The Healthcare Reform Act

Jeff Kubik, an attorney with an MBA from the University of Chicago, brings more than 30 years of experience to his company, Employee Benefit Risk Management (EBRM). EBRM has first-hand knowledge of what it takes to process claims and manage risk in the individual medical and small-group markets.

By Jeff Kubik, JD, MBA

health3For those who have watched President Obama’s news conferences and town hall meetings, it should be apparent that Medicare and Medicaid are bankrupting the country and health care reform is on the horizon. As an executive who brings more than 25 years in the health care industry to this commentary, what is most confusing to me is the President’s plan to fix the health care problem by adding additional Medicare-type programs. As you could tell from the President’s commentary, the health care topic can be extremely confusing, so I’m hoping that my perspective might enable us to reduce this conundrum to “simple” terms. So here goes.

My discussion begins with a primer on how private health care works, starting with a simplified discussion of small group health insurance pricing. Small business is an important entrepreneurial segment of our economy that accounts for 70% of jobs and job growth, according to our current Administration.

For every dollar that a small group pays to a private health insurer as premium, a minimum of 80 cents is spent on claims with the other 20 cents spent on administrative costs, marketing or distribution costs, premium tax and profit (AMPP). Any discussion revolving around AMPP is silly and takes focus away from claims costs, which is the true cost issue in health care. In other words, if the government could reduce AMPP by 15% (which they can’t), it would reduce premiums by approximately 3%, which represents a very minimal cost in the total equation.

The real culprit in health care costs is the cost of claims. Claim costs are why we have PPOs, HMOs, HSAs and all options in the health care alphabet soup. All of these programs are a reflection of the numerous attempts to control this huge cost of claims. However, this claim cost is also where we get the most “bang” for our health care savings dollar. In short, for health care, claims costs are where the rubber hits the road. Focusing anywhere else is simply noise.

How does the government control this huge cost of claims? Very simply: they fix the price the provider of service can charge. In fact, both Medicare and Medicaid now pay providers less than the cost of care. Not less than the market price but less than the cost. How do these providers stay in business? They charge the private payers more to make up for the loss on the government programs. This is called cost shifting and it has been going on in health care as far back as I can remember. Furthermore, the number of procedures done on private pay patients can increase in an effort to overcome the underpaymenta from government programs. (Talk about unintended consequences!)

If you want to substantially reduce the premium for private pay insurance, get rid of government programs. Premiums would drop like rocks because the providers could return to an honest, competitive model of charging everyone market prices. Again folks, it’s true if you are unhappy about the cost of your private pay insurance you should just get the government out of the equation and your rates will go down.

Conversely, if we expand government programs, private pay premiums will increase at a much faster rate due to this hidden tax called cost shifting. Taken to the extreme, if we went to a fully government-sponsored program in the United States, there would be no private payers to shift the cost to, so the United States would experience what all other nationalized health care countries have experienced: The unintended, unavoidable consequence of rationing care. Anyone who has balanced a household budget can attest to this rationing concept.

This Administration identified runaway cost of government-sponsored health care as the problem but has offered the clearly contradictory solution of expanding government-sponsored health care. Why? The answer: politics. Currently our politicians are not as interested in fixing health care as they are interested in garnering votes. This is not new to American politics and is the reason why we are in this position in the first place.

The fact is that a horrible decision was made in 1965 when it was decided that Medicare would be an entitlement for all that would be paid for by an additional payroll tax. Seemingly good intentioned at the time; however, in hindsight the cost numbers never added up. This country cannot afford to cover the cost of care for those people who can afford it themselves. Healthcare entitlements are simply unaffordable.

We need to have a new direction in politics that focuses on taking care of the health care needs of as many of our citizens as possible that do not have the means to take care of themselves. We need to have the political resolve to stop taking care of the people who do have the means, regardless of the consequences in terms of votes. Simply put, we need to take care of those who cannot take care of themselves, not those who will not take care of themselves.

President Obama has made it very clear in his television appearances that Medicare and Medicaid are the problem and that the cost is unsustainable. “Medicare and Medicaid are the single biggest drivers of the federal deficit … and will consume the entire federal budget.” The big question is why the politicians are not addressing this problem but instead recommending an expansion in this admittedly unsustainable program.

Current estimates show federal health care liability is seven times greater than Social Security. (How many young people believe they will receive Social Security benefits in their lifetime?!)

Let us use common sense to repair the misguided entitlement programs of the past, and not apply politics to compound them.

We need to get our best and brightest to figure out how to stop this government health care menace. Perhaps one solution is to pick a Medicare entitlement cutoff age, maybe 50 years old. All people under the age of 50 will not be automatically entitled. When these people reach retirement age, a true means test is then applied to determine if they can or can’t afford health care.

All health care is local, so all heath care plans should be local. Funding for those who can’t afford it might be an appropriate debate over federal or local participation. There should be no debate that health care delivery is local.

Now, a couple of clarifying points: some of the current confusion is fostered by political rhetoric confusing access to care with being insured. The United States does not have an access to care problem. In fact, it is illegal to deny emergency treatment in our hospitals.

However, there are many people who do not maintain health insurance. Based on age and income statistics, the majority of this uninsured number have access to a health plan but chose not to take it. These people know they have to buy auto insurance before the crash, homeowners insurance before the fire, but choose to wait until they are sick to cover themselves for health problems.

I suspect many of these uninsured are concerned about the cost. The fastest way to reduce private pay cost is to quit shifting the unsustainable public entitlement cost to the private sector. Remember all parties agree that Medicare and Medicaid are broke. Private health care is still thriving even when faced with having to pay artificially inflated claims costs to subsidize these financially failing government programs.

Finally, a few non-confusing, affordable solutions to help with the onerous claims cost problem:

1. Medical Malpractice – Instead of using a patient’s lack of satisfaction with the outcome of their medical procedure as the basis of a claim, have experts determine what gross negligence is in the medical profession and establish that as the legal threshold. Then sponsor “Loser Pays” for medical malpractice actions.

2. Advertising of Drugs – Prohibit drug companies from advertising direct to consumers as a mechanism to increase market share. Ethical drugs should be advertised only to medical professionals rather than to significantly less informed consumers.

Public health care is the problem. Let’s quit playing politics and get the true health care problem fixed.

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