Healthcare Reform: An Overview of Key Concepts

This article describes the overriding goals and concepts discussed in the healthcare reform plans currently under consideration by the Congress. Specifically, the article discusses the concept of a public option as part of healthcare reform, the concept of providing universal coverage and the issue of how to pay for healthcare reform. The article also touches on several other key issues.

1. Overriding goal. Three of the core concepts related to healthcare reform are cost containment, universal access and high quality. There is a common belief that two of the three goals can be readily achieved. For example, one can provide full access and lower cost but not achieve high quality. In contrast, a system can provide high quality and cost containment but not provide full access. However, it is difficult to achieve all three elements. Pres. Obama has stated that his two basic requirements for a healthcare bill are that the bill expand insurance coverage and make medical care more affordable. In essence, access and cost containment as opposed to quality are his two key goals.

Three core healthcare reform plans are currently being debated in Congress. A House of Representatives plan, a Senate Finance Committee plan and a Senate Health Education, Labor and Pension plan.

The means of paying for healthcare reform include certain easily achievable savings from efforts such as attacking fraud and abuse, reducing waste and adding information technology. These concepts tend to be politically appealing but do not cover the costs of significant healthcare reform.

Other ways to achieve savings that could help fund healthcare reform include rationing care, lowering reimbursement to providers and/or increasing taxes. Each of these approaches is, politically, much more challenging.

2. A public plan. There are three core models for a public plan. First, there is the type of public plan included in the healthcare reform proposal currently under consideration by the House of Representatives. This uses Medicare infrastructure and pays providers Medicare plus 5 percent to providers.

A second core plan is a weaker public program that acts like an insurer but cannot access Medicare rates. In essence, it uses some of the existing Medicare infrastructure but must negotiate provider rates independently.

A third public plan, called a "trigger plan," only commences if certain criteria are met.

The view of providers and payors toward introducing a public plan is generally very negative. Payors tend to view the public plan as providing significant competition for enrollees. The typical premiums that would be part of the public plan are estimated to be $100-$200 a month less for a family or individual than comparable commercial plan premiums.

For example, the Lewin Group estimates that a family on a public plan would pay $738 a month versus $917 a month on average. This lower cost option means that when a public plan is fully integrated into the system, one would see a significant number of beneficiaries migrate away from commercial plans and into the new public plan. The Lewin Group estimates that 122 million Americans would, in year three of the public option, migrate to a pubic plan from commercial plans. This type of migration, coupled with lower rates paid to providers, would lead to substantial drops in income for hospitals, physicians and other providers. The Lewin Group estimates that this type of migration together with the "Medicare plus 5 percent" fee schedule will lead to a drop in hospital income of approximately $31 billion by the third year of the public plan and a drop in physician income of approximately $16,200 per physician, totaling approximately $11.5 billion for all physicians collectively. In light of these predictions, it comes as no surprise that physicians and hospitals overall have great concern regarding the adoption of a significant public plan.

The House Plan and the Senate HELP Plan each include very substantial public options. The Senate Finance Committee, led by Sen. Max Baucus (D), has resisted calls by many Democrats to include in its reform proposal a government-run insurance plan that would compete with private payors.

Four perspectives on a public plan are as follows. These provide some insight into the differing views toward the introduction of a public plan.

a. Karl Rove (Against) reports that "[t]he Lewin Group estimates 70% of people with private insurance — 120 million Americans — will quickly lose what they now get from private companies and be forced onto the government-run tools as businesses decide it is more cost-effective for them to drop coverage." (Karl Rove, How to Stop Socialized Health Care, Wall Street Journal, (June 11, 2009)

b. Robert Reich (For) "…The public option has become such a lightening rod. The American Medical Association is dead-set against it, Big Pharma rejects it out of hand, and the biggest insurance companies won't consider it. No other issue in the current health-care debate is as fiercely opposed by the medical establishment and their lobbies now swarming over Capital Hill.

"Of course, they don't want it. A public option would squeeze their profits and force them to undertake major reforms. That's the whole point. Critics say the public option is really a Trojan horse for a government takeover of all health insurance. But nothing could be further from the truth. It's an option. No one has to choose it. Individuals and families will merely be invited to compare costs and outcomes. Presumably they will choose the public plan only if it offers them and their families the best deal — more and better health care for less. Private insurers say a public option would have an unfair advantage in achieving this goal. Being the one public plan, it will have large economies of scale that will enable it to negotiate more favorable terms with the pharmaceutical companies and other providers. But why, exactly, is this unfair? Isn't the whole point of cost containment to provide the public with health care on more favorable terms? If the public plan negotiates better terms – thereby demonstrating that drug companies and other providers can meet them — private plans could seek similar deals.

