After I left seminary in the early 1990’s I did some additional training in Conflict Resolution. I trained to do family and divorce mediation as well as commercial mediation. One of the tasks of a mediator is peer through the veil of animosity, anger, and rigid positions and find common ground that both sides can agree to.
I saw that often with the help of a good mediator people can find solutions that are actually better than what either side may have expected initially. Washington D.C. still uses the language of compromise. Within that language is the idea that each side is giving something up…that each side is losing a little.
Create a win/win scenario for health insurance
Mediators, negotiators, and even corporate America have long since put the language of compromise and that mindset behind them and embraced the idea of creating win/win situations. That’s what I am trying to offer with my proposal. It’s win/win (at least I think it is) for the American people.
As you read try to imagine yourself as the President or a member of Congress and look at the big picture. Almost all of us have had some sort of negative experience with our healthcare system. It might have been the care itself, the attitude of a doctor or nurse, or (very commonly) the cost of treatment. Try not to focus on your experience, but on what you might do if you were shaping policy.
I would expect that most all of us at this point have heard that we have the most expensive healthcare system in the world. Our cost per person is way out of line compared to any other country. The latest numbers I have seen are that we spend around $12,000 per year on insurance or out of pocket costs per person and there are about 330,000,000 (330 million) of us.
How do we get that cost down and why are we so focused on health insurance reform vs health care reform? The simple answer is that health insurance reform is the low hanging fruit. Usually, low hanging fruit is the easiest to pick and a very large part of the harvest. In this case health insurance reform has become so political that very little is happening to take advantage of what can be saved there.
I often tell people healthcare reform is kind of like cutting an onion. There’s only so many ways to slice it and they all make you cry. What I mean by that is there is no “perfect” system.” Other countries that have universal healthcare (meaning everyone is covered) struggle constantly with the cost vs benefit balance. Despite their struggles they all seem to do it more equitably and affordably than we do.
When we look at other countries nearly every single one of them has a combination of not-for-profit, government managed, and for-profit in their health insurance system. We simply have the most expensive combination. Many people do not realize that we have multiple healthcare and health insurance systems in America.
There is the for-profit system dominated by the “Big 5” (UnitedHealthcare, Anthem, Aetna, Humana, and Cigna) when it comes to health insurance companies, plus the large hospital systems, and pharmaceutical industry.
We also have the Indian Healthcare System (IHS) which largely operates on or near native American reservations. There is the Veterans Administration that runs hospitals and out patient clinics all over the nation. There are also county health departments that, depending on your state, may help with primary care or may be focused on mental health, women’s health issues, etc.
There is also Medicare. Medicare is not a healthcare system, rather it is a health insurance system. It is the most efficient health insurance system in America in large part for 3 reasons. First, and foremost, is that it is the largest risk pool of any insurance system in the nation. There are approximately 45 million Americans covered by Medicare Insurance.
The second reason Medicare is so efficient is that much of the overhead is accounted for by other government agencies. For example legal and human resources functions are handled by the Office of Personnel Management. Add those savings to the fact that Medicare does not pay millions of dollars annually or grant stock options. With some large corporations executive compensation (President, CEO, and other executive team members) tops $50 million a year (year after year).
The final reason is that the “core” benefits of Medicare (Parts A & B) have little marketing or sales expense attached. While commissions on health insurance outside of Medicare have dwindled in recent years due to the Affordable Care Act (i.e. Obamacare) they used to hover around 10%.
Of those three reasons I think the most significant is the risk pool. I’ll discuss risk pools more in just a bit, but I want to take a detour and discuss what drives healthcare costs.
There are a lot of factors that drive up healthcare costs. There are some that have a much larger impact than others and we need to have an understanding about what some of those things are and how they are dealt with in our current system.
What drives healthcare costs?
The three main drivers of healthcare costs are: 1. End of life care, 2. Care of those with Chronic Conditions, 3. Discreet health events (think a heart attack, accident, or stoke that people survive and do not require ongoing care). These costs can be analyzed in a number of different ways. For instance; legitimate analysis also shows technology and pharmaceuticals to be top cost drivers as well.
Both ways of looking at the top drivers of healthcare costs are correct as end of life care and care of those with chronic conditions both are driven by technology and pharmaceuticals. My point here is that you can analyze costs a number of different ways and they might all be legitimate. When you read this or other articles on healthcare reform look for how they break down the costs and what perspective they are writing from.
