As we pause for what most Americans consider the beginning of summer and an extended weekend break from work, etc., please never forget those who serve, have served and gave the ultimate sacrifice. Freedom isn’t free! To all my brothers and sisters in arms past, present and future my deepest thanks and respect to you for your service
Over the course of many engagements plus my years as an executive, I’ve addressed and been asked to address, the theme of effective governance, particularly at the Board level. To bring this topic into full context, one of my many “hats” that I wear (periodically), is as an advisor to graduate and post-graduate students working in the arena of health policy and healthcare management. One of my students currently, is researching this topic of governance especially as the same (effective v. not effective) correlates with organizational prosperity. Her area of concentration in this research is non-profit health care organizations, though for-profit organizations are included as a contrast subject.
Her research and our conversations, reviews, etc. are fascinating as the content leads me across my many experiences serving on boards (non-profit, for-profit and publicly traded) as well as my many client engagements working with and/or in conjunction with, senior executives and their boards. Upon further thought it thus occurred to me that I haven’t written anything as of late on this whole issue of governance – what it is, what it should be, where effective and ineffective collide in terms of organizational prosperity, etc. Of course as always, my episodic journey (fits and spurts over a few weeks where time permits) led me through tons of stuff from my notes on engagements to former lectures and presentations to other research I have gathered. Being brief: Wow. I have a collection; quite a bit deeper than I thought/remembered. The net of my review is that this topic of “governance” lends itself to a series of posts. This is the first and for simplistic sake, it covers the core duties and the counterbalance of liabilities, for any Board (non-profit or for-profit).
To start, the core duties of a board are completely separate and thus, different from the core duties of management. A board has a bifurcated role and responsibility. The first duty is the advise and consult responsibility with management concerning the strategic and operational direction of the company. The second and equally important duty is to monitor company performance at the macro level (financial, compliance, risk, etc.). Topically, the latter element includes but is not necessarily limited to (not in particular order);
- Approval of strategic plans and strategies.
- Testing of performance measurements and oversight of risk management.
- Succession planning for the top executive(s) and the process of selection, when required, thereof.
- Audit – assuring the completeness, compliance and integrity of financial statements
- Compliance – assurance that the company/organization complies with all federal, state and other related laws and regulations.
- Approval of major capital investments
- Protection of company assets and reputation, including tangible and intangible assets (intellectual property, trademarks, name, etc.)
- Assure adequacy of executive compensation packages and develop and implement, the same in order to assure the security of key executive(s).
- Represent the interest of shareholders and/or stakeholders (non-profits).
The key issue for a board is the concept of independence; the independent director. In this regard, the ideal is that a board is solely interested in the welfare of the organization and thus, each director is free of self-interest such that the same would compromise his/her judgment and/or render him/her unable to take positions opposite of management when required.
The board is headed by the Chair(man or woman) who is responsible for agenda, meeting schedules and structure, committee coordination and overall communication within and across the board. Boards make decisions on a majority rule basis unless specifically required otherwise (certain actions may require a super-majority) and such decisions are based on the information and input from management.
Board committees may exist in large numbers or in smaller numbers. In healthcare, the following committee functions/board committees require specific attention.
- Quality/Compliance: This is a major risk area and it is perhaps, the most critical oversight function for a healthcare board today.
- Governance: Boards need to address new member recruitment, director performance, board performance, board education, etc. This element also includes CEO performance and may/may not encompass compensation for the CEO. Some organizations split compensation into another committee. I have found both split and shared equally as effective if properly managed.
- Audit/Finance; Second only to compliance in terms of risk, boards need to engaged in the review of investments (capital, other), financial statements, the engagement of auditors, the review/approval of financial plans, budgets, forecasts, and where applicable, any organizational financing activities from feasibility through completion/non-completion. This function also encompasses financial risk management and review of public release information.
Board terms are all across the map today but the two best practice models I favor are one-year, annual election of members or staggered two or three-year terms. Each have merit and each have flaws. The true test of effectiveness of any “term” condition is how effective the governance function is in terms of director review, board review, etc. Boards that have effective director performance review, clear criteria and effective board performance review self-police and thus, make term conditions work regardless of length.
