Real Health Care Reform- Part 2: Empowering Consumers

In 1960, health care accounted for 5.1% of GDP compared to 16.1% of GDP today. In 2009, health care costs were over $7,200 per capita in the United States. Being a more affluent society than our industrialized counterparts, we tend to spend more for quality. But for any market-based approach to work, one has to look at outcomes and on most metrics (like infant mortality, life expectancy, etc.), we rank lower than our counterparts. Part of the reason their per capita costs are lower are because they ration services and because they are tort-aversive.

Make no mistake, the US is not the only victim of inflation in health care. The difference is that our rate of inflation is considerably higher than in other countries. Some have attributed this to an aging population. The median age of Americans is at an all-time high and seniors use a large share of the health care dollar. However, in the US, 12.6% of the population is 65 or older while in Europe, 16.7% of their population falls in this category yet their per capita expenditures in health care are lower. Therefore, age alone cannot account for inflation in health care. In fact, the CBO estimates that age contributes less than 10% to the inflation rate. Its a moot point anyway since we cannot control the aging process beyond extending life expectancy.

Since the beginning of the debate, tort reform has been a central mantra by conservatives. Nowhere in over 2,000 pages of Obamacare is the issue addressed. However, most studies show that tort reform would solve about 2% of the problem. But, the AMA makes a valid point since fear of malpractice lawsuits force doctors to practice costly defensive medicine. The number of lawsuits in the US is double that of Australia and triple that of Canada, but the awards are considerably higher in those countries. France may be a decent model for reform in this area. Potential plaintiffs must first go through a regional malpractice review board for resolution of claims. These claims, if valid, are then paid from a fund financed by the private insurance industry there. The closest analogy here is workman’s compensation where payments are disbursed with no blame assigned. This way, only the most egregious cases see the light of day in court. The review board findings are also public and shine transparency on physician effectiveness. Here in the US, the only time we hear of malpractice is when a trial hits the newspapers.

One of the greatest causes of inflation in health care is the increasing use of elective procedures. For example, a c-section delivery costs double that of a normal vaginal delivery. Likewise, cataract surgery costs about $3,300. Where the US has a distinct advantage in health care is the lack of waiting time to get these procedures. The wait for cataract surgery in Britain, for example, is four months while it is almost immediate here. Also, many Americans demand unnecessary and costly MRIs or Cat-scan procedures and doctors generally do not deter these requests and often encourage them. Other countries have higher per capita MRI unit figures, but they are used considerably less.

One statistic stands out: 10% of health care consumers account for 70% of all spending. Much of this can be decreased by healthy lifestyles. Imagine a world where purchasers shop for insurance and where policies financially reward healthy lifestyles. It would be less draconian than government mandates and suggestions and we would see Michelle Obama’s face less on television. For example, despite high health care spending, we are an obese nation. We also have high drug abuse and tobacco use rates- all lifestyles that affect health. About 75% of all health care spending is on the big 5: coronary heart disease, congestive heart failure, diabetes, asthma, and depression. The first three can be alleviated through lifestyle changes rewarded through lower insurance premiums. Estimates are that for every 1% decrease in the incidence of these maladies, it saves the system $77 billion annually. Safeway Stores has a program where they reward employees for healthy lifestyle choices- discounted gym memberships, smoking cessation programs and bonuses for using generic drugs. As a result, insurance premiums decreased 30% over a five year period.

None of these reforms that empower purchasers can be implemented as long as the majority of health insurance is obtained through employers. The system lacks both portability and purchaser choice. Hence, the special tax treatment for employer-based insurance needs to cease. Lets assume an employer purchases health care insurance for their employees at a cost of $10,000 for a policy and that the employee pays $3,000 through payroll deductions. The employee does not “see” this money in the form of higher expendable income anyway. And the employer has a tax advantage because they can write off that $7,000. By breaking this cycle and somehow directing at least that $7,000 towards higher employee wages, you immediately increase their income. This gives them the means to then purchase health care insurance on their own, increase government revenues, and decreases the income disparity gap. Since the purpose of eliminating the tax break is to give the consumer (the employee) the means to purchase health insurance, some of that money would have to be diverted for those purposes. If the money is going to be paid out anyway in the form of a benefit, does it matter whether that money goes to the consumer or the insurance company?

The consensus dollar amount of gross yearly income to purchase health insurance is $50,000. However, 54% of Americans make less than that amount. Therefore, they would need some form of government help in the form of subsidies on a sliding scale basis. Based on 2010 figures, the average price for a health insurance policy purchased through the employer for a family of four is $13,770 while the average cost for the same policy purchased on the private market is $6,800. Assuming one has the average policy offered by the average employer and they opt out for private insurance in exchange for higher wages, their annual wage would increase by $13,770 of which $7,000 would automatically be dedicated to purchase insurance of their choice. That translates into an additional $5,280 in real income, or about $100 a week- a stimulus we can all live with! They can then purchase a policy that fits their needs. The policy would also be portable. Of course, there must be some mechanism to ensure that (1) the person actually purchases insurance and (2) the employer actually converts the cessation of medical benefits to increase in wages.

As part of this “tailoring” process, lower premiums can be negotiated in exchange for higher out-of-pocket payments. In fact, the average out-of-pocket costs now for a family are about $2,600 annually. Assuming $7,000 is used to purchase a decent policy, another $3,000- the amount annually contributed by the employee- could be diverted to a Health Savings Account which could be used for these other expenses and still be $300 ahead at the end of the year. This would further encourage consumers to make informed health care choices which would further drive down costs. The Kaiser Foundation, comparing employer-based versus privately purchased plans found one negative- those who purchased their insurance privately were less apt to fill prescriptions or pursue certain other procedures. But, more importantly when it comes to overall health, they found absolutely no differences. Because the prescription was not filled or the blood test not taken did not make the person any less healthy.

Obviously, the system would have to be tweaked along the way. It makes little sense to increase wages only to have the employee formerly covered by their employer use those increased wages to pay for that dream car or vacation. There needs to be a mechanism to encourage the purchase of insurance or “punish” the non-purchase of insurance. Likewise, there needs to be a mechanism to encourage employers to divert those “savings” from the offer of benefits into higher wages, not higher corporate profits. Maybe, if true choice were introduced into the equation, a “mandate” would make more intuitive sense. But first, the playing field must be evened so that everyone must be given the means, through government subsidy or increased wages, to purchase health care insurance that fits their individual needs or the needs of their family.