Health Scare

Echoing the Guns of August -- and Frank Rich's masthead in last Sunday's New York Times, which I anticipated in draft form -- the health scare wars have escalated at warp speed, bolting the hallowed halls of Congress, swamping the airwaves, and laying waste to town meetings coast-to-coast, where the battle has been joined for the hearts and minds -- and hips, knees, spines, and, lungs -- of America.

It's democracy and demagoguery in action. Health care reform -- the newest linchpin of the Obama administration -- is under fire.

Watching proponents and opponents of Congress's extreme one-thousand-page makeover of the nation's health care system lambaste each other and their lawmakers with hyperbole, distortions, and fearmongering would be comical if the matter at hand were not so serious -- and expensive.

As I wade into the murky waters of this complex and bewildering subject, an introductory disclosure would seem to be in order.

In one respect I am representative of the myriad conflicts and irrationalities inherent in the American health care system. As an employer paying seventy percent of the health care costs of 534 of my 716 employees through self-funded insurance administered by Anthem, my interests certainly lie in containing those costs in the areas where I operate my fifty-one stores, thereby saving me money.

But as a volunteer board member of Centra Health, the monolithic and monopolistic regional hospital system which serves the city of Lynchburg and its four adjacent counties, I must promote its viability and profitability, which require continuous investment in elaborate facilities and state-of-the-art technology, all in the name of increased market share and superior quality -- but undoubtedly at some higher cost to employers like me.

In all fairness, Centra Health is an efficient and effective provider of health care services -- at least according to available comparative data. Its 2006 Medicare reimbursement per enrolee was $6399, $450 less than the Virginia average, $2000 less than the national average, and $4000 less than Dallas, Texas.

Which doesn't make my own company's health care costs any easier to swallow.

I find it both amusing and depressing -- and tellingly symptomatic of the system's opaqueness -- that so many providers -- both physicians and administrators -- harbor the illusion that it is the insurance company who is paying their bill (and, sadly, most employees are drinking the same Kool-Aid) -- growing money for them as facilely as tomatoes on a vine. They conveniently forget, ignore, or discount the source of the premiums -- like the physical therapist who told my brother-in-law when he wanted to forgo post-heart-surgery treatment: "Don't worry, your insurance will take care of it," only to have the latter set the record straight. "Technically, yes, but practically, no, because my wife's company is really writing the check."

Similarly, sitting in Centra Health board meetings, I have had to restrain myself when I hear physicians berate insurance companies for refusing coverage for various procedures or medications -- jeopardizing, they claim, the well-being of their patients (and their own incomes) -- denials which may be saving me money. (Cynics, of course, will contend that these are phantom savings and merely feed the insatiable maw of the evil insurer.)

Maybe the cynics are right; an examination of my company's financial statements for the past four years indicates a steady rise in health insurance costs -- in spite of declining sales revenue and employee head count.

Schewel Furniture Company's health insurance costs average $270,000 a month, or $530 for each of the 534 employees who participate in the plan. (The total number of lives insured, including spouses and dependents, is 856.) Employees contribute about $50,000 (or $90 each) per month (plus a $1000 deductible and up to $4500 in co-pays), leaving Schewel with a monthly health insurance bill of $220,000, and an annual one of $3,000,000.

This latter number represents a 24% increase since 2006, a period during which revenues declined 10% and payroll 6.5%. Consequently, health insurance costs as a percent of the company's payroll now stand at 12%, up from 9% three years ago.

For small businesses like Schewel, who, for competitive reasons, must provide health insurance to their employees, this trend -- driven by utilization (and overutilization), technological advancements, and cost shifting from underfunded public reimbursements to private insurers -- is unsustainable. When it reaches the tipping point, those businesses will be compelled to drop insurance altogether (as many have already done) or raise employee contributions, deductibles, and co-pays to levels at which many will opt of their plans -- outcomes which will increase the aggregate number of uninsured and further compound the cost-shifting problem.

