Background

Quality health care should be uniformly accessible and affordable. All patients should have the security of knowing that they are protected from financial catastrophe as a consequence of major illness or injury. Likewise society should be protected from the financial burdens of the costs of catastrophic healthcare delivered to those who can afford the cost of insuring against such catastrophic loss but who opt not to purchase it knowing that their risk is low and that someone will be there to pick up the tab for their misfortune.

In San Diego County, health care coverage is neither uniformly accessible nor affordable. In fact, approximately twenty-five percent of the county's citizens under the age of 65 lack health insurance coverage of any kind, with cost being the number one barrier to obtaining coverage. Many physicians believe there has been a very serious decline in access to health care services, especially timely access to services at the appropriate level of care, as opposed to indiscriminate and costly use of the emergency rooms and unnecessary delays of routine care until more costly intervention is needed.

One of the objectives of the San Diego County Medical Society (SDCMS) in staging last October's "Code Blue" Rally was to develop public awareness of the precarious condition of the health care delivery system in San Diego.

The SDCMS believes that 1) severe under-funding of the institutions and professions that actually provide front line care, 2) improper distribution of available funds, and 3) artificially low premiums for coverage of first dollar and basic day to day services, are the root causes of the problems at hand. The absence of the consumer awareness of such fiscal realities has made for unreasonable and unsustainable expectations on the part of the public. Physician groups flirt with fiscal insolvency, while many others have already failed, resulting in tens of thousands of San Diegans being involuntarily forced to change physicians. Hospital systems are closing their smaller community hospitals in order to concentrate assets and to protect the solvency of their core facilities. The County trauma system, a tremendous asset to our community, is grossly under-funded, with virtually every participating hospital system losing money. The very fabric of San Diego's health care delivery is unraveling just as the baby-boomers approach their years of maximum health care utilization.

We must act now to change the way we finance health care before it is too late! Minor adjustments will not correct for the problems at hand. In the opinion of the SDCMS, the situation requires bold intervention and a totally new approach.

Provided herein are eight proposals for change and a brief executive summary of the history and rationale supporting these proposals. The Medical Society intends to take the lead in assembling a coalition that will implement these changes. Our membership must be the driving force behind this effort.

History of Present Illness

Prior to the mid 1940's, most health insurance was affordable and protected people against the consequences of extraordinary expenses (catastrophic coverage). Individuals paid their own day-to-day expenses out of pocket and doctors charged whatever was most appropriate including even chickens or services in kind. The doctor-patient relationship encompassed the patient's economic status as well as his or her health care needs.

As a result of changes in the federal tax code in the 40's that created significant incentives for employers to offer health insurance, employers gradually began to offer increasingly comprehensive insurance coverage that paid more and more of an employee's total health care costs, including his or her day-to-day expenses. Since 1960, inflation-adjusted per capita spending from personal funds, as a percentage of total spending, has in fact decreased by about 67%. However, disconnecting consumers from the cost of the services they utilize has had very severe UNINTENDED CONSEQUENCES.

As soon as employers began to offer more comprehensive health insurance, premiums began to increase immediately since insurance was now being used to cover both the costs of catastrophic illness and the day-to-day expenses of millions of generally healthy people. Employees, less connected to the costs of health services, consumed more, as there was little financial consequence to utilizing more advanced or expensive services. Providers of health care felt free to charge more for their services. Health care prices and consumption rose precipitously ultimately causing the government to create Medicare to protect the elderly from the resulting health care inflation. This further aggravated the situation by making the government the third party payer for almost all seniors as well as for all Medicaid beneficiaries; which worsened the problem by disconnecting the largest per capita consumers of care from the majority of their costs.

In retrospect, this trend of increasingly comprehensive coverage leading to increasing utilization comes as no surprise. The Rand Health Insurance Experiment, funded by the Department of Health & Human Service and reported in 1988, demonstrated beyond any doubt that low deductible insurance that covers first dollar expenses (day-to-day care) increased outpatient expenditures by as much as 67% and inpatient spending by nearly 30%. Up to that point it had been erroneously theorized that the increased utilization associated with first dollar coverage was the result of sicker people choosing more comprehensive coverage.

The introduction of Medicare in 1965, while appropriately protecting seniors from increasingly unaffordable healthcare, did serve to further aggravate the pattern of health care cost inflation. Where there is an absence of significant cost sharing by the recipients of healthcare services, in this case by seniors, utilization and overall health care costs will rise precipitously. In the case of Medicare, the program's projected cost estimates were so low that the entire program was on the brink of insolvency within 20 years. As a result, the federal government was forced to launch a series of fee reduction and price control initiatives on hospitals and physicians, who in turn increased their charges to their private patients, a phenomenon known as "cost-shifting."

By the 1990's, tens of billions of dollars were being "cost-shifted" to the private sector to compensate for the progressive underfunding of Medicare and other federal health programs. This resulted in an even more marked increase in private sector insurance premiums.

