Swallowing the health-care pill
Costs are expected to rise before any benefits are seen
- April 28, 2010
Joe R. Wilson of Fredericksburg expects to feel pain before he notices any gain from the federal health-care reform legislation passed in March. Wilson is owner and CEO of PermaTreat Pest Control, a company with 10 offices, which pays about a half million dollars a year on health insurance costs for its 107 employees. “That’s a lot for a company that does about $9 million in business,” he says.
The immediate impact for him is increased costs: More of his part-time employees are going to be eligible for health insurance benefits, and some employees with dependent adult children under 26 now can re-enroll them in the health-care plan. “Over the past several months, we had taken several dependents who had reached age 23 off our coverage, and now we’re going to need to put them back on,” he says. His company pays 75 percent of premiums for employees and covers half of family premiums.
Wilson’s interest in health reform is keen. He serves on the board of directors for Mary Washington Healthcare, a nonprofit company that operates two hospitals, and is vice chair of the local chamber of commerce. “Health insurance costs have been going up at two or three times the rate of inflation for the past 10 or more years. Anyone with two grains of sense knows it can’t continue that way,” he says. “But what has upset us, in the circle I travel in, is that we have taken on this humongous change in the system with one gulp, and we are not getting information we can feel confident about.”
If Wilson feels he didn’t get what he asked for, he’s not alone. Opinion polls showed that a majority of the public opposed the 2,400-page health reform bill when Congress passed it in March. Many business organizations, including the Virginia Chamber of Commerce, U.S Chamber of Commerce and the National Federation of Independent Business, are highly critical of the legislation, saying that it will drive up expenses without controlling the cost of health care. Virginia was the first of a growing number of states filing lawsuits challenging the federal law.
Hugh Keogh, the president and CEO of the Virginia Chamber, says his organization supports market-oriented health-care reforms that would make insurance more accessible. “Unfortunately, the House-passed bill that has now been signed into law will not accomplish that goal,” he says. “Instead, it will impose new employer mandates, raise taxes and increase the federal deficit, all at a time when our economy is struggling to recover.”
Nonetheless, health economist Len M. Nichols believes that support for the law will increase as its voluminous provisions become more widely known. “One of the least understood facts is that this is not some Draconian government-takeover bill. If it were, it would have been two lines long: ‘You’re all on Medicare. It starts in July,’ “ says Nichols, the new director of the Center for Health Policy Research and Ethics at George Mason University. One reason that the law is so long and complex, he adds, is that it includes incentives intended to slow the growth of health-care costs. “The politicians talk about coverage expansion more than they do the cost-growth containment because those incentives are more complicated to explain. But to say it’s only about coverage expansion is to ignore roughly half the bill.”
If those measures work, they will take time. Meanwhile, costs for businesses will mount. “There’s very little benefit in the short term,” says Doug Gray, executive director of the Virginia Association of Health Plans (VAHP). “The reality is that this is part of a long process. There are going to be more costs on existing arrangements, and there are going to be costs to ramp up before more resources are provided.”
Supporters of the health-reform legislation, which include the American Medical Association and the American Hospital Association, believe it will reduce demand for expensive emergency care if people newly covered by insurance seek preventive care and earlier intervention.
In addition, the law gives states three years to develop insurance exchanges, which are intended to give purchasing clout to small businesses and individuals. In the meantime, as early as this summer, states will begin creating temporary high-risk pools so that patients with pre-existing conditions can buy insurance at more competitive rates.
Some states already have started the process. An insurance exchange is part of the Massachusetts health-reform plan passed in 2006. Massachusetts’ plan, Health Connector, has a subsidized program for those without employer-sponsored insurance and an unsubsidized program that makes private health insurance plans available at more competitive rates than small business or families could get on their own.
Since Health Connector began, the percentage of uninsured working-age adults dropped from 13 percent in 2006 to 4 percent in 2008. Health Connector officials say that premiums for the unsubsidized program rose by an average of 5 percent from 2007 to 2008, in contrast to the significantly larger increases seen before the plan was implemented.
But the effectiveness of the Massachusetts plan has been hotly debated because of its soaring cost. The initial estimates had the program covering about 215,000 people at a cost of $725 million. Current estimates predict the state will spend $880 million this year. The state is trying to cut costs and last summer announced it would end coverage of 30,000 illegal immigrants.
Utah also launched an insurance exchange program last year for small businesses. When the program’s limited launch was announced, 136 businesses representing 2,333 employees signed up in the first eight days. Employees in the program can select from a variety of plans from several major carriers. Some businesses, though, found that insurers were charging higher rates for companies in the exchange than for those not participating. This spring the legislature passed a bill that would require insurers to calculate premiums the same way for both groups.
Besides the creation of exchanges, the health reform law is expected to increase demand for primary-care services by eliminating co-pays for preventive care. While that provision delights health-policy leaders, it could pose problems in rural and low-income areas, almost all of which already face a shortage of primary-care providers.
In Virginia, where the level of Medicaid reimbursements ranks 48th in the nation, that shortage could become more acute if fewer doctors accept patients covered by the federal and state funded program. About a third of Virginia’s 1 million uninsured would be eligible for Medicaid under the new law. Doctors fought proposals to cut Medicaid 4 to 5 percent in the last General Assembly session.
