Business Forward: Rising Health Care Costs and Business

This briefing examines rising health care costs and current reform proposals.  We also recommend additional resources, including opposing viewpoints.  For detailed comparisons of specific reform proposals, the Kaiser Family Foundation has produced side-by-side assessments.  The Kaiser Family Foundation has also produced a helpful primer on the legislative process health reform will follow. To learn more about spending and coverage in your state, the Center for American Progress has produced a State-by-State Report.

Total spending and share of U.S. economy.  America will spend nearly $2.5 trillion on health care this year.  That represents nearly 18% of our GDP – and a 6% increase over 2008. Employers and individuals cover about half these costs directly, and they cover the remainder through taxes for Medicare, Medicaid and other services.

Insurance premiums.  Last year, an employer-based family health insurance policy cost $12,680, on average.  That’s about as much as the annual earnings of a full-time minimum wage job – and 5% more than a similar policy would have cost in 2007.

Recent increases in health care spending as a percentage of GDP have been driven, in part, by the current recession.  But the long term cost trends were unsustainable long before 2008’s financial crisis. 

Per capita spending on health care nearly tripled from 1990 to 2009, and could double again in 2021. 

 

 

 The share of GDP devoted to health care almost doubled from 1980 to 2007 – and it is likely to double again by 2040. 

 

 

 

Employer-sponsored health insurance premiums have nearly doubled since 1996 – and could double again by 2025.

 

 

As premiums rise, so do deductibles.  In fact, the average deductible will nearly double by 2016 (to $2,700).

 

 

Rising costs are bad, but rising costs relative to our competitors are worse.  Today, manufacturers in the U.S. pay more than twice as much in hourly health care costs as their major trading partners ($2.38 per worker per hour, versus $0.96).

 

The difference between what we spend on health care and what our competitors spend is growing.  In 1970, U.S. spending on health care was only a moderately higher percentage of GDP than other economically developed countries.6  In 2007, the U.S. spent nearly twice as much of its GDP to health care as several of our biggest competitors (16.0% vs. 8.2%, for Canada, Germany, Japan, Sweden, Britain and France, on average).

 

Impact on coverage and compensation.  Employers have responded to these rising costs by increasing deductibles, switching plans and, in some cases, dropping health insurance altogether.  According to NFIB member surveys, approximately one in four small businesses that offer health insurance to their employees made changes to their coverage last year, in order to offset rising premiums. According to a Kaiser Family Foundation survey, four out of ten employers surveyed are likely to take similar steps this year.

 

And many small businesses are foregoing or dropping health coverage altogether.  From 2000 to 2007, the percentage of large firms offering health insurance to employees remained steady, but the percentage of small businesses offering health insurance dropped by 13% (from 68% to 59%).

 

Businesses that offer health care are covering these costs, in part, by shifting more of each compensation dollar from wages to health benefits.  This has contributed to wage stagnation.  In fact, employee health insurance premiums have risen at about four times the rate of wages over the past 10 years.

 

 

If insurance premiums continue to grow at their current rate, employees could see their net wages shrink (in real dollars).

 

 

Impact on profits.  Without reform, rising health care costs will limit business owners’ ability to reinvest in their businesses and start new ventures. A study by MIT’s Jonathan Gruber for the Small Business Majority estimates that small businesses alone will lose $52.1 billion in profits to high health care costs over the next 10 years alone. Health care reform can reduce these losses by more than 56% percent, saving $29.2 billion in small business profits and allowing small business owners to reinvest those dollars in the economy.

 

 

 

Impact on jobs.  The Small Business Majority report also estimates that, without health care reform, rising costs could cost 178,000 jobs over the next 10 years.  Health care reform could reduce these losses by more than 72% percent, saving 128,000 jobs.

 

 

 

 

More government debt.  Last year, private funds covered 54% of America’s $2.2 trillion in health care expenditures.  But as Americans grow older, more of that spending will be picked up by public programs, including Medicare, Medicaid and SCHIP.  By 2018, public spending could cover 51% of nearly $4.5 trillion in health care costs. Without substantial costs reforms, that shift will drive more debt.

 

Rising cost of “uncompensated care.” As the number of uninsured Americans rises, employers that do offer insurance pay more to cover hospitals losses on “charity care” and unpaid bills.  In 2008, total government spending to reimburse health care providers was $43 billion. The Center for American Progress estimates that approximately $1,100 of each family’s annual health premium goes toward uncompensated care.

