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Why Do Our Health Insurance Rates Continue the Upward Climb?

Let’s state the obvious at the very beginning: The health insurance premiums we pay are a derivative of the healthcare (and administrative) costs we incur. As healthcare costs increase, so too, will our health insurance premiums.

One datapoint from the Iowa Employer Benefits Study© that has proven to be THE fixation each year is the rate health insurance premiums have increased. The results in 2018 are no exception. Iowa employers, regardless of employee size and industry, reported they experienced a size-weighted increase of 8.4 percent.

What this metric fails to tell us, however, is WHY this continues to happen every year – a phenomenon somewhat akin to what Bill Murray’s character experienced each day in the movie, ‘Groundhog Day.’ Like Murray, we continue to relive our past.

Healthcare spending in our country is quickly approaching 20 percent of our economy, about double what is found in other high-income countries. In 2019, this ‘crisis’ will be 50 years strong, with no signs of abatement. Worth noting, national health expenditures in 1969-70 was just 6.9 percent of GDP.

Unfortunately, finding comparable data that can easily provide insight on WHY healthcare consumes about one-fifth of our economy is difficult. If we can understand the fundamental reasons for higher costs, we can then make the necessary corrections to address the core problems that continue to plague our economy and adversely impact the personal purchasing power of most Americans.

We all have our own theories, credible or not, about this WHY question. Some of these theories typically include:

  • Americans are higher utilizers of care (compared to other industrialized countries) and that is WHY we pay more – because healthcare consumption is really a volume problem.
  • Tied closely to the theory above, is the belief that the U.S. lacks enough primary care physicians but has too many specialists who charge more for their services.
  • High usage of prescription drugs, in addition to our inability to negotiate favorable price concessions with drug manufacturers.
  • A fee-for-service reimbursement system that incentivizes healthcare providers to give us excess (and usually unnecessary) care.
  • A broken malpractice system that drives excessive defensive spending.
  • The U.S. under-invests in beneficial spending of social programs compared to other advanced countries. By not investing in the ‘social determinants of health,’ we pay the eventual price of having a sicker population that uses more healthcare and that drives high healthcare spending.
  • A national culture that refuses to face death, and instead, spends excessively at the end of life.

On the surface, any of the above theories have merit, perhaps merit that can even be substantiated. However, when taking a deeper dive, some theories may shake out as myths.

Unmasking Some Popular Myths

Recently, a report in JAMA indicated that healthcare utilization in the U.S. is not what we have historically believed. It turns out that, “When it comes to utilization, there is no compelling case that the U.S. rates are substantially higher than comparator countries.” Admittedly, we do have more CT scans, knee replacements and higher cardiac procedures than other countries. But we have fewer hip replacements, and overall hospital days, and physician visits per population. The authors of this work make the point that “we certainly do not overuse services at such a rate to meaningfully explain spending that’s twice as much as comparator countries.”

It is important to note, however, according to a 2017 article published in Health Affairs, there is excess utilization of many low-value services in the U.S. Because these low-value services are also low cost, this does not appear to impact the spending differences between the U.S. and other countries.

The fee-for-service (FFS) payment structure is widely believed by many to push health costs upward, but FFS does not have the impact on costs as popularly perceived. Rather, FFS adversely impacts accountability in how healthcare is delivered and undervalues the quality we expect to have. Eliminating FFS to keep costs down may provide some relief, but its demise is more about initiating better practices of care.

A 2016 article in JAMA basically found the spending for end-of-life utilization in the U.S. to be in line with other countries, meaning that it is also high everywhere. End-of-life spending occurs due to uncertainty about when a person is going to die – we spend a great amount of money on people who are really sick, but they die anyway. Because most other countries are similar to our perceived “unique culture” in the U.S., this narrative does not hold true on why costs are higher in the U.S. than elsewhere.

Two (Primary) Reasons for Grossly High Health Costs

I’ve just spent some time debunking commonly-held beliefs on why healthcare costs are high in the U.S. (and Iowa). Harvard professor and physician, Ashish Jha, one of the authors to the JAMA article that refutes high healthcare utilization in the U.S., provided a fascinating discussion about understanding healthcare costs to the Senate Committee on Health, Education, Labor, and Pensions this past June.

Jha argues that two major culprits are responsible for gobbling up the U.S. GDP:

  1. Administrative Complexity
  2. High Medical Prices
Administrative Complexity: 

As consumers of goods and services, Americans love to have many choices available to them – and healthcare is no different.  We desire choices in the providers who perform the care we seek and in the various health plans we purchase – either individually or through our employers. But with choices come complexity and additional costs. In healthcare, how many choices become too many?

Fragmentation of our healthcare system centers around the number of health insurers – we have about 858 insurers in the U.S. With each insurer, there are various protocol requirements by physicians and hospitals when confronting billing and insurance-related activities. There is a myriad of different claim forms, hoops to jump through to ensure a claim will be paid, zillions of different benefit plans that require unique compliance procedures and varying challenges of claim denials.

When compared to other high-income countries, the costs of administrative inefficiencies in the U.S. are enormous. One aggressive 2014 report puts this cost at 30 percent of total healthcare spending. Another more cautious report from the OECD uses a narrower definition of administrative costs and estimates the U.S. to be at eight percent, which is over twice the average of other advanced countries.

High Medical Prices:

Reinhardt et al. (2003) argued in a Health Affairs article, “It’s the prices, stupid.” Again, compared to other industrialized countries, the U.S. has the highest prices for medical goods, services and labor – and nearly all brand-name drugs. A recent Wall Street Journal article, “Why Americans Spend So Much on Health Care,” states that “Among the reasons (for high medical prices) is the troubling fact that few people in health care, from consumers to doctors to hospitals to insurers, know the true cost of what they are buying and selling.”