Finally and key for all boards and members to understand is that boards have specific legal duties, typically identified under their respective state laws or as embodied in case-law. These duties are typically identified as “fiduciary” in nature.
- Duty of Care: The requirement that decisions are made via deliberation and investigation/data.
- Duty of Loyalty: The requirement that directors act in the best interest of the corporation or enterprise. This duty has also been, in some case-law decisions and state laws, expanded to include the best interest of shareholders.
- Duty of Candor: This is more applicable to publicly traded companies but I have found it universally applicable. It essentially means that the Board provides all relevant and transparent information to any party where the organization solicits business, solicits investment, or is inclined to be or involved in transactional business. Effectively, this is the full and honest disclosure rule or as I like to call it, the “tell the truth” principle.
In my next post, I’ll explain how the implications of board duties, structures, etc. play out in real life and how public vs. private (non-profit vs. for-profit) situations compare and contrast.
Most of my readers know by now that I am an economist by training and formal education. My clients know this as well. The net result is that I’ve been queried, almost to death as of late, as to what this current round of Washington folly is really all about. Is it about the ACA? Is it about the budget? Spending? Is there really a debt ceiling, etc.? Suffice to say, this post is intended as a concise answer (and no, economists are not known to be concise or clear on anything so I’m going out on a limb here).
While most Americans express concern over the amount of debt at the Federal level, the truth is that the amount is really not the issue. The ratio of debt to GDP is the bigger issue plus the cost of servicing the debt as percentage of the revenue received by the government. Today, the debt load is approximately $16 trillion (beginning of 2013). Of this total, around $10 trillion arrived since 2002. The $10 trillion is the result of the wars in Iraq and Afghanistan, entitlement growth, stimulus spending, tax cuts, and the recession. Income flows into the government coffers reduce substantially during recessionary periods and periods of stagnant GDP growth. As revenue evaporates faster than spending, and during recessions spending on behalf of the government normally increases (income support programs, entitlement growth, etc.), the deficit gap widens. Deficits require funding (the bills must be paid) and thus, the source for the government is borrowing. As of late (last few years), the government has borrowed more than $1 trillion annually to cover its cash outflow shortfalls.
While the question of long-term sustainability begs and the debate wages on about fiscal balance, the truth is that while this process (escalating borrowing) is on its face unsustainable, it is likely more temporary in nature than permanent. At the very least, the policy drivers and economic factors will shift, altering the present course of borrowing. For example, across the last two fiscal years, borrowing has reduced as budget deficits recede naturally. Spending priorities in Washington have shifted and taxes increased. The 2013 deficit will not exceed the trillion-dollar mark, coming in at $700 billion or so. As wars conclude and the economy recovers, even if slightly more than present, the deficit shrinks and the need to borrow is lessened.
What is central to the issues referenced in the title is the budgetary math and how the dollars are received and spent. Within a budget of $3.8 trillion, two-thirds is allocated toward “fixed” or “mandated” spending. That leaves $1.2 trillion in the variable or discretionary bucket. Interesting to note, the budget proportion as a percent of GDP hasn’t changed all that much – up only 2% compared to the most recent forty-year average. What has changed is the allocation percentages with more dollars spent today on entitlement programs. For example, Medicare spending is nearly three times greater as a percent of GDP compared the forty-year average. Health spending is more than double and Social Security is one and a third times more. Because the percentage of GDP spent is roughly the same, the offsets are found in defense spending, science and technology, general government and interest (yes, even with a rising debt level, lower rates have kept the interest cost lower than the historical average).
