HEALTH - A New Prescription

March 14, 1998, 7 a.m.

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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