Health Care Insecurity: Roadblock to Prosperity

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Health Care Insecurity Roadblock to Prosperity

• Choices for Vermont
• Rebuilding the Foundation of Prosperity
• October 2, 2008

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Health Care Insecurity Roadblock to Prosperity

• Current health care financing in Vermont
• Health care financing and the broader economy
• Opportunities for reform

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How Health Care is Financed

• Three ways to look at this
• Where the money comes from
• Intermediaries (where it visits along the way)
• Where it ultimately winds up

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Where the Money Comes From

• All money for health care originates in
  households
• It flows into the system through 3 main channels
• Taxes
• Premiums
• Out-of-Pocket (direct payments to providers)
• And one smaller one - philanthropy

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Where the Money Comes From Out-of-Pocket

• Out-of-Pocket (OOP) includes
• Cost sharing, like deductibles, coinsurance, and
  copayments
• Payments for services not covered by insurance
• ALL payments by the uninsured
• In Vermont, about 490 million of the 3.9
  billion in health care spending (12.5) is OOP
  (2006).

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Where the Money Comes From Premiums and Taxes

• Straghtforward
• Taxes pay for public programs like Medicare and
  Medicaid
• Premiums pay for private insurance like MVP and
  Blue Cross
• Not so straightforward
• What about public employees?
• What about Medicare and Medicaid premiums?

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Premiums and Taxes

• So whats the difference?
• Taxes are
• Mandatory
• Linked (usually) to ability to pay
• Premiums are
• Voluntary
• Sometimes (not always) linked to expected
  consumption of health care services

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Premiums and Taxes

• In 2006, Medicare, Medicaid, and other state and
  federal programs (mostly tax-financed) paid about
  1.8 billion (46) of Vermonts health care bill
• Private insurance and self-insured employers paid
  about 1.6 billion (41).
• Payments on behalf of public employees (included
  in private above) were about 360 million (9 of
  total spending).

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Intermediaries

• Private
• Employers
• Health Insurers
• Public
• Medicare
• Medicaid

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Where the Money Goes

• Providers
• Payers
• Administration
• Reserves
• Profits

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Funds Flows
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Health Care Financing and Vermonts Economy

• Issue Areas
• Health care costs are consuming a larger and
  larger share of resources
• Costs of health insurance for private sector
  entities are embedded in the costs of their goods
  and services, not explicitly financed
• These costs are extremely difficult for employers
  to control
• Employers and employees must trade off wage
  increases and benefits
• Retiree health costs are an increasing burden

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Health Care Financing and Vermonts Economy

• Health care costs are consuming a growing share
  of individuals, employers, and governments
  revenues
• This leaves less and less for other expenses
• For example, adjusted for inflation, the per
  capita income in Vermont rose by about 5,000
  between 1997 and 2006. About 2,000 of that was
  consumed by increasing health care costs.

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Health Care Financing and Vermonts Economy

• Between 1997 and 2006, total personal income in
  Vermont grew about 5.3 per year.
• During that period, health care spending grew at
  an average annual rate of 9.2.
• The share of personal income spent on health care
  grew from 13 to 18.
• At that rate, in another 10 years, well spend
  one-quarter of all personal income on health.

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Health Care Financing and Vermonts Economy

• The problem of averages
• Unlike many costs, such as food or heat (!),
  health care costs vary enormously in a
  population.
• The healthier half of a typical population
  accounts for less than 5 of all costs
• About 70 of all health care spending is
  accounted for by 10 of the population.

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Health Care Financing and Vermonts Economy

• Health care costs affect different families quite
  differently
• For those with employer-sponsored insurance,
  their contributions are rising between 10 and
  20 per year, benefits are being reduced, and
  wage increases are traded off for coverage.
• For those who purchase insurance directly, costs
  are rising and the only products remaining in the
  market are high-deductible (3,500 or more)

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Health Care Financing and Vermonts Economy

• Health care costs affect different families quite
  differently
• For those with no insurance, a single episode of
  illness can lead to financial ruin.
• The uninsured often go without preventive care,
  increasing their risks.

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State Government an Illustration

• In the first year, assume a state budget of 1
  billion, 10 of which is spent on health care
  programs.
• Assume state revenues grow at 4 per year and
  health care costs grow at 10 per year (both are
  historical averages). No new revenue sources.
• In 25 years, health care costs will consume ALL
  new revenue.

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State Government Spending Illustration
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Private Sector Costs

• Under the current system, health care costs are a
  cost of doing business for employers.
• This is true whether you believe that employers
  pay for health care or that employees pay the
  full cost
• These costs are included in the price that the
  employer charges for goods or services
• As health care costs rise rapidly in the US, this
  makes international competition more difficult

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Can Employers Control Health Care Costs?