The government via taxes, will take in approximately $3 trillion. The gap thus is $800 billion, give or take a billion or so. This gap is the driver of borrowing limits and debt ceilings. In effect, the debt ceiling is a self-imposed number and one that is totally arbitrary. Congress established the debt ceiling back in 1917 with the passage of the Liberty Bond Act. In the 70s, via passage of the Budget Control and Impoundment Act, the debt ceiling became less relevant. Effectively, the debt ceiling issue was tied to the budget and a parliamentarian procedure known as the Gephardt Rule (after Congressman Dick Gephardt) allow the ceiling to automatically adjust incident to budget passage. The problem to a certain extent of late is that the government hasn’t operated with a budget for at least three years and spending bills (appropriations) have stalled in the Senate. Essentially, a debt ceiling discussion thus becomes separate from other fiscal operation activities.
So where are we now and what does this mean? In cold hard reality, the issue of the debt ceiling is less about default on credit but about the ripple effect economically that will occur. The U.S. really can’t default on its debt and does operate with enough cash flow to keep interest payments current. The President does have unique authority via executive privilege and orders to adjust the U.S. borrowing limit. The Treasury also has other temporary powers. Using these powers is a last resort as doing so will certainly cause economic havoc world-wide via the real signal that the U.S. government is in chaos. Remember, the stability of much of our economy is based on the stability of our systems of banking, credit and government – the full faith and credit stuff – nothing more. If this system isn’t credible and stable, the erosion is tsunamic.
History and an updated view of the economic reality we live in, paints the true picture. Today, our debt driver and our economic structural flaws within the government budget (such as it is) are entitlements as presently configured. There simply is not enough room on the discretionary side or the variable side to right size the budget, offsetting the entitlement growth. The demographic shift that is occurring in the U.S. and all first world countries (aging) is the catalyst. By 2033, 20% of our population will be 65 and older, eligible as presently configured, for Social Security and Medicare. Moreover, the expenditure to income ratio per each under Medicare produces a significant outflow deficit. For example, a 65-year-old couple in 2020, assuming average wages earned during their work years will contribute $110 thousand (with employer share) into Medicare. Across their remaining life, Medicare will spend in present dollars, almost 4 times more ($430,000). By 2022, Medicare spending is projected (under current law) to consumer 4.5% of GDP (3% today) and rise of 6.7% by 2035. This net change equates to a spend rate of more than $1 trillion in current dollars on Medicare alone.
To the point: Health policy is the shutdown, budget and debt ceiling debate. The good news is that it is fixable but the bad news is that it must be fixed by government. There is no other course of action that can and will adjust the debt trajectory. Now, hope is also muddled within the mix. The healthcare industry has gotten smarter and evidence suggests that recent reductions in healthcare spending increases are as much due to more efficiencies in healthcare delivery (generic drugs, better insurance bargaining, smarter consumption habits of patients) as due to a weak economy. A public-private initiative could create a paradigm shift, favorably changing the entitlement spending outlook. Congress and the President will need to get creative and utilize a different legislative approach to resolve the present dilemma.
Is the sky falling because of too much debt? Not really. Governments and especially ours, don’t really need to be too concerned about the debt load in the short-run. The concern is about changing or adjusting the factors that drive debt. As long as the increase in new debt is less proportionately, than the increase in GDP, debt load as percentage of economic activity reduces. For example, between 1945 and 1980, the government only encountered 8 years with surplus revenue. Fully all other years involved deficit spending. In 1945, at the end of World War II, debt as percent of GDP weighed in at 120%. By 1981, the level subsided to 30%. The reason? GDP growth accelerated during these years and the deficits were relatively small. The economic truth is that government policy needs to focus-in on all things fundamentally favorable to GDP growth while constraining with simple austerity, the deficit levels. The debt problem thus resolves itself. There is no need to “pay it back” and fundamentally, no reason to do so. The best approach is to minimize its impact on the economy by fixing the root cause. In this case, adjusting entitlement spending by relatively modest means (currently structural changes to reduce about $500 billion) is all that is needed.
In response to a number of e-mail and other inquiries, hoping to avoid more and the guilt that comes from not responding to each promptly, I will be in Dallas for the LeadingAge Annual Meeting and Conference. I am speaking twice – two sessions. The first is Tuesday, October 29th and the session reference is Data Driven Marketing and the second is on Wednesday, October 30th and the session reference is Bring Your Therapy In-House. I’ll be generally around the conference location Monday through Wednesday. Anyone wishing to connect, contact me as far in advance as possible.
