Context and discussion regarding the problems, implications and solutions to health care reform with a contrarian point twist. Includes discussion of The Patient Protection and Affordable Care Act, economic data, insurance data, H.R. 3590, H.R. 4872, a history of health reform. Finally, the presentation outlines the implications for business, physicians and the health care system.

1. THE ECONOMICS OF HEALTH REFORM:
IMPLICATIONS FOR HEALTH PROFESSIONALS
Don McDaniel
April 27, 2010

2. AGENDA
» A Context for our Discussion
» The Seemingly Intractable Problems
» A Deeper Dive
» Implications
» One Contrarian’s View
2

3. THE PATIENT PROTECTION AND AFFORDABLE
CARE ACT
» Expanded Coverage
» Individual Mandate
» Employer Requirements
» Insurance Market Reforms
» Subsidies and Penalties
» Health Exchanges
3

4. HEALTHCARE: THE ECONOMIC ENGINE
1. United States $14.3 T
2. Japan $ 4.8 T
3. China $ 4.2 T GDP 2008 (USD)
4. Germany $ 3.8 T
5. France $ 2.9 T
6. UK $ 2.8 T
7. US health economy $ 2.4 T
8. Italy $ 2.4 T
4
Sources: International Monetary Fund and Centers for Medicare and Medicaid.

5. NATIONAL HEALTH EXPENDITURES PER CAPITA,
1980–2007
5
Data: OECD Health Data 2009 (June 2009).

6. INSURANCE TAKE-UP 1990 - 2007
1990 2006 2007
73.2%
Pr i va te 67.9%
67.5%
13.0%
M edi ca r e 13.6%
13.8%
9.7%
M edi ca i d 12.9%
13.2%
4.0%
Oth er
3.6%
G over nm ent
3.7%
13.9%
U ni ns ur ed 15.8%
15.3%
0% 10% 20% 30% 40% 50% 60% 70% 80%
6
Source: US Census Bureau, Current Population Survey, 2008 Annual and Social Economic Supplement. Data
released March 2008.
Table HI05. Health Insurance Coverage Status and Type of Coverage by State and Age for All People: 2007.
Link: http://pubdb3.census.gov/macro/032008/health/h05_000.htm.

7. Intractable Problems
7

8. PROBLEM #1
HEALTH EXPENDITURES AS A PERCENTAGE OF GDP
* 2009 – 2018 Projected
8
Source: Centers for Medicare and Medicaid Services

9. PROBLEM #2
AVERAGE PERCENTAGE INCREASE IN HEALTH INSURANCE
PREMIUMS COMPARED TO OTHER INDICATORS, 1988 -2007
20%
18% Health Insurance Premiums Workers' Earnings Overall Inflation
16%
14%
12%
10%
8%
6%
4%
2% 3.7%
0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
9

10. PROBLEM #3
GROWTH IN MEDICARE SPENDING VS.
PRIVATE HEALTH INSURANCE SPENDING
Medicare Private Health Insurance
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
10
Source: American Hospital Association via the Centers for Medicare & Medicaid
Services, Office of the Actuary. Data Released January 8, 2008

11. AGGREGATE HOSPITAL PAYMENT-TO-COST RATIOS
FOR PRIVATE PAYERS, MEDICARE, AND MEDICAID
11
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2008, for
community hospitals.
(1) Includes Medicaid Disproportionate Share payments

12. HOSPITAL PAYMENT SHORTFALL RELATIVE TO COSTS FOR
MEDICARE, MEDICAID, AND OTHER GOVERNMENT
Medicare
Medicaid
Other Government
12
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2008, for
community hospitals.
(1) Costs reflect a cap of 1.0 on the cost-to-charge ratio.

13. A BEACON OF LIGHT, BUT…
13

14. PROBLEM #4: ENOUGH
PHYSICIANS?
14

15. NATIONAL SUPPLY & DEMAND PROJECTIONS FOR FTE RNS
15
Source: National Center For Health Workforce Analysis, Bureau of Health Professions, Health
Resources and Services Administration. (2004). What Is Behind HRSA’s Projected Supply, Demand, and
Shortage of Registered Nurses? Link: ftp://ftp.hrsa.gov/bhpr/workforce/behindshortage.pdf.

