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Health Care Financing Reform: (42) The House Bill's Public Option – Negotiated Rates or the "5% Solution"

by Professor Will Huhn on October 21, 2009

in Health Care,Wilson Huhn

     Brian Beuter of Talking Points Memo reported last night that after receiving an encouraging preliminary report from the Congressional Budget Office, House Speaker Nancy Pelosi is moving ahead on H.R. 3200, the "America's Affodable Health Choices Act."  This post contains information about the House bill.

     On October 14 three committees of the House of Representatives reported out an amended versions of H.R. 3200, called "America's Affordable Health Choices Act."  Here is a link to the full text of the bill as adopted by the House Ways and Means Committee on July 14; here is a very brief summary of the bill from the Congressional Research Service; and here is more detailed summary, dated July 14, 2009, from the House Ways and Means Committee. 

     The House bill in its current form contains a number of provisions similar to the bill adopted by the Senate Finance Committee: it establishes an "exchange," a marketplace for people to purchase health insurance; prohibits exclusions for preexisting conditions; requires individuals to purchase health insurance; subsidizes low-income people to purchase insurance; prohibits co-pays or deductibles for preventive care; and limits to total amount of all co-pays and deductibles within a particular year. 

     The bills also differ in a number of respects.  The House bill would open up the exchange to all individuals and all employers – the Senate bill is far more restrictive.  To pay for the subsidies the House bill would raise income taxes on high income persons, while the Senate bill would impose an excise tax on high-end health insurance plans, which would largely affect the same persons as the House bill.  But the key difference between the House bill and Senator Baucus' bill is that the House bill contains a "public option," a health insurance plan that would be operated by the federal government through the Department of Health and Human Services.  This program, which H.R. 3200 calls the "Public Health Insurance Option,"  is provided for in Sections 221-226 of H.R. 3200, which are set forth at the end of this post.  The bill would allow any person to purchase "public health insurance" – essentially, it would be the same as allowing people to purchase Medicare coverage.  The premium rate would be set according to the cost of the program – that is, the government would not be subsidizing the cost of public health insurance – people would have to pay for insurance coverage at cost.  (Here is article from the AP posted by USA Today about the differences between the House and Senate health care reform bills.)

     According to Reuters the three versions of the House bill differ in one key respect – how reimbursement rates for doctors and hospitals would be set under the public option.  On version of the bill (the one summarized below) simply sets reimbursement rates at the Medicare rate plus 5%.  The two other versions of the bill would require the government to negotiate rates with doctors and hospitals.  Speaker Pelosi is deciding which of those versions to send to the House floor.  It would undoubtedly be less expensive to peg reimbursement rates to the Medicare standard rather than to negotiate rates with doctors and hospitals.  It would save transaction costs – the cost of negotiating rates – and, in addition, Medicare reimbursement rates are very low. 

     In my opinion, if the Democrats in Congress choose to advance the "5% solution," they will lose the support of health care providers.  The American Medical Association largely supports health care financing reform.  Doctors and hospitals resent the control that private health insurance companies exercise over the practice of medicine, and are alarmed at the increasing concentration and lack of competition in the health insurance market.  The AMA wants there to be universal coverage, elimination of exclusions for preexisting condictions, and increased focus on preventive care, but it strongly favors negotiated rates over imposed rates of reimbursement – and for doctors, at least, I think that the imposition of reimbursement rates would be a deal-breaker.   (See this AMA position paper and this video from the James Rohack, President of the AMA.)  Furthermore, I doubt that health care reform can be enacted over the opposition of the nation's physicians.  Accordingly, I predict that Speaker Pelosi will ultimately choose to support a bill with negotiated rates.  That may not be her initial position, but as a practical matter it is the best she can hope for.

     Here is a summary of Sections 221-226 of H.R. 3200 as adopted by the House Ways and Means Committee creating the Public Health Insurance Option:

Sec. 221. Establishment and administration of a public health insurance option as an Exchange-qualified health benefits plan. Requires the Secretary of Health and Human Services to develop a public health insurance option to be offered starting in 2013 as a plan choice within the Health Insurance Exchange. It participates on a level playing field with private plan choices. Like private plans, it must offer the same benefits, abide by the same insurance market reforms, follow provider network requirements and other consumer protections.

Sec. 222. Premiums and financing. Premiums for the public option are geographically-adjusted and are required to be set so as to fully cover the cost of coverage as well as administrative costs of the plan. This includes a requirement that the public option, like private plans, include a contingency margin in its premium to cover unexpected cost variations. In order to establish the public option, there is an initial appropriation of $2 billion for administrative costs and in order to provide for initial claims reserves before the collection of premiums such sums as necessary to cover 90 days worth of claims reserves based on projected enrollment. These start up funds are amortized into the premiums for the public option to be recouped over the first 10 years of operation. The plan must be self-sustaining after that initial funding.

Sec. 223. Payment rates for items and services. The Secretary of HHS establishes geographically-adjusted provider payment rates for the public option. For the first three years, those rates are based on Medicare rates with a 5% add-on for practitioners who also participate in the Medicare program. This increase also applies to practitioners, like pediatricians, who do not typically participate in Medicare. After the first three years, the Secretary is granted greater flexibility in setting rates, but the general rule is that overall spending should remain consistent with the initial levels. Flexibility is provided to the Secretary to create payment rates for services not covered by Medicare, pursue delivery system reforms, make adjustments to offset geographic variations and adjust rates as necessary to assure competitiveness with Exchange-participating plans or for excessive or deficient payments. Medicare providers are presumed to also be participating in the public option unless they opt out. There are no penalties for opting out. The Secretary also has authority to negotiate prescription drug prices for the public option.

Sec. 224. Modernized payment initiatives and delivery system reform. The Secretary is empowered to move forward with delivery system reforms to change the way the public option pays for medical services to promote better quality and more efficient use of medical care. Such payment changes must seek to reduce cost for enrollees, improve health outcomes, reduce health disparities, address geographic variation in the provision of medical services, prevent or manage chronic illnesses, or promote integrated patient-centered care.

Sec. 225. Provider participation. Provides the Secretary of HHS with the authority to develop conditions of participation for the public health insurance option. Providers must be licensed in the state in which they do business. Physician participation comes in two types: preferred physicians are those physicians who agree to accept the public optionâs payment rate (without regard to cost-sharing) as payment in full, participating non-preferred physicians are those who agree not to impose charges in excess of the balance billing limitations in Medicare. Providers must be excluded from participating in the public option if they are excluded from other federal health programs.

Sec. 226. Application of fraud and abuse provisions. Applies Medicareâs anti-fraud and abuse protections to the public health insurance option.

     When the CBO data comparing the cost of the three various versions of H.R. 3200 become available I will post that information.

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