A number of my regular readers and clients routinely ask for my thoughts/analysis on where the Reform Act/Affordable Care Act/Obamacare is at, particularly in-light of the recent one-year delay in the employer mandate. Given the complexity of this subject and the scope of the overall law, a single post won’t cover the subject adequately. In compiling my notes, research, etc., the logical approach is to address this subject in four posts;
- The economic, social and political environment
- The implications for providers
- The implications for consumers/employers
- The “best guess” of what happens next, post-the mandate delays, etc.
This first post, not to state the obvious, is focused on the economic, social and political environment that envelopes the legislation and is impacting its course.
Like the legislation or not or like or not its intent, the ACA is a fascinating window into current social, economic and political realities. It by its legislative intent, is a governmental attempt to address a number of social, political and economic factors within one large, overarching piece of law.
- The rate of spending or expenditures relegated to healthcare in the U.S.
- The cost of and access to, health insurance for a subset of individuals not covered or inadequately covered through traditional entitlement programs (current or former eligibility tests applicable) or traditional health plans (employer sponsored primarily).
- The government’s role in assessing the adequacy and quality of provider programs.
- Certain innovations deemed worthy of further exploration that in theory, will improve efficiency, care delivery and thus, quality as measured via outcomes.
- The legislative mechanics to accomplish the above (authorizations, funding, delegation to various agencies, creation of other governmental entities for implementation and administration, etc.).
Structurally, the ACA is overlaid across existing governmental programs such as Medicare and Medicaid. It does virtually nothing to change these programs, their benefits, their funding, etc. Arguably, the most the ACA does to these programs is fine-tune certain elements and add some subtle adjustments to payments and disclosure requirements for providers. The most notable change within the ACA occurs within Medicaid as the ACA expands the definition (financial) of eligibility allowing people with greater financial means (up to 133% of the federal poverty limit effective in 2014) to participate in the program.
Politically, the need for the ACA was expressed (condensed) as an intervention to increase the number of people in the U.S. with health insurance coverage (reduce the number of uninsured) while simultaneously, “bending the cost curve” on Medicare and other entitlement programs (the rate of spending). Both intents are laudable. The latter may be somewhat attained but the cost curve bend, not and certainly, not as a result of the ACA.
The primary reason the ACA will have negligible impact or frankly, none at all in changing federal outlays for healthcare is that it doesn’t address, by legislative language or other, any specific funding and benefit elements of current entitlement programs, save to actually expand benefit eligibility (Medicaid). It further ties the government to enhanced levels of funding in order to effectuate the expansion. Additionally, the economic and social factors at play in the U.S. don’t coalesce around the legislation and in fact, are polar opposite to the legislation.
The driving elements of increasing expenditures, current and future, under Medicare and Medicaid are economic and social factors that can’t be adjusted by legislation. Legislation or policy at its best can only respond to these factors via incentive and alignment but essentially, in the U.S., government fiat doesn’t work to adjust economic and social factors. Our system of government and enterprise, even with greater regulation and oversight, can’t alter certain mercantile and social forces at play. Principally;
- An increasing percent of the population, even without changes to eligibility criteria, is eligible for federal entitlement benefits. This is fundamentally the case for both programs – Medicare and Medicaid. The aging population alone is the principal driver for increasing Medicare enrollment. The economic shift in labor and payroll, an increasing driver for Medicaid eligibility. These factors can’t be changed by policy unless the policy changes the eligibility in such a manner as to constrain growth. The ACA did not do that.
- The economy in the U.S. is in a period of adjustment and it has been now for the past twenty plus years. This period is continuing and will for at least another twenty or thirty years. The U.S. is no longer a production-based economy in the traditional sense; it is a consumptive, service based economy. Economic activity is heavily influenced today by consumer behavior (consumptive) and as it has shifted toward an employment locus in a service sector, the wage profile is different and lower than what was realized in the former production economy. See the manufacturing industry as an example, particularly the assembly line style. Today, the overall number of jobs are fewer, demand higher skills, and are slowly replaced by innovation and automation. The fear is not overseas manufacturing usurping jobs but onshore technology advances eradicating jobs. Manufacturing will remain a vital portion of the U.S. economy although not as relevant when viewed as a labor source in quantity.
