By Don McCanne
October 1, 2010

In the Quote of the Day for September 28, 2010, I wrote, “The $18,000 in average health care costs for a family of four is already over one-third of the median household income of $50,000.” Understandably, some readers perceived that I was implying that the average family with an income of $50,000 was paying an average of $18,000 out of that income for health care. That wasn’t my intent. I was trying to make the point that our current level of spending on health care is already far beyond the capability of the members of a typical household to pay their equally allocated share.

Also I should have refined the numbers a little bit more. The median household income is now $50,221, but the Census Bureau does not include the value of the employer contribution to the insurance premium in that number. According to the Hewitt report in my September 28 message, employers contribute $7612 per employee (including dependents if covered). So the median income with the employer insurance contribution added would be $57,833. The population with a median household income is not identical to the family of four described by the Milliman Medical Index (the average amount spent on actual health care for a family of four covered by an employer-sponsored PPO), but there is considerable overlap.

For purposes of describing how high health care spending is in relation to income, dividing the the Milliman Index of $18,074 by the adjusted median household income of $57,833 does provide a rough approximation of how much that is. It is still over 31 percent, though short of the “over one-third” I reported previously. Again, I can’t overemphasize that $18,074 is not the average amount that each family of four is paying directly out of its income, but it is the average amount that is being spent on health care on its behalf.

Even these numbers seem unbelievable. How could we possibly be spending that much when incomes are so low comparatively?

A very good friend of mine responded in appropriate disbelief. He wrote, “The information on the average health care costs that a family pays is difficult to determine, but the link here shows an average about $6,000 which is about 14% of the median household income.”

The link to an article on the cost of heath insurance:
http://healthinsurance.about.com/od/healthinsurancebasics/a/cost_of_health_insurance.htm

Because it has been so difficult for many of us (including me) to grasp just how much we are spending on health care, I decided to provide a more detailed response. Since this reality check is so important, I decided to share my comments with others by making this the Quote of the Day for today (and you may wish to share it with others):

Response to a Dear Friend:

I knew that you would have a problem with these numbers. It doesn’t seem reasonable that the average health care costs for a family of four with employer-sponsored insurance is $18,000 when the median household income is $50,000. These numbers don’t seem to compute, but they are very real.

Let me start with the $6,000 (actually $6,328) for family insurance as cited in the article you sent. That number came from a report by AHIP (America’s Health Insurance Plans – the lobby organization that helped to orchestrate the reform bill).

AHIP – Individual Health Insurance 2009:
http://www.ahipresearch.org/pdfs/2009IndividualMarketSurveyFinalReport.pdf

From page 4 of the report: “Nationwide, annual premiums averaged $2,985 for single coverage and $6,328 for family plans in mid-2009.”

That $6,328 is not health care costs, but rather it is the premium paid for family coverage in the individual insurance market. It is not the premium paid for an employer-sponsored family plan. That’s a very important distinction and here’s why.

The individual insurance market is highly dysfunctional, and was one of the primary motivators for the regulatory changes in the Patient Protection and Affordable Care Act (ACA). About 30 percent of individuals who apply for individual plans are denied coverage. The private insurers will cover only individuals with an unblemished health record. Most health care costs for those individuals are very low and often below the deductible. This is why the insurers can sell an individual family policy for only $6,328 – these are healthy people who rarely file significant claims. In fact, when they do file larger claims, the private insurers routinely look to see if they could find an omission in the application such as a prior yeast infection not reported, and then they would reject all claims and rescind the coverage.  Both of these practices are illegal for employer-sponsored group coverage, which is partly why group coverage is more expensive, but they were very effective in limiting claims losses in the individual market. The new law requires guaranteed issue (all applicants accepted) and prohibits rescission (retroactive revocation of insurance). These two changes will wipe out the individual insurance market as we know it, and will result in skyrocketing insurance premiums.

