The Problem

Today, the American healthcare system is characterized by three core problems:

1. Rising Costs. Healthcare spending totaled $2.4 trillion in 2007 and represents 17% of America’s GDP. Despite numerous cost containment efforts over the last 30 years, healthcare costs have steadily increased at a rate 2x-3x that of CPI. US per capita healthcare spending is at least twice that of other major industrialized countries. By 2017, healthcare costs are expected to equal $4.3 trillion or 20% of GDP.
2. Inadequate Coverage. Despite these high and ever-increasing costs, over 48 million Americans lack health insurance. Of the uninsured, it has been reported that over 70% are employed.
3. Poor Value. While America is well known for staggering medical innovation, cutting-edge pharmaceutical research, and remains the ‘go-to’ destination for the highest-quality specialty care, broad-based healthcare outcomes are poor. The system is riddled with high medical error rates, lack of standardization in care delivery, and poor patient and public health outcomes (e.g. the US’ infant mortality rate ranks 29th in the world).

Elements of a Solution

A range of ideas to address the numerous problems in American healthcare has been well circulated by both federal and state-level policymakers over the past three decades. The debate, typically hotly partisan, has included proposals ranging from a full single-payer financing to a fully individual-based health insurance market. The desire to engineer broad-ranging, comprehensive reform has typically ended in failure –with the ambition of previous efforts, ironically, slowing adoption of even incremental system improvements.

Some basic elements to address the core problems described above and achieve common ground among industry interests could include:

1. Mandates to purchase health insurance
2. Subsidies to help make health insurance more affordable
3. Federal Reinsurance to back-stop severe claims and promote payer innovation & entrepreneurship
4. A True Consumer Marketplace for Health Insurance
5. Consumer-Level Financial Incentives to stimulate greater health, wellness, and personal responsibility
6. Tax Reform

Mandates

Today, unlike auto insurance in most states, it is not required that individuals possess health insurance coverage. The lack of a mandate leads to several key healthcare economic problems, including adverse selection, an unhealthy reliance on therapeutic intervention rather than preventive care misaligned incentives, and free riding on private & public payers.

1. Adverse selection is a major risk in any insurance market, whereby those individuals who are least likely to require insurance protection are typically the first to exit the insurance pool. Among the American uninsured, 40% live in households that earn over $50,000 and many have opted not to pay for coverage available either through employers or on the individual market
2. The uninsured unintentionally drive an inefficient allocation of healthcare resources. Uninsured individuals are more likely to engage in costly emergency care and hospitalization, and less likely to receive preventive care, than those with health insurance. Furthermore, uninsured individuals are 30-50% more likely to be hospitalized for an avoidable condition. Ultimately, the United States spends nearly $100 billion annually to provide uninsured residents with health services, often for preventable diseases or diseases that could have been treated more efficiently with earlier diagnosis.

Implementing an individual-level mandate on all Americans, at least for a basic level of health insurance (e.g. a very high deductible health plan with free coverage for annual preventive care), would strengthen the risk pool, mitigate adverse selection, and encourage access to earlier healthcare intervention. Businesses could facilitate their employees’ ability to comply with a mandate by making individual and/or group insurance coverage available through the worksite (regardless of whether they earmark dollars for their employees to purchase insurance).

Subsidies

The most common counter-argument to mandates is the concern regarding how people with low incomes and/or who lack employment would cope financially with a mandate to purchase health insurance. This should be addressed by federally –funded, state-administered means-tested subsidies (either as a direct transfer payment or through an income tax credit) to enable individuals who do not currently qualify for Medicaid to purchase health insurance coverage either on the open insurance market or through their employer.

Federal Reinsurance / Support for High-Risk Pools

The distribution of healthcare claims within the pre-65 population is decidedly non-normal – a minority of individuals drives a disproportionate share of healthcare costs due to either catastrophic medical events and/or chronic disease. This ‘80/20’ effect has several unintended consequences on insurance markets. First, it increases the gap between the actual cost and the perceived value of health insurance for healthy individuals – contributing to adverse selection in the absence of mandates. Second, it creates an economic incentive for carriers to seek to deny coverage for perceived higher-risk individuals. Rising costs of high-end treatment due to advances in medical technology and biologic drugs further exacerbate these effects.

The federal government can address these concerns by creating a reinsurance entity to guarantee reimbursement to health insurance carriers for catastrophic medical claims over a certain level (e.g. $200,000 per person per calendar year). Alternatively, the federal government could grant dollars to states to create and/or strengthen their own high-risk pools – similar to those operating in 35 states today. In exchange for this new level of financial support, the government could opt to require that private insurance carriers accept new guidelines to provide guarantee issue coverage to all individuals below the age of 65.

A True Marketplace for Health Insurance

Today, most individuals who work for most companies can select, at best, from one or two health insurance plans. A legacy of today’s employer-centered health insurance model, individuals are forced to select from options selected by their employer (often in consultation with a third-party administrator or insurance broker). Needless to say, such a system does not provide adequate choice for individuals to best meet their own personal needs.

A new, fresh approach would allow individuals to access more meaningful arrays of choices of health insurance to better meet their own personal needs. This could be achieved either through changes in regulation to make individual health insurance more attractive or, more feasibly in the near-term, by creating new risk pooling and rating methodologies with group-based insurance (similar to the community rating approaches used in several states).

Creating an open transparent marketplace would force carriers to compete for individuals on meaningful dimensions of choice such as competitive pricing, quality service, and ease of administration. It would foster greater innovation among insurance carriers and drive cost efficiency, in stark contrast to today’s system where individuals are forced to accept choices made for them by third-party decision makers.

A publicly financed and administered health plan to compete with private offerings could be an additional option within the marketplace. The merit of such an option is beyond the scope of this paper.

While giving consumers more choice and responsibility has its definite merits – the transition requires great care because, for at least 30 years, people have not had to make meaningful decisions regarding their own insurance. Therefore, the government could support this paradigm shift by structuring incentives for employers, insurance carriers, and/or other stakeholders to offer online and/or telephone-based resources to help people make good decisions.

Financial Incentives

Ultimately, changing the trendline on America’s healthcare costs will require individuals to take greater personal responsibility for their own health and wellness. While no amount of attention to diet and exercise can help avoid certain diseases and/or the vagaries of the genetic lottery, it is well documented that at least 50% of healthcare costs are due to behavior – and a far higher proportion of chronic disease such as diabetes, heart disease, and respiratory ailments (e.g. emphysema, CoPD).

There are various approaches to institute greater financial rewards & penalties for better healthcare management – most of which should be administered by insurance carriers themselves. The government’s role would be to establish an regulatory framework allowing carriers and employers to more easily and clearly implement policies that reward good behavior and penalize costly healthcare practices.

Tax Efficiency

Today’s employer-centered system provides a substantial subsidy for employer-paid health insurance in the form of tax deductibility. Like the mortgage interest deduction, this subsidy encourages over-consumption of health insurance and is illustrated by the fact that the actual policies purchased through employers typically cost 2-3x more than the policies purchased by individuals, despite the inefficiencies of the individual health insurance market.

The removal of this subsidy, in addition to encouraging more efficient healthcare consumption, could also be an important element of financing the other elements of a comprehensive reform package.