Having gained the imprimatur of the United States Supreme Court, the Patient Protection and Affordable Care Act, dubbed ObamaCare by its opponents, is here to stay, at least for the moment. Its ultimate impact on business, the economy, and the health-care system is still in the making, but that it will have far-reaching effects is beyond doubt.
Paul Starr, professor of sociology and public affairs at Princeton University is largely comfortable with the law, emphasizing in particular its responsible self-financing.
Economist Elizabeth Bogan, senior lecturer in the department of economics at Princeton University, is comfortable with providing insurance for the uninsured and with the efficiencies the law introduces, but she is very concerned about the costs it adds to the existing mix of services.
The Affordable CareAct and other healthcare issues facing business today are the focus of several symposiums and workshops in the coming weeks, including the Pronceton Chamber of Commerce’s second annual Healthcare Symposium to be held at Mercer County College on Thursday, September 27. See story on page 31.
According to Starr, the impetus for the Affordable Care Act is the breakdown of the existing system for health-care financing, with fewer and fewer people getting health care from their employers. “This law is a way to strengthen that system and help it survive,” he says.
Coverage is declining, he says, because of rising health-care costs, and as a result many new businesses are not offering benefits. “If we did nothing, employer coverage would drop,” says Starr. “There is vast evidence that changes through this legislation will help sustain the employer-based financing system.”
Offering context for the law’s evolution, Starr sets out the constellation of affected parties in the original debate over the legislation. Most health-care groups, he says, supported the legislation, including the American Hospital Association and the American Medical Association. The pharmaceutical and hospital industries negotiated deals with the White House and the Senate Finance Committee that satisfied their concerns about the law.
The insurance industry was divided. Initially the major insurance lobby, America’s Health Insurance Plans, was favorably disposed to the law’s general approach, but insurance companies were sharply divided internally and five commercial insurers ended up opposing the bill, financing big ads against it. Nonprofit insurers, however, supported it by and large. Due to these conflicting views the insurance lobby took no position for or against the legislation.
The employer groups were relatively unconcerned with the upcoming law. “They didn’t see it as a big problem and had other things on their minds,” Starr says. This differed from 1993-’94 when major business groups were very opposed to the Clinton health plan and its employer mandate.
The Affordable Care Act, however, does not require employers to offer health insurance, although it does invoke a penalty on employers of a certain size who do not.
Effective January 1, 2014, employers with 50 or more full-time employees that do not offer coverage and have at least one full-time employee who receives a premium tax credit (a subsidy made available to low-income families to help them purchase health insurance) will be charged a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment.
Employers with more than 200 employees are required to automatically enroll their employees into health insurance plans that they offer. Starr notes that very small firms as well as companies with largely high-income employees will not be affected.
In any case, providing insurance will benefit employers who do. “Why do most companies offer insurance?” asks Starr. “Because it is an attraction to employees; people prefer jobs with health benefits, and this law will strengthen the interest of employers in supplying that benefit.”
Yet there is some concern about the bill’s impact on employers. Conservatives point to surveys of benefit managers who suggest that they will drop health coverage, notes Starr. But the more impartial studies he has seen do not agree with that.
“The evidence from Massachusetts — after Massachusetts instituted very similar reforms that included an individual mandate — is that more employers offered insurance,” he says. In any case, there is no employer mandate, even though there are incentives in the form of tax credits.
Many conservatives also believe the legislation will cause job losses. “Republicans always refer to the Affordable Care Act, or Obamacare, as job killing,” says Starr, “but there is no responsible independent evidence that supports that.”
What the existing health-insurance environment has caused is “job lock,” where people will stay in a job rather than go out on their own and start a new business because the job they have provides health benefits, and if they go out on their own, it would be difficult for them to get affordable health insurance. The new legislation effectively eliminates this “job lock,” says Starr. “It is good for the economy. It is better for people to exchange jobs freely, and it is very good in terms of small business creation. This is the kind of effect that many conservatives are ignoring.”
A vital element of the law is the establishment of health insurance exchanges. Starr cites a working example — the Health Connector in Massachusetts. “It works like buying a ticket for air travel on Expedia,” says Starr. “It makes it much easier and cheaper to buy health insurance.”
