I'm not sure we're closer to middle ground, rather, the ground is clearly shifting.

First, the question was whether we were going to have health care reform at all. President Obama won the election, so that question was put to rest. Next, the question was how quickly we were going to have it. Now it is clear it will happen this year. So then, we began discussing what kind of health care reform we will have, and one of the biggest points of contention was whether we will have a public health insurance option. Today, all signs point to the answer to that question being yes.

• The Finance Committee is discussing multiple options for a public health insurance plan, with only cursory examination given to the option without a public health insurance plan at all.
• Republicans like Olympia Snowe are discussing compromises and signaling that they are open to the idea of a public health insurance option.
• Previously closed Senators like Arlen Specter are also now open to the idea

Clearly, the political ground has shifted.

Health Care for America Now wants a robust public option that competes on a level playing field with private insurance. Mr. Butler thinks this is impossible, but that honestly wouldn't be that much of a change from what we have now. According to a new report we released today, 94% of insurance markets in this country operate under near-monopolies. There is no fair competition right now.

It is very feasible to look within the current health care system to reduce waste and inefficiencies to save money. The areas outlined by Senators Baucus and Grassley are ripe with savings. But we need not stop there. To acquire even more savings and efficiency, we need to look broadly at the science of health care delivery, new care delivery models, and teamwork among health professionals.

We need to create an integrated, coordinated care system that rewards better quality, better safety and better service delivered at a lower cost. The proposal to ensure appropriate payment and reduce geographic variation is a good place to start. But, can we do more? For example, could we find a way to reward providers, and patients, who use an effective, efficient system to manage chronic conditions? Keeping patients who have hypertension, diabetes, and other chronic conditions healthy is much more cost effective than waiting to provide treatment until people are very ill. Yet, much preventive care and chronic condition management is not adequately reimbursed.

We could also develop a reimbursement model that rewards coordinated care among providers, eliminating duplication of appointments, diagnostic tests, and medical errors. And we could look at all types of providers and use each provider's role to its best advantage; for example, Intermountain Healthcare, and other similar integrated practices, have found it is more effective and efficient to use specially-trained nurses to provide ongoing management care to diabetic patients, calling in a physician specialist only when there is a problem. Patients are healthier and more satisfied, and the cost is less.

There is much potential in re-engineering the health care delivery system but we must be ready and willing to change the reimbursement model to reward better outcomes, better safety and better service.

It is good to see the Finance Committee re-opening the discussion about reforming the health tax exclusion as part of overall health reform. While I think an overall replacement of the exclusion with credits would be the right way to go, that would be a heavy political lift. But capping the exclusion based on income and the local actuarial value of a benchmark plan would be a good and achievable step.

Given the choice between revamped regulation of the private market and a public plan, count me with the regulators – notwithstanding Uwe’s caution about the degree of regulation that will be said to be needed. There simply can’t be a level playing field with Congress ultimately responsible for the rules and the public plan. There can be no “wall of separation” between oversight and the plan’s management – just imagine the pressure on Congress to start fiddling with payment rates and premiums. And as many supporters of the public plan option make clear, part of the idea is to use the power of the large federal buyer to force changes onto the private sector. Some level playing field!

President Obama and leading lawmakers are forever telling Americans they want to create a system like Members of Congress have, the FEHBP. I agree. That would mean health exchanges. It would mean a credit subsidy system (the FEHBP subsidy is essentially a 75% premium credit up to a limit). It would be precise but relatively light regulation. It would mean nationwide coverage agreed with a number of national private plans, in addition to more localized plans. And, like the FEHBP, it would mean no public plan.

Since 2001, the cost of family coverage from an employer has climbed by almost 80 percent, while workers’ earnings have risen only 24 percent. At the same time, the private health insurance industry has made enormous profits, and several insurance firms have provided their top executives annual compensation packages exceeding $20 million. Our lopsided health insurance system enables a few to get rich from insurance profits while millions of uninsured families cannot afford to take their children for regular visits to the doctor or dentist. This is unjust and costly.

Creating a public health insurance plan is a key element of health reform that will encourage market competition while yielding substantial near- and long-term benefits to children and our nation. A public plan option should be available nationwide to those who want it and deliver services through private health providers as Medicare does. And those satisfied with their current insurance could keep it.

