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Using the IRS to Tame Healthcare Costs

As I approach the eve of receiving results from our 19th annual Iowa Employer Benefits Study©, a survey that was on sabbatical in 2017 to accommodate our Iowa Patient Safety Study©, I am waiting in great anticipation as to the status of employer benefits in Iowa after this one-year hiatus.

From this latest study, we will be learning quite a bit regarding many key components found in health and dental insurance, life and disability coverages, retirement, and a multitude of paid-time off components that are extremely important to employees.

But as in previous studies, I will be highly focused on health insurance components, such as premiums, employee contributions and out-of-pockets expenditures. As we are all painfully aware, the cost of health insurance, although experiencing relative tepid growth in the past few years, continues to outpace inflationary costs. In May, the Milliman Medical Index was released showing that, on a national average for 2018, the total cost of insurance for a family of four exceeded $28,000 (it was $23,215 in 2014). As we know, the rising cost of health insurance and medical care alters purchasing behaviors – rational or not.

A recent commentary written in the Wall Street Journal, “The IRS Can Save American Health Care,” by Regina Herzlinger (professor at Harvard Business School) and Joel Klein (chief policy and strategy office at Oscar Health) piqued my interest. Now it must be noted that Dr. Herzlinger is a huge proponent of “consumer-driven healthcare,” while Oscar Health is a technology-focused health insurance company that primarily focuses on individuals purchasing health coverage through designated state marketplaces. Oscar would presumably benefit greatly from what these authors have proposed.

The Existing Problem

Thanks to a 2017 Kaiser Family Foundation report, the authors make a point that eight percent of employers offer a choice of tighter provider networks for their employees to use. Tighter networks restrict the number of providers that can be covered in a geographical location, but in return, providers concede on price, making the plans’ cost more competitive. By abdicating the important choice to exclude higher-cost providers, the authors argue that large hospitals that are dominant in local markets are able to charge higher prices without facing much backlash.

Employers benefit from using pretax dollars when they purchase insurance on behalf of employees, who understandably, are unsure about the true cost of health insurance as this tax exemption greatly distorts and conceals this cost. As a result, employees are likely to believe that someone else is paying the majority of the cost and may not feel as compelled to discern the charges they rack up. If employees work for employers who don’t offer health insurance, they can buy policies on their own through the individual markets, however, they will not benefit from the same tax breaks allowed to employers.

According to the authors, it is who pays for the coverage that ultimately impacts healthcare costs.

Proposed Approach to Put Employees in Charge of Health Costs

Herzlinger and Klein are advocating the IRS to adjust its technical definition of Health Reimbursement Arrangements (HRAs) so that they can be used to pay insurance premiums to satisfy the ObamaCare employer mandate. How could this happen? Employers would simply fund a fixed amount of money into each employees’ HRA, and then have the employee buy the best health plan for their families in ACA-exchanges. Employees would now have tax-free money to purchase health insurance, and if any money is left after the purchase, they can pocket the savings as taxable income. This provides an economic incentive to employees to become thrifty with their money.

The thought process is that employees would now have the appropriate tax break to induce buying cheaper, more-tailored policies – rather than receive a standard plan offered by their employer. The theory is that having more workers purchase coverage through the individual marketplaces would “drive down premiums.” Workers may be more inclined to select a scaled-down provider network that would have fewer providers, but in return, the insurer would be empowered to negotiate lower prices with hospitals and physicians. Such activity would eventually break the stronghold that dominant health providers have in their markets. A 2017 McKinsey analysis suggests that tighter provider networks can be at least 18 percent cheaper (and still achieve similar outcomes).

With this IRS adjustment, the authors feel the Department of Health and Human Services – and Treasury – could work with states and employers on offering HRAs to employees. There would be no act required by Congress to make this happen, bypassing the common gridlock found in Washington.

Will This Be Successful?

This approach is simple in concept and may have some merit of pushing workers to become better healthcare ‘consumers.’ However, expecting a new insurance approach – even through different tax advantages – to overcome the myriad of twisted, inefficient, and opaque incentives that mold how providers and other stakeholders behave is, I’m afraid, mere wishful thinking.