- Socially, we have come to expect government to be an arbiter in the distribution and production of health care and health benefits. We expect interventionist policy and the government to employ distributive justice for our care. One only needs to look at the coverage breadth for government programs compared to private programs to see this evolution. Gone are the days when private, employer sponsored plans can be considered “Cadillac” coverage compared to government entitlement programs. Today, the inverse is true as employer plans have scaled options, imbedded greater increments of cost-share, and narrowed provider choices. Oddly enough, the ACA is an evolved governmental effort to reach into the “private sector” and lay-over, a mandate for expanded coverage, benefits, and conditions – very similar to a government run, entitlement based infrastructure (e.g., no pre-existing condition limitations, no lifetime benefit caps, mandated coverage and benefit levels for group plans, etc.). If government is, and I believe it is, a reflection or mirror if you will. of present-time, social expectations then one can readily conclude that the ACA exists because the dominant social trend current demands government intervention in health care.
Politics in the U.S. has evolved as well. The political environment is about wins and losses in and across party divisions and sub-interest groups. Broad consensus is rarely attainable on issues of substance. The ACA evolved as a result of a point-in-time shift in central governance – a movement toward an ideological trend that government can and should be more involved in social imbalance. The truth however is that the present wave of social imbalance, the slow decline of a “middle-class” isn’t fixable by government policy and redistribution. This shift has occurred as a result of a changing world economy and in the opposite, government policy which hasn’t evolved. In short, the change in social structure has arisen gradually, across multiple administrations and the trends have been present since the mid-70s. Government can’t fix or legislate a re-balance.
In order to frame the life or death or evolution of the ACA going forward, the environmental factors of politics, economy and social expectations need dissection. For example, the political environment remains fractured so the likely remedy legislative is as we see today; subtle shifts around the edges, delays, and partial recalibration mostly coming via administrative rule-making and executive order rather than legislation. While party balances in power may shift moderately, a ground-swell shift is unlikely – the electorate too disjointed and divided for this to occur.
Socially, the structures of society continue to shift. People are more mobile. Traditional jobs more scarce especially those with benefits. Education is required but not necessarily in the form of traditional four-year degrees for many new and evolving jobs. The ability to earn a family supporting or for that matter self-supporting wage without special training or skills is eroding quickly, save for farming to a certain degree. Wages will not inflate to any large degree for quite some time again, except in certain industries where scarce labor-skill is operative. Child bearing occurs later and today, in rising numbers within single parent, non-intact couples. Saving rates remain low although personal debt levels have declined but this is likely temporary. And finally, most individuals don’t view their income allocation toward health care as favorable and would prefer, a greater amount of their income be available for discretionary spending. As long as this view, not supported economically, remains prevalent, the pressure on government to subsidize or create cheaper health care will remain high.
Economic trends and economies are changing and will continue to evolve for another decade plus. This essentially means that labor-levels and employment levels are different and will remain different and thus, higher levels (historic) of unemployment, under-employment, income and non-participation will remain. These factors cause governments to fund entitlements and support programs. This will change over time as new sub-economies evolve and social structures adjust. Expectations move and production shifts to balance a mixed demand for different services, goods, and commodities world-wide. Today, the imbalance however is palpable as fossil fuel production has moved geographically, food production and distribution as well, and manufacturing re-structuring to a heavy industry third-world production and high-tech production and design residing in first-world countries The U.S. economy will be different and thus so will be standards of living, valuations on real property, consumer behavior,, and credit and investing. How this shapes the ACA going forward, I’ll delve into in the next series of posts.