Those paying the bills (employers and public agencies) demanded that this rise in insurance premiums be brought under control. This presented a challenge, because in a system of third-party payors in which consumers are essentially spending "the insurance company's money," the traditional cost controls arising from cost-sharing are absent. To replace these missing cost controls, the "gatekeeper" concept and stringent "utilization review" processes were created to reduce utilization and to restrict access to the more costly forms of care. Unfortunately, these measures had only limited success, primarily because it was difficult for both physicians and patients to justify limiting patient access to care simply because insurance companies wanted to reduce their medical service losses. Indeed, some over utilization driven by patient demand and to some degree by physician overuse needed to be addressed and corrected, but the motive for reducing access through a gatekeeper system and utilization guidelines rapidly showed itself to be profit driven by the payors, not in any way serving the public good.

Having failed to adequately restrain the rise in health care costs with gatekeeping and utilization review, the insurance industry adopted a new concept for paying providers, capitation. Taking advantage of a longstanding rift between primary care providers and specialists, insurers drove a wedge between them by offering the primary care physicians the promise of greater income if they would agree to accept fixed prepayments per patient (capitation). Greater income was in theory to be generated by eliminating wasteful use of expensive services and specialty care. Capitation had another attractive benefit for insurers. It virtually eliminated insurer financial risk by passing on the cost of providing care, as well as the costs of unexpected catastrophic care, to the doctors and hospitals. At the rates initially offered, capitation was well received and some savings were achieved.

Unfortunately, only large medical groups could afford to accept capitation, because individual physicians could not absorb the cost of even one medical disaster. Patients could no longer be self-directing, because their employer, who was choosing their health care plan, was determining on an annual basis which physicians they would or would not be covered to see. Insurers, having captured complete control of a large number of capitated lives, began to progressively reduce capitation rates to well below actuarially sound levels while at the same time adding more and more "benefits" to which the insured was entitled without regard to the fact that the costs for such new benefits were to be borne by the same medical groups that were also receiving fewer dollars each year to pay for the costs of all the care rendered by the physicians. Medical groups, which had become dependent on these plans, were obliged to accept financially unsound contracts, since rejecting them would result in the immediate loss of income and bankrupt all but the very strongest of groups.

Present Day Conditions

Capitation presents an inherent conflict of interest for physicians, because the physicians directing patient care ultimately pay for the services rendered. The potential for abuse increases as the actuarial soundness of the capitation rates decrease.

A more insidious consequence of capitation for patients is the gradual loss of access to more advanced services. It is nearly impossible to justify the cost of cutting-edge technology in a system that barely covers present-day expenses. This becomes even more problematic when under-funded medical groups are unable to pay for services unavailable within the group. For hospitals, any surplus capacity results in expenses that exceed their capitation payments. As a result, as per capita revenue streams have decreased, so have the number of hospital beds.

Since the advent of managed care, total inflation-adjusted per capita health care spending has increased by about fifty percent (50%). Few, if any, believe that managed care has increased access to services. Thus, under capitated-managed care, more dollars are being spent than ever before, but consumers have less access to care; leading to the conclusion that the cost of services has actually risen.

Capitated pre-paid first dollar coverage is an insurer's dream come true. Not only are premiums nearly twice as high as conventional catastrophic coverage, but insurers have also managed to retain a similar percentage of the total premium as profit, as if they were still assuming the same degree of financial risk!

It was hoped that first dollar coverage would encourage utilization of preventive health care services, which would then reduce the future incidence of major illness and create a health care dividend to offset the cost of preventive care. Unfortunately, the ratio of catastrophic expenditures to first dollar expenditures has remained remarkably stable over the years and provides little evidence of a significant health care dividend.

The number one reason given by individuals for not obtaining health insurance and for employers to decline to offer health insurance coverage to their employees is cost. In an attempt to reduce financial barriers to accessing preventive care, we have significantly increased the cost of available insurance products, and have thereby driven nearly one fourth of our citizens out of the insurance pool all together! The uninsured, no longer participating in the insurance pool, now cost the health care system billions of dollars each year in unfunded federal and state mandated acute care services.

First dollar coverage fosters excess utilization and is, by its nature, much more costly than true insurance against extraordinary expenses. In the mind of the public, health insurance no longer means protection against extraordinary expenses, but protection against virtually all expenses. Imagine how much auto insurance would cost if it covered every expense including new tires, gasoline, and windshield wipers?

Overview of Proposals

The proposals herein are intended to address private sector health care. We would note however, that government-sponsored programs would likely benefit from these reforms as well.

We believe that it is most rational to design a system of healthcare financing around what can work most reasonably for the vast majority of Americans. In the United States, approximately 85% of those under 65 (approximately 187 million people) currently have health insurance. Our proposals are designed to improve and expand on that 85%. While on the surface, there may seem to be those individuals who may not derive great benefit from what we propose, we believe that appropriate adjustments in the system can be made for those individuals.

We would also note that our proposals are interdependent and must be considered as a whole, as alteration or omission of one proposal may significantly impact the effectiveness of another.

I. Reconnect consumers to the cost of their day-to-day health care (reduce or eliminate most first dollar insurance coverage.)

