I’ve been following the debate in Washington regarding health care reform very closely. You see, I am a former managed care executive. I currently work as a professional consultant for physicians and physician groups all over the country. I am also an economist, which makes me very interested in the impact that these possible changes will have on the market place and on the U.S. economy. As you might guess, I am also very curious about the outcome of what could be a revolutionary shift in how this country provides and finances its health care.
As I watch the debate rage back and forth and the various proposals get developed, formulated, discussed, and then revised again and again, a nagging thought continues to strike me: “Where’s the beef?” Remember the old Wendy’s commercial from so many years ago that had the little old lady asking where the beef was on a sandwich that was supposed to be all about the beef but wasn’t? In the same way, I keep wondering, “Where are the cost savings?” Ever since the idea for health care reform was pitched, it has been explained as though it is something we have to do; the alternative was just not an option. It was sold to us as something that was absolutely necessary in order to keep Medicare from going broke by 2017 and to keep our economy from being ruined by runaway costs. We were told that reform must happen now because controlling costs simply cannot wait. These are all statements that I agreed with because health care costs consume a higher percentage of our economy every year.
But as the proposals started to take shape, something alarmed me; I wasn’t seeing the cost savings! I could see the mandated benefits, I could see the expansion of coverage to almost all Americans, and I could see a lot of great things in the proposals, but what I couldn’t see were the cost savings. As the discussions progressed, we started to get cost estimates on the various health care proposals. The early house bill was estimated to cost $900 billion dollars over 10 years. Later versions and the current Senate proposal were estimated to cost around $800 billion dollars over the next decade. Wait a minute, how did an initiative that was supposed to be about cost savings turn into an $800 billion dollar expense? Then the President told us not to worry because he wouldn’t sign a bill that added any money to the deficit. Hold on! I thought this was about reducing costs? How did we go from needing to reduce costs to being content with something that doesn’t increase the deficit? Is anyone else concerned that these financial projections are coming from a government entity that has a worse track record of predicting the future than a long-range weather forecast? Where’s the beef?
I started digging deeper into the proposals and the numbers. The most current Senate proposal has a price tag of more than $800 billion dollars. But the proposal is being presented as “budget neutral” because this expanded coverage will be paid for through a number of taxes and commitments from hospitals and drug companies. One of the largest sources of funding in the most current proposal is a tax on the so-called “Cadillac Health Plans.” Basically, this means that the Senate proposal would tax the insurance companies at a rate of over 30% for all plans that are so rich in benefits that the total annual premium for a single person is over $8,000 dollars and for a family is over $21,000 dollars. This tax on the insurance companies is projected to account for over $200 billion dollars of the $800 billion needed in funding. It sounds good, doesn’t it! Lets just tax the evil insurance companies and that will pay for most of the bill! But there’s a problem here. You see, this kind of thinking completely ignores the fact that nothing happens in a vacuum.
Newton taught us that every action has an equal and opposite reaction. If we impose a tax on the insurance companies for these “Cadillac Health Plans,” the insurance companies and the employers who purchase these plans will no doubt react. If this kind of tax is enforced, the most likely response will be for insurance companies to simply pass premium taxes onto the employers. This will then force employers to avoid paying the tax by reducing benefits so that they only provide their employees with health care plans below the Cadillac threshold. This will mean that the expected $200 billion dollars in tax revenue won’t actually be paid by insurance companies after all. Does anyone really think that an industry as large and sophisticated as the insurance industry is going to get hit by a $200 billion dollar tax without developing plans to avoid it? I have worked in the insurance industry for 18 years, and you can bet that they aren’t going down without a fight. But that’s not even the worst part of this whole problem. The worst part is that we are creating funding mechanisms that aren’t really there to pay for coverage expansion for the uninsured, and we have completely lost sight of the whole point of this endeavor which was to reduce costs, not to increase them. Again, where’s the beef?
