The Baucus Plan by the Numbers

The Congressional Budget Office on Tuesday released a preliminary analysis of the chairman’s mark of America’s Healthy Future Act of 2009, which was released earlier that day by Senate Finance Committee Chairman Max Baucus.

The good news is that, according to the CBO, the Baucus plan would reduce the federal deficit by $49 billion dollars during the 10-year period ending in 2019. In 2019 alone, the plan achieves $16 billion in deficit reduction. Moreover, in contrast to the bill produced by the House committees, in which net outlays increased in the out years, the CBO expects the Baucus plan to further reduce the federal budget deficit after 2019, “as added revenues and cost savings are projected to grow more rapidly than the cost of the coverage expansion.”

Most of the savings are generated from two sources: 1) transitioning Medicare Advantage plans to a competitive bidding system, thereby reducing the federal subsidies that are paid to private plans; and 2) reducing annual Medicare market basket updates (annual increases in Medicare payments to providers to compensate for higher office expenses and other input costs). Cuts to the Medicare Advantage program were fully expected, as private plans on average currently receive significantly more than the costs in fee-for-service Medicare, and the reductions in the market basket updates are not overly severe, even though their cumulative impact is significant.

Of more concern, however, is a provision relating to payment for physicians’ services under Medicare Part B. Starting in 1998, as a way of controlling overall spending growth in Medicare, Congress implemented the sustainable growth rate (SGR) formula for the annual adjustment in fees paid to physicians in Medicare. Adhering to this formula, however, would have resulted in cuts to the fees paid to physicians, so Congress repeatedly has overridden the formula since 2003 to allow payment increases. But the formula was never repealed, so if Congress does nothing to override it each year, payments to physicians would automatically be cut by the cumulative difference between current payment rates and payments under the original formula. The Baucus plan once again overrides the SGR for 2010, allowing another increase in payments to physicians, but does nothing to repeal the SGR, meaning that cuts—estimated by the CBO to be approximately 25%—would begin in 2011. Because the cuts are not a change in current law, they are not scored as savings by the CBO. The issue, however, is whether it is realistic to expect that Congress would allow a drastic cut of 25% to stand. Certainly physicians will not stand by and allow these cuts to be implemented. Without these cuts, however, the deficit reductions promised by the Baucus plan would likely prove to be illusory.

So far, at least, critics of the Baucus plan have focused on other issues. In particular, many Democrats object to the exclusion of a public plan option in the insurance exchanges. Republicans, on the other hand, are objecting to including in the exchanges non-profit health insurance cooperatives, saying, in the words of Senate Minority Leader Mitch McConnell, that they are “just another name for a government plan.” From the CBO’s perspective, however, the cooperatives are a non-issue. “The proposed co-ops had very little effect on the estimates of total enrollment in the exchanges or federal costs because…they seem unlikely to establish a significant market presence in many areas of the country or to noticeably affect federal subsidy payments,” according to CBO Director Douglas Elmendorf.

But it is only a matter of time before attention gets focused on the issue of cuts to physicians’ payments, and I assume Senator Baucus knows this. Perhaps, his real plan is to use the threat of drastic cuts as a stick to force physicians to move away from a reliance on fee-for-service payments and toward adoption of alternative payment mechanisms, such as bundled payments, or the capitated payments that may come with participation in an accountable care organization. In the end, it may require the stick of payment cuts to force providers to consider the potential carrots they may receive through alternatives to fee-for-service Medicare.

Obama Makes His Case

In his speech on healthcare reform before a joint session of Congress last night, President Obama presented the rationale for reform as well as an outline of a plan he favors, and he also tried to dispel many of the misconceptions that have surfaced regarding the bills that have circulated in Congress.

The outlines of his plan are very similar to the proposal released by Senator Baucus over the weekend, but there were two important differences. One is that he would impose a mandate on employers to provide health insurance to their employees, although there would be exemptions for small businesses. The second is that he would provide a public insurance option among the choices from which individuals and small businesses could choose in insurance exchanges established in each state. In explaining the rationale for a public option, he said his concern was that there be meaningful competition among insurance plans. He cited the example of Alabama, where he said that 90% of the insurance market is controlled by just one company. He downplayed the importance of a public option, however, and said that he would be open to exploring alternatives, such as having a public option only in states where insurance companies were not providing affordable coverage, or using non-profit health insurance cooperatives instead of a government-run plan.