A public health insurance plan should also be administered in a way that increases efficiencies and minimizes inconsistencies across state lines, unlike the current Children's Health Insurance Program (CHIP), which allows eligibility levels and benefit packages to vary wildly from state to state. If states or regions are given the power to set their own coverage rules under a public health insurance plan, a similar "lottery of geography" for anyone enrolled in such a program could be the end result. We need a strong public health insurance plan that gives Americans a real choice in finding―and keeping―affordable, quality health care and coverage for themselves and their children.

A meaningful public health insurance plan option is a crucial component of any comprehensive strategy to extend affordable coverage to all Americans and lower total national health care expenditures to more sustainable levels. Several of the policy options included in the recent report by Senator Baucus and Senator Grassley show that it is possible to find a reasonable compromise solution that allows for fair competition between public and private plans while safeguarding access, quality, and lower costs. As these proposals continue to develop, it is critical that Congressional leaders keep patients and the public interest at the center of the debate.

Several design options have emerged that allow policymakers to build a “level playing field” that facilitates fair and healthy competition between a new publicly sponsored health insurance plan and private carriers. These include:

1. Requiring a public health insurance plan option to be financially self-sustaining, with premiums set to cover projected medical outlays and administrative overhead. Premiums could be subsidized for low-income individuals, but individuals should have the choice of applying their subsidies to either a private plan or a public health insurance option.
2. Establishing a reserve requirement for the public health insurance plan, as the federal government now does with the Blue Cross/Blue Shield standard option in the Federal Employees Health Benefits Program.
3. Allowing the public health insurance plan to pay providers more than what Medicare pays. The goal should be to establish a process (e.g., review by a Congressional commission similar to MedPAC) that determines a "fair payment rate sufficient for efficient operations").
4. Ensuring that both the public and private plans meet minimum benefit standards for adequate financial protection and access for enrollees.
5. Separating the public agency that offers the health insurance plan from the public or quasi-public entity that sets the rules and runs the national health insurance exchange.
6. Subjecting the public health insurance plan to the same laws and regulations as self-insured private plans (e.g., state income tax regulations) and applying these rules on a uniform basis. In addition, establishing national standards for public reporting, guaranteed issue, and community rating is sound policy.

While ensuring fair competition between private plans and a public health insurance option is an important consideration as the policy debate unfolds, we must not lose sight of the central goals of health reform--covering the uninsured at an affordable federal budget cost and slowing the rise in health care costs. A public plan will serve as a catalyst for change and raise insurance industry standards so that Americans have better access to care. The public health insurance plan option is also a key strategy for needed cost containment initiatives, including innovative payment methods that move away from fee-for-service payment and administrative efficiencies that lower wasteful overhead. The use of purchasing leverage under Medicare, Medicaid, a public health insurance plan, and participating private plans would also help slow the growth in health care costs to more sustainable levels.

With several meaningful compromise proposals offering a middle ground, it is time for private insurers, health care providers, and policymakers to step up to the plate. A level playing field means raising--not lowering--standards. In the end, the issue is not "private" or "public" but access, quality, and affordability.

Sen. Baucus and Sen. Grassley today released a series of policy options for health care reform, and included options for changing the tax exclusion for employer-provided health insurance. These options are viewed as viable money savers to pay for health care reform. Here are their options, from a committee statement this morning. Are any of them politically viable, and what is the best and the worst way to do this?

Here are the remainder of the options that Sens. Baucus and Grassley released today, which include everything from taxing alcoholic to sugar-sweetened beverages:

POLICY OPTIONS FOR FINANCING HEALTH CARE REFORM

Health System Savings – Looking within the current health care system for opportunities to reduce waste and inefficiencies can produce significant savings to finance health care reform. In April, the Finance Committee released policy options that would improve quality and patient care in the health care delivery system, while reducing costs at the same time. The policies that follow here explore further options for reducing costs within the current health care system.

