Health Benefit Plans for Consumers: More Choices at Higher Cost

There’s little doubt that health insurance as we knew it -- or as some would like it to be again -- is irretrievably lost.  The cost of healthcare services and the declining health of Americans have precipitated a fundamental shift in how health benefits will be structured, financed, and delivered.  Events of the past week offer a critical insight into how these changes are taking place.

First, the National Center for Health Statistics reported that the percentage of employees enrolled in high-deductible healthcare plans (HDHP) has jumped significantly during the past four years.  During the first quarter of 2011, 20.3% of group health-care plan participants were enrolled in a high-deductible plan, up from 12.9% in 2007.  The center defines a high-deductible health plan as one with deductibles of $1,200 for self-only coverage and $2,400 for family coverage in 2011. This compares with a deductible of $1,150 for self-only coverage and $2,200 for family coverage in 2007.

During the same period, enrollment in consumer-driven, high-deductible plans nearly doubled, rising to 8.8% of plan enrollees during the first quarter of 2011 from just 4.5% in 2007. A CDHP is a high-deductible plan linked to a health savings account or health reimbursement arrangement.  Combined, HDHPs and CDHPs are now used by 3 in 10 group healthcare plan participants.  It’s likely that an even larger percentage of Americans who purchase health insurance directly choose either a HDHP or CDHP plan.

This upward trend should come as no surprise.  Employers will continue to adjust benefits and shift greater exposure to employees as long as healthcare costs exceed employee productivity gains.  Increasingly, employers want to limit their health benefit exposure, and are moving to defined- contribution financing models, similar to what occurred with retirement benefits.

The benefits industry is moving quickly to respond to this trend.  Last week, three Blue Cross Blue Shield Plans – Blue Cross Blue Shield of Michigan, Health Care Services Corporation and WellPoint – jointly purchased Bloom Health, an emerging leader in the development of private insurance exchange capabilities. 

Although the public attention has focused on the development of government-led health insurance exchanges, the private sector has been busy creating exchange models for employers who don’t participate in the public exchanges.  Private exchanges, marketed directly to employers, will facilitate the defined contribution model that employers are favoring.

All of which tells us that in the near future, look for most employers to offer employees a fixed amount to be spent on health care--and other benefits-- available through an exchange platform.  Employees will likely have more benefit choices to choose from, but the choices will more often involve HDHP and CDHP plans.

The era of the healthcare consumer is upon us.  A growing number of fully accountable purchasers are entering the market.  There’s still a lot not to like about American health care, such as the reimbursement mechanisms now in place. But the foundation for a consumer marketplace is well underway. 

It’s Time to Rethink the Tax Exemption for Non-Profit Hospitals

Simply put, it’s time to end the tax-exemption for America’s hospitals. 

This issue resurfaced recently as the result of a decision by the State of Illinois to revoke the property-tax exemption for three hospitals. The reason: Their average percent of revenues dedicated to charity care was only 1.3 percent.  In revoking the exemption, the state established a simple litmus test: Is the hospital a charity or a business?  Is it Motorola or is it a soup kitchen? 

When hospitals came on the scene more than 100 years ago, they were more like soup kitchens than Motorola.  The health care they provided to our communities was a luxury.  Many communities lacked e doctors, and even fewer had hospitals.  Many hospitals were established only when community leaders pooled their treasures to build and staff them.   Back then, it was only fitting that these institutions be chartered as nonprofit entities, exempt from paying taxes.  The healing profession was as much a calling as a career.  That’s all changed. 

Can anyone argue that today’s hospital is anything other than a commercial enterprise?  Watch more than five minutes of Sports Center highlights and you can’t help noticing a community’s local hospital system advertising its services across a stadium or arena.  In communities with more than one hospital, open competition exists for patients who will occupy treatment centers and fill beds.  American hospitals are now fully entrenched in the business of providing health care. Many of them are $100- million-plus businesses. Today, more hospitals resemble Motorola than soup kitchens.

The foundational problem with exempting hospitals from paying taxes is this: Doing so implies that they’re something they’re not.  Hospitals are not charities in the classic sense.  Hospitals don’t agree to provide care to all without regard to the ability to pay for their services.  Indeed, think about the first question you’re typically asked when you’re admitted to a hospital:  Do you have insurance?

Yes, hospitals provide free care to some, but this is the exception.  The overwhelming majority of patients are insured by private or government programs, and others without insurance pay for their care out of pocket.  What’s more, hospitals don’t rely solely on contributions from the public to support their charitable cause.

The hospital community will almost assuredly oppose any thought of repealing their tax exemption, but the repeal may actually work to their benefit in three, important ways.

First, taxing hospitals will eliminate a significant, public relations problem – executive compensation. The public image of a tax-exempt charity is at odds with the compensation practices of today’s hospital systems.  In Illinois, one of eight hospital CEOs earned seven figure paychecks in 2008.   

Second, providing charity care will soon be much less of an issue for hospitals than it’s been in the past.  That’s because the number of Americans without coverage will decline significantly in 2014 as health care reform is more fully implemented.  The traditional argument not to tax hospitals as we do other businesses will lose its merit.

Even if hospitals fear that they’ll be disproportionately disadvantaged by charity-care patients, a number of ways exist to equitably share this cost across the hospital community.

To those who argue that the burden of paying taxes will simply increase the cost of health care, I offer two responses.  First, the current tax exemptions, on the margin, distort the true cost of health care to the extent that these institutions do not pay taxes.  Second, factoring the burden of paying taxes into a hospital’s cost structure will force hospital leaders to more aggressively manage their expenses.

Third, eliminating the tax exemption will eliminate the time and expense hospitals spend on justifying the exemption.  Wouldn’t this time and energy be better spent on delivering care?

Hospitals have become sophisticated, commercial enterprises.  This is a good thing; it’s a reflection of the gains we’ve made in treating the health-care needs of our communities.  

Because of these changes, the time has come to update our thinking on the tax benefits we provide hospitals.