The Surprising Secret Behind Trumpcare’s CBO Score
Robin Young • Thu, July 6th, 2017
The non-partisan Congressional Budget Office (CBO) scored both versions (the House and the Senate) of Trumpcare and reported that the bills would have a devastating effect on the number of insured Americans. According to the CBO, both versions would reduce healthcare coverage for 20+ million people.
The CBO is Congress’s analytics group. Its goal is to predict the practical impact of legislation.
And it tries to perform its functions with utter non-partisanship so that both political parties can respect the reports. It’s a no-spin zone.
So, we were quite surprised to read a June 2017 article in The New England Journal of Medicine (NEJM) which appeared to disclose one of the key methodologies by which the CBO scored Trumpcare (and before that, Obamacare).
In a nutshell, the authors of the NEJM article quantified the price elasticity of American healthcare!
Which, in turn, became one of the key algorithms behind the CBO’s Trumpcare score.
So, here’s a peek under the hood of the CBO’s recent scoring of Trumpcare.
Elasticity of Demand
Economists define “elasticity of demand” as the relationship between a change in the quantity demanded of a particular good and a change in its price. Higher prices, lower demand. And vice versa.
Healthcare demand is, by reputation, inelastic.
Which implies that healthcare demand never declines, no matter what prices do.
The CBO, however, had to put numbers on the relationship between healthcare pricing and demand.
Here’s how they did it and what they learned.
Healthcare’s Elasticity of Demand
An article appeared in June 2017 in The New England Journal of Medicine. The authors were Joseph P. Newhouse, Ph.D. (who famously led the team that conducted the RAND Experiment in 1971) and Sharon-Lise T. Normand Ph.D.
(N Engl J Med 2017; 376:2160-2167June 1, 2017DOI: 10.1056/NEJMra1602774).
In the article (titled: The Changing Face of Clinical Trials: Health Policy Trials) Newhouse and Normand performed a meta-analysis of clinical trials of healthcare financial incentives. They, of course, looked at the classic 1971 RAND Health Insurance Experiment and the 1985 Oregon Health Insurance Experiment, which are two well-known examples of trials that varied the prices that patients paid for their care and then measured how those price changes affected consumption of healthcare services.
The RAND Experiment
The RAND experiment found that for each 10% increase in cost of a prescription drug, spending decreased by 2% to 6%, depending on class of drug and condition of the patient.
The experiment sought to answer: "Does free medical care lead to better health than insurance plans that require the patient to shoulder part of the cost?"
The research team, which was organized by health economist Joseph Newhouse, established an insurance company using funding from the U.S. Department of Health, Education and Welfare.
The company randomly assigned 5,809 people to insurance plans that had either zero cost sharing, 25%, 50% or 95% cost sharing with a maximum annual payment of $1,000.
It also randomly assigned 1,149 persons to a staff model health maintenance organization (HMO), the Group Health Cooperative of Puget Sound. That group had no cost sharing and was compared with those in the fee-for-service system with no cost sharing as well as an additional 733 members of the Cooperative who were already enrolled.
The RAND’s 5 Basic Conclusions
- An early conclusion was that health insurance without co-payments "leads to more people using services and to more services per user," referring to both outpatient and inpatient services. That conclusion changed over time and eventually concluded that free care had minimal influence, favorable or adverse, on the average participant.
- "Low income initially sick group assigned to the HMO... [had a] greater risk of dying" than those assigned to fee-for-service (FFS) care.
- Cost sharing reduced "appropriate or needed" medical care as well as "inappropriate or unnecessary" medical care.
- Healthcare utilization rates were minimally influenced by variations in coinsurance rates. The exception was for poor and sick people where a reduction in coinsurance rates was harmful, on average.
- Increased cost sharing is associated with lower rates of drug treatment, worse adherence among existing users, and more frequent discontinuation of therapy. For each 10% increase in cost sharing, prescription drug spending decreased by 2% to 6%, depending on class of drug and condition of the patient.
The Oregon Experiment
In 2008 Oregon conducted an experiment with Medicaid expansion to answer the question: ‘Does Medicaid expansion change healthcare utilization?’
It found that in the first year of coverage people who received Medicaid were 30% more likely than a control group to have a hospital admission, 15% more likely more likely to take prescription drugs, 35% more likely to have an outpatient visit, 60% more likely to have a mammogram, 25% LESS likely to have an unpaid medical bill sent to a collection agency and 35% LESS likely to have an out-of-pocket medical expenses.