Since last week, I’ve fielded a number of questions/inquiries stemming from the PBS segment on Assisted Living. Interesting, a number of the queries have come from sources tangential to the industry (policy folks, trade associations, advocacy groups, etc.). Thematically, these sources are looking for answers as to “why” and “what can be done”. Aside from ill-advised regulations, my perspective is the best fix is an industry driven effort.
One could over-simplify by saying, “don’t take anyone as a resident that needs more care than can be or should be provided in Assisted Living” but that’s not practical. Residents change throughout their stay, sometimes rather abruptly. The most complex changes, and those that represented the focus of the PBS piece, are cognitive and behavioral. While medications exist to ameliorate or control certain behaviors, the medications have side-effects and are ideally, the final, last course of behavior management. In all instances, behavior medication should only be given in a setting where a Registered Nurse is present and assessments and monitoring can occur (remember, only Registered Nurses can assess by license authority).
The lessons learned or should have been learned and the counsel I have provided to clients and inquisitors alike is as follows;
- Be clear with residents and families on admission, what kind of staff are on-site and immediately available. This communication should frame then, the services that can and will be provided.
- Be clear with resident physicians on the same information. Don’t encourage or allow physicians to become comfortable with providing orders for PRN (as needed) medications if the same medications require a professional assessment prior to administration, unless the facility has RN coverage on each shift. Effectively, this means that PRN orders for anxiolytics, hypnotics, anti-psychotics, narcotics, etc. are inappropriate without access to an RN for an assessment.
- Beef-up pre-admission screening and assessments with qualified, licensed personnel to fully understand, prior to admission and re-admission, the care needs of the resident. In many cases, I advise going to the resident’s current place of residency prior to admission.
- Make certain that any public (written in particular) or oral representations of Assisted Living as an alternative to nursing home care are gone and certainly, not made or implied. Assisted Living is not a substitute for institutional care if the institutional care is truly required.
- Create specific assessment and re-assessment periods to address care changes more frequently. I like quarterly reviews for Memory Care residents and no less than semi-annual for Assisted Living (non-Memory Care). I also like mandatory 30-45 days post admission, again at 90 days and then semi-annual. I also like this schedule to repeat whenever a resident is hospitalized and returns or returns after an SNF stay.
- Utilize evidence-based, best practice protocols for AL and Memory Care. AMDA is a good resource. Provide physicians with the information as well.
- Develop and utilize, a solid orientation and training program for staff. For Memory Care, there are some good resources available today from Leading Age, AHCA and ALFA. For facilities and organizations that are heavily invested in Memory Care, I also recommend exploring and using, TCI or CPI to augment training (specialized training in dealing with aggressive and combative behaviors).
- Be focused on staff levels based on care needs of residents. If increasing or integrating more professional staff is not an option, be vigilant on discharge planning or transition planning. Bottom-line: If you can’t effectively meet resident needs 24/7, say so and start discharge planning. Have sufficient numbers of staff trained and available, even PRN if required, to address resident care challenges.
For facilities/organizations capable of going to the “next” level, either by size or by financial status, I recommend the following as true “game-changers” for Assisted Living.
- Contract with a “house doctor” or Medical Director. Build a system that integrates elements of medical oversight and engagement with your resident population and staff.
- Expand the care team to include social workers, in Memory Care a psychologist or psychiatrist (or RN extender), a dietician, qualified activities professionals, and rehabilitation therapists.
- Employ a building or program administrator with appropriate degrees and training plus a demonstrable history of working in a post-acute/long-term care environment. Paying a bit more is worth it for someone with appropriate training and education.
- Become active participants in state and national trade associations. Encourage staff to participate as well. I also encourage networking with other professional organizations such as the Alzheimer’s Association.
- Hold regular family meetings or focus groups to both inform and solicit feedback. I like at least semi-annual.
- Connect with a local home health provider for staff augmentation when residents need more care, temporarily or until discharge. I also recommend connecting with a hospice agency.
- Contract for pharmacy consultations on all residents and if possible, have a pharmacist as a resource to Memory Care staff.
