Duke Research Advantage

By Kevin Schulman, M.D.

Ted Kennedy passed away this week at age 77 of glioblastoma (he was treated surgically here at Duke for his disease last year; Duke has the best program for this disease in the world, but the prognosis for people diagnosed with glioblastoma remains grim).

Kennedy spent more than 45 years in the US Senate, and during that time he championed both liberal causes and bipartisanship. Orrin Hatch, a conservative Senator from Utah, has said publicly that Senator Kennedy was the only Democrat he could work with in the Senate. That’s quite a statement.

In the politics of health care reform, there are two committees in the Senate with jurisdiction. Senator Kennedy was chairman of the Health Education Labor and Pensions Committee (HELP), which has passed a version of the health reform legislation. Democratic Senator Max Baucus is chairman of the Senate Finance Committee, which has jurisdiction over entitlement programs (including Medicare and Medicaid). The Senate Finance Committee has not passed a bill, as Senator Baucus and his committee appear to have some substantial disagreements with the House and HELP committee versions of the bill — as they work to craft a bipartisan piece of legislation.They have tentatively committed to reporting out a bill by mid-September.

I was on a panel earlier this week with a major health insurance executive. I was asked about the status of health reform. I suggested that there are three issues that need to be addressed as part of reform: 1) access to health insurance, 2) the costs of health care, and 3) the future solvency of Federal health programs.

Currently, the debate seems to be limited to access to insurance. The second and third issues are more problematic and look like they will remain despite health reform (or may even be exacerbated by the reform).

The insurance executive suggested that access was relatively easy to solve. In fact, he suggested that their trade association, AHIP, had agreed publicly with a reform plan that included market reforms including removal of underwriting from small group policies in return for a mandate for coverage (as we teach in health economics and strategy, in the absence of a large group or mandates, insurers would face adverse selection without underwriting since only the sick would be interested in an expensive insurance policy).

The executive suggested the debate was really over the public option. Here, the debate spills over from access to costs. Health insurance costs include medical loss (payments to doctors, hospitals and pharmacies), a sales charge, a “risk” premium, overhead, and margin.

United Healthcare, for example, reports a medical cost ratio of 82% for 2008. This leaves 18% for these other categories. An argument for the public plan is that Medicare’s medical cost ratio is 96-98%. Thus, a public plan would be cheaper. This is an apples-to-oranges comparison, since Medicare doesn’t have huge expenses for marketing, risk and administrative expense that a public plan would obviously have to bear.

There are other hidden costs of a public plan as well. While most seniors support Medicare, Medicare’s low payments for primary care physicians and the overpayment of specialty physicians has been acknowledged for 15 years, yet Medicare has been politically powerless to change its payment system even as physicians leave primary care in droves. A public plan could face the same risk.

Healthcare, however, is a local monopoly in many places. Hospitals or physicians that are required to be included in provider panels have the ability to set their own prices. The ability to use a public plan to set rates for providers with monopolistic market power is an attractive feature that private health insurance plans cannot match (and thus oppose).

So where does this leave us in the reform process (it’s not really a “debate” since all of the shouting means there is almost no discussion of the three core issues I raised)?

Senator’s Kennedy’s death is significant. Will it inspire a sympathy effort to have the “Kennedy reform bill” in his honor, or will his death remove the last hope for compromise in the Senate?
We’ll find out over the next few weeks.