Current Efforts to Reform Health Care Financing

In a July Wall Street Journal editorial,¹ Andy Stern, the president of the Service Employees International Union declared, "It's time to assert one simple fact: The employer-based system of health coverage is over...the system is collapsing, crushed by out-of-control costs, a revolutionary global economy and masses of uninsured."

This paper explores three reform options now being deployed and tested in the market.

The basic problem destabilizing health care underwriting, in both the private and public sectors, is the cost trend in health care. The federal government projects overall health care spending in the United States will double over the next 10 years to more than $4 trillion. That represents one in five dollars of gross domestic product. In 2015, per person spending on health care will rise to $12,300. As a reference, our national health care bill for 2005 was $6,700 for every man, woman and child, including the 45 million uninsured.

The first approach to reforming health care's underwriting system is expanding coverage for the uninsured and thereby increasing the insured pool of beneficiaries. The second is converting to a single payer system similar to the current Canadian system. The third option converts the health benefit from a defined benefit to a defined contribution model.

Expanding Coverage
The problem of the uninsured is real and growing, for both the public and the private sec-tor. Over 45 million Americans under age 65 lacked health insurance coverage in 2004, an increase of 800,000 in a single year and over six million people since 2000.

While the majority of Americans obtain health insurance through their employer, being employed does not guarantee a worker will have health insurance. The uninsured are primarily families with low and moderate incomes who work for small or medium sized employers. Coverage is not available in the workplace or is unaffordable for these families.²

Multiple efforts are underway to address the growing problem of the uninsured. State initiatives in Hawaii and Massachusetts address the problem of the uninsured by using private health insurance underwriters. In addition, there are multiple efforts to reduce the uninsured through Medicaid expansion. For example, the Dirigo Health Plan, Maine's new universal access to health coverage plan implemented in 2003, expanded the number of people covered by Medicaid by about 78,000, a 32 percent increase. Similarly, Illinois has expanded the state's Medicaid rolls by 310,000.

Hawaii's Prepaid Health Care Act
We have the most experience with Hawaii's Prepaid Health Care Act (PHCA), initiated in 1974. Until the Massachusetts Mandatory Health Insurance program started in April of 2006, Hawaii was the only state to require employers to provide health insurance to all full-time employees.

Negative effects. The Hawaiian economy differs significantly from the rest of the United States. This makes it difficult to assess cause and effect for economic outcomes attributable to PHCA. For example, Hawaii ranks 49th in income growth rate and 43rd in employment growth rate. Hawaii has the worst business bankruptcy rate and is 48th in new business growth rate.

It is, however, clear that PHCA's impact on employers and employees has been profound. According to a University of Hawaii analysis,³ approximately 55 percent of Hawaii's employers restricted wage increases, 33 percent reduced other employee benefits and 60 percent raised prices to help offset the burden of employer mandates. Furthermore, approximately 40 percent of employers reduced the number of employees and 10 percent hired part-time instead of full-time workers to avoid the mandate.

Compared to other states, Hawaii has a higher percentage of employees working 20 hours a week; and Hawaiian employers are less likely to insure these part-timer employees.

The effect of PHCA on Hawaii's health care system has been substantive. For example, the national average for acute care hospital beds per 1,000 population ranges between 4.2 and 4.76, compared to 2.1 in Hawaii. The average number of beds for nursing home patients is 56 per 100,000 nationally. Hawaii has 18 per 100,000. Until recently, Hawaii had one MRI scanner per 1 million people, while the U.S. average was one per 100,000 and Canada had one per 400,000.

Positive effects. At 9.6 percent, Hawaii has one of the lowest rates of uninsured in the country. In addition, Hawaii's cost for health care is substantially lower than the rest of the country. In 1996, Hawaii and national premiums were similar for single enrollees and for family coverage. As of 2003, Hawaii's premiums for single coverage averaged 13 percent below and family coverage averaged nearly 15 percent below the rest of the country. For 2006, Hawaii's rates are predicted to be 27 percent below the national average for both single and family coverage.

