PNHP

OECD Health at a Glance 2011

OECD Health at a Glance 2011

Health at a Glance 2011: OECD Indicators

Organization for Economic Cooperation and Development (OECD)
November 23,2011

Why is health spending in the United States so high?

The United States spends two-and-a-half times more than the OECD average health expenditure per person.

Rich countries spend more than poor countries. Chart 3 (at link below) shows that for nearly every country, if you know how rich they are, you can predict their health spending per person per year to within a few hundred dollars. The United States is an exception – Americans spend nearly $3000 per person per year more than Swiss people, even though Swiss people have about the same level of income.

Where does the money go?

Hospital spending is higher than in the five other OECD countries, by over 60%.

Spending on Ambulatory care providers – that is, physicians and specialists as well as dentists, is much higher than in the other OECD countries – almost two-and-a-half times the average of the other five countries.

Spending on Pharmaceuticals and medical goods is higher in the US than in any other country, but overall accounts for a smaller share of total health spending than in the other countries.

Spending on Public Health and Administration is particularly high – more than two-and-a-half times the average.

Are U.S. health prices high?

Overall, the evidence suggests that prices for health services and goods are substantially higher in the United States than elsewhere. This is an important cause of higher health spending in the United States.

Does the U.S. provide too much health care?

(The United States) does not have many physicians relative to its population; it does not have a lot of doctor consultations; it does not have a lot of hospital beds, or hospitals stays, when compared with other countries, and when people go to hospital, they do not stay for long. All these data on health care activities suggest that US health spending should be low compared with other countries.

On the other hand, the US health system does do a lot of interventions. Table 3 (at link below) shows that it has a lot of expensive diagnostic equipment, which it uses a lot. And it does a lot of elective surgery – the sort of activities where it is not always clearcut about whether a particular intervention is necessary or not.

Why is health spending in the United States so high?
http://www.oecd.org/dataoecd/12/16/49084355.pdf

Health at a Glance 2011: OECD Indicators
(The entire publication can be accessed for free at this website.)
http://www.oecd-ilibrary.org/social-issues-migration-health/health-at-a-glance-2011_health_glance-2011-en

Comment: 

By Don McCanne, MD

The Organization for Economic Cooperation and Development (OECD) has just released “Health at a Glance 2011: OECD Indicators.” It “provides the latest comparable data on different aspects of the performance of health systems in OECD countries.” You should save the link above that provides free access to this publication since the data are frequently used by the policy community to compare the United States with other nations.

When examining the tables, charts, graphs and text, keep in mind that the data are sometimes presented in a manner that does not always correlate with highly credible data from other sources.

For instance, the category of public health and administration does not include the same administrative costs as measured by Woolhandler and colleagues in their landmark NEJM articles. Nevertheless, the OECD still reports that public health and administrative costs in the United States are more than two-and-a-half times the OECD average.

Also, the OECD estimates of public spending for health care in the United States leave out two important categories. The tax deductibility of employer-sponsored plans amounts to a subsidy of taxpayer funds, plus taxpayers also pay for the employer component of health insurance premiums for employees of federal, state and local government agencies. Although the OECD reports the percent of government spending on health care in the United States as being one of the lowest, on a per capita basis our public spending on health care is actually higher than the public and private spending combined in almost all other nations.

So when you hear others cite the OECD data, it would be helpful if you have a heads up on the actual data and how it compares to that of other reliable sources. Save the link above for future reference.

OECD Health at a Glance 2011

Health at a Glance 2011: OECD Indicators

Organization for Economic Cooperation and Development (OECD)
November 23,2011

Why is health spending in the United States so high?

The United States spends two-and-a-half times more than the OECD average health expenditure per person.

Rich countries spend more than poor countries. Chart 3 (at link below) shows that for nearly every country, if you know how rich they are, you can predict their health spending per person per year to within a few hundred dollars. The United States is an exception – Americans spend nearly $3000 per person per year more than Swiss people, even though Swiss people have about the same level of income.

Where does the money go?

Hospital spending is higher than in the five other OECD countries, by over 60%.

Spending on Ambulatory care providers – that is, physicians and specialists as well as dentists, is much higher than in the other OECD countries – almost two-and-a-half times the average of the other five countries.

Spending on Pharmaceuticals and medical goods is higher in the US than in any other country, but overall accounts for a smaller share of total health spending than in the other countries.

Spending on Public Health and Administration is particularly high – more than two-and-a-half times the average.

Are U.S. health prices high?

Overall, the evidence suggests that prices for health services and goods are substantially higher in the United States than elsewhere. This is an important cause of higher health spending in the United States.

Does the U.S. provide too much health care?

(The United States) does not have many physicians relative to its population; it does not have a lot of doctor consultations; it does not have a lot of hospital beds, or hospitals stays, when compared with other countries, and when people go to hospital, they do not stay for long. All these data on health care activities suggest that US health spending should be low compared with other countries.

On the other hand, the US health system does do a lot of interventions. Table 3 (at link below) shows that it has a lot of expensive diagnostic equipment, which it uses a lot. And it does a lot of elective surgery – the sort of activities where it is not always clearcut about whether a particular intervention is necessary or not.

Why is health spending in the United States so high?
http://www.oecd.org/dataoecd/12/16/49084355.pdf

Health at a Glance 2011: OECD Indicators
(The entire publication can be accessed for free at this website.)
http://www.oecd-ilibrary.org/social-issues-migration-health/health-at-a-glance-2011_health_glance-2011-en

The Organization for Economic Cooperation and Development (OECD) has just released “Health at a Glance 2011: OECD Indicators.” It “provides the latest comparable data on different aspects of the performance of health systems in OECD countries.” You should save the link above that provides free access to this publication since the data are frequently used by the policy community to compare the United States with other nations.

When examining the tables, charts, graphs and text, keep in mind that the data are sometimes presented in a manner that does not always correlate with highly credible data from other sources.

For instance, the category of public health and administration does not include the same administrative costs as measured by Woolhandler and colleagues in their landmark NEJM articles. Nevertheless, the OECD still reports that public health and administrative costs in the United States are more than two-and-a-half times the OECD average.

Also, the OECD estimates of public spending for health care in the United States leave out two important categories. The tax deductibility of employer-sponsored plans amounts to a subsidy of taxpayer funds, plus taxpayers also pay for the employer component of health insurance premiums for employees of federal, state and local government agencies. Although the OECD reports the percent of government spending on health care in the United States as being one of the lowest, on a per capita basis our public spending on health care is actually higher than the public and private spending combined in almost all other nations.

So when you hear others cite the OECD data, it would be helpful if you have a heads up on the actual data and how it compares to that of other reliable sources. Save the link above for future reference.