I do consider myself to be an advocate of ‘market-driven’ forces to make healthcare more efficient, safe and affordable, however, it will take a carefully-crafted menagerie of both public-private approaches to ‘tame’ this beast and eventually alleviate runaway health costs.

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A Man with an Impactful Reach

Thenh Bo Bong – Circa 1977 Courtesy of Centerville Greenhouses, Inc.

With the recent passing of Iowa’s uber-popular Governor Robert D. Ray, I am reminded of his influence on our family four decades ago while growing up in Centerville. This impact was in the form of becoming educated about life outside of Iowa…and our country.

Growing up in a small Iowa town can have both positive and not-so-positive vibes…much of which relates to how we personally perceive whether we can have an impact on the community where we live, work and play. In 1972, after my parents purchased a greenhouse in southern Iowa, our family moved to Centerville from Fargo, ND. Some of my best memories come from those initial years of helping make the greenhouse a growing concern. It took a lot of hard work to transform a run-down, badly neglected facility into something we would be extremely proud of – and depend on for our livelihood.

Governor Ray, elected in 1968, was up for his first re-election the year we moved to Iowa. Given my age at the time, I knew very little about him, other than through newspapers articles or radio and television. I now have the luxury of knowing more about Gov. Ray and his policies, understanding that even though he was a fiscally-responsible Republican, he also embodied a progressive agenda that crossed party lines.

But he was more than that. Gov. Ray demonstrated a humanitarian response by accepting several thousand displaced refugees from Southeast Asia – a result from the horrible aftermath of the Vietnam war. The concern back then for some Iowans and Americans was that the refugees would take away ‘our’ jobs. Gov. Ray persisted, however, telling The Iowa City Press-Citizen in 2003, “I decided we couldn’t sit here in the middle of Iowa, in the land of plenty, and let them die…They had to risk everything, their homes and members of their family.”

New Arrival in Centerville

Around 1976, Gov. Ray’s compassionate action spilled over to Centerville – and to our family business. Through their own compassion, my parents felt it was their civic and moral obligation to reach out to a newly-arrived family from Laos, who spoke little-to-no English but desired to quickly assimilate into a new location and culture. As teenagers in rural Iowa, my siblings and I now had ringside seats to observe how refugees could reconstruct a new life of hopeful opportunity after having experienced tragic circumstances that occurred halfway around the globe. There are no social studies classes or textbooks that could be written to describe what we experienced working with this newly-hired employee – a tiny man in his forties with a wife and three children. His name was Thenh Bo Bong.

Thenh Bo Bong: Courtesy of the Centerville Iowegian 1980 Progress Edition

Although Thenh Bo spoke no English, his sons would act as his early interpreters. Over time, he would intently listen and watch his co-workers and quickly grasped the various jobs that needed to be performed at the greenhouse. I specifically remember that, despite the hot and humid summer months, he enjoyed having hot tea or water during our sanctioned morning and afternoon breaks. Though very quiet, primarily due to not speaking English, he always had an infectious smile and was very courteous to others – the language barrier could easily be replaced through other means. From this, I learned that effective communication can come in many forms, one of which, of course, is the spoken language. But the universal language, regardless of culture, is more easily demonstrated through our actions toward one another. Learning this invaluable lesson came from on-the-job training with our newest employee.

During the winter months, my sister, Mary, would pick up Thenh Bo (along with his two sons) at his home and deliver the sons to the junior high before taking Thenh Bo to the greenhouse. Mary herself, would then proceed to high school. Our parents sponsored Thenh Bo’s parents when relocating to Centerville, and also helped furnish their apartment with bedding, curtains and various other items. The tapestry of cultures, no matter how different, impacted many lives in this small town.

During his employment at the greenhouse, Thenh Bo and his wife had a newborn son, John, who was named after my older brother. When afforded the opportunity, it is amazing just how disparate cultures can intertwine with one another and, as a result, become more enriched. As I understand it, Thenh Bo’s children became well educated and, eventually, pursued their vocation in medicine.

The legacy that Gov. Ray leaves for us is both vast and immeasurable. If not for his efforts, we would never have met the Bong family to appreciate their culture and fully understand the realization that we truly do live in a world that is a better place because of acts of kindness (and boldness) that began through Gov. Ray.