Exchanges make it possible for everyone to buy insurance, including people with chronic illness or otherwise difficult medical histories — something that would be either difficult or available only at an exorbitant rate in the existing system.
A point that is “crucial to the whole genius of health insurance exchanges,” but hard to convey is that from the consumer standpoint the rates are the same regardless of health, but the insurers get paid according to the risk of the subscribers they enroll.
Through a system called “risk adjustment,” a fund is created in the exchange and insurers who get relatively healthy subscribers get paid less whereas those who get relatively unhealthy subscribers get paid more. So both the insurers and individuals are protected, says Starr.
Insurance exchanges are not a left wing idea, says Starr. They were championed by the Heritage Foundation, a group sympathetic to Mitt Romney, and before the last few years conservative health-care economists viewed them enthusiastically.
“It is a way to maintain a private insurance system, but get everybody covered,” says Starr. Individuals and small businesses get the advantage of being part of much larger group, that is, everyone in the exchange.
Furthermore, the existing insurance market for individuals and small groups has been very inefficient due to a complex, bureaucratic system of insurance brokers as well as individual insurers who do the underwriting and require each person to have a medical exam.
They then judge each individual applicant, which is very expensive. As a result, 30 cents of every dollar go to administrative costs. Theoretically, Exchanges will streamline this whole process, although there will be some startup costs.
When looking at the costs of the Affordable Care Act to government, Starr says it is critical to distinguish between costs to the government and the overall costs public and private. He quotes estimates by the Congressional Budget Office that this legislation will reduce the deficit by more than $100 billion over the next 10 years.
In Starr’s view, the law is responsibly financed in two different ways.
First, to balance the additional costs of covering the uninsured, the law reduces spending in other areas. “These reductions come through Medicare, but no Medicare benefits have been reduced,” he says.
The Congressional Commission on Medicare found that Medicare payments to private Medicare insurance plans have been excessive, costing the government 12 to 13 percent more than the traditional Medicare program. The Affordable Care Act cuts back these payments, as does the budget prepared Congressman — and GOP vice presidential candiate Paul Ryan. Yet none of these companies has withdrawn from the Medicare market.
Second, the Senate Finance Committee found that hospitals and other medical providers are going to get back billions of dollars from people who used to leave unpaid bills but will now have insurance. But because the purpose of the bill is not to create windfall profits for hospitals from this additional revenue, some of this will be taken back by reducing future increases in Medicare hospital payments. There will also be a fee on medical equipment makers that will “claw back” some of the additional revenue that these companies will be getting as a result of the bill.
“This is all a way of financing health-care reform from within the existing expenditures,” says Starr. “It covers the uninsured but is not providing windfall profits in doing so.”
The clawbacks pay for about half of the additional cost of the law, and the other half will be covered by additional taxes, the most important being an increase of .9 percent in the Medicare taxes for a family making more than $250,000.
“The Affordable Care Act is an example of a fiscally responsible measure; it extends the life of the Medicare trust fund by about eight years,” he says. “The Republicans’ promise to repeal would make Medicare financially weaker, but most seniors do not understand this.”
Starr’s father, who died when Starr was 15, was a pediatrician, and when they lived in Brooklyn, his office was right below Starr’s bedroom. “When I was growing up, there was always a waiting room full of babies and kids that was right in our house,” he says. His mother, who was born in 1907, earned a master’s degree in bacteriology, although her focus was on raising her children.
Starr earned a bachelor of arts in history and sociology at Columbia University in 1970 and has adoctorate in sociology from Harvard University. His 1984 book, “The Social Transformation of American Medicine,” won the 1984 Pulitzer Prize for Nonfiction and Bancroft Prize in American History. He analyzed the historical development of the communication industry in “The Creation of the Media,” and his most recent book, “Remedy and Reaction,” traces the history of healthcare reform.
Sandra Starr, Paul Starr’s first wife, died in 1998. Now married to Ann Baynes Coiro, he has four children and three stepchildren.
Central to the discussion of health-care reform is the fact that in national health expenditures, both public and private, the United States spends vastly more on health care than other countries — in spite of the fact that we have had nearly 50 million people without health insurance. Starr explains, “The difference between the United States and other countries is not that Americans get more health care but that prices are higher. There is huge bureaucratic overhead in the system.”
