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Volume 5, No. 12
February 2010


February
Features:

Hybrid car Alternative Fuel Technologies

Commercial Real Estate Update

Independent Contractor or Employee? By Mel Muskovitz

Small Business
and the Internet

"Shy & Retiring"
By Mike Gould

Of Note From Local Businesses Local Business News Briefs Pages 11-12

March Feature:
Banking in 2010 What do businesses need from local banks to assist in the continuing recovery?

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THE AREA'S ONLY LOCAL BUSINESS NEWS MAGAZINE

Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Healthcare Reform's Impact
On Business


Thomas Buchmueller, Professor of Business Economics and Public Policy at Stephen M. Ross School of Business

Thomas Buchmueller, Professor of Business Economics and Public Policy at Stephen M. Ross School of Business, University of Michigan.

By David A. Baker and
Margaret J. Baker

Annual U.S. spending on healthcare is estimated to be a gigantic $2.1 trillion, representing more than one-seventh of the U.S. DGP. Yet, the number of uninsured remains 40 million or more.

That reform is needed is clear to virtually everyone. Despite this clear need, however, the current healthcare bill in Congress is being met with a good deal of opposition from businesses.

What, then, can we expect to be in the final bill, and what implications does it have for businesses?

At the time this went to press, the House and Senate healthcare bills were in reconciliation, and Massachusetts Senator Scott Brown had just stirred the pot with his stunning win over Attorney General Martha Coakley. By now, the situation has changed considerably, with the most likely scenario being a healthcare bill that has emerged from reconciliation in some shape and form and is on its way to become law. And if the bill's progress to President Obama's desk has stalled, it is nevertheless helpful to look at the implications of any future healthcare legislation on businesses.

HEALTHCARE BILL BASICS
Thomas Buchmueller is a Professor of Business Economics and Public Policy at the Stephen M. Ross School of Business who focuses on health insurance economics and related public policy issues. Buchmueller describes the general idea of how healthcare reform, as proposed in the Senate and House bills, would work.

"One of the big impacts of the law is that it's going to extend insurance coverage to somewhere around 30 million [by 2019] (31 million in the Senate bill and 36 million in the House bill). And a lot of that increased coverage is going to come from people who are subject to a new individual mandate, many of whom aren't going to be eligible for subsidies to buy health insurance through these new purchasing pools and exchanges ("health insurance exchange" is sort of the generic term for them)."

"Each exchange will be a managed marketplace where individuals and small firms will go and choose from a menu of health plans where the exchange agency have vetted the different plans and have required them to provide certain benefits, to conform to certain standards, and apply certain rules on underwriting basically. For example, insurers can't deny coverage, exclude preexisting conditions, or charge you an extremely high premium because you're 'high risk.' So basically, it provides a list of consumer protections. In the small group market, some of these protections exist already, but in the individual markets, they don't exist. These are new protections for consumers."

Buchmueller continues, "There are really a couple objectives. One is to increase choice and make available apples-to-apples comparison that for the whole system can be beneficial because it encourages competition. Health plans have to compete head-to-head that way. It's also going to clean up the market in some sense, trying to eliminate the insurer practices that are tough on high-risk groups. . . So, in principle, I think there's good reason to be optimistic that this could make the individual and small group markets more stable."

Others are less optimistic about the way the reforms would change the market. Ed Wolking, Jr. is Executive Vice President at the Detroit Regional Chamber (DRC). Wolking works with companies and community organizations on healthcare and is active in national and state legislative advocacy on their behalf. According to Wolking, "Obviously the implications will be profound if and when they pass a healthcare bill proposal. . .The bottom line is we would be very concerned about what we have seen so far on balance."

TWO IMPROVEMENTS EVERYONE CAN AGREE ON
Before we look at concerns people have with the legislation, let's look at what most agree is good about the bill: coverage extended to 30+ million Americans and long-awaited insurance reform. Wolking insists most parties agree that these are welcomed changes to the system. "These two positive points are simple," says Wolking, "and they are generally things that many people agree on on both sides of the aisle."

1. Extended Coverage
According to Wolking, "The first positive point is that you do get a lot more of the uninsured covered, depending on the House or Senate version. There are many, many more people who are uninsured who will be insured. How Congress gets to that is where there are lots of concerns, disagreements, and issues, but the fact that coverage is extended is welcomed." This coverage comes through individual mandates, which the DRC supports, as well as employer mandates, which the DRC does not support.

Buchmueller agrees that covering the uninsured is critical. "The biggest objective is expanding coverage. The market is not going to do that because the key aspect of expanding coverage, or at least the way that these bills go about doing it, is a combination of new requirements for individuals. There is the element of personal responsibility here. You need to go and buy insurance because if you don't and you end up in the emergency room, other people are going to be footing the bill. So that, itself, is going to increase coverage."