I’m quite sure there are countless ‘Thenh Bo’ stories throughout Iowa and beyond. Each one of them unique. We’re thankful to Gov. Ray and Thenh Bo (and his family) for teaching us that it is through compassion and understanding that we can “sit here in the middle of Iowa, in the land of plenty”…and provide the less fortunate a chance to live and contribute.

Now THAT is an impactful reach!

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Did Iowa Mess Up Its Individual Health Insurance Market?

The individual health insurance market in most every state is, at best, precarious. Iowa is no exception – a conclusion reached recently by national consultant, Wakely Consulting Group, one of many organizations that I collaborated with in 2012 when analyzing the Iowa population for implementing a state-based health insurance marketplace. Their report, “Analysis of Alternative Policy Decisions in Iowa’s Individual Market,” sheds light on how a concoction of earlier decisions can undermine fragile markets. In short, the individual health market is a tangled mess.

The Affordable Care Act (ACA) established state-based marketplaces that allowed Americans without employer health coverage to purchase health insurance regardless of preexisting conditions. Such sanctioned ACA plans would also provide minimum essential standard-of-benefits.

The premium paid by those qualified to enroll in these plans varies, primarily based on factors of age, tobacco use, family size and geography. Other factors – such as pre-existing conditions, health status, claims history, duration of coverage, gender, occupation, and small employer size and industry – cannot be used to impact insurance premiums. Individuals earning a certain amount of income (100-400 percent of poverty), can receive subsidies to pay for their coverage, while others above this threshold must pay the full premium themselves.

The whole idea of insurance risk is to cover as many insureds as possible, safeguarding that there will be enough ‘good’ risks to help offset those considered to be ‘bad’ risks. When the Iowa marketplace was launched in 2014, Iowa had four insurers competing in the individual marketplace. Today, Medica is the only insurer that sells ACA-compliant health plans in Iowa. To sustain its business in Iowa, Medica had to increase the premiums in 2018 by 50 percent – which did not impact those receiving premium subsidies but slammed those who earn above the subsidy limit.

On top of this, the state’s largest insurance company – Wellmark Blue Cross and Blue Shield – maintained a large block of pre-ACA grandfathered plans (policies in effect before March 2010) and grandmothered health plans (policies written after 2010 enactment but before 2014) within its block of individual health business. The state of Iowa allowed Iowa carriers to maintain both blocks of business outside the sanctioned ACA marketplace.  According to the Wakely report, “Iowa’s ACA individual market in 2015 represented approximately 40 percent of the total non-group market…while the other 60 percent were covered under the two transitional plans.”

From its analysis, Wakely’s conclusion is that had Iowa NOT allowed for grandfathered and grandmothered plans (an option for each state to decide), the enrollment in the ACA-compliant plans would have increased by 55,000-85,000, while the change in premiums would have dropped by 8-18 percent. Had this happened, I’m sure there would have been new ‘winners’ and ‘losers’ on the amount of premiums individuals would be required to pay.

Lessons Learned?

The likely lessons learned from Iowa, according to Wakely and The Commonwealth Fund, is that further segmentation of the individual market between healthy and unhealthy enrollees wreaks havoc for those who do not receive subsidies that offset massive premium growth. Adopting policies to expand the risk pool and maintain a balance between healthy and unhealthy enrollees, using state-level reinsurance programs can be beneficial to state-based marketplaces.

As mentioned in the Commonwealth Fund analysis, “…premiums in the state’s (Iowa) individual market are already among the highest in the country, with an average annual marketplace plan premium in excess of $10,000 in 2018.” The middle-class consumers – entrepreneurs, independent consultants, farmers, and early retirees – who earn too much to quality for subsidies become ‘losers’ in the insurance risk game.

Granted, with the advent of new association health plans and short-term medical plans that can legally shed many ACA requirements and theoretically become more cost competitive, many of the healthier middle-class insureds may qualify for these plans – but what about those with pre-existing conditions?

The policies we generally make in healthcare are too often made from situational circumstances that cause knee-jerk reactions that may appear to be expedient, but ultimately exacerbate an already complex problem.

Scottish writer, Walter Scott, put it quite succinctly:

O, what a tangled web we weave…when first we practice to deceive.

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