Another reason that individual plans are so cheap (if you call $6,328 cheap) is that they do not provide nearly as good coverage – both in benefits and cost sharing. Individual plans frequently omit pharmaceuticals, mental health services, maternity benefits, etc. Also they tend to have larger deductibles ($1,000 to $25,000) and high coinsurance (a percentage of fees which is usually much higher than co-pays would be). The bankruptcy studies have shown that medical debt contributes to about 60 percent of personal bankruptcies, and three-fourths of those with medical debt had health insurance. Individual plans have deteriorated to a degree that they don’t keep people out of bankruptcy when they develop significant medical problems. The new law will establish a standard benefit package which will also drive premiums up, though it will still permit excessive cost sharing (at an actuarial value of 60 to 70 percent).

Another study done for AHIP by PriceWaterhouseCoopers:
http://www.ahip.org/content/default.aspx?bc=174|28536

From page 5: “This analysis shows that the cost of the average family coverage is approximately $12,300 today.”

Once again, this is not the costs of health care, but it is the average of family premiums paid by those in both the individual and employer-sponsored group market. Already you can see that group coverage is going to be higher when you remove the individual plans from the calculations.

Okay, now the Milliman Medical Index does not represent premiums paid, but rather it represents the average amount paid for health care for a family of four with an employer-sponsored PPO plan (Blue Cross, Blue Shield, etc.). It does not include the administrative costs and profits for the insurer; it includes only the average amount that was paid for actual health care for the family. It is an important number for business entities because it shows what health care actually costs. You should read the first couple of pages of their report since it really brings home what we are paying in health care. (Note that Milliman is an actuarial consulting firm for industry – so these are not numbers that we concocted.)

Milliman Medical Index:
http://publications.milliman.com/periodicals/mmi/pdfs/milliman-medical-index-2010.pdf

From page 1 (3rd page of document): “The total 2010 medical cost for a typical American family of four is $18,074.”

But it’s even worse. This is what businesses and their employees are paying for health care. Keep in mind that this sector is the relatively healthy workforce and their young healthy families.

When you think about it, the private insurance industry has skimmed off the largest and healthiest sector of our society and is selling insurance to them – America’s workforce. The private insurers are having great difficulties selling affordable plans to employers because these costs even for the healthy are so high. They have been shifting more costs to patients through higher deductibles and other cost sharing, but they still can’t keep their premiums affordable. This is why Karen Ignagni of AHIP said over and over again during the debate on reform that this is not going to work unless the GOVERNMENT does something to control costs – a tacit admission that the insurers are incapable of controlling costs.

But think about this. If $18,074 is the average amount that health care costs for a relatively healthy family of four, then what is average cost if you include everyone in the calculation? That is, what is the cost per capita if you add up all health care spending in the nation and divide that by our population of 310,000,000? That number is available from the Office of the Actuary, Centers for Medicare and Medicaid Services (CMS).

Health Spending Projections:
http://content.healthaffairs.org/cgi/reprint/29/3/522

From the table on page 523:
Projected National Health Expenditures (NHE) for 2010: $2,589.6 billion
NHE as percent of GDP: 17.3%
NHE per capita: $8,289.9

So if we put all of our health spending dollars into one giant insurance fund, we would be paying out an average of $8,290 for each man, woman and child in this nation. For that family of four, their share is $33,160. Think about what that means when the median household income is $50,000.

These numbers are very accurate, yet how could that be? How could we be spending so much per capita and yet the average family does not see health bills of that magnitude?

First of all, we fragment our insurance risks into multiple pools. The less healthy 20 percent of people consume 80 percent of our health care. Workers fall into the 80 percent of people who use only 20 percent of the care. Thus isolating the healthy workers and their families into employer-sponsored pools dramatically reduces the per person insurance premiums because of the much lower per person costs of these healthy individuals.

