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Health Freedom Watch
(Email newsletter published by the Institute for Health Freedom)
February 2007
Contents:
California Health-Reform Plan: $12 Billion Solution to a Purported $9.5 Billion Problem?
In January California Governor Arnold Schwarzenegger announced his $12 billion health-reform plan, which includes requiring every Californian to have health insurance. It also establishes electronic health records that can be exchanged easily across computer systems on a statewide basis. While details of the plan have yet to be worked out, his proposal is summarized in the ten-page “Governor’s Health Care Proposal.” Following are points that may be of interest to Health Freedom Watch readers. The plan:
- Promotes Evidenced-Based Medicine: The plan would create a new “Healthy Actions Incentives/Rewards” program to encourage Californians to use evidenced-based medical services that are cost-effective and reduce disease. Citizens would pay reduced premiums for using government-approved medical services and engaging in sanctioned lifestyles. The proposal states, “All of the Healthy Actions programs are linked to the completion of a Health Risk Assessment and follow-up doctor visit.” Yet a major problem with state government serving as judge of best medical practices, rather than individuals and their chosen physicians and health-care providers, is that mandatory insurance-coverage policies will be heavily influenced by special-interest groups—the groups with the most money to fund research will be able to lobby the legislature for coverage and mandates of their services.
- Paves the Road to National Medical Screening: The proposal calls for establishing a national model for diabetes screening, prevention and treatment. It would develop “comprehensive” (i.e., everybody in, nobody out) screening for pre-diabetes and diabetes, and “proven interventions” would be directed at the targeted population. However, it is not clear whether the screening will be voluntary or mandatory and how other states will be encouraged to follow this initiative.
- Mandates Electronic Prescribing: In an effort to reduce medical errors, all health-care providers and facilities would be required to prescribe by electronic means by 2010. It remains unclear what privacy and security protections will be provided Californians’ prescription data. If the state is relying on the federal medical-privacy rule, citizens will not be asked permission before their data is shared for many purposes. Thus forcing all doctors and facilities to exchange sensitive information electronically would infringe on people’s privacy.
- Promotes Electronic Data Exchange: The plan calls for appointing a deputy secretary of health information technology (HIT) to coordinate the state’s HIT-related efforts to “achieve 100 percent electronic health data exchange in the next 10 years.” It promotes the use of standardized personal health records that are accessible via the Internet and smart cards that are portable between health plans. It also calls for the Office of Statewide Health Planning and Development to collect and distribute data on health outcomes. However, until citizens are ensured of their legal right to withhold consent before their information is shared, many will continue to oppose electronic medical records and national health tracking.
- Mandates Individual Coverage: The proposal would mandate all citizens to purchase health insurance and provide subsidies for those who cannot afford it. While this sounds benign—even responsible—digging a little deeper leads one to see that mandatory health insurance interferes with citizens’ freedom of choice and of contract. If government says everyone must purchase a certain type of health insurance that excludes an individual’s preferred treatments, he or she would have to buy additional insurance but could not buy a comprehensive policy more to his or her liking.
- Government Would Use State Employment/Tax Records to Enforce the Individual Mandate: The proposal states that “the salary tax withholding and payment process with the [California] Employment Development Department and the state income tax filing process will be utilized to promote compliance with the individual mandate.” Also, “systems will be established to facilitate enrollment of uninsured persons who use the health care system. Providers will play an important role in supporting enrollment by instituting such strategies as on-site enrollment at provider locations, as well as by underscoring the expectation that everyone present a coverage card at the point of service.” Wouldn’t linking health-insurance status to employment and tax records deter many illegal immigrants from seeking preventive and emergency health-care services and thus fail to enroll a large number of uninsured persons?
Mandating health coverage doesn’t mean everybody will comply, stresses John Graham, director of health-care studies at the California-based Pacific Research Institute, in a recent San Francisco Business Times article. “California law requires car insurance, but 25 percent of the state’s drivers remain uninsured.”
Moreover, Graham challenges a key argument Schwarzenegger uses to promote his plan. Schwarzenegger cites a New America Foundation study that asserts the average California family pays about $1,186 a year in “hidden taxes” buried in insurance premiums to cover the uninsured (about $455 for individuals). That’s $9.5 billion a year. But Graham says the claim is misleading.
“First, many uninsured have jobs. One fifth earn more than three times the federal poverty level—about $50,000 for a family of three. By forgoing health insurance, these people are voluntarily paying extra income tax—likely more than $2,000 a year for the family above. Even the governor estimates these extra taxes at $8.4 billion—so the uninsured already pay almost 90 percent of the so-called ‘hidden tax’ as explicit taxes” Graham explains.
“[T]here is a real hidden tax, but it is due to overinsurance, not uninsurance,” Graham says. “Because of bad incentives, insured Californians use 2.5 times more health services than the uninsured—much of it wasted. U.S. Sen. Tom Coburn (R-Okla.), an obstetrician, agrees with economists who estimate that one-quarter to one-third of health care is wasted because almost nobody has the right incentives to use it wisely.”
“It takes a special effort to propose a $12 billion solution to a so-called problem that costs $9.5 billion, then claim that you are reducing the cost of the problem,” notes Graham.
Sources:
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Nation’s Health Expenditures Hit Nearly $2 Trillion in 2005, Projected to Double to $4 Trillion by 2016
U.S. spending on health care hit nearly $2 trillion—$6,697 per person—in 2005, according to a report released by federal actuaries in January. The study was conducted by the National Health Statistics Group, part of the Centers for Medicare and Medicaid Services (CMS). The CMS is the largest single payer of health care in the world.
Do the Math!
