This page is devoted to some basic facts and ideas that are often overlooked in the health care debate. The text and research is mostly my own compilation of information from sources many folks might not be aware of. Some of these observations won't make a lot of sense unless you have a good working knowledge of the bill, so bone up and enjoy.

Lesson 1. So, let me see if I have this straight.

If an employer doesn't have health coverage for his employees, there will be an 8% payroll tax penalty. OK. Does anyone here know, as a percentage, what the average cost of health insurance coverage is to employers in the US? No? I didn't think so. The range is between 6.5%-16.5%, with the national average at....wait for it....11%. OOPS! Let's look at American workers who have employer sponsored health insurance. 56% of those workers are at companies that spend MORE than 10% of the payroll budget on health insurance. On top of this, the employer tax deduction is going to be cut by 50% for the smallest employers and will be reduced even further based on the numbers and incomes of employees. Most employers will lose at least 60%-65% of their health insurance related deductions.  Are you starting to get the picture? Can anyone here tell me what the advice of any competent CPA is going to be? Source data at Kaiser

Lesson 2. Why do employers offer health insurance?

Because they are nice people? Uh...no. Because it's the "right" thing to do? Wrong again. Panel, I'm going to flip over all the cards. Businesses offer insurance coverage for the same reason they offer pensions, profit sharing and other perks. To attract and retain higher quality workers. In the long run, it has been cheaper to offer insurance to a worker than to retrain his replacement.

This equation took a major hit when the government stepped in and forced employers to offer it to all or none. Employers were suddenly saddled with giving insurance to the rank and file, not just as a reward to keep key people around.

What do you think is going to happen when these large companies discover that they have been freed from the burden of providing health insurance to 1000, 5000, 25,000 employees for a paltry 8% of payroll? For most of them it will result in a 3%-5% net savings in payroll expense. They can easily find other ways to compensate those chosen key employees, while at the same time relieve themselves of the insane burdens related to privacy issues, claims and related HR duties. In fact, the very first job cuts are going to be the insurance specialists in the HR department. It makes perfect economic sense. Ask any CPA.

Lesson 3. Employers won’t cut health insurance just to save a few percentage points.

All I can say is, what planet are you from? Especially when this argument comes from the very same people who view corporations and big business as the spawn of Satan. You can’t have it both ways. They are either nice guys or ruthless bandits who would cut mom’s throat for a wooden nickel. The reality is that they are neither. They are in business to be in business. If cutting health insurance makes sense economically, they will do so.

Another factor no one seems to have addressed is the very strong incentive for companies to free themselves from the horrendous privacy compliance rules and other  HR burdens that come with offering health insurance today. Not only will these companies save money, they will relieve themselves of a huge HR headache, remove themselves from the threat of privacy lawsuits, and from other procedures, problems and costs related specifically to offering health insurance benefits.

In large companies, it will result in even more savings as entire sections of HR departments are fired because their job function no longer exists. And you should NOT count on the very real economic value of employee goodwill. As “No Health  Insurance” becomes an industry standard, the goodwill factor will evaporate in terms of competition for employees.

Lesson 4. Employers will keep offering insurance because if they don't, they will lose their employees to an employer who does.

A very good argument, but for 2 major factors. The first is almost a no-brainer. The employer who cuts his bottom line can offer product or service at a lower price than his competitor. The competitor will be forced to follow suit or lose market share. The only way to do that is to cut the bottom line. I’ll leave it to you to figure out how he lowers his costs.

The second factor is less obvious, but even more telling. As a percentage of payroll, health insurance cost tends to be the same or similar within specific industries. Service industry runs to 16%. Skilled trades runs to 12%. Source data at Kaiser

Here's the point. Within a given industry, based on the averages for that industry, most employers will either dump coverage or most employers will keep coverage. They already have substantial cost parity within their competitive community. The decision to retain or drop coverage is going to follow general industry lines. It is not going to be spread widely. If you are in an industry with a high percentage of payroll devoted to health insurance, you are going to be SOL. Most or all of the companies that need your skills are going to be dropping coverage.

Lesson 5. Tort reform.

On the surface, it might appear that the only impact of large malpractice settlements is the occasional high dollar settlements. That, and high malpractice insurance premiums for providers. If only that were the case, we could just walk away from tort reform.

The harsh reality is that the fear of malpractice lawsuits has created a phenomenon in the provider community know as "practicing defensive medicine". Physicians spend enormous amounts of time worrying about being sued, and rightfully so. In many states, the laws in place encourage patients to sue at the drop of a hat, often for frivolous reasons, occasionally for an honest mistake, and very rarely, for a real case of malpractice.

