Issues Regarding the 2010 Patient Protection Act

As attorneys and advisers, we are asked to enter into planning situations and have something of a crystal ball as to the future. One of the most game-changing legislative reconfigurations may be reflected in the Patient Protection and Affordable Care Act (“PPACA”) passed in 2010. Unfortunately, PPACA is structured in a way that prevents it from being successful from the start. The numbers and assumptions being used are flawed. They are not tied to a realistic approach for providing services locally or nationally by Medicare.

Local Levels

On local levels, Massachusetts, Tennessee and Connecticut have all unsuccessfully attempted programs that served as models for PPACA. One problem that Massachusetts had to face is that it failed to accurately anticipate the true cost of the program. When the program was signed into law, Massachusetts estimated that Common Care's health insurance subsidies would be about $725 million per year. But by 2008, those projections had been revised. New estimates indicated that the plan was to cost $869 million in 2009 and $880 million 2010, an upwards increase of more than 20%.

Massachusetts was not the first state to face a budget crisis due to unexpected cost spikes incurred after instituting policies designed to increase insurance coverage. In 1994, Tennessee launched TennCare. The program successfully cut the state's uninsured rate to about 6%. But in 2005, the state was forced to scale back significantly, slashing 170,000 people from the rolls after the program's rapidly increasing costs threatened to send the state into bankruptcy. The sickest taxpayers were dumped into pools and shifted into public plans. Additionally, businesses stopped offering health insurance and threw their employees onto the public pools, and the rolls exploded. Soon, one in five Tennesseans were enrolled in TennCare. Tennessee also discovered that providing prescription drug coverage with no co-pays and no limits was a prescription for disaster. The per capita rate of prescriptions per patient was almost twice the national average.

In Connecticut, legislation was passed to prohibit insurers from discriminating against people with pre-existing conditions, to create more buying power, to assure enhanced coverage while reducing its cost, and to offer insurance to small employers and non-profits. This was all enacted without a budget and meaningful dialogue between the stakeholders. The final nail in the coffin was the Office of Fiscal Analysis, a non-politically motivated agency, which estimated that the program for the uninsured and the poor would cost an additional $483 million annually.

Threshold Issues

The lack of consistent financial assumptions creates threshold issues for PPACA. The numbers that are relied upon for PPACA are drawn from primarily two sources, the Congressional Budget Office (“CBO”) and the Centers for Medicare and Medicaid Services' (“CMS”) Office of the Actuary. The CMS Actuary (“OACT”) conducts the actuarial program for CMS addressing the methodologies for analysis of health care financing of the benefit to be provided in implemented programs. The Actuary's report last year critiqued PPACA and found its assumptions flawed. The report claimed that the estimates used by the White House and its allies underestimated costs by 68% and could not possibly be seen as a good-faith projection of the program's future. The approach of CMS also obscured the true costs of the assumptions necessary to limit projected growth. The model assumes that cost growth must slow from current rates to Gross Domestic Product (“GDP”) + 1 on average during the period between 10 and 25 years in the future. But the model does not specify how this slowdown would occur. Would the demand for medical services slow as prices rose? Would the supply of doctors increase so as to exert downward pressure on costs? While these changes may accurately reflect future realities if no policies changed, the automatic adjustment obscures the cost that would need to be borne in order to generate such savings. For instance, if the supply of doctors expanded to decrease the rate of cost growth, that is more likely to be welfare enhancing than a fall-off in consumer demand growth due to increased prices or a fall in technological growth.

The obscuring of policy choices is worsened by the policy-neutral baseline used by CMS (and other nonpartisan agencies). By law, these forecasts must assume current legislation is to hold. But current law may be changed annually. The current law benchmark therefore does not represent a projection of actual law, but rather a static situation. Thus, the projections assume future unspecified cost savings on top of an optimistic baseline, giving rise to the impression that less must be done to actually bring Medicare cost growth in check. While CBO typically provides a scenario that includes realistic policy updates, OACT does not (or at least does not publicize it as CBO does).

CBO operates under a similar current law environment as the OACT, but its forecasting methodology differs greatly. CBO instead relies more heavily on a pure extrapolation of current costs growth rates. As a result, CBO projects Medicare costs to grow much faster than does OACT.

