New Mexico Health Choices

1. New Mexico Health Choices a market-based approach to universal coverage Presentation to the Health Coverage for New Mexicans Committee Celia Ameline, September 7th 2006 (revised)

2. Provide health insurance to all New Mexicans Goals for a better healthcare financing system Let everyone pay no more and no less than a fair share of costs; end discriminatory pricing Simplify administration, cut overhead Control costs and improve quality

3. Why universal coverage? • There is a right to healthcare… Recognizing only a right to emergency care is unethical and counter-productive. Everyone expects people in need to be treated. And a dollar of prevention is worth a blank check on a cure. • … but a limited right Not covering treatments of doubtful or marginal value vs. cost Not covering some services people can afford on their own Consumers, not taxpayers, must assume costs beyond this limited right • Insurance is better than access to a safety net Insurance encourages early diagnosis and access to care, offers better treatment and follow-up. It avoids segregating the poor into under-funded government-dependent systems. It funds care in a predictable, impartial way that benefits patients, providers and taxpayers.

4. to achieve universal coveragehealth insurance must be… Administrative and medical cost savings must be pursued. Individual payments must be scaled with household income. Businesses must remain competitive locally & nationally. • Affordable • Separate from employment The needs of the self-employed, unemployed, part-time and seasonal workers must be addressed. Benefits must survive changes in job situations and family status, economic downturns. • Required Everyone already has a limited right to healthcare: now everyone must have an obligation to pay their fair share.

5. What is equitable financing? • It ends discriminatory pricing practices Premiums must not be tied to age, gender, or medical needs. Small businesses must not be charged more than large firms. • It includes a community responsibility Family premiums now cost 25% of the median family income in NM. At a minimum, the state must subsidize insurance for low and middle-income residents. Or, the basic right to healthcare, like justice or education, can be recognized as a public responsibility. • It also includes an individual responsibility Beyond basic healthcare rights, individuals and employers can pay voluntary premium supplements to obtain their desired level of coverage. Patient cost sharing addresses our responsibility as healthcare buyers.

6. Managed competition of private insurance carriers The market-based approach Consumer-selected, not employer-directed insurance Premium assistance or voucher funding Government as facilitator, not central planner

7. Market-based universal coverage basic principles • A large purchasing pool offers plans from several competing private insurance carriers. Plans cannot reject members or raise premiums based on medical history • Consumers purchase the plan of their choice based on service & cost. Employers can help pay for health insurance, but gradually move away fromemployer-sponsored group insurance • Insurance coverage is mandatory (no free riders) • Partial public funding makes insurance affordable to everyone, yet keeps insurance buyers sensitive to price differences • The primary cost control driver is intensified competition between carriers, promoting a proactive health management approach and more cost-effective healthcare delivery models • Patient cost sharing plays an important but secondary role Common to many market-based proposals, e.g. 1977’s Consumer Choice Health Plan, Massachusetts law, Wisconsin Health Plan, FEHB expansion plans

8. Market-based model overview Economic constraints: Increased federal funding Misc. state revenues Individual tax Business tax Affordability Competitiveness Existing state + federal programs Voucher funding or premium assistance Individual voluntary supplements Optional cafeteria benefits Wages & other labor costs Cost-saving incentives vs. access to care Consumer choice HSA / cost sharing Disabled, LTC, safety net Alliance insurance purchasing pool Individually purchased community-rated health plans

9. NMHC population coverage New Mexico residents under 65, except: • People electing coverage under employer-sponsored group plans • Medicare beneficiaries, military personnel, federal employees (at least initially) • Homeless or transient persons, and illegal immigrants for whom no payroll or income taxes are collected, stay covered through emergency rooms and safety net programs • Possibly Medicaid recipients; the expert study should consider the feasibility and impact of raising eligibility levels, and/or migrating non-disabled, non-elderly recipients into Alliance benefit plans (with additional cost-sharing assistance and social support services); other recipients would keep current benefits • The expert study should consider the feasibility and impact of including Indian Health Service beneficiaries

10. NMHC benefit design recommendations Standardize Alliance benefit offerings • A “basic” medical and behavioral benefit package for children (per committee definition of basic coverage). • A “basic” medical and behavioral health adult benefit package (e.g. state employee plan). This is to be offered in three cost sharing options: e.g. no-deductible/copays/$2,500 max OOP; low-end & high-end HSA requirements with co-insurance. • Carriers may offer a “comprehensive” rider for the basic package; HMOs must offer a POS rider for out-of-network reimbursement. • Carriers may design and offer a “minimum” medical and mental health adult benefit package, which must be HSA-eligible, may have restrictions on visits, procedures & drug formulary, and/or may cap annual benefits at no less than $500,000. • Dental, vision, long-term care and other benefits can be purchased separately from a variety of carriers through or outside the Alliance.

