Before the U.S. Congress voted on the Patient Protection and Affordable Care Act, the national health care insurance reform bill backed by President Obama, the Congressional Budget Office, also known as the CBO,  stated that the proposed laws would increase federal spending by $788 billion dollars over ten years.

Opponents of the health insurance reform bill questioned the accuracy of those figures. Critics suggested  that the analysts at the CBO intentionally underestimated the cost of the bill to keep it below $1 trillion—a figure that many believed would send taxpayers into “sticker shock.”

Just days after President Obama signed the health insurance reform act into law, the CBO changed its estimate of the legislation’s cost. Instead of costing $788 billion over the first ten years as originally forecast, the CBO said health reform would actually cost a staggering $940 billion—just shy of the dreaded $1 trillion price tag.

Even the revised estimate was a sham, critics of the bill maintained. Accordingly, Congressman Jerry Lewis of California, the top Republican on the House of Representatives Appropriations Committee, which authorizes congressional spending, asked the CBO for clarification of its analysis of the cost of health care insurance reform. This week, Douglas W. Elmendorf, the director of the CBO, sent Representative Lewis a letter indicating that the bill would cost even more.

The CBO analysts found another $115 billion that needed to be added to the cost of the bill. Good-bye $1 trillion ceiling. The revised estimate puts the total cost of the bill for the initial ten years at $1.05 trillion. But what’s $115 billion between friends?

One million dollars is a lot of money, but you would have to multiply it by 115,000 to get $115 billion in new spending—and that’s merely one tenth of the overall cost of health insurance overhaul. We are talking about $3200 in new spending for every man, woman, and child in the United States—or $12,800 per family just for the health insurance program. That is not instead of private health insurance premiums, but on top of them.

Actually, it will be more. Possibly much more. In his letter to Lewis, CBO Director Elmendorf reported:

CBO does not have a comprehensive estimate of all of the potential discretionary costs associated with PPACA, but we can provide information on the major components of such costs. Those discretionary costs fall into three general categories:

• The costs that will be incurred by federal agencies to implement the new policies established by PPACA, such as administrative expenses for the Department of Health and Human Services (HHS) and the Internal Revenue Service for carrying out key requirements of the legislation.

• Explicit authorizations for a variety of grant and other program spending for which specified funding levels for one or more years are provided in the act. (Such cases include provisions where a specified funding level is authorized for an initial year along with the authorization of such sums as may be necessary for continued funding in subsequent years.)

• Explicit authorizations for a variety of grant and other program spending for which no specific funding levels are identified in the legislation. That type of provision generally includes legislative language that authorizes the appropriation of “such sums as may be necessary,” often for a particular period of time.

CBO estimates that total authorized costs in the first two categories probably exceed $115 billion over the 2010-2019 period, as detailed below. We do not have an estimate of the potential costs of authorizations in the third category.

[Emphasis mine.]

Give Congress the authority to raise “such sums as necessary” to fund new programs for various constituent groups, and the cost is literally incalculable. And these amounts are not part of the CBO estimates.

Do you think I could operate my business like that? Suppose I quoted you the cost of a health insurance policy, but added a clause that would allow me to charge “such sums as necessary” to keep my business growing. I doubt if you would sign on the dotted line.

But that is what we as taxpayers just did.

I recently sat down with a highly respected doctor who has a practice and also teaches medicine at a major university. I wanted to know his opinion of the health insurance reform bill signed into law in March. I was surprised by some of his answers.

Q. Were you a supporter of health care insurance reform before the debate began last year?

A. Yes, I have supported healthcare reform for at least twenty years.

Q. What is your concern?

A. In a word: costs. Healthcare costs are bankrupting American families. When I started out as a doctor in 1981, only 8 percent of bankruptcies were driven by medical costs. Twenty years later, in 2001, that figure had more than quintupled, to 46.2 percent of bankruptcies. But it didn’t level off. In 2007, almost two thirds—62.1 percent—of all bankruptcies were health related. The reason, of course, is not that families are making less, but that the cost of care is skyrocketing. In 1970, the amount of money spent on all facets of healthcare, known as the National Health Expenditure (NHE), was 7.2 percent of our gross domestic product (GDP). By 2005, the NHE had more than doubled to 16 percent of GDP. Estimates are that the figure will stand at 19.5 percent of GDP by 2016. This is a cost curve that cannot be sustained.

