Friday, November 13, 2009

Costs of Coverage: Facts and Figures

As I spent some quality time reading the Affordable Health Care for America Act which just passed the House of Representative, I realized that at least some of the people who read this blog do not really know what the costs are for health insurance and how this bill may affect those costs.  This posting is therefore designed to give you, by reviewing a couple of recent studies, some real numbers so that costs can be better understood.  Unfortunately, when we debate whether to spend one trillion dollars or eight hundred billion dollars, the real numbers sometimes get lost.  Lee Trevino, one of the great golfers of our time, once, when asked about the stress of making a putt for first or second place in a tournament worth tens of thousands of dollars said, “Real pressure in golf is playing for ten dollars when you only have five dollars in your pocket”.  By the same token, talking of billions and trillions of dollars if often not as meaningful as talking of the amounts a family has to pay.  So the place to start is asking just how much an employed family now pays for health insurance.

Current Health Insurance Costs

A study published in Health Affairs reported on just that question.  Entitled, “Job-Based Health Insurance: Costs Climb At A Moderate Pace” and based on the Kaiser/HRET Survey of Employer Health Benefits the article says that average annual health premiums in 2009 were $4,824 for single coverage and $13,375 for family coverage.  Most people’s employers pay about 75 - 80% of those costs however labor economists are quick to point out that since employers calculate employee costs on the basis of salary plus all benefits, those dollars that employers pay for health premiums are really taken right out of salary checks.  Those premiums are about 5% higher than they were in 2008.  Premiums reflect the costs of medical care.  While much is made of the high administrative fees, even in the most expensive of plans, administration is still less than 20% of the premium costs (and usually less than 15%).  


Impact on Hospitals

A major part of the 80 – 85% of costs that are directly related to care are paid to hospitals.  While it might sound obvious, the amount of money a hospital will charge for a stress test, delivery of a newborn, treatment in the Emergency Room, or any other service therefore directly impacts your premium and out of pocket costs (after all everyone has that pesky deductable and the 20% or so that the individual is responsible for).  Also in Health Affairs, a study entitled “How A New ‘Public Plan’ Could Affect Hospitals’ Finances And Private Insurance Premiums” specifically assessed how the proposed public option would effect hospital bills for those who are on an employers health plan.  In the article they say “Because it is possible, and perhaps even likely, that this new public payer would pay less than private payers for the same services, such a plan could negatively affect hospital margins. Hospitals may attempt to recoup losses by shifting costs to private payers.”  That would become higher premiums for employers, higher out of pocket costs for employees and less financial room for employers to raise salaries or hire new employees. 

Large Employers Point of View

In a report published today entitled “Health Care Reform:Creating a Sustainable Health Care Marketplace” the Business Roundtable spoke of their belief that if implemented in the best possible manner, parts of the current health legislation may lower the upward trend of costs by 15 or 20%.  They also pointed out that the way the legislation is currently being discussed, the risks to achieving that sort of saving is significant.  They did go one step further and suggested that the best way to save money is to foster “true market reform” which would include individual accountability, full transparency of cost and quality information, a focus on health rather than our current focus on illness and addressing professional service capacity, that is the number of physicians, especially primary care physicians we need.  They gave Lasik surgery as an example of the effect a free market has on health costs.  Lasik is considered cosmetic and is therefore not covered by insurance.  In recent years, cost has come down for the surgery and quality has improved. 



As this chart show, as the number of Lasik surgeries has increased, the cost initially sent up, then decreased dramatically as more eye surgeons learned the procedure and became adept at it, and then the price became relatively stable, going up only in line with the cost of living of all items.  While cosmetic surgery is not the same as necessary care, there are ways to encourage market forces in health care.  Current legislation being considered by the House and Senate does not use those free market tools. 

The Bottom Line

Health insurance is expensive and is getting more expensive.  It reflects medical care.  Any effective plan needs to fundamentally change our system of paying doctors and hospitals, change our medical liability laws, and address individual responsibility in order to create real change.  I do not see that in any of the current proposals.