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U.S. Health Care A Work In Progress

Financial Executive magazine...September 2009

By Stephen Barlas

As Congress prepares to duke it out when returning from recess on details of a U.S. health-care overhaul, the real winners — or losers — of this bout are those who will be obliged to pay for and receive the “transformed” services: businesses and individuals.

The health-care reform legislation snaking its way through Congress is not nearly as venomous as some in the corporate community initially worried it would be. In truth, it is not close to being “transformative,” in the sense that it makes major changes in the way health care is delivered and how costs are controlled. So existing corporate health insurance programs will stay in place, as is, for the most part, which is the good news, so it seems — for now.

But the bill might bite some small businesses. There is likely to be a requirement that businesses over a certain threshold size either provide insurance, or that all individuals whose companies don’t provide insurance purchase a policy — like automobile insurance is required — from state-based cooperatives, where private insurers will compete for these estimated 46 million new “customers,” said to be the uninsured.

In the latter instance, companies would subsidize the costs of some employees’ premiums. If a threshold is set for required company coverage, it will be above $500,000 a year in payroll, and probably higher. The House’s Affordable Health Choices Act, for example, requires employers above $500,000 that do not provide insurance to pay an 8 percent payroll tax.

These taxes would help fund the subsidies for employees and the unemployed who go to nonprofit state insurance cooperatives or health insurance exchanges to purchase individual policies.

If private plans offered in the states have to vie for this new lollapalooza of a market with a federal government plan(s), referred to as a “public option,” — where the federal government creates a government-run insurance option to compete with private plans in efforts to drive down costs to consumers — private insurers may end up shifting some of their costs to private employers.

Yet some believe low, government-negotiated reimbursements will harm rural health-care providers and physicians would make up the gap in revenue by trying to negotiate higher reimbursements from private employers buying coverage from private plans.

As company premiums rise, younger, healthy employees could defect from reasonably good corporate plans to cheaper “public” plans.

That loss would be a double whammy on corporate costs.

The U.S. Chamber of Commerce Senior Manager of Health Policy James P. Gel-fand explains: “We especially don’t want younger, healthier employees to leave because that raises costs for everyone in the employer plan, and eventually you get to a death spiral and the plan ends.”

The big concern for employers — especially large companies that already provide good health benefits — is that insurers will take a loss on policies extended to the formerly uninsured and then try to make up that lost revenue by increasing premiums for employers. Following closely in second place is a concern that companies and their employees, either directly or indirectly, will have to pay the lion’s share of the $1 trillion bill that will come due after 10 years of coverage of the nearly 46 million so-called uninsured.

WHO to Tax

In terms of the 10-year costs and the revenue-raising options, the House bill has been much more problematic. The Congressional Budget Office estimated that the House plan could raise the U.S. deficit by $239 billion, which raised the ire of the 52 so-called “Blue Dog Democrats,” relative conservatives who initially blocked the House Energy and Commerce Committee from passing the bill that its chairman, Rep. Henry Waxman (D-Calif.), had labored over for months.The House had planned to finance the $1 trillion-plus expense by taxing high-income individuals, which would have brought in about $550 billion. The rest of the $1 trillion total would come from cuts to the Medicare and Medicaid programs.

The tax increases honchoed by Ways and Means Chairman Rep. Charles Rangel (D-N.Y.) would have made married couples making $350,000 subject to a 1 percent income surtax. The levy would rise to 2 percent for those making above $500,000 and 3 percent for those with incomes of $1 million or more. If those surtaxes stay in a final bill, which is likely, the starting income level will probably be upped considerably, to maybe $1 million a year, though the level of surtax is anyone’s guess.

Members of the Blue Dogs barked at the new taxes, too. Given their ability to stop a bill in the House, their yapping forced Senate Finance Committee Chairman Sen. Max Baucus (D-Mont.) and top Republican Sen. Charles Grassley (R-Iowa) to both cut costs and come up with revenue sources different from the House’s to win support in the upper house from Senate Democrats politically aligned with the House Blue Dogs.Any Senate plan will have to be even more moderate to attract Republican votes, which will probably be needed, even though Democrats theoretically have a 60-vote filibuster-proof majority.

