Health care problems and solutions

Michael Tanner gets to the root of the problem with health care:

Essentially, we all want to live forever. This makes health care a very desirable good. At the same time, the normal restraints imposed by price are frequently lacking. Today, of every dollar spent on health care in this country, just 13 cents is paid for by the person actually consuming the goods or services. Roughly half is paid for by government, and the remainder is covered by private insurance. And, as long as someone else is paying, consumers have every reason to consume as much health care as is available.

On the other, when consumers share in the cost of their health care purchasing decisions, they are more likely to make those decisions based on price and value. Take just one example. If everyone were to receive a CT brain scan every year as part of their annual physical, we would undoubtedly discover a small number of brain cancers much earlier than we otherwise would, perhaps early enough to save the patient's life.

But given the cost of such a scan, adding it to everyone's annual physical would quickly bankrupt the nation. But, if they are spending their own money, consumers will make their own rationing decisions based on price and value. That CT scan that looked so desirable when someone else was paying, may not be so desirable if you have to pay for it yourself. The consumer himself becomes the one who says no.

Think of it this way. If every time you went to the grocery store, someone else paid 87 percent of your bill, not only would you eat a lot more steak and a lot less hamburger - but so would your dog. And food costs would go up for everyone.

The RAND Health Insurance Experiment, the largest study ever done of consumer health purchasing behavior, provides ample evidence that consumers can make informed cost-value decisions about their health care. Under the experiment, insurance deductibles were varied from zero to $1,000. Those with no out-of-pocket costs consumed substantially more health care than those who had to share in the cost of care. Yet, with a few exceptions, the effect on outcomes was minimal.

And, in the real world, we have seen far smaller increases in the cost of those services, like Lasik eye surgery or dental care, that are not generally covered by insurance, than for those procedures that are insured.

When someone else is footing the bill, don't be surprised if consumers aren't terribly concerned about costs. As a result health insurance premiums have exploded to cover those costs.

The solution proffered by Democrats in response to this development is to broaden the number of people covered by insurance, which are disproportionately the young and healthy. By forcing them into the health insurance pool, their premiums act a de facto subsidy from the healthy to the unhealthy.

Even Democrats, however, at least tacitly acknowledge that such a move is insufficient to reign in costs, which is why they have resorted to 2,000+ page legislation that amounts to a Rube Goldberg machine for health care, complete with subsidies and byzantine rules and regulations. Fortunately we don't have to engage in mere theoretical debates as to how this would play out in reality, as a sneak peak of ObamaCare is already available in Massachusetts, the "Mini-Me" of the Democrats' proposed health care overhaul. The Wall Street Journal editorial page takes a look at how that's going:

As with all new entitlements, the rolling cost crisis began almost immediately. For fiscal 2010 taxpayer costs are $47 million over budget, in part due to the recession, and while the $913 million [Governor Deval] Patrick requested for 2011 is a 5% increase over 2010, spending has grown on average 6.7% per year.

Meanwhile, average Massachusetts insurance premiums are now the highest in the nation. Since 2006, they've climbed at an annual rate of 30% in the individual market. Small business costs have increased by 5.8%. Per capita health spending in Massachusetts is now 27% higher than the national average, and 15% higher even after adjusting for local wages and academic research grants. The growth rate is faster too.

Those data come from granular studies about the Massachusetts health markets published recently by the state. Not that anyone on Beacon Hill seems to have to read them, judging by their policy proposals. Besides Mr. Patrick's latest inspiration, last year a blue-ribbon commission endorsed a "global budget"—i.e., an arbitrary government limit on medical spending, with politics shaping what gets covered and what doesn't.

As in Washington, the political class and providers blame insurers, but a better culprit is the state's insurance regulation. Incredibly, the average "medical loss ratio" in Massachusetts for individual policies is 112%—that is, insurers pay $1.12 in benefits for every $1 in premiums.

This is the direct result of forcing insurers to charge everyone more or less the same rate regardless of age or health status, which makes it rational for people to wait to enroll until they need expensive coverage. It is also the result of the state's decision to merge the individual and small-group insurance markets, which transfers individual costs onto small businesses. Mr. Patrick actually justified his plan by citing small-business costs.

Another reason costs are so high is that state regulations have mandated that insurance coverage be far richer than the rest of the country. The average insurance deductible is 28% lower than the U.S. average, and the benefits are more generous with less cost-sharing. Patients are thus insensitive to the cost of care.

To anyone with even an elementary understanding of either government or economics none of this should come as a surprise, as the Massachusetts model does little to change the incentives for health care consumers. Rather it is more concerned with extending the current insurance-based model to as many people as possible. Taking a broken system and trying to extend its reach doesn't make much sense in theory, and it isn't working in reality.

Fortunately there is another way, as illustrated by Indiana Gov. Mitch Daniels, who also has a column in today's WSJ (Speculation is growing, by the way, that Daniels is considering a run for the presidency). Rather than promote more of the same, Daniels has attempted to change the health care paradigm by making consumers more cost-conscious through the introduction of health savings accounts for Indiana government employees. For those unfamiliar, HSAs are accounts into which a certain amount of money is deposited each year -- $2,750 in the case of Indiana public employees -- to cover health expenses. Expenses beyond $2,750 are shared with the state and those above $8,000 are covered completely. Unused funds, meanwhile, are the permanent property of the HSA's owner, providing an incentive to manage the money carefully and seek out low prices.

Daniels explains how the system, introduced five years ago, has worked out. It's a startling contrast with the Massachusetts approach:

State employees enrolled in the consumer-driven plan will save more than $8 million in 2010 compared to their coworkers in the old-fashioned preferred provider organization (PPO) alternative. In the second straight year in which we've been forced to skip salary increases, workers switching to the HSA are adding thousands of dollars to their take-home pay. (Even if an employee had health issues and incurred the maximum out-of-pocket expenses, he would still be hundreds of dollars ahead.) HSA customers seem highly satisfied; only 3% have opted to switch back to the PPO.

The state is saving, too. In a time of severe budgetary stress, Indiana will save at least $20 million in 2010 because of our high HSA enrollment. Mercer calculates the state's total costs are being reduced by 11% solely due to the HSA option.

Most important, we are seeing significant changes in behavior, and consequently lower total costs. In 2009, for example, state workers with the HSA visited emergency rooms and physicians 67% less frequently than co-workers with traditional health care. They were much more likely to use generic drugs than those enrolled in the conventional plan, resulting in an average lower cost per prescription of $18. They were admitted to hospitals less than half as frequently as their colleagues. Differences in health status between the groups account for part of this disparity, but consumer decision-making is, we've found, also a major factor.

Overall, participants in our new plan ran up only $65 in cost for every $100 incurred by their associates under the old coverage. Are HSA participants denying themselves needed care in order to save money? The answer, as far as the state of Indiana and Mercer Consulting can find, is no. There is no evidence HSA members are more likely to defer needed care or common-sense preventive measures such as routine physicals or mammograms.

Despite this success HSAs are nowhere to be found among the reams of health care legislation. In fact, some analysts fear that ObamaCare's goal of moving away from high-deductible plans -- recall that President Obama flatly stated they were not "not health insurance" during last week's health care summit -- could eliminate them as an option entirely.

To conclude, Congressional Democrats and the Obama Administration are pushing an approach which is failing in Massachusetts over an approach which seems to be working in Indiana. Not only that, but their proposed "reforms" may actually remove the latter as a viable option. This can only be explained as either gross ignorance or the triumph of ideology above all else. President Obama, however, assures us that he is not an ideologue. It rings hollow.