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(HealthNewsDigest.com) – Much of the debate about health care reform focuses on controversial issues such as non-profit health cooperatives, the public option and individual mandates. Less attention has been given to the core principles underlying a reformed system, that is, the principles that help us define what it is we truly want from our health care system.
Here are some core principles of a reformed system upon which Americans would generally agree:
• No American is denied access to medical care due to inability to pay;
• All Americans are encouraged to utilize medical care appropriately, neither under- nor over- utilizing it;
• All are encouraged to make wise decisions in respect to medical care and lifestyle;
• Great deference is given to the doctor/patient relationship;
• Medical care prices and quality are transparent, both between patients and their doctors and between insureds and their insurers.
The goal of health care reform should be to create a system that lives up to our core principles. In order to understand whether a reformed system would be better than the current system, let’s examine from the perspective of an actuary how the current and a reformed system might compare in respect to these principles.
The U.S. Health Care System Today
We tend to think of medical insurance as the only means to access our health care system. Not even the uninsured are denied emergency treatment due to an inability to pay. Because emergency treatment is often the only care available to the uninsured, they are incentivized to under-utilize other medical services. So when the uninsured eventually do access the medical care system, they may be sicker and their costs may be higher compared to the medically insured.
By contrast, the benefits available to the medically insured are often so generous that many expect to make claims annually. There is no other type of insurance for which this is true. In fact, one generally hopes never to make a claim against most insurance policies. Why is medical insurance different?
By its nature, insurance should be a financial service that is frequently bought, rarely used, but critical to the well-being of the buyer. Actuarially speaking, medical insurance today is more than insurance; it is also prepaid medical care. In contrast to buyers of other insurance, buyers of prepaid medical care are incentivized to extract value from their purchases, especially since they prepaid for some services. They are likely to over-utilize medical care, and this over-utilization drives up the demand for and the prices of medical care.
Moreover, the prepaid medical care/insurance combination inserts a third party — an administrator — into virtually every doctor/patient interaction. Whether public or private, the administrator is, figuratively speaking in the examining room exerting influence over the decisions patients should make in consultation with their doctors. Because the administrator controls most of the payment monies, his or her opinion may, be the most important one.
The generous benefits available to the medically insured sometimes include wellness and disease management. Such benefits remove an impediment cost to making wise preventive care and lifestyle choices, but they are often not structured to incentivize the insured to use them. Some insureds use them of course, but more might if premiums were restructured so that there was a financial incentive if benefits are properly utilized.
More importantly, most medical insurance pays providers per service, not episode. This encourages over-utilization of medical services, and again drives up the demand for and the prices of medical care. Because the costs borne by patients are comparatively trivial, they often have little interest in how much the next test costs, for example. With its distorted incentives that encourage under- and over- utilization of medical care for different populations, disrupt doctor/patient relationships, and contribute cost but little additional quality to medical care, the U.S. medical system today fares poorly against these core principles.
America’s Healthy Future Act of 2009
The legislation (“Chairman’s Mark”) proposed by Senate Finance Committee Chair Baucus, America’s Healthy Future Act of 2009 (http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20Americas_Healthy_Future_Act.pdf), is similar in many ways to the ideas presented by President Obama in his speech before the joint session of Congress on September 9. How does the Chairman’s Mark measure up against those principles?
A major goal of the Chairman’s Mark is to reduce the number of uninsured Americans. According to the Congressional Budget Office (CBO), the Mark would reduce the number of uninsured by about half by the year 2015 (http://finance.senate.gov/sitepages/leg/LEG%202009/091609%20CBO_Analysis.pdf).
The newly insured will have greater access to care, but will they be able to access that care along with 25 million more insured lives? Will there be sufficient capacity in the medical care system to deliver that care? The Chairman’s Mark addresses the latter of these questions by creating incentives that would strengthen primary care, and thereby add capacity to the medical care delivery system. Until that capacity is in place, the potential increase in demand could drive prices higher.
The situation for those who remain uninsured would be little different than today’s system. They will continue to access medical care, usually in an emergency setting, so they will still be incentivized to under-utilize other care.
