Last night, the President addressed a joint session of Congress to discuss health care reform. As expected, the speech was very good. No matter what your views are, we cannot deny that the President is a wonderful public speaker, a gifted politician, and a very smart man.
The President outlined some broad and well-accepted provisions that he has dedicated himself to seeing through in a health care reform bill. The first things he discussed were the key principles of insurance reform. These ideas resonated well with the general public and with both parties. The President called for a bill that would eliminate coverage denial for people with pre-existing conditions. He called for an end to lifetime maximums that are currently present in most insurance plans. He also called for a cap on out-of-pocket maximums contained in most insurance plans. Finally, he made reference to making it illegal for plans to “drop your coverage when you get sick or water it down when you need it most.” These are all very positive changes that most of the country supports. The problem is there was no discussion on the side effects that these changes will have. Changes and reforms like the one being discussed can be compared to a prescription that your doctor may write to help you with your illness. Often times these prescriptions come with serious side effects. While the side effects may not be bad enough to make you stop taking the medication, they should at least be understood before starting any type of therapy.
So what are the side effects of insurance reform? Simply put, they will drive up the cost of insurance. This is not a “might” or “may” but rather a “will”. If we eliminate pre-existing condition exclusions, eliminate lifetime maximums, reduce the out-of-pocket maximums, and limit insurance companies’ ability to mitigate their risk, it will have a direct effect on premiums. This will happen for two reasons. First, the more money an insurance company has to pay out in claims, the more it has to charge in premiums. This is no secret, and a fairly obvious fact. Secondly, and perhaps less obvious, is the fact that some of the tools that insurance companies use are designed not only to reduce their expenditures, but to also reduce unnecessary utilization. Let’s not forget the early days of managed care and HMO’s when all doctor visits were small co-pays and most prescriptions could be purchased for $10. These benefit plans can lead to unnecessary over utilization, which is why the industry moved to more cost-sharing for the patient in the first place. Now, don’t get me wrong; I’m not defending insurance companies. I spent eighteen years working inside that industry, and I will be the first to say that reform is needed and needed badly. What I am saying is that while I support these kinds of reforms, we need to go into them with a full understanding of the potential the side effects.
Think about this: what will happen in a weak economy if insurance reforms get passed in such a way that premiums go up and the other provisions of reform don’t come into play for four more years? Will we see a dramatic increase in the uninsured as businesses large and small reduce or drop their insurance? Will we see businesses cut more jobs in the face of increasing premiums? We could very well improve insurance coverage for the average American, but in doing, we could also cause them to loose their jobs. If you think I’m wrong about this, do your own simple test. Call your auto insurance agent and ask him or her how much your premium would go up if you changed you’re deductible from $500 to $250 or if you increased your coverage. They will probably be able to quote you the increase over the phone. You see, all insurance companies have a very good handle on actuarial tables, and they completely understand the relationship between coverage and premiums. While I don’t know how exactly how much more you would have to pay to increase your auto insurance coverage, I do know that you will pay more. The same holds true for health care.
The other point that these reforms don’t appear to address is the issue of experience rating. If the government mitigates the insurance companies’ ability to limit their risk, they will respond by placing more emphasis on experience rating. Let me give you an example. Let’s say you have a medium sized employer with an employee who has a child with a very expensive illness like Hemophilia. This child is required to use very expensive products to control their bleeds. The child over his or her lifetime is likely to cost well over the current lifetime maximum of $1 million. With the lifetime maximum removed through legislation, the insurance company now knows that their risk exposure is very high with this employer group. So what will the insurance company do? Since they are not in business to loose money, they will begin passing significant rate increases to the employer to cover that cost. This is called experience rating. The insurance company will increase the rates until they are either collecting enough money to cover the cost of that child or until they drive that employer to find a different insurance company. Now, let’s say the broker for this company understands what is going on and tells the company that their rates will go down if they can “get rid of the employee with the sick kid”. If you think that this kind of discussion doesn’t happen, I have some wonderful investments in mortgage derivatives that I would like to sell you.
Let’s also consider what happens to the self-funded employer when things like lifetime maximums go away. We now have employers who can significantly improve their bottom line if they find a way to get rid of high-cost employees. Again, I am not saying that we shouldn’t proceed with insurance reform, but rather, I am simply pointing out that it will come with some pretty bad side effects.