Primary care doctors are paid, on average, $218,000 in the U.S. – about $85,000 more than similar physicians in advanced countries. Computed tomography (CT) scans, MRIs, colonoscopies and many other procedures are about double the cost compared to other countries. As an example, I recently had a CT scan performed at a Des Moines hospital, taking no more than five minutes. I learned a month later through my insurance company’s Explanation of Benefits, that the charge was a whopping $8,323.01, while the network ‘savings’ was $7,608. I would love to learn how that charge (and write-off) was determined!

Jha points out in his comments to the Senate committee that Prince Louis, the “royal baby” born to Kate Middleton and Prince William earlier this year, was delivered in a “luxurious private maternity ward in expensive London.” The Economist article cited by Jha indicated the cost was $8,900 for this delivery, while the ‘average’ delivery cost in many U.S. communities is around $10,800 – but can be much higher depending on the location. Even the cost of the best and most luxurious delivery care in London pales to what us common folk have in this country. Put another way, the delivery cost of the ‘royal baby’ was comparable to the exaggerated charge of my five minute CT scan!

Of course, it might be somewhat of an equalizer if the care we received in the U.S. outperformed care in these other countries. It does not. In 2017, The Commonwealth Fund ranked the U.S. as the lowest performing country when compared to 10 other countries. Healthcare outcomes, in addition to access, administrative efficiency and equity placed a dismal 10 or 11 in these categories.

Administrative inefficiencies and high medical prices are two simple evils found in the healthcare cost crisis. Sounds as though the solutions should also be simple – tackle the factors that determine prices and simplify administrative services. We must combat a dysfunctional healthcare ‘system’ that desperately needs infusion of common sense and the embracement of the right incentives to perform efficiently. Doing so would drive competitive battles to reduce costs to a more reasonable level.

Until then, the premium increases experienced by employer-sponsored plans will continue into the foreseeable future.

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A New Employer Mindset Needed
Avoid Repeating Healthcare ‘Time Loop’

Time LoopIn the 1993 movie, “Groundhog Day,” actor Bill Murray plays a Pittsburgh TV weatherman who finds himself in a comical time loop while covering the annual Groundhog Day event in Punxsutawney, PA. Murray’s character wakes up each day to relive February 2 and eventually learns how to use his prior-day experiences to make a difference within Punxsutawney. But it takes him many, many attempts and frustrations before he realizes he must re-examine his life and priorities before he can make desired progress.

I was recently approached by a very large Iowa organization interested to know my ‘take’ on the next phase of employer-based health coverage. Specifically, I was asked how to break the endless cycle of doing the same things over and over again to control health costs – as current attempts seemingly do not move the cost needle.

This particular organization assuredly represents most employers when it comes to the frustration of offering health coverage to their workforce. Much like the Murray character, employers continue to relive their renewals, year-after-year, only to repeat past practices that invariably result in a similar and familiar fate. A handful of these annual activities typically include the following:

  • Changing insurance companies or third-party vendors, including pharmacy benefit managers, wellness vendors, insurance brokers, etc.
  • Increasing employee cost-sharing components, such as deductibles, co-payments and out-of-pocket maximums
  • Limiting (or expanding) provider networks
  • Embracing consumer-driven health plans
  • Converting to a new financial mechanism to pay for coverage, such as self-funding, partial self-funding and a host of other hybrid funding arrangements

To avoid repeating similar (and predictable) results from these practices, employers should take a page from Murray and re-examine their priorities. Here are three ‘takes’ that I shared with this particular organization:

  1. Employers Must Recognize and Accept that Preventable Medical Mistakes is a HUGE Problem

    Employers should not assume employees and their family members will consistently receive safe and appropriate care from the local provider community. Even the best and most prestigious hospitals are not immune from committing these errors. Preventable mistakes are VERY costly, both in lives and in money. According to the Robert Wood Johnson Foundation, poor quality-of-care costs employers at least a third of the single-health premium. In Iowa, this would conservatively amount to $1,850 per employee each year. The social costs due to preventable medical errors dwarf this amount.* Just as importantly, eliminating preventable mistakes will also result in employees and family members living healthier and more productive lives.

  2. Insist that Patient Safety becomes a PRIORITY

    In the past, employers have relied on healthcare providers and insurance companies to control costs and quality, assuming that patient safety was naturally baked into the services we purchase. Yet, employers unknowingly pay for medical errors – albeit at the lower-negotiated fee available through insurers – but such discounted ‘savings’ are eventually negated due to paying for undocumented preventable mistakes. Employers and employees (not insurers) are the ultimate payers for this wasteful and unnecessary cost through higher insurance premiums. And, because of this, they must insist that new health plans deny payment for preventable medical errors. At the very least, this should be a minimum requirement. Few private plans attempt to do this, primarily because they have scant metrics to detect these errors. How would they know?

  3. Require public TRANSPARENCY from local providers

    The word ‘transparency’ has become an overused word – especially within healthcare. But for the ultimate payers of healthcare (employers and employees) to determine the value they receive from the ‘investment’ they make, the provider community must enter the 21st Century and demonstrate their value by publicly reporting comparable and usable safety information. This should also be a minimum requirement.

Offering and paying for expensive health insurance coverage year-after-year is the ‘Groundhog Day’ confronting frustrated employers. Unless a new mindset takes hold in the employer community that can forever alter our perpetual ‘Groundhog Day,’ very little will change in our ‘town’ of Punxsutawney.

*Additional details to follow over the next month.

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