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Health Insurance Costs Wednesday, September 02, 2009

The mailbox was full when I stuck my head outside the door just after lunch today: a magazine, a Visa bill, two movies from Netflix, and a large package from my health insurance provider.

"Dear Health Net Plan Member, Thank you for your continued membership ..." As a self-employed individual, I bear the full cost of my health insurance. Starting in October, that will be $254 per month—more than $3000 per year.

"The primary reason for the rate increase this year is the continuing upward trend in medical costs. In particular, hospitals continue to drive much of our costs, and this trend is not expected to change significantly anytime soon," the letter explains, adding that their hospital costs have risen 128% and utilization of hospital services is up 28% since 2001. It's hard to know whether "utilization" is on a per-member or absolute basis, measured in dollars, days or number of procedures, but the 128% price increase alone is astounding since inflation over the same period has been approximately nil. "Other reasons for rising medical costs include prescription drug costs, expensive medical technology and benefit and administrative mandates passed by the legislature."

[right] My personal health insurance premiums (yellow) and percent increases (green) over the past four years for the same coverage. Note that it does not include dental or vision care, and there is a $1000 per year deductible for most services. After that I'm still responsible for 20% of most care. (Click the picture for a larger view.)

So what can you infer from that? Either the member population is getting sicker and needing more care, they are getting more/more expensive treatments (necessary or not), or they are being charged more for the care they receive. Or a combination of all of these.

Personally, my insurance premiums have gone up by 65% in less than four years (a compounded average of 13.3% per year). And I haven't changed age brackets in that time. The scariest point, though, is that the year-over-year rate of increase is going up exponentially: in 2006 my premiums went up by 8.4%. The increase was 9.0% in 2007; 13.7% in 2008; and 22.7% this year. Next year I move to the next age bracket. That alone will increase my premiums by 6% or so.

[left] Paramedics wheel an injured volleyball player off the court at the state championships in Forest Grove, Ore.

So where is all this extra money going? In 2003, about 6.2-million health care workers earned $342-billion in wages*. In 2008, 7.1-million workers earned $480-billion in wages*. Between people and wages, that's a rather modest 7% increase per year. Over the same period, the total payroll for health care support workers increased by about 6.4% per year*. So I think it's safe to say that neither the number nor the remuneration of doctors, nurses, and therapists are to blame.

So that leaves their service providers. I don't have numbers to back me up, but I doubt that hospital costs are up so much because the price of food, cleaning and waste disposal services have outstripped inflation, nor because electricity, water and gas rates are going off the charts.

What about malpractice costs? I can't speak to the costs of malpractice insurance, but the total settlement costs were actually down 14% between 2001 and 2006*. That may be due to increased spending on defense attorneys.

The cost of treating the uninsured is another big weight on the system, but most sources suggest that it has been fairly consistent around 8% of the cost of insurance, which makes sense when the percentage of uninsured people holds steady. But with the rapid escalation in health care costs in recent years combined with loss of benefits and jobs in the current recession, the proportion of uninsured residents is sure to go up.

Marketing significantly outpaced the general rate of medical inflation, increasing by an average of 15.7% between 2001 and 2005*, but it is a relatively small percentage of a hospital's budget.

So what's left? What happens with the extra $100 per month I'm spending for the same coverage I had three years ago?

I can only conclude that the majority of the price increases we've seen in recent years is ending up in the pockets of the corporations that run the system: insurance companies, hospital corporations, drug companies and medical equipment manufacturers.

It's hard to blame them. In a pure capitalist system, companies are supposed to maximize their profits without regard to the effect that has on others. Take, for example, a diabetic who wants to buy individual insurance. The insurance company knows that customer will cost at minimum a couple hundred dollars per month for insulin and supplies alone. Why would a private insurance company ever take them on for less? Why should they?

And because the barrier to entry into the market (money) is so high, the few companies have an effective and sustainable oligopoly. Obviously, it's in the interest of the health care industry to maintain the status quo.

[right] A medical researcher treats samples at Portland's Oregon Health and Science University.

