By: Dale Weckbacher
The debate over how to fix the healthcare system is contentious. This is understandable since all individuals eventually need to use the healthcare system. In this report we will take a trip back in history to see how health care used to be delivered and paid for. We will then analyze the quality of care and look at what has caused health care costs to outpace inflation. Next we will analyze the current public option under consideration in congress. Finally, we will look at a proposal offered to congress in 2005 that needs to be considered. After reading through this report, it should become clear that the solution to the current health care crisis is not with the government but with the free market.
The references used in this report are readily available to everyone through the internet. This is intentional because I wanted to demonstrate that with a little work, plenty of information on health care is available. However, a word of caution, make sure your information comes from reputable sources especially when seeking numerical data. This is why I found most of my quantitative data from the U.S. Department of Health and Human Services. I also went right to the source for information about the proposed congressional legislation to set up a public option and for information on the testimony of Mr. O’Grady to Congress in 2005. I encourage readers of this report to go to the sources and verify that the information is true. So let us begin our study by taking a trip back in time to when health care was much simpler.
History:
As a child I remember a morning when I woke up with a high fever. My mother called the doctor and he actually came over to the house. After examining me I got a shot of penicillin and soon was feeling better. My mother than paid the doctor, thought nothing of it and was glad her son would soon be feeling better.
Doctors were more like family members in those days. When ones doctor would retire, it was devastating to the family. However, today things have changed. Does this mean that Doctors are less dedicated today than they were back then? According to Ward (2009), the doctors today are equally dedicated but they have many more illnesses to treat requiring many more hours of study. The present crop of doctors is required to see many more patients and spend much more time studying. It is not that they want to be less personal; it is that the demands of the profession leave little time for adding the personal touch.
This demonstrates how the medical profession has changed through the years. It is in these changes that we can see the causes of the current problems with the healthcare industry. To correctly solve the problems with health care we must look at the changes that have occurred and determine what action is necessary to correct the problems these changes have caused.
One of the first major changes to health care in the United States was the introduction of health insurance as an employee benefit. Due to World War II wage and price controls remaining in effect, employers were no longer allowed to entice high quality employees with higher pay. This led to the offering of health insurance as a benefit to entice high quality employees (Geller, 2006).
This insurance was much different from that we commonly use today in that it resembled our present day auto insurance. My first encounter with this type of insurance occurred with my first job after graduating from college. I had just gotten married and we were expecting our first child. The insurance had a $100 deductible per year and paid 80% of the costs that exceeded the deductible. My income was around $850 per month back then and the total bill from the hospital came to around $2500. We made payment arrangements with the hospital and filed a claim with the insurance company. Our total amount due came to around $580 which we paid off at $50 per month. When we received the check from our insurance company, we endorsed it over to the hospital to reduce our balance with them.
Our family doctor at that time charged $25 for a routine office visit so we usually paid that at the time we visited the doctor and then filed a claim with the insurance so they could record these charges against our deductible for the year. Because we had to pay $25 per office visit, we only went to the doctor when it was absolutely necessary and had a financial incentive to remain healthy. Unfortunately, the health insurance of today totally separates the insured from the doctor or hospital providing the service and acts as a third party payer. According to Geller (2006), this fact has removed any incentive for remaining healthy. Geller also mentions in his article that there is no incentive to shop around for a better price and that there is now a sense of entitlement leading to glut in the system.
The question to consider is whether health care is indeed a right and if it is a right is the government required to supply it to every citizen? Lamm (1998) makes a case against making healthcare a right. In his article, Lamm states the conundrum faced by government policy makers today, how to extend health care to the medically indigent and yet set limits on what benefits are to be subsidized by public policy. In other words, if health care is to be truly viewed as a right, how much health care are we able to fund through public policy and who will be in charge of determining what is covered and who is entitled to receive health care services. Should the patient be able to decide what health care services he or she receives in consultation with his or her doctor or do we want someone else (i.e. an insurance company or government official) making this decision. Medicare, Medicaid, and managed care provide insight into how our society has attempted to answer these questions.
Americans over the age of 65 who have retired often lose their employer provided health insurance. Individuals in this age group also have the greatest need for health care in our society. Since our society has decided health care is a right (Lamm, 1998) (Geller, 2006), President Lyndon Johnson decided to provide federally provided health care for those over the age of 65 (DeRise, Evans, Konosky &, Wilson, 2005). With this legislation, the line was drawn in the sand deciding that health care was a right that every citizen was entitled to receive and that it was the obligation of the state to provide it. In 1966 Medicaid, a plan to provide health care to persons living in poverty was added as an entitlement (Klemm, 2000).
