Scoring Health Reform: Where Economics and Health Policy Meet Stephen T. Parente, Ph.D., M.P.H. Professor and Minnesota Insurance Industry Chair of Health Finance Department of Finance Director, Medical Industry Leadership Institute University of Minnesota Carlson School of Management Heller-Hurwicz Institute November 17, 2011

Agenda  Level Set: The Trillion Dollar Health Marketplace  Scoring Objectives  New York Health Reform/Debate Example  What is the Economics that drives simulation  What are simulations projecting now?  Health reform alternatives to 2009/2010 law  What is on the horizon?

Physicians CongressMain StreetMedical Technology Courts Federal Government <90% Income Insurers 99% Income91-99% Income Big Business Hospitals The $2.7 Trillion Healthcare Marketplace The $2.7 Trillion Healthcare Marketplace

Scoring Objectives  Federal/State government reform cost (1 & 10 year) Tax credits, deductions, vouchers, subsidies, system investments, direct service provision.  Federal/state government revenue generated Taxes and fees collected – usually from change in tax law for individuals and corporations.  Change in insured/uninsured  System wide impact (non-tax $$$ effects placed upon stakeholders – positive & negative)

Scoring Challenges  Inter-related set of factors that play on each over time – dynamic simultaneous equations  Little true data to be used to predict response from comparable experiments or demonstrations  Few actual ‘levers’ to test effect based on real data  Little peer review and few colleagues that are not ‘conflicted’ or ‘private’ or ‘non-transparent’

Levers that Matter  Credits/Deductions/Subsidies  Insurance Choice Set  Plan Design  Premiums in the Real World  State-specific factors  Growth rate & inflation  Income-related points of inflection  Out of Sample Land - Missing data assumptions

New York Health Reform Debate: Policy ‘Influence’ Tool – The Op-Ed

Estimate plan offerings using linked data Merge employer data Estimate hedonic premium regression Assign plan choices to full MEPS sample Estimate plan choice regression Use parameter estimates to predict plan choice probabilities for MEPS Re-scale take-up rates Define plan design & premium Simulate impact of proposed policies Model Estimation Choice set Assignment/ Prediction Policy Simulation Economic Components for MicrosSimulation MEPS Data Sources CDHPseHealthinsurance

Economic Model: Demand for Health Insurance  Plan Choices: HMO, 3 Preferred Provider Organizations (PPOs) (low, medium, high premiums), High Deductible health plans with Health Reimbursement/Savings Accounts  Utility-maximization assumption where U hj =  j +  Z j +  X hj + e hj  Estimate a conditional logit model of plan choice using the pooled, employer data Explanatory variables  Plan attributes (Z) Annual tax-adjusted employee premium ($1000s dollars) Savings/reimbursement account size ($1000s dollars) Donut hole: difference between annual deductible and account size ($1000s dollars) Coinsurance rate (i.e.,.10 = 10% coinsurance)  Interactions between employee and plan attributes (X) Age, female, wage income, family contract  Plan-specific constants (  j )

Economic Model Data Sources  Health plan choice data from several large employers participating in a Robert Wood Johnson Foundation funded study on health insurance Employee premium, deductible, coinsurance, worker’s age, gender, wage income, single/family coverage  Federal Medical Expenditure Panel Survey (MEPS) Household Component: All adults age not enrolled in public insurance programs and not full-time students during Round 1  Demographic, employment, and health insurance information Linked Insurance Component: Subset of workers offered employer coverage and their plan choices  Plan type, premiums, contributions, coinsurance, copayments and deductibles  eHealthinsurance.com Individual health plan information

Plan Choices in the NY Simulation  Direct Pay Low PPO restrictive network high co-pay 15 percent coinsurance  Direct Pay Medium PPO Lower co-pay and coinsurance than the Low PPO  Direct Pay High PPO lowest co-pay no coinsurance  HSA High deductible, low account contribution

Simulation Calibration  Applied plan choice model estimates to predict probabilities of plan choices for Federal MEPS sample respondents  Model Calibrations  % of adults who turn down employer offers by income quartile  % of adults in the individual market who are uninsured by income quartile  Applied New York State population weights to the calibrated model to represent the population 19-64, excluding full-time students, those enrolled in public insurance, and non-offered dependents with employer coverage through their spouse

