The Political Conundrum meets the Cost Conundrum
|
|
(HealthNewsDigest.com) – Realistically, the current Healthcare bills being considered don’t do much to reduce costs and that’s their biggest problem. No one believes that overall healthcare spending will go down – just that it will shift to the taxpayer in the form of guaranteed coverage for the uninsured at the general taxpayer’s expense (as seen in Massachusetts and Tennessee).
In their current forms, the insurance funding models being proposed feel like health “welfare” for the poor, the unemployed and those who have elected not to buy insurance.
In the models being proposed, those with jobs have to pay twice — for their coverage and for everyone else’s.
Let’s explore how funding methods can be used to put a realistic market driven cap on rising healthcare costs.
Perception is Reality
The employed don’t think about the costs to the businesses that provide them with healthcare coverage. They only think about the costs they see (monthly premiums and co-pays). For anyone in the middle class to believe that a reformed healthcare insurance industry model will benefit them, there has to be evidence of meaningful cost controls. Unfortunately, the Medicare program isn’t a good basis from which to argue that the government has shown an ability to control healthcare costs.
Forget for a moment that Medicare does control some costs. The way it does so has a distorting effect on the rest of the healthcare cost structure and it has a reputation for fraud and abuse, as well as a reputation of low quality service by Medicare providers (unless you buy the supplemental insurance).
To get out of the weeds on Cost Containment, there has to be a plausible role that government can play that isn’t;
1) price controls,
2) profit controls,
3) micro-management of eligibility for specific treatments,
4) rationing or
5) actions that affect quality of care.
Unfortunately for those who propose government backed Public Option insurance, that’s what insurance companies do every day. If the government wants to be in the insurance business, it will have to act like an insurance business (see the Massachusetts and Tennessee models) and do all the things that insurance companies do. That won’t be politically palatable.
Let’s assume for the moment that the Public Option is dead. In that case, the Government can’t use the technique of under-cutting the private insurance companies for comparable coverage and by doing so with a large enough share of the market, gain pricing power (think of it terms of the Wal-Mart model).
It is not clear that the Public Option would have given the government that level of pricing power in any case. At worst, it could have acted as Medicare does and further distort the insurance industry pricing model. However, the Public Option was the only credible way being proposed to build a big enough leverage point for the government to exert market power as a buyer of healthcare in order to control costs. There is another way however.
Realistic Market Based Funding
Step # 1 is for the government to mandate that businesses administer a program that provides a Basic Standard Healthcare Policy to their employees. This program would mandate that employers can spend no more than 12% of payroll on providing healthcare insurance – and the portion of cost absorbed by the business would be treated as a business expense. In other words, costs above 12% of payroll are not treated as ordinary business expense.
A critical component of this approach is a standard health insurance policy; with standard coverages that is available and fully transportable nationally; a Basic Standard Healthcare Policy.
If businesses choose not to provide medical insurance for their employees, they will have to pay a 15% of payroll tax. The delta in the cap for medical coverage as a deductible business expense is intended as an incentive to businesses to offer coverage and a cost cover if the government has to provide it. Move the percentages and you’ll change business behavior. Smart companies will work to reduce their healthcare costs below 12% in order to gain the cost advantage over their peers.
Any additional services that the employer wants to offer above what 12% will buy can be paid for by the employee directly with a supplemental policy or can be provided by the employer, but if provided by the employer, is subject to tax as a in-lieu-of-compensation benefit.
This will cause coverage for basic healthcare to get priced right – and it’s a form of cost control familiar to most businesses; unbundling. It will allow those who have the means, to gain additional insurance protection balanced against their actual risk. It will allow companies that wish to do so to offer more insurance to their employees as a benefit but above a certain level of insurance will treat that as a taxable benefit.
Making basic medical insurance standard and thereby transportable from job to job will allow people to buy into a long term medical policy when young and healthy and normalize their payments over their life-time; like life insurance does. This approach works for the insurance companies and it works for the citizen and it doesn’t require the government to do anything other than make healthcare insurance transportable from state to state.
Insurance companies should be granted the means to adjust rates based on personally controlled risk factors like smoking or obesity. If a basic policy was purchased at an early age, the effects long term of changes in lifestyle will be factored into the rate and hence shouldn’t be adjustable. When a basic policy is purchased at an older age, its appropriate to adjust the rate to reflect the shorter period that individual will have to contribute to the insurance premium pool.
The goal is to cap the amount of money available to fund the delivery of healthcare services and use the economic incentive of the insurance company to make money by administering the insurance pool efficiently as a lever against the healthcare delivery industries desire to make a profit.
