Editor’s note: This is the first in a three-part analysis of the Shumlin administration’s plans for a single payer health care system.
With the adjournment of the Legislature this spring, the health care reform effort in Vermont passed a second birthday of sorts. It’s still substantially on track, but some angst and political opposition has emerged along the way.
The major step taken this year was the establishment of the legal framework for the exchange, a new structure within state government to manage the transition of the current health care insurance industry to the requirements of a reformed system. Most of this spring’s insurance legislation was driven by federal law, but at least one key element — barring small group sales outside the exchange — was specific to the Shumlin administration’s design.
A second piece of this spring’s work was the shift of the responsibility for cost management of the health care delivery system to the Green Mountain Care Board; the board will assume most of the powers exercised in the past by BISHCA, the Department of Banking, Insurance, Securities and Health Care Administration (and now renamed the Department of Financial Regulation). Establishment of the board, the first step in Gov. Peter Shumlin’s initiative, was completed last spring.
The concept of an insurance exchange is a major component of the federal Affordable Care Act known colloquially as “Obamacare.” The purpose of the exchange is to form a bridge from the current insurance-based, fee-for-service system to one that bundles payment to hospitals and doctors so they can take responsibility for the cost efficiency of the delivery system. An important component of the federal law is that individuals must have health insurance with federal subsidies to help them pay for it.
Under the law, each state must have such an exchange in operation by Jan. 1, 2014; if a state doesn’t create one, the feds will set one up for them. A minority of states, a dozen or so, are establishing exchanges immediately; most are waiting for the feds to act.
Some states that have moved ahead have had political difficulty. In New York, for example, Gov. Andrew Cuomo set up an exchange by executive order after the New York Senate refused to authorize it.
The Vermont exchange is designed to operate in two stages. The first goes into effect in 2014 and covers what is known as the small group market — individuals and employers with 50 or fewer employees.
The second stage of Vermont’s plan takes effect Jan. 1, 2016, when the exchanges will expand to cover firms that employ 51 workers or more. The second stage introduces the requirement that all employers with 51 or more workers provide health insurance to the workers (nearly all such firms — 98 percent of those in Vermont—already do so). That expanded system will include penalties for failing to insure workers.
We will ignore stage two for now for two reasons.
The first is that the U.S. Supreme Court is on track to issue an opinion in June on whether the mandate is constitutional. If the high court voids the mandate, the exchange could still go into operation in 2014, but the overall atmosphere for reform would shift in a way that could drive some changes in the 2016 reform structure.
Moreover, the national election in November could materially affect the whole effort. If the Republican challenger defeats President Obama and especially if the Republicans win control of the U.S. Senate (they already control the House) they can almost certainly strangle Obamacare in its crib.
Assuming, however, that Obama prevails and the high court rules only on the individual mandate, then the Vermont exchange is virtually certain to open for business on Jan. 1, 2014, about 18 months from now. So, what will it look like, how will it affect small business in the state, and how will it affect the uninsured?
It should be noted at the outset that much of the public discussion of the exchange — in blogs and the web and in newspapers and radio and television — has been dominated by people who are highly critical of the single-payer idea in Vermont, as well as many of the details of the exchange. Some of this sentiment is ideological — if the government is doing it, it must be bad — or based on self interest: It will disrupt the way they now do business and cost them money. (We’ll assess the validity of the opposition later in the series.)
A wholesale restructuring of the health care industry in the United States under the Affordable Care Act will be extremely complicated and there is no way yet to parse what it might look like, but from the Vermont perspective the exchange portion of the program looks like a terrific deal for both workers and individuals. That’s because there are federal subsidies to support both coverage for the currently uninsured and for small businesses who now provide health coverage for their workers and those who don’t.
The first formal analysis on this question was the so-called Hsiao report, which kicked off the Shumlin initiative last year, and which estimated that these subsidies could run from $200 million to $400 million per year. Those figures constitute a goodly chunk of the whole hospital bill for the state, now running to about $2 billion. None of this is Shumlin’s idea; it is entirely an outgrowth of the first step toward Obamacare and it is a huge slug of money to grease the skids toward the much more complex steps to follow in 2016.
