Health Care, and how to reform it.

This is my attempt to pull together and digest a great deal of information. Where I analyze specific plans below, I may not have certain details correct, because I’m looking at writeups that may not convey exact details, or I may misinterpret what I read. I provide links so you can – if interested – glean details for yourself. I’m not trying to prove any specific point, but to present what I see as out there. You will easily see why no politician seems to understand what’s needed.  This is updated in 2015.

The problem is enormous.

In May 2011, I posted my opinion on What’s wrong with American Health Care? The biggest problem? We can’t afford it.  

To obtain United States Health Care, total costs in 2013, go to http://www.cms.gov, find CMS Fast Facts, and download the pdf..

In 2009, a staggering $2.5 trillion was spent on health care services and products, over 60 percent of which purchased hospital care, physician and clinical services, and retail prescription drugs. Keep this in mind: health care costs are too great to be totally paid by the government. At best, the government can only furnish a safety net. Various forms of insurance, including Medicare/Medicaid, covered about 71% of the total spent, patients paid about 12% out of their own pockets, and the rest was paid by “Other Third Party Payers and Programs” – see the chart for details.

Consider the incredibly high average estimated lifetime cost of health care. According to a study done in 2004, “per capita lifetime expenditure is $316,600, a third higher for females ($361,200) than males ($268,700). Two-fifths of this difference owes to women’s longer life expectancy. Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years.” Health Services Research Study (Note – I find these astronomical numbers difficult to believe. I haven’t spent nearly that much in my lifetime, and I don’t know anyone who has, for certain. Yet, many people do depart this world as a result of catastrophic illness that rings up enormous hospital and doctor bills.)

In 2011 dollars, the numbers could be even worse: ($406,940 average; $345,372 males; $464,2657 females) — this applies the factor of .778 taken from the tables at Consumer price index tables and shows the terrific decline in dollar value from 2000 to 2011. Assuming these estimates are in the ballpark, no conceivable health care system could be provided by the government to cover the entire population.

Remember, as a person advances through life, medical costs rise – due to many factors, including the advance of technology – with higher priced equipment. New technology offsets some otherwise increasing costs, by curing conditions not previously curable. Thus these estimates are suspect, and no doubt it’s impossible to know how much a new-born child will pay in her lifetime if she lives to a given age x. But the study shows such costs are likely to be very large.

According to the study, one-sixth of lifetime costs occur to about age 40; one third 40-65; and about half over 65. Most of the latter occurs in the last 2 years of life. A combination of health insurance with copays and deductibles, Medicaid, or free services seems to serve up to about 65, after which Medicare takes over. Health insurance fails for many, because the young don’t think they need it, and It’s often too expensive for the old. This is the reason Congress mandated in Obamacare that everyone (all ages up to retirement) will have to obtain health care insurance – so that the premiums paid in would cover the expenditures.

From wikipedia:

[There are generally five primary methods of funding health care systems:

  1. general taxation to the state, county or municipality
  2. social health insurance
  3. voluntary or private health insurance
  4. out-of-pocket payments
  5. donations to health charities]

Examples of the above: Medicare is paid for out of the general revenue, plus premiums for Part B which are paid by recipients (theoretically.) Social health insurance – Medicare, Medicaid, Obamacare.

Medicare came into being in 1965 as part of a Social Security law signed by Lyndon Johnson. Before then, elderly people were mostly on their own to pay for health care. Without doing the research to prove what I’m saying here, I speculate that many people had shorter lives before Medicare, because they couldn’t afford the costly operations and hospital stays necessary to control their ailments. Medicaid was created by the same act. Thus before 1965, the poor and elderly (often one and the same) relied on charity to pay for their care – and charity was probably rare.

Because it’s difficult to tax the poor and elderly, the government pays for Medicare/Medicaid mostly out of general funds – i.e., the taxpayers bear the costs.