11. Role of the Alliance (1) The Alliance is like a large corporate benefits office. • The Alliance issues an annual request for proposals, then selects four or five medical & mental health carriers for participation. • Carriers’ financial reserves, prior enrollment, customer satisfaction, adequate access to providers are selection criteria, as well as premiums. • The Alliance oversees the publication of standardized plan brochures. It facilitates consumer enrollment by providing web, mail and phone-based assistance. • The Alliance publishes plan quality indicators, including standard member satisfaction surveys

12. Role of the Alliance (2) Administrative simplification • The Alliance provides easy templates and education materials to employers wanting to setup cafeteria benefits • The Alliance sends consolidated payroll deduction and billing statements to participating employers • The Alliance allocates public subsidies to eligible participants • The Alliance replaces NMHIA, NMMIP, SEIP, SCI, the Insure New Mexico Call Center, and processes Medicaid applications

13. Market-based approachmultiple-choice, price-informed, distributed decisions Employers Wages + benefits Healthy workforce Consumers $$$ Treatment choice = Need + Ease + Cost Caretaking, educating patients Plan choice = Access + Price + Service Satisfying, keeping members healthy Providers Insurers Choice of networks = Price + Effective Care Quality control, care coordination, payment Professional development Competition Alliance Optimizing competition: transparency, plan standards, quality measures Facilitating member enrollment, employer participation, health IT State gov. Low-income subsidies Insurance regulations

14. Central planning approachpolitically informed single decision-maker State gov. Employers Premium setting Benefit setting Additional funding Employer premiums Commission $$$ Bulk purchasing Capital budget planning Price setting Quality improvement Individual premiums Providers Patients Treatment choice = Need + Ease (little or no cost sharing) Caretaking, educating patients Professional development

15. Features of markets vs. central planning

16. Premium assistance vs. voucher funding Funding Designing a funding mix Selecting public funding sources

17. One market-based framework,a range of options << Less public funding Better coverage >> Assistance model Individuals responsible for premiums + Low-income premium assistance Voucher model Public vouchers cover some benefits for all (reduced cost sharing for low-income) + Voluntary supplements Minimum / basic vouchers for all Premium assistance for all up to 300% / 400% FPL Medicaid expansion Reinsurance, high-risk pool Assistance to uninsured only Basic vouchers for all children NMHC recommendation

18. Comparing voucher & assistance models

20. The need for low-income assistance in NM An average insurance premium costs more than 10% of income for anyone earning less than 400% FPL. Over 70% of New Mexicans live under 400% FPL, so the gap between effective premium assistance and vouchers is not as wide as in other states.

21. Designing a public funding mix A distinction should be made between: • The cost of covering children & low-income residents (Medicaid, premium assistance and/or reduced cost sharing) This should be funded by a community-wide effort through federal funding, a state income tax and/or a value-added tax, or other revenues; but not by taxing only pool participants, and not by taxing only labor costs or sales. 2) The remaining cost of individual coverage This can be funded by pool participants and their employers, using any combination of member premiums, voluntary supplements, and business and income taxes from which non-participants are exempt. However ERISA prohibits mandating employer contributions for their employee’s premiums.

22. Three components of healthcare coverage Desired coverage level (reduced cost sharing and/or expanded coverage) Minimum benefit vouchers for all • Community commitments • Cost sharing assistance for low-income residents • (e.g. premium for low-copay plan or direct reimbursement) • Enhanced social support services • (e.g. transportation, additional behavioral health) • - Services to disabled populations (Medicaid) The expert study must have working definitions of the minimum benefits and community commitments in order to estimate public funding needs.

