Healthcare Town Hall

Uwe Reinhardt’s article on the New York Times Economix blog uses the Milliman Medical Index to frame the healthcare affordability challenge.

The virtue of this index lies in its inclusion of out-of-pocket spending in total health spending. Just tracking premiums for employment-based health can be misleading, if employers shift more and more of the cost of health care out of their benefit package into deductibles or coinsurance paid by employees, exclude certain benefits altogether or otherwise limit coverage…

Although the family’s contribution of $8,584 is by no means trivial, it is less than half of the total average cost of a family’s health care cost. Most employees probably believe that “the company” – that is, its owners – absorbs the other 58 percent of the family’s total health spending.

Economists have long argued that this is an illusion – that over the longer haul the bulk and possibly all of the ostensibly employer-paid health insurance premiums gets indirectly shifted back into the employee’s paycheck through lower increases in take-home pay.

To the extent that there is a limit to this cost shift – e.g., for low-wage or unionized employees — the backward shift takes the form of reduced employment or, alternatively, the employer’s decision not to offer employees health insurance at all.

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Uwe Reinhart offered some perspective on the current state of healthcare reform during a keynote speech at Community Hospital in Monterey, Calif. Here’s a summary from the Monterey County Herald:

Reinhardt represented America as an ill-equipped motorcyclist about to crash.

“We can see these rugged bikers roaring past our cars … T-shirts flapping in the wind, with a bandanna at most as protective headgear,” Reinhardt wrote.

“Even if the motorcyclist had little savings and did not carry health insurance, he surely would expect to be taken by ambulance or helicopter to the nearest hospital emergency room for whatever treatment was critically needed, however expensive.”

Renhardt believes that this irresponsible attitude drives up health care costs for everyone.

As an example, Reinhardt asked the Community Hospital audience to imagine a blue-collar American couple working in retail or at a big-box store. Together, he said, they might bring home $40,000 a year. But the Milliman Medical Index, which benchmarks total heath spending for a typical American family of four, said average costs are currently around $16,700 a year. This makes standard health care expenses 42% of income.

“This will only get worse,” Reinhardt cautioned, because wages are not rising fast enough to cover health care.

Assuming current trends in growth of health care costs and wages, he showed that in 2019 more than half of that same family’s wages could go to health care.

Reinhardt described the American middle class as “sailing into a perfect storm.” Lower-class families are beginning to be priced out of health care and middle-class families will be increasingly uninsured to save money, he warned.

Reinhardt described three things needed for basic health care reform:

· Many young, healthy people with few costs to offset the older, unhealthy few who rack up huge bills.

· A large number of insurance subscribers to make it economically viable for insurance companies.

· Adequate subsidies toward the purchase of health insurance for consumers.

“It’s like a three-legged stool,” Reinhardt emphasized. “You can’t sit on it for very long if it has two legs.”

Read more…

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As the country continues to sort through the question of how best to reform healthcare, a number of experts are using Milliman research to articulate distinct opinions. Here are two perspectives on the proposed public plan:

• Prof. Uwe Reinhardt of Princeton has penned an assessment of the president’s speech last week on the Health Affairs blog:

While we’re on the subject of private insurance and cost control, the opponents of a public health plan frequently argue that such a plan would “underpay” hospitals and doctors, forcing the latter to recover the shortfall from private insurers through a cost shift estimated by Milliman Inc. to be around $90 billion a year.

If that is true, however, then one may ask the following question: If the private plans cannot resist increased prices as a result of this particular cost shift, how then can they resist any price increases justified to them by any cost, whatever its origin? How, for example, could they resist picking up the tab for the so-called medical arms race by which hospitals compete? I find this an intriguing question and invite comments thereon.

• Perry Bryant of West Virginians for Affordable Health Care uses the Milliman Medical Index to put the cost problem in perspective:

Let’s be honest. The United States has unsustainable health-care costs. The Milliman Medical Index puts the cost of a typical family plan at $16,700 in 2009, up by more than $1,100 in one year. If premiums continue to rise annually by 8 percent, within 10 years the typical family health insurance plan will cost $36,000. What businesses or families will be able to afford health insurance at $36,000 a year?

Controlling cost needs to be the focus of the health care debate, because it is the only way that we can preserve health insurance for those fortunate enough to still be insured, and to achieve health coverage for all Americans. The public plan option has many advantages, particularly if it is designed properly. It would be grossly unfair, however, to the millions of uninsured Americans to frame the debate as public plan or nothing.

