Heath Care Reform Must Have Serious Cost Controls

Wednesday, September 16, 2009 | 0

By Joe Paduda

The reports from consulting firms Segal and Aon that health benefit costs will jump more than 10% next year shows exactly what we're in for if health care reform efforts fail.

And by "reform," I mean reform with strong cost controls.

When costs increase 10% a year, they double every seven years. With current family premiums in the $15,000 range, employers and employees will be paying $30,000 per family in 2016. And that's not including deductibles and copays, which are sure to rise.

If you're relying on so-called consumer-directed health plans (CDHPs) to stem the tide, good luck — their costs went up two points more than "regular" HMO and PPO plans. Industry veterans aren't surprised, as new insurance products almost always have good experience in the first couple years and as the block "ages," claims creep up. As I've noted previously, CDHPs are not a panacea, in fact they may well drive up costs due to delayed care. (That said, with substantial changes CDHPs could be a valuable tool in cost containment.)

Eventually the U.S. will reform its health insurance and health care delivery "systems." Unfortunately I don't see it happening this year due to the failure of the Democrats to put forth a program that controls costs, make a cogent argument and control the debate, and the decision by the Republicans to remain nothing more than the "Party of No."

But when something can no longer continue, it won't.

When enough Americans lose their coverage, when cost-shifting gets to the point where those left with insurance are paying thousands in premiums to cover those without, when local taxes to pay for teachers' and police benefits get so high that folks are losing their houses, when Medicare finally goes insolvent, when hospitals are collapsing due to the cost of indigent care, when big pharma and device companies are no longer making the gazillions they so richly deserve, then, and only then, will the screaming hordes at Town Hall meetings decide that any health care coverage is better than none.

What happens then?

Well, we may end up with single payer, or Medicare for All, or some version of the German or Swiss or French systems. The false patriots championing freedom and the American tradition of independence and all that other hooey will find themselves drowned out by the moms and dads desperate for insurance to cover their kids and parents.

While the opponents of reform may well win this battle, in the long run they will lose the war. Their best chance (which some seem to have recognized, albeit half-heartedly) is to engage now, get the best deal they can, and retool their business models to prosper without relying primarily on risk selection and underwriting to avoid unhealthy members.

What does this mean for you?

If you are an investor, look closely at the chronic care solutions offered by health insurers — the ones who are investing heavily will be the long-term winners.
   
A clarification

Before I go on, let me clarify. My statement that a family policy would cost $30,000 in 2016 was based on the latest info from two large consulting firms about commercial health insurance premiums — rates are going up more than 10%  next year. And it is highly likely they will continue to accelerate at or near the 10% number.

Some suggest that just because something happened in the past does not mean it will continue into the future, but I'd respectfully note that while that is true in the abstract, in the concrete world of health insurance, there's a very high likelihood that costs will indeed go up 10% — or more — per year for the foreseeable future absent meaningful cost reform.

The AON survey reports trend rates ranged from 16.0% and 18.2% for HMO, PPO, Indemnity plans in 2002, 15.7% to 17.2% in 2003, 14.1% to 15.3% in 2004, 12.7% (CDHP) to 14.6% in 2005, 11.9% to 14.4% in 2006, 10.7% to 12.7% in 2007, and 10.5% to 12.4% in 2008.

The past is a pretty good predictor of the future; over the past eight years cost have consistently increased more than 10% each year, with most increases well above that level. Whether we are at the bottom of the cycle or cost inflation rates will continue to decrease is unclear, but what is clear is that the inflation rate will head back up at some point in the next few years.

Back to the real world impact for not enacting health care reform:

• If nothing changes, the share of the nation's budget paid by the government will be greater than that paid through private insurers.
• 178,000 small business jobs will be lost by 2018 as a result of health care costs
• If employee contributions stay at their current level (about 30% of premiums), workers will be paying $9,000 per year, or $750 per month, toward their health coverage — not including deductible, copays, coinsurance, and services not covered
• General Motors' health insurance will add about $3,000 to the cost of each vehicle — if the automaker is still in business.
• In my hometown of Madison, Conn., municipal employee health insurance costs are paid for with property taxes; without reform the amount of tax revenue needed to pay those bills will double by 2016, forcing tax increases and/or significant service cuts
• More Americans will have to rely on the kindness of others for their health care, because 65 million of us will be without health insurance