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US Supreme Court

This morning, the Supreme Court upheld Affordable Care Act’s individual mandate. While the biggest surprise was Chief Justice John Roberts’s siding with the majority in the case, a close second was how the majority interpreted the constitutionality of the of the mandate. They said the mandate is a tax, not an extension of the Commerce Clause.

Confused as to what exactly that means? I asked Thomas Brennan, an associate professor of law at Northwestern with a joint appointment in finance at the Kellogg School, to clarify things.

Brennan said the main question before the Supreme Court was which part of the Constitution allowed Congress to penalize people who don’t get health insurance. There were two main possibilities, the Commerce Clause, which gives Congress the right to regulate commerce between states, and the 16th Amendment, which grants Congress the power to levy taxes without doling it out to the states or basing it on Census results.

That the taxation argument won caught people by surprise. The Commerce Clause has been why many laws enacted by Congress have passed legal muster, including the Civil Rights Act of 1964 and various parts of the New Deal. It was also seen as the part of the Constitution on which the mandate would be either upheld or struck down.

The taxation issue “was not briefed or argued in nearly as much detail as the Commerce Clause issue, and I don’t think that most people thought it would carry the day for the new law,” Brennan said.

Part of that surprise stems from the Commerce Clause’s wide applicability. “Over the years, the nature of what exactly constitutes ‘Commerce’ for this purpose has been broadened considerably,” Brennan said.

In the Affordable Care Act case, “One argument was that the penalty provision now came within its scope as well. Another argument was that this was far beyond the intended meaning of the Commerce Clause, particularly because it charged people a penalty for inaction rather than for action. The Supreme Court decided, essentially, that this latter argument was more correct—the Commerce Clause does not go this far. As a result, today’s opinion can be seen as reining in, to a degree, the expansion of the Commerce Clause to new areas.”

While four of the five in the majority supported the mandate under the Commerce Clause, Justice Roberts did not. Yet even though he didn’t support the Commerce Clause argument, he didn’t invalidate the mandate, either. Instead, he said the mandate acted as a tax on the people who have to pay it, which is within Congresses powers.

But as with many aspects of law, there’s a lot more to this decision than meets the layperson’s eye. “The tricky thing here is that the constitution requires ‘capitations’ and ‘direct taxes’ to be apportioned among the states, which means that the amounts collected need to be pro rata across the states according to the populations of the states as recorded by the Census,” Brennan said.

“There is a critical question here of what a ‘capitation’ or ‘direct tax’ is, and it is murky and complicated,” he continued. “The relevant prior Supreme Court cases that deal with the issue are over 100 years old, and some of them over 200 years old. The answer is not completely clear, but it seemed very plausible that the penalty might be a ‘capitation’ or ‘direct tax’ and thus be subject to apportionment. This would have eliminated the taxing power as a basis for upholding the penalty provision, since apportionment among the states was not what the law was doing.

“What the Supreme Court did today, though, was to really significantly simplify and expand the interpretation of what things are neither ‘capitations’ nor ‘direct taxes’ and thus are things which Congress has the power to collect from people under its taxing power, without apportionment.”

In the last century or so, few Supreme Court rulings have limited the expansion of the Commerce Clause. This ruling went against that trend. “But that was significantly offset by a new door to Congressional power that was opened by reading the taxing power as far more broad than it had previously been understood to be,” Brennan said.

Brennan also noted that while today’s ruling was influential, he’s not sure how it will affect legislation or court rulings in the future. “In principle, it opens up the door to many other things being deemed taxes that are not subject to apportionment and letting Congress collect penalties or taxes from people for all sorts of things,” he said. “For right now, though, it simply means that the penalty provision of the health care law has been upheld.”

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The Supreme Court is expected to rule later this month on a central part of the Affordable Care Act, the individual mandate that would require everyone to purchase health insurance. While the individual mandate is important, health insurance exchanges are another key feature of the legislation. They would allow individuals and small businesses to band together and use strength in numbers to purchase plans at lower costs. The exchanges are to be set up on a state-by-state basis. Some states have been dragging their feet or outright refusing to begin the process, but others have been moving rapidly.

When it comes to setting up a health insurance exchange, states face three main challenges, said Leemore Dafny, an associate professor of management and strategy and expert on health insurance exchanges. (Dafny will be on leave from the Kellogg School next year to serve as a deputy director at the Federal Trade Commission’s Bureau of Economics.) The first is “developing a governing authority, and identifying leadership for that entity,” a process that can be fraught with politics. Next the state has to determine how prescriptive it will be regarding plan specifics. “Do they emphasize the quality? The lowest bid? A combination of the two?” she said.

