A Very Costly Health-Care Solution

The following article originally was published by the Rocky Mountain News:

SPEAKOUT: A very costly health-care solution

By Linda Gorman and Ari Armstrong
Wednesday, January 30, 2008

As the health-care debate unfolds, we hear a lot about cost-shifting, the idea that some people are charged more for health care to make up for the fact that others do not pay. Various legislators, journalists and activists tell us that the state should adopt the Blue Ribbon Commission on Health Care Reform’s recommendation to impose an individual mandate and force everyone to buy health insurance in order to end the unfairness of cost-shifting.

In fact, the commission’s recommendations likely will shift more costs onto those who already have insurance. Along with the individual mandate, the commission recommends large subsidies for those whom the commission considers too poor to purchase the insurance it says they should have.

Under the commission’s plan, people with health insurance would be taxed to subsidize health insurance for single people making as much as $40,000 a year, and families of four making as much as $82,600 a year. Many of these people pay for their own health care now, or have the assets to do so in an emergency.

The commission would also increase cost-shifting by forcing many more people into Medicaid.

Because Medicaid pays so little to providers, Medicaid as a whole generates far more uncompensated care and cost- shifting than the uninsured.

Those who advocate an individual mandate throw up all kinds of numbers to support the wild claims that the proposal would save everyone money. A Jan. 8 article from The Denver Post claims that “Coloradans who have insurance spend an extra $950 each year to cover the costs of those who show up at the hospital without insurance.”

The article attributes the number to state Rep. Anne McGihon, who said that the figure comes from Partnership for a Healthy Colorado. Partnership for a Healthy Colorado, in turn, says it got the figure from Families USA, which published a paper in 2005. That paper’s estimates were unable to accurately predict the percentage of uninsured residents in Colorado. The paper also grossly overestimated at least some costs of uncompensated care.

The Lewin Group, the modeling firm hired by the commission to collect information about Colorado, reported total Colorado expenses for the uninsured of about $1.4 billion. Of that amount, around 45 percent, or $627 million, was paid out-of-pocket by the uninsured themselves.

Private philanthropy covered $197 million. Another $341 million was paid by the Veterans Administration, workers compensation and various public programs.

The leftover uncompensated costs, the ones that are not paid by any identifiable source, total $239 million. Divide $239 million by Colorado’s 2.8 million insured residents, and the result is a maximum likely cost-shift of about $85 per insured individual per year.

To “fix” the problem of $239 million in cost-shifting, the commission proposes to increase health spending in Colorado by more than $3 billion, funded with an income tax increase of $800 million to $1.8 billion, new taxes on various politically incorrect types of food and drink, and an increase in the cigarette tax.

The sensible way to solve cost-shifting is to reduce health-care costs so that people fund their own health care, not to force people to buy insurance created by special-interest groups or to expand Medicaid. Professor Christopher Conover of Duke University estimates that 10 percent of annual health costs are caused by inefficient regulation. Results from experiments in consumer-directed health-care plans suggest that freeing consumers, providers and insurers can reduce costs by up to 30 percent.

The hostility of the commission to any plans like this was summed up in two votes that took place one after another on the same day. First the commission voted to recommend that the state legislature study single-payer health reform plans. Then it voted not to recommend that the legislature study consumer-directed reforms. While single-payer plans have failed around the world, consumer-directed reforms are succeeding wherever they’re given the chance.

Linda Gorman, a senior fellow with the Independence Institute, serves on the Blue Ribbon Commission for Health Care Reform. Ari Armstrong writes for FreeColorado.com.

March 8, 2008, Update: After reading Dave Kopel’s article about citations, it occurred to me that I had not provided the citations for the article above, so here they are, as provided by Linda. The first eight references refer to the “experiments in consumer-directed health-care plans.”

1. Willard G. Manning et al. June 1987. “Health Insurance and the Demand for medical Care: Evidence from a Randomized Experiment.” American Economic Review, 77,3, p. 251-275.
* The abstract says “A catastrophic insurance plan reduces expenditures 31 percent relative to zero out-of-pocket price.”
* In the body of the paper they predict expenditures and find that “Mean predicted expenditure in the free care plan is 46 percent higher than in the 95 percent plan…” (p. 260)
2. Agenda, FY 05-06 Joint Budget Committee Hearing, Department of Health Care Policy and Financing, State of Colorado, January 4 and 5 2005. In response to question 32 the Department wrote: Average monthly allocation per client, $3,925. Average monthly expenditure per clint:$3,131 per client. This works out to a monthly saving of 20%.
3. “Full placement feat: HSA helps Wendy’s grill health costs,” Employee Benefit News, June 1, 2006. Gale Infotrak version, record A146476601. Reports that the return on investment for HSA program is 221% due to the fact that health claims costs fell by 14% from 2004 to 2005 and are on track to be 4% less than last year.
4. Silicon Designs experiment in 2005/2006. Lower out-of-pocket costs from employees (4.9 %) Lower company cost, from about 17% of salaries paid to about 15 percent of salaries paid. John Cole. “Report on One Year of Experience with HSAs/HDHPs,” http://www.silicondesigns.com/hsa.pdf. Accessed March 8, 2008.
5. Humana, Inc. June 2005. “Health Care Consumers: Passive or Active? A Three-year Report on Humana’s Consumer Solution.” http://apps.humana.com/marketing/documents.asp?file=519272 accessed March 8, 2008. A report on a three year internal experiment with a consumer directed plan for Humana employees. Cost increases were lower than trend by roughly 15 percent over the two years.
6. Wharam et al. 2007. “Emergency Department Use and Subsequent Hospitalizations Among Members of a High-Deductible Health Plan,” JAMA, 297, 1093-1102. This article looks at ED visits and subsequent rehospitalizations among members of a health plan that switched a fraction of insureds from a traditional HMO to a high deductible plan in 2001-2005. It concludes that ED visits decreased in those switched to high deductible plan with reductions primarily in repeat visits for conditions that were not high severity and in the rate of hospitalizations. It does not conclude anything about spending clinical outcomes.
7. J. Hsu et al. 2006. “Cost-sharing for emergency care and unfavorable clinical events: findings from the safety and financial ramifications of ED copayments study,” Health Services Research, 41, 5, 1801-20. Another study of the effects of copayments on ED use that does not directly address expenditures but does find that ED visits decrease with no apparent health effects when payments range from $20 to $100.
8. John Mackey. October 2004. Whole Foods Market’s Consumer-Driven Health Plan. A speech delivered at the State Policy Network Annual Meeting. Transcript available at http://www.worldcongress.com/news/Mackey_Transcript.pdf.

Christopher J. Conover. October 4, 2004. Health Care Regulation a $169 Billion Hidden Tax, Policy Analysis No. 527, Cato Institute, Washington DC. http://www.cato.org/pubs/pas/pa527.pdf