High Stakes Health Reform – Employers: In or Out?

poker

It’s high noon for private healthcare. Over the last decade, large, medium and small employers that procure and manage over $1T of private healthcare spend for an estimated 180M Americans have been engaged in an expensive game of Texas Hold ‘Em – – wagering with and against a continuum of stakeholders that all seem to possess more powerful hands. As providers consolidate, insurers retrench and the government wrestles with obligations of an uncontrolled fee for service Medicare, the costs of staying at the final table are taking its toll.

To many veteran observers, it appears that employers may be on the brink of folding their cards. As finance and HR professionals consider the table stakes and costs to remain in the game, the Affordable Care Act (ACA) has suddenly provided a potential golden opportunity to step away from a fifty year obligation without incurring onerous near term financial consequences.

As individuals and small business have continued to lapse into the ranks of the uninsured, those small and mid-sized businesses choosing to continue to offer health insurance are coming to the realization that the Affordable Care Act will not result in the moderating of double digit medical trends. In the near term, some contend costs will continue to rise by much as 25-40% before the launch of 2014’s guarantee issue health exchanges.

Larger employers are already cynical to whether reform will actually work for them or against them. Bigger firms and collectively bargained plans are beginning to understand that if small and mid-sized employers drop out of offering private healthcare, the decline of employer plans will leave them as the sole remaining source for private insurance cost shifting. As the cards are turned, the outcomes are far from certain – – and as we have come to discover, business hates uncertainty.

A skilled poker player can recognize the ”tells” of players attempting to buy time or bluff in hopes of seeing another turn of the ACA river card. One can almost hear the private sector thinking: “Do I drop my insurance and pay a penalty that is considerably less than my current financial obligations to provide care?” “Do I keep providing coverage and hope that public policy changes drive improved quality and price controls that will get my costs under control?” “What if the GOP wins in 2012?” “What if Obama gets reelected?” Do I really think the $ 2000 penalty for failure to cover my employees will stay at $2,000 if costs skyrocket?” ”Do I wait and see what others at the table do not wanting to be the first to fold?” “How in the hell did I get into this game in the first place?”

It’s even odds at best when predicting how employers are likely to respond to ACA. What was once considered unthinkable – severing the social contract of providing healthcare to one’s employees – is now not only under serious consideration, but is enabled by a series of intended and unintended consequences resulting from the passage of health reform. Consider some of the emerging fact patterns:

 1) The Social Contract of Healthcare Has Changed under ACA– The Affordable Care Act has mandated that insurance offered through exchanges is “guarantee issue” – eliminating the potential for anyone with a pre-existing condition to be denied coverage or be “rated up” for health status. Historically, employers have worked hard to honor the implied social contract that employer sponsored benefits forged with their employees – – a contract that ensured that an individual would be offered guarantee issue coverage as part of a group purchasing arrangement.

The value of guarantee issue employee coverage coupled with the favorable tax treatment of sponsored benefits has maintained a private sector incentive to use healthcare as a tool to attract and retain employees. Employers are stepping back from this assumption as they consider costs, possible changes in tax treatment and the safety net of exchanges. Some may no longer feel the intrinsic value of offering coverage is worth the potential risk of continuing to provide it – particularly if escalating premiums and public to private cost shifting threaten to further erode earnings.

2) The Culture of American Business Has Changed – It seems less and less relevant whether a business is public or private. The nature of the US workforce and the firms that employ them have changed since the grey flannel days of the career employee. Public firms live quarter to quarter and an increasing number of private firms are either owned or operated by those seeking greater returns on private equity. Businesses are struggling to balance a desire to create long-term value and the very real pressures of an uncertain domestic and global economy.

The notion of investing in employee health improvement plans that may not fully yield returns for two to three years is an unattractive proposition for financial professionals dealing with the need for more immediate financial synergies. The burden of healthcare is weighing on employers and they are doing the math. If penalties for dropping coverage create an opportunity to arbitrage the cost of healthcare, firms could see a net windfall of as much $ 2,000 – $5,000 per employee. This savings expressed as additional earnings per share or as a multiple of earnings is too attractive to not consider as employers push for cost savings and higher EBITDA. As the average American now works for eight different employers over the course of one’s professional life, traditional incentives to create longer term employment such as defined benefit pension, plans, retiree medical and rich employee benefit plans are disappearing – – unless explicitly negotiated as part of a collective bargaining agreement. Employers are asking the difficult question– “would employees rather have a job or healthcare?”

