I'm Back Part 2--Winners, Losers, and Winners/Losers in Healthcare Reform

WINNERS
Sick patients-Coverage will be expanded to 32 million people who lack insurance. Not all of them wanted or needed this coverage, but for those who needed it and couldn’t obtain it this change will be a big win. Many of the healthcare system horror stories have focused on this group and the legislation fixes this problem.

Future sick patients—What if I don’t want coverage? Starting in 2014 those who opt not to purchase coverage will be subject to annual fine of $695 based on coverage at the end of the prior year. However there is nothing to stop someone from waiting to sign up for coverage until they get sick. No fine and only premiums paid during the months after signing up make this ripe for games like signing up in December to avoid the fine (and likely some scrutiny in the final regulations).

Early retirees—Many under age 65 retirees had been left out in the cold as more of their former employers eliminated early retiree health plans due to cost concerns. The elimination of pre-existing conditions and the ability to purchase coverage is a major help to this population. Medicaid eligibility will be expanded, as well. Subsidies for purchasing care from the exchanges will be available to those making 4 times the poverty level.

Medical schools—The need for doctors just expanded, so while it has always been competitive to get into medical school, the new system will amp this up. The need for more and larger medical schools will increase. Expect to see increased medical school enrollments and an acceleration of new medical schools.

Lawyers—The legislation yielded double bonus for attorneys. The cry for tort reform to decrease the cost of malpractice insurance (and a relief from the defensive medical practices by physicians who order extra tests and provide unnecessary care to cover their behinds) was unheeded. This means lawyers still get to sue and share in not only large judgments but settlements in frivolous suits. In addition this legislation will spawn all kinds of new disputes to litigate. Big winners.

Consultants—Companies are going to be confused and looking for answers. Anyone who can help sort out the mess will benefit from additional business.

Solutions Providers—These specialized experts who can help companies come up with creative ways to offset cost increases in the face of the new order will be winners. Employers will get little help from Washington on cost issues. Developing a new healthcare strategy with supporting tactics will become paramount. There are many interesting and effective offerings and solutions available on the market in areas such as value-based benefits, data management and analysis, performance standards, wellness, disease and care management, medical record interoperability, virtual care, onsite clinics, and contract management. Look for more innovations to come.

Life Insurance companies—The prospect of higher income taxes makes life insurance an even wiser vehicle for saving in a tax advantaged way. Knowledgeable financial professionals will be advising their clients to find ways to avoid the higher taxes, often through variable annuities and life insurance. Life insurance companies will be more aggressively marketing the tax savings of their products and adding revenue from an aging population.

LOSERS
All taxpayers—Where will the money come from to pay for this? Because the bill focuses on revenue in the early years and pushes out the big spending to later years, the costs have been underestimated. Initial estimates are an incremental 3-5% over healthcare trend over the next 3-5 years. And these are the lower cost years! This will be a huge drain on the treasury and therefore on future taxpayers. The initial tax increases focus on the wealthy, but the wealthy cannot fund this themselves. Get ready for income tax rate increases for most taxpayers and maybe a VAT to offset these costs.

The Middle Class—After the wealth transfer associated with the taxes, the shrinking of the middle class seems inevitable—and not because they are getting wealthier.
Healthy people—Some people really didn’t want health coverage. Now these people will be required to participate or pay a penalty. This is an inevitable result of any broadening of access. The issue is the penalty is really too low to dissuade people from opting out. Look for the penalty for those who can afford it to increase dramatically over time.

The economy—The cost of healthcare, growing budget deficits, and the disincentives for job growth among small businesses give pause for concern over the economy’s growth prospects. The deficit will be a choker for the economy for years to come. The adverse impact on employers (see below) can only hurt the economy too.

Future Members of Congress—The game isn’t over. Future members of Congress will be left holding the bag to clean up the issues caused by the new legislation.

WINNERS/LOSERS
Health Insurance Companies—A dramatic increase in insured Americans could be viewed as good business for health insurance companies. Their administrative capacities are still needed to run the system. However they will inherit a poorer risk pool and mandated coverages making their book of business less profitable. Health insurance companies will be subject to new excise taxes under the rules. As we have already seen in the vilification of the insurance companies in Massachusetts because of higher medical costs, being able to pass on price increases to offset the higher costs will be difficult but it will happen.

Prescription Drug Companies—Simple demographics plus expanded insured populations will expand usage of their drugs tremendously. The additional fees imposed on them starting in 2011 will be offset by their business growth long-term, but the pricing of the product is a big question mark. Cutbacks in reimbursements, as is the case with the health plans, will limit the upside for pharma companies. This uncertainty over pricing and certainty over fees does explain the reduced financial outlooks given by these companies to Wall Street for the next couple of years.

Large Employers—Starting in 2014, any employer with over 50 employees must offer health coverage or will be subject to $166.67 per month penalty per employee (excluding the first 30). Mandates on cost sharing and spending requirements will ensure coverages are credible, plans must have no pre-existing condition exclusions, and maximum 90 day waiting periods. And administering this will be tough, especially in the beginning. So where is the winning status? The penalty is actually so low relative to the cost of coverage that employees would likely opt out of coverage and pay the penalty. Many anticipate the penalties to increase in advance of 2014; expect to see changes as soon as the initial regulations are promulgated on this point to avoid the incentive for employers to drop their plans. And when that happens some employers who paid far less for the benefits of some employees (especially in the hospitality, retail, and staffing industries) will be faced with dramatically constrained margins. These companies will need to increase pricing, amend their business model, or close shop. Even in other industries healthcare costs will continue to erode employer profit margins. On second thought, maybe they are really just losers in this reform.

