Healthcare: Transparently opaque

By Jeremy Lemer and Ed Crooks - Financial Times

Published: February 21 2011 21:45 | Last updated: February 21 2011 21:45

For more than four decades, Jim Henderson has worked at Dynamic Sales, his family’s construction and industrial supplies business in St Louis, Missouri – and every year he has seen the cost of buying health insurance for his six employees increase. The premiums often rise by double-digit percentages. In one memorable year, 2003, they went up 25 per cent.

“We cannot pass those cost increases on to our customers,” he says. “The company can either take the hit to profits, or pass the extra cost on to our employees, or raise their deductibles so they have to pay more if they need treatment.”

Like many small business owners, Mr Henderson is sceptical about government interventions in healthcare, including the sweeping Patient Protection and Affordable Care Act passed by Congress last year. He argues that the law, known to its enemies as “ObamaCare”, takes “away the freedom of the business owner”.

Ferocious battles are being waged over the act in the courts and in Congress. A centrepiece of President Barack Obama’s legislative programme during his first two years in office, it was pitched as a way both to expand access to coverage to 32m uninsured Americans and to control spiralling cost inflation in a nation that spent a higher share of gross domestic product on healthcare than any other developed country in 2008.

For the Republicans, it has become a touchstone issue. Since winning control of the House of Representatives in November’s midterm elections, they have made the repeal of the “job killing” act a priority.

The Obama administration, meanwhile, argues that its plan will benefit corporate America. “The bottom line for businesses is clear: the Affordable Care Act will save money and create jobs,” says Kathleen Sebelius, secretary for health and human services.

But while many of the promised savings are pushed into the future, or depend on details yet to be tied down, the costs are already hitting businesses still struggling in the aftermath of the recession.

On both sides of the debate, however, there is agreement that healthcare needs reform. Above all, business and economists are worried about the ever-growing cost of the system, which they say holds down wages, encourages wasteful spending and threatens the long-term stability of public finances. “We need to look at why we spend as much,” Bill Gates, the founder of Microsoft, the computer software company, said in a recent television interview. “We need to look at why we have such huge costs.”

Healthcare spending has been growing faster than the economy as a whole for decades. On recent trends, it will rise from one-sixth of GDP in 2009 to nearly one-third by 2035 and almost half by 2080, according to the Congressional Budget Office.

In spite of this, the US is in general no healthier than other countries. The 17.3 per cent of GDP that it spends on healthcare compares with 10.4 per cent in Canada and 8.7 per cent in the UK, but average life expectancy at birth is lower than in either of those countries. “If we thought every dollar spent on healthcare was really going to improve our health, then we would be happy to spend more,” says Katherine Baicker, a health economist at Harvard university. “The problem is that we do not.”

In a 2007 report, McKinsey Global Institute showed the US paid more than any other developed country for virtually every aspect of care, from staff to drugs to overheads and administration. Those higher costs, it argued, stemmed from a system-wide failure to offer patients an incentive to curb demand, or providers to restrict supply.

Proponents of the act argue that the reforms do exactly that. For example, it establishes an independent payment advisory board to find ways to hold down the growth in public healthcare spending for the over 65s, which is set to take off as baby-boomers reach retirement age. If Congress fails to adopt alternative measures that achieve this aim, the board’s ideas take automatic effect.

Given the size of public spending on healthcare for the elderly and poor – almost half the total outlay – administration officials argue that the board will have a powerful effect on industry norms, and encourage more efficient care. The act also offers incentives for doctors and hospitals to form accountable care organisations: groups that will be paid more if they keep costs down while meeting quality standards

To tackle inefficiencies in private insurance, which covers healthcare for most citizens – about 150m – the act establishes state health insurance exchanges. Due to be established by 2014, they are supposed to help small businesses and individuals to pool together to cut administrative costs and purchase good quality and affordable coverage. However, the detailed structure of the exchanges is undecided, and they have never been tried on such a large scale. Where they have been used at state level, their record has been mixed; they have failed in Texas, Florida, North Carolina and California.

