Our Dysfunctional Health-Care System: Can Cost Cutting Heal It?

The number of Americans who have health insurance through their employers is dropping with unprecedented speed. The latest Gallup and Healthways, Inc. survey reveals that in the third quarter of 2011, only 44.5 percent of Americans now carry health insurance through their employers. That’s a decrease of more than 5 percentage points in three years.

As fewer employees enjoy health-care coverage through their employers, they’re paying more for the privilege. According to the Commonwealth Fund, premiums for employer-sponsored family health insurance policies increased by 50 percent from 2003 to 2010.

In fact, the annual amount employees pay toward their insurance has risen by a whopping 63 percent over that timeframe.

As sobering as these statistics are, they only skim the surface of an underlying problem. Over time, our health-care system has morphed into a dysfunctional state, and now resembles a dinosaur teetering under its own weight.

Our current system suffers from two, life-threatening disorders. The first is a market bias to provide the very best health care no matter what the cost. This cost push has moved steadily up even as consumers have been shielded from the true costs of their health care and are now shouldering more and more of the cost burden.  They just don’t know the cost of what they’re buying.

Look at it this way. Consumers are familiar with the cost of gas. They haven’t a clue about what health-care services cost until they get socked with a bill, even though they are the primary purchasers of these services.

The second disorder is this: Unlike other consumer purchases, in health care, price and demand carry no equilibrium-creating pressure to put the brakes on rising costs. If gasoline gets too expensive, people can drive less and prices fall. If the costs of health-care services soar, consumers have not had any effective way to make prices fall. For the most part, they don’t use less health care, at least not yet.

The rub comes in as employers are hit with rising insurance costs. Simply put, employers are typically willing to pay increased premiums if the increases are in line with inflation and if their cost structures allow for them. If the increases exceed these criteria, they pass the cost increases on to their employees.

All of which begs the question: How will consumers be able to keep supporting the staggering increases in health care? The answer is: they won’t. And this suggests that the system is fast growing more dysfunctional, will soon fail to support its own weight, and will fall apart. Unless, that is, something major is done.

Some health-care systems are already scanning the horizon and learning what other industries instinctually know how to do when costs unreasonably outpace demand. They’re searching for ways to cut costs. What a novel idea for health care.

Others are looking to the federal government to step in and shore up our dysfunctional - system. Ironically, government is a big part of the problem. Given the rigid, non-compromising philosophies now driving the health-care discourse in Washington, government stands frozen in grid lock without the resilience to find or even discuss solutions. Thus, nothing gets done.

And as we know, through Medicare and Medicaid, the federal government unilaterally establishes the prices it pays for health-care services and leaves hospitals and physicians to right size their incomes by digging deeper into the pockets of their customers.

Just as important, Washington today moves with a vacuum of leadership and without a shared vision of what should be done. And so the health-care dysfunction continues.

Without a resolution at hand, our health-care system risks turning into a non-caring force in favor of those who can afford its services. Those with the money to pay will receive the health care they need. Those who can’t pay will go without.

In the meantime, the best course seems to be to do whatever we as individuals can do to keep ourselves healthy so as to minimize our reliance on this dysfunctional system.

Medicare May Be Serving Seniors, but It’s Putting the Rest of Us in a Financial Death Grip

Information released this past week point out the damaging impact that government health-care programs are having on the commercial, health-insurance market, and the market for private health benefits.

The first bit of news comes from the latest Healthcare Economic Indices released by Standard & Poor's (click here for the indices).  The indices show that the average cost of health-care services covered by private-insurance companies jumped by nearly 7.5% for the year ending June 2011.  By comparison, the average cost of services covered by Medicare increased only 2.5 percent for that same time period.  Experts speculate that hospitals will likely continue to shift costs to private payers as government programs squeeze hospitals and doctors with lower reimbursements to manage their program shortfalls.

For every action, there is an equal and opposite reaction.  On Monday of this week, the National Business Group on Health released the results of a survey of its membership.  The news here is that large employers expect their health care costs to increase 7.2% in 2012.  Is it just coincidence that hospitals are increasing their charges to private insurers by 7.5% and that commercial health-care costs will be up by an expected 7.2% in 2012?

