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The Health Care Solution

March 5th, 2009 – The health care system we have today does not work as well as it should for anyone. While reform is a given, in order to make sure we go down the right path we need to be sure the solution we come up with employs the proper balance of free markets and government regulation.

First, we need to provide a federal mandate that require insurance for all. Then we need another mandate to require the insurance industry to cover everyone, regardless of pre-existing conditions. This will address the issue of insuring people with pre-existing conditions coverage and eliminate the issue of portability since there would be universal access to health care.

To foster competition and market efficiency, the government would have a third mandate that insurers each offer a basic level of benefits for a core plan; and then insurers can offer supplemental plans for additional benefits to those who wish to purchase them. As the core plan will be the same from one carrier to the next, that will allow consumers to shop for benefits on an “apples to apples” basis. The supplements will allow consumers freedom of choice to buy up the level of benefits they desire and can afford. However, this alone will not solve the larger problem of reigning in spiraling health care costs.

While we pay premiums of over $723 billion annually to health insurers and see health insurance premiums rise each year, it is surprising to many people that health insurers generally operate on about 3% profit. That is 1/2 the profit of life insurance companies and nearly 1/3 the profit of property and casualty insurance companies. Major prescription drug companies have a 16.8% average profit according to the Money Magazine article used as a source for this section.

So why do our health insurance rates go up each year? Hospitalization, tests and prescription drugs are the big 3 cost drivers factors that cause health insurance premiums to rise. Federal data shows that nearly 86 cents of every dollar you pay for health insurance premiums goes to pay for medical services such as doctor visits, prescription drugs and hospital costs.

So, for each $1.00 of health insurance premiums according to a 2006 PricewaterhouseCoopers study:

  • $0.86 goes to doctor visits, prescription drugs and hospital costs
  • $0.05 goes to prevention, disease management, care coordination and investments in health information technology, plus provider support and marketing
  • $0.06 goes to insurers’ administrative costs, including claims processing and compliance with government regulation
  • $0.03 goes to health insurance company profits

Health insurance premium increases have been outpacing inflation and wage growth and we must acknowledge the reality that the premiums are largely driven by the underlying cost of health care services. Thus, rising health insurance premiums are not the cause, but are the symptom of a serious ailment that threatens our country’s economic health.

Health care spending was estimated to make up 16% of the United States Gross Domestic Product in 2007. To put that another way, that is about $7,600 for every person in the country and 4.3 times what was spent on national defense. On its present course, health care spending is expected to increase to 20% of the United States Gross Domestic Product by 2016. Health care spending accounted for 10.9 percent of the GDP in Switzerland, 10.7 percent in Germany, 9.7 percent in Canada and 9.5 percent in France, according to the Organization for Economic Cooperation and Development.

There is no doubt that our country’s health care system is ripe with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance. Not surprisingly, economists found that rising health care costs have a direct correlation to drops in health insurance coverage.

Clearly, the government needs to focus on controlling costs, correcting inefficiencies and eliminating waste and fraud first and foremost. There must be a solution regarding the complexity of the provider and insurance pricing models and general lack of visibility to consumers that prevents free market dynamics from keeping prices competitive. They also need to protect doctors from a legal system that almost requires they practice defensive medicine and often order excessive tests in an effort to protect themselves. The government also needs to offer a real enforceable mandate that all Americans have health insurance, require insurers to insure every citizen regardless of pre-existing conditions and allow free market forces to control health insurance costs.

However, if the underlying core cost drivers of health care services are not addressed then the initiative will not succeed. Health care services costs and waste must be reduced in order to control the out of pocket costs for Americans and slim down the health care services share of the United States Gross Domestic Product.

Under the current system doctors and hospitals have negotiated network contracts with multiple insurance companies and sometimes multiple contracts with individual insurance companies. With each contract there is a set fee schedule organized by diagnostic code. Cash payers will typically pay yet another price. If the government set a single annually indexed target pricing schedule for health services, that would strip away the need for all the private insurance network pricing agreements. This system will reduce the administrative burden on doctors and hospitals and make it easier for them to run their practices and focus on practicing quality medicine.

Providers would be required to publish their fees and any excess fees charged above the set “reasonable and customary” fee schedule that the insurance carriers would pay them from. Then, if every consumer and insurance carrier gets the same deal and can easily see what that base price is and what any excess charges might be, then the free market will reward providers that provide the right balance of cost and quality. Emergency medicine would be required to adhere to set fee schedules since consumers have no choice in the matter in that situation.

Health care providers will still be able to set their own fee schedules, subject to market forces. For providers that charge fees in excess of the set fee schedule, the consumers’ copays and deductibles must be front loaded or indexed against the underlying costs. That way, consumers will take the time to visit the doctor’s web site to view their fee schedule, see if there are any extra costs, and take into account the provider’s quality rankings to make an informed choice.

Now doctors and hospitals have one fee schedule to manage, the public can view it and the free market will reward providers that balance quality with reasonable costs. Moreover, web site templates can be easily provided to the doctors to help them publish and manage this information using open source software like WordPress MU. It would be fairly easy to set up and can include online appointment scheduling integration and “Click to call” functionality. Consumer reviews can also be posted on the providers site, if they wish, or consumers can visit third party review sites to get feedback on other patients’ experiences and level of satisfaction.

As a nation, we need to go after is the underlying cost drivers and inefficiencies that keep driving up the cost of health insurance. I want positive change that benefits ALL Americans. The best system will strip away the confusing and inefficient health services pricing model and increase visibility by using the Internet to show cost and quality metrics, so consumers can shop for the best value, as they would with other products and services. This will keep what works in our system and fix what is broken.

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