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Healthcare reform still has a way to go, and there are a lot of flaws even in the more liberal House legislation.  But no matter which side you’re on, you have to admit the House vote in favor of healthcare reform is historic.  Scott Fidel of Deutsche Bank comments:

While passage of the House bill was a milestone for HC reform, the real surprise was probably how close the vote ended up being; the Dems had almost no margin for error in the final vote. We saw two noteworthy political themes emerge from the vote. First, a number of “Blue Dog” Democrats ended up voting in favor of the bill, thus once again proving that while they advertise themselves to the public as independent “fiscal conservatives”, they typically end up voting along straight party lines. The second theme is that the abortion issue is emerging as one of the real potential areas of controversy in the reform process, along with the public plan. Indeed, Speaker Pelosi needed to make an important last minute concession around abortion to get the approval of certain pro-life Dems. We suspect we haven’t heard the last of the abortion issue as it relates to health reform.

Both the American Medical Assn. and AARP announced yesterday their support for the House version of healthcare reform, and to me this is a big deal. 

Seniors enrolled in Medicare Advantage plans will almost certainly face benefit reductions or higher premiums following reform because of funding cuts to the program.  The cuts may be fair and justified, but that doesn’t mean there won’t be a backlash among the 10 million or so seniors enrolled in Medicare Advantage plans (I called AARP for comment, but didn’t hear back by presstime).  AARP’s support means the organization will be on the front lines educating members why reform is necessary and why it’s good for the 50-plus crowd.  Says AARP:

Today’s endorsement marks the first time in this legislative battle that AARP has put its full weight behind a comprehensive health care reform package. In the coming days, AARP will be informing its members about the health care reform package through its publications, paid advertising and more than 5 million calls and e-mails to its grassroots activists.

AARP notes the House bill would eliminate the Medicare Part D donut hole and allow the government to negotiate drug prices (two things I’ve been calling for since the Part D program’s inception), strengthen the financial status of the Medicare trust fund, expand preventive care for Medicare, lower insurance costs for AARP individuals age 50 to 64 (i.e., those not yet eligible for Medicare) and create a voluntary long-term care insurance program.  That’s a pretty good sell; that said, there will be seniors in Medicare Advantage plans who need convincing.

As for AMA, it’s support of the House legislation is tied to the Medicare payment fix for physicians — which is actually a separate bill from the reform legislation.  In other words, docs are signing on in exchange for not having to deal with the perennial issue of looming cuts to physician payments from Medicare.  So the question is will AMA still support the House bill if it doesn’t get the physician fix?  AMA doesn’t offer a clear answer.  But healthcare attorney Bruce Merlin Fried of Sonnenschein, Nath & Rosenthal does: he says AMA won’t get the fix, but will still end up supporting the legislation.

I’ll be posting today from the Oppenheimer healthcare conference at the Waldorf in New York.  First up, an excellent assessment of the status of healthcare reform by Bruce Merlin Fried of Sonnenschein, Nath & Rosenthal.  Some key comments:

On the likelihood of reform passing this year: “Unlikely.” Fried notes the Senate bill probably won’t go to the floor until Nov. 19 and then will be debated three to four weeks, which takes us close to Christmas.  More likely, legislation will be ready “in time for the President’s State of the Union speech.”

On the public plan: “I actually do presume…a public plan to be in the bill.”  But Fried is unclear whether it will have an opt-out, trigger or other fallback provisions.  Fried thinks Senate Majority Leader Reid may still be able to get the necessary 60 votes — including possible support from Sen. Lieberman.  “It’s all about the endgame,” he says.

On the impact of a public plan on private insurers:  “There’s an open question as to whether the public plan can compete effectively.”  For example, Fried wonders who will run the plan and how will rates be negotiated.  He adds, “There has to be a concern about positive margins otherwise we’re going to be subsidizing this thing forever.”

On the $6.7 billion managed care tax: “Congress, the Senate, needed more money and so voila there’s a fee.”  But Fried pointed to the “idiocy of imposing a fee on plans that operate government programs,” which amounts to driving up the cost of something you’re going to subsidize.  “If they could tax the end-user they would.  They want the managed care organizations to be the bad guys.”

On the animosity of many in Congress toward health insurers: “I’ve been at this a long time.  I’ve never seen this level of anger and distrust.”  Fried says it’s been building for years: care denials, options backdating, rescissions in California, and finally the poorly timed release of the AHIP-PriceWaterhouse study on the negative impact of reform.  “There needed to be a bad guy in this debate, and the insurance industry was deemed to be the bad guys.”

