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Financing of health care – Where is it going? John P. Garven, CLU, RHU Financing of health care – Where is it going? John P. Garven, CLU, RHU President, Benico, Ltd. President, Illinois State Association of Health Underwriters Policy Advisor, The Heartland Institute (847 -669 -4800, ext. 202; john. [email protected] com) August 19, 2008 – Northern Illinois Association of Health Underwriters

Agenda 1. 2. 3. 4. 5. 6. 7. 8. How did we get here? Agenda 1. 2. 3. 4. 5. 6. 7. 8. How did we get here? Key concepts Key facts International comparisons The case for competition and consumerism Current debate around health policy at the national level Steps toward achieving improved cost, quality, and access Key questions to ask 2

How did we get here? The first modern group health insurance plan was formed How did we get here? The first modern group health insurance plan was formed in 1929. § Blue Cross and Blue Shield entities begin offering group health plans in 1932. § Several large life insurance companies entered the health insurance field in the ‘ 30’s and ‘ 40’s. § 3

How did we get here? § WWII wage freezes imposed by the federal government. How did we get here? § WWII wage freezes imposed by the federal government. § Employee benefit plans proliferated in the ’ 40’s and ‘ 50’s. Strong unions bargained for better benefit packages, including tax-free, employersponsored health insurance. 4

How did we get here? Social Security was expanded in 1954 to provide disability How did we get here? Social Security was expanded in 1954 to provide disability benefits. § Medicare and Medicaid were implemented January 1, 1966 during the Johnson administration. § ERISA, passed in 1974 as a pension reform bill, reinforced the employer’s role in providing health benefits. § 5

How did we get here? 1970 s: Private health insurance moves toward comprehensive major How did we get here? 1970 s: Private health insurance moves toward comprehensive major medical insurance. § The Federal HMO Act was legislated by Congress in 1973. § PPOs, HMOs, and POS plans emerge during the ‘ 80 s and ‘ 90 s as the prevalent form of private health insurance. § 6

How did we get here? § By 2001 93% of private insurance was of How did we get here? § By 2001 93% of private insurance was of the managed care variety. § Over the last 7 years, the clear trend has been away from HMOs and toward CDHPs (consumer-driven health plans). 7

Key Concepts § § “Health care” is NOT the same as “health insurance”. Health Key Concepts § § “Health care” is NOT the same as “health insurance”. Health insurance is nothing more than a means of financing and managing the financial risk of health care services. We no longer have health insurance. What we actually have is a form of prepaid health care, thanks to 25 years of managed care. And over the years legislators have “helped” by piling on benefit mandates to satisfy constituent complaints and special interest requests, driving up health insurance costs for everyone along the way. 8

Key Concepts § § § Health insurance is expensive because health care is expensive. Key Concepts § § § Health insurance is expensive because health care is expensive. Any legislative proposal that aims to “reform health care” is NOT legitimate if it does not address health care’s underlying cost drivers and embrace personal responsibility. There is no problem with access to health insurance. The issue is AFFORDABILITY, both in terms of the premiums for coverage AND the less than uniform tax treatment of such coverage. 9

Key Facts: Current insured and uninsured statistics In 1940 the total US population was Key Facts: Current insured and uninsured statistics In 1940 the total US population was 127 million. About 12 million Americans (9. 4%) were covered by some form of private health insurance. § At the end of 2006 249. 8 million (84. 2%) were insured, and 47. 0 million uninsured (15. 8%)*. § * Source: Census Bureau publication - Income, Poverty, and Health Insurance Coverage in the United States: 2006 - http: //www. census. gov/prod/2007 pubs/p 60 -233. pdf 10

Key Facts: Where do Americans & Illinoisans get their health insurance? § Sources of Key Facts: Where do Americans & Illinoisans get their health insurance? § Sources of health insurance coverage: Source U. S. Illinois Employer 54% 59% Individual 5% 4% Medicaid 13% 11% Medicare 12% Other Public 1% 0% Uninsured 16% 14% Source: Kaiser Family Foundation, Health Insurance Coverage of the Total Population, states (2005 -2006), U. S. (2006) 11