This is the essence of private insurance based healthcare in the US. It has not worked to date because there has not been a cap on insurance spending; cost increases in the delivery chain are passed to the insurer and on the employer and employee without any restraint.
For the unemployed and self-employed, they will have to either buy a basic policy that provides minimum coverage (think of it in terms of minimum auto accident insurance) or pay a tax. If they buy a policy, it is tax deductible. If they chose not to buy a policy, in addition to the tax they pay, which is designed to cover the long-term costs associated with their lack of a basic policy, they will have to pay for service at Medicaid rates directly.
For those below the adjusted poverty line in income, they must sign up for Medicaid – and if they show up at emergency services without a Medicaid card, they will be issued one.
Small business employees would be treated with the same rules as the uninsured; buy a basic policy at the rate established for their salary/wage level or pay a tax. However, as an incentive to small businesses, basic health care costs paid by a small business would be tax deductible as well as a legitimate business expense (double deductibility).
12% and Employee Participation
For every company, 12% of payroll is a different number. For companies with highly paid workers, 12% of payroll buys a lot more healthcare than a company with a relatively lower paid workforce. However, between companies in the same industries, the relative costs are the same. The goal of a fixed percentage is not destabilize the inherent cost structure of specific industries by making one company more or less competitive. Insurance companies operating in a given state would be required to offer their products to all employers and accept 12% of the employee’s salary as the payment for basic health insurance coverage.
The employees’ share of the 12% could either be fixed as a % of salary or as an adjusted amount based on wage tier (6% participation for a $100,000 a year employee is quite a bit different than 6% participation for a $30,000 a year employee).
When 12% becomes the national standard, it will be built into each cost structure in every industry the same way and there will not be a competitive advantage for businesses to arbitrage their healthcare costs. Pricing power will move to the health care consumer (employee) and away from the intermediary (employer).
The 12% is a ceiling for the rate for basic healthcare. It puts the insurance industry in the position of gaining more profit and more leverage if they can provide the same insurance for less. In other words, they can offer their Basic Healthcare Insurance Policy product at a lower price than 12% of payroll.
Call it: All American Healthcare
The principle is that if you hire an American citizen to work for you (big employers), you have to give them basic health insurance (so the government doesn’t have to do it for you) and build it into your cost structure. If you are a small business, where the burden of the cost would be too high to absorb, your employees either have to take on the burden of their healthcare themselves or the government will give you an incentive (double deductibility) to allow you to provide the coverage.
In the competition for workers, small business who offer health insurance get enough of a subsidy to compete with bigger companies in the talent market and if they can’t/won’t offer insurance, they forego the tax deduction that their peers will get for offering insurance.
As time goes by, the government can decrease the amount of the minimum healthcare cost percentage allowable as a business cost (thereby incentivizing insurance companies to offer the lowest cost basic insurance coverage). By publishing this in advance with an adequate work-in timeframe, the entire healthcare chain can adjust to the new cost structure with some degree of certitude as to what the rules of the game are going to be in the future — essential for business planning both by employers and by the healthcare industry itself.
Healthy Shift In Pricing Power
Those who would say that the 12% payroll cap is price control don’t take into account the impact that regulation of basic healthcare spending at the aggregate level will have on the healthcare delivery chain.
With at most, only 12% of US payroll available for basic healthcare services, the competition to capture that pool of dollars will be intense by the healthcare insurance industry.
However, in every case, the insurer must still negotiate prices with the healthcare delivery providers. The insurance company’s inability to pass on price increases that emerge from the healthcare delivery system will be a constraining factor to the price of healthcare delivery; you can’t raise prices if the insurance companies won’t pay.
Pricing power will be transferred to the healthcare consumer who will have the ability to select an insurer (from a wider pool of companies) based on factors that are germane to their healthcare needs. Healthcare insurers will have to market their products directly to the healthcare consumer with a standard product offering defined for everyone as a baseline for comparison.
Unbundling higher cost from lower costs services will give the insurance industry the ability to control prices for basic healthcare services with the healthcare delivery chain.
The government’s role in this case is to control the amount of money flowing into the insurance pool as a means to control the amount that is ultimately paid to the service providers. Insurance companies will have to negotiate rates with providers that will generally be uniform, but could be higher if there is additional value that can be translated into a more appealing insurance product to the healthcare consumer.
Rising Costs That Are Passed On By Employers To The Employee
The proposed funding model will standardize costs for basic healthcare at a percentage of the employee’s salary. This will give stability to both the employee’s and the employer’s financial planning.