Recoverable administrative waste is much greater than most realize

Billions Wasted on Billing

By Ezekiel J. Emanuel
The New York Times, November 12, 2011

The range of expert opinions on how much of (administrative costs) could be saved goes as high as $180 billion, or half of current expenditures. But a more conservative and reasonable estimate comes from David Cutler, an economist at Harvard, who calculates that for the whole system – for insurers as well as doctors and hospitals – electronic billing and credentialing could save $32 billion a year. And United Health comes to a similar estimate, with 20 percent of savings going to the government, 50 percent to physicians and hospitals and 30 percent to insurers.

http://opinionator.blogs.nytimes.com/2011/11/12/billions-wasted-on-billing/

And…

Cutting Health Costs by Reducing the Bureaucracy

Letters, The New York Times
November 20, 2011

To the Editor:

Ezekiel J. Emanuel lowballs estimates of the current costs and potential savings on medical bureaucracy, and raises vain hope that health reforms short of a single-payer system will realize substantial savings (“Billions Wasted on Billing,” Sunday Review, Nov. 13).

Peer-reviewed studies in The New England Journal of Medicine by two colleagues and me document that administrative costs account for 31 percent of health spending in the United States versus 17 percent in Canada. The 14 percentage-point difference translates to $380 billion in potential savings in 2011. Other researchers have reached similar conclusions.

A single-payer reform could realize these savings by eliminating insurance middlemen and radically simplifying payments to doctors and hospitals. The lesser measures that Dr. Emanuel champions – computerized and standardized billing – won’t do the job.

Hospital billing has been computerized for decades, and bureaucratic costs have skyrocketed since the adoption of the standard hospital billing form in 1982.

Combat over who pays and who profits underlies health administration’s overgrowth. A nonprofit single-payer system makes those issues moot.

Steffie Woolhandler
New York, Nov. 14, 2011

The writer, an internist, is a professor of public health at the City University of New York.

http://www.nytimes.com/2011/11/21/opinion/cutting-health-costs-by-reducing-the-bureaucracy.html?ref=opinion

NEJM – Costs of Health Care Administration in the United States and Canada
http://www.nejm.org/doi/full/10.1056/NEJMsa022033

Comment: 

By Don McCanne, MD

The landmark 1991 and 2003 New England Journal of Medicine articles comparing health care administrative costs in the fragmented, multi-payer financing system in the United States with the single payer system in Canada were meticulous, peer-reviewed studies that confirmed that a massive amount of administrative spending in the United States is potentially recoverable – an estimated $380 billion for 2011 alone.

Politicians and academics who believe that we need to support politically feasible models of reform, such as the Affordable Care Act, have attempted to ignore or discredit these numbers. Even the most noted attack on these numbers, by Brookings economist Henry Aaron, was based on a back-of-an-envelope calculation arbitrarily assuming health care wages to be one-tenth of what they actually are in the United States. There is some irony in this attack by the highly-respected and otherwise highly-credible Aaron when in the same article he states, “I look at the U.S. health care system and see an administrative monstrosity, a truly bizarre melange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird.”

During the reform process, administrative inefficiencies were frequently brought up as a problem that needed to be addressed, but the perception of the extent of the problem always fell far short, at least by those who controlled the process. This led to grossly deficient suggestions such as merely streamlining insurance billing functions through computer systems (which already exist) and through a simplified universal billing form (which is already in use). This myopic thinking has led to grossly deficient estimates of potential savings, such as that of Ezekiel Emmanuel who suggests a savings less than one-tenth of the true potential.

It is true that not much of the current administrative waste can be recovered as long as politically influential individuals, such as Ezekiel Emmanuel, insist the the private insurers must remain as an intermediary in our health care financing. Their business product is administration.

As you watch the development of new innovations by the insurance industry, you will see that they all involve even more administrative products. As long as they are in charge, they will always try to capture a larger portion of our national health expenditures. However, since administrative costs will now be limited to 15 to 20 percent of their premiums, you will see these new administrative services being introduced as “health care.” Only the label has changed.

Recoverable administrative waste is much greater than most realize

Billions Wasted on Billing

By Ezekiel J. Emanuel
The New York Times, November 12, 2011

The range of expert opinions on how much of (administrative costs) could be saved goes as high as $180 billion, or half of current expenditures. But a more conservative and reasonable estimate comes from David Cutler, an economist at Harvard, who calculates that for the whole system – for insurers as well as doctors and hospitals – electronic billing and credentialing could save $32 billion a year. And United Health comes to a similar estimate, with 20 percent of savings going to the government, 50 percent to physicians and hospitals and 30 percent to insurers.

http://opinionator.blogs.nytimes.com/2011/11/12/billions-wasted-on-billing/

And…

Cutting Health Costs by Reducing the Bureaucracy

Letters, The New York Times
November 20, 2011

To the Editor:

Ezekiel J. Emanuel lowballs estimates of the current costs and potential savings on medical bureaucracy, and raises vain hope that health reforms short of a single-payer system will realize substantial savings (“Billions Wasted on Billing,” Sunday Review, Nov. 13).

Peer-reviewed studies in The New England Journal of Medicine by two colleagues and me document that administrative costs account for 31 percent of health spending in the United States versus 17 percent in Canada. The 14 percentage-point difference translates to $380 billion in potential savings in 2011. Other researchers have reached similar conclusions.

A single-payer reform could realize these savings by eliminating insurance middlemen and radically simplifying payments to doctors and hospitals. The lesser measures that Dr. Emanuel champions – computerized and standardized billing – won’t do the job.

Hospital billing has been computerized for decades, and bureaucratic costs have skyrocketed since the adoption of the standard hospital billing form in 1982.

Combat over who pays and who profits underlies health administration’s overgrowth. A nonprofit single-payer system makes those issues moot.

Steffie Woolhandler
New York, Nov. 14, 2011

The writer, an internist, is a professor of public health at the City University of New York.

http://www.nytimes.com/2011/11/21/opinion/cutting-health-costs-by-reducing-the-bureaucracy.html?ref=opinion

NEJM – Costs of Health Care Administration in the United States and Canada
http://www.nejm.org/doi/full/10.1056/NEJMsa022033

The landmark 1991 and 2003 New England Journal of Medicine articles comparing health care administrative costs in the fragmented, multi-payer financing system in the United States with the single payer system in Canada were meticulous, peer-reviewed studies that confirmed that a massive amount of administrative spending in the United States is potentially recoverable – an estimated $380 billion for 2011 alone.

Politicians and academics who believe that we need to support politically feasible models of reform, such as the Affordable Care Act, have attempted to ignore or discredit these numbers. Even the most noted attack on these numbers, by Brookings economist Henry Aaron, was based on a back-of-an-envelope calculation arbitrarily assuming health care wages to be one-tenth of what they actually are in the United States. There is some irony in this attack by the highly-respected and otherwise highly-credible Aaron when in the same article he states, “I look at the U.S. health care system and see an administrative monstrosity, a truly bizarre melange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird.”

During the reform process, administrative inefficiencies were frequently brought up as a problem that needed to be addressed, but the perception of the extent of the problem always fell far short, at least by those who controlled the process. This led to grossly deficient suggestions such as merely streamlining insurance billing functions through computer systems (which already exist) and through a simplified universal billing form (which is already in use). This myopic thinking has led to grossly deficient estimates of potential savings, such as that of Ezekiel Emmanuel who suggests a savings less than one-tenth of the true potential.

It is true that not much of the current administrative waste can be recovered as long as politically influential individuals, such as Ezekiel Emmanuel, insist the the private insurers must remain as an intermediary in our health care financing. Their business product is administration.

