Download PDF Report >>> Senate bill TOC

The Affordable Healthcare Act for All Americans is without a doubt, a large and complex piece of legislation at just over 2,400 pages.  But how big is 2,400 pages when wide margins, lines numbered, text double spaced, large font,  multiple levels of indent, and more than a few references to other documents?  The sample page below (standard 8.5 inch wide paper) is indicative of the 2,400 page document. The actual content is but a small fraction of a page. AHA legal text sample

Aside from the claims of too lengthly and complex, Republicans argued that this was a Democratic bill rammed through congress.  Interestingly, AHA includes more than 160 Republican amendments accepted during the month-long mark-up through just one committee (HELP), one of the longest in Congressional history.

Critics have claimed it’s a government takeover of our health system.  It may be news to those critics but half of the health system is already government-run.  And the great bulk of the reform bill deals with steps to improve existing government systems that has hardly drawn any attention.  The following provides a quick breakdown of the law sections.  The PDF report that can be viewed/downloaded shows the entire table of contents.

There are 10 “Titles” or major topics in the bill.  Only the first, at 374 pages, less than one sixth of the entire bill deals with changes to how the private sector handles health care. Yet, this is the section that has garnered nearly all the criticism. The bulk of Title I deals with prohibiting abuses by the insurance industry, which, if you ask on an issue by issue basis, most people will agree with the new provisions. Nothing in the bill involves a “takeover” of private insurers.

The next three Titles [II,III,IV] deal with improving Medicare and Medicaid programs and comprise 852 pages, one-third of the bill.  These Titles address reduction of waste, fraud and abuse, and pilot new payment methods towards a “results” oriented method common in most other industrialized countries.  There are few objections to this section.

Title V, at 256 pages, addresses anticipated shortages of primary physicians and other healthcare workers due to services that will be required by aging baby boomers.  This is totally opposite the “death panels” that ration healthcare that unfortunately got too much press for a falsehood.

Title VI uses 323 pages to improve transparency and integrity, yet more efforts to reduce waste, fraud and abuse in both the public and private health sectors. Who objects to efforts like this?

Title VII  improves Access To Innovative Medical Therapies, with focus on lowering the cost of drugs

Title VIII addresses ‘‘Community Living Assistance Services and Supports Act’’ or CLASS Act. This title The purpose of this title is to establish a national voluntary insurance program for purchasing community living assistance services and supports.  Moving people from higher cost hospitals and nursing homes to assisted living lowers costs, a laudable goal.

Title IX includes the revenue provisions that include provisions to raise revenue to pay for the expanded coverage.

The final Title X addresses 1) Medicaid and CHIP, 2) Support for pregnant and parenting women, and the major section 3) Indian health care improvements.  None are controversial issues.

Title I——-Quality, Affordable Health Care For All Americans [374 pages – 14%]

Title II——Role Of Public Programs [221 pages – 8%]

Title III–—Improving The Quality And Efficiency Of Health Care [501 pages – 19%]

Title IV–—Prevention Of Chronic Disease And Improving Public Health [130 pages – 5%]

Title V——Health Care Workforce [256 pages – 9%]

Title VI–—Transparency And Program Integrity [323 pages – 12%]

Title VII-—Improving Access To Innovative Medical Therapies [65 pages – 2%]

Title VIII—Class Act [53 pages – 2%]

Title IX—–Revenue Provisions [93 pages – 3%]

Title X——Strengthening Quality, Affordable Health Care For All Americans [373 pages – 14%]

.

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Fact Check: Provider Consolidation Driving Up Costs

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Fact Check:  Provider Consolidation Driving Up Costs

  • · Massachusetts Attorney General issued a report that: “points to the market clout of the best-paid providers as a main driver of the state’s spiraling health care costs” and “found no evidence that the higher pay was a reward for better quality work or for treating sicker patients”.
  • · According to a new report in Health Affairs, Paul Ginsburg and Robert Berenson found that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.”
  • · According to a brief from the National Institute for Health Care Management: “With only a few exceptions, results consistently demonstrate that hospital consolidations result in higher prices for hospital services.”
  • · The Federal Trade Commission and the Depart­ment of Justice noted: “Most studies of the relation­ship between competition and hospital prices have found that high hospital concentration is associated with increased prices, regardless of whether the hospitals are for-profit or nonprofit.”

FACT CHECK CHECKED: The above are arguments that America’s Health Insurance Plans (AHIP) included in their response to advocates of reform. What AHIP may not recognize is it has set forth some of the most compelling arguments for a “public option”.

AHIP freely admits that insurers are powerless on their own to control provider costs. Even with anti-trust exemptions, they have failed to combine forces and confront providers.  Short of a government takeover, the only long-term solution is more clout.  The only entity with more clout is the government itself being an insurer, which, by the way, it already is – Medicare.

Medicare doesn’t so much “ask” providers what they charge.  Medicare almost “tells” providers what it will pay. Republicans were so concerned with Medicare’s clout that they wrote into law “prohibiting” negotiated drug discounts.  But discounts will become necessary.

For many Americans, a drastically reformed healthcare system was a non-starter.  The administration politically tried to blend features of the current into the proposed system to reduce upheaval to such a large part of the economy.  Any change can be unsettling, and how you view it is very important.  Is the glass half full or half empty?  At some point, radical cost control will occur, and private insurers will not be leading the charge.