Let’s see what that would be for this healthy family of four. Milliman shows that their average health care costs are about $18,000. The new health care bill says that the plans should have an actuarial value of 60 or 70 percent, but let’s use 70 percent (the insurance pays an average of 70 percent of health care costs and the family pays an average of 30 percent out of pocket). Thus the insurer pays an average of $12,600, and the family pays an average of $5,400. The law also allows the insurer to keep 15 percent of the premium to pay the bills and the administrative costs, so the premium for the family would be $14,824 ($12,600 divided by .85). Thus the family pays, under the new law, an average of $20,223 (the premium plus the out-of-pocket expenses). Again, with a median household income of $50,000 no middle income family could afford that. That is why the law provides subsidies for both the premiums and for the out of pocket expenses. However these subsidies will not be adequate for most, so, under the new law, financial hardship is an almost inevitable consequence for those who face significant medical problems.

There is a much more important reason why families are not paying an average of $33,000. Although they receive their health care financing through risk pools for the healthy, most higher cost patients have their care financed through expensive risk pools for the sick. Some examples include Medicare, Medicaid, the VA system, state high risk health pools, safety-net institutions for the uninsured, and so forth. What do these have in common? They are financed by us – the taxpayers! In fact, if you add those together, and include the tax subsidies we are providing for employer-sponsored coverage, and include the private health insurance that tax payers purchase for federal, state and local government employees, we are already paying 60 percent of our entire national health expenditures through the tax system. That is largely invisible to most of us. Also, it shows that our health care financing is much more progressive than most realize. The wealthy are paying much more than average-income families.

If that’s already true, then why don’t we leave it like it is? The reason is that this fragmented system of financing health care wastes hundreds of billions of dollars each year – money that could be going to pay for health care. Perhaps worst of all, from our perspective, is that the current law will leave tens of millions uninsured; it will establish underinsurance as the norm (60 to 70 percent actuarial value); and it will do very little to slow the outrageous escalation in health care costs. A single payer national health program – an improved Medicare that covers everyone – would control costs and cover everyone. How that works is another story.

Peace,

Don

by Vernon K. Smith, Ph.D., Kathleen Gifford and Eileen Ellis
Kaiser Family Foundation
September 2010

In FY 2010, 48 states implemented at least one new policy to control cost and 46 states plan to do so in FY 2011 with some states reporting program reductions in multiple areas. While many states mentioned that ARRA (American Recovery and Reinvestment Act of 2009) helped to avoid or mitigate provider rate cuts, states still took action in this area. In FY 2010, 39 states implemented a provider rate cut or freeze compared to 33 states in FY 2009. In FY 2011, 37 states have planned provider rate restrictions. More than any other area, provider rates are linked to economic conditions. Under budget pressure, states turn to rate cuts to have an immediate budget impact and when conditions improve states are able to restore or enhance rates. States must balance the need to control costs with ensuring that provider rates are sufficient to maintain participation and access to services for enrollees.

In FY 2010, 20 states implemented benefit restrictions, the largest number in one year since the surveys began in 2001 and double the number from FY 2009. In addition to this record level of benefit restrictions in FY 2010, 14 states have planned benefit restrictions in FY 2011. These benefit restrictions include the elimination of covered benefits as well as the application of utilization controls or limits for existing benefits.

Under health reform, Medicaid will be expanded to cover nearly all individuals with incomes below 133 percent of poverty resulting in a large adult expansion in most states, particularly adults without dependent children who had historically been barred from coverage under the program. This expansion provides the foundation for new coverage under health reform. Not surprisingly, Medicaid officials are playing a lead role in preparing for health reform implementation, in many cases alongside insurance commissioners. Some of the key challenges that states will face in implementing reform include implementing the Medicaid expansion, transitioning to a new income eligibility methodology for Medicaid, setting up Health Insurance Exchanges and re-designing eligibility systems to coordinate with the Exchanges. These challenges are magnified by recent administrative cuts and state workforce reductions limiting states’ capacity to focus on new responsibilities. Many states said that they need
timely regulations and guidance as well as financial support to help them move forward and meet tight implementation timelines.

http://www.kff.org/medicaid/upload/8105_ES.pdf

Comment:

By Don McCanne, MD

In spite of the infusion of funds from the American Recovery and Reinvestment Act of 2009 (ARRA), states are implementing Medicaid provider rate cuts and implementing Medicaid benefit restrictions. Yet with the enactment of the Patient Protection and Affordable Care Act (ACA), the Medicaid program will be greatly expanded to include almost everyone with incomes below 133 percent of poverty.

