Tuesday, February 19, 2008

A Modest Proposal for Reforming the Health Insurance Industry

How To Reduce Health Care Spending With Or Without Help From The Government

Reform is coming to the health insurance industry. If we’re not careful, the reforms may make matters worse instead of better.

The pressure for reform is building because the skyrocketing cost of providing health insurance for employees is becoming too much of a burden for businesses. Large firms find themselves at a competitive disadvantage in the global economy. Small businesses simply can’t afford the cost. The percentage of workers with health insurance provided by employers is declining.

The practice of providing health insurance as a fringe benefit began during World War II as a means of circumventing wage controls. It has endured because it benefits everyone involved. Employers can deduct the full cost of providing insurance as a business expense. Workers pay less in taxes since they are not taxed on the value of the premiums paid on their behalf. Insurance companies get more business than they otherwise would.

Since increases in premiums don’t show up as a reduction in take-home pay, workers have been insulated from the impact of dramatic increases in the cost of health insurance. Now costs have reached the point where employers are reducing their contributions toward premiums and co-pays are rising.

As more and more workers are left to fend for themselves, even those who can afford health insurance experience a great deal of "sticker shock" when the cost of premiums is no longer hidden among their fringe benefits. Individuals with incomes just above the limits for Medicaid simply can’t afford to purchase a policy on their own. Many young and healthy members of our society who could afford coverage, elect to forego having health insurance if it’s not provided through their employer. The people who need insurance the most - those with serious health issues and/or chronic conditions - are the most likely to be priced out of the market or simply excluded by insurance companies.

Health care spending in the United States has been spiraling out of control for some time now. A report by the World Health Organization paints a very clear picture:

  • The percentage of our gross domestic product devoted to health care more than tripled during the period from 1960 to 2005, growing from 5.2% to 16%.
  • Overall, the World Health Organization ranked our health care system as 37th best in the world.
  • In 2004 we spent $6102 per person on health care, compared to $3165 for Canada, $3150 for France, $3043 for Germany, and $2508 for Britain.
Although we outspend them by a wide margin, life expectancy in the U. S. is lower than it is in any of these other nations. All of these other nations have universal health care.

Britain, with the lowest cost per capita, is the only nation with a system that can legitimately be labeled "socialized medicine." Hospitals in Britain are owned by the government. Doctors and other health care providers are government employees.

Spokespersons for the insurance and pharmaceutical industries and their reactionary supporters in the Republican Party often use the term "socialized medicine" to describe the Canadian system. (Actually, they don’t just use the term, they hurl it like an epithet.) The Canadian, French, and German systems can more accurately be described as "socialized health insurance."

Advances in medical technology and new medications have increased the cost of health care. It is now possible to treat medical conditions that were previously not treatable. These new care options are expensive, but also improve the quality of life, and may even extend life itself, for chronically ill and terminally ill patients. Diverting a little of our GDP from SUVs and iPhones seems a reasonable trade-off in such cases.

The higher cost of health care in the United States, compared to the other nations mentioned above, can be attributed to a second, less benevolent, factor - the involvement of private insurance companies in nearly every interaction between health care providers and patients with health insurance. The army of bureaucrats who screen applicants, review and approve (or disapprove) claims, and handle disputes adds to the expense of health care. The clerical workers needed to shuffle paperwork back and forth between insurance companies and health care providers adds to the cost of health care. And the profits of insurance companies adds a final measure of cost.

Our "health care" crisis is, in reality, a health insurance crisis. The involvement of the insurance industry does nothing to improve the quality of health care, while adding significantly to the cost. In a strange perversion of the normal role of insurance, with regard to health care, the burden of paying the premiums for coverage has become unbearable for many people who don’t have any significant medical expenses other than insurance premiums.

It is no accident that the primary focus of "health care" reform is on making sure every member of our society has health insurance. Insurers and drug companies have managed to put a fair number of politicians in their debt through the legalized bribes known as campaign contributions. As a result, they may well retain a dominant role within the health care market even if we get a few reform measures passed.

Our timid, frightened representatives in Congress find themselves trapped between insurance and pharmaceutical companies who make large contributions to their election campaigns and outraged citizens tired of being forced to choose between living with the risk of being uninsured (including the risk of being denied care) or of being fleeced by the insurance industry. Now Congress faces increased pressure as their corporate sponsors outside the insurance business join the chorus calling for reform.

Although members of both major political parties have been co-opted to some extent, health care reform is one issue where there is a stark contrast between the parties. The positions of this year’s candidates for the presidency (some no longer in the race) illustrate the differences.