Plan Choice – Conditional Logit (1 of 2) Adjusted r-square: ~0.363, Reference PPO_High

Plan Choice – Conditional Logit (2 of 2) Adjusted r-square: ~0.363, Reference PPO_High

Scenarios Modeled for New York  Removing restrictions on underwriting community rating guaranteed issue  Allowing Health Savings Accounts into the market Currently, these high-deductible savings plans may not be sold in the New York State individual market.  Allowing the purchase of policies issued by insurers based in and regulated by neighboring states.  Allow the sale of “mandate lite” plans

Micro-simulation Used - ARCOLA  ARCOLA (Adjusted Risk Choice & Outcomes Legislative Assessment)  ARCOLA is a micro-simulation model designed to estimate the impact of health policy proposals at the federal and state level  Model first used by the Office of the Assistant Secretary of Planning and Evaluation (OASPE) of the Department of Health and Human Services (DHHS)

ARCOLA’s strengths & weaknesses Strengths  Peer-reviewed in Health Affairs & Journal of Risk & Insurance  Can be used for federal & state estimates  Is based on a microeconomic model of health insurance demand published in three journals  Is supported by consumer driven health plan choice, cost & use Weaknesses  Needs survey data from a state to make estimates – Zogby provided data for this analysis  Has not been bench- tested with Urban or Columbia University models with state data  Works only through price effects, but that is the dominant factor affecting insurance choice

What is the Impact of Eliminating Community Rating (CR) and Guaranteed Issue (GI) and Introducing Health Savings Accounts? The combined effect of No CR & GI is a 37% reduction in the Number of uninsured in NYS.

What is the Impact of Interstate Market Competition? If everyone took advantage of lower premiums, there would be a 26% reduction. A 17% reduction if ¼ buy CT,PA

What is the Impact of Reducing the Number of Mandates in New York? If 20 mandates were removed, the impact would be a 3% reduction in the uninsured, 9% reduction if 40 mandates removed.

Summary of NY Simulation Results  Removing Community Rating & Guaranteed Issue has the greatest impact on reducing the number of uninsured.  Introducing HSAs into the market reduces the uninsured, but does not have nearly the impact of removing CR & GI.  Letting New Yorkers purchase insurance across state lines can lead to up a 26% reduction in the uninsured.  Reducing the number of mandates will have an impact, but not as great as interstate competition or the removal of CR & GI.

Current Simulation Work

PPACA: Impact of Health Reform Reconciliation Bill, as of 3/15/2010  Uninsurance is reduced by 59.8% (81% if base is US citizens only) to newly cover 32 million people, 17 million of whom through State Medicaid Agencies.  CBO (Congressional Budget Office) Estimates– 3/18/2010 CBO 10 year cost: $940 billion CBO deficit savings $130 billion  My estimates – 3/19/ year cost: $1.36 trillion  My Summary: Additional costs will eliminate deficit savings and add to deficit by $287 billion  On April 22, 2010 the Medicare/CMS actuary concluded health reform would add $251 billion to the deficit.

Health Reform Goal: Expansion Uninsured Impact As of 4/22/2010, CMS Actuary forecasts uninsured in 2019 to be 22 million.

Average Annual Premiums for Single and Family Coverage, * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits,

Individual/small group premiums will increase at 8% per year, minimum

2011: ACA Accelerated HDHP - Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, * Distribution is statistically different from the previous year shown (p<.05). No statistical tests were conducted for years prior to No statistical tests are conducted between 2005 and 2006 due to the addition of HDHP/SO as a new plan type in Note: Information was not obtained for POS plans in A portion of the change in plan type enrollment for 2005 is likely attributable to incorporating more recent Census Bureau estimates of the number of state and local government workers and removing federal workers from the weights. See the Survey Design and Methods section from the 2005 Kaiser/HRET Survey of Employer-Sponsored Health Benefits for additional information. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, ; KPMG Survey of Employer-Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), %

CBO: Spend ($ billion)

CBO: Tax/Save

CBO: Projected Savings on Vote Eve, March 21, 2010 By 2019, $122 billion deficit savings

CBO: Projected Additional Cost/Savings of Pending Changes By 2019, $676 billion additional deficit burden

Current vs. Pending Budget Effect – CBO’s Own Numbers Net impact: $554 billion additional deficit $1.4 trillion additional deficit

What Might be Repeal & Replace regardless of who wins 2012?