16. PROBLEM # 5
THE DEMOGRAPHIC TSUNAMI
» One-quarter of all Medicare recipients
» Have five or more chronic conditions
» See, on average, 13 physicians per year
» Secure 50 prescriptions per year
» Over 13,000 different drugs being sold in the U.S. in
2007 – 16x what was available 50 years ago
» Over 900,000 physicians in the U.S. – 75% are in
practices of less than 8 physicians
» Payment system issues – hard to support a “system” of
care
16

17. PROBLEM #6
NUMBER OF FULL-TIME AND PART-TIME HOSPITAL
EMPLOYEES
17
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2008, for
community hospitals.

18. PROBLEM #7
ARRESTED DEVELOPMENT: CONSUMER SOVEREIGNTY
2008 What do things really cost?
Out-of-Pocket
12%
Other
» We don’t demand price
13%
transparency
Other
Private
7% » We don’t demand better
Medicaid(
excluding S-
Private
information to inform our
CHIP)
15%
Insurance
33% purchase decisions
Medicare
» Consumer demand should
20%
drive supply-side reform
18
Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group

19. “WE SPEND SO MUCH BECAUSE WE SPEND
SO LITTLE…”
18.00% 60.00%
16.00%
Percentage of Out-of-Pocket Expenditures
50.00%
14.00%
NHE as Percentage of GDP
40.00%
12.00%
30.00%
10.00%
8.00%
20.00%
6.00%
10.00%
4.00%
0.00%
2.00%
0.00% -10.00%
19

20. HEALTH REFORM 2010
H.R. 3590 THE PATIENT PROTECTION AND AFFORDABLE CARE
ACT
H.R. 4872 THE HEALTH CARE AND EDUCATION TAX CREDIT
RECONCILIATION ACT OF 2010
20

21. BIG THEMES
» Coverage expansion to 32 million people by 2019
» Expands Medicaid to 133% of FPL ~ 16 million new
enrollees in Medicaid and SCHIP
» Eliminates coverage denials due to pre-existing
conditions
» Closes Part D “doughnut hole” for seniors
» Increases Medicaid payments to PCPs
21

22. HEALTH REFORM - CHRONOLOGY
2010
» Insurance reforms
» Eliminates lifetime limits
» Small business tax credit – sliding scale tax credit for
businesses with < 25 employees
» Age 26 – can stay on parents policy
22

23. HEALTH REFORM - CHRONOLOGY
2011
» W-2 reporting – health benefits
» Brand-name drug tax ~ $33B in new fees
» OTC drugs not eligible for reimbursement from
FSA/HAS/HRA
» Federally-subsidized long-term care program –
employers can participate through payroll deductions
23

24. HEALTH REFORM - CHRONOLOGY
2012
» Medicare Advantage – reduction in payments
2013
» New FSA limits
» Medical device 2.3% excise tax
» Medicare payroll tax base increase
» Medicare investment tax – 3.8%
» Medicaid reimbursements to increase to 100% of
Medicare
24

25. HEALTH REFORM - CHRONOLOGY
2014
» Medicaid eligibility expansion – up to 133% of FPL
» Premium credit subsidies – up to 400% of FPL
» Insurance Exchanges come online – “qualified” plans for individuals
and small businesses
» Individual mandate – “carry or penalty” - $695/year to $2,085 or 2.5%
of household income
» Employer requirements - >50 employees have to provide insurance
or incur penalty – up to $2,000/$3,000 per employee
» Federal health insurance premium tax – will raise almost $70 Billion
through 2019 - passed on through premiums
» DSH cuts
» Pre-x and annual limits prohibited
25

26. HEALTH REFORM - CHRONOLOGY
2015
» Creates Independent Medicare Payment Advisory
Board – reductions in Medicare spending?
2018
» Cadillac Tax – 40% excise tax above:
» $10,200 single/$27,500 family
26

27. HOW TO PAY FOR IT?
» Cuts to Medicare spending by as much as $575 Billion
» Parts A and B and future market basket: $233 Billion
» Elimination of Medicare Improvement Fund: $27 Billion
» Medicare Advantage: $145 Billion
» DSH payments: $50 Billion
» Freeze income threshold for Part B: $8 Billion
» Independent Payment Advisory Board: $24 Billion
» Increase in HI payroll tax: $63 Billion
Source: CMS Office of the Actuary

28. HOW TO PAY FOR IT?
» Projected funding sources for health reform – 10 years:
» Individual penalties - $17B
» Employer penalties - $52B
» New Taxes/Assessments on Industry - $107B
» Cadillac Tax on High Premiums - $32B
Source: Congressional Budget Office

