A Plan To Replace The Affordable Care Act

The problem with the Affordable Care Act (ACA, aka Obamacare) begins at its core when it mixes up health insurance with health care. Health Insurance isn’t Health Care, period. Because it isn’t, the cost of health care cannot be controlled by controlling the cost of health insurance. Because ‘health care reform,’ despite its name, has very little to do with health care, and everything to do with health insurance, it cannot succeed.

To try and control health care costs the ACA created tools to “force” competition between insurance companies and have insurance companies pressure doctors and facilities to lower prices. The ACA tries to accomplish this by implementing a Medical Loss Ratio (MLR) on insurance companies. The MLR forces insurance companies to use 80% (in some cases 85%) of the premiums collected for claims. This means if your premium is $100, $80 is used for claims. The rest of the money, $20, is used for business expenses and profit. If you consider the $20 as the company’s income, and a standard 20% profit margin, that leaves only $4 to compete on. That means my $800 premium can be brought to $768 by competition, only if the insurance company removes all of its profit margin.

The other side of the ACA premise is that the insurance companies will negotiate harder with the doctors and hospitals to bring down the 80% claims portion of the MLR. But doing so causes doctors and hospitals to drop out of the plans. We currently see this trend taking place. More and more doctors are turning to the concierge model, and the best hospitals are on fewer networks. In fact, 9 out of the top 10 hospitals in the country either do not take any ACA insurance or are on only one ACA network.

Because of this, and many other issues, the ACA, as well as other solutions, such as selling insurance across state lines, that doesn’t recognize the difference between health insurance and health care cannot work and so it is doomed to utter failure.

Just identifying problems with the ACA isn’t enough, there must be a comprehensive solution proposed because so many of the ACA goals are worthwhile.

Goals

People that need insurance when they have Pre-existing conditions should be one of the top goals of any health care plan. Solutions are difficualt to come by because most would cause advere selection, but the pre-ACA system never allowed them in, which isn’t acceptable. There is no doubt that any solution must solve this problem.

There are many uninsured people that use the emergency room for non-emergency care and that stresses the system and raises the cost of health care for everyone. At the same time the statistical difference of the outcomes between the insured and uninsured show that getting insured could be good for your health. There is no doubt that lowering the number of uninsured should be a goal of any solution.

Most critical is lowering the cost of health care, which in turn will lower the cost of health insurance. The goal should be to lower the total out-of-pocket costs, health insurance premiums and cost of services, not one or the other. Any plan that doesn’t result in lowering these total costs would not be worth implementing.

Problems

There is no doubt that the pre-ACA system was dysfunctional. This was caused by many years of manipulation that has driven ‘health insurance’ from an insurance product into a payment system. It has caused a breakdown of supply and demand in the health care market, which is the main factor in rising prices. The supply side of the equation is easy to see (doctors, hospitals, etc.), so what is the demand side?

Many things are cited for rising health care costs; rising malpractice insurance, cost of R&D, cost of education, etc. However, when you look at dentistry, cosmetic surgery, and Lasik eye surgery they have the same cost pressures, yet their fees remain substantially constant. Why is that? In one word, competition. Competition at the delivery level, and price transparency because there isn’t an insurance product obscuring the payment.

This trend of moving from health insurance to a payment system has been caused by trying use health insurance to compete. Companies have been trying to find a competitive edge, and wanting to help their employees by offering health insurance features that obscure the cost of health care. For example, copays. This one feature is probably more responsible for rising health care costs than any other feature, and people are addicted to it. I’ve had clients willing to pay an extra $150/month to get a $35 copay they will use 3 times a year.

Each week you probably go grocery shopping and load your cart with items you need and feel are worth the cost. Now imagine if no matter what you put in your cart, no matter how empty or full, the cost will always be $25. Would you change what you buy? Would you change how much you buy? What would happen to the true, under lying cost of food? Demand would go up, supply go down, and prices would rise to reflect that. That’s the equivalent of copays.

