The problem with health insurance exchanges. The risk for patients. Pension plan to 401k analogy.
With the implementation of health insurance exchanges in October 2013 and the beginning of the Affordable Care Act (ACA), also known as Obamacare, there is tremendous risk for the American public to be worse off. Certainly the millions of Americans who currently are uninsured because their employers do not offer insurance coverage and those with pre-existing conditions unable to purchase affordable individual coverage, will benefit. It is those with employer based insurance coverage who may lose.
They just don’t know it yet.
Employers have found it difficult to absorb the rising health insurance premiums and costs, which have increased faster than inflation. They have tried many ways to slow health care spending including requiring employees to have more “financial skin in the game” to encourage them to make “smarter” choices about their health care. They’ve done this with higher deductibles and co-pays and requiring employees to pay a larger percentage of the total health insurance premium. Yet despite these strategies, employers have seen their health care costs soar.
Desperate for a solution, it appears that the ACA may have given them an option. With the term – “health insurance exchanges” becoming part of the American lexicon, companies now have a way to finally contain health care costs. With public health insurance exchanges, individuals with no ability to purchase health insurance from an employer, will be able to purchase health insurance in a marketplace much the same way they do for hotels or flights. Depending on their household income, they may qualify for a tax credit. Shifting from a company offering health insurance benefits and instead having individuals find insurance on their own will increasingly be the norm. It is this where employers have now seized the chance to improve their own costs.
Large employers have started creating private health insurance exchanges for their employees. Instead of purchasing health insurance coverage for the benefit of their workers, companies will give them a sum of money and let the individuals choose. This is particularly good news for large companies which self insure. When they self insure, companies take on all of the financial risk, pay all of the medical claims as they come in, and often, despite their best attempts, have little control over how much health care their employees use. Now by giving workers a lump sum of dollars and have them choose what plan they can afford and how much risk they are willing to take, employers can predict how much they will spend on health care. If employees want more coverage they pay the difference out of pocket.
Instead of employers trying to structure health insurance benefits packages and balancing what they can afford and what current and future employees might find attractive, these private health insurance exchanges give workers the responsibility to make these choices and have them choose what is right for them.
As a result, companies is now they have predictable costs around health care. Employees have even more choices to purchase the right type of insurance for them. Recently IBM, General Electric and Walgreens have announced that they will move both retirees and current workers into such an arrangement.
In theory this is good for both employers and employees, right?
Sadly, however, a similar story occurred a few decades ago when employers were faced with financial risks and costs that they wished to manage better. They moved that financial risk and costs to employees and offered them more choices to do better than the employer by allowing them to choose how to spend their money. It was when companies moved from providing pension plans (defined benefit) to 401(k) plans (defined contribution).
We now know decades later that workers have suffered tremendously as companies have done well.
Now I am not recommending that employers be paternalistic or that they not find ways to manage their expenses. What I am saying, however, is that history has demonstrated that in the realm of financial planning the public on average has not been particularly good at saving money for something in their best interest, retirement as a recent article noted. From the article:
The Employee Benefit Research Institute’s yearly Retirement Confidence Survey found that the percentage of workers confident about having enough money for a comfortable retirement is “essentially unchanged” from the record lows observed in 2011, with 28 percent of workers “not at all confident” they have saved enough and 21 percent saying they are “not too confident.”
The Economic Policy Institute, a progressive economic think tank, recently found that nearly half of households have no savings in retirement accounts at all, and for the half that do, savings are very unevenly distributed — a household in the 90th percentile of the retirement savings distribution has nearly 100 times more retirement savings than a household in the 50th percentile, who have almost nothing saved.
The need for individuals to manage retirement funds created a new industry with a plethora of financial products and services like financial advisors, mutual funds, and brokerages. Yet as these groups “compete” for these dollars that individuals must manage for retirement, the data demonstrates that despite all the help, workers are in a dire economic situation. Many must continue working beyond traditional retirement to make ends meet.
Extrapolating this outcome to the shift in health care coverage from defined benefit to defined contribution is quite easy. Individuals should make smart decisions to stay healthy. What we eat, how much we exercise, what habits do we keep and which ones do we change, and many others, are daily decisions which are subtle and can have profound impact on our health. With the new health insurance exchange products which have high deductibles and health savings accounts (HSAs), employees will now have a financial incentive to stay healthy as well as a new way to save money for future medical expenses. However data has shown that the public already has a track record of not saving well already.
Could this shift in how we get health insurance create a country where even more people will not have the financial resources to take care of themselves either retirement or now increasingly health care? Is it possible that another new industry will arise helping these individuals in this new world where they need to improve their odds of financial well being and health? Is it possible that those who offer these services and products will profit financially and yet those who are helped are poorer as a result? There is evidence that entrepreneurs see an opportunity and a new market to fulfill that gap. Get DNA testing. Body scans. Alternative treatments with hormone supplementation. Use of wearable devices. Will these products and services make people better and healthier? Will it simply make them poorer? Whether the outcome is the same as retirement planning remains to be seen.
This is the real risk to patients.
Our nation so far has been willing to accept that if individuals are unable to save adequately for retirement, that is their fault. If they work hard to close that gap, then this is a consistent quality and trait Americans appreciate – hard work and consistent with the Puritan values our country was founded on. Will we be equally as tolerant however if individuals become ill or injured, sometimes through no fault of their own or choose to have a lower quality of life because they cannot afford a MRI, a doctors visit, or treatment? Will less expensive options created by entreprenuers be adequate to replace these traditional forms of care? How will the quality and safety of these options be evaluated?
As increasingly more Americans will undoubtedly purchase health insurance via these exchanges, time will tell if what occurs will model what occurred with retirement planning or will it evolve into something better. If the former, it is possible Americans will not like what they see and the US health care system with its mix of public programs (Medicaid and Medicare) and private insurers may be movinhg towards a single payer option. If the latter, where health care is more affordable and accessible through innovation and new modes of care delivery, then the shift to insurance exchanges was a good thing.
Let’s hope our past history about future events is wrong.
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“history has demonstrated that in the realm of financial planning the public on average has not been particularly good at saving money for something in their best interest”
The public, whether individuals or the government, long ago learned that paying later would let one get more value from current dollars. Why pay for anything now when credit will let you pay years later with greatly devalued dollars, the interest can be deducted from your income in the meantime, and dying first might let you totally escape? If pay-as-you-go is not in your self-interest, how can saving for the future make sense, especially when you can pay your debts with new debt? But, economists tell us inflation is good for the economy.
The 401k type programs were a huge gift to the money management industry. The health care industry has also been hugely profitable. The average household makes less than $60 thousand, the average salary for a CEO of a non-profit hospital is $600 thousand, and the top hedge fund managers make a billion. The money trickling down is overwhelmed by that being swept up. The “printing presses” are hard pressed to print money fast enough to keep the sweepers busy, but you have a point.