Cutting to the Chase on Health Care

09/04/2009 5:58 pm EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

When its August recess ends next week, President Obama will address a joint session of Congress in his latest attempt to salvage health care reform.

The president reportedly will propose simplifying and scaling back ambitious plans that have been debated in Congressional committees. He will focus more sharply on expanding coverage to the uninsured without the controversial “public” option, in which the government pays providers directly for care, as Medicare does today.

Interestingly, some of the new proposals being floated by Administration officials were pretty similar to the ones raised by experts I spoke with Wednesday, suggesting some rough consensus is emerging.

The two big issues, of course, are covering the uninsured and reducing costs. The first will be easier to tackle than the second, but both need to be taken on.

An estimated 45.7 million Americans don’t have health care coverage, according to US Census Bureau estimates. That widely used statistic may be exaggerated, however.

Some 9.3 million of those are “non-citizens”—maybe half illegal aliens and half US foreign-born residents with green cards. So, that takes out about five million from the total. Another 6.3 million may be on Medicaid but don’t report that coverage to census takers, while 4.3 million more are eligible for Medicaid but don’t sign up. Others are a mixture of people who are eligible for employer insurance but don’t take it and uninsured families and singles whose incomes are too high for Medicaid.

So, maybe 25 million to 30 million legal residents of the US don’t qualify for or don’t take private health care insurance coverage.

The consequences of that lack of coverage can be dramatic. According to the bipartisan National Coalition on Health Care, 62% of all bankruptcies filed in 2007 were linked to medical expenses, while 1.5 million US families lose their homes to foreclosure every year because of high medical costs. Nearly five million Americans have lost coverage in the past year.

So, what’s the solution?

The RAND Corporation did a comprehensive computer analysis of policy options now under consideration and came to some striking conclusions.

Some 44% of the uninsured either are currently eligible for Medicaid or have an offer of employer-sponsored insurance for them or their spouse. Only 78% of employees who are eligible for employer coverage actually take it.

So, a mandate for every individual to have health care coverage would make substantial inroads into the ranks of the uninsured.

“It really does work,” says Elizabeth McGlynn, associate director of RAND Health. “If your goal is reducing the number of uninsured, that’s the [tool] that’s most powerful.”

Requiring every individual to have coverage—just as most states require vehicle owners to have auto insurance—would be a strong incentive for people to sign up.

It would also work much better than an employer mandate, according to McGlynn. “Employer mandates don’t deal with people who have an offer and don’t take it up,” she says. And they don’t include small firms “where most of the uninsured are.”

RAND and other major institutions involved in the debate, like the Mayo Clinic (which also backs individual mandates), support some form of subsidy for individuals who make too much money to qualify for Medicaid but not enough to buy full-price insurance policies. They would also prevent insurers from excluding people based on pre-existing conditions. (That would be easier for insurers if they had a broader coverage pool that included more young, healthy people.)

Who would insure these people? I would hope the market would become attractive enough to bring in more companies that sell directly to individuals, such as Blue Cross and Blue Shield. Experience with nonprofit co-ops has been too limited to draw any conclusions.

But the public option has too many problems and doesn’t address the issue of rising costs. That’s why Mayo opposes it, because they say it’s too much like Medicare.

“We lose a ton of money on Medicare,” says Bruce Kelly, Mayo’s director of government relations. He estimates there was an $800-million shortfall last year between what Medicare paid and what Mayo spent on the relevant care.

It’s also inefficient. Medicare spends $16,000 per patient in Miami and half that in Minnesota, he says. It pays twice as much in New York City as it does in upstate New York cities like Rochester and Buffalo. The 40 million-plus Medicare recipients accounted for 12% of all federal spending in 2005, and Medicare spending is projected to increase by 7% annually through 2014, about in line with the private sector’s growth.

But you don’t get what you pay for. According to the World Health Organization, the US health care system ranked 37th in the world overall in 2000, but it was number one in costs. (It was also number one in responsiveness, which is a good thing.)

“We do a lot of things that don’t benefit anybody and just waste money,” says McGlynn. “The higher the spending, the worse the quality,” says Kelly.

Again, much of this problem is not amenable to government solutions. The experts agree we need to move beyond the fee-for-service model, in which doctors and hospitals are reimbursed for office visits and procedures. But what will replace it?

McGlynn of RAND suggests some form of “bundled payment” scheme in which practitioners receive a certain amount of money to treat specific diseases and chronic conditions, based on a standard care regimen devised by medical practitioners. Kelly says the key is better communication and coordination of care among various providers treating a patient to avoid waste and duplication.

These ideas sound promising, but we’ll need more details and they would require big changes in medical practice. So, we can’t count on them to solve the problems now.

One issue that hasn’t been on the table is malpractice reform

The American Medical Association estimates that physicians who practice “defensive medicine” to protect themselves from lawsuits add $151 billion a year in health care costs.

That strikes me as way too high, and McGlynn says doctors’ practices haven’t changed much in states that have adopted tort reform, But recently there has been some speculation the Obama team may throw in some tort reform provisions to win Republican support for his plan.

I wouldn’t count on hearing that next week, but I’ll be back with more on this topic after the president’s speech. 

Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.

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