A recent survey tells us that high cost of healthcare is the issue Californians are most concerned about today – more than schools, infrastructure, jobs, crime, even cost of housing (which is a close second).
This shouldn’t be surprising given that Californians are experiencing year-over-year health insurance premium increases of more than 20%. Additionally, many Californians who obtained access to health insurance via the ACA’s Medicaid expansion now have insurance coverage but not much in the way of actual access because Medicaid reimbursement rates are so low that the number of doctors serving Medicaid patients has declined precipitously.
You’ll find that this piece is not about denigrating Obamacare or blasting Congressional Republicans for failing to “repeal and replace”. Doing so would only add heat to an already incendiary debate. What we need is some light. We need to see what our real options are and then select the best one available.
The sad reality is that a real solution is unlikely to come from Washington anytime soon. Even the bipartisan solution proposed by Senators Lamar Alexander and Patty Murray is just a stopgap measure to prevent the ACA from crashing. Fortunately, there is a provision in the ACA that enables Californians to address our own health care concerns. That provision, called “demonstration waivers”, allows broad flexibility to states to redesign their health insurance and healthcare delivery systems.
Last May, California Senate Democrats voted unanimously to support the passage of a universal health care plan that the Legislative Analyst’s Office estimated would cost about $400 billion annually. For perspective, we point out that the State budget for all expenditures—not just health care, but also K-12 and higher education, social services, transportation, corrections and every other expense category—totals less than half of that amount. Assembly Speaker Anthony Rendon sensibly pulled the bill, pointing out that a practical, affordable solution would require a lot more thought.
Some statistics will suggest what is possible. The United States currently spends nearly 18% of its Gross Domestic Product (GDP) on healthcare but ranks 41st in life expectancy, 55th in infant mortality, and 49th in maternal mortality. By comparison, the vast majority of industrialized countries—including the United Kingdom, France, Canada, and Japan—spend between 9 and 12 percent of their respective GDPs on healthcare while achieving substantially better healthcare outcomes.
But Singapore is crushing them all both in terms of quality and cost. It can not only boast of being the only country in the top five in infant mortality, life expectancy, and maternal mortality—but also of spending just 4.7 percent per year of its GDP on healthcare. Singapore delivers the world’s best healthcare outcomes for 70 percent less than what the United States is spending and about 50 to 60 percent less than what the single-payer countries are spending.
The Singapore model is particularly intriguing because major parts of its system have been implemented here in the U.S. with great success, including by major private sector employers like Whole Foods Markets and by government-sector innovators such as the State of Indiana with its Healthy Indiana Plan.
The Singapore model is based on three key principles: choice, responsibility, and security. Some of the Singapore model—for example requiring everyone to deposit 7% of their income in a Health Savings Account—would be difficult to implement in the U.S., but innovators like Whole Foods Markets have implemented effective substitutes here in the United States. So what follows is based on the Singapore model but with local adaptations that can, together, provide affordable, high quality healthcare for every Californian.
There are five primary components to our Singapore-derived model:
- Fully-Funded Health Savings Accounts (HSAs). These accounts, which are owned by beneficiaries and transferable to heirs at death, are funded by employers—or by the government for those who are unemployed or disabled. Consumers can use their HSAs to pay insurance premiums, deductibles and co-pays.
- High-deductible health insurance.With HSAs strongly funded, participants are both protected and empowered by high-deductible health insurance. They are protected because they have the financial resources necessary to pay for the insurance plans’ premium and $2,000 annual deductible. They are empowered by the fact that they have the means to choose when to access medical services, and from whom. Participants also have a strong incentive to shop around for the best deal on any medical service because any money they do not spend this year stays in their HSAs, always rolling over to the next year. That incentive becomes the basis for intense competition among providers to improve services and lower costs. Consumers who are spending their own money demand high quality at low prices.
- Reasonable co-pays. Co-pays of 20% between $2,000 and $3,000 and 15% between $3,000 and $4,000 limit total co-pays to $350 per year for expenditures up to $4,000. Above that level, co-pays are 10%, but an appeals board is able to approve waivers for those who don’t have the means to cover their co-pays (a similar safety net in Singapore accounts for less than1 percent of Singapore’s healthcare spending).