29. IN THE CROSSHAIRS
» Consumer directed plans with HSAs
» 8 million Americans currently participating
» Medicare Advantage plans
» 10.2 million (22% of total Medicare book) currently
participating
» 40% of African-Americans and 54% of Latino seniors
participate in MA – mimics Medigap without the added
cost
29

30. BELLWETHER?
THE MASSACHUSETTS EXPERIENCE
30

31. MASSACHUSETTS REFORM PLATFORM
» Individual Mandate
» Employer Mandate
» All employers with 10 or more employees. $295 fine per
employee if insurance is not offered
» Middle-Class Subsidies
» Commonwealth Care for all families with income up to
300% of the federal poverty level
» The Connector
» Acts as an exchange for individuals and small business
» Very familiar to National legislation!
31

32. ACCESS TO CARE
» Health insurance does not guarantee access to care!
» An additional 400,000 people are attempting to access the
same number of physicians
» Wait time went from 33 days to ~ 50 days
» 75% of non-urgent ED visits are due to physician shortages
32

33. WAIT TIME ACROSS THE US - 2007
City % of Population Number of Average wait to see
Uninsured Physicians per a specialist
1,000 people
Boston, Mass 9.4% 4.53 49.6
Philadelphia, PA 11.3% 3.32 27.0
Los Angeles, CA 20.5% 2.60 24.2
Houston, TX 27.1% 2.15 23.4
Minneapolis, MN 9.6% 2.81 19.8
New York, NY 15.2% 4.00 19.2
Denver, CO 18.4% 2.65 15.4
Miami, FL 24.2% 2.53 15.4
Seattle, WA 13.6% 2.62 14.2
33
Source: National Center for Policy Analysis

34. MASSHEALTH: MASSCOST?
» State spending on healthcare has increased by 45%
($595 million) since 2006
» Commonwealth Care was estimated at $725 million
annually: 2010 projection is at $880 million
» Health insurance premiums are growing at a rate of 8-
10% a year, nearly twice the national average.
34

35. IMPLICATIONS
35

36. IMPACT ON PHYSICIANS
» Medicaid Coverage Expansion
» Dramatic cuts to Medicare- $575 Billion
» Reimbursement challenges for private insurers
» Ban on physician-owned hospitals
Source: CMS Office of the Actuary

37. IMPACT ON BUSINESS
» Small business already gets the shaft!
» Highly regulated markets
» Very concentrated insurance markets
» Highest growth in premium YOY
» Higher cost per benefit – most cost-shifted market
» New mandates, new taxes and expansion of entitlement
programs – all good for business?
» Industry taxes on medical devices, pharmaceuticals and
health insurers will likely be passed on
37

38. IMPACT ON BUSINESS
» Incentives point to “Pay vs. Play” for
employers, especially small employers
» Signals seem to favor push of new insured's to public
programs or State Health Exchanges
» PWC study states 10-year premium growth in
commercial premiums will be 40% higher than without
reform legislation*
» Where’s the innovation in plan design, benefits and
financing?
38
*Source: PWC, “Potential Impact of Health Reform on the Cost of Private Health
Insurance Coverage”, 10/09

39. ONE SCENARIO –
HEALTH CARE DEATH SPIRAL
» Medicare in crisis fueled by cuts to fund reform
» Public payors further reduce reimbursement
» Private insurance market “crowd-out” – public programs a bigger “slice” of providers
business
» Private insurance reforms hamper effective pricing/down-ward pressure on reimbursement
» Untold pressure on “physician entrepreneur” - further widening of physician shortage
(especially PCPs)
» Extreme costs and workforce pressures compel explicit rationing of health services
» No “innovation” premium
» Migration of entrepreneurs and capital to other industries
39

40. OH, BY THE WAY…
» Projects Health Reform will increase National Health
Expenditure by $311 billion by 2019
» $77 billion more than the estimate by the Congressional
Budget Office in December 2009
» Expanded coverage will lead to greater utilization of services
coupled with lower federal payments to providers
» 50% of Medicare advantage enrollees
» Also predicts that 15% of hospitals could be driven into the
red
Source: CMS Office of the Actuary

41. “LOW HANGING FRUIT”
1. Fuel growth in CDHC vehicles (HSAs)
2. Equalize tax laws with respect to employer-
sponsored vs. individual market health insurance
3. Allow interstate commerce for health insurance
4. Repeal all coverage mandates
5. Enact substantive tort reform
41

42. THANKS
Don McDaniel
dmcdaniel@sage-growth.com
http://twitter.com/don_mcdaniel
http://www.linkedin.com/in/rdmcdaniel
(o)410.534.1161
(m)443.904.2882
42