With the introduction of these two entitlements, our society started down the slippery slope of escalating costs due to the interference of a third party, the government, coming between the patient and their doctor. The government as the third party was now in a position to determine what health care the patient received based upon whether the doctor would be paid through Medicare or Medicaid. As Geller (2006) stated in his article, the patient lost any incentive to shop for lower prices and now felt entitled to receive whatever they could get. However, as Lamm (1998) warned in his study, policy makers have to balance the demands for health care by those enrolled in these programs with the resources they have available. With both Medicare and Medicaid predicted to go bankrupt by the year 2017, policy makers will have to raise taxes on those working who are not beneficiaries of either program, reduce prices paid to providers, reduce membership in the programs, or reduce coverage provided to members of the programs. These are difficult choices and may require society to rethink whether health care as a right necessarily means it is something to which everyone is entitled to receive from the government or their employer. However, perhaps the greatest sense of entitlement has come not from the government but the private sector through the invention of managed care.
The origins of managed care come from the military of the 1960’s. Its author Alain Enthoven came to work for the Department of Defense for the Office of Systems Analysis and began formulating cost-benefit analyses. They formed the planning-programming-budgeting system (PPBS) with the goal of economically evaluating and comparing alternative defense programs aimed at accomplishing the same goals (Lowe, 1998).
Mr. Enthoven coined a curious phrase to explain the process by which the old ways of doing things were gradually replaced. The phrase was “incrementalism with strains”. He felt that as changes were implemented in a step-wise fashion, military contractors and Congress should experience the “strains” of the changes (Lowe, 1998).
Due to resistance, PPBS was a failure and the program was cancelled. Mr. Enthoven became president of the medical products division of Litton Industries. It was here that he became interested in healthcare economics. After becoming a professor at Stanford University, he offered President Jimmy Carter a draft of his “Consumer Choice Health Plan” based on managed competition in the private sector. However, President Carter rejected the plan but Mr. Enthoven submitted it to the New England Journal of Medicine where it was published in 1978 The published plan contained the same guiding principles as PPBS (Lowe, 1998).
Mr. Enthoven theorized that physicians functioned as a guild, limiting the effect of market forces on them. Because of this he believed managers working outside of the medical profession must make decisions on behalf of individuals and families. He believed physicians must organize themselves into economic units (Lowe, 1998).
Mr. Enthoven also theorized that competing plans would insure choices for patients, keep costs low, and produce good outcomes. He also wanted to see curtailment of the economic power of both physicians and other providers of health care. In other words, managed care acts like most social programs by forcing itself on the masses and penalizing the producers (Lowe, 1998).
If the goal of managed care was to reduce costs and produce good outcomes, it has failed miserably. Health care costs continue to outpace inflation and physicians continue to see their incomes squeezed forcing them to see more patients adding to the disconnect between patient and doctor. However, in spite of this disconnect the quality of health care remains high in the U.S. as we will see later.
Both providers and patients are demanding changes but before society just starts randomly making changes, we need to develop a program of smart change that fixes what is wrong with the economics of the system without reducing the quality of care the system provides. This will not be easy since reductions in cost will reduce capital providers need in order to continue providing high quality health care. The system has also created a sense of entitlement in patients which is driving up the demand for healthcare. This increase in demand is further exacerbating the problem by increasing costs.
This history lesson has shown us how our healthcare system has evolved from a simple system where the patient paid for services as they were provided to a system where patients feel they are entitled to whatever health care is available irregardless of the cost. In the next section we will determine the causes of the escalation in health care costs so we can begin making changes to target these causes and begin bringing health care costs back in line with inflation.
The Economics of Health Care:
As with any other product or service, health care is subject to economic forces. Economics is the management of scarce resources with alternative uses (Sowell, 2007) (Hackett, 2006). Since all activities, including health care, involve the use of resources, the laws of economics will apply. The question we must ask is whether the problems with our current healthcare system are solely due to economic failures or is the entire system broke and in need of a complete overhaul.
To determine whether more than the economics of the healthcare system are broken, we need to evaluate the quality of the system. If quality has declined than more than just the economics of the system are in need of repair. However, if the quality of the system remains high, we must find a solution that addresses the economic failures of the system without damaging the quality of care the system offers.
Therefore, the first question the research needs to address is whether the quality of health care in the U.S. has declined, increased, or stayed the same over several years. To measure health care quality, we will look at life expectancies and death rates. First, we will look at life expectancies since birth over several years. Second, we will look at life expectancies from age 65 in order to eliminate premature deaths due to accidents that are not the result of failures in the healthcare system. Finally, we will look at death rates for various diseases to determine whether the healthcare system has been able to reduce deaths due to these diseases.
If we determine that the quality of the overall healthcare system is declining or in a stagnant state, then more than just the economics of the system are in need of repair. If, however, we determine that the quality of the system is improving, we will want to fix only the economic failures of the system without sacrificing the quality of care patients are currently receiving.
Qualitative assessment of the healthcare system: Making health care more affordable is a balancing act. Something can always be made more affordable by lessening its quality. This may be a good strategy for some products or services but would not be seen as an acceptable outcome for consumers of health care. It is therefore important for us to begin our analysis by looking at the current quality of the healthcare system.
This type of qualitative analysis can be difficult because of its subjective nature so we will attempt to do this analysis by looking at life expectancies and death rates. My hypothesis is that if we observe a rise in life expectancy and a reduction in death rates, it will be seen as an increase in the quality of care. However, some individuals in the population die prematurely due to accidents and war. We will therefore also be looking at life expectancies for individuals at 65 in an effort to eliminate a large number of these accidental deaths.
