President of Bailit Health Purchasing, LLC
The serious problems in our health care system have been more than adequately documented in this journal and many others over the two past decades. Rates of uninsurance rise with a steadiness fueled by costs that seemingly know no bound. Quality varies with little or any relationship to cost, and ill-informed consumers cannot be confident that they are receiving the care that they need.
It initially appears astounding that that these problems are not getting resolved despite the well-intended efforts of many, many people. In fact with respect to cost growth and insurance coverage, the problems with our health care system are getting worse. Much worse. We who work in the field of health policy have failed.
Yet, the reasons for this failure are not difficult to understand. The health care industry represents a whopping 14.9% of the GDP (Levit, Smith, Cowan, Sensenig, and Catlin, 2004). It is an economic monolith, that becomes larger and, hence, more difficult to change every day. There are two sectors which foot the growing health care bill, neither of which is up to the challenge of curbing the expansion: government and employers.
“One person’s waste is another person’s income.’ (Wasson, 2004)
Federal and state government pay the largest share of the health care bill. They fight valiantly to control health expenditure growth, but rarely, if ever, by addressing the problem. Instead government purchasers often end up shifting costs to private payers. States and the federal government also reduce covered health care services in times of profound economic hardship. Finally, state and federal government assume loans (especially the federal government) and cut other service expenditures to meet the growing demand for health care dollars.
Ultimately, however, government fails to manage the growth of health care costs for two primary reasons. First, constituting a large economic sector, health care employs many Americans, thus creating a mission conflict for those elected and appointed to serve us. Reductions in healthcare expenditures result in lower income and potentially reduced employment for many Americans, including some who are politically influential. Second, most Americans don’t want health cost growth restricted since the impact of costs is not directly visible to most Americans. That is, American taxpayers don’t appear to appreciate how growing health care costs reduce available funds for other government programs and contribute to government debt.
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“I’m not afraid of you running away, honey. I have a feeling you won’t.” – Tom Petty and the Heartbreakers (Petty 1976)
American employers, especially those that compete in international markets, suffer great disadvantage due to the high costs they incur for insuring their employees. The automakers have long referenced the impact of health insurance costs on their competitiveness and profitability (Hawkins 2004). Yet, for all of the interest that employers have in reducing their health insurance costs, they have been remarkably ineffective. Most Americans work for small businesses, and few employers have the size to devote human resources to managing health insurance costs. Those that do, and companies such as General Electric, General Motors, Verizon and others have worked at the problem for years, find innumerable barriers that temper the effectiveness of their efforts.
First, large corporate employers often have employees dispersed across the country with few markets where they are concentrated enough to render the employer any leverage. Even in markets where large employers do have some employee population density, the percentage of an insurer or provider’s business represented by the insurer tends to be modest (usually far less than 5%, unless in a rural market).
Second, employers can find their interests conflicted. For example, General Electric is a major supplier of imaging systems to hospitals. In addition, many employer executives hold governance roles on hospital boards.
Third, employers’ top human resource priority is to recruit and retain talented employees. When health insurance cost management and staffing objectives conflict, cost management is sometimes compromised. In addition, labor agreements, when present, often curtail efforts to manage health insurance cost.
Fourth, employers find their clout marginalized in an era in which insurers have consolidated, leaving employers with fewer choices, and providers have reclaimed their pre-managed care market dominance, rendering insurers, as well, with little leverage. For example, recently in one small state where the leading employers requested a tiered network product, the few remaining insurers told their largest customers that they refused to develop such a product (Kibbe 2004). Under such circumstances, employers are powerless to effect any health care marketplace change.
Finally, employers are increasingly at a loss for what to do. Like many others in our health care delivery and financing system, they despair over what seems to be an intractable problem. As a result, some employers are giving up. They have decided that they simply cannot sustain a business expense that grows at a double digit pace year after year. And so employers have begun to pull their money out. This means that employers are restricting the rate at which their expenditures grow, and they are requiring employees to pay an increasing balance. This action on the part of American employers will significantly shape the future direction of the American health care system.
“‘to call this consumer-driven is a misnomer’ these are largely mechanisms to shift costs to insured people and call it something else.” (Turnbull 2004)
In a desperate effort to retain some degree of control over health insurance costs, employers have reverted to shifting costs to employees. Managed care benefit designs look increasingly like traditional indemnity insurance with deductibles and coinsurance. Employees’ health insurance premiums have increased 36% since 2000 (Families USA 2004). Their share of health insurance costs has increased a whopping 60% since 2000. At the same time, employees have experienced a decline in the comprehensiveness of their coverage. This increased cost to employees for lower value health coverage represents the cost shift from purchasers (Aston 2004).
In addition to the transformed managed care benefit designs, employers are now offering their employees “consumer-directed health plans”, health savings accounts, and other products that all have common characteristics; a large deductible, followed by coverage ranging between traditional 80/20 and catastrophic coverage, and the ability to “bank” unspent dollars. The fact that Kaiser, a insurer founded on the HMO staff model approach to preventive care and wellness, has elected to begin to offer a high deductible plan with an HSA to employers in order to compete indicates how profound this market shift is (PRNewswire 2004). Prior prognosticators had predicted that offerors of comprehensive policies would be forced into this action to avoid adverse selection (Crane and Tollen 2002).