Key Facts: Who are the uninsured, and how many are there? § § § Key Facts: Who are the uninsured, and how many are there? § § § Being uninsured for most is a temporary situation. About 75% are without coverage < 1 yr. 1/3 are eligible for public programs but not enrolled. 20% earn $50, 000 or more, and more than ½ of this group actually earn $75, 000 or more. More than 22 of the 47 million are younger than 35, and many can afford insurance but simply choose to go without. Chronically uninsured estimate – 5%-6%, principally citizens in the 18 -40 age group with incomes below 300% of FPL. Source: U. S. Census Bureau, Income, Poverty and Health Insurance Coverage in the United States: 2006; The Uninsured in America, Blue Cross, Blue Shield Foundation, 2005. 12

Key Facts: Current tax policy The biggest tax break that citizens get is the Key Facts: Current tax policy The biggest tax break that citizens get is the federal income tax exclusion for employment-based health insurance. § The economic value of this tax exclusion is about $160 billion. Contrast this with the value of the deduction of mortgage interest in the current FY budget, which is “only” $89 billion. § 13

Key Facts: Health care spending in the U. S. § Total spending, public and Key Facts: Health care spending in the U. S. § Total spending, public and private, was $2. 1 trillion in 2006, or $7, 026 person, 16% of the gross domestic product (GDP). § U. S. health care spending is expected to increase, on average, by 6. 7% per year, reaching $4 trillion by 2016, or 20% of GDP. § This compares to double-digit increases in the 1980 s; a 7. 3% average from 1990 to 1995; 5. 7% from 1995 to 2000 (during the peak years of managed care); and 8. 2% from 2000 to 2004. Source: The Boomers Are Coming, But Don’t Panic Yet - http: //healthaffairs. org/blog/2008/02/28/the-boomers-are 14 coming-but-dont-panic-yet/

Key Facts: Health care spending in the U. S. “The government is the single Key Facts: Health care spending in the U. S. “The government is the single greatest contributor to this problem by the nature of the tax code and the structure of health care entitlement spending; and these can be corrected with fundamental changes in public policy to restore the market’s vitality. ” Source: U. S. Rep. Paul Ryan, R-WI, HEALTH SPENDING: The Problem Is Government, Not The Market, 15 February 26, 2008 issue of Health Affairs

Key Facts: Administrative costs § According to CMS estimates, the administrative costs, taxes, profits, Key Facts: Administrative costs § According to CMS estimates, the administrative costs, taxes, profits, and other non-benefit expenses of private health plans have averaged 12. 4% of premiums over the last 40 years. This includes all types of health insurance purchased privately, ranging from employer-based coverage to individually purchased plans, Medigap and long-term care insurance, but do not include private health plans operating in Medicare or Medicaid. Source: CMS Office of the Actuary, January 2005 16

Key Facts: Cost drivers Preventable medical errors - Americans receive recommended care only 55% Key Facts: Cost drivers Preventable medical errors - Americans receive recommended care only 55% of the time, and between 44, 000– 98, 000* people die in hospitals each year because of medical errors. § Litigious environment - Doctors order more tests, medications, and referrals than are medically necessary principally to protect against accusations of negligence. § Medical liability costs and defensive medicine, combined, account for about 10% of our nation’s health care spending. § Sources: National Institute of Medicine; American Institute for Preventive Medicine; Towers Perrin. U. S. Tort 17 Costs: 2005 Update. March 2006

Key Facts: Cost drivers § Cost-shifting - A “hidden tax” imposed when health care Key Facts: Cost drivers § Cost-shifting - A “hidden tax” imposed when health care providers increase the prices they charge to private payers to offset losses from uncompensated and charity care and declining reimbursements from Medicare and Medicaid. Source: Pricewaterhouse. Coopers for America’s Health Insurance Plans. The Factors Fueling Rising Healthcare Costs 2006. February 2006. 18