We will also compare the life expectancies of different countries as a means of comparing the quality of care in diverse cultures with differing healthcare systems. However, more than just the healthcare system contributes to the longevity of life in a culture. Diet, level of activity, and differing medical practices (i.e. holistic medicine in Asia v. traditional drug based medicine in the west) are contributing factors. Additional research will be necessary to determine the impact of these factors on life expectancy which is beyond the scope of this study.
Tables 1 and 2 (pp. 30-31) compare life expectancies of both males and females from birth for various countries. The U.S. ranking as of 2004 (the last year of the study) was 23rd for males and 25th for females. This is up from 26th for males and females in 2003 (Center for Disease Control, 2008).
However, since some individuals die prematurely due to accidents and war, a better indicator of the quality of the healthcare system would be to look at live expectancy for individuals after they reach the age of 65. Tables 3 and 4 (PP. 32-33) compare life expectancies of both males and females who have reached the age of 65. The U.S. Improves its ranking on these tables with a rank of 9th for both males and females on these tables up from 13th for males and 14th for females in 2003 (Center for Disease Control, 2008).
Factors influencing the dramatic increase in ranking could be due to premature deaths caused by the wars in Afghanistan and Iraq. Another factor could be due to the mobility of the population in the U.S. Because of this mobility, more miles are traveled in automobiles. This leads to more accidents and deaths due to these accidents.
This increase in ranking could indicate how well our health care system cares for individuals over 65. However, further verification is necessary so we will need to look at death rates. Table 5 (P. 34) shows total deaths in the U.S. in 1980 and 2005 based on death certificates. There was a dramatic decrease in the percentage of total deaths due to both cardiovascular disease and heart disease over this period. The most likely cause of this decrease is the increased survival rate of open heart surgery (i.e. heart bypass surgery), the invention of heart stents to open blocked coronary arteries, and the awareness of cholesterol and fat in diets plus the testing of cholesterol levels as part of routine physicals (Center for Disease Control, 2008).
The percentage and number of deaths due to malignant neoplasm’s or cancer and diabetes are increasing (Center for Disease Control, 2008). However, breakthroughs in the treatment of many causes of cancer should contribute to reductions in deaths due to this disease just as they did with heart and cardiovascular disease. In addition, the increased awareness of obesity should help lessen cases of type II diabetes and contribute to a reduction in these deaths as well.
When these breakthroughs and changes in lifestyle occur on a mass scale, the ranking of the U.S. in life expectancy should increase. However, the research necessary to determine the impact of these changes on life expectancy are beyond the scope of this study. What we can conclude from our qualitative analysis is that the quality of health care in the U.S. is high as evidenced by increases in life expectancies and reductions in certain types of deaths. In addition, the ranking of the U.S. when compared to other nations can improve by focusing on decreasing the number of deaths due to diabetes and cancer.
Quantitative Analysis the Cost of Health Care: Now that we have determined that the quality of the healthcare system is actually improving overall, we need to look at the problems that exist with the economics of the healthcare system. This quantitative analysis will involve looking at the increases in health care expenditures from 1965 to 2009, comparing these increases to inflation, and looking at the percentage of these expenditures that are paid out of pocket, by private insurance, and through public programs (i.e. Medicare and Medicaid).
The major complaint patients have about their health care is its cost. Due to inflation, the cost of most everything increases over time. Therefore, increases in the cost of health care due to inflation would be normal and due to market forces. However, if the cost of health care or anything exceeds inflation by a significant amount over time, we can conclude that some external forces are having an impact on the economics of the market, leading to a failure in the market (Hackett, 2006).
Table 6 (pg. 35) offers a comparison of the increase in health expenditures from 1965 to 2008 and compares the percentage of increase to the inflation rate each year. The average annual rate of inflation since 1965 has been 4.61%. The average increase in health care costs has been 9.87% over the same period or an average of 5.27% more than the inflation rate. The table also shows us that the rate of increase in medical expenditures has exceeded the inflation rate every year (US Inflation Calculator.com, 2009) (U.S. Health and Human Services, 2009).
These numbers provide strong evidence that there are external forces impacting the cost of health care. In order to find a solution to the economic problems with the healthcare system, we will need to determine what these external forces are and make reforms that address these issues. Next, we will look at the trends of how health care expenditures are paid.
Table 7 (pg. 36) provides a comparison of medical expenditures and breaks them down into those paid out-of-pocket by the patient, those paid for through private insurance, and those paid for through public programs. A study of these numbers shows us that the percentage of expenditures paid out-of-pocket by the patient has been decreasing while expenditures paid through either private insurance or public programs is increasing (U.S. Health and Human Services, 2009). This shows us that expenditures for health care paid for through third-party payers (i.e. private insurance companies, Medicare, and Medicaid) is increasing while expenditures paid for directly out-of-pocket by the patient are decreasing.
