Health Care Insecurity: Roadblock to Prosperity

Choices for Vermont: Rebuilding the Foundation of

Prosperity October 2, 2008

Health Care Insecurity: Roadblock to Prosperity

• Current health care financing in Vermont• Health care financing and the broader

economy• Opportunities for reform

How Health Care is Financed

• Three ways to look at this– Where the money comes from– Intermediaries (where it visits along the way)– Where it ultimately winds up

Where the Money Comes From

• All money for health care originates in households

• It flows into the system through 3 main channels– Taxes– Premiums– Out-of-Pocket (direct payments to providers)

• And one smaller one - philanthropy

Where the Money Comes From – Out-of-Pocket

• Out-of-Pocket (OOP) includes– Cost sharing, like deductibles, coinsurance, and

copayments– Payments for services not covered by insurance– ALL payments by the uninsured

• In Vermont, about $490 million of the $3.9 billion in health care spending (12.5%) is OOP (2006).

Where the Money Comes From – Premiums and Taxes

• Straghtforward:– Taxes pay for public programs like Medicare and

Medicaid– Premiums pay for private insurance like MVP and

Blue Cross

• Not so straightforward– What about public employees?– What about Medicare and Medicaid premiums?

Premiums and Taxes

• So what’s the difference?• Taxes are– Mandatory– Linked (usually) to ability to pay

• Premiums are– Voluntary– Sometimes (not always) linked to expected

consumption of health care services

Premiums and Taxes

• In 2006, Medicare, Medicaid, and other state and federal programs (mostly tax-financed) paid about $1.8 billion (46%) of Vermont’s health care bill

• Private insurance and self-insured employers paid about $1.6 billion (41%).

• Payments on behalf of public employees (included in private above) were about $360 million (9% of total spending).

Intermediaries

• Private– Employers– Health Insurers

• Public– Medicare– Medicaid

Where the Money Goes

• Providers• Payers– Administration– Reserves– Profits

Funds Flows

Health Care Financing and Vermont’s Economy

• Issue Areas– Health care costs are consuming a larger and larger

share of resources– Costs of health insurance for private sector entities

are embedded in the costs of their goods and services, not explicitly financed

– These costs are extremely difficult for employers to control

– Employers and employees must trade off wage increases and benefits

– Retiree health costs are an increasing burden

Health Care Financing and Vermont’s Economy

• Health care costs are consuming a growing share of individuals’, employers’, and governments’ revenues

• This leaves less and less for other expenses• For example, adjusted for inflation, the per

capita income in Vermont rose by about $5,000 between 1997 and 2006. About $2,000 of that was consumed by increasing health care costs.

Health Care Financing and Vermont’s Economy

• Between 1997 and 2006, total personal income in Vermont grew about 5.3% per year.

• During that period, health care spending grew at an average annual rate of 9.2%.

• The share of personal income spent on health care grew from 13% to 18%.

• At that rate, in another 10 years, we’ll spend one-quarter of all personal income on health.

Health Care Financing and Vermont’s Economy

• The problem of averages– Unlike many costs, such as food or heat (!), health

care costs vary enormously in a population.– The healthier half of a typical population accounts

for less than 5% of all costs– About 70% of all health care spending is

accounted for by 10% of the population.

Health Care Financing and Vermont’s Economy

• Health care costs affect different families quite differently– For those with employer-sponsored insurance,

their contributions are rising between 10% and 20% per year, benefits are being reduced, and wage increases are traded off for coverage.

– For those who purchase insurance directly, costs are rising and the only products remaining in the market are high-deductible ($3,500 or more)

Health Care Financing and Vermont’s Economy

• Health care costs affect different families quite differently– For those with no insurance, a single episode of

illness can lead to financial ruin.– The uninsured often go without preventive care,

increasing their risks.

State Government – an Illustration

• In the first year, assume a state budget of $1 billion, 10% of which is spent on health care programs.

• Assume state revenues grow at 4% per year and health care costs grow at 10% per year (both are historical averages). No new revenue sources.

• In 25 years, health care costs will consume ALL new revenue.

State Government Spending Illustration

Private Sector Costs

• Under the current system, health care costs are a cost of doing business for employers.– This is true whether you believe that employers pay

for health care or that employees pay the full cost• These costs are included in the price that the

employer charges for goods or services• As health care costs rise rapidly in the US, this

makes international competition more difficult

Can Employers Control Health Care Costs?

