TENNESSEE'S ATTEMPT TO EXPAND HEALTH
CARE
In
1993, Tennessee quickly passed legislation to create the TennCare
program. The speed with which the legislation flew through the
assembly was unprecedented. Only a few months later, Governor Ned
McWherter, a Democrat, received the necessary federal Medicaid
waivers from the Clinton Administration to put the plan, which he
had proposed, into effect beginning on January 1, 1994.
TennCare did not go through a normal
legislative process to give proponents and opponents, special
interests, and the public an opportunity to comment on it and allow
the legislature to make needed changes based on that information, and this
rush to "do something" was unfortunate. Legislators had hoped that,
by enacting TennCare, the state could offer one health insurance
safety net to cover all poor or uninsured residents at a lower cost
than the state would spend on Medicaid, the federal-state program
providing health care to the poor.
Governor McWherter and supporters of
TennCare in the legislature--like President Clinton and
congressional supporters of his plan--had argued persuasively that
the state's current patchwork health insurance system was expensive
and inefficient. The key to improving the problems was to shift
everyone into managed care and provide close state-government
oversight. The seductively simple theory was that, once the state
controlled the money and the care provided, existing inefficiencies
would disappear. Everyone would be covered and the state would save
money.
In
order to implement the plan, Tennessee applied for and received a
five-year federal waiver from the Health Care Financing
Administration (HCFA), the federal agency that runs the Medicare
and Medicaid programs. This Section 1115 waiver permitted the state
to leave the Medicaid program but use that money to fund TennCare.
In return for the waiver, the federal government required the state
to cover all Tennesseans who qualified for Medicaid, plus the
uninsured and the uninsurable--or those who could not obtain
coverage because of a pre-existing condition.
Initially, TennCare covered 1.1 million people--the 766,000
residents then enrolled in Medicaid and an additional 340,000 who
were uninsured or uninsurable. Today, it covers 1.3 million
people--about the same number of Medicaid-qualified residents plus
550,000 others. (See
Table 1.)
The
federal waiver from HCFA set the stage for TennCare to become a
model for state health care reform across the country. The Clinton
Administration and other states watched with hopeful anticipation
to see whether the "universal vision" of this highly regulated
health care system would work.
TennCare's Track Record
One
of the reasons the Clinton health care proposal failed is that the
Administration and its congressional supporters had not promoted
the provision of basic coverage--the "bare bones" benefits that
would assure an adequate level of care. Such policies cover major
medical expenses but not all the options that would make a plan
more comprehensive as well as more expensive. As a result, health
insurance is more affordable and thus more accessible, especially
for middle-income families.
Instead, supporters of the Clinton plan
pushed for a "Cadillac" type of plan that included many
government-mandated "options" (which, because they were mandated,
ere not really options at all).
TennCare's sponsors wanted the plan to be comprehensive as to both
who and what it covered.
Eligibility.
Eligibility criteria have changed since TennCare was passed.
Currently, the program is available to:
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People who are eligible for Medicaid;
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Uninsured children under the age of 19 who
do not have access to health insurance and children with access to
health insurance whose family incomes fall below 200 percent of the
poverty level;
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Workers who lost coverage due to the
closing of their employer or the expiration of their benefits under
the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985,
and those with limited coverage (with no income restrictions);
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The "uninsurables," or those who have been
denied health insurance coverage because of a medical condition
(with no income restrictions); and
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Uninsured people with incomes below 200
percent of poverty (a group that has been closed to new entrants
since 1995), although some people such as displaced workers can
still enter as uninsured persons.
Managed Care Coverage.
Although most states are beginning to move their Medicaid
populations into managed care, Tennessee is the only state to have
done so with all of its Medicaid recipients. TennCare
beneficiaries who do not qualify for Medicaid are also enrolled in
managed care. The state contracts with managed care organizations,
provides a capitated payment system for each patient, and expects
physicians and hospitals in the program to provide comprehensive,
high-quality health care.