Not a single Republican candidate has offered any reform that would reduce the role of the insurance industry. They propose "health savings accounts" that would let businesses off the hook and privatize risks. They want to put caps on damage awards and end "frivolous lawsuits" in cases of medical malpractice. They favor tax credits to offset the cost of individuals purchasing insurance on their own. (This, of course, would make it easier and more acceptable for businesses to drop coverage as a fringe benefit.)

Republicans warn of the dangers of "socialized medicine" and "one-size-fits-all" programs controlled by the government. The Democrats favor a larger role for government.

Dennis Kucinich was alone among the candidates in supporting "Medicare-for-all." While this approach has merit, it is not likely to be implemented, at least not directly.

The mainstream Democratic plan to achieve universal health insurance was originally put forward by John Edwards. It has now been adopted (with minor differences) by both Hillary Clinton and Barack Obama.

The plan involves four key elements: (1) "community rating," which would require insurance companies to accept all applicants and charge all policyholders the same premiums; (2) subsidies for small businesses and moderate-income individuals; (3) mandated coverage, which requires employers to provide health insurance and also requires individuals who aren’t covered through their jobs to purchase insurance; and (4) a buy in to Medicare, or a similar government operated program.

Several of the Republican candidates offered support for subsidies for small businesses and low-income individuals to help achieve universal health insurance. Some Democrats would support tax credits to offset the cost of purchasing insurance for individuals who are not covered through their jobs. Other than that there is little agreement between the parties. Control of Congress and the White House after this year’s elections will determine the nature of health care reform.

The insurance industry will have no problem with tax breaks, subsidies and/or mandates since all of these measure will increase their profits. Insurers may not even object to community rating as long as the government is willing to put up the money needed to pay for the higher premiums resulting from the inclusion of high risk individuals. The net result of these "reforms" would be universal health insurance through private insurance companies.

Forcing businesses to provide coverage, requiring individuals to purchase insurance, and using taxpayer’s money to pay for those who can’t afford insurance, will shift the burden of paying off the insurance companies, but these reforms accomplish nothing in terms of reducing the overall cost of health care.

Insurance companies are the problem. Increasing their role in health care is not the solution. The overall cost of health care in the United States is not going to be reduced unless we succeed in eliminating or marginalizing, the role of insurance companies.

The battle will be joined - and won or lost - on the basis of the last element in the Democratic plan. Giving people the option to buy in to Medicare, or some similar government-operated program, at a price equal to the actual cost, will reduce the role of private insurers. It will also reduce their profits. The insurance industry will fight this piece of the Democratic plan with every weapon at their disposal.

Medicare has several advantages over private insurance companies with regard to keeping costs down. In addition to eliminating profits, there is no money spent on advertising, there is no need to maintain a sales force, and policing the system costs less than what private companies spend trying to deny claims and screen out high risk individuals.

It will be difficult for Republicans to object to a buy-in option if it’s done right. The government would not be forcing anyone to sign on, but would simply offer consumers a choice between private insurance and a public plan. If the premiums to buy into the program are equal to the cost of running the program, offering people that choice will be revenue neutral. There would be no need to raise taxes to pay for the program.

Republicans never miss an opportunity to push the message that government is incompetent and incapable of providing services as efficiently as private enterprise. If they truly believe that, they have nothing to fear from offering people a choice between private insurance and a government-run program.

Should the Democratic Party manage to get all four elements of their plan passed into law, we will have accomplished a reasonably satisfactory reform of the health care industry. A "Medicare for all who want it" system will reduce the overall level of spending on health care.

The primary inefficiency within a Medicare-style system is that it is open to abuse by providers of medical care who can increase their income by over-treating patients. If Uncle Sam is picking up the tab, there is no incentive for either patients or doctors to limit the duration or range of treatment. Providing oversight to limit such abuses adds to the expense of the program.

To keep health care costs to an absolute minimum, we need to offer consumers one additional option - catastrophic illness plans that make health insurance work the way insurance is supposed to work.

In Wealth of Nations, Adam Smith described the virtues of a market economy where fair prices result from a large number of buyers interacting with a large number of sellers. To achieve the efficiencies of a market economy, we need to reduce the role of both the health insurance cartel and the government by limiting health insurance to the traditional role of insurance - spreading and sharing the risk of catastrophic events.

You can get a tune-up for your car or get minor repairs done without involving the company that provides your car insurance. You can replace a broken window or repair a leaky faucet without involving the company that insures your home. We could achieve a significant reduction in the cost of health care by eliminating routine care from insurance policies. We should be able to get treatment for minor accidents and ailments, without involving a health insurance company.

