A Private Market Solution

You are probably aware that the Swiss healthcare system, passed 18 years ago, was the successful model for both Mitt Romney’s Massachusetts health care plan, and President Obama’s Affordable Care Act, just upheld by the U.S. Supreme Court.  This article will explore the Swiss health care model, and provide a background on why this model was chosen for the U.S. It will examine why the ACA reforms were needed, and to what extent the reforms will succeed in bringing U.S. health care problems under control.

US Health Care Reform – Doing Nothing is Not an Option

Highest Costs Worldwide:The main reason that healthcare reform became an issue is out of control health costs that are on a course to bankrupt the nation. Per-capita state-sponsored health expenditures in the United States – before the ACA – are the third-highest in the world, only below Norway and Luxembourg.

Health Care Costs are the Biggest Long-term Driver of National Debt : Health care spending is growing at about 1.5x the rate of growth of GDP – close to 24% of the economy in 2012 , up sharply from 20% before the financial crisis, and projected to grow to somewhere between 40% and 60% by 2080.  If the trends of the last 20 years continue, health care spending will eat up U.S. GDP in our children’s lifetimes.

U.S. Health Care Expenditure As A Percent of GDP; Data via bea.gov & cms.gov. The blue line in the chart below is the federal government’s projection of health care spending, and the red line projects spending at the trend growth rate of the last 20 years.

Health care spending is the root cause of the U.S. sovereign debt problem. According to The Economist, if health care costs were under control, i.e. growing no faster than the economy, we could manage our debt. However, as shown in the chart below, projected federal spending on health care as a percent of GDP is projected to rise from 5% today to about 18% of GDP. This will take up most of the total federal budget which is about 24% of GDP,  leaving no room for social security, defense, or any of the other federal government roles.  If this forecast comes to pass, either taxes will rise to Swedish levels, or the U.S. will be a junk-quality sovereign credit.

Graph via Fidelity.com

The Swiss Point the Way

While every country in Europe guarantees health care for all its citizens, Switzerland, like the U.S., chose to do so through the private markets, rather than through socialized medicine. That is why many academics who have studied the Swiss health care system have pointed to this nation of 7.5 million as a model for health care in the U.S.

Indeed, it attracted a wide spectrum of American admirers, like Fox News talk show host Bill O’Reilly, Presidential Candidate Mitt Romney and Newt Gingrich, and lured some members of Congress on fact-finding trips here to seek ideas for overhauling the United States system. According to Regina Herzlinger, a Harvard Business School professor who has studied the Swiss approach extensively:

Switzerland’s health care system is different from virtually every other country in the world. What I like about it is that it’s got universal coverage, it’s customer driven, and there are no intermediaries shopping on people’s behalf. And there’s no waiting lists or rationing.”

Similarities

  • Required Coverage: According to Dominic Büttner of The New York Times, in his article,  Incentives and Costs of the Swiss Government Model (October 1, 2009), the Swiss private insurers are required to offer coverage to all citizens, regardless of age or medical history.  As with the ACA, those people, in turn, are obligated to buy health insurance.The Swiss have an individual mandate and the government defines the minimum benefit package. The government has enacted Medicare-style price controls for hospital and physician reimbursement. Insurers must charge similar rates to the young and old (“community rating”), must cover pre-existing conditions, and must operate as non-profit entities. Princeton economist Uwe Reinhardt describes Switzerland as “a de facto cartel of insurers and health care practitioners who transact with one another in a tight web of government regulations.”
  • No Care Rationing: Another similarity with the ACA is that the Swiss government does not “ration care” — that populist bogeyman in the American debate, which explains why healthcare costs are higher here than in other European nations, although lower than in the U.S. It does keep down overall spending by regulating drug prices and fees for lab tests and medical devices, and by requiring patients to share some costs — at a higher level than in the United States — so they have an incentive to avoid unnecessary treatments.
  • Subsidies for People of Modest Income: Like the ACA which provides a subsidy to moderate-income Americans, the Swiss government also provides direct cash subsidies to people if health insurance equals more than 8% of personal income, and about 35% to 40% of households get some form of subsidy. In some cases, employers contribute part of the insurance premium, but, unlike in the United States, they do not receive a tax break for it.

Differences

  • No Medicaid: One difference is that the U.S. ACA model does not include the option of a government-run health insurance plan.
  • More Insurance Regulation: Another difference is that Swiss insurance companies offer the mandatory basic plan on a not-for-profit basis, while they are permitted to earn a profit on supplemental plans.
  • No Medicare: Unlike the United States, where the Medicare program for the elderly costs taxpayers about $500 billion a year, Switzerland has no special break for older Swiss people beyond the general subsidy.

Chief Benefits

  • Universal Coverage: An article by Avik Roy of Forbes titled “Why Switzerland Has the World’s Best Health Care System” points out the main accomplishment of the Swiss health care system: universal coverage. 99.5% of Swiss citizens have health insurance.
  • Quality and Choice: Most beneficiaries have complete freedom to choose their doctor, and have access to quality health care.
  • Less Bureaucracy: Swiss citizens relish the lack of bureaucracy, especially compared with systems in Britain and Germany. Appointment waiting times are almost as low as those in the U.S., the world leader.
  • Lower Costs: Because the Swiss can choose between plans from nearly 100 different private insurance companies, insurers must compete on price and service, helping to curb health care inflation. Hospital physicians like Edouard Battegay at the University of Zurich say universal coverage also lowers costs by reducing emergency room visits. He expresses amazement at what he saw when he worked briefly in Seattle:

I’ve seen things in the U.S. that I’ve never seen here; it was a state of disaster. Chronic disease management is better here. If you don’t treat hypertension, you treat strokes. Not treating patients is expensive.