23. Recommended three-tierfunding structure - 3 - Voluntary supplements Cafeteria Supplements (employer/employee choices) Premiums for the self- & un- employed - 2 - Remaining cost of minimum benefit vouchers Health Coverage Contribution (employer-covered workers are exempt) Medicaid (& other reusable public funding) Income Tax - 1 - Community commitments

24. Medicaid & other reusable public funding • Medicaid ~ $1 billion (TBD, critical) Medicaid covers 403,000 people: 45,000 Medicare dual eligibles, 102,000 other adults, and 256,000 children, or 49% of all children in NM. State cost is $678 million, federal match is $1836 million. Of the $2.5 billion total, the amount potentially reusable as Alliance premiums excl. special social services is TBD, est. $1 billion. Recommendation: Maximize eligibility and federal funding first (e.g. children to 300% FPL, adults to 150% FPL), later move non-elderly, non-disabled recipients into cheaper Alliance plans plus low-income assistance and special services. • Other state healthcare spending ~ $100 million (TBD) Operating and capital budgets for safety net facilities should be studied, along with programs consolidated by the Alliance, and uncompensated care funds and provider grants made by DOH, CYFD & other agencies. • County & local health care spending (not reusable) Up to $137 million in NM counties, $6 million in Albuquerque cannot be reused directly, but may result in local tax cuts or redirected spending.

25. Individual Income Tax Goals: • Get contributions from all community members and all forms of income to fund community commitments; • Make contributions roughly proportional to income overall • Keep tax structures fairly competitive with other states • Simple collection similar to regular income tax withholding Recommendation (voucher model): A low flat percentage of adjusted gross income, earmarked for healthcare If implementing a premium assistance model: A progressive income tax to fund assistance with fixed-dollar pool premiums & sliding scale assistance

26. Health Coverage Contribution Goals: • Fund minimum benefits based on pool participation • Reduce or stabilize costs for the vast majority of employers currently offering health insurance • Remove unfair cost and wage disparities between businesses • Scale cost for part-time and seasonal employees • Allow firms to opt out by offering employer-sponsored group coverage • Minimize federal taxation Recommendation: A fixed dollar amount per employee per hour

27. Health Coverage Contributiontechnical features • Employers are responsible for the contribution, collected monthly like NMGRT and state income taxes. • Employees are free to either take an employer-offered health plan if any, or to join the Alliance (except if union agreements apply). The contribution is credited back to the employer for each employee who opts for employer-sponsored coverage. • Up to 30% of the contribution can optionally bepassed on to employees for continuity with current employee shares of premiums. Gradually standardizing or eliminating this would make it easier for job applicants to compare wages and benefits. • Rates should be tiered by company size to soften the initial impact on small businesses (most of which do not offer benefits today), and to avoid creating a windfall for large corporations.

28. Health Coverage Contributionadditional options • Alternative 1: a percentage of total payroll. Benefits low-wage employers and automatically matches wage increases, but discourages the creation of higher paying jobs. • Alternative 2: a low percentage of gross income (revenue minus cost of goods & services sold), a.k.a. value-added tax. Stops penalizing businesses that hire more workers, but requires a much larger transfer of financial responsibilities. Could also replace NMGRT, since it is a broad-based non-pyramiding tax. • The opt-out system is designed to maximize choice and convenience, and to avoid unneeded disruption. If adverse selection becomes a significant problem, part of the contribution may be withheld, or the premium tax may be inched up.

29. Federal tax implications • Medicaid expansion • Health Coverage Contribution • Voluntary supplements • Individual income tax • Sales tax (not recommended) Exempt from: Payroll taxes Federal income State income NO NO NO NO Note: premiums for the self-employed cannot be exempted from payroll taxes

30. Health plan administration Individual behaviors Health information technology Provider administration & pricing Beyond healthcare financing Cost control

31. Health plan administration savings • Broker fees ~ 3% of premiums Carriers pay brokers by commission ranging from 1-10% of premiums; brokers get paid more for selling higher-priced insurance and for moving groups between carriers. Good brokers provide a useful service in the opaque and complicated world of employer-sponsored insurance. They are not needed in a streamlined, consumer-driven marketplace. • Carrier administration ~ 2-4% of premiums The excess overhead of managing small groups is eliminated. Member turnover and coordination of benefits costs are reduced. Marketing expenses are capped at 1% of premiums. Adding 400,000 enrollees and selecting only 4-5 carriers yields economies of scale. Increased competition and transparent pricing add pressure to keep costs and profit margins low.

