60 Years of Entitlement Reform: How Violated Principles Created a Broken System

Problem: Most if not all health care and other entitlement reforms in this period have been narrowly targeted at a specific subset of the overriding problem. That problem is the need for a risk transfer from an individual or family to an entity able to mitigate the risk so that the individual, family, and society together can partially if not entirely resolve the problem. Often, part of the desired outcome should be a reduction in reliance on the risk transfer. Unfortunately, entitlement reforms (to a serious degree) have not reduced reliance on the risk transfer and frequently have achieved the opposite. Further, such reforms are often not concerned with consequences beyond the narrow application of the reform, nor with following basic scientific, actuarial, economic, medical, accounting, legal, and governance principles. As a result, outcomes have become less and less satisfactory over time relative to the objectives of the risk transfers.

Testing or Measurement of Satisfaction of Objectives: We have performed numerous tests of the health care reforms relating to public risk transfer systems using our Computer Actuarial Assessment Model (CA2M), as well as simpler methods of assessing other non-health reforms. Measurements considered using CA2M relate to costs, risk transfer adequacy, access to treatment or services, population health status, economic effects, and system sustainability. More general assessments of the same considerations were performed for other risk transfer systems using much rougher approaches. In most instances, we found serious violations of professional principles in evaluating these systems, leading to serious consequences in some if not many of the measurements considered.

Below are the principles for each category we have identified, with examples of the more egregious violations of these principles.

Scientific Principles

1. Identifying the Problem or the Reason for the Risk Transfer: The reason for a risk transfer is to mitigate a risk to a positive degree for the individual, family, and society. Despite all of the efforts at doing so and the enormous resources poured into it, poverty in general has not been reduced over the last 60 years, government deficits have soared as system sustainability has deteriorated, and many other risks have not been sufficiently mitigated.

2. Establishing Hypotheses that Are Anticipated to Produce the Necessary Risk Transfer: Numerous hypotheses have been put forward, and frequently they do not change even as it becomes apparent the hypotheses put forward are not resolving the problems. One example is the Affordable Care Act, as demonstrated in our testing of the law. (Reference: Document Report — Testing of ACA)

3. Continual Testing and Redefining Hypotheses Until the Identified Problem Is Resolved: This process is deficient in so many of our entitlement reforms. For instance, consider the lack of progress in resolving the non-sustainability of Social Security and Medicare over time.

Actuarial Principles

4. Risk Classification: This principle requires proper identification of risk characteristics of individuals or groups that are materially different (non-homogeneous). It involves setting criteria for rating, eligibility, etc. consistent with such differences. Violations typically include not allowing differences in rates by age or health status, and eligibility requirements that require pooling of non-homogeneous groups. For instance, HIPAA violated this principle in 1997 with its requirements for small group eligibility, and many states subsequently violated this principle with rate band requirements for these groups. Another violation has been pooling violations mandated by law, such as requiring the combining of medically needy individuals with individuals with much more minor health issues.

5. Moral Hazard: The requirement to accept an uninsurable risk or a highly rated risk at a subsidized price for coverage. Rules that insurers must afford protection to such insureds and cover losses elsewhere has been a common occurrence. Insurance should be used only for low-frequency and high-severity risks. High-frequency and/or lower-severity risks should be paid for and covered by other means, such as Direct Primary Care. An example of a violation of this principle is coverage of cost sharing via mandated Medicare Supplement policies to protect against claims under the Medicare Part B deductible. Numerous scenarios also exist where supplemental policies are sold to fill in gaps in coverage — whether for those under age 65 or seniors — where the protection does not fit a definition of low-frequency and high-severity. But cost sharing in insurance does not automatically create moral hazard if the situation covered in totality still protects against a low-frequency/high-severity scenario.

6. Adverse Selection: This is when one party is provided an advantage so that the other party to a contract is disadvantaged. For example, Medicaid coverage of pregnancy affords the eligible participant a significant opportunity to adversely select against taxpayers in general. Another common violation has been governmental rules created on established contracts that limit rate increases artificially, as opposed to denying them on actuarial grounds (insufficient credibility based on data).

