Here in California the past few days, the media has been full of outrage over the proposed 39% rate increase by Anthem Blue Cross for individual health insurance policy holders.  Washington DC has heard that outrage and our politicians at every level are piling on demanding an explanation.  It turns out this isn’t just limited to California.  The same company or affiliates raised premiums 23% in Maine, 22.8% in Oregon, and likely other places I don’t know about. I also suspect that Anthem Blue Cross is not the only insurer using this opportunity, for good or ill, to raise rates either as a “me to” tactic or in the belief there is safety in numbers.

I have two of my children who having graduated from college are no longer eligible to be on our family group health insurance plan.  COBRA enables me the privilege of continuing their coverage but the monthly premiums for that privilege are about $500 per month per kid and just increased by 8%.  I guess I should feel lucky compared to the Anthem Blue Cross customers.  But it still is $1,000 per month I must come up with or risk having two of my graduated but “without benefits” kids uninsured.  That is the trap isn’t it.  We can’t afford our increasing health care insurance costs but we can’t afford NOT to have it.

I have wrestled with the ideas proposed in ObamaCare.  On the one hand, a single payer system is seductively simple.  On the other, government services are notoriously heavy-handed, costly, and not very user-friendly.  Try visiting the DMV lately?

The US Health & Human Services Department says that healthcare spending reached $2.3 trillion in 2008, or $7,681 per person or 16.2% of GDP double the 8.1% of GDP in 1975, and triple the 5.2% share in 1960. Clearly, we have a growing problem here and our aging population bubble is going to make it worse before it gets better.

So what’s going on with these outrageous health premium increases?

This isn’t a new problem as we all know.  Premiums have gone up and up and up as health spending has increased over time.  It has been compounded by periods of high inflation and even when  the CPI is low health costs kept rising at faster rates than other consumer prices.

Why?

No competition, a focus on billable procedures, and no incentives by each of us as individual consumers of health care services to control the costs since more and more of our first dollar costs were being covered by our plans—a vicious cycle of cost increases seemingly out of control.

“Give the People what they want, and give it to them hard!”

The conspiracy-theorist in me wonders if the stumbling of ObamaCare once thought inevitable but now seemingly dead on arrival, is provoking a backlash of a different sort.  Is there a campaign to make the current system so painful, so costly, so in-your-face that we will put aside our reservations and trepidations about the single payer public option and flee to it as refuge from all this?

Health insurance companies are ranking right up there with banks and other scoundrels for our civic loathing.  Yet, we can’t seem to find the right answers to the question of how we would reform the system to make it work better. The ObamaCare cure seems worse than the disease.

From Vicious Circle to Virtuous Circle for Health Care

The pragmatist in me says that the real solution to health care cost increases is to re-introduce market competition and individual responsibility to the system shifting the decisions about both spending, plan coverage, and cost reasonableness to individuals in a reformed system that creates a more “virtuous circle” for all.  By modifying our tax laws and setting competitive market principles to work we could see significant improvements in both quality of care, coverage availability, and affordability.

Five Principles for Virtuous Circle Health Care Reform

There are plenty of ideas to consider as alternatives before we give up and go to the single-payer government system including but not limited to:

