Monday, January 12, 2009

Reform Is Coming

Two particularly interesting and important things happened at the end of last week. One, as reported by the New York Times (“Daschle Lays Out a Plan to Overhaul Healthcare”), was presumptive Health Czar Tom Daschle’s visit to friendly confines of the US Senate to chitchat about reform. The article reports he appeared fluent on the topic, didn’t need to resort to notes and enjoyed a very favorable reception from his former colleagues. Granted, it seems he wasn’t thrown too many hardballs, but his message was quite clear: “as we face a harsh and deep recession, the problem of the uninsured is likely to grow.” Acknowledging criticisms of the failed 1994 attempt to address the systems shortcomings, Mr. Daschle asserted, “The[y] are good arguments for undertaking reform in a way that is aggressive, open and responsive to Americans’ concerns,” he said. “They are not good arguments for ignoring the problem.”

While many, like Jeff Goldsmith, had suggested a go-slow approach on health reform, it appears clear something more aggressive will happen. The Administration will join the growing chorus of proposals gathering for consideration and vote.

Which leads to the other item that appeared on Friday. The Commonwealth Fund Commission on a High Performance Health System issues their analysis (part I of II) of Leading Congressional Health Care Bills. It’s an interesting tome and a surprisingly fast read. Admittedly, I have spent the most time on the section dealing with mixed private-public insurance with a shared responsibility for financing advanced through proposals by President-elect, Senator Max Baucus and the “Building Blocks” plan offered by the Commonwealth Fund itself. Ego being what it is, I assume the bill that finally goes to the floors of Congress for debate, vote and conferencing will resemble the President’s view of the universe. He is the “Noun” to the verb “Change.” He gets to claim victory and credit (and, if necessary, blame).

The details of the proposal are fairly clear and widely available. Two items jumped out at me though which are worth mention.

First, Figure 3 of the report compares US Population by Primary Source of Insurance under Current Law and Proposals, 2010. Under the Obama-Baucus-Building Blocks (OBBB) model, the Employer Sponsored insurance market is projected to change very little. – covering 49% of all Americans, down from 53% currently. I personally found that small shift surprising. in the election, the Doom-And-Gloomers often said that if the Goverment was providing and "out" employers would take it. Guess not.

The Connector – the new mechanism that will be the market-maker for insuring the currently uninsured and which is also expected to pick up some people currently covered by Medicaid – will become the third largest “insurer” at an estimate 19% of the population, behind Medicaid/SCHIP (45%) and just ahead of Medicare (10%).

It is expected, in this model, that providers would receive Medicare rates for people insured under the Connector, so Medicare’s fee schedule would cover 29% of the population. An intriguing question. Can hospital operators profitably serve a third of their patient population at Medicare rates? Maybe more intriguing is the financing aspect of the OBBB plan that places a 4 percent assessment on hospital gross revenues and 2 percent on physician revenues to partially fund the expansion of access. Gross revenues, not net. This is an interesting kettle of fish; a tax dressed up in sheep’s clothing. It could certainly impact hospital pricing strategies. I foresee an abundance of multivariate analyses calculating how much prices could increase and still deliver bottom line benefit in excess of new taxes.

Beyond the fun questions of profitable business management and pricing strategies, the bigger question that bubbled up was the issue of tax-exempt status. Once you’ve started to tax, it’s hard to stop.

So if the total uninsured burden on the US economy drops to 1% of the population (4 million people) and the care for 78% of all citizens is paid at Medicare rates or better, what becomes of hospitals’ charitable missions? Losses on serving Medicaid, providing medical education, and under/unfunded research burdens can’t justify millions of dollars of foregone state and local tax receipts. Even if they were to receive credit for the assessments that help fund the Connector program, it seems hospitals will be exposed to a significant, non-defensible assault.

I won’t argue that this is a bad thing. I can imagine a provider revenue boom (not to mention savings in collections, something hosptials particularly stink at). As a marketer, in a land of taxable hospitals, I see incredible marketing opportunities – grow sales at all costs to spread fixed costs across more cases and drive marginal revenue. Relieved of the burden of the uninsured/no-pay patients, does a new “Wild West” of health care competition emerge? Puzzling questions I don’t have full ideas on yet.

But if I were a gambling man, I’d continue to put chips down on “Change.”

Changes aren’t permanent, but change is.”


  1. In 2006, the U.S hospital margin for Medicare patients was -9.4%, for Medicaid patients -14.7%, for self-pay (other) patients -25.1%, and for commercial patients 23.1% . The average overall hospital margin was 3.8%. Clearly, commercial payers are subsidizing the government's obligations. It would be interesting to see what would happen to commercial rates when Medicaid patients and self-pay patients are covered at the higher (albeit low) Medicare payment rates.