HEALTH CARE SPENDING IN THE PRIVATE SECTOR AND EFFORTS TO CONTAIN IT

Written Statement Prepared for the Annual Meeting of the Council on Healthcare Economics and Policy

Robert Wood Johnson Foundation
Princeton, NJ

June 8, 2002

Henry E. Simmons, M.D., M.P.H., F.A.C.P.
President, National Coalition on Health Care

---

      Good morning. In discussing health care spending in the private sector, I am going to share with you the collective experience and viewpoints of a unique alliance of organizations that for over a decade has worked to develop an understanding of the problems we face, and then advance policy options and prepare the groundwork necessary to address them.

      The National Coalition on Health Care is the nation’s largest and most broadly representative non-partisan health reform alliance. Former Presidents Bush, Carter, and Ford serve as our Honorary Co-Chairs. Our Co-Chairs are former Iowa Governor Robert D. Ray, a Republican, and former Florida Congressman Paul G. Rogers, a Democrat. Our 80 members reflect a wide range of political views. Members include large businesses, such as Safeway, AT&T;, and SBC Communications; many of the nation’s largest consumer, provider and labor organizations, such as AARP and the AFL-CIO; and organizations representing our country’s three major religious groups, which happen to be among our largest employers. This religious involvement positions us to raise the serious ethical issues inherent in our troubled system.

      In addition, two of the nation’s largest health and pension funds have recently joined us. Carl McCall, Comptroller of the State of New York and Sole Trustee of the New York State Common Retirement Fund, is a member, as is CalPERS (the California Public Employees’ Retirement System). These two organizations alone serve as fiduciaries for more than three million individuals and control more than 250 billion dollars worth of corporate and other assets. And we’re seeing more and more interest. Additional funds like these will join our reform effort.

      Collectively, our current members employ or relate to over 100 million Americans. They control or influence many tens of billions of dollars of health care purchasing power. And I think the signal is clear: There is a lot of power — not only political power, but financial power — mobilizing around the issue of health care reform.

      I give you this background because the broad experience of our members in individually attempting to deal with the health system’s problems is very relevant.

      On the basis of our Coalition’s experience, I want to offer you six observations to consider about private health care spending and efforts by employers and other private payers to contain or constrain it.

      Observation one: We have not one, but three systemic problems: rising costs, decreasing coverage, and pervasive, destructive, and expensive quality problems. These problems are interrelated and growing worse. To successfully deal with one, we must deal with them all.

      Observation two: What is most striking about the very large premium increases we are now seeing is not just their magnitude, but the fact that they are taking place now. Let me explain.

      We’ve already heard in this conference the news about large premium increases. Earlier this week, Hewitt Associates reported that preliminary HMO increases for 2003 are averaging 22 percent – nearly 7 percent higher than the increases Hewitt found for this year. Premiums are rising at the fastest real rates in history. All of these increases are occurring, of course, at a time of low general inflation.

      What is especially worrisome is that we are seeing these startling premium increases even though employers, especially large employers, have become quite sophisticated about health care purchasing. Many of them had a great deal of success in the middle and late 1990s in stabilizing their health care costs. Now their efforts are of little avail. Health care premiums, for even the largest and smartest purchasers, are out of control.

      A case in point: CalPERS, the nation’s second largest purchaser of public employee health benefits and a new member of our Coalition. After years of success in holding down its cost increases for coverage of 1.2 million people, CalPERS now finds that its good fortune has run out. In 2003, CalPERS faces a premium increase of 25 percent. This comes after a 13 percent increase this year, and double digit increases are likely to continue.

      In mid-April, Bill Crist, the president of CalPERS, told David Broder of the Washington Post,

“In 1992, we hadn’t taken advantage of our position in the marketplace. But soon after that, we standardized our benefits and invited the managed care companies that were entering our market to compete for our business. That competition for market share held costs down, and for several years, we gained national prominence for actually lowering premiums. But we’ve pretty much wrung out what we can through competition.”

      Broder then observed that “virtually every other corporate and individual purchaser is facing the same problem as CalPERS.”