Insurers can look on government as an unreasonable competitor or they can look on government as the only insurer who finally has enough clout to contain provider costs.  It may be that insurers eventually withdraw from the market for “essential medical benefits” and focus their efforts on supplemental policies that go beyond basic.  If they did, they would look a lot like health insurers in Europe and other industrialized countries. Diminished compared to today but not destroyed.

Download PDF Report >>> Fact Check – profits and consolidation

Fact Check: Put health plan profits in perspective

Download PDF Report >>> Fact Check – profits and consolidation

Fact Check:  Put health plan profits in perspective

  • Ezra Klein, Washington Post:… it’s hard to see how [health plan profit margins] are a primary driver of health-care spending, much less the growth in health-care spending.”
  • Henry Aaron, Brookings Institute: “Insurance company profits in the large picture have very little to do with the overall rising cost of health care.”
  • Kaiser Health:“With the nation’s health care spending estimated at $2.5 trillion this year, even the elimination of insurers’ profits and executive compen­sation would lower health care spending by just 0.5 percent.”

FACT CHECK CHECKED: Granted, the insurers cut is a miniscule piece of total costs.  But it is still billions of dollars of non medical costs.  Where are they spending them?  It should be in two areas: to responsibly manage insurance and contain costs. If insurers were managing just fine, reforms would not include rule after rule after rule to rein in unsavory practices that occur now.

Cost containment has two faces: price and volume. You can control one or both. Insurers can control volume by denying claims, and here they have been successful.  In the price area, they have utterly failed to contain prices from providers. But Wall Street is indifferent in how one generates earnings, only that one does.  Clearly, insurers’ focus is Wall Street and not Main Street.

Insurers claim they add value by negotiating discounts with providers.  But by insurers’ own admission, those providers simply raise their rates resulting in no actual cost reductions.  Insurers are adding virtually no value, but draw compensation as if they were saving billions.

All large companies pay cost control experts to contain costs. If they fail, the experts are fired or the companies go out of business. Yet insurers exert every conceivable pressure to maintain the status quo which they admit has been a failure in containing healthcare costs.

Download PDF Report >>> Fact Check – profits and consolidation

Fact Check: Lines of Business Obscure Profit Margins

Download PDF Report >>> Lines of Business Obscure Profit Margins

FACT CHECK: In 2009, the percentage of premiums that went towards administrative costs and profits declined for the sixth year in a row and have been consistent for decades.

FACT CHECK CHECKED: America’s Health Insurance Plans (AHIP) combines self-insured line of business (LOB) and insured LOB and presents the results as if it were one homogeneous market.   Nothing could be further from the truth. Size wise, the ratio of self insured LOB to insured LOB is roughly 58% / 42% of self-insured / insured or underwritten.

Insurers charge self-insured (ASO – administrative service only) groups an administrative fee that, for the top 10 health insurers, averaged 6.94% of costs.  That translates to 6.5% of “premiums” which are really medical benefits plus service fee income.  This “efficient” administrative expense is not evident in the insured LOB.

To identify the administrative costs and profits for the insured group, one computes and then removes the self-insured revenues and expenses from the CMS Totals as shown in the table below.  Sources and stepwise methodology (top to bottom) are shown in the far right column.

The claim that insurers’ average percentage of premiums that went towards administrative costs and profits was around 11.75% (and have been consistent for decades) totally obscures two radically different lines of business with divergent expense ratios.   For 2008, self-insured admin costs and profits were about 6.5% for self-insured groups, but about 18% for insured groups.  Since the profit margin is VERY slim for the self insured, the bulk of profits are born on the backs of the insured groups which include small business and individuals. A reasonable question to ask is “why are insurers satisfied with profit margins of well under 1% on 55 % of their business but feel a need to push margins well beyond 10% on 45% of their business?”  Though risk is a small factor in the insured LOB, they have to compete far harder on self-insured LOB than on insured LOB where they hold oligopoly power in local market areas and convert that market power into profits.

Download PDF Report >>> Lines of Business Obscure Profit Margins

Non-Partisan CBO Estimates of Healthcare Reform

Download PDF Report >>> CBO Estimate of Healthcare Reform

SUMMARY

Few doubt how unsustainable current medical trends are.  With medical inflation consistently outpacing the CPI, health costs will continue to take a greater share of the economy. Private insurers claim they can solve the problem with reform but without a Public Option.  History suggests this is a dubious claim at best.  Looked at from multiple angles, private insurers are not likely to succeed.  Profits gains have far exceeded key indices, medical loss ratios have gone way down while costs have gone way up, competition is diminished by concentration of major insurers, and tort reform complaints carry little water.

DISCUSSION

The graph below shows CBO projections of under 65 population by insurance group. The top, red bars are the uninsured that continue to grow each year.  While insurance through employment is fairly consistent, greater employee cost sharing is an increasing burden.

Neither the Senate nor House reform proposals provide financial support to unauthorized immigrants.  When analyzing various effects of reform, this group has no effect. For data consistency for both before and after reform, unauthorized immigrants are not included in the populations.  Removal lowers uninsured population between 5 and 8 million over the 10 year period.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

While the country may be coming to some agreement that reform is needed, differences exist on how to achieve reform. Health Insurers want to have participation mandatory which is a valid point. Except they have offered no other steps on how to reduce costs and are against Public Option that would offer real competition. However, they would be beneficiaries of millions of new customers.

