Cost Factors in Health Insurance

Recently, the Maryland legislature passed a bill requiring employers of 10,000 or more to spend at least 8% of payroll on employee health insurance or pay the difference to a state Medicaid fund. In Massachusetts, where job creation lags behind the nation, similar legislation is proposed for businesses with 10 (ten) or more employees. In his January 19 Washington Post column, George Will asserts that similar bills are pending in “30 or so other states.”

Such legislation discourages employers from locating, (or expanding), in those states. Wal-Mart was planning to build a distribution center on Maryland’s Eastern Shore that would employ at least 800. Wal-Mart is now reconsidering that expansion.

Requiring employers to provide health insurance may not be best for workers. To keep costs down, employers may choose to hire young workers rather than middle-aged or older ones. Businesses may also screen out those with health problems or a family history of them, (medical records aren’t completely secure). Some companies fire employees when off the job behavior of the employees or their spouses could increase insurance costs. Discrimination on the grounds of age or health status is hard to prove. Discrimination on the basis of “lifestyle” is permissible in some states. While some people may applaud such discrimination as a means of keeping insurance prices down, it could turn previously productive, taxpaying workers into a new class of unemployables who may end up collecting Welfare and Medicaid.

It would be best for both employers and employees if health insurance were purchased by individuals without employer involvement: The way life, auto and homeowners insurance are purchased. The high price of health insurance is the reason that can’t be done easily. Rather than rejecting the idea of health insurance as an individual responsibility, we should look into why the price is so high and how we can reduce it.

“All-inclusive” plans
One reason health insurance is expensive is “all inclusive” plans with low deductibles and low co-insurance payments. Such plans encourage people to seek treatment for minor, self-limiting or preventable conditions. An extreme example was described in Pia de Solenni’s May 23, 2005 National Review column, “Abortion on the Air.” The column reports a discussion on the Washington D.C. Elliott in the Morning radio show in which a caller reported 16 abortions by his first and second wives. When Elliot asked if the caller could have used a cheaper method of birth control, Elliot’s co-host said, “Insurance pays for it,” referring to abortion. Even the ardently pro-choice should be upset by that conversation: A surgical procedure for something that could have been prevented by a prescription or an over the counter (OTC) item is being paid for with everybody’s premiums. All inclusive, low deductible health insurance plans also encourage the use of insurance for services such as doctor’s office visits and vaccinations that are easily paid out of pocket without the administrative costs that accompany insurance. Many people see employer provided plans as “free” and don’t realize that higher premiums may mean lower wages.

The combination of cheaper high deductible health insurance plans and Health Savings Accounts, (HSAs), which use the insured’s pre-tax money might, encourage more careful healthcare spending. Some fear that high deductibles would lead people to defer seeking necessary care. It seems unlikely that the average person would endanger his health that way.

State mandated coverage
Some state regulations make insurance costly. New York and New Jersey have “guaranteed issue” requirements that allow previously uninsured individuals to purchase health insurance after becoming seriously ill. Normally, companies use money paid while people are healthy to cover their costs when they get sick. In a “guaranteed issue” situation, rates must be increased to cover ill customers. The high rates generated by “guaranteed issue” shrink the risk pool by discouraging young, healthy people from purchasing insurance. Those two states also require “community rating” which prohibits charging different rates to customers of different ages and health status. While charging more to people who are elderly, ill or have other risk factors may sound unfair, insurance works on the basis of risk: Those more likely to use the insurance pay higher rates. In Congress, Representative John Shadegg sponsored a bill giving grants to states that form high risk pools. While the bill involves the use of tax money, it keeps high risk individuals from being uninsurable and should keep their coverage from raising all customers’ rates.

Lobbying from special interest groups led to state mandates that all policies sold in a state cover their services: Massage therapy in four states, acupuncture in 11 and chiropractic in 47. One reason obesity has been classified as a disease is pressure from weight loss clinics to mandate coverage of that service. Some may applaud that as encouraging healthy habits, but how effective will a weight loss program be for someone who can afford it, but only participates if insurance pays?