In any given year, the vast majority of us have no need for anything more than routine medical care. Within a system where insurance functioned in the normal manner, a substantial percentage of the interactions between doctors and patients would take place without generating additional costs for both providers and insurers that result from the review and approval process and the associated paperwork. This simple change in our approach to health care would reduce the cost of health care more significantly than any other reform being proposed.

Consumers would have complete freedom to patronize any doctor or hospital. To help them make informed decisions, a complete list of the fees charged by each doctor and hospital should be available upon request. The transparency of the fee structure alone would help to control costs. The complex deals negotiated between insurance companies and health care providers make it difficult to even figure out the true cost of care.

Some insurance companies already offer plans with greatly reduced premiums and high deductibles. In some cases companies pay for part of the cost of preventative measures, such as annual check-ups, but most of the cost of health care is paid directly by patients.

These types of plans are not very common. They are often considered as a last resort for those who can’t afford the premiums for full coverage. They are also not very popular with many people who are forced to settle for such a plan. Overcoming the resistance to this approach might be difficult.

A system where employers or the government pays your premiums creates the illusion that you are getting something for nothing with regard to health care. A lot of people are addicted to that illusion. They fail to realize that the costs are passed on to them through a combination of higher taxes and reduced pay. (Shall we blame Milton Friedman for failing to convince more people that there is no such thing as a free lunch?)

A plan with lower premiums and a high deductible makes a lot of sense for healthy individuals. A Medicare-style plan makes more sense for those with chronic health problems. These alternatives, however, should be offered as options, not mandated.

Even though catastrophic illness plans save most people money and would reduce the overall cost of health care if they were widely adopted, some people will not want to buy into a plan that requires them to pay for health care directly. After all, paying for health care is not nearly as much fun as going shopping. On the other hand, more people might take advantage of this option if it were readily available. It is a choice that should be offered by both employers and the government.

Employers who provide health insurance as a fringe benefit could reduce their costs by negotiating to include catastrophic illness plans as an option offered employees. If a reasonable share of the savings from reduced premiums were passed on to employees to offset their increased out-of-pocket expenditures for health care, most workers would eventually realize that they are better off financially with that type of plan. Even employees whose medical expenses exceeded the deductible amount would see only a small increase in actual cost. The overall cost of health care would be reduced for both workers and employers.

The decreased income to insurance companies would be largely offset by the savings they would realize from having a greatly reduced role in the health care system. They would no longer need to provide oversight or approval for routine medical transactions. Profits might decline somewhat, but insurance companies would remain profitable.

If such a plan were offered by the government it could help moderate-income individuals and families by basing premiums on ability-to-pay. With or without a progressive premium schedule, a government-run plan offers the additional benefit of maximizing over-all savings by eliminating profits.

The primary goals of whatever reforms are implemented should be to reduce the overall cost of health care and to offer consumers a range of meaningful choices. Consumers should have the choice of acquiring a policy through a private company or buying in to Medicare. Consumers should have a choice between full coverage and a policy that covers only catastrophic costs. All of these options need to be available if we hope to reduce the cost of health care significantly.

If Congress manages to supplement the existing Medicaid and Medicare programs with a buy-in to Medicare they will deserve a higher approval rating and a brief respite from being labeled a "do-nothing" Congress. If they add the option of a catastrophic illness plan they will have done everything we can reasonably expect from the government with regard to reducing the cost of health care.

If the unholy alliance of insurance companies, pharmaceutical companies, and Republicans, manages to buy-off and/or bluff the Democrats into stopping short of these goals, people who want to limit the cost of health care will have to go it alone.

The savings from eliminating profits could be realized without government involvement through an insurance company organized by consumers as a not-for-profit corporation or a co-operative. The primary challenge for this approach would be enrolling enough people to spread risk broadly.

Given my own libertarian leanings, I am inclined to believe that this would be a better solution to the health care crisis. Considering the dismal track record of libertarian ideas, I’m willing to settle for government getting the job done.

This is one issue where a grassroots movement could be quite effective. It would involve nothing more than individuals and individual employers negotiating and purchasing catastrophic plans in lieu of, or as an alternative to, full coverage plans. People who want to go on paying off the insurance industry to meddle in their dealings with doctors should be free to do so. Those of us who are tired of supporting "bureaucratized medicine" should band together to limit the role of insurers with or without help from the government.

© 2008 Gary Winston Apple
Used by permission. All rights reserved.

Permission is hereby granted to make or post copies of this essay for non-commercial use, provided the copyright notice is included in the copy.

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