As you watch the development of new innovations by the insurance industry, you will see that they all involve even more administrative products. As long as they are in charge, they will always try to capture a larger portion of our national health expenditures. However, since administrative costs will now be limited to 15 to 20 percent of their premiums, you will see these new administrative services being introduced as “health care.” Only the label has changed.

Should health care in America be a right?

By Philip Caper, M.D.
Bangor Daily News, Nov. 17, 2011

America is the only wealthy country in the world that does not guarantee its people access to health care as a fundamental right. More than 15 percent of Americans are uninsured and many more are seriously underinsured. That was the bottom line message of T.R. Reid, author of the best-selling book “The Healing of America” and the television documentary based on it, “Sick Around The World.”

All other wealthy democracies provide universal health care to their residents, and do it for about half of what the U.S. spends. Reid, who was on a speaking tour of Maine last week, has studied health care in more than a dozen countries. He has concluded that America too could establish a universal health care system that covers everybody and simultaneously reduces overall costs. All that is required is the political will to do so.

Why has every country other than the U.S. made health care a human right? Reid attributes it to two basic factors.

The first is the ethic of “caring for the least of our brethren” shared by most of the world’s great cultures. They simply believe it is the right thing to do.

That’s not universally true in America. During a recent debate, Republican presidential candidates were asked whether somebody who had voluntarily decided to forgo health insurance but needed expensive life-saving treatment should be left to die. Many in the audience signaled their approval of that idea. One even shouted “let him die.” It’s clear that some Americans, worried about freeloaders or some other unworthy getting something they don’t deserve at public expense, are repelled by the idea of health care as a right.

My own experience, as well as the avalanche of negative coverage this episode generated, has convinced me that most Americans disagree. We are all human. At some unpredictable time in our lives most of us will become sick enough to require medical care. The chances of that happening increase as we age. All of us, if we’re lucky enough to live that long, will grow old and suffer from the infirmities that normally and inevitably accompany aging, but can be eased by good health care.

When — not if — that happens we will want to have that care available. For that reason, we should all be willing — and required — to participate in a health care system that protects us. Do unto others. Shared responsibility.

The second factor Reid cited is affordability. As strange as it seems, it turns out to be less expensive to include everybody in a health care system than to exclude some. In testimony before the Maine legislature last year, Harvard professor William Hsiao, one of Reid’s mentors, estimated that an improved Medicare-like system would produce annual savings to Mainers of a billion dollars. That’s right, a billion dollars every year.

I have yet another reason for wanting to see such a system enacted. A physician’s job is caring for the sick, no matter who they are. Our professional ethics do not permit us the luxury of deciding who is worthy of medical care and who is not.

Doctors want to work in a health care system that allows us to do our job. That job is to diagnose and treat disease, and to comfort patients according to our best professional judgment. In America, that is becoming increasingly difficult. The micromanagement of medical practice by outside parties is becoming commonplace.

No other country in the world would tolerate the degree of interference in medical practice that exists here. Doctors are becoming more and more frustrated with the conditions under which they must practice.

Such micromanagement is an attempt to save money and increase profitability for individual private insurance companies. But it adds hugely to our overall health care bill. In fact, it is estimated that up to 30 percent of our $2.7 trillion health care bill goes not for health care, but is squandered arguing about money — who gets what, and who pays. The effect on patients can be devastating.

Another lesson Reid learned in his travels is that in every country with a well-functioning health care system, government plays an overwhelmingly dominant role in financing, regulating or directly providing health care.

For the past 30 years, we have tried to let market forces govern our health care. That experiment has been a spectacular failure. Perhaps these excess costs could be justified if we produced superior results. But we don’t. According to the World Health Organization, many of our results are worse than other advanced nations, and few are better.

As a nation, we are already paying more than enough to care for every American, but we’re far from that goal. Even if the new federal health care reform law works perfectly, over 25 million Americans will be left out.

Reid, a self-described optimist, ended his tour by observing, “If the French can do it, so can Americans.” I agree. All we need is the will.

Physician Philip Caper of Brooklin is a founding board member of Maine AllCare, a nonpartisan, nonprofit group committed to making health care in Maine universal, accessible and affordable for all. He can be contacted at pcpcaper21@gmail.com.

http://bangordailynews.com/2011/11/17/health/should-health-care-in-america-be-a-right/

Top economist warns Canada against two-tiered health care

By KAREN HOWLETT
Globe and Mail, Thursday, Nov. 17, 2011

Canada should remain committed to publicly funded health care, and not open the door to two-tier medicine, says a new report by a top economist.

Governments can improve efficiencies in the system, including changing the way doctors are compensated, without allowing patients to pay for some services, Don Drummond, former chief economist at Toronto-Dominion Bank said in the report released on Thursday.

“A great deal can be done to improve efficiency in the system before privatization is considered,” Mr. Drummond says in the report prepared for the C.D. Howe Institute. “It seems best to simply leave this issue aside for the moment.”

The report, titled Therapy or Surgery? A Prescription for Canada’s Health System, amounts to a staunch defence of Canada’s public health-care system that guarantees universal coverage for many services, including hospital care and prescription drugs for the elderly.

It will likely provide a road map for reforms to health care in Canada’s most populous province. The economist is conducting a review of all program spending in Ontario.

Mr. Drummond’s report for the Ontario government will not be released until early next year. But he says the government won’t meet its commitment to erase the province’s deficit by 2018 unless it caps annual growth in spending on health care, education and other programs at 1 per cent for the next six years. The province is facing a projected deficit of $16-billion this year.

Reducing spending will not be easy. Canadians spent $192-billion on health care in 2010, accounting for just under 12 per cent of the country’s economic output or GDP, the report says. In Ontario alone, government spending on health care has climbed an average of 7.6 per cent a year over the past decade.

The grim reality is that provincial revenues will not grow fast enough to offset rising health-care costs, the report says. The report is the latest foray into public policy by Mr. Drummond, one of Canada’s most influential advisers to governments. In a report last year, he warned that left unchecked, health-care costs are set to reach between 70 to 80 per cent of total program spending by 2030, up from just over 40 per cent today.

In the earlier report, Mr. Drummond and TD Bank economist Derek Burleton proposed that the provinces bill affluent seniors for their drugs and pay doctors based on the quality and cost-effectiveness of their care.

Mr. Drummond returns to those themes in his latest report. He recommends that the provinces overhaul the payment system for doctors by lowering fees in lockstep with improvements in technology that allow them to perform many procedures, including cataract surgeries, more quickly.

The McGuinty government is considering such changes in the next round of contract talks with the Ontario Medical Association. The OMA contract expires in March.

Mr. Drummond also recommends changing the compensation system for doctors. About 80 per cent of doctors’ compensation in Canada consists of fee for services. Blended payment systems, consisting of 70 per cent salary and 30 per cent fee for service are likely best, the report says.

Canadians could receive better value for the money they spend on health care if nurse practitioners or physician assistants performed some tasks now done by doctors, the report says. As well, practical nurses could take on some duties now done by registered nurses.

Mr. Drummond also says there is a role for the private sector in the health-care system as long as its services are paid for out of the public purse. Canada needs more clinics dedicated to one medical procedure, such as cataract surgeries, that produce better care for less money.