Finally, states have to determine how risks will be spread across participating insurers. Since insurers have no choice in customers—preexisting conditions are not grounds for denial—one could become overloaded with sick people. For the exchange to function properly, other insurers would compensate that company for its outsize share of the risk burden, Dafny said.

Once an exchange is up and running, states can still tweak their approach. “Massachusetts has been refining theirs regularly—most recently, by constraining the proliferation of plan variations to reduce overwhelming choice and to facilitate price comparisons,” Dafny said. That removes some of the pressure to create a perfect exchange from the start.

Health insurance exchanges will likely have a significant impact on how people shop for health insurance. Their scope is limited for now, since current exchanges are aimed toward individuals and small businesses. Employees of large firms, which typically provide health coverage, are welcome to apply, but likely won’t—they would probably pay more than they currently do through their employer.

But in the future, new exchanges could be geared toward just such people. Dafny explored the idea in a recent research paper. She discovered that employees of large firms participating in an exchange would give up at least $1,240 in employer subsidies for the opportunity to select the plan of their choosing. In this case, employers would benefit by saving money, Dafny noted, and employees would be happier by gaining access to a plan that they feel suits them better.

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Nurses station

On Monday, the New York Times covered a study that claims electronic medical records may not cut health costs. The paper was written by a collection of doctors and public health experts. Steve Lohr, reporting for the Times:

The study showed, however, that doctors with computerized access to a patient’s previous image results ordered tests on 18 percent of the visits, while those without the tracking technology ordered tests on 12.9 percent of visits. That is a 40 percent higher rate of image testing by doctors using electronic technology instead of paper records.

That’s seemingly bad news for electronic medical records, which have been touted as one way to drive efficiency and cost savings in health care. The New York Times is apparently taking this study quite seriously, going so far as to publish an editorial the day after the article ran.

Still, something about this study didn’t seem right to me, so I asked around. Some professors were willing to give me a bit of background, but not openly, citing research in progress.

First, electronic medical records (EMR) are typically deployed in hospitals and clinic networks that have money to spare. The up-front costs of switching from paper to digital are not insignificant. Second, not all providers have deployed EMR to the same degree. Hospitals and clinics that use EMR can be split into roughly two camps—those still early in the transition and those that have been using EMR for years.

The study covered in the Times did not account for this bifurcation. If it had, it’s most likely that it would have reported a different result. Hospitals and clinics early in their use of EMR have higher costs for the first two years. After that, if the hospital is in a well-networked location with access to talented information technology professionals, costs will likely drop. Many hospitals further along with the transition have seen their costs drop after the initial spike.

Finally, during the time covered by the EMR study, imaging technologies have become more widespread. It’s possible that doctors are ordering more imaging tests because they now have access to more imaging machines, and that this merely coincided with the adoption of EMR.

There’s certain to be more research on this topic, so stay tuned.

Photo by Dave Q.

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The federal government announced Monday that pharmaceutical, medical device, and other healthcare firms will have to disclose their financial relationships with doctors. Research shows that doctors who receive financial or other compensation from such companies treat patients differently and ultimately raise the cost of care. That’s good news for patients, though the industry will undoubtedly be affected.

In a way, pharma and medical device firms already knows how to deal with such regulations. “Variations of this type of regulation have been around for a while,” said Lakshman Krishnamurthi, a professor of marketing, “particularly in the area of Continuing Medical Education where sponsoring drug companies must report their relationship with the medical presenters.”

But this new requirement, he said, “goes further.”

The majority of internists and general practitioners will probably not be affected, Krishnamurthi said, but specialists like oncologists, psychiatrists, and orthopedic surgeons who have closer relationships with pharma and medical device companies will likely notice some changes.

More likely to feel the heat of the new regulations are the companies themselves. “The rep picking up lunch for the office staff to chat up the receptionist or the nurse will not be able to do so, or will have to report it if he/she does so,” he said. “But this is small fry. The bigger question is the effect on consulting and research interactions between doctors and the drug/device industry. Yes, there can be abuses but one would expect the vast majority of these interactions to have positive effects on discovery, drug interactions, and use of drugs.”

The overall financial impact is also less clear, Krishnamurthi noted. Companies will have to generate and disclose reams of data to comply with the new laws. “This will not be costless,” he said. “These costs will be passed down. So, there can be unintended consequences of the increased reporting requirements in the form of higher prices.”

“The counter is that the companies will not be spending the monies in the first place to avoid the reporting requirements. There will be some reductions, but if the companies believe all—or most—of the spending is legitimate anyway, they will continue to spend the money.”

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by wendizzle

Doctors who specialize in a particular field of medicine tend to be paid more for their services than a primary care physician—that’s no secret. The median specialist in 2004 was paid $135,184 more than the equivalent primary care physician, an amount that has grown more than 60 percent since 1995. While there may be myriad reasons why specialists are paid more, there is one that may surprise you—billing errors.

