Government’s Medicare Auditor — Healthcare Bill To Raise Costs, Lower Access, Rife With Uncertainty

The Auditor for Health & Human Services Center for Medicare & Medicaid Services has now commented on PPACA. Not surprisingly, his review is not flattering — a $251 billion additional cost through 2019. I’ve read the whole report which can be found here, but I’ve included the lengthy end of the report because it presents a pretty fair summary of the bill, IMHO. His comments on the size and scope of the changes and, therefore, the difficulty in forecasting the results are instructive. In other words, central planning doesn’t work. But, most Americans know that already.

The end of the report:

Caveats and Limitations of Estimates

The Federal costs and savings, changes in health insurance coverage, and effects on total national health expenditures presented in this memorandum represent the Office of the Actuary’s best estimates for the PPACA.  Although we believe that these estimates are reasonable and fairly portray the likely future effects of this comprehensive package of health care reforms, they are subject to much greater uncertainty than normal.  The following caveats should be noted, and the estimates should be interpreted cautiously in view of their limitations.

• These financial and coverage impacts are based on the provisions of the PPACA as enacted on March 23, 2010 and amended on March 30 by the Health Care and Education Reconciliation Act of 2010.

• Many of the provisions, particularly the coverage expansions, are unprecedented or have been implemented only on a smaller scale (for example, at the State level).  Consequently, little historical experience is available with which to estimate the potential impacts.

• The behavioral responses to changes introduced by national health reform legislation are impossible to predict with certainty.  In particular, the responses of individuals, employers, insurance companies, and Exchange administrators to the new coverage mandates, Exchange options, and insurance reforms could differ significantly from the assumptions underlying the estimates presented here.

• The nominal dollar amounts of costs and savings under national health reform are sensitive to the assumed trajectory of future health cost trends.  Relative measures, such as the cost as a percentage of GDP, are less sensitive.

• Due to the very substantial challenges inherent in modeling national health reform legislation, our estimates will vary from those of other experts and agencies.  Differences in results from one estimating entity to another may tend to cause confusion among policy makers.  These differences, however, provide a useful reminder that all such estimates are uncertain and that actual future impacts could differ significantly from the estimates of any given organization.  Indeed, the future costs and coverage effects could lie outside of the range of estimates provided by the various estimators.

• The existing number of uninsured persons in the U.S. is difficult to measure, and the number of uninsured persons who are undocumented aliens is considerably more uncertain.  Medicaid coverage and Exchange premium subsidies under the PPACA are not available to undocumented aliens.  As a result of these measurement difficulties, the actual costs under the PPACA and the reduction in the number of uninsured persons may be somewhat higher or lower than estimated in this memorandum.

• Certain Federal costs and savings were not included in our estimates if (i) a provision would have no, or only a minor, impact; (ii) the legislative language did not provide sufficient detail with which to estimate a provision’s impact; or (iii) the estimates are outside of the scope of the Office of the Actuary’s expertise and will be prepared by other agencies.  In particular, we did not include any Federal savings pertaining to the excise tax on high-cost employer-sponsored health insurance coverage, the fees on insurance plans, the excise tax on devices, and other non-Medicare revenue provisions of the PPACA, as those estimates are provided by the Department of the Treasury.  (In contrast, the impacts of these provisions on national health expenditures are reflected.)  Similarly, Federal administrative expenses associated with the PPACA are not included here and will be estimated separately.  The Congressional Budget Office and the Joint Committee on Taxation have estimated that the total amount of Medicare savings and additional excise tax and other revenues would somewhat more than offset the cost of the national coverage provisions, resulting in an overall small reduction in the Federal deficit through 2019, and for the following 10 years as well, if all of the provisions continued to be fully implemented.

• In estimating the financial impacts of the PPACA, we assumed that the increased demand for health care services could be met without market disruptions.  In practice, supply constraints might initially interfere with providing the services desired by the additional 34 million insured persons.  Price reactions—that is, providers successfully negotiating higher fees in response to the greater demand—could result in higher total expenditures or in some of this demand being unsatisfied.  Alternatively, providers might tend to accept more patients who have private insurance (with relatively attractive payment rates) and fewer Medicare or Medicaid patients, exacerbating existing access problems for Medicaid enrollees.  Either outcome (or a combination of both) should be considered plausible and even probable initially. The latter possibility is especially likely in the case of the substantially higher volume of Medicaid services, for which provider payment rates are well below average.  Therefore, it is reasonable to expect that a significant portion of the increased demand for Medicaid would be difficult to meet, particularly over the first few years.   We have not attempted to model that impact or other plausible supply and price effects, such as supplier entry and exit or cost-shifting towards private payers.  A specific estimate of these potential outcomes is impracticable at this time, given the uncertainty associated with both the magnitude of these effects and the interrelationships among these market dynamics.  We may incorporate such factors in future estimates, should we determine that they can be estimated with a reasonable degree of confidence.  For now, we believe that consideration should be given to the potential consequences of a significant increase in demand for health care meeting a relatively fixed supply of health care providers and services.

