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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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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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Employer-Sponsored Health Insurance – An Impending Decline?

Americans partake in a variety of traditions. We throw tailgate parties, both before and after football games. During Halloween, our tradition involves children going door-to-door begging for candy, using the words, “Trick or treat!” Before Thanksgiving, our president and many state governors will pardon hand-selected turkeys from becoming the next meal. After Thanksgiving, Americans find the energy to start their annual Christmas gift list and go shopping on Black Friday…and/or wait until Cyber Monday.

During this time of year, millions of Americans will also perform the ritual of selecting a health plan for the new year – based on how much the new insurance plan will now cost them. In addition to the increased insurance premiums, Americans are forced to wrestle with climbing deductibles, copayments and out-of-pocket maximums. In some cases, working families are spending more of their income on insurance coverage that may not protect them compared to insurance plans from yesteryear.

Employer-sponsored health insurance is the largest-single source of health coverage in the U.S. – covering more than 150 million American workers and their dependents. By comparison, Medicaid, the second-largest source of coverage, insures about 70 million Americans, or less than half of job-based coverage. Medicare, health coverage for our seniors, covers 50 million Americans. Finally, the other 17 million American who have health coverage are enrolled in the Affordable Care Act marketplaces and individual markets offered in each state.

Underinsured

As mentioned, adults with job-based health coverage are seeing higher deductible and out-of-pocket costs compared to prior years. In fact, relative to their income, a recent Commonwealth Fund report has found that working Americans are effectively “underinsured” – they spent more than 10 percent of their income, excluding premiums, on healthcare; spent more than five percent if they were low income; or they had a medical deductible that exceeded five percent of their income. According to the report, this is more than double what it was in 2003, and up sharply from just three years ago (2014).

The major factor for the rise in the underinsured is that employer plans (both small and large employers) are increasingly fighting rising healthcare costs by super-sizing their deductibles to keep the cost of premiums relatively reasonable. Commonwealth estimates that the number of ‘underinsured’ American adults (ages 19 to 64) is 41 million, or 28 percent of U.S. adults. This number is double the rate in 2003 and is up by 10 million since 2014.

In the U.S., health spending increased by 4.3 percent in 2016, outpacing overall spending for goods and services, which increased by 2.8 percent that same year. Additionally, healthcare costs continue to grow faster than American workers’ wages. Over time, this cost pressure recedes the workers’ paychecks, which negatively impacts other purchases workers need or desire to make. In Iowa, as an example, the average deductibles offered by employers has increased drastically, up 185 percent between 2004 and 2016. Using a linear regression equation, the average single and family deductibles could climb to $2,000 and $4,500 respectively, by the year 2020.

Despite being large purchasers of healthcare services for employees and their dependents, employer-sponsored plans run the long-term risk of being unable to control rising healthcare costs – which can exacerbate the rising discontent workers have of paying more but getting less in return. Unfortunately, employers seldom work together to increase their leverage with health providers – primarily due to employers lacking the staff and expertise to combat the complexities of healthcare markets. First and foremost, employers are in the business of focusing on their own core products and services and the associated challenges found within the markets they operate. By fiat, insurance companies continue to play the role of the purchaser on behalf of most employers and their employees.

Employee Discontent?

What will the future hold if more workers become dissatisfied about their receding take-home wages? Dr. David Blumenthal, President of the Commonwealth Fund, recently wrote: “With that discontent will likely come increased calls for dramatic reforms in our health insurance system, reforms that will better protect the millions of Americans who have long depended on protections they receive in the workplace. Some of these discontented Americans may become more receptive to government interventions in private health insurance markets.”

Assuming this discontentment is real, and it appears to be, employers will need to find new approaches to apply additional leverage when making future health coverage purchasing decisions. Being a reluctant purchaser may only prolong the inevitable. For employers, there’s no better time than the present to engage in activities that will provide value for their workforce. Otherwise, external cost pressures may eventually jeopardize health coverage at the workplace.

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