You, Too, Can Speak Health Care

You, too, can be fluent in Health Care! In only 10 easy audio lessons, you can amaze your friends with your command of phrases like single payer, health co-operative and rescission, plus acronyms like ERISA, LOS, IPA and HIPAA. Available on CD or by MP3 download for 10 easy payments of only $29.95.

Tempted? We’ll be attempting a similar feat over the next four weeks. Jim Fatula and Kent Gardner will be offering a “back to basics” look at the debate over health care reform. Two core issues—health care cost and health insurance coverage—occupy center stage.

Visiting Washington this summer, Kent watched a session of the Senate and listened to a member’s passionate speech on this subject. Yet he spoke to an empty chamber. Only one other senator was present. Oh, and C-SPAN’s camera, focused only on him. It seemed a metaphor for what has been a sorry debate, filled with speeches but few discussions. Radicals on both ends of the spectrum are driven more by ideology than by thoughtful differences in policy. This is a war between different faiths, a bitter competition between tribes in which winning is the only goal.

At one end of the faith spectrum is a belief that the greed of the private sector is unbounded and cannot be tamed or channeled. These believers advocate moving toward a single payer system, where government would have a central role in the financing and delivery of health care. At the other end of the spectrum are those who hold a similar belief about government, convinced that government is fundamentally incompetent and controlled by special interests. These believers argue for reliance on decentralized markets with government’s role as limited as possible.

The practical reality is somewhere in between these two ends of the spectrum. Markets can fail, spectacularly. Activities directly controlled by government are often influenced by the few against the interests of the many, and performance can be poor. What is the right kind and mix of private/public solutions to meet our health care challenge? This is the heart of the debate.  Moreover, both “camps” have different beliefs about the behavior of citizens/consumers, (who are taxpayers, users of health care, employees with or without health insurance, etc.) affects and is affected by any changes we may make.

The discussion is not about “overhauling the health care system,” desirable as this might be. It is for the most part about changes to health insurance, how individuals finance their health care needs. Health insurance coverage does not guarantee us access to health care nor does it guarantee that the health care we receive will make us healthier.

The two largest publicly-funded health insurance programs—Medicare and Medicaid— have been left largely untouched by most proposals, despite the fact that they are central to health care delivery. Individuals who are 65 and over (plus a few other covered groups) receive care under Medicare. Some of the poor and some of the near-poor qualify for Medicaid, depending on the state.

Medicare’s dire financial circumstance was originally a major impetus for health care reform. The Congressional Budget Office forecasts that the total cost of Medicare will rise from about $500 billion this year to $943 billion (88% growth) in only ten years. And that’s only the beginning—the CBO forecasts that Medicare and Medicaid together will consume 12% of GDP by 2050, up from 4% today.

Yet the fundamentals of Medicare and Medicaid do not change under the proposals with the most traction in Congress. The Baucus proposal, for example, cuts payments to Medicare Advantage plans and some Medicare providers as a way to raise money to finance expanded coverage for the uninsured. Giving provider payments a haircut may change Medicare, but that will be an unintended consequence. Medicaid eligibility will be expanded as a way of covering more of the uninsured near-poor, perhaps also for financial reasons as the cost of Medicaid is shared with the states.

Most of the rest of us rely on a health insurance system that is employer-based. A large proportion of employers, particularly large employers, provide health insurance to their employees, although they are not required to do so. This dependence on employer-based insurance is something of an accident.  There are two principal causes. First, tax law allows individuals to exclude a wide range of noncash compensation from taxable income. Do you get free coffee at work or do you have to pay for it? In a sense, those of us who get free coffee are getting “paid” more than those who don’t. We don’t have to report this kind of thing on our tax returns. Health insurance is also excluded. Fifty years ago health care was less expensive and health insurance, when offered, was largely of the “catastrophic” variety, so the impact of this tax rule was nearly trivial. Today, the difference is anything but. Consider one of CGR’s 2009 health insurance options: The Excellus Healthy Blue 15/25 plan costs $8,227 per year for family coverage. For an employee with family income above $67,900, his or her tax rate on additional income (both state and federal) is 31.85%. For CGR, the cost of either paying family health insurance coverage or granting $8,227 in added salary is the same. The difference for the employee is not. Assuming that the employee could and would purchase the same plan at the same price, the difference in after-tax income is $2,620. Which would you choose?

The nature of insurance explains a second reason for our dependence on employer-based coverage. Insurers know that people who buy insurance of their own free will are more likely to need insurance than those who do not (e.g. if you buy flood insurance, you probably don’t live on a mountaintop). For this reason, insurers are willing to offer a better average rate to cover individuals who are part of a group than to individuals who apply for coverage independently. Adding $8,227 to our employee’s cash compensation will probably not be enough to permit him or her to purchase comparable coverage.

If we could start over, we would not build our health insurance system around a connection to employment. The rapid increase in the cost of health care, thus the cost of health insurance, has demonstrated the flaws of the system we created by accident. For many employers, health insurance coverage is simply unaffordable. The cost of CGR’s family plan is about $4 per hour for a full time, hourly worker. For a firm employing unskilled workers earning the minimum wage, full coverage would add 55% to total employee compensation. It is no surprise that employers have been cutting the share of coverage they are willing to pay or eliminating health insurance benefits entirely. What is not understood by employees is that  wage increases and  health insurance premiums are interchangeable to the employer. As premiums rise, most employers will limit wage increases.

Many of the proposals being considered in Washington are aimed at fixing the problems that arise from our dependence on employer-based coverage. With a market dominated by powerful employer-based plans plus Medicare and Medicaid, the health insurance market for individuals has many flaws. Workers whose employers don’t offer a plan or individuals who are self-employed are disadvantaged under the current system. Not only is it hard to find affordable insurance coverage, individuals who pay for health care without the power of an insurance provider often pay much higher prices for the same services.

Underlying the entire discussion is the question of how society shares the cost of care between the young and the old, the healthy and unhealthy, those with healthy lifestyles and those without, and between the rich and the poor. Finally, how can we design a system of care and payment that is humane, yet does not encourage unnecessary expense?

Kent Gardner, Ph.D., President & Chief Economist with Guest Columnist James Fatula, Ph.D., Chair & Assoc. Prof., Dept. of Public Administration, SUNY Brockport

Published in the Rochester (NY) Business Journal October 2, 2009