3) Small and Mid-Sized Employers Don’t Manage Healthcare As A Business Risk – Employers have spent too much time looking at healthcare as an expense and not as a business risk. Any effective risk management process first focuses on identifying all the factors driving losses. As data reveals unique risk patterns, the risk manager seeks ways to eliminate or mitigate risk, models scenarios for retaining risk and assesses the most cost-effective way to finance their risk. Ultimately, risk transfer in the form of insurance is the last step an employer employs. The more risk an employer retains, the more they seem to understand the correlation between loss control and loss ratios.

Too often, health insurance is managed as an annual marketing (risk transfer) exercise with little time dedicated to the initial steps designed to diagnose and reduce underlying cost drivers. Since 80% of all group healthcare expenses arise from medical claims and at least 60% of these claims are related to modifiable health risks, one would think employers would see the value in employing more resources to impact and understand these major costs. It seems many firms lack the will, resources or energy to intervene in employee and dependent health and lifestyle. The consequences of this failure to intervene are self-evident in the escalating rates of obesity, lack of compliance with basic preventive health programs and a rising rate of chronic illness among the working employed.

4) Human Resource Generalists Often Lack The Resources and C Suite Support To Tackle Tough Change – HR is being asked to more than ever – with fewer resources. Ratios of HR professionals to staff have steadily declined in the last decade while the costs of managing human capital have soared. The historical inclusion of employee benefits and healthcare as part of their universe of HR responsibilities reveals the best and worst in firms. For many public and private employers, healthcare and employee benefits are secondary skill sets to HR generalists who are focused on a range of business and human capital issues.

In these difficult economic times, HR is often focused on limiting disruption to employees – – ensuring broad open access networks, limited medical management oversight and minimal hassle. The system that has resulted is one whose incentives are perversely built around treating chronic illness and not preventing it. HR teams are understaffed and often unable to build the infrastructure required to assess, mitigate and manage employee population health risks. The added burden of regulations such as HIPAA and ADA have spooked employers from wanting to be too prescriptive with employees over lifestyles and chronic conditions that may be borne out of a personal failure to manage health. The C Suite has expressed anger at increases but has generally been unengaged – electing to intervene in the eleventh hour of renewals instead of actively managing and supporting the internal efforts required to rein in their second largest cost beyond payroll. Firms that have shown HR and the C Suite engagement are posting as much as 10% lower annual medical trends according to a recent National Business Group on Health survey.

5) The GOP has not offered a coherent alternative to ACA where employer sponsored benefits would serve as a linchpin to market reforms – It seems clear to most industry insiders that if ACA is left to its current design – replete with its incentives to drop coverage, increase essential benefits, and avoid focus on personal health improvement – it will begin to unravel employer based healthcare. Providers have long since contended that private healthcare has subsidized public care as government cost shifts in an effort to reduce its growing burdens of Medicaid and Medicare.

Without private insurance as a counter balance and reimbursement incubator for more aggressive market based solutions, the current trajectory seems to be pointing us towards a single payer system. As larger numbers of consumers are pushed to purchase through exchanges dominated by a limited number of private commercial insurers, escalating costs and lack of choice may cause consumers to call for a more affordable “public” option beyond private insurance. Some feel the architects of ACA specifically designed the legislation to set these wheels in motion. The GOP has not seemingly connected the dots to articulate to the American people why the private sector should serve as the catalyst for market reforms. Many feel a single payer system within the US is necessary and inevitable given our infinite demands and finite resources. Others argue, the private sector has never really legislatively enabled to fulfill its role as a market force.

A political opportunity exists for an employer advocate to emerge in Washington – offering a blueprint that anchors employer sponsored plans, unleashes true market forces capable of forcing rationalization of oversupply, reducing variability in outcomes, restoring the role of the primary care provider, improving quality and enabling universal transparency.

6) ACA May Incent Employers to Dump Coverage – ACA offers employers a lower healthcare exit cost by pegging incentives to drop coverage well below the true actuarial cost of healthcare. A large percentage of industries will have workers eligible for generous federal subsidies (400% of the FPL). Many will quickly see the logic of dumping coverage and in doing so, immediate improve struggling margins.

Other employers will be hesitant to play first mover but will gratefully follow a competitor who may choose to dump coverage. CBO estimates for coverage dumping are extremely low in the first years of exchanges. The cost estimates of ACA also fail to identify the rising costs of federal subsidies if more workers buy through exchanges. The only real impediment to dumping healthcare is business’ distrust that the current penalty for dropping coverage will remain at $ 2,000. Many believe that future CBO estimates and GAO studies will reveal the need to adjust employer penalties to track with rising medical inflation. Today’s $ 2,000 penalty could morph into tomorrow’s $6,000 cost per exchange covered insured. Burdened by this knowledge, employers are justifiably cynical toward a government that remains $ 38T underfunded in its existing Medicare obligations.

