June 2013 Archives

Lipstick on a Pig Study

This week, an Australian group published a study that claimed that pigs that were fed a GM diet developed inflamed stomachs and larger uteri. Does this mean genetically modified foods bad for you?

Without even attempting to answer this, it is clear that some people believe that they are. But what is this belief based on?

Unfortunately, the "answer" is a combination of agenda-driven science and reporting--not real science. And sometimes money.

The study appeared in the obscure Journal of Organic Systems--a journal heavily funded by the giant organic food industry. But even a cursory look at the actual study data revealed that, despite the flashy headlines, there is nothing there. Nothing.

Nonetheless, it still generated quite a bit of press coverage, which was undoubtedly the point of the whole exercise. There were thousands of online references to this study, and virtually all of them said the same thing: "Pigs fed GMO feed found to have severely inflamed intestines."

Too bad it's all garbage. By selective reporting of data, the authors managed to fool pretty much everyone. Here's how:

A group of 168 pigs was divided into two groups--half ate a "normal" diet and half ate the identical diet, except the corn and soy in their diet were genetically modified. After 23 weeks, the pigs were sacrificed and examined.

The conclusion: Pigs that ate the GM diet were more than twice as likely to develop severe inflammation of the stomach and also slightly more likely to have a heavier uterus.

Can this really be true? Does GM food really damage pig stomachs or cause enlarged uteri? Do the data match the headlines? Not even close. The devil is in the details, and upon closer inspection, the conclusion goes to hell. Here's why:

As part of the autopsy, the group examined the weights of 8 pig organs. There was a statistically significant difference in only one organ--the uterus--and just barely-- 0.12 percent of the GM-fed animal's body weight compared to 0.10 percent from the other group. Statistical significance is a mathematical method of teasing out real data from numbers that arise by chance. It is helpful, but not foolproof.

Worse still, 18 categories of pathological abnormalities were measured, but the authors found only one category with a significant difference--severe gastric inflammation.

True--GM-fed pigs were more than twice as likely as non-GM fed animals to develop "severe" stomach inflammation. But the GM-fed pigs also had a lower (although not statistically significant) incidence of both more severe stomach conditions (erosions, ulcers) and less severe conditions (mild and moderate inflammation). And twice as many pigs fed GM diets showed no inflammation.

Does this make sense? No--and it shouldn't. This is because the authors based their conclusion on two pieces of statistically significant data, and pretty much ignored 95 percent of the rest of the study. It's a common trick.

If you perform enough measurements in any study, it is virtually certain that something statistically significant will show up, just by chance. But when the remaining data fail to support (or even contradict) these findings, the conclusions become meaningless. Which the authors clearly knew, yet still presented it as fact.

Sadly, this is the typical way that agenda-driven science is done these days, and it works. Sloppy or ideology-driven journalists report these "findings" as facts and they become just that in the collective consciousness of non-scientists around the world.

As such, complex and important medical and scientific issues do not get a place at the table, leaving behind nothing but confusion and bad information.

No wonder no one knows what to believe anymore.


The 2012 presidential election was perceived (at least by those on the left) to be a referendum by voters on health care policy. Indeed, Democrats enacted what is arguably the biggest health care reform since 1965 - when Medicare and Medicaid were created - in the form of the ACA, or Obamacare. It wouldn't be a stretch to say that Republicans lost the election, at least partly, because of a lack of a coherent policy geared at repairing the broken American health care system (though it also isn't a stretch to say that Obamacare does not fix the broken health care system). Yet, it might be wise not to throw out the baby with the bathwater - one important Republican reform idea, most recently proposed by Representative Paul Ryan, is receiving some well-deserved traction.

Medicare's payment advisory commission - MedPAC - recently released a report addressing a number of growing challenges in the Medicare program. Chief among them (and the first chapter of the report) is the recognition that Medicare fee-for-service (FFS) is likely not the most efficient and cost-effective way to cover the care that beneficiaries will need. The alternative approach to the standard FFS model is essentially what Paul Ryan and other conservatives have been promoting for some time - premium support. Although MedPAC (understandably) doesn't adopt the premium support moniker (instead referring to their model as "competitively determined plan contributions" or CPC), the structure is very similar to what we saw in Ryan's proposals.