Insurance products now sport deductibles of $2000, $5000, and more. Who is buying these products? Most often it is small businesses which struggle the most to provide employees health coverage and which are dropping it in increasing numbers (Gaynor 2004). A leading national health care consultancy predicted that employers would seek to bring down their health insurance cost growth in 2005, but only by “considerable cost-shifting to employees “especially among smaller employers” (Medicine and Health 2004).
These products are said to be giving employees “some skin in the game.” The famous Rand Health Insurance Experiment of the 1970’s and 1980’s did, in fact, demonstrate that consumers use fewer services as the financial consequences of such use increases. Some believe that these lessons suggest that new higher cost sharing plan designs will yield desired savings now (Newhouse 2004).
Yet, these analyses don’t give sufficient attention to the fact that basic episodes of health care, such as a hospitalization, are far more expensive now than in the 1970’s and 1980’s. For both medium and lower income workers, a $2500 deductible can prove too large, and one hospitalization will leave them with a debt they cannot afford to pay. Warren, Sullivan and Jacoby found that one of four bankruptcy petitioners in the US identified illness or injury the reason for filing for bankruptcy in 1999, while another quarter of those petitioning had $1000 or more in medical bills not covered by insurance. More recent research from 2001 confirmed this finding (Himmelstein, Warren, Thorne, and Woolhandler 2005).
Yet medical bankruptcy does not just result from increasing medical costs or increasing employee shares of medical costs. Americans are more leveraged than ever before, with consumer debt hitting $1.98 trillion in October 2003 (Powell 2004). Annual consumer bankruptcies increased from 290,000 in 1985 to 1.6 million in 2003. Warren believes the data suggest medical bankruptcy is a middle class problem, noting that historically high levels of consumer debt leave middle class families vulnerable to one modest medical bill (Crenshaw 2000).
Recent data indicates that of the 20 million Americans reporting difficulty paying medical bills in 2003, two-thirds had health insurance coverage (Ginsburg 2004). Estimates in 2002 were that 20% of insured individuals were underinsured ” before the growth in employers offering high deductible insurance coverage (Kaiser Commission on Medicaid and the Uninsured 2002).
The problems with cost shifting to employees are at least threefold. First, these “consumer empowerment” products currently do not provide consumers with nearly as much information as they need to make good decisions, if any at all. Second, they adversely affect the sick and poor who are faced with significant out-of-pocket costs and limited means, as documented in the Rand study and elsewhere (Piette M. Heisler; and T.H. Wagner, 2004). Third, as noted above, the flexibility of even middle class families may be insufficient to handle medical debt of only a few thousand dollars.
Where to next? A newly emerging problem of underinsurance.
“few companies have undertaken fundamental change without some severe external threat” (Berwick, James and Coye 2003)
While the percentage of Americans who are uninsured is certain to continue to rise in the near future, a new phenomenon is likely to become more commonplace ” underinsurance. Individuals will be forced to select health insurance coverage for themselves and their families with large deductibles for one of two reasons. First, it may be the only means for remaining insured. Second, in other cases this will be the only coverage made available by their employer. Whatever the reason for their obtaining the reduced coverage insurance products the products” impact will be the same: some who can least bear the financial risk will feel compelled to carry it.
Increased prevalence of high deductible products is likely to result in increasing levels of bad debt for hospitals, physicians and other service providers. Patients will be unable to pay their deductibles. Signs of rising bad debt are already appearing, and hospital providers, in particular, are taking aggressive steps to manage the risk (Kowalczyk 2004). Financial analysts are taking note of the trend and its impact on hospital finances at a time when bad debt is already a primary issue of discussion in the industry (Davis 2004).
It may well be that underinsurance, and not uninsurance, creates the ‘tipping point’ for significant change in our health care delivery and financing system. There are two plausible reasons for this. First, underinsurance will significantly extend the financial impact of the nation’s health insurance coverage problem into the middle class at a faster pace than will occur with the growth of the uninsurance rate.
Second, growing bad debt will force the greatest economic beneficiary of the growth of the health care sector ” providers of health services ” to become actively engaged in finding a health care coverage solution in order to stave off a deepening financial crisis. They will find eager partners in those employers who suffer in international competition due to health insurance costs, and in the increasing number of middle class voters with inadequate coverage.
This is not a doomsday scenario, but rather a forecast of what appears to be a likely change of events that will force an end to the decades-long failure to manage health insurance costs. These events will hopefully galvanize us to make difficult changes for which there appears to be no will today.
As employers begin to pull their money out, the rate of coverage deterioration will quicken. It is hard to imagine any scenario that will reverse the trend. As a result, we need to begin to envision the process by which we may finally fashion a solution to providing affordable, quality, health care coverage in the United States. Such a process will necessitate buy-in from key stakeholders, including public and private purchasers, elected officials, providers, and consumers of health care. Until the majority of people believe that the status quo is threatened, consensus for significant health reform in this country will remain elusive. However, we will have only a small window of opportunity to address fundamental issues with our current health care financing and delivery systems before chronic underinsurance and rising uninsurance destabilize our current imperfect system.
The author greatly appreciates the advice provided by Mary Beth Dyer, Laurie Burgess, and Marge Houy.
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