Geller (2006) theorized that the involvement of third-party payers would cause increases in health care costs due to the elimination of the incentive to be healthy or shop around for a better price since someone else is paying for it. It appears from the data provided by the U.S. Health and Human Service (2009) that as third-party payer involvement increases, so do the costs of health care. However, are third-party payers the only externality that could be impacting health care?
As we found in our comparison of life expectancies (Center for Disease Control, 2008) the quality of health care in the U.S. has been increasing. However, increases in quality such as these often come with a price. In the first year of the Center for Disease Control (CDC) study, procedures such as heart bypass surgery, chemotherapy, and hip replacements were unknown. In addition when you went to the doctor complaining that your knee hurt, the doctor could only rely on an X-ray to diagnose the problem. Today’s doctors can use MRI’s in addition to X-rays to make a better diagnosis.
All of these additional procedures add to the cost of health care but they also contribute to the increase in the quality of health care. In fact, in 2004 it was estimated that 50 to 75 percent of the increase in health care expenditures was attributable to technological progress (United States Government, 2004). Since we have determined that the problem with the healthcare system is in the economics and not the quality of treatment, we are looking for ways to improve the economics without damaging the quality of care. Some may consider the cost of these new procedures as an externality contributing to the increase in cost but it can also be argued that these improvements improve the quality of health care, adding to its value, and therefore are not an externality at all but a value added improvement to the product resulting in higher costs. The benefits of such improvements must be weighed against the costs to determine if they are worth while.
Finally, we must consider the effect of litigation on health care. When a litigation case is brought to court, a jury decides the decision of guilt and the amount of damages to be awarded. Juries are not required to consider professional standards as a basis for their decision but are only required to determine whether to professional acted with reasonable prudence and competency (Love & Eickemeyer, 2009). In other words, even if a doctor follows all the proper procedures and acts in a professional manner, the jury can still rule that they failed to act prudently and award large damage settlements.
This fear of litigation is prevalent in all sectors of our society and leads professionals in all professions to practice in a defensive manner. Perhaps the greatest example of this is the increase in cesarean sections (c-sections) preformed.
In 1970 only five percent of births were by c-section as opposed to 28 percent in 2009 (Masterson, 2009). The reason for this increase is fourfold – medical, financial, legal, social. In this study we will look at the legal pressure, threat of litigation and how it affects the economics of health care.
One of the most profitable forms of medical litigation is for babies born with cerebral palsy caused by oxygen deprivation due to the doctor’s failure to perform a c-section during delivery. Many prominent attorneys (i.e. former senator and vice presidential candidate John Edwards) profited greatly from these lawsuits (Trial Lawyers Inc. Health Care, 2005).
The truth is that cerebral palsy is only rarely attributable to birth asphyxiation resulting in little decrease in the percentage of infants born with cerebral palsy. However, the threat of these lawsuits has caused many obstetricians to perform unnecessary c-sections as a means of protecting themselves since the jury may not consider the facts and rule that the doctor failed to act prudently (Love & Eickemeyer, 2009) and perform the c-section even though it was unnecessary. In fact, in 2004 a jury awarded the highest medical malpractice award ever of $112 million (later settled for $6 million based on a pre-verdict agreement). The jury’s basis for the award was cited as failure of the doctor to act on signs of fetal distress. Since the cost of a c-section is much greater than a natural vaginal birth, this represents an unnecessary increase in the cost of health care (Trial Lawyers Inc. Health Care, 2005).
From this study we can conclude that the two externalities of increased third-party payment of medical expenses (U.S. Health and Human Services, 2009) (Geller, 2006) and the increasing threat of litigation (Love & Eickemeyer, 2009) (Trial Lawyers Inc. Health Care, 2005) are contributing to health care costs outpacing inflation. However, increases in cost due to more expensive surgical and diagnostic procedures are viewed as a value added component improving the quality of the health care product (United States Government, 2004). The only exception to this would be more expensive procedures that are performed as a defensive measure against possible litigation (Trial Lawyers Inc. Health Care, 2005). In the next section we will consider alternative solutions to correcting the problems with the economics of health care.
The Public Option:
One of the most hotly debated pieces of legislation to come up in my lifetime is the current proposal in the Congress to set up a public option to pay for health care. In the introduction to the bill it states that the purpose of the bill is to “to provide affordable, quality health care for all Americans and reduce the growth in health care spending, and for other purposes” (111th U.S. Congress, 2009). However, like many pieces of legislation introduced in Congress, they are often diluted with numerous amendments and loose their focus. This piece of legislation is 1018 pages long and many members of Congress have already admitted that they have not had time to read the bill. With legislation this large, the possibility of the bill losing its focus is greater. In addition, the health care of the nation is extremely important and any attempts to reform it must be done with great care.
The purposes of providing quality care and the goal of reducing health care costs are within our previously determined guidelines of making health care more affordable without sacrificing quality. However, we must do more than some congresspersons and actually read more than page one of the legislation in order to determine if this proposal will actually meet its goals. In addition, the clause “for other purposes” leaves the door open for earmarks to be added to the bill that do not have anything to do with health care.