At its core, the premium support model injects about as much private sector competition as could be imagined into the Medicare program. Ryan's version of the model would have private plans - ostensibly, those that provide coverage through the Medicare Advantage program - compete with Medicare FFS on a cost basis. The benefit structure would be pre-defined by law, and the Medicare program would provide beneficiaries with vouchers (pegged to the second-cheapest plan in their region) that they could use to purchase Medicare-equivalent coverage. Any cost above the voucher would be borne by the beneficiary. Private plans would compete with Medicare FFS for members, and in the end, whichever program could pay for the same benefits at lower costs would come out on top.

For all the criticisms that Ryan's premium support proposal received, it isn't the first time the idea was considered. First off, the idea goes back to a 1995 proposal by Brookings Institution scholar Henry Aaron. The premium support model also received play in the Domenici-Rivlin proposal to reduce the nation's debt.

But the idea of injecting more competition into Medicare is more than just volumes of failed legislation - the program has experimented with competition already. Medicare Advantage, an alternative Medicare funding arrangement already allows Medicare beneficiaries to purchase private coverage using Medicare dollars. (It should be noted, however, the MA is not, in and of itself, a competitive program, and the report notes that MA costs are tied more closely to FFS costs and are largely unrelated to the commercial market.) The difference is that payments to MA programs are based on regional administrative benchmarks tied to FFS costs; plans bidding below the benchmark receive rebates which are used to either offer additional benefits or reduce premiums; plans bidding above have to charge enrollees additional premiums. Moreover, MA plans don't compete with FFS in the full sense of the word - beneficiaries that choose to go with FFS face no penalty if the cost of providing FFS benefits is greater than the cost of providing MA benefits (although MA plans generally cost more per-beneficiary than FFS does, there are important nuances - for instance, MA patients tend to have shorter hospitalizations, even though their health status is comparable to those in FFS).

In MedPAC's discussion of CPC models, the authors note that fundamentally, differences between CPC models depend on how the federal contribution is calculated. They present three illustrative scenarios:

1)      Federal contribution is 100% of local FFS costs. Under this approach, the federal contribution is tied explicitly to FFS spending. This ensures that no plan would get reimbursed more than what FFS would spend for a particular beneficiary.

2)      Federal contribution is based on a weighted average of local FFS costs and local bids. Because the contribution would be based on both FFS and private plan bids (FFS competes directly with plans), low-spending areas would see higher plan bids (resulting in higher contributions) while high-spending areas would see lower plan bids (and lower federal contributions).

3)      The final option takes the lesser of FFS costs and private plans. FFS does not compete directly with plans under this option, but this results in the lowest cost of reimbursing private plans. The low-use / high-use dynamic from the second option is still in play, however, but no matter what, contributions could never become greater than FFS costs.

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MedPAC's analysis reveals an interesting dynamic in how competitive bidding may play out - the structure of the federal contribution can essentially act as a transfer mechanism from FFS beneficiaries to those who choose to participate in private plans. The model that reduces federal contributions the most - the third scenario from above - also results in the greatest premium increases across the board, for FFS beneficiaries and those who enroll in private plans.

However, the authors of the report offer additional considerations. A CPC-based Medicare reform may choose to allow variations in benefits (while maintaining an equivalent actuarial value as Part D does) for instance, which would allow plans to better tailor benefits to particular populations or regions. The question of an administrative benchmark is also salient, especially with regard to political feasibility - prior CPC demonstrations were shut down largely because stakeholders opposed the elimination of benchmarks.

But perhaps one point in particular deserves some attention - high-use areas (big cities, generally) can see substantial benefits from greater competition: FFS use in Oklahoma City, for instance, is 16 percent above the national average; MA HMOs bids, according to MedPAC's analysis, are 8 percent lower. Yet, in low-use areas, the reverse is true. The explanation offered, and it is fairly convincing, is that MA HMOs tend to have somewhat higher administrative costs in order to better coordinate care - these fixed costs are more easily offset in high-use areas making it easier to compete with FFS on cost.

Fundamentally, injecting more competition into Medicare may work in some areas and not work in others. But that's the beauty of competition - the plans that can't compete with FFS shouldn't be expected to enter the markets where they can't. But if they can, indeed, offer significant benefits in high-use markets, CPC-based reform should be on every policymakers wish list.