Key Facts: Cost drivers Increased utilization: In 2006 alone higher utilization of services accounted Key Facts: Cost drivers Increased utilization: In 2006 alone higher utilization of services accounted for 43% of the year-over-year increases in the costs of health care, fueled by increased consumer demand, new and more intensive medical treatments and defensive medicine, and aging and unhealthy lifestyles. § Unhealthy lifestyles § Smoking, obesity, and inactivity are the top causes. § Source: Pricewaterhouse. Coopers for America’s Health Insurance Plans. The Factors Fueling Rising Healthcare Costs 2006. February 2006. 19

Key Facts: Important U. S. stats § In the U. S. we spend much Key Facts: Important U. S. stats § In the U. S. we spend much more in saving prematurely born infants and extending the life of our elderly than do other countries. (Wesbury 1990, Wennberg 2006) § Pregnancy, birth, and abortion rates among girls aged 15 to 19 are higher in the U. S. than in other developed countries. (Singh and Darroch 2000) § Obesity rate for U. S. adult population is nearly double that of Canada and substantially higher than the EU. (Anderson and Hussey 2000). Source: “Ten Principles of Health Care Policy”, 2007, Heartland Institute 20

Key Facts: Behavior & Lifestyle: U. S. Weight Gain 1986 -2006 No Country Can Key Facts: Behavior & Lifestyle: U. S. Weight Gain 1986 -2006 No Country Can Fund All the Consequences: Hypertension Type 2 Diabetes Osteoarthritis Stroke Coronary Heart Gallbladder Sleep Apnea Respiratory Issues Some Cancers 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 2006 Obesity Trends Among U. S. Adults (BMI>30%) No data ≥ 30% <10% 10%– 14% 15%– 19% 20%– 24% 25%– 29% Source: Centers for Disease Control & Prevention, 2006 Behavioral Risk Factors Surveillance System 21

International comparisons § Canadians live 2 ½ years longer than Americans; and Europeans live International comparisons § Canadians live 2 ½ years longer than Americans; and Europeans live a little more than a year longer than we do. Reasons for this (other than a lack of access to health insurance) include… § Americans are 3 times more likely than Canadians to die in auto accidents, and 10 times more likely to die (than our neighbors to the north) as a victim of a violent crime. § Elaborating on a point made in the previous slide, Americans eat more and move less than people in other countries. More than 60% of Americans are overweight, and almost 40% are obese. Source: Obesity: World Health Organization, 2006. NOTE: Obesity is commonly defined as a Body Mass Index (BMI) of greater than or equal to 30. 22

International comparisons The U. S. spends more on its healthcare than other countries, although International comparisons The U. S. spends more on its healthcare than other countries, although all countries are experiencing high rates of spending growth. § America's health care spending drives much of the world's medical innovations. § Health outcomes improve with income even under single-payer systems. Informed estimates suggest this gradient is no steeper in the U. S. than it is in Canada. § 23

International comparisons - WHO World Health Organization (WHO) § WHO’s rankings puts the U. International comparisons - WHO World Health Organization (WHO) § WHO’s rankings puts the U. S. at 37 th out of 191 countries. § Countries with socialized health care tend to be ranked higher simply because citizens are treated equally – even when the quality of care is extremely poor. Meanwhile, countries in which citizens have unequal access to medical care tend to be ranked lower, even when the overall quality of care is superior. § By the WHO's logic, treating people equally matters more than treating people well. So theoretically, a country with a negligent health care system could improve its rankings just by neglecting everybody more equally. Source: How Good Is Our Health Care System? , published on June 30, 2008 at www. galen. org. 24