TennCare covers inpatient and outpatient
services, physician services, prescription drugs, and medical
supplies, as well as laboratory tests and x-rays. It covers home
health care, hospice care, and ambulance charges. In addition to
physical health care benefits, TennCare contracts with behavioral
health organizations to provide comprehensive mental health
benefits. Out-of-pocket expenses are limited for low-income
participants. Others, such as the uninsured, the "uninsurables" who
are unable to purchase health insurance because of a pre-existing
condition, and those who have lost coverage, pay premiums based on
a sliding scale.
Problems for Providers.
Currently, nine managed care organizations participate in the
program, but this will soon change. Blue Cross Blue Shield of
Tennessee, which covers half of TennCare's recipients, recently
announced that it will drop out of TennCare next summer. In
addition, Xantus HealthPlan of Tennessee, Inc., recently went into
receivership, and other TennCare managed care organizations claim
that they cannot continue to provide services for the low
reimbursement rates they receive in the program, even after the
legislature provided an additional $190 million to help make up the
shortfall. As a
result, it is likely that far fewer managed care plans will be
participating in the future.
UNINTENDED CONSEQUENCES
Although TennCare was designed
specifically to control costs and expand coverage, the program
faces enormous problems that prevent it from improving health care
for many Tennesseans.
PROBLEM #1: Rising Subsidies.
Federal subsidies are addictive. It is almost impossible for lower
levels of government to forgo them after relying on them in the
past--a fact well demonstrated by TennCare. The reason: The federal
government matches the state's contribution to the Medicaid
program, but in most cases the federal share exceeds that of the
state. This disproportionate match induces state and local
governments to spend more than they otherwise would, which
certainly helps states that are struggling to expand Medicaid
coverage. It also, however, makes it very difficult to repeal those
benefits in the future.
For
example, for every Medicaid dollar Tennessee spends, the state puts
up about 37 cents. The federal government pays the other 63 cents.
This means that for the state of Tennessee to cut Medicaid costs by
one dollar, it must be willing to cut three dollars from the
program's funds--an almost impossible task when doctors and managed
care organizations clamor that the program is underpaying them.
The
perverse incentive that this creates, both politically and
financially, is to throw more state money at Medicaid because the
state gets so much bang for its buck. However, if the state is not
careful, it will find its budget increasingly dominated by Medicaid
to the detriment of other programs and the taxpayers.
PROBLEM #2: Higher Costs and Higher
Taxes.
At a time when other states are experiencing record budget
surpluses, the Tennessee legislature recently held a special
session to consider imposing a state income tax to offset the
budget shortfall created by TennCare. Governor Don Sundquist, a
Republican and one of the income tax's strongest backers, proposed
lowering the state sales tax to offset some of the increase in the
income tax. Nonetheless, the purpose would still be to obtain more
revenue for the state, not to break even.
The
state needs the increase in funds because TennCare is so
expensive--it consumes $4.3 billion in the current budget--and
costs are growing rapidly. According to a new study of Tennessee's
economy, health care expenditures increased 69 percent between 1992
and 1999, while personal income increased only 38 percent.
Supporters argue that TennCare, which
spends about $3,300 per person per year, has saved Tennessee money
over what the state would have spent on Medicaid. But
they are comparing the program's costs with a projected Medicaid
growth rate that is too high. When TennCare was created, proponents
compared it with Medicaid expenditures in 1992--one of its more
expensive years because Congress was expanding the program--to
project future Medicaid expenses. Such
comparisons should use projections for at least two years; even
more than that would provide a significantly more accurate
picture.
Moreover, as shown in Table 2, the growth
in Medicaid spending nationwide moderated in the mid-1990s, in part
because of the strong economy and the success of welfare reform.
Tennessee was unable to enjoy even this budgetary reprieve because
TennCare was already draining excess revenue from the state budget.