Those customers would come from those currently uninsured, or insured through individual and employer groups. In the graph next column, CBO assumes reform includes an Exchange that would shift nearly 40 million from uninsured, individual and employer groups (left side of graph) to Medicaid and the Exchange (right side).  Note that not all the movement is to the Exchange.  A large number of uninsured poor would switch to Medicaid.  Still, the Exchange is expected to grow quickly to nearly 25 million. This group is the target for private insurers and Public Option.

So why is it necessary to have a Public Option on the Exchange?

 On its face, private insurers could certainly cover 25 million new enrollees without government involvement. But the catch is that the government IS involved because of another feature of reform.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

That reform feature is “affordability credits”.  Even those with insurance find their total health care costs consume so much of their income that they do not get needed care. Affordability credits help those with lower incomes pay premiums and shared health costs. The effect is shown in the chart below. Medicaid pays for the very poor while credits help less well off people in the Exchange.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

In short, the Government will be paying some $100 billion each year in credits to Exchange enrollees, much of it going towards insurance premiums.  Will private insurers provide good value for this outlay? Their track record is not encouraging. 

Health care costs fall into two categories: medical cost outlays and administration / overhead costs. In 1993, 95% of premiums went for medical costs at Investor-owned insurers as shown below.  Over the next 14 years, this decreased to just above 80%, a shift of about 14% or one percent per year.  Meanwhile Medicare administration and overhead costs have remained fairly constant through the period.  While some may argue this is not a direct comparison, the fact that Medicare medical loss ratio stayed constant while investor-owned insurers drop significantly cannot be denied.

 Sources: PricewaterhouseCoopers’ Health Research Institute, and U.S. Center for Medicare & Medicaid Services

14% becomes urgent when you consider premium dollars as shown in the chart below. Private insurance runs over $600 billion. 14% of this is nearly $90 billion per year.  Fortunately, one-third of private insurers are non-profit.  But that leaves some $60 billion added overhead including contribution to profits since 1993.

Source: Center for Disease Control – Health, United States 2008 Figure 19

Profits did not grow to $60 billion, but they sure did grow as shown below, exceeding by a huge margin the S&P 500 and CPI for urban wage earners.  All the growth occurred since 2002.

Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Standard and Poors, and Health Insurers’ 10K’s

Not only did investors do well, but so did executives and all at the expense of people paying for health insurance. 7 insurance CEO’s drew nearly $70 million total compensation in 2008.

Still, Investor-owned insurers argue that their profits are a mere 3% of revenue.  Another and better measure is Return on Equity (ROE) which is profitability based on investment.  By this measure, health insurers are earning 17%.  From the chart below some industries do have greater returns, but 17% should be nothing to complain about.  The 10 insurers are even higher than credit card issuers.

Sources: 10K reports for top 10 Investor-owned Insurers and  CCH Almanac of Business and Industrial Financial Ratios, 2009 Edition

Now high returns to executives and investors might have some justification if private insurers were successful in containing and bringing down the major component of health care – medical costs.  Yet, year after year, medical costs outpace the CPI.  One could almost argue that insurers “administer” health care costs rather than provide a value added “management” of those costs.

Competition often has something to do with companies holding down costs.  In competitive markets, insurers need to maximize cost control efforts to maintain market share.  But is there really competition?  The graph below shows the market share of the top two insurers in each state weighted for population covered.

 Sources: AMA, Consumer Union, Sector & Sovereign analysis

Over half the U.S. population lives in states where two insurers control over 60% of the market.  That is not a good omen for competition.  For instance, insurers claim that their market share allows them to negotiate lower rates with providers.  It would not be fair to paint all insurers with the same brush. But a number of insurers have been found not to be driving down rates, but of negotiating with providers to NOT contract lower rates with their competition.  Instead of reducing costs, these illegal acts increase medical costs compared to a truly competitive environment.

Insurers and others also argue that tort reform would bring down medical costs owing to current waste of defensive medicine. There is no argument about the waste. But is it due to defensive practice or simply practice? Data suggests that the latter is more prevalent.

The graph below, derived from Dartmouth College data, groups two sets of hospitals, the 100 highest cost, and 100 lowest cost hospitals for Medicare spending per decedent during the last two years of life.  The bars represent average costs by states that have enacted tort reform setting caps on non medical damages.  For the lowest cost hospitals, tort reform shows virtually no effect on hospital costs. For the highest cost hospitals, it is mixed. But there is no clear evidence that tort reform will substantially lower costs.

Source: Dartmouth_hosp_DAP_Hosp_HRR_ST_01_05.xls

So far, private insurers’ track record suggests that left to the free market, they will not be very successful in lowering costs, either administrative or medical costs, with or without tort reform.  It may be unrealistic to even expect investor-owned insurers to succeed given that their number one priority is to their investors.

Instead of using their actuaries to data mine patterns to help providers reduce costs, their efforts are focused on denying claims and raising premiums to high claims groups.  Instead of returning surpluses to people paying premiums, they are buying back billions of dollars of their own stock to increase value to their shareholders.

