America's Bitter Pill

by Steven Brill

  Imposing some kind of tax on employer-provided insurance, which the unions would oppose, was mentioned as a Baucus idea, but it was not included in the menu of options for the president. However, a 3 percent income tax surcharge on individuals with incomes above $500,000 and families with incomes above $1,000,000 was listed.

  The memo acknowledged that some of these revenue-raising ideas “would be politically challenging.” Emanuel and Kocher thought that to be an understatement bordering on fantasy. To them, there was no chance that any Republicans would agree to that 3 percent. They suspected DeParle’s group had included it because they thought the president would like it.

  Worse, from the standpoint of the economic team, the memo gave short shrift to what they thought were the real “game changers” when it came to costs.

  Again, this was emblematic of the understandable tension between the two sides: The economic team wanted to use reform to bend the cost curve. DeParle and her healthcare reform policy team, including Lambrew at Health and Human Services, wanted to expand coverage. If some cost-cutting provisions helped to make coverage reform more fiscally palatable to Congress, that was a plus. But if any of the economic team’s ideas were likely to face so much opposition from any sector of the industry that Congress would run for cover, that was a negative.

  DeParle had included a half page describing three of Zeke Emanuel and Bob Kocher’s cost-cutting ideas, such as promoting the “efficient use of technology” by, among other things, analyzing the cost-effectiveness of new medical technology, and data “registries” for all devices and drugs that would track the results they produced in one database in order to weed out those whose results did not justify their costs. That was the most far reaching—and, given the lobbying clout that would be arrayed against it—the most far-fetched idea that DeParle included.

  However, DeParle had left out what the economic team considered to be some of the more important game changers, but ones that more left-of-center reformers had always been wary of: medical malpractice reform, tough penalties for hospitals with high patient readmission rates, and a push to allow hospitals and doctors to consolidate their services into “bundled payments.”

  Emanuel and Kocher also wanted to add estimates of the savings that could come with each. DeParle and Lambrew refused.

  Following frantic efforts by Emanuel and Kocher to get their edits into the memo, which, except for a few changes of words and phrases, were rebuffed by the domestic policy people, the revised seven-pager was sent to the president by the eight o’clock deadline.

  According to three senior members of Obama’s staff, Valerie Jarrett had been instrumental in establishing this messy process, which purported to present a consensus from “your advisers,” while not revealing those advisers’ points of disagreement. This was Obama’s preference, or at least it was as expressed in a frequently voiced directive from Jarrett: “Don’t bring us your problems,” she liked to say, according to these three advisers. “Bring us your solutions.”*6

  Rather than laying out conflicting views for the president, the process frequently became a battle of whose views appeared over whose signature. Here, DeParle’s views and signature prevailed.

  This “war of the pens” also produced typographical errors, disjointed sentences, and other signs of a rush job to finish what at least had the virtue of being a crisp, complete picture of the state of the healthcare reform effort and the decisions that now needed to be made.

  It began by walking the president through a summary of where things stood in the House and Senate. By now the House—where three committees shared jurisdiction—was settling on the big-picture issues much the way Baucus’s and Kennedy’s committees were. The core of their plans, too, was the Romneycare three-legged stool. But there were significant, looming differences in the details, which reflected the more liberal nature of the House and the fact that none of the committee chairs there was worried about attracting Republican support.

  The House’s version of the coverage benefits that would be included in the baseline insurance policies that people would have to buy was more generous than the Senate’s. That meant more expensive insurance and, therefore, more money for subsidies for lower income people to buy it.

  The Senate, reflecting Baucus’s post-election white paper, was talking about some kind of tax on employer-based insurance. The House, more sensitive to union reaction, didn’t have that on its list.

  The briefing memo reported that both the House and Senate were likely to include a public option—the setting up of a government-run nonprofit insurer to compete with private insurers that Senator Grassley had urged Obama to reject at the White House conference in March. The House’s public option was more muscular and threatening to the insurance industry. The Senate version “attempts to minimize unfair competitive advantage with private plans” was the euphemism DeParle used to describe a Senate plan that would require the public insurance entity to pay doctors and hospitals the same prices that private insurers did, and would, therefore, likely have little impact.

  DeParle’s memo then walked the president through a series of trade-offs he was going to have to decide on at the big senior staff meeting she had scheduled for the following week.

  More generous subsidies and subsidies to people higher up the income ladder would guarantee more coverage, but would obviously cost more. So would more generous benefits in the baseline insurance package.

  Money could be saved by encouraging the insurance companies on the exchanges to offer less choice of the hospitals and doctors that would be in their networks; that way they could bargain for better discounts from the lucky providers in exchange for including them. However, noted DeParle, there is “some question about how this would relate to the fact that most public opinion research found that Americans highly value a choice of doctors.” Obama knew that. His pollsters had successfully urged him to promise voters on the campaign trail that they would always be able to keep the doctors they had.

  The most careful language was reserved for DeParle’s description of the choices the president needed to make concerning the individual mandate. Here, she tried to ease Obama off his old campaign position—the one that had produced his attacks on Hillary Clinton for favoring the mandate.

