Under The Knife
A 50/50 sharing of costs would make employers careful shoppers for their health insurance and employees careful shoppers for their medical care.
June 1 1990 by Rita Ricardo-campbell
Medical care costs in the
The inflation of U.S. health care prices make it the highest spending nation per capita, but not the highest in real terms. Based on exchange rates, in 1980 and today, the
The rise in the
Among seven major countries (
The increase in
Expenditures of the Department of Health and Human Services-which is responsible for Medicare and Medicaid-now total more than $150 billion annually. The 1988 Catastrophic Health Insurance bill would have, if enacted, resulted in the largest expansion of Medicare since it began in 1965. The Act was repealed in late November 1989.
The bungled legislation did not address the real issues. The proposed bill’s only innovative measure was its financing: that would have required middle- and upper-income elderly to pay for the benefits. Even though the government’s prospective costs were badly underestimated, the proposed redistribution of income created by taxing higher income elderly to pay the bill for all elderly spelled the legislation’s eventual defeat.
NATIONAL HEALTH INSURANCE
Because of the inflation in health care costs, a drive for national health insurance within the
The argument for the
The complicated legislation will not stop calls for a simple national health insurance plan, possibly patterned after
‘S NATIONAL PLAN CANADA
The Canadian health care system is financed from federal and provincial government tax revenues.
Broadened government mandates requiring employers to provide basic insurance benefits have emerged as a substitute program to national health insurance. The U.S. Bipartisan Commission on Health Care (Pepper Commission) recommended this route for employers with 100 or more employees. But these costs to employers would act as a payroll tax and are likely to restrain employment growth and depress wage rates. The estimated federal cost to provide health insurance to those workers who do not already have it will be $23.4 billion, with employers paying an additional $20 billion!
HEALTH CARE IN THE ’90s
More hospitals will close nationwide primarily because of low occupancy rates, which averaged only 52 percent in 1988.
Some hospitals will merge and surviving hospitals will become more specialized. Patients requiring treatment that can be offered by centralized facilities will be concentrated. Concerns over the high numbers of “unnecessary” procedures which do not benefit patients more than non-invasive alternatives (coronary bypass, endarterectomy) will continue.
There is an oversupply of surgeons who through various means try to maintain their skills and income levels. New tools such as the magnetic resonance imager (MRI) reduce the need for diagnostic surgery, effective drugs for ulcers replace intestinal surgery and other medical advances mean that some surgeons, to keep busy, are practicing primary care and some overtreat their patients. Medicare’s new reimbursement rates will hasten the decline in surgical fees that competition has started. Federal grants to assess diagnostic and surgical procedures will rise to $50 million in fiscal year 1990 and $148 million in 1994.
The Health Insurance Association of America has also suggested incremental changes. In March 1990, it proposed that all states have a pool for uninsurables with a private reinsurance mechanism, and that employers with fewer than 25 employees not be denied insurance or their rates not be exorbitantly raised if one or more of their employees become high risk or uninsurable. By April 1990, expanded Medicaid coverage will provide care for children up to age six (increased from age one), in families with incomes up to 133 percent of the federal poverty level.
THE PROFIT POSSIBILITY
Some health insurers have begun to make money. The 74 plans of Blue Cross and Blue Shield that lost $1 billion in 1988 and $2 billion in 1987 are expected “to end 1989 with a $1 billion gain.” Insurance profits depend on the past year’s total premiums exceeding total costs.
Business will continue to shift costs to employees by increasing deductibles and co-payments, eliminating dependent coverage and transferring existing employee insurance coverage to managed plans with utilization reviews and pre-admission certification. These actions have already resulted in new, sizable enrollment in employer-supported, prepaid group health care plans, health maintenance organizations (HMOs) and preferred provider organizations (PPOs), both of which have annual fixed, per capita charges. However, relatively higher Medicare reimbursement to primary care physicians could squeeze prepaid group arrangements that save money in part by limiting patients’ self-referral access to specialists.