And Professor Dean Smith says this may not be as expensive as we think. Dr. Smith is Senior Associate Dean for Administration of the School of Public Health at the University of Michigan. According to Smith, "For those who are going to be buying insurance, there is potentially a good side to healthcare reforms that are talked about.

"Currently, we have a large number of people who don't have insurance. Depending on the estimates, that number is between 40 and 50 million. Many of those persons currently receive care, and the estimates are they receive between half and two-thirds as much care as they would receive had they been with insurance working in the normal healthcare system.

"Now we're all paying for that currently," Smith continues. "We're all paying for that through health insurance premiums that include payments to providers for the uninsured care. If we move to a system where everyone has to have insurance, the cost for people who currently have insurance should go down by the amount that they are currently subsidizing others.

"Now it's going to take a little while for that to sort out," advises Smith. "I don't expect day-one premiums to be lower, but there certainly is that expectation in the marketplace. And that's part of the reason that the healthcare costs won't be $2 trillion; it will be $1 trillion."

2. Insurance Reform
A second positive point stemming from healthcare legislation is the insurance reform included in the bill. According to Wolking, "This is the second measure of improvement in the bill, which by and large, liberals and conservatives, all kinds of people agree on."

Wolking outlines the positive reforms. "There is the notion that there is going to be guaranteed issue and guaranteed renewability. So there is a move to make sure that people cannot be denied insurance because of their health status or some other factor if they apply for insurance. There would be some public backstop for anybody who for some reason does not qualify for a private insurance program or who cannot afford a private insurance program. So we're essentially extending guaranteed issue and renewability to individuals. That's all positive and that's something that most everyone agrees to.

"There are rating standards as well. And while we have to be careful of how such standards are implemented because some states' rating standards have not worked very well, there is essentially what they call a rating band. Not everyone will get the same price, but there is some control over the price that people will get."

Buchmueller explains how expanded coverage and insurance reform go hand-in-hand. "These pieces fit together in interesting ways. From the insurance companies' perspective, the reason that they will exclude preexisting conditions and the reason that they will charge higher premiums for people who appear to be higher risks is because they are afraid of adverse selection. They are concerned that people are going to not take insurance, wait until they are sick, and then show up. Insurance markets break down when that happens.

"The current insurer underwriter practices are not there because insurance companies are evil, it's just their response to the fundamental problem of adverse selection. The individual mandate and these regulations fit together. If you have a system where everybody's required to pay in, even when they're healthy, and pay premiums, then the insurance companies are more able to say, 'OK, now we won't discriminate based on risk because we know we're insuring a broader pool and there's better risk sharing.'

CONCERNS WITH THE BILL
The positives of extended coverage and insurance reforms are well-received, but there are a variety of concerns about a number of other aspects of the bill. "So those are the two big positives in what may come out," says Wolking. "But how you get there is a maze. It's very, very problematic for many people, as individuals, businesses, providers, or insurance companies."

Many area businesses agree with Wolking about the healthcare bill. In a December 2009, our company, Baker Strategy Group, conducted a study with Michigan manufacturers. The feedback from the 502 responses in the study showed that concerns about the impact of healthcare costs on the business topped any other cost concerns measured (tax, energy, labor, capital and regulatory). Comments we received from presidents of companies located in Michigan include the following:

These frustrations are rooted in any number of common objections. Congress has shown a disappointing lack of transparency in a process that was expected to be "open," "transparent," and covered on C-SPAN. The process is rushed and the Congressional Budget Office (CBO) has not had a chance to fully analyze the bill's implications, such as the impact on national health expenditures (NHE). Other reforms are not included, such as tort reform, although it's not clear how large of an impact such reform would have on overall costs. And the vast legislation is added to an already heavily-regulated industry, creating a "new regulatory regime," as Smith calls it, with a good possibility of unintended consequences arising from such complexity.

In the end, though, the primary concern that seems to emerge is costs: How much does it really cost? How much of the cost will the private sector bear? And will costs increase or decrease going forward?

Exactly how much the healthcare bill will cost is difficult to decipher. One must navigate the congressional financial maneuvers to sort it out. Based on a recent Wall Street Journal analysis, the CBO estimates the Senate bill will cost $871 billion over ten years. The House bill, meanwhile, is estimated to cost $1.05 trillion over the same period.

These cost estimates, however, are incomplete. While insurance programs don't begin until 2013, taxes are applied beginning this year. As Wolking states, "There is a fundamental mismatch of costs and revenues over the cycle of this that is being measured, and that's how advocates have said 'we're doing this reform and making it budget neutral.' If you looked at it in a true accounting sense it is not budget neutral. You have 10 years of revenues and 7 years of expenses."