Thus far the focus has been the cost of illness. Another aspect is the benefit of staying healthy. Corporations have had success in wellness programs. They not only reduce health care costs, but lower absenteeism. (http://www.uscorporatewellness.com/USCW White Paper 2009.pdf)  Some insurers offer wellness programs, but they often include a health risk assessment on employees and that runs a risk that insurers may use that data in setting rates for the company: if towards lower rates, good. If higher rates, not so good.

Fortunately, large corporations are the biggest block of insured people, and their wellness efforts can have a broad effect.  The graph below shows the U.S. population by source of health care coverage. Big business covers 45% of the population, 28% who self insure and another 17% who shift risk to insurers.

Source: CBO, EBRI, CMS, Goldman Sachs Research estimates

Groups at a disadvantage to big business include individual and small group business and the uninsured that together make up over a quarter (27%) of the population. If private insurers are unable or unwilling to lower administrative and medical costs for them, then the next best alternative is to offer a Public Option.

Without progress in both lowering administrative and medical costs, the affordability credit paid for by the government is going to cost taxpayers more than can be justified.  The question is not whether a non-profit Public Option will succeed. The question is whether private insurers can succeed after years of failing to take the needed steps to contain costs.

The stakes are huge. CBO projects that with a Public Option, the insurance picture changes dramatically as the graph below shows. Medicaid grows a bit for the poorest, but the uninsured and non employer based population can look forward to more affordable insurance.  Meanwhile the majority of the population is unaffected.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

Download PDF Report >>> CBO Estimate of Healthcare Reform

Medicare Trends

Download PDF Report >>> Medicare Trends

SUMMARY

Medicare became law only in 1965 in part to mitigate the adverse effect of rising health care costs on seniors’ income. Those costs were driving many millions of seniors below the poverty line. In the pre Medicare environment, nearly 30% of seniors had fallen below the poverty level. In the intervening years, the percent of seniors with income below poverty level has dropped nearly three times.

While the benefits to seniors have dramatically improved their lot, the cost to society is the elephant in the room that needs to be addressed in Congress.  This report looks at the components that are driving up Medicare costs as well as increasing seniors’ out-of-pocket expenses.

 Overall population is increasing demands for care

As expected, growing populations result in growing health care costs. What is evident from the graph below is that in addition to overall growth, the percent of people 65 years and old is increasing.

Two factors are contributing. One is that the baby boomers as a group are beginning to move into the senior group. They are followed by a drop off (percent wise), in younger people.  Projections refer to the increasing mix of older people with fewer people working to pay into Medicare. But this trend is not permanent, and once the baby boomer “bubble” works its way through the population, the mix of retirees to workers stabilizes.  But that is out past the year 2040, beyond the range of most forecasts.

In short, solve the Medicare problem expected for the next 30 years and only minor changes will likely be needed after that.

Source: Center for Disease Control – Health, United States 2008 Figure 01

Greater life expectancy adds to aging population

The second factor contributing to the growth of seniors is their increasing life expectancy.  The graph below  shows that all major groups of seniors have benefited from better health care. Life expectancy at birth show lower increases.

The question is whether these significant increases will continue into the future.  If they continue, then the percent of seniors will continue to increase.  If trends tend to slow, then the population age mix may stabilize.

On the other end of the age scale, if birth rates rise, this will create a greater percentage of younger people.  And there is some evidence of this occurring, though not equally among different races. 

Source: Center for Disease Control – Health, United States 2008 Figure 14 

It may be 30 years before age group % stabilizes

On the assumption that the mix of aged people stabilizes in the 2040-2050 range, this still represents a significant change from today where less than 15% of population is 65 and over.  By the time it stabilizes, seniors will represent over 20% of population and may for some time to come beyond that.

Current Medicare premiums assessed on workers is not enough to cover those future costs. Two events clearly need to happen. One is to increase the “premiums” paid into the system.  Options include raising all rates uniformly or raising the wage ceiling on which premiums are based. The other is to take costs out of Medicare.

Another analysis has shown huge discrepancies being paid in Medicare indicating excess care being provided to some and not others that needs to be addressed.

Source: Center for Disease Control – Health, United States 2008 Figure 01

As people get older, their health demands increase

It is common knowledge that seniors slow down as they age.  The graph below shows the five most common reasons seniors reduce their activity level.  As they age, each factor grows in significance.

 Nearly 3 in 10 seniors over 85 will become limited by arthritis or musculoskeletal conditions.  2 in 10 seniors over 85 will be limited by heart or circulatory conditions.  Though climbing with age, vision, hearing and senility are factors in less than 1 in 10 seniors 85 and older.

While the graph shows the number of medical conditions increasing with aging, it does not indicate severity.  But on volume alone, seniors require more health care. This can be mitigated somewhat by more exercise and healthier diets, the two largest slowdown factors. Less can be done about vision, hearing, senility or dementia.

