Financing of health care

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Financing of health care Where is it going?

• John P. Garven, CLU, RHU
• President, Benico, Ltd.
• President, Illinois State Association of Health
  Underwriters
• Policy Advisor, The Heartland Institute
• (847-669-4800, ext. 202 john.garven_at_benico.com)
• August 19, 2008 Northern Illinois Association
  of Health Underwriters

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Agenda

• How did we get here?
• Key concepts
• Key facts
• International comparisons
• The case for competition and consumerism
• Current debate around health policy at the
  national level
• Steps toward achieving improved cost, quality,
  and access
• Key questions to ask

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How did we get here?

• The first modern group health insurance plan was
  formed in 1929.
• Blue Cross and Blue Shield entities begin
  offering group health plans in 1932.
• Several large life insurance companies entered
  the health insurance field in the 30s and
  40s.

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How did we get here?

• WWII wage freezes imposed by the federal
  government.
• Employee benefit plans proliferated in the 40s
  and 50s. Strong unions bargained for better
  benefit packages, including tax-free,
  employer-sponsored health insurance.

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How did we get here?

• Social Security was expanded in 1954 to provide
  disability benefits.
• Medicare and Medicaid were implemented January 1,
  1966 during the Johnson administration.
• ERISA, passed in 1974 as a pension reform bill,
  reinforced the employers role in providing
  health benefits.

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How did we get here?

• 1970s Private health insurance moves toward
  comprehensive major medical insurance.
• The Federal HMO Act was legislated by Congress in
  1973.
• PPOs, HMOs, and POS plans emerge during the 80s
  and 90s as the prevalent form of private health
  insurance.

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How did we get here?

• By 2001 93 of private insurance was of the
  managed care variety.
• Over the last 7 years, the clear trend has been
  away from HMOs and toward CDHPs (consumer-driven
  health plans).

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Key Concepts

• Health care is NOT the same as health
  insurance. Health insurance is nothing more
  than a means of financing and managing the
  financial risk of health care services.
• We no longer have health insurance. What we
  actually have is a form of prepaid health care,
  thanks to 25 years of managed care. And over the
  years legislators have helped by piling on
  benefit mandates to satisfy constituent
  complaints and special interest requests, driving
  up health insurance costs for everyone along the
  way.

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Key Concepts

• Health insurance is expensive because health care
  is expensive.
• Any legislative proposal that aims to reform
  health care is NOT legitimate if it does not
  address health cares underlying cost drivers and
  embrace personal responsibility.
• There is no problem with access to health
  insurance. The issue is AFFORDABILITY, both in
  terms of the premiums for coverage AND the less
  than uniform tax treatment of such coverage.

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Key Facts Current insured and uninsured
statistics

• In 1940 the total US population was 127 million.
  About 12 million Americans (9.4) were covered by
  some form of private health insurance.
• At the end of 2006 249.8 million (84.2) were
  insured, and 47.0 million uninsured (15.8).

10
Source Census Bureau publication - Income,
Poverty, and Health Insurance Coverage in the
United States 2006 - http//www.census.gov/prod/2
007pubs/p60-233.pdf
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Key Facts Where do Americans Illinoisans get
their health insurance?

• Sources of health insurance coverage

Source U.S. Illinois
Employer 54 59
Individual 5 4
Medicaid 13 11
Medicare 12 12
Other Public 1 0
Uninsured 16 14
11
Source Kaiser Family Foundation, Health
Insurance Coverage of the Total Population,
states (2005-2006), U.S. (2006)
12
Key Facts Who are the uninsured, and how many
are there?

• Being uninsured for most is a temporary
  situation. About 75 are without coverage lt 1
  yr.
• 1/3 are eligible for public programs but not
  enrolled.
• 20 earn 50,000 or more, and more than ½ of this
  group actually earn 75,000 or more.
• More than 22 of the 47 million are younger than
  35, and many can afford insurance but simply
  choose to go without.
• Chronically uninsured estimate 5-6,
  principally citizens in the 18-40 age group with
  incomes below 300 of FPL.

