Sifting Through the Health Reform Rhetoric

Posted: September 30, 2009 in National Health Care
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I received this opinion piece by email and it was printed in the Des Moines Register. Cliff Gold was a Senior VP of Blue Cross and Blue Shield of Iowa.  He was instrumental in helping ABC build systems to begin administering medical insurance for the co-op system. This is a fairly balanced piece and provides a lot of info about the issue of health care reform. I do not agree with the final sentence. I think we should be moving as far away from “public” healthcare as we can. Although, I acknowledge in the short term we will be stuck with this until we figure out better private solutions.

Sifting Through the Health Reform Rhetoric 

There is so much misinformation being bandied about in the health care/health insurance reform discussion that the public cannot possibly be able to sift through the rhetoric in order to ascertain the truth. Reform is needed badly in the health care and health insurance system.  But the issue is so critical that the public deserves the truth. 

After spending 30 years in the health insurance business and the past a year-and-a-half as a retiree and part-time management consultant, I have a unique perspective on the debate over reforming the health care system.  As someone who has been registered with both parties over my 35 years in Iowa, I also have no political ties or bias.   

So let’s look at some facts, starting with the uninsured.  While the U.S. Census reports about 47 million uninsured Americans, a figure oft-cited and rarely illuminated, the facts tell an interesting story.  The Census Department admits that its number is likely overstated and includes over nine million people, about 20 percent, who are not U.S. citizens.  None of the reform proposals purports to cover them, thus the number of American who are uninsured is no more than 38 million.   

Of these, almost 40 percent, or about 16 million people, are currently already eligible for Medicaid, the State Child Health Insurance Program (S-CHIP) or other government programs, but are not enrolled.  The same government that many people want to entrust with a greater role in health care cannot find and/or sign up the people who already qualify for existing comprehensive, low-cost, taxpayer-supported health coverage.

It is a great irony to hear politicians rail about the number of uninsured while they seemingly fail miserably in getting their constituents to enroll in the programs.  

Thus, the true number of American citizens who are either uninsured or aren’t eligible to be is far smaller than we have been led to believe.  And of those who remain, close to half live in households making more than $75,000 a year and, at least theoretically, have some financial means to pay for at least high-deductible, catastrophic health insurance that would protect them from debilitating health care costs if they chose to.  These are people who might be termed “uninsured by choice.”   

This latter group is among the targets of those who want to mandate individual coverage.  And it makes sense.  Like automobile insurance, which is legally required in most states, every individual who can afford coverage could or should have the responsibility to buy at least a basic level of health insurance so that the rest of our citizens don’t bear an unfair burden.  For the 8-14 million Americans who truly can’t afford even a basic level of insurance, including catastrophic coverage, there may be a “moral obligation” to provide it.  These people are disenfranchised just as elderly and poor were in the 1960s when the architects of Medicare and Medicaid created these “social” programs as part of the President Lyndon Johnson’s Great Society.

Indeed, barriers need to be knocked down that preclude those who can afford private health insurance from getting it.  Those barriers include medical underwriting to sift out people with previous or current medical conditions, so-called “pre-existing conditions,” or who have a history of incurring large medical expenses.  As long as all insurers must accept these individuals, thus leveling the playing field, the insurance industry should herald and embrace this reform.  But the rest of us have to understand that bringing these individuals into the insurance system will raise the premium rates for everyone else, however marginally.  I believe this is far preferable than raising taxes on everyone, on the rich, or on businesses and employed individuals. 

This brings us to the main point of contention about health care reform today, the “public option.”  Assuming that everyone who can afford coverage is required to buy it; that everyone who can’t is covered by the government; and that the private sector is required to take all eligible applicants, there is no logical or conceivable reason to inject a government option into the health insurance market.  Why? 

First, it would make the government both regulator and competitor, an inherently unfair infiltration into a capitalistic system.  It would also be bad fiscal policy.  The government program would have too many built-in advantages to foster effective competition.  The government programs wouldn’t need to build profit margins into rates and would probably have lower marketing expenses, such as broker commissions and promotion costs.  It would, however, have to build financial reserves for claims, or else if would run into the same enormous problem it has today with Medicare, which has billions of dollars in unfunded liabilities.  Medicare may appear to be a well-run, low-cost system but, when the unfunded liabilities are taken into consideration, it is financially insolvent by any regulatory standards.  Its rate of cost inflation mirrors the private sector. 

But the main reason the government-sponsored option would have a price advantage over the private sector is because it would pay hospitals, physicians and other health professionals at levels at or close to Medicare, which pays far less than it costs hospitals, physicians and other professional to provide care.   And this problem is worse in Iowa than in almost any state in country.  Today, that under-funding from government is shifted to the private sector, accounting for 10-15 percent of all private insurance costs.  The major commercial insurance companies in the state pay 140 percent or more on average than Medicare to compensate for government under-funding.  The more people who sign up for a government “public option,” the worse the under-funding problem becomes.  And with uncompetitive premium rates, there will be a smaller private insurance sector, thus intensifying the cost shift or making the plight of providers even worse. The financial viability of hospitals, clinics and the rest of the health care system would become tenuous at best. 