7) Few Employers Seem Willing To Play The Role of Market Force – ACA passed with significantly less resistance from business than the united private sector front thrown against Hillary Care in 1994. In the 16 years since Clinton health reform was defeated, retiree and existing employee medical obligations have swelled along with the average costs of collectively bargained public plans. There is an increasingly emotionless calculus being discussed in private and public board rooms of America.

Do we want to be burdened with trying to save private healthcare? Who should fix it – employers or taxpayers? The omission of business leadership actively arguing in defense of its role to assume the role of market force for change suggests that employers are quietly preparing to get out from underneath their obligations if an opportunity presents itself.

8) Employers Don’t Believe Government Can Fix Fee For Service Medicare – Employers understand healthcare is a zero sum game. As government rations reimbursement to doctors – underpaying for services in Medicare and Medicaid, the private sector is overcharged to compensate for the payment inequities. Most employers are skeptical of the government’s ability to reign in fee for service Medicare obligations leaving one logical path – – Medicare hospital and provider fee cuts getting shifted to the private sector. This only escalates the rising healthcare cost burden – forcing employers to artificially shoulder CMS’s inability to medically manage fee for service Medicare utilization.

Most economists agree that unless we fix a fee for service Medicare, the current entitlements will sink our economy. Employers do not sense that government has the will nor the acumen to tackle their own third rail of entitlements and in doing so, many employers prefer tax payers shoulder the burden of the fix, not shareholders.

9) Smaller and Mid-Sized Employers Are Trapped in One-Size-Fits-All Pools – Individuals and small business have been the initial focus of reform. Historically, most individual and small insurance programs have been fully insured and pooled with groups of a similar size to create an adequate spread of risk to actuarially predict future costs and to minimize premium volatility due to catastrophic losses.

Most small employers have been stuck in a cycle of double-digit increases as costs of care rise and insurers aggressively manage loss ratios across their entire insured pools to protect profits. A small employer often has no access to their own claims information and as such, sees little value in adopting more disruptive plan designs that might improve their own workforce health status. In the final analysis, an engaged smaller employer ends up being blended with less engaged employers and has little ability to impact their own premium increases. As a result, small employers have become conditioned as commodity buyers of insurance and regard efforts to control losses through workforce engagement as a waste of time. Over the last ten years, insurers have benefited by laws that have precluded smaller employers aggregating purchasing power outside of these carrier pools.

Regulations that restrict the formation of multiple employer welfare associations (MEWAs) have limited smaller employers’ ability to establish “ safety groups” of like-minded employers willing to engage in more aggressive designs focused on reducing trend. The myth that self insurance is inappropriate for smaller employers and the nature of commercial insurance –which often steers employers back to insured arrangements, gives small employers few options. The passage of ACA will create similar insured pools in exchanges essentially replicating existing carrier pooling methodologies that have proven ineffective in controlling medical inflation. With the introduction of minimum loss ratio requirements and tighter community rated pricing, profits will be smaller but costs will continue to rise.

10) Unions Plans Have Not Shown A Willingness to Entertain Designs That Could Protect Their Own Long Term Financial Viability – Collectively bargained plans are some of the richest benefit designs in the US. Unfortunately, the most well insured people are often our most over treated, not our healthiest. One might even argue that the absence of incentives to become better consumers conspires to keep collectively bargained plans the most expensive and inflationary programs in the market.

Couple this with a captive, aging workforce that is descending into chronic illness and one can see how employers and local governments could be very tempted to shift this population risk to a public option pool where risks can be more adequately spread across other employers and/or taxpayers. Many municipal and collectively bargained plans are likely to exceed the federal maximum allowable cost thresholds triggering a “Cadillac” tax in 2018 – incurring an excise tax of 40% for plan costs that exceed $10,200 per individual and $ 22,500 per family. The current trajectory of most bargained plans has them eclipsing these exorbitant tax triggers well before 2018. Unions have historically been reticent to adopt more innovative designs that spur their members to change the way they access the healthcare system. These solutions include participating in premium networks that reimburse medical providers based on value – – directing at risk and chronically ill patients to proven centers of excellence, reestablishing primary care gate keepers and creating incentives for employee health engagement that shifts costs to those who are not compliant with choose health compliance guidelines.

In the next two years, the stakes will only climb in the cat and mouse game of healthcare. Those who advocate private sector market reforms are hoping the symptoms of rising employer resignation are temporary and motivated by a changing political and economic climate. Most believe business can play a vital role in reshaping healthcare delivery by demanding transparency, outcomes based reimbursement, personal responsibility, employee engagement and public policy changes that force market reform and better competition.

