Picture yourself starting a new job with a big firm in, say, five years. Your salary, vacation and sick leave are set. But health insurance isn’t part of the package. The company stopped providing coverage the year before, after the federal government stopped giving employers tax breaks for insuring their workers. Now, you get the tax break. And it’s your responsibility to buy health insurance. You can buy a traditional indemnity policy from a company such as Blue Cross/Blue Shield. You can join a health maintenance organization (HMO) such as Kaiser Foundation Health Plan. You can even get insurance through your trade association or church. It’s your choice.
Farfetched? Perhaps. But rumblings from employers that they’d just as soon get out of the business of providing insurance—combined with warnings from analysts that health care costs could start exploding again—are rekindling the deba te on overhauling the health care system. This time, however, the impetus is not coming from the Clinton Administration, which got badly burned in its 1993 reform attempt; it’s coming from influential conservatives.
All it will take is a dip in the economy, and the country will realize that managed care alone won’t keep health care costs under control, said William McInturff, a partner at Public Opinion Strategies, a Republican polling firm. ”As soon as the economy weakens, we’ll be back to a very serious debate about health care. The problems are still there. Imagine what will happen when people start losing jobs.”
McInturff predicts that the issue will come to a head in the next presidential election. ”In 2000, people will be talking about tax breaks. Businesses are going to want to get out of the business of picking coverage and move to defined benefits. We’ll be ready to deal with major change in 2000.”
When Washington last considered health care reform, health care costs had been increasing rapidly since the mid- 1980s, at a rate seemingly stuck in the double digits, and the public listed reform as a high priority. That effort, though, collapsed with a thud, as it became clear that Americans weren’t buying what President Clinton was selling. But changes were already under way in the private marketplace. Employers were turning to managed care to cut costs. And the economy was on the upswing. After a while, it appeared that the cost problems were a thing of the past.
”We had a whole bunch of brain-dead politicians breathing a sigh of relief after the 1993 debate,” said Robert Moffitt, director of domestic policy studies at the conservative Heritage Foundation. ”But the fundamental problems of the system are still there and in fact are getting worse.”
Consider recent developments:
* Although employers are shifting more workers from expensive fee-for-service plans into managed care, many employers are opting for so-called preferred provider organizations (PPOs) and point of service (POS) plans instead of HMOs. The PPO and POS plans give patients the option of picking doctors outside the plan’s network. But they don’t control costs nearly as well as the HMOs.
* Consumers have already persuaded Congress and state legislatures to require health plans to provide certain services, like extra days in the hospital for baby deliveries and mastectomies. Now, consumer groups are lining up behind a bill by Rep. Charlie Norwood, R-Ga., that would let patients visit doctors outside their managed care plans and would require insurers to reimburse those doctors. The Norwood bill would also let patients appeal to a third party if their managed care plan denied them treatment and would give them the right to sue their health plans—and perhaps even their employers. Some economists say the bill, which has 225 co-sponsors and election-year appeal, could raise health care premiums by as much as 23 per cent.
* Managed care plans are beginning to feel squeezed financially. They’ve been holding down premiums for several years to ensure their competitiveness and boost market share, and some are starting to show big losses. As a result, premiums are beginning to rise.
Small wonder that employers are getting nervous about being in the health care business. Even without Norwood’s bill, health care costs are expected to grow at an annual rate as high as 8 per cent by 2000, recent studies show. ”If PARCA (Norwood’s bill, the Patient Access to Responsible Care Act) is enacted, we are out of the health care business,” said M. Anthony Burns, chairman of Ryder Systems Inc. and chairman of the Business Roundtable’s health and retirement task force. The result, he said, ”would be an unmitigated disaster. Employers would hand people a check to buy health care on their own.” Is Managed Care a Bust?
There’s no doubt that managed care is going through growing pains. ”Every single HMO in the country is either losing money or showing much-reduced profits,” said Ken Abramowitz, a health care analyst at Sanford C. Bernstein & Co., a New York City investment firm. ”Everyone has lost control over costs.”
After President Clinton’s health care reform effort died in 1994, health care cost inflation plummeted from double digits to around 3 per cent. For this decrease, some observers credit the mass movement to managed care. Not Ian Morrison, a health care analyst in Menlo Park, Calif. ”Way too much credit is being given to the managed care marketplace and not enough to the fact that Hillary scared the bejesus out of the health care industry,” he said.
Now, prices are on the rise again. On average, HMOs are expecting to raise premiums by 4.6 per cent this year, compared to 3.1 per cent last year and 1 per cent the year before, according to Douglas B. Sherlock, senior health care analyst at the Philadelphia-based Sherlock Co., which publishes newsletters on health services firms and conducts annual surveys on premium rate increases. Currently, the average HMO is operating with a profit margin of 0.8 per cent, Sherlock said, down from 8 per cent five years ago. Many health plan managers are realizing—as profits decline—that it’s extremely difficult to control costs and give consumers what they are demanding.
Take New York City-based Oxford Health Plans, which tried to do it all. Oxford offered enormous networks of physicians and lots of options for flexibility. As a result, it became very popular, and membership boomed. ”They have sold to consumers the promise that managed care is compatible with an enormous freedom of choice and an enormous lack of provider accountability for care,” said Morrison. ”In a closed-panel setting, if health care quality is not high, you can identify the particular provider and say, ‘Your outcomes are poor. You’re not doing right by your patients.’ But in an open-panel system, you don’t have that.”
After announcing major losses, Oxford last month asked New York state’s insurance department for the go-ahead to increase premiums 50 per cent for HMO members and 60-70 per cent for those with a broader choice of doctors. The company now has two million members, but Sherlock predicts it will slice off 400,000 of them to keep costs down.
