In a recent appearance on “Face the Nation,” Karen Ignagni, the president of America’s Health Insurance Plans, the principal lobbyist for health insurance companies, was asked why health premiums are so high.
She gave two reasons. First, she said that many customers had cancelled their coverage during the economic recession, resulting in a reduced overall insured-pool, thereby driving up premiums on a per-patient basis. Second, she argued that major increases in the cost of medical services charged by health care providers necessitated rising premiums. While her first reason strikes me as disingenuous at best, considering that premiums had been rising considerably beyond the rate of inflation well before the economic downturn began to take hold in early 2008, there can be little doubt that spiraling medical costs are the leading force in premium inflation.
The proposals I offered last week, namely tying charges for medical services to a rational cost or profit basis, rather than setting them at the provider’s discretion and providing the patient with an up-front cost estimate, are, together, the first step in a two-step process intended to make health care more affordable. In order for such savings to reach their intended beneficiary, the American public, health care providers need to pass along those savings to their customers in the form of reduced premiums.
There are those who have called for a radical restructuring of the private health insurance market. Proposals have ranged from more strictly regulating health insurers to doing away with private insurance altogether, to be replaced by a government-run, single-payer system, much as exists in Canada and Europe. Political philosophy aside, those proposals ignore a little reported fact: the vast majority of Americans are satisfied with their existing health insurance. In a recent Gallup Poll, 74 percent of respondents expressed satisfaction with their health coverage. By comparison, the president’s approval rating hovers around 50 percent, cable TV companies’ at around 30 percent, and Congress’s in the high teens. Accordingly, it would seem that selectively targeted reforms, enabling the vast majority of Americans to continue to afford their premiums, rather than a systematic overhaul, would be appropriate.
This is what I believe to be the most effective reform proposal as a follow-up to cost containment. Prior to cost control taking effect, a health care cost index would be established in each state, creating a cost base year. Each year thereafter, the index would be revised, taking into account cost savings from the previous year. For each dollar of savings, the insurer would keep 25 cents and would pass on the remaining 75 cents to its customers in the form of lower premiums. This would align the interests of insurers and their customers, allowing the former to reap significant benefits from cost reduction while dedicating the majority of cost savings to the latter. If Ignagni is to be believed that spiraling health care costs are the primary cause of premium increases, she should be most comfortable with this proposal.
Why not provide for a single national cost index rather than a separate one for each state? In order to incentivize each state to seek meaningful cost reductions from their state-licensed providers (e. g, doctors, hospitals, clinics) so that the savings can be passed on to those within the state. A national index would allow states to refrain from enacting cost-saving reforms while reaping the benefits from other states having done so.
Wouldn’t mandating health insurers to pass on the majority of cost savings to their customers constitute a step toward socialized medicine? No more than the regulation of electricity, water and cable TV rates constitute a socialized economy. Indeed, insurance companies are currently duly licensed and regulated by each state in which they do business. They also receive hundreds of billions of government dollars annually for treating Medicare and Medicaid patients.
Finally, why wait for health care cost reduction to require insurers to lower their premiums? Shouldn’t this be required immediately, considering the industry’s near-record profits in 2009? Here is where we cross the line from targeted reform to radical overhaul, which is neither in the public’s best interest nor sound policy. My plan to reduce insurance premiums presupposes a reduction in health care costs, a tangible benefit to health care providers being brought about by government policy. In this case, it is not only reasonable, but also prudent to require that insurers share their windfall. In the absence of health care cost reductions, however, the government would be unable to point to a tangible monetary benefit to insurance companies and would legislate arbitrary reductions in premiums. That would be a step toward socialism.
Perhaps this is all just an exercise in wishful thinking. Can we expect government to bring about meaningful health cost reduction, given annual double digit increases in recent years? Perhaps not. But only by doing so can we hope to deal effectively with what most burdens our health care system. The president’s health care proposal, which barely passed the House on Sunday, is not only too costly but, as I indicated last week, is also way too timid in tackling health care cost reduction. What is needed is a two-pronged approach: effective cost reduction giving way to more affordable premiums. For that is what is needed and that is what the public most wants. Anyone listening?
Nathan Mitzner is a junior risk management insurance major. He can be reached for comment at [email protected].