On Medicare Advantage: There will be significant reductions in benefits, Fried says.  States with big Medicare Advantage populations, e.g., California, Florida, New York, Pennsylvania, will be impacted.  The Democrats have forgotten the lessons of the Balanced Budget Act, Fried says, which resulted in retrenchment of Medicare Advantage plans.  Consolidation is likely, he adds.

Who’s afraid of a public health plan? 

According to a Congressional Budget Office preliminary analysis (here), only 6 million people would enroll in the public option proposed as part of the House healthcare reform bill.  Why?  Because a public plan required to negotiate with providers — as stipulated in the House bill — will have higher premiums than private plans offered through insurance exchanges, CBO says.

A public plan paying negotiated rates would attract a broad network of providers but would typically have premiums that are somewhat higher than the average premiums for the private plans in the exchanges. The rates the public plan pays to providers would, on average, probably be comparable to the rates paid by private insurers participating in the exchanges. The public plan would have lower administrative costs than those private plans but would probably engage in less management of utilization by its enrollees and attract a less healthy pool of enrollees. (The effects of that “adverse selection” on the public plan’s premiums would be only partially offset by the “risk adjustment” procedures that would apply to all plans operating in the exchanges.) 

Basically, CBO is saying what others (including myself) have been speculating for some time: that the public plan might end up a dumping ground for the sick as insurers cherry pick the healthy, i.e., a risk-selection mechanism (see prior post).  Said another way, in opposing a public plan, the health insurance industry may actually be shooting itself in the pre-existing foot.

CBO notes that all told, about 36 million more people would have insurance coverage under the House bill at a cost of $894 billion over 10 years (not including a physician fee fix).  About 21 million people would purchase coverage through insurance exchanges and 15 million would be added to Medicaid.  (Actually, the exchanges would enroll a total of about 30 million; however, 9 million are expected to come from employers already offering coverage to their employees).  Another 18 million people, including 6 million illegal aliens, would remain uninsured.

Under the heading “Ensuring value and lower premiums,” the House healthcare reform bill would mandate that health plans have a minimum medical cost ratio of 85%, but the requirement would be eliminated after establishment of an insurance exchange.

Each health insurance issuer that offers health insurance coverage in the small or large group market shall provide that for any plan year in which the coverage has a medical loss ratio below a level specified by the Secretary (but not less than 85 percent)…The Secretary shall establish a uniform definition of medical loss ratio and methodology for determining how to calculate it based on the average medical loss ratio in a health insurance issuer’s book of business for the small and large group market. Such methodology shall be designed to take into account the special circumstances of smaller plans, different types of plans, and newer plans.

Under the heading “Sunshine on price gouging” any premium increases by health insurers would have to be justified to federal and state regulators.

The Secretary of Health and Human Services, in conjunction with States, shall establish a process for the annual review of increases in premiums for health insurance coverage. Such process shall require health insurance issuers to submit a justification for any premium increases prior to implementation of the increase.

(Hat tip Justin Lake of UBS).

The House healthcare reform bill contains a clause that I find hard to believe.  It reads as follows:

NO BAILOUTS.—In no case shall the public health insurance option receive any Federal funds for purposes of insolvency in any manner similar to the manner in which entities receive Federal funding under the Troubled Assets Relief Program of the Secretary of the Treasury.

In other words, the government isn’t going to receive funds from the government to bail out the government.  Now let me tell you what I think will really happen if the government-run option gets into financial trouble.  The government will bail it out.

Here’s a video (hat tip: Firedoglake.com) of House Speaker Nancy Pelosi (D-CA) announcing the Affordable Health Care for America Act.  Click here to read a copy of the 1990-page bill.  We’re still waiting for the CBO analysis, but Pelosi says the bill will extend coverage to 36 million more Americans at a cost of under $900 billion over 10 years; about 4% of Americans would remain uninsured.  The bill would extend Medicaid eligibility to 150% of the federal poverty level, add a public option-lite (i.e., provider rates would be negotiated rather than set at Medicare levels or slightly higher), provide subsidies to people up to 400% of FPL, and close the Medicare drug donut hole.

All of which is more or less what we’d expected.  Still, I have to admit it was pretty exciting to watch the announcement, even despite the bill’s shortcomings.  As Pelosi noted, it really is an “historic moment.”

But what I want to talk about for a minute is that last detail — closing the Medicare Part D donut hole.  In an opinion piece back in 2006, I’d pointed out that the convoluted benefit design resulting in the donut hole was an absurdity that wouldn’t last.  (I also predicted the government would eventually start to use its bargaining power to negotiate drug prices, another big failing of Part D that we haven’t yet addressed; although I still think we will — secret back door agreements or not; Addition: Nov. 10, Sorry, failed to note the House bill gets at this as well).