An eHealthInsurance.com study found that the price of a health insurance policy for a family of four with a $2,000 deductible and 20% co-insurance ranged from $172 per month in Kansas City, MO to $1,200 per month in New Jersey. State mandated coverage and issue regulations account for the difference. Last summer, Representative John Shadegg introduced a bill allowing people to purchase health insurance from any of the 50 states. That free-market approach will enable people to save by buying only the coverage they need.

Prescription prices
Overall, prescription drugs save health care dollars. According to Doug Bandlow’s March 2, 2005 Washington Times column, “The Costs of Health Care,” Columbia University’s Frank Lichtenberg estimates that every $1.00 spent on prescriptions lowers hospital spending by $3.65. However, there is room for savings on prescriptions. Theresa Agovino’s October 25, 2005 AP article, “Generic Drugs Could Have Saved Us $20B,” summarized a survey by Express Scripts of approximately three million of their commercial customers that examined six classes of drugs including cholesterol lowering medications and antidepressants. The survey found that generics cost an average of $60 less per monthly prescription than brand name drugs. The survey estimated that approximately $2 billion could be saved annually if generic drugs were dispensed when available. According to Marc Siegal’s book, False Alarm, surveys by the FDA and Kaiser demonstrated that 20% to 30% of patients ask their doctors about advertised drugs. Doctors, who receive samples of these drugs, have no incentive to prescribe generics or older drugs that may on insurers’ “preferred” lists. Additionally, some plans charge only slightly lower patient co-insurance prices for generics than for brand names leaving customers unaware of the actual price difference. People might be more cost conscious if prices, rather than just the co-pay amounts, were prominently displayed on the patient information leaflets.

The uninsured
Hospitals that accept federal funds, including Medicare, are required to provide emergency treatment to those who can’t pay. Some costs of unpaid services are recouped with tax money and some is passed on to other patients and insurers. This was the rationale behind the Maryland bill, but it is misdirected. A RAND Corporation study found that about 20% of illegal immigrants have health insurance through their employers and virtually none purchase their own. The illegal immigrant population in the U. S. is estimated at 8 to 12 million. If the RAND study is correct, we have 6.4 to 9.6 million uninsured illegal immigrants. In his article, “Catastrophe in Care,” that appeared in the June 2, 2005 issue of Tucson Weekly, Leo W. Banks states, “Nationally, American hospitals lose $1.45 billion a year” treating illegal immigrants.

One ignored uninsured population consists of those who can afford insurance, but choose not to. This group includes some whose employers offered them the opportunity to partake in workplace health plans. Many of the voluntarily uninsured are young, healthy people who feel they don’t need it until that case of appendicitis or that skateboarding accident happens. Massachusetts recently enacted a law requiring that all who can afford health insurance purchase it. That should be a personal choice. However, legislation making it easier for hospitals and state Medicaid programs to collect payment for treatment from uninsured individuals who could have afforded health insurance would be a step in the right direction.

Defensive medicine
Doctors, fearing malpractice suits, often request additional diagnostic tests and referrals to specialists that aren’t medically indicated. Insurance pays for this. Patients and insurers also pay for malpractice insurance in the form of higher fees for service. Courts should focus on actual negligence rather than failure to foresee a remote outcome such as failure to test for an extremely rare disease. The AMA also needs to take strong disciplinary action against doctors who are actually guilty of malpractice. Some doctors who lose their licenses in one state because they were found guilty of malpractice simply relocate, get sued again and cause malpractice insurance rates to increase. Something like a national registry might help prevent bad doctors from practicing.

There is no single, simple answer for reducing health insurance costs. Legislating that employers pay for health insurance isn’t the answer. If costs continue to increase and businesses contend that they can’t stay in business if they provide health insurance, government may step in with some form of “universal” coverage. If individuals purchased their own health insurance, people would have more flexibility than employers or government can provide. It also allows health insurance portability that isn’t available with employer sponsored plans. It may also reduce the costs of health insurance and health care because people often aren’t cost conscious when someone else pays the premiums.

Copyright Eva Ellsworth, 01/22/06, all rights reserved