Q. Where did the president and congress go wrong with the bill that passed?

A. The main deficiency is the absence of any tort reform. For physicians in the United States, the threat of a malpractice lawsuit is real. Without legislative relief, ‘defensive medicine’ will continue to take a significant chunk out of healthcare dollars. Estimates suggest that savings accrued from tort reform could account for 20-25% of the NHE and may be prudently used to reduce the healthcare costs. When President Obama addressed the American Medical Association in June 2009, the first thing out of his mouth was that tort reform was off the table. At that point, the AMA members should have gotten up and walked out of the room.

Q. Were the Republicans right to oppose the law?

A. No. They should have demanded changes in the law, rather than making political hay out of it. During the debate, they argued that the outcome of such legislation would be the rationing of care and “death panels” that would decide who receives care at the end of life. The truth is, we already have soft rationing of care. We need an honest discussion of what the priorities are for us as a nation. How important is it to screen new born for all the genetic disorders? How important is it to employ all available technological advances at the end of life? How important is it to provide all possible reproductive services for infertility? How important is it to have instant surgery or advanced testing irrespective of the cost and the specificity? We can not afford instant health care for every Americans every time. Educating public so that they do not have undue expectations is as important as the launch of healthcare reform itself.

Associate Supreme Court Justice Louis D. Brandeis once wrote that the various states of the union can function as social laboratories, experimenting with government programs on a small scale to see what works. In a dissenting opinion to New State Ice co. v Liebmann (1932), Justice Brandeis wrote, “A single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Brandeis’s proposed scheme recently has been tried by the state of Massachusetts. In 2006, the state enacted a health insurance overhaul that is strikingly similar to the national health care insurance legislation signed into law by President Obama in March. The Massachusetts experiment has been in place long enough now to find out if it is sustainable.

Recent news out of the Bay State suggest it is not.

Many of the points I made in this space during the debate over health care insurance have been proven true by the Massachusetts experiment. Particularly, I predicted that mandates placed on the insurance providers requiring the coverage of people with pre-existing medical conditions would cause the costs for everyone to skyrocket. How else would the astronomical cost of insuring seriously, chronically, or even terminally ill patients be covered?

According to a story in The Boston Globe, this is exactly what is happening. The largest health insurance providers proposed a rate increase to help offset the cost of insuring those with pre-existing conditions. Hoping to mask the true cost of their health reform legislation, state regulators denied the rate increase. Facing millions of dollars in losses and eventual insolvency, the six largest health insurance providers in Massachusetts filed suit to have their rate increases approved. Robert Weisman of The Boston Globe reported:

A half-dozen health insurers yesterday filed a lawsuit against the state seeking to reverse last week’s decision by the insurance commissioner to block double-digit premium increases — a ruling they say could leave them with hundreds of millions in losses this year.

The proposed rate hikes would have taken effect April 1 for plans covering thousands of small businesses and individuals. Insurers wanted to raise base rates an average of 8 percent to 32 percent; tacked on to that are often additional costs calculated according to factors such as the size and age of the workforce.

Yesterday’s legal action sets the stage for a showdown between state regulators and the health insurance industry.

Governor Deval Patrick has made reining in runaway health care costs a centerpiece of his administration and his campaign for reelection — contending they are stifling the capacity of small businesses to create jobs. At the same time, health insurers argue that government is forcing them to sell policies at a loss that is unsustainable as the costs of medical services climb.

I also predicted that the fines the federal legislation calls on the IRS to levy against taxpayers who do not enroll in a health insurance plan are not large enough to force those who do not want insurance to buy it. In fact, any motivation to buy health insurance created by the fines is more than offset by the more serious mandate that allows the uninsured to wait until they are sick or need medical attention before enrolling in a health insurance plan. A certain number of people will game the system—especially in a down economy. This is exactly what the Massachusetts experiment has revealed.

A staff reporter for The Boston Globe name Kay Lazar wrote about how thousands of Massachusetts residents are waiting until they need medical attention before signing up for health insurance. Since the health insurance providers cannot turn them down, the patients are having their care paid for by the insurance companies. Lazar reported:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state’s largest private insurer provided the Globe.

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company’s data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions.

“These consumers come in and get their service, and then they leave because current regulations allow them to do it,” said Todd Bailey, vice president of underwriting at Fallon Community Health Plan, the state’s fourth-largest insurer.

It doesn’t take a genius to foresee the pitfalls of ignoring actuarial reality. The foundation of insurance is actuarial science. Massachusetts has proven in the social laboratory that the laws of actuarial science are immutable.