7. Recognizing Dynamic Changes in Rating Characteristics or Variables Over Time: Medicare has violated this principle by never changing the age of eligibility from age 65 for aged benefits since its inception in 1965, despite average life expectancy increasing from roughly age 75 then to roughly 84 today. Another example that has frequently been observed is not allowing changes in rate slopes by age, area, or other factors despite credible data showing the differentiation is warranted.

8. Actuarial Soundness: This principle requires that each generation be treated equitably. Medicare has and continues to egregiously violate this principle by pushing more and more costs to future generations. Per our estimates, Medicare — with a reasonable functional accounting analysis — contributes roughly $500 billion a year to the federal deficit today. Likewise, Medicaid and other entitlement programs are creating significant deficits that future generations will need to address. Indeed, little if any functional cost analysis is done for any of the numerous federal, state, and local government programs.

Economic Principles

9. Scarcity: Resources are limited while human desires are unlimited, but human desires are constrained by demand versus supply. Frequently, when mandating that benefits are prescribed by law, the legislation and rules do not consider the consequences of requiring a benefit of excessive scope relative to what the market can provide at a reasonable cost. For example, providing a pregnancy benefit in health coverage for free or with a subsidy in individual health coverage must account for the selection of individuals and families relative to usage thereof, and/or implications of funding such incentives, plus the corresponding impacts on education, social services, and other needs.

10. Value/Costs and Benefits: Any reform should produce a net positive value to society across the entire population. In fact, our beta testing of ACA using CA2M shows this reform had more negatives than positives — both hypothetically per analysis prior to the reform and per actual analysis afterward. For example, in expanding Medicaid under ACA from some level of poverty (20 to 100% of the Federal Poverty Level, or FPL, varying by state) to 138% of FPL for non-pregnancy benefits, was the overall benefit or value added to the United States in totality positive or negative? The answer is not intuitively obvious. Some positives exist due to better access and health status for those in need of an additional risk transfer. But some negatives exist, such as increased patient loads and higher utilization under Medicaid, which means higher charges for privately covered individuals and more stress on providers to meet access demands. Our analysis of the Medicaid ACA reform demonstrates that as time marches on, the negatives have proliferated while the positives have not.

11. Demand versus Supply: Any reforms should consider this impact and the unintended potential consequences of such imbalances. Numerous price controls over time have been implemented in Medicare (i.e., DRGs, RBRVS) and in Medicaid (i.e., fee-for-service schedules, 340B). The impact of these price controls over time has been numerous, creating upward pressure on demand and restrictions on supply. These imbalances have been met by more cost shifting to unaffected markets, access issues in affected markets, health status problems related to access issues, and corresponding impacts on GDP.

12. Incentives: Consumers and businesses respond to incentives when making purchasing and investment decisions. Included in such decisions are trade-offs — the consideration that having more of one item may require having less of another. Further, decisions to take on debt (make an investment) should be weighed against the potential to produce more gains than the initial investment (while accounting for interest and inflation considerations). For instance, in setting out policies for Social Security and Medicare, what are the investments made on behalf of individuals and businesses versus the returns? CAUS modeling of these initial investments and returns suggests that benefits were heavily front-loaded for the benefit of early generations under these programs, and that today's population and future generations are and will pay a heavy price for this approach. Further, such an analysis suggests aggregate returns under the current approach are very small compared to what one would consider a reasonable target.

Accounting Principles

13. Revenue, Expenditure, and Matching Principle: Revenues and expenditures should be recognized as earned and paid out so that they are reasonably matched against each other over time. For instance, in a single-premium policy to cover medical costs for a person's remaining lifetime, revenue should be allocated over that lifetime consistent with GAAP accounting so that it is properly matched against costs. But in federal accounting, the period in which the premiums or revenues are collected is deemed earned at that time, and the expenses occur when they are paid out. This approach means that in social insurance (i.e., Social Security and Medicare), revenue for a working person (e.g., age 30) is collected today and used to pay benefits for someone collecting benefits and not working (e.g., age 70). The outcome of this approach is to have one generation pay for the benefits of a different generation. Unless monies are set aside from earlier periods that are adequate to reasonably fund future generations, those future generations can be left in an untenable position. This is why Social Security and Medicare are in financial difficulty.