In an effort to garner Republican support, President Obama also said that he was willing to consider medical malpractice liability reforms, an issue that Republicans have repeatedly cited as a way of reducing healthcare costs. It is also an issue that the American Medical Association would like to see addressed, but none of the bills or proposals coming out of Congress so far have addressed this issue.
Toward the closing of his speech, President Obama invoked the words of Senator Edward Kennedy and reminded everyone that Senator Kennedy had a history of working closely with key Republicans, including Senators Hatch, McCain, and Grassley, on healthcare issues. While he made a strong case for healthcare reform, whether President Obama succeeded in swaying any Republicans with his speech last night remains to be seen.

Back to Work

The Labor Day holiday yesterday was the final day of the summer recess for Congress, and both chambers are back in session today. One member of Congress who worked during the recess was Senator Max Baucus, who unveiled an 18-page “framework” for a healthcare reform bill over the weekend.

The broad outlines of the framework are familiar. It would include an individual mandate requiring most Americans to have health insurance. It would also create state insurance exchanges in which private insurance companies would compete to offer health insurance plans to individuals and small businesses, while subsidizing the cost of insurance for individuals or families with incomes up to 300% of the federal poverty level, as well as ensuring that individuals and families with incomes of up to 400% of the federal poverty level would have to pay no more than 13% of their income in health insurance premiums. Insurance reforms would prevent insurance companies from denying to coverage to individuals with pre-existing medical conditions and would also require insurance companies to cap beneficiaries’ out-of-pocket expenses. The Baucus proposal would also expand eligibility for Medicaid to 133% of the federal poverty level.

These provisions, which mirror provisions in the House bill, are relatively uncontroversial. Unlike the House bill, the Baucus proposal does not include a “play or pay” provision requiring employers to provide health insurance to their employees, but it would impose fees on employers whose employees receive subsidies on health insurance plans purchased through the new insurance exchanges.

The biggest sticking point on healthcare reform for Republicans in Congress, and even some conservative Democrats, has been over the inclusion of a public plan among the health insurance plans offered in the exchanges. The Baucus proposal does not include a public plan, but it does include a provision of non-profit health-insurance cooperatives to compete with private plans in the exchanges.

The other novel feature of the Baucus proposal is that it would impose excise taxes on insurance companies for high-end health insurance policies, defined as plans with premiums in excess of $8,000 per year for individuals and $21,000 per year for families. The rationale for taxing high-end insurance plans is that, because these plans so completely shield beneficiaries from medical treatment costs, beneficiaries have no incentive to seek cost-effective treatment. It is assumed that, by requiring insurance companies to pay a 35% tax on premiums received in excess of the thresholds, they will pass on their costs to employers in the form of higher premiums. Employers, therefore, may opt to offer their employees less generous health insurance plans, and, faced with higher potential out-of-pocket expenses, their employees may become more cost-conscious consumers of healthcare services.

Even if the costs eventually get passed onto employers, it sounds politically more palatable to tax insurance companies than employers. Some employers and unions offering such high-end plans, however, are self-insured, so they would also be subject to the tax. Moreover, not all high-premium plans offer excessive benefits. Some plans have high premiums because the employees covered are much older and sicker than average beneficiaries.

Still, although unions and public employees may be opposed to this financing option, it has the advantage of potentially contributing to a lower rate of healthcare inflation. Alternatives, such as simply taxing high-income individuals, would raise revenue but contribute nothing to lowering healthcare costs.

To raise additional revenue, across-the-board annual fees would be imposed on companies in several industries based upon their market shares, including $2.3 billion for the pharmaceutical industry, $4 billion for the medical device industry, $6 billion for the health insurance industry, and $750 million for clinical laboratories. Other provisions affecting the pharmaceutical industry include an increase in the Medicaid rebate to 23.1% and a requirement to discount the cost of drugs purchased in the Medicare Part D doughnut hole by 50%.

The lack of a public option in the Baucus proposal will likely infuriate many Democrats. In releasing a proposal that excludes a public plan, however, Senator Baucus is essentially calling the Republicans’ bluff. If Republicans are unwilling to support even his very moderate plan, then he will have made it clear that Republicans were not serious about seeking a compromise in the first place. On the other hand, if Republicans are willing to embrace his proposal, then the Senate will have a bill it can pass with bipartisan support. Excluding the public plan option may alienate many House Democrats, but both Democrats and Republicans appear to have been focusing on the public plan for ideological reasons rather than the impact it would have on choices available in the insurance exchanges. Either way, the outcome of negotiations today and tomorrow between Senator Baucus and key Republicans on the Senate Finance Committee may impact what President Obama says in his speech to Congress Wednesday night.