”There’s tension inside these health plans,” said Sherlock. ”The marketing guys are saying, we have to appease these critics and (tell patients), ‘You can go anywhere, see any specialist you want.’ But the medical management guys say it will be more expensive. The marketing guys won. Predictably, the plans grew. Enrollment, expanded choice, and the control of their networks has not been as tight.”
But this doesn’t mean the death of HMOs, said Morrison. ”The HMOs have hit a wall, and now they have to reinvent themselves and make some steps forward. They know they have to do $ %it. The problem is that it’s easier to invest in research and development when you’re making money, and health plans are not now making money. There are some angry shareholders out there.”
Karen Ignagni, president of the American Association of Health Plans, which represents most managed care plans, says it’s shortsighted to think that managed care won’t work. The first wave of managed care was offering artificially low prices to be competitive. She said that she still expects to see some discounting in certain communities. But managed care is now adjusting and entering the second wave of its evolution, she said. Health plans are building information systems to improve the quality of health care delivery, which is key to sustained cost control. ”Highest quality is the most cost-effective strategy, because in the end, you don’t do things that are unnecessary. That’s the essence of disease management.”
Managed care plans are now collaborating more with medical providers—they’re focusing on prevention and early detection, she said. ”We’re seeing tremendous evidence of the cost-effectiveness of this,” Ignagni said. And it’s working for more-open networks, like PPOs and POS plans, she added.
When it comes to controlling health care costs, some conservatives think it’s time to reexamine a system that has developed almost by accident over the last half-century.
When President Roosevelt placed wage and price controls on the economy during World War II, Congress agreed to cushion the blow by allowing companies to count benefits as compensation and count them as tax-free. From that concession sprang the system of workers’ getting health insurance through their employers. ”There was no debate in Congress that said we should have a tax code that favors employer-based insurance,” Moffitt said.
But what has resulted, Moffitt said, is a fundamentally broken market, because the purchaser of the insurance—the employer—is not the same as the consumer—the worker/patient. ”The laws of supply and demand don’t exist. You cannot have real efficient allocation of resources unless you have a normal collision of supply and demand. And you can’t have it unless you change the tax treatment of the health care market.”
As long as people believe their employers are paying for their health care, they won’t be prudent purchasers of medical services, said John C. Goodman, president of the conservative National Center for Policy Analysis in Dallas. ”People need to make the important decisions of choosing between health care and other goods and services.” Empowering Individuals
As chairman of the House Ways and Means Health Subcommittee, Rep. William M. Thomas, R-Calif., is in a good position to redirect the tax break. Here’s his idea:
Employers would give the money they’re now spending on a worker’s health care (not counting the tax break they get from the government) directly to the worker in cash. The federal government, meanwhile, would determine the market value of a basic health plan, and from that would calculate the tax credit that the individual would get. Workers who wanted a better policy would have to use their own money to cover the added cost.
Thomas would want the government to provide a subsidy for those workers who don’t make enough to be eligible for a tax credit. ”If people want more choice, then they put more money in, and they get more choice,” he said. ”Choice and accessibility costs money. If you don’t want the program that you can buy for the credit amount, then buy a better one.”
The idea is not to end group insurance purchases. Larger companies would still be in a good position to purchase group health care. But workers who didn’t like their employer’s plan could join a pool through their union, church or other organization. ”Instead of having just employer pools, you would have huge national pools,” said Moffitt. ”Right now, the federal employee health benefits program has nine million federal employees and dozens of plans to choose from. All kinds of associations would be in a position to sponsor insurance.”
Thomas isn’t the only one in Congress pushing for change. Rep. Jim McCrery, R-La., who also serves on the Ways and Means Committee, and Don Nickles, R-Okla., who is the Senate majority whip, also are on board. ”There’s an enormous inequity in the tax code,” Nickles said, adding that he will try to make some changes whenever the next tax bill arises. But Nickles acknowledges that changing the system won’t be easy. He says that he’ll concentrate first on enhancing the tax break for the self- insured.
There are major stumbling blocks. Giving the tax break to individuals would help many of the 41 million uninsured Americans, including those whose employers don’t now provide insurance. But the cost to the government could be extraordinary. ”If you’re talking about fixing the system, you’re talking about spending some money here,” said Moffitt, who suggested using some of the current budget surplus or any money recovered from the pending tobacco settlement.
Redirecting the tax break raises other policy questions. ”Any time you talk about empowering individuals rather than using large pools, you need significant insurance-market reforms as well,” said Christopher Jennings, special assistant to the President for health care. He mentions several concerns: For instance, how do you make sure that individuals are guaranteed access to health insurance if they have to get it on their own? How do you see to it that insurance companies don’t discriminate against the unhealthy or raise their premiums to prohibitive levels?
Moreover, would people be required to get health insurance? Would the tax credit vary, depending on regional variations in health care costs? And would the tax break be enough to enable workers to buy a plan if they didn’t have assistance from their employers?
There are also smaller changes Congress could make, Moffitt said. ”Why not give people the right to have the conditions of their benefits disclosed to them? If a person doesn’t like the employer plan, he can take the money and get into another plan and … get the same tax break.” Another option is simply to extend the tax credit to those who currently don’t have insurance.
Thomas says he’d like to keep politics out of this debate—at least for now. ”If you get the policy right, the politics tends to follow,” he said. ”If you try to start with politics, you wind up where we are, to a certain extent, because frankly, a lot of decisions in the past have been made on the basis of politics. It doesn’t solve fundamental problems.”
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