Changes should include – – all payer legislation to increase the field of competing payers, disclosure laws like Texas HB 2015 which requires insurers to release claims data for employers as small as 100 lives. Without data, smaller private sector employers are unable to focus on their true underlying cost drivers – the state of employee/dependent health and the incentives that do not exist to promote effective prevention.

Most business leaders seem to favor the notion of smaller government, reduced public spending, effective regulation and market based reform. Healthcare is emotionally charged. It impacts every voter and as such, politicians shy away from the difficult decisions around changing behavior. The real question for the private sector is whether it is willing to step up and assume its role as a catalyst for change or whether we have passed a critical tipping point as a society where our near term profit focus and increasing agnosticism to how we achieve those profits sets in motion an irreversible change that dismantles the last predominantly private system left in the industrialized world.

By playing the right cards, employers may still be able to preserve the best parts of private healthcare and begin to lead a process reelection hungry politicians do not have the will to take on. In winning this poker game of private healthcare, business can redirect government to follow its lead and focus on fixing fee for service Medicare and Medicaid.

America needs its businesses to remain in the healthcare game. The question remains unanswered whether employers will rise to the call – – or fold their hand.

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz

A False Summit?

A False Summit?

While a divided Congress met at the Blair House to attempt to reconcile differences, America hunkers down , chilled by cold economic winds and unnerved by the gathering storm brought on by fiscal shortfalls and unsustainable deficits.  As our elected officials argued over a way forward, it was obvious that there would not be enough common ground found to chart a coherent course that improves access, reduces medical trend and moderates ballooning federal and state deficits driven by increasing obligations to existing entitlements through Medicare and Medicaid.

In between stumping and finger pointing, inconvenient truths tumbled like falling rocks on the heads of policymakers locked in the heated debate over whether to begin reforming healthcare by expanding access to 30M Americans or by addressing the underlying cost drivers of a system that all unanimously agree needs fixing.  While Kent Conrad ( D-ND), and Paul Ryan ( R-W ) came across as lucid scouts describing the decades deep crevasses of entitlement deficits and the imprecise orienteering of CBO accounting, other Congressional exemplars reinforced our belief that they were simply no longer fit to lead a next generation of climbers eager to move up the mountain.

The sad truth is we face a formidable obstacle in healthcare reform.  It is a Darwinian wilderness where the strong survive and individuals are unevenly protected.  It is a foreign land where neophyte consumers believe that “quality care” is getting unrestricted access to all the services that they believe they need for as low an out of pocket cost as possible. A diverse ecosystem of for profit and non profit stakeholders seek to accommodate this insatiable expectation and in doing so, assert that they create great value through the services they provide.  It seems no one believes they are part of the problem. Yet, people continue to die from exposure.  We fail to rope in the most vulnerable among us and have sadly become more indifferent to their personal tragedies.

We are in desperate need of reform but experiments such as Massachusetts that seek only to expand access to the uninsured  have taught us that the summit of universal coverage cannot be conquered without an underpinning of affordability.  They will end in financial disaster. The ropes that safely bind us to a fiscally sustainable path must be anchored by employer based insurance and woven with universal reforms in reimbursement, Medicare/Medicaid, access, consumerism and stakeholder engagement. The entire process must be reinforced with chronic disease management,  transparency and balanced regulation of the small and individual insurance markets.

Enormous time has been spent vilifying insurers, as if to convince us that aggressive oversight of payers can somehow fix our healthcare system.  Singling out a particular stakeholder as the primary barrier to our goals of quality, access and affordability is the reckless equivalent of telling an obese person that they can lose all the weight require simply if they just stop eating bread.  The mountain’s crest offers no easy access. The route is marked by tombstones of idealistic reformers who fell short of their objectives.  Stakeholders must recognize that we are all part of the problem but we do possess a map that can safely lead us to the top.   Ironically, many of the legislators attending the Blair House summit actually helped contributed to the treacherous conditions in which we now find ourselves – as we consider a future where public and private healthcare expenditures exceed an insurmountable 20% of our GDP.

