Tell Me Something I Don’t Know

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You know the good features in the Affordable Care Act. You know Republicans want to repeal it.  Fine, so “tell me something I don’t know”.

REPUBLICAN PROPOSALS

For instance, did you know that Nixon proposed a comprehensive health reform plan in 1974, or that Republicans countered Clinton’s health reform with their own in ‘93? What were some of their reforms?

Start with the ever-popular individual mandate. Republicans were strongly for it. Now they are solidly against it.  Banning exclusions due to pre-existing conditions?  They were for that before they were against it.   Continue reading

Health Care Reform: Separating the Wheat from the Chaff

Download PDF Report >>> Healthcare Reform Pro-n-Con

By Andrew Kurz* and Miles J. Zaremski**

 

It is time to hit the reset button—not on legislation—but on all the disparaging rhetoric surrounding it.  Denigrating a position or viewpoint one knows nothing about or is premised on incorrect “facts” makes it harder to adopt positions that best serve what Americans need and really want.  It is also more difficult to garner broad support from the general public if one succumbs to only what special interests desire.

The shot across the bow sent Democrats by the voters of Massachusetts with the election of Scott Brown can have many meanings, but one in particular has to be striking: politicians in Washington are not getting things done to help us outside the beltway.  A clear message from the Massachusetts’ electorate was that it is just as easy to remove an elected-official, as it was to vote that individual into office.

Americans are rightly upset with Washington, and certainly with good reason—particularly with health care reform, and other major pieces of legislation.  So little gets done, and when something is finally accomplished, it generally contains much unneeded and unnecessary pork.

We are here to focus strictly on explaining health care reform issues that make sense to all parties.  The focus is not on the current state of legislation, on Congress, or on the President.  We begin with the premise that accessing and affording health care in this country is truly broken.  On that, there is universal agreement.  Most would also agree that basic health care is a right for all Americans, not a privilege or responsibility—although a measure of personal responsibility is certainly involved. The authors also have the luxury of being “outsiders” and are not otherwise bound by having to politically compromise.   We can look at the best of what both sides of the aisle have offered that every American can readily understand and assimilate into their own experiences and household needs.

We offer a couple of other observations before we do.  Of the 2,000 pages in either the present House or Senate bills, less than 20% of them are concerned with much discussed reforms to private health insurance.  The remaining portions improve Medicare and Medicaid, and as well public health and the workforce.  Those changes are extremely important to bending down the cost curve for a segment that consumes about 50% of all health care dollars.  Ironically, for those who believe that reform is socialism, these programs are already government managed or sponsored.

Health care is cast in terms of affordability and accessibility.   Affordability is typically cast through the prism of a health insurance policy since that is how and where the majority of Americans receive their care.  Main Street also knows that what they pay for insurance is out of sight—sending thousands into bankruptcy, and, for millions, effectively denying them any insurance coverage at all.  For the overriding majority of the uninsured, insurance premiums either would consume far too much of their income, or they are locked out because of some pre-existing condition.  So health care reform, at least for starters, is health insurance reform.

Insurance reform has three fundamental goals or objectives: lowering costs, increasing availability, and maintaining or improving quality.  While there is wide agreement on these goals, there remains less agreement on how to achieve them.  When reviewing the paths to achieve each of these “end points”, the question is, whether they lead to progress toward achieving them (goals) or whether the means to get there are simply different paths with no discernible difference in outcome.  The strength of any analysis must focus on the former, as we now do.

ISSUES ON WHICH THERE IS BROAD AGREEMENT

The following objectives of which we speak have no adversary, though politics has a habit of tinting some folks’ glasses.

1. Accessibility: Broad agreement exists that insurance policies should (a) not exclude pre-existing conditions; (b) not allow cancellation of an existing policy owing to a medical condition; (c) guarantee issuance and renewals; (d) extend dependent child coverage to 26 years; and (e) allow cancellation only premised on non-payment of premium or fraud in the procurement of a policy.

2. Affordability:  Broad agreement also exists that insurance policies should (a) not set lifetime or annual limits on benefits; (b) set reasonable annual limits for cost sharing, i.e., deductibles and co-pays; (c) not allow pricing differentials based on sex; (d) set reasonable restraints on age-related differentials; and (e) create a national high risk reinsurance pool to protect insurers from the few enrollees who incur extremely high cost medical treatments.

