Health Care Reform Stuck on Costs

Aug 2009

(Livingston, NJ) Everyone supports health care reform as a goal.  The costs of health care are growing faster than inflation, wages and the overall economy.  At present, the United States pays more than twice on health care than any other country, about $8,160 per person.  As compared to other industrialized countries, the result of all this spending is mediocre, and in some cases, below average.
 
Nearly 150 million Americans remain uninsured, many of them working full or part time jobs.

Two of three House committees and one of two Senate committees have approved the Affordable Health Choice Act, which envisions near universal health care coverage and private insurance companies selling coverage to employers and individuals in competition with a government-sponsored plan.

These bills provide health insurance to millions of uninsured Americans at a cost of roughly $1 trillion over the next decade – mostly for subsidies to low and middle income people and expansion of the Medicaid program for the poor.

But according to John Sarno, president of the Employers Association of New Jersey, the massive reform is teetering on disarray because on disagreements over funding the expansion.  By the same token, sustaining the current system will eventually harm the economy, he says.

To pay for the subsidies, the House Education and Labor Committee has proposed a surtax on high-income earners, yet many in Congress appear on the verge of revolt on this issue.

Likewise, a bipartisan group of Governors are opposing an increase in Medicaid, which is 40% funded by the states.  They are convinced that a major expansion of the program will leave states with heavy costs overwhelm already strained budgets.

Employers, particularly small business, are greatly concerned about costs.  Nearly 177 million Americans are covered by an employer-sponsored plan.
 
Employers with payrolls exceeding $400,000 would have to provide coverage or pay an 8% payroll tax.  Employers with payrolls between $250,000 and $400,000 a year would pay a smaller tax, and those less than $250,000 would be exempt.

Small employers that do not provide insurance say that it is too expensive.  According to Sarno, for a small business in New Jersey, the average cost per employee in 2006 was $7,561. The cost of health care premiums in the state rose nearly five times faster than wages this decade. Premiums in New Jersey rose 71%, while earnings increased just 15% between 2000 and 2007.

Sarno thinks that for small employers it would be cheaper to pay the 8% payroll tax rather than provide health insurance. “As small employers decide to cut or cancel coverage, the employers who continue to provide coverage will continue picking up the tab for those who do not, just as they do now. Their premiums will continue to go up, forcing more employers to get out of the game,” Sarno says.
 
Medicare, the health program for the elderly, also faces a looming crisis.  The Annual Report of the Boards of Trustees for Social Security and Medicare warns that the Medicare trust fund used to pay for inpatient hospital treatment is already taking in less money than it spends and will become exhausted in 2020.

The Obama administration and a key Senate committee has proposed empowering a Medicare board to recommend spending cuts and best medical practices, but critics contend that such a board would place health services on the slippery slope of  government rationing – a political third rail.

Similarly, taxing employer-provided health benefits appears politically unpalatable, although the Senate Finance Committee has proposed taxing only the most generous policies that many economists think encourage use of medical care.

If employers declined to offer health insurance “it would simply shift the cost onto workers, consumers and taxpayers who would need to help pay for the subsidies necessary to keep individual policies affordable. In short, the health care mandate will ultimately shift the costs of health care insurance onto the same workers who can’t afford it now, consumers who are struggling to pay down debt, and onto the already burdened taxpayer,” says Sarno.

Health care economists see promise in steps like improved management of chronic diseases, increased focus on preventive care and advances in health information technology, but the Congressional Budget Office believes that savings from these measures will not mitigate the costs of expanding health care.

Fundamental changes such as permitting the government to demand discounts from drug companies and reduce payments to inefficient hospitals have been side tracked by the given and take of negotiation.  Drug companies and hospitals have agreed to take voluntarily take steps to reduce costs in exchange for less regulation.

Sarno believes that unless substantial cost savings can be achieved, the bills in their current state would harm the people that the reform is designed to help.

“Right now it’s a vicious cycle,” he says. “To avoid the accusation of socialized medicine or rationing, government is taking a light approach to cost savings.  But without such savings, insurance will not be affordable to the working poor and workers with modest wages. As employers find it in their interest to get out of the health care business, the demand for new taxes will be great.  I doubt that we are ready to pay higher taxes for health care subsidies for a relatively small percentage of the population.”

“It’s this type of piecemeal approach and short-term thinking that has created the crisis in the first place,” he adds.

 What health care reform means for employers. EANJ Webinar, click here for details and registration.