But two senior Democrats, Sens. Robert Byrd (D-W.Va.) and Ted Kennedy (D-Mass.), have been sick and may not be able to get to the Senate floor to vote. (Editor note: by publication time, Sen. Kennedy had passed away.) So Baucus and Grassley are heading toward raising revenue by taxing generous employee insurance plans, an idea the unions have fought, and which business groups have also been unenthusiastic about.

Such a tax would bring in considerable revenue and encourage companies to offer plans with higher out-of-pocket costs, forcing employees to be — or so the reasoning goes — smarter health care consumers. That would help constrain costs, possibly.

An alternative, pushed by Sen. John Kerry (D-Mass.), would tax the insurance companies that offer those expensive policies, not the employers or the employees. In that instance, of course, the insurance companies would likely pass along the cost of that tax to employers in the form of higher premiums. “The Senate Finance Committee is likely to define the framework of the possible for negotiations this fall,” states Paul Dennett, senior vice president for Health Care Reform at the American Benefits Council (ABC), most of whose members are large corporations.

Dennett says the Finance Committee’s emerging approach “is the most favorable” from an employer’s standpoint. There will not be a requirement that employers provide health insurance, nor will there be a minimum benefit package companies have to supply if they voluntarily offer insurance.

But in the event employees found company policies too pricey — the Senate Health, Education, Labor and Pension Committee set the threshold at 12.5 percent or more above the employee’s wage — they could buy a cheaper policy from the state-level cooperatives, and the company might have to subsidize that premium. If a company did not provide insurance, it would probably have to pay either a payroll tax surcharge or a fixed amount per employee.

Where’s the Cost Containment?

The big issues have been how to raise $1 trillion and whether employers should be dunned for not providing health insurance. Totally absent from the debate has been a serious discussion of significant measures that would help private employers reduce their health insurance costs. Even the Blue Dogs, who devoted reams of press releases to the cause of cost containment, had nothing to say of specific substance on the issue.

“Ninety-five percent of the discussion has been on how to cover the uninsured and who should pay for it,” agrees Michael Thompson, a principal in PricewaterhouseCoopers’ Human Resources Services practice. “There is no doubt business has been playing defense.”

“Business has been so concerned about possible negative impacts of the legislation that we haven’t had the time or resources to advocate building on the good things companies are doing, such as wellness programs,” concedes the Chamber’s Gelfand.

Thompson explains that one of the few corporate cost containment measures in the prospective legislation is one that will provide federal grants of some indeterminate amount for local community wellness programs. These would probably be pilot programs to begin with — where local companies, physicians, hospitals and even supermarkets get together to help employees either prevent or mitigate chronic conditions such as diabetes, cardiovascular disease and cancer, to name a few.

Restraining health-care costs tops business’s agenda. Martin Reiser, manager, Government Policy, Xerox Corp., explains that according to government estimates, during 2008-18, average annual health spending growth (6.2 percent) is anticipated to outpace average annual growth in the overall economy (4.1 percent). “Consequently, if we fail to address these underlying costs and improve our health-care system, rising health-care costs will threaten the viability of U.S. businesses of all sizes and put job security, pay increases and other vital employee benefits at risk for millions of American workers.”

Randy Vogenberg, principal at benefits-consulting firm Institute for Integrated Healthcare, estimates that employer health-care costs are averaging a 15 percent increase a year, with the range approximately 12 percent to 22 percent, not including some outliers, who do much better or much worse.

But so far, the Democrats who control Congress — with barely a cross word from President Obama — have focused on covering the uninsured, not on “bending the cost curve,” the other major objective proclaimed at the start of this political effort.

The good news, at this point, is that most larger companies, those with 100-plus employees — that is, employers who offer fairly substantial health insurance already — will not have to change their health-benefit programs appreciably because of minimum benefit standards prescribed by Congress. Congress is unlikely to actually set a minimum benefit plan beyond requiring no-cost-sharing preventive care and no annual or lifetime limits.