Specialists erroneously charged nearly one-third of all patients referred to them, according to new research published today by Joel Shalowitz, professor of health industry management. More often than not, the billing errors worked in specialists’ favor. Shalowitz’s survey of 466 referrals found enough errors to save Medicare $536 million annually if the billing system were simplified.

Medicare splits referrals into two categories, consultations and regular referrals. Consultations are a type of referral reserved for cases when the primary provider cannot comfortably make an accurate diagnosis. Specialists generally earn more for their consultation services—up to 30 percent more at Medicare rates—than they do for simple referrals where primary care provider made the initial diagnosis.

Most specialist services in Shalowitz’s study were not accurately billed, especially if the error was in the specialist’s favor. “If a doctor sends a patient to another doctor for a referral, chances are overwhelmingly it will be billed as a consultation,” Shalowitz said. “On the other hand, if it is submitted as a consultation, chances are overwhelmingly it will be billed as a consultation.”

A staggering 78 percent of referrals were incorrectly billed at the higher consultation rate, while only 5.5 percent of consultations were billed as lower paying referrals. These numbers raise uncomfortable ethical questions given that the consultation code was originally meant to compensate specialists for the additional time they invested in those patients, including making diagnoses and writing formal letters alerting primary providers of their patients’ conditions. The latter requirement has since fallen by the wayside, Shalowitz noted, and has never been well enforced, leaving little to prove or disprove that a consult took place.

Enforcing consultation requirements would be an enormous bureaucratic undertaking, he added, one that would certainly drive up costs. Eliminating the consultation code, though, could both reduce the pay gap between specialists and primary care physicians while spurring lower costs throughout the insurance industry. Private insurers often follow Medicare’s lead when determining their billing practices, Shalowitz said, and doing away with consults could help trim everyone’s medical costs.

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Dangerous Money

One year ago today the Dow Jones plummeted nearly 778 points, the largest single point total in the index’s history and a certain sign that our latest economic woes wouldn’t disappear quickly.  Since then, the unemployment rate has soared and the economy has continued to shrink.  So have you felt healthier this past year?

You should, according to a new study released Tuesday in the Proceedings of the National Academy of Science. The authors of the study combed through mortality and life expectancy data for 1920-1940 and compared the numbers to economic indicators for the same two decades.  Life expectancy plummeted during times of economic growth, they found, especially during the boom-boom years of the 1920s.  But when the Great Depression struck, mortality rates decreased and people of all stripes tended to live longer.

Perhaps even more intriguing is the correlation between certain diseases and economic growth.  Cardiovascular and renal diseases flourished during the 1920s, but leveled off in the 1930s.  Traffic deaths also fell during the Great Depression, as did the number of people succumbing to pneumonia and the flu.  Only suicides rose during the 1930s.

So what’s to blame?  Tobacco and booze, for one—more people drank and smoked heavily in heady times.  Furthermore, a working population is at greater risk of accidents on the job, a grim and widespread reality for blue collar workers in those days. The authors also suspect work-related stress played a role by exacerbating chronic diseases.

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Obama addresses a joint session of the U.S. Congress

David Dranove was one of the 32.1 million Americans to watch President Obama’s address on healthcare. Like many others, he was waiting to hear about the public option, or lack thereof. But Dranove also had his ears pricked for a policy point likely to be wrapped in more subtle language—the taxation of so-called “gold-plated” insurance plans.

Two-thirds of the way through (some time after Joe Wilson’s gauche exclamation—at 34:43 in the video linked above), President Obama mentioned that his proposed reform “will charge insurance companies a fee for their most expensive policies.”

I heard this statement myself, sighed with relief at the prospect of shopping malls bereft of full body scanning services, and moved on. I should have pondered the point further. Such a fee could finally encourage true competition in the insurance industry, according to Dranove.

The fee is “just another way of eliminating the tax subsidy for people who buy expensive health insurance plans,” he said. “It has been a centerpiece of virtually every economists proposal.”

“If you tax expensive plans, the expensive plans will have to raise their premiums, so the people who buy them end up paying more.” Dranove said. “It’s just as if they’d lost their subsidy.”

The President has “come around to what a lot of health economists, including myself in my last blog, had been suggesting he needed to do, which is get rid of the public options, focus on covering the uninsured, and do something about the tax break for expensive plans,” he said, adding the subsidies for gold-plated plans were “crazy tax policy.”

The tax-exempt status of health insurance in the United States dates back to World War II (pdf). During the war, wages were frozen to combat inflation. Employers, looking to compensate employees without violating the wartime mandate, started tacking on various benefit packages like health insurance. A 1943 regulatory ruling declared employer contributions to health plans tax-exempt, and a 1954 revision of the tax code cemented the policy.

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