Medicaid is provided by states to those who can not afford to pay for health care. It is supported by block grants and contributions from the states, averaging about 16.8 % of state budgets. Federal regulations guide the states in designing and administering the funds, but there is some variability from state to state. Poverty alone is not sufficient to qualify for Medicaid assistance, which focuses on children, pregnant women, and the disabled, as well as those in nursing homes who cannot pay on their own. [from Wikipedia]—> In 2008, Medicaid provided health coverage and services to approximately 49 million low-income children, pregnant women, elderly people, and disabled people. Federal Medicaid outlays were estimated to be $204 billion in 2008. Medicaid payments currently assist nearly 60 percent of all nursing home residents and about 37 percent of all childbirths in the United States. The federal government pays on average 57 percent of Medicaid expenses. <–[from Wikipedia]

Note that Medicare, which seems to work, is almost totally paid for by the federal government. The Part B premiums an elderly person pays are deducted from Social Security, which is paid out of general revenue, supported by FICA tax — a payroll tax on all wages up to an annual limit per person. In essence, this is funny money – all coming from the same source. The only exception to this is that a few people may not have sufficient Social Security income to pay for the Medicare Part B premiums, and thus might have to be paid out of the person’s other income or savings. Also, doctors are shortchanged by Medicare; they have to raise their general rates to make up the difference. Bureaucrats constantly try to decrease the amounts doctors are paid.

Most currently proposed health care reforms retain Medicare in some form. Obamacare does as well. It’s important to note that health care reform usually includes but is not limited to Medicare/Medicaid reform.

Other federal government-supported health care:

There are several other hugely expensive programs supported by the federal government, mostly financed from the general revenue fund:

FEHB is the program provided for active and retired federal civilian workers. It provides multiple insurance competing plans which the insured selects each year. The amount the government pays varies by plan, up to 72% of the premium, and the worker pays the rest. In 2010, about 250 programs were available for selection. Competition among plans is said to have made FEHB the most efficient of federal health care programs, outperforming Medicare. About 4 million employees are covered under this program, along with their dependents for a total of about 8 million insured. The annual budget is about 40 billion dollars.

The Indian Health Service, administered by the Bureau of Indian Affairs, provides health care to American Indian and Native Alaskan people. children.The IHS employs approximately 2,700 nurses, 900 physicians, 400 engineers, 500 pharmacists, and 300 dentists, as well as other health professionals totaling more than 15,000 in all. The IHS currently provides health services to approximately 1.8 million of the 3.3 million American Indians and Alaska Natives who belong to more than 557 federally recognized tribes in 35 states. The agency’s annual budget is about $3.6 billion.

A Department of Defense activity which provides medical care to active and retired military personnel and their dependents. The annual budget is about 42 billion dollars.

A program administered by the U.S. Department of Health and Human Services that provides matching funds to states for health insurance to families with children.The program was designed with the intent to cover uninsured children in families with incomes that are modest but too high to qualify for Medicaid. Annual cost is about 12 billion dollars.

Veteran’s Health Administration

A network of hospitals, clinics, doctors, and other medical personnel which provides for veterans retired from military service, with military-related disabilities, or Purple Heart awardees – with approximately one million eligible veterans. The VHA budget is currently about 50 billion dollars annually.

Principles of health care insurance:

Recently, certain politicians seem to have forgotten how health insurance works, so before proceeding, I’d like to reiterate some basic principles that insurance must follow to remain viable. Health care insurance providers intend to make a profit– which means, they try to take in more money in premiums than they pay out in benefits. They never intend to pay for all medical costs; instead, they structure a reasonable co-payment and deductibles combination to reduce benefits paid. The purchaser’s out of pocket costs are reduced by insurance but never eliminated. They offer cafeteria style plans, with additional fees for each option chosen. For example, if a purchaser doesn’t think she needs mental illness coverage, she doesn’t have to pay for it. A single man might not choose to have coverage for giving birth or having an abortion. A patient can choose a higher deductible in exchange for lower premiums, thus paying more out of pocket in the event of a serious medical event but perhaps saving money in the long term.

President Obama’s Affordable Health Care Act seems to be intended to squeeze private health care insurance providers out of existence. The result would be a government insurance plan. Bureaucrats in total control!

