Dear Republican Party Proponents of “Repeal & Replace”: Here’s Some Practical Low Cost Ideas For What To “Replace” ObamaCare With…

Dear incoming Republican Majority House Members-

What follows are some ideas if you’re seeking to put forward policy about the the “replace” part of “repeal and replace…”

It just isn’t possible to “make the case” that employers have been steadily dropping health insurance coverage from what used to be called “fringe benefits.” At best, many of these people get “limited coverage plans,” which basically put them back into the ranks of the uninsured if they ever are admitted to a hospital or have a serious injury of almost any kind. As a Nation, we can’t just ignore the growing ranks of the uninsured. But…the main problem with access to health insurance is cost; not any other “lack of access” (except for people with pre-existing conditions):

Census data chart showing how employers are dropping coverage

ObamaCare primarily universally ignored cost (the hard stuff) and focused only on the “coverage” issue. Not easy, but NOT REALLY THE PROBLEM.

People lack access mostly because of the cost of coverage. The cost of coverage is so high not because of the impact of the often-demonized “profit-seeking publicly held health insurance companies;” it is because the care costs so much. Health insurance companies, particularly those with stockholders, just try to make profits by staying a little ahead of the cost curve:


Making fundamental changes to a part of the American economy which is on track to comprise roughly 20 percent of the Gross National Product by the year 2012, is a task that should not and can not be dealt with in town-hall meetings. Even President Obama supporters are beginning to question how the nation will ever be able to afford the continuously increasing costs that are the root of the “health insurance problem.”

Before I continue, it is appropriate for ‘full-disclosure’ to make it clear that my perspective comes from my 25-year career as a health insurance executive. Although unlike most health insurance companies today, the one’s I’ve worked for have been either ‘mutual companies,’ or not-for-profits,’ making them immune to delivering Wall Street profit objectives (more on this important distinction below).

As most economists acknowledge, the current recession will likely continue longer and deeper than any contraction since the end of World War II. With this in mind, it would make a lot of sense to return to the long-standing American concept of incremental social-policy change in health care.

The suggestions that follow are not particularly futuristic or visionary, neither do they really address the fact that it is the cost of health care that dictates the cost of health insurance. However, these suggestions will significantly improve the existing system without creating any incremental tax costs for the American taxpayer.

Obamacare takes people who were getting “uncompensated care” (for which hospitals and doctors were “shifting costs” with higher fees for people with employer-sponsored health coverage), into people with “compensated care.” But most of the costs for people who were previously uncompensated were supposedly already in the system. So…Are hospitals and doctors going to lower their rates to insurance companies since they will have far less uncompensated care? Never gonna happen…

OK, back to ideas on the “replace” side of “repeal and replace:”

These are simple, no-nonsense, and low-cost solutions to solving key problems within the existing system, The barriers that have prevented these ideas from already being implemented are familiar: Political will and special-interest lobbying. On the chance that the Obama Administration and Congress may be returning to the idea of incremental reform; the following problems and solutions should be considered in the process:

The First Problem: Regulation & Red Tape. The current private health insurance system is regulated differently, depending on whether coverage is “self-insured,” mainly large companies of 100 employees that are financially able to pay for most of the costs of health care for their employees and dependents, or “insured” – small employers, some large employers and all individuals who buy their own health insurance.

The Situation: There exists a maze of 50 regulatory bureaucracies, which are state departments of insurance, controlling the “insured” market. Yet since the early 1970’s a Federal Tax regulation that was not intended to impact health insurance coverage, “ERISA,” (The Employee Retirement Income Security Act) has served as a “magic loophole” that eliminates most state insurance department oversight of the “self-insured” market. “Self-insured” employers, by the way (which are “responsible for” about half of all people who have health insurance, are blissfully not subject to most of the byzantine spiderweb of State regulatory oversight.

Lawyers and corporate financial wizards call this loophole the “ERISA-exemption,” in the sense that self-insured companies are “exempt” from state regulation and are only subject to the Federal laws that apply to health insurance.

Although there have been attempts to standardize state insurance regulation, nearly every state in the Union has a department of health insurance, each with its own set of rules and regulations about how health insurance coverage works. This creates much confusion and poses many questions. Why should anyone need to navigate different regulations for health insurance coverage based upon a topographical feature, say, a river, that has nothing to do with health care?

Does anyone believe that people on two sides of a state border have different health care needs because of which side of the border they live or work on? If not, why should they have different health insurance regulatory structures?

The Solution: Abolish state level oversight of health insurance in lieu of a Federal structure to serve all Americans. Regulate insurance and self-insured companies through a Federal Department of Health Insurance, within the Department of Health & Human Services, which currently regulates Medicare programs through a single set of Federal rules applied by the Centers for Medicare and Medicaid Services.

The Second Problem: The Challenges of Choice. Confusion and high administrative costs result from an overabundance of so-called “choice” in health insurance benefit designs.