12
Source U.S. Census Bureau, Income, Poverty and
Health Insurance Coverage in the United States
2006 The Uninsured in America, Blue Cross, Blue
Shield Foundation, 2005.
13
Key Facts Current tax policy

• The biggest tax break that citizens get is the
  federal income tax exclusion for employment-based
  health insurance.
• The economic value of this tax exclusion is about
  160 billion. Contrast this with the value of
  the deduction of mortgage interest in the current
  FY budget, which is only 89 billion.

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Key Facts Health care spending in the U.S.

• Total spending, public and private, was 2.1
  trillion in 2006, or 7,026 per person, 16 of
  the gross domestic product (GDP).
• U.S. health care spending is expected to
  increase, on average, by 6.7 per year, reaching
  4 trillion by 2016, or 20 of GDP.
• This compares to double-digit increases in the
  1980s a 7.3 average from 1990 to 1995 5.7
  from 1995 to 2000 (during the peak years of
  managed care) and 8.2 from 2000 to 2004.

Source The Boomers Are Coming, But Dont Panic
Yet - http//healthaffairs.org/blog/2008/02/28/the
-boomers-are-coming-but-dont-panic-yet/
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Key Facts Health care spending in the U.S.

• The government is the single greatest
  contributor to this problem by the nature of the
  tax code and the structure of health care
  entitlement spending and these can be corrected
  with fundamental changes in public policy to
  restore the markets vitality.

Source U. S. Rep. Paul Ryan, R-WI, HEALTH
SPENDING The Problem Is Government, Not The
Market, February 26, 2008 issue of Health Affairs
16
Key Facts Administrative costs

• According to CMS estimates, the administrative
  costs, taxes, profits, and other non-benefit
  expenses of private health plans have averaged
  12.4 of premiums over the last 40 years. This
  includes all types of health insurance purchased
  privately, ranging from employer-based coverage
  to individually purchased plans, Medigap and
  long-term care insurance, but do not include
  private health plans operating in Medicare or
  Medicaid.

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Source CMS Office of the Actuary, January 2005
17
Key Facts Cost drivers

• Preventable medical errors - Americans receive
  recommended care only 55 of the time, and
  between 44,00098,000 people die in hospitals
  each year because of medical errors.
• Litigious environment - Doctors order more tests,
  medications, and referrals than are medically
  necessary principally to protect against
  accusations of negligence.
• Medical liability costs and defensive medicine,
  combined, account for about 10 of our nations
  health care spending.

17
Sources National Institute of Medicine
American Institute for Preventive Medicine
Towers Perrin. U.S. Tort Costs 2005 Update.
March 2006
18
Key Facts Cost drivers

• Cost-shifting - A hidden tax imposed when
  health care providers increase the prices they
  charge to private payers to offset losses from
  uncompensated and charity care and declining
  reimbursements from Medicare and Medicaid.

18
Source PricewaterhouseCoopers for Americas
Health Insurance Plans. The Factors Fueling
Rising Healthcare Costs 2006. February 2006.
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Key Facts Cost drivers

• Increased utilization In 2006 alone higher
  utilization of services accounted for 43 of the
  year-over-year increases in the costs of health
  care, fueled by increased consumer demand, new
  and more intensive medical treatments and
  defensive medicine, and aging and unhealthy
  lifestyles.
• Unhealthy lifestyles
• Smoking, obesity, and inactivity are the top
  causes.

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Source PricewaterhouseCoopers for Americas
Health Insurance Plans. The Factors Fueling
Rising Healthcare Costs 2006. February 2006.
20
Key Facts Important U.S. stats

• In the U.S. we spend much more in saving
  prematurely born infants and extending the life
  of our elderly than do other countries. (Wesbury
  1990, Wennberg 2006)
• Pregnancy, birth, and abortion rates among girls
  aged 15 to 19 are higher in the U.S. than in
  other developed countries. (Singh and Darroch
  2000)
• Obesity rate for U.S. adult population is nearly
  double that of Canada and substantially higher
  than the EU. (Anderson and Hussey 2000).