A wave of healthcare mergers and acquisitions has made headlines lately, but it's not the first time in recent history that healthcare providers have attempted to consolidate their market power this way. In the 1990s hospital systems grew by acquisition and affiliation, but were largely unable to achieve the synergies they wanted. The motivation at that time was to protect -- by acquiring -- their referral base. This time they are driven largely by defensive pressures to increase their clout in negotiation with payers as well as to avoid being taken over themselves. Additionally, some recognize that to form an ACO they need to acquire some specialty practices in order to provide the range of services their assigned beneficiaries require.

These large-and growing-hospital systems are seen by some as an antidote to rising costs. Efficiencies of scale that can be achieved through consolidation will, it is anticipated, drive down costs thus leading to lower prices for all consumers whether government or privately insured. However our confidence in the hospital's ability to achieve these benefits is low based on previous experience in the 1990s and beyond.

In fact, the evidence already suggests the opposite is happening. Costs for basic services at a hospital are often significantly higher than at an independent provider. For example, the charge for a basic MRI in a hospital setting is estimated to be between $1700 and $2200, while the same procedure at an outpatient imaging center is charged at $700-$1000.

Why so much higher? Two often cited rationales are: first, that the hospitals have greater overheads - so much for the synergies of scale - and secondly, that large hospital systems are able to negotiate better reimbursement rates due to their size. Even if they could reduce the cost to treat, why would the hospital feel compelled to shrink their margin by lowering their reimbursement rate? Research from Northwestern University showed that prices were increased by about 40% after the merger of neighboring hospitals.

Another possible reason for such high cost is that the rates quoted from the chargemaster bear little or no relation to the costs incurred to provide service. The justification for the amount in the chargemaster is opaque. The lack of transparency allows hospitals to charge cash-paying patients (those who are uninsured or wealthy medical tourists) whatever they want. This figure is not connected to either the costs incurred or the amount negotiated - increasingly from a position of strength as the only provider in the community.

Hospital systems have a poor track record of creating value from acquisitions and consolidation. They haven't successfully integrated physician practices, nor have they leveraged their scale to reduce their costs and manage their overhead allocation. This is largely because nobody has held them accountable. As long as there continues to be a lack of transparency about not only what they charge but how they calculate these figures, they will continue to create fantastic numbers for inclusion in the chargemaster and use their dominant market position to defend their reimbursement levels.


The brouhaha over California's premium rates (see Will Wilkinson's terrific coverage for a good summary) is largely dying down, especially as the NSA is now commanding the attention of many journalists. Largely, the debate over California's proposed premiums for 2014 centered around three issues:


1) Are premiums they increasing?
2) Are benefits more comprehensive?
3) Will people pay less?

Thanks to Avik Roy's fantastic coverage and analysis, we know the answers to all three questions. Rates will increase for most young people (the large plurality of the uninsured), even when taking into account subsidies, and even for benefits comparable to Obamacare's minimum requirements.

So, at least in California, there will certainly be rate shock for young people, which may hamper the ability of Obamacare to offer affordable rates to the rest of the incoming uninsured.

But amidst the debate over how much who will pay, one piece of the question was ignored - what is the fundamental goal of expanding coverage? Austin Frakt highlights four options - for my purposes, I would argue that maximizing coverage while minimizing premium increases is the primary goal. And certainly, few would argue that maximizing coverage of young, healthy people in particular, isn't important in minimizing premiums. Therefore, it seems safe to say that in order to maximize coverage while minimizing premium increases, you need to ensure that a large number of young and healthy people sign up for coverage, to balance the risk pool.

Indeed, even more specifically, one could argue that the goal of Obamacare is to expand coverage to those who are unable to get it - that is, those with pre-existing conditions who may be denied coverage or may be charged exorbitant rates. This is why the law includes a pre-existing condition exclusion (rating on health status is no longer allowed) and limits age-rating. The goal is to redistribute from the healthy to the unhealthy - which is why the individual mandate and the premium subsidies are necessary as sticks and carrots, respectively.

It seems odd, then, that we rarely question whether pre-existing conditions are a massive problem in this country. According to HHS, somewhere between 50 and 129 million people under 65 have pre-existing conditions that could preclude them from purchasing individual insurance policies. This number is almost certainly inflated, but even taking it at face value reveals that most of these people likely have employer-sponsored coverage or Medicaid - 160 million Americans receive coverage through their employers; around 56 million receive coverage through Medicaid.

