The Constitution

The 10^th Amendment to the Constitution of the United States says the following:

“The powers not delegated to the United States by the Constitution, or prohibited by it to the states, are reserved to the states respectively, or to the people”.

The purpose of this provision is to enshrine into our society the concept that power resides with ‘we the people’.  Our federal government has only limited powers to impose its will on all people in the 50 United States.  Clearly, there must be rules that govern how we live together.  How do 50 separate states function together, properly balanced by individual freedoms to choose how we wish to live our lives?  Therein lies the purpose of the 10^th Amendment.

Creating Rules For A Civil Society

In the absence of rules, there would be chaos, which regrettably prevails in far too many places around the world.  We are lucky to live in a civil society called the United States of America, where we maintain our individual freedoms but accede to certain basic requirements such as:

• Stopping at a red light (both as pedestrians and drivers)
• Purchasing of insurance if you choose to drive a car
• Paying taxes

We could not function as a society without rules, but how are the rules made and by whom?  The answer lies in the genius of our Founders, who established the Constitution as the basis for rulemaking in this country, with a balance of powers between the executive, legislative, and judicial branches of government.

How Does This Apply To Healthcare Services and the Purchase of Health Insurance?

We now return to the fundamental question….can and should an individual be required to purchase health insurance?  Most people would agree that in a civil society, people who have heart attacks should not be left on the street to die.  But it is more complicated than that, including:

• How does the patient reach a hospital?
• Who is responsible for treatment?
• Who pays for the patient’s care?

These questions all have to be answered, starting with do we take care of the heart attack victim lying in the street.   The 10^th Amendment tells us that the answers must come from the states and/or the people, but generally not from the federal government.

So, does it EVER make sense to require every individual to purchase a health insurance policy?  Insurance is based on the “law of large numbers”, and it is a fact that an individual mandate will create a larger, more stable risk pool.  A larger risk pool is likely to have a mixture of good risks and bad risks, greater predictability of loss and financial stability, and lower cost of risk.  A state legislature must weigh the benefits of an individual mandate against the perceived ‘negatives’ associated with requiring specific action(s) on the part of all of its citizens.

I conclude that the individual mandate is one, but not the only, valid approach to establishing a large risk pool which is essential to creating stable prices for health insurance.  And, it is perfectly appropriate, and legal, if it is so determined at the state level.

Is The Individual Mandate Reasonable (EVEN FOR CONSERVATIVES)?

YES, if it is the decision of a state government, and not a requirement of the federal government.  If you pay taxes, buy car insurance, and stop at red lights, you should have no problem with a requirement to purchase private health insurance IF that is the decision of your state government.  It’s that simple, consistent with the 10^th Amendment.

So, let’s see an end to all the bickering about the individual mandate.  It is consistent with states’ rights and conservative principles when done at the state level, as in Massachusetts.  At the same time, it is arguably unconstitutional when imposed on all 50 states, as in PPACA.  If conservatives want to “repeal and replace” ObamaCare, let’s start with the fact that 50 state experiments are an appropriate and legal way to fix our healthcare system, some of which may even include an individual mandate.

I have written previously in favor of health exchanges, and an important related question is whether or not to incorporate an individual mandate, as contained in the Patient Protection and Affordable Care Act (PPACA).   Some argue that an individual mandate is an essential element of health reform, but I don’t think it is.  Furthermore, the constitutionality of PPACA is being challenged based on the question of whether the individual mandate violates the principle of limited federal government powers (i.e, the 10^th Amendment or “states’ rights”).  The remainder of this discussion focuses more on the desirability and less on the legality of the individual mandate.

What is the Individual Mandate?

Simply stated, the individual mandate requires all individuals in a specific geography to purchase insurance.  Many state legislatures require its licensed drivers to purchase automobile insurance, but those residents have an option of whether or not they wish to drive.  There is no equivalent ‘option’ regarding health insurance (whether to “live”?).  So therein lies the principle difference in the individual mandate for health insurance—is it an overreach of the federal government to require all living US residents to purchase health insurance, since living is a human condition and not a choice?  But moving on to the issue of desirability, the first question is….

Does the Individual Mandate Make Economic Sense?