14. Cost Principle: The value of an asset to be used in determining taxes or user fees, for instance, should be based on historical costs or actual value created per events — not current or future market values. Therefore, when considering revenue streams in attempting to create amortization as part of generational matching, consistent projections of cash flows (revenues and expenditures) are necessary. We are simply not following this principle in our public programs today.

15. Objectivity Principle: Actual data should be used as it becomes available, and all assumptions and estimates should be periodically reviewed and revised as appropriate to reflect results and ensure compliance with the revenue/expenditure/matching and cost principles above. We are simply not following this principle in our public programs today.

Medical Principles

16. Autonomy: This principle requires that the patient be able to make choices regarding their treatment. While arguably this principle has been violated the least of any, more and more patients are seeing their access to treatment and other choices deteriorate today because of the increasing problems in delivering high-quality and affordable health care. For instance, patients today covered by Medicaid have poorer access to timely care and quality treatment than those with Medicare or commercial insurance.

17. Justice: This principle requires that all patients have access to treatment while sharing the burdens of experimental treatments. Our system continues to see increasing access issues for poor patients and those in rural areas in many instances, while experimental treatment issues continue to abound.

18. Beneficence: This principle requires that the procedures and treatments provided are for the purpose of helping the patient. It also requires continual training of medical personnel, with the purpose being a net benefit. The first part is still true, but the supply and training of medical personnel has suffered. The shortage of supply versus demand as noted above has been due to a combination of influences, including price controls as noted above.

19. Maleficence (Non-Maleficence): This principle requires that treatments should not harm the patient or others in society. This principle is at the forefront of issues relating to COVID-19. The treatment of people with COVID was done to the exclusion of many people with other health conditions. Further, shutting down the economy has had many deleterious effects. One can debate the positives and negatives of such policies, but the policies implemented in response to COVID clearly violated this principle as well as others above, while overall producing serious negatives.

Legal Principles

20. Accountability: Laws must be enforced and applied uniformly. Many of our laws are different for some than others due to exemptions. For instance, the ACA does not apply to Congress. And the application of policies is hardly uniform in many instances. Consider the history of the Doc Fix under Medicare, let alone the accounting of the program as exemplified in comments by the Chief Actuary for Medicare in recent years on assumptions underlying program sustainability.

21. Fairness: The rights of individuals and groups should be protected. Given the deficits and problems with access, health status, costs, and generational issues as noted above, saying the system is fair and just is a difficult proposition.

Governance Principles

22. Participation: For risk transfer systems to achieve their objectives, participation in the programs must be substantial among targeted individuals and families. This goal is often achieved, but the objective of decreasing participation of individuals and families so that they become less reliant on the risk transfer is typically not. Indeed, Medicaid participation has exploded under ACA, as have government deficits; meanwhile, population health status is deteriorating, as is access to treatment.

23. Transparency: Risk transfer systems are funded by people in one form or another through payments which may be taken from payroll, covered via general tax revenue, covered via other fees, or covered through the funding of deficits. All of the revenues, disbursements, and liabilities require proper accounting and transparency so that the public is aware of the financial considerations today and tomorrow. However, accounting for the costs of these systems is anything but transparent. For instance, functional cost accounting of the liabilities and long-term amortization schedules for these programs are not well understood, nor are the ramifications of the long-term liabilities on economic performance.

24. Effective and Efficient: For risk transfer programs to be effective and efficient, one should be able to demonstrate that they satisfy their objectives and provide value to the individuals, families, and society they are supposed to serve. Our testing demonstrates that our entitlement system is not sustainable and is having a negative effect on living standards. To reverse this, we believe the principles found herein should be followed and not violated.

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