Unfortunately, without reform, this percentage will grow.  More new enterprises will forego coverage.  More established companies will drop coverage.  As the number of uninsured Americans grows, so do premiums of those lucky enough to have it. 

Lost worker productivity.  Because many workers lack proper health care coverage, they are less likely to obtain preventive care and generally take more time to recover.  Several studies put the cost to American business at between $65 billion and $135 billion per year. One study by the New America Foundation estimates lost worker productivity among the uninsured could cost more than $200 billion per year.

Lost innovation, fewer entrepreneurs. Health care reform could reduce “job lock,” if workers no longer stay in suboptimal jobs because they cannot afford to switch – or lose – health insurance.  This will spur entrepreneurial activity by increasing the incentives for Americans to launch their own companies.  It could also increase the pool of workers willing to work at small firms.

The current recession has aggravated historic differences between health care spending and GDP.  Since 1970, health care costs have grown at an annual average rate about 2.4 percentage points faster than the economy as a whole.  That difference produced the current health care crisis. 

 

But the 2008 financial crisis, and the recession it helped create, could cause the difference between health care spending and GDP to double in 2009 – putting even more pressure on businesses already struggling to pass on rising health care costs.

This additional pressure is also occurring at a time when Medicare and Medicaid are beginning to accommodate the Baby Boomers.  While approximately two-thirds of increases in Medicare and Medicaid are driven by rising health care costs, the remaining one-third is driven by the increase in seniors qualifying for this coverage.

Our 21st century economy depends more on small businesses, which are having an increasingly tougher time affording health care.  Small businesses are responsible for two-thirds of net new jobs created each year.  Because of their size, however, those firms pay approximately 18% more than large employers for the same coverage.  Among the smallest businesses, administrative costs can be as high as 27% of premiums.

That’s one reason why only 43% of firms with fewer than 50 employees offer health insurance, while 96% of firms with more than 50 employees do.  NFIB member surveys indicate that owners of new firms are reluctant to offer health benefits because they fear the coverage will become too expensive to maintain.  It also affects the coverage they offer their employees.  For example, small business employees are 4 times more likely to have high deductibles.

In our 21st century economy, workers change jobs more often, which makes our current system’s exclusion of pre-existing conditions increasingly unworkable.  Forty-two percent of Americans have changed their health care coverage in the past five years, many of them as the result of switching jobs. Nearly as many worry they will lose their coverage in the next five years.  From 2003 to 2007, one in three Americans experienced a gap in coverage, or needed help from government insurance to cover their costs.

But insurers currently exclude “pre-existing conditions” for new hires, in part, because failing to do so would cause many Americans to wait until they become ill to buy insurance.  The only way to offer “guaranteed issue” for new policies – essentially covering pre-existing conditions – is to require more Americans to pay for insurance, and to move from an “experience rating” to “community rating” system.  Balancing this tension has always been critical to meaningful reform, but it will become even more so as Americans hold more jobs over their careers. 

In May, representatives from across the health care system, including doctors, hospital administrators, health insurers, pharmaceutical firms, medical device manufacturers, and unions, proposed reforms that could potentially reduce the annual growth rate in health care costs by 1.5 percentage points, potentially saving more than $2 trillion over the next 10 years. 

These commitments represent just part of the potential savings possible, but their potential impact on our economy is striking.  If these commitments begin to work in 2013, as projected by the White House Council of Economic Advisors, health care spending – currently projected to grow to 34% of GDP by 2040 – would only rise to 23% of GDP.

 

Small businesses face several disadvantages under the current health care system.  Because they spread their risk over a smaller number of employees, their premiums can vary widely from year to year, and a major medical expense can increase the firm’s costs substantially.  Their administrative expenses are also higher.  These differences result in small businesses paying approximately 18% more than larger employers for the same coverage, with the smallest businesses paying 27% more.

Several current reform proposals seek to address these challenges by creating “insurance exchanges”  that allow small businesses to pool risk, lower their administrative costs, and simplify administration.  (See below.)

Some argue that the best way to solve these problems for small businesses is to shift the burden for buying insurance to individuals.  But moving from small businesses to individuals could magnify the administrative and risk problems identified above.  One 2006 survey estimated that nearly 9 out of 10 Americans seeking individual coverage gave up before obtaining it, either because they were not offered coverage, or because the coverage offered was too expensive. For a summary of subsidies for individual coverage, the Kaiser Family Foundation has provided a Primer on Coverage Subsidies.