Yes, because insurance is based on the “law of large numbers”.  The individual mandate creates a larger, shared risk pool, and the larger the pool, the more likely you are to have a mixture of good risks and bad risks.  A larger risk pool also means greater predictability of loss, greater financial stability, and lower costs.  You do NOT want to create a pool where certain participants (the perceived ‘good’ risks) can be “cherry-picked”.  Many insurance pools have failed (with serious financial consequences) because certain participants choose to leave the pool in order to realize short-term premium savings (sometimes the result of “predatory pricing”).  If this happens to a significant degree, the pool will inevitably fail and EVERYONE ends up paying more.

Creating a Large, Stable Risk Pool

An individual mandate is one way to do it, but not the only way.  Consider a “conditional” mandate, where individuals or small employer groups (below a certain size, say 25 employees) that choose to buy health insurance must buy it through a State Health Exchange.  There would be an annual open enrollment period when the election to participate and choice of plan takes place.  In other words, a person cannot wait until they are sick or become injured to buy health insurance coverage.   In my view, people seek health insurance to avoid catastrophic losses, and thereby provide their families with financial protection from a serious illness or injury (e.g., the $100,000 healthcare bill that may cause bankruptcy).  Most people would feel compelled (but not obligated) to buy health insurance at an annual open enrollment because nobody knows if a serious illness or injury looms 6 months into the future.

ObamaCare vs. RomneyCare

So, we have determined that in order for health reform to succeed, there must be:

1. Competition between carriers on the basis of cost and quality.
2. A large and stable group of health insurance purchasers (the “risk pool”).
3. No “cherry-picking” of the good risks.

An individual or conditional mandate within the context of a health insurance exchange accomplishes these objectives.  When implemented at the State level through State legislation, such as RomneyCare, the approach clearly passes Constitutional muster and complies with the concept of “states’ rights”.  Other states can learn from the experience and may choose to follow a similar approach if it is proven successful.  Furthermore, the Massachusetts legislature (or succeeding states that adopt either an individual or conditional mandate) can decide to improve, change, or repeal its legislation at any time.  That, in my view, is the vision of our Founders.

Does the ObamaCare individual mandate pass muster on these same Constitutional questions regarding States’ rights?  Does the individual mandate fall within the definition of enumerated powers of the federal government?  I have my doubts, and the Supreme Court of the United States will likely soon tell us.

Romney was Governor of Massachusetts from January 2003 through January 2007.  When RomneyCare was passed and signed into law in 2006, it was the right thing to do—a state experiment, a 90 page bill, and passed on a bi-partisan basis.  ROMNEY DESERVES CREDIT FOR TRYING SOMETHING, to fix a system that everyone knows is broken.  RomneyCare succeeded in covering the uninsured in Massachusetts, but it failed as a means to control healthcare costs.  Could RomneyCare been modified subsequent to 2006 to address healthcare costs?  I think so.  Is Romney to blame for the failures of RomneyCare?  Not in my view, because he’s been out of office for 4+ years.

Romney’s explanation last week could have turned a negative, RomneyCare, into a positive for Romney.  RomneyCare is a failed experiment in health reform.  But, instead of learning from the experience of Massachusetts, ObamaCare REPEATS the mistake of RomneyCare.  ObamaCare does little to address the problem of healthcare costs, but rather covers all Americans into a broken health insurance system.  Romney should say that as President,  I will not allow that to happen.  We will design a program at the federal level that will NOT impose the failed lessons of Massachusetts on the entire country.  Rather, we will let states experiment to find the right answer for them and let other states follow their lead, should they so decide.

My positions about ObamaCare are well known in my blog and newsletter archives–there are some positive aspects to Obamacare, but it is poor legislation (2900 pages) passed poorly.   Obamacare still needs to be fixed. Your thoughts??

First, Just The Facts…

1.      Health reform passed by the Obama Administration (the Patient Protection and Affordable Care Act or PPACA) includes a requirement that states establish regional or statewide Health Insurance Exchanges by 2014, or to participate in a federally-run exchange.

2.      A Health Insurance Exchange is a “marketplace” where patients/consumers can purchase their health insurance.  Individual purchasers are connected to private sector sellers of health insurance.