The public option and the quality of health care: Pages 30-35 of the bill establish and describe the duties of a Health Benefits Advisory Committee (HBAC). With the exception of the 9 members appointed by the Comptroller General of the United States, this committee will consist of the Surgeon General and at most 17 other members who are appointed by the President. The committee’s duties are to provide the Secretary of Health and Human Services recommendations on health benefit standards (111th U.S. Congress, 2009). In simple English this committee will determine what health benefits individuals enrolled in the public healthcare plan will receive.
In order to determine whether the quality of care will be impacted with the implementation of a public option, we would need to know the basis the HBAC will use in determining its recommendations. The bill is unclear about this basis, leaving it up to the discretion of the HBAC. The concern of many is that the establishment of the HBAC takes the decision making power out of the physicians hand and places it in the hands of a government official who, most likely, has not had the opportunity to physically examine the patient. In addition, many fear that the HBAC will base its decision on economics or politics which have nothing to do with the quality of health care delivered to the patient.
Another concern of many regarding the public option is that it may lead to the rationing of health care. Section 1151 of the bill establishes guidelines designed to reduce potentially preventable hospital readmissions (111th U.S. Congress, 2009). Most of us do not want to needlessly be admitted to the hospital, on the surface this looks and sounds like a good idea but once again the decision on whether an individual is readmitted depends on whether the Secretary determines the condition is an applicable condition and whether a sufficient amount of time has transpired since their last admission. The concern here is that the Secretary, under pressure to reduce costs, will lengthen the time between admissions or rule that the condition is not applicable. Many see this as a potential for the rationing of health care.
In section 223 page 124 of the bill, the Secretary is given unlimited authority to determine whether fees are excessive or deficient (111th U.S. Congress, 2009). Due to the rising costs of health care, many see this as a way of controlling costs. However, an unintended consequence of this could cause many doctors and other healthcare professionals to leave the profession and pursue other careers. This could lead to a shortage of healthcare professionals.
Perhaps the most controversial provision in the bill is found in section 1233 pages 425-430. In this section the bill establishes guidelines for end-of life counseling. The practitioner is required to advise the patient on end-of-life issues every five years. The practitioner, or healthcare professional, does the counseling but he must follow the guidelines of the bill. Among these are providing the patient with a list of national and state agencies to assist patients with end-of-life planning (111th U.S. Congress, 2009). Many fear this is an additional intrusion in the doctor patient relationship. In addition with the previously mentioned provisions that could lead to rationing, these agencies could be forced to advise patients to opt for hospice instead of life saving measures to cut costs.
The determination of whether a patient receives potentially life saving measures should not be based on some hypothetical guideline set by a bureaucratic agency. These decisions must be made on a case-by-case basis which can only be done by the physician who actually examines the patient. This is because the physician has an opportunity not only to examine the physical condition of the patient but can also evaluate the patient’s mental state.
Every patient seen by a physician has family and friends who will miss them when they are gone. The question is do we want the decision on whether a person lives or dies based upon some bureaucrats hypothetical guidelines or do we want that decision based upon the patient, doctor, and the patients families. Having had to make an end-of-life decision with my mother, I am sure glad that I had the power to make the decision based upon input from the doctor and did not have to depend upon some bureaucrat who never examined my mother.
The economics of the public option: In our analysis of the numbers for health care, we determined that the problem with the healthcare system is not in the quality of care delivered by healthcare professionals but in the economics of the system. We therefore concluded that the any reform of the healthcare system must correct the economics of the system while leaving the quality of care at its current level and allowing the continuance of research and development to improve care. Let us analyze the public option to see if it accomplishes this goal.
In our analysis of the numbers we determined that there are two external forces and one internal force at work affecting the cost of health care. We determined that the force of improvements in health care due to improved treatment methods and procedures actually contributed to the improvement in quality and should not be tampered with. However, in the public option currently being considered in Congress, this may not be accomplished.
The establishment of the HBAC with the goal of cost reductions may view certain procedures as unnecessary and costly and disallow them (111th U.S. Congress, 2009). The basis of their decision could be based upon the opinion that the person is elderly and/or will not contribute sufficiently to society in the future. The HBAC may only allow end-of-life procedures for these individuals since that will be less costly and contribute to reductions in cost, which is one goal of this legislation. However, this would constitute a reduction in the quality of care resulting in a reduction in cost. This is not an acceptable outcome based on the legislations stated goal (111th U.S. Congress, 2009).
Section 401 pages 167-168 of the bill prohibits individuals from opting out of health insurance coverage by placing a tax on them (111th U.S. Congress, 2009). The reasoning behind this provision is that these individuals will eventually need health care and be unable to pay for it. Since the law requires that healthcare providers provide emergency health care to everyone regardless of their ability to pay, they reason that the burden of payment for these individuals will be borne by everyone else who pays into the system should these individuals need emergency care. However, upon closer examination of these individuals, the assumption that they cannot pay for their care may be unfounded.