Consequently, MD's order barrages of tests, make endless referrals to specialists and hundreds of other expensive recommendations for patients they are confident have no need of same. They do it because of the minuscule chance that there may be a problem there was no indication of, but will result in a lawsuit if present. And the insurance companies pay these claims for the same reason. They cannot risk the chance of a lawsuit by denying a claim an MD has deemed medically necessary. Imagine the savings if MD's didn't feel forced to order full blood panels for the common cold.

Lesson 6. Large employers pay less for insurance than small employers because they can negotiate discounts.

I would love to find the fool that first started this lie and strangle him. It has been trumpeted by politicians and advocates from all areas of the political spectrum. It is just plain dead wrong. The trend for many years has been exactly the opposite. As a percentage of payroll, large companies spend about 40% more on health insurance per employee than small employers. The average company of 26-50 employees spends between 10%-11% of its payroll budget on health insurance. Companies with 1001-5000 employees devote about 14%. Over 5000 employees and the figure drops to 12.7%, but nowhere near the average 10.6% of a small employer. So for all you healthcare wonks, CUT IT OUT! You're wrong. Source data at Kaiser

Lesson 7. Group or employer provided health insurance is cheaper than individual private coverage.

This is one of the biggest and most damaging myths circulating today. Nothing could be further from the truth. The main reason people believe this is because as employees, they have never paid or been aware of the actual premium for their coverage. Currently, employers are required pay a minimum of 50% of the premium, more in some states.

For decades employees have paid very little or nothing for top notch plans. They got used to it, never knowing the actual cost to the employer. The biggest difference between “group” and “individual” coverage is that the insurance company CANNOT, by law, refuse to issue the group policy based on the health history of the applicants. This means the insurance company MUST insure even employees who are in the middle of six figure ongoing medical problems.

On the other hand, in most states, insurance companies have the right to refuse and/or modify coverage based on the detailed medical history of the applicant. Premiums are literally 1/2 or 1/3 of what is charged for identical group coverage. The difference can be vividly displayed by comparing individual rates in NJ (where a company must issue and pay claims for pre-ex regardless of health history) and your state. Go to ehealth.com and compare rates for urban areas with identical benefits. You will see exactly what I am talking about.

Lesson 8. Insurance companies control what gets covered.

Another foolish myth. The reality of the health insurance market is that there are actually 50 very different markets. Each state has an Insurance Department or regulatory body that serves the same purpose. What your insurance policy looks like is controlled not by the company, but by the rules created by your state government and implemented by your state insurance Department.

Regulation ranges from minimal to absurd, depending on where you live. Each state has a different set of minimum required mandates that an insurance company must provide in order to sell in that state. In 1965, there were 7 state mandated benefits in the US. Today, there are over 1000. Many are 'normal" items that are universally covered by all companies, but some are ridiculous. Among those are cosmetic hair transplants, in vitro fertilization, wigs, clinical trials (yes, experimental stuff), off label drug use, birthmark removal, contraceptives, psychotropic drugs and breast reductions.

The list goes on and on, and it is dictated by YOUR state government. I'm sure you folks in CT, FL, MA, MD, MN, MO, NH, NM, OK and PA will be pleased to learn that part of your insurance premiums are going to pay for that bad hair plug job your neighbor just got. Source data at mandates

Lesson 9. Rationing Part 1.

The Dems would have you believe that opponents to this insanity are using rationing as a scare tactic. Well, I suppose they are factually correct, but that doesn’t change the fact that the plan WILL create rationing of healthcare. As they say, even paranoids have enemies.

The reality is simple. The health care system is already close to an overload in some regions, especially in major urban areas. It is most obvious in hospitals, where staff regularly work 60 hour weeks, and often even more. Add to this a dramatic shift in the mindset of new entrants into the medical fields. These folks actually expect to be able to spend large amounts of time with their families, hobbies, life outside work.

The era of old doctors working 80 hour weeks because they WANT to is coming to a close. What does all this mean? Very simple. Even without an influx of new patients, the system is straining as fewer man hours are worked by each provider. What happens if you add 20 Mil, 30, Mil or 50 Mil NEW patients? Do I need to lay this out for you?

Lesson 10. Rationing Part 2.

What happens when government holds the purse strings in any program? Very simply, it controls what gets paid for and what doesn’t. We don’t need to theorize here. We need only look at the examples of other nations, and yes, even at several of our own states.

MA is about to institute rationing to its grossly underfunded program. The OR plan has devolved from a lofty full tilt plan to a rationing plan with so few options that it isn’t even worth having, even when OR pays your premiums. The TN plan is hemorrhaging as I type this, sucking up every new penny of revenue coming into the state.