Although these clinics are privately operated, they bill the public medicare system for their services.

In the absence of federal leadership, the task falls to the provinces to reform health care, the report says. Mr. Drummond criticizes the federal government for its response thus far to the federal health accord, which expires in March, 2014. All Prime Minister Stephen Harper has done, he said, is promise to extend the annual six per cent increase in transfer payments to the provinces for another two years.

“The federal government walks on eggshells in this provincial domain and will continue to be happy to leave the messy parts to the provinces,” he says.

Report: Therapy or Surgery? A Prescription for Canada’s Health System

http://www.theglobeandmail.com/news/national/top-economist-warns-canada-against-two-tiered-health-care/article2239426/

Experts try to define affordable health insurance

We All Want It, but We Don’t Know What It Is: Toward a Standard of Affordability for Health Insurance Premiums

By Peter Muennig, Bhaven Sampat, Nicholas Tilipman, Lawrence D. Brown and Sherry A. Glied
Journal of Health Politics, Policy and Law, October 2011

Abstract

The 2010 Patient Protection and Affordable Care Act (P.L. 111-148), or ACA, requires that U.S. citizens either purchase health insurance or pay a fine. To offset the financial burden for lower-income households, it also provides subsidies to ensure that health insurance premiums are affordable. However, relatively little work has been done on how such affordability standards should be set. The existing literature on affordability is not grounded in social norms and has methodological and theoretical flaws. To address these issues, we developed a series of hypothetical vignettes in which individual and household sociodemographic characteristics were varied. We then convened a panel of eighteen experts with extensive experience in affordability standards to evaluate the extent to which each vignette character could afford to pay for one of two health insurance plans. The panel varied with respect to political ideology and discipline. We find that there was considerable disagreement about how affordability is defined. There was also disagreement about what might be included in an affordability standard, with substantive debate surrounding whether savings, debt, education, or single parenthood is relevant. There was also substantial variation in experts’ assessed affordability scores. Nevertheless, median expert affordability assessments were not far from those of ACA.

In-Person Discussion

The discussion started in earnest with a review of the vignettes, beginning with Sarah (age 25, single, no children, college graduate, working for a non-profit), a vignette character who earns $1,610 per month, just under 200 percent of the FPL. In the case of characters with very low earnings, such as Sarah, there was considerable agreement among the panelists. All but one of the experts thought that she should pay something for health insurance, and all agreed that it should be very little.

The discussion heated up when participants considered Jessica, who earns $2,210 per month (age 25, single, no children, lives in Chicago, and pays rent of $1160 monthly). Here it was revealed that some participants interpreted affordability as what the person should pay and others as what they could pay. This provided a jumping-off point to a broader discussion of what affordability means.

One participant suggested that Jessica could “literally” afford $800 per month, and denounced affordability as “a lousy policy where you impoverish people so they can buy a minimal set of other goods after they end up paying for health insurance.” Another respondent who also gave a very high affordability threshold noted, “I’m not saying it would be worth it for her to pay this much, but she could still manage reasonably well if she [did] . . . so.” Many others disagreed with this literal interpretation, noting, “I don’t think literal affordability is an interesting policy.” One respondent described affordability as “asking really, ‘How much could one reasonably pay for health insurance.'” Several others argued that a policy would be affordable for beneficiaries if there would “be no adverse consequences by pushing them to that limit.”

One participant, who argued that the standard should be $100 to $150, said, “I’m a low-ball guy because [I take into account] the real costs of living, the fact that the poverty line is too low, etc.”

Conclusion

There is not a natural, objective standard of affordable health insurance coverage. Of course this is true for most (if not all) policies that require government subsidies. Reasonable people disagree about how much a given household can be expected to put aside to spend on health insurance and health care. That there is considerable disagreement even among distinguished experts in social policy on this issue suggests that the concept is mainly a subjective one and that any specific affordability threshold or subsidy structure is likely to be contentious and contested. In this area, as with many others, even highly qualified experts are unlikely to provide scientific answers to guide policy.

http://jhppl.dukejournals.org/content/36/5/829.full.pdf+html

Comment: 

By Don McCanne, MD

This study was designed to demonstrate what well qualified policy experts, from across the political and academic spectra, would conclude should be the standard for determining affordability of health insurance premiums. So what is that standard?

After analyzing a great many vignettes, each expert then devised their own rules of thumb for determining appropriate premium contributions. Although the rules were quite varied, the mean calculations for premium contributions were close to those specified in the Affordable Care Act (ACA). Does this mean that members of Congress and their staffs were quite astute in their calculations of premium subsidies for the exchange plans?

Although the mean calculations were close to those of ACA, there was a very wide variation in the experts’ assessed affordability scores. In the vignette for “Jessica” ($2210 per month income with a Chicago rent of $1160, leaving $1050 for all of her expenses other than rent), expert estimates of affordable health insurance premiums ranged from $100 or $150 per month up to $800 per month. At $800 per month, that leaves $250 for all expenses other than rent and health insurance (e.g., food, clothing, utilities, transportation, education expenses, retirement fund, and “luxuries” such as a cellphone, TV, vacations, holiday gifts, etc.). That $250 must also cover out-of-pocket medical expenses such as deductibles, copayments, and out-of-network services. Even the “low-ball” estimate leaves only $900 to $950 per month for everything beyond rent and health insurance.

The fundamental defect here is that we keep trying to match payment for a specified package of medical benefits to the incomes of specific individuals. Since a reasonable package is no longer affordable by median-income individuals, some form of subsidization is required for the majority of us. Yet recognized experts in the policy community have very different concepts as to how much and in what form the subsidies should be.

Averaging these wide ranges of opinions on how much each person should pay is not a satisfactory solution since the averages or medians place too much of the burden of health care costs on those with modest incomes. These averages also would not satisfy those dispassionate experts who believe that individuals should pay dearly for their health insurance and health care, so they won’t waste their money on things like flat-screen TVs (or really, “wasting” it on healthier foods, transportation to their employment, 401k plans, and so forth).

Financing health care and providing health benefits need to be totally separated. The correlation between ability to pay and medical need is negative, not positive. Payments based on ability to pay should be made into a common risk pool covering everyone, most easily accomplished through the tax system. Health care benefits should be provided to everyone out of that risk pool based on medical need. That is sort of the way Medicare works now for selected populations, but it could be improved.

That sounds like a good idea. Let’s improve Medicare and then provide it for everyone.

Cutting Health Costs by Reducing the Bureaucracy

Letter to the Editor
The New York Times, Nov. 20, 2011

To the Editor:

Ezekiel J. Emanuel lowballs estimates of the current costs and potential savings on medical bureaucracy, and raises vain hope that health reforms short of a single-payer system will realize substantial savings (“Billions Wasted on Billing,” Sunday Review, Nov. 13).

Peer-reviewed studies in The New England Journal of Medicine by two colleagues and me document that administrative costs account for 31 percent of health spending in the United States versus 17 percent in Canada. The 14 percentage-point difference translates to $380 billion in potential savings in 2011. Other researchers have reached similar conclusions.