These three (3) big factors that drive the cost of care…but what about the cost of insurance? What is it that drives up the cost of insurance?
The problem of risk pool fragmentation:
The insurance market in the US is divided into so many different risk pools that costs cannot be distributed widely enough to drive insurance costs down. Insurance is regulated at the state level, so you automatically have 50 risk pools.
There are five huge companies that sell across the nation. Humana, Anthem, United Healthcare, Cigna, and Aetna make up “the big five”. In addition 37 states have a BlueCross/BlueShield organization. In addition there are some (but not a huge number) of regional insurance companies.
Take those 50 state based risk pools and multiply them by 6 (the big five plus a Blue Cross or regional insurance company). That gives us 300 risk pools. The thing is each company does not have a single risk pool. There are risk pools for their Medicare plans. There are risk pools for their large corporate plans. Risk pools for small business plans. Risk pools for individual plans.
Now we take those 300 risk pools and just multiply by 4 for Medicare, large business, small business, and individual. Now we have 1200 risk pools!
It. Gets. Worse.
Most companies run “profit and loss” at the individual policy level effectively making each different kind of policy its own risk pool! Now when you do the math there are over 10,000 risk pools…and I’m not done!
The insurance card you carry from the large company you work for has an insurance company name on it. What many don’t know is that many large companies self-insure and the insurance company provides only administration and probably a stop loss for huge claims. All those companies that self-insure are not in any insurance companies risk pool (except for the catastrophic event).
All this fragmentation of risk pools increases costs. Some people want to argue here that there is no increase in costs. If someone breaks their leg it costs the same whether the risk pool is larger or smaller. While that is true it’s really a different conversation. I am writing about health insurance reform, not healthcare reform.
Take that example of a broken leg. If there are 1,000 people in the risk pool the cost is effectively distributed among 1,000 people. If the risk pool is 1,000,000 people the cost is effectively distributed among 1,000,000 people. Individuals will pay less in the larger group.
There is a very real part of health insurance reform that is just that simple.
What about competition? We often hear people on television talking about the need for competition and how it will drive down the cost of care.
The problem of competition:
Let’s revisit what the competition is. We have the big 5 companies (Humana, Cigna, United Healthcare, Anthem, and Aetna). In addition, many states (about 37) also have not-for-profit Blue Cross organizations. So, in most states there are six major competitors.
However, that doesn’t paint the whole picture as in every major market and most mid-major markets some combination of two of those six organizations have well over 50% marketshare. That is not competition. You can’t make a sweet sixteen out of six competitors. In those places where two companies share most of the market you can’t even make a final four.
The idea that there is competition in health insurance that will drive down monthly premiums is just a farce. It’s a red herring. Competition in health insurance does not exist. There simply are not enough companies to have competition. As a state regulated product with thousands of risk pools more insurance companies would make the problem worse in our current system.
Furthermore, even if we had more health insurance companies competition wouldn’t exist. In order for there to be competition there has to be some basis for comparison.
In my experience most people don’t know a co-pay from co-insurance. Consumers use “deductible” and “out of pocket maximum” interchangeably when they are entirely different parts of the policy. What I am getting at is that in order for there to be competition consumers have to be able to compare and they can’t.
Consumers are shopping blind.
Even the way a policy is depicted in a summary of benefits it is not easily understood how the policy works. If consumers cannot easily compare policies then there cannot be competition.
Let me make a parallel with buying a truck. Among American manufacturers consumers have three choices (yes, I know Toyota and Honda make trucks too, but I’m not writing an exhaustive treatise on truck buying just trying to make some points about comparison shopping).
One company might have more hauling capacity. One company might have more horsepower, another might have an engine with more torque. All three use a different strategy to get good gas mileage. Dodge uses diesel engines. Ford switched to aluminum bodies. GM uses a V6 in it’s base model. The point is it’s fairly easy to know what you are looking at.
Insurance is not an easily comparable product and without the consumer being able to compare there is no real competition, the consumer is just shopping blind.
When it comes to those issues that drive the most cost in healthcare they are predominantly already in the Medicare system.