International comparisons - WHO § Great Britain and Canada rate much better than us, International comparisons - WHO § Great Britain and Canada rate much better than us, yet… § 1 million British citizens currently in need of care waiting for hospital admission, and 100, 000 operations are canceled each year because of shortages of operating rooms, equipment or personnel. § Canada has more than 800, 000 citizens awaiting medical procedures. Many of these patients will die before they get the treatments they need. Those who can come to the United States for medical care. § A very crucial reading of a health care system should be how well you do when you get sick. Yet WHO chooses not to include this data in its survey. Source: How Good Is Our Health Care System? , published on June 30, 2008 at www. galen. org. 25

International comparisons Recently public opinion surveys were conducted in 26 single-payer countries. In 25, International comparisons Recently public opinion surveys were conducted in 26 single-payer countries. In 25, majorities of respondents identified health system reform in their countries as an “urgent priority. ” § In Great Britain, in a November 2006 survey over half the respondents rated the NHS worse than in 1996. § Isn’t it comforting to know that we are not the only ones in the Western developed world who have problems with their healthcare systems? § Sources: The Stockholm Network, “Impatient for Change” (2004) and “Poles Apart” (2005) ; Nov. 2006 article 26 www. inthenews. co. uk

International comparisons - Canada A lawsuit reached the Supreme Court of Canada in June, International comparisons - Canada A lawsuit reached the Supreme Court of Canada in June, 2005. A Quebec businessman who waited 12 months for a hip surgery wanted to pay out of his own pocket to get it done in Canada but was not permitted. § Another lawsuit was filed in September of 2006 by a Calgary man who paid for a state-of-the-art hip replacement in the U. S. after being told he was too old to qualify for it under Alberta’s provincial health plan. § 27

International comparisons – Japan Everyone between the ages of 40 and 74 — 56 International comparisons – Japan Everyone between the ages of 40 and 74 — 56 million people — are now required to have their waistlines measured regularly. The maximum waistline for men is 33. 5 inches. That’s the maximum. For women it’s 35. 4 inches. Those waistlines are larger will have three months to shape up, or undergo what’s being called “reeducation. ” Those who persist in ignoring the will of the government will face fines and other penalties. Source: Institute for Policy Innovation, www. ipi. org, July, 2008

The case for competition and consumerism We believe making consumers aware of the actual The case for competition and consumerism We believe making consumers aware of the actual cost of health services will improve the relationship between the consumer (i. e. , patient) and the physician. § Once consumers control payment for most services, they will become more inclined to shop for services and inquire about the cost and quality of that care. § 29

The case for competition and consumerism Market forces work in healthcare just as they The case for competition and consumerism Market forces work in healthcare just as they do in other markets. To wit… § Price controls lead to shortages. Medicaid programs set fees for doctor visits below market prices. As a result, there is a severe shortage of doctors willing to treat Medicaid patients. § Competition reduces prices. While health care costs overall have risen dramatically in recent years, prices for items not covered by insurance such as Lasik, cosmetic surgical procedures, and meds that have gone over the counter (e. g. , Claritin), have fallen. Source: “Ten Principles of Health Care Policy”, 2007, Heartland Institute 30

The case for competition and consumerism § Consumer Driven Health Plans (CDHPs) got a The case for competition and consumerism § Consumer Driven Health Plans (CDHPs) got a “jump start” in June of 2002 when the Internal Revenue Service confirmed the favorable tax treatment of employerprovided coverage and medical care expense reimbursements under health reimbursement arrangements (HRAs). § Health Savings Accounts (HSAs) were created shortly thereafter following the passage of the Medicare Modernization Act in December of 2003. 31

The case for competition and consumerism – market trends § Year-over year HRA / The case for competition and consumerism – market trends § Year-over year HRA / HSA enrollment Jan '06 Jan '07 Jan '08 HRAs 2. 9 M 4. 3 M 5. 0 M HSAs 3. 2 M 4. 5 M 6. 1 M TOTALS 6. 1 M 8. 8 M 11. 1 M Comment: HRA growth is slowing, but HSA growth is accelerating. Sources: Consumer Driven Market Report and AHIP Research’s 4 th annual survey of enrollment in HSA-qualified 32 health plans, published 4/30/ 2008.