Had the state addressed the Medicaid problem differently in 1993,
Tennessee lawmakers, like Members of Congress and so many other
legislators in other states, might today be debating what to do
with a budget surplus rather than a budget deficit.
There are several reasons why TennCare
costs the state so much money. A primary reason is its ambitious
nature. Currently, 24 percent of the state's population is enrolled
in the program. TennCare's creators intended it to be ambitious and
designed it to be more aggressive than other states' programs in
covering the poor and uninsured. They succeeded, making the program
uncontrollably large compared with those of most other states. For
example, in 1997:
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Only the seven states with significantly
larger populations have surpassed Tennessee in the number of people
they covered in their state-run programs.
-
Nearby states that are comparable in size
to Tennessee, such as Kentucky, Missouri, Mississippi, and Alabama,
have about one-third to one-half the number of Medicaid
participants enrolled in their programs.
TennCare enrolls a higher percentage of
adults than children; and adults, on average, require more health
care. Whereas in most states, children make up a little more than
half of the people on Medicaid, in
TennCare, children represent about 41 percent of enrollees.
Another contributing factor is that
TennCare provides a very generous benefits package that is better
in some respects than the packages some private-sector employers
offer their employees. For example, although many employers do not
offer drug coverage, 22 percent of TennCare's budget covers its
prescription drug benefits.
In
addition, TennCare includes the state's uninsurables with
pre-existing medical conditions. Middle- and upper-income
uninsurables pay monthly premiums to TennCare, but this type of
program never raises enough in revenue to cover costs, and
therefore loses money. TennCare's uninsurable population is
disproportionately large, and this imposes a huge financial
pressure on the system.
Finally, the ease with which sick people
can enter the system encourages people to wait until they have a
medical condition before they obtain coverage. Uninsurables need
only prove that they have been turned down for private insurance
coverage before they enter the program. Given
such ease of entry, it is curious that healthy Tennesseans are
still paying for private health insurance coverage.
There are other factors the state cannot
control. Although health care spending moderated in the mid-1990s,
every indication is that higher health care cost increases will
become the norm for both the public and private sectors in the
future. Several
factors will cause this increase.
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The growing use of prescription drugs is a
trend that will hit Medicaid populations especially hard since the
poor, on average, have more health problems;
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There are new medical technologies that
permit hospitals and physicians to do more than they could in the
past;
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New federal and state mandates will
require Medicaid to cover products and services, such as Viagra,
that it might not otherwise cover;
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New restrictions on managed care plans
that provide services to many Medicaid recipients nationwide and
all of TennCare's population are driving up the cost of care;
and
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The gradual aging of the population will
mean that more people, especially the poor, will face more health
problems in the future.
The
combination of such factors means that Americans can expect health
care to be more expensive for the population as a whole, but
particularly for Medicaid recipients.
PROBLEM #3: Declining Quality of
Care.
Since its inception, TennCare has faced quality problems. The
reason: Chronically low reimbursement rates for doctors and
hospitals have led to rationed care, which means less care in most
cases.
A
March 1999 actuarial review by PricewaterhouseCoopers found that
managed care organizations reimbursed providers at a rate of about
$11 per member per month (about 10 percent) below what would be
considered an "actuarially sound" level. The report estimated that
the managed care organizations needed to institute a capitation
rate increase of 5 percent to 35 percent, with a 20 percent
increase as its best-guess estimate. At the
end of the 1999 session, the state legislature followed the
recommendation to increase the capitation rate, providing an
additional $190 million in state and federal matching funds--most
of which is required to go to providers. This increase brought
TennCare's current budget to $4.3 billion.
Financial cutbacks or low reimbursement
rates usually do not produce an immediate drop in the quality of
care. Doctors and hospitals look for alternatives first. They may
absorb the losses for a while. They may also cost-shift money from
private-sector or Medicare patients to help make up the difference.