(3) Quality:  Broad agreement also exists that insurance policies should (a) not require cost-sharing for basic, preventive health care services, though not necessarily for visits beyond recommended check-up intervals; (b) require an essential benefits package that covers all basic health care needs and allows comparison based only on price and service; (c) standardize forms in order to reduce paperwork and inefficiency in processing claims and enrollment; and (d) further the work of computerizing necessary medical information without running afoul of privacy laws.

Virtually every other industrialized country worldwide has health care inclusive of the above provisions.   These nations also provide universal coverage, exceeding the 95% range.  While all such programs operate differently, all have a private marketplace component and deliver health care at half the cost and with about the same average quality as the U.S.   Moreover, while the U.S. leads other nations in some criteria used to judge access and affordability, it lags in other criteria.  One measure where our country lags is the number of patient visits.  Our falling down on this measurement is oxymoronic to the claim that the US has the best health care system while citizens elsewhere wait an interminable amount of time to see his or her physician.

ACCESSIBILITY ISSUES ON WHICH THERE IS LESS AGREEMENT

While Medicare at 55 has been proposed to increase accessibility, the three major avenues to increase accessibility have been: (1) a public option; (2) lifting the antitrust exemption; and (3) allowing insurers to sell health insurance across state lines.   We address the latter three now.

PUBLIC OPTION: Arguments favoring a public option are that it would be a non-profit insurer with the sole goal of providing basic insurance while incurring minimum overhead.  This should bend prices down which also improves affordability.  Arguments against a public option are that it adds government insurance into the mix, pulling business and profit margins away from private insurers.  It is fair to note that private insurers did not object to government insurance for seniors – Medicare –which took the lion’s share from private insurers, though the private market still operates within segments of these programs.

ANTI-TRUST: The second method for increasing access through competition is to remove private insurers’ anti-trust exemption.  This exemption allows insurers to not only collude on setting premium prices, but also to monopolize markets of whatever size.   Both promote concentration, less competition, and higher prices.

SALES ACROSS STATE LINES: The third method is for insurers to sell across state lines. There are two ways to achieve this.  The first alternative is leveling the playing field with a uniform set of rules that a national exchange would establish, similar to what CAFE mileage standards do for car manufacturers when mandating “corporate average fuel economy” that apply in all states.  A national exchange is the health equivalent for enforcing uniform standard rules.  The other alternative is to use the credit card “model”, where different rules apply to different policies depending upon the insurer’s home state.  The question becomes, would the public prefer insurers to act more like credit card companies (banks) with no federal intervention, or to participate on a level playing field with federal enforcement?

AFFORDABILITY ISSUES ON WHICH THERE IS LESS AGREEMENT

TORT REFORM: High on the list for many is tort reform, though neither pending bill in Congress includes this.  Typically cast in terms of placing caps, or ceilings, on non-economic damages, it is an element of the health care reform debate that has gained attention in many quarters.  Many states already have such reform, but this would be a federal cap.  The argument in favor of caps on these damages is that there would be less defensive-medicine, overall health care costs would drop significantly, and doctors would find their malpractice insurance premiums lowered. The argument against caps is that there is minimal relationship between caps on these type damages and premium charges, or health care costs.  Opponents argue that premiums increase more as a result of insurers’ not obtaining projected financial returns from investments while “defensive medicine” has more to do with generating income than avoiding liability.

If the theory is correct, viz, that a cap on damages will reduce health care costs, consider establishing a 3-5 year period with a federal cap of, let’s say, $1.0M on non-economic damages and that would not pre-empt states which have such ceilings in effect.  If utilization drops significantly indicating less defensive medicine, then such caps could become permanent; it not, then the federal cap would sunset.

AFFORDABILITY CREDITS: Affordability credits are a sliding scale subsidy for individuals and families earning less than some multiple of the federal poverty level (FPL).  The House suggested an upper limit of 400% of FPL while the Senate proposed less.  To fund affordability credits (the premium subsidies), a tax could be levied on individuals with adjusted gross income exceeding $250K ($500K for families), and taxing plans with “Cadillac” benefits.  Rather than setting a flat rate, a fairer method would be to use regional cost bases, and to tax only the amount exceeding some percent of average, basic, benefits by region.  Arguments for and against affordability credits tend to center on the method of funding.  The two above are funding options under consideration.