The President then began addressing universal coverage. Again, this is an issue where we are likely to find general agreement. I don’t know anyone who doesn’t think that we should make coverage available for all Americans. The issue isn’t whether we would like to see this happen, but rather, how do we make it happen and even more importantly, how do we pay for it?
When the President focused on cost savings, he pointed out several initiatives. He touted the cost savings that have already been pledged by the drug companies and hospitals. He talked about eliminating some of the Medicare expenditures that are being paid to private insurance companies. These are all areas that can and should be attacked, but even the President doesn’t believe they will be enough to solve the problem. His main focus is on eliminating the waste that is already in the system. The President commented that “we will also create an independent commission of doctors and medical experts charged with identifying more waste in the years ahead.” I agree that if we could eliminate all of the unnecessary waste in the system, it would make a huge impact on the total cost of health care. However, the real issue is how do we do that? The American health care system consists of dedicated, highly educated people who provide care to patients every day. While I know that every profession has its bad apples, I firmly believe that the vast majority of physicians practice in a way that they feel is truly best for their patients and they are not intentionally doing things that don’t add value. Yes, there is waste in the system, but it’s going to be extremely difficult to get rid of that waste. What concerns me most is the notion that a government sponsored “commission” is somehow going to be able to instantly figure out how to eliminate this waste and then implement these ideas universally. It’s simply unfeasible and unrealistic to believe that a government-sponsored commission is going to be able to solve the problem of waste.
The bottom line is that the President gave an outstanding speech with included some very good ideas. The speech was short on details, which is to be expected given the amount of time he had and the complexity of the problem. The real work lies ahead because, like all things, the devil is in the details. If Congress and the administration can draft legislation that will not only accomplish insurance reform and universal coverage, but also find a way to address the cost issues with health care, then they will have accomplished an incredible feat. If however, they are wrong, and the side effects of their prescription are worse than the original problem, we could be in very dire straights. Consider this: the President’s plan wouldn’t become fully implemented until some time in 2013. Several estimates have revealed that Medicare will be bankrupt by 2017. If health care reform, as the President wants it, gets passed and implemented in 2013, it will take at least a year to figure out if it is working or not. That means we won’t know if we have fixed the problem until 2014 or 2015. If this “solution” does not work, how on earth are we supposed to fix the problem before the train wreck that will occur by 2017?
The President outlined some broad and well-accepted provisions that he has dedicated himself to seeing through in a health care reform bill. The first things he discussed were the key principles of insurance reform. These ideas resonated well with the general public and with both parties. The President called for a bill that would eliminate coverage denial for people with pre-existing conditions. He called for an end to lifetime maximums that are currently present in most insurance plans. He also called for a cap on out-of-pocket maximums contained in most insurance plans. Finally, he made reference to making it illegal for plans to “drop your coverage when you get sick or water it down when you need it most.” These are all very positive changes that most of the country supports. The problem is there was no discussion on the side effects that these changes will have. Changes and reforms like the one being discussed can be compared to a prescription that your doctor may write to help you with your illness. Often times these prescriptions come with serious side effects. While the side effects may not be bad enough to make you stop taking the medication, they should at least be understood before starting any type of therapy.
So what are the side effects of insurance reform? Simply put, they will drive up the cost of insurance. This is not a “might” or “may” but rather a “will”. If we eliminate pre-existing condition exclusions, eliminate lifetime maximums, reduce the out-of-pocket maximums, and limit insurance companies’ ability to mitigate their risk, it will have a direct effect on premiums. This will happen for two reasons. First, the more money an insurance company has to pay out in claims, the more it has to charge in premiums. This is no secret, and a fairly obvious fact. Secondly, and perhaps less obvious, is the fact that some of the tools that insurance companies use are designed not only to reduce their expenditures, but to also reduce unnecessary utilization. Let’s not forget the early days of managed care and HMO’s when all doctor visits were small co-pays and most prescriptions could be purchased for $10. These benefit plans can lead to unnecessary over utilization, which is why the industry moved to more cost-sharing for the patient in the first place. Now, don’t get me wrong; I’m not defending insurance companies. I spent eighteen years working inside that industry, and I will be the first to say that reform is needed and needed badly. What I am saying is that while I support these kinds of reforms, we need to go into them with a full understanding of the potential the side effects.