A single-payer reform could realize these savings by eliminating insurance middlemen and radically simplifying payments to doctors and hospitals. The lesser measures that Dr. Emanuel champions — computerized and standardized billing — won’t do the job.

Hospital billing has been computerized for decades, and bureaucratic costs have skyrocketed since the adoption of the standard hospital billing form in 1982.

Combat over who pays and who profits underlies health administration’s overgrowth. A nonprofit single-payer system makes those issues moot.

STEFFIE WOOLHANDLER
New York, Nov. 14, 2011

The writer, an internist, is a professor of public health at the City University of New York.

http://www.nytimes.com/2011/11/21/opinion/cutting-health-costs-by-reducing-the-bureaucracy.html?_r=1&ref=opinion

Pay Attention To Health Insurance Non-Benefit Costs!

By Merton Bernstein
Health Affairs Blog, November 16th, 2011

The McKinsey Global Institute reported in 2007 and 2008 that the United States spends twice as much for health care as for food. According to Census and Department of Agriculture data that pattern continues. Yet millions remain outside the protection of health insurance and many nominally within its bounds are seriously underinsured. Millions of individuals and thousands of businesses stagger under the cost of health care, many state and local communities find them unmanageable and some businesses find them a handicap or unaffordable. Alas, health insurance premiums continue to rise – on average another 9 percent in 2011. Medical care costs can change direction if policy makers stop whistling past a significant contributor – non-benefit costs.

These very substantial outlays include: payments by providers and insurers to prepare and process about a billion non-Medicare bills a year; pay to health provider personnel preparing records of services rendered as a prelude to billing; fees providers pay contractors to assemble their bills; fees that large employers pay contractors to administer their plans; provider payments to bill collection companies, largely in vain, to squeeze past due payments from patients, many already wrung dry by the costs of illness and income lost by family caregivers; lost time and pay for dickering with insurers seeking to minimize reimbursements; efforts by insurers and self-insurers to shift the duty to pay to other insurers and entities; and expenses for seeking reimbursement from other plans (a zero-sum endeavor which adds to costs without any overall savings).

Non-benefit costs also include fees, usually not counted in the total cost of care but nonetheless real, that employers pay consultants and the time executives expend in selecting plans; insurer Wall-Street-style executive pay and bonuses; commissions to sales agents, with repeat payments on renewal; advertising and other promotional activities like payments to physicians for speeches and “consulting;” reinsurance fees to hedge against large “losses;” investment expenses; and, not least, insurer profits. Don’t omit provider and insurer outlays to promote and protect tax breaks and other arrangements favorable to private plans.

All such expenditures end up, in whole or considerable part, some with a mark up, in the prices charged by providers and insurers and then folded into the prices of what we buy or increasingly cannot afford – for example, home heating and higher education. Moreover, when U.S. companies pay up to twice as much for medical care than their foreign competitors, as they typically do, they lose business and American workers lose jobs.

The Factors Behind Non-Benefit Costs

Those costs are larger than necessary due to how we arrange (I almost wrote “organize”) health care. Over 1,300 enterprises sell or administer employment-based medical care insurance or medical benefit plans. The thousands of plans covering tens of millions employees vary in countless ways that must be taken into account in the labor intensive activities of preparing bills and processing them. The bills themselves consist of charges for innumerable procedures, services and supplies. Bill preparation and processing may be even more complicated and costly than many realize, not least because providers and insurers negotiate a variety of price lists.

But “variety” doesn’t capture the multiplicity of plan provisions; “unnumbered,” “countless,” “unknown, possibly unknowable,” or “lots” are more like it. A Health Affairs article by Uwe Reinhardt calls medical care pricing “cockamamie” and “madness.” One experienced administrator notes, “The average provider – doctors or hospitals – has between 5 and 10 reimbursement rates for the exact same procedure… [A] hospital chain may have 150 rates for the same procedure.” A highly regarded expert, Paul Ginsburg, comments that “observers outside of health care would be stunned by the degree of price variation.”

How come? Providers and insurers seek to attract profitable groups, that is, employers with large numbers and low-risk employees. They offer advantageous rates to such clients whose own bargaining power varies and so the rates charged them vary. Less desirable customers – such as small employers, high risk people like women of child- bearing years and older people – get higher prices. The resulting potpourri of prices introduces another complicating dimension for legions of clericals preparing provider bills who must apply the details of the deal reached by the particular provider/insurer/employer/client involved.

Insurers with their multiple negotiated price lists go through the same process, but in reverse, when they process bills, sometimes seeking mistakes so as to deny or delay payment. Computerization does not solve the problems that arise in processing bills submitted electronically when, as can frequently happen, the recipient computer program finds errors and objections to bills submitted. The provider staff or contractor must address the problems individually. The bill preparing process is slower, more complicated, more error prone and costly than if rates were uniform for each particular service. The plethora of plan variations prevents preparers from becoming sufficiently familiar with plan provisions to readily recognize and avoid errors.

The Magnitude Of Non-Benefit Costs

Non-benefit costs of private arrangements consume 8 percent to 30 percent of private plan total costs. In contrast, the simpler, more standardized coverage and pricing provisions of Medicare, Medicaid and the Children’s Health Insurance Program (CHIP) result in lower non-benefit costs. Medicare’s administrative costs are regularly in the 3 percent range; Medicaid’s and CHIP’s costs are somewhat higher due to the periodic application of means testing needed to repeatedly determine the eligibility of millions of patients. But both programs incur lower non-benefit costs than private insurers. Non-benefit costs merit serious attention – about the only thing not now paid.

The 2007 McKinsey analysis concluded that the U.S. non-system is “intrinsically more expensive” than those of many of the 34 OECD [Organization for Economic and Cooperative Development] countries. And McKinsey’s 2008 version observed that “multi-payer systems (and a multi-state regulated system) create extra costs and inefficiencies in the form of redundant marketing and management overhead tha[n]…countries which have a less fragmented payment system…” (Page 21) Non-benefit costs, though largely hidden in prices, count in what must be paid. The multiplicity of public programs, though less numerous and varied than private programs, also increase non-benefit costs. They too could and should be simplified.

The 2007 McKinsey analysis assigned $147 billion of the cost above the expected level based on our country’s comparative wealth “to operational expenses and support functions” and “$98 billion …in administration and insurance” out of 2006 total health car
e outlays of $1.9 trillion. Given our larger totals since then, most recently $2.48 trillion, those excessive costs now must be significantly higher.

We pay more than necessary for health insurance while too many people get left out, primarily because of costs. Even many with “coverage” do not seek benefits because discouraged by deductibles and co-insurance. Many pay for non -benefit costs in more than money.

We should cease being distracted by ideological debate and start paying attention to the realities of non-benefit health insurance costs. Until we do, we will not fully understand how health care costs are savaging our economy, federal and state treasuries and personal budgets. Until we have a realistic diagnosis of the dimensions and characteristics of non-benefit costs, we will not have a practicable prescription to reduce them.