The principal proposal to address small business concerns – by eliminating pre-existing condition exclusions, adopting “community rating” underwriting, and requiring most employers to provide health insurance to their employees – is addressed below.

Efficiency reforms (like health care IT, performance measurement and tort reform) could have a significant impact on long-term costs, but they alone cannot solve our problem of portable, affordable health care.

In simplest terms, insurance companies cannot offer to insure us at reasonable prices – and cover pre-existing conditions – if Americans can choose to put off buying insurance until they get sick. 

Today, insurance companies can deny you coverage for an existing health problem, or “pre-existing condition.”   If they did not do this, Americans could put off buying insurance until they needed expensive care.  (This would be like allowing home owners to buy fire insurance after their house started burning.) For that reason, insurers have agreed, in principal, to “guaranteed issue,” which means they will issue a policy (and cover pre-existing conditions) to anyone who pays his or her premiums, provided Americans are required to obtain insurance.  Consumers would be protected on the pricing of these policies by switching from “experience rating” (where your rate is determined by your own health history) to “community rating” (where your rate is determined by the group you are joining).

If “guaranteed issue” and “community rating” reforms are not adequately balanced, insurers or patients could be harmed.  For example, if insurers are allowed to refuse to cover all but the healthiest individuals, patients could go without insurance altogether.  On the other hand, reforms that allow patients to avoid obtaining insurance could lead only those individuals expecting to face high health care costs to seek coverage.

To solve this problem, several proposals would establish an “employer mandate,” requiring companies – including many small businesses – to provide coverage or pay a fee.  These proposals vary in terms of how big a small business would have to be to fall under the mandate, as well as how much of this additional business expense would be offset by tax credits and subsidies.  For those businesses falling under the mandate, credit levels would be tiered, according to the number of employees and total wages paid.  To “play,” employers would likely have to contribute at least 50% of the cost of coverage (more, in some bills).  In exchange for providing coverage, small employers would receive a tax credit (ranging from half the cost of the coverage provided, at the high end, to $2,000 for each family and $1,000 for each individual).

Several reform proposals would also cause the Federal government to reinsure catastrophic costs in order to protect small businesses from dramatic price volatility that can now occur when an employee develops a major illness.

Competing Viewpoints.  Recent reports from Small Business Majority summarize what these exclusions and tax credits could mean for small businesses of various sizes. A Report by Third Way projects what families would likely pay for these premiums. A recent NFIB Report outlined several concerns with employer mandates, generally finding a one-size-fits-all approach unfair, regressive and expensive.

The CBO estimates the cost of efficiency reforms (like health care IT) and providing coverage subsidies to the uninsured (through programs like Medicaid, tax credits for individuals and small businesses, or direct assistance) could reach $1 trillion over the first 10 years.  As outlined in a in a recent article by the Kaiser Family Foundation’s President, Drew Altman, the actual cost will depend largely on how much we subsidize coverage.  Will subsidies be capped at families earning 200, 300 or 400% of the U.S. poverty level?  Will reform include an individual mandate?  What coverage will insurance cover, and how much of it will be offered through Medicaid?  Altman’s analysis.

 

Proposals to fund these costs vary widely.  President Obama’s first budget proposed $622 billion in savings in Medicare and Medicaid over a 10-year period.

 

President Obama’s budget proposed savings of $622 billion over ten years, including: 

To cover costs not addressed through savings, proposals in Congress include a variety of options, including, a “pay-or-play” system (described below) requiring employers that do not offer coverage to paying fees that would help cover the uninsured; reducing or eliminating deductions for employer health costs, limiting spending on flexible spending accounts (FSAs); capping itemized deductions for higher income earners; graduated tax surcharges of 1-5.4% on income in excess of $280,000 for single taxpayers and $350,000 for families; and “sin” taxes on alcohol and sugar-sweetened drinks.

For a general assessment of how to cover these costs, see the Kaiser Family Foundation’s Primer on Financing Health Care. For specific reform proposals, see the Kaiser Family Foundation’s side-by-side assessments. 

The U.S. health system is considered the most advanced system in the world, but it is also highly fragmented.  The McKinsey Global Institute has estimated that market inefficiencies, in general, cost America $100 billion each year. This section summarizes key reform principles.  For more detailed analysis, the Kaiser Family Foundation has a produced a comprehensive, side-by-side assessment of current reform proposals.