The problem with health care costs is very similar to that of an illness or a disease. The earlier you diagnose and treat the disease, the easier and less painful it is to treat it. On the other hand, the longer you wait the harder and more painful the treatment becomes. Catching something like breast cancer in its earliest stages significantly increases your chance for survival and makes you less likely to have to deal with things like mastectomies and radiation therapy. The problem with health care reform is no different. We have been avoiding the problem of health care costs for too long, and we have found ourselves in a position where we need to take action before it spirals even further out of control.
I think the federal government is missing the boat right now. The result will be a delay in the necessary treatment of the problem, which will mean that when we finally do get around to dealing with the cost problem, the treatment will be much more invasive and painful. What is likely to happen if we pass some legislation now that doesn’t do anything to control costs? Well, it will likely be several years before the lack of impact on health care costs become apparent. By that time, we will be in even worse shape, just like the cancer patient who doesn’t get an early diagnosis and early treatment. We will be faced with limited treatment options which will be significantly more painful to enact.
The bottom line is this: the only way to control the cost of health care is to either reduce the volume (the number of services provided) or to reduce the cost for each service. It’s as simple as that. It should also be understood that reducing the “price” of something means that you are also reducing the revenue that is received for that service, which of course ultimately impacts the physicians, hospitals or providers of the care that was rendered.
What happens if we find ourselves 3 or 4 years closer to the collapse of Medicare without having done anything to reduce the cost of health care? Faced with the option of reducing volume, which will quickly become a discussion on rationing, or reducing the price of services, it seems clear to me that our elected officials will choose to go after the price reduction side of the equation. It doesn’t take a Nobel Prize winning economist to understand that reductions in revenue for the services that are provided by physicians and other health care providers translate into significant reductions in physician incomes.
With that scenario in mind, I leave you with one pretty scary thought. Why on earth would anyone go into the practice of medicine, through the long and difficult training process, only to begin their career later in life and significantly in debt, working long hours with the intense pressure that comes with being a doctor, if you know that your income will just continue to decline year after year through your entire career? How good will our health care be if we cannot attract the best and brightest students to become physicians? And how good is universal health care if we don’t have enough doctors? Now that’s a scary thought.
As I closely watch this debate, I’m becoming more and more concerned. The last time I had this type of sinking feeling was a couple of years after the United States invaded Iraq and I found myself asking, “Where are the weapons of mass destruction? I thought this was supposed to be about weapons of mass destruction?”
As I watch the debate rage back and forth and the various proposals get developed, formulated, discussed, and then revised again and again, a nagging thought continues to strike me: “Where’s the beef?” Remember the old Wendy’s commercial from so many years ago that had the little old lady asking where the beef was on a sandwich that was supposed to be all about the beef but wasn’t? In the same way, I keep wondering, “Where are the cost savings?” Ever since the idea for health care reform was pitched, it has been explained as though it is something we have to do; the alternative was just not an option. It was sold to us as something that was absolutely necessary in order to keep Medicare from going broke by 2017 and to keep our economy from being ruined by runaway costs. We were told that reform must happen now because controlling costs simply cannot wait. These are all statements that I agreed with because health care costs consume a higher percentage of our economy every year.
But as the proposals started to take shape, something alarmed me; I wasn’t seeing the cost savings! I could see the mandated benefits, I could see the expansion of coverage to almost all Americans, and I could see a lot of great things in the proposals, but what I couldn’t see were the cost savings. As the discussions progressed, we started to get cost estimates on the various health care proposals. The early house bill was estimated to cost $900 billion dollars over 10 years. Later versions and the current Senate proposal were estimated to cost around $800 billion dollars over the next decade. Wait a minute, how did an initiative that was supposed to be about cost savings turn into an $800 billion dollar expense? Then the President told us not to worry because he wouldn’t sign a bill that added any money to the deficit. Hold on! I thought this was about reducing costs? How did we go from needing to reduce costs to being content with something that doesn’t increase the deficit? Is anyone else concerned that these financial projections are coming from a government entity that has a worse track record of predicting the future than a long-range weather forecast? Where’s the beef?
