Health Insurance: Past, Present and Future

Prepared for OACUBO Annual Meeting, April 2009

Dr. Melissa A. ThomassonAssociate Professor, Department of Economics, Miami University

Research Associate, National Bureau of Economic Research

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

Health Expenditures as share of GDP

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

0

500000

1000000

1500000

2000000

2500000

Health Expenditures (millions of $), Inflation-Ad-justed and Unadjusted

AdjustedUnadjusted

Why are costs rising?

Technology

More generous insurance coverage•Less restrictive managed care•More comprehensive coverage

Behavior and Demographics•Lifestyles•Aging

Technological Advance takes 2 forms:

• Treatment substitution– Replace CABG with angioplasty and stents

• Treatment expansion– Diagnose heart disease earlier, treat more people

before heart attacks.• Either case: costly, but benefits probably

outweigh costs• Insurance companies must ensure proper use

Changes in insurance

• Pushback in the late 1990s about strict managed care

• Return to discounted FFS (PPO, POS plans)– Not as effective at holding down costs

• Increasing coverage of pharmaceuticals• Lower consumer out-of-pocket expenses– Moral hazard: consumers spend more when it isn’t

their money

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

0

0.1

0.2

0.3

0.4

0.5

0.6

Private Health Insurance and Consumer Out of Pocket Payments ,

% of Total Health Expenditures, 1990-2007

Consumer OOP, % of totalHealth Insurance, % of total

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Hospital, Physician, and Pharmaceutical Ex-penditures as % of Total, 1990-2007

HospitalPhysicianPharm

Perc

ent o

f Tot

al E

xpen

ditu

res

Demographics and Behavior

• The good news: we are living longer.• The bad news: we are living longer.• Cost of medical care for the elderly is 3-5

times more expensive than for the non-elderly.

Lifestyle choices: Obesity and Smoking

• 20% of the population smokes; leading to high health care costs and productivity losses.• 66.3% of population is overweight (BMI > 25) or obese (BMI > 30); 34% is obese.• Overweight and obesity linked with

– Coronary heart disease– Type 2 diabetes– Cancers (endometrial, breast, and colon)– Hypertension (high blood pressure)– Dyslipidemia (for example, high total cholesterol or high levels of triglycerides) – Stroke – Liver and Gallbladder disease– Sleep apnea and respiratory problems– Osteoarthritis (a degeneration of cartilage and its underlying bone within a joint) – Gynecological problems (abnormal menses, infertility)

(Source: NIH, NHLBI Obesity Education Initiative. Clinical Guidelines on the Identification, Evaluation, and Treatment of Overweight and Obesity in Adults. Available online:http://www.nhlbi.nih.gov/guidelines/obesity/ob_gdlns.pdf (PDF-1.25Mb)

Obesity is expensive:

• $78.5 billion in medical spending attributable to overweight/obesity in 1998. (Finkelstein, Fiebelkorn, Wang 2003).

• Study of 11,000 Duke University workers found workers’ comp claims were much higher for overweight and obese workers

Medical Claims per 100 FT Employees(Duke University study of 11,000 employees)

Normal (BMI < 25) Overweight (BMI=25-29.9)

Mildly Obese (BMI 30-34.9)

Moderately Obese (BMI 35 - 39.9)

Severely Obese (BMI>40)

$7,503

$13,338

$19,661 $23,373

$51,091

Source: Ostbye,T., Dement, J., Krause, K. “Obesity and Workers’Compensation.” Archives of Internal Medicine, vol. 167, April 23, 2007.

Obesity Trends* Among U.S. AdultsBRFSS, 1990, 1998, 2007

No Data <10% 10%–14% 15%–19% 20%–24% 25%–29% ≥30%

Source: CDC Behavioral Risk Factor Surveillance System: http: //www.cdc.gov/brfss/

How to tame costs?

• There is evidence that a well-designed employee wellness program can:– Reduce sick

leave/absenteeism– Reduce WC claims– Lower health care costs

• Consider changes in health insurance eligibility and plan design

Health Insurance Eligibility

• Incentivize employees with spousal coverage to take-up spousal coverage (and drop their own).

• Utilize dependent eligibility audit to make sure ineligibles aren’t using benefits.

Offer Health Savings Account

• Combines high deductible health plan with a savings account that belongs to the employee.

• High deductibles empower employees to make cost-conscious decisions.

• Savings account means that money not spent can be saved:– Used for future health and long term care expenses.– Money belongs to the employee – they can take it

with them if they leave employment.

Important Details

• Preventive care covered 100%.• Money contributed on pre-tax basis (cannot be

combined with an FSA).• Only will work if consumers are knowledgeable

and have access to information:– What does an MRI cost? What are alternatives to

emergency care?• Once deductible is met, employees have no

incentive to reduce spending.

Do HSAs work?

• They will not solve the big problem: most health care spending is incurred by a small percentage of individuals with serious health conditions.

• They will help at the margin, and can be structured so as not to adversely affect employees.

Will the government save us?

• Employment-based system grew in the 1940s as employers sought to attract workers during wage freezes.

• Tax-advantaged form of compensation.• Insurance companies like to insure people

who are able to work because it reduces adverse selection.

• Less attractive when firms see 20-30% of their compensation rising at a rate greater than inflation.

Reform

• Two primary (and opposing issues): access and cost.

• Broad-based reform has never been politically appealing…until now.

• The state of the economy (coupled with high and rising costs) may make reform more palatable for the middle-class.

Obamacare will:• Require employers to offer

coverage or contribute to the cost covering workers.

• Establish a National Health Insurance Exchange to make coverage affordable:– private health insurance

options and new public plan • Very similar to plan in

Massachusetts

Commonwealth Health

• Employers with more than 50 employees– Must offer a Section 125 Plan– Could be required to pay the Free Rider Surcharge

if they do not (“high and unplanned”)– Must make “fair and reasonable” contribution to

health insurance or pay a “fair share contribution” of up to $295 per employee

• Inidviduals must be enrolled in a plan or pay tax penalties of up to $912

Not a panacea• Largely successful in reducing the number of

uninsured.• Threatened by rapidly rising costs.• What else can be done?– EMR (estimated savings of $100 billion)– Malpractice reform (eliminate “waste” of defensive

medicine of $210 billion).– Encourage evidence-based medicine.

• Much of what could be done would lower the level of costs but not the rate of growth.

• To really reduce costs, we have to give up technology and insta-access to care.