In considering the rhetoric and reality of our circumstances, we must understand why the current House, Senate, GOP and Presidential proposals are false summits for conquering our current healthcare crisis.   Congressional leaders, desperate for re-election, will simply not commit to an honest discussion of the risks and realities of fixing healthcare. To conquer the mountain of public and private healthcare spending we must belay our way with:

1)   Reimbursement reform – 30M uninsured people will be entering a healthcare system that is graduating less than 2% of its medical school graduates as primary care doctors. This means no care coordinator to assist those who have historically accessed medicine through the most expensive setting in America -the emergency room.  Massachusetts as the first state to adopt universal coverage and individual mandates has discovered in their first years of universal coverage that ER visits are increasing by 8%-10% as individuals – now covered – default into old patterns of access.  The rural and urban family practice physician is disappearing as a disproportionate amount of federal, state and private sector reimbursement is going toward specialists and facility care and their treatment of chronic illness – – instead of its prevention. We must restore the role of the primary care provider as the control point and care coordinator for a first generation of consumers committed to health improvement. Reform should focus on higher reimbursement and educational incentives to study and practice primary care.

2)   Medicare and Medicaid reform – If the US government were an insurer, it would have been seized years ago by regulators for serial underfunding of present value obligations.  To propose $500B of physician fee cuts while promising seniors no benefit cuts and an expansion of the presently unfunded Medicare part D prescription drug program is irresponsible.  To even qualify to expand its role in covering more Americans, Medicare and Medicaid need to address an estimated $ 100B  in annual fraud, abuse and overtreatment.  The current programs achieve “ affordability” by rationing reimbursement to doctors.  Another 21% in fee cuts will only reduce the number of doctors willing to accept payment from the federal government. The ethical and moral no man’s land surrounding end of life care in America make funding the last six months of life in the US, more expensive than five decades of life preceding them.

3)   Access Reform – Consumers must accept and be willing to enter into medical home/gatekeeper delivery systems where primary care providers coordinate care and authorize access to specialty and tertiary care services.  Over 110M Americans access the healthcare system through the emergency room each year.  More than half of these individuals are insured but not under the care and control of a primary care provider.  Self-referrals and self diagnosis is leading to overtreatment of insured individuals – consuming, according to Overtreated,authored by Shannon Brownlee, as much as $700B each year that might otherwise be available to finance care for the uninsured and the underinsured.

4)   Consumer Reform – With 60M Americans overweight and slowly descending into lifestyle based chronic and catastrophic illnesses, we are not requiring those who might be eligible for expanded coverage to engage in healthier lifestyles.  Asymptomatically ill and chronically unstable individuals are more likely to incur catastrophic claims.  5% of Americans treated in Medicare and private insurance consume 50% of all services.  Subsidies and minimally credible coverage mandated for the uninsured should include plan designs that require biometric testing, lifestyle coaching, and compliance rewards for managing chronic conditions. Consumers must be limited in their ability to sue a treating physician if that doctor has followed evidence based medicine guidelines for treatment.

5)    Stakeholder Reform – There are myriad opaque pricing and payment practices that plague the $ 2.2T healthcare system.  Transparency of services should not just extend to insurers but to brokers, agents, hospitals, pharmaceutical benefit management, specialty and other third parties who play a role in the healthcare delivery chain.  Affordability must focus on demanding value for payment.  You cannot improve what you cannot measure.  Consumers, employers and government are often ignorant to cost shifting, clinical variability, hidden remuneration and perverse incentives that threaten to compromise the objective treatment, advice and service support that must characterize a world class system.

The Blair House healthcare gathering reinforces our notion that Congress understands the logistical complexities of fixing healthcare but in its failure to find common ground, it was merely a false summit.  While our public policy guides argue on the best way forward, we lose confidence that neither group is actually carrying the essentials necessary for quality care to survive. The prevailing sentiment among Democrats is to follow the uncertain fiscal direction of Massachusetts choosing a less intimidating path of achieving universal access before tackling the more jagged and dangerous step of affordability reform.  The GOP has counseled a conservative route to the top – opting for an incremental and sluggish pace with no clear timeline to ultimately conquer the peak.

It remains to be seen whether Congress and the American people will fatigue before conquering healthcare.  For 180M Americans covered by employer-sponsored healthcare, the fear of leaving their base into the unknown thin air of change creates doubt and concern.  For 45M uninsured, the prospect of climbing higher seems a worthwhile alternative to their current circumstances.

The risk of getting to the top too rapidly is fiscal edema and a Darwinian rationing as we realize that we have finite resources.  If we move to slow, additional fellow climbers may perish from inaction.  One thing is for certain.  Storm clouds are gathering and conditions are deteriorating. We are in the “death zone”.  We have to go up or go down.

We simply cannot remain here.

Harry and Louise Go To Washington

Harry & Louise Go To Washington

By Michael Turpin

 

As academics, reformers and political action committees swarm to Washington like springtime midges eager to help contour imminent health care reform legislation, change is clearly in the wind.  The mood inside the Beltway is infinitely different than in 1993 when a Republican controlled Congress, partisan stakeholders, employers and two iconic middle class consumers named Harry and Louise coalesced to defeat Hillary Clinton’s complex prescription for reforming runaway costs and inefficient delivery.  Unfortunately, once the threat was ameliorated, stakeholders fell back into old patterns and failed to offer more enlightened solutions to moderate the rising costs of healthcare in the US.