There is plenty of demand for health care because everybody needs it. Perhaps it is a reflection of the optimism inherent in the American dream: people will pay anything for a marginal improvement in their well-being. After all, without your health you have nothing.

Therein lies the problem: As certain as taxes is death, and almost as certain is a stage of declining health before the curtains are closed. At that point, the health care industry has you right where they want you. They can offer you the cure, or at least a stay of execution ... for a price. They could name just about any price, and you'll pay. I mean, what else are you going to do? You could be dead tomorrow.

And yet, therein is also a solution: as certain as death are taxes. I find it highly ironic that otherwise sane Americans who couldn't care less if insurance premiums skyrocket (i.e. the well-to-do and those with employer-provided health insurance), are so fearful of a government-run insurance program that might increase their taxes. A side-effect of the inherent distrust Americans have for their government (warranted or not), they fear that any government-run program will be innately counterproductive—even if the existing systems were still in place. They fear it will be inefficient, wasteful, and they don't know what they would get if they tried to use the program.

Well, fortunately I've never been in a situation where my medical insurance really started to kick in. And I hope that they would cover me if I were—after all, that's what I'm paying them for. But have you ever tried to read one of those contracts? Even in "plain English" the list of coverages and exceptions is extensive, changes every year, and the terms are detailed. If the insurance company ever decided that my claim was too expensive, I'd be in a worse position than David against Goliath if I tried to challenge it.

Fair or unfair, the federal government is about the only institution large enough and willing (maybe) to challenge the oligopoly that is today's U.S. health care system. Is it a perfect solution? Probably not. Is it a radical change? Yes. But you can't cross a chasm with small steps.

The health care system in this country is not healthy. It's time for a real change.

5 comments:

Drew said...

Good discussion. I agree that there is need to make changes so that those who cannot afford healthcare (approximately 4 to 10 million people in this country), whether it is because of poverty or because their premiums are too high due to their "preexisting condition" can get coverage. Nevertheless there is a problem with government health care. There is an old maxim of any business: you can pick two of "best prices", "highest quality" and "fastest service", but you can't have all three. If there is limited money, at some point quality goes down and wait times go up.

There is a reason why "government efficiency" is an oxymoron. Medicare is already a good example - initially projected to be covered by a social security payment from your income (ie a tax by any other name), it was really just a huge Ponzi scheme to pay for current users with money from current workers. It is now virtually bankrupt and the current Congressional bill to fund universal healthcare is to be partially paid for by making medicare cuts. No one can possibly believe that our government (regardless of who is in office at the time) can make that work.

The second problem in your discussion is the assumption that insurance companies, medical equipment manufacturers, pharmaceutical companies, etc, are making huge profits. Granted they are a profitable busines, but their actual profit margins are much more limited than is commonly reported. Just like health care doomsayers inflate the uninsured to figures like 47 million, reported profits from companies in the health care industry are usually reported as gross profits and not net. Furthermore we often forget who owns these firms. It is not a handful of multimillionairs living high on the hog, it is everyday Americans who have their retirement funds invested in them, unions pension schemes, and other investors.

As a physician dealing with insurance companies daily (both as an advocate for my patients and trying to pry payments for my services from insurance companies) I can tell you that there are problems that need to be addressed. On the other hand, having worked in Canada where I didn't have to get prior authorization for my patients or have three staff members to do my accounts receivable because the government was pretty good at paying my bill, I still would not trade what we have here for what we have in Canada.

Why? First, the cost is much higher in Canada for the actual services received (bear in mind that statistics provided by the government suggest less money is spent per person on health care in Canada than the U.S.; however, they don't include how much money is collected in taxes that, if the government were a private business, would amount to a 40 to 50% profit). Secondly, for all the talk about "universal coverage" more than one million people in Canada have no primary care physician (due to underserviced rural areas or due to overpopulated urban areas) leaving them with the single resource for health care that uninsured Americans have -- the emergency room.

There are many good suggestions to incrimentally improve our health care system here, without removing personal choices and personal responsibility. Here is just one of the ideas: http://tiny.cc/pIrXE

Andrew Davey, M.D.
Phoenix, AZ

Matthew said...