What about the uninsured population? HHS claims that some 25 million uninsured Americans suffer from a pre-existing condition. This is more than likely far from being within the same universe as the real number - data from the Society of Actuaries puts the number of uninsured in poor health at around 500,000; less than one percent of the total number of uninsured. Even taking into account those considered to be in "fair" health, the number rises to about 2.7 million - only about 5 percent of the uninsured.

So if this is the case, that those in poor health make up, at most, 5 percent of the uninsured, an important question comes to mind - is there a better way of covering these people? The fact that California's largely unregulated individual market has become the largest in the country indicates that the majority of the uninsured (the young and healthy) could probably get relatively affordable coverage with minimal intervention. It makes little sense, then, to force an expensive and comprehensive insurance product on them, to cross-subsidize those in poor health. A more straightforward, and less distortionary approach would use high-risk pools to enroll those that truly have pre-existing conditions and are uninsured. To be fair, states have tried high-risk pools in the past, but they have suffered from a lack of funding and significant obstacles (Minnesota being one of the few success stories) - but these issues are easier to address than the adverse selection created by pricing young people out of insurance exchanges to help cover the 1 percent.. 


In recent weeks, early reporting data from Advocate Health Care's accountable care organization (ACO) has reignited discussion about the sustainability and scalability of the ACO model. This is especially noteworthy since ACO advocates are touting the 2% savings Advocate's ACO has achieved. Unfortunately, most of the discussion so far has focused on the obvious issues, like upfront infrastructure investments and concerns about the fact that patients aren't required to stay within the ACO. But these concerns barely scratch the surface of the issues surrounding ACOs.

Let me put what I see as the real problem with ACOs in context. The goal of ACOs -- getting to better healthcare at lower cost -- is laudable. But the means are fundamentally flawed.

I've been an advocate for healthcare reform in this country for many years... moving to a market-based system that centers on the consumer and reflects transparency in cost and quality while connecting payment with outcomes. The means to do this are there. My firm has identified about $500 billion in unnecessary care, in cost due to medication errors, and in cost due to poor care coordination. Add to that the estimated $250 billion in fraud and abuse, and you have a substantial amount of money in our healthcare system that could be redeployed. That's more than enough to provide coverage for those that can't afford it.

With the Patient Protection and Affordable Care Act (PPACA), there were really 3 goals: insurance reform, delivery reform, and payment reform. So when I read the legislation and saw the 9 pages describing the ACO, I thought, "This is not going to work." It flies in the face of everything we know about organizational design and human behavior. And to make matters worse, it's an overlay on the existing fee-for-service model.

Theoretically, the idea of combining all providers across the continuum of care under one umbrella sounds good. But if you've ever worked at a large company, you know that having everyone nominally working for a single organization doesn't mean that everyone is aligned, and it doesn't mean that you won't have silos. And as designed, the ACO model is very complex, and it's very difficult to implement. It creates a bureaucratic overly on a broken system.

So that 2% that Advocate has saved? They've got a lot further to go to get to $750 billion.

Accountable care is needed. But as I've argued consistently, ACOs are not. So the obvious question becomes, what will get us to better health outcomes at lower cost?

Imagine an alternative where primary care physicians are able to take time to diagnose patients and help them make better choices for their own health. Insurers incent beneficiaries financially to make better health choices. Employers create financial incentives to make good decisions about health. Physicians make information about cost and outcomes available, like in any other industry. It's a fundamentally different approach -- one that is market-based and patient-centered, not organization-centered.

Consider the example of Lasik and cosmetic dermatology. When the technology was first developed, it was very expensive. But in the years since, the costs have gone down while quality has improved -- like in any other industry. Years later, many more people are able to take advantage of these services. And they pay for them differently -- it's a bundled price for a whole procedure, instead of paying separately for every minute detail.

The only way to get costs under control is by changing payment. Providers need to have incentives to keep patients out of the hospital. We're starting to see some signs of that already -- outside of the PPACA legislation -- in CMS's refusal to reimburse "never" events. Ironically, CMS already had the administrative authority to do this and didn't need PPACA.