People under the age of 65 clearly have heart attacks, cancers, car accidents, etc., but for most people end of life care happens inside the Medicare system. When it comes to the cost of those with chronic conditions it costs much more to care for a 72-year-old with diabetes than it did 20 years before when they were diagnosed.
Discreet health events (think a heart attack, accident, or stoke that people survive and do not require ongoing care) happen in and out of the Medicare system. The point is that Medicare already handles the lion’s share of these three (3) major factors that drive healthcare costs and it does so very efficiently.
It’s size of Medicare’s risk pool
It goes back to the risk pool. The risk pool for Medicare is nearly 45 million people. Medicare is the largest risk pool in America by an incredibly huge margin. What would happen if we made that risk pool even larger and opened up Medicare to younger Americans?
What if we add 289,000,000 (289 million) people to the pool? These will primarily be people who are not facing end of life care, lower percentages of whom have chronic conditions, and who only occasionally have discreet health events. Medicare Premiums should go nowhere but down. Clearly there are some people facing those three categories of care who are under 65, but not at anywhere near the rates that Medicare currently deals with.
Medicare is also incredibly efficient
The system that takes care of most of those cost drivers now is Medicare. Compared to other health insurance systems in the USA (and even the world) it is incredibly efficient. Medicare has a Medical Loss Ratio (MLR) of 97%. That means for every $1 that goes into Medicare, 97 cents is used to pay claims or make people healthier. No other health insurance payment system we have in the USA comes close to that.
To the point of people on the right, it’s not a fair comparison. Medicare as part of the government doesn’t fund a lot of the infrastructure that a separate corporation has. Some HR functions, legal functions, sourcing of supplies and equipment…a lot of that kind of thing is done by other federal agencies (as discussed above). If you added the cost of all those things into the cost structure of CMS (The Center for Medicare and Medicaid Services) their MLR would clearly not be 97%.
To the point of people on the left. 1. Since Medicare doesn’t have that overhead it is incredibly efficient with each dollar. Nintey-Seven% of each dollar allocated to Medicare goes to pay claims or help people lead healthier lives. 2. Even if Medicare did have line items for those costs it would still be more efficient as it doesn’t spend exorbitant amounts on executive team salaries, advertising, marketing, sales commissions, and profits.
Both viewpoints have merit and are accurate. What would Medicare’s MLR be if all overhead were accounted for? It’s reasonable to guess that even IF Medicare had more “corporate” type infrastructure, but still didn’t have bloated executive salaries, marketing, sales commissions, and profits it would still have a better MLR than for-profit health insurance.
The Proof is in the Pudding
Outside the world of Medicare if a 64-year old wanted a high deductible health insurance plan with a $5500 deductible and a $6700 out of pocket maximum could expect to pay around $600 a month in premium (here in East Tennessee). A high deductible plan is going to mean substantial out of pocket costs in addition to that premium.
Now imagine a year passes. Getting older means higher premiums right? Now that same person turns 65, but enters the Medicare system. Getting older means higher premiums right? Well what happens when they go into Medicare?
In the Medicare system that 65 year old can now get the Cadillac plan for half of that $600 a month. That would be Traditional Medicare, a Part D plan, dental, and a “G” supplement all for around $300. In that case their out of pocket costs will virtually be limited to a small deductible and their prescription co-pays.
So what is Medicare?
See the link below for a deeper conversation on what Medicare.
In summary, Medicare provides a base of coverage, but there are deductibles and co-insurance to be paid. There are Part D plans that help cover pharmaceuticals. There are also Medicare Supplements (also known as Medi-gap).
For the healthcare of any one patient there could be up to four payers (Medicare, a Part D plan, a supplement, and the patient may have co-insurance to pay). So be clear, what I am suggesting is not single payer or socialism. What Medicare does is put most of the risk in one single pool and multiple ancillary risks into competitive risk pools.
The Competition is in the ancillary risk pools.
Again, the proof is in the pudding. There are probably 40 or more companies just in Tennessee selling Medicare supplements. There is also a deeper level of competition both for Part D plans. So, for those that want market driven healthcare where competition drives prices down…look no further than Medicare.
Medicare has a lot of competition in large part due to the fact that Medicare Supplements are “defined benefit plans.” What this means is that a given policy from one company is exactly the same as another company. Remember the comparison with buying a truck. It’s fairly easy to see if one truck is blue and has a really nice interior vs a truck that is grey with a basic interior. The point is it’s easy to comparison shop.
