Recent action on health-care legislation is headed for a strategic disaster -- rising health-costs and a fiscal explosion. Business leaders need to recognize this, and work to change course before it is too late.
Health care and insurance are complex systems with interacting parts. The consensus wants coverage to be available to everyone (except illegal immigrants), with no penalties for pre-existing conditions. The insurance companies want everyone to buy insurance, so that the cost of covering the sick will be offset by premiums from today's healthy. Legislators want to limit the premium cost to low-income households, and to allow those with incomes too high for Medicaid coverage but too low to purchase their own insurance to have a relatively painless exemption from buying coverage. Business leadership organizations want to maintain control of the health plans of their employees. And everyone wants the total cost of the initiative to be limited, and to be fully paid for by savings elsewhere and by taxes.
These demands cannot all be met at once. The price of insurance cannot be set by law; it is determined by the cost of health care for the population to be covered. Legislators are unable or unwilling to enact effective measures to mitigate health expenditure growth. To cover the health care risk for everyone, everyone must buy coverage. If modest-income families are to buy insurance, they must be subsidized. Those subsidies have costs, and those costs drove the total cost of the health care bills in Congress higher than the target. To save money, the subsidies were cut. For political appeal, more low-income families were excused from purchasing insurance, and penalties for refusing insurance were reduced. With fewer healthy people in the risk pool to share the cost of covering the sick, the price of insurance inevitably will rise.
This process will feed on itself. As insurance becomes more costly, those who see themselves as healthy will refuse insurance in increasing numbers, even if they must pay the now-reduced penalties. After all, if they do become sick later, they will be able to buy insurance virtually on the way to the emergency room - because discrimination against pre-existing conditions will be banned. As more healthy people drop insurance, the price per person will rise - inducing still more healthy people to decline coverage, in an ever-worsening spiral.
This legislative process appears preordained to fail. Democratic leaders in the Senate and the House are working to combine their five bills without violating the President's cost constraint. The House and the Senate reject each other's cost offsets. Every additional feature will have to be paid for. Legislators will not want to burden poor people with higher costs, and likely will reduce, rather than increase, the penalties for not having insurance.
The final bill certainly will raise funds by imposing various taxes on firms and especially insurers. These taxes will be passed on to customers through higher insurance premiums. (It is ironic that the taxes in the Finance Committee bill will be on insurers, whether for-profit or nonprofit, but not on self-insuring employers. This will tilt the playing field in favor of self insurance, which is almost always costly fee-for-service, and against efficient prepaid plans like the Group Health Cooperatives and Kaiser Permanente, which compete for members in employment groups.)
The standards for an acceptable policy under the mandate will probably increase premiums too. So people will increasingly go without insurance until they need it, and thanks to guaranteed issue, they will then enroll when they anticipate medical needs. When they foresee no more medical needs, they will drop insurance because $4000+ per year in premiums is a lot more than $200-750 of penalties for going without insurance.
This vicious cycle will become a "death spiral" as more and more healthy people drop out of the insurance pool. So finally, insurance companies - quite possibly including the nonprofit integrated delivery systems like Group Health Cooperative and Kaiser Permanente, which have been commended for driving competition and innovation - will have to withdraw from the individual market.
As the insurance companies withdraw, the advocates of the "public option" will say, "We told you so." So access to the public option will be expanded and it will grow rapidly. Its premiums will have to be high by today's standards - unless it is able to draw on open-ended public subsidies the way Medicare does. So, to provide "competition" and "challenge the private insurers," it will be subsidized - either explicitly with cash, or implicitly with the right to compel doctors and hospitals to participate at artificially low reimbursement rates. Private insurance companies cannot survive against a subsidized public insurance company backed by the full faith and credit of the federal government, with the power of law to extract below-market services from providers. There will be a government "single payer" for people not in self-insured employment groups. But a government insurance company will be no more able to bring health expenditure growth to sustainable rates than Medicare has been. Just look at the politics of the Sustainable Growth Rate formula for physician fees in Medicare for an example of what will happen.
Rising costs will overwhelm the subsidies to cover low-income people. Those subsidies will have to rise to keep pace with costs. The Federal budget deficit, already far too high, will continue to grow unsustainably as health expenditures continue to outpace revenues (and the GDP out of which those revenues are collected).
The end of the story is a sequel to the economic thriller of the last two years. The foreign investors who have been our nation's lenders of last resort - and even American investors - will be increasingly reluctant to buy the torrent of US Treasury securities needed to finance our health-cost-driven deficits. The Treasury will have to pay higher and higher interest rates, sending deficits still higher, stoking inflation, and stifling investment and economic growth.
Only market forces - insurers, providers and consumers, all with aligned incentives to seek and deliver the highest-quality care at the lowest possible price - can stop our health-care industry from piling onto the already outsized budget deficit. The Wyden-Bennett bill introduced in Senate Finance, based on the principle of cost conscious individual choice of health plan, is the only proposal that gets health care costs under control and avoids a government single-payer system in the long run. The legislation now under consideration heads in the opposite direction, and its momentum is strong. Business leaders, with their interests grounded in the long-term health of the economy, need to stop this march into madness and work to get the Wyden-Bennett bill enacted.