Over time, however, prohibitively low reimbursement rates drive the
best doctors out of a program or force the increasingly cynical
physicians who remain to find other ways to be compensated for
their services.
Patients may not recognize the decline in
quality immediately. Hospitals and physicians may not even
recognize it themselves at first. But eventually, they come to
realize that choices between money and patient care are being
made. Add to
that scenario the standard managed care practice of allowing
physicians to limit the amount of care they provide and the result
is a prescription for rationing care.
PROBLEM #4: Fraud and Abuse.
Between 1988 and 1993, federal Medicaid spending grew at an
average annual rate of 19.6 percent. The rate of increase has
slowed, but Medicaid is still expected to grow by an average annual
rate of 7.9 percent from 1999 to 2004.
The
program also has been plagued with fraud. Even before managed care
was adopted, many states (especially those with large inner-city
populations) experienced significant problems with what came to be
known as "Medicaid mills"--doctors who routinely saw 60 or 70
patients a day, most of whom only wanted a prescription for drugs
subsidized by Medicaid.
The
prevalence of these two factors--explosive growth and abuse of the
system--led states to begin placing a significant portion of their
Medicaid population in managed care. Tennessee was the only one to
place all of its Medicaid beneficiaries in managed care.
While there is some reason to believe that
managed care can reduce the amount of fraud that occurs when
beneficiaries get unneeded medical products and services, or when
providers prescribe goods or services that patients do not need,
other types of fraud are likely. TennCare's rich benefits package
and ease of entry make the program a magnet for abuse. According to
news accounts:
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TennCare spent $6 million covering 14,000
dead enrollees;
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TennCare covered 16,500 enrollees who
lived out of state;
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An analysis of 98,000 enrollees found that
20 percent were ineligible to be in the program; and
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450 of those ineligible were state
employees who had access to the state employees' health insurance
plan.
The
legislature may be able to implement reforms to address these types
of fraud, but incremental steps will not solve TennCare's growing
financial problems. These problems are systemic and will continue
to invite abuse. The system needs fundamental reform.
TEN LESSONS FROM TENNCARE
Legislators across the country can learn
from TennCare's track record and avoid making the mistakes
Tennessee's legislators made in their attempt to improve health
care. The following ten lessons are key to enacting good
reform.
Lesson #1: The states have limited options
for fixing the health care system.
Tennessee officials hoped to do at the
state level what President Clinton was unable to do at the federal
level. They
were not successful.
TennCare's experience demonstrates that,
under the current system, universal coverage at the state
level--even just coverage for those who cannot or will not obtain
coverage through their employer or government program--is
economically impossible unless the state is willing to commit a
huge amount of its limited resources to the program. Such a
commitment may be politically impossible because there is limited
willingness among taxpayers to pay for such programs, and Tennessee
may have reached the limit. But there are additional reasons that
states are limited in what they can do--reasons that are deeply
rooted in the very structure of the health insurance market and are
a product of federal, not state, policy.
The Federal Tax Impediment.
The current health insurance system is largely a result of federal
tax policy. People who obtain health insurance through an employer
receive a tax exclusion for that benefit; that is, they do not
record the money their employer spends on insurance as income and
thus pay no taxes on it. The self-employed get a partial tax
deduction, but those who work for employers who do not provide
health insurance receive no tax break on the money they spend to
obtain health coverage. Since
states are unable independently to change federal tax law, it is
almost impossible for state legislatures to alter the current tax
incentives. Moreover, whatever reforms they make must be compatible
with federal tax policy.
The Employee Retirement Income Security
Act of 1974.
Many states are targeting the business community for health
insurance reform. They reason that if they could require businesses
to provide employees with health insurance, they could pass on to
the private sector the expense of and responsibility for creating
universal coverage.
However, the Employee Retirement Income Security Act (ERISA) places
the health insurance programs of employers who self-insure (i.e.,
who pay the health insurance bills instead of paying an insurance
company) under federal labor law rather than under state insurance
laws. As a result, states have virtually no control over the health
insurance plans of self-insured companies.