The Massachusetts Program
Massachusetts aims to increase coverage in phases over three years to include 90 to 95 percent of the uninsured, through the insurance requirement for individuals, along with a new assessment on employers who don't cover workers and creation of private, subsidized health plans for people who can't afford them on their own.

Massachusetts will not allow insurers to reject individuals with health problems or charge the sick more for coverage. Even so, critics say many people will not be able to afford individual plans, and employers who now provide comprehensive insurance coverage are likely to be tempted to offer inferior bare bones plans under the new system. Individuals who refuse to buy a policy face a tax lien of up to 50 percent of the policy cost.

The fear expressed by the Massachusetts Chamber of Commerce is that the plan will hurt businesses, especially small ones. It predicts the plan will force employers to favor capital improvements over labor, and will compel out-sourcing of jobs overseas. Only time will tell, but both plans are interesting laboratory tests for the rest of the country.

A Single Payer System
Every other wealthy nation now provides most of its citizens with guaranteed health insurance, while spending less on health care than the United States. These industrialized countries have established hybrid systems in which the public sector, which has the greater share of responsibility, works alongside the private sector in funding health care.

The Canadian system
The Canadian system, given its proximity and cultural similarity with the United States, is frequently used as an example of a single payer system. Canada tries to control health care spending with price caps and global budgets

Canada achieved a lower percent of GNP spending on health care compared with the U.S. by several mechanisms. Private insurance covering publicly insured services is illegal. Physicians are forbidden to accept private payments above the fees billed to the govern-ment. Hospitals are public or non-profit, and tightly regulated. Physicians' fees are deter-mined by provincial agencies. Prices of drugs are controlled. In short, the public supply of medical services is rationed, and there is little private alternative.

Canadians appear to be more satisfied with their system than are United States citizens. For example, US respondents (compared with Canadians) were less likely to have a regular doctor, more likely to have unmet health needs, and more likely to forgo needed medicines. Disparities based on race, income, and immigrant status were present in both countries but were extreme in the United States.⁴

The Canadian system has limited access to high cost specialty care. The result is a pro-longed wait for access to specialists. Thus, the degree of satisfaction in Canada appears to be inversely proportional to the severity of disease experienced by the individual polled.

To date, the Canadian system has not reduced health care cost trends. In fact, Canada's per capita health care costs in recent years have been rising at roughly the same rate as those in the United States.⁵

Current projections indicate provincial government spending on health care will consume more than half of Canada's total revenue from all sources by 2020 and all revenue by 2050 in six out of 10 provinces if current trends continue.⁶

SB 840
SB 840, the Health Insurance Reliability Act authored by Sheila Kuehl (D-Los Angeles) but vetoed by Governor Arnold Schwarzenegger, would have created a state-run health insur-ance system. It would have included a state agency, with a commissioner and medical board, to negotiate fees, set policy on medical issues and pay claims. This system would have been similar to the Canadian system.

The Act would have replaced the current system of multiple public and private insurers with a single insurance plan. California would buy prescription drugs and durable medical equipment as one buyer.

The impetus for a single payer system in California is not dead. Democrat Phil Angelides had committed to signing similar legislation if elected governor. In reality, California is one election away from a single payer system.

Consumer-directed health care
The third option is a market approach to health care financing. The theory driving this option holds that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.

Consumer-directed health plans (CDHPs) increase the incentives to make consumers financially responsible for choosing costly health care options. CDHPs assume consumers will seek and use information on the efficacy of treatment and provider performance if they have a sizeable financial stake in care decisions. To help them choose the best health care options, many employers provide informational tools. To these are added financial incentives that in theory will encourage cost containment by inducing consumers to eliminate unnecessary care and to seek lower-cost, higher-quality providers.

Critics argue that health care will never be a true marketplace. They point out that because sick, scared patients in emergencies generally make the most expensive health care decisions, the ability of a patient to perform, as an informed consumer is not reasonable.

Raising consumer cost sharing, especially deductibles, is at the core of the CDHP strategy. Often the higher deductible is combined with a tax-free personal health care spending account. Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs) are the newest form of these accounts.