Another worry people may have given the expected addition of nearly 30 million people to the health-care system is what they will add to the already high costs of health care in this country. Starr estimates that the increase in total health expenses, both public and private, will be on the order of one percent when compared to total consumption of health care. “There’s no reason to fear that this will greatly affect the overall level of use of healthcare services,” he says.
Elizabeth Bogan is less sanguine about the financial impacts of the Affordable Care Act and notes that the savings of $100 billion over 10 years that Starr cites is “nothing” in a budget of way over a trillion dollars.
Her concern is projected total expenditures for Medicare and Medicaid given the current realities plus the Affordable Care Act, as set out in the Congressional Budget Office’s 2010 projections of government spending out to the year 2050. These estimates also include the effects of increases in the elderly population and assume that cost increases over the last couple of decades for a variety of things will continue.
They also include the interest that the government will eventually have to pay on its bonds. The resulting projection is that current promises embedded in Social Security, Medicare, and Medicaid leave the government responsible for 40 percent of gross domestic product.
The problem, suggests Bogan, is that current tax collections are only a little over 18 percent of gross domestic product, and, except in extreme situations, the government has never collected over 21 percent in income taxes.
“Even with high tax rates, people don’t pay them, they avoid them, or they don’t work,” she says. “If you look at the whole period of time since World War II, the amount collected is 18 to 20 percent most years — even in the years after World War II when the tax rates went very high on big incomes.”
The Affordable Care Act itself adds about a trillion dollars in costs over the 10-year horizon and more beyond that, suggests Bogan. “The act appears to be self-financing for the 10 years because new taxes are included in it,” she says. “But the total taxes that the Federal government is projected to collect (which is assumed to be no more than 20 percent of GDP per year) won’t pay for existing Medicare/Medicaid or the extensions.”
The additional taxes specified in the act include: a .9 percent Medicare surtax on wages in excess of $200,000 for single taxpayers and $250,000 for married couples; a 3.8 percent tax on investment income of high earners; annual fees from insurers and drug and medical device companies (adding up to $93 billion over 10 years); limits of $2,500 a year on what employers or employees can contribute to health-care flexible-spending accounts; a new 40 percent excise tax on high-cost health plans (coverage costing $10,200+ for a single employee); and a 10 percent excise tax on tanning parlor services.
“The point is these new taxes in the Affordable Health Care Act were already insufficient to pay for existing projections of Medicare and Medicaid, although the whole bill pretends that we start from everything being OK so we could just add some taxes on the rich and pay for the new bill,” Bogan explains.
Continuing to describe her problems with those who believe the act will be self-sustaining, she expresses grave concerns about the assumption by Starr and others that over the next 10 years part of the act’s costs will be funded by the $700-plus billion in reductions of payments to health-care providers.
“Both the Republicans and the Democrats are lying about this,” says Bogan. “The Republicans say Obamacare takes this out of Medicare. The Democrats that this reduced payment will save the indicated money.”
A provision similar to this one, explains Bogan, was passed a decade ago to reduce Medicare expenses and has been rescinded yearly by Congress “after the medical community scares patients that if they don’t get paid the providers will cut care.”
For her, this history provides clear evidence that Congress will not cut payments to providers. “So it is a farce,” she says, “and the bill alone actually will add to the deficits (about $600 billion over the next 10 years). These taxes are not enough to pay for the existing projections so it is a bit of a joke to say that the bill is self financing.”
Bogan is also worried about the expanding cost of coverage as medicine advances. “Health-care coverage is very expensive because we keep inventing new ways to care for people, find more expensive things to do, and expand what can be done — what we call ‘reasonable medical care,’” she says.
“I am concerned that we have set ourselves up through this program for a continually expanding share of GDP to go to health care — through Medicare, Medicaid, and the requirement that employers cover everybody and, if they are not covered by their job, they can have subsidized coverage for a private premium,” she says.
On the other hand, Bogan accepts that universal care is important. Once you say that anybody can get insurance without a penalty for prior health conditions, she says, the individual mandate to either purchase insurance or pay a penalty is necessary. “Otherwise everybody would wait until they were sick to get insurance — unless their employer covered them or they have Medicare or Medicaid.”