PURCHASE MANDATE: This provision mandates that all citizens purchase health insurance.  Arguments in favor are that by adding millions of customers, insurers would incur lower costs.  First, overhead would be allocated over more policies creating unit savings.  Second, with larger risk pools, the “risk margin” insurers require would be less, which should lead to lower premium prices.  Mandatory insurance would also have the salutary effect of reducing the number of those without insurance who rely on hospital emergency rooms for non-emergency health care—a very inefficient way to render treatment.  Arguments against mandatory purchase includes whether such a requirement is constitutional, though it seems similar to employees “purchase” of Medicare insurance through wage withholding at work.  Those who do not favor a mandate as well point to insurers’ gaining considerably in revenues, yet question whether or not insurers will increase premiums for any new insurance reforms, like no pre-existing condition barring coverage.

The only way a mandate works is if affordability credits are extended to millions of financially disadvantaged.  Those affordability credits will come from government subsidies, and because taxpayers are responsible for these monies, many believe it fair to expect insurers to discount, or reduce, premium charges when setting rates.  Insurers are not likely to do this voluntarily.  Price controls are one way to restrain premium rates, but are not viewed as a long term solution.  The best solution remains competition.  This is why many argue that the anti-trust exemption must end, though they feel even that may not be enough; that stronger measures are needed.  The current mix of for-profit and not-for-profit insurers has not been successful in restraining prices, and a government backed not-for-profit is needed.  This thinking is the impetus behind advocating for a strong public option.

DISCOUNTED DRUGS: The final affordability issue would be to allow Medicare to negotiate drug discounts and to allow cross-border purchases.  Arguments against discounting are that margins are needed for research into new drugs and that the quality of imported drugs cannot be assured.  Arguments in favor of discounts are similar to the purchase mandate.  The government handed big pharmaceutical companies $Billions of new business with no risk.  Many feel that the pharmaceutical industry should be forced to accept “discounts”.  The current no discount policy has resulted in U.S. drug prices far above what pharmaceuticals cost in other industrialized countries.  As for quality, many of the drugs purchased here are the very same pharmaceuticals that buyers in other industrialized countries purchase.  Recall, too, that the Medicare drug program costing hundreds of billions of dollars was not funded, with the entire cost of the program being added to the federal deficit.

INTERIM CONSUMER PROTECTIONS WHILE REFORMS ARE IMPLEMENTED

Many of the above provisions cannot be implemented quickly.  Some method is needed to restrain premium increases in the interim.  To prevent health insurers from imitating credit card companies who increased rates before reforms became effective, a gatekeeper, whether through a national commission, state insurance commissions, percent increases imposed by statute, or another mechanism, ought to be in place from the outset of any reform enacted into law.

CONCLUSION

In less than ten pages, we have summarized the salient components of 2010 health care reform.  What we have penned allows the reader to understand the core provisions for any reform, pro and con.   Moreover, the material described in the foregoing pages is a give and take where no one constituency will be entirely happy.  But in order for every American to afford and access health care, each segment of our society must give up something that may have been sacrosanct to them.  Such compromising also levels the playing field between corporate and Main Street America.   If every “player” comes to the table called health care reform in good faith and acts fairly and openly, the nation as a whole will benefit.  Partisanship only leads to what occurred in Massachusetts; we cannot afford to see this with efforts to reform health care any longer—our system is broken and on the brink of disaster.

© 2010 Andrew Kurz and Miles Zaremski

*   Mr. Kurz is a former CFO for Blue Cross-Blue Shield of Wisconsin.  He has done extensive research into healthcare reform and has been recognized and quoted for his analyses, statistical charts, and insights into reform efforts.  He is now retired in suburban Chicago and can be reached at agkurz@att.net.

** Mr. Zaremski is a health care attorney and author, with extensive background in healthcare policy.  He has counseled and represented Members of Congress.  His law firm is in Northbrook, Illinois; he can be reached at mzaremski@gmail.com.