National health spending is projected to almost double between 2005 and 2016, reaching more than $4 trillion a year by 2016, according to a report by CMS’s Office of the Actuary. That’s roughly $12,782 per person. Following are estimated national health expenditures per person between 2005 and 2016:
| Year |
Per Capita Health Spending |
| 2005 |
$6,697 |
| 2006 |
$7,092 |
| 2007 |
$7,498 |
| 2008 |
$7,957 |
| 2009 |
$8,468 |
| 2010 |
$8,985 |
| 2011 |
$9,525 |
| 2012 |
$10,110 |
| 2013 |
$10,735 |
| 2014 |
$11,383 |
| 2015 |
$12,062 |
| 2016 |
$12,782 |
Thus as states propose various universal health-insurance plans in the coming years, it would behoove citizens to carefully evaluate how much it is going to cost to cover the uninsured not just today but in five years and more from now.
Sources:
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Restoring “True” Insurance
The jury is in and the verdict has been given. For decades, insurance has been grossly misused as a tool to manage medical costs in this country. In fact, it has served to promote and support one of the most damaging elements to the medical market: “first-dollar benefits.”
Benefits that disguise the actual cost of medical services do great harm to the naturally occurring and self-limiting economic aspects of a buyer purchasing services from a seller. With minimal office and pharmacy co-payments of $15 or $20, the insured makes a decision on whether to use the services or drugs without having to consider the cost. This creates what insurers call “moral hazard.”
It is very inefficient to hire an insurance company to pay expenses that are relatively certain to be incurred over a reasonable period of time: “budgetable expenses.” This seems more obvious with bills for groceries, gasoline, or utilities, but the same economic effects occur with medical bills.
What can we do about this? First, we need to reestablish the true definition of “insurance.” Although there are many dictionary definitions, the most concise one is most helpful here: “risk mitigation.” One needs insurance if one faces a “risk” of loss, and desires to shift that risk to an entity willing to assume it in exchange for a payment (the premium). What we have come to know as “traditional” health insurance is clearly something else. It would be more accurately described as a very inefficient method of financing medical services.
For medical services, “true insurance” is generally referred to as “catastrophic coverage.” We all know that extended in-patient hospital confinements result in expenses that only the wealthiest among us would be willing or able to absorb, and would lead to catastrophic economic hardship in the absence of insurance. This is an example of a risk, and its mitigation is the true and proper function of “health insurance.”
This is not mere hair-splitting. In addition to the waste associated with moral hazard, the fact is that insurance companies are terribly inefficient administrators. The logic that demands we not use steam shovels to till our gardens or hand trowels to build roadbeds rings true with the use of insurance as well. Insurance companies are very expensive personal bookkeepers and check writers. In spite of advances in claims-paying software and years of fine tuning, small transactions such as payment of doctor’s office charges and related expenses are most problematic. Decades ago when first-dollar coverage became the norm it wasn’t such a noticeable waste. Now that the medical sector has grown to almost 20 percent of the gross domestic product it is a very serious waste of resources.
How do we specifically define “catastrophic coverage”? Reasonable persons will disagree about this, and the loss that constitutes a catastrophe depends on the ability of the insured to absorb financial risks. Most visualize catastrophic insurance as a comprehensive health insurance plan (similar to the “traditional” model) with a very high calendar-year deductible (very different from the “traditional” model). For the sake of argument, let’s assume the deductible is $50,000.
The immediate objection is that most people cannot afford to fund the first $50,000 of medical expenses in a year. This is no doubt true, but no one is suggesting that the $50,000-deductible policy is the only protection that anyone may or should have. The goal here is to separate “financial management” from the element of “risk” wherever possible, because insurance companies that are capable of providing risk abatement up to millions of dollars are not the best at managing finances on the individual level. No matter how hard they try, elephants will never be able to play the piano.
Consequently, it is irrational to empower these insurance companies with all available medical funding in the form of premiums for “first dollar comprehensive medical insurance programs.” There are many potential solutions for managing that first $50,000 in medical expenses that would be much less costly than the usual policies available today. This “non-catastrophic” expense is best addressed in terms of financing methods, and creative market solutions can be developed. When financing is not appropriate, one would be able to purchase lower cost “limited” insurance programs that are designed to terminate at the point where the catastrophic deductible is reached. The amount and proportion of self-insuring, financing, and/or purchasing of limited insurance by an individual would be tailored to the specific needs of that particular individual and his family.
A combination of financing and insurance would increase the buying power of the individual, because properly structured catastrophic insurance combined with any appropriate mixture of financing methods should be less expensive than traditional insurance policy costs. It would also tend to alleviate some of the problems associated with medical underwriting for those with health problems, because of the separation of catastrophic risks from the expected expenditures for known health problems.
There are other serious barriers to developing solutions to medical financing problems, the most important being the tax code, which strongly favors employer-sponsored benefit programs. However, changing the mindset about what insurance can and should accomplish so as to reflect economic realities is a necessary step.
Frank Timmins has worked in the insurance industry for 34 years, primarily with employer-based benefits. He is founder and former president of Group Administrators, Inc., and a founding partner of Medcon Benefit Systems Group. Contact: Ftimmins@medconbenefit.com.
Source: “Restoring ‘True’ Insurance,” by Frank Timmins, Journal of American Physicians and Surgeons, Volume 11, Number 4, Winter 2006 (reprinted with permission): http://www.jpands.org/vol11no4/timmins.pdf
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Health Freedom Watch is a monthly email newsletter published by the Institute for Health Freedom (IHF), a national nonprofit, educational organization whose mission is to bring the issues of personal health freedom to the forefront of the American health-policy debate. IHF monitors and reports on national policies that affect citizens' freedom to choose their health-care treatments and providers, and to maintain their health privacy--including genetic privacy. IHF is not affiliated with any other organization.
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