Let’s begin with the question, What would be the single most effective thing any state could do legislatively to produce the most positive outcome in healthcare/insurance reform? Is there such a thing? Belief in the Pareto Principle or the 80-20 rule of problem solving would suggest such effective prioritization of effort should likely exist and in what follows I’ll make the case that not only does a simple focused solution exist but fits state based healthcare/insurance reform especially well.
While running for President, Herman Cain, as a career problem solver, would often say that the number one thing about problem solving is to make sure you’re working on the right problem, then caution that this is not as easy as it sounds. Einstein is attributed to have said, “Not everything that counts can be counted, and not everything that can be counted counts.” All three citations say essentially the same thing, that knowing where to focus effort can and should result in greater efficiency and less wasted time in solving almost any problem.
Fortunately on the healthcare/insurance issue, in consideration of all the separately identified component problems, there exist a few select studies and one highly successful, sufficiently large real world example that, taken together, reveal proper focus that fits the significant 20 in the Pareto Principle, the right problem Herman Cain speaks of, or what really counts according to Einstein, leading to clear and simple solutions.
Any consideration of the healthcare/insurance issue that does not start with, or misses entirely, the 1994 CATO study by Stan Liebowitz, titled simply and directly “Why Healthcare Costs Too Much”, risks missing the stark reality that unnecessary third-party payment is the central culprit both in terms of cost and the disruption of a normally functioning marketplace that requires the direct interaction of provider and consumer, according to what one is willing to accept and the other is willing and able to pay, in order to efficiently set prices and allocate resources. It is the illusion of free or almost free caused by low or non-existent deductibles and low copays that incentivizes massive overuse that Liebowitz estimated to be, including administrative costs, $333 billion in 1994, easily making unnecessary third-party payment the number one source of excess cost in the system. The lesson of the Liebowitz study is simple. The solution lies in focusing on methods that increase direct payment and reduce third-party payment. This is the central issue and required for reconnection to market forces long abandoned prior to Obamacare or Obama. The Executive Summary states, “The use of medical savings accounts needs to be promoted. High deductible health insurance should be encouraged.”
Following Liebowitz in 2001 Milton Friedman wrote “How to Cure Healthcare“, which featured a cartoon depicting unnecessary third-party payment via employer-provided health insurance as dumping money down a rat hole. The conclusion was the same, again pointing to the basic need to increase direct payment relative to third-party payment, which today represents about 5 of every 6 dollars spent on healthcare services.
The two cited studies alone clearly identify the single source of greatest waste, the acceptance and growth of unnecessary third-party payment. Neither argues against the proper use of insurance to protect assets against expenses that would be unaffordable otherwise. In addition, achieving more direct payment coincidentally lessens the effects of other identifiable problems, namely largely negating the considerable costs of coverage mandates so long as they conform to a high deductible, curbing the use of defensive medicine by raising questions of necessity, bringing consumer demand for pricing transparency, lessening the opportunities for fraud, and restoring the doctor-patient relationship as nothing else can. It also provides partial portability as the health savings account component always remains the property of the insured employee. These positive effects on other component problems not addressed lends confidence that the focus on unnecessary third-party payment is the 20 of Pareto, the root of the overall problem.
Following Liebowitz and Friedman, in 2003 Congress passed the act that established Health Savings Accounts with the requirement that they be associated with High Deductible Health Plans (HDHP). Starting with 2004 such plans became available, alone setting the stage for significant reform with their adoption, but there was a problem. Widespread adoption did not happen. Years of embracing the false comfort of third-party payment along with limited understanding of personal finance and economics and the disconnect from cost caused by employer provision had conditioned the majority of the public to not see the advantages of high deductible plans. Employers were slow to offer as employees and unions were quick to resist. By the start of 2012 after 9 years of availability less than 10% of Americans were covered with high deductible plans that included health savings accounts, although as the reality of Obamacare approached and costs continued to soar these plans have been increasing in recent years.
Fortunately there is one glowing exception to the slow adoption of the high deductible approach that should be the model for the entire nation, both in its simplicity and results. When Mitch Daniels took office as Governor of Indiana following his 2004 election, such was his understanding of and faith in the free market that he had no concerns that the path he decided to take would work. All 30,000+ state employees were offered high deductible health insurance plans alongside the existing PPO plans most employees are routinely provided. Then the state made the commitment to back the new choices with education. Human resource personnel met with employee groups to explain how the high deductible approach would be to the benefit of most who chose it.
The results speak for themselves. In the March 1, 2010 Wall Street Journal, Governor Daniels laid it out. By that time state employee participation in high deductible had reached over 70%, up from 4% only five years earlier and the state estimated taxpayers would save in excess of $20 million. More importantly, this projected annual savings is after the state funds health savings accounts $2750 each year for family plans and proportionally less for individual plans. As compared to the PPO plans, spending in the high deductible plans was only 65 cents on the dollar. Emergency room use was down 67%, showing that even the insured will use an emergency room for non-emergency when the out-of-pocket cost is low enough and it is a situation of convenience. Importantly, satisfaction was high, with only 3% going back to the PPO plans after choosing high deductible. Since 2010 the situation has improved even more, with the participation rate in the high deductible plans now in excess of 90%, all by free choice of the employee.
There is no reason to believe that the Indiana results cannot be replicated everywhere. This could be accomplished by legislation in any state to simply require all employers, public and private, who choose to offer health insurance to their employees, to include the choice of high deductible plans with health savings accounts. No current offerings would have to change. In Indiana they remained as they were. It was individuals coming to the realization that the high deductible choice is in their best interest that led to the changes and the savings and the satisfaction.
Business normally resists regulation but should consider embracing this requirement. In a world where third-party payment has been so widely accepted and its evils to the marketplace so little understood by so many, an external requirement would give managements cover to put before their employees that which may likely be, and often is, resisted at the outset due to lack of understanding. The key is choice rather than coercion, and results are clearly win-win, with the potential to slash costs for employers and empower employees with spending their own money ahead of that of others who then gain control in the transaction.
Indiana accomplished so much by doing so little. All they did was a justifiable function of government to assist the proper working of the free market by insuring each consumer information and choice, both necessary to market efficiency. If all this seems too simple, think Pareto, Herman Cain, and Einstein. Think also Ronald Reagan who said in a 1964 stump speech, “There are no easy answers, but there are simple answers.”