3.      There are a set of ‘rules’ for the Exchange which define how the health insurance will be bought and sold.  The rules must be carefully established and enforced in order to meet both public policy objectives and the needs of buyers and sellers in the Exchange.

4.      Today, for individual purchasers and small employer groups that are ‘high risk’ (or are perceived to be by insurance companies), health insurance can be unaffordable and sometimes unavailable.

Why Do We Need Exchanges?

The health insurance system in the United States is broken.  Healthcare costs and premiums continue to rise disproportionally.  It is a fact that approximately 30% of what we spend is wasted dollars (on unnecessary, inappropriate, and poor quality care).  And, we are at a major competitive disadvantage in the world economy.

Insurance is driven by the ‘law of large numbers’, and Exchanges address a critical problem by combining individuals and small employers into a large risk pool.  There are no exclusions for pre-existing conditions, with designated periods of time (“open enrollment”) when private insurance companies offer to sell their insurance plans to all the participants in the Exchange.

It is here that competition on the basis of cost and quality takes over.  There must be transparency—accurate and useful information available to patients and consumers so that they can make informed choices, including: patient outcomes, quality measures, premium and cost information, satisfaction levels, and so forth.  Those health insurers that provide the highest quality products at the lowest prices will be the winners in an Exchange model.

Are There Current Examples of Exchanges?

There are examples of Health Insurance Exchanges that already exist, such as the Federal Employees Health Benefits Program, or FEHBP.  Under this plan, insurance companies submit competitive bids once a year to the federal government’s Office of Personnel Management (OPM).  Federal employees then get information on benefits, costs and services, and can make their annual election of a carrier and a benefits plan. Competition to attract members on the basis of cost, quality and outcomes is what keeps costs down while providing the best possible care. Many states have similar plans for state employees.

Exchanges for private sector employees are also operational in Massachusetts and Utah.  They are very different models and there are lessons to be learned from each.  The early results from Massachusetts (the Massachusetts HealthConnector) are that the program has succeeded in providing health insurance to nearly all state residents, but has so far failed to address rising healthcare costs.  The Utah Health Exchange is designed differently, focusing on ‘defined contribution’ approach, but it is too early in its operations to draw any firm conclusions.

Where Do We Go From Here?

There is much more to be learned and written about Health Insurance Exchanges.  However, “perfection is the enemy of the good”, so the time is NOW to start building Exchanges throughout the United States.  When designed and implemented properly, they will be a major step forward towards fixing our health insurance system, so let’s get going.

It is true that the devil is in the details.  So, for a more detailed discussion of this topic, I refer you to “Health Reform in the 112^th Congress”, where I offer suggestions on:

1.      Positive aspects of the new law that should be retained.

2.      Problematic provisions (e.g., 1099 reporting) that should be removed.

3.      Important elements of health reform that are missing from the current law and should be added.

This debate will continue for weeks, months, and probably years.  There will hopefully be an expedited review, because otherwise the Supreme Court is not expected to rule on the constitutionality of the individual mandate for a year and a half.  I’m happy to present to Boards, senior managers, and other groups on the implications of Obamacare and what they could (and should) be doing now.

I would welcome your questions, comments and suggestions.

The following are highlights of a recent news release from the Kaiser Family Foundation on the rising costs of health care and the resultant shifting burden of costs from employers to employees:

• Family health premiums overall rose by 3% in 2010, to $13,770 per year
• An average workers’ share of those premiums increased by 14%.
• The percent of workers with deductibles of at least $1000 increased from 22% to 27%.
• Among smaller businesses (less than 200 employees), 46% of workers face deductibles of $1000 or more.

The Changing Paradigm…

The marketplace is responding to health care costs that have been increasing at rates far in excess of general inflation AND data that shows a significant portion of healthcare spending is wasted on unnecessary care, inappropriate care, and poor quality care.  For the last several decades (and still today to a significant degree), someone else was paying the bill.  Patients had little or no “skin in the game”, so why say “no” even if a service is either unnecessary or costs too much?