For
example, state legislatures that want to require employers and
insurers to cover treatment for drug and alcohol abuse (a benefit
"mandate") can impose the law only on companies and people buying
from health insurers operating within the state. Such purchasers
usually are small companies and individuals buying their own
policies. Self-insured employers--whose employees make up about
half of the workforce--need not comply. Thus, this process puts
smaller businesses at a competitive disadvantage against larger
companies, which can pick and choose what to cover or choose very
few options in order to keep the cost of policies down.
The
inability to impose health insurance laws on all insurance in the
state leaves a huge escape hatch for businesses. Employers
dissatisfied with state regulations may look for a way to
self-insure or may choose not to provide any health insurance
coverage. States have been challenging the ERISA preemption in
courts, but they have experienced little success so far.
If
states want to expand coverage, they must first realize that their
options to enact fundamental change are limited. They have little
ability to do good and a lot of opportunity to do harm, as TennCare
demonstrates.
Lesson #2: Don't rush to create a
radically new program.
"Haste makes waste," and in TennCare's
case, the haste with which the system was created led to
significant waste. A state's health care system, including its
health insurance markets and the interaction of those private
markets with public health care programs, is complex. Bad policy in
such a complex environment predictably will produce even worse
results. Badly designed policies, even if enacted with the best of
intentions, often have disastrous consequences. If there is one
area in which state legislatures should tread carefully, it is
health care policy.
Tennessee, however, did not do this.
Governor McWherter proposed TennCare on April 8, 1993. By May 5,
the legislature had approved the outline and authorized the
governor to proceed. By June, the state submitted a request to HCFA
for a waiver that would permit TennCare to move forward. The U.S.
Secretary of Health and Human Services had reservations about some
of the provisions and met with the governor in the fall to discuss
them. By November, HCFA had granted the waiver, which allowed
TennCare to begin operations on January 1, 1994.
Thus, only about eight months had
transpired from TennCare's inception to its implementation, with
minimal input from the elected representatives of the taxpayers of
Tennessee. The political objective appears to have been to get a
complex regulatory structure in place and then to allow the
"experts" to work with a minimum of interference from the
legislature.
Of
course, America's Founding Fathers inspired a much different
approach to the legislative process. As evident from even a casual
reading of The Federalist Papers, James Madison, John Jay,
and Alexander Hamilton believed that an elected legislature--an
essential feature of a republican form of government--should govern
through careful deliberation. The Founders intentionally created a
legislative system that is slow and cumbersome in order to minimize
the chance that damaging legislation would be rushed through to
enactment. Slowly moving legislation, especially on weighty
matters, gives the people a chance to learn about it, analyze it,
and determine whether any aspects of it could cause harm or work
poorly, which would enable legislators to change or improve the
proposal.
TennCare bypassed this slow and deliberate
legislative pace. Much of the approval process took place after the
legislature had been dismissed for the year and under the shadow of
the Clinton health care plan, which created momentum for doing
something quickly. The governor of Tennessee capitalized on that
momentum, but instead of becoming a solution to a real and
difficult problem, TennCare became part of the problem.
There is a growing desire in some states
to reevaluate the possibility of creating a system of universal
coverage based on the Clinton model, but state legislatures should
move slowly and cautiously, giving ample opportunity for vetting
the components of any proposal for such reform. Otherwise, they
will have to revisit the enabling legislation, time and again, in
an effort to reform the "reforms" that fail to work.
Lesson #3: Include medical professionals
and other stakeholders in developing the reform.
Reforming something as extensive and
complex as the health insurance system requires input from all
stakeholders. Insurers, the medical community, elected
representatives and other government officials, and especially the
taxpaying public should have a say--or at least an opportunity to
raise issues and concerns--about the direction or elements of
reform.
This
did not occur in Tennessee. The system is based largely on the
proposal of Governor Ned McWherter and his political allies. The
professional medical community and the private insurers had little
input.