In the end, it's all about payment for outcomes and putting the consumer at the center. The ACO model fails to do this.

One of the most disappointing things about the recent commentary is that while some questions have been raised about sustainability and scalability, what's largely been absent from the debate are questions about ACOs' viability. ACOs will fail to improve healthcare costs and quality because they take a fundamentally broken system and create a complex bureaucratic overlay, making an already complicated system even more complex. And each layer of complexity will only add cost, decrease efficiency, and reduce transparency.

The answer isn't a new, complex organizational model, but rather greater transparency and greater accountability for costs and outcomes. Creating incentives that focus on achieving quality outcomes, providing choice and allowing real competition will get us there -- ACOs won't.


If there is a perfect example of 1) state of the art pharmaceutical research, and 2) the importance of the so-called "me-too" drugs, it is the massive effort over the past two decades to find treatments for (and possibly eradicate) hepatitis C--a blood borne viral infection of the liver that has infected about 200 million people worldwide--four times the number of people infected by HIV.

The causative pathogen, hepatitis C virus (HCV) takes hold in the liver, where it relentlessly replicates, causing irreversible damage, often leading to cirrhosis and less frequently, liver cancer over the course of two to three decades. It is the leading cause of liver transplants in the U.S.

Beginning in the 1990s, virtually all major pharmaceutical companies had major HCV research efforts, and to say that it worked out is quite an understatement. But there was a long way to go.

Until 2011, when two HCV protease inhibitors, Incivek (Vertex) and Victrelis (Schering-Merck), the first direct-acting antiviral agents for HCV were approved, the standard of care was interferon and ribavirin-- a combination that was less than 50% effective and fiendishly toxic, causing many patients to stop treatment, even though they may have been signing their own death certificate in the process.

The two protease inhibitors, which were coincidentally approved within two weeks of each other, boosted the cure rate to about 80%--a huge advance, but not without some problems--sometimes severe skin rashes and anemia. And each drug was meant to be added to the interferon-ribavirin combination rather than replacing it, making the side effects even worse.

As is so often the case in drug research, the breakthrough drug against a given disease, while extremely important, will often be surpassed by the next generation of similar drugs, often referred to (usually in a pejorative way) as me-too drugs. This is precisely what is happening in the world of HCV research right now.

Gilead, Abbott (now AbbieVie), and Bristol-Myers Squibb are leading the way with drugs and cocktails that not only eliminate the need for interferon, but show cure rates approaching 100 percent--something that was unimaginable even 10 years ago.

This has created an interesting dilemma. Three years ago, some doctors were suggesting that patients wait until Incivek and Victrelis were approved rather than undergo the older interferon-based therapy. And this is happening once again. There is an ongoing debate over whether it makes sense for previously-untreated patients to wait a few months until the second-generation drugs are approved.

In drug research, this is about as good as it gets. Using a strategy of drug design similar to one employed in HIV research, pharmaceutical companies succeeded in doing something that was thought to be impossible--potentially wiping out one of the most world's most important viral infections.

These results highlight the obvious-- it is counterproductive and illogical to forgo research in a particular area simply because there are already drugs approved for that indication. Right now there are least three more protease inhibitors in the pipeline and roughly ten different polymerase inhibitors (drugs that act by a different mechanism). Unnecessary? Hardly.

It is all but certain that of the multiple "me-too" drugs in development, some will rise to the top and some will fail as they are subjected to more pre-and post-approval scrutiny. This will mean a world of difference for patients as the best drugs and drug combinations become clear--something that would be impossible without multiple therapy options.

This should really go a long way towards shutting up fools like Marcia Angell of the Harvard Medical School, a perennial industry critic who believes that one drug is sufficient for any disease, and that "me-toos" are simply tools for maximizing drug company profits. It would be impossible for her to be more wrong.

This mindset was dead wrong with HIV. Without multiple choices, optimized cocktails, which are now doing incredible things, would have been impossible. It is just as wrong here. The lives of 200 million people will bear this out.


There are bad headlines and bad headlines.

The bad ones are merely poorly written and confusing. The bad ones actually lead you to the wrong conclusion. When they inevitably get picked up by news organizations and mindlessly passed around, the already-scientifically-ignorant and confused American public absorbs them and becomes even more so.