The case for competition and consumerism – HSA market trends HSA distribution: 30% of The case for competition and consumerism – HSA market trends HSA distribution: 30% of HSAs are in the small group market, 45% in the large group market, and the remaining 25% in the individual market. § Small businesses are strongly embracing HSAs – HSA enrollment in the small group market increased 70% over the past year. Over 1. 8 million Americans working for small businesses now have coverage through HSAs. § HSAs continue to make health insurance more affordable for the uninsured -- HSA products accounted for 31% of new coverage issued in the small-group market and 27% of their new purchases of health insurance in the individual market. § Source: AHIP Research’s 4 th annual survey of enrollment in HSA-qualified health plans, published 4/30/ 2008. 33

The case for competition and consumerism – market trends § In 2006 the Treasury The case for competition and consumerism – market trends § In 2006 the Treasury Department projected more than 21 million covered by HSAs by the end of 2010 if the HSA rules were revised, which occurred in December of that year. § HSA enrollment growth should reach 10 million covered lives by the end of 2008. § The average HSA established now will have a $22, 000 balance ten years from now. Unspent balances in HSAs will help employees better plan for and afford health care in retirement. * Sources: America’s Health Insurance Plans, April, 2007; “Fact Sheet: Dramatic Growth of HSAs” http: //www. treas. gov/offices/public-affairs/hsa/ 34

The case for competition and consumerism - Takeaways § Tax-favored account-based plans should swing The case for competition and consumerism - Takeaways § Tax-favored account-based plans should swing the pendulum away from third party payment and pre-paid healthcare and move us back toward more of a direct payment model, which the baby boomers grew up with when the family doctor used to make house calls and Dad handed the doctor a check or paid him with cash. § Once account-based plans achieve critical mass (2011 -2012), their prevalence should help curb overutilization, a significant healthcare cost driver. 35

Recent assaults on the private market: 3 rd-party substantiation of HSA spending § Currently Recent assaults on the private market: 3 rd-party substantiation of HSA spending § Currently HSA distributions are selfsubstantiated. 3 rd party substantiation of expenses would be a costly and timeconsuming process. § Most HSA payments are made with a specially designated debit card, so it’s easy to track where the money goes. § GAO study: >90% of HSA withdrawals went toward qualified medical expenses. 36

Recent assaults on the private market: Medicare Advantage Medicare Improvement for Patients and Providers Recent assaults on the private market: Medicare Advantage Medicare Improvement for Patients and Providers Act of 2008 On Wednesday, July 9 th, the Senate passed Medicare payment legislation, H. R. 6331, by a vetoproof margin of 69 -30 following a House tally, also veto-proof, of 355 -59 last month. And then on Tuesday, July 15 th, following President Bush’s veto of the bill the day prior, the House voted 383 to 41 to override it, and the Senate voted 70 to 26. 37

Recent assaults on the private market: Medicare Advantage § The Act is an 18 Recent assaults on the private market: Medicare Advantage § The Act is an 18 -month fix to the provider-funding issue, and is being financed by $12 billion in cuts to the private Medicare Advantage program. § More than 20% of Medicare beneficiaries choose the Medicare Advantage option. § Also, the Act includes new and potentially problematic marketing and sales restrictions on insurance producers selling private Medicare products, despite the fact that CMS has an ongoing proposed rule for policy changes in this area. 38

What the candidates are saying: Senator Barack Obama Sen. Barack Obama recently announced a What the candidates are saying: Senator Barack Obama Sen. Barack Obama recently announced a plan designed to help businesses afford health insurance, but the ideas would perpetuate today's problems and add new bureaucracy in the process. § Small businesses would get refundable tax credits to offset 50% of the amount they pay for health insurance for their workers and have the government take over a portion of the catastrophic costs of high-cost employees. § For a reliable critique of the Obama plan, be sure to read “High Stakes”, published on July 18, 2008 by the Galen Institute (www. galen. org) 39