• Perhaps in some ways, but their influence is small compared to cost trends

• If costs can not be controlled, either the employer’s product becomes more expensive or part of the increase is passed on to employees– Increased contribution to premium– Increased cost sharing / reduced benefits

The Wage / Benefit Tradeoff

• Most economists look at health benefits as one part of total compensation.– The cost to the employer is the same whether the

employer pays the employee $5,000 in cash or $5,000 in benefits, but the benefit is tax-free to the employee (and thus worth more)

– But cash is much easier to control

• Increases in health care costs will often create a trade-off, under which wage increases are smaller, or wages remain flat

Retiree Benefits – Direct Spending

• Demographics are changing – the number of retirees relative to the number of active employees is increasing sharply

• Combined with increasing health care costs, retiree health spending is growing dramatically

• Recent automaker / UAW deals

Retiree Benefits – Other Effects

• Until recently, both private and public employers included only the “current” costs of retiree health benefits on their balance sheets– The amount they pay in the current year

• Now, they have to show the liability for future costs on their balance sheets– FAS 106 and GASB 45

• This has a major impact on their financial status

Reform Options

• What is it that we want to reform?– Financial• Control rate of growth• Equity of contribution

– Access• “Universal”• Coverage• Care

– Quality of Care

Reform Options

• The cost of insurance and the cost of care– Historically, insurance costs have gone up faster

than underlying health care costs– Several factors contribute to this, including:

• Cost shifting• Adverse selection• Benefit structures

– In addition to the basic affordability issue, this leads more people (usually healthier) to drop their coverage, increasing insurance costs even faster.

How Far Can a State Go?

• Limits to a state’s ability to reform its health care system– Federal law• ERISA• Medicare• Medicaid

– Border crossing– Status quo

Political Complexities

• Are you willing to change how your care is financed and delivered in order to support health care reform?

• Polarization and over-simplification– “Markets” vs. “Socialized medicine”

Reform in Vermont

• Long history of reform– Several efforts to achieve or move toward

universal access and cost containment• Governor Aiken inaugural address, January, 1939• Daniels Commission, 1975• VHIP• Governor’s Blue Ribbon Commission, 1991• Act 160

The Current Reform Environment

• Several Major Parts– Catamount Health• State-subsidized private health insurance for certain

eligibles

– Blueprint• Reform of the delivery system• Reduction in the incidence of chronic illness

Is Catamount Health Working?

• Over 5,000 people have signed up for Catamount Health. This is about one-third of the people eligible for it.

• Enrollment has also increased in other Medicaid programs, especially VHAP

Catamount Health - Issues

• Currently, subsidized premiums for Catamount Health range from $60 per month (below 175% of poverty, about $18,000 per year for an individual) to $185 per month (up to 300% of poverty, $31,200 per year)

• The unsubsidized product costs $393 per month

• Is this affordable?

Other States

• So far, Maine, Massachusetts, and Vermont are the leaders.

• Many other states are attempting various reforms

• For details, check out:http://www.kff.org/uninsured/kcmu_statehealthreform.cfm

Massachusetts

• The most far-reaching state-based reform to date

• Key element: an individual mandate, combined with income-based subsidies.– With an out if insurance is not “affordable”

• Based on surveys, it seems to be working. Almost 95% of people in Massachusetts are covered, the highest percentage in the country

But…

• Massachusetts has had minimal impact so far on costs

• Unless costs are brought under control, the program will quickly become unaffordable

National Health Care Reform?

• While the legal barriers are far less daunting at the national level, the political barriers are much higher

• Consider what it took in 1965 to enact Medicare and Medicaid

• Consider what happened to Clinton health care reform

Current Presidential Proposals

• Obama – much like Massachusetts, but the mandate applies only to children

• McCain – while a more conservative proposal (no mandates, reliance on existing market), it is much more radical in one way – sharp reduction in the importance of employer-sponsored health insurance; most people will shift to subsidized coverage in individual market

Conclusions

• Health care reform is essential, and seems to be impossible

• Concerns about health care have a 100 year history. How long can we muddle through?

• There is a lack of agreement on what reform means, but we seem to be more able to come to agreement on areas other than financing

Questions?

Steve KappelPolicy Integrity

www.policyintegrity.com