Health Care Insecurity:
Roadblock to Prosperity
Choices for Vermont:
Rebuilding the Foundation of
Prosperity
October 2, 2008
Health Care Insecurity: Roadblock
to Prosperity
• Current health care financing in Vermont
• Health care financing and the broader
economy
• Opportunities for reform
How Health Care is Financed
• Three ways to look at this
– Where the money comes from
– Intermediaries (where it visits along the way)
– Where it ultimately winds up
Where the Money Comes From
• All money for health care originates in
households
• It flows into the system through 3 main
channels
– Taxes
– Premiums
– Out-of-Pocket (direct payments to providers)
• And one smaller one - philanthropy
Where the Money Comes From –
Out-of-Pocket
• Out-of-Pocket (OOP) includes
– Cost sharing, like deductibles, coinsurance, and
copayments
– Payments for services not covered by insurance
– ALL payments by the uninsured
• In Vermont, about $490 million of the $3.9
billion in health care spending (12.5%) is OOP
(2006).
Where the Money Comes From –
Premiums and Taxes
• Straghtforward:
– Taxes pay for public programs like Medicare and
Medicaid
– Premiums pay for private insurance like MVP and
Blue Cross
• Not so straightforward
– What about public employees?
– What about Medicare and Medicaid premiums?
Premiums and Taxes
• So what’s the difference?
• Taxes are
– Mandatory
– Linked (usually) to ability to pay
• Premiums are
– Voluntary
– Sometimes (not always) linked to expected
consumption of health care services
Premiums and Taxes
• In 2006, Medicare, Medicaid, and other state
and federal programs (mostly tax-financed)
paid about $1.8 billion (46%) of Vermont’s
health care bill
• Private insurance and self-insured employers
paid about $1.6 billion (41%).
• Payments on behalf of public employees
(included in private above) were about $360
million (9% of total spending).
Intermediaries
• Private
– Employers
– Health Insurers
• Public
– Medicare
– Medicaid
Where the Money Goes
• Providers
• Payers
– Administration
– Reserves
– Profits
Funds Flows
Health Care Financing and
Vermont’s Economy
• Issue Areas
– Health care costs are consuming a larger and larger
share of resources
– Costs of health insurance for private sector entities
are embedded in the costs of their goods and services,
not explicitly financed
– These costs are extremely difficult for employers to
control
– Employers and employees must trade off wage
increases and benefits
– Retiree health costs are an increasing burden
Health Care Financing and
Vermont’s Economy
• Health care costs are consuming a growing
share of individuals’, employers’, and
governments’ revenues
• This leaves less and less for other expenses
• For example, adjusted for inflation, the per
capita income in Vermont rose by about
$5,000 between 1997 and 2006. About
$2,000 of that was consumed by increasing
health care costs.
Health Care Financing and
Vermont’s Economy
• Between 1997 and 2006, total personal
income in Vermont grew about 5.3% per year.
• During that period, health care spending grew
at an average annual rate of 9.2%.
• The share of personal income spent on health
care grew from 13% to 18%.
• At that rate, in another 10 years, we’ll spend
one-quarter of all personal income on health.
Health Care Financing and
Vermont’s Economy
• The problem of averages
– Unlike many costs, such as food or heat (!), health
care costs vary enormously in a population.
– The healthier half of a typical population accounts
for less than 5% of all costs
– About 70% of all health care spending is
accounted for by 10% of the population.
Health Care Financing and
Vermont’s Economy
• Health care costs affect different families quite
differently
– For those with employer-sponsored insurance,
their contributions are rising between 10% and
20% per year, benefits are being reduced, and
wage increases are traded off for coverage.
– For those who purchase insurance directly, costs
are rising and the only products remaining in the
market are high-deductible ($3,500 or more)
Health Care Financing and
Vermont’s Economy
• Health care costs affect different families quite
differently
– For those with no insurance, a single episode of
illness can lead to financial ruin.
– The uninsured often go without preventive care,
increasing their risks.
State Government – an Illustration
• In the first year, assume a state budget of $1
billion, 10% of which is spent on health care
programs.
• Assume state revenues grow at 4% per year
and health care costs grow at 10% per year
(both are historical averages). No new
revenue sources.
• In 25 years, health care costs will consume ALL
new revenue.
State Government Spending
Illustration
Private Sector Costs
• Under the current system, health care costs
are a cost of doing business for employers.
– This is true whether you believe that employers
pay for health care or that employees pay the full
cost
• These costs are included in the price that the
employer charges for goods or services
• As health care costs rise rapidly in the US, this
makes international competition more difficult
Can Employers Control Health Care
Costs?