1. Interstate competition. Congress could authorize interstate competition for health care plans of various types to allow vendors to compete to aggregate individual policyholders for their plans without the current state-by-state mandated coverage and restrictions.  Such a system seems to have worked better than expected in giving seniors the ability to shop for prescription drug coverage so maybe it will work here.  The problem is only about 13 million Americans buy health insurance in the form of individual plans since the vast majority still gets health plan coverage under group insurance plans through their employers. The law also effectively prohibits multi-employer insurance buying cooperatives or risk pools making it difficult for small business to afford coverage for employees. And for individuals, choice is limited, prices are very high, and there is no more assurance they will not be subjected to the same volatile rate spikes for coverage they currently see since one rationale by Anthem Blue Cross for its rate increases is that the recession means that fewer healthier Americans are buying individual coverage.  DUH!  Not in a captive market where ABC can jack the price up 39% and its customers’ choice is pay it or get dumped.
2. Transition from Employer-based Group Coverage. We all like this because it is what we know and we don’t have to do anything about it.  Group coverage is only about 50 years old begun during the WWII period to attract working to defense contractors and spread during the post-war boom times to become the norm.  The system was a good way for employers to attract workers in a crowded field. Unions liked it because it gave them leverage in labor bargaining agreements.  Employees liked it because it was a “benefit” and often thought of as “free” even though the practical consequence was merely shifting salary dollars to benefit costs and limiting our freedom to shop for medical and insurance coverage.  The tax system also virtually enshrines this approach today making medical insurance costs tax deductible for employers as a cost of doing business, not taxable to group- covered employees while individual insurance premiums are not deductible unless they get to a high hurdle of 7.5% percent of your taxable income. Nonetheless, the current dilemma is so many employees are now covered this way they fear changes that would shift them to either a government plan or to the volatile individual market preferring the stick with “the devil we know”—until, that is, we get laid off!
3. Medical Savings Accounts and Major Medical Coverage Individual Plans. Federal government data tells us that out-of-pocket payments for medical expenses has fallen from 47% of total health spending in 1960 to a record low of 11.9% in 2008.  The reason is simple; our group coverage often was “improved” by paying more of the “first dollar” items we used to pay for out of pocket.  Medical Savings Accounts were introduced to encourage a reverse in this shift in coverage by bundling customer paid first dollar costs with major medical insurance coverage for catastrophic care .  This balancing was thought to offer the best of both worlds in individual responsibility for preventive health and routine care and insurance protection at lower costs for major medical needs.  Advocates of single payer systems hated it, but it still might be the best option for many Americans.  But it is very hard to do.  One reason is that state by state regulation forces required coverage on many plans and thus it was impracticable for insurers to aggregate enough major medical insured to make the risk tolerable within a given state.  Interstate shopping for coverage without mandated coverage features would open a new world of competition to the health market. Paying out of pocket first dollar health costs with either pre-tax dollars from MSAs or tax deductible dollars would restore individual responsibility and cost consciousness.
4. Tort Reform. Let’s face it, the plaintiffs bar gets hammered for aggressive ambulance chasing lawsuits seen as driving up malpractice insurance costs to the point many doctors just stopped practicing.  Balance that against the occasional horror story we all hear about medical mistakes and genuine malpractice building sympathy for the aggrieved.  The trial lawyers have been major political contributors at both the Federal and State levels and have successfully preserved their options to date.  But while tort reform to limit malpractice lawsuits and awards may work to reduce doctors’ medical malpractice costs it, alone, is unlikely to bring down premium costs for the individual insured.  That was the experience in Texas when reform was introduced, the State saw an increase in the number of doctors practicing both at risk specialties as well as in rural areas, but insurance premiums overall for individuals and groups continued to rise.
5. Pre-existing Conditions Coverage. There is a fine balance between setting premiums based upon the relative risk of the insured and using issues like pre-existing conditions to effectively deny coverage and improve profit margins shifting these individuals into high risk pools. One answer is to have bigger pools so such risks of pre-existing conditions can be partially mitigated and spread across a larger base. Another is to have a premium schedule that reflects increased risks with premium adders that are equitable across the entire pool for such pre-existing conditions but limit the discrimination on covering such individuals.  California has such a policy requiring insurance plans to accept those who are forced out of group plans to transition through COBRA to private plans without considering pre-existing conditions.  It seems to be a reasonable compromise of interests and builds the base of individual plan insured.

So my suggestion for the President and the Republicans flirting with bipartisanship is this:

Use these 5 principles above to craft a reform plan for the existing system that empowers individuals and creates a gradual but deliberate transition from group plan coverage to individual market based coverage.  You’d do this by making all current employer group spending on healthcare taxable income to each employee.  Employees could stick with their group plan or use that money to shop for a new plan in interstate commerce that better suits their needs paying any increase or keeping any savings.  Their premiums for participating in either the employer group plan or a separate private plan would be tax deductible.  The government should set a maximum deductible premium but grandfather a transition in over five years to allow the competitive market place to work.   The role of the States and Federal Government is to assure full disclosure of plan coverage and limits and standard presentation of premiums and costs.  The vendors in competition will be more than happy to build software and other solutions to encourage plan comparisons just as happens now for comparing Rx coverage.

That’s my plan and I’m sticking to it!