• Perhaps in some ways, but their influence is
  small compared to cost trends
• If costs can not be controlled, either the
  employers product becomes more expensive or part
  of the increase is passed on to employees
• Increased contribution to premium
• Increased cost sharing / reduced benefits

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The Wage / Benefit Tradeoff

• Most economists look at health benefits as one
  part of total compensation.
• The cost to the employer is the same whether the
  employer pays the employee 5,000 in cash or
  5,000 in benefits, but the benefit is tax-free
  to the employee (and thus worth more)
• But cash is much easier to control
• Increases in health care costs will often create
  a trade-off, under which wage increases are
  smaller, or wages remain flat

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Retiree Benefits Direct Spending

• Demographics are changing the number of
  retirees relative to the number of active
  employees is increasing sharply
• Combined with increasing health care costs,
  retiree health spending is growing dramatically
• Recent automaker / UAW deals

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Retiree Benefits Other Effects

• Until recently, both private and public employers
  included only the current costs of retiree
  health benefits on their balance sheets
• The amount they pay in the current year
• Now, they have to show the liability for future
  costs on their balance sheets
• FAS 106 and GASB 45
• This has a major impact on their financial status

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Reform Options

• What is it that we want to reform?
• Financial
• Control rate of growth
• Equity of contribution
• Access
• Universal
• Coverage
• Care
• Quality of Care

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Reform Options

• The cost of insurance and the cost of care
• Historically, insurance costs have gone up faster
  than underlying health care costs
• Several factors contribute to this, including
• Cost shifting
• Adverse selection
• Benefit structures
• In addition to the basic affordability issue,
  this leads more people (usually healthier) to
  drop their coverage, increasing insurance costs
  even faster.

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How Far Can a State Go?

• Limits to a states ability to reform its health
  care system
• Federal law
• ERISA
• Medicare
• Medicaid
• Border crossing
• Status quo

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Political Complexities

• Are you willing to change how your care is
  financed and delivered in order to support health
  care reform?
• Polarization and over-simplification
• Markets vs. Socialized medicine

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Reform in Vermont

• Long history of reform
• Several efforts to achieve or move toward
  universal access and cost containment
• Governor Aiken inaugural address, January, 1939
• Daniels Commission, 1975
• VHIP
• Governors Blue Ribbon Commission, 1991
• Act 160

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The Current Reform Environment

• Several Major Parts
• Catamount Health
• State-subsidized private health insurance for
  certain eligibles
• Blueprint
• Reform of the delivery system
• Reduction in the incidence of chronic illness

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Is Catamount Health Working?

• Over 5,000 people have signed up for Catamount
  Health. This is about one-third of the people
  eligible for it.
• Enrollment has also increased in other Medicaid
  programs, especially VHAP

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Catamount Health - Issues

• Currently, subsidized premiums for Catamount
  Health range from 60 per month (below 175 of
  poverty, about 18,000 per year for an
  individual) to 185 per month (up to 300 of
  poverty, 31,200 per year)
• The unsubsidized product costs 393 per month
• Is this affordable?

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Other States

• So far, Maine, Massachusetts, and Vermont are the
  leaders.
• Many other states are attempting various reforms
• For details, check out
• http//www.kff.org/uninsured/kcmu_statehealthrefo
  rm.cfm

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Massachusetts

• The most far-reaching state-based reform to date
• Key element an individual mandate, combined with
  income-based subsidies.
• With an out if insurance is not affordable
• Based on surveys, it seems to be working. Almost
  95 of people in Massachusetts are covered, the
  highest percentage in the country

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But

• Massachusetts has had minimal impact so far on
  costs
• Unless costs are brought under control, the
  program will quickly become unaffordable

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National Health Care Reform?

• While the legal barriers are far less daunting at
  the national level, the political barriers are
  much higher
• Consider what it took in 1965 to enact Medicare
  and Medicaid
• Consider what happened to Clinton health care
  reform

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Current Presidential Proposals

• Obama much like Massachusetts, but the mandate
  applies only to children
• McCain while a more conservative proposal (no
  mandates, reliance on existing market), it is
  much more radical in one way sharp reduction in
  the importance of employer-sponsored health
  insurance most people will shift to subsidized
  coverage in individual market

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Conclusions

• Health care reform is essential, and seems to be
  impossible
• Concerns about health care have a 100 year
  history. How long can we muddle through?
• There is a lack of agreement on what reform
  means, but we seem to be more able to come to
  agreement on areas other than financing

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Questions?

• Steve Kappel
• Policy Integrity
• www.policyintegrity.com