It works like this: As of 2014, all health insurance for individuals and companies with 50 or fewer employees will be sold through the exchange. All the insurance sold there must have a fully elaborated set of benefits in terms of what is covered, as well as conditions that prevent insurance companies from rejecting people on the basis of factors such as pre-existing conditions.
Obamacare establishes four levels of permitted richness of plan that can be offered. They are denoted by “metal” levels: The platinum level calls for the employer to pay 90 percent of the claims submitted on behalf of the people covered in the pool; these payments would be paid according to the policy purchased by the company. The remaining 10 percent would be paid by some combination of the company and the employees, through mechanisms such as copays and deductibles. The gold level percentage figures are 80-20, silver 70-30 and bronze 60-40.
The federal subsidy limits the individual’s burden on a sliding scale up to income levels of $92,200 for a family of four. The individual consumers of health care will pay for their share in the form of copays and deductibles and a share of the total premium for the coverage.
The Department of Financial Regulation has estimated the impact on the following model participants in the program:
- A couple with no children now buy insurance that costs $13,200 per year. Their family income is $52,000 per year. If they buy insurance through the exchange in 2014, they would receive a federal tax subsidy that would drop the cost for the same coverage to $4,994, a savings of 63 percent.
- A single, self-employed electrician, annual income $40,000 per year. He buys insurance with the same coverage as example one. His annual cost now is $7,200. Cost from the exchange would be $3,804.
- A family of four, mother, father and two kids, with an annual income of $32,000. They now buy an insurance policy with a $10,000 deductible at an annual cost of $8,400. If they buy insurance in the exchange, their costs drop to $960, a savings of 89 percent. Moreover, if they were spending the whole $10,000 on medical care, they would save $7,500 because their deductible in the exchange would be much lower.
For most individuals and employees of small businesses in Vermont, the combination of the exchange structure and the federal subsidies are a financial boon. They either provide insurance coverage to the bulk of those that have none now, or they hold out the prospect for improving the coverage of those who have very high deductibles or pay very high premiums.
There are some caveats. One is illustrated by the final individual example provided by the Department of Financial Regulation: the family of four with an annual income of $450,000 per year who buy health coverage in the private market, and in the future will have to buy it inside the exchange. They will get no financial boost because their income exceeds the federal $92,200 limit.
A second caveat concerns those individuals who have no health care insurance now — and don’t want to pay anything in the future for health insurance, whether they can afford it or not. Those individuals will have to purchase care in the exchange in 2014 because of the personal mandate in the federal law. That would change obviously if the Supreme Court kills the mandate. The purpose of the individual mandate is to make sure that everyone pays what he or she can afford for health care coverage, since at some point everyone is certain to be treated if they get sick or injured.
If the mandate survives, it will be enforced by the federal government through the income tax system. When the individual files his tax return, he will have to report whether he has health coverage. If he or she doesn’t, they will have to pay a penalty according to the following formula: a minimum of $695 a year or 2.5 percent of family income, up to a maximum of $2,085. The penalty would be phased in between 2014 and 2016, and there would be exceptions, including “financial hardship,” people whose income is so low they don’t have to file a tax return, and those for whom the lowest cost plan would consume more than 8 percent of their income.
In short, most small business employees and individuals who buy insurance would have health coverage, and for a significant portion of the Vermont population, the federal tax subsidies would make it less expensive than it has been in the past.
Small businesses and the mandate
What about the employers, the small businesses, the backbone of the Vermont economy? What is the effect on them? Could they afford it? Would it drive them out of business? These are critical questions.
The Department of Financial Regulation estimates that there are 16,500 such firms in Vermont and about 7,500 now provide some kind of health insurance. What is the effect on them? And what about the companies that don’t provide health insurance?
These questions lie at the heart of the anti-reform effort in Vermont since its inception in early 2011. We’ll return to this issue in much more detail in No. 3 of the series, and while there may be some employers who may pay more than they do now, the vast majority should get a significant reduction.
Under federal law, no employer with 50 or fewer workers has to provide health insurance and that does not change when the full impact of Obamacare kicks in in 2016. Employees will have to obtain coverage as individuals, but at no cost to small businesses.
How about those companies that do provide insurance? There has been much talk about how some companies could face increases of up to 18 percent per year. That would be catastrophic. We’ll return to this issue in more detail later, but the fact is that no small employer has to pay an increase of 18 percent because he or she isn’t required to pay for health insurance. This provision is the ultimate safety valve for the small business community.