The Chairman’s Mark imposes an individual mandate, requiring most Americans to pay tax penalties if they do not purchase health insurance, and it establishes an insurance “exchange,” tax credits and more in order to make insurance more affordable to buyers at different income levels.
The Chairman’s Mark defines five levels of benefit plans – platinum, gold, silver, bronze and young invincible – based upon their actuarial values. In order to satisfy the individual mandate, one must purchase the equivalent of at least the bronze plan. (So-called “mini-medical” plans are not allowed onto the exchange; “mini-medical” policies do not satisfy the mandate.) Though there is limited detail, the five levels of benefit plans appear not to be much different from the benefit plans found in the health insurance market today. To a large degree, therefore, they will perpetuate the same pattern of distorted incentives that result in over-utilization, increased demand and rising prices in today’s system. (An exception is that smoker/non-smoker pricing is allowed in the individual and small group markets, conditioned on coverage of smoking cessation coverage.)
Among the means to fund these reforms is an excise tax that would apply to high cost medical insurance. Designed differently using actuarial principles, such a tax might mitigate some of the distorted incentives. For example, it could be designed to tax premiums that are used to buy prepaid medical care and not tax premiums that buy true insurance.
The Chairman’s Mark introduces a number of wellness and disease prevention benefits to Medicare and Medicaid. Like insured wellness benefits, the availability of these benefits does not assure their utilization. The Chairman’s Mark, however, appropriates $200 million to provide incentives to encourage Medicare and Medicaid beneficiaries to use these benefits.
The Chairman’s Mark includes numerous items that reform payment transparency and promote quality. For example, the value of employer-provided coverage would be reported on employees’ W-2s. Numerous provisions address reforming Medicare’s payment system to focus on value-based purchasing, and groups of providers could become Accountable Care Organizations (ACOs), and thereby become eligible for incentive payments. Finally, the Secretary of Health and Human Services would be directed to create a national quality improvement strategy.
Actuarial analysis suggests that the Chairman’s Mark would fare better against the core principles outlined here than the current system, but in only some respects would it do a better job mitigating the system’s inherent financial risks. By reducing the uninsured population, it reduces the number of Americans who are incentivized to under-utilize medical care. It takes some steps to improve upon payment transparency and quality. Though financial incentives might be more effective, it attempts to encourage the Medicare and Medicaid populations to adopt healthier lifestyles and to take advantage of preventive care opportunities. However, the Chairman’s Mark leaves in place many of today’s distorted incentives that drive over-utilization, higher demand and, therefore, higher prices.
If the recent financial crises have taught us anything, it is that incentives do indeed matter. As we reform our health care system, we need to incorporate real incentives that meet the core principles and encourage Americans to:
• Lead healthier lifestyles to reduce the risk of falling ill;
• Take advantage of wellness and disease management opportunities to mitigate the risks of developing or living with chronic diseases;
• Utilize the medical care system appropriately- neither under- nor over- utilizing it.
As central as a public option, health cooperative and/or other policy goals are to the spirited debate about reforming our health care system, they miss the target: a system that lives up to our core principles. If we focus on defining those principles, we can create something upon which we can all agree: a system with the potential to deliver high quality care at truly affordable prices.
John I. Mange is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He serves as Executive Director and CEO of Health Reinsurance Management Partnership, a member of the London Reinsurance Group family of companies. His recent essay, “Prepaid Medical Care and Medical Insurance” won first prize in a contest sponsored by the Society of Actuaries’ Health Section. It is available in Visions for the Future of the US Health Care System, which is available at http://www.soa.org/library/essays/health-essay-2009-toc.aspx.
This article is for information purposes only and should not be construed as legal, tax, insurance or reinsurance advice. Efforts have been made to ensure its accuracy, but errors and omissions are possible. Individual circumstances may vary and specific legal, tax, insurance and reinsurance advice is always recommended. The information presented is based on a limited review of specific current and proposed legislation. Other legislation and future changes, implementations and conditions may affect this information. Opinions expressed are those of the author and do not necessarily reflect the policy of Health Reinsurance Management Partnership or any of its affiliates.
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