Roger Chizek, director of U.S. benefits for medical-technology maker Medtronic Inc., says his company already pays 100 percent of employee preventive care. But he adds that a big question is whether the “Benefit Commission” that Congress would create to set the terms of a minimum package endorses the same preventive services Medtronic now covers, or whether it would force Medtronic to expand preventive service coverage beyond traditional preventive services.

Equally importantly, Congress will not change the terms of the Employee Retirement Income Security Act (ERISA), which allows companies to self-insure and not be bound by individual state requirements having to do with benefit packages.

Options for Control

Moreover, what was seen as an early threat by Democrats to require all employees with generous health plans to report some or all of that benefit as income has dissipated, though it has not disappeared. The House rejected this approach while the Senate Finance Committee will adopt some truncated form, applying income taxation to employer plans of a fairly high value, maybe $25,000 a year or more.

PwC’s Thompson says taxation of employee health insurance would require actuaries to come up with a way to value each of a companies’ health plans and compare it to some base level established by Congress for taxation purposes, and then report the “overage” to the Internal Revenue Service, as is currently the case for high-value, corporate-paid life insurance policies. Those IRS reports could then be subject to audits as to whether the “inputed” amounts were reasonably determined, and could even lead to regulations on how COBRA (Consolidated Omnibus Budget Reconciliation Act) rates (which are expected to be the basis for any calculation) are determined.

“This could be a very complex process that I don’t think anyone has the appetite for,” says Thompson. In addition, companies would have to pay Medicare and FICA taxes on the portions of that employee income.Some have argued that taxing high-value, employer-provided plans would, in fact, force employees to shed less optimal features, and maybe accept higher-deductibles and co-pays, forcing them to become more careful health-care consumers. Penny-pinching employees, theoretically, could put a damper on health cost increases.

But Gelfand says the way to beat down health-care costs is to give companies more leeway and incentives to institute wellness programs and to change the way health-care providers are paid — away from fee-for-every-service and toward fees for continuums of care — where physicians, hospitals and allied health providers would get one global fee, for example, for caring for someone who just had a heart attack.

“Medicare should be where this starts,” he says. “In the end, when the health-care system is completely fixed, there should be no more fee-for-service, where providers are paid based on the quantity of services they provide.”

Companies have also embraced consumer-driven, high-deductible health insurance plans as a way to keep health insurance costs in tow. Deloitte’s Center for Health Solutions found that the cost of consumer-directed health plans increased by only 2.6 percent in 2006 among the 152 major companies it surveyed. (That’s about a third the rate of increase for traditional plans.)

Medtronic offers a consumer-directed plan as one of its three options, and about 20 percent of employees have signed on. This may be one of the reasons Medtronic’s employee health insurance costs have been increasing about five percent a year.

Medtronic is deep into wellness programs, too, where employees are offered premium reduction incentives to participate in smoking cession, weight loss, dietary revamping and other programs that have a major impact on reducing insurance costs for cardiovascular diseases, diabetes and cancer, to name a few “high expense” chronic diseases.

“Wellness programs are one of the silver bullets we have, but there are a lot of constraints on us in terms of using those programs,” Chizek says.

But the bill being developed by Congress skimps badly on wellness program expansion. There are a couple of provisions that have been broached, such as turning a current corporate tax deduction for wellness programs into a tax credit and in­creasing the cap on the premium concession companies can award employees who participate in wellness programs (now 20 percent). These may or may not make it into a final bill.

It is more likely that federal funding of community-based wellness programs will be part of any final legislation, although the funding level for those grants is unclear. Even so, it would be years before their results could be applied nationwide.

When the health-care debate began in earnest earlier this year, President Obama and members of Congress promised a paradigm shift, a new world order where health-care costs for companies would decline as uninsured Americans were handed policies and physician and hospital costs were straight-jacketed. In fact, with regard to medical cost-containment in the private sector, any final bill is likely to be a paradigm whiff.

Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in Washington, D.C., for 27 years and has written several articles for Financial Executive — including the 2008 Apex award winner for editorial excellence.