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Summary – Health Care Reform: Separating Wheat from Chaff

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Insurance reform has three fundamental goals:

  1. lowering costs,
  2. increasing availability,
  3. maintaining or improving quality.

When reviewing the paths to these “end points” of healthcare reform, the question is, whether they progress toward achieving them (goals) or whether the means to get there are simply different paths with no discernible difference in outcome.

ISSUES ON WHICH THERE IS BROAD AGREEMENT

ACCESSIBILITY:  Insurance policies should (a) not exclude pre-existing conditions; (b) not allow cancellation of an existing policy; (c) guarantee issuance and renewals; (d) extend dependent child coverage to 26 years.

AFFORDABILITY:  Insurance policies should (a) not set lifetime or annual limits on benefits; (b) set reasonable annual limits for deductibles and co-pays; (c) not allow price differentials based on sex; (d) set reasonable restraints on age-related differentials; and (e) create a national high risk reinsurance pool to protect insurers from enrollees who incur extremely high cost medical treatments.

QUALITY:  Insurance policies should (a) not require cost-sharing for basic, preventive health care services; (b) require an essential benefits package that covers all basic health care needs; (c) standardize forms to reduce inefficiency in processing claims and enrollment; and (d) further computerizing medical information.

ISSUES ON WHICH THERE IS LESS AGREEMENT

PUBLIC OPTION: Arguments in favor are that a government non-profit insurer would provide basic insurance with less overhead.  Arguments against are that it adds government insurance into the mix, pulling business and profit margins away from private insurers.  Note: private insurers did not object to government Medicare for seniors which took the lion’s share from private insurers.

ANTI-TRUST: Removing private insurers’ anti-trust exemption increases competition.  Exemptions allow insurers to not only collude on setting premium prices, but also to monopolize markets resulting in higher prices.

SALES ACROSS STATE LINES: There are two ways to sell.  The first is leveling the playing field with a uniform set of rules similar to what CAFE mileage standards do for car manufacturers when mandating “corporate average fuel economy” that apply in all states.  A national exchange is the health equivalent for enforcing uniform standard rules.  The other alternative is to use the credit card “model”, where different rules apply depending upon the insurer’s home state.  The question becomes, would the public prefer insurers to act more like credit card companies (banks) with no federal intervention, or to participate on a level playing field with federal enforcement?

TORT REFORM: Many states already have such reform; this would be a federal cap on non-economic damages.  The argument in favor is there would be less defensive-medicine and overall health care costs would drop significantly.  The argument against is there is minimal relationship between caps and health care costs; that “defensive medicine” has more to do with generating income than avoiding liability.

AFFORDABILITY CREDITS: Affordability credits are a sliding scale subsidy for individuals and families earning less than some multiple of the federal poverty level (FPL).  To fund affordability credits (subsidies), a tax could be levied on individuals with adjusted gross income exceeding $250K ($500K for families), and taxing plans with Cadillac benefits.  Arguments for and against tend to center on the method of funding.

PURCHASE MANDATE: This mandates that all citizens purchase health insurance.  Arguments in favor are that by adding millions of customers, insurers would incur lower average costs.   Mandatory insurance would also have the salutary effect of reducing the number of those without insurance who rely on hospital emergency rooms for non-emergency health care—a very inefficient way to render treatment.  Arguments against include whether such a requirement is constitutional, though it seems similar to Medicare insurance through withholding work; and whether or not insurers will increase premiums for new insurance reforms, like no pre-existing condition barring coverage.

The only way a mandate works is if affordability credits are extended to millions of financially disadvantaged.  Affordability credits will come from government subsidies, and because taxpayers are responsible for these monies, many believe it fair to expect insurers to discount, or reduce, premium charges when setting rates.

MANDATE EXPECTS LOWER PRICES: Insurers are not likely to do this voluntarily.  Price controls are one way to restrain premium rates, but are not viewed as a long term solution.  The current mix of for-profit and not-for-profit insurers has also not been successful in restraining prices.  The best solution remains more competition, and is the impetus behind those advocating a strong public option.