For many individuals and families unable to participate in group plans and ineligible for Medicare or Medicaid, the cost of purchasing health insurance -- which is not tax-deductible to them as it is for businesses -- can be exorbitant, and the policies themselves filled with more holes than a slice of Swiss cheese. So testifies my son David, a self-employed film editor in New York City, who pays $300 a month to an insurer he fears will drop him any day or refuse to cover an expensive procedure.

In recent town hall meetings, President Obama, trumpeting the need for reform, introduced his own witnesses, insurance-company victims like Nathan Wilkes, whose six-year-old son's treatments for hemophilia have exceeded his $1,000,000 lifetime policy cap; Katie Gibson, who was dropped by her insurer when she received a cancer diagnosis; and Lori Hitchens, who cannot find insurance because she has a pre-existing condition. (Of course, the President neglected to tell his audience that expanded public coverage of such individuals will be borne by them, the taxpayers.)

While defenders of the status quo proudly maintain that Americans, to quote former President Bush, "have the best health care system in the world," certain troubling statistics suggest otherwise.

The United States dominates the biotechnology field, accounting for 3/4's of the world's revenues and spending in research and development. It produces more new pharmaceuticals, medical devices, and affiliated biotechnology than the Western European countries combined. (Wikipedia) According to a study by the Commonwealth Fund, the United States ranks first in providing the "right care" as defined by standard clinical guidelines and earns high marks for preventive measures like Pap smears, mammograms, blood tests, and cholesterol checks. Most Americans, including this one, when faced with a life-threatening illness, would rather be treated in this country than anywhere else. (New York Times, 8/12/07)

On the other hand, the United States spends $2.4 trillion per year on health care, $8000 per person, two-and-a-half times more than any other advanced country. But, reports the Commonwealth Fund, "it ranks last or next-to-last when compared with five other nations -- Australia, Canada, Germany, New Zealand, and the U.K. -- on most measures of performance, including quality of care and access to it."

It has 47 million people without health insurance (who do receive care in emergency rooms) and many more with poor coverage. It has the greatest disparity in the quality of care given to the richer and poorer of its citizens. It ranks last among twenty-three nations in infant mortality rates, and near the bottom in life expectancy at age sixty. In an eight-country comparison, it ranks last in years of potential life lost to circulatory diseases, respiratory diseases, and diabetes, and has the second-highest death rate from bronchitis, asthma, and emphysema. Its primary care doctors lag behind their compatriots in other advanced nations in adopting electronic medical records and prescribing medications electronically. (New York Times, 8/12/07) Every year 100,000 patients die in U.S. hospitals due to infection and 200,000 from blood clots following surgery or illness. (David Goldhill, The Atlantic, September 2009)

Such a cost-benefit analysis cries out for reform.

Meanwhile, other surveys report that seventy percent of Americans are satisfied with their health care.

And why wouldn't they be?

An estimated eighty percent of Americans have insurance -- either through employer-funded plans or Medicare -- and for relatively small premiums (less than $100 per month, in the case of my employees), they receive soup-to-nuts care. In spite of the glaring deficiencies noted above -- about which most people are blithely ignorant, until a family member falls victim to a medical error -- what's not to like about walking into a hospital or doctor's office (other than the inconvenience of being pricked and poked) for any minor or major procedure knowing full well that someone else will be paying most or all of that bill as well as for any number of new benefits?

It's another illusion, because the sad truth is that "our nation's health care bill is too big to be paid by anyone but us -- all of us." (Goldhill)

With employer-based health insurance costs -- on average, $12,000 per family -- up 78 percent since 2001, employers like Schewel have no choice but to limit raises and entry-level wages in order pay their insurance premiums. The total cost is startling. If one assumes over a forty-year period that an individual's earnings, insurance premiums, Medicare taxes, and out-of-pocket costs increase at a modest three percent annually, while his salary will grow from $30,000 to $107,000, he and his employer will have paid over his lifetime for his family's health care $1.77 million. (Goldhill)

"As a nation, we now spend 18% of GDP on health care. In 1966 Medicare and Medicaid made up 1% of government spending; now that figure is 20% . . . Already the federal government spends eight times as much on health care as it does on education, twelve times what it spends on food aid to children and families, thirty times what it spends on law enforcement . . . For families, household expenditures on health care exceed those on housing." (Goldhill)

There is no shortage of culprits in this race to insolvency.