Drew,

Thank you for your detailed comments. Let me address some of your points.

First, let's put a number on the uninsured. In 2007, it dropped to 45.7-million (15.3%), according to the U.S. Census Bureau (http://www.census.gov/prod/2008pubs/p60-235.pdf). They consider someone insured "if they were covered by any type of
health insurance for part or all of the previous calendar year." That may include some who can afford insurance but choose not to buy it, but the numbers of uninsured are concentrated at the lowest income brackets. And it does not include the 25-million "under-insured" (http://tiny.cc/qPzJW). That group is rapidly growing.

You are correct that payroll deductions on today's workers pay for the social security and medicare costs incurred by today's retirees. I don't know that it was ever intended to be any different: they started paying out benefits when the system was created, even though the first beneficiaries had never contributed to it. The problem is that the system didn't anticipate a significantly aging population curve, significantly longer life expectancy, or significantly higher health care costs. These problems were identified and could have been solved in the 1990s, but that would have required a small increase in the deductions and Congress couldn't/wouldn't make that happen. Now the problem has compounded for about 15 years, and it will take a much, much larger increase to correct it.

More to the point, it's not that different from the health insurance that you or I have: my insurance company doesn't deposit my monthly checks into a special account dedicated to my health care. It uses my dollars to pay for someone else's claim today, and will use someone else's money if/when I file a claim.

As for the "second problem ... that insurance companies, medical equipment manufacturers, pharmaceutical companies, etc., are making huge profits," that was less an assumption than a conclusion. I am now paying $100 more per month (65%) for the same coverage I had three years ago, and I haven't changed age brackets in that time. Even in the health care industry, wages haven't gone up that much. So where is the money going?

[cont'd in next comment]

Matthew said...

[cont'd from previous comment]

I don't understand your comment about Canadian taxes amounting to a 40-50% profit, so I can't respond to that.

As a former resident of Northern Ontario, I can attest to the shortage of doctors in rural parts of the province. There are moderate (and recently improved) bonuses and programs in place to encourage doctors to practice in under-serviced areas. But even an American-style health care system is not enough to make up for the competitive disadvantages facing remote northern communities (like cold weather, vast distances, the absence of colleagues for support, inadequate local education for children, limited employment opportunities for spouses, limited social/cultural activities, just to name a few). The situation in Ontario isn't much different than that in Alaska ... or many other rural states.

It is true that many Canadians do not have a family doctor. But simply "not having a primary care physician" (either in the U.S. or Canada) does not leave you in the emergency room. I haven't "had a family doctor" since I left home for university nearly 20 years ago. I've seen doctors several times since, but never once had to resort to the emergency room.

As for Congressmen Shadegg and Hoekstra's article, they correctly note that nobody is focused on controlling costs. As they say, "the health-care market is a stacked deck that favors insurance companies rather than patients."

But their proposed solution is almost literally offering a Band-aid solution to cancer.

Shadegg and Hoekstra compare health insurance to car insurance, which is an interesting choice.

One of the ideas that's floating out there is to require all Americans to carry health care insurance. That's already part of the deal for drivers: you have to have car insurance. One should note, however, that about 15% of American drivers don't. Heck, I pay for additional insurance to cover the possibility of getting hit by an uninsured/under-insured motorist. Don't think health care would be any different.

Shadegg and Hoekstra would like to see television commercials for health care insurance as we do for cars. This highlights the flaw in their plan. Contrary to their assertion (and what the advertisers imply), those television commercials for Geico and Progressive don't offer "better auto insurance at lower costs," just lower costs. The devil is in the details, and the lower price comes at the expense of higher deductibles, lower limits and more exclusions.

Private health insurance companies can't afford to—and won't—let their profit margins slip. Under Shadegg and Hoekstra's proposal, instead of better service at a better price, Americans will simply be offered reduced prices in return for reduced services. More choices, yes, but not better. Many Americans who now have good (if expensive) insurance through their employers will unknowingly and trade comprehensive coverage for short-term savings. And offering health insurance vouchers to low-income Americans will only ensure that the insurance companies devise a minimal product at that price point.

