STATS ARTICLES 2009
The Pricewaterhouse Coopers controversy: Fair arguments or flawed methods?
Nirit Weiss, MD, MBA, October 29, 2009
On October 11, 2009, PricewaterhouseCoopers released a report titled “Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage.” Since then, the media coverage of the health care debate has refocused sharply on the question of the integrity of the report and the validity of its conclusions. How well does the report hold up under scrutiny? Should we be concerned that proposed reforms will drive up private insurance premiums, as the report concludes? Or is the report itself merely a thinly-veiled effort by the insurance industry to protect its own interests, as much of the media coverage has suggested?
In its report ”Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage,” PricewaterhouseCoopers (PwC) concluded that the health care reform bill currently under consideration by the Senate (“America’s Healthy Future Act of 2009”) is likely to drive up costs of private health insurance.
The PwC report’s findings reinforced concerns over whether the public will be able to maintain the same coverage they now enjoy. However, media coverage of the report raised doubts about the findings, due to the report’s sponsorship by America’s Health Insurance Plans (an association representing insurance companies), along with PwC’s failure to take into account some countervailing measures included in the bill. A detailed understanding of the report’s approach and methods is necessary to make an informed assessment of its validity.
PwC studied the impact of four key provisions included in the recently approved Senate Finance Committee bill:
- Insurance market reforms (such as guaranteed issue and rate band restrictions) and consumer protections (such as high minimum benefit requirements) that are not coupled with an individual mandate for Americans to obtain health insurance.
- An excise tax (a tax typically levied on producers of goods felt to be harmful to society) on the providers of high value health plans (“Cadillac plans”).
- Increased cost-shifting to the private sector (decreased Medicare payments).
- Multi-billion dollar tax increases to health sector entities, which will increase their cost structure and be passed on to consumers in the form of higher premiums.
In evaluating the impact of these proposals on premiums, PwC acknowledged that some assumptions and estimates were made in the absence of contradicting evidence. Most of these estimates were based on information taken from generally accepted sources, such as the Congressional Budget Office (CBO), the Senate Finance Committee, or the National Health Expenditure Accounts. Other estimates were taken from extensive research from previous reports by PwC, which are referenced in the current report.
The assumptions include an increase in private healthcare costs of six percent per year under current law (in the absence of implemented reform), and they do not attribute any cost savings to the other provisions included in the bill. This report also does not take into account the role of proposed governmental subsidies in partly offsetting the increase in premiums for consumers of private health insurance.
The study produced some startling results. PwC concluded that, if the Senate Finance Committee bill is passed, by 2019 the average annual premium will be $9,700 for individual private coverage and $25,900 for an average family. While health care reform strives in part to match the anticipated 6 percent per year increase in costs to the more modest growth in the Consumer price Index of 2.5 percent per year, the reform proposal will increase the cost to consumers of private health insurance by an additional 18 percent above the expected increase under the current system.
How well does this conclusion stand up to close scrutiny? PricewaterhouseCoopers presented detailed data breaking down the extent of premium increases by age bracket and according to whether insurance is obtained by individuals, small businesses, large businesses, or large self-insuring businesses. The report concludes that individuals and small businesses would be hardest hit, with 49 percent and 28 percent increases, respectively.
PwC also concluded that the health insurance “exchanges” that are proposed to help increase access for small group and individual coverage would also drive up the costs for those groups. This would occur in part because large groups already have “guarantee issue” regulation, while small groups and individuals can still seek to negotiate their rates down by individual underwriting. Thus, PwC’s conclusions, if valid, present a serious indictment of the current health care reform proposals.
The media backlash surrounding the release of this report stands on the following key criticisms:
- The report was not objective, because it was commissioned by the health insurance industry.
- The study is flawed because it focuses onlyon four specific provisions of the Senate bill, and it does not factor in any cost savings which might result form remaining provisions in the bill.
- The study is flawed because it does not account for the role of proposed governmental subsidies in offsetting premium increases for Americans who wish to keep their private health insurance.
With respect to the first concern, PricewaterhouseCoopers is indeed a private firm which is commissioned to research and prepare reports for those who choose to hire its services. As with any such report, every effort should be made to identify biases or confounding factors which might alter the conclusions. This is certainly true of industry-sponsored studies, in which the client has a direct financial interest in the conclusions.
However, the criticisms must also be valid enough to stand on their own. The simple fact of being funded by private industry does not automatically invalidate the findings of a study. By the same logic, Senate and House committees are also composed of individuals whose campaigns were supported by private special interests, so the same argument could be made to invalidate conclusions drawn by our legislators. The findings of any report must always be judged on their own merits.
Second, concerns have been raised that the study focuses on four specific provisions of the bill, while ignoring the potential for cost saving of the remaining provisions. The Senate’s “America’s Healthy Future Act of 2009” does indeed contain numerous additional provisions. Those that are intended to help contain the costs of care, and therefore the cost of private health premiums, include outcomes research and linking payment to “quality of care,” promoting disease prevention and wellness, and strengthening primary care. Shouldn’t any report evaluating the cost of reform take these provisions into account?