Source Ten Principles of Health Care Policy,
2007, Heartland Institute
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Key Facts Behavior Lifestyle U.S. Weight Gain
1986-2006
No Country Can Fund All the Consequences Hyperten
sion Type 2 Diabetes Osteoarthritis Stroke
Coronary Heart Gallbladder Sleep
Apnea Respiratory Issues Some Cancers
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Obesity Trends Among U.S. Adults (BMIgt30)
No data lt10 1014
1519 2024 2529
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Source Centers for Disease Control Prevention,
2006 Behavioral Risk Factors Surveillance System
22
International comparisons

• Canadians live 2 ½ years longer than Americans
  and Europeans live a little more than a year
  longer than we do. Reasons for this (other than
  a lack of access to health insurance) include
• Americans are 3 times more likely than Canadians
  to die in auto accidents, and 10 times more
  likely to die (than our neighbors to the north)
  as a victim of a violent crime.
• Elaborating on a point made in the previous
  slide, Americans eat more and move less than
  people in other countries. More than 60 of
  Americans are overweight, and almost 40 are
  obese.

Source Obesity World Health Organization, 2006.
NOTE Obesity is commonly defined as a Body Mass
Index (BMI) of greater than or equal to 30.
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International comparisons

• The U.S. spends more on its healthcare than other
  countries, although all countries are
  experiencing high rates of spending growth.
• America's health care spending drives much of the
  world's medical innovations.
• Health outcomes improve with income even under
  single-payer systems.  Informed estimates suggest
  this gradient is no steeper in the U.S. than it
  is in Canada.

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International comparisons - WHO

• World Health Organization (WHO)
• WHOs rankings puts the U.S. at 37th out of 191
  countries.
• Countries with socialized health care tend to be
  ranked higher simply because citizens are treated
  equally even when the quality of care is
  extremely poor. Meanwhile, countries in which
  citizens have unequal access to medical care tend
  to be ranked lower, even when the overall quality
  of care is superior.
• By the WHO's logic, treating people equally
  matters more than treating people well. So
  theoretically, a country with a negligent health
  care system could improve its rankings just by
  neglecting everybody more equally.

24
Source How Good Is Our Health Care System?,
published on June 30, 2008 at www.galen.org.
25
International comparisons - WHO

• Great Britain and Canada rate much better than
  us, yet
• 1 million British citizens currently in need of
  care are waiting for hospital admission, and
  100,000 operations are canceled each year because
  of shortages of operating rooms, equipment or
  personnel.
• Canada has more than 800,000 citizens awaiting
  medical procedures. Many of these patients will
  die before they get the treatments they need.
  Those who can come to the United States for
  medical care.
• A very crucial reading of a health care system
  should be how well you do when you get sick. Yet
  WHO chooses not to include this data in its
  survey.

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Source How Good Is Our Health Care System?,
published on June 30, 2008 at www.galen.org.
26
International comparisons

• Recently public opinion surveys were conducted in
  26 single-payer countries. In 25, majorities of
  respondents identified health system reform in
  their countries as an urgent priority.
• In Great Britain, in a November 2006 survey over
  half the respondents rated the NHS worse than in
  1996.
• Isnt it comforting to know that we are not the
  only ones in the Western developed world who have
  problems with their healthcare systems?

26
Sources The Stockholm Network, Impatient for
Change (2004) and Poles Apart (2005) Nov.
2006 article www.inthenews.co.uk
27
International comparisons - Canada

• A lawsuit reached the Supreme Court of Canada in
  June, 2005. A Quebec businessman who waited 12
  months for a hip surgery wanted to pay out of his
  own pocket to get it done in Canada but was not
  permitted.
• Another lawsuit was filed in September of 2006 by
  a Calgary man who paid for a state-of-the-art hip
  replacement in the U.S. after being told he was
  too old to qualify for it under Albertas
  provincial health plan.

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International comparisons Japan

• Everyone between the ages of 40 and 74 56
• million people are now required to have their
• waistlines measured regularly.
• The maximum waistline for men is 33.5 inches.
• Thats the maximum. For women its 35.4 inches.
• Those whose waistlines are larger will have three
  
• months to shape up, or undergo whats being
• called reeducation.
• Those who persist in ignoring the will of the
• government will face fines and other penalties.

Source Institute for Policy Innovation,
www.ipi.org, July, 2008
29
The case for competition and consumerism

• We believe making consumers aware of the actual
  cost of health services will improve the
  relationship between the consumer (i.e., patient)
  and the physician.
• Once consumers control payment for most services,
  they will become more inclined to shop for
  services and inquire about the cost and quality
  of that care.