Addendum – The Volume Of Non-Medicare Claims

Despite long and extensive efforts, I did not find any studies or reports showing the number of claims made by providers and processed by insurers or other plan administrators. Inquiries to friendly experts yielded responses that did not have such information. Then I came upon Best’s Aggregates and Averages, Life/Health 2008 edition (page 309). Exhibit of Premiums, Enrollment and Utilization, for the U.S. Health and HMO Industry. That reports over a billion “Ambulatory Encounters” in 2007. The total of 1,042,811,297, was composed of 707,834,804 physician encounters and 334,976,492 non-physician encounters. After subtracting the 195,145,992 Medicare Supplemental and Medicare events, 564,046,655 non-Medicare physician encounters and 343,618,451 non-Medicare non-physician encounters remained. In addition there were 75,985,336 non-Medicare in-patient admissions.

It is reasonable to deduce that each of the non-Medicare physician encounters resulted in at least one billable event and that all of the Inpatient admissions resulted in at least one billable event, for an assured total of 564,046,655 billing events for physicians and 6,185,316 hospital event billings. – totaling 570,231,971. In addition, the likelihood is that most of the 343,618,451 non-Physician encounters (lab tests and rehab) also generated bills, producing a total of at least 913,800,000 bills in 2007. Many of the physician encounters probably generated more than one bill because, it is likely that some significant number of the initial bills were found wanting in some respect (a common occurrence) and so led to at least one additional billing episode for many of them.

Moreover, the unexpectedly small number of Medicare bills strongly suggests that the Best’s data do not represent the universe of non-Medicare bills. It follows that about one billion non-Medicare bills are generated and processed each year, very possibly more.

A note about insurance company profits. They usually result, not from insuring, but from investment of premiums and other income that remain on hand and thus available for investment. Insurance companies quite often set premiums and other charges quite low, often at a “loss” on underwriting, so as to maximize investment when investment returns are good. When investment returns shrink, insurers quite often raise premiums and other charges to offset the lower investment income when other prices rise but incomes lag. As a result, insurers raise charges at an inopportune time for the rest of the economy.

Experts try to define affordable health insurance

We All Want It, but We Don’t Know What It Is: Toward a Standard of Affordability for Health Insurance Premiums

By Peter Muennig, Bhaven Sampat, Nicholas Tilipman, Lawrence D. Brown and Sherry A. Glied
Journal of Health Politics, Policy and Law, October 2011

Abstract

The 2010 Patient Protection and Affordable Care Act (P.L. 111-148), or ACA, requires that U.S. citizens either purchase health insurance or pay a fine. To offset the financial burden for lower-income households, it also provides subsidies to ensure that health insurance premiums are affordable. However, relatively little work has been done on how such affordability standards should be set. The existing literature on affordability is not grounded in social norms and has methodological and theoretical flaws. To address these issues, we developed a series of hypothetical vignettes in which individual and household sociodemographic characteristics were varied. We then convened a panel of eighteen experts with extensive experience in affordability standards to evaluate the extent to which each vignette character could afford to pay for one of two health insurance plans. The panel varied with respect to political ideology and discipline. We find that there was considerable disagreement about how affordability is defined. There was also disagreement about what might be included in an affordability standard, with substantive debate surrounding whether savings, debt, education, or single parenthood is relevant. There was also substantial variation in experts’ assessed affordability scores. Nevertheless, median expert affordability assessments were not far from those of ACA.

In-Person Discussion

The discussion started in earnest with a review of the vignettes, beginning with Sarah (age 25, single, no children, college graduate, working for a non-profit), a vignette character who earns $1,610 per month, just under 200 percent of the FPL. In the case of characters with very low earnings, such as Sarah, there was considerable agreement among the panelists. All but one of the experts thought that she should pay something for health insurance, and all agreed that it should be very little.

The discussion heated up when participants considered Jessica, who earns $2,210 per month (age 25, single, no children, lives in Chicago, and pays rent of $1160 monthly). Here it was revealed that some participants interpreted affordability as what the person should pay and others as what they could pay. This provided a jumping-off point to a broader discussion of what affordability means.

One participant suggested that Jessica could “literally” afford $800 per month, and denounced affordability as “a lousy policy where you impoverish people so they can buy a minimal set of other goods after they end up paying for health insurance.” Another respondent who also gave a very high affordability threshold noted, “I’m not saying it would be worth it for her to pay this much, but she could still manage reasonably well if she [did] . . . so.” Many others disagreed with this literal interpretation, noting, “I don’t think literal affordability is an interesting policy.” One respondent described affordability as “asking really, ‘How much could one reasonably pay for health insurance.'” Several others argued that a policy would be affordable for beneficiaries if there would “be no adverse consequences by pushing them to that limit.”

One participant, who argued that the standard should be $100 to $150, said, “I’m a low-ball guy because [I take into account] the real costs of living, the fact that the poverty line is too low, etc.”

Conclusion

There is not a natural, objective standard of affordable health insurance coverage. Of course this is true for most (if not all) policies that require government subsidies. Reasonable people disagree about how much a given household can be expected to put aside to spend on health insurance and health care. That there is considerable disagreement even among distinguished experts in social policy on this issue suggests that the concept is mainly a subjective one and that any specific affordability threshold or subsidy structure is likely to be contentious and contested. In this area, as with many others, even highly qualified experts are unlikely to provide scientific answers to guide policy.

http://jhppl.dukejournals.org/content/36/5/829.full.pdf+html

This study was designed to demonstrate what well qualified policy experts, from across the political and academic spectra, would conclude should be the standard for determining affordability of health insurance premiums. So what is that standard?

After analyzing a great many vignettes, each expert then devised their own rules of thumb for determining appropriate premium contributions. Although the rules were quite varied, the mean calculations for premium contributions were close to those specified in the Affordable Care Act (ACA). Does this mean that members of Congress and their staffs were quite astute in their calculations of premium subsidies for the exchange plans?

Although the mean calculations were close to those of ACA, there was a very wide variation in the experts’ assessed affordability scores. In the vignette for “Jessica” ($2210 per month income with a Chicago rent of $1160, leaving $1050 for all of her expenses other than rent), expert estimates of affordable health insurance premiums ranged from $100 or $150 per month up to $800 per month. At $800 per month, that leaves $250 for all expenses other than rent and health insurance (e.g., food, clothing, utilities, transportation, education expenses, retirement fund, and “luxuries” such as a cellphone, TV, vacations, holiday gifts, etc.). That $250 must also cover out-of-pocket medical expenses such as deductibles, copayments, and out-of-network services. Even the “low-ball” estimate leaves only $900 to $950 per month for everything beyond rent and health insurance.

The fundamental defect here is that we keep trying to match payment for a specified package of medical benefits to the incomes of specific individuals. Since a reasonable package is no longer affordable by median-income individuals, some form of subsidization is required for the majority of us. Yet recognized experts in the policy community have very different concepts as to how much and in what form the subsidies should be.

Averaging these wide ranges of opinions on how much each person should pay is not a satisfactory solution since the averages or medians place too much of the burden of health care costs on those with modest incomes. These averages also would not satisfy those dispassionate experts who believe that individuals should pay dearly for their health insurance and health care, so they won’t waste their money on things like flat-screen TVs (or really, “wasting” it on healthier foods, transportation to their employment, 401k plans, and so forth).