What the candidates are saying Senator John Mc. Cain Health insurance for most nonelderly What the candidates are saying Senator John Mc. Cain Health insurance for most nonelderly Americans is purchased with funds from three sources: (1) an employer contribution, (2) an employee contribution and (3) a government tax subsidy. § The Mc. Cain health plan is based on the idea that the first two contributions should be determined by individual choice and competition in the marketplace. The government's contribution, however, would be the same for everyone: $2, 500 for every adult and $5, 000 for every family. § For a reliable critique of the Mc. Cain plan, be sure to read Dr. John Goodman’s blog post entitled “John Mc. Cain’s Health Tax Credit”, published on July 14, 2008 by the National Center for Policy Analysis (http: //www. john-goodman-blog. com/john-mccains-health-tax-credit/) 40

Side-by-side comparison of the candidates’ proposals www. health 08. org/sidebyside. cfm § Prepared by Side-by-side comparison of the candidates’ proposals www. health 08. org/sidebyside. cfm § Prepared by the Kaiser Family Foundation and Health Policy Alternatives, Inc. based on information on the candidates' websites as supplemented by information from candidate speeches, the campaign debates, and news reports. The sources of information are identified for each candidate's summary (with links to the Internet). The comparison highlights information on the candidates' positions related to access to health care coverage, cost containment, improving the quality of care and financing. Information will be updated regularly as the campaign unfolds. 41

NPR event – September 16, 2008 Debate Venue: Rockefeller University’s Caspary Auditorium Universal health NPR event – September 16, 2008 Debate Venue: Rockefeller University’s Caspary Auditorium Universal health coverage should be the federal government's responsibility http: //www. intelligencesquaredus. org/Event. aspx? Event=30 Art Kellermann Michael Cannon Paul Krugman Sally Pipes Michael Rachlis John Stossel 42

Steps toward achieving improved cost, quality, and access Do not mandate guaranteed issue and Steps toward achieving improved cost, quality, and access Do not mandate guaranteed issue and modified community rating. The commercial health insurance market in Illinois is not as bad as many (from a regulatory perspective) but certainly can (and should) be improved through market-based reforms. § Health IT is long overdue, although a small measure of it is included with the new Medicare legislation. § 43

Steps toward achieving improved cost, quality, and access Tax equity: Individuals who don’t have Steps toward achieving improved cost, quality, and access Tax equity: Individuals who don’t have jobbased coverage should at least receive the same tax break on their health insurance premiums that the self-employed and citizens with job-based coverage receive. § Federal health insurance tax credits: A major demographic of the uninsured are those who make too much to qualify for government health programs but cannot afford health insurance even when subsidized by their employers. Targeted tax credits could help. § For more information on health ins. tax credits visit http: //www. nahu. org/legislative/uninsured/credits. cfm 44

Steps toward achieving improved cost, quality, and access § Expand consumerism by increasing health Steps toward achieving improved cost, quality, and access § Expand consumerism by increasing health care quality and cost transparency. The private market will figure this out long before it’s legislated. § Encourage employer-sponsored wellness programs, and incorporate wellness and disease management programs into all public and private health plans. § Implement meaningful medical malpractice reform. 45

Key questions to ask § What are the appropriate roles for governments, individuals, and Key questions to ask § What are the appropriate roles for governments, individuals, and businesses? § Do the policy proposals address the underlying causes of unnecessary health care spending, or just try to impose caps and mandates? § Do the reforms empower consumers to make better choices, or leave them with less control over their health care and fewer choices? 46

Key questions to ask What role should personal responsibility play? What happens if we Key questions to ask What role should personal responsibility play? What happens if we discourage it? § What will things look like not next year or 5 years from now, but rather 10, 20, and 30 years from now? § What can I do as a thought leader to effect change for the good? § 47

Thank You 48 Thank You 48