      Observation three: Increasing health care costs for employers – and sharply rising premiums in the non-group market – will increase the number of Americans without health insurance. In a study we commissioned, the Lewin Group found that, over time, a one percent real increase in insurance premiums is associated with an addition of 300,000 to the ranks of the uninsured. On this basis, our Coalition estimated in a recent report, “A Perfect Storm: The Confluence of Forces Affecting Health Care Coverage,” that due to cost escalation, the number of uninsured Americans may have increased in 2001 and 2002 by 6 million.

      Observation four: Let’s not kid ourselves: Many of the new wave of ostensible cost containment tactics that employers are edging towards – increased cost-sharing, defined contributions – are in fact ways to shift costs, not contain them. If and as more companies move in this direction, we will see the employee share of health care spending continue to rise. The effect would be the equivalent of a wage decrease – with some added disadvantages.

      With increased cost sharing through higher deductibles and co-payments, more and more employees would put off needed health care for financial reasons – the very scenario that health insurance is meant to protect against. And with defined contributions, many would drop coverage altogether because of sharp increases in the costs of maintaining it.

      How sharp might those increases be? Consider a brief, simplified example. Let’s suppose that beginning this year, a large company decided to cap its contribution to family coverage at 80 percent of last year’s premium, adjusted in subsequent years for increases in the CPI. If last year’s premium for family coverage was $7,000, the firm’s contribution that year would have been $5,600, with an employee expected to pay the remaining $1,400.

      Now let’s assume that the premium for family coverage increases 15 percent a year in 2002, 2003, and 2004 – and that the CPI increases 2.5 percent a year in each of those years (for our purposes, a conservative assumption because it is slightly above current estimates). Under these assumptions, the family premium would jump to $10,646 in 2004. The employer’s contribution would increase from $5,600 in 2001 to $6,031 in 2004.

      By contrast, the employee’s share of the premium would more than triple, from $1,400 in 2001 to $4,615 in 2004 – an increase of $3,215 in just three years. How many moderate-wage employees would be able to pay $4,615 a year – not even counting deductibles and co-payments – to secure health coverage? How many would have to forego coverage for themselves and their families?

      Observation five: Over time, employers can make progress on their cost problems, and improve the quality of care that employees and their families receive, by working more closely with health plans and providers to spread the use of best practices and best processes for care. That progress does not depend on politics. There is no excuse for not moving forward now.

      Gaps and shortfalls in the quality of American health care have been receiving increasing attention recently – in part because of the two landmark reports prepared and issued by the Institute of Medicine and in part because of our studies on quality and the unstinting efforts of outstanding researchers and leaders in the medical community.

      The Coalition has launched a new effort called the Best Processes Initiative. Working with Don Berwick and the Institute for Healthcare Improvement, we will develop tools for purchasers, providers, and patients to encourage and reward the adoption of practices and processes to improve care and reduce unnecessary expenditures. We plan to begin with practices and processes for the care of chronic diseases – building on a report we issued last month, with funding from the Agency for Healthcare Research and Quality and the Robert Wood Johnson Foundation.

      Don Berwick, who has studied these issues extensively, has offered the following assessment: “Even with modest assumptions about defect rates in health care, total cost reductions of nearly 30 percent below current levels should be attainable.” Clearly, identifying the full range of opportunities to reduce health care costs by reducing errors and improving quality – and then implementing the needed changes in practices and processes – is a long-term effort. It will take large amounts of leadership, organizational change, and investment. But this is a long-term effort that should be pursued with a real sense of urgency – not just (or even principally) to save money, but to save lives and prevent harm.

      The Institute of Medicine has reminded us that there is a chasm between the quality of health care that many Americans should receive and the quality of care they actually do receive – and that the consequences of this gap are dire: millions of preventable injuries and hundreds of thousands of preventable deaths each year. Quality is a cost issue, yes, but it is also, without exaggeration, a matter of life and death. Just think of the irrationality: We currently spend $1.5 trillion a year to pay for health care, and we spend a pittance to improve its quality or to reform the system. If there is any less sound public policy, I don’t know what it is.