It seems to me that too much of the debate over the "public option" has been focused on the first word and not on the second. The President's plan does not eliminate the option for Americans to continue with whatever private insurance they have right now. If government-run programs are as inefficient as you suggest, the private companies should have no trouble competing. On the other hand, if the government can do a better job than the private insurance companies, the consumer wins.

Since the Declaration of Independence, Americans have claimed the inalienable rights to life, liberty, and the pursuit of happiness. At least two of these depend directly on one's health. Health care should be a right, not something anyone has to negotiate.

Drew said...

Matthew,
Not to belabor this too much, since the argument is to some degree philosophical and emotional, rather than pragmatic; however, I would like to make a few points.

First is how much it costs the Government to run health care (i.e. 40% or more in addition to the per patient annual expense) is a “guestimate” based on tax revenues vs. payouts. Governments are very good at obfuscating their budgets. While you would hope they are more responsive to scrutiny, they are actually not (have you ever tried to ‘fight City Hall’?).

Furthermore, as you point out, they did not make necessary corrections in Medicare funding when they could. Why? It was not politically expedient to do so. Hence Medicare is bankrupt.

The question remains, how will our Federal Government pay for universal health care? The “rosy” economic prediction is for an additional $1,000,000,000,000 over the next ten years, with most of the cost back ended (conveniently after the next Presidential election). Most economists predict rapid escalation of costs after that. If it follows Medicare’s example, the costs will be greater than the rest of the federal budget within two decades.

Note that the $1 Trillion dollar cost over the next ten years includes tax increases and a 40% cut in the Medicare budget. (No, they are not saying that they plan to ‘cut Medicare’. Instead they are going to use 'efficiency' and reduce payment for services. Which brings up the next question, if the Government is not being efficient with Medicare now, how can we expect them to be efficient in the future with either Medicare or universal health care? If they are going to reduce payments to hospitals, doctors, suppliers etc. – does that not mean that there will be significant reductions in service or longer wait times?)

Next, the figures (based upon Canadian Census Data from 2004) show that 14% of Canadians do not have a family doctor because they cannot find a doctor to take them into his/her practice. Surprisingly there is only a very slight increase rate of unserviced patients in rural areas than in municipalities. Why don’t we just graduate more Doctors and utilize other paramedical providers such as Nurse Practitioners? Because the Government has a limited amount of money to spend – by restricting access to the system, there is significant cost savings.

Canada could allow a private / public system but has essentially outlawed it. Private payment is illegal in Canada. Why? Political expedience – no one wants to allow a system where the “haves” get something the “have not’s” can’t afford. It is class warfare, pure and simple. Canada has the good fortune to be next to the U.S.A. where those who can afford care can get it, for a price.

[Continues ...]

Drew said...

[Continued from above]

The final issue, which is philosophical, is the point you bring up about “life, liberty, and the pursuit of happiness”. This is framed in a document intended to allow for the individual liberty of each American. Government health care is an erosion of individual liberty and responsibility. We should be prepared to look after ourselves, and our families. We should be responsible for helping those in our communities. Without that, the constitution is just a piece of paper in a museum.

The Government’s role is to provide for fair and equal trade, or opportunity. More and more we are going from having a “safety net” to have a “security blanket”. If health care is a “right”, why not food and shelter?

After all, we don’t want people to starve while they freeze to death on the streets. When do we start complaining that people are profiting from selling food and have the Government take over all farms and supermarkets? Why should one person have filet mignon, when another has to settle for hamburger? Under Government “food care” everyone can get all the rice and beans that they need.

When do we declare landlords to be evil exploiters of people’s need for shelter? When do we say that ownership of land is not a right, nor a privilege, but an outmoded concept? Shouldn’t we all own everything is common? Where does this stop?

Health care does have issues that need to be addressed. There is no reason why we cannot identify the individual situations that create barriers to people getting health care, and deal with them on case by case basis. It may take more time than passing a thousand page (plus) bill that few will read and virtually no one can understand, but it will protect us from the abuses that Big Government is so prone to.

Andrew C. Davey M.D.