The Department of Financial Regulation laid out this scenario when the agency issued its examples earlier this year. XYZ company with an owner, Mr. Jones, and seven employees, pays a total premium of $153,600 per year in the current insurance market. Each person, including the owner, has a $2,500 deductible. The employees in the company, including the owner, pays 20 percent of the cost of the premium, or a total of $30,720.
If XYZ went into the exchange, the company would pay roughly the same amount it does now, but the company would qualify for a 16 percent tax credit worth just under $5,000.
In the scenario envisioned by the Department of Financial Regulation, the primary benefit for XYZ from health care reform would be a very significant reduction in the year-over-year increases in premiums, driven by the inflation in the delivery system itself. But let’s say that XYZ currently has a low-cost policy, either because its employees are unusually healthy, or it buys its coverage through an association, such as a Chamber of Commerce, which has been able to assemble an unusually low cost pool of insured individuals. Going to the exchange then might generate an increase, say, as much as 18 percent of the annual premium.
If Mr. Jones were to eliminate his personal coverage and his employees went into the exchange as individuals, the total premium for the employees would drop from $30,720 to just over $27,000. The owner, however, would be on the hook for the full cost of $14,475 since the example assumes he would have a $100,000 salary and hence not be eligible for the tax credits.
The key metric for the company, however, would be the elimination of $153,000 from its operating expenses for the year. The owner, Mr. Jones, shouldn’t have much difficulty finding a way to get a piece of that to make up for his $14,000 health insurance policy. He could pay himself the $14,000 for his own policy and pick up the whole $27,000 cost for his seven employees and he would still have more than $100,000 to play with.
In the example, his employees would be covered, he could get his entire $14,000 premium paid for, and he could take his $100,000 salary up to $200,000.
There is a second potential benefit to the exchange which is a dramatic simplification of the whole insurance question. Insurance companies are not responsible for the huge run-up in health care costs over the last 50 years — the delivery system produced inflation rates that the companies could absorb only with great difficulty. But in responding to that pressure, the whole health insurance industry has become hideously complicated.
It is so complicated, in fact, that a whole new industry has grown up to deal with it — agents and brokers who have mastered health insurance’s complexities and who manage them for clients. A major goal of the exchange is to reduce the complexity to manageable levels.
Every year, purchasers scramble to keep their costs as low as possible. Buyers move from carrier to carrier, trying to get the best possible deals. This process has been particularly damaging to individuals and employees. Across the country, employers have been steadily shifting the burden for the cost of care to the employees. The buzzword for this shift is replacing defined benefits with defined contributions. You translate the first as “we pay your health insurance.” The second amounts to “we pay what we can afford and you pay the rest.” And the percentage that is “the rest” has been growing steadily for a decade.
One of the interesting elements in the federal exchange law is that it aims at eliminating the effects of so-called cherry picking, whether it is deliberate or not. The gross effects of cherry picking — getting only health people into your patient pool, denying care for all sorts of reasons, have been eliminated in Vermont. But Obamacare levels the playing field for insurance companies inside the exchange. If one company ends up with a healthier pool of people than another and hence has lower costs and higher profits, that company has to share those profits with its competitor.
As we noted earlier, the framework and much of the detail of the exchange function is being driven by federal law, but the state is playing a role in one major element of the Vermont exchange. That is the provision that insurance for the small group market can be sold only within the exchange. This feature has been strongly opposed on the grounds that it can eliminate options for small businesses that already have working relationships with insurance companies, or that are nervous about where the whole reform effort is headed.
The reality in Vermont seems to vitiate that argument. There are only two companies now that sell insurance to the small group market. They are Vermont Blue Cross and Blue Shield and MVP, the Schenectady, N.Y.-based health maintenance organization. Both will offer coverage in the exchange and if they don’t offer enough plan options, the Green Mountain Care Board can order them to.
The exchange, in summary, is a first step toward reform, but it is nevertheless just a first step. The much bigger challenge lies in developing much greater integration in the delivery system and then building a new reimbursement system so that doctors and hospitals can take responsibility for both the system’s cost and quality performance.
We’ll look at those questions next.