A good place to start is the health care industry: all the doctors, hospitals, pharmacists, drug companies, equipment suppliers, nurses, and home health agencies drinking from this $2.4 trillion trough, each group determined to maintain its position and resistant to any financial penalties that reform might entail. Writing in the Wall Street Journal, Abraham Verghese quotes this axiom of medical economics: "Every dollar spent on medical care is a dollar of income for someone." (To which I would add, as an employer footing the bills, this corollary: every dollar spent on medical care is an opportunity cost, a dollar that could have been invested somewhere else.)

Helping to fill the trough are insurance companies and the federal government.

Unlike other forms of insurance -- life, property, liability -- "in which the many who face the risk of loss from a catastrophic event share the cost incurred by the few who actually suffer the loss," health insurance is comprehensive; that is, "it is the primary payment mechanism not just for expenses that are large and unexpected, but for those that are nominal and routine . . . Since insurance is probably the most complex, costly, and distorted method of financing any activity, its use to fund virtually all care is itself a major cause of health care's high expense." (Goldhill)

For example, for every two doctors in the U.S, there is one health insurance employee. In 2006, it cost $500 per person to administer health insurance. Inefficient claims processing wastes $210 billion annually, according to the Price Waterhouse Coopers Health Research Institute. Many small businesses like Schewel are compelled to employ at least one human resource staffer to advise and assist workers in filing claims.

Moral hazard -- the tendency for people to alter their behavior and take less care with their decisions when risk has been minimized or eliminated -- adds more excess cost to health insurance. With little of their own money at stake, consumers are easily enticed by the newest drug, device, or procedure. They defer to the infinite wisdom and revered authority of physicians who will benefit financially by ordering diagnostic tests, performing surgery, and scheduling follow-up treatments (some of which, admittedly, are measures undertaken for malpractice defense).

Insured and uninsured Americans spend similar amounts of their own money on health care each year --$654 and $583 respectively -- but they spend wildly different amounts of other people's money -- $3800 and $1100 respectively.

While proponents of expanded federal health insurance -- which currently funds fifty percent of health care through Medicare and Medicaid -- claim to be able to cut costs by covering the uninsured and streamlining administration, skeptics are wary. And well they should be. Government interference in the health care industry over the past fifty years has increased costs rather than contained them.

In 1954, Congress made health plans tax-deductible to businesses without making the resulting benefits taxable to employees. Employer-based health insurance became the most affordable method for funding all types of health care, not just catastrophic care. Seeking a competitive advantage, employers began offering very generous plans with low co-pays -- encouraging patients and their doctors to opt for "excessive tests and other inappropriately expensive forms of care," and consequently raising private health care costs, it is estimated, by as much as 35%. (Martin Feldstein, Wall Street Journal, 8/19/09)

Furthermore, in designing Medicare and Medicaid in 1965, the government essentially adopted the comprehensive insurance model, launching the great health care inflationary spiral and injecting more distortion and irrationality into the marketplace.

"The government regularly tries to cap costs by limiting Medicare and Medicaid reimbursement rates to providers," yielding two perverse consequences. To compensate for below-cost reimbursements, providers must raise rates to private insurers; and they "may perform excess services and steer patients toward higher-priced, more lightly-regulated treatment." (Goldhill) Even President Obama, who wants to expand government's role, pointed to the problems of a system "in which the more tests and services are provided, the more money is paid," a system "which pays generously when you do something to a patient, but is stingy when you do something for a patient." (Verghese)

Bureaucratic regulatory and reimbursement policies are static, inefficient, and slow to respond to market conditions. For example, because Medicare richly rewards specialists who do lots of tests and procedures rather than generalists, in the field of geriatrics, there is a shortage of generalists who address "the cluster of common patient problems related to aging," while seniors overuse specialists not focused on their specific health needs. (Goldhill)