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The case for competition and consumerism

• Market forces work in healthcare just as they do
  in
• other markets. To wit
• Price controls lead to shortages. Medicaid
  programs set fees for doctor visits below market
  prices. As a result, there is a severe shortage
  of doctors willing to treat Medicaid patients.
• Competition reduces prices. While health care
  costs overall have risen dramatically in recent
  years, prices for items not covered by insurance
  such as Lasik, cosmetic surgical procedures, and
  meds that have gone over the counter (e.g.,
  Claritin), have fallen.

Source Ten Principles of Health Care Policy,
2007, Heartland Institute
31
The case for competition and consumerism

• Consumer Driven Health Plans (CDHPs) got a jump
  start in June of 2002 when the Internal Revenue
  Service confirmed the favorable tax treatment of
  employer-provided coverage and medical care
  expense reimbursements under health reimbursement
  arrangements (HRAs).
• Health Savings Accounts (HSAs) were created
  shortly thereafter following the passage of the
  Medicare Modernization Act in December of 2003.

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The case for competition and consumerism
market trends

• Year-over year HRA / HSA enrollment
• Jan '06 Jan '07 Jan '08
• HRAs 2.9 M 4.3 M 5.0 M
• HSAs 3.2 M 4.5 M 6.1 M
• TOTALS 6.1 M 8.8 M 11.1 M
• Comment HRA growth is slowing, but HSA growth
  is accelerating.

Sources Consumer Driven Market Report and AHIP
Researchs 4th annual survey of enrollment in
HSA-qualified health plans, published 4/30/ 2008.
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The case for competition and consumerism HSA
market trends

• HSA distribution 30 of HSAs are in the small
  group market, 45 in the large group market, and
  the remaining 25 in the individual market.
• Small businesses are strongly embracing HSAs
  HSA enrollment in the small group market
  increased 70 over the past year.  Over 1.8
  million Americans working for small businesses
  now have coverage through HSAs.
• HSAs continue to make health insurance more
  affordable for the uninsured -- HSA products
  accounted for 31 of new coverage issued in the
  small-group market and 27 of their new purchases
  of health insurance in the individual market.

Source AHIP Researchs 4th annual survey of
enrollment in HSA-qualified health plans,
published 4/30/ 2008.
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The case for competition and consumerism
market trends

• In 2006 the Treasury Department projected more
  than 21 million covered by HSAs by the end of
  2010 if the HSA rules were revised, which
  occurred in December of that year.
• HSA enrollment growth should reach 10 million
  covered lives by the end of 2008.
• The average HSA established now will have a
  22,000 balance ten years from now. Unspent
  balances in HSAs will help employees better plan
  for and afford health care in retirement.

Sources Americas Health Insurance Plans,
April, 2007 Fact Sheet Dramatic Growth of
HSAs - http//www.treas.gov/offices/public-affair
s/hsa/
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The case for competition and consumerism -
Takeaways

• Tax-favored account-based plans should swing the
  pendulum away from third party payment and
  pre-paid healthcare and move us back toward more
  of a direct payment model, which the baby boomers
  grew up with when the family doctor used to make
  house calls and Dad handed the doctor a check or
  paid him with cash.
• Once account-based plans achieve critical mass
  (2011-2012), their prevalence should help curb
  overutilization, a significant healthcare cost
  driver. 

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Recent assaults on the private market 3rd-party
substantiation of HSA spending

• Currently HSA distributions are
  self-substantiated. 3rd party substantiation of
  expenses would be a costly and time-consuming
  process.  
• Most HSA payments are made with a specially
  designated debit card, so its easy to track
  where the money goes. 
• GAO study gt90 of HSA withdrawals went toward
  qualified medical expenses.

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Recent assaults on the private market Medicare
Advantage
Medicare Improvement for Patients and Providers
Act of 2008 On Wednesday, July 9th, the Senate
passed Medicare payment legislation, H.R. 6331,
by a veto-proof margin of 69-30 following a House
tally, also veto-proof, of 355-59 last month.
And then on Tuesday, July 15th, following
President Bushs veto of the bill the day prior,
the House voted 383 to 41 to override it, and the
Senate voted 70 to 26.
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Recent assaults on the private market Medicare
Advantage

• The Act is an 18-month fix to the
  provider-funding issue, and is being financed by
  12 billion in cuts to the private Medicare
  Advantage program. 
• More than 20 of Medicare beneficiaries choose
  the Medicare Advantage option.
• Also, the Act includes new and potentially
  problematic marketing and sales restrictions on
  insurance producers selling private Medicare
  products, despite the fact that CMS has an
  ongoing proposed rule for policy changes in this
  area.