Calling the mandate a “middle-class tax,” she adds, “it is not necessarily bad if you believe it is what we have to do.” Since many people believe in universal coverage, she says, “if we start with that, then what we are doing is a reasonable approach to universal coverage.”
She is somewhat worried about the impact on employers with under 50 employees that get some tax credit for offering health insurance. Some, she says, must pay as much as 35 percent of the cost of coverage. “On a small employer, this is a huge burden,” she says.
But overall, if the subsidies and insurance exchanges outlined in the act work well, she thinks it may not be too expensive a burden on small business.
But she has some concerns that the requirement to buy health insurance at 50 employees may encourage businesses not to grow. She has heard of companies with 45 employees saying they would not go over 50 because then they would have to buy everyone health insurance. “Every time we put more things on business, it tends to mean it is too expensive to hire labor in the U.S., and even small businesses find they can outsource accounting, say, to Bangladesh,” she says. “I think it ultimately hurts economic growth in the United States.”
This tradition of employers providing health insurance has been a voluntary one since World War II. It is the “must cover” that makes Bogan a little nervous. The question for her is what exactly will be included in the mandated policies and what are we saying that people are entitled to?
In this country, suggests Bogan, the prevailing ethos is that everyone deserves the “best” medical care. This is not true in other domains. Not everyone is required to have the most crash-worthy car nor is there a rule that people can’t live in trailers because a storm might destroy them.
Bogan makes the somewhat controversial point that whereas everyone deserves access to good medical care, everyone does not need to have “equal” care. She would like to see a less expensive system where no one is denied care, but not everyone may need immediate access to a medical doctor.
The smart diagnostic systems now being developed, which can be run by technicians, may do just as well for mundane complaints. “There would not be a huge demand for doctors and therefore it would not keep driving their salaries up,” says Bogan, adding that it would not pull down doctors’ salaries either. “If they are doing specialty stuff that requires expertise, they should be paid for it.”
Bogan would like to see a more corporate model in medicine, with doctor as CEO. “I think the model should be doctors at the top, and there should be extensive medical care available for everyone, but not everyone is entitled to see an MD in every situation,” she says. That is, unless they pay for it privately.
The view that everyone deserves the best inspires regulations that may get in the way of providing care efficiently and cost-effectively. “The trouble with political control of a lot of healthcare is that you get regulations that are supposedly protective that are ridiculously expensive,” she says.
For example, when she had to be on crutches and wanted to buy some secondhand, she found out that this was illegal, even though a pair of disinfected, used crutches would have suited her perfectly. “Politicians love to say things like, `If anything happens to you, you deserve the best, only new stuff,” she says.
The best, she concludes, gets in the way of the good — a long-term, viable system of healthcare for everyone.
What is important going forward is to find ways to keep costs in line, and Bogan advises that we both reduce what will be covered and explore ways to reduce the costs of good medical care. If the costs of both Medicare and Medicaid are not reduced, she says, they will be in default within the next 50 years.
Contributing vastly to health-care costs in the United States is end-of-life care, and Bogan faults the Republicans for taking out of the bill support for discussions between patients, families, and their doctors about end-of-life care and instead damning these provisions with the phrase “death panels.” She characterized these provisions as “some discussion at the end of life about what we should do, whether we should do hospice care or continue to do invasive surgery.”
“We as a society are spending billions of dollars on dying people,” she says. Although she agrees that there is room for different perspectives on what constitutes loving care for the dying, she herself leans in the direction of hospice.
In a decade-old economic study, economists compared expenditures per Medicare registered person in Miami and Minneapolis and found that the expenditures in Miami were twice as high as those in Minneapolis. On the face of it, one might wonder whether perhaps Miami simply had a sicker and older population, but a regression analysis holding constant age and diagnosis found that people don’t live longer in Miami than in Minneapolis, despite the extra medical care.
“That means that we’re wasting all the money,” says Bogan. But not only that. “There is plenty of evidence that end of life care reductions in expensive surgery and using hospice instead may increase the quality of life at the end,” she says.
The difference is cultural — the two cities define what is loving end-of-life care in different ways: in Miami it means putting one surgery on top of another, whereas people in Minneapolis tend to use hospice and spend a lot of time with sick relatives.