The fear that a government option will ultimately lead to a system where virtually everyone will be covered by the government is real; it may be inevitable.  The private insurance sector that does remains will likely only sell supplemental insurance policies similar to those under Medicare.  There are currently 12 standardized government-approved supplements that can be offered by the private sector.  For the “new” programs, such supplements would most likely cover deductibles, co-insurance and/or additional benefits not covered under the “private option.”  The insurance companies might be profitable but they would be inconsequential in the market, putting millions of people into the rolls of the unemployed. 

I fear that many of the supporters of the “private option” think that it will cover all care with no deductibles and co-insurance and do so at low costs.  More likely, the government policies offered would resemble those in the private sector and would include substantial out-of-pocket costs.  Medicare has those today, including a deductible approaching $1,000 for the first hospitalization and 20 percent co-insurance for physician services.  But the premium for Part B is limited to only 25 percent of the actual costs for the medical component of the program.  The deductibles and co-insurance under the “public option” plan(s) are likely to be higher in order to be price competitive.

 The “new health care” will probably be comprised almost exclusively of government-defined programs – Medicare for the elderly; Medicaid for the poor; S-CHIP for uninsured children; and the “public option” for everyone else.  Medicare, Medicaid and S-CHIP will continue to be funded almost exclusively through taxes on all of us while private premiums and new taxes will fund the “public option” at a cost of $1 trillion or, almost certainly, more.  Employers will either opt out of the system or, in order to attract and keep employees, subsidize some of their employees’ premium cost and/or offer to contribute toward supplemental insurance in order to remain attractive to workers. 

There is another great misconception about how government programs are administered.  Some pundits and much of the news media tell us that the current Medicare and Medicaid programs are “government administered” and/or “government run.” Not true. Both terms are misleading at best and uninformed at worst.   

These programs are government defined either by law or regulation and overseen by the federal Centers for Medicare and Medicaid Services (CMS).  Medicare is regulated nationally while Medicaid is a joint federal/state program with a major regulatory role for the states.  For Medicare, CMS sets the rules and establishes the payment levels for providers in each state.  States set the payment levels under Medicaid.  But neither program is government “administered” in the way most people think of this term.  Private health insurers or processing firms chosen by CMS or state government “administer” the programs following competitive bidding processes.  No government employees pay claims, reimburse providers or provide customer service to beneficiaries.  None.   

Thus, many of the same companies that the Obama Administration and Congressional leaders of both parties vilify daily as wasteful and profit mongering have been hired by the government to administer Medicare, Medicaid and S-CHIP.  Government processing arms of the insurance companies who hold government contracts largely offset company overhead since they are virtually prohibited from making real profits by serving as government intermediaries or carriers. 

Advocates of government-provided health insurance often cite the low administrative cost percentages of Medicare (about 3 percent).  Yet those low administrative costs are actually delivered by some of the same private insurance companies that the media pundits and politicians condemn.  

The reasons for the low administrative cost percentages under Medicare stem from three factors.  The first results from an inexcusable misunderstanding caused by the use of percentages instead of real dollars when talking about costs.  Because Medicare beneficiaries generate so much in health care costs (in Iowa, at least three times those under age 65), 3 percent of their health care costs actually equates to almost the same dollar amount as the private sector spends on its customers.  Here is a hypothetical example that is close to reality.  The average Medicare beneficiary incurs about $800 per month in health care costs in Iowa.  Three percent of this figure equals $24 per person per month.  For private customers, almost all of whom are under age 65, incur about $250 per month in health expenses.  Ten percent of that total equals about the same number of dollars.  The dollars are about the same while the percentages vary.  But it should be noted that not all insurance companies have administrative costs this low, but some do, particularly those who also serve as government contractors. 

Secondly, the design of the Medicare program makes administration inherently cheaper because all Medicare beneficiaries have the exact same “socialized” benefits.  Thus, there is no cost involved with administering multiple insurance options as there is in the private sector.  But under the “public option” concept, the government would almost certainly offer a range of different benefit programs in order to compete with the private sector, thus complicating administration and increasing the costs.   

The third reason is the most legitimate argument for lower costs for government programs: the government will not need to build in profit margins or high marketing costs to attract and keep customers.  They will have the advantage of using existing government buildings, Congressional offices, and public communications to distribute marketing materials and promote their products.  Of course, the government will likely not provide the consulting services an insurance agent does. 

The intense rhetoric of the current health care debate has led to misinformation on both sides.  There are no “death panels” in the proposed legislation.  Medicare benefits will not be reduced under any proposals.  And no one can guarantee that people will be able to keep their current insurance if there is a government option because employers, the main source of health care to workers, always have the right to opt out of providing insurance, changing carriers or (potentially) to convert to the public option. 

(Editor’s note: This is not entirely accurate. Yes, there are technically no “death panels” that have direct rules that say if patient A has B than C equals death. That’s not the point. HR 3200 does create a panel of “experts” to develop guidelines on care. It’s not a stretch to say that this could evolve into a “death panel”. Meaning they may develop guidelines that fill out the above equation. Remember HR 3200 has a public option and as more weight is placed on an already broke system, decisions could be made. I don’t think this claim is irresponsible.

It may indeed be time to reform health care but it must be done responsibly.  Everyone should have a basic level of coverage and protection from the potentially catastrophic costs of care.  We need reform that maintains the balance between government and privately funded health care that has delivered a highly accessible, technologically advanced system to almost all Americans.  Everyone agrees that care needs to be less variable.  It surely has to be of higher quality.  And it must be far more cost effective and efficient than it is now.  But it also must maintain an appropriate balance of public and private health insurance.

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