According to U.S. Census statistics, of the 46.6 million individuals in the U.S. without health insurance, 17 million live in households with $50,000 or more in annual income. It is presumed that these individuals could afford health insurance but choose to pay as they go for their health care (DeNavas-Walt, Proctor &, Hill Lee, 2006). Since insurance is a transfer of risk from the individual to some insurance company, these individuals have decided to take on the risk themselves instead of transferring it to someone else. In addition, it is estimated that 18 million individuals without health insurance are between the ages of 18 and 34. These individuals are young, healthy, and a low risk to the system (U.S. Department of Health and Human Services, 2005).
However, what if one of these individuals has a catastrophic illness or accident that they are unable to pay for. Let us address accidents first. Accidents usually occur at some ones home, a place of business, because of an automobile accident, or at work. An individual who is a victim of an accident at one of these places falls under insurance carried by the owner of that home, car, or business. The only insurance these individuals need is catastrophic coverage in the event of an illness requiring hospitalization. They are either financially able to pay for their routine health care needs or rarely need health care due to their youth and healthy lifestyles. Therefore, the assumption that these individuals represent a substantial risk to the overall healthcare system is unfounded.
However, these individuals may contribute to higher insurance premiums for individuals who decide to purchase health insurance. This is especially true for the 18 to 34 age group. Health insurance, as well as other types of insurance, is a pool. Individuals who purchase the insurance coverage pay premiums. These premiums are put in a pool from which claims are paid out. With the absence of lower risk individuals who opt out of buying insurance, the pool consists of higher risk individuals who will require more health care and thus file more claims. In order to be profitable, health insurance providers must raise premiums on those who purchase coverage.
This is the logic behind Section 401 of the proposed public option. However, this will place an additional financial burden on these individuals and as an unintended consequence cause them to reduce spending in other areas or reduce their savings. This mandate also violates the U.S. economic system of free enterprise and gives the Internal Revenue Service (IRS) additional intrusion into individual financial affairs.
Proponents of the public option have stated that the option will not eliminate private health insurance but will simply provide another option. However, section 313 pages 149-150 of the bill require employers with annual payrolls in excess of $400,000 to either provide private coverage where the employer contributes an excess of 8% of total payroll or pay a tax of 8% of payroll (111th U.S. Congress, 2009). Since, most employers currently contribute more than 8% of their payroll for insurance premiums; it will place businesses that choose to continue offering private insurance at a competitive disadvantage against competitors who opt for the public option, which only costs 8% of payroll. This will cause many businesses to dump their private coverage and go exclusively with the public option.
In addition, section 102 pages 16-19 of the bill place limitations on new enrollments by private insurance providers (111th U.S. Congress, 2009). These providers are prohibited from enrolling any new members after the date the public option takes affect. The bill also prohibits them from making any changes in coverage. Without the ability to add new members, the loss of existing members through changes in employment or loss of job, and the loss of members through employers opting out of private plans, these insurance companies will eventually go out of business. The bill does not outlaw private insurance but instead phases it out through attrition.
Finally, this proposal does nothing to rein in the high costs of litigation. Instead, if private insurance is phased out, who will the consumer of health care sue? He or she cannot sue the Government without their permission so they will have to sue the doctor. However, the incomes of the doctors and hospitals will be restricted meaning they may not have the means to pay for malpractice insurance. This could cause additional doctors and healthcare providers to opt out of the industry.
This loss of choice for the consumer of health care will force them into a monopolistic healthcare program governed by the HBAC. The HBAC will then have the power to determine who gets care, what care they receive, and how much doctors and other healthcare providers are paid. This will lead to rationing of care, healthcare providers opting out of the industry, and fewer individuals going into the healthcare profession. In other words, this bill achieves its goal of reducing costs by reducing the quality of care provided to the consumer of health care. No wonder the members of Congress and the President have conveniently decided not to participate in the program but keep their current program.
The public option fails to meet our goals of reducing costs while maintaining the current quality of care. For this reason it should not be implemented but this does not mean that we should do nothing and maintain the status-quo. Instead, we need to explore other options. In the next section I will propose an option that unleashes market forces to reduce costs without jeopardizing the quality of care. I will also propose tort reform and how to reform both Medicare and Medicaid.
Healthcare Reform through the Free Market:
In this study, we have determined that the healthcare system in the U.S. is of high quality but costs have been consistently increasing faster than inflation. We have determined that the increase in costs is due to technological innovation, the use of third party payers, and litigation. The public option, now being proposed, fails to address these issues and is actually the introduction of another third party with the power to eliminate the competition.
Competition in the market place drives prices down (The White House, 2004). Unfortunately, due to dependence on third party payers, the user of healthcare is usually unaware of the cost of services and thus has no incentive to price shop (Geller, 2006). The challenge is finding a way to reintroduce competition into the healthcare system.