“Last fall, we surveyed our membership, and 75 percent of those who responded said a Medicaid cut of 5-10 percent would force them to cut off their practice to new Medicaid patients or stop seeing them altogether,” says Dr. Dan Carey, a Lynchburg cardiologist and president of the Medical Society of Virginia. “Medicaid covers about 68 percent of the cost of providing the care ... No one would build a road for 32 percent charity. Why do we expect the medical community to do that?”
The health-care law includes some incentives to recruit more primary-care doctors, nurses and nurse practitioners and provides a Medicare bonus for many primary-care services for the next five years.
Trying to ease the doctor shortage is the Edward Via Virginia College of Osteopathic Medicine in Blacksburg. Its mission? Educate primary-care physicians to work in underserved areas. Of this year’s graduating class of 146 students, 57 percent are going into primary-care residencies, says William King, associate vice president for student services. Overall, 86 percent will be working in either primary care or what King calls “primary point of care,” which includes emergency medicine, obstetrics/gynecology, psychiatry and general surgery.
Just up the road from Blacksburg, 42 students begin training this fall as the initial class of the new Virginia Tech Carilion School of Medicine and Research Institute. The school is a joint venture between Virginia Tech and Carilion Clinic, a health organization involved in a project that may suggest the next step beyond federal health-care reform. Carilion is one of three sites in the nation using the Accountable Care Organization plan developed by the Engelberg Center for Health Care Reform at the Brookings Institution and the Dartmouth Institute for Health Policy and Clinical Practice. Under this model, doctors, hospitals and insurers work together to coordinate care, focus on preventive measures and reward effective disease management practices.
“Once we get [patients] into the system, then we need to figure out how we start capturing savings by focusing on quality outcomes and quality processes,” says Gray, the VAHP executive. But even with preventive care incentives, he notes, the government cannot force Americans to take better care of themselves. “The reality is that we’re in poor health. We don’t eat right. We don’t exercise, and we make poor lifestyle decisions.” The most effective health-care reforms, he believes, start on a personal level.
Money matters in the health-care laws
The new health-care laws increase taxes on people with higher incomes and high-cost health insurance plans.
● A new 3.8 percent “Medicare contribution” tax on unearned income beginning in 2013 for individuals earning more than $200,000 per year ($250,000 for joint filers). Unearned income is passive income that a taxpayer receives on investments, including interest, dividends, royalty income and rental income.
● A new 0.9 percent surtax on individuals earning more than $200,000 per year ($250,000 for joint filers) on their share of hospital insurance payroll taxes.
● A new 40 percent nondeductible excise tax on individuals with plans costing more than $8,500 ($23,000 for families). The threshold increases to $9,850 ($26,000 for families) for individuals with certain high-risk jobs or those older than 55 but not yet receiving Medicare.
The legislation provides tax credits for some individuals and small businesses to help them get health coverage.
● A new credit for small businesses with up to 25 employees and average annual wages of less than $40,000. The credit, based on a sliding scale, will reimburse employers for up to 50 percent of the cost of providing insurance for employees. Employers with fewer than 10 employees and average wages of less than $20,000 would receive a 100 percent credit.
● A new credit for businesses equal to 50 percent of investments made in 2009 and 2010 for therapies to prevent, diagnose and treat acute and chronic diseases. The business may not employ more than 250 people when it submits its application for the credit.
● A new premium-assistance tax credit for individuals earning less than 400 percent of the federal poverty level. The credit, which is based on a sliding scale, will reimburse them for the cost of higher insurance premiums.
In order to “bend the cost curve” of health insurance down by increasing the insurance pool, the laws impose penalties on individuals and employers who fail to obtain or provide health insurance.
● A $2,000 penalty on employers per full-time worker not covered if the employer has 50 employees and at least one of its employees qualifies for a premium subsidy in the new health insurance exchange. The first 30 employees are exempt from the penalty calculation.
● For individuals who fail to obtain coverage, a penalty equal to the greater of a flat fee or a percentage of income. Individuals with incomes below the IRS tax-filing threshold are exempt from the penalty. The flat fee is equal to $95 in 2014, $325 in 2015 and $695 in 2016. The percentage of income is equal to 1 percent in 2014, 2 percent in 2015, and 2.5 percent in 2016 and beyond.
The laws place new limitations on flexible spending and health savings accounts and tax deductions for health-care costs.
● A new $2,500 limit on tax-free contributions to health-care flexible spending accounts.
● An increase in the penalty for nonqualified withdrawals from health savings accounts to 20 percent.
● A new prohibition to use flexible spending account funds to purchase nonprescription medications.
● An increase in the threshold for claiming deductions for medical expenses to 10 percent of a taxpayer’s adjusted gross income for those under 65, up from 7.5 percent.
The laws also include a number of new taxes and fees for businesses.
● A new 10 percent excise tax on indoor tanning services starting on July 1, 2010.
● A new excise tax on taxable medical device sales equal to 2.3 percent of the price of the device.
● A new annual nondeductible fee on health insurance providers beginning in 2014.
● A new nondeductible annual fee on pharmaceutical manufacturers and importers of branded drugs beginning in 2011.
● A new requirement that 501(c)(3) hospitals conduct periodic community health needs assessments and adopt written financial assistance policies.