Group insurance is temporary, and that’s a problem. What happens to someone who has a heart attack and has to leave their job due to health problems? At first they face skyrocketing prices because they have to pick up the full cost of the insurance via the COBRA program, then 18 months later their insurance ends when COBRA ends. It’s the temporary nature of group insurance that keeps people with preexisting conditions stuck at companies.

The trend in moving health insurance into a payment system was accelerated when Obamacare added feel-good services. Prior to Obamacare, insurance either paid for preventative care to avoid disease or medically necessary care. The only arguably feel-good service was maternity coverage without complications. This service was introduced to the group market by companies trying to find a competitive edge, just like the copay.

However, normal deliveries tend to take place in hospitals with medical care, making it straddle the line between insurable and feel-good services. Obamacare went over the line when it required contraceptives be covered under the preventative care clause of the law. Unless you feel pregnancy is a disease that needs to be eradicated, contraceptive services are neither preventative, nor medically necessary.

Solutions

Solutions to this problem, though complex, must interact with each other to create a comprehensive solution by tweaking the pre-ACA market, not replacing it as the ACA did. Solutions shouldn’t limit choice, but reward actions that move towards the desired direction. Government intrusion, control, and reach should be kept at a minimum.

The tax code is the place to start. Individual insurance should get the same tax breaks as group insurance. This would encourage the purchasing of insurance and lower the effective cost, allowing more people to be able to afford insurance, thus lowering the uninsured rate.

Taxes can also be used to encourage the purchasing of truly insurance products like HSA qualified plans. These high-deductible plans encourage competition at the delivery level and lowers total costs. Currently a person in the 20% tax bracket, that uses their HSA to pay a $5,000 deductible, will save $1,000 on their taxes. This will have the net effect of a $4,000 deductible. This flexibility, coupled with higher-deductibles, cause people to shop for their medical services. Raising HSA limits, while expanding items covered, can help encourage adaption of this truer form of insurance. There should be encouragement to look at the total cost of ownership instead of just premium, deductible, and copays.

There isn’t any price transparency in the current system. If you want to find out a price for a procedure, there are very few ways of accomplishing this and it should be a simple task. To be sure there are some services such as compass PHS ( www.compassphs.com ) that can help, but it is very limited.

The problems start right from the get-go, there isn’t a good way to identify the procedure itself. You can’t simply call up a diagnostic center and ask for the cost of a sonogram. You need to know what part of the body, what conditions, and a number of other elements. Even if you knew the exact procedure, calling the diagnostic center won’t help. They have to know your insurance, and if they do, they would have to contact the insurance company to find out the negotiated price. That can’t be done unless you come in and give them all of the information. Normally they ask you to call the insurance company, which can’t help because it depends on the specific code and the doctor involved, so they tell you to contact the Dr. This creates a never ending circle. If you call an insurance company they can’t tell you. They have too many contracts and don’t know the CPT codes (maybe they know but don’t want the liability), and the doctor just doesn’t know.

A central pricing system should be built that allows the insured to ‘shop’ for their health care, not insurance. They should know that the MRI they needs costs $2,500 at the hospital or $500 at the facility down the road. Since they have a higher deductible, skin in the game, they will want to shop. The pricing system needs to be specific, based on the insurance plan the insured has, and the specific facility.

Adding price transparency and a pricing system, coupled with insured with skin in the game, should drive health care prices down, and have a direct impact on insurance prices. The uninsured rates should drop accordingly.

Some of the uninsured, after doing a cost/benefit analysis still aren’t going to be willing to buy insurance. Changing the calculus could lower the uninsured rate. For example, a number of people figure if something bad happens, they will get it fixed, then go bankrupt if needed. Not that they want to, but since the probability, as they see it, is low, they are willing to take that bet. However, if the bankruptcy laws were changed to not allow that debt to be wiped out, the calculus would change.