Politicians often remark that by excluding
special interests--which usually means the people a proposed piece
of legislation will affect the most--they can create public policy
that will work because it has not been corrupted by those whose
profits would be affected by the legislation. However, those same
special interests are often the ones that have the deepest
understanding of how the system operates and what will and will not
work.
Tennessee's politicians are not alone in
pursuing this unproductive politics of exclusion. For example:
-
Kentucky decided to push through health
insurance legislation in 1994 and ignore the comments of the
insurers who would have to operate under the system. Within just a
few years, 45 of the state's insurers dropped out of the system,
leaving only Anthem Blue Cross and KentuckyKare.
-
New Jersey decided to reform its
individual health insurance market (policies bought by individuals
and self-employed people) by making policies more accessible and
affordable. As a result, the state imposed a "guaranteed issue"
requirement so that people could obtain a health insurance policy
regardless of their health status, in addition to a "community
rating" requirement that charges everyone the same price, again
regardless of health status. Because healthy people can go other
places and get cheaper premiums, guaranteed issue creates a system
in which only sick people are in the pool and premiums are very
expensive. Currently, a person in New Jersey purchasing an
individual policy with a $500 deductible and a 20 percent
co-payment will pay between $25,000 and $30,000 a year for most of
the policies available.
In
both Kentucky and New Jersey, insurers and other "special
interests" tried to warn state legislators that their plans would
not work. Tennessee likewise excluded the experts, and now
Tennessee legislators are being forced to consider how to reform
TennCare before it breaks the state budget. This time, they should
include stakeholders in their deliberations on the substance, not
just the outline, of this complex program.
Lesson #4: Don't overprice the plan
through a comprehensive benefits package.
Besides their desire to enact reform
legislation quickly, ignoring the special interests who know what
works and what does not, state lawmakers who push massive reform
typically want to provide a comprehensive package of benefits. Like
the reasons put forth for guaranteed issue and community rating
requirements, the rationale advanced by proponents of comprehensive
benefits assumes that insurers, employers, and health plans will
limit what they cover because they "put profits above patients."
The state-level reformers want to prove that they can create a
health insurance package that is easy to obtain, comprehensive, and
affordable for a lot less than the system provided by
profit-motivated employers and insurers.
This
approach has not worked. Insurers know that if the government
creates a subsidized health insurance policy with a richer package
of benefits than most people obtain from their employers, then more
people will try to drop their employer-provided coverage and join
the public system. This predictable process is called the
"crowding-out effect."
This
is precisely what has happened in TennCare. Tennessee made TennCare
a very attractive insurance policy, including, for example,
prescription drug coverage. When the plan was open to anyone who
was uninsured, people who could purchase policies in the private
sector flocked to the program, forcing TennCare to limit access to
the uninsurable population.
Besides the impression that insurers and
employers limit benefits to save money, there is another myth
guiding policymakers: that many of the people who have health
insurance are underinsured. That is, the policy may not cover all
medical services, experimental procedures, preventive care, and
prescription drugs.
But
the truth is that most people are overinsured. That is, they have
health insurance coverage for medical products and services, such
as preventive care, that they could easily pay for out of pocket.
The "underinsured mentality" leads lawmakers to try to impose on
insurance much more comprehensive--and therefore
expensive--policies than most people need. Comprehensive health
insurance packages can quickly break a state's budget, as TennCare
has demonstrated. Not even Medicare is comprehensive. It leaves a
number of gaps, which is why the vast majority of seniors obtain
some type of supplemental coverage.
It
is understandable that lawmakers would want to provide
comprehensive coverage, especially to the poor, but that desire
must be balanced against the limited funds available and the
problem of luring people to the program who could obtain coverage
in the private sector. Tennessee ignored that balance and is now
paying the price; other states should learn from that mistake.
Lesson #5: Managed care is not a
panacea.