What’s my point?  There is, as Paul Krugman has noted, an irreversibility to healthcare reform.  “The really important thing, for reformers, is to get the principle of universality established. Once that happens, there’s no going back,” he wrote.  

I have put it a different way in this blog.  The U.S. is making incremental progress toward a highly regulated public-private health insurance market or single-payer healthcare.  The only question is how soon before we get there.  The merged bill from Senate Majority Leader Harry Reid (D-NV) goes further than the Baucus bill, and the House bill goes further than both.  But they all get us a little closer to where I think we’re eventually heading, and there’s no going back.

Here’s a very good piece by Maggie Mahar of Health Beat titled The Public Option: It’s Not About Politics; It’s About the Economics of Reform.  Mahar has remained optimistic that a public plan will make it into the final reform legislation — even when many liberal observers, myself included, considered the public option essentially dead.  (Admittedly, the odds do seem better now that Senate Majority Leader Reid has come out in support).  But even though Mahar and I may have disagreed on the odds of a public plan surviving this round of legislation, we both agree that a public plan is inevitable at some point because of the economics of healthcare.  To quote Bogart as Rick, “Maybe not today, maybe not tomorrow, but someday soon and for the rest of your life.”  My view — as I’ve stated before (see prior post)– is that eventually the U.S. will move to a highly regulated public-private insurance market or single-payer healthcare.  Btw, Mahar is thoughtful, logical and thorough in her reporting on healthcare; be sure to put Health Beat on your favorites list.

Addition (Oct. 28, 2009; 3:31 p.m.): I just remembered, Paul Krugman makes a similar point in a post titled The Facts Have a Liberal Health-care Bias.

Serious students of health care have known for a long time that the magic of the marketplace doesn’t work in health care; the United States has the most privatized health-care system in the advanced world, and also the least efficient. The pale reflection of this reality in the current discussion is that reform with a strong public option is cheaper than reform without — which means that as we get closer to really doing something, rhetoric about socialism fades out, and that $100 billion or so in projected savings starts to look awfully attractive….It has also been clear from international evidence that universality is cheaper than leaving a few people expensively without care. That’s reflected now in the projected savings from a strong employer mandate.  The point is that reality is pushing for a more progressive reform than the Baucus bill. Truly, the facts have a liberal bias.

Probably not in big numbers, argues Scott Fidel of UBS:

We are skeptical that a majority of the states would choose to “opt-out” of a public plan, given the firm position that Democrats currently hold at the state level. The Dems currently control the governorship in 28 out of 50 states and also control 27 state legislatures compared to only 14 that are in GOP control. The other 9 state legislatures are either split or officially nonpartisan.

The state “opt-out” approach would also serve to expand the battleground over health reform to the state level from the current war zone in D.C. Functionally, it would also further increase the relevance of upcoming state-level elections for the private health insurance industry. For example, the upcoming governors races in NJ and VA would both suddenly have much more important ramifications for the industry.

The public health plan option just got a big boost.  Senate Majority Leader Harry Reid said today he will include in healthcare reform legislation a public option with a clause allowing states to opt out.  Reid is charged with merging the two Senate bills: the Senate Finance Committee bill, which doesn’t include a public option; and the HELP bill, which does.  Justin Lake of UBS has some thoughts on what this might mean for the managed care industry.

It is clear that the probability of some sort of public plan option has increased over last several weeks and given that plan is unlikely to go into effect for several years the devil will be in the details from a stock reaction standpoint.  While we see a government run, even playing field “opt-out” proposal as unlikely to change the competitive dynamic of the managed care industry on day one, the key will be whether this type of plan is viewed by the investment community as a precursor to eventual direct government intervention on behalf of the public plan in terms of setting provider rates in order to make it more/anti-competitive versus MCOs.

Meanwhile, leading managed care stocks like Aetna, Cigna, Humana, United and WellPoint were down anywhere from 2-4% today.

As I’ve said before, I view this round of healthcare reform as an incremental step toward a highly regulated public-private insurance market or a single-payer system.  A public option — even one with an opt-out — simply gets us where I think we’re eventually going sooner.  Btw, if I had to choose between a public option and getting everyone insured (e.g., the SFC bill would leave about 25 million people without health insurance), I’d probably go with getting everyone insured.  That and the lack of real cost controls are among the key failings of the SFC bill.

Does the health insurance industry want to kill healthcare reform?  That’s the question after the industry sponsored a report showing how premiums will rise substantially because of certain aspects of reform legislation (see prior post).  My feeling is that the industry — led by America’s Health Insurance Plans — isn’t out to kill reform, but rather to address what it perceives as its shortcomings.  Still, if AHIP really wanted to kill reform, Carl McDonald of Oppenheimer has a few suggestions (from a research note he published Oct. 17).

