A Brief History…

UPDATE: Another form of health care subsidy doesn’t work either.

Those who led the 2006 effort said it would not have been feasible to enact universal coverage if the legislation had required heavy cost controls. The very stakeholders who were coaxed into the tent — doctors, hospitals, insurers and consumer groups — would probably have been driven into opposition by efforts to reduce their revenues and constrain their medical practices, they said.

Now those stakeholders and the state government have a huge investment to protect. But the task of cost-cutting remains difficult in a state with a long tradition of heavy spending on health care. Massachusetts has more doctors per capita than any state, Boston is home to some of the country’s most expensive academic medical centers, and a new state law requires comprehensive benefits like prescription drug and mental health coverage.

Now will come the cost controls but they will not use the market mechanisms the French system uses; fee-for-service with the patient paying the doctor first and getting reimbursement later. Also, mental health coverage is a black hole for payment programs. The Massachusetts program will be altered to fit political theories, not medical necessity.

One proposal for health reform has been the medical IRA. At one time about 14 years ago, I was very enthusiastic about the concept. They are also called Health Savings Accounts and are combined with a high deductible insurance policy to be used for hospitalization. There were struggles about them, with opposition from Democrats, for years but they were finally enacted into law by the Bush administration in 1993.

For 2008, in order to qualify to open an HSA, your HDHP [High Deductible Health Plan] minimum deductible must be at least $1,100 (self-only coverage) or $2,200 (family coverage). The annual out-of-pocket (including deductibles and co-pays) for 2008 cannot exceed $5,600 (self-only coverage) or $11,200 (family coverage). HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and copays & coinsurance) for non-network services.

This is not a bad idea as saving is always a good thing to do. High deductible insurance plans are always cheaper than low deductible as the cost of processing a large claim is about the same as processing a small one. Processing many small claims runs up overhead and premiums. Secondly, the high deductible tends to reduce moral hazard. Many people have the feeling that, “If I have the coverage, why not use it ?” The trouble with this is that the filing of many small claims tends to drive the cost of the premium up and the incentives of “first dollar coverage” are what gave us much of the current cost problem with insurance.

Why, then don’t I believe this concept works ? The health insurance industry left the concept of community rating years ago. Community rating means that a group, usually a geographic or age group, will be charged the same rates for similar insurance coverage. This is what is done in auto insurance. There have been complaints about “red-lining” certain neighborhoods because of a perceived higher risk of car theft or even accidents in certain neighborhoods, often inner city but not always. I have found that auto insurance is higher in Tucson than in southern California, for example. Some of that is due to a high rate of auto theft related to the proximity to Mexico and the ease of crossing the border. Some of it may be due to a higher risk of uninsured other drivers on the road in Tucson. or in Los Angeles, which also has higher rates than Orange County. Fifty years ago, health insurance was priced this way but no longer. What we have now is experience rating. That means the premium is based on your personal profile, including age sex and previous medical issues. Soon, it may include such measures as your genetic information including risk of inherited health factors. Insuring anyone with a history of illness has become nearly impossible unless they are part of a large pool such as an employee of a large corporation. This is why employer-based insurance will be so difficult to get rid of. High deductibles and medical IRAs is one approach.

My enthusiasm for medical IRAs was stimulated by the RAND Health Insurance Study of the 1980s.This studied the effect of co-pays, the payment of a cash fee for the medical service in addition to the insurance payment. This is the concept of the high deductible health plan.

As the co-pay increases, utilization decreases. Opponents say this denies care to the poor who cannot afford the co-pay. Studies were then done to analyze this effect and to see if, indeed, poor participants were being denied care that they needed. There is an old concept in medicine of the “worried well.” These are people who seek care for every tiny complaint. There is also the moral hazard issue where demand expands to fill supply. There is an old expression, “land office business,” the source of which many people don’t understand. The Land Office was giving away free land in the days of the homesteaders. Offer something for free and you will find many takers who may not even know what you are giving away. The question is, do co-pays deny necessary care ? Probably not but the amount has be set correctly. The RAND studies could never show any significant adverse health effect of the deductibles which were studied for several levels. The 95% deductible listed in the chart is 95% of the amount of deductible, which is some cases was $500/year.

Effects on Health

* Free care improved the control of hypertension. The poorest patients in the free care group who entered the experiment with hypertension saw greater reductions in blood pressure than did their counterparts with cost sharing. The projected effect was about a 10 percent reduction in mortality for those with hypertension.
* Free care marginally improved vision for the poorest patients.
* Free care also increased the likelihood among the poorest patients of receiving needed dental care.
* Serious symptoms[2] were less prevalent for poorer people on the free plan.
* Cost sharing also had some beneficial effects. Participants in cost sharing plans worried less about their health and had fewer restricted-activity days (including time spent in seeking medical care).

The alternative, since no plan can afford unlimited care, is rationing as seen in England’s NHS and Canada’s program. Rationing often is determined by politics, as in Canada where the system was designed to provide unlimited primary care but restrict specialty care, especially hospital care. The subject continues to be debated. Part of the problem with the “first dollar” plans is that utilization, and cost, is always grossly underestimated.

My own concerns about medical IRAs are more practical. Many people do not understand how contracting between insurance plans and hospitals and other health services has affected their ability to understand the system. For example, there have been newspaper stories about uninsured patients whose hospital bills were far higher than an insurance company would pay for the same service. Moreover, the insurance deductible that you pay for certain services, such as outpatient surgery, may be more than the entire amount paid by your insurer. The 20% you pay is 20% of the “retail” bill while the 80% paid by the insurance company is 80% of a far smaller negotiated price. Neither the insurance company nor the hospital will tell you what that price is. It is not unusual to pay $4,000. (20%) of a $20,000 bill while the insurance company pays $2500, nearly half of what you pay.

Doctors may sometimes discount, even heavily discount, their fees for patients who are paying cash but they must be very careful to keep the insurance companies and Medicare from finding out about that discount. If Medicare learns that a doctor is discounting bills, or even failing to collect the deductible or co-pay for visits, they will reset the “profile” of that doctor. That profile is the base from which Medicare and most insurance companies set the amount they pay. A cash discount for one patient could result in a sharply lowered payment schedule for the entire practice of that doctor. Few patients understand this.

That practice of negotiated prices and fee schedules is the principle reason why medical IRAs are not as good a method of paying medical bills. Unless the bill goes through the payment process with the insurance company, the contract price may not be the price the patient is paying. The difference may be very large. This weakens the benefit of the medical IRA s a concept. Medical prices have no relationship to reality and the customer is unable to determine the actual price of services, necessary for a cash market.

I have since become interested in other alternatives, the best of which is the French system.