Financing health care and providing health benefits need to be totally separated. The correlation between ability to pay and medical need is negative, not positive. Payments based on ability to pay should be made into a common risk pool covering everyone, most easily accomplished through the tax system. Health care benefits should be provided to everyone out of that risk pool based on medical need. That is sort of the way Medicare works now for selected populations, but it could be improved.

That sounds like a good idea. Let’s improve Medicare and then provide it for everyone.

CDHP-induced death spiral in Indiana

Indiana places a big bet on consumer-driven health insurance

By Christine Vestal
Stateline, November 17, 2011

One thing Mitch Daniels believes with absolute conviction is that consumers need to pay more of the cost of their health care.

“The prevalent model of health plans in this country,” the Republican Daniels argued recently in a Wall Street Journal commentary, “signals individuals they can buy health care on someone else’s credit card.” He called today’s health care system “a machine perfectly designed to overconsume and overspend.”

No one can say Daniels isn’t practicing what he preaches. Indiana has been using a version of consumer-driven health care for state employees since 2006. Starting next year, 90 percent of Indiana state workers will be covered by a consumer-driven plan with low premiums and high out-of-pocket expenses for actual care.

Indiana has attracted customers to its consumer-driven system by adding quite a few sweeteners. Starting in 2006, Indiana state employees were given the option to sign up for a consumer-driven plan with no monthly premiums. The plan paid 80 percent of all doctor bills, but only after a $5,000 deductible was met. The maximum out-of-pocket exposure was $8,000.

The traditional plan — with a $1,500 deductible and $2,000 total exposure — remained available at a cost of $3,500 in annual premiums for family coverage.

To make the consumer-directed plan even more attractive, Indiana did other things that most states haven’t done. It paid 60 percent of the $5,000 deductible through a contribution to an employee-owned health savings account. The entire $3,000 contribution was deposited on January 1, reducing much of the risk that a catastrophic event early in the year would leave an employee with a huge medical bill and not enough money set aside to pay for it.

At first, state employees were slow to adopt the scheme; only 4 percent signed up the first year. But it gradually caught on — partly through word-of-mouth and partly through an intensive education program. By the third year, 30 percent of the state’s 28,000 civil servants had signed up, and the numbers have steadily increased.

As more of the state workers opted for a consumer-driven plan, premium costs in the traditional plan started rising. An employee’s annual premium for family coverage in the traditional system started out at $3,500 in 2006, rose to nearly $5,000 within three years, and next year will exceed $9,000. The consumer option generated something of a snowball effect.

The reason for the premium increase in the traditional plan is what is known as “adverse selection.” When an insurance pool shrinks, fewer healthy people remain to cover the costs for those who have high medical bills. At this point, the math on the traditional plan no longer makes sense for anyone. “It defies logic that anyone would continue to stay in the traditional plan,” says Indiana’s personnel director, Daniel Hackler.

In Indiana’s case, the state contribution for health insurance is about $15,000 per employee for both consumer-driven and traditional plans. The savings come from reduced use of the health care system and from cheaper prescription drugs.

In part, it is Indiana’s intensive education and outreach program that has overcome the barriers to acceptance that most states face.

But Indiana’s generous health savings account contribution is likely the biggest reason for the plan’s extraordinary growth.

So is it time to declare Mitch Daniels’ experiment a success? Possibly. Experts say that the state’s traditional plan is close to what they call a “death spiral,” in which the cost of covering a small pool of subscribers exceeds the price any given employee is able to pay. Once the remaining traditional plan subscribers are added to the consumer-driven pool, the price tag is likely to go up, and customer dissatisfaction is likely to go up with it.

For now, though, it seems to be working. In addition to other advantages, each of Indiana’s current consumer-driven subscribers has a sizeable health savings nest egg to fall back on. Overall, the savings account fund exceeds $49 million, and many individual subscribers have more than $10,000 in their accounts.

http://www.stateline.org/live/details/story?contentId=614068

Comment: 

By Don McCanne, MD

Although there has been continued slow growth in consumer-driven health plans (CDHP) – high-deductible health insurance plans (HDHP) paired with health savings accounts (HSA) – the take-up by public employees in Indiana has been phenomenal – 90 percent of state workers. What drove this success? Or is it a success?

It is easy to understand why CDHPs would appeal to healthy, wealthy individuals. The high-deductible plans have significantly lower premiums than traditional plans. The money saved by purchasing these lower cost plans can be placed in an HSA, using pre-tax income. If the person remains healthy, the funds that accumulate in the savings account, including any tax-deferred earnings, can be drawn out in retirement without paying a penalty. It’s a great plan for those who stay healthy and have the extra funds to deposit into these accounts.

But what about those who rapidly deplete their savings accounts because of significant medical problems? They must then rely on a high-deductible plan that potentially subjects them to financial hardship because of high out-of-pocket expenses. Thus CDHPs are a poor choice for those who need more health care. This defeats the purpose of pooling risk in which the many who are healthy pay the bills for the few with greater needs.

The funds from the HSAs that are drawn out in the retirement years of the many who are healthy have been omitted from the collective pooling of funds that are needed to take care of the sick (i.e., the lower premiums of the high-deductible plans underfund the collective need of everyone, and the difference is made up by shifting the responsibility for payment directly to the patients who need more health care). It is not only the HSA money that has been diverted from the pools, but also the money that was saved by paying lower premiums yet was never deposited into the HSAs (the most common circumstance).

It is interesting what Indiana Gov. Mitch Daniels did with the state employees’ health benefit program. Most employers that switch to a CDHP do so to save money by paying the lower premium of the HDHP. Some employers will even use a portion of the savings, but not all, to provide seed money for the HSAs. Gov. Daniels decided to put all of the savings in the HSAs so that the cost of the CDHP (HDHP plus HSA contribution) was about the same as the traditional health plan. His ideological drive to make employees sensitive to health care costs was greater than his desire to save the state money.

Imagine the response of the healthy employees, which is most of them. In exchange for agreeing to change to a high-deductible plan – a plan that they probably wouldn’t use much anyway because they are healthy – they are given a cash contribution of $3,000 each year for their own savings accounts, which can be used for health care now or for their retirement later on. If they were to stay healthy and didn’t draw on these accounts, they could have perhaps another $100,000 for retirement!

The healthy employees were sold on the concept, and made the transition. Employees with medical problems in their families were more reluctant to change. They did not want to give up their established health care relationships, plus they didn’t want to be exposed to high-deductibles with depleted HSAs. They stayed in the traditional plan.

Most who have been following health policy recognize that this is ”
adverse selection.” The healthy leave the insurance pool and the sick stay in. That can only drive premiums up. The employees share of the premium for a family plan went from $3,500 to $9,000. Ouch!

Many of you recognize this as the “death spiral” of premiums. With higher premiums, more leave the plan, and then it eventually has to shut down because nobody could pay the even higher premiums that would have to be charged.

So now this concentration of employees and their families with higher health care needs moves into the CDHPs. What will the insurers do when they have a large influx of expensive patients signing up with the high-deductible plans? Obviously, they’ll have to jack up the premiums to levels that will displease everyone.