Think about this: what will happen in a weak economy if insurance reforms get passed in such a way that premiums go up and the other provisions of reform don’t come into play for four more years? Will we see a dramatic increase in the uninsured as businesses large and small reduce or drop their insurance? Will we see businesses cut more jobs in the face of increasing premiums? We could very well improve insurance coverage for the average American, but in doing, we could also cause them to loose their jobs. If you think I’m wrong about this, do your own simple test. Call your auto insurance agent and ask him or her how much your premium would go up if you changed you’re deductible from $500 to $250 or if you increased your coverage. They will probably be able to quote you the increase over the phone. You see, all insurance companies have a very good handle on actuarial tables, and they completely understand the relationship between coverage and premiums. While I don’t know how exactly how much more you would have to pay to increase your auto insurance coverage, I do know that you will pay more. The same holds true for health care.
The other point that these reforms don’t appear to address is the issue of experience rating. If the government mitigates the insurance companies’ ability to limit their risk, they will respond by placing more emphasis on experience rating. Let me give you an example. Let’s say you have a medium sized employer with an employee who has a child with a very expensive illness like Hemophilia. This child is required to use very expensive products to control their bleeds. The child over his or her lifetime is likely to cost well over the current lifetime maximum of $1 million. With the lifetime maximum removed through legislation, the insurance company now knows that their risk exposure is very high with this employer group. So what will the insurance company do? Since they are not in business to loose money, they will begin passing significant rate increases to the employer to cover that cost. This is called experience rating. The insurance company will increase the rates until they are either collecting enough money to cover the cost of that child or until they drive that employer to find a different insurance company. Now, let’s say the broker for this company understands what is going on and tells the company that their rates will go down if they can “get rid of the employee with the sick kid”. If you think that this kind of discussion doesn’t happen, I have some wonderful investments in mortgage derivatives that I would like to sell you.
Let’s also consider what happens to the self-funded employer when things like lifetime maximums go away. We now have employers who can significantly improve their bottom line if they find a way to get rid of high-cost employees. Again, I am not saying that we shouldn’t proceed with insurance reform, but rather, I am simply pointing out that it will come with some pretty bad side effects.
The President then began addressing universal coverage. Again, this is an issue where we are likely to find general agreement. I don’t know anyone who doesn’t think that we should make coverage available for all Americans. The issue isn’t whether we would like to see this happen, but rather, how do we make it happen and even more importantly, how do we pay for it?
When the President focused on cost savings, he pointed out several initiatives. He touted the cost savings that have already been pledged by the drug companies and hospitals. He talked about eliminating some of the Medicare expenditures that are being paid to private insurance companies. These are all areas that can and should be attacked, but even the President doesn’t believe they will be enough to solve the problem. His main focus is on eliminating the waste that is already in the system. The President commented that “we will also create an independent commission of doctors and medical experts charged with identifying more waste in the years ahead.” I agree that if we could eliminate all of the unnecessary waste in the system, it would make a huge impact on the total cost of health care. However, the real issue is how do we do that? The American health care system consists of dedicated, highly educated people who provide care to patients every day. While I know that every profession has its bad apples, I firmly believe that the vast majority of physicians practice in a way that they feel is truly best for their patients and they are not intentionally doing things that don’t add value. Yes, there is waste in the system, but it’s going to be extremely difficult to get rid of that waste. What concerns me most is the notion that a government sponsored “commission” is somehow going to be able to instantly figure out how to eliminate this waste and then implement these ideas universally. It’s simply unfeasible and unrealistic to believe that a government-sponsored commission is going to be able to solve the problem of waste.
The bottom line is that the President gave an outstanding speech with included some very good ideas. The speech was short on details, which is to be expected given the amount of time he had and the complexity of the problem. The real work lies ahead because, like all things, the devil is in the details. If Congress and the administration can draft legislation that will not only accomplish insurance reform and universal coverage, but also find a way to address the cost issues with health care, then they will have accomplished an incredible feat. If however, they are wrong, and the side effects of their prescription are worse than the original problem, we could be in very dire straights. Consider this: the President’s plan wouldn’t become fully implemented until some time in 2013. Several estimates have revealed that Medicare will be bankrupt by 2017. If health care reform, as the President wants it, gets passed and implemented in 2013, it will take at least a year to figure out if it is working or not. That means we won’t know if we have fixed the problem until 2014 or 2015. If this “solution” does not work, how on earth are we supposed to fix the problem before the train wreck that will occur by 2017?
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