Final Word: Communicate and be clear with residents and families regarding the services that are “truly” available and where the “appropriateness” line resides for the organization/facility. Don’t ever extend beyond what staff can provide and what the organization is capable of delivering on a consistent almost constant basis. Recognize that resident care needs change and that limitations exist as to what ALFs can and should provide. Be clear, be compassionate, and be honest – within the community and the organization.
The Fiscal Cliff stories are everywhere and as a result, lots of misinformation, conjecture, and supposition of deals, no deals and what happens next abound within the media. The economist in me can’t help but opine on the economics at stake but for this purpose, I’ll take only a slice of the overall issues; a healthcare slice.
Suffice to say, the issues on the table are polarizing and complex as the intricacies of policies current, past and yet in transit are all actors in a grand ideological play. If for example, I chose to take each possible issue that is part and parcel to the Fiscal Cliff discussions singularly, elaborating on what the issue is, why it is part of the discussions, and the pros and cons of addressing the same temporarily or permanently, I would pen the equivalent of War and Peace. The healthcare elements are complex enough and below, I’ve done my best to summarize and focus.
- Obama Care/PPACA: This is the grandaddy of conundrums at the table, ideologically and practically. The ideological issues are clear while the economic implications are muddy and tied to issues within the Fiscal Cliff discussions. Taking this issue in two big chunks for sanity and brevity, the discussions tilt on separate axis’: Deficits and Taxes. Sequestration which is part of the Fiscal Cliff discussion (cuts in federal spending), impact Medicare and are a direct result of rising federal deficits and the debt ceiling (yes, its back) debate. The primary driver of current deficit levels is entitlement spending. Within and inextricably linked to the Fiscal Cliff discussion is renewed discussion regarding entitlement spending, the debt ceiling, etc. and thus, costs associated with the PPACA. As Congress controls funding for federal programs, an unavoidable discussion regarding Medicare and Medicaid spending is embedded within the Fiscal Cliff/debt ceiling discussion and thus, core elements of the PPACA are on the table (metaphorically). The second chunk of PPACA impact is its phase-in of new taxes. Here’s where things get horribly complicated. First, the PPACA imputes an additional Medicare tax on individuals that earn over $200,000 and families that earn over $250,000 (.9%). This tax applies only to “people” not employers. In addition, the PPACA imputes a 3.9% tax on investment income for individuals and families. Investment income is defined as dividends, capital gains, rents, royalties, etc. This tax applies to any individual with a Modified Adjusted Gross Income of $200,000 or families at $250,000. The Fiscal Cliff twist or dilemma? If no compromise on current tax rates is attainable and the rates rise to pre-Bush levels, a person earning over $200,000 per year could pay capital gains tax (including the PPACA portion) of 23.8% (currently 15%) and a dividend tax of 43.4% (currently taxed at individual tax rates or approximately, 35%). This implication alone has many economists fearful of signficant market reactions and potential pullback from investors enough to create a recession.
- Medicare Cuts: This element of Fiscal Cliff discussions contains known and unknown elements. The known elements involve Sequestration cuts if unresolved, equal to approximately a 2% Medicare cut in provider payments and the evaporation of the present “doc fix” funding, netting in January to a 27% cut in physician and other Part B provider payments. Without resolution, both occur automatically. The unknown elements center around the debt ceiling and the structural deficits current and projected in entitlements, principally Medicare and Medicaid. In a recent Fitch outlook, Fitch indicated that while the healthcare industry outlook at present is stable, deficit reductions, increased taxes, etc. could drastically change industry fortunes to negative and quickly. Fitch notes that margins today are small and capital levels reasonably adequate but fortunes can change quickly with margin erosion via cuts and unmeasured structural changes to Medicare and Medicaid funding. Given that numerous provisions across healthcare arising from the PPACA are presently in-play (hospital readmission penalties and medical device taxes for example), the industry is already under a certain amount of constraint.