With Medicare supplements its easier to comparison shop than in the 64 and under market. If you decide you want the “G” supplement then you compare rates from companies that offer the “G” supplement. I tell people they are shopping on three (3) factors. 1. Which supplement do they want? 2. What is the initial rate (premium) for that supplement? 3. What is that company’s history of rate increases?
Is this Medicare4All proposal single payer?
This may surprise some people but, what I do not support is re-inventing Medicare into a single payer system. Medicare is not now, nor should it ever be single payer. It does not fit our economic culture and it doesn’t have to be single payer for it to work and substantially lower costs.
Within the current Medicare system Medicare (as I mentioned before) provides a base of coverage and then people fill in gaps with Medicare supplement policies (also called Medi-gap policies). With my proposal Medicare Supplements would still be available.
What would some of the challenges be to transition to Medicare4All?
Individual Coverage to Family Coverage
One of the largest changes would be going from individual coverage only in Medicare to family coverage. In the current system coverage is built around the individual. Whether it is Traditional Medicare with a supplement or a Medicare Advantage plan each plan only covers one person. Instead of having one plan for each family member I think it probably does make more sense to have one plan for the whole family.
That doesn’t seem like a big change, but my expectation is that it will take several years for the insurance companies to figure out where to set premiums. There will be growing pains and that is part of the path to get a better system.
Insurance company actuaries crunch the numbers, do a lot of analysis, and with that analysis companies set their premium rates. Well initially there won’t be complete data sets for those actuaries to work from because all coverage is now individual.
Think about it this way. There’s not a lot of teenagers in the Medicare system currently. There are not a lot of pregnancies and births in the Medicare system right now. So those actuaries can pull some of that data from current policies, make adjustments, and get as close as they can…but I can tell you…they won’t get it right for 4 to 5 years.
How would Premium Be Paid?
The vast majority of working age people get their coverage through their jobs. Those employers typically pay a substantial portion of the monthly premiums. In my proposal who would pay the premiums…the corporation or the family/individual? Would it be all corporations or only those of a certain size?
The current law can get pretty technical, but effectively companies with more than 50 employees (full time) do NOT have to provide health insurance, but if they don’t then they pay a penalty. There are exceptions as well for seasonal employment and other categories. Still most premiums are paid through the employer.
I would make a change to that. The employer could pay the employee a non-taxable amount to be used for the base coverage of Medicare4All. It could be collected via payroll deduction much as premiums are now.
The employer could also, at their discretion, make supplements available and pay a portion (or all) of those premiums to the supplemental insurance company. This would still be a non-taxable benefit to the employee and the free market would help give incentive to employers competing for employee talent as to whether or not that was provided.
Would Supplemental still be state based?
Another one of those hairy little details that need to be worked out would be what do states regulate and what does the federal government regulate. Even though Medicare supplements are federally defined it’s up to each state to determine if it wants to allow a company to sell inside the state.
This is how it works currently and rates are reasonable. If companies could restructure their risk pools to have one large risk pool instead of 50 that should help keep rates lower. States could still determine the individual financial fitness of companies to determine if they could sell in a given state.
Medicare can be confusing how can we simplify it?
Medicare currently has parts A & B. There are different deductibles for each. Part A has a per incident deductible (with a 60 day look back) and Part B has a annual deductible.
There are separate trust funds for Part A benefits and Part B benefits.
Then there are co-pays or co-insurance beyond a certain point. For Part B co-insurance after deductible is 80/20 which is really good, but there’s no out of pocket maximum and excess charges could effectively change the patients 20% to 35%. Confused yet?
While people CAN comparison shop more easily inside the Medicare system than outside the system I think there is room for simplification when it comes to policy design.
Let us take a look at how a traditional health insurance is structured. A non-medicare health insurance policy is a three (3) stage policy.
- Stage 1 is the deductible (the “you pay”) stage. During this stage you pay, at the negotiated rate.
- Stage 2 is the co-insurance (the “you both pay”) stage. During this stage you split costs with the insurance company and they pay the larger percentage.
- Stage three is the Out of Pocket Maximum (the “they pay”) stage. This is your financial stop loss. This is where the financial bleeding stops.