It will still be possible for additional insurance products to get to the market if they have appeal. We need more insurance products in the market, not less. But, it will also retard the inflation of healthcare costs for basic healthcare by limiting the costs that business can incur as a business expense to offer it.
Cumbersome and Intrusive Insurance Companies
The argument is made that insurance companies make using coverage difficult and try to deny coverage as a profit maximization technique. This may be true in some cases, but in a significant number of instances, this is a misunderstood behavior.
Generally the “real” problem here is the company buys a policy with coverage exclusions to keep their costs down while giving the impression to their employees that they have good coverage. The story that makes the paper is the one where the employee tries to use coverage they “thought” they had — and find out they don’t have it; because their employer didn’t buy it.
There are some insurance companies that behave fraudulently. The solution is in policing the offenders and not in changing the basic nature of insurance.
The legislative solution is a Basic Healthcare Insurance Policy available nationally – defining the coverage that everyone should have — to level the playing field for all businesses (think of it in terms of EPA car emissions standards as applied to healthcare) and to eliminate the worry that employees have of inadequate coverage being discovered when it’s already too late.
Setting the minimum coverage list and terms of coverage will not be a trivial task but there is already a basic consensus in the market on what coverages are appropriate. The government’s role should be to ensure that those coverages are adequate for most people and that the things not covered are clearly understood so that prudent consumers can buy the additional coverage they think is necessary – and the insurance companies can offer that supplemental coverage at rates that are affordable and competitive.
This reform will also prevent businesses from cutting deals with only one insurance supplier and pocketing rebates and other incentives at the corporate level.
This dis-intermediation of businesses as the healthcare buyer will rapidly incentivize the insurance company to treat the insured as the customer and not the company buying the insurance.
Quality of service would become a competitive advantage where as now, companies buy insurance for their employees and the cost of delivering healthcare services is something that both the company buying the insurance and the insurance company want to mitigate; often at the expense of the healthcare consumer.
Quality of Coverage
There has to be an incentive for people to buy catastrophic health insurance. Either it can be made part of the overall basic coverage, in which case it will get absorbed across a very wide pool of risk, or it should be offered as a supplemental policy, bought at the discretion of the individual.
In the case of supplemental insurance, the risk to the individual is that of impoverishment if they have elected not to purchase a supplemental policy that provides for healthcare coverage above the Basic Standard Healthcare Policy and encounter a medical condition that requires catastrophic coverage.
It’s still a free country and citizens may want to make this decision themselves, but the cost of catastrophic coverage (think of it as earthquake coverage) is low when applied across a very wide pool of risk.
This argues for including it in the basic coverage package.
Potential for Loss of Insurance with Job Loss
The hard truth is America does not want to create a healthcare “welfare” entitlement. To the extent that job loss results in the cost of insurance being borne at least partially by the worker, it creates an incentive for the worker to get back into the workforce as quickly as possible.
When economic conditions keep workers out of the work-force, the basic coverage policy should be equivalent to the standard Medicaid coverages and assumed by the state that is providing unemployment benefits and for the same length of time.
Pre-Existing Condition Exclusion
Denying insurance companies the right to refuse coverage for a pre-existing condition will be minimal in the overall structure of insurance financing. Essentially, the additional risk will get priced into the overall insurance pool. If the same rules apply to all basic healthcare insurance policies, the market will even out and absorb this risk.
There should be a penalty for early termination and shifting of insurance coverage from one provider to another (think of it in terms of cell phone contracts). When the insurer has no ability to lock in a customer, they have no means to set a long-term rate. The customer accepts the lock-in in return for the rate concession.
With lock-in, however, the insurance company also has a real economic incentive to encourage wellness. That incentive does not currently exist in the current model where insurance products are bought in bulk by companies for their employees based on the lowest cost to the company. Rate credits should be allowed based on individual absence of claims (think of it in terms of the car insurance model).
This will encourage healthcare consumers to stay with providers they are satisfied with and encourage insurance companies to offer wellness programs that reduce claims.
4Gen Consulting, LP, is a global specialty-consulting firm with a focus on managing complex business and system changes. The firm has successfully helped businesses unlock value through their methods and tools for IT Business Management, Business Process Improvement, Cost Improvement and IT and Business Program Design and Delivery.
Subscribe to our FREE Ezine and be eligible for Health News, discounted products/services and coupons related to your Health. We publish 24/7.
HealthNewsDigest.com
We also create, produce and distribute tv/cable public service campaigns: HealthyTelevisionProductions