32. Improving individual behaviors • Prevention and disease management Insurance coverage reduces costly complications due to delayed treatment. Selling directly to consumers helps cut turnover and build personalized relationships with increased acceptance and ROI for education & prevention activities, support groups & case managers for chronically ill patients. • Smart, income-appropriate cost sharing Cost sharing must not discourage prevention or access to needed care. It must reward patients for using services wisely and for selecting lower-cost or better-quality options. For incentives to work, patients need improved access to treatment quality, availability and cost information. • Penalties for unhealthy or costly behaviors The Alliance can define uniform incentives if individual carriers cannot. Getting a physical, showing non-smoking status and acceptable/improving body mass index should be rewarded. Reckless sport injuries, missed appointments, complications due to non-compliance should be penalized.

33. Health Information Technology • Centralized electronic eligibility verification based on Alliance enrollment data, Medicaid and other participating plans • Streamlined treatment authorizations requests • Routing claims through a common clearinghouse, potentially: • Accepting simplified electronic billing forms, auto-populating some patient information and routing claims based on enrollment • Collecting real-time public health data (bioterrorism, flu response) ● Storing life-saving blood, allergy, medication, PCP contact data for patients willing to share it with emergency providers The Alliance can crystallize shared HIT investments such as: = Huge potential for better care, reduced costs

34. Provider administration & pricing • Administrative savings • Fewer carriers, semi-standardized benefit plans, centralized eligibility systems • Streamlined authorizations, billing are needed to really cut admin staff • Making insurers responsible for collecting patient cost sharing would lift a significant burden and risk for providers, facilitate low-income cost sharing assistance, and encourage many professionals to do their own billing. Timely consolidated statements for patients would better inform them, deter fraud, and insurers can set up electronic payment tools to get paid faster. • Encouraging competitive pricing practices Complicated billing procedures have an indirect cost: complications, delays, uncertainties and conflicts feed mistrust towards payers and slow down the adoption of more competitive, cost-aware pricing practices. Savings from administrative and previously uncompensated care costs need to be reflected in lower medical prices. The intensified competition between health plans should curb excesses and reward more cost-effective providers.

35. Beyond healthcare financing • Train and retain more medical professionals, particularly nurses • Improve the quality of care (continuing education, performance incentives) • Revamp FDA policies on drug advertising, sales, price negotiation, ongoing efficacy and safety research, patents, etc. • Examine medical litigation, malpractice insurance, patient compensation and defensive medicine issues • Study end-of-life practices and cost drivers for high-need patients • Invest in public health research • Remove barriers to the utilization of lower-cost mainstream & alternative providers who can prove clinical benefits and rigorous standards of care • Encourage school-based and workplace wellness programs Reforming healthcare financing is not a cure-all, but it is the first, simplest, and highest-impact step in making healthcare accessible & affordable to all.

36. Compatibility with employment benefits ERISA preemption Risk adjustment How will ending cost shifting cut costs? Technical considerations

37. Compatibility with employment benefits Employers want to compete for workers through benefits as well as wages; and want changes to have a minimal impact on existing wages & benefits. • Under the proposed voucher system: • Employers decide what portion of the Health Coverage Contribution they pay for (70-100%), at least initially, to match current contributions • The Alliance can help employers setup a cafeteria benefit plan, through which they can contribute additional tax-free dollars that employees can use for medical and dental premium supplements, optional insurance products (e.g. vision, life, long-term care) or HSA contributions 2) The system allows employers to offer group insurance as they do now, and be exempted from the Health Coverage Contribution

38. Allowing employer-sponsored plansbut avoiding adverse selection and employee lock-in Advantages: building trust over time; not raising costs or cutting benefits for currently insured employers and workers; letting national firms do benefits their way. Risks to be avoided: • Keeping employees locked into less desirable options » Individual employees are free to join the pool on their own, if their employer’s plan with tax incentive is less attractive than the pool offerings and public voucher. It’s an implicit benefit standard, if not met the employer must pay the Health Coverage Contribution. 2) Leaving out large well-funded healthy groups can raise premiums and reduce funding in the statewide pool, dampen reform benefits » The insurance mandate, low-income subsidy, lower cost & easier administration for small business should build a large enough pool without concentrated risk.