As outlined above, the unintended consequences of first dollar coverage have erased any tangible benefit of increased access for those fortunate enough to still have insurance. In contrast, if individuals were to take responsibility for purchasing their own day-to-day care while being protected against financial ruin, they will "shop" for more affordable services, and by doing so, will drive down the cost of services. In addition, because individuals would be paying for a significant portion of their day-to-day care, they will rightfully demand to choose their own physician and the type of care they desire. High deductible coverage is significantly less expensive, with appropriate support for the federal government in the form of tax credits, virtually all of the currently uninsured could afford to participate in the insurance pool; thus all but eliminating unfunded major medical expenses.

In any given year, the 10% of the population that utilizes the most health care services (who that might be varies considerably from year to year) spends about 76% of the total health care dollars, primarily within acute care facilities. First dollar coverage, which tends to cover day-to-day expenses, has not changed that reality. The lowest utilizing 90% of the insured population under the age of sixty-five spends only about $500 per year per person (average less than $42/month) on day-to-day health and dental care.

Thus our present first dollar coverage system is designed to pay a significant portion of what for 90% of the population is $500 or less, while leaving tens of millions vulnerable to the full brunt of catastrophic medical expense. The SDCMS believes that we need to turn this around.

II. Empower consumers to discover the cost of health care services in advance of consumption.

Once consumers are reconnected to the cost of their day-to-day care, they must also be empowered to shop more effectively for these services. This means that fee information must be made readily available to consumers in advance of consumption. Web based information systems can give consumers real-time access to fee information. Once a significant number of patients are reconnected to the cost of their health care, they will demand information on for more affordable quality care. In this new system, SDCMS will support consumers as they seek usable information about fees and about health care quality.

III. Reduce or eliminate capitation as a form of provider reimbursement.

The initial apparent benefits of capitation in temporarily stabilizing healthcare costs have been more than offset by the damage done to patients and to their trust in their physicians. In practice, capitation has resulted in decreased access to care, while putting physicians and medical groups in the untenable position of bearing the costs of providing necessary care. As patients have come to realize this, their confidence in the quality of the care they receive has been undermined. Moreover, under capitation, the large insurers that have come to dominate the private healthcare market bear little or no financial risk themselves. The SDCMS believes that patients and the community are far better served when payments are made for care rendered, rather than profits made from care withheld.

IV. Provide for full tax deductibility of health care expenses for all (including expanding the availability of Medical Savings Accounts).

The health of a nation's citizenry is a greater good certainly to be sought. A healthy workforce drives a healthy economy. Encouraging consumers to access necessary care by allowing them to deduct qualified medical expenses and catastrophic health insurance premiums from their tax burden is appropriate and necessary. Enabling consumers to save money in a tax-free environment for future health care needs (Medical Savings Accounts) significantly reduces the risk of incurring health expenses that exceed their ability to pay. A gradual transition from employer tax benefits to individual tax benefits will drive the system toward the individual responsibility we support.

V. Encourage employer-defined contributions as opposed to employer-defined benefits.

Employers have a business interest in their employees' health, but the consumer/ employee, not the employer, should choose both the type of coverage they desire (above a mandated catastrophic plan) and have ownership of it. Currently many employers provide all of their employees with the "benefit" of a particular type of coverage. This leaves consumers at a disadvantage when their employer changes the benefit, often resulting in the employees having to involuntarily change their physicians. Instead if employers were to offer their employees a fixed and defined "contribution" toward their health care coverage, the individual would be empowered to choose the physician and plan design of their choice. Millions of federal workers presently have this option; the SDCMS believes it is time for all consumers to be similarly empowered.

VI. Promote private ownership of all health insurance policies.

Individual and families that own their own insurance policies will choose the type of plan that suits their needs and can change jobs without risking a loss of health care coverage. Further, all tax advantages to the individual that are presently realized through employer-provided health insurance should be maintained.

VII. Support mandatory community rated, catastrophic health insurance.

Like auto liability insurance, mandatory participation in the insurance pool is appropriate and necessary for the benefit of society as a whole. Federal tax credits should be available on an appropriate sliding-scale basis to those who would require assistance to participate. Community ratings based on age and geographic location enable every individual to obtain protection from financial ruin as a consequence of a major illness or injury. Community rating alone, without a requirement to obtain insurance, could drive up the cost of insurance. A combination of mandated individual catastrophic coverage and community rating spreads financial risk across the entire population and thus reduces the cost of insurance for those who most need it.

VIII. Require adequate funding mechanisms for the provision of government-mandated services.

No matter how comprehensive the changes we recommend, some patients will slip through the cracks and appear at hospitals, clinics, physician offices or other health care treatment facilities without adequate funds to pay for their care. Legislative mandates to provide care must be accompanied by reasonable methods of reimbursing for the care delivered. In addition, if these reforms are enacted successfully, Funds from mandated catastrophic pools could be allocated to communities to assist in covering the costs of the remaining uninsured care. Some reforms would be needed to allow for appropriate recoupment of costs borne by governmental entities or those who render unreimbursed care to those who failed to purchase the catastrophic insurance required.

The San Diego County Medical Society believes these proposals to be both reasonable and necessary. The situation demands our immediate attention. We solicit your comments.

"Never doubt that a small group of thoughtful, committed citizens can change the world; indeed it is the only thing that ever has." - Margaret Mead