Last week's, "Diet soda as bad for teeth as meth, dentists prove" hit a new low. It was so wrong on many levels that it is worth tearing to bits. Which is exactly what I happen to be in the mood to do.

Bad headlines are nothing new. I see them all the time. But, this one would have you believe that there was actually a legitimate study that likened the consequences of drinking diet soda to the complete destruction of teeth and gums from chronic use of methamphetamine.

And this idiocy was picked up verbatim by hundreds of news sites, including NPR (!), and will undoubtedly be filed away in the consciousness of the many people who saw it. At this point it becomes fact. Which is especially unfortunate in this case, because just about everything in it is wrong.

For example: According to author Dr. Mohammed Boussiouny, a professor of restorative dentistry at the Temple University School of Dentistry "[m]eth, crack and diet soda have one thing in common: They're highly acidic and can cause erosion and significant damage without good dental hygiene."

But anyone who's made it through a high school chemistry course will tell you that not only are methamphetamine or crack cocaine not acidic, but they are in fact basic--the exact opposite of acidic.

Here are a few more flaws:

"The case study looked at the damage in three people's mouths."
It is not a study. It's an opinion by a dentist, and a mighty stupid one at that.

Yet, somehow this made it into the journal General Dentistry: "You look at it side-to-side with 'meth mouth' or 'coke mouth,' it is startling to see the intensity and extent of damage more or less the same," said Boussiouny.

Boussiouny is basing his "study" on one woman, whose teeth were completely rotted away and unsalvageable. From this he magically concludes that the acidity of diet soda will eat away your teeth until you have something resembling "meth mouth." Look up the photos if you wish, but please have a strong stomach.

The conclusions are based on one person.
The woman drank two liters of diet soda for about 5 years, and for some reason liked to hold it in her mouth before swallowing it. Her teeth rotted, therefore it must have been the diet soda, right?

Not really--the woman in question hadn't seen a dentist in 20 years, which was conveniently left out. Any remote chance this may have had something to do with her condition?

And here's the fundamental problem with a study with one subject: A man walks down 54th street and a piano falls on his head. Therefore, everyone else should make a serious effort to walk on 55th street instead. Ridiculous? You bet. Just like any study of one.

Diet soda is the culprit because it is acidic.
Well, so is regular soda. And it just happens to contain sugar, which has been rumored to cause tooth decay. Duh. So, is it diet soda that is the culprit? Or just the soda? Or the lack of dental care? Or the exchange rate of the Euro? Absolutely impossible to tell. Would this happen to someone who drank two liters of sugared soda a day for 5 years and failed to see a dentist for 20 years? Who knows? They only mention the term "diet" at all because this is what the one woman they based this asinine study on just happened to drink diet soda. Or because someone has an itsy bitsy agenda.

Yet, this will no doubt be taken as an indictment of diet soda, when in fact the fact that the stuff is artificially sweetened is not only irrelevant, but probably less harmful to your teeth.

While it is unlikely that anyone will die from this (except maybe diabetics who switch back to sugar-sweetened soda for no reason), the cumulative effect of sloppy and agenda-driven reporting is a bit more serious.

I have no doubt that it is responsible for a huge database of misinformation that drives people to do exactly the wrong thing: skipping vaccinations, following useless or dangerous diets, taking herbs instead of seeing a doctor, and failing to take potentially life-saving medications because they scared to death over minuscule or non-existent risks.

It is hard enough to make many decisions when you have the correct information at hand. Throw in garbage like this and it becomes impossible.


Paul Krugman, the Nobel laureate, Princeton University economics professor, New York Times economics blogger, and die-hard champion of the left, argues in his Saturday piece, that we aren't having a legitimate, serious discussion about Obamacare. He points to my Manhattan Institute colleague, Avik Roy's, recent piece, which claims that in California, insurance premiums are increasing, contrary to what California's Benefit Exchange is claiming.

I've written briefly about California's numbers - one problem is that the exchange is framing them as falling by comparing with small-group plans (employer sponsored insurance); the other is that California already has a large individual market, which means that the current rates shouldn't be as oppressive as those around the country, which in turn means that California isn't representative of the rest of the country.