And for those who oppose the public plan, the ball is in your court. What are your measures to reduce $3 trillion of health care costs over the next 10 years?

Milliman Medical Index, Reform, Uninsured Milliman Medical Index, public plan, Uwe Reinhardt

Prof. Uwe Reinhardt uses the Milliman Medical Index to frame comments about what the president ought to say in his healthcare reform speech tomorrow night. Prof. Reinhardt’s comments are part of a larger discussion at the National Journal. Here’s an excerpt:

The President’s overarching aim in the speech should be to present to the Congress and to the American people a realistic – and I emphasize “realistic” – picture of the situation in which American health care finds itself. It should be a sober speech, without rhetorical flourishes.

According to the Milliman Medical Index, total health spending for the typical non-elderly, privately insured American family has grown at an annual compound rate in excess of 8 percent throughout this decade.

By contrast, wages and salaries in the U.S. have grown at an average annual compound rate of only about 3 percent in the past decade and a half. At the moment, they grow at an even lower rate, if at all. And the fraction of Americans who are employed has been falling for most of this decade.

It is simple arithmetic that, if these trends continue for another decade – as they very well might — more and more American middle- and lower-income families will be priced out of American health insurance and health care.

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New Jersey is launching an accountable care organization.

Healthcare the game?

The Health Beat Blog looks at healthcare profits.

The Atlantic runs a policy piece: “How American health care killed my father.”

The Health Care Blog offers a policy counterpunch.

And the latest from Uwe Reinhardt.

Accountablity, Reform ACOs, Uwe Reinhardt

Uwe Reinhardt offers another big-picture view of the economic implications of healthcare reform on CNN.com today:

America’s currently insured middle class will be increasingly desperate if health reform fails. Millions more such families will see their take-home pay shrink. Millions will lose their employment-based insurance, especially in medium and small-sized firms. And millions will find themselves inexorably priced out of health care as we know it.

Milliman Inc., an employee benefits consulting firm, publishes annually its Milliman Medical Index on the total health spending by or for a typical American family of four with private health insurance. The index totals the family’s out-of-pocket spending for health care plus the contribution employers and employees make to that family’s job-related health insurance coverage.

The Milliman Medical Index stood at $8,414 in 2001. It had risen to $16,700 by 2009. It is likely to rise to $18,000 by next year. That is more than a doubling of costs in the span of a decade!

Since 2005, the index has grown at an average annual compound rate of 8.4 percent. Suppose we make it 8 percent for the coming decade. Then today’s $16,700 will have grown to slightly over $36,000 by 2019.

Economists are convinced that this $36,000 would come virtually all out of the financial hides of employees, even if the employer pretended to be paying, say, 80 percent of the employment-based health insurance premiums. In the succinct words of the late United Automobile Worker Union leader Douglas Fraser:

“Before you start weeping for the auto companies and all they pay for medical insurance, let me tell you how the system works. All company bargainers worth their salt keep their eye on the total labor unit cost, and when they pay an admittedly horrendous amount for health care, that’s money that can’t be spent for higher [cash] wages or higher pensions or other fringe benefits. So we directly, the union and its members, feel the costs of the health care system.” (“A National Health Policy Debate,” Dartmouth Medical School Alumni Magazine, Summer 1989: 30)

Unfortunately, very few rank-and-file workers appreciate this fact. Aside from their still modest out-of-pocket payments and contributions to employment-based insurance premiums, most employees seem sincerely to believe that the bulk of their family’s health care is basically paid for by “the company,” which is why so few members of the middle class have ever been much interested in controlling health spending in this country.

Cost, Economy, Reform Milliman Medical Index, Uwe Reinhardt

The U.S. Department of Health and Human Services (HHS) has issued a series of state-by-state reports on health reform. Check out your state.

Uwe Reinhardt is part of a discussion of healthcare costs at the National Journal that’s populated by heavy hitters. Here’s an excerpt from Prof. Reinhardt:

A message President Obama should hammer home crisply – and I mean crisply – to the American middle class is that the sun may be shining today on them, but that it is sailing into a perfect storm.

According to the Milliman Medical Index, total health spending (employer-paid premium, employee-paid premium and out-of-pocket spending) for a typical non-elderly American family of four is now $16,700. It has been growing at an average annual compound rate of about 8.5% since 2000. At a rate of only 8%, total health spending for that family will rise to over $36,000. Yet the gross wage base that should, ideally, support all of a family’s spending (even the part “paid” by employers but ultimately taken out of the employee’s take-home pay) has been growing only at 3% or so in the past decade and is not rising at only 1.8%.