Cappy McGarr, chairman of the Texas exchange that collapsed in the 1990s, argues stringent regulation will be needed to make them work. For example, rigid rules about the insurance that companies can offer could offset any savings for business, warns Beth Umland, director of health and benefits research at Mercer, the consultancy.

Mistrust of the act’s presumed benefits has fuelled business opposition. Groups such as the National Federation of Independent Business, the US Chamber of Commerce and the National Association of Manufacturers have joined the call for repeal. Amanda Austin of the NFIB says: “The act has been presented as a solution for small employers but we don’t see it as doing anything to help us.”

The list of complaints is long. Business bodies object to the new taxes to help cover the cost of the reforms, to the time needed to understand the 2,900-page act, and to the lack of clarity on details of its implementation. Many take issue with what they call the “unofficial employer mandate”, which can mean a penalty of up to $3,000 per head for any company with 50 or more employees that does not offer government-approved insurance.

At the core of the opposition, though, is fear that reform will drive the cost of healthcare even higher. Critics say that measures to improve access, by forcing insurers to cover people they would previously have excluded or offer more generous benefits, will raise costs for companies that can ill afford it.

Pat Felder, who runs a car parts distributor in Baton Rouge, Louisiana, says her employee insurance premiums went up by 17 per cent last year, and she has been warned to expect a 20 per cent-plus rise this year. She says the insurance companies blame the rise on the new legislation.

Larger employers are not by and large experiencing such steep rises but they still expect costs to jump by about 9 per cent in 2011, of which roughly two percentage points will come directly from the reform package, according to a survey by Mercer.

Even if average increases arising from the act are relatively modest, many businesses feel an opportunity has been missed. “Ultimately, the greatest impact may lie in what the legislation fails to do: control costs,” says the NAM.

Critics are offering alternative proposals. Republicans in Congress want to curb medical litigation, which encourages unnecessary tests and procedures to avoid lawsuits. Many businesses favour abolishing regulations that prevent health insurance being sold across state lines, limiting choice.

Harvard’s Ms Baicker argues, however, that more radical measures are needed to curb costs. “There is no painless way to contain rising healthcare spending,” she says. “Limits on what treatments are covered by public programmes or private insurance; payment reform so hospitals and doctors are not necessarily paid more for carrying out more procedures; and, in some cases, more co-payments by patients may all be needed.”

Mr Gates agrees: politicians must address tough questions about limited resources. “How many teachers are you willing to fire in order to have 78-year-olds have a procedure which will be invented five years from now that adds four months to their life?” he asks.

“That sounds terrible, but infinitely choosing those things will shift you away from education for the young, and towards infinite invention of such [medical] procedures.”

W hether the measures put in place by the act go far enough to tackle the ballooning cost trend will be unclear for at least a decade. The government’s actuary has estimated that the law will accelerate the growth of spending slightly to 2014 but slow it slightly during 2015-19.

Beyond that, it will require political determination and relentless persistence to refine cost controls and make them stick. “We do not have all the answers and we will not have all the answers,” Peter Orszag, former director of the Office of Management and Budget, said recently. “We have to try something [and then] adjust, try something [and] adjust.”

For now, that leaves companies on the front line when it comes to tackling costs. At United Parcel Service, the delivery company that is one of America’s largest employers, management has taken an aggressive approach to reducing the several billion dollars it spends on healthcare every year. It began a “healthy connections” programme in 2006, which collects data from thousands of staff to identify those at risk of expensive, chronic conditions such as diabetes. It then provides “coaches” who offer assistance to improve lifestyle and control disease.

UPS declines to say how much the “very expensive” programme costs but says it has not yet delivered net savings – though it expects to see a greater effect as the number of participants grows. Last year the company offered workers $100 each to take tests that will provide further information on their state of health. Experts say such moves are typical of large employers. In 2010, 27 per cent provided incentives for workers to participate in health programmes, up from 21 per cent in 2009, says Mercer.

“We don’t know what the healthcare reform act will do to help public and private companies to reduce those costs,” says Mike Johnson, vice- president of human resources at UPS. “But we do know one thing: that healthcare costs continue to rise at 8 or 9 per cent a year, and the best way to get a handle on that is . . . to educate our employees and their families about the choices they make and the impact those choices have on their personal health and costs for the organisation.”

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