Ensuring Appropriate Payment –Medicare and Medicaid payments often differ significantly from the actual cost of providing health services. The policy options take a number of approaches to correct this inconsistency without hindering the quality of care or patient access by updating payment rates for home health services, which have the highest profit margin in Medicare, to be more reflective of actual costs of providing care; ensuring appropriate payments for Durable Medical Equipment such as oxygen or power wheelchairs; adjusting payments for high-growth, potentially overvalued services such as imaging and minor procedures; reducing “market basket” updates for providers whose payments are higher than actual costs; and increasing and expanding the rebates paid by drug manufacturers to state Medicaid programs.

Capturing Productivity Gains—Today, Medicare payment rate updates don’t account for new technologies and other productivity increases that reduce costs. This results in an exaggerated payment rate that is more than the actual cost of providing medical services. The policy options look at three ways to adjust the annual inflationary increase to account for productivity in Medicare payment rate updates. The first option would reduce the inflationary update by an amount equal to all of the expected productivity gains, the second option would reduce the update by an amount equal to one-half the expected productivity gains, and the third option would reduce the update by an amount equal to one quarter of the expected productivity gains.

Reducing Geographic Variation – Researchers at Dartmouth and elsewhere have found that health care spending varies widely across the United States. Moreover, higher health care spending does not correspond to better quality care of care. The portion of total spending on health care items and services that do not produce better health outcomes is estimated to be as high as 30 percent of Medicare spending. The policy options explore ways to reduce geographic spending variation by reducing Medicare payments in areas where spending is above the national average. Adjustments would be made to reflect differences in input prices and beneficiary health status.

Making Beneficiary Contributions More Predictable—Out-of-pocket costs for Medicare beneficiaries vary significantly by the type of service provided. As a result, Medicare beneficiaries lack consistent incentives to weigh relative costs when choosing among options for treatment. In addition, there is no annual limit on the amount a patient must pay out of his or her own pocket. In order to meet those costs, most Medicare beneficiaries obtain additional coverage to help meet these costs through sources such as Medigap. Studies have found that beneficiaries with supplemental coverage use more services than beneficiaries without it, which drives up health care costs. The policy options look at ways to rationalize that out of pocket cost-sharing so it is more predictable and consistent with proposals to improve the quality of care. One option is to change cost sharing in Medicare to, for example, apply a single deductible and copayments where there is none today. Other options include instituting nominal cost sharing in private Medigap policies, or capping total out-of-pocket cost sharing in Medicare or Medigap, or a combination of these.

Exploring current health care tax expenditures—The policy options explore several options for modifying the current tax treatment of health-related expenses to eliminate inconsistencies and discourage wasteful health care spending.

Exclusion for Employer-Provided Health Insurance--Under current law, employer-provided health insurance is not counted as income for tax purposes and the amount of health care benefits that are counted as tax free is unlimited. This tax-free status encourages employers to offer “Cadillac plans,” or overly generous health care plans that promote the overuse of health care services and drive up health care costs. Moreover, the plans are subsidized by taxpayers as a result of being tax free. The policy options explore five changes to make the exclusion more equitable and efficient. These options include capping the exclusion based on the value of health insurance policy or the income level of the employee eligible for the exclusion. A third option would be to cap the exclusion based on both the value of the health insurance policy and income level. Another option would be to convert the employer-provided health insurance exclusion to an individual tax deduction or credit. The options also consider whether to grandfather in existing plans so that benefits provided under existing collective bargaining agreements are not limited.

Modify Health Savings Accounts (HSAs) – Individuals enrolled in high-deductible health insurance plans can set up Health Savings Accounts (HSAs) to withdraw from for qualified medical expenses without paying taxes. Likewise, contributions made to HSAs by individuals and employers are not considered income for tax purposes and earnings on HSAs accumulate tax free as the balances rollover from year to year. The policy options explore three ways to modify HSAs. The first option would restrict HSA contributions to the lesser of the individual’s deductible or the statutory limit. The second option would increase the penalty for withdrawing from an HSA for non-medical expenses from 10 percent to 20 percent. The third option would require certification from the employer or from an independent third party that HSA withdrawals were made for medical expenses.

Modify or Eliminate Flexible Spending Accounts (FSAs) – Similar to HSAs, FSAs allow individuals and their employers to contribute an unlimited amount of tax free income to a Flexible Spending Account. Employees can withdraw from their FSA to pay out-of-pocket medical expenses besides premiums. But unlike HSAs, FSAs do not roll over from year to year and operate on a “use-it-or-lose-it” principle. The policy options explore limiting the amount that can be contributed to an FSA or eliminating FSAs altogether.

