House Energy and Commerce Subcommittee on Oversight and Investigations Hearing

A May 2013 issue brief n4 by the American Academy of Actuaries identifies several factors that will determine premium levels in 2014: the effectiveness of the individual mandate and premium subsidies at attracting low-cost enrollees into the insurance market; new benefit requirements that may lead to higher premiums but lower out-of-pocket costs; decisions by employers about whether to continue offering coverage and the health status of employees whose coverage is dropped; how each state's current market rules compare to the ACA reforms that take effect in 2014; and the demographic characteristics and health status of consumers purchasing coverage through the new Exchanges.

A March 2013 report n5 by the Society of Actuaries concludes that changes driven by the ACA could increase underlying claims costs in the individual market by an average of 32 percent nationally by 2017. This report also predicts wide variation across the states, with as many as 43 states experiencing a double-digit increase in claims costs.

The New ACA Health Insurance Tax

The health insurance tax established by the ACA - which we mentioned above in our review of the Milliman report - is scheduled to begin in 2014 and will exceed $100 billion over the next ten years. The tax is set at $8 billion in 2014, $ 11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018. In subsequent years, the tax will increase annually based on premium growth.

The health insurance tax will be imposed broadly on health insurance providers, based on their market share, and will impact the following: (1) businesses and public employers that purchase health insurance on a fully insured basis, including small businesses that provide coverage; (2) all individuals and families who purchase coverage in the individual market or through an Exchange; (3) Medicare beneficiaries who enroll in Medicare Advantage health plans or Medicare Part D prescription drug plans; and (4) state Medicaid programs that contract with managed care organizations.

While the ACA health insurance tax is assessed on health plans, experts agree that it will impact consumers and employers that purchase coverage directly from health insurance plans in the individual and group markets as well as beneficiaries in public programs. The Congressional Budget Office (CBO) has stated that this tax will be "largely passed through to consumers in the form of higher premiums." n6

The magnitude of the expected premium increase is addressed by a pair of actuarial studies that have been conducted by the Oliver Wyman firm and commissioned by AHIP. The first study n7 examined the impact the premium tax will have - from a nationwide perspective - on individual market consumers, employers, Medicare Advantage enrollees, and state Medicaid programs. A second study n8 provides state-by-state data on the impact of the tax in all 50 states.

The Oliver Wyman analysis concluded that the health insurance tax alone will increase the cost of family coverage in the individual market by $270 in 2014 and by an average $5,080 over the ten-year period of 2014-2023. The study also estimated that the health insurance tax will increase the cost of family coverage in the small group market by $360 in 2014 and by an average of $6,830 over the same ten-year period. These findings are reinforced by Congress'Joint Committee on Taxation (JCT) n9, which has estimated that repealing the health insurance tax could decrease the average family premium in 2016 by $350 to $400.

The health insurance tax is particularly burdensome not only because of its size, but also because it is not deductible for income tax purposes. This means that health plans must pay the tax and then also pay federal, state, and local taxes on the taxed amount. The Oliver Wyman study notes that because the ACA health insurance tax is not deductible, the potential impact of the tax on premiums will be $1.54 for each $1.00 paid toward the tax by insurers.

Focusing specifically on the Medicare Advantage (MA) program, the Oliver Wyman study found that the health insurance tax will increase costs for MA enrollees by $16 to $20 per month in 2014 and by $32 to $42 per month by 2023. The average expected increase in the cost of MA coverage over ten years is $3,590. This number represents a direct reduction in the resources that will be available to support the health care benefits of 14 million seniors and persons with disabilities who value the improved quality of care, additional benefits, and innovative services their MA plans provide. Additional costs will be imposed on Medicare Part D plans, for which the health insurance tax will increase premiums by an estimated $9 in 2014 and $20 in 2023 for a total increase of $161 over 10 years.

We also are deeply concerned by estimates in the Oliver Wyman study that the health insurance tax will put greater pressure on state Medicaid budgets by increasing the average cost of Medicaid coverage by an estimated $1,530 per enrollee between 2014-2023. In several states (see chart on next page), the impact on the cost of Medicaid coverage will exceed $2,200 per enrollee over ten years. Taking such a significant level of resources away from Medicaid at a time when many states are implementing major expansions in Medicaid eligibility is a shortsighted move that may compromise access to health care services for millions of vulnerable people.

