1. OFFICE OF THE ACTUARY National Health Care Reform: Promises, Prospects, & Pitfalls Presentation for the Middle Atlantic Actuarial Club May 14, 2009 Richard S. Foster, FSA Chief Actuary

2. Nature of the Problem Uninsured – 45.7 million in 2007; more since recession began Cost Growth – Since 1975, per capita NHE has grown 1.9% faster per year than per capita GDP Affordability – Employer health insurance premiums more than doubled between 1999 - 2008; wages increased 34% – High U.S. health costs hinder competitiveness of companies – Many workers can’t afford employee share of premiums Federal, State budget implications – Medicare: Part A Trust Fund exhausted in 2017 – Medicaid: 41 states and DC facing FY2009 and FY2010 budget shortfalls

3. Past and Projected National Health Expenditures, as a Percentage of GDP

4. Nature of the Problem, continued Inefficiency – Medical care is fragmented – Payment mechanisms reward more services, not quality of care – Treatment practices & costs vary widely by region – Significant incidence of medical errors, unnecessary services Potential for catastrophic costs – 700,000 personal bankruptcies annually related to health care costs (and most have insurance)

5. Why Do Health Costs Grow Faster?

6. US vs. Rest of World

7. Growth in Health Expenditures per Capita, 2001-2006 OECD Average – 6.8 percent

8. Health Expenditures per capita and Life Expectancy at Birth, 2005 Health Expenditures per Capita, US PPP Life Expectancy at Birth, in Years Source: OECD Health Data.

9. Who are the players? Health Reform Administration (White House, HHS, OMB, Treasury) Businesses (large/small) Advocates (AARP, Families USA, unions) Health Care Providers (AMA, AHA, AHIP, PhRMA, AdvaMed ) States (Massachusetts, California) Congress (Senate: SFC, HELP, Aging House: W&M, E&C)

10. Types of Reform Proposals Changes to tax treatment of health – Limit or eliminate exclusion of employer health insurance costs from employee compensation – Create standard deduction for health insurance – Limit deductibility of health care costs

11. Types of Reform Proposals, cont. Mandated coverage – Children only? Everyone? – Penalties and incentives for employers “Pay or play” Subsidies for small employers – Penalties and incentives for individuals Penalties up to full low-cost option premium Subsidies for low-income individuals (< 400% FPL)

12. Types of Reform Proposals, cont. Rules on non-group private health insurance – No exclusion of pre-existing conditions – Guaranteed issue & renewal – No underwriting, except age rating Health insurance “exchange” or “connector” – Increased pooling – Facilitated enrollment – Private plans, public plan option?? – Standardized policy options?

13. Types of Reform Proposals, cont. Changes to Existing Public Programs – Expand Medicaid to 100% of FPL or higher – Expand SCHIP – Open Medicare to voluntary enrollees aged 55-64 Who is Eligible? – Citizens only? – Legal residents only? – Everyone?

14. Efforts to “Bend the Curve,” Pt. 1 How to reduce health care cost growth to sustainable level? The key to addressing affordability, coverage, and other health care problems Many ideas considered—most can change level but probably not slope Mark McClellan:“How to avoid ‘triumph of hope over experience’?”

15. Efforts to “Bend the Curve,” Pt. 2 Why do health costs increase faster than GDP? – Normal “market” doesn’t exist for health care Insurance insulates people from true cost Extreme value placed on health Complexity of “product” – “Guaranteed market” for new medical innovations Demand for best possible treatments Medical research, development, implementation companies have little incentive to focus on cost- reducing technology Most innovation to date has been cost-increasing

16. Efforts to “Bend the Curve,” Pt. 3 Comparative effectiveness with (substantive) cost- effectiveness Federal Health Board More substantive cost-sharing [Sector-wide price or budget controls… ] [Vouchers (w/ amount updates < health cost increases)… ] Health information technology / electronic health records Value-based purchasing / Pay for performance Preventative services Competition (with or without public plan) Provider efficiency incentives Malpractice reform Payment bundling; “medical home,” Accountable Care Organizations

17. Why Health Reform Might Pass in 2009: Democratic President and Democratic majorities in House, Senate Public concerns over health costs Business non-competitiveness due to health costs Condition of economy Use of “reconciliation” rules in Congress Willingness of those that defeated prior initiatives to work together (AHIP, Republicans, advocates) Industry commitment to voluntarily slow rate of cost growth

18. Why Health Reform Might Fail in 2009? Costs of proposals >> savings from Medicare, tax changes, etc. Current Federal budget situation Public plan option Use of “reconciliation” rules in Congress Concern over use of comparative effectiveness and cost effectiveness by government “Blue Dog” Democrats concern over costs, budget deficits

19. Parting Observations Can 30% of current costs really be eliminated? – Where did this # come from? – Difficulty in determining unnecessary/harmful services after the fact – Extraordinary difficulty in determining unnecessary/harmful services before the fact – Barriers:Provider desire to protect revenues Little incentive for patients to change behavior Similar reform occurred in Massachusetts; what have we learned? – Increased coverage, though not to 100%, and mostly through public plans – Costs have been much greater than expected and rate of growth has not slowed

20. Who Are the Estimators? CBO CMS Office of the Actuary (OACT) Treasury Jon Gruber, MIT HHS: ASPE (w/ Urban) and AHRQ Private organizations: Lewin, RAND, Urban Requirements: – Objective estimates of financial impacts – Guard against “wishful thinking” regarding proposals on cost growth

21. OACT Health Reform Model (OHRM)