American health care's dirty little secret

Joanna Robinson over at Fey Accompli indulges in a bit of schadenfreude at the hands of human resources managers everywhere, in light of Kaiser's latest numbers finding that health care premiums were up another 9.2% in 2005, and that the share of businesses offering coverage to their employees dropped to 60% from 69% in 2000.

I was actually there at the Kaiser presentation yesterday, and they seem to take some creative liberties in choosing which numbers to highlight to the press. For instance, the press release makes great hay about the fact that average annual premiums for family coverage reached $10,880, thus eclipsing the gross earnings for a full-time minimum-wage worker of $10,712.  That sounds quite terrifying, but it skips over the part where employees opting for family coverage were only responsible for 26% of those premiums, which was actually down from 28% in 2004. And, of course, any household whose head made only $10,712 a year would be eligible for Medicaid anyway.

Even the 9.2% number, it should be noted, marks a trend of flattening increases, down from 11.2% in 2004 and 13.9% in 2003.  Hewitt Associates, for one, have projected that flattening to accelerate considerably in 2006.

That's not likely to cheer the lovely Ms. Robinson, who sees in these cost trends, and in the expansion of high-deductible options, a hope that the employer-based model of health care provision may finally be imploding:

High-deductible plans are a good transition to people owning their own insurance and being responsible consumers that demand good service and low prices - something that does not happen now with so many intermediary institutions keeping the system bloated and inefficient. If prices keep rising at the rate they have been, which I hope they do, it will finally provoke an actual market response.

I'm not quite sure about that.

High-deductible health plans, of course, are already widely available in the individual market, and in fact, they always have been. The newer and more marked trend is HDHPs coupled with Health Savings Accounts, which have only been available for the past year. The early evidence is that they, too, have had their greatest initial impact in the individual market, though Kaiser's lament that relatively few HDHPs in the group market are bundled with HSAs is premature -- the rules for the plans were only formalized this year, so H.R. managers looking to include the option would only have their first real chance to do so over the coming few months as they look forward to January renewals.

HSA/HDHPs are an interesting development but also, in my opinion, a mixed blessing. The "HD" part is promising, as it looks to return the concept of "insurance" -- that is, transfer of uncertain and potentially large risk in the long-term for the certain and predictable  payment of premium dollars in the short-term -- to what is all-too-loosely called "health insurance." Were homeowners insurance to function the way health insurance does, every time you painted a room or changed a lightbulb, you'd make a claim on your policy. And you would only be allowed to shop at an Allstate-approved home improvement store...where non-members would be charged 10 to 30 times as much.

But are these products really likely to help bring costs down in what Joanna describes as the "bloated" U.S. health care system? At the margins, perhaps.  They could reward some doctors and hospitals who lower visitation fees, thus encouraging investment in more efficient processing systems and procedures. They might also cut down on a few unnecessary tests, or lead consumers to comparison shop among diagnostic labs.

But despite the name, the deductibles in most "High-Deductible Health Plans" really aren't all that high -- $1,000 to $1,500 is typical for a singles policy. And, anyway, the HSA part of the equation would usually cover any of the common utilizations that the HD part would otherwise discourage. Furthermore, even if it did have the effect of curbing some arguably inefficient spending patterns, it's not entirely clear that discouraging "overconsumption" of routine health care is actually cost-effective. There are few markets more prone to "pennywise and pound-foolish" category errors on the part of consumers than in health care.

I actually would posit, contrary to the common wisdom, that rising health care costs are not due to the LACK of a market response -- rather they ARE a market response! What they are responding to is that we, as a culture, have a voracious demand for things that tend to make us sick, and for some medical means to deal with the consequences. Rising health care costs are not primarily the result of waste and widespread inefficiency -- they are the result of the ever-widening panoply of medical technologies created to address the trouble we create for ourselves. The cost of existing technologies is not growing -- it's  falling, and impressively at that. But in the world of health care, there is always some expensive new gadget that enables some daring new procedure, and always a slew of Americans in line clamoring for access to it.

This fact of American life is rarely fully appreciated, in part because of preconceived notions (many of them held by Puritanical doctors and health care advocates) about what people "should" want from a health care system. Take this 2003 article from Washington Monthly, comparing American expenditures on health care with those of our amigos in Costa Rica:

TO GET AN IDEA OF HOW WILDLY ineffective our health-care system is, consider this: The United States spends roughly $4,500 per person on health care each year. Costa Rica spends just $273. That small Central American country also has half as many doctors per capita as the United States. Yet the life expectancy of the average Costa Rican is virtually the same as the average American's: 76.1 years.

How can that be? According to public health researchers, the biggest reasons are behavior and environment. Costa Ricans consume about half as many cigarettes per person as we do. Not surprisingly, they are four times less likely to die of lung cancer. The car ownership rate in Costa Rica is a fraction of what it is in the United States. That not only means that fewer Costa Ricans die in auto accidents, but that they do a lot more walking, and hence they get more exercise. Thanks to a much lower McDonald's-to-citizen ratio, the average Costa Rican thrives on a traditional diet of rice, beans, fruits, vegetables, and a moderate amount of fried food--and therefore enjoys one of the world's lowest rates of heart disease and other stress-related illnesses.