  “Your campaign plan,” she began, “included a requirement for parents to cover children but not a similar requirement for adults, in part because you expressed concern about affordability of premiums for families. We have explored three alternatives to this approach.”

  In other words, DeParle was assuming Obama would agree to a different position. This was because people such as Rahm Emanuel and Neera Tanden—the Obama campaign policy adviser who was now working with Lambrew at HHS,*7 and who remembered what Obama had told her in July about how “maybe Hillary was right”—had assured DeParle that Obama was ready to move.

  The three alternatives DeParle proposed were stacked in favor of the one listed last. First was a straight mandate, with no exceptions, which would require “generous subsidies so as not to pose an undue burden on the people being mandated.” The second was something called automatic enrollment, in which people would be automatically enrolled but could then opt out and not pay any penalty the way they would if there was a mandate. DeParle noted that “experts in behavioral economics” believed this would work nearly as well as a mandate. However, she added, “others, including the MIT model we have been using”—meaning Jonathan Gruber—believed it would not work.

  The final option was an “individual requirement with an exemption process.” As in Massachusetts, those who could demonstrate that the premiums they would have to pay, even with subsidies, would take too much of a bite (such as more than 7 percent) out of their incomes would not have to pay the mandate’s penalties. Others could claim an exemption for “special circumstances.” That, of course, was the obvious choice—and, in fact, is exactly what Hillary Clinton had proposed when Obama attacked her for wanting to force people to “buy i
nsurance they can’t afford.”

  “GIVE THE HOUSE AND SENATE THE SPACE THEY NEED”

  On April 30, 2009, a large group gathered with the president in the Roosevelt Room to review a PowerPoint about healthcare reform. This was the meeting that DeParle’s April 25 memo had been meant to prepare the president for. But this time, the PowerPoint had been prepared jointly by the economic team and DeParle’s healthcare policy people. Peter Orszag and Larry Summers had insisted on that. In fact, Kocher, who prided himself on his McKinsey-bred PowerPoint skills, controlled the document.

  Unlike in DeParle’s prior memo, in Kocher’s PowerPoint slides the public option was never mentioned as something Obama even had to decide on.

  By taking the pen from the healthcare reform team, the economic team was happily able to put up a bunch of real numbers. Thus, the first slide provided Kocher and Zeke Emanuel’s full list of game changers, and declared in a bold box underneath the list that “For every 5% we can reduce healthcare growth over the next ten years we will save families $2,500.” It was a nice thought, but it was also a turn of phrase that would come back to haunt the White House as it morphed into promises of $2 trillion in cost cuts and $2,500 a year per family in reduced spending on healthcare.

  That was followed by a price list of coverage options and ways to raise money to pay for reform.

  Generous insurance coverage with low deductibles? $1,120 a month in premiums.

  Plain vanilla, “catastrophic” coverage: $420 a month.

  Taxing employer-provided insurance for people in the 75 percent income percentile: worth $200 billion over ten years.

  Taxing those benefits for all people in the 50th percentile or over: worth $325 billion over ten years.

  The economic team was clearly on Baucus’s side. They wanted to finance reform by taxing insurance benefits, something the unions and the healthcare reform team opposed.

  The president started the discussion with one big, clear decision. The PowerPoint had laid out four possible reform plans, ranging from the most expensive, costing $1.2 trillion, to the least expensive, costing $600 billion. Each used a midpoint level of insurance coverage. The most expensive would include a mandate for all (with hardship exemptions), which would cost more because of the subsidies required to help people pay their premiums. The least expensive had no mandate. The president said he wanted to go for the big one.

  Obama had now signed on to the mandate, though he would not go public about it until he was pressured by Baucus to write him a letter in early June saying he would “accept” it if legislators decided that that was the best course. (The draft of the letter would end up being negotiated between DeParle and an ever-reluctant David Axelrod, who still feared the political fallout, while Axelrod was on Air Force One traveling with the president to Egypt.)

  Yet for all the specific numbers arrayed in the PowerPoint for various taxes and savings from givebacks by the hospitals and the drug companies, the rest of the conversation didn’t focus on choosing those options. It was disjointed, rambling, vague.

  Axelrod steered the group to a discussion about how to shape political strategy and messaging to keep things moving on Capitol Hill. Gene Sperling, the counselor to the Treasury secretary, gave a discourse on some of the finer points of the options for taxes listed on the PowerPoint, which now included an alcohol tax (worth $60 billion over ten years), a tobacco tax ($25 billion), and the income tax surcharge, which the economic team had raised from a $500,000 threshold to $1,000,000. None of these taxes would ever make it into any draft of a Senate bill.

  Phil Schiliro, who was in charge of congressional relations, suggested that they defer making decisions on the taxes or the specifics of issues such as the nature of the penalty for enforcing a mandate. It was better to wait for Congress to come to grips with those details in the bills that would be drafted by each house, he explained—which was consistent with his view that the House and Senate were likely to come down on opposite sides of many of these issues and, therefore, that anything the president declared definitively would be opposed by one side or the other.

  Obama was game for that. “We’re committed to full reform,” he said. “But we have to give the House and Senate the space they need,” he added.