Current leading health care reform proposals:

  • The Affordable Health Care Act (colloquially referred to as Obamacare).

Obamacare consists of a combination of health care insurance, premium support for the poor, and Medicare/Medicaid. As a bill, it is a 2000 page monstrosity consisting of every meddling idea ever conceived of, including tax increases, much new bureaucracy, stringent regulations on insurance providers, a backup government insurance option intended to become the only one (government sole provider), and a mandate that all persons carry insurance. It is doubtful that more than a few people have ever fully read the legislation, and of those who have, none may fully understand it.

Obamacare violates sound insurance principles. It takes the approach of “one size fits all” insurance – a requirement imposed on all insurance providers. This unfairly increases the costs for every payer. Also, the Obamacare requirement that insurance must cover pre-existing conditions could force insurance providers to drastically raise rates or go out of business. Without the mandated insurance, nothing stops a person from waiting until she becomes ill before buying insurance. As an example, the provider could be stuck with paying out $100,000 while collecting only a much smaller amount from the patient until the patient dies or is cured – after which the patient drops out.

As a person ages and reaches the age of eligibility for Medicare, a modified Medicare takes over – new bureaucratic Obamacare regulations which essentially ration Medicare services from that point on.

The line between Obamacare and Medicaid is very fuzzy. Obamacare specifies coverage for the poor, but still supports Medicaid.

  • The President’s Fiscal Commission Report.

In spring of 2010, Alan Simpson chaired a bi-partisan commission to suggest reforms, and they reported in December of that year. President Obama totally ignored their recommendations, which would have made some modest incremental improvements to health care, medicare, and the budget. The report was referred to as The Moment of Truth.

  • Congressman Paul Ryan’s Roadmap for America’s Future.

A much more aggressive plan of reform (compared to Simpson’s) was released by Paul Ryan in 2010. It consisted of reforms to Medicare/Medicaid as well as a general plan for health care reform. I explain and compare the Simpson and Ryan plans in my May 2010 post: Health Care: Simpson vs. Ryan. The Ryan plan by itself may be accessed at Roadmap for America’s Future. Strangely, there is no mention of means testing in the plan, although I believe it may be included. It strikes me as unworkable in the area of health care.

Analysis of this plan is difficult with available data sources. However, it’s possible to do a very rough ballpark, based on numbers for 2008. About 67% of the approximately 300 million people, or 205 million, would have been covered and eligible for Roadmap credits. The other 33% would come under Medicare. Thus, Ryan’s tax credits would be in addition to Medicare, if I read it correctly (by no means certain that I am.)

Take 67% of the 142 million tax returns filed in 2008, assume an average subsidy of $3200 (a swag) and you come up with a federal subsidy of 95 million times $3200, or 294 billion dollars. This is a big addition to the health care budget. I hope Ryan took this into consideration. Remember, it’s part of a total plan including tax reform, so I assume this is not an enormous oversight.

  • The Heritage Foundation Plan.

The American Heritage Foundation Plan is a package of reforms which, taken together, have been scored as significant improvements in health care. It is a premium-support plan. Like the Ryan Plan, it consists of subsidies for individuals and families for the purpose of purchasing private health insurance or a federal fee-for-service insurance. Subsidy amounts are a bit lower, and the HF plan specifically mentions means testing – thus it is insurance for the lower-income group. Again, private insurance firms competing with each other are the hoped-for driver of lower costs to the patients.

Heritage Foundation Plan

Medicare is retained and reformed under the HF plan. It becomes a single offering (Parts A, B, C, D combined) and adds catastrophic coverage. It will have most features of the current Federal Employees Health Benefit Plan, FEHB, in that there will be a government contribution to allow the employee to purchase the government Medicare fee-for-service plan or a private plan.

General health care reforms in the HF plan (excluding Medicare) also involve premium support for lower-income households, so they can afford private insurance. It ends the existing tax credit for purchasing insurance, and adds the value of employer-provided health insurance to the gross pay of an individual for tax purposes. In exchange, it provides a non-refundable annual tax credit of $2000 for an individual, $3500 per family which can be used to pay for insurance premiums. An enhanced federal subsidy will be given to extreme low income households with incomes less than 200% of the federal poverty level, to ensure that they will be fully covered.