In May, 2009 the private sector is unusually silent.  Harry & Louise, have just lost 40% of their net worth in the recent financial markets meltdown.  Harry lost his job in January and is worried about being able to afford healthcare coverage.  Being 55, he would love to not go back into sales but take that teaching job. He and Louise are waiting to see what the government might propose to help relieve their financial burdens and growing concerns over healthcare once Harry’s subsidized COBRA coverage runs out.

Harry has read the statistics.  He knows that employers who purchase care on the behalf of some 177M workers appear to be at their wits end and seem to be pondering whether now is the time to transfer the risk of a generation of overweight, soon to be chronically ill Americans to the government.  Louise has a friend who is a pediatrician and has heard that doctors are torn between two evils – insurers that have serially reduced their reimbursement and smothered them with bureaucracy and a government run system of reimbursement that serially underpays for services. Harry and Louise voted for the new administration and they are hoping these proposed changes will be good for them. However, they get fatigued with all the discussion and don’t seem to have the stamina to question too deeply the long range cost impact for tax payers to extend universal coverage to an additional 45.7M Americans. It seems this time around, everyone is ready for change. 

The statistics on the uninsured tell a diverse story of healthcare in America.  Of the 45.7M uninsured, 12.1M are eligible for government sponsored children’s health insurance ( SCHIP) or Medicaid but are not enrolled. 17.6M earn $ 50k or more in earnings.  9.7M are non citizens and 7.9M are college aged adults. Each group represents a different pool of risk for a new and broadened US universal access plan.  Health reform is not just about achieving 100% access for Americans, it is also about achieving affordability so we can support the cost of high quality care for all citizens.  This means driving out an estimated $900M in waste caused by preventable illness due to lifestyles, clinical variability in healthcare delivery due to defensive medicine and inconsistent adherence to evidence based best practices for treatment, and inefficiency/lack of coordination across a predominately manually administered delivery system.

Having worked as a healthcare consultant in the US and in Europe and having laid with pneumonia on a gurney in the hallway of a socialized healthcare system, I felt the need to reach out to Harry and Louise and offer some perspective on a US healthcare platform that we all agree needs to be reformed: 

1) This is a Global Issue – Every nationalized system is straining under rising healthcare costs and is achieving affordability primarily through rationing services.  In each market, there is a rapidly growing consumer financed, alternative private care market that features concierge medicine and medical tourism (E.g. Canadians coming to US, French going to India, Arabs coming to France.)  As we move toward universal coverage and the possibility of backing into a single payer system in the process, we need to understand that many systems we are seeking to emulate are experiencing rapidly expanding privatization paid for by those who can afford to go outside of struggling government run healthcare programs.   We are in a sense, passing one another in the hospital hallway. 

2) Can Government Handle Being The Bad Guy?  -Where there is national health, the government is now the payer.  Instead of a for profit or nonprofit insurer denying coverage due to lack of clear medical necessity or the absence of clinical justification, the government now gets to wear the black hat.  During my most recent trip to the UK, a 30-year-old cancer patient was suing the NHS for denying a cancer therapy that was very expensive and not likely to change his prognosis.  His oncologist was obviously throwing everything he could at the disease but the poor cost/benefit of the specialty drug forced the government to deny the estimated $35,000-a-year treatment.  

3) I’ll have the Reformed Torte, please! – There are major differences in medical liability law in Europe.  Defensive medicine – that serves both as a shield to avoid allegations of malpractice and as a curtain to obscure overtreatment – is non-existent abroad. There are fewer MRIs, CT Scans, and multiple office visits delivered each year because physicians do not over treat as a means to avoid litigation or to enhance income due to reduced reimbursement.  Medical malpractice tort costs exceeded $ 30B in 2007 – a cost that eclipsed the profits of the ten largest commercial insurers by over 2 ½ times. 

4) Talent Drain – The per capita multiple of salary for physicians in the US is 8.5 times the average worker’s pay. This is down from over 10 times which attributes to the heartburn expressed by doctors as they watch their overall wages declining. In Europe, that per capita salary delta is less than 2.5 times.  Simply put, doctors make a lot less in nationalized systems.

A good example is the UK where the government has reduced pay for local family practice practitioners and nurses creating shortages that have been filled by foreign trained physicians immigrating to the UK seeking higher levels of reimbursement than their home countries.  As doctors leave home countries seeking better salaries, the talent drain is creating medical and public health crises in more vulnerable countries often exacerbating difficult public health problems at home.