Medicaid always has been and always will be a welfare program for low-income individuals. Serving a population that lacks an adequate political voice, it also has been and always will be a chronically underfunded program.

Most physicians who do accept Medicaid patients do so, in spite of inadequate reimbursement, because they believe that everyone should have health care. With a much greater volume of Medicaid patients some physicians will certainly face the dilemma of crowd-out of privately insured patients because of the Medicaid overload in their appointment schedules.

Imagine a physician facing Medicaid overload, declining net revenues, and frustrations of trying to help patients negotiate a system with diminishing benefits and with impaired access to specialized services because of a lack of willing providers.

Certainly some physicians will feel that they have no other choice than to close their practices to Medicaid patients. What will that do to other physician practices that are already overloaded with Medicaid patients?

Adverse selection can sink insurers, but it would be much more tragic to see adverse selection sink the practices of those physicians who are trying their hardest to do the right thing.

If everyone were in the same health care program, say an improved Medicare for all, an underfunded, segregated sector of stigmatized and humiliated welfare patients wouldn’t even exist. They would have access to the same care the rest of us have. Wouldn’t that be nice for a change.

Hoping for Economic Recovery, Preparing for Health Reform: A Look at Medicaid Spending, Coverage and Policy Trends

by Vernon K. Smith, Ph.D., Kathleen Gifford and Eileen Ellis
Kaiser Family Foundation
September 2010

In FY 2010, 48 states implemented at least one new policy to control cost and 46 states plan to do so in FY 2011 with some states reporting program reductions in multiple areas. While many states mentioned that ARRA (American Recovery and Reinvestment Act of 2009) helped to avoid or mitigate provider rate cuts, states still took action in this area. In FY 2010, 39 states implemented a provider rate cut or freeze compared to 33 states in FY 2009. In FY 2011, 37 states have planned provider rate restrictions. More than any other area, provider rates are linked to economic conditions. Under budget pressure, states turn to rate cuts to have an immediate budget impact and when conditions improve states are able to restore or enhance rates. States must balance the need to control costs with ensuring that provider rates are sufficient to maintain participation and access to services for enrollees.

In FY 2010, 20 states implemented benefit restrictions, the largest number in one year since the surveys began in 2001 and double the number from FY 2009. In addition to this record level of benefit restrictions in FY 2010, 14 states have planned benefit restrictions in FY 2011. These benefit restrictions include the elimination of covered benefits as well as the application of utilization controls or limits for existing benefits.

Under health reform, Medicaid will be expanded to cover nearly all individuals with incomes below 133 percent of poverty resulting in a large adult expansion in most states, particularly adults without dependent children who had historically been barred from coverage under the program. This expansion provides the foundation for new coverage under health reform. Not surprisingly, Medicaid officials are playing a lead role in preparing for health reform implementation, in many cases alongside insurance commissioners. Some of the key challenges that states will face in implementing reform include implementing the Medicaid expansion, transitioning to a new income eligibility methodology for Medicaid, setting up Health Insurance Exchanges and re-designing eligibility systems to coordinate with the Exchanges. These challenges are magnified by recent administrative cuts and state workforce reductions limiting states’ capacity to focus on new responsibilities. Many states said that they need
timely regulations and guidance as well as financial support to help them move forward and meet tight implementation timelines.

http://www.kff.org/medicaid/upload/8105_ES.pdf

In spite of the infusion of funds from the American Recovery and Reinvestment Act of 2009 (ARRA), states are implementing Medicaid provider rate cuts and implementing Medicaid benefit restrictions. Yet with the enactment of the Patient Protection and Affordable Care Act (ACA), the Medicaid program will be greatly expanded to include almost everyone with incomes below 133 percent of poverty.