That, my friends, is changing.  We are witnessing is a gradual shift “from paternalism to shared responsibility”.  It is about aligning incentives between employers and their employees.  If you are one of those employees with a deductible of $1000 or more, you have “skin in the game”.  Now, before seeking care, you must ask yourself, “do the benefits justify the costs”?   Only if the answer is yes are you going to proceed with the care that you’ve chosen to purchase and receive.

How HSAs Help To ‘Save Costs Without Shifting Costs’

Clearly, a high deductible health plan (HDHP) is a cost-shift to the employees.  But, the impact can be partially or significantly ameliorated with an underlying Health Savings Account funded by the employer (see HSAs Work…Here’s Why).  HSAs are a model for properly applying insurance principles to health care.  In other words, insurance is means to protect you from large, unpredictable financial losses—it is not an appropriate financing mechanism to pay for smaller and more routine expenses.   You can be sure that those employees who are paying the first $1000 of expense are motivated to avoid services and expenses that are unnecessary, inappropriate, or may result in a poor outcome.

What’s missing from the Kaiser Family Foundation statistics, for those workers who are subject to high deductibles, is the amount of money contributed to an HSA by the employer.  We strongly recommend that employers take a portion (even a small portion) of what they save and/or would otherwise pay in premium and use it to fund an HSA, and thereby pay for some level of an employees’ primary care needs.  This, we believe, is the model for the future…

1. Before a plan can file a Form 5500 using EFAST2, the appropriate individuals must register at the EFAST2 website.  This process involves identifying the party who will complete the Form 5500 and any and all parties who will sign it.  One individual can register for more than one role.  All users are encouraged to register early to avoid last-minute errors.

2. Once an individual registers, he or she cannot go back to choose additional roles, so it is important to understand the roles each person will play before the registration process begins.  The five available roles are Filing Author, Filing Signer, Schedule Author, Transmitter and Third Party Software Developer.

3. The individual who completes the online Form 5500 must register as the Filing Author and the individual who will sign the online Form 5500 must register as the Filing Signer.

4. The credentials an individual uses to register are personal and are not linked to the company.  The registration process assigns a unique identification, personal identification number and password to each user.

5. The Form 5500 can be completed either by the Filing Author or a third-party administrator.  If your TPA typically prepares your Form 5500, verify that the TPA is properly certified to prepare and submit the filing.

6. The Internal Revenue Code permits either the plan sponsor/employer or the plan administrator to sign the filing.  However, the Form 5500 instructions state, “Any Form 5500 that is not electronically signed by the plan administrator will be subject to rejection and civil penalties under Title I of ERISA.”

7. Filings submitted under the EFSAT2 program will be posted on DOL’s website, so all social security information should be excluded from the filings. In addition, if your plan is a defined benefit plan and you maintain a company intranet, you must post certain information from the Form 5500 on the company’s intranet website.

8. Plans are no longer required to attach a copy of the Form 5558 (application for extension of time to file) to the Form 5500 filing. Filers who previously submitted a Form 5558 for the plan year now simply check the appropriate box on line D. Plans must retain a paper copy of the Form 5558, if any, with the plan’s permanent records.

9. Schedule E and Schedule SSA have been removed from the Form 5500. The annual registration statement must now be filed directly with the Internal Revenue Service.

10. Plans will be required to retain a paper copy of the Form 5500, with all required signatures, for their permanent records.

EBN asks if the goal is to save paper and be more green/efficient, why is there a requirement to keep a paper copy?   I’m from the government and I’m here to help….

HSAs and Health Reform

Last summer, as the health reform debate was heating up, I met with a Democrat member of Congress (who happens to sit on the House Ways and Means Committee).  At the time, the big push was still for the “public option”, and I was told by this MOC that Democrats don’t like HSAs.  As the debate proceeded, I would continually make the point that the HSA model was the most successful innovation in health finance of the last decade, and there were success stories everywhere that you turned.  There were numerous success stories in the private sector among employers both large and small, and those with low, middle, and higher income people.  Very importantly, the concept also worked in the public sector (e.g., Indiana).