It certainly seems to make sense that these measures would increase wellness and therefore decrease overall health care costs. However, what makes apparent intuitive sense is sometimes disputed by empirical evidence. In this case, numerous studies published in highly regarded academic journals have either failed to show cost savings, or actually showed cost increases, as a result of increased prevention and “wellness” efforts. [See sidebar] Very few specific preventive measures which have been studied have clearly demonstrated cost-effectiveness, and even fewer have been found to be cost-saving.
Thus, many of the measures which PricewaterhouseCoopers left out of their equations are either known to not be cost-saving, or the potential savings are still too unknown to be quantified. A detailed analysis of which measures are indeed cost-saving needs to be undertaken, and this is also proposed in the bill.
But if and when such cost-benefit analyses are worked out, the question arises as to whether patients are really going to be denied care which is not cost effective. Such decisions have generated political fury in Britain, a country that is acculturated to, and generally supports, nationalized medicine. Given our much stronger culture of personal choice, and given that many people will, as a consequence, demand access to care regardless of cost, public protest over "rationing" seems inevitable. In other words, it seems likely that even if such cost-effective measures are found, implementation will depend as much on politics as on medicine or economics.
The most telling criticism of PricewaterhouseCoopers’ conclusions is that the report failed to take into account the role of proposed governmental subsidies in offsetting the premium increases for Americans who wish to keep their private health insurance. PricewaterhouseCoopers itself makes note of this at the very beginning of its report. Obviously, if the question is the impact of proposed reform on the future premiums paid by Americans who maintain their private health insurance, any subsidies provided to help offset these costs are highly relevant. However, what is most relevant to consumers of health care is the impact of health reform legislation in the absence of “corrective” subsidies. The authors of the bill imply that these will be paid from the savings obtained from the increased efficiency of the system. As noted above, however, these savings are still largely theoretical and as yet unproven.
In fact, the bill states that the funding will be derived from increased taxation on the so-called “Cadillac” insurance plans, from fees paid by industry and from increased taxation of individuals. But these increased costs to industry will likely be passed through to consumers of private health insurance. The bill also assumes billions of dollars in savings from decreasing Medicare payments, including a 24 percent decrease in physician reimbursements. But Medicare and Medicaid already reimburse less than the actual cost of caring for a patient. Further decreases will likey lead more physicians to opt out of accepting these patients, which would will significantly decrease their access to care.
Another Senate bill, the “Medicare Physicians Fairness Act of 2009,” attempts to correct for this problem by repealing the cuts in physician reimbursement. Because it is introduced in a separate bill, these additional costs are not factored into the calculations of the savings expected from the health care reform bill. These subsidies would ultimately be paid for by the public. They represent funds that are redistributed among individuals, but they cancel each other out on either side of the cost-savings analysis.
A major potential source of savings is the mandated requirement that all individuals must purchase insurance. This is intended to bring down the per-person premium rate by assuring the participation of relatively healthy young people who have previously chosen to remain uninsured. However, the potential cost saving effects of such a mandate have been diminished by the Senate Finance Committee bill, which weakened the recommended mandate to the point where individuals would face paying only a few hundred dollars in fines, far less than the cost of purchasing insurance.
Under the current bill, fines for failing to purchase insurance would not begin in 2014, and they would rise to a maximum of $750 in 2017. The IRS would collect these fines through tax returns, but the bill specifically prohibits criminal penalties for failure to pay the fines. (PwC did, in fact, calculate their increases based on the mandates laid out in the plan.)
Finally, the results of the PwC study are consistent with the outcomes of several smaller-scale experiments with guaranteed-issue and community rating on a state level, which led to increased cost and decreased enrollment in private insurance. New York and Washington are two examples. In Massachusetts, coupling similar reforms with an individual mandate was not enough to prevent significant increases in insurance premiums.
All these factors argue for taking the PricewaterhouseCoopers study seriously, despite the industry sponsorship that produced a media backlash against its conclusions. All scientific and economic studies are subject to limitations which impact the strength of their conclusions. Knowledge is imperfect, assumptions must be made, estimates are used, and human behavior does not always follow the model. These caveats hold true for the studies cited by both proponents and opponents of the current legislation. However, every additional valid study should enhance our knowledge and inform our decisions.
The PwC analysis is not invalidated by the existence of potential cost-saving measures, since these are unproven, or by the provision for subsidies against increased premiums, since these will depend on projected efficiencies that may prove difficult to implement, or – in their absence – on increased taxation. This leaves open the possibilities of increased private health insurance premiums, decreased benefits available for purchase, and restricted access to (expensive) new innovation.
In September 2009, President Obama told the Congress: If you “already have health insurance…nothing in the plan will require you to change the coverage or the doctor you have.” Surely such unfortunate outcomes will not be required by the Senate Finance Committee bill, or any other plan that emerges from the legislative process. But they may well be the expectable results of legislation that sets into motion new economic incentives, political forces, and unintended consequences beyond its control.
Nirit Weiss is a practicing neurosurgeon. She also holds a Master of Business Administration and specializes in healthcare economics. She previously wrote for STATS about the methodological flaws in the Commonwealth Fund’s National Scorecard.