Medicaid always has been and always will be a welfare program for low-income individuals. Serving a population that lacks an adequate political voice, it also has been and always will be a chronically underfunded program.

Most physicians who do accept Medicaid patients do so, in spite of inadequate reimbursement, because they believe that everyone should have health care. With a much greater volume of Medicaid patients some physicians will certainly face the dilemma of crowd-out of privately insured patients because of the Medicaid overload in their appointment schedules.

Imagine a physician facing Medicaid overload, declining net revenues, and frustrations of trying to help patients negotiate a system with diminishing benefits and with impaired access to specialized services because of a lack of willing providers.

Certainly some physicians will feel that they have no other choice than to close their practices to Medicaid patients. What will that do to other physician practices that are already overloaded with Medicaid patients?

Adverse selection can sink insurers, but it would be much more tragic to see adverse selection sink the practices of those physicians who are trying their hardest to do the right thing.

If everyone were in the same health care program, say an improved Medicare for all, an underfunded, segregated sector of stigmatized and humiliated welfare patients wouldn’t even exist. They would have access to the same care the rest of us have. Wouldn’t that be nice for a change.

What if everyone had Medicare?

By Henry Abrons
San Francisco Chronicle
September 24, 2010

The Census Bureau released its annual report on income, poverty and health insurance coverage in the United States earlier this month, and it’s no surprise to learn that we’re in bad shape. The number of people living in poverty was 43.6 million (14.3 percent), up sharply from 2008, and real per capita income declined 1 percent.

Looking at health insurance, the situation is truly dire. There was a dramatic spike in the uninsured – 4.3 million more, to a record 50.7 million – in spite of the expansion of government health insurance rolls by nearly 6 million.

Those opposing government health insurance should ponder the fact that private health insurance coverage dropped to the lowest level since comparable data were first collected in 1987. On the other hand, those who look to the new health reform law – the Patient Protection and Affordable Care Act (PPACA) – for a solution should be deeply disturbed.

PPACA was not designed to provide universal coverage. In fact, if the new law works as planned, in 2019 there will still be 23 million uninsured. Yet the consequence of being uninsured can be lethal: Research published last year shows about 45,000 deaths annually can be linked to lack of coverage. That number is probably more than 50,000 today.

As Don McCanne, senior health policy fellow at Physicians for a National Health Program, has observed, PPACA is an underinsurance program. Employers, seeing little relief, will expand the present trend of shifting more insurance and health care costs onto employees.

Individuals buying plans in the new insurance exchanges (which won’t start until 2014) will discover that subsidies are inadequate to avoid financial hardship. Inevitably, they will end up with underinsurance, spotty coverage and high deductibles.

And workers who are unemployed or without employment-based insurance will move into Medicaid (Medi-Cal in California), where providers are reimbursed at such low rates that many will not accept patients.

When Congress passed the new law last spring, it based its decision on a faulty assumption – namely, that the rest of the population will have sustainable private health insurance. But between 2008 and 2009, the number of people covered by private health insurance decreased from 201.0 million to 194.5 million, and the number covered by employment-based health insurance declined from 176.3 million to 169.7 million.

If this trend continues, as it’s bound to do under current economic conditions, the ranks of the uninsured will expand and the new law will fall far short of the mark – either the cost will exceed projections, or coverage will be need to be reduced.

The Census Bureau report underscores the urgency of going beyond the Obama administration and swiftly implementing a more fundamental reform – a single-payer national health insurance program – improved Medicare for all.

Improved Medicare-for-all, by replacing our dysfunctional patchwork of private health insurers with a single, streamlined system of financing, would save about $400 billion annually in unnecessary paperwork and bureaucracy. That’s enough to cover all of those now uninsured and to provide every person in the United States with quality, comprehensive coverage.