Want details? Google it and find more than you ever wanted to know. The reality is very simple. If you have a budget, a fixed  number of providers and a massive influx of users, someone is going to have to act as the gate keeper, determining who gets treatment, how much treatment, and for what conditions. The budget is the 5 lb sack and the patients are the 10 lb of...you know. It ain’t gonna fit, and Henry Waxman is going to be the one who determines whether you live or die, walk straight or suffer a handicap, use the john like a normal person or crap into a bag on your belly.  

Lesson 11. Selling across state lines will generate big savings and more competition.

 

Great sound byte. The reality is very different. It appears that consumers in some areas of the country would indeed enjoy substantial savings. However, the cost of those savings would be a dramatic reduction in competition, not an increase. Sounds counterintuitive, especially to a capitalist. What advocates of this concept fail to account for is the impact of government regulations.

 

Currently, each state has its own regulatory body that has authority over virtually all insurance transactions that take place within that state. Insurance regulation is a State matter, not subject to Federal control or regulation except in cases affecting interstate commerce.

 

Each state has its own rules and laws controlling health insurance. These rules go far beyond the structure of insurance policies. State insurance regulation encompasses agents, companies, medical provider networks, claims payment practices, and a host of other issues. Perhaps most important to this subject is the licensing of companies and agents to do business within the state.

 

Just as a license (and all the pertinent qualifications) is required for local companies and agents, “foreign” or non-resident licenses are required for any company or person who wants to do insurance business within that state. I will not bore you with details of reciprocity, appointment fees, retaliatory rules and the like.

 

Any attempt by the federal government to “usurp” those prerogatives will be vigorously opposed at the state and agency level. There is a strong chance that such attempts could end up before the U.S. Supreme Court. I will leave the detailed issues to Constitutional scholars. Suffice it to say the state insurance departments and state governments will guard their prerogatives and rights very jealously.

 

Currently, individuals are not allowed to purchase health insurance outside their state of residence. The popular theory is that a person in a high premium area like Manhattan should be allowed purchase a policy from a low premium area like Tulsa. The myth is that the NYC resident can somehow get a much lower Tulsa premium for essentially the same coverage. The reality is somewhere in the middle.

 

The key to understanding local insurance premium rates is to understand that they are driven by local health care costs and home state coverage mandates. First, we will look at the hard costs of medical services.

 

The cost of health services is driven by factors like the local tax rates, office space rental rates, local salary rates for support staff and malpractice insurance rates. Medical equipment and supply costs tend to be similar nationwide, but all of the rest of the overhead costs are subject to local conditions.

 

Consider office space lease rates as an example. In Manhattan, they currently range from $40-$90 per sq ft. The same quality office runs at $7.50-$18.00 per sq ft in Tulsa OK. Most every other geography based variable cost factor follows this trend. Wages, tax rates and all the rest. The result is a dramatic difference in health care costs between the two cities.

 

The second factor is the existence state coverage mandates, or more accurately, the number and nature of them. Each state has a series of items they require to be included in any health insurance policy sold within that state. These mandates cover medical procedures, treatments and devices, the types of practitioners included in coverage, and who must be covered under the family or employer policies.

 

Some of the less “conventional” mandates include coverage for hair “prosthesis” and port wine stain removal, dieticians, pastoral counseling and social workers, and coverage for grandchildren and non-custodial children. In 2008, the number of mandates from state to state ranged from a low of 19 in Alabama up to 63 in Maryland. The exact impact on cost varies from state to state, but is fair to say that it can be substantial in some comparisons.

 

This brings us to health insurance premiums. Compare policies between the two cities. You will find that a Manhattan resident (55 mandates) pays between 100%-200% higher premium for very similar coverage than a Tulsa resident (36 mandates) does. It has nothing to do with insurance company profit margins or competitive issues. It is a product of the actual cost of local health care and the cost of mandates.

 

As you look at health insurance premiums within an area like a city and its surrounding suburbs, you discover that rates for identical coverage vary based on the location. Usually, the city itself and wealthiest suburbs will have the highest rates. Middle and lower income suburban area rates will be a bit lower. The rural fringes will be even lower. These rate differences are driven solely by the hard cost of health care in that local area and the fact that most services for the insureds will take place in that area.

 

If we adopt a cross state sales law, a Manhattan resident will get lower premiums for similar coverage because he bought an Oklahoma policy. However, the savings will be limited to those dictated by the mandates, not the geography. Just as the Tulsa policy rates are adjusted between city and suburbs to reflect local costs, so they will be adjusted upwards to account for local Manhattan costs. The Manhattan buyer will enjoy a premium break only because of differences in mandates.

