Philadelphia Reflections

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Proposals for Reform of Health Care Financing: Trimming Fat Makes Better Insurance Affordable.

Since Benjamin Franklin's time and before, there has been little dispute that saving for a rainy day is a generally good thing. The big problem has always been that to save more, you must spend less. True, spending more and saving more is hard to imagine, but quirks in health insurance might indeed make it possible to save more while spending about the same. The lucky circumstance that major health costs cluster toward the end of life provides a long preliminary period when compound interest could be at work. It should also be possible to persuade even the revenue-hungry Congress that allowing health benefits to be tax exemptions and allowing their internal interest income to be tax-sheltered, represent no greater revenue cost than is now accorded the pay-as-you-go system. Taking before-tax income and compounding it, tax-exempt, for a long period of time can generate astonishing sums of money.

But you must start with some seed money. The heart proposal for a relatively painless transition to funded health insurance is to abandon the insurance mechanism for small medical costs. Health insurance would not pay anything until a person's health costs totaled, say, $500. In insurance jargon, we would abandon "first-dollar" coverage and impose a subtab=ntial "front-end deductible". Please don't get hysterical; just listen how money gets taken from one pocket and placed in another in this way. Quite obviously, the premium for $500-deductible insurance is smaller (by about 25%) than for first-dollar coverage. Equally obviously, the subscriber then has to pay out of pocket for some medical costs which formerly seemed free. However, if the employer contributed the same amount the employee hasn't lost money, just undergone forced saving. Since some medical care then has less illusion of being a free lunch, there will be some "utilization" saving. (see Table A) That's one true saving which contributes to the seed capital we're trying to build up.

Table A

AVERAGE LENGTH OF HOSPITAL STAY BY PAY STATUS

SELF PAY 7.7 Days

BLUE CROSS 8.6

COMMERCIAL 7.6 < /p>

WORKMAN"S COMPENSATION 12.1

UNITED MINE WORKERS 16.7

MEDICAID 7.1

MEDICARE 14.5

TOTAL 9.3

Source Hospital Utilization Project, Pittsburgh (Jan 1972-June 1973)

A second real saving generated by high deductible insurance comes from the way the employee makes interest-free loans to the system. Whenever he digs into his pocket and pays medical expenses which do not total up to the annual deductible, an equivalent sum (which first-dollar insurance would have paid out) continues to earn interest within his funded insurance. His employer is paying for the medical expense, but the payments get locked into the investment fund. The double payment might otherwise have increased personal savings, or it might have been "squandered on drink"). If the money would have been saved, it earns a greater return in a tax-sheltered account. If the money would have gone for luxuries, it is no matter. However, if it actually deprives a marginal income producer of true necessities, some readjustment must be made and the ultimate result will probably be increased cost to the employer. Since at most we are talking about $5 a week, this obstacle does not seem as serious as the problem we are trying to solve. Excluded from all this discussion, of course, are those truly poor people whose medical care is destined to come from private or public charity. A funded system will reduce the number of charity cases, but it does not pretend to address their medical payments directly.

The third source of cost saving, hence seed capital for investment, comes from eliminating the rather horrendous costs of processing insurance forms and checks for millions of little medical expenses which aggregate to less than $500 a year per individual. The fourth section of this book ("Tangles") deals at length with the complexities going on inside those big insurance company buildings. Suffice it here to say the national cost of insurance administration and processing is at least $xxxx billion, a sum equal to 1/xxx of the federal deficit or 1/xxx of the loss in the international balance of trade. It makes no sense use insurance to pay a five-dollar claim with a bank check, because it costs at least $1.50 to produce, send, credit, deposit and reconcile the check. It makes no sense to require a claim form to be filled out, mailed, received, opened, verified, and processed because it costs from two to six dollars to do it. To go through all this processing for a five-dollar charge essentially doubles it into a ten-dollar cost. This sort of thing happens every single day in my office, and it must happen millions of times a day nationally. The cost in extra mail bags alone must be appreciable. So, a large front-end deductible health insurance policy is definitely less costly to society than a first-dollar policy which pays for exactly the same medical care at the same prices. The savings would become part of the nest-egg saved up in the funded insurance.

Proposals For Reform of Health Care Financing: AMA Resolution, No loss/No Gain Clauses in Group Health Insurance

WHEREAS a "no loss / no gain" clause in a group health insurance contract assures employees that an employer who transfers the group to a new insurance carrier will not create "pre-existing illness" exclusions or loss of benefits under an ongoing claim under the old carrier.

AND WHEREAS some states (Arizona, California, Connecticut, Florida, Georgia, Minnesota, New Hampshire, New Jersey, North Dakota, New Mexico, Rhode Island, South Carolina, Texas, and Wisconsin) require the inclusion of "no loss/no gain" clauses, state do not.

THEREFORE BE IT RESOLVED that the AMA review the experience in states which require "no Loss / no gain" . clauses in group health contracts, with recommendations as to whether AMA activities to promote that concept or some alternative, might be appropriate.

Typical language for no loss/no gain:

Benefits are payable for pre-existing conditions if you or your dependents were insured for all of the benefits under the old plan on the date it ended. Benefits will be the lesser of the benefits payable under the new plan as if there were no pre-existing conditions section; or the benefits that would have been payable under the old plan.

 

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