Finally, of course, legislators and regulators do not operate in a vacuum, and are prey to the relentless pressure and unlimited resources of special interest groups. Just two years ago Congress bound Medicare so that its representatives could not negotiate with pharmaceutical companies over the price of drugs, a $500 billion sellout. As a result the cholesterol drug Zocor costs Medicare $1485 for a year's supply, while the Veteran's Administration pays $127. (Stanley Crouch, News and Advance)

So it is that opponents of reform -- exemplified by right-wing commentators indignant at a governmental takeover of the health care system and self-righteous seniors who want to keep the government out of their health care -- have demonized the government, but for the wrong reasons.

Don't the latter know who is paying their health care bills -- fifty percent of the nation's total -- and who is setting their provider reimbursement fees? Do any of these noble free marketers really want to walk away from Medicare and Social Security? And in response to those constitutionalists who question every citizen's "right" to adequate health care, haven't we already acknowledged that right -- for the indigent and for the over-65 crowd?

And for those on the other side of the equation, the wage earners who are feeding the beast rather than making steady withdrawals, don't they realize whose dollars are buying grandma's walker and nursing home care, dollars which will soon exhaust themselves unless more taxes are wrung from already-stretched workers and employers?

The eternal conundrum of our health care system is that while the government -- in surreptitious collusion with insurance companies and providers -- has unintentionally exacerbated the cost problem, only the government wields the power to reduce those costs (although some would argue that in a redesigned system the consumer has that power) -- by garnering concessions in the price of drugs and services (instead of making deals that inflate those prices!) and by minimizing third-party administrative costs. But when a jaundiced public looks at the government's dismal track record, it shakes its collective head and murmurs: No way.

And when presented with one reasonable cost-cutting concept -- end-of-life counseling -- that public, ginned up by the opposition, explodes in outrage.

Far be it from me to endorse death panels, but the fact is that 27% of Medicare dollars are spent during the last year of a person's life. As harsh as it may sound, often the cost of the medical services provided far outdistances the benefits received, primarily because that cost is being borne by some ethereal other entity -- a phenomenon that does not occur with the purchase of any other product or service in our economy.

When George, the 62-year-old father-in-law of a friend of mine, was diagnosed with an aggressive cancer that had spread throughout his body, his doctors informed him and his family that he had six months to live. Thanks to a battery of experimental drugs and treatments, he outlasted their prognostication by a painful six months, heavily sedated, running up hundreds of thousands of Medicare bills.

What this tragic tale of runaway costs demonstrates is that, regardless of whether employer-based insurance continues as the norm or whether public insurance is expanded, two equally distasteful choices confront the American public: control costs by reducing coverage of situations like George's (that is, impose rationing); or increase revenues to pay for the all-inclusive, unlimited care we all think we want and need, either through higher premiums (passed on to employees in the form of higher contributions, deductibles, and co-pays) or higher taxes.

While conservatives these days decry higher taxes as a matter of principle, even they would be hard-pressed to abandon Medicare and Social Security, which are rapidly running out of money. But even moderates and liberals who espouse progressive taxation as a necessary component of a just society are finding it a little unsettling to burden the few -- no matter how wealthy they might be -- with the health bill of 47 million uninsured.

If indeed government insurance is to be expanded, two more palatable alternatives might be to tax employer-provided insurance as income, which would have the added benefit of making those plans less "rich," or to impose a national sales tax, which would make it readily transparent to every citizen whenever he made a purchase that he was funding his own (and others') health care.

A better solution, of course, would be real reform: somehow bringing health care costs under control, so that they are no longer rising more than twice the rate of inflation and consuming an ever larger portion of GDP.

Here are a few of the best ideas surfacing from think tanks.

Providers should make their prices transparent so that consumers understand what treatment really costs. John Mackey, CEO of Whole Foods, writing in the Wall Street Journal, asks: How many people know the cost of their last doctor's visit or hospital stay? What other goods or services do we buy without knowing how much they will cost us?