A single-payer plan would also furnish us with effective cost-control tools, like the ability to negotiate fees and purchase medications in bulk. It would permit patients to go to the doctor and hospital of their choice.

Short of a full national plan, some states, like ours, are eyeing a state-based single-payer model. The new health law allows states to experiment with different models of reform, but not until 2017. Congress should move that date forward. There is no time to waste.

(Henry Abrons, M.D., is a member of Physicians for a National Health Program-California – www.pnhpcalifornia.org.)

http://articles.sfgate.com/2010-09-24/opinion/24086986_1_health-insurance-health-reform-law-universal-coverage

Henry Abrons’ message is certainly very familiar to supporters of an improved Medicare for all, but we have to keep repeating it over and over until more people start listening.

U.S. Census Bureau
September 28, 2010

Median Household Income

Real median household income in the United States fell between 2008 and 2009 — decreasing by 2.9 percent from $51,726 to $50,221.

http://www.census.gov/newsroom/releases/archives/american_community_survey_acs/cb10-cn78.html

And…

U.S. Health Care Cost Rate Increases Reach Highest Levels in Five Years, According to New Data from Hewitt Associates

Hewitt
September 27, 2010

According to Hewitt’s analysis, the average total health care premium per employee for large companies will be $9,821 in 2011, up from $9,028 in 2010. The amount employees will be asked to contribute toward this cost is $2,209, or 22.5 percent of the total health care premium. This is up 12.4 percent from 2010, when employees contributed $1,966, or 21.8 percent of the total health care premium. Average employee out-of-pocket costs, such as copayments, coinsurance and deductibles, are expected to be $2,177 in 2011—a 12.5 percent increase from 2010 ($1,934). These projections mean that in a decade, total health care premiums will have more than doubled, from $4,083 in 2001 to $9,821 in 2011. Employees’ share of medical costs—including employee contributions and out-of-pocket costs—will have more than tripled, from $1,229 in 2001 to $4,386 in 2011.

http://www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=9106

And…

Milliman Medical Index

The annual Milliman Medical Index (MMI) reports total annual medical spending for a typical American family of four covered by an employer-sponsored preferred provider organization (PPO) program. The MMI represents the total cost of payments to healthcare providers, and excludes the non-medical administrative component of health plan premiums.

The total 2010 medical cost for a typical American family of four is $18,074.

https://pnhp.org/news/2010/may/the-mmi-proves-that-ppaca-is-already-a-failure

Comment:

By Don McCanne, MD

Think about this. Median household income is now back down to $50,000. The average cost of health care for a family of four with an employer-sponsored PPO plan is $18,000. Premiums for employer-sponsored plans have doubled in the last decade, while the employees’ spending on health care has tripled!

The Patient Protection and Accountable Care Act (PPACA) was specifically designed to leave the large market of employer-sponsored private health plans intact – the “you can keep the insurance you have…” strategy for reform. Most individuals and families will see little change as a result of PPACA since they will continue to receive their insurance coverage through their employment.

Very specifically, employees of larger companies will not see premium subsidies like for those who purchase plans in the state exchanges, nor will they see the subsidies for out-of-pocket expenses. The architects of PPACA decided that employer contributions to the premiums would obviate the need for subsidies – glibly suppressing the fact that employer contributions are actually paid by the employees in the form of forgone wage increases.

The health care financing structure of PPACA is an unmitigated disaster. For most families, health care costs will encroach at increasing percentages on their budgets for basic essentials such as housing, food, and transportation, not to mention education, retirement plans, and other discretionary expenses. The $18,000 in average health care costs for a family of four is already over one-third of the median household income of $50,000.

We desperately need to enact policies that will bring costs under control while establishing an equitable method of financing that makes health care affordable for everyone. PPACA doesn’t even come close. What will work is a single-payer national health program – an improved Medicare that includes everyone.

(Why aren’t people talking about this? Why is all of the media coverage about the tweaks to our fragmented, dysfunctional system – tweaks that will never get us there? Doesn’t anyone care?)