Oliver Wyman's state-by-state findings provide additional information showing which states will be most severely impacted by the ACA health insurance tax. The charts below highlight the top 20 states with the highest per-person cost impact in each market segment. These charts show, for example, that families purchasing coverage in the individual market will be hit the hardest in New York while those getting coverage from a small employer will be most impacted in West Virginia. With respect to public programs, Medicare Advantage enrollees in New Jersey and the Medicaid managed care program in Washington, DC will be hardest hit by the new tax.

To avoid the increased costs that would result from the ACA health insurance tax, we strongly support legislation, H.R. 763, which would repeal the tax. This bipartisan bill, the "Jobs and Premium Protection Act," was introduced in February 2013 by Reps. Charles Boustany (R-LA) and Jim Matheson (D-UT). To date, 182 House members have cosponsored this bill, including 27 members of the House Energy and Commerce Committee.

Underlying Medical Costs

Additional challenges are raised by the underlying costs of medical care, which are driving up the cost of coverage, taking up a greater share of federal and state budgets, and threatening the long-term solvency of our nation's public safety net programs.

A September 2012 study n10 by the Health Care Cost Institute found that "higher prices were the primary driver of per capita health spending in 2011." This study found that unit prices increased by 9.7 percent for outpatient surgery, 9.1 percent for emergency room visits, 7.4 percent for mental health and substance abuse admissions, 6.5 percent for surgical admissions, and 6 percent for deliveries and newborns.

Another study n11, published by the American Journal of Managed Care, provides new data on trends in hospital prices across the country. This study, conducted by researchers at AHIP, found that from 2008 to 2010 inpatient hospital prices increased 8.2 percent annually, while also highlighting common medical procedures that experienced the highest growth in prices during the period studied. Overall, the price for a spinal fusion increased the most (15.2 percent annually) between 2008 to 2010. The next highest price increases were for bronchitis and asthma treatment (10.3 percent annually) and uterine laparoscopic procedure for non-malignancy (9.8 percent annually).

Our study also found wide variation in hospital prices across states and localities. Among the states examined by this study, New York experienced the largest increase in hospital prices from 2008 to 2010 (10.5 percent annual growth). Texas (9.3 percent annual growth) and Tennessee (8.8 percent annual growth) also saw higher-than-average increases in hospital prices. Hospital prices also varied significantly among metropolitan areas within a state.

Another AHIP study n12 highlights the exorbitant fees that some out-of-network physicians are charging for services. This study found that some physicians who choose not to participate in health insurance networks are charging patients fees that are 10 times - and in some cases, close to 100 times - Medicare reimbursement for the same service in the same geographic area. The following are just a few examples of the unreasonable charges consumers sometimes face when receiving care from out-of-network providers:

. $19,000 for a colonoscopy and biopsy - 33 times more than Medicare pays;

. $29,998 for an upper GI endoscopy biopsy - 73 times more than Medicare pays; and

. $12,000 for a tissue exam by a pathologist - 93 times more than Medicare pays.

In addition to showing how much patients who seek out-of-network care are being charged by some physicians, these findings also illustrate the value of the physician networks that are established by health plans to ensure that patients have affordable access to a wide choice of high quality health care providers, and that consumers receive savings when they visit contracted providers who have agreed to lower rates.

Similar concerns are raised by data n13 on hospital prices recently released by the Centers for Medicare & Medicaid Services (CMS). These data show significant variation across the nation and within communities in the amount hospitals charge for common inpatient services. For example, among all hospitals nationwide, CMS reported that the average hospital inpatient charges for services provided in connection with a joint replacement range from a low of $5,300 to a high of $223,000. Additionally, the CMS data show that average hospital inpatient charges for services provided in connection with treating heart failure range from a low of $21,000 to a high of $46,000 in Denver, Colorado and from a low of $9,000 to a high of $51,000 in Jackson, Mississippi.