Small Employers—No employer mandate of coverage exists and there is no consequence for employers with less than 50 full-time employees who don’t offer coverage. Employees will get their coverage from the exchanges. Tax credits will be available to small firms. And some of the fallout from large employer failures may benefit smaller firms. So where is the loser status? There will be a disincentive for the small firms to grow beyond 50 employees.

Over age 65 retirees—In addition to starting to plug the Part D doughnut hole in 2010, starting in 2011 brand name drug discounts will be available to reduce their costs. However Medicare reimbursement rates to providers will fall making it more likely that doctors may choose to stop taking Medicare patients. Finding a doctor with an avalanche of new Medicare eligible participants coming as the baby boomers age will become increasingly difficult. The concern raised prominently during the Bush presidency does not disappear; Medicare funding will run out in the foreseeable future without changes or cutbacks.

Hospitals—Fewer write-offs and higher bed occupancy would be a boon to hospitals, but the reimbursement levels will fall. There will likely be have and have-not facilities depending on their clout over health plans.

Doctors—While consumer demand will increase for care with a rising population, there are too few doctors to provide the care, especially primary care physicians. In addition the new legislation makes it even less attractive for a doctor to enter primary care. Nurse practitioners may fill some of the gap of basic medical services, freeing up doctors to perform more sophisticated care. However lower Medicare reimbursements and nothing done to counteract malpractice rates make this profession a labor of love over economics.

Brokers—If costs are cut and plans are mandated, it is possible that third parties will be looked at as a cost rather than a value-add. With people browsing online for prices and purchasing directly from exchanges, the role of the middleman decreases. There will still be complexity in the purchase process, but look for broker commissions to be less attractive and for the brokers to transform themselves.

Obama—There was a large cost to this fight, he did accomplish his goal of passing this major legislation. This could become his legacy or his downfall. A one term President? That doesn’t seem so far-fetched.

I'm Back!

I have been watching from the sidelines while the various parties have fought it out over healthcare reform. I had ideas about better ways to approach the problem, but this process degenerated into a political battle versus an answer in the best interest of the long-term for everybody. Both political parties can take credit and are at fault for the result after a “Battle Royale”.

Democrats adopted a win at all costs approach. They took an ideological view that providing broader access to healthcare was a moral obligation; lots of long-standing agendas crept into the final bill. With victory in sight, the Democratic leaders became more arrogant and went for the kill. Unfortunately the long-term realities of the bill were ignored for the sake of the “greater good”. The experts were ignored and shouted down. We will see a major transfer of wealth to pay for this bill like we have never seen. But greater access to healthcare for all was achieved with the introduction of health insurance exchanges. Individuals who had no way to purchase health insurance now could. And we are not talking about emergency care in a hospital setting.

Republicans realized they couldn’t win so they stopped making constructive suggestions. In seeing defeat early, they reverted to “no” for everything. Branding the mandate for participation in the new plans as socialism did make headway on public opinion, but didn’t make the bill better. If the Republicans use the November elections as a reversal referendum, they will lose again—at least in the minds of many Americans.

We are now in the position to try and take the good and fix the bad in this legislation. The original bill was over 2,500 pages long. Now comes the hard work with an anticipated 100,000 pages of regulations expected to be drafted. Hopefully the middle ground will fall back to the three legged stool of issues in our present healthcare system: access, cost control, and quality.

But we won’t have to wait too long for the regulations because the law kicks in soon. Interim high risk pools are coming in mid-June. The effective date of the initial reforms is 9/23/10. Any employer with a plan year following that date will need to incorporate the elimination of pre-existing conditions for children, elimination of lifetime maximums, coverage for those under age 26 on a parent’s plan, mandated coverage of preventive care, external review processes for employer health plans, a $250 senior subsidy to plug the Medicare part D subsidy, and the banning of canceling insurance for individuals. Some of the major health plans have already implemented the last item.

Here are some of the other plan highlights. By 1/1/11, small businesses will be eligible for tax credits and temporary reinsurance will be available for early retiree medical plans (to persuade companies to still offer the coverage until the exchanges are put in place). For 2011, employers will need to show the value of their plans on employee W-2 forms and offer a voluntary government long-term care plan to employees. Those employers with more than 200 employees will move to auto enrollment for healthcare. And over the counter medications will be eliminated from FSA and HSA accounts.

In 2013, a $2,500 cap will be put on flexible spending accounts. What might be an indicator of things to come is the introduction of new taxes for those earning over $200,000 as an individual or $250,000 as a joint filers (0.9% of wages and 3.9% of unearned income). The elimination of the medicare part D tax exclusion (which was originally put in place to encourage employers from keeping their retiree prescription coverages when part D was introduced) has already prompted companies to take GAAP charges for the anticipated future liability changes. For a couple of weeks the White House and Congress viewed this as a political statement by companies until someone reminded them of accounting rules—pretty scaring that this was unanticipated.

So while the target is still moving as the details of round one get sorted, who are the anticipated winners and losers?
(See my next blog entry to find out)