- Healthcare and the Economy: Healthcare today is a $3 trillion economy, larger in scope than the entire Canadian economy (GDP) of $1.74 trillion. In fact, only three other nations in the world have a larger total economy than the U.S. healthcare economy (Germany, Japan and China). The Fiscal Cliff implications for healthcare also hold enormous economic implications for the U.S. Simply, if the U.S. economy moves closer to a total stall or recession, the impact on healthcare is enormous. The two largest entitlement programs are tax funded and a reduction in tax revenues via additional economic slow-down, further employment rescission, etc. places not only additional deficits into Medicare and Medicaid but additionally, removes paying patients from the system. More deficits in Medicare and Medicaid place greater burden on policy makers to cut spending. Economic weakness moves patients away from seeking care and ultimately, shifts the health risk profile of the population. This shift is insidious and fraught with long-term implication as it is typified by undiagnosed and ill-treated chronic diseases – already a major problem in the U.S. Any further long-term erosion of population health status due to persistent underemployment, unemployment, etc. pushes the unresolved care burden incrementally higher (more expensive). The net result is a sicker population overall, one that becomes ridden with chronic illness, disability, etc. Further, additional burdens for providers arise in the form of patients seeking too much urgent and emergent care; expensive and often, under or not reimbursed adequately, if at all. Given that the economy remains in an overall fragile state of recovery and the last series of years have been straining on providers, any inability on the part of Washington to resolve the Cliff issues with certainty and equanimity bodes poorly for providers and patients alike.
Not that I am opposed to answering dozens of e-mails with the same or similar question, I thought it best to post this reply with a uniform answer.
YES, I will be at Leading Age in Denver, in October. And YES, I am speaking on Tuesday, October 23rd. My session is between 8:00 – 9:30 AM and the topic/subject matter is focused on the development and use of Economic Value Propositions in marketing strategy. I am happy to connect with folks but my time is a bit limited as I fly in from Charleston on Sunday and fly back out shortly after my session.
Sorry everyone – no trends this week (not that there aren’t any). Bumping around the Illinois, Iowa and Wisconsin circuit this week and today, I’m out of gas and headed for a golf course. Time to lay low a bit, recover and recreate. On my radar when I return to action post Labor Day are all of the following (and then some).
- Political news abounds – convention season in full swing and healthcare smack-dab in the middle of the growing debate.
- Some interesting dynamics coming out on hospital observation stays.
- Hospice, hospice, and hospice – fraud, utilization, census shifts, etc.
- Medicaid managed care and the Wellpoint dynamic.
- Omnicare, Sunrise acquisition, PBMs and the fairly massive transitions of former brand medications headed to generics.
- Home health and why this industry has trended so poorly as of late.
- Other cool stuff too (if you’re a fan of health policy and economics)!
Until next week – a fairway beckons!
Later today, the Congressional Budget Office is set to release an updated “score” of the Affordable Care Act (PPACA) incorporating the decision of the Supreme Court. The fundamental reason for the update is the Court’s decision to invalidate a provision within the Act that would have penalized states via reduced federal Medicaid funding should one or more opt to not participate in Medicaid expansion. As I have written over the past week or so, this revised score from the CBO should be fascinating, especially when spun politically by both parties.
In advance of today’s release (earlier estimates had the release pegged for yesterday), Douglas Holz-Eakin and his group the American Action Forum (Holz-Eakin is a former CBO head) provided their score of the ACA and the Medicaid expansion opt-in, opt-out scenario. Per their estimates, if six states decided to opt-out of expansion, the associated cost increase is between $72 and $80 billion between 2014 and 2021. If all states opted out (won’t happen), the associated cost increase over the same time frame is between $562 and $627 billion.
The reason for the cost increase estimate lies on the cost difference between newly eligible participants via expansion not being cared for within the state Medicaid system and thus using federal subsidies to buy insurance through the exchanges, at commercial insurance pricing. There is a cost difference between the two with Medicaid grant funding to a state lower (even at the Act’s full funding level) than federal subsidy through the exchange. Holz-Eakin estimates that in the six state opt-out scenario, 4.4 million individuals will not participate in Medicaid and 3.2 million (people over 100 percent of the Federal Poverty Level) will thus purchase subsidized insurance through the Exchange.
I’ll provide additional updates once I receive and review, the revised CBO score.