Aetna's experience
There are early indications that CDHPs are starting to gain traction and show beneficial results in the market. Aetna recently announced the results of an analysis of four years of data from its consumer-driven health plan, called HealthFund.⁷ In addition to those in HealthFund, the 1.6 million Aetna enrollees also included employees in traditional Preferred Provider Organization (PPO) plans.

Aetna found that consumer-directed plans consistently result in lower medical costs, maintained or improved levels of chronic and preventive care, and increased use of generic medications and consumer tools and information.

Other findings:
For "full-replacement" plans - where all workers were required to switch to HealthFund - the three-year increase in medical costs was 3 percent. Financial results achieved by full replacement plans demonstrated a savings of $1 million per 1,000 members over a three-year period. By contrast, those in PPO plans saw their 3-year medical costs increase 27 percent.

HealthFund enrollees sought care for chronic conditions at a higher rate than PPO enrollees; they were also more apt to use preventative care and generic drugs.

The lower costs associated with HealthFund was not due to younger patients, or a disproportionate amount of males or families without children. Those enrolling in HealthFund were nearly the same age, on average (31.6 vs. 33.4). They were also closely balanced in terms of male/female ratio and family size. HealthFund enrollees were also more apt to use online tools to better manage their conditions.

The Wal-Mart deductible plan
The CDHP product is about to get a major test drive in the market. Wal-Mart, the Bentonville, Ark., retailer announced in late September 2006 that, as of January 1, its primary health-insurance offering for new hires will be a high-deductible plan with premiums as low as $11 per pay period in some areas. After employees are enrolled in Wal-Mart's coverage for a year, they can pair the high-deductible plan with a HSA plus a contribution of up to $2,400 from Wal-Mart, for medical expenses.

The new offering will quickly become the dominant coverage among Wal-Mart's 1.3 million U.S. employees. Employees hired before January 1 can retain older coverage plans, which offer lower deductibles for higher premiums.

Conclusion
America's health care system is undergoing innovative reform, because the current system is not financially sustainable. All the reforms will radically restructure the current high-tech, specialty-dominated and acuity-oriented health care system.

The Hawaii and Massachusetts programs try to recapture the growing number of uninsured in the group health risk pool. The group health model cannot survive without the young and mostly employed population in the risk pool.

The Canadian System⁸ has profoundly changed the delivery system. It has wide support but limits access to specialty care.⁹ It has not reduced the health care cost trend.

Finally, CDHP products convert the health benefit from a defined benefit to a defined contribution model similar to widely-deployed 401K retirement plans. If this model harnesses the power of the consumer, its effect on health care will likely be the most profound of the options discussed.

It is also quite possible that none of the three efforts will solve the problem of health care financing. We may come to recognize that we cannot reform health care through the fi-nancing system.

Should that prove to be the case, a real national debate must be joined to determine the kind of a health care system we want to pay for rather than continuing the non-productive debate on how to pay for the current system.

djgibson@winfirst.com

1. "Horse-and-Buggy Health Coverage;"Andy Stern; July 17, 2006; Page A10.
2. Source: THE UNINSURED: A PRIMER"; Kaiser Commission on Medicaid and the Uninsured, January 2006.
3. Source: Lee Et. al. (2004) University of Hawaii; Current Population Survey, 1994-2003, U.S. census bureau
4. Access to Care, Health Status, and Health Disparities in the United States and Canada: Lasser et al. Am J Public Health.2006; 96: 1300-1307.
5. Source: "Public Health Insurance in Canada Financially Unsustainable According to Annual Study," Fraser Institute, October 2, 2006; based upon: Brett J. Skinner and Mark Rovere, "Paying More, Getting Less 2006: Measuring the Sustainability of Public Health Insurance in Canada," Fraser Institute, September 2006. http://www.fraserinstitute.ca/shared/readmore.asp?sNav=nr&id=746
6. ibid.
7. Source: "Aetna Releases the Broadest Study to Date on Consumer-Directed Plans," Aetna, October 2, 2006; and "Making a Difference: Aetna HealthFund," Aetna, September 2006.
8. As would have the just vetoed California's Health Insurance Reliability Act (SB-840)
9. The supply of specialists in Canada is half that of the U.S. based on population. In addition, physician income is approximately half of the earnings of their U.S. counterparts.