Governor McWherter and other supporters of
TennCare sold the program to the public in part by claiming that
managed care would save the system so much money that the state
would be able to cover not only the Medicaid population, but the
uninsured and uninsurables as well.
Studies have shown that managed care can
indeed save states money, especially in a program as chronically
inefficient as Medicaid, but those savings are limited. In both the
public and private sectors, there appears to be a one-time savings
of between 2.3 percent and 9.6 percent when shifting to managed
care. After that, however, costs begin to grow at relatively the
same rate as under traditional insurance.
Although many states have managed to squeeze additional savings out
of Medicaid managed care, they have been able to do so in large
part because they are arbitrarily cutting reimbursement rates below
providers' costs.
Managed care may be able to hold down some
costs, but there is a limit. Below that limit, cuts will begin to
threaten the availability of services and the quality of care.
TennCare has demonstrated that while states can use managed care to
provide health care for less money, proponents of universal
coverage are too optimistic in thinking that managed care is the
panacea that will let them obtain "universal" coverage with no
additional cost.
Lesson #6: Keep reimbursement rates
adequate.
TennCare was meant to be more than managed
care; it was meant to be managed competition. Like the Clinton
health care plan, it would have the state offer a flat amount of
money for each enrollee, and managed care companies would compete
against each other for customers, keeping prices low and quality
high. Once again, state lawmakers failed to understand just how
insurance markets work.
As
with many managed care arrangements, TennCare imposes a capitation
rate, meaning that providers receive a predetermined amount of
money for each person enrolled. Currently, managed care
organizations receive an average of $132 per enrollee per month,
while behavioral health organizations receive about three times as
much per enrollee. Those
patients who, on average, use less than $132 a month in health care
services are profitable. Those who use more than $132 per month
cost providers money.
Thus, providers have an incentive to
attract patients who are healthy rather than sick. Even though
TennCare and other such plans impose restrictions prohibiting what
is known as "cherry picking," it is not unusual or hard for health
plans to find a way around the restrictions.
As a
so-called public-private partnership, TennCare would try to foster
competition by providing enrollees with a choice of plans. However,
reimbursement rates have been kept so low that no new managed care
organizations have joined, several have dropped out, and Blue Cross
Blue Shield, which covers about half of the TennCare population
today, has said that it intends to exit the program in June 2000.
This
is a health care disaster. A fundamental rule of the marketplace is
that price controls cannot foster competition. This is especially
true if the government sets the prices too low. Companies will not
compete to win a money-losing contract, which is precisely what
TennCare has become. It is probably fair to say that the only
reason some of the managed care organizations have remained as long
as they have is a sense of obligation to provide health care. But
even that obligation has its limits, especially if capitation rates
become too low.
The
obvious solution for Tennessee would be to raise reimbursement
rates, as PricewaterhouseCoopers and others have suggested, and the
state recently complied. But there are reasons why politicians may
want to avoid the obvious solution. The state determines what the
capitation rate will be, and that decision can be guided more by
politics than by good patient care.
Part
of the political problem is that there are other pressing claims on
the state's limited resources. For example, if health care
providers are in desperate need of a reimbursement increase but
teachers clamor more loudly, then any additional state money
available may go to pay teachers rather than doctors and
hospitals.
But
the bigger problem is saving political face. TennCare was promoted
as a way to cover more people and save money. If politicians raise
reimbursement rates above a predetermined level, they become
targets of critics who say they lied when the program was sold to
the state. Politically, it is much easier to keep reimbursement
rates low, say they are adequate, and claim that complaints emanate
only from greedy doctors and health plans.
In
November 1999, the Tennessee legislature convened a special session
to consider adopting an income tax in addition to the state's sales
tax so that the state could meet its financial obligations, created
largely by TennCare's drain on its resources. The legislature
failed to do anything but study the problem yet again. It may be
that Tennesseans have reached their limit on how much they are
willing to spend to help middle-class people buy government-run
health insurance.
