Whether or not the Affordable Care Act (ACA, aka Obamacare) is repealed, the U.S. is spending way too much on healthcare. From 2009-2013 healthcare spending averaged 17.4% of GDP in America (public and private sources combined), and it will rise to 19.3% by 2023. With or without the ACA, this level of spending is unsustainable. In contrast, countries in the European Union spend an average of 10.2% of their GDP, and have longer life expectancies than Americans.
In this blog, I’m going to present some ideas to reduce government spending on healthcare. There is no pain-free, silver bullet solution that will fix this problem quickly – it will take a number of steps, over time, to slowly bring costs down.
First, an assumption – I believe the ACA is here to stay. Repeal after 2016 is very unlikely. It would probably throw the healthcare system into disarray, lead to substantial social upheaval, and be too painful politically.
Given that both the healthcare system and the public are still digesting the ACA – and polls show that most Americans are tired of the healthcare debate – the approach I’m proposing is more evolutionary than revolutionary. There’s something to be said for an incremental approach that let’s things evolve in a more orderly process. I’m advocating a 5-10 year process of slowly moving health insurance and healthcare to a more market driven system, without adding lots more regulation.
The goals going forward should be to reduce total healthcare spending (public and private), ensure coverage for all citizens, and to improve the healthcare reimbursement and delivery systems. This is a tall order, and why it should be a longer-term process that can evolve without creating major disruption in the whole healthcare system
In order to reach these goals there are three big changes that will need to occur: Making health insurance more like insurance; health insurance that is controlled by individuals and not employers; and more consumer responsibility.
Overutilization of insurance is one of the primary reasons for higher healthcare spending today – we need to disincentivize this behavior. Part of the problem is that healthcare insurance is really prepaid medical care, not insurance. We have home and auto Insurance for protection against large unanticipated expenses, not routine maintenance or minor repairs. Covering routine healthcare expenses is inefficient.
We need to begin slowing moving health insurance from managed care plans (HMOs and PPOs), to high-deductible health plans (HDHP). HDHP insurance coverage is mostly for major and catastrophic expenses. By requiring higher deductibles and co-pays, people will have more “skin in the game” which leads to more prudent use of healthcare.
The Centers for Medicare & Medicaid Services has reported that people in high-deductible plans use healthcare at lower rates than those in plans with little or no out-of-pocket plans. One study showed that 26.6% of HDHP plan members delayed or didn’t get treatment due to out-of-pocket expenses, compared to just 9.9% of people who have traditional health insurance.
Part of the high-deductible solution should also include Health Savings Accounts (HSAs). These accounts let employers and employees make tax-free contributions into an account that can be used for out-of-pocket healthcare expenses. These plans are generally popular with both employees and employers.
Employees like them for several reasons: 1) All money put in to an HSA is 100% tax deductible (up to $3350 for an individual and $6650 for a family), and any unspent money in the account for a calendar year rolls-over. 2) They own and manage the HSA. If an employee leaves their job, they get to keep the account. 3) HSA funds can be used tax free for out-of-pocket medical expenses (up to $6450 for an individual and $12,900 for a family) including dental and vision.
Having an HSA makes HDHP plans more doable for employees, as it allows them to cover high deductible payments and co-pays. Spending some of their own money on healthcare also encourages people to be more prudent shoppers – a vital component needed to begin lowering healthcare costs.
Because of the lower cost, employers like HDHPs too, and many are switching to these high-deductible plans with HSAs. The number of employers offering an HDHP has grown to 83%; and 56% offer an HDHP with a health savings account (HSA). In addition, 31% employers reported that HDHP is their highest-enrolled plan, and 25% of employers offer only an HDHP with 37% more considering an HDHP-only program in the next three years.
HDHP plans are not a panacea – there’s no such thing. People who are in poor health and/or have chronic conditions are not good candidates for HDHPs. Higher out-of-pocket costs might prevent them from: Going to the doctor when ill; re-filling a prescription; scheduling a follow-up appointment; or seeing a specialist. In some cases, forgoing treatment can lead to even more serious health issues to deal with later that end up being much more expensive. Studies show that an HDHP plan may cause lower-income members to also defer medical care because of cost.