"But, say the critics, the public plan starts off with an unfair advantage because it's likely to have lower administrative costs. That may be true – Medicare's administrative costs per enrollee are a small fraction of typical private insurance costs – but here again, why exactly is this unfair? Isn't one of the goals of healthcare costs containment to lower administrative costs? If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine." (Why We Need a Public Health-Care Plan, Wall Street Journal, June 24, 2009)

c. The Commonwealth Fund (For) recently published a study in which it compared estimated impacts of a public plan with (1) reimbursement at Medicare levels, (2) a public plan with reimbursement between Medicare and private levels and (3) a purely private system.

Estimates indicate that premiums for the public plan choice in the Public Plan with Medicare Payment Rates path would initially be 25 percent below those currently available for a comparable benefit package in the private individual/small firm market and 16 percent lower under the Public Plan with Intermediate Payment Rates scenario.

Private plan premiums would initially be 3 percent lower within the exchange as it facilitates the process of choosing plans and reduces administrative costs, especially for individuals and small businesses. (Karen David, Cathy Schoen, and Stuart Guterman, Fork in the Road: Alternative Paths to a High Performance U.S. Health System, The Commonwealth Fund, June 2009)

d. David Burda, editor of Modern Healthcare (Against) commented as follows:

i.    With Medicare and Medicaid patients representing more than half all hospital business, how did hospitals do it? [Record profits in 2007] We'll let MedPAC explain. In its March report, MedPAC said that starting in 2000, hospitals had "regained the upper hand in price negotiations (with private insurers) because of hospital consolidations and consumer backlash against managed care." Consequently, the rates paid by private insurers to hospitals rose so much that by 2007, private payers were reimbursing hospitals on average more than $1.32 on the dollar, according to MedPAC. Or, hospitals' profit margin on patients covered by private insurance was 32%.

ii.    If you're still not convinced it would be a financial disaster, consider this: The new public insurance program would compete with private insurer plans by charging less for health benefits. If the public plan is taking in less revenue per enrollee, it certainly is not going to pay out more per enrollee for care. The new plan would be an even worse payer than Medicare or Medicaid. Then, where would providers turn to charge more to cover the shortfalls? To the fewer private plans whose ranks were thinned by competition from the new public health insurance program? Good luck with that, as they would be far less generous as they fight for survival against the new government program. (Public Enemy Number 1 –– A New Public Insurance Program Likely Will Shortchange Providers, June 29, 2009)

3. Covering the uninsured. Most people generally agree with the concept of covering the uninsured as a goal. In fact, this was the core goal of the Massachusetts plan which assures coverage to essentially all people in Massachusetts.

There are generally considered to be three large groups of the uninsured. These include people that are Medicaid eligible but not properly enrolled in Medicaid, people that are the working poor (in essence, people who if they bought healthcare insurance would use up such a substantial percentage of their income that they would be not able to afford other necessities) and, third, people that choose not to buy coverage but aren't Medicaid eligible or working poor. This last group includes people who are eligible but for whom insurance may be very expensive or they cannot obtain insurance (for example, they may have pre-existing conditions that preclude them from obtaining insurance) and people who choose not to buy insurance.

The Massachusetts plan provided individual and employer mandates. For individuals, it required people to buy health insurance. The Massachusetts plan also included efforts to help sign up the Medicaid eligible and provided significant subsidies for the working poor to buy insurance. The great problem with the Massachusetts plan to date is that it is far more expensive than previously anticipated.

A federal plan for covering the uninsured is likely to include certain types of mandates for individuals to buy insurance and for businesses to offer insurance. The mandates for individuals would include subsidies to the working poor (i.e., for people with low incomes up to approximately 300-400 percent of the federal poverty level), as well as a standardizing of Medicaid eligibility (e.g., 115 percent of the federal poverty level) so nationally there is one level of eligibility for Medicaid coverage. There will also be rules that prevent payors from denying coverage based on pre-existing conditions.