In my last post, I discussed explained the basics about health insurance company formularies. Here are eight things to remember about formularies:

1. Health care insurance providers develop drug formularies to meet the health needs of the vast majority of its plan members, but no single formulary includes every drug that is needed for every patient.
2. Health insurance providers are required to notify their members when they make changes to their formularies.
3. Differences in formularies comprise a significant difference between health insurance plans; some plans offer more drugs than others do.
4. Some health insurance companies are able to negotiate better prices for drugs than other companies are, passing the savings along to plan members.
5. If your prescription drug is not on your health insurance provider’s formulary, you can ask your doctor to prescribe a similar drug that is covered by your health insurance plan.
6. You can also ask your doctor to see if your plan’s formulary includes brand name drugs with lower co-payments or generic drugs that are suitable replacements for your current prescription drugs.
7. Your doctor can advise you on the possibility of splitting higher dosage pills to save money.
8. You can seek an exception to a formulary if your drug is not on the formulary and no suitable substitute works for you.

Remember, if you have any questions about your health insurance plan or its formulary, feel free to email or call me.

Every health insurance company publishes a list of prescription drugs that it has approved for use by members of its various health insurance plans. This list is known as the formulary.

Formularies vary from health care insurance company to health care insurance company, and from one plan to another within a company. All formularies cover certain basic drugs, but formularies can differ when it comes to newer drugs.

Most health insurance plans offer members three kinds of drugs:

Generic

After a pharmaceutical company’s patent on a drug has expired, any other drug manufacturer has the right to produce drugs using the same chemical composition. These drugs are called generic drugs. They are known by their chemical names, rather than the original company’s brand name, but the packaging often includes the words “compare to” and then the brand name.

Because the generic drug companies do not need to pay royalties on the patent or to spend money on developing new drugs, generic drugs cost less than the brand name drugs.

People who use prescription drugs can save money by switching to generic versions of the same drug.

Formulary

Formulary drugs are drugs that a health insurance company prefers to make available to its plan members based on the drug’s effectiveness, its lack of side effects, or its pricing from the manufacturer.

The majority of formulary drugs are brand name drugs

Health insurance plan formularies may include both generic drugs and brand name drugs

Because drug companies reach many potential customers at once when added to a health insurance company formulary, the drug makers often offer health insurance providers large discounts on their brand name drugs

Non-formulary

Drugs that have not been included on a health insurance company’s formulary are known as non-formulary drugs

Non-formulary drugs usually are brand name drugs for which there are generic substitutes or other brand name drugs that can be prescribed for the same condition at a lower price or with greater effectiveness.

Whenever you are shopping for a new health insurance plan, you need to know the true cost of the plan. The true cost involves more than the premium cost. It also includes out-of-pocket expenses, such as deductibles, co-pays, and coinsurance.

When evaluating health care insurance plans, be sure to ask these nine questions:

1. How much will it cost for you or your children to see a doctor?
2. How much will your laboratory tests cost?
3. How much will your x-rays cost?
4. How much will you pay if you have outpatient surgery?
5. How much will you have to pay for a hospital stay?
6. What kind of wellness benefits does the health insurance plan offer?
7. What is the actual cost of obtaining prescription medications, including co-pays?
8. Does the health insurance plan have an annual deductible? How much is it?
9. What is the maximum amount you will have to pay each for in out-of-pocket expenses?

By matching the answers to those questions to your own health history and anticipated needs, you will be able to better compare competing health insurance plans.

As I mentioned in my last post, the people of Massachusetts sent a message to Washington about health insurance reform when they rejected Martha Coakley, a supporter of the Democrat plan, and elected Scott Brown, who fiercely opposes it. The White House has been in disarray about what the election meant, but now the president is calling for a televised meeting with Republicans on February 25 to hear their proposals about health care insurance reform.

There are plenty of reasons for thinking this meeting is nothing but an empty gesture. One almost can hear Admiral Ackbar from Star Wars shouting, “It’s a trap!” Still, the Republicans will attend. As strong as some of their ideas are, I recommend changing them up a bit by adding a new wrinkle: government super funds.

For example, one of the best ways to lower healthcare costs is to cap medical malpractice awards. This would lower physician overhead by decreasing medical malpractice insurance premiums. More importantly, it would eliminate the need for doctors to practice defensive medicine, ordering endless tests, just to make sure they are not sued later for missing something. However, the typical tort reform is a non-starter with Democrats, who are heavily backed by trial lawyers.

As a compromise, Republicans could suggest that medical malpractice awards could continue to have no limits, but the medical malpractice insurance providers would be on the hook only for, say, $5 million. The government would create a super fund from taxpayer revenues to pay medical malpractice awards in excess of $5 million.

This would lower the risk for medical malpractice insurance companies, thus lowering premiums and overhead for doctors. It also would take away some of the pressure to practice defensive medicine, lowering the overall cost of health care. I suspect judges and juries might think twice about ordering $50 to $100 million medical malpractice awards if they know the taxpayer is picking up the tab.