Source: Center for Disease Control – Health, United States 2008 Figure 13 

Medicare a major factor in improving poverty levels

Medicare came law only in 1965 in part to mitigate the adverse effect of rising health care costs on seniors’ income. Those costs were driving many millions of seniors below the poverty line. The success of Medicare was dramatic as shown in the graph below. With pre Medicare environment, nearly 30% of seniors had family income below the poverty level. In the short span of 7 years, the percent of seniors with family income below poverty level dropped to 15%, roughly in half. Gradual reductions since have lowered that threshold to about 10%.  This could partially explain why older seniors are often very protective of their benefits. They remember when there was no safety net.

Source: Center for Disease Control – Health, United States 2008 Figure 04 

 Price inflation creates higher bills for seniors

The graph below highlights cost trends for four groups of people from 1996 to 1996. Except for a slight break around, 1998 – 2000, costs have trended upward every year for every age group. Within each age group there is another consistent trend. Seniors 65-74 years incur only about half the expense that seniors 85 and over do, while those 75-84 years incur more than half again as much as seniors 65-74. This confirms the comments above that as people age, their health demands increase.

Now these data are per enrollee. So price inflation is causing costs for all seniors to rise. As seniors age, their costs continue to rise. And finally, as the baby boomer bubble moves into the senior ranks, the total number of seniors increases dramatically. It is sort of a “perfect storm” where all factors are pointing towards Medicare costs consuming more and more of the nation’s economic output.

Source: Center for Disease Control – Health, United States 2008 Table 143 

Cost sharing of Medical Expense Also Rising

In nearly all cases where medical expense is incurred, insurance picks up a large share of the costs, but not all. Amounts paid by individuals is called “cost sharing” or deductibles and co-payments, or out-of-pocket expense. Below are 6 age groups that incurred over $2,000 in out-of-pocket expense. This threshold allows a focus on the more expensive medical encounters. Cost sharing for all seniors has consistently risen over the entire period.  Any solutions to rising Medicare costs that reduce benefits, shifting more costs to seniors should at least take into account that seniors have for years, been paying higher out-of-pocket costs for health care. 

Source: Center for Disease Control – Health, United States 2008 Table 133

 One Good Example of Government Run Medicare

While overall Medicare costs have continued to rise, there is one component that is trending favorable – Administrative Expense. Early on, there were inefficiencies in Medicare part B as these tended to be smaller dollar claims but the same amount of manual effort to record claims into the system.  As automation and standardization increased, these costs came down such that since 2000, the administrative costs per claim dollar for both hospitals and doctors are roughly equal.

What is far mor telling is that since 2000, these administrative costs have (a) stayed level and (b) averaged just two (2%) of total costs.  In the 1980’s private insurers, primarily non-profit, had administrative costs of about 5%. Today, insurers are frequently incurring administrative costs of more than 20% on large blocks of their businesses.  In at least one area, government appears to have done better.

Source: Center for Disease Control – Health, United States 2008 Table 142

Download PDF Report >>> Medicare Trends

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Selected Industries Financial Ratios

Download PDF Report >>> Selected Financial Ratios

A publication in its 40th year titled Almanac of Business and Industrial Financial Ratios tracks 50 operating and financial factors in nearly 200 industries. 4 measures for 8 industries are highlighted in the graphs below. They reflect tax return data (IRS Form 1120) through June of 2006.  In addition, selected 2007 financial data from the nation’s Top 10 for-profit health insurers came from their SEC 10K reports.  The Almanac industries include tax returns for the following:

Industry Tax Returns Revenues
Hospitals , Nursing Care 10,498 $76.0B
Outpatient  Care Centers 4,453 $24.8B
Engineering 60,986 $133B
Computer Systems  Design 62,135 $117.8B
Management Consulting 134,243 $138.7B
Commercial Banking 30,534 $55.4B
Credit Card Issuers 46,735 $28.7B
Investment Banking 5,402 $29.4B

The Top 10 health insurers had revenues of $242.5B. When comparing net income as a % of sales, these insurers ranked lower than other industries as shown in the first two graphs below.  The top 10 are in red below.

The Top 10 pay a higher % in taxes so their before tax ratio is slightly better (upper left graph) than after tax ratio (upper right graph.)  But is % of sales a proper comparison across industries?  Higher revenue industries all tend to have lower Income as a % of sales than do lower revenue industries.

Rather than dividing net income by sales, one can divide net income by equity.  Equity is how much shareholders’ money is invested in the business.  It takes into account loans.  And it puts firms of different size on a more equal footing.

Return on equity or ROE is a recognized way for comparing companies in different industries.  The two lowest graphs show average ROE for the Top 10 compared to 8 industries. Though not the highest before/after tax, Top 10 returns exceed hospitals, outpatient care centers, computer systems design, credit card issuers and investment bankers.  Returns trail highly profitable, engineering, management consulting, commercial banking, and physicians and lawyers (not shown).

In summary, health insurers are fairly profitable enterprises as currently structured.  But some ask whether at least part of that profitability is derived from questionable denials of claims made by their subscribers.

Download PDF Report >>> Selected Financial Ratios

Who Should Help Pay for Healthcare Reform

Download PDF Report >>> Who pays for healthcare reform

 Summary

Health care is expensive and is getting more so.  Further, the government is taking on a greater share as people age and move into the Medicare system.  Attempts that tweak the current system will likely fail to lower costs.  What is needed is a new model that would be phased in.