I started digging deeper into the proposals and the numbers. The most current Senate proposal has a price tag of more than $800 billion dollars. But the proposal is being presented as “budget neutral” because this expanded coverage will be paid for through a number of taxes and commitments from hospitals and drug companies. One of the largest sources of funding in the most current proposal is a tax on the so-called “Cadillac Health Plans.” Basically, this means that the Senate proposal would tax the insurance companies at a rate of over 30% for all plans that are so rich in benefits that the total annual premium for a single person is over $8,000 dollars and for a family is over $21,000 dollars. This tax on the insurance companies is projected to account for over $200 billion dollars of the $800 billion needed in funding. It sounds good, doesn’t it! Lets just tax the evil insurance companies and that will pay for most of the bill! But there’s a problem here. You see, this kind of thinking completely ignores the fact that nothing happens in a vacuum.
Newton taught us that every action has an equal and opposite reaction. If we impose a tax on the insurance companies for these “Cadillac Health Plans,” the insurance companies and the employers who purchase these plans will no doubt react. If this kind of tax is enforced, the most likely response will be for insurance companies to simply pass premium taxes onto the employers. This will then force employers to avoid paying the tax by reducing benefits so that they only provide their employees with health care plans below the Cadillac threshold. This will mean that the expected $200 billion dollars in tax revenue won’t actually be paid by insurance companies after all. Does anyone really think that an industry as large and sophisticated as the insurance industry is going to get hit by a $200 billion dollar tax without developing plans to avoid it? I have worked in the insurance industry for 18 years, and you can bet that they aren’t going down without a fight. But that’s not even the worst part of this whole problem. The worst part is that we are creating funding mechanisms that aren’t really there to pay for coverage expansion for the uninsured, and we have completely lost sight of the whole point of this endeavor which was to reduce costs, not to increase them. Again, where’s the beef?
The problem with health care costs is very similar to that of an illness or a disease. The earlier you diagnose and treat the disease, the easier and less painful it is to treat it. On the other hand, the longer you wait the harder and more painful the treatment becomes. Catching something like breast cancer in its earliest stages significantly increases your chance for survival and makes you less likely to have to deal with things like mastectomies and radiation therapy. The problem with health care reform is no different. We have been avoiding the problem of health care costs for too long, and we have found ourselves in a position where we need to take action before it spirals even further out of control.
I think the federal government is missing the boat right now. The result will be a delay in the necessary treatment of the problem, which will mean that when we finally do get around to dealing with the cost problem, the treatment will be much more invasive and painful. What is likely to happen if we pass some legislation now that doesn’t do anything to control costs? Well, it will likely be several years before the lack of impact on health care costs become apparent. By that time, we will be in even worse shape, just like the cancer patient who doesn’t get an early diagnosis and early treatment. We will be faced with limited treatment options which will be significantly more painful to enact.
The bottom line is this: the only way to control the cost of health care is to either reduce the volume (the number of services provided) or to reduce the cost for each service. It’s as simple as that. It should also be understood that reducing the “price” of something means that you are also reducing the revenue that is received for that service, which of course ultimately impacts the physicians, hospitals or providers of the care that was rendered.
What happens if we find ourselves 3 or 4 years closer to the collapse of Medicare without having done anything to reduce the cost of health care? Faced with the option of reducing volume, which will quickly become a discussion on rationing, or reducing the price of services, it seems clear to me that our elected officials will choose to go after the price reduction side of the equation. It doesn’t take a Nobel Prize winning economist to understand that reductions in revenue for the services that are provided by physicians and other health care providers translate into significant reductions in physician incomes.
With that scenario in mind, I leave you with one pretty scary thought. Why on earth would anyone go into the practice of medicine, through the long and difficult training process, only to begin their career later in life and significantly in debt, working long hours with the intense pressure that comes with being a doctor, if you know that your income will just continue to decline year after year through your entire career? How good will our health care be if we cannot attract the best and brightest students to become physicians? And how good is universal health care if we don’t have enough doctors? Now that’s a scary thought.
As I closely watch this debate, I’m becoming more and more concerned. The last time I had this type of sinking feeling was a couple of years after the United States invaded Iraq and I found myself asking, “Where are the weapons of mass destruction? I thought this was supposed to be about weapons of mass destruction?”
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