The federal plan will also include employer mandates. These may require employers above a certain size to provide coverage to their employees (i.e., at least at a low level of basic benefits, and pay for at least half of those costs for full-time employees).

The general business community's thoughts on mandatory coverage for employers is quite negative. That stated, Wal-Mart has come out in favor of a mandatory coverage concept:

Wal-Mart breaks with business and fosters mandate
"Wal-Mart Backs Drive to Make Companies Pay for Health Coverage" (Wall Street Journal, July 1, 2009, Janet Adamy and Ann Zimmerman). "We are for an employer mandate which is fair and broad in its coverage," said the letter, signed by Wal-Mart Chief Executive Mike Duke. Andrew Stern, president of the Service Employees International Union, also signed the letter, along with John Podesta, who led Pres. Obama's transition team and is chief executive of the Center for American Progress, a liberal-leaning think tank.

The National Retail Federation, the industry's main lobby, said it was "flabbergasted" by Wal-Mart's move. "We have been one of the foremost opponents to employer mandate," said Neil Trautwein, vice president with the Washington-based trade group. "We are surprised and disappointed by Wal-Mart's choice to embrace an employer mandate in exchange for a promise of cost savings."

"Mr. Trautwein said an employer mandate is 'the single most destructive thing you could do to the health-care system shy of a single-payor system,' under which the government handles healthcare administration … The group believes forcing companies to provide insurance will raise costs for its members.

"Under the plans being discussed in Congress, small businesses would either be exempt from the mandate or face a less-onerous requirement. The U.S. Chamber of Commerce said most of its members oppose an employer mandate, and it doesn't think Wal-Mart's stance will change that. "The kind that the groups in this letter support is the worst incarnation, the most dangerous policy," said James Gelfand, senior manager of health policy for the group, which represents three million businesses."

4. Paying for healthcare reform.
There are several different possible ways of paying for healthcare reform. These include reductions in reimbursement (e.g., the pharmacy industry has pledged $55 billion in reductions, the hospital industry has pledged $155 billion in reductions and certain other reductions have also been discussed). The other substantial methods that are being looked at to pay for healthcare reform include taxing healthcare benefits (these are not currently taxed) or taxing healthcare benefits above a certain amount. The Democrats generally oppose taxing healthcare benefits. Sen. Baucus of the Senate Finance Committee has indicated an interest in taxing healthcare benefits above a certain amount. In essence, if someone receives more than $17,000 a year or $25,000 a year in healthcare benefits, they would be taxed on benefits in excess of such amount.

Sen. Barbara Boxer (D), in contrast, has opposed the concept of taxing healthcare benefits.

"Working people in many cases have given up raises in pay and instead have gotten health benefits," said Senator Barbara Boxer, Democrat of California, who is up for re-election next year. "So it seems unfair to now tax their benefits. I think that would be changing the rules in the middle of the game in a way that is so harmful and would set them back, so I have a real problem with that." (Democrats Divide Over a Proposal to Tax Health Benefits, New York Times, July 8, 2009)

The other core method for paying for healthcare benefits is an increased tax rate for high earners. This is an integral part of the House and Senate HELP Plan for paying for healthcare reform.

5. Other key issues. Certain of the other key issues that are part of healthcare reform include 1) the concept that an insurer cannot bar people with pre-existing conditions from coverage, and limiting insurers' ability to rate individuals and charge premiums based on differences in health conditions; (2) small group market reform essentially making it much easier for small business groups to obtain coverage; (3) a Web site portal that would provide a uniform place where individuals and businesses can compare benefits and costs of coverage from insurance companies (and exchange); (4) benefit rules and concepts providing minimum benefits and standardizing packages to be broken down into categories by lowest level, low, medium and high (in essence, standardizing benefits packages such that it is easier for people to shop for insurance); (5) subsidies to buy insurance or provide coverage for businesses or individuals; (6) standardizing Medicaid eligibility rules nationwide based on percentage of income; (7) creating a Medicare coverage option for people that are less than 65 years but older than 55 years; (8) possible incentives for preventative and healthy lifestyle; and (9) employee and employer mandates for full-time employees that require employers to buy at least the low option of coverage and cover at least 50 percent of the cost.

This provides a summary of some of key issues being debated as part of healthcare reform. Should you have additional questions or wish to discuss this further, please contact Scott Becker at (312) 750-6016 or

Mr. Becker and Ms. Mikula are attorneys with McGuireWoods.

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