As a result, Miami doctors perform more invasive procedures, doctors are paid more, and costs are higher, but the results are no different. “If outcomes are no better when we spend twice as much, then we are wasting money — that is the meaning of inefficiency,” says Bogan.
Bogan adds another caveat. Although laypeople and some doctors may believe that tons of surgery extends life for a few months, in reality, some people get infections in hospitals that they would not get otherwise, and sometimes the body of an older person simply cannot take the shock of late-age surgery.
Although certainly there are stories of late-age surgeries that extend life significantly, the statistics tell a different story. “The problem with journalism,” says Bogan, “is that people don’t want to look at the statistics; they want to hear the stories, and you can always twist a story in a thousand ways.”
Sometimes the issue is not hospice versus invasive surgery, but simply whether to fund certain kinds of “treatments” at the end of life. Bogan relates a personal experience when her mother was dying of Alzheimer’s. The nursing home pushed her to have her mother do physical therapy, and Bogan happened to observe the 15-minute session, which consisted of having her mother pick up a balloon to try to improve her balance. The nursing home billed the government $945 for the session.
“Part of the problem of extending the government’s payment of more and more care is that there is no mechanism for an individual to say, ‘This is not worth my doing’ — because someone else pays the bill,” she says. “I am worried that, while this bill is not the horrible thing that many Republicans think about it; at the same time, it doesn’t attack the problem that we are wasting resources on medical care, especially for the very old.”
“I’d rather see preschool education,” she says. “Everything has an opportunity cost; if you’re doing x, you’re not doing y.” One example she raises is paying under Medicaid for people in nursing homes who are often comatose. “We have made some very weird decisions,” she says. “My concern is that those decisions have been pushed by free Medicare, because people don’t think about the true costs.”
In addition to reducing invasive care for the dying, Bogan suggests that we need to revamp payment systems and incentives. A positive aspect of the bill is its creation of a commission to find ways to reduce medical costs and test innovative payment methods.
One is to pay for outcomes instead of inputs. “Now if a doctor runs 30 tests, he gets paid for 30 tests; if the person gets no better, he still gets paid,” she says. Now they are testing ways of paying doctors for health outcomes.
Some language in the bill also allows for experiments with reducing costs. One permits Medicare Advantage to pass on to a patient some savings for accepting generic instead of patented drugs. It turns out that many people were willing to accept the generics, thereby reducing the cost of prescription coverage. “For economists, if you make someone gain by choosing something, they will usually do it,” says Bogan. “My hope is that we can push savings by changing some of the incentives.”
Bogan is not so happy with changes in health savings accounts that she says save money in the short term by increasing taxable income, but may reduce pressure on the system to be more efficient.
Under the 2003 Medicare Prescription Drug, Improvement, and Modernization Act, a health savings account could be as large as the deductible on an insurance policy but not exceed $5,000 for an individual or $10,000 for a family. The Affordable Care Act will reduce allowed contributions to $2,500 a year, increased annually for cost of living.
With a tax-free health savings account, she says, people have a reason to look at the health-care system more carefully. If they did not spend the money, they could roll it over into the future. This change, however, reduces the amount of medical expenditures that a person will evaluate closely.
Bogan also has another nit to pick with the Affordable Care Act’s changes in health savings accounts — the money in them cannot be spent to buy over-the-counter medications. This raises somewhat government monies, but there is a big negative side. People who could buy nose drops over the counter, for example, will often get a prescription for something that is insignificantly different because it will be covered.
As a result, they end up using medical services and $300 worth of a doctor’s time to get a nose spray that will save them $10 or $20. “These are little things, but they are all part of the problem,” says Bogan. “If there are things a third party has paid, you will use it, even if it costs a lot. Since prescriptions are covered but over the counter is not, there is a huge incentive to go to the doctor. If OTC was covered, it would cost less and you would use it.”
As for the insurance exchanges mandated by the act, Bogan thinks they are a good idea and is sorry that some states are resisting them. “I think that this is a genuine attempt at bi-partisanship by the Democrats,” she says. “They are looking for a way to make markets be the way that lovers of markets think they should be — to make for a more efficient system and reduce the cost of insurance by having competition created in state markets.”
Bogan would also like the government to grant any insurance company that gets a license to sell in one state a license to sell in every state. “I think it would reduce the cost of insurance, because it would add more competition,” she says.