The Situation: Among the reasons for the original Medicare program’s lower administrative costs (than privately administered insurance plans) is the fact that 85 percent of Medicare beneficiaries who are enrolled in the program all have a single, easy to understand “benefit design” – more commonly known as coverage, exclusions, and cost-sharing. Doctors and hospitals all know what is in the Medicare benefit design, and there is little confusion over which services will be paid by Medicare. Even the private market for supplements to the basic Medicare plan were standardized to just seven “benefit designs,” that are the same throughout the USA.

Contrast the simplicity of a single benefit design for 30 million Medicare beneficiaries with private health insurance companies’ tens of thousands of benefit designs – all of them equipped with their own definitions and variations of coverage, exclusions and cost-sharing provisions. This is clearly “choice” taken to ridiculous proportions. These tens of thousands of benefit designs create the need for doctors and hospitals to have staff that does nothing but figure out which insurance has what coverage. Does anyone believe that the cost or availability of health insurance coverage is improved by having tens of thousands of benefits in place? Choice is important, but one size does not fit all in health insurance needs. However, tens of thousands of choices? Hardly.

The Solution: Over a three-year period, the nation could shift from an unlimited number of health insurance “benefit designs” to, at most, one hundred plans. At the end of the phase-in period, every health insurance plan for groups or individuals would need to conform to one of those plans. A hundred plans is still a lot, but as long as we place such a high value on “choice,” it is far better than tens of thousands. There is no doubt that a reduction in administrative costs and complexity would result from changing the existing system of unlimited “choice,” to a much smaller menu of plans.

The Third Problem: “U.S.A.” – Uninsured Sickly Americans. Some people cannot afford health insurance because of cost, and others because insurance companies “underwrite” prospective buyers. Underwriting, a form of predicting and calculating the costs of a person’s health care needs based on a number of factors, also allows insurance companies, in many cases, to reject applicants for coverage based on their health status.

The Situation: This problem exists because under the current system, many people, for many reasons, don’t pay for health insurance coverage, and would buy it “only when they need it.” It’s the same reason you can’t buy homeowners insurance after your home has already been flooded or burned. Insurance works because the cost of providing health care is spread across the populace. In any given year of the past twenty years, 80 percent of people are responsible for 30 percent of health care cost, while just 20 percent of the people incur 70 percent of those health care costs.

The Solution: If health insurance companies had their costs for a single person limited by creation of several multi-state risk pools for the entire American population, then they could also be prohibited from excluding people from coverage for “pre-existing conditions.” This would eliminate a major reason why some people can’t buy health insurance on their own because of their health status. This “fix” would enable many more people to get health insurance on their own.

The Fourth and Final Problem: The Woes of Wall Street. A huge factor in high health insurance cost is that most health insurance companies are publicly-held and at the whims and mercies of a highly-volatile stock market. In addition to covering the cost of health claims and their administrative expenses, publicly-held health insurance companies are also expected to provide dividends and other forms of investment returns to their stockholders.

The Situation: After President Truman’s implementation of wage and price controls in 1948, health insurance became a fringe benefit of employment and until the late 1990’s, most companies bought their health coverage from mutual insurance companies. The most well-known of these are the formerly mostly mutual structured Blue Cross and Blue Shield plans.

While publicly-held, stock-driven health insurance companies existed prior to the late 1990’s, it was not the way most American’s received their health coverage. But after most of the Blue Cross and Blue Shield affiliated companies shifted to Wall Street listed stocks, the majority of people today receive their coverage from companies that have investor returns among their primary objectives. Mutual companies, while still oriented toward not losing money, have very little incentive to “make money” beyond that needed for their“ reserves” (the amount of funds they would need to pay for the health care costs of their insured populations for a given time period), and to cover their costs of administering the claims.

The Solution: We should return to a model where private health insurance is delivered by mutual insurance companies, or at least companies that are not driven by the need to produce returns for their investors.

The way most Americans got their health insurance coverage in the 1970’s and 1980’s was far better than the way most of us are insured today. Back in the 1970’s, “mutual” insurance companies, without Wall Street investment return demands, provided most health insurance.

Health insurance, like the rest of health care economics, differs from the rest of the economy for many reasons. Adding a shareholder’s demand for a tidy stock return to a health insurance companies’ expectations is contradictory to the objective of reducing health care costs.

And isn’t reducing health care costs at the root of what we are all arguing about?

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About Benjamin D. Zelman

www.zelmanandcompany.com
This entry was posted in The Health Care Cost Crisis and tagged , , , , , , , , , , . Bookmark the permalink.

2 Responses to Dear Republican Party Proponents of “Repeal & Replace”: Here’s Some Practical Low Cost Ideas For What To “Replace” ObamaCare With…

  1. Rodney says:

    Great Post.

    These PCIP programs are to be in place until 2014, which is when affordable health insurance companies will be required to accept all applicants regardless of their health condition and pre-existing problems.

    Good post

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