However, the use of HDHP insurance along with HSAs is one of the few options proven to slow the growth of health care inflation, and still provide protection against catastrophic costs. Moving to HDHPs with HSAs makes health insurance more like insurance, and is one option in moving toward health insurance that is controlled by individuals instead of employers. Another option is to move to a Defined Contribution framework and private insurance exchanges.
Private insurance exchanges are online marketplaces for health coverage, much like the public exchanges in the ACA. In this set-up, employers would give their employees a defined contribution (a set amount) to buy a health insurance plan from a variety of participating insurance companies. The idea of private exchanges is to offer a wide array of health insurance plans at different price points, which allows employees to pick a plan best suited to their needs.
What employers like about private exchanges is the ability to greatly reduce their health benefits administration, which can be complex and costly. And with health insurance prices being unpredictable from year to year, using the defined contribution approach an easier way for employers to control their costs. In addition, part of the ACA that goes into effect in 2018 is a 40% excise tax on high-cost health plans (aka Cadillac plans), and moving to HDHPs and lower-cost plans selected on exchanges will allow employers to avoid this tax.
It’s expected more employers will adopt this model as they come to understand that private exchanges can offer several options for health insurance. This is especially true for smaller businesses that can typically only afford to offer one or two choices. Approximately six million workers got their insurance through private exchanges this year, up from about three million last year. The pace of growth in private exchanges is expected to remain robust, and is projected to enroll 40 million people (about 24% of the insurance through employer market) by 2018.
A future goal will be to allow private exchanges to sell to individuals (including those with federal subsidies), just like the people using the ACA public exchanges, and allow for people to move between public and private exchanges (during open enrollment periods) when it better suits their needs. In fact, this should be encouraged to keep competitive pressures between marketplaces. It also helps keep risk pools stable – the more people in a marketplace the more secure it will be in the long-run.
Both the HDHP with HSAs model, and Defined Contribution model, are good stepping stones for moving from health insurance that is controlled by employers, to one managed by individuals. Because both models offer workers choices and potential savings, it should help minimize backlash from employees as employers make this shift from traditional insurance plans. In the past, employers have been reluctant to move to HDHPs and lower-cost plans, so they could remain competitive with health plans offered by other employers. However, the looming 40% tax on Cadillac plans is putting pressure on all employers to make similar moves.
Both models also encourage employees to be better shoppers and will begin to create a healthy tension in the insurance and healthcare marketplaces. The competition between insurance companies on exchanges should also help keep prices down. I believe that most people will likely accept a model of higher deductions and co-pays if they believe they are sharing in the rewards of overall lower costs, and see some of the savings go to them instead of insurance companies or healthcare providers.
While both political parties continue to fight over Obamacare, the ACA has already set in motion a market trend that is moving toward more consumer responsibility and participation in healthcare spending, and less employer paternalism. The ideas that I have outlined in this blog build upon this trend, minimize future disruption in the healthcare system, and are the next best steps to take towards reaching the goals of: Reducing total healthcare spending (public and private); ensuring coverage for all citizens; and improving the healthcare reimbursement and delivery systems.
In next week’s blog, I’ll share more ideas and subsequent steps for achieving these goals. I welcome your feedback on these topics. Feel free to leave your thoughts in the “comments“ section below. If you’d like to keep your thoughts private, please reply with an email instead.
Links to related blogs:
We’re spending too much on Healthcare: http://www.commonsensecentrist.com/were-spending-too-much-on-healthcare/
The Political Challenges of Controlling Federal Healthcare Spending: http://www.commonsensecentrist.com/the-political-challenges-of-controlling-federal-healthcare-spending/
Medicaid and Obamacare: http://www.commonsensecentrist.com/medicaid-and-obamacare/
More on Medicaid and Obamacare: http://www.commonsensecentrist.com/more-on-medicaid-and-obamacare/
Medicare turns 50 – will it survive another 50 years: http://www.commonsensecentrist.com/medicare-turns-50-will-it-be-around-another-50-years/
Options for Fixing Medicare Spending: http://www.commonsensecentrist.com/options-for-fixing-medicare-spending/