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No Shortage of Ideas on Health Care Reform  (no comments)

Posted: Wednesday, February 10th, 2010

by Dennis G. Smith

But if anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance abuses, let me know.
-President Obama, State of the Union, January 27, 2010

Let us adopt President Obama’s words as the aspiration of all Americans and as the framework of authentic health care reform. There is virtually no disagreement about these goals, but there are major disputes as to how to achieve them. To restart health care discussions, the White House and congressional leadership need to acknowledge that the current legislation falls short of the aspirations expressed by the President.

Should the White House and the congressional leadership truly open the doors to finding bipartisan solutions, they will find there is no shortage of ideas for how to achieve our goals. Providing subsidies to low-income individuals and families, for example, has been an accepted feature of federal and state legislation for several years. If there is flexibility in determining who should receive taxpayer provided assistance, how much they should receive, and how the assistance can be used, agreements likely could be reached. On the other hand, the concentration of power in the hands of the federal government, a central and recurring theme in the design of current legislation, is a major obstacle for many Americans and will likely continue to generate strong opposition from the general public.

Problem is Not Cost, the Problem is Excess Cost. To put a finer point on the President’s goals related to bringing down premiums and the federal deficit, the problem with health care costs is that they are growing faster than the rest of the economy. If health care spending as a percentage of gross domestic product (GDP) were to remain constant, the pressures on families, employers, and government would be solved. For example, in 1998 national health expenditures (NHE) accounted for 13.5 percent of GDP. In 2008, NHE had increased to 16.2 percent of GDP. If NHE had remained at 13.5 percent of GDP, we would have spent $389 billion less than we actually did in 2008. That would have been a savings of $1,280 per man, woman, and child in the United States.

Integrity of Talks Requires Time for Alternatives. At a February 9, 2010 White House News Conference, the President stated that on restarting health care reform legislation, he is “… open to any ideas …” and that he is willing to “… meet [Republicans] halfway,” (News Conference by the President, February 10, 2010). Representative Paul Ryan (R-WI) has released A Roadmap for America’s Future, a comprehensive approach to putting the federal government on a sustainable fiscal path. Included in the Roadmap is a series of health care reforms to Medicare, Medicaid, and the tax treatment of health insurance. Ryan’s health care proposals would meet all of President Obama’s goals including insurance reform. According to CBO, Medicare and the federal share of Medicaid represented 5.3 percent of GDP in 2009. Without reform, Medicare and Medicaid will rise to 6.3 percent of GDP in 2020 and 11.1 percent in 2040. Under Ryan’s Roadmap, Medicare and Medicaid expenditures in 2020 would remain at 5.3 percent of GDP, the same level as 2009, increasing moderately to 6.4 percent of GDP in 2040.

Invite the States Too. Washington would do well to restart bipartisan talks by listening to the lessons of state experiences, both positive and negative. Governor Phil Bredesen (D-TN) can explain how the federal legislation would fall into the same pitfalls as TennCare did. As a former executive in the health care sector, he would add great value to the discussions. States from Alabama to Wyoming can give critical first-hand accounts of dealing with adverse selection, crowd-out, health exchanges, premium rating, employer contributions, reinsurance, subsidies for low-income individuals, and perhaps most importantly, financial viability.

Massachusetts and Utah can explain the realities of exchanges and why they took different approaches to them. Oklahoma officials can explain why the Oklahoma Employer/employee Partnership for Insurance Coverage (O-EPIC) is a better approach for low-income individuals than traditional Medicaid. North Carolina has been a leader in medical homes while Louisiana is focused on provider sponsored networks. The Tennessee Farm Bureau and the Lubbock, Texas Chamber of Commerce can enlighten policy makers about purchasing cooperatives. Florida, Indiana, and Vermont can relate the experiences of innovative Medicaid demonstration projects. New York and Texas can explain how the most vulnerable Medicaid populations can be successfully served through managed care plans.

States understand that with or without federal legislation, they will be at the forefront of improving access, quality, and affordability.

Why Premiums Go Up. To expand coverage while lowering costs, we need to first understand why health care costs have been increasing faster than the rest of the economy for more than two decades. Two well known and highly respected health policy experts, Henry J. Aaron and Paul B. Ginsburg, have remarked, “[e]xactly why Americans spend so much on health care is not well understood.” They explain, “[i]nsurance is intended to boost demand for health care services, preventing the direct cost from discouraging its use by people who need it. At least since the 1960s, it has been well recognized that in performing its intended function, insurance risks encouraging excessive demand for care.” Finally, they point out, “[i]f insurance blinds people to the cost of care they use, they will be insensitive to the relative price of different services, tending to use excessively costly care, and too much of it.” (See Health Affairs, “Is Health Spending Excessive? If So, What Can We Do About It?, September/October 2009.)

Medicare, Medicaid, and employer sponsored health insurance are all designed to hide cost from the individual. In 2009, the average premium for a worker with single coverage through an employer was $4,824 (State of the States, January 2010, Robert Wood Johnson Foundation). But the direct employee contribution was $779, just 16 percent of the total. For average family coverage, the worker directly pays 26 percent of the total. To Aaron and Ginsburg’s point about being blind to cost, the employee does not see how much he/she is really paying for health care in forfeited wages. Greater awareness about the true cost could change behavior.

Fundamental laws of economics apply to health care. “The natural price,” as explained some 400 years ago by Cardinal Juan de Lugo, “is raised by abundance of buyers and money and lowered by the contrary factors,” (Thomas E. Woods, Jr., Ph.D., How the Catholic Church Built Western Civilization, Washington, D.C., 2005. p. 160).

The recent rise and fall of prices in the housing market comes immediately to mind as a prime example of Cardinal de Lugo’s economic theory. We may have seen his theory at work in health care as well just last year when private health insurance premiums grew just 3.1 percent from the previous year. The experts at the Centers for Medicare and Medicaid Services (CMS) suggest this lower rate of growth was due, at least in part, to employers and individuals leaving the market and cutting back on health care utilization. This also suggests that predictions that health care will eventually consume as much as 30 percent of our economy are unlikely to become true. Families, businesses, and governments cannot devote that much of their budgets to the single purpose of purchasing health care. There simply are other priorities that must be satisfied as well.

But we clearly do not want to relive the experience of the housing sector in which prices are lowered by individuals abandoning the market. The cost in human terms, of delays in seeking appropriate medical treatment, would be devastating.

Health care premiums represent both the direct cost of providing health care and the assumption of risk. The pending legislation would have increased health insurance premiums in a number of ways, including the elimination of medical underwriting, reducing cost-sharing, adding benefits including “free” preventive care, new federal control over what health plans will be offered in the market, providing subsidies worth as much as $20,000 for a family of four, and providing subsidies to the middle class. Each of these components would transfer risk from individuals to someone else, most especially to the federal government through a new open-ended entitlement.

Naturally, the abundance of buyers and money pushes the price up. The result of the legislation’s approach could not be anything else. That is why, in turn, the legislation relies on artificial price controls in Medicare and Medicaid that shift the cost of new coverage to providers. Unfortunately, as we have seen over the years in the Medicaid program, such an approach ultimately reduces access to care.

Congress and the Obama Administration are on a merry-go-round, destined to end up in the same place as we are currently in. If we want different outcomes, the health care talks indeed need to start from scratch.