Physician migration is beginning to happen in the US.  For example, in states like Rhode Island, family practice MDs see lower levels of reimbursement than in Massachusetts and as a result, move across state lines to practice the same medicine for higher reimbursement. The drain of physicians is even more acute in New York where rural counties with larger populations of Medicare and Medicaid beneficiaries are losing doctors to Metropolitan New York because there are more privately insured patients to treat.  It does not pay much to be a primary care doctor anymore.  It does not pay at all to be a primary care doctor paid by the government. 

5) Innovation Erosion – The US finances much of the medical device and biotech innovation that drives improvement in medical quality and treatment.  Insurers, despite their public relations problems and opaque business practices, do contribute to improving consumer information systems and provide needed sentinel controls to limit fraud and abuse.  The US health system also attracts capital – – investment that drives innovation, process improvements, competition and new therapies that are plagiarized around the world – often at much lower costs.  New drugs that are financed and sold at expensive retail prices in the US are offered wholesale in other countries where nationalized purchasing depress the profit making power of the bio tech or pharmaceutical company that developed the drug. 

If the US is slowly transformed through government purchasing into a single national purchaser, the velocity in which capital will flee the healthcare sector to seek better returns will be unprecedented. Overall medical spend as a percentage of GDP will surely subside but innovation will slow and investment will be redirected like the proverbial baby with the bath water into new areas where capital will get an adequate return. 

6) Public Plan Crowd Out – Expanding government run public health plan options will accelerate the transformation of the US to a single payer system.  As the Federal government adds 45.7 million plus uninsureds to some type of expanded Medicaid or Medicare (CMS) program, privately financed healthcare through employers will bear more cost shifting from doctors and hospitals.  CMS does not negotiate provider reimbursement, it promulgates it.  If a hospital knows its costs are increasing 8% and it has received a 2% cut from the government – which represents 60% of the hospital’s reimbursement – the hospital must get in excess of a 25% increase from its private payers to make its 8% budget.  If the private payers balk at such a rich price increase, the hospital threatens to drop out of the insurer’s network.  

Enter the employer who purchases the private coverage from the insurer.  The employer immediately gets skittish at the idea of losing a hospital from their broad PPO network and admonishes the insurer to resolve their dispute with the hospital.  Unwittingly, the employer is perpetuating the problem of cost shifting and will end up inflating their own cost of care. The insurer pays the hefty 25% increase and voila, you have medical trends in excess of 10% for private payer care. Meanwhile the government is applauding its 2% across the board cost reductions and urging more employers to join their public plan because of its affordability.  Eventually, the government controls the entire system and there is no one left to shift cost of rising care to except taxpayers and providers by limiting reimbursement.

7) Are We Avoiding the Tougher Conversation?- The third rail of health reform is affordability – you touch it as a politician and you die.  Access is a safe and popular term right now in the health reform debate.  Who does not want to see every American given access to healthcare?  However, the challenge is the failure of policymakers to understand that affordability is a zero sum game.  With the net present value of our current Medicare obligations already estimated to be underfunded by some $ 8 Trillion dollars, the additional cost of expanding this coverage to 45.7 million additional Americans seems untenable without corresponding cuts to offset the current and future costs of care.  To save $ 900B in documented overtreatment and waste, someone will have to get paid less money.

There is tremendous rhetoric around the cost of administration in healthcare.  The combined profits of the ten largest commercial insurers added up to $ 12.9B in 2007.  On the other end of the spectrum, the estimated cost of obesity, according to the Forum for Health Economics and Policy, over the last 25 years has been $ 1.1 Trillion.  The cost of smoking was estimated by Health and Human services to be $ 157B each year. The cost of fraud is estimated at $ 100B by the Center for Medicare and Medicaid Services. 

While reform must absolutely change stakeholder practices and insist on total transparency of all administrative expenses not attributable to actual claims, ( PWC estimates this number to be 13% of every dollar while anecdotally, we often hear numbers as high as 30% ), the real opportunity for changing the system is changing people.

Regulation should focus less on price controls and more on population risk management – medical management, personal health improvement, rationalizing redundant and inefficient delivery systems and returning patients to a primary care based model where physicians are incented to keep patients healthy. In Japan, government officials have gotten serious about the public’s obligation to contribute to lower costs of care. Ideas have included considerations that would be viewed as outrageous in the US such as a surcharge tax for overweight individuals – as these consumers are more likely to develop costly and avoidable chronic illnesses that will consume more services from the national system.