But what about people who truly couldn’t afford it. There has to be a safety net, both in the health care system and bankruptcy system. The obvious starting point is Medicaid, but that system needs to be totally revamped. A system of free clinics partnered with hospitals should be established, maybe a better word is encouraged. This way when someone who is truly in need and goes to the ER room for services that are better handled in the doctor’s office, they could be redirected there. Tax incentives could be used to establish such a system, and even pay for some of it. Although block grants back to the states, so they could find the best solutions locally, would be the most effective to work out these systems. The one-size-fits-all solutions need to be minimized.

An aside important to later discussions: One statistic that is often quoted is insurance rates rise at 20% per year. That means a policy that cost $100 in 2003, would cost $619.17 in 2013. However, in 2013 I could get a 21 year-old a policy for $85/month. How can these mutually exclusive statistics be true? It’s simple, Insurance companies raise rates faster on active policies than on new policies. For example, I have one (now) client that kept their policy since 1998 and it was up to $2,000/month, their new policy is $800/month. There are good reasons why this happens, but the why isn’t as important as the fact that it does. The bottom line is people move plans every 3-5 years to manage costs.

Insuring the uninsurable is a complex problem, but solvable. The solution can’t get people to take a chance without insurance and buy after the fact. The ACA system accomplishes this by having an open enrollment period. With some changes to the pre-ACA insurance system this could be accomplished more efficiently, have less of an effect on the pricing model, and encourage purchasing of insurance earlier.

The pre-ACA system set rates for individuals based on underwriting that took their health into account. If someone was uninsurable (i.e., too much risk), they are moved to a risk pool, which is very costly. The pre-ACA system also would not insure pre-existing conditions when accepted, unless there was insurance in place, without a 63 day break in coverage, prior to the policy starting. The problem happened when the insured would try to move plans. If they became uninsurable on the old plan they are stuck on that plan, and subject to rising rates.

Creating a system, that once in place, allows an insured to move plans even with pre-existing conditions, with a maximum rate-up (increased cost) would eliminate the problem of moving plans. In other words, you can move between plans and insurance companies with pre-existing companies as long as you stay insured. Insurance companies can mitigate that risk by charging more, but with an upper limit. There should be responsibility on the insured too, so having a caveat “as long as a controllable condition (i.e., diabetes) is kept under control” would help manage that risk. Conditions like cancer, which the insured has no control over, would not have a caveat. If the insured doesn’t take responsibility, the insured could be moved into the risk pool.

The risk pool is the entry point into the system for an individual that doesn’t have insurance, but has a pre-existing condition. It should be more expensive than the individual market (incentivize individuals to get insurance before something happens), but still have a maximum rate. When an individual enters the risk pool without insurance, their pre-existing condition should not be covered for 12 months. This of course could saddle an individual with huge bills that will last the rest of their life, especially since bankruptcy wouldn’t take care of it. But that is a choice they will be making if not entering the system beforehand. This is a strong incentive to buy insurance before something happens and that should lower the uninsured rate.

Once an individual is in the risk pool with a stabilized condition for 2 years, they would be able to join the individual market again, thus giving them more choices and lower costs. Since the risk pool would be taking on considerable more risk which the maximum rate up would not cover, adding $1-$2 to each individual plan not in the risk pool could subsidize the risk. To be sure, the risk pool should be for major pre-existing conditions, while the individual market should be for minor conditions.

Group health insurance should be ended. There I said it, someone had to. The fact is group health insurance has caused a lot of this problem. There isn’t room in the article to go through a full history, nor is it important. Moving insurance out of the hands of an employer and putting control back into the hands of the consumer can only be good.

On the other hand, having the employer pay part of the insurance is good for the consumer and good for the company. These two concepts do not have to be mutually exclusive. A system could be developed that consumers would registered their plans in. Companies could then access the system identifying their employees and rules for cost sharing. The system could then calculate the amount the company owes and send them a bill. When the company pays the money would be distributed to the appropriate insurance companies involved. When an individual leaves the company, they keep their insurance and pay the full premium. When they start for a new company, the new company can start paying their portion of the premium.

Implementing reforms such as these would let the free market forces take care of our insurance and uninsured problem much more efficiently than disrupting the entire system as the ACA did.