DISCOUNTED DRUGS:  Allow Medicare to negotiate drug discounts and cross-border purchases.  Arguments against are that margins are needed for research into new drugs and that the quality of imported drugs cannot be assured.  Arguments in favor are that the current no discount policy has resulted in U.S. drug prices far above what prescription drugs cost in other industrialized countries.  As for quality, many of the drugs purchased here are the very same that buyers in other industrialized countries purchase.

© 2009 Andrew Kurz and Miles Zaremski

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Non-Partisan CBO Estimates of Healthcare Reform

Download PDF Report >>> CBO Estimate of Healthcare Reform

SUMMARY

Few doubt how unsustainable current medical trends are.  With medical inflation consistently outpacing the CPI, health costs will continue to take a greater share of the economy. Private insurers claim they can solve the problem with reform but without a Public Option.  History suggests this is a dubious claim at best.  Looked at from multiple angles, private insurers are not likely to succeed.  Profits gains have far exceeded key indices, medical loss ratios have gone way down while costs have gone way up, competition is diminished by concentration of major insurers, and tort reform complaints carry little water.

DISCUSSION

The graph below shows CBO projections of under 65 population by insurance group. The top, red bars are the uninsured that continue to grow each year.  While insurance through employment is fairly consistent, greater employee cost sharing is an increasing burden.

Neither the Senate nor House reform proposals provide financial support to unauthorized immigrants.  When analyzing various effects of reform, this group has no effect. For data consistency for both before and after reform, unauthorized immigrants are not included in the populations.  Removal lowers uninsured population between 5 and 8 million over the 10 year period.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

While the country may be coming to some agreement that reform is needed, differences exist on how to achieve reform. Health Insurers want to have participation mandatory which is a valid point. Except they have offered no other steps on how to reduce costs and are against Public Option that would offer real competition. However, they would be beneficiaries of millions of new customers.

Those customers would come from those currently uninsured, or insured through individual and employer groups. In the graph next column, CBO assumes reform includes an Exchange that would shift nearly 40 million from uninsured, individual and employer groups (left side of graph) to Medicaid and the Exchange (right side).  Note that not all the movement is to the Exchange.  A large number of uninsured poor would switch to Medicaid.  Still, the Exchange is expected to grow quickly to nearly 25 million. This group is the target for private insurers and Public Option.

So why is it necessary to have a Public Option on the Exchange?

 On its face, private insurers could certainly cover 25 million new enrollees without government involvement. But the catch is that the government IS involved because of another feature of reform.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

That reform feature is “affordability credits”.  Even those with insurance find their total health care costs consume so much of their income that they do not get needed care. Affordability credits help those with lower incomes pay premiums and shared health costs. The effect is shown in the chart below. Medicaid pays for the very poor while credits help less well off people in the Exchange.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

In short, the Government will be paying some $100 billion each year in credits to Exchange enrollees, much of it going towards insurance premiums.  Will private insurers provide good value for this outlay? Their track record is not encouraging. 

Health care costs fall into two categories: medical cost outlays and administration / overhead costs. In 1993, 95% of premiums went for medical costs at Investor-owned insurers as shown below.  Over the next 14 years, this decreased to just above 80%, a shift of about 14% or one percent per year.  Meanwhile Medicare administration and overhead costs have remained fairly constant through the period.  While some may argue this is not a direct comparison, the fact that Medicare medical loss ratio stayed constant while investor-owned insurers drop significantly cannot be denied.

 Sources: PricewaterhouseCoopers’ Health Research Institute, and U.S. Center for Medicare & Medicaid Services

14% becomes urgent when you consider premium dollars as shown in the chart below. Private insurance runs over $600 billion. 14% of this is nearly $90 billion per year.  Fortunately, one-third of private insurers are non-profit.  But that leaves some $60 billion added overhead including contribution to profits since 1993.

Source: Center for Disease Control – Health, United States 2008 Figure 19

Profits did not grow to $60 billion, but they sure did grow as shown below, exceeding by a huge margin the S&P 500 and CPI for urban wage earners.  All the growth occurred since 2002.

Sources: U.S. Dept. of Labor, Bureau of Labor Statistics, Standard and Poors, and Health Insurers’ 10K’s

Not only did investors do well, but so did executives and all at the expense of people paying for health insurance. 7 insurance CEO’s drew nearly $70 million total compensation in 2008.