Eighteen months after Medicaid coverage began, the researchers found that emergency department use rose 40% increase and that the increases ranged across different types of visits, including visits classified as preventable or primary care treatable, and across different subgroups.
In one trial conducted in rural Ghana, families were randomly assigned to either receive free formal medical care or continue to pay user fees (control group). Those receiving free care used healthcare services about 12% more often than those paying fees. There was, however, no significant difference in anemia (the disease measured in the study) prevalence between the two groups.
A trial similar to the RAND experiment was carried out in rural China. This experiment showed that pricing affects the use of care across diverse cultures and had similar outcomes as did the RAND experiment.
Another trial, the Post–Myocardial Infarction Free Rx Event and Economic Evaluation (MI FREEE) trial found that adherence to drug protocol in the control group (co-pay) was less than 50% for all four drug classes. Making the drugs free raised adherence by 4 to 6 percentage points and reduced rates of major vascular events and revascularization.
The CBO’s Scoring of Trumpcare
Reading the House (and later Senate) bills, the CBO then analyzed it for potential impact on spending and health coverage. A significant part of that analysis was based on an estimate of the elasticity of healthcare as described in these various studies.
The CBO concluded the House’s version of Trumpcare would “increase insurance premiums before 2020, relative to those under current law—by an average of about 20 percent in 2018 and 5 percent in 2019.”
In addition, the CBO estimated that Medicaid funding would decrease by $834 billion from Obamacare levels. That, as well as other funding cuts, would likely reduce the availability of health insurance.
Quoting directly from the CBO report: “CBO and JCT [Joint Committee on Taxation] estimate that, in 2018, 14 million more people would be uninsured under H.R. 1628 than under current law. The increase in the number of uninsured people relative to the number projected under current law would reach 19 million in 2020 and 23 million in 2026. In 2026, an estimated 51 million people under age 65 would be uninsured, compared with 28 million who would lack insurance that year under current law.”
Trumpcare Would Cut Orthopedic Demand 0.7%, Spine 1.2%
A new analysis by one of Wall Street’s top medical device research groups has concluded that passage of the American Health Care Act (Trumpcare), if ultimately signed into law by President Trump, would likely reduce orthopedic procedure volumes 0.7% in 2018 and, cumulatively, overall volumes 1.2% in 2026.
The new analysis also concluded that the spine surgery sector would be the hardest hit.
The May 17 research report was issued by Wells Fargo Securities and was based on their analysis of the Congressional Budget Office analysis of the initial House AHCA bill.
Five takeaways from both the CBO report and Wells Fargo’s analysis:
- AHCA could cut spine procedure volumes by 1.2% in 2018. The spine sector is more fragmented, has more pure play suppliers and is already the weakest sector in terms of procedure volume growth so it may well experience the highest rate of volume decline due to AHCA passage.
- Passage of AHCA could cut coverage for 4.4% of U.S. population. The CBO estimated that passage of AHCA would remove health coverage from approximately 14 million people or 4.4% of the U.S. population in 2018. Doing the math, that would mean a potential 0.5% reduction in healthcare procedure volume.
- Orthopedic procedures are highly dependent on insurance coverage. Wells Fargo’s research team found that orthopedic procedures are among the most dependent on insurance coverage. Of the six procedures which appeared to be most dependent on insurance coverage, four were orthopedic including knee arthroplasty, hip arthroplasty, spine fusion, and non-hip and knee arthroplasty. For example, the average number of uninsured among the non-elderly (non-Medicare) population is 10.5%. But the number of uninsured who have knee arthroplasty (again, non-elderly) is 1.2%. Again, 10.5% for the overall population and 1.2% for knee arthroplasty.
- People with healthcare coverage tend to consume more healthcare services than those without coverage. Wells Fargo’s team found that the number of procedures per million tends to be lower in people without insurance then those with insurance.
- Pure play spine especially vulnerable. While the Wells Fargo team focused on companies, the logic also holds for any pure play spine surgery provider (ambulatory surgery center, clinic and hospital). Most orthopedic services and implant/instrument providers are part of large diversified companies like Johnson & Johnson, Medtronic, Stryker, Zimmer Biomet and Smith & Nephew. The portfolio effect of a broad range of medical device, pharmaceutical, biologic and durable equipment products mutes the effect of AHCA. But pure play companies and providers—which are more prevalent in the spine sector than in any other orthopedic sector—are more vulnerable to AHCA insurance coverage changes.