A medical malpractice award super fund also would be transparent: the funds in it could only be used for one purpose. This would lower administrative costs and let taxpayers know where their money is going.

A second compromise would be to create an “uninsurable American” super fund. As I have touched on before, one of the main rhetorical devices used by proponents of health insurance reform is to suggest that private health insurance companies make a “practice of denying coverage to people who are seriously ill.” The uninsurable American super fund would pay for treatment for those people.

Keep in mind, however, that the uninsurable and the uninsured are two different things. Many people have many reasons for not carrying health insurance. The Democratic proposal includes fines levied by the IRS and even the threat of imprisonment to force people to buy health insurance, but it incentivizes people to not get health insurance at all by guaranteeing coverage if they do get sick. Forcing insurance companies to cover people with serious preexisting conditions takes away one of the main motivators for health people to buy health insurance and at the same time destroys the actuarial foundation of private health insurance.

The number of people who are uninsurable is infinitesimal. The vast majority of people with preexisting conditions already are covered under group health insurance, which by law cannot deny or delay coverage to people with preexisting conditions. Many people with preexisting conditions are over 65 year old, but they are covered by Medicare and are not excluded because of preexisting conditions. People with low incomes who qualify for Medicaid also are covered regardless of preexisting conditions. The same goes for children of the poor or working poor, who are covered by programs such as S-CHIP or Healthy Families. Military personnel are also covered through the VA.

The only people whose health insurance coverage is delayed or denied are people with preexisting conditions (which are rare in the first place) who are not insured through a group plan offered by their employer, are not in the military, are not 65 or older, are not poor enough to qualify for Medicaid, and are not under 18 years old in a family that makes more than about $80,000 a year. How many of these people can there possibly be?

Even if there are a million such people (which I doubt) and they all needed an average of $50,000 in health care a year (which is insane), it still would only cost $50 billion, compared to the hundreds of billions the proposed overhaul would cost.

Republicans should pre-empt false charges that they do not care about the sick by offering to cover the truly uninsurable and those with malpractice claims above $5 million by setting aside funds for just those purposes. Creating health care insurance super funds would be humane while preserving the private health insurance system that functions so well for so many right now.

Earlier this week, Massachusetts held a special election to fill the vacancy in the U.S. Senate left by Senator Edward Kennedy’s death in 2009. At first, the pundits expected Martha Coakley, the Democrat, to hold onto the seat. After all, the state has more than three times as many registered Democrats as Republicans. According to form, Coakley enjoyed more than a 20-point lead in the polls. But in the final weeks of the campaign, Coakley’s lead disappeared. On Election Day, Republican Scott Brown prevailed by a five-point margin–receiving 52% of the vote to Coakley’s 47%. The stunning turnaround left politicians and pundits sifting through the results like CSI detectives trying to make sense of what happened.

Democratic spin-meisters argued that voter discontent at the stagnant economy sank the Coakley campaign. Republicans disagreed, saying the vote was a referendum on the health insurance reform legislation passed by the Senate on Christmas Eve, in the middle of the campaign.

The vote on health care insurance reform marked the turning point in the campaign, catapulting Brown from sacrificial lamb to successor of the Lion of the Senate.

The forensic evidence supports the latter view. The health care insurance reform debate dominated the news during the campaign, and it was the central piece of legislation that a U.S. Senator would have to consider this term. Brown made the issue the centerpiece of his campaign, promising voters he would oppose it. Coakley said she would vote for it. It was left to the voters to decide.

They did. Resoundingly.

Nor were the Massachusetts voter out of step with the rest of the country. Polls indicate that scarcely more than a third of voters support the health insurance reform bill nationwide. Concerned citizens across the country are saying, “Wait. Let’s think about this. We want to improve the health care system, but this bill is not the way to do it.”

The demise of the Democrats’ filibuster-proof majority in the Senate affords the opportunity to incorporate some bi-partisan ideas into health insurance reform. For example, we can address the underlying causes of runaway healthcare costs by putting a cap on medical malpractice awards, decreasing the need for doctors to practice defensive medicine by ordering superfluous, costly tests and procedures. We can permit health insurance companies to do business across state lines, allowing healthy competition to drive down insurance costs. And we can protect the actuarial foundation of health insurance while extending health insurance coverage to the gravely ill by creating a transparent superfund to pay for the care of the truly uninsurable. These simple steps would require little in the way of bureaucracy or cost but would make private health insurance more affordable, allowing millions of people who are currently uninsured to get the coverage they need.

What are we waiting for?