CBO applies two modifications to the otherwise unchecked forecast growth of Medicare. First, CBO assumes that unidentified policy changes will reduce Medicare cost growth by one-fourth of the reduction in non-Medicare growth. For instance, if spending growth rates for health care outside Medicare (or Medicaid) fell from 2% to 1%, the growth rate for Medicare would fall to 1.75%. The only limitation on cost growth in the CBO forecasts is the requirement that nonhealth consumption never decline. So by the end of a 75-year window, all income growth is channeled into increased health care spending. In the end, Medicare grows much faster in the CBO's projections than in those from the OACT, especially in the long-run window. Cost growth 75 years out still remains 1.1% above GDP growth. The implications for cost of Medicare at the end of the window are substantial. For instance, in the base scenario presented by the OACT, gross Medicare expenditures grow from about 4% of GDP today to 12% in 2082, while CBO projects Medicare's expenditures to grow to 17% of GDP by that time period.

CBO's estimates are less optimistic than OACT's, but both approaches rely heavily on extrapolation; they both impose restrictions to limit growth, and their models obscure the true costs of the status quo. CBO spells this out in its report on Medicare. CBO states that under its scenario, the slowdown in excess cost growth would not be without effect and would not occur simply through improved efficiencies given the current structure of the health sector. But writing such language in a methodological report is different from explicitly projecting either sharp health care rationing (under their baseline forecasts) or declining nonhealth spending.

Summary

In summary, if current trends continue Medicare's actual costs would exceed its estimated costs by 30% by the end of the 75-year projection window. CBO and CMS each project a slowdown in growth even without policy change, so that Medicare would roughly triple under the CMS projections and increase by 500% under the CBO projections. Their projections methods are actually quite close for the first 20 years, after which the differing assumptions on long-term growth begin to expand. The present value of unfunded obligations under all parts of Medicare during FY 2009 over an infinite horizon is at about $36 trillion. Hypothetically, this amount would be set aside today such that the principal and interest would cover the shortfall assuming the program continues indefinitely.

If not politically, at least analytically, given local governments' experience with insurance reform and the financial assumptions used in the PPACA, the PPACA should be considered DOA!

Lawrence L. Bell, a member of this newsletter's Board of Editors, is the principal of Advisors, LLC, which provides solutions for underfunded pensions and OPEB liabilities. He teaches business and estate planning and is a qualified expert, testifying on taxes and benefits. Bell works with entrepreneurial, profit, nonprofit, and government organizations in strategic planning on a regional, national, and international basis. He served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, BOLI, GASB, FASB, IASB, and OPEB solutions, 409A, and Benefit Planning. Alexandra Taylor Bell is a Public Policy Intern at METRICS, a Washington, DC, nonprofit organization committed to working for solutions in health care.

As attorneys and advisers, we are asked to enter into planning situations and have something of a crystal ball as to the future. One of the most game-changing legislative reconfigurations may be reflected in the Patient Protection and Affordable Care Act (“PPACA”) passed in 2010. Unfortunately, PPACA is structured in a way that prevents it from being successful from the start. The numbers and assumptions being used are flawed. They are not tied to a realistic approach for providing services locally or nationally by Medicare.

Local Levels

On local levels, Massachusetts, Tennessee and Connecticut have all unsuccessfully attempted programs that served as models for PPACA. One problem that Massachusetts had to face is that it failed to accurately anticipate the true cost of the program. When the program was signed into law, Massachusetts estimated that Common Care's health insurance subsidies would be about $725 million per year. But by 2008, those projections had been revised. New estimates indicated that the plan was to cost $869 million in 2009 and $880 million 2010, an upwards increase of more than 20%.

Massachusetts was not the first state to face a budget crisis due to unexpected cost spikes incurred after instituting policies designed to increase insurance coverage. In 1994, Tennessee launched TennCare. The program successfully cut the state's uninsured rate to about 6%. But in 2005, the state was forced to scale back significantly, slashing 170,000 people from the rolls after the program's rapidly increasing costs threatened to send the state into bankruptcy. The sickest taxpayers were dumped into pools and shifted into public plans. Additionally, businesses stopped offering health insurance and threw their employees onto the public pools, and the rolls exploded. Soon, one in five Tennesseans were enrolled in TennCare. Tennessee also discovered that providing prescription drug coverage with no co-pays and no limits was a prescription for disaster. The per capita rate of prescriptions per patient was almost twice the national average.

In Connecticut, legislation was passed to prohibit insurers from discriminating against people with pre-existing conditions, to create more buying power, to assure enhanced coverage while reducing its cost, and to offer insurance to small employers and non-profits. This was all enacted without a budget and meaningful dialogue between the stakeholders. The final nail in the coffin was the Office of Fiscal Analysis, a non-politically motivated agency, which estimated that the program for the uninsured and the poor would cost an additional $483 million annually.