- Price Transparency:Every provider is required to publicly post prices and offer care to all-comers at those prices, including those with pre-existing conditions. Providers can charge what they wish, but consumers can comparison shop. And they can comparison shop because prices are publically posted. We know that price transparency matters a great deal because our current insurance system hides the large majority of medical prices from consumers. Prices are only available for “elective procedures” like LASIK eye surgery or cosmetic surgery that are not covered by insurance. The result is zero competition for anything covered by insurance, but intense competition for everything that is not covered by insurance. Not surprisingly, prices in the non-competitive insurance sector go up every year while prices in the competitive sector fall due to intense competition. Our proposal to require publically posted prices is the key step necessary for unleashing the power of competition to raise quality and lower prices. HSAs give people the money they need to comparison shop. Posted prices give them the information necessary to comparison shop.
- Age-Rated Health Insurance:Switching from community-rated insurance to age-rated insurance stabilizes insurance markets by eliminating the severe adverse selection generated by community-rating requirements. In Singapore, young, healthy people buy insurance because the premium they pay is set to their age group and thus inexpensive. They also have money in their HSAs to pay for it. Pricing goes up with age, but because the impact of the preceding four plan components is so significant, premiums for people over 65 in Singapore are about one quarter of what they are in the United States—meaning that people’s HSA can cover the premiums and provide health security.
The State of Indiana has implemented a plan for State employees that includes the first three of these components. The result: medical spending has been reduced by 35 percent and the State has seen a 12 percent net savings even after accounting for the money deposited by the State into participating employee’s HSAs. The plan is optional for State employees, who can also choose from HMOs and PPOs. In the first year, the take-up rate was 2% of State employees; the second year 72%; and today it’s over 90%. Whole Foods Markets has also put in place a plan with similar provisions for its employees and also enjoyed major costs savings while ensuring health security for its employees.
The first three provisions work because they make consumers as diligent and responsible in their spending for healthcare as they do for every other kind of shopping they do. Let’s face it, we don’t buy anything else like we buy healthcare, where we go and use the service without having any idea what it will cost, then get a largely unintelligible letter from our insurance companies about what we have to pay.
The fourth provision has a huge impact because it gives consumers the information they need to be smart buyers. And it gives providers an incentive to make pricing competitive if they wish to stay in business.
And the fifth provision brings virtually everyone into insurance markets because it recognizes that young, healthy people who are often struggling to achieve economic security are not going to be inclined to subsidize the healthcare costs of older people.
It’s by adding the fourth and fifth provisions that Singapore gets from the 35% savings achieved in Indiana to the 70% savings they achieve compared to U.S. costs. By the way, on an after-tax basis, doctors in Singapore earn approximately the same as U.S. doctors. The savings do not result from cutting doctors’ or nurses’ pay. They result comes from eliminating waste and inefficiency in the system and from a sound understanding by the Singaporean government of behavioral economics.
Complex actuarial calculations will need to be run to determine the right set of numbers to make this work for California consumers, employers, providers, insurance companies and government, but a rough analysis suggests that this plan would work if employers deposited into HSAs an amount equal to 7% of base pay (a lot less than most employers are currently paying for employee health benefits), and deductibles would be about $2,000.
If policy-makers need more persuasion to evaluate this model, consider this. Assuming savings of 50% (somewhere between Indiana and Singapore savings levels), insurance premiums for a middle-aged couple with two children, would be about $1,400 per year, compared to more than $18,000 today. And because Medi-Cal services (currently about $13,000/year) would also be reduced by 50%, the savings could be used to offer universal health care and to increase Medi-Cal reimbursement rates so Medi-Cal beneficiaries would be able to do more than say they have health coverage – they would actually be able to get access to health services.
Too good to be true? We implore policymakers to run the numbers, do the analysis. Californians deserve nothing less.
SEAN FLYNN
Professor Sean Flynn chairs the Economics Department at Scripps College. He is the author of Economics for Dummiesand co-author of the most widely used textbook in U.S. universities on behavioral economics. He is an expert on healthcare best practices.
PETE WEBER
Pete Weber serves on multiple California non-profit boards, including as co-chair of California Forward, a bipartisan governance reform organization. He is the founder and chair of the California Bridge Academies, a program that successfully transitions Cal-Fresh beneficiaries to self-reliance.