We’re not in advertising, but it really doesn’t seem like it would be all that challenging to put together a half-dozen 30-second spots to blanket each TV station in the country for a couple weeks that would make every reasonable person in the country very, very fearful of health reform and what Congress is doing. One spot, which AHIP has already begun airing in certain markets, would talk to seniors and explain to them that Medicare rates are being cut, and will result in reduced benefits and more money out of their pockets, and close with the very sensible question of why Congress believes that it’s right to take money from seniors and use it to fund health care coverage for the rest of the population. In another ad, we’d appeal to the middle class, highlighting how much in additional taxes the middle class will end up paying to fund the reduction in the uninsured. It’s always good to have a more thematic approach, too, perhaps focusing on the fact that 25 million people will still be uninsured even after we spend close to a trillion dollars, and calculating how much we’re spending for every person that will gain access to coverage. And so on.
 
Combine the health insurance industry advertising with the media blitz that a number of unions have launched against the Cadillac tax on high cost plans that the unions despise because of the large number of their members that would be impacted, and the unease that the hospital industry is feeling right now because of the evisceration of the individual mandate that occurred over the last couple weeks, and it means that we could be in for a few testy and highly charged weeks ahead.

As I wrote in a prior post, the controversial report sponsored by America’s Health Insurance Plans arguing that certain healthcare reforms would raise costs was hyperbolic, but in fairness it did make some valid points.  That’s another way of saying that the report was flawed and biased but also partly correct.  The problem is arguing that reform will raise costs doesn’t count if you are actively opposing reforms that might actually reduce costs.  In other words, you can’t have it both ways — a point Forbes makes quite well.

The real phoniness here is the idea that the HMO lobby AHIP is committed to cutting costs. At the same time that AHIP is saying that health reform will be too expensive for families, it’s asking Congress to keep generously subsidizing HMOs through the Medicare Advantage program. (See “Strange Bedfellows In The Baucus Brawl.”) And it’s asking that Congress not tax so-called Cadillac insurance plans, even though such a tax would likely slow down health inflation.

Some would argue the same is true about the industry’s opposition to a public plan and, of course, single-payer healthcare.

Click here for an interesting piece in The Wall Street Journal suggesting there’s a rift among health insurers over reform — with some wanting to “go negative” and others wanting to support the reform effort.  Not surprisingly, the Journal suggests, business interests are behind the divergent views:

Ron Williams, Aetna Inc.’s chief executive, has been working with the White House and Senate Finance Committee in an attempt to mend a rift between insurers and Democrats sparked by an industry-funded study critical of the measure. But the Blue Cross Blue Shield Association continued to step up the rhetoric against the legislation by releasing its own study Wednesday critical of the bill.

The split in the industry shows how varied the interests of insurers are. Mr. Williams’s company, which largely administers health benefits for large corporations, has less to lose in an overhaul than insurers who sell policies to individuals and small employers, as many Blue Cross plans do. That area of the insurance market is the one that will likely face significant new restrictions on the way insurers can price policies, restrict coverage and compete with other plans.

Karen Ignagni, chief executive of America’s Health Insurance Plans, published an op-ed in the Washington Post yesterday defending the much-maligned, industry-sponsored report from PriceWaterhouseCoopers arguing that certain provisions of the Baucus healthcare reform bill would sharply increase health insurance premiums. 

You can judge for yourself, but the piece sounds a lot like damage control to me (and others as well).   Consider the chain of events: 1. The industry sponsors a misleading report; 2. The reaction is a swift, round denunciation of the report’s methodology and AHIP’s motives (including sharp words from President Obama: “It’s smoke and mirrors.  It’s bogus”); 3. PWC issues a statement basically admitting the estimates could be wrong all things considered, as Politco reports; 4. Ignagni takes her defensive stance. 

The whole mess has to be pretty embarrassing for Ignagni and AHIP, an organization that has a history of masterfully playing the game in Washington.  But I actually believe Ignagni when she says that the industry still supports reform.  As I noted in a prior post, this is mostly about the weak coverage mandate in the Baucus bill, and on that score AHIP has a point.   Btw, Matthew Holt over at The Health Care Blog has a funny post arguing that insurers are the “poor suckers” in the Baucus bill.  The industry signed on for guaranteed issue and community rating but didn’t get a strong mandate to avoid adverse selection.  What would save them?  Holt argues, ironically, a public option to off-load high-risk members.  Curiouser and curiouser.