The Fork in the Road for Health Care | Health and Fitness

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Milliman, the global actuarial and employee benefit consulting firm, released its annual Milliman Medical Index for 2012 on May 15. Based on a large, nationwide sample of families with employment-based health insurance, the index tracks the total cost of spending on health for a typical family of four under age 65 that is covered by an employment-based, preferred-provider health insurance plan.

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The virtue of this index lies in its inclusion of out-of-pocket spending in total health spending. Just tracking premiums for employment-based health can be misleading, if employers shift more and more of the cost of health care out of their benefit package into deductibles or coinsurance paid by employees, exclude certain benefits altogether or otherwise limit coverage.

For 2012, the nationwide average of the total health spending for a typical family of four was estimated by Milliman to be $20,728. On a regional basis, that average varies from a low of $18,365 in Phoenix to $24,965 in Miami.

A just-released study by the Health Care Cost Institute shows that much of these spending increases are the result of rising prices and not of rising use. Reporting on the study, Julie Appleby of Kaiser Health News notes,

Higher prices charged by hospitals, outpatient centers and other providers drove up health-care spending at double the rate of inflation during the economic downturn ? even as patients consumed less medical care over all.

The chart below shows the path of the Milliman Medical Index since the year 2000. Although the increase of ?only? 6.9 percent between 2011 and 2012 was the lowest since Milliman started publishing the index 12 years ago, a 6.9 percent increase is nevertheless alarming in a period when gross domestic product per capita and the gross wages of employees rise at much lower rates.

Milliman

On average, according to Milliman, employers contributed 58 percent, or $12,144, to the total cost of $20,728, through contributions to their employees? health insurance premiums. The family itself contributed another 25 percent, or $5,114, toward the premium via direct payroll deduction. In addition, it spent 17 percent, or $3,470, out of pocket for health care.

Although the family?s contribution of $8,584 is by no means trivial, it is less than half of the total average cost of a family?s health care cost. Most employees probably believe that ?the company? ? that is, its owners ? absorbs the other 58 percent of the family?s total health spending.

Economists have long argued that this is an illusion ? that over the longer haul the bulk and possibly all of the ostensibly employer-paid health insurance premiums gets indirectly shifted back into the employee?s paycheck through lower increases in take-home pay.

To the extent that there is a limit to this cost shift ? e.g., for low-wage or unionized employees ? the backward shift takes the form of reduced employment or, alternatively, the employer?s decision not to offer employees health insurance at all.

This point on backward cost-shifting was driven home recently in a paper in Health Affairs by David Auerbach and Arthur Kellerman. The authors present data showing that a decade of health care cost growth in employer-based health insurance ?has wiped out real income gains for an average U.S. family? from 1999 through 2009. Health care has come to chew up American household budgets like Pacman.

It is illuminating as well as alarming to juxtapose the Milliman data with data on the distribution of money income among households in the United States. The next chart exhibits that distribution for 2010, taken from the Annual Social and Economic Supplement of the Current Population Survey of the Bureau of the Census.

Census Bureau

As the median in that chart shows, in 2010 about 50 percent of American households had a money income of roughly $50,000 or less (the green bars). Only 10 percent had a money income of $140,000 or more. Just 3.9 percent had a household money income of $200,000 or more.

Americans are fond of the idea that individuals and families should be self-reliant. But a question confronting the American public and their political representatives is how they imagine households with money income of, say, $30,000 to $50,000 will tolerate the ever-larger bites the health care Pacman seeks to take out of their budgets.

I see two answers at the crossroads at which we find ourselves.

First, if we wish to continue with even the semblance of the idea that our health care system offers rich and poor patients roughly the same kind of health care experience in case of illness ? that is, that we do not ration health care by income class in this country ? then we will have to enlist government somehow to impose on total health spending an annual budget that cannot grow faster than ability to pay ? say, the rate of growth of gross domestic product per capita.

That the private sector might accomplish this on its own is belied by the available data, although hope in that direction springs eternal.

Alternatively, on the second fork in the road, we can segregate health care into tiers, by income class, as follows:

For higher-income groups we might have self-financed, boutique medicine in which the sky is the limit. Ideally that tier should not enjoy the huge public subsidies toward health care that now are channeled to higher-income groups through the tax preference accorded employment-based health insurance.

For the broad middle class, we would have a wide set of arrangements characterized by ?reference pricing? all around, or health insurance policies with very high deductibles and coinsurance. Either way, consumers would have more ?skin in the game,? in health policy jargon.

By ?reference pricing? is meant an insurance regime under which, for every type of health care (and not only for pharmaceuticals), the insurer would reimburse the insured only at the prices of low-cost producers in a market area, leaving the insured to pay out of pocket the entire difference between that low-cost price (the reference price) and whatever a particular higher-priced provider might charge. In this tier there might emerge, over time, a rationing of health care by income class.

Finally, for publicly insured low-income families, including the elderly, there would emerge a separate, purely public health care delivery system that can be tightly budgeted. There would be budgeted public clinics for ambulatory care and budgeted public hospitals for inpatient care ? an analog of the Veterans Department health system. In such a tier, politicians could effectively ration health care without ever acknowledging that that was what they were doing.

The baby boom generation knows these are the alternatives but lacks the temerity to discuss them openly. Can anyone imagine a baby boom politician openly proposing to ration health care by income class?

My students will not have that luxury. At some point they will have to catch and deal with the can that their parents have kicked down the road for decades. They will have to make moral choices, for example, on the distribution of very high cost medical interventions.

Article source: http://economix.blogs.nytimes.com/2012/05/25/the-fork-in-the-road-for-health-care/

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