In addition, the two public programs currently in existence, Medicare and Medicaid, are going broke. Graph 1 (pg. 38) illustrates how Medicare expenditures are exceeding income and thus depleting fund assets. This illustration estimates total fund depletion in the year 2019 (U.S. Department of Health and Human Services, 2008). The millions of baby boomers expected to go on the program in the next few years expect the program to be there for them. In addition, they have paid into the system and feel entitled to Medicare. Medicaid is also causing a financial strain on state budgets. Modifying this program to make it more efficient will assist states in balancing their budgets. A solution to these problems may seem impossible at first but in testimony before Congress O’Grady (2005) proposes a solution that many believe will address what is actually wrong with the healthcare system.
O’Grady (2005) touted the introduction of Health Savings Accounts (HSAs) which when coupled with High Deductible Health Plans (HDHPs) to provide individuals with more choice over their health care. The HDHP provides coverage for catastrophic events and usually have a high deductible. The HSA is actually a savings account and can be used to pay for routine health care needs. The funds in the HSA can be moved from one employer to another and from one year to the next. In addition, O’Grady also proposed tax credits for employer contributions to employees HSA’s.
Since the HSA is the property of the individual there is an incentive to remain healthy and be frugal with the money in their HSA. This frugality and healthy living incentive will cause a reduction in health care costs due to the reintroduction of competition and frugality into the system. In addition, the individual also does not lose their health care coverage if they lose their job (O’Grady 2005). Since many of the uninsured are individuals who are between jobs, this feature will reduce the number of uninsured (Meier, 2004).
HSAs also solve the unique economic problem presented by health care. Since demand for health care increases with age, the wise thing is for an individual to save while they are young for future health expenses (United States Treasury, 2009). With the incentive of part of their premium going into a savings account that will cover future health care needs, those who previously chose not to purchase healthcare insurance may decide to contribute to a HSA (U.S. Department of Health and Human Services, 2005).
The market forces of a HSA will cause many of the uninsured who find themselves between jobs or who have decided not to purchase health insurance will become insured. In addition, many with annual incomes over $50,000 may decide to purchase a HSA for the investment (DeNavis et. al., 2006). This will leave only those who do not have health insurance because they cannot afford it.
In addition to the introduction of HSA’s, O’Grady (2005) also proposed Association Health Plans. These pools will enable small employers to form large groups and purchase insurance for their employees at reduced prices. This will make them competitive with large employers and labor unions. This will reduce the costs of premiums for both the employer and employee.
O’Grady (2005) also proposed the creation of a ‘national marketplace’ for insurance products. This would allow individuals to purchase health insurance across state lines, giving them more choices and introducing additional competition.
As O’Grady (2005) predicted, the HAS, Association Health Plans, and the National Marketplace will slow the increases in health care costs due to the introduction of competition into the system and the elimination of dependence on third party payers (Geller, 2006). However, how can the uninsured who cannot afford health insurance get coverage? The Medicaid program is their answer but it is in need of reform.
At present, Medicaid spending is expected to outpace the growth in the economy if it continues to operate under the current law. Medicaid spending increased by 7.3 percent from 2007 to 2008 and is predicted to grow at an annual rate of 7.9 percent. The economy is projected to grow at a projected rate of 4.8 percent (Health and Human Services, 2008).
HHS secretary Mike Leavitt reported that these increases in spending are unsustainable which is why the current Medicaid system is in need of reform (Health and Human Services, 2008). One method of reform would be to introduce competition into Medicaid. However, how do we add competition to a government program? The answer can be found in the testimony of O’Grady (2005).
In 1975 the Earned Income Tax Credit (EITC) was added to the tax code. The EITC is a refundable tax credit started to aide low to moderate income families. As a refundable credit, individuals who paid little or no taxes can receive a credit above what they had withheld from their paychecks (Internal Revenue Service, 2009). The EITC is added to their tax refund check so they can have additional cash to help with their living expenses.
O’Grady (2005) mentioned the use of refundable tax credits as a means of providing health insurance for low income individuals. These refundable tax credits could be offered through the tax system to individuals below an established income level. The amount of the credit would be determined by the income of the individual and the number of family members. However, instead of adding the refund to the individuals tax refund, the refund would be issued in the form of a voucher. The voucher could be used to purchase health insurance from a list of providers in their state. The state would be responsible for contracting with providers and vetting them out to insure they have the ability to provide coverage and that they operate in an ethical manner. The voucher would be used to purchase a HSA with a HDHP rider. Any balance over the cost of the HDHP portion of the insurance would be deposited in the HSA.
We also want to provide an incentive for individuals to increase their incomes so they can afford private insurance coverage. To accomplish this, the Medicaid reform plan should include career counseling to direct individuals into higher skilled and paying careers. The states are best equipped to handle this counseling since they already have community college systems and state universities to direct individuals into and since the states will no longer have to administer a Medicaid program, they will be able to direct some of the funds they previously allocated to Medicaid into these counseling programs. This combination of competition and incentives will result in significant reductions in Medicaid spending and result in a sustainable program.
Medicare is also going broke. Graph 1 (pg. 38) illustrates that in 2019 the plan assets will be depleted if Medicare continues under present law. This is also an unsustainable path meaning reform is needed (U.S. Department of Health and Human Services, 2008). Since health care expenditures increase with age, using the premiums paid by individuals currently employed or self-employed as contributions to a HSA that they could use after age 65 would make the most sense.
