The best-kept secrets in health reform

Copyright 1994 by Michael J. Hihn:

Health care represents 1/7 of our economy, approaching one trillion dollars a year. Of that total, what percent would you say is controlled by insurance companies? In round numbers, 60%, 40%, or 30%? Insurance companies are the primary target of health-care reform. And, although containing costs is only one goal, we should know how much of that goal is being addressed. What was your answer?

The correct answer is ... less than 15% of national health-care costs are paid by private insurers. And I apologize for the trick question. That was for 1990, which you can confirm in the Statistical Abstract at your local library. (I assume you may not believe private insurance is so small a factor.) Insurance companies spent $90 billion of the $675 billion total, or 13.3%.

In that same year, government insurance spent nearly twice as much, $174 billion, for Medicare/Medicaid alone. And costs for these government plans are increasing nearly twice as fast as private plans. That's the first well-kept secret: government plans dominate the health care market, and do the worst at controlling costs. But we keep hearing the private sector has failed. If the auto industry is in trouble do we blame the smallest supplier, Chrysler?

In autos as in health care, the largest supplier (GM) is the least efficient. Are Ford and Chrysler customers demanding a takeover by a less efficient GM? Or might GM shareholders prefer a takeover by a more efficient competitor? For health care, the evidence suggests it's the private sector that should be taking over the government plans. We're doing it backwards.

Here's another well-kept secret: Three major health-care proposals, including the President's, will require higher local taxes for many schools and cities. When I was a school board member at an average- sized suburban system, we saved tens of thousands of dollars per year by self-insuring employee health costs. We reimbursed expenses ourselves, up to a "stop-loss" maximum (high-deductible insurance). Self-funding is a proven cost-saver for millions of Americans. But the President would make these savings illegal for employers of fewer than 1,000. Do your city and schools self-insure?

In a May 19th Wall Street Journal op-ed piece, it was reported that 405,000 small-medium businesses now self-insure their employees. Administrative costs average only 6%. The Independent Grocers Association manages a self-funded plan for IGA grocery stores, providing coverage for 37,000 families. But because each store is an independent small business, that coverage would be banned.

Self-funding is one way employers have cut costs without sacrificing quality. The other is a major switch to HMO coverage. From 1980 to 1992, when insurance rates were skyrocketing, HMO enrollments more than quadrupled - from 9.1 million to 37.2 million Americans. Both options, self-funding or HMO, provide one-time savings of 30-45% from the switch, with future savings from better management.

Meanwhile, employers who provide traditional low-deductible, third-party health insurance have failed to control rate increases. Instead, those employers shifted more of the burden to workers.

Cost increases are much less in private health plans. But look deeper, and we see two opposing factors. Traditional plan rates are still skyrocketing. But actual cost reductions are occurring in those workplaces, both public and private, that reject or reduce traditional coverage.

That's why Medical Savings Accounts (MSAs) deserve a closer look. MSAs, and how they work, is another well-kept secret. My family already has a restricted MSA, the Flexible Savings Accounts now used by millions of Americans. (Flex accounts are another cost-saver the President would repeal.)

Personally, I love a system that eliminates both government and insurance bureaucracies. We have HMO coverage. Our flex account self-reimburses the co-payments (tax free). We fully self-insure (pay cash for) the optical needs of three people, also from the tax-free flex account.

Reimbursement is simple, from my wife's employer. I attach cash receipts to a simple form that contains her name, employee number and signature. We get the same tax treatment as employer-paid insurance, without paying insurance overhead. If I could, I'd cancel the HMO, buy insurance for only major expenses, pay cash for everything else, and let the savings accumulate for our son when we're gone. But Congress won't let me.

One proposal, by Senator Phil Gramm, would have your employer place your full insurance costs, up to $4,500, into a tax-free MSA. It would then be your money. You could self-insure (pay cash) to whatever extent you want, and buy whatever insurance you want ... including what you have now. There's a strong incentive (cash in your pocket) to either self-insure or switch to an HMO. Each year you could withdraw up to $1,500 of any savings, as taxable income.

Self-insuring would save the most. But the Senator may have oversold that option, while doing nothing to help you do so. His critics claim most folks are too dumb to shop for insurance. Are you too dumb?

The critics have a point, though. If the Senator wants to encourage self-insurance (paying cash), he could have made it a lot easier. Two simple changes would do that. First, help more small employers to provide self-insured plans, by allowing small-business and trade associations to manage them ... like IGA.

For those who want to individually self-insure, Gramm's plan already transfers the money to your own account. Permit banks to offer a debit card on MSAs, and we can even eliminate that simple form I described. You'd have two health-care cards. One for catastrophic insurance, which would rarely be used. Another that automatically pays your doctor (or HMO co-pay) from your MSA ... totally eliminating their own paperwork.

One card or two? With one-card plans, we start by repealing proven cost-savers, then add a huge new bureaucracy and more insurance reimbursements than now. Add the second card and we slash insurance involvement, avoid more government, expand what already works, and give you several options to increase your take-home pay.

If we then do likewise with government plans, the savings would pay all or most of the costs for universal coverage. That's the final best-kept secret. The real obstacle to genuine reform is ... partisan politics. It's Democrats who most want universal coverage. But it's Republicans with the best way to pay for it, by cutting costs for the currently insured.

SOURCES: From 1993 Statistical Abstract, Table 150 for total healthcare costs, table 162 for Medicaid, table 156 for Medicare, table 841 for private insurance (subtract "income maintence").

Copyright 1994 by Michael J. Hihn. Permission granted to redistribute if these lines and copyright are left intact. This was originally published as a weekly newspaper column.