Repeal, Replace or Ration Probabilities  Repeal Only: <10% probability Requires tea party dominance of political landscape. Tea party (broadly defined) has influence but not a majority cartel of political power.  Replace: Two versions Revise 50% – No GOP Presidential victory in 2012 but budget force issue for GOP Congress and President Obama Replace 50% - GOP victory in 2012 in Presidency and Congress – move to something like Market Based Reform  Ration (leave PPACA alone): 35% probability US Will go to Double A or Single A credit rating by 2014 unless Medicare prices at Medicaid rates and starts restricting of technology. High deductible health plans (HSAs) become the only affordable plans in insurance exchanges.

Circa : GOP was Serious GOP Proposal Cost per newly insured Estimated reduction in uninsured Total Estimated Annual Cost Per Capita Cost Administration’s Proposal (Sim#1) 2,924,949$8,075,081,354$2,761 Low-income Buy-In (Sim#2)4,495,887$12,219,668,960$2,718 Full subsidy (Sim#3)12,819,856$69,214,319,880$5,399 Full subsidy Generous HSA (Sim#3a) 23,507,540$211,118,893,800$8,981 Full subsidy Non-working (Sim#4) 3,143,487$11,234,374,714$3,574

But, the Designs had Diminishing Subsidy Returns Sim #1 Sim #2 Sim #3 Sim #4 Sim #3A

New Flavor: Market Based Reform Feature Set  This proposal was originally discussed by moderate GOP/Dems up to Senate Vote on 12/24/2009 – Joint Committee on Taxation Score was $480 billion over 10 years and paid for with Medicare cuts or any tax other than a ‘Buick’ tax.  Guaranteed issue insurance coverage/no pre-existing conditions etc.  Insurance exchanges, interstate purchase permitted  A tax on those who choose health insurance benefits greater than $6.5K for single coverage and $13K for family coverage equal to the employee’s marginal income tax rate times the amount over those thresholds  Full subsidy up to 200% of the federal poverty line and subsidy phased down to zero at 300% of FPL (~$66,000 for a family of four).  All insurance plans must offer preventive care benefits.  All plans must use modified community rating: premiums can vary only by geographic region (to be defined), family structure, actuarial value of benefits, and age.  Start date is January 1, 2013.

Meaningful Market Based Reform Feature Set AgeIndividualFamily 18-34$1,364$3, $2,237$4, $3,725$6,812 An income and age-adjusted health insurance voucher with the following 2010 amounts:

2009/10 Meaningful Market-Based Health Reform Proposal Results  Uninsurance is reduced by 35% (46% if base is US citizens only) to newly cover approximately 17.6 million people  Subsidy - Tax Recovery = Net cost: $49 billion subsidy for voucher, annual 2013 $50.6 billion tax capture, annual 2013 Total cost over ten years: $435 billion Total revenue over ten years: $450 billion Net cost (surplus): -$15 billion over ten years  Private insurance crowd out: Not an issue.

Concluding Thoughts Market Dynamics to Watch (and Score)  Hospitals Going on physician practice buying spree to become Accountable Care Organizations Overplay their hand and budget and start cutting back  Physicians Next generation become free agents and plug in where needed. Will rebel against ACO control if they can and should be able to because with docs, there is no Care in ACO.  Health Plans No subsidized health benefit left behind. Will rally to get as much federal $$ as possible. Will enter provider market directly (buy hospitals) or indirectly (buy bankrupt hospital’s assets).

Thank You! Q & A Stephen T. Parente, Ph.D. Minnesota Insurance Industry Chair of Health Finance Director, Medical Industry Leadership Institute Professor, Department of Finance Carlson School of Management University of Minnesota th Ave. S. Room Minneapolis, MN (w), (m)