8)  Achieving Zero Trend – Zero medical trend can be achieved, according to Dr Dee Eddington of the University of Michigan, through risk management not through cost shifting or rationing. The current debate on healthcare reform is unfortunately happening among too few of the stakeholders and as we speak, compromises are being forged that seem to be less about lowering medical trend and more about limiting or eliminating the role of those who add administrative expense to the system.  

Pundits point to the Massachusetts “Connector” as a shining example of how a state government has created efficient purchasing of individual and small group coverage for the uninsured of Massachusetts.  A closer look reveals a different story – looming deficits, forced expansion of the  program to mandate the participation of small employers in with individuals creating a greater spread of risk, and disproportionate cost shift to small employers.  Perhaps the most troubling is a menu of benefits so rich ( much richer than most private plans ) that it will surely drive medical trends in double digits for the foreseeable future.  It is less than two years old and is already being seriously examined as a ” solution” for individual and small group insurance purchasing.  

True affordability creates winners and losers and that’s not always good for politics. You could convert the top ten insurers to non-profit status and save a mere $ 12B a year compared to attacking obesity, one of the root causes of medical inflation that has inflated our costs of care by hundreds of billions of dollars in the last decade.  

There are certainly egregious examples of 30% administrative costs for every insurance dollar spent.  However, these statistics are often isolated and misleading as these expenses are often incurred by individual and small group plans that have higher distribution, pooling and risk charges. Individual and small group insurance is in need of reform – reforms that require guarantee issue coverage, mandates for insurance and aggregated purchasing to achieve the same administrative savings that larger employers enjoy. Insurers do make a disproportionate amount of profit on small groups and individuals. Insurers will make less money on their commercial products when they no longer can shift risk to smaller employers and individuals.  Most large employers pay less than 10% for administrative services.  The average margin on all commercial insurance is less than 6%. They, like many others, will have to clearly justify the value they bring to managing the consumer through a complex healthcare system. 

 

9) Rationalize or Ration? – Affordability is an unpopular discussion.  To achieve affordable care, one must be prepared to make some tough decisions.  You must either begin to rationalize the excessive and uneven care provided in the US or ration it.   Rationalizing means taking on difficult decisions around which hospitals stay open and which hospitals close.  It means enduring withering attacks from hospital worker unions in underperforming or redundant facilities.  It means demanding accountability from consumers to take responsibility for their health and encouraging plan designs that shift cost to those who refuse to be complaint.  It means questioning profit taking by players in the system that are not clearly adding value to the distribution chain but merely living off it.  It is demanding total transparency in any opaque area of healthcare delivery.  Where there is less visibility, there is more room for abuse.

 

Rationalizing care means making tough decisions about redundancy of services – reducing the number of MRI and CT scanning machines within a geographic area, balancing the excess supply in markets where too many hospitals compete to cover too small a population. And, it means having a difficult ethical debate around end of life care.

True reform and long-range medical trend management is painful for a generation of Americans who believe the unencumbered healthcare is an entitlement.  Countries with aging and declining populations are bracing for surging medical and pension obligations.  As the US seeks to offer expanded access, other countries are seeking to control it and to forge a more reciprocal public covenant with its citizens. Everybody wants something for nothing and no one wants to change.  True political courage is leading the discussion first around affordability.  So far, the policymakers seem reticent to hold accountable those most likely to be impacted – consumers, hospitals, doctors, unions, medical device manufacturers, biotech, and pharmaceutical companies.   It is almost easier to first expand care, and then knowingly descend into the inevitable crisis of underfunding where Congress can then legislate draconian measures.

 

10. Stopping the Conveyor Belt – A nationalized system does nothing to slow the conveyor belt that moves “at risk” patients toward becoming tomorrow’s chronic, acute and catastrophically ill. Medical trends will continue unchecked and will only be marginally impacted by bulk government purchasing and price controls.  Over time, our best and brightest will no longer seek medicine as a career and with that shift, quality will erode along with capital investment.  As costs inevitably go up, rationing increases, and a two-tier system emerges like a toadstool on the heap of government bureaucracy and regulation.

 

There is no doubt that we need change to our system.  However, the question is whether reform will be driven by a Trojan Horse – universal access supported by an expanded public plan to compete with private employer sponsored care or a tougher discussion with all stakeholders – including unhealthy consumers – about the cost drivers and the need for everyone to change.

Will Harry and Louise wake up and smell the coffee?  Will Harry lose that 20 lbs he put on while sitting around the house watching the Food Channel when he was supposed to be looking for a new job? Will Louise end up on a hallway gurney in a two tiered American health system? Stay tuned.