Health Insurance Exchanges.  These would allow small companies and individuals to pool their buying power and achieve economies of scale now enjoyed by only the largest employers.  It would also help individuals who have lost a job could purchase individual coverage through the exchange.  It could also make it easier to provide financial support to those in need (for example, by providing coverage while capping the family’s cost at a specified percentage of their total income).  For more information, see a Primer on Exchanges by the Kaiser Family Foundation.

Investing in Better Health Care IT – And Taking Steps to Break Down Barriers that Prevent Efficiencies.  Today, each doctor’s office has to deal with separate billing and administrative procedures for each insurer, plus Medicare, Medicaid and CHIP.  This means each office must manage several different platforms for confirming a patient’s coverage, submitting claims, checking status of a claim, receiving payments, reconciling payments against claims, and submitting bills to the patient.  Only one of these processes is performed electronically on a regular basis.

Congress and the Administration have proposed creating and mandating standardized systems for electronic billing, benefit determination, preauthorization and patient payment.  As part of the American Investment and Recovery Act, the U.S. will invest nearly $20 billion in computerizing medical records to reduce costs and improve quality.

Results-oriented management.  Business leaders in other industries rely heavily on consumer satisfaction studies, output measures and cross-industry comparisons to measure ROI.  In health care, these practices are usually limited to specific insurers, and they are rarely shared with consumers.  Medical technology could account for half of real long-term spending growth, yet we lack a system for valuing these investments and allocating their use. One study found that it can take as much as 17 years for new practices and procedures to be fully disseminated to the medical community

Health care IT reforms could allow managers to assess the performance of their employees and of specific procedures.  These same reforms could help consumers make more informed choices on care.

Comparing differences in spending and health outcomes across States suggests that nearly 30% of Medicare’s current costs could be eliminated without adversely affecting our nation’s health.  President Obama and Congress are already investing $1 billion on “comparative effectiveness” research, which will help doctors share and use information about which treatments work.

Greater coordination among doctors.  Doctors often operate without complete information or involvement with a patient’s other medical conditions and medications.  By doing more to coordinate care, the Mayo Clinic is able to provide among the Nation’s best care – at 17% less cost than the national average. A similar approach in North Carolina saved more than $240 million in one year (after start-up costs of approximately $8 million). 

Several proposed reforms would encourage greater coordination by bundling payment for a hospital stay and follow-up care, so that hospitals have an incentive to avoid readmissions. 

Eliminating fraud and abuse.  Because our claims systems are antiquated and care is fragmented, it is easier for providers to bill for services they do not render, “upcode” services for higher fees, and provide services that are not medically necessary. 

Data system reforms will enable real-time detection of fraudulent activity, and better funding of enforcement could help governments identify and punish billions in fraudulent charges.

Encouraging preventive medicine – and helping provide more primary care.  We can reduce our total health care spending by encouraging Americans to have a “health risk appraisal” that helps prevent disease and identify illnesses early.  Eliminating co-pays and other fees for vaccinations, smoking cessation classes, and some cancer screening can reduce future costs.

Through the American Recovery and Reinvestment Act, investing $1 billion on prevention and wellness programs that reduce health care costs for chronic illnesses. Through the American Recovery and Reinvestment Act, the U.S. is investing $500 million on training new doctors and nurses, which will help address future labor shortages.

Reform tort laws, so doctors practice less “defensive medicine.”  A 2005 American Medical Association study found 9 out of 10 doctors practice “defensive medicine” by ordering unnecessary tests and procedures.  Reforms include a nationwide cap on non-economic damages (“pain and suffering”) and establishing medical courts or dockets that would operate with more specialized medical knowledge.  Opponents of tort reform note that only 5 percent of claims go to trial.  Of those, fewer than 1 in 100 end in a jury verdict for the plaintiff.  It is also difficult to distinguish procedures ordered as “defense medicine,” from those driven by the U.S.’s “fee for service” system, which pays doctors for volume, not value.

However, both sides generally agree that the current system leaves too many patients without help, rewards some claimants that do not deserve relief, and drives doctors to avoid certain fields of medicine.  A New England Journal of Medicine31 study found no relationship between the presence or absence of medical negligence and the outcome of malpractice litigation. Judgments were driven by the degree of injury, not the degree of error.  On the other hand, they also found that few of those injured file claims. 

For an overview of medical tort reform recommendations, see the American Tort Reform Association. For a detailed look at systematic recommendations, see a Report by the Center for American Progress.

 

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