Those hurt the most will be those with health care needs, who have depleted HSAs, who will have higher premiums, and who will have greater out-of-pocket costs because of the high deductibles – the very people who have the greatest need for insurance protection. This is hardly a “success.”

By now, you can write your own closing lines about how we can do it right.

CDHP-induced death spiral in Indiana

Indiana places a big bet on consumer-driven health insurance

By Christine Vestal
Stateline, November 17, 2011

One thing Mitch Daniels believes with absolute conviction is that consumers need to pay more of the cost of their health care.

“The prevalent model of health plans in this country,” the Republican Daniels argued recently in a Wall Street Journal commentary, “signals individuals they can buy health care on someone else’s credit card.” He called today’s health care system “a machine perfectly designed to overconsume and overspend.”

No one can say Daniels isn’t practicing what he preaches. Indiana has been using a version of consumer-driven health care for state employees since 2006. Starting next year, 90 percent of Indiana state workers will be covered by a consumer-driven plan with low premiums and high out-of-pocket expenses for actual care.

Indiana has attracted customers to its consumer-driven system by adding quite a few sweeteners. Starting in 2006, Indiana state employees were given the option to sign up for a consumer-driven plan with no monthly premiums. The plan paid 80 percent of all doctor bills, but only after a $5,000 deductible was met. The maximum out-of-pocket exposure was $8,000.

The traditional plan — with a $1,500 deductible and $2,000 total exposure — remained available at a cost of $3,500 in annual premiums for family coverage.

To make the consumer-directed plan even more attractive, Indiana did other things that most states haven’t done. It paid 60 percent of the $5,000 deductible through a contribution to an employee-owned health savings account. The entire $3,000 contribution was deposited on January 1, reducing much of the risk that a catastrophic event early in the year would leave an employee with a huge medical bill and not enough money set aside to pay for it.

At first, state employees were slow to adopt the scheme; only 4 percent signed up the first year. But it gradually caught on — partly through word-of-mouth and partly through an intensive education program. By the third year, 30 percent of the state’s 28,000 civil servants had signed up, and the numbers have steadily increased.

As more of the state workers opted for a consumer-driven plan, premium costs in the traditional plan started rising. An employee’s annual premium for family coverage in the traditional system started out at $3,500 in 2006, rose to nearly $5,000 within three years, and next year will exceed $9,000. The consumer option generated something of a snowball effect.

The reason for the premium increase in the traditional plan is what is known as “adverse selection.” When an insurance pool shrinks, fewer healthy people remain to cover the costs for those who have high medical bills. At this point, the math on the traditional plan no longer makes sense for anyone. “It defies logic that anyone would continue to stay in the traditional plan,” says Indiana’s personnel director, Daniel Hackler.

In Indiana’s case, the state contribution for health insurance is about $15,000 per employee for both consumer-driven and traditional plans. The savings come from reduced use of the health care system and from cheaper prescription drugs.

In part, it is Indiana’s intensive education and outreach program that has overcome the barriers to acceptance that most states face.

But Indiana’s generous health savings account contribution is likely the biggest reason for the plan’s extraordinary growth.

So is it time to declare Mitch Daniels’ experiment a success? Possibly. Experts say that the state’s traditional plan is close to what they call a “death spiral,” in which the cost of covering a small pool of subscribers exceeds the price any given employee is able to pay. Once the remaining traditional plan subscribers are added to the consumer-driven pool, the price tag is likely to go up, and customer dissatisfaction is likely to go up with it.

For now, though, it seems to be working. In addition to other advantages, each of Indiana’s current consumer-driven subscribers has a sizeable health savings nest egg to fall back on. Overall, the savings account fund exceeds $49 million, and many individual subscribers have more than $10,000 in their accounts.

http://www.stateline.org/live/details/story?contentId=614068

Although there has been continued slow growth in consumer-driven health plans (CDHP) – high-deductible health insurance plans (HDHP) paired with health savings accounts (HSA) – the take-up by public employees in Indiana has been phenomenal – 90 percent of state workers. What drove this success? Or is it a success?

It is easy to understand why CDHPs would appeal to healthy, wealthy individuals. The high-deductible plans have significantly lower premiums than traditional plans. The money saved by purchasing these lower cost plans can be placed in an HSA, using pre-tax income. If the person remains healthy, the funds that accumulate in the savings account, including any tax-deferred earnings, can be drawn out in retirement without paying a penalty. It’s a great plan for those who stay healthy and have the extra funds to deposit into these accounts.

But what about those who rapidly deplete their savings accounts because of significant medical problems? They must then rely on a high-deductible plan that potentially subjects them to financial hardship because of high out-of-pocket expenses. Thus CDHPs are a poor choice for those who need more health care. This defeats the purpose of pooling risk in which the many who are healthy pay the bills for the few with greater needs.

The funds from the HSAs that are drawn out in the retirement years of the many who are healthy have been omitted from the collective pooling of funds that are needed to take care of the sick (i.e., the lower premiums of the high-deductible plans underfund the collective need of everyone, and the difference is made up by shifting the responsibility for payment directly to the patients who need more health care). It is not only the HSA money that has been diverted from the pools, but also the money that was saved by paying lower premiums yet was never deposited into the HSAs (the most common circumstance).

It is interesting what Indiana Gov. Mitch Daniels did with the state employees’ health benefit program. Most employers that switch to a CDHP do so to save money by paying the lower premium of the HDHP. Some employers will even use a portion of the savings, but not all, to provide seed money for the HSAs. Gov. Daniels decided to put all of the savings in the HSAs so that the cost of the CDHP (HDHP plus HSA contribution) was about the same as the traditional health plan. His ideological drive to make employees sensitive to health care costs was greater than his desire to save the state money.

Imagine the response of the healthy employees, which is most of them. In exchange for agreeing to change to a high-deductible plan – a plan that they probably wouldn’t use much anyway because they are healthy – they are given a cash contribution of $3,000 each year for their own savings accounts, which can be used for health care now or for their retirement later on. If they were to stay healthy and didn’t draw on these accounts, they could have perhaps another $100,000 for retirement!

The healthy employees were sold on the concept, and made the transition. Employees with medical problems in their families were more reluctant to change. They did not want to give up their established health care relationships, plus they didn’t want to be exposed to high-deductibles with depleted HSAs. They stayed in the traditional plan.

Most who have been following health policy recognize that this is “adverse selection.” The healthy leave the insurance pool and the sick stay in. That can only drive premiums up. The employees share of the premium for a family plan went from $3,500 to $9,000. Ouch!

Many of you recognize this as the “death spiral” of premiums. With higher premiums, more leave the plan, and then it eventually has to shut down because nobody could pay the even higher premiums that would have to be charged.

So now this concentration of employees and their families with higher health care needs moves into the CDHPs. What will the insurers do when they have a large influx of expensive patients signing up with the high-deductible plans? Obviously, they’ll have to jack up the premiums to levels that will displease everyone.

Those hurt the most will be those with health care needs, who have depleted HSAs, who will have higher premiums, and who will have greater out-of-pocket costs because of the high deductibles – the very people who have the greatest need for insurance protection. This is hardly a “success.”

By now, you can write your own closing lines about how we can do it right.