On
the subject of uninsurance, taxpayers should be treated to a
healthful dose of honesty. Other states are considering ways to
cover all of their uninsured. State officials should decide up
front whether their legislature is willing to ask taxpayers to pay
for the insurance they want to provide. Unless there is an honest
and truthful discussion about the true cost of a program, states
are likely to promote reform with artificially low cost
projections. Years--and millions of dollars in debt--later,
proponents will try to avoid explaining how they could have
misjudged the costs so badly while they look desperately for new
ways to meet the shortfall.
Lesson #7: Create a real high-risk pool
for the uninsurable.
One
of TennCare's safety-net provisions is its coverage of the state's
uninsurable population--those who are unable to get a health
insurance policy because of a pre-existing medical condition. This
part of the program is very costly and inefficient, and reforming
this high-risk portion of TennCare would lower program costs
significantly. Fortunately, there are other state models that show
how to establish an effective high-risk pool.
Currently, 27 states have implemented some
form of high-risk pool to address the needs of their
uninsurables.
Although these programs vary significantly, most states have
created an insurance safety net for this group of people.
Typically, people qualify by proving that they have been denied a
health insurance policy because of a pre-existing medical
condition. If accepted into the high-risk pool, they are able to
purchase a standard health insurance policy, but usually at a rate
of between 25 percent and 50 percent above the cost of a standard
policy.
There are two reasons for the additional
premium. First, uninsurable people cost more to cover. Second, and
perhaps more important, states want to discourage people from
waiting until they get sick to get an insurance policy. A 50
percent increase appears to be a fairly reasonable deterrent.
However, TennCare charges about 22 percent
more for the uninsurables who have incomes at or above 400 percent
of poverty. This means that the state loses money, even on those
who could easily afford higher premiums. For example, a qualified
family falling in the uninsured category that makes between 400
percent and 749 percent of poverty pays about $489 per month in
premiums. An uninsurable family pays about $595 for the same
coverage. Using TennCare's rate for the uninsured as the standard,
charging the uninsurables 50 percent more than the standard rate
would mean that a family would pay about $733 a month.
Is
that unaffordable? Remember, these are families with incomes
between 400 percent and 749 percent of poverty--or between $62,400
and $116,800 a year for a family of four. While $733 a month is not
inexpensive, it also is not unreasonable, especially for those in
the upper-income category who already have medical conditions that
may cost the plan thousands of dollars in medical expenses.
Even
if the state raised the premium cost to 50 percent more than the
standard premium, the state would still need to subsidize the
program, but the amount of money needed would be much less than is
required under the current system. Although other states with
high-risk pools also lose money, those losses are manageable. (See
Table 3.)
Another problem is that TennCare, oddly
enough, seems to favor the rich. Under current rates, an
uninsurable family making 750 percent of poverty or above pays only
$18 more a month than those in the 400 percent to 749 percent
category. This is a very small increase, given the huge income
differences.
Pricing high-risk insurance too low and
making TennCare very easy to enter has created an unsustainable
program that encourages people to remain uninsured until they get
sick and enter TennCare after being denied coverage by a private
insurer. Insurers are all too willing to deny coverage, since they
do not want to pick up the expenses of a high-risk patient.
As a
result, about 114,000 people are classified as uninsurable in
Tennessee. The uninsurable in all other 27 states with high-risk
pools combined amount to slightly more than 100,000
people. As
Figure 1 shows:
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California, the most populated state in
the country, only has 21,429 people in its high-risk pool.
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States with populations close to
Tennessee's have drastically fewer people in their high-risk
pools.
Legislators should keep in mind that the
uninsurables are not necessarily the same as the poor. For the
uninsurables, the primary goal should be to make health insurance
accessible, not affordable. While charging 50 percent above the
standard premium can make a policy expensive, charging too little
is an open invitation to people to wait until they get sick before
obtaining insurance.