  The meeting ended with no directive from the president other than asking Rahm Emanuel and Orszag to draft and give to Capitol Hill a list of “taxes we could support”—which at this stage seemed like everything on the list except the tax on employer-provided insurance.

  CAPPING THE INSURERS’ PROFITS

  Another memo addressed to the White House and Department of Health and Human Services “health reform team” and signed by Jeanne Lambrew on May 2, 2009, also caught the economic team unprepared. It was about an arcane health insurance term called the medical loss ratio, or MLR.

  The MLR is the ratio of claims insurers pay out to hospitals, doctors, and other providers of medical care compared to the premiums they receive from customers who buy their insurance. An insurance company that takes in $100 million in premiums and pays out $80 million to cover medical bills would have an MLR of 80 percent.

  In fact, 75 to 80 percent was a typical MLR, which meant that 20 to 25 percent in costs to oversee claims and otherwise manage the company was par for the course—despite the fact that administrative costs to pay for healthcare in other countries were typically closer to 5 percent (meaning a 95 percent MLR), and Medicare’s administrative costs were less than 1 percent.

  However, on Wall Street a low MLR was a badge of honor. A 70 percent MLR meant that the company was keeping 30 percent of its revenue to cover all of its administrative costs and, yes, its profits and dividend payouts.

  Conversely, among healthcare reformers, the MLR was viewed as a measure of community responsibility. The higher the MLR, the more generous the company was about paying claims as opposed to dividends or executive salaries.

  In her memo, Lambrew zeroed in on the MLR in those terms, proposing that the reform package include a regulation, which had already been adopted in some states, that would require insurers whose MLRs dipped below a certain level in any given year to issue premium rebates to customers as a way of paying them back for that deficit. She did not propose specific benchmarks, but pointed to different proposals in the past that had targeted a 75 to 80 percent MLR for insurers in the small-group or individual market, and higher ratios for insurers in the large-group market—which served companies employing large numbers of workers, and where economies of scale lowered per-customer administrative costs.

  In other words, if the limit was set at 80 percent and an insurer ended up with a 78 percent MLR, it would have to rebate 2 percent of its premiums to its customers.

  Lambrew was careful to list the pros and cons, but on balance she made a good argument for including the rule in the reform package, noting that “increasingly fewer markets are competitive, as health insurance markets have become increasingly consolidated.”

  Lambrew was certainly on firm political ground. David Simas, an Axelrod aide who was already tasked with focusing on the politics of reform, had told Lambrew and DeParle that an MLR regulation that would force insurance companies to mail back refunds to consumers was a winner. In fact, it might end up being the single most politically appealing piece of healthcare reform.

  The merits, though, were more debatable. At a meeting of his National Economic Council staff soon after Lambrew’s memo circulated, Summers called it a “stupid idea,” and told his people to try to kill it. It was “dumb for us to cap anyone’s profits,” he said, dismissing the idea much the way the legendarily blunt Summers might have taken down a freshman economics student at Harvard who said something in class that he thought was “dumb.”

  This kind of MLR regulation would create incentives for the insurers to load up on costs for medical care, Summers added. In the noncompetitive, concentrated markets that Lambrew had described, they would be motivated to worry less about getting deep discounts from hospitals,
because the more they paid, the more they could keep for administrative costs and profits.

  Worse, Kocher—the former McKinsey consultant—chimed in, they would engage in all kinds of games to shift expenses from the administrative category to the categories that counted on the “medical loss” side of the equation, which was supposed to include paying for care and paying for efforts to improve care through “quality improvements.” A doctor at the insurance company, for example, whose job was to vet claims might have his or her role recategorized to include ascertaining that quality care was being provided. That would move his salary from administrative costs to claims costs, thereby raising the medical loss ratio. Some of the fees paid to pharmacy benefit managers—the big names were Caremark and Express Scripts—to manage prescription drug programs could arguably be called expenses related to insuring wellness or improving patient safety, which would also raise the MLR.

  Whether Summers was right about the merits of the idea, the star Harvard economist was certainly on target about how insurers and those providing healthcare services would react to it. When the MLR provision would hit the health industry’s radar in the months ahead as a likely part of reform, dozens of conferences would be convened around the country to go over the best ways to get expenses categorized as related to care and not management. Private equity firms evaluating investments would even try to gauge whether the service or product envisioned would be included on the good side or the bad side of the loss ratio calculation. The MLR regulation would turn that Wall Street badge of honor on its head, encouraging the insurers to shoot for higher MLRs.

  Beyond that, there was an irony in Lambrew’s MLR proposal that drove the economic team to distraction. Yes, insurance companies carried a lot of well-deserved baggage: infuriating customer service, incomprehensible Explanation of Benefits notices, arbitrary decisions denying care, and outsized salaries often paid to their top executives. (UnitedHealthcare’s CEO had famously taken home more than a billion dollars in a severance package, before having to give back $486 million after he had left his job as part of a settlement with the SEC for having backdated his stock options.) Still, by 2009, most insurance companies were relative slackers in the healthcare ecosystem. Their tight profit margins were dwarfed by those of the drug companies, the device makers, and even the purportedly nonprofit hospitals.