Do the math! If health reform fails and the status quo continues unabated, health care will chew up the budgets of American middle class families like PacMan, and millions more middle class families will be tossed into the pool of uninsured. That’s what is in the status quo for the American middle class.

Instead of lengthy discourses fit for publication in Health Affairs, President Obama could get this message across with one simple flip chart. Perhaps then the American middle class would appreciate more what benefits their families may derive – perhaps not today, but over the next decade – from a program of systematic cost containment and federal subsidies for lower-income Americans.

Finally, we’ve talked about the cost of care in Florida before. Here’s one attempt to reverse that trend.

Cost, Reform HHS, Miami, Uwe Reinhardt

Uwe Reinhardt pens an article in the New York Times today offering some perspective on the $1.6 trillion price tag attached to healthcare reform by the CBO. He uses the Milliman Medical Index to put that price tag in perspective. Excerpting from the article:

Based on a sample of several million American families with employment-based health insurance, the index represents the average annual cost of health care for a typical American family of four.

The “cost” figures in the graph are all inclusive. They are the sum of employer- and employee-paid health insurance premiums plus the family’s out-of-pocket spending on health care.

At the trend over the last decade, which is likely to continue, this cost index will stand at $18,000 by 2010. It will have more than doubled its level since 2001. And if that trend continues for another decade — and there is a good chance it will — then 10 years hence America’s health system will be able to extract from the rest of society the sum of $36,000 per typical non-elderly family of four.

Consider now an average American family that is sustained economically by a gross wage base of $60,000 today. By “gross wage base” economists mean the wages earned by the household’s breadwinners prior to the deduction of fringe benefits and taxes, whether paid by employer or employee. Business people would think of it as all the debits they make for an employee to the account “Payroll Expense.” Economists call it the “price of labor.”

All of the health care costs included the Milliman Index are financed by this gross wage base, which must also finance all of the family’s taxes and living expenses.

In the past decade, average wages in the United States have grown at about 3 percent per year. With the economy likely to be in the doldrums for years to come, it would be highly optimistic to expect an average growth rate in wages any higher than 3 percent. Most probably it will be lower.

But even at an optimistic 3 percent growth rate in the average gross wage base, a base of $60,000 now will have grown to only to about $80,000 a decade hence. The $36,000 of projected health spending would have to come out of that wage base of $80,000. In other words, health care alone would chew up 44 percent of the wage base that must support such a family.

One can change the assumed growth rates for such a calculation to get slightly different forecasts. But the conclusion for any realistic set of assumptions remains the same: In the coming decade, an ever larger number of middle-class American families will see their household budgets chewed up inexorably and mercilessly by the cost of health care.

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Prof.  Uwe Reinhardt fields a reader question about healthcare costs in a New York Times blog entry today, with help from the Milliman Medical Index. Quoting Prof. Reinhardt:

Consider a family whose breadwinner(s) earn a gross wage of $60,000. By “gross wage” I mean wages that the employer books as labor expense — in accounting parlance, the total debits the employer makes to the payroll-expense account for the employee. It includes the employee’s pay before deducting any contributions that employees make toward their fringe benefits — e.g. health insurance — and any taxes they owe. It also includes the full cost of employer-paid fringe benefits and contributions to Social Security and Medicare.

In the absence of any government subsidies, this “gross wage base” of a family is the donkey that must carry the full burden of the family’s employment-based health insurance, whether formally paid for by the employer or employee.

At an annual growth rate of 3 percent, a wage base of $60,000 now will grow to $80,600 in 10 years. On the other hand, at an annual growth rate of 8 percent, a family’s total spending on health care would grow from $16,700 now to $36,000 in 10 years.

It follows that 10 years hence health care would swallow up 44 percent of this family’s gross wage base in 2019, before any allowance for employer- or employee-paid fringe benefits and taxes. It is the perfect storm into which America’s lower middle class now is being pushed, if the leaders of America’s health system continue to manage that system in their customary style, totally in abstraction from the fiscal agony their expensive managerial and practice style visits on the rest of the country.

Read Prof. Reinhardt’s blog entry

Affordability, Cost, Milliman Medical Index Milliman Medical Index, Uwe Reinhardt