The secondary affect of these developments is that employers now plan to offer even more consumer-driven health plans in 2012.  Of those surveyed by the National Business Group on Health, 75% said they expected to offer a high-deductible health plan (HDHP) with a health savings account (HSA) in 2012, compared to 64% this year.  Realistically, we should expect all, large employers to offer HDHP/HSA products within the next two to three years.

Some time ago, the virtues and vices of high-deductible health plans used to spark fierce debates. Not now.  For the time being, those debates have been overshadowed by the reality of health-care costs that continue to rise, and to increase disproportionately for commercial insurance programs.  High-deductible health plans are now the default choice for employers seeking to shield themselves from the costs of commercial health insurance.

Far from being better purchasers of health care, the government simply establishes a price it is willing to pay, leaving hospitals and physicians to right size their income statements and balance sheets by digging into the pockets of their customers.  As long as employers continue to finance the lion’s share of the private sector health-care tab, they will adjust their benefit programs to achieve a premium price point that’s affordable.  This will drive the continued adoption of high-deductible health plans and health savings accounts.

In the short run, advocates of greater health-care consumerism are benefiting from the continuing cost shifting from government programs that’s taking place.  This phenomenon may be single-handedly creating millions of HDHP/HSA health-care consumers, who are learning firsthand how to become savvy health-care purchasers.  This may, however, simply be the proverbial “lipstick on the pig.”

Unless America’s government programs are reformed quickly, they will continue to crowd out private benefit programs and make them even less affordable.  The increased prices paid for services in the commercial market are, in reality, a hidden tax paid to support the solvency of the Medicare program.

Equitable, sustainable, payment system reform can’t come quickly enough.

Obama's Gift to the Heritage Foundation

For the past 30 years, the Heritage Foundation and many conservatives have advocated the virtues of a reformed health care market in which individuals take ownership of selecting their health benefits. The Obama health care reforms may deliver just that result to millions of Americans. At least that’s the outlook described in a study released by McKinsey & Company early last week.

McKinsey suggests that employers will stop providing employer-sponsored health insurance (ESI) under health care reform at a much greater rate than previously assumed. Earlier government studies estimated that, beginning in 2014, up to 9 million Americans would shift from employer-sponsored insurance to insurance purchased through Health Insurance Exchanges. McKinsey estimates that as many as 30% of employers will definitely or probably stop offering ESI in the years after 2014.

A core finding of the McKinsey analysis is the recognition that employers have a built-in incentive to capture the government subsidies made available to individuals earning less than 400% of the federal poverty rate and for whom their health insurance premiums exceed 9.5% of their income. By facilitating a scenario in which premiums for low-income employees exceed 9.5%, employers can reduce their health care costs, even after paying a government-imposed penalty.

The McKinsey study identifies a number of ways employers can facilitate this strategy, but the net effect of each approach is an outcome in which highly-paid employees retain employer-sponsored insurance and lower-compensated employees migrate toward purchasing health insurance through the Exchanges. In the process, employers can effectively cap their health insurance liabilities at a fixed amount.’

If McKinsey is correct in its analysis, the implications for the health benefits industry are significant.

1. The health benefit marketplace will be more “retail” than ever before. Health Insurance Exchange purchasers will perhaps represent the “lions share” of the commercial health insurance market. Health insurers will need to effectively segment their customers on a basis other than medical costs to be successful.
2. The purchasing considerations of employers will likewise evolve. Employer-sponsored insurance may become a more pronounced tool for attracting and retaining highly-skilled employees. If this is the case, employers may become less fixated on the total cost of the product and more interested in the value-added product features that in the past have been left on the “cutting room floor.”
3. The health improvement and wellness sector can also be expected to undergo change. Employers have never been completely sold on the ROI of health improvement and wellness programs. As significant portions of employees move into the Health Insurance Exchange market where employer costs are fixed, it is unclear whether employer-sponsored health improvement and wellness programs will be as highly valued as a cost containment tool. Health improvement and wellness program providers will have to sell employers on a different value proposition, one that emphasizes the ability of these programs to improve workforce satisfaction, engagement and productivity.
4. Finally, it would be shortsighted to think that the government would see such an influx of subsidy-eligible employees without reacting. If McKinsey is right in its analysis, the government’s cost estimates are woefully low. It will not take long for the government to react, most likely by increasing the penalty employers pay when their employees opt out of employer sponsored coverage.

Ironically, it may be the Obama health care reforms that move the country further than it ever imagined toward an individually-driven consumer market.