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What the candidates are saying Senator Barack
Obama

• Sen. Barack Obama recently announced a plan
  designed to help businesses afford health
  insurance, but the ideas would perpetuate today's
  problems and add new bureaucracy in the process.
• Small businesses would get refundable tax credits
  to offset 50 of the amount they pay for health
  insurance for their workers and have the
  government take over a portion of the
  catastrophic costs of high-cost employees. 

For a reliable critique of the Obama plan, be
sure to read High Stakes, published on July 18,
2008 by the Galen Institute (www.galen.org)
40
What the candidates are saying Senator John McCain

• Health insurance for most nonelderly Americans is
  purchased with funds from three sources (1) an
  employer contribution, (2) an employee
  contribution and (3) a government tax subsidy. 
• The McCain health plan is based on the idea that
  the first two contributions should be determined
  by individual choice and competition in the
  marketplace.  The government's contribution,
  however, would be the same for everyone 2,500
  for every adult and 5,000 for every family.  

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For a reliable critique of the McCain plan, be
sure to read Dr. John Goodmans blog post
entitled John McCains Health Tax Credit,
published on July 14, 2008 by the National Center
for Policy Analysis (http//www.john-goodman-blog.
com/john-mccains-health-tax-credit/)
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Side-by-side comparison of the candidates
proposals

• www.health08.org/sidebyside.cfm
• Prepared by the Kaiser Family Foundation and
  Health Policy Alternatives, Inc. based on
  information on the candidates' websites as
  supplemented by information from candidate
  speeches, the campaign debates, and news reports.
  The sources of information are identified for
  each candidate's summary (with links to the
  Internet). The comparison highlights information
  on the candidates' positions related to access to
  health care coverage, cost containment, improving
  the quality of care and financing. Information
  will be updated regularly as the campaign
  unfolds.

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NPR event September 16, 2008 Debate Venue
Rockefeller Universitys Caspary Auditorium
Universal health coverage should be the federal
government's responsibility http//www.intelligen
cesquaredus.org/Event.aspx?Event30


Art Kellermann Art Kellermann   Paul Krugman Paul Krugman   Michael Rachlis Michael Rachlis
Michael Cannon   Sally Pipes   John Stossel
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Steps toward achieving improved cost, quality,
and access

• Do not mandate guaranteed issue and modified
  community rating. The commercial health
  insurance market in Illinois is not as bad as
  many (from a regulatory perspective) but
  certainly can (and should) be improved through
  market-based reforms.
• Health IT is long overdue, although a small
  measure of it is included with the new Medicare
  legislation.

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Steps toward achieving improved cost, quality,
and access

• Tax equity Individuals who dont have job-based
  coverage should at least receive the same tax
  break on their health insurance premiums that the
  self-employed and citizens with job-based
  coverage receive.
• Federal health insurance tax credits A major
  demographic of the uninsured are those who make
  too much to qualify for government health
  programs but cannot afford health insurance even
  when subsidized by their employers. Targeted tax
  credits could help.

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For more information on health ins. tax credits
visit http//www.nahu.org/legislative/uninsured/cr
edits.cfm
45
Steps toward achieving improved cost, quality,
and access

• Expand consumerism by increasing health care
  quality and cost transparency. The private
  market will figure this out long before its
  legislated.
• Encourage employer-sponsored wellness programs,
  and incorporate wellness and disease management
  programs into all public and private health
  plans.
• Implement meaningful medical malpractice reform.

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Key questions to ask

• What are the appropriate roles for governments,
  individuals, and businesses?
• Do the policy proposals address the underlying
  causes of unnecessary health care spending, or
  just try to impose caps and mandates?
• Do the reforms empower consumers to make better
  choices, or leave them with less control over
  their health care and fewer choices?

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Key questions to ask

• What role should personal responsibility play?
  What happens if we discourage it?
• What will things look like not next year or 5
  years from now, but rather 10, 20, and 30 years
  from now?
• What can I do as a thought leader to effect
  change for the good?

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• Thank You

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