      Observation six: We will need major new public policy initiatives to respond to surging health insurance premiums. Here, I want to share with you a portion of a letter that Bill Crist of CalPERS just wrote to state health funds. He starts out by saying: “CalPERS joined the National Coalition because we’ve determined that there must be an intensified effort to obtain federal government focus in confronting the current destructive increases in the cost of health care. The Coalition’s commitment has clear humanitarian dimensions, but for CalPERS the decision to support it is essentially pragmatic.”

      And here’s the key paragraph:

“At the present time, CalPERS is confronted with increases in health insurance premiums that are so great as to destroy our ability to provide health care protection our members deserve and expect. In our opinion, neither current market economic forces nor current public policies offer any hope for relief from those accelerating prices. We know that these same conditions confront all organizations, public and private, that are charged with similar responsibilities.”

      All of the members of the National Coalition on Health Care – from many sectors of the American economy and society – share that assessment. As I have suggested in these remarks, health care costs affect, and are affected by, the quality of care and the extent of uninsurance. Public policy change needs to reflect that interconnectedness; health care reform is a multivariate equation.

      We must create a massive effort, public and private, to improve the quality of all care and to eliminate that waste of hundreds of billions of dollars and the unnecessary carnage that it causes.

      We must control total health system costs — not just for Medicare, not just for the big buyers, but for everybody. Other industrialized nations have managed to contain costs while covering all of their citizens; we can, too. And we must stop the national shell game of cost-shifting.

      What reforms does the Coalition believe will be necessary?

      Our members have concluded that a solution will require a comprehensive strategy that effectively integrates federal, state, and private sector policies to achieve the following goals:

• Assuring health insurance coverage for every American;
• Improving the quality of all care;
• Controlling total system costs and stopping cost-shifting;
• Creating a more viable and equitable mechanism of financing; and
• Simplifying administration.

      As you can see, cost containment is one, but only one, of these essential goals. Why must all these goals be achieved? Because, as I said earlier, our problems are inextricably intertwined; we cannot solve one without addressing them all.

      It’s a vicious cycle. Without system-wide cost containment strategies, you cannot assure, afford, or sustain coverage for all. Without coverage for all, you cannot assure quality, and in the absence of quality, you cannot contain costs or make rational payment decisions. In addition, without coverage for all, you can neither create a truly competitive system, make the system less complex, control costs, stop risk selection and cost-shifting, nor achieve a level playing field of equitable financing. Remember that those who developed the managed competition market hypothesis also concluded that coverage for all would be necessary to make it work.

      We recognize that it will not be easy to achieve these ambitious reforms. We must get the public and our political leaders to understand that there is a great deal of unfinished business in health care, and that business has to be addressed now. We are convinced that health care will be the transcendent domestic issue in our society in this decade.

      We also recognize that right now the political dynamic for major reform is timid and stalled. The immediate task is to change the public perception and the present political dynamic. At a Coalition meeting this week, our members agreed to make this our highest priority over the next two years.

      To conclude: Given the Coalition’s assessment of the problems, what are our answers to the major questions that are the subject of this conference?

1. Should health care costs be contained? Absolutely, because unless they are contained none other than the wealthy can be assured they will have health care coverage when they need it or continue to be able to afford the coverage they now have. We strongly support major systemic cost containment efforts.
2. Can health care costs be contained without harming patients? Yes, but not with the strategies we are currently using or contemplating.
3. Must the system be restructured? Yes, from top to bottom.
4. What will be necessary to control cost? Major national policy changes and the abandonment of our 40-year-old patchwork strategy. We reject as unacceptable and unworkable any strategy that focuses on cost containment alone. We should never think of costs without at the same time thinking of the need for health insurance coverage for all and quality improvements.

      We must make a concerted effort to elevate health care quality on the national agenda and to be sure that quality and cost receive equal consideration in decisions we make. A difficult task? Yes, but one that must be completed. Otherwise, our great-grandchildren will be attending not the ninth, but the 109th Princeton conference, the topic of which will be why we didn’t do what was necessary in health care reform sooner.