There can also be co-pays with a policy. A co-pay is a specific dollar amount for a certain service. For instance you go to a family doctor and you have a “co-pay” of $20. A co-pay is a set dollar amount. Co-Insurance is a set percentage (i.e. 80/20)
Why not let Medicare follow a similar structure? Unify Medicare’s risk pools. Create a standard deductible and co-insurance rate. Medicare would have a huge risk pool driving those costs down. Then the ancillary risks could be taken care of in a competitive supplemental market.
Let Medicare follow the structure of a Traditional Policy
- Stage 1 Deductible (the “you” pay stage) of $1250 per person. After each person in the family has $1250 in care (up to a family maximum of $3750) that person moves into stage two of the policy. This is lower than the current Part A deductible of $1364, and higher than the Part B deductible of $185. Remember the current part A deductible is per incident and this would be an annual deductible.
- Stage 2 Co-Insurance (the “you both pay” stage). Standard co-insurance percentage would be 70/30. Part B co-insurance is currently 80/20, but IS subject to excess charges from some doctors. Excess charges in the current system could drive the percentage to something more like a 65/35 split.
- Stage 3 Out of Pocket Maximum (the “they pay” stage). Currently, traditional Medicare does not have an out of pocket maximum at all. I would suggest a similar structure with Medicare4All. That provides the consumer with a definite motivation to secure a Medicare Supplement.
Supplemental companies would be able to sell policies that could cover more of the deductible (in $250 increments), increase co-insurance from 70/30 to 80/20 or even 90/10. The the Out of Pocket Maximums could be improved in $500 increments. There could be some supplements that also included co-pays (much as the “N” supplement does now).
This would create a system where consumers can comparison shop. If someone wanted $750 per person deductible, 80/20 co-insurance, and a $6000 out of pocket maximum it could quote that from any number of insurance companies.
With the current Medicare system when a supplement provides an out of pocket maximum (like the “F,” “HDF,” or “G”) Medicare continues to pay 80% on Part B claims and the supplemental company is paying 20%. With my proposed system the same dynamic would still be in play.
This gives the insurance company limited liability as they are never covering 100% of the costs themselves. This is another feature that would help keep rates down. It should also lead to even more competition than we see in today’s market for Medicare Supplements.
Finally, in today’s system once someone is enrolled in Medicare the supplement are medically underwritten. In my proposed system
What about those with Low Income?
No matter how inexpensive or efficient we make a system there will always be people that have a tough time affording coverage. Even for some families that have reasonable incomes the cost of healthcare can get out of hand if there is someone with special needs or chronic conditions.
I would promote a two step system for keeping consumers healthcare costs in line. The first track would be having a 10% of overall income limit on premiums and out of pocket costs. This would apply only to people who purchased a supplement (or those on track two). The idea is to get everyone good insurance, not to let them rely on the government for their out of pocket maximum.
As is with the ACA (Affordable Care Act) now this would be reconciled on taxes, but greatly simplified. This is one reason company contributions to healthcare are non-taxable income to the employee. Tax credits could be paid to the employee, not the employer and not the health insurance company.
My plan calls for the health insurance company and Medicare to send the enrollee an end of year statement showing how much premium and out of pocket costs were billed. The enrollee also keeps receipts for what they have spent out of pocket.
This would be added up and compared with the “total income” on the tax return. If there is more than 10% spent on premiums and out of pocket costs then the tax payer gets a parallel tax refund. This greatly simplifies the system of tax credits that the ACA uses today.
This track would require the enrollee to purchase a supplement and for them to be responsible enough to keep track of receipts showing what they have paid (not just statements showing they have been billed).
Track two would be for those who are under financial duress. These are people that regularly live with incomes under 250% of the federal poverty level. One criticism from the right is that these types of programs for the poor create an incentive such that the poor actually want to stay poor so they can collect more benefits.
While I think there are always going to be a small element of society that is lethargic and unambitious I have seen too many people who through no fault of their own have a hard time.
I would agree that this portion of the program needs to be carefully structured. It needs to have incremental steps (probably a curvilinear algorithm) so that people are not punished for making more money. The percentage of income spent on healthcare would curve from 10% down to 0% based on income, family size, disabilities, special needs family members, etc.