• Perhaps in some ways, but their influence is
small compared to cost trends
• If costs can not be controlled, either the
employer’s product becomes more expensive
or part of the increase is passed on to
employees
– Increased contribution to premium
– Increased cost sharing / reduced benefits
The Wage / Benefit Tradeoff
• Most economists look at health benefits as
one part of total compensation.
– The cost to the employer is the same whether the
employer pays the employee $5,000 in cash or
$5,000 in benefits, but the benefit is tax-free to
the employee (and thus worth more)
– But cash is much easier to control
• Increases in health care costs will often create
a trade-off, under which wage increases are
smaller, or wages remain flat
Retiree Benefits – Direct Spending
• Demographics are changing – the number of
retirees relative to the number of active
employees is increasing sharply
• Combined with increasing health care costs,
retiree health spending is growing
dramatically
• Recent automaker / UAW deals
Retiree Benefits – Other Effects
• Until recently, both private and public
employers included only the “current” costs of
retiree health benefits on their balance sheets
– The amount they pay in the current year
• Now, they have to show the liability for future
costs on their balance sheets
– FAS 106 and GASB 45
• This has a major impact on their financial
status
Reform Options
• What is it that we want to reform?
– Financial
• Control rate of growth
• Equity of contribution
– Access
• “Universal”
• Coverage
• Care
– Quality of Care
Reform Options
• The cost of insurance and the cost of care
– Historically, insurance costs have gone up faster
than underlying health care costs
– Several factors contribute to this, including:
• Cost shifting
• Adverse selection
• Benefit structures
– In addition to the basic affordability issue, this
leads more people (usually healthier) to drop their
coverage, increasing insurance costs even faster.
How Far Can a State Go?
• Limits to a state’s ability to reform its health
care system
– Federal law
• ERISA
• Medicare
• Medicaid
– Border crossing
– Status quo
Political Complexities
• Are you willing to change how your care is
financed and delivered in order to support
health care reform?
• Polarization and over-simplification
– “Markets” vs. “Socialized medicine”
Reform in Vermont
• Long history of reform
– Several efforts to achieve or move toward
universal access and cost containment
•
•
•
•
•
Governor Aiken inaugural address, January, 1939
Daniels Commission, 1975
VHIP
Governor’s Blue Ribbon Commission, 1991
Act 160
The Current Reform Environment
• Several Major Parts
– Catamount Health
• State-subsidized private health insurance for certain
eligibles
– Blueprint
• Reform of the delivery system
• Reduction in the incidence of chronic illness
Is Catamount Health Working?
• Over 5,000 people have signed up for
Catamount Health. This is about one-third of
the people eligible for it.
• Enrollment has also increased in other
Medicaid programs, especially VHAP
Catamount Health - Issues
• Currently, subsidized premiums for Catamount
Health range from $60 per month (below
175% of poverty, about $18,000 per year for
an individual) to $185 per month (up to 300%
of poverty, $31,200 per year)
• The unsubsidized product costs $393 per
month
• Is this affordable?
Other States
• So far, Maine, Massachusetts, and Vermont
are the leaders.
• Many other states are attempting various
reforms
• For details, check out:
http://www.kff.org/uninsured/kcmu_statehealthreform.cfm
Massachusetts
• The most far-reaching state-based reform to
date
• Key element: an individual mandate,
combined with income-based subsidies.
– With an out if insurance is not “affordable”
• Based on surveys, it seems to be working.
Almost 95% of people in Massachusetts are
covered, the highest percentage in the
country
But…
• Massachusetts has had minimal impact so far
on costs
• Unless costs are brought under control, the
program will quickly become unaffordable
National Health Care Reform?
• While the legal barriers are far less daunting at
the national level, the political barriers are
much higher
• Consider what it took in 1965 to enact
Medicare and Medicaid
• Consider what happened to Clinton health
care reform
Current Presidential Proposals
• Obama – much like Massachusetts, but the
mandate applies only to children
• McCain – while a more conservative proposal
(no mandates, reliance on existing market), it
is much more radical in one way – sharp
reduction in the importance of employersponsored health insurance; most people will
shift to subsidized coverage in individual
market
Conclusions
• Health care reform is essential, and seems to
be impossible
• Concerns about health care have a 100 year
history. How long can we muddle through?
• There is a lack of agreement on what reform
means, but we seem to be more able to come
to agreement on areas other than financing
Questions?
Steve Kappel
Policy Integrity
www.policyintegrity.com