Standardize the Definition of Qualified Medical Expenses-- Under current law there is no standard definition for what qualifies as a medical expense for HSAs, FSAs, or itemized medical expense tax deductions. The policy option would apply a standard definition of qualified medical expenses across the board.

Modify the Itemized Deduction for Medical Expenses--Under current law, a taxpayer that itemizes deductions may take a deduction for medical expenses – including insurance premiums and out of pocket medical costs – in excess of seven and a half percent of adjusted gross income. According to the Congressional Research Service, only six percent of all tax returns take the medical expense deduction. The policy options examine elimination the itemized deduction for medical expenses or raising the seven and a half percent floor for claiming deductions.

Modify the Special Deduction for Non-Profit Blues – Under current law, Blue Cross/Blue Shield and other similar organizations are eligible for a 25 percent tax deduction of total claims and certain expenses each year. These organizations are also exempt from the requirement to reduce deductions for unearned premiums by 20 percent. Blue Cross/Blue Shield has historically received a tax preferred status because it was originally created to provide a more significant community benefit than other insurance companies. However, an overhaul of health related tax policies provides the opportunity to reassess that tax treatment. The policy options look to either reduce the special tax deduction from 25 to 10 percent or eliminate the deduction and unearned premium exclusion altogether.

Modify the FICA Tax Exemption for Students--Current law exempts students employed by a college or university from contributing to FICA through payroll taxes. Teaching hospitals have applied this exception to medical residents receiving stipends. The IRS issued regulations to narrow the definition of school for purpose of the exemption and better describe student employment. The policy option would formally adopt the IRS regulation into law.

Medicare Payroll Tax for State and Local Government Employees – Certain State and local governments do not currently pay taxes Medicare payroll taxes on their employees. The policy option would extend Medicare payroll tax to all State and local government employees.

Modify the Rules Pertaining to Nonprofit Hospitals – Under the policy options, non-profit hospitals would be required to maintain a minimal level of charitable activity, limit charges to uninsured, indigent patients, and limit aggressive collection actions. Hospitals that do not meet those requirements would be subject to an excise tax.

Lifestyle tax proposals – The policy options include two proposals to promote wellness and healthy choices, and curb activities that increase overall health care costs.

Increase Taxes on Alcoholic Beverages – Current law imposes an excise tax on alcoholic beverages, charging $13.50 per proof gallon, which translates to about 21 cents per ounce of alcohol. Because of this measurement, the excise tax treats different types of alcohol differently. Beer is measured by the barrel and the tax rate per barrel is $18 or about 10 cents per ounce of alcohol. The current tax on wine is $1.07 per gallon or about 8 cents per ounce of alcohol. The policies present the option of standardizing the tax on alcohol and increase the excise tax to $16 per proof gallon.

Impose an Excise Tax on Sugar-Sweetened Beverages – Sugar-sweetened beverages contribute to obesity which drives up health care costs within the system. The policy options would expand on what some states have already done by imposing a federal tax on beverages sweetened with sugar, high-fructose corn syrup, or other similar sweeteners. The tax would not apply to artificially sweetened beverages.

Revenue provisions presented in the Obama Administration’s Budget—The Obama Administration proposed a number of revenue raising measures in the President’s Health Care Reform Revenue Fund. In deference to the President, all of the Administration’s proposals are presented in the policy options.

Pushing aside pure ideologues at either extremum of the ideological spectrum, we should ask ourselves what Americans are likely to crave in their health insurance system. I would assume these desiderata:

1. Reliable health insurance that is not lost with the loss of a job;
2. Health insurance premiums independent of their and their family’s health status
3. Health insurance premiums the family can afford at any income level.

In a nutshell, I would surmise that the typical American family craves the same solid protection from the financial inroads of ill health that has long been enjoyed by citizens in other industrialized nations.

As Germany, Switzerland and the Netherlands have demonstrated, it is, indeed, possible to devise a set of strict regulations and public subsidies (or forced cross-subsidies among the insured) that can deliver these three desiderata without a government-run health plan.