David Goldhill, writing in The Atlantic, describes what happened when, preparing for the birth of his second child, he asked for the total cost of the delivery. He was told that the hospital discussed prices only with the uninsured and co-pays only if the payer was applying for federal assistance.

"Keeping prices opaque is one way medical institutions seek to avoid competition and keep prices up. They get away with it because so few consumers pay directly for their services . . . But without transparency on prices -- and the related data on medical outcomes -- efforts to give consumers more control over health care have failed, and always will." (Goldhill)

Secondly, the current fee-for-service reimbursement system -- in which physicians are compensated for individual procedures and treatments, regardless of their quality or experience level or patient outcomes -- fosters overutilization of those services.

Quoting Goldhill: "Many people believe that the U.S. would get better health outcomes at lower cost if payments to providers were structured around the management of health or whole episodes of care, instead of piecework." Under such integrated delivery systems, providers would receive a fixed, lump-sum, capitation-like payment "to treat a patient with a certain condition, based on average costs elsewhere and on what scientific evidence has found to be effective." (David Leonhardt, New York Times) "Private health systems like the Geisinger Clinic and some Blue Cross plans have adopted this model and pay doctors for an entire illness." (Scott Gottleib, Wall Street Journal)

Similarly, writes Atul Guwande in the New Yorker (June 1, 2009): "Decades ago, the Mayo Clinic, in an effort to eliminate the financial barriers to improved patient care, pooled all the money the doctors and the hospital system received and began paying everyone a salary so that the doctors' goal in patient care couldn't be increasing their income. Mayo elevated leaders who focused first on what was best for patients, and then on how to make that financially possible."

"Doctors, nurses, and even janitors sit in meetings, working on ideas to make the service and care better, not to get more money out of patients (and insurers)." The result is one of "the highest-quality, lowest-cost systems in the country."

With this evidence on hand, why can't Medicare offer reimbursement incentives for such collaborative care systems, a first step towards reform?

A third idea is that the government and businesses should promote high-deductible plans and Health Savings Accounts (HSA's) -- from which individuals would pay all but their most catastrophic health costs, which would be covered by some form of private or public insurance.

Whole Foods, for example, pays 100% of the premiums for all full-time employees for its high-deductible health insurance plan and contributes $1800 per year to Health Savings Accounts for employees to spend on health and wellness. Both features encourage employees to spend more wisely on their health care, since they spend their own dollars until their $2500 deductible is used up, and they can roll over unspent HSA dollars from year to year, allowing them to grow over time.

In fact, individual Health Savings Accounts -- rather than single-payer, universal health insurance -- could conceivably replace employer-funded insurance, which, writes Charles Krautheimer, is economically senseless, "an accident of World War II wage and price controls, which, by hindering health-insurance security and portability, decreases labor mobility and overall productivity."

Under a "consumer-driven" care system, as envisioned by David Goldhill, "every American would be required to maintain an HSA, and contribute a minimum percentage of post-tax income -- subject to a floor and cap on total dollar contributions -- which would rise over a working life. All non-catastrophic care would be funded out of HSA's. Once the funds exceeded a ceiling established for each age, account-holders would be allowed to withdraw money for any purpose" -- an incentive for them to spend their health care dollars judiciously.

Such a system, while radical in design and, frankly, clearly impractical in the current environment, could not only alter the way people buy their health care but also revolutionize the delivery of such services, since providers would be compelled to respond to their consumers' new patterns of behavior.

Sadly, however, the virulent partisanship, inflammatory sound bites, and bloated rhetoric of the current debate offer little optimism that any fiscally responsible or global solution to what can no longer be termed anything less than a crisis will emerge. In truth, too many health-care interests groups -- hospitals, insurance companies, professionals, pharmaceuticals, device manufacturers, even advocates for the poor -- have too much at stake to champion, or assent to, meaningful change.

Reform, when it comes, will most likely amount to little more than a costly and ill-conceived iteration of the precarious status quo.