One very established HMO, for example, Kaiser Permanente, announced a 19.6 percent increase in its 1990 rates in
Business has underestimated the future cost of retiree health benefits. The average age of retirement has dropped to 61.5 years; many large firms pay retiree health benefits as early as age 60 years. That is five years before Medicare covers some of retiree medical bills.
According to A. Foster Higgins’ prepared survey of 1,600 companies, the average cost of medical care for retirees under 65 years of age was $2,400 in 1988, 11 percent higher than for active employees, and 75 percent higher than for retirees at 65 years who have some Medicare coverage.
Personal health care expenditure per capita for all ages was $1,776 in the U.S. in 1987, but for those 65 years or over, it was $5,360, and for those 85 years or over, $9,178. And women, who at 55 years live on average four years longer than men, are an increasing portion of the labor force.
The proposed Financial Accounting Standards Board’s (FASB) new rule would require companies to carry as accrued liabilities on their books the potential liability of future health insurance premiums and benefits already promised to current and future retirees. This potentiality has shaken the retiree health plans of many companies. The General Accounting Office (GAO) estimates that existing, total, accrued liabilities of business for their current retirees who are 60 years and over was $112 billion in June 1989. Pressure for tax-free trust funds to pay these benefits continues, and some companies are using employee stock ownership plans (ESOPs), where they may have a 50 percent tax deductibility of interest on loans to the ESOP.
A few companies have announced that after a transition period they will reduce or stop subsidizing medical care premiums for future retirees. Unions at NYNEX, Lockheed, and Pittston mining struck to protest worker health benefit cutbacks in this form, higher deductibles, and cost control.
The repealed Medicare Catastrophic Coverage Act spurred companies to reduce retiree health benefits. Business believed that the federal government would be taking over payment of the elderly’s “excess” medical bills, and even, eventually, 80 percent of bills for prescription drugs over a $600 annual deductible. Business could, with clear conscience, save on future retiree health care costs because the federal government had preempted them.
Federal bungling of the repealed Medicare Catastrophic Act has increased predicted premiums for “medi-gap” health insurance benefits. These are estimated to rise on average by 20 percent in 1990. In
To contain rising medical costs I propose the following: Gradually reduce the expensing of 100 percent of premiums by business to 50 percent, while exploring how to strip back to basic care. We could reduce 100 percent cost by 10 percent every two years until only 50 percent of premiums can be expensed. This would help stop the substitution of increases in tax-exempt benefits for increases in taxable wage rates.
Controlling surging medical care costs in the
Employers pay more than $150 billion annually in health insurance premiums and benefits that also act to subsidize the consumption of medical care by most workers. Although these costs are in lieu of wages, their impact is somewhat different. Costs of employer-paid insurance and benefits escape corporate and personal income taxes resulting in a government subsidy of many billions of dollars annually.
As long as the consumer does not pay the full cost of resources devoted to medical care, the demand for medical care will outstrip supply and create a need for some rule-unless “waiting” and “price” are acceptable to distribute or ration medical care. If the resources for medical care are artificially restricted, providers, primarily physicians, will be forced to do most of the rationing. Alternatively or complementarily, the government can, through regulations, limit entitlement to medical benefits. For example, the state of
The public is not sufficiently informed about the costs and benefits of medical treatments and government regulations to discuss the questions of allocation already being decided by the courts. Indeed, the courts recently upheld micro-management by Medicare that denies patients from personally paying amounts above the Medicare authorized payment. The courts argued this would “create a two-class system, since poor people who are dependent on insurance couldn’t buy the service themselves.” The reopening of the debate over national health insurance cannot avoid the recognition of realistic cost-containment as the critical issue.
No society has a “perfect” health care system. For informed patients paying their own way and for informed government and employers paying premiums, the essence of supply and demand is already working.
Economist Rita Ricardo-Campbell is a senior fellow at the Hoover Institution at