Threshold Issues

The lack of consistent financial assumptions creates threshold issues for PPACA. The numbers that are relied upon for PPACA are drawn from primarily two sources, the Congressional Budget Office (“CBO”) and the Centers for Medicare and Medicaid Services' (“CMS”) Office of the Actuary. The CMS Actuary (“OACT”) conducts the actuarial program for CMS addressing the methodologies for analysis of health care financing of the benefit to be provided in implemented programs. The Actuary's report last year critiqued PPACA and found its assumptions flawed. The report claimed that the estimates used by the White House and its allies underestimated costs by 68% and could not possibly be seen as a good-faith projection of the program's future. The approach of CMS also obscured the true costs of the assumptions necessary to limit projected growth. The model assumes that cost growth must slow from current rates to Gross Domestic Product (“GDP”) + 1 on average during the period between 10 and 25 years in the future. But the model does not specify how this slowdown would occur. Would the demand for medical services slow as prices rose? Would the supply of doctors increase so as to exert downward pressure on costs? While these changes may accurately reflect future realities if no policies changed, the automatic adjustment obscures the cost that would need to be borne in order to generate such savings. For instance, if the supply of doctors expanded to decrease the rate of cost growth, that is more likely to be welfare enhancing than a fall-off in consumer demand growth due to increased prices or a fall in technological growth.

The obscuring of policy choices is worsened by the policy-neutral baseline used by CMS (and other nonpartisan agencies). By law, these forecasts must assume current legislation is to hold. But current law may be changed annually. The current law benchmark therefore does not represent a projection of actual law, but rather a static situation. Thus, the projections assume future unspecified cost savings on top of an optimistic baseline, giving rise to the impression that less must be done to actually bring Medicare cost growth in check. While CBO typically provides a scenario that includes realistic policy updates, OACT does not (or at least does not publicize it as CBO does).

CBO operates under a similar current law environment as the OACT, but its forecasting methodology differs greatly. CBO instead relies more heavily on a pure extrapolation of current costs growth rates. As a result, CBO projects Medicare costs to grow much faster than does OACT.

CBO applies two modifications to the otherwise unchecked forecast growth of Medicare. First, CBO assumes that unidentified policy changes will reduce Medicare cost growth by one-fourth of the reduction in non-Medicare growth. For instance, if spending growth rates for health care outside Medicare (or Medicaid) fell from 2% to 1%, the growth rate for Medicare would fall to 1.75%. The only limitation on cost growth in the CBO forecasts is the requirement that nonhealth consumption never decline. So by the end of a 75-year window, all income growth is channeled into increased health care spending. In the end, Medicare grows much faster in the CBO's projections than in those from the OACT, especially in the long-run window. Cost growth 75 years out still remains 1.1% above GDP growth. The implications for cost of Medicare at the end of the window are substantial. For instance, in the base scenario presented by the OACT, gross Medicare expenditures grow from about 4% of GDP today to 12% in 2082, while CBO projects Medicare's expenditures to grow to 17% of GDP by that time period.

CBO's estimates are less optimistic than OACT's, but both approaches rely heavily on extrapolation; they both impose restrictions to limit growth, and their models obscure the true costs of the status quo. CBO spells this out in its report on Medicare. CBO states that under its scenario, the slowdown in excess cost growth would not be without effect and would not occur simply through improved efficiencies given the current structure of the health sector. But writing such language in a methodological report is different from explicitly projecting either sharp health care rationing (under their baseline forecasts) or declining nonhealth spending.

Summary

In summary, if current trends continue Medicare's actual costs would exceed its estimated costs by 30% by the end of the 75-year projection window. CBO and CMS each project a slowdown in growth even without policy change, so that Medicare would roughly triple under the CMS projections and increase by 500% under the CBO projections. Their projections methods are actually quite close for the first 20 years, after which the differing assumptions on long-term growth begin to expand. The present value of unfunded obligations under all parts of Medicare during FY 2009 over an infinite horizon is at about $36 trillion. Hypothetically, this amount would be set aside today such that the principal and interest would cover the shortfall assuming the program continues indefinitely.

If not politically, at least analytically, given local governments' experience with insurance reform and the financial assumptions used in the PPACA, the PPACA should be considered DOA!

Lawrence L. Bell, a member of this newsletter's Board of Editors, is the principal of Advisors, LLC, which provides solutions for underfunded pensions and OPEB liabilities. He teaches business and estate planning and is a qualified expert, testifying on taxes and benefits. Bell works with entrepreneurial, profit, nonprofit, and government organizations in strategic planning on a regional, national, and international basis. He served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, BOLI, GASB, FASB, IASB, and OPEB solutions, 409A, and Benefit Planning. Alexandra Taylor Bell is a Public Policy Intern at METRICS, a Washington, DC, nonprofit organization committed to working for solutions in health care.