39. Avoiding ERISA pre-emption ERISA “shall supersede any and all state laws” that “relate to employee welfare benefit plans”. However, it shall not “relieve any person from any law of any state which regulates insurance”. • Cannot mandate employers to buy health insurance for their employees, mandate premium contribution levels, regulate the structure of benefits offered, or create penalties for those purposes. • Mandatory contributions levied on employers to generate revenue for the community’s use in healthcare (or anything else), are not “employee” benefits, they are state taxes which cannot be challenged in federal court. • Credits granted back to employers for providing coverage are safe if they do not vary based on benefit characteristics (they are also unlikely to be challenged, no matter what)

40. Need for risk adjustment Company A Marketing Company B Higher care Plan A1 Low-copay inclusive Plan B1 Low-copay inclusive Sicker Plan A2 High-deductible restricted Plan B2 High-deductible restricted Healthier • High-deductible plans attract healthier people. As low-copay plans incur higher claims, their cost can rise and become unaffordable. • Carriers may be tempted to cut costs by attracting the healthy, discouraging the sick. This penalizes plans offering better care.

41. Risk adjustment solutions The Alliance pool already reduces adverse selection problems by getting rid of small-group underwriting, limiting the number of cost-sharing options and increasing the size of the risk pool in each plan. In addition: 1) Each carrier can be required to cross-subsidize the different cost-sharing levels of its “basic” plan by looking only at claims below the maximum OOP amount to differentiate premiums. 2) Carriers must not be penalized for serving costlier populations, and yet need to carry some risk as an incentive to control costs. A combination of demographic-based premium transfer adjustments, and partial reinsurance of very high claims on a mutual basis would be extremely effective. No public subsidies or third-party re-insurance are needed for this purpose; net settlements would likely be small. The system would be best designed and administered by agreement between the carriers’ actuaries.

42. No more uncompensated care:a huge windfall for providers… The end of cost shifting = high prices, no losses Cost of uncompensated care: $400 million in hospitals in 2005 Minus $100-150 million from federal and county grants Plus uncompensated care outside hospitals, $50-$100 million = $300-$400 million cost shifting = 10-15% of medical spending by private insurance carriers = half the reason why medical prices billed to private insurers are around 20% higher than Medicare on average (other reasons may be below-cost Medicaid fees and negotiating leverage) Increased demand = higher revenue + inflationary risk Covering 400,000 uninsured will increase demand by at least $400 million since they now only get half the care they need. In the short term, this can strain the delivery system’s limited capacity, and may result in inflationary pressures as well as longer waiting periods.

43. …demands a tough re-balancing act Leaving prices unchanged would result in providers getting paid up to $400 million more each year, just for the services they are already performing. At the same time, providers also benefit from increased demand and reduced administrative burdens. Providers can earn more without excess if, for example: A) Hospitals negotiate rate reductions across the board B) A temporary cap is set on reimbursement for other providers, e.g. they cannot be reimbursed more than 110% of Medicare, or rate increases are prohibited for 2-3 years • Other options, not as economically effective, include: • Getting hospitals to surrender windfall profits to subsidize premiums • Taxing healthcare services to subsidize premiums (e.g. restoring NMGRT) • Asking providers to forfeit some cost sharing from low-income patients

44. Economic development success factors • Market-based universal coverage: • Cuts business healthcare costs, especially for small employers • Helps develop a healthy workforce which improves productivity • Attracts relocating firms • Encourages individuals to create or join new businesses • Is compatible with a competitive individual taxation structure • Has a low risk of technical failure and inadequate pricing • Keeps New Mexico attractive for healthcare professionals • Offers growth & security to healthcare entrepreneurs & investors • Attracts well-off retirees thanks to a stronger health infrastructure • Distributes public spending all over the state and has a high economic multiplier effect, which in turn raises state revenues

45. Political success factors Market-based universal coverage… • Cuts costs for a wide majority of people and businesses • Is flexible in benefit and financing options • Is simple and inexpensive to implement vs. single-payer proposals • Does not cut benefits for the currently insured, only improves choices for all New Mexicans • Avoids massive transfers of financial responsibility • Does not kill the insurance industry and move jobs to government • Does not subject providers to cash-strapped, state-based single-payer pricing (e.g. Medicaid) or budget controls • Limits government role, risks of conflict & corruption • Encourages innovation and adaptation to consumer demands …improves the lives of all New Mexicans

46. It will be tough, but it’s worth it!Thank you!