Medicaid block grants may continue to the states, but the federal contribution will be capped. The line between Medicaid and general health care subsidies seems somewhat hard to define.

Applying the same “analysis” to Heritage as I gave for the Ryan plan, the cost would be even larger, and again it is an add-on to Medicare. I don’t see where the costs are covered, but as in Ryan it’s part of a total plan.

  • Herman Cain’s recommendation: The Chilean Model.

As of this date (November, 2011) Cain’s website has no specific suggestions for health care, outside of repealing Obamacare. However, during debates he has mentioned the “Chilean Model” in relation to both Social Security and Health Care, and stated his plan (if there was one) would be copied from Chile – a plan he praises. Here’s the Wiki article on health care in Chile. It seems to describe only private health insurance. I wonder whether Herman has actually read this, because some of the details are a bit goofy:

Features:

  1. No primary health care physician – most specialize. No referrals are needed.
  2. Patients are treated in order of arrival. All arrive about the same time in the morning.
  3. Before visiting the doctor, a patient needs to visit his health insurance office and purchase a voucher (“bono” in Spanish) – usually by paying the co-pay amount. According to Wiki, those who show up without a bono may be charged more, and must pay in cash – a doctor visit is cited at 15,000 pesos, or currently about $30.00 in dollars.
  4. If the doctor orders a test, he writes a prescription which the patient takes to the insurance office – the patient again buys a bono in order to pay for the test.
  5. After the test, the patient picks up his results and then must go see your doctor again to have them interpreted – this is another visit requiring another bono. There is no communication back to the doctor about the results.

Here’s another Wiki article: Health Care in Chile Chile has maintained a dual health care system under which its citizens can voluntarily opt for coverage by either the public National Health Insurance Fund (FONASA) or any of the country’s private health insurance companies (Isapre). All workers and pensioners are required to pay 7% of their income for insurance (except the poorest workers). Beneficiaries may seek attention at public or private health facilities. When choosing public health facilities, the cost is free for people older than 60, people without income or with disabilities and for workers earning less that one minimum wage (MW), or less that 1.46 MW if they have three or more dependents. Workers who choose not to join an Isapres, are automatically covered by Fonasa. Fonasa also covers unemployed people receiving unemployment benefits, uninsured pregnant women, insured worker’s dependant family, people with mental or physical disabilities and people who are considered poor or indigent.

Private insurance participants pay on average 9.2% of their income toward health insurance. The additional amount paid over the required 7% is voluntary and is paid to increase the benefits available. Over 50% of the public sector health budget is raised through taxation — this goes to the public social security system and the Fonasa plans to help cover expenses. Isapres cover all expenses using only the contributions of members.

To Summarize the Chilean model of health care: It isn’t significantly different than America’s current system, in that it has defined benefits and allows for private insurance, however coverage is mandatory and taxes are withheld from earnings. I believe that what Cain compared the Chilean model to was Social Security, and either I misinterpreted what he said, he misspoke, or he didn’t know the difference at that time. (In Chile, the entire Social Security tax is placed into a private investment account owned by the individual.)

  • Newt Gingrich’s Health Care Page (in his 21st Century Contract with America).

Newt emphasizes patient choice between federal and competing private plans, electronic records to track patient care and detect fraud, knowledge of medical fees and performance so that patients can make an intelligent choice, stopping junk lawsuits, allowing insurers to compete across state lines, reforming the food and drug administration to speed new drugs to the market, and supporting medical research. He would block grant medicaid to the states while giving them more flexibility. He would also support the option of health savings accounts. He does not strongly favor premium support plans such as Ryan’s and Heritage Foundation.

He doesn’t want to force Americans into a new plan; rather, he would offer optional new plans which they would hopefully prefer and migrate to on their own. He would retain the old plans as long as needed.

He favors state high-risk pools to cover the very ill who can’t pay and have no insurance.