Roy takes it a step further and actually examines what it would cost 25 year old non-smoking male to buy insurance coverage now and under Obamacare - the median cost more than doubles from $92 to $205 a month (or $184 a month for non-subsidized catastrophic coverage). Ditto for 40 year olds, who will see costs increase from $121 to $261.

It would seem that the result is pretty clear - costs will increase. But that isn't what Dr. Krugman is disputing - the point of contention is that this methodology essentially compares apples to oranges, when oranges won't be available in 2014 (a better way of putting it is comparing two apples - one weighing half-a-pound and the other weighing a pound, when the half-pound apple will be taken off the market next year). To his credit, Krugman is correct. A combination of new benefits requirements, community rating restrictions, maximum out-of-pocket limits, taxes, and various other regulations will make some plans unavailable in 2014 - ostensibly, the cheapest plans available now won't make the cut.

Before delving into questions of benefits etc., it is worth noting that this is one case where comparing apples to oranges is exactly the correct methodology. The very fact that new regulations will make some plans obsolete is one of the main points that those on the right are making. Because the plans being made obsolete are relatively inexpensive, costs will, by definition, increase. Whether consumers are, on average, better off with more comprehensive minimum benefit packages and community rating restrictions, is an altogether different question. It is certainly within the realm of possibilities that consumers could be made better off (total consumer surplus increases) with new regulations. That isn't a question that can be answered now, however - Obamacare will have to be studied years after the fact to understand its impact. Moreover, other questions remain - for instance, costs aside, since the uninsured are predominantly young and (relatively) healthy, it is questionable whether we should be requiring them to purchase relatively comprehensive insurance coverage.

The question of costs, however, is easy to answer now. Costs are - no matter how you measure them - increasing.

But what if we were to make a more "apples to apples" comparison - that is, compare relatively generous plans now, with the default generous plans under Obamacare?

Let's take our 40-year old non-smoking male, and assume that he is fairly risk-averse. Let's say he earns close to GDP per-capita - about $50,000. Our 40-year old is currently uninsured, and being risk-averse as he is, would probably like to cover a good number of eventualities, meaning that his plan should have a relatively higher actuarial value - similar to those mandated under Obamacare.

If our 40-year old currently lives in Southern Los Angeles, a good option might be the Cigna "CA Open Access Value 3000" plan - coming at $227 per-month, with a relatively low deductible of $3,000. The plan includes maternity coverage, and a prescription drug plan, and covers preventive services without a deductible. Indeed, the plan's brochure indicates that the plan design is intended to comply with Obamacare regulations. What will be the cheapest plan available on the exchange for this 40-year old? It will be 9.3 percent more expensive, at $242 dollars (and this doesn't take into account potentially higher deductibles).

This isn't quite the doubling of premiums that Roy discusses - because this does compare similar plan designs. And yes, as some have noted, premium tax credits may brunt the impact for individuals buying insurance on the exchange. But the point is the same - even comparing plans that offer similar benefits, other regulations in Obamacare will make the insurance market more expensive, driving up costs.

 Note: Current insurance rates here are based on estimates from www.ehealthinsurance.com.  


In what is emblematic of every annual Medicare trustee report, the most recent offers a word of warning (which is about as urgent as any warning you can expect from an actuary):

Without unprecedented changes...Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance. Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result.

Perhaps former CBO director, Douglas Holtz-Eakin summed it up best when he tweeted:

Medicare and Social Security are still broken, going broke...because we've done nothing to fix them.

In a word, yes - this is the message that Medicare's trustees are sending Congress and the President. Neither Democrats (who may otherwise wish to sit on their laurels, confident that the ACA's cuts to Medicare have saved the program), nor Republicans can ignore the fact that Medicare - the health insurance safety net for over 50 million elderly and disabled Americans - is hemorrhaging money and efficiency.

It makes sense then, to take a moment to review how and why, and what can be done about it.

1. When You Assume

All projections - whether they come from the CBO, Medicare's Trustees, the White House, or the private sector - are based on a comprehensive set of assumptions. Assumptions can incorporate the gamut from changes in GDP, productivity, costs and virtually anything else that the authors find is relevant in their modeling efforts.

Of course, as the leading experts in risk-adjustment and financial modeling, actuaries know this well. And while the front-page projections of government accounting are usually based on a "current law" baseline (that law takes effect as written), there are often major differences between what is supposed to occur and what actually does. The latter is known in the policy world as "current policy" - what is expected to happen.