Provider consolidation is a significant factor contributing to growth in underlying medical costs. A recent study n14 from the Robert Wood Johnson Foundation reports that hospital consolidation generally results in higher prices, stating: "When hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent." The study further cautions that "physician-hospital consolidation has not led to either improved quality or reduced costs" and, additionally, points out that consolidation "is often motivated by a desire to enhance bargaining power by reducing competition."

In an effort to help inform the public about the impact of rising medical costs, AHIP has developed a new iPad app n15 that consolidates fifty years of federal health care spending data into a series of easy-to-use, interactive charts. Users of this app can view historical and projected health care spending data at the national level, state-by-state, on a per capita basis, or as a percent of GDP. The app also provides a detailed breakdown of how much the nation is spending on different aspects of the health care system, such as hospital care, physician services, prescription drugs, and health plan administrative costs, and how each of these components contributes to health care cost growth.

III. Bringing Down Health Care Costs Our members are very pro-active in advocating solutions to rein in the costs of health care. AHIP's Board of Directors recently approved a statement recommending a series of strategies to bring down costs and make health care coverage more affordable. These strategies complement the innovative delivery system and payment reform initiatives health plans are spearheading all across the country.

Our Board has recommended three strategies for reducing health care costs:

1. Tackling Barriers to Transparency: We call for the elimination of barriers that prevent stakeholders from understanding how markets are (or are not) working. Increased transparency - with a concurrent focus on quality - will give consumers and purchasers a clearer perspective on the drivers that are contributing to higher health care costs in their community, as well as an understanding of how dynamics such as provider consolidation affect the costs they pay.

2. Facilitating Benefit Modernization: Recognizing that a range of legal, regulatory, or operational barriers often prevent health plan innovations from being adopted in local communities, we believe that cost containment strategies must modernize these "rules of the road" to ensure that innovative plan designs - aimed at decreasing costs while ensuring safe, high quality care - can thrive. This includes re-evaluating scope of practice requirements, accelerating the use of health information technology, promoting preventive care and wellness programs, promoting laws or regulations that support innovative delivery structures, and eliminating excessive network requirements that prevent plans from forming lower cost, high quality networks.

3. Advancing Bold, Structural Reforms: Strategies to address rising health care costs need to include fundamental, structural changes in the health care system. Further, action needs to be grounded where health care is delivered today - at the state and local levels. A state-federal shared savings, or "gain-sharing," initiative could be implemented that would allow states to keep a portion of any health care cost savings they generate. This would direct hundreds of billions in needed incentives to cash-strapped states, while at the same time bending the total cost curve and having a productive impact on the economy as a whole, as well as family, corporate, and government budgets.

Building upon the strategies in our Board statement, we have proposed a policy agenda, recently published n16 by the American Journal of Managed Care (AJMC), outlining policies that would support and encourage delivery system reform. This agenda includes proposals in the following areas: providing greater transparency on what providers are charging for services; aligning public and private quality measures; promoting administrative simplification and meaningful data exchange; investing in research on what works; promoting scope of practice laws to allow doctors and other clinicians to practice to the "top of their license"; and encouraging states to play a greater role in expanding private-public efforts to bring costs under control.

On another front, AHIP recently joined a diverse stakeholder group, the Partnership for Sustainable Health Care, in releasing a report n17 that outlines recommendations for decelerating health care costs and improving quality. This partnership includes organizations that play a prominent role in the hospital, physician, business, and consumer sectors. We were supported in our work by a grant from the Robert Wood Johnson Foundation.

Our report proposes a set of integrated, system-wide approaches involving both the public and private sectors that will significantly curb the growth in health care spending and enhance the delivery of care. Specifically, we outline a seven-part vision for a transformed health care system: (1) health care that is affordable and financially sustainable for consumers, purchasers, and taxpayers; (2) patients who are informed, empowered, and engaged in their care; (3) patient care that is evidence-based and safe; (4) a delivery system that is accountable for health outcomes and resource use; (5) an environment that fosters a culture of continuous improvement and learning; (6) innovations that are evaluated for effectiveness before being widely and rapidly adopted; and (7) reliable information that can be used to monitor quality, cost, and population health.