While the US does enjoy a quality system, it is not the top in comparison to many other industrialized countries.  However, the US does pay 50% or more of its GDP than do these same countries. And with its transaction based model, future cost increases will squeeze our productive sector.

Looking at several other countries, there is a clear difference in the health payment model.  In the U.S. the model has been relatively unchanged over decades.

One goes to a doctor or hospital, is billed for the encounter and the bill is paid by him, a health insurer or both.  It matters less whether the treatment resolved the health issue.

Other countries rely more on outcomes, where “bonus” payments are made to providers who solve the health issue.  Of course, it is risky to completely switch to this method overnight.  Rather it should be phased in over years.

Short term, however, increased costs are expected. And the fairest way to pay is to tax those who benefited more in the past.  Those who did benefit are a small group – the top 5%.

Some will argue that taxing the wealthy will cost jobs. But jobs are created not from income but from net worth, and gains there suggest that other factors weigh more heavily than marginal tax rates in job loss or creation.

Who is paying for healthcare today in the U.S.

The graph below shows 2006 funding of healthcare. With the aging of the population, Medicare creates increased government spending. Close to half of all health care is paid for by government.  For those worried about government getting involved, they are a little late. It’s already involved.

Private insurance is a major funds source, and most of that is provided through employers. Consumers with insurance through work see only out-of-pocket expenses. Even with costs rising, and with insured seeing higher cost sharing, they are still somewhat shielded from total health costs.

Conversely, those without insurance are exposed to the full brunt of higher health care costs.  Combining all people, the costs are not only a heavy burden, but that burden falls heavily on those who lose and do not have insurance.

Source: Center for Disease Control – Health, United States 2008 Figure 19

 What are others paying for healthcare today 

Some believe that the US costs are worth it.  We have high quality care and we pay for it.  But while quality is high, it is by no means the highest in the world.  And as the graph on the right shows, the US stands alone in how much it spends – some 50% more than other highest countries and almost doubles that of Japan.  These other countries must be doing something different and they are.

One factor is the payment business model. The US is primarily a transaction based system.  Higher rates, more revenue. More procedures, more revenues. The combined effect is healthcare costs that are not only more expensive, but rising faster than in the rest of the world.

As for tomorrow, we can learn by looking at components of growth in US health care spend, and how those trends portend future expenditures.

Source: OECD Health Data 2009, June 09

What healthcare increases may look like tomorrow

Aside from any current inequities in who pays for health care, these expenditures are not only rising but at an ever-increasing rate. The graph below shows the growth in costs from 1965. The spike in 1965-1970 was Medicare.

Population and general inflation are reasonably expected factors.  In addition, however, there is medical (price) inflation and intensity (more procedures) driving up costs.

Unless there is a major change in these trends, healthcare costs will consume an ever greater portion of GDP, and squeeze out productive output.

To bring this under control requires more than tweaking around the edges of the current healthcare model.  Other countries spend less on healthcare so how do other countries cover costs for less.

Source: Center for Disease Control – Health, United States 2008 Table 126

U.S. insurers & Medicare are very Transaction based

For decades, the U.S. has had a primarily transaction based model like figure 1 below.  You get treatment from a physician or hospital and pay for their time and expenses.

When Medicare began, it used this traditional model but quickly learned that costs were rising out of control. So they changed to a fixed price model like figure 2 below. But when Medicare squeezed down prices, some providers increased their volume to recoup part of their losses.

Managed care or HMO’s (not shown) had limited success in freezing total payments. But healthier groups can often select traditional coverage at lower cost, leaving HMO’s with more of the higher cost people. In short, reform with only a transaction based model will not likely succeed.

 

Other countries are more Outcomes based

What other countries did was adopt normal profit-making business models like figure 3 below where the goal is to offer rewards for greater productivity and improved quality, in a word — outcomes. 

It is the basis for most bonuses.  Also many contracts are include a bonus if a project comes in under budget and ahead of time. Healthcare payments in other countries rely far more on outcomes than the does the U.S. And it works.

Medicare is piloting this concept, paying small bonuses to providers who show better outcomes. As data is obtained, base amounts can be reduced and the outcome gradually increased bringing the U.S. closer to the world model.

Will private insurers adopt this model? Unless all insurers are required to do so, it is doubtful.  Alternately, a public option using this model would cause private insurers to voluntarily adopt as a way to remain competitive.

Can the U.S. afford more income taxes

Other industrialized countries are clearly providing quality health care at significantly lower costs than in the U.S.  But what about other taxes or more specifically, total taxes.

How does the U.S. compare in total taxes with these other countries?  The graph below shows tax components. Despite complaints about corporate rates, U.S. take is lower than most countries. Sales taxes are high but discretionary (no buy, no tax) as states rely heavily on this source.

Social Security and income taxes are two mandatory taxes affecting individuals and here the U.S. ranks near the bottom.  Without becoming just like Europe, some increase in mandatory taxes should let the U.S. remain competitive with the rest of the world.  And if real reform does come, higher initial costs can be expected to result in savings down the road as the U.S. costs approach other countries.

Source OECD in Figures 2008 – OECD © 2008 – ISBN 9789264055636

Looking at income tax as a source of new funds

Where does one look for new taxes. While there are several options, one key is to see who is earning what today.  The graph below displays the average after tax income for selected percentile groups.  The small blip at the furthest left is the average income of 60% of the U.S. Those in the 61% to 95% range average somewhat better.  Also noted is the greater number of households in these groups’ results in their paying the majority of income taxes.