She thinks this would also help address the problem of states that do not have enough insurance companies. Noting that many people fear this would mean a less regulated market and would create a “race to the bottom” attitude, she responds, “That depends on how much you distrust markets. I think everyone should have a little distrust, but I think that many times having many buyers and many sellers is a way for something to be delivered at its cost, including some profit.”
Another way to reduce costs is to increase efficiency. “Pressure must be put into the system for cost controls,” she says. “People (doctors and patients) have to be made more cost conscious and cheaper ways of delivering care with smart computer systems and lower level personnel need to happen. “
Bogan’s push toward lower costs with greater efficiency should raise health outcomes. She writes, “Better electronics will reduce hospital deaths from medication errors. Bundling care and letting lower level people reach out to the chronically ill more frequently by phone and E-mail will encourage people to take their medications and thus not end up with much more expensive care later, etc.”
Bogan grew up in Basking Ridge. Her father was a research scientist for Bell Telephone Laboratories and in the 1950s was the co-inventor of the Bell solar battery. Her mother was a commercial artist in New York during the Depression and painted indoor golf scenes on the walls of putting parlors in the 1930s. Later she stayed at home with her children.
While in a great books course in high school, Bogan read Adam Smith’s “The Wealth of Nations” and was fascinated by it. With siblings who were liberal arts types, Bogan, as winner of the mathematics prize at her high school, was her dad’s “son” — the scientist who loved physics and math and ultimately economics. In 1966 she graduated from Wellesley College with a degree in mathematics and economics.
Marrying after her junior year, she followed her husband, who graduated from MIT, got an MBA from Wharton, and then joined the Navy as a commissioned officer and went to New Hampshire where he was involved in building submarines. Bogan earned a master’s degree in quantitative economics at the University of New Hampshire. When the family moved to New York City, she was accepted at Columbia University to do a doctorate in economics, where she explored the economic conditions that cause a company to cancel its plans for expansion.
Bogan was treated well at Columbia, although during her tenure the school was not so accustomed to women in the economics department. But one incident belied her total acceptance. As she was preparing to deliver a preliminary talk on her dissertation, she picked up her handouts in the department office. Because her topic had been listed with only her last name, professors had no idea she was a woman; one man, therefore, walked into the office and asked her to get him a cup of coffee. Thirty minutes later when he walked into the room where she was to speak, “he was gentleman enough that he blushed from ear to ear when he realized that I was giving the seminar.”
After receiving her doctorate, Bogan was pregnant and was planning to take a couple years off, but her thesis advisor urged her to interview at a New Jersey school close to her home in Short Hills. She got her first position at Fairleigh-Dickinson University, where she became a full professor and eventually chair of the economics and finance department all while raising her two sons.
But after 20 years at Fairleigh-Dickinson, she was able to move to her dream job at Princeton University, with the help of a little push from her older son, Nathaniel. Determined to go to MIT, he came to her with his acceptance letter from Princeton, and said to her, “Mom, you’re the one who always wanted to go to Princeton; I want to go to MIT.”
So Bogan wrote to Allen Blinder to see if she could teach at Princeton for a semester while she was on sabbatical. He invited her to teach the introduction to microeconomics in the fall of 1990. The students in the class then petitioned the department and the university to find a way to keep her permanently. At the same time, Princeton had been thinking about creating a new senior lecturer position for people who taught well but did not necessarily publish a lot. Two years later, she was teaching in this position at Princeton.
Her son Nathaniel does technical mathematical programming for Cognex in Native, Massachusetts. Her son Andrew, who did go to Princeton and earned a doctorate at the University of California, San Francisco, in biophysics, followed his father into money management, and the two of them run the Bogan Science Fund and the Bogan Infrastructure Fund.
“I am concerned that unless we do things to reduce the cost of medical services and reduce the demand for end-of-life services, we are on a complete collision course,” says Bogan. “It can’t be done; we can’t spend 40 percent of GDP and only tax 20 percent.” She even suggests that a 20 percent value added tax that, although regressive, would fund the difference in a way that income tax will not be able to.
“We’ve got to change productivity or this Obamacare is not going to work; it is too expensive,” she concludes.