There are several important areas where current policy baselines are important to keep in mind, but one very salient example in the health policy realm is Medicare's infamous "sustainable growth rate" (SGR). The SGR governs the rate at which Medicare's payments to providers changes annually, and for many years the SGR required that physician payment rates be reduced - last year, the reduction would have been close to 30 percent. Because it is widely agreed that reductions in Medicare's payment rate would result in much worse access to care for Medicare's population, Congress has routinely overridden the reductions in its annual "doc fix." So, because it's unlikely that Congress will allow payment rates to be reduced, part of Medicare's "current policy" baseline is to assume that SGR cuts will not happen.

This "alternative scenario" has become so important, that now every report by Medicare's actuaries includes alternatives to current law.

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Over time, the difference between current law and the SGR alternative projection will about to about 0.7 percent of GDP (over $100 billion); through the modeling period, the difference in Medicare spending comes to about 11 percent (well over $1 trillion). But that's not all. The top line in the graph assumes that IPAB is relatively ineffective, SGR cuts are overridden, and the ACA's cuts to Medicare will not be sustained past 2020 (a point that was made in the 2011 technical review of Medicare's actuarial reports) - the difference from the current law baseline to the full alternative policy is a massive 3.3 percent. This grows over the modeling period, and while the actuaries don't provide a full estimate, the total difference in Medicare spending between the two scenarios would be massive.

Unfortunately, there is likely no single solution here. The first step (and kudos to President Obama for including this in his FY14 budget) is to eliminate the SGR and immediately develop a new payment formula, replacing the SGR temporarily with a 1 or 2 percent increase in payment rates. The new formula would need to ensure that evaluation and management services are adequately compensated (so as not to skew too far in favor of specialists). This would address part of the issue, eliminating the need for a "doc fix" and moving current policy closer to current law. But ultimately, as long as Congress (and the President) believes in using gimmicks like provider payment reductions to hold down Medicare spending, we will continue to see a disconnect between current law and current policy - this only serves to make Medicare's future less certain, to no one's benefit.

2. Medicare Is (only slightly) More Solvent

During the last election cycle, a popular talking point became the solvency of Medicare's trust fund. For clarification, when we discuss Medicare's trust fund we usually refer to Medicare Part A - Hospital Insurance. This fund pays for inpatient hospital services, Part B (which actually has an increasing fund balance over the modeling period) pays for outpatient services, and Part D (which is funded largely through premiums) covers prescription drugs.

The new ominous deadline for Medicare Part A is now 2026 - a two year improvement from last year's report which projected that the trust fund would be depleted by 2024. This "improvement" is likely due to expenditures last year being lower than expected coupled with more optimistic forecasts about economic growth in later years (which in turn means greater payroll tax revenue).

hi_trust_fund.png

But there's more to it than that. The 2026 figure comes from "intermediate" assumptions regarding costs - under the worst-case scenario assumptions the trust fund would be depleted 7 years earlier, in 2019.

Perhaps the solution here is simple. The actuaries note several times that there is no provision to pay Medicare Part A benefits with general revenue - so for some, the obvious fix would be to allow general revenue to be used for Part A. However, this would be short-sighted; it misses the entire point that Medicare, as is (even with the ACA's "productivity adjustments"), is unsustainable - both in the short-run and the long-run.

That one federal program alone will eat up at least 6.5 percent of GDP in the future should not be taken lightly by policymakers. Containing Medicare's costs is critical - reworking the SGR (as noted above) and Medicare's payment formula is an important step. Simplifying Medicare, by combining Part A and B deductibles, for instance, can help eliminate some of the program's "hospital favoritism." More drastic measures would forbid MediGap plans from covering deductibles or copays to ensure that beneficiaries still have some skin in the game and make smarter decisions. Going further, Medicare's eligibility age can be raised little by little, which would reduce Medicare spending by $148 billion over ten years.

What policymakers should not do, is rest easy thinking that existing "productivity" adjustments are good enough.

While the Medicare trustees report is rife with scary language (and many other scary charts), the actuaries make one point above all else: Medicare is not sustainable. The program is broken and will not survive without major changes - the earlier the better.


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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013


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