But look at the highest 5% earners, and especially the top 1%.  That 1% averages over $1 million per household.  So if there is a tax increase, should all taxpayers contribute the same percent increase?  Or should increases be progressive as is the basic income tax structure.

One way to answer this is to see how income for these same households changed over time.

Source: Congressional Budget Office-Historical Effective Federal Tax Rates: 1979 -2005

Who benefited from income gains over 25 years

The graph below employs the same groups as above.  For several reasons, there has been a substantial income shift with enormous increases in income for the top 1%, with modest increase for the 95%-99% group.  ALL the rest of the percentile groups actually lost ground, and the lower the income bracket, the greater the loss.

Over the past 28 years, there has been a very sharp drop in marginal tax rates leading to two results.  First, high income earners keep more of their income.  But with high marginal rates, companies did not pay extremely high salaries and bonuses as most of it went towards taxes.  With lower marginal rates, executive compensation began an upward spiral that far exceeds their counterparts in other countries.

The combined effect of near runaway compensation and lower taxes is primarily responsible for the shift to the rich.

Source: Congressional Budget Office-Historical Effective Federal Tax Rates: 1979 -2005

Why are so many people afraid of higher tax rates

Some note that total revenues rose when Kennedy cut taxes and apply that logic to every tax change since.  But as the graph below shows, the marginal rate at that time was 90%.  Had the IRS run amuck? Actually, the U.S. raised taxes to pay down war debts, a good habit missing today. 

From the prior graph, one could assume that a fair way to apply new taxes to individuals is to tax those who gained the most relative to others from tax cuts in the past.

Today we have low marginal rates, major gains by the very rich, and a national debt that has been almost ignored. Not to increase taxes but to add to the national debt is to put a heavier burden on the next generations.

In conclusion, a logical and fair place to look for new sources of tax revenue is the top 5% of households.

Source: IRS – SOI Tax Stats – Historical Table 23

Net worth – the job generating engine

Some complain that taxing the income of the rich will cause a loss of jobs.  But income is not the prime determinant in job creation.  To start a business, one in fact, may have to give up current income. 

Businesses are started by those with net worth.  And if they are lucky, they can leverage that net worth with loans to fund their new enterprise.

The graph below shows the growth in net worth from 1989 for four selected percentile groups.  As one would expect, those less well off tend to work for others and their net worth (lower 50%) makes barely a blip on the scale.

Even the net worth of the 50%-90% groups is modest.  The greatest concentration of accumulated wealth is in the top 10%. And that group not only grew more in absolute dollars, but also as a percent gain over prior periods.

Source: Federal Reserve Board, 2007 Survey of Consumer Finance (March 9, 2009)

New worth grew more when tax rates were higher

The graph below details the increase in net worth over the prior period.  The lower 50% experienced inconsistent gains up and down.  Higher groups fared better but all were impacted by recessions.  Of note is that the two 3-year periods ending in 1998 and 2001 occurred during Clinton’s term where he had actually raised marginal tax rates.

One should skip the recession period of 2004. By 2007, the tax cuts of Bush’s term resulted in net worth increases, but they were significantly less than those of the Clinton period.

Obviously, there are additional factors at play, but to simply argue that any increase in marginal rates, and especially raises in the top brackets will result in loss of jobs is a tenuous argument not supported by this data.

Source: Federal Reserve Board, 2007 Survey of Consumer Finance (March 9, 2009)

 

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Cost and Access to Healthcare

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Summary

Health care reform is one of the most serious issues facing the United States today.  Past efforts at reform have been met with opposition from insurers, hospitals, doctors, business groups and political parties, and that opposition has stymied reform while the problems continued to worsen.

Today, there is more general acceptance of the need for reform but the level has not occurred uniformly across all stakeholders.  Insurers are recognizing the need to drop the most onerous “pre-condition exclusions” and providers are recognizing the need to get more efficient themselves.  Consumers of healthcare are a more divided lot.

Those who have health insurance coverage through work and who have never suffered a significant illness or injury may think this problem applies more to other people.

Conversely, those who have experienced medical problems or have lost jobs and health insurance are more aware of what has gone wrong with the system and are looking for better access to health care and better control of costs.

What the following shows is that health care problems cut across virtually all characteristics with adverse trends occurring in all areas except Medicare Prescription Drugs.

Insurance through the workplace is down, premiums as a percent of compensation are up, out-of-pocket costs are rising, insurance coverage by age group, marital status, race and region are all declining, and more people are not getting needed medical care or drugs because of costs. Finally, all this is aggravated by the rise in unemployment that has put at risk health insurance coverage for millions more Americans.

Health insurance through work is declining

The graph below shows the percent of employees obtaining insurance through their workplace by 4 regions and the USA as a whole.  The trend is almost consistently downward beginning around the year 2000.  The Midwest which once had the highest percent of employees insured, has dropped some 8% in just 6 years.

The Northeast and Midwest do, however, continue to lead the South and West in terms of percent of employees covered, and all regions experienced a coverage downturn in the late 1980’s and early 1990’s, a period of both slow growth and a recession.

