John Kerry's healthcare proposal: budget-buster

By Kevin Gabriel
Web posted March 22, 2004

John Kerry's Healthcare proposal is pretty much what one
would expect. One might call it "Hillary Lite." There is an attempt
to expand coverage and the government slides into the insurance
business. It's designed to start us on the road to nationalized
health care. After all, once the government gets involved in a
business like this, they are sure to feel the need to exercise
greater and greater control over time.

Employer coverage does not seem to be mandated but it is
strongly encouraged and an attempt is made to entice them into
providing more benefits. This is tied into the proposal that the
government get into the business of providing 75 per cent of the
insurance on all claims over $50,000. The Kerry people tell us
that such claims constitute .4 per cent of the total number of
claims and 20 per cent of total expenses. Such numbers are
probably on the low side, but are not unrealistic. The resulting
reduction in insurance premiums (since insurers will not need to
charge for the part the government reimburses) is to be passed
on to insureds, either through better benefits or reduced
contributions. Employers will be required to demonstrate that this
"savings" is indeed passed on. The proposal also pushes disease
management programs, which, it claims, will significantly reduce
costs.

Nothing in the proposal is said about how the government will
pay for becoming the principal provider of what is typically
referred to as "excess of loss" or "stop-loss" insurance. But,
since all the Democrats can talk about these days is the state of
the deficit, perhaps we ought to think about that.

Insurance companies and their actuaries spend a lot time
working on just this kind of problem. And, for a $50,000 stop-
loss cover, and assuming an inception date for such a program of
1/1/2006, a reasonable estimate of the average employee cost
would be around $255 per month or $3062 per year. This
assumes that the government does not alter the underlying basis
of payment to physicians and hospitals. It also assumes that
medical care trend (the rate of per capital increase in medical
costs) stays roughly where it has been.

Now, there are something over 104,000,000 million households
in the US, about 82.6 per cent of which involve those under 65.
Let's assume that these are the only people John Kerry is talking
about, even though there are some people over 65 who do
work. They will come under Medicare. Further, let's assume that
15 per cent of the remaining families are covered under other
government programs. Otherwise, let's assume that all employers
choose to avail themselves of the program. The government
would need over $160 billion to cover everyone. And that's just
the first year! The amount will escalate very quickly, as we shall
see.

Is this a fair number? I think so. It assumes the typical insured
lives in an average location with average costs and that, across
all industries, claims are constant. It also assumes that there are
managed care contracts in force that hold down reimbursement
rates. It assumes that it takes 20 per cent of costs to disseminate,
manage, and oversee the program, a level slightly below what the
typical excess carrier would assume.

The data used to compute these rates is based on a population
of insureds. Thus, some underwriting is assumed. But, under the
Kerry plan, there apparently will be no underwriting. Everyone
will be covered. Actuarial literature would argue that the
difference between an underwritten and a non-underwritten
population is at least 10 per cent, perhaps substantially more. In
this respect, the cost estimate is low.

But this work raises many questions, none of which are
addressed by the Kerry proposal. They include the following:

1) Why will Employers will even bother to enroll in the wonderful
"premium rebate" plan? They won't gain anything, except to take
on the chore of demonstrating to the government that they have
indeed, "passed on" the savings to their employees.
2) Currently, Employers have a strong interest in managing large
claims because they are either directly on indirectly on the hook
for them. For very large employers, like GM, which are
completely self-insured, every dollar paid out on such claims
comes from their coffers. For employers that are insured, they
risk that large claims will result in higher rates next year. Now the
government will be running the excess loss business. And they
certainly won't be underwriting. One wonders if anyone will care
what happens to a $50,000 claim.
3) Passing the savings on to workers is more easily said than
done and its effects may not be good for controlling costs. For
example, it is not clear on how this policy would apply to those
workers who already aren't paying anything for healthcare or pay
very little. One would assume they will have to get more benefits.
But that will only increase utilization. The result will be higher
costs, not lower costs. In this respect, the Kerry proposal does
nothing to address the fundamental problem with healthcare
financing in the US – that everyone is spending someone else's
money.
4) The excess of loss business is subject to what actuaries refer
to as "leveraged trend." What this means is that costs at high
levels (and excess of $50,000 is certainly that) increase faster
than costs at the original level. This isn't anything supernatural; it's
simply the mathematical consequence of escalating costs. For
example, if the cost of medical care is rising at 15 per cent per
year, the rate of increase in costs at the $50,000 level is higher,
more like 25 per cent-30 per cent. So that $160 billion number
will rise by more than $40 billion in year two. If the current rate
of increase in medical care costs were to persist, then the cost of
program would approach $500 billion by 2010. The ten-year
cost of the Kerry plan will be in the trillions.
5) Many hospitals and Managed care networks actually charge a
higher rate for large claims than they do for smaller ones. This
policy, known as an "outlier" provision has caused insurers no
end of headaches, as the excess of loss carriers do not get the
benefit of favorable reimbursement rates at low dollar levels.
What is the government going to do about these? Most likely
they will outlaw them. So the hospitals will have to raise rates at
the lower levels to make up for the lost revenue. And if they
hospitals are not allowed to do that, then many of them will go
out of business.
6) Who is going to coordinate this program between the
government and the Insurance industry? Are insurers supposed
to pay the claims and get the 75 per cent from the government or
is the government going to pay the claims directly? What about
claims that insurers would now deny (due to misrepresentation,
typically)? In all likelihood, they will no longer exist, since
underwriting is likely to be non-existent under this plan. Is the
government going to dictate what insurers can charge for their 25
per cent share of the excess claims? If so, they are likely to end
up with 100 per cent of the coverage whether they want it or
not.
7) At what rate is the government going to reimburse its share of
the excess claims? Are they going to use the rates paid by
insurers? Or are they going to dictate their own rates, perhaps by
employing what exists for Medicare? Most likely, once they see
the cost of this boondoggle, they will mandate that everyone
accept Medicare rates. In case you've forgotten, those are the
rates that are so low that many physicians won't accept
Medicare patients.
8) What is the government going to do about plans that are
capitated, such as HMOs? In these plans members pay a
monthly fee and their services are covered. There are no bills
that accumulate to $50,000. Providing such cover (Known in the
business as HMO Excess or Provider Excess) is a complex
process. Who is going to be responsible for this?

But the biggest problem remains the cost. Just where are we
going to get the money? By repealing the Bush tax cut, a good
portion of which hasn't even happened yet? I don't think so.

The Kerry proposal puts a lot of emphasis on cost control. They
act like these concepts have just fallen from the sky. But insurers
and employers are already hard at work on these programs.
They're not interested in losing money or seeing medical costs
spiral either. And as for disease management programs, these
are for controlling costs on chronic medical conditions, such as
diabetes or asthma. Those conditions run up costs, but generally
not at the $50,000 level. Large individual claims come from
things like premature births, burns, cancers, and so on – matters
that are catastrophic and not always predictable.
 
The implication of the Kerry plan is that we are going to do so
many wonderful things to save money that this foray into the
insurance business will pay for itself. This is the typical
Democratic slant on any program with which they are attempting
to buy votes: we can all get something for nothing.

John Kerry wants to put the government in the health insurance
business. But, he obviously has no clue about how that business
operates. And he hasn't given even a moment's thought to the
cost. When it comes down to it, the Kerry Healthcare proposal
is not only irresponsible, it is incompetent.

 Kevin Gabriel is a consultant and writer who lives in Boston. He
 works extensively in the healthcare industry.
 
 Enter Stage Right -- http://www.enterstageright.com