However, Medicare currently uses premiums paid by those currently working to cover medical expenses of current Medicare participants, which are why current plan assets are being depleted (U.S. Department of Health and Human Services, 2008). This means that the premiums currently paid by these individuals cannot be placed in a special HSA for these individuals without placing an additional strain on the Medicare system. For this reason, a one time bailout of the Medicare system is needed along with a plan to allow individuals to begin investing their current Medicare premium payments into a private HSA.
The government needs to conduct an actuarial study of the population in order to determine a dollar value on the costs of health care for individuals from 65 until death in order to insure funds will be available. The government can then, based on the findings of the study, deposit sufficient funds in Medicare to provide coverage for those currently on the program.
For those not on the program, their Medicare withholdings will go into a private account similar to the ones proposed for Medicaid. Of course, those approaching 65 will not have time to contribute enough to cover their routine expenses so once they have exhausted all the funds in their private account, they will revert to the current program. This will require annual payments into the fund to cover these expenses. However, as years go by, the amount of each individual's accumulated contributions to their private funds will increase until a point where retirees reaching 65 will have sufficient funds in their accounts to cover their routine expenses. This will leave Medicare with only the responsibility of providing catastrophic care.
Table 8 (pg. 37) illustrates how, based upon the current percentage of contributions, an individuals account would grow. In this illustration, an individual’s income grows from $20,000 per year to $75,000 per year from age 20 to 65. The contributions are invested at 5%.
In this simple illustration, the individual would accumulate $97,023.96 that they will be able to use for prescriptions and other routine health care expenses. They will also be able to use any amounts in other HSA’s as well. This will represent a gradual phasing out of Medicare part B and part D without the pain that would occur should the program suddenly become insolvent. With Medicare relieved of part B and D the program will be sustainable through premiums paid by plan participants.
Conclusion:
The current crisis in health care is not with the quality of care but with how health care is paid for. The current proposed public option goes too far and attempts to totally overhaul the entire health care system (111th U.S. Congress, 2009). However, the system is in need of some reform but other options need to be considered. Among these other options are one that was presented to congress by O’Grady (2005).
O’Grady (2005) recommended promotion of HSA’s through tax credits to employers who offer them. He also recommended Association Health Plans which allow small businesses to pool their resources and purchase group health insurance for their employees at more affordable prices. Finally, O’Grady recommended the formation of a ‘national marketplace’ which would allow individuals to purchase health insurance across state lines. This would give individuals more choices and the increased competition would drive premiums down.
These free market models could also be used to restore solvency to both Medicaid and Medicare. Low income individuals could earn vouchers through a refundable tax credit on their income tax return for the purchase of health insurance. Medicaid would also provide mandatory career counseling to these individuals so they can find employment providing a private health insurance plan so they do not have to permanently depend on Medicaid.
Medicare premiums currently paid by working individuals could be deposited into a HSA. The HSA would be the property of the individual similar to their current 401K plan. In order to phase in the program, the government would be required to subsidize the program for individuals close to retirement age. Eventually, individuals will have sufficient savings in their account to pay for routine health care and prescriptions at age 65. This would do away with Medicare parts B and D. Medicare Part A would be sustained through premiums paid by individuals on the program through deductions on their Social Security Checks. These individuals would also be able to use any funds they accumulated in their private HSA.
The healthcare system is fixable but smart change involves fixing what is wrong with the system. The basic structure of the system is fine as evidenced by increasing life expectancies and the lowering of death rates (Tables 1 through 5). The problem is that health care costs are out pacing inflation due to technological advancements, third party payers, and out of control litigation. Free market forces, if allowed to function freely, coupled with tort reform will fix the problems without damaging the quality of care.
I encourage readers of this report to contact their Senators, Congresspersons, and The President. Let them know that there are other options out there besides the public option and that you believe these other options do a better job of addressing the real problems with the healthcare system. The good news is that we currently have one of the best healthcare systems in the world but we can make it better and more affordable by reintroducing competition and free market forces into the economics of the system while leaving the quality of the delivery of health care alone.
Tables: (Click on the table to expand it)
Table 1: Life expectancy comparison by country for males from birth
(Center for Disease Control, 2008)
Table 2: Life expectancy comparison by country for females from birth
(Center for Disease Control, 2008)
Table 3: Life expectancy comparison by country for males at 65
(Center for Disease Control, 2008)
Table 4: Life expectancy comparison by country for females at 65
(Center for Disease Control, 2008)
Table 5: Numbers of deaths U.S. 1980 and 2005
(Center for Disease Control, 2008)
Table 6: Inflation Medical Expense Comparison
(US Inflation Calculator.com, 2009) (U.S. Health and Human Services, 2009)
Table 7: Health Expenditures from 1965 to 2008
(U.S. Health and Human Services, 2009)
Table 8: Illustration of Growth in Private Medicare Fund:
Graph 1:
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