Publications

Rising Premiums A Problem of Global Proportion

Dayton Business Journal - November 2005
Expert Advice Column by Kathleen A. Carlson

The answer is . . . “The system is not working.”

Is it a quote from: a) Alan Greenspan; b) your director of network support or; c) Dave Waibel, president of Dayton Trane, about the affordability of health care coverage for his employees?

Thanks to the Dayton Area Chamber of Commerce and their first Healthcare Summit held last Friday at the Schuster Center, it’s (c) a quote that aptly describes how most of the attendees felt about the funding system for healthcare. The Summit elevated the dialogue on the state of the funding system from individual board rooms to a regional stage. We hope it’s the beginning of a regional effort to advocate for a change.

As if you don’t already know, health insurance premiums have gone through the roof. On a grand scale, they account for $1,200 of the cost of every General Motors car and a prime motivator behind Delphi seeking bankruptcy protection to reorganize. On a small scale they represent almost 9% of commercial heating and cooling systems contractor Dayton Trane’s total operating expenses, up from 4% five years ago, and an additional $6 per hour on a $19 per hour employee for Diamond Tool & Die.

The seemingly intractable price progression is holding back job growth and reducing our global competitiveness. Our labor rates on average include about 75% of the cost of health insurance. Labor rates for those of many of our foreign competitors do not. The double digit increases only widen the chasm. What’s behind the price advances?

Certainly, technological advances have raised the cost of treating and diagnosing many illnesses. Increasing life expectancies and improving the quality of life costs more money. Healthcare is big business. Four of the top 25 companies measured by their market capitalizations are involved in the healthcare industry: Johnson & Johnson, Pfizer, Amgen and Genentech. Decoding the human genome has unleashed a whole new frontier for understanding and developing treatments for our ailments.

New advancements have accounted for some of the double-digit pace.

Next on our list is what some would call those greedy, paper-pushing insurance companies. United Healthcare and Wellpoint, formerly Anthem, Inc., are the 31st and 64th largest companies in the domestic stock marketplace. Premium revenues are up 20% or more, but so too are expense claims. However, other operating expenses are up much less, leading to expanding operating margins and 20% plus gains in reported earnings.

Are we getting too accustomed to their exorbitant price increases? Is there too little competition? One would think the profit-robbing increases in premium costs would cause business consumers to push back on their providers, to shop price and reduce margins. On the contrary, consolidation in the industry has expanded margins with the gains being passed along to their investors, not their consumers.

The for-profit motive has also accounted for some of the double-digit pace.

What about the front line healthcare providers, doctors and hospitals? Here we have a fragmented group of caregivers. Whereas they used to be price givers – reimbursed on a cost plus margin system, and whereas some would say this system promoted cost advances, the consolidation and regulatory forces united to make them price takers. Lacking much competitive clout, they take the price the insurance companies, Medicare and Medicaid will give them.

A problem the hospital providers have is that the price given does not cover all of their costs. It might cover the direct costs of providing the service, but doesn’t cover either their indirect overhead costs (administration, depreciation and education) and/or the cost for service provided by those who aren’t covered under a program. Medicare and Medicaid don’t pay for either one. The insurance companies will pay for the indirect overhead costs and have paid for some of the uninsured, but are balking at paying for any more.

Of course, we all know insurance companies really haven’t paid for any of it; we the insurance-buying public have paid for it through rising premiums. Paying for the uninsured has also contributed to the double-digit pace.

The system is broken because the uninsured problem grows every time premiums rise too much - more companies drop their plans or raise the shares employees must pay, who then drop their plans. At any one point in time, 17% of our population under the Medicare-eligible age 65 is uninsured and another 17% are covered by a government-sponsored program. That means a third of the under age 65 population either goes without service or pays below market prices for their healthcare.

The system shouldn’t be based on employers paying for coverage. It’s not working, anti-competitive and restrains job creation. An intelligent fix would have a profound impact on our economy and our stock market. The dialogue’s begun; let’s keeping it going.