Still, Investor-owned insurers argue that their profits are a mere 3% of revenue.  Another and better measure is Return on Equity (ROE) which is profitability based on investment.  By this measure, health insurers are earning 17%.  From the chart below some industries do have greater returns, but 17% should be nothing to complain about.  The 10 insurers are even higher than credit card issuers.

Sources: 10K reports for top 10 Investor-owned Insurers and  CCH Almanac of Business and Industrial Financial Ratios, 2009 Edition

Now high returns to executives and investors might have some justification if private insurers were successful in containing and bringing down the major component of health care – medical costs.  Yet, year after year, medical costs outpace the CPI.  One could almost argue that insurers “administer” health care costs rather than provide a value added “management” of those costs.

Competition often has something to do with companies holding down costs.  In competitive markets, insurers need to maximize cost control efforts to maintain market share.  But is there really competition?  The graph below shows the market share of the top two insurers in each state weighted for population covered.

 Sources: AMA, Consumer Union, Sector & Sovereign analysis

Over half the U.S. population lives in states where two insurers control over 60% of the market.  That is not a good omen for competition.  For instance, insurers claim that their market share allows them to negotiate lower rates with providers.  It would not be fair to paint all insurers with the same brush. But a number of insurers have been found not to be driving down rates, but of negotiating with providers to NOT contract lower rates with their competition.  Instead of reducing costs, these illegal acts increase medical costs compared to a truly competitive environment.

Insurers and others also argue that tort reform would bring down medical costs owing to current waste of defensive medicine. There is no argument about the waste. But is it due to defensive practice or simply practice? Data suggests that the latter is more prevalent.

The graph below, derived from Dartmouth College data, groups two sets of hospitals, the 100 highest cost, and 100 lowest cost hospitals for Medicare spending per decedent during the last two years of life.  The bars represent average costs by states that have enacted tort reform setting caps on non medical damages.  For the lowest cost hospitals, tort reform shows virtually no effect on hospital costs. For the highest cost hospitals, it is mixed. But there is no clear evidence that tort reform will substantially lower costs.

Source: Dartmouth_hosp_DAP_Hosp_HRR_ST_01_05.xls

So far, private insurers’ track record suggests that left to the free market, they will not be very successful in lowering costs, either administrative or medical costs, with or without tort reform.  It may be unrealistic to even expect investor-owned insurers to succeed given that their number one priority is to their investors.

Instead of using their actuaries to data mine patterns to help providers reduce costs, their efforts are focused on denying claims and raising premiums to high claims groups.  Instead of returning surpluses to people paying premiums, they are buying back billions of dollars of their own stock to increase value to their shareholders.

Thus far the focus has been the cost of illness. Another aspect is the benefit of staying healthy. Corporations have had success in wellness programs. They not only reduce health care costs, but lower absenteeism. (http://www.uscorporatewellness.com/USCW White Paper 2009.pdf)  Some insurers offer wellness programs, but they often include a health risk assessment on employees and that runs a risk that insurers may use that data in setting rates for the company: if towards lower rates, good. If higher rates, not so good.

Fortunately, large corporations are the biggest block of insured people, and their wellness efforts can have a broad effect.  The graph below shows the U.S. population by source of health care coverage. Big business covers 45% of the population, 28% who self insure and another 17% who shift risk to insurers.

Source: CBO, EBRI, CMS, Goldman Sachs Research estimates

Groups at a disadvantage to big business include individual and small group business and the uninsured that together make up over a quarter (27%) of the population. If private insurers are unable or unwilling to lower administrative and medical costs for them, then the next best alternative is to offer a Public Option.

Without progress in both lowering administrative and medical costs, the affordability credit paid for by the government is going to cost taxpayers more than can be justified.  The question is not whether a non-profit Public Option will succeed. The question is whether private insurers can succeed after years of failing to take the needed steps to contain costs.

The stakes are huge. CBO projects that with a Public Option, the insurance picture changes dramatically as the graph below shows. Medicaid grows a bit for the poorest, but the uninsured and non employer based population can look forward to more affordable insurance.  Meanwhile the majority of the population is unaffected.

 Source: CBO, Oct 7, 2009 letter to Senator Baucus

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