• As stated in the section on Medicare estimates, reductions in payment updates to health care providers, based on economy-wide productivity gains, are unlikely to be sustainable on a permanent annual basis.  If these reductions were to prove unworkable within the 10-year period 2010-2019 (as appears probable for significant numbers of hospitals, skilled nursing facilities, and home health agencies), then the actual Medicare savings from these provisions would be less than shown in this memorandum.  Similarly, the further reductions in Medicare growth rates mandated for 2015 through 2019 through the Independent Payment Advisory Board may be difficult to achieve in practice.

• In estimating the financial impact of the Medicaid eligibility expansion, we assumed that existing and new Medicaid enrollees would be appropriately classified for FMAP purposes.

• As discussed in the section on the CLASS program, we believe that there is a very serious risk that the program, as currently specified, will not be sustainable because of adverse selection.

Conclusions

The national health care reform provisions in the Patient Protection and Affordable Care Act, as amended, make far-reaching changes to the health sector, including mandated coverage for most people, required payments by most employers not offering insurance, expanded eligibility for Medicaid, Federal premium and cost-sharing subsidies for many individuals and families, a new system of health benefits Exchanges for facilitating coverage, and a new Federal insurance program in support of long-term care.  Additional provisions will reduce Medicare outlays, make other Medicaid modifications, provide more funding for the CHIP program, add certain benefit enhancements for these programs, and combat fraud and abuse.  Federal revenues will be increased through an excise tax on high-cost insurance plans; fees or excise taxes on drugs, devices, and health plans; higher Hospital Insurance payroll taxes for high-income taxpayers; a new tax on investment revenues and other unearned income; and other provisions. The Office of the Actuary at CMS has estimated the effects of the non-tax provisions of the PPACA on Federal outlays, overall national health expenditures, and health insurance coverage in the U.S.  Our estimates are based on available data sources and what we believe are reasonable assumptions regarding individual, employer, and health plan responses to the legislation, together with analyses of the likely changes in the cost and use of health care services. Our primary estimates for the PPACA are as follows:

• The total Federal cost of the national insurance coverage provisions would be about $828 billion during fiscal years 2010 through 2019.

• By 2019, an additional 34 million U.S. citizens and other legal residents would have health insurance coverage meeting the essential-benefit requirements.

• Total net savings in 2010-2019 from Medicare provisions would offset about $575 billion of the Federal costs for the national coverage provisions.  The Medicaid and CHIP provisions, excluding the expansion of Medicaid and increased CHIP funding, would raise costs by $28 billion.  Additional Federal revenues would further offset the coverage costs; however, the Office of the Actuary does not have the expertise necessary to estimate all such impacts.  The Congressional Budget Office and the Joint Committee on Taxation have estimated an overall reduction in the Federal Budget deficit through 2019 under the PPACA.

• The new Community Living Assistance Services and Supports (CLASS) insurance program would produce an estimated total net savings of $38 billion through fiscal year 2019.  This effect, however, is due to the initial 5-year period during which no benefits would be paid.  Over the longer term, expenditures would exceed premium receipts, and there is a very serious risk that the program would become unsustainable as a result of adverse selection by participants.

• Total national health expenditures in the U.S. during 2010-2019 would increase by about 0.9 percent.  The additional demand for health services could be difficult to meet initially with existing health provider resources and could lead to price increases, cost-shifting, and/or changes in providers’ willingness to treat patients with low-reimbursement health coverage.

• The mandated reductions in Medicare payment updates for providers, the actions of the Independent Payment Advisory Board, and the excise tax on high-cost employer-sponsored health insurance would have a downward impact on future health care cost growth rates.  During 2010-2019, however, these effects would be outweighed by the increased costs associated with the expansions of health insurance coverage.  Also, the longer-term viability of the Medicare update reductions is doubtful.  Other provisions, such as comparative effectiveness research, are estimated to have a relatively small effect on expenditure growth rates. We hope that the information presented here will be of value to policy makers and administrators as they endeavor to implement and monitor the health reform act.

Richard S. Foster, FSA, MAAA

Chief Actuary

I add one additional paragraph from the detailed discussion of Medicare impacts. It clearly points out the double-dip revenue recognition of the Medicare Part A “savings”. This is the part that he points out in the caveats and conclusions that the Treasury and CBO will estimate.

Based on the estimated savings for Part A of Medicare, the assets of the Hospital Insurance trust fund would be exhausted in 2029 compared to 2017 under the prior law—an extension of 12 years.  The combination of lower Part A costs and higher tax revenues results in a lower Federal deficit based on budget accounting rules. [emphasis added] However, trust fund accounting considers the same lower expenditures and additional revenues as extending the exhaustion date of the HI trust fund.  In practice, the improved HI financing cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions) and to extend the trust fund [emphasis added], despite the appearance of this result from the respective accounting conventions.

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