Track two would also include case management. One of the things that benefit low income medicaid enrollee’s today is case management functions provided by Medicare Advantage plans. While I am not a fan of Advantage plans the case management they provide is of significant benefit to low income clients.
Medicare is not structured to provide much in the way of case management and this is something that could be “farmed out” to health insurance companies. Let me be clear here that this is about case management, not utilization or prior authorization reviews. There is significant evidence that Medicare Advantage plans overuse utilization reviews.
Utilization reviews are used, according to the insurance companies to keep costs down. There is some research that also shows that they help prop up profits and deny people care they should be able to get. This is one of many topics that either straddles or crosses the line between health insurance reform and health care reform.
There are doctors and medical professionals that will do a test, procedure, etc in order just to pad their billing. As I mention in my articles on, “The Red Herrings of Healthcare Reform (see article under BLOG) Medicare needs to make sure doctors are compensated fairly so there is no need to pad billing. It also needs to have some sort of mechanism to watch for and take action against those that do.
I would suggest that instead of case by case utilization reviews that Medicare or the CDC (Center for Disease Control) to focus on worst practices and best practices. Let me give you some examples of that to help communicate what I mean.
When I was growing up we had a doctor in town that would give you a shot of something virtually no matter what you came in for. He was likely one of the over-prescribers of anti-biotics that have lead to resistant strains of bacteria. That is a “worst practice” and should be able to be detected through data analysis.
Doctors practicing “worst practice” medicine often aren’t trying to do it intentionally, but many times are not aware of what their “worst practices” nor what “best practices” they should implement.
Another example: At nearly every doctors office visit you go on a nurse will take your blood pressure in one arm. It’s a “best practice” to take blood pressure in both arms because more than a 10 point difference can be an indicator of peripheral vascular disease.
Instead of creating hurdles to care for patients through utilization reviews we should have teams of analysts and “best practice teams.” These teams can find the doctors not using medicine effectively (worst practices) and give them on-site continuing education on using best practices.
What about prescriptions?
Because of fragmented risk pools even large health insurance companies like Anthem, UnitedHealthcare, and Humana do not have the ability to effectively negotiate with pharmaceutical manufacturers.
Other countries use price controls or allow their insurance industry to negotiate en masse with the pharmaceutical companies. Price controls are not something that Americans are fond of. We like “free markets.”
While the “invisible hand of the free market” via Adam Smith is an antiquated and incomplete theory it still pervades. Ironically, markets are most “free” when they are well regulated and everyone is playing by the same set of rules. Without rules the powerful just run roughshod over the competition, customers, and stakeholders.
On the other side of the argument letting the industry band together and do all the negotiation puts the pharmaceutical companies at their mercy. Whether they are at the mercy of the government or another industry partner they might still would not have any leverage to negotiate prices.
To this end I suggest a modified approach.
Because of the state regulated nature of healthcare even these large companies are forced to negotiate on the basis of the size of each ones risk pool…and as was discussed earlier those risk pools are fragmented.
With a Medicare4All system risk pools are consolidated into national risk pools instead of state based risk pools. This would allow the “Big 5” companies to have leverage with manufacturers. Smaller Part D companies could band together in “Tranches” to negotiate with the size and leverage of larger competitors.
In that type of structure there is still negotiation and competition, but there are more even terms with the pharmaceutical companies and the government does not have to put price controls into place.
Our economic culture in America is not to affix price controls, but let prices work themselves out in a competitive balanced market. We don’t have that today, but we could with a Medicare4All system.
Summary of my Medicare4All proposal
There are, of course, other issues that would have to be addressed, but I think this is a pretty significant start. It allows for one huge risk pool to drive the cost of insurance down.
It allows for ancillary risk to be borne in a competitive insurance market. It allows for middle income (track 1 enrollees) and lower income families (track 2 enrollees) to have relief from spending an enormous percentage of their incomes on healthcare related expenses.
It allows for Part D providers to consolidate their risk pools and the creation of tranches for smaller insurance companies. This creates a more competitive landscape to drive down the costs of prescriptions.
If you want to see market driven healthcare, if you want to see everyone have coverage, if you want to see deeper risk pools, if you want to see cost effective health insurance…Medicare has to be part of the answer. It works and it fits the economic culture we have in this country. After than we can actually start to tackle the cost of healthcare and not just health insurance.