What may not be realized by many Americans, however, just how extensive and intrusive the required regulations need to be.

Nor may it be clear to voters how large the public subsidies or cross subsidies will have to be, especially in a nation with as wide an income distribution as ours – along with the UK the widest in the industrialized world.

Finally, what may also not be realized is that Germany and Switzerland operate all-payer systems with fees that are negotiated between associations of providers and of insurance carriers. In these negotiations, the demand side of the sector has considerable market power.

By contrast, in the U.S. every private insurance carrier annually negotiates all fees with every provider of care. It is a highly fragmented system that has begotten a completely impenetrable array of prices and rampant price discrimination in which fees for the same items can vary by more than a factor of three among payers, even within a single state. In these myriad of one-on-one negotiations, the demand side (insurers) is so fragmented as to be weak relative to the supply side. Overall, our private insurance system has ceded a disproportionate degree of market power to the supply side.

If Americans are serious about bending down the trend line of health spending – which I am still not convinced they are – then I am not sure how our currently fragmented, relatively weak demand side will achieve it, regardless of the promises they whisper into the President’s ear at mellow White House Love Ins. I have no doubt that private insurers sincerely would like to be able to bend the curve. I’d like to learn, however, exactly how they would do so with their highly fragmented market structure. In fact, would any private insurer now openly pledge not to raise premiums over the next decade by more than 5% per year?

To my mind, John Sheils is on the mark in arguing that a public plan would be more likely to help bend down the health-care spending trend line in this country, precisely because it would help add market moxy to the demand side of our health system.

And this is precisely why our providers of health care oppose a public plan along, of course, with the health insurance industry, which naturally does not welcome a new competitor with market moxy. Ideology does not drive this preference. It is just perfectly understandable economic interest.

The outcome of the brewing battle over the public health plan has been revealed to me during a recent walk up a nearby mountain. I know it. But I shall not reveal it—not yet.

Cost Containment with a Down-sized Public plan

The public plan is the primary tool for controlling costs for the non-Medicare population under the health reform bills now emerging in Congress. Premiums under a public plan modeled on Medicare would be up to 30 percent less than for comparable private insurance due to the lower provider payment levels under Medicare. However, if the public plan is substantially restricted or eliminated, there is little remaining in these plans that would slow cost growth for the non-Medicare population.

For example, Senator Baucus’ recent reform options papers describe several cost containment initiatives including: investments in health information, delivery system and payment reforms, and the public plan. But only the public plan targets costs for the non-Medicare population, which is the group most at risk for losing coverage due to runaway premium growth.

The proposed investments in health information are designed to reduce costs by automating patient data and developing evidence-based medical (EBM) information on the effectiveness of alternative health procedures. While these initiatives are likely to improve the quality of care, CBO has found that they would do little to control costs in the near term.

The Baucus proposal includes excellent delivery system and payment reforms to promote accountability and reward quality that would be implemented in Medicare and other government health programs. While some private insurers are likely to adopt these approaches once proven effective under Medicare, any cost relief for the non-Medicare population would be substantially downstream.

This leaves the public plan as the only significant force for reducing health care cost growth for the non-Medicare population. With a 30 percent price advantage over private insurance, we estimate that about 70 percent of privately insured people would shift to the public plan. Savings would be enhanced by applying the Medicare payment reforms to those in the public plan as well.

Senator Schumer has proposed a “level playing field” variant that would require the public plan to use negotiated provider payment levels, just as private plans must do. However, savings under this variant would be small despite lower administrative costs under Medicare, because Medicare does not employ the utilization review systems used by private plans to avert unnecessary spending. Also, restricting the plan to individuals and small firms only, as some have proposed, would similarly limit the potential for private sector savings.

New approaches will be needed to replace the public plan as the primary driver of cost control for the non-Medicare population. For example, a cap on the exclusion for employer-sponsored benefits would raise revenues while creating incentives for people to enroll in more cost-efficient plans such as integrated delivery systems. A large increase in taxes on tobacco products and new taxes on high-fat foods would also raise revenues while creating incentives for health lifestyles. We present examples in: http://www.lewin.com/content/publications/Testimony_May_12_2009.pdf.