The Partnership for Sustainable Health Care report includes recommendations in five key areas:

. Transforming the current payment paradigm. We encourage the accelerated adoption of payment approaches that demonstrate their effectiveness in improving both quality and cost. These value-based payment approaches include a range of models that include incentives for patient safety, bundled payments, accountable care organizations, and global payments.

. Paying for care that is proven to work. We recommend that public programs and the private sector reduce payments for services that prove to be less effective or of lesser value than alternative therapies.

. Incentives for greater consumer engagement in care. We encourage the use of high-value services and providers through tiered cost-sharing and related financial incentives. The goal of such tiered cost-sharing is to create financial incentives for consumers to make better use of their discretionary care choices, leading to savings from improved adherence to preventive measures and evidence-based care, lower utilization of unnecessary services, and the use of more efficient, higher-quality providers.

. Improving health care infrastructure. We call for reforms aimed at strengthening the foundational infrastructure of America's health care system so that cost- and quality-related innovations can be implemented more effectively. Specific initiatives include:

o Accelerating research on treatment effectiveness to give patients and providers more information on which to base health care decisions;

o Speeding the adoption and the use of electronic health records and health information exchanges to improve care for patients;

o Ensuring that there is an adequate and diverse health care workforce;

o Reducing and resolving medical malpractice disputes;

o Promoting greater transparency in health care costs; and

o Encouraging competitive markets.

. Incentives for states to partner with public and private stakeholders to transform the health care system. We propose a gain-sharing system that would enable states to receive fiscal rewards for successfully meeting cost- and quality-related goals. States would have flexibility to use different combinations of strategies that fit their specific cultures and political environments, ranging from working with private and public payers to collaboratively implement major payment reforms, to modifying scope of practice restrictions, to providing incentives for improvements in care coordination to promote quality and patient safety.

IV. Conclusion

Thank you again for considering our perspectives on these important issues. Our members remain strongly committed to working with Congress, the Administration, and other stakeholders to expand access to high quality, affordable coverage options.

n1 Milliman, Comprehensive Assessment of ACA Factors That Will Affect Individual Market Premiums in 2014, April 25, 2013

n2 Gabel, J. et al. (2012). More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014, Health Affairs 31 No. 6

n3 Kurt Giesa and Chris Carlson. "Age Band Compression under Health Care Reform." Contingencies; Jan/Feb 2013.

n4 American Academy of Actuaries, How Will Premiums Change Under the ACA?, May 2013

n5 Society of Actuaries, Cost of the Future Newly Insured under the ACA, March 2013

n6 CBO letter to Sen. Even Bayh. "An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act." 30 November 2009.

n7 Carlson, Chris. "Estimated Premium Impacts of Annual Fees Assessed on Health Insurance Plans." Oliver Wyman. October 2011.

n8 Carlson, Chris. "Annual Tax on Insurers Allocated by State." Oliver Wyman. November 2012.

n9 See JCT Letter to Senator Jon Kyl. 12 May 2011.

n10 Health Care Cost Institute, Health Care Cost and Utilization Report: 2011, September 2012

n11 AJMC.com, Trends in Inpatient Hospital Prices, 2008 to 2010, March 6, 2013

n12 AHIP, Survey of Charges Billed by Out-of-Network Providers: A Hidden Threat to Affordability, January 2013

n13 CMS Press Release, Administration Offers Consumers An Unprecedented Look At Hospital Charges, May 8, 2013

n14 Robert Wood Johnson Foundation, The impact of hospital consolidation - Update, June 2012

n15 http://ahip.org/Issues/US-HC-Spending101-App.aspx

n16 AJMC.com, Health Plan Innovations in Delivery System Reforms, April 16, 2013

n17 Partnership for Sustainable Health Care, Strengthening Affordability and Quality in America's Health Care System, April 2013

Read this original document at: http://docs.house.gov/meetings/IF/IF02/20130520/100868/HHRG-113-IF02-Wstate-DurhamD-20130520.pdf