It's very telling that the author doesn't notice any of the corollaries embedded in the statistics he cites. Because of our health care system, and our surplus of doctors and technology, Americans can smoke twice as many cigarettes as Costa Ricans, can use lots and lots more cars to get us places, can gorge on all the tastiest fried foods...and still enjoy the same average lifespan! That is, in spending our health care dollars, the bargain Americans have opted for is to use that money to enjoy their lives rather than extend them. Where Phillip J. Longman sees inefficiency, I see rational choice.

So, no, I don't think uncoupling health care from employment is likely to do much to address the real drivers of health care costs. It would take a far more fundamental change in American culture and the sorts of things Americans value to do that. Moreover, Joanna's wish for a purely individual consumer-driven health care model -- common among libertarians, and a concept toward which I'm not completely unsympathetic -- runs into a bit of trouble when you start to game out how costs are distributed through the system.

Since I started writing about insurance full-time three years ago, I've come to have a deeper appreciation of what I like to call the American health care model's "dirty little secret." In her post, Joanna laments being uninsured, but the plain fact is -- for someone young and healthy like Joanna -- anything other than truly catastrophic-level health insurance is probably an irrational purchase. Even in an employer-provided plan, with your boss to pick up 3/4s of the tab, annual premiums, co-pays and deductibles are almost certain to far exceed one's consumption of covered health care services.

Indeed, were it not for the tax advantages granted by the IRS to employers to provide compensation by way of benefits rather than salary (together with the exemption from benefit mandates provided to large groups under ERISA) most people probably would buy their health insurance in the individual market. And were health insurers freed from state regulatory fiats that limit their ability to establish underwriting criteria (deciding which risks to take on and which to refuse), to determine which benefits they would provide and which they would eschew, and to decide how much they wanted to charge for different sorts of policyholders, health insurance would undoubtedly be cheaper -- far, far cheaper -- for the overwhelming majority of citizens.

Now, this sounds great, especially to a libertarian. But another Kaiser chart reveals the dirty little secret.

You see it? Yep. That's it. It's hard to believe, but our health care expenditures are so concentrated that just 5% of the population account for half of them, half the population accounts for nearly all of them, and the remaining half accounts for virtually none of them.

A further wrinkle to the dirty little secret -- for most, more than half of those costs will come in the two months before they die. Thus, for "market forces" to work their magic in controlling the driving costs of the system, we'd have to sit back while all but the most obscenely wealthy die because they can't afford the treatment that would keep them alive.

This is an intractable problem. You can play with the numbers and the various possible structures all you like, but it stays with us no matter what sort of system we opt for -- public or private, insurance or managed care, cash-and-carry or single-payor....you can't escape it. Most people consume no significant amount of health care. For those that do, the costs would almost always far exceed their ability to pay if there were no mechanisms to socialize those costs.

As it is now, we socialize the costs through successive tiers of mixed public and private payment structures. The old and the poor are both disproportionately likely to face high costs, so we have Medicare and Medicaid, both of which have moved toward structures -- like Medicare Advantage -- that allow mixing of some private insurance in with public subsidies.

Among the general population, we rely mostly on employer-provided insurance. Because employers -- especially large employers -- tend to draw from a diverse base of labor, and because the terms of group plans are the same for every employee, this further spreads costs on a relatively even basis, with healthier employees subsidizing sicker ones, and the employer itself subsidizing everybody.

For everybody else, there is a hodgepodge of very imperfect options. You can choose to purchase private insurance, but since it is usually irrational for young and/or healthy people to insure all but the most catastrophic of risks, private plans in the individual market will tend to face problems of adverse selection: the only people who will buy the coverage are those who either already need it, or who have a good sense that they will very soon.

Some states minimize this problem by creating high-risk pools, where those whose employers don't provide group coverage and who are too wealthy for Medicaid, too young for Medicare, and too sick for individual coverage can pay a little bit higher than usual for policies that are still mostly subsidized by the state. Where it's been done, this has helped limit adverse selection and made for a healthier individual market. But were it not for the fact that the overwhelming majority of those at "high risk" are already in Medicare, Medicaid, or group coverage, the risk pools would fall apart.

So, one way or another, those costs are going to get socialized. If it isn't through employer-sponsored coverage or some other distortionary third party mechanism, it'll be through direct taxpayer subsidy. Not many Americans would be willing to accept the alternative -- which is, essentially, to let the chronically ill suffer and let the terminally ill die.

And as committed as I am to free markets, I'm not all that inclined to argue that they should.

Comments

[California Health Insurance]

It is unfortunate to hear so many lack health insurance. We really need to improve our health care system. Health insurance is a major aspect to many and we should help everyone get covered.

[R.J. Lehmann]

Maybe you should give up your commissions, overrides, and communications fees, Carol Roane. That might help some afford the coverage.

[Andrew Spark]

Health care is much more complex than just the question of who pays for the insurance. But I firmly believe that a healthier general population is beneficial for a country, and accessibility to health care is an important part of achieving that.

[KJtraisaTatBBV]

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