We all know about the process that lead to the passage of a bill in March of 2010—sausage making at its worst.  As the dust settles and we begin to assess how best to move forward under the new health reform laws, I believe that it is full steam ahead for the HSA model.  There were certain policy changes that may have a slightly negative impact, but they are minor.  The changes are as follows:

• Penalties for the use of HSA funds for “non-qualified” expenses will go up.
• The list of “eligible medical expenses” was pared back somewhat with the removal of over-the-counter (OTC) drugs, unless prescribed by physician.
• Contributions to an HSA will be limited to the level of your high deductible health plan.

Friends, it could have been much worse.  The private sector now has an opportunity to show the government what works, so let’s take advantage of it.

Where Do We Go From Here?

My hope, and expectation, for the future of health reform is that we keep the positive features of Obamacare (e.g., underwriting changes, health exchanges) and repeal the negative aspects (e.g., some new regulation, confusing tax credits).  In addition, we need to keep pushing for other changes that were not, but should have been, part of health reform such as:

• Increased competition (e.g, repeal of health insurer anti-trust exemption, allow competition across state lines)
• Transparency
• Tort reform

In short, we need to GET TO WORK.  The health care system remains an employer-based system, so employers need to roll up their sleeves and manage the heck out of their health benefits.  That means a move away from business as usual—give your employees appropriate incentives and ‘skin in the game’, developing a multi-year plan, promote wellness, and use competition to shift the balance of power away from insurance companies and to you, the purchaser of health benefits.  In most cases, there is a role for HSAs in your health benefits strategy.

Friedman says that health care can be universal and public—but “Free, no.” Doctors and hospitals don’t work for free, it’s just that the patient doesn’t pay them. “Treatment isn’t free, it’s just depersonalized. Everywhere there’s a schedule, a quota the doctors have to meet; next!…And what do patients come for? For a certificate to be absent from work, for sick leave, for certification for invalids’ pensions (i.e. disability): and the doctor’s job is to catch the frauds. Doctor and patient as enemies—is that medicine?”

Friedman’s answer—give people the option to purchase insurance with a very high deductible, i.e., a policy for medical catastrophes, which would be decidedly cheaper. The difference can be deposited in a special “medical savings account” that can be drawn on only for medical purposes. Mr. Friedman was talking about Health Savings Accounts before we called them HSAs. It is still the best way for employers to purchase health insurance to obtain the maximum value for your health dollars.

Medicare has 4 parts:

• Part A, Hospital (started in 1967)
• Part B, Physician and Other (started in 1967)
• Part C, Medicare Advantage (started in 1985 under a different name)
• Part D, Prescription Drugs (started in 2004)

When people talk about Medicare, they generally refer to ‘traditional Medicare’—Parts A & B & later D.  This is where the federal government ‘negotiates’ with providers, sets the rates of payment, and cuts the checks.  And, those who can afford it typically purchase a private Medicare supplemental policy to cover those services not paid by Medicare.  KEY POINT: this program is a financial disaster.  This is the program that is costing taxpayers 10X what was originally projected, and is the reason that thankfully the concept of a ‘Public Option’ was turned down as a part of Obamacare.  The government has no track record of success in the health insurance business.

Part C or Medicare Advantage is an effort to deliver Medicare benefits through the private sector.  It is justly being criticized today for payment excesses, but it used to be a VERY successful program.  At the outset, private plans were compensated based on a formula that approximated 95% of what the government would normally pay per capita.  Because of better ‘managed care’ leading to efficiencies, the plans were able to add benefits in order to attract membership.  That is why Medicare Advantage is popular.  SO WHAT HAPPENED?  Under the watchful eye of our elected representatives, capitalism and a lack of transparency allowed this program to be bastardized by the insurance companies (sound familiar Wall Street?).

So, the demise of Medicare Advantage under Obamacare (except for the deals cut in certain states) is misplaced—let’s not throw out the baby with the bath water.  Let’s fix what is wrong with the Medicare program , and go back to the Medicare Advantage basics of the 1980s.  How do we do this?

• Allow only PPOs and HMOs to participate in Medicare Advantage
• Limit the number of plan choices to foster competition.
• Return to rates of payment to private plans approximately equal to what the government would pay under traditional Medicare.

Obamacare can be fixed.  Big government control and over reliance on regulation in health care will reduce quality and innovation, and be a financial disaster.  We can do better.