I don’t eat breakfast much, but when I do, my favorite place is the Sandcastle in the Village on St. Simons Island, Georgia. However, every time I eat there, I have a dilemma. All I really want is 2 eggs, toast and bacon. This runs about $5.25, but they also have this wonderful breakfast buffet. I mean it is really good. As many eggs as you want, 5 kinds of meat, grits, hash browns, corn beef hash, 4 kinds of juice, waffles, pancakes. I mean really good. The buffet costs $7.25 only $2.00 more for all that choice and bounty.
Remember – all I wanted was 2 eggs, bacon and toast, but I always rationalize getting the buffet. I end up spending more than I intended, and end up paying for a lot of stuff I don’t need or want (or even eat). I end up eating way more than I wanted (or needed). It ruins the rest of my day.
The cost of the buffet is based upon average consumption – and I am a small eater. I pay a lot for what other people are eating. What would happen if a lot of really hungry people were allowed to at eat the buffet for free (because of a special government program)? Now, I am paying for what they eat through taxes. Also:
- Average consumption at the buffet would go way up (these are hungry folks).
- This would cause the average cost of the buffet to go way up (for me as well – as I must still pay my share for what others are eating – and extra taxes).
- The line would get rather long – delaying my meal.
- Ultimately, the buffet would run out of items – including stuff I would like (or need) to eat.
Now, imagine the restaurant saying the buffet was the only choice – no al a carte. AND, only certain items were available on the buffet – not all there is now.
While doing research for this paper, I read all I could get my hands on. My perspective was from the initial objectives for Reform. Remember those? Provide broader access to healthcare for the “uninsured”, and to lower the cost of healthcare for all. Even at the beginning of our year long journey, I thought those two objectives were at odds with each other, but like most Americans, I moved forward in faith that these disparate objectives might somehow be reconciled to one another.
As I read the words of the Patient Protection and Affordable Care Act (PPACA) Bill, I can’t help but wonder when our elected leaders lost total sight of the ultimate objectives. Neither of the primary outcomes will be achieved. From my viewpoint, we are left with an incredibly complicated set of rules, taxes, exceptions, and more twists and turns than the lines at Disney World.
In order to understand my interpretation of “Health Reform” more appropriately termed “Health Insurance Reform”, it would be instructive to establish my understanding of how this was all supposed to work. You have heard this from me before, but I will reiterate here in order to establish a proper framework for what follows.
Principles and Characteristics of Insurance:
- On a Macro level, insurance is a mechanism wherein many people pool their risks by paying a relatively small amount in order to cover the claims of the few that actually experience the event which they paid to insure themselves against.
- On a Micro level, insurance is “exchanging an unforeseeable, unbudgetable, financially catastrophic event into a series of affordable payments” (premiums).
- Insurance is typically used to protect against infrequent, but intense claims. Think of your homeowner’s insurance policy. I have paid my insurance premiums for years and years, and have never filed a claim. However, if I need it, a homeowner’s insurance claim is likely to be a big event.
- The price of insurance is predicated upon the risks in the pool and the overall claims arising from these pooled risks against which the insureds have paid their premiums.
- Ultimately, insurance is not a product – it is a “cost plus” service. The insurance company gathers funds from the members of the pool and pays out to those few with claims. Of course, the insurance carrier should also perform services that will help to impact claims costs. The carrier adds the cost of its overhead to the total claims for the year (including a “safety margin”), discounts these costs for earnings on any reserves previously established and this becomes the premium for the coming year.
Healthcare vs. Health Insurance:
Now, we come to “health” insurance. Prior to the early 1990’s, in Atlanta, we looked to the insurance carriers to provide “insurance”. There were no physician visit copays and relatively few prescription drug cards (those having arisen in the late 1980’s). Insureds did not engage the insurance company at all for physician charges, only for hospital-based claims (inpatient, outpatient surgery, advanced imaging, etc.). The insurance company was there for facility based charges, and for physician charges that exceeded our deductible. Deductibles during these years were commonly higher than deductibles today as they were for catastrophic coverage.
With the advent of Health Maintenance Organizations or HMO’s, it was decided that insureds could drive care into the discounted networks if we added a “Healthcare” component to the mix, and thus were born physician copays. After 1990, “Healthcare” and “Insurance” were merged to create Health Insurance. No longer did you need to pay your deductible up front, but rather, for $5 (initially), you could see a network doctor. Of course, at this time, drug card copays also flourished.
This gave rise to two systemic problems:
- Routine healthcare does not meet the essential definition of insurance. It is not unforeseeable – as we know children (or ourselves) will need some level of routine care each year. It is not unbudgetable (routine preventive healthcare services cost less than a $100 – even today). While routine healthcare may be inconvenient or irritating, it is not financially catastrophic. If insurance is a cost plus service, why are we paying the insurance company to process $100 claims (at a cost of $125), rather than expensing this directly? Of course this anomaly was exacerbated by a tax code that made the extra cost tax deductible – and by a robust economy.
- Routine healthcare is not an “infrequent” event. It can almost be “daily”. Insurance companies then had to get into the “claim processing” business in addition to being in the risk acceptance business. Routine preventive healthcare services required enormous increases in personnel, technology, etc. As such, the administrative overhead increased dramatically.
At BenefitStrategies, we believe we need to go back to looking to the insurance companies for insurance and go back to personal responsibility for routine healthcare issues. However, having someone else pay for our colds and flu symptoms is imbedded in our system. Further, we cling to unrealistic (unsustainable?) out of pocket limits. If we then add defensive medicine (due to tort law suits), improvements in technology, and mostly a system that provides services to all while only charging the few, it is no wonder American Healthcare is in a mess.