Over the Christmas holidays, the Senate gave the United States the “gift” of health care insurance reform legislation.

Right now federal lawmakers are hard at work bringing the health insurance bill passed by the Senate and the one passed by the House into accord. Later this month or early next month the legislation most likely will be signed into law. This will mark a new epoch in how people go about paying for the healthcare they receive. Here are a few of the changes that appear to be coming our way:

• Those who do not have health care insurance provided through their employers, Medicare, Medicaid, or private individual insurance will be required to buy private health insurance.

• Those who do not have health insurance will be fined and possibly face criminal prosecution.

• The Internal Revenue Service (IRS) will be empowered to identify and enforce fines for noncompliance with the new regulations.

• People who earn up to 4 times the U.S. federal poverty level (about $80,000 for a family of 4) likely will qualify for tax credits to help pay for private health insurance.

• Those without health insurance might be able to purchase lower cost coverage through government-managed health insurance exchanges that require private health insurers to offer policies on a not-for-profit basis.

• Companies that employ 50 or more employees will be required to offer health care insurance if they do not already do so. Companies that do not comply with the new regulations will be fined up to $750 per employee.

• Health insurance providers will offer benefits to everyone who enrolls without limitations for preexisting conditions.

• Health insurance providers will not be allowed to charge as much as they do now based on age differences, gender differences, or any other factors that amount to higher risk.

• Health insurance companies will not be able to limit benefits paid over a lifetime of the insured.

If you are among the uninsured, I do not recommend waiting for these mandates to be implemented. That will not be until 2013 at the earliest. It is important to get some kind of policy in place now, at least to cover major medical bills that might arise from an accident or serious illness.

In addition, there will be two national elections which may or may not affect which of these provisions actually go into effect. Until then, there will be many private health insurance I will be happy to help you explore.

The media’s focus in the health insurance reform has shifted from one issue to another—the public option, Medicare buy-in, abortion funding, and the impact on the deficit. Some news outlets picked up on the point I have been making here about the long-term consequences of mandating health insurance policies that violate the basic tenets of actuarial science.

As the Senate proceeds toward passage of a bill on Christmas Eve, the media and the Congress remain silent on the most important question of all: How much will health care insurance legislation cost each American?

How much will it cost you?

Premium amount is a crucial factor in choosing health insurance. The goal of health insurance is to protect a family from a financial catastrophe, not to create one. Premiums that are too high can break a family’s budget. Debt is debt, whether you get there premium by premium or all at once in a sudden medical disaster. That is why I always seek the “sweet spot” in a health insurance policy that provides essential benefits tailored to a family’s needs while fitting comfortably within a its budget.

Forcing, coercing, or even allowing a family to buy a policy beyond its means is not sustainable.

Yet that is what Congress appears to be doing. Through its mandates, Congress is requiring every person too young for Medicare and too well off for Medicaid to buy a health insurance, without anyone knowing what it will cost them.

It’s as if I were to ask my new clients to hand me a blank check, promising to fill in the premium amount once I know what it is.

There can only be one reason for the secrecy: Premiums will go up.

Costs are bound to rise, because of the mandates in the legislation, such as requiring health insurance companies to insure those with advanced diseases and limiting the amount older people can pay to just three times the amount younger people pay, even though older people consume five times the benefits.

To accommodate these government mandates, health insurance providers will raise premiums on everyone—not just on those with high-end policies. As I have written here, younger workers will bear the brunt of the premium hikes.

How much premiums will rise is anyone’s guess. Even after the Senate’s health reform bill passes, congressional leaders will have to reconcile it with the bill passed by the House of Representatives. Amazingly, no one will know the cost of the health insurance legislation until it becomes law.

We might not know even then, because the first estimates will be based on assumptions about behavior—assumptions that might prove false. The earliest forecasts of individual costs will assume that the vast majority of the uninsured will sign up for health insurance rather than risk fines or jail, which the legislation mandates. But will they?

I doubt it. We don’t know how much the fines will be, but right now they are about $750 a year—far less than premiums will be. With unemployment at 10 percent nationwide and 12 percent in California, millions of families will opt to pay a fine than assume the new premiums.

This is especially true since the legislation simultaneously takes away one of the biggest motivators for getting insurance: fear of uninsurability. By guaranteeing that even those with the most serious illnesses can get health insurance, the new law assures scofflaws that they will have insurance when they really need it.

Lack of participation in the program create an enormous shortfall in insurance receipts. Congress will have no choice but to increase the penalties. To stay solvent, the insurance companies will have to increase premiums as well.

I will keep an eye out for estimates on what the legislation will actually cost an individual. I urge you to do the same—and share that information here in form of a comment.