In 2003, Newt founded the Center for Health Transformation to develop free market healthcare reforms to foster a 21st Century System of health and healthcare that is centered on the individual, prevention focused, knowledge intense and innovation rich. Newt also served as the Co-Chairman of the National Commission for Quality Long-term Care and the independent congressional Alzheimer’s Disease Study Group. The Center for Health Transformation

A comparison of the plans:

Plan Feature: Obama
care
Ryan plan Heritage plan Chilean model Gingrich plan
Can select from several insurance plans (competition) Y (1) Y Y Y Y
Means test – benefits reduced or zero after upper income limit N N Y Y N
Mandate – all must purchase insurance Y N N Y N
Medicare included in plan N N (5) N Y ??
Medicare reform included in plan N y y ?? ??
Medicaid replaced by plan N N Y (7) ?? N
Insurance premium support for poor included in the plan Y Y Y Y Y
Insurance premium support for everyone included in the plan N Y y N ??
Private plans must insure all possible ills (one size fits all) Y N N N N
Insured may opt out of government plan Y (3) Y Y Y Y
Insurance paid for by govt. supplied deductions/credits N y y N Y
Plan part of total reform (incl. tax reform) N Y Y Y ??
Govt. limits doctor/hospital reimbursement Y N N ?? N
Plan includes medical savings accounts Y (4) N N ?? Y
Plan requires a tax increase Y N ?? ?? ??
Insurance must accept pre-existing conditions Y (6) ?? ?? Y Y (8)
Health providers must publish rates and risks for everyone Y Y Y Y Y
Reduces malpractice litigation N Y Y ?? Y

Source: William Dameron.

?? means insufficient information disclosed in plan description.

Notes:

  1. However, there is a competing government plan designed to drive away private competition.
  2. Patient may be fined if no insurance is purchased.
  3. Patient must purchase insurance, but a govt. plan may be offered at some point
  4. These are called FSA – set up by employer.
  5. Medicaid supplements the standard plan with extra premium support as needed. Medicare revised, includes optional medical savings accounts.
  6. Through high-risk insurance pools.
  7. Mostly. Capped allotments to states cover the rest. The description is fuzzy.
  8. High risk pool.

My conclusions:

I suggest that health care reform should follow these principles:

  • There should be means testing. The objective should be to bring the best possible health care to the people who otherwise can’t entirely afford it, at an affordable cost to the patient and to state/federal government. (In other words, it should function as a safety net, not as insurance. Those who can afford to buy their own insurance should not be covered.)
  • The plan should allow for changing circumstances of patients. You may not be able to afford care this year which you could have afforded last year, and vice versa.
  • Third party interest should be eliminated or reduced. The patient should have a financial interest in keeping cost low. There should always be a co-pay percentage the patient has to pay, and insurors should be able to set deductibles.
  • The insurable should have a choice of as many competing plans as possible, and should be able to choose features he needs and opt out of those he/she doesn’t. No “one size fits all” plans should be mandated.
  • Government liability should be capped. If the government goes bankrupt or is forced to borrow or print money to support health care, serious economic consequences may result.
  • Health providers should be free to set their own rates. In return, insured should be able to know their rates and results in a public database.
  • Frivolous or predatory medical malpractice suits should be greatly reduced. Awards should be limited, and the loser of the suit should pay all costs.
  • Lawsuits against pharmaceutical companies drive up costs for everyone. Patients should be given the best knowledge of risks in taking drugs, should agree to accept them before receiving their prescriptions, and thereafter hold the pharmaceutical company to be free of fault if something goes wrong. Unless outright fraud can be proven, there should be no litigation against pharmaceutical companies.
  • The best means of support by government to the insured is a non-refundable tax credit which can only be used to pay the insurance company.
  • Health care should be removed from the federal budget and kept separate. It should be supported by it’s own revenue stream, to the maximum extent possible. I suggest a 2 to 3 % sales tax to support it, with the remainder supported from the treasury.
  • The boundaries between general health care, Medicare, and Medicaid should be made specific. It would be desirable to have one plan cover every participant. People should always be able to opt out and be responsible for their own health.

Bill.

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