I have long been a proponent of health care reform. With 15 – 20% of the population having access to healthcare without paying into the system, it is no wonder that health insurance premiums have skyrocketed over the past 20 years. Add the 30% of the population covered by Medicare and Medicaid (which do not pay their fair share either), and it is hard to solely blame insurance companies for the cost of insurance.
So, health care reform was intended to address 2 issues:
- Get more people “insured”. The current legislation does not get more people insured (remember the definition of insurance – paying into the system and receiving benefits?).The current legislation merely lets people that were getting free healthcare at the emergency room seek free healthcare at the physician’s office (or ER if they so choose).If these folks could not afford insurance now (or chose to not buy it), they are certainly not going to pay into the system in the future. If the Congress was concerned about the “uninsured”, why do these folks have to wait until 2014 to be covered? How many unfortunate folks will die before 2014?
- Lower the cost of insurance. The Administration would suggest that getting more people insured will lower cost. Do you think the new entrants to the insured roles are healthier? Are they less healthy than those that sought health insurance (and had to be healthy to get it) currently? If we add millions of “less healthy” folks to the risk pool, and they still do not pay into the pool, how are costs going to go down?
Provisions that suggest costs will not go down include but are not limited to:
- Insurance companies can no longer underwrite insureds, but can only price their products based upon the (inflated) claims. Rates can no longer be based upon age. Do you think premiums for a 60 year old will go down? Or do you think premiums for the 25 year old will go up? But this is OK, because the 25 year old can pay a $95 fine and not buy insurance until needed. This is cheaper than an $1,800 annual premium.
- We are removing pre-existing limitations. Good for the insured, but costly for the risk pool when the unhealthy pay fines to the government until they are seriously ill and only then join the risk pool – and with no pre-existing limitations.
- Preventive care will be covered without any cost. Good for the insured, but expensive. Further, those not inclined to “get a physical” still will not – as the plan will pay unlimited amounts to fix them when they get sick.
- No internal limits on services. Good for the insured, but costly, as there are no restraints on unnecessary service (except perhaps rationing).
- I won’t go into the impact on waiting lines, etc. as the patient load for physicians’ increases exponentially.
Finally, until we address the overall health characteristics of our nation, claims will continue to skyrocket. Obesity and Diabetes is pandemic in this country and until we get the Cheetos out of their hands, nothing is going to change. Currently, 70-75 cents of every dollar spent on health care is spent on treatment of a preventable disease. Preventable diseases are those associated with a well-researched and widely accepted set of modifiable health risk factors (nutrition, weight control, exercise, cholesterol level, blood pressure, etc.).
Society at large is beginning to understand the long- and short-term consequences of poor lifestyle choices which brings me to the biggest problem with this Health Insurance Reform: Lifestyle Behavior is the single greatest determiner of health status which remains wholly unaddressed by the current healthcare reform legislation. Consumerism in healthcare is about behavior change—people taking personal and financial responsibility for their health and wellness. A better way of saying this is:
“Nobody spends somebody else’s money as wisely or as frugally as he spends his own.”
Milton Friedman, Economist and recipient of the 1976 Nobel Memorial Prize in Economics
In the beginning, our system was a brilliant conception. However, it went wrong in the early 1990’s, and we have inherited an entitlement culture and have paid the insurance companies too much to do which they are ill designed to do. Then, Federal and State regulation added to the problem (Georgia mandates 138 healthcare items that have to be covered by insurance – whether or not the employer wants it covered). Ultimately, it has been access to healthcare without having insurance that has tipped the system over the edge. We now have more people taking from the system than we have paying onto it.
This version of health reform fails to address any of these issues, and will not achieve either of its primary objectives. In fact, I believe this bill is the result of a failed effort to install a single government based single payer system.
As this concept was politically untenable, I believe the bill as passed intends to destroy the insurance company based system altogether over the next 3 – 5 years, so the government can make a case for taking the whole arrangement over. If you think not, note the sections of the law that require Insurance Companies to pay out 85% of premiums in benefits. This leaves 15% gross margin with which to run their business. Could you do that? From where will funds come to establish claim reserves? To invest in technology? To cover their employee and equipment (and benefit) costs?
By 2012, the Director of Health and Human Services is empowered to decree what plans will be available for purchase, what rate increases will be allowed (we already have a Federal “rate increase regulation” Board being established), and it would appear that the system of fines and taxes established is disconnected altogether from healthy outcomes.
When the “exchanges” are established, there will be little incentive for employers to maintain health programs on behalf of their employees. It will be permissible to provide “fairness vouchers” or pay the fines and tell employees to get their own insurance. In the beginning, this will be cheaper. However, the cost will be paid somewhere, somehow. If the employer payroll tax is going up, employers will (rightly) decide to not pay this AND support an employer paid option.
I have attached a “best efforts” summary of the Health Reform Provisions and mandates and their impact on employers, individuals, and insurance companies. There are a lot of questions that remain, and a lot will not be known until the Director of Health and Human Services decides what is best for us.
About the Author: Carl C. Schuessler, DHP, DIA, GBDS is the Managing Principal of BenefitStrategies, LLC. an Insurance and Employee Benefits Brokerage and Consulting firm. We specialize in Insurance, Risk Management and Employee Benefit Consulting. BenefitStrategies helps improve your cash flow, save money and retain top talent with well-structured employee benefit and financial planning solutions. With more than 20 years of experience in employee and executive benefits consulting and financial planning experience, he guides large firms, privately held companies and executives through the challenges of evaluating planning opportunities. We pride ourselves on our ability to be creative in designing innovative, optimum plans and helping companies and individuals make the most of their financial resources.
For more information:
Carl C. Schuessler, Jr., DHP, DIA, GBDS
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