If coverage declines in the current recession anything like that of 1991, there may be continued steep declines in workplace provided health insurance beyond the scope of this graph.

Source: Center for Disease Control – Health, United States 2008 Table 138

Health insurance is taking a bigger bite of income

The graph below shows the percent of total compensation going towards health insurance.  Since 2000, the trend in all regions is uniformly upward.  What the graph does not show is the percent of total compensation going towards co-pay and deductibles which are also rising.

The Midwest pays the highest percent of compensation, both currently and in the past.  The West and South, which at one time lagged behind the Northeast, are now tied.

With insurance a percent of compensation, the average compensation for these regions affects insurance. The South continues to lag due to low average compensation.  The Midwest insurance cost is mitigated somewhat as its compensation is lower versus the Northeast or the West.

From any viewpoint, health care costs are rising faster than compensation and putting a heavier burden on all.

Source: Center for Disease Control – Health, United States 2008 Table 135

More costly claims are becoming more common

Not only are insurance premiums taking a growing percent of compensation, but out-of-pocket costs are compounding the problem.  The graph below shows the percent of those having medical and drug claims whose out-of-pocket cost exceeded $2,000.

The trend is upward for all but children under the age of 18, and it is climbing most steeply for seniors 65 and older.  These steep increases for seniors has been mitigated by the Medicare Part D drug program whose effects are not yet evident in the time periods shown.

The message is that having insurance does not fully protect persons who are struck by illness or injury.  There are still risks of significant expenses.  And those who have never incurred serious illness or injury tend to be less aware of the out-of-pocket costs that they may incur.

Source: Center for Disease Control – Health, United States 2008 Table 133

Declining private health insurance favors no group

A graph above showed the decline in insurance coverage obtained through the workplace.  Although that is where most get their health insurance, the graphs below are for all persons under 65 and for all sources of insurance. Those with health insurance coverage have been on a downward trend for all classifications.

As expected, when a person gets older, health insurance becomes more important and that is born out in the upper right graph. Possibly a more disturbing trend is the lower graph where single, divorced or widowed people lag significantly behind married people. One conclusion is that families are very conscious of their children’s health care and covering them nearly always includes covering themselves … because that is how most insurance is sold.

Source: Center for Disease Control – Health, United States 2008 Table 137

People not getting needed costly medical care

The graph below shows the percent of people under the age of 65 who did not get needed medical care due to costs. More importantly, it only includes persons whose income exceeds 200 % of poverty level or about $44,000/year income for a family of four.

It is understandable that people with no medical insurance are less likely to get medical care due to costs. However, even some with insurance do not get that care because of co-pay and other out of pocket expense.  And roughly the same trend exists for those who lose health insurance for less than a year as for those who lose insurance for more than a year.

The graph shows an upward trend of 20% over a 10 year period and suggests little sign of change.  The decline in insurance coverage is aggravating the situation even more.

Source: Center for Disease Control – Health, United States 2008 Table 80

Those not getting needed medical care varies by age

The graph below is similar to prior but includes people over 65. As above, it only includes persons whose income is greater than 200 % of poverty level.

Those not getting needed medical care also varies by age, whether or not insured.  Both older people and children are less likely to skip needed medical care due to costs while the two middle age groups appear willing to risk skipping needed care.  Still, the trend for middle age groups is up.

Not getting needed medical attention can lead to more serious consequences if not treated promptly.  This is a risk that affects all people, not just the less well off.

Since these graphs end in 2006, they do not reflect the 2009 increase in unemployment that often leads to short periods of no health insurance for those who lost jobs.  And for many, those job losses extend for more than a year

Source: Center for Disease Control – Health, United States 2008 Table 80

People not getting needed costly medicines

The graph below shows the percent of people under the age of 65 who did not get prescription drugs due to costs. This graph also only includes persons whose income exceeds 200 % of poverty level or about $44,000/year income for a family of four.

Similar to the medical care graph, the trend is upward with more people forgoing needed drugs over the last 10 years.  However, there is a recent and measurable change in access by longer term uninsured as they appear to be getting some form of help with their prescriptions.

For those uninsured less than a year, the graph shows more skipping drugs, and the upward trend is worse than appears for basic medical care.

And like medical care, the steady decline in insurance coverage is aggravating the access to drugs even more.

Source: Center for Disease Control – Health, United States 2008 Table 80

Those not getting needed medicines varies by age

The graph below is similar to above but includes people over 65. As above, it only includes persons whose income is greater than 200 % of poverty level.

Those not getting prescription drugs also vary by age, whether or not insured.  A significant drop in not getting drugs among those over 65 was significantly affected by the introduction of Medicare Part D prescription drug program that lowered costs for seniors.

Though that program is not inexpensive, costs are lower, and so more are able to stay current on their medications.

Children are being adversely affected as drug costs continue to eat away at parents’ ability to buy drugs for them. Fortunately, this lack of access is at low overall levels but a potentially serious problem for those who are affected.

Source: Center for Disease Control – Health, United States 2008 Table 80

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World Healthcare Spend % of GDP

Below is a chart showing the percent of Gross Domestic Product spending on Healthcare.  Note, that the United States was at one time competitive with the other industrialized countries, but now spends far more than these other countries.