 

The question is, are the savings enough to justify this dramatic change in the relationship between the federal government, state governments, the insurance industry, and consumers? Before any such change is implemented, there needs to be serious study of the costs and benefits involved. The primary source of savings would come from the state mandate factor, and to date, no publically available study has been made of the real world hard cost differences. The health insurance companies almost certainly have the answers, but that data is likely to be considered proprietary and vital to their competitive strategies.

 

Which brings us to the other promised benefit. Increased competition between insurance companies. At first glance, this makes a lot of sense. Allow carriers into states not previously open to them for a variety of reasons and premiums will be reduced through the mechanism of increased competition. Capitalism at work.

 

Will it work? Yes, in some areas, but only at the cost of reduced competition.

 

Consumers are not allowed to purchase health insurance from another state. What is meant by this is the local consumer may only purchase insurance plans that are reviewed and approved by their local state insurance department. The home state of the issuing insurance company is not really an issue. Any company must gain the approval of each state it wishes to do business in and then gain approval for each product it markets in that state. This means state mandated benefits must be included.

 

Under the proposed idea, the local resident will ignore the costly mandate laden plan available in his home state and purchase a different plan with fewer mandates from another, less restrictive state. What has not been addressed is that this procedure will have a devastating impact on smaller local insurance companies.

 

According to AM Best, there are 980 insurance companies whose primary business type is health or HMO products. When you factor in companies that offer health insurance as a secondary product, this number climbs to 1300-1400. Of these companies, somewhere between 6-12 are considered to have a national presence in the health insurance market. Depending on how you define the term, there are also a number of companies that operate on a “regional” basis.

 

However, the vast majority of health insurance companies operate in a single or just a few states. Regardless of how the cross state sales barriers are removed, if local differences in mandates are maintained, these small companies will be put at a severe competitive disadvantage. The only open question is one of degree.

 

For the purposes of this discussion, we will use hypothetical companies, X and Y, in adjoining states, A and B. X is in state A with a heavy load of mandate requirements and Y is in state B with minimal requirements. Assume that the actual health care costs in the states are identical and that the only factor that would generate a difference in premiums is the difference in mandates. Finally, assume that the premium difference is 10% between the two states for identical coverage. The policy in A that costs $100 per month can be purchased for $90 in B.

 

If residents in state A are allowed to purchase state B policies from company at $90, what will happen to company X? Through no fault of its own, it will not be able to compete against company Y. Obviously, company X is doomed. So much for promoting competition.

 

The simple example above fails to touch on a number of sticky side issues. If there is a complaint or lawsuit against company Y, in which state will it be filed? Does the selling agent or company require a license in State A? Does state A have any recourse against the agent or company from state B?

 

Obviously, the real world is a bit more complicated, but the example above forms the core of nearly every variation of problems that will arise under a cross state sales scenario. Local companies in states with heavy mandates are going to find themselves in a very bad position when competing against outsiders if they are not allowed to remove those mandates from policy offerings.

 

Large national players will have an overwhelming advantage. In most states, they already have a presence, with marketing systems, agents and all that a company needs to compete. Far more importantly, if they currently sell in that state, they have a database of local claims information. They already know how much each procedure will cost. They have access to local provider networks or may even have built their own.

 

From there, it is a simple matter to insert the “local” information into a product they already sell in another state. A low mandate state. By simply removing the “local” mandates and recalculating the premiums based on the local data, the big company will be able to quickly produce a low mandate policy priced to sell in the high mandate state.

 

If we use Manhattan and Tulsa again, it will happen this way. The Manhattan resident simply goes online to find his best deal. He chooses the Oklahoma policy and enjoys a 10% savings over similar coverage (minus a few mandates he doesn’t care about) from a New York company selling a New York policy. The New York company will find it impossible to compete in this situation. And soon, it will go out of business.

 

The only recourse for the New York company is to open a subsidiary in Oklahoma and start selling in and from that state, under those rules, then marketing to their clients in New York. Of course, that takes time and capital they might not have.

 

If state governments were structured to allow a rapid response to a market change like this, the outcome might be acceptable. They would need to pass laws reducing mandates to levels comparable with their neighbors to level the playing field for their domestic insurance companies. Sadly, experience forces us to admit that expecting such intelligent and speedy action from state politicians and bureaucrats would be folly.

 

In the final analysis, it appears that the only way to increase competition and reduce premiums is to create and enforce a single federal standard nationwide, with a low number of mandates. Such a standard would have to be both minimum and maximum to be effective. Which would bring us right back to the states rights issue and some heavy Constitutional battles. It seems that every benefit has a price. How much are we willing to pay?