Obama's health care plan: The return of Kerrycare
By Kevin Gabriel
web posted July 28, 2008
Barak Obama recently released details on how he plans to help small businesses pay for health care. And we've seen it before. His plan echoes the 2004 plan of John Kerry in a couple of important ways.
The new Messiah proposes to help small businesses defray their health care costs by 1) providing a tax credit of up to 50% of what they pay for health insurance, and 2) making the government the reinsurer of catastrophic costs. These ideas move us toward complete government control of the health care industry and remove the individual from the decision making process.
The Tax Credit
Like any liberal, Mr. Obama knows that the best way to implement an expensive program is to make somebody else pay for it. Despite the incessant nattering from the liberal politicians about how our health care system is "broken," they always want to retain the most fundamental part of that system in any reform: make the employer foot the bill.
By placing the onus for the funding on the employer, Obama's plan masks the cost of health care. It removes the entire financing mechanism from the consumer's consciousness. Thus, it reinforces the essential disfunctionality of our health care system: nobody pays for anything with his own money.
The proposal will continue the established pattern of forcing employers to be in the health care purchasing business. A CEO may think he's making cars or computers, but the chances are good that he's spending a good chunk of his cash, resources, and time selecting medical plans and paying for them. His employees have no choice beyond the options he sets for them. But that's OK, the average person is too dumb, in Mr. Obama's view, to be involved in choosing a health plan.
Government Reinsurance
A somewhat more novel – and even more dangerous -- part of the plan is to make the government responsible for "catastrophic" claims. These, Mr. Obama's web page says,"account for a high percentage of medical expenses for private insurers." John Kerry had the same plan in 2004. This amounts to making the government the sole reinsurer for all medical plans.
And, in the end, it amounts to a government takeover of the health care business.
Anyone who has been in the reinsurance business, knows that, even if one is only responsible for coverage above a "high" level such a $50,000 or $100,000, he needs to have a lot of say about what goes on underneath. Reinsurers of such claims will set parameters for how claims are to be managed and at what rates they are to be reimbursed. They will require that underlying insurers prove their competence to administer claims and then spend lots of time auditing submissions to be sure they were managed in accordance with their understanding.
In fact, if the underlying insurer's capabilities don't measure up, the reinsurer won't provide coverage.
Now the government will play this role. That means it will dictate how the underlying plans are to handle claims. And, when they are presented with a catastrophic claim, it is going to be auditing it to be sure that it was managed correctly.
With this idea, the devil truly is in the details. The number of items the government will need to control is myriad. In addition, they will need to impact every claim , not just the catastrophic ones. After, how will one know if a claim is going to be catastrophic until it gets there?
Here are just some of the questions that will need to be resolved:
- Claim Management: Currently, certain claims are put under special management programs, often long before they reach catastrophic level. Such programs go under several different categories, including Large Claim management (LCM), Utilization review (UR), disease management (DM), to name just a few. What will the government require for these? Will it have a "mandatory" vendor? Will there be multiple vendors? What will a vendor need to do to receive approval from the government? Or will the government simply co-opt the whole claim management industry?
- Coverage of catastrophic claims is subject to what actuaries refer to as "leveraged trend." What this means is that costs at high levels increase faster than costs at the original level. This isn't anything supernatural; it's simply the mathematical consequence of escalating costs above a threshold. For example, if the cost of medical care is rising at 15% per year, the rate of increase in costs at the $50,000 level is higher, more like 25%-30%. One would hope that Mr. Obama's minions would understand this concept and figure it into their cost estimates. But one must be skeptical. Failure to account for this will result in almost immediate cost overruns and will exacerbate pressure for the government to impose even tighter price controls or ration services.
- Many hospitals and Managed care networks actually charge a higher rate for large claims than they do for smaller ones. This policy, known as an "outlier" provision has caused insurers no end of headaches, as the excess of loss carriers do not get the benefit of favorable reimbursement rates at low dollar levels. What is the government going to do about these? Most likely they will outlaw them. So the hospitals will have to raise rates at the lower levels to make up for the lost revenue. And if hospitals are not allowed to do that, then many of them will go out of business.
- Who is going to coordinate this program between the government and the Insurance industry? How much of these catastrophic claims is the government going to pay? Are insurers supposed to pay the claims and get reimbursed by the government or is the government going to pay the claims directly?
- How is the government going to calculate the cost of the underlying claim? Right now, the cost of a given procedure varies by location and health plan. Most likely, there will have to be some standardized method of calculating costs. This means the government will dictate reimbursement rates from dollar one. So even claims that don't hit the "catastrophic" threshold will have to be controlled. In other words, they will take over.
- The concept of a "network" of providers will become meaningless. Networks are groups of providers that band together for contracting purposes. They agree to give certain insurers certain rates in return for the insureds under their control. But if all providers are to be reimbursed at the same rate, there will be no need to networks. It is unclear, for example, how Aetna's network would be any different from, say, CIGNA's.
- At what rate is the government going to reimburse the excess claims? Obviously, as with the underlying claims, they are going to dictate the payment rates. Most likely, they will mandate that everyone accept Medicare rates. In case you've forgotten, those are the rates that are so low that many physicians won't accept Medicare patients.
- What is the government going to do about plans that are capitated, such as HMOs? In these plans members pay a monthly fee and their services are covered. There are no bills that accumulate to $50000. Providing such cover (Known in the business as HMO Excess or Provider Excess) is a complex process. Who is going to be responsible for this?
- How will an employer or health plan demonstrate compliance with the government standards that will be imposed? This opens the door to a mountain of paperwork.
- How many claims will end up audited? This will be a big part of the government's job. The moral hazard that will exist for employers and health plans to "stick it to the government reinsurer" will be great. There will also need to be timeliness standards imposed on the government if this is to work. For some self-funded employers, payment of catastrophic claims in a reasonable period is essential if they are to maintain adequate cash flow.
As these items make clear, even at the "catastrophic" level, a government run reinsurance scheme will lead to governmental control of the entire health insurance industry. All the other players will simply be providing support. It will be only a small step more to fully nationalized health insurance.
So there we have them, the two cornerstones of Obama's health care vision: put the government in charge and make corporations pay. Sadly, we've heard this all before. 
Kevin Gabriel is a freelance writer and consultant living in Massachusetts.