Meanwhile, Congress has its own vernacular. "Costs" for this bill is what it will cost the government. Costs born by the private sector are not included. Wolking takes issues with this skewed perspective. "When government leaders talk about cost, they're also talking about cost within the federal government budget. They're not talking about total cost of the measures to everybody in the private sector, including individual businesses. We have to honest about this. To achieve reforms, there are additional costs on the private sector as well, individuals and business."

Wolking elaborates, "And those costs can be substantial. One example cited by the CBO is the cost of a Bronze plan, which is the minimum tier of benefits that people 30 years old or older would be required to purchase. The Bronze plan would between $4,500 and $5,000 annually for individuals and between $12,000 and $12,500 annually for families.

It is true that there will be some cost savings as well. Many people, for example, are paying for insurance currently without a subsidy who would get a subsidy under the bill. There are also some small companies that may actually see costs decrease, depending on their current healthcare arrangements.

The point, though, is that the cost implications are still unclear. Dr. Douglas W. Elmendorf is the Director of the CBO. On November 18, 2009, Elmendorf sent the most recent analysis of the Senate healthcare bill to Senator Harry Reid. In this CBO analysis, Elmendorf warned about the added private sector costs incurred by the unfunded mandates. Elmendorf wrote, "The total cost of mandates imposed on the private sector, as estimated by CBO and JCT [Joint Committee on Taxation], would greatly exceed the threshold established in UMRA (Unfunded Mandates Reform Act)."

Even as the bill is expected to reduce the deficit by $130 billion, Elmendorf reminds the Senate of two issues with this estimate. First, "In the subsequent decade, the collective effect of its provisions would probably be small reductions in federal budget deficits if all of the provisions continued to be fully implemented." And second, "Those estimates are subject to substantial uncertainty."

"One of the big costs of the bill," says Buchmueller, "is going to be the subsidies. And what they're trying to do is really focus these subsidies on people who don't have access to group insurance now and can't afford individual insurance. So, basically, the bill targets people who are not getting offered insurance from their employer and meet a certain income standard.

"There's a concern that there a lot of employers out there who already offering insurance to employees and might have an incentive to drop that coverage in order for their employees to qualify for these subsidies. So there are some provisions in the bill that, above a certain firm size, if an employer doesn't offer insurance and their employees qualify for these subsidies, the employer has to kick in to contribute to that. The way that it's written, they are not going to change what a lot of employers are doing, but they are put in place to keep them from changing. They don't want the employer-sponsored pool to erode, because then it's going to raise the cost to the federal government. "

But the level at which this fee is set can make a big difference in employer behavior. Under the Senate bill, for example, employers who have more than 50 employees and one or more full time employees receiving a premium tax credit would pay a fee of $750 per full time employee. These fees are a cost to an employer, but some employers may opt for the fee rather than pay for insurance coverage. If more employers than expected opt for the fees, insurance costs would go up for individuals, and costs would increase for the government for subsidies. If current assumptions underestimate how many employers opt for the fee, it could become a fiscal problem for the country. Risks of this sort are not addressed well in the current healthcare bills.

WHAT BUSINESSES SHOULD DO
First of all, relax. You have some time. As Smith noted, "The good news about whatever is coming down the pike is that it's not going to happen tomorrow."

Next, learn about your options. Smith expects a good deal of work will be needed to navigate the variety of options and consequences of a healthcare bill. "There are a number of benefits consulting firms that provide on their websites more general advice about key considerations for small businesses . . . But sometime within the next two years businesses are going to have to make decisions about retaining the insurance options they offer their employees"

Finally, consider promoting other models of reform that get to the heart of the issue. An example of such a reform is value-based insurance design. Dr. Smith runs the Center for Value-Based Insurance Design at the University of Michigan. And according to Smith, "The premise for our Center for Value-Based Insurance is that health insurance plans do not select well what is worthwhile and what is not worthwhile . . . So we're working with a number of employer groups to design health insurance products that give individuals incentives to reduce cost sharing to use those services that are essential, and higher cost sharing for those things that are not essential."

Wolking agrees with the value-based model. "If you really want to control costs," says Wolking, "you have to change the way you pay for healthcare. The way we pay for healthcare today, the more services provided the more fees that are paid. What we need to do is move to a system that pays for performance or outcomes for an episode or episodes or for care management and the system will respond. And this approach to purchasing medical services applies at the state level and at the federal level; to individuals and to businesses.

On balance, it is clear that some form of healthcare reform is inevitable. And while even the experts can't predict the full ramifications of a healthcare bill, they caution businesses not to adopt a wait-and-see posture. Rather, businesses should take this time to learn about their options and promote other reform models. As far as businesses go, Smith's words are salient: "I really have a great empathy for small businesses right now because I think that there are going to be a lot more options available than there are now and most of them are going to be confusing."

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