  • Better Health Outcomes: By many measures, the Swiss are healthier than Americans, and surveys indicate that Swiss people are generally happy with their system.

Lowering Costs

High Quality Care At Lower Cost: Switzerland provides high-quality care at costs well below what the United States spends per person.  Health care costs consume 10.8% of gross domestic product in Switzerland, compared with 16% percent in the United States, the highest level of spending among industrial countries, according to the Organization for Economic Cooperation and Development.

But Costs Are Higher than Other European Models: However, the model does not address healthcare costs nearly to the extent that the socialized medical plans in other countries do, where healthcare costs are as low as 5% of GDP. So the Swiss government is continually working to reduce costs. While prescriptions are covered, the government has insisted consumers make over a 20% copay if they want brand-name drugs, rather than 10% for generics.

New Cost Initiatives:While many patients seem content, the burdens fall more heavily on doctors, especially general practitioners and pediatricians, some of whom say they feels squeezed by government regulators and insurance companies that have fought to hold down costs — most recently with a 15% cut in lab fees and the threat of a so-called blue letter, a warning from an insurance company that a practice is prescribing too many drugs or expensive procedures. If doctors cannot justify their treatments, they can be forced to repay insurers for a portion of the medical services prescribed.  Pius Gyger, director of health economics and health policy at Helsana, the country’s biggest insurer, says the so-called blue letters have been highly effective – even though estimates show only about 3% of doctors get the letters and fewer than 1% actually have to return money. According to Mr. Gyger:

It’s an easy exercise for us and it has an effect.If there’s something strange, we knock at the doctor’s door. For doctors, it’s an incentive to treat economically, but often perceived as a threat.

The government health office also lowered reimbursements across the board for medical devices in 2006.

Patients Pay More: Along with lower costs and the freedom to choose doctors come bigger bills for individual patients. On average, out-of-pocket payments come to $1,350 annually,  the highest among the 30 countries tracked by the O.E.C.D. and above the $890 average for the United States, which comes in second.

The insurance policies themselves can also be expensive, and can top about $13,600 a year for a family of four in Zurich. This roughly comparable to the national average annual premium for a family policy under employer-sponsored group plans in the United States, although in high-cost American cities the figure can be much higher.

Doctors Earn Less: As in the United States, practitioners typically are paid on a fee-for-service basis, rather than on salary. But they make less than their American counterparts. According to the O.E.C.D., specialists in Switzerland earn three times more than the nation’s average wage, compared with 5.6 times for American specialists. General practitioners in Switzerland make 2.7 times more than the average wage, versus 3.7 in the United States.

The Potential Impact in the U.S.

The Massachusetts Example: In 2006, Massachusetts adopted the Swiss health care reform model, which strongly resembles the ACA, creating near universal insurance coverage, setting minimum standards for health insurance, mandating that employers offer insurance and individuals must have it, and creating a health care exchange. But Massachusetts  health reform was light on cost saving measures. The results: it’s been a great success in bringing over 97% of residents into the health care system, and Governor Patrick points out that the impact on the state budget has been a manageable 1% increase in spending.

The modest impact on the state budget is mostly due to the federal government’s decision to expand its Medicaid reimbursements in line with the expansion of coverage in Massachusetts; in other words, the federal government paid for almost all of the state’s increased cost.

Massachusetts Still Struggles with Costs: The Beacon Hill Institute, an affiliate of Boston-based Suffolk University, examined the growth rate of total health care spending in Massachusetts since 2006 compared to the national trend, including both the spending born by the state budget and other forms of spending: federal health care transfers to the state, direct federal spending (i.e., Medicare), and private insurance. They found that health care spending in Massachusetts grew faster than the national average in the five years following health care reform: state spending, direct federal spending, and private insurance rates. Emergency room utilization increased, despite greater access to primary care physicians. BHI attributes the surge in costs to several factors: more demand for medical services versus concentrated and slow-to-expand supply caused prices to rise; the law mandated additional coverages in private insurance; and that the reform act lacked significant cost-containment features. There was significant savings in payments to hospitals for treatment of the uninsured, but this savings is overwhelmed by the other costs.

Source Of Funding For Increases In Mass Health Care Expenditure Since 2006; Source: Beacon Hill Institute

Massachusetts Costs May Be Overstated: But Massachusetts has always had a health care cost problem, even before reform.  There are many highly respected health care institutions with noted specialists providing services in the Commonwealth, and a high concentration of specialists creates higher spending.  Partly because of this, Massachusetts was always near the top of the country in how much they spend per capita on health care for their constituents.  And in that legislation, cost was not a consideration.  For those of you not in the know, this is exactly like Obamacare.

According to Forbes’ Carolyn McClanahan, after Massachusetts enacted Romneycare, it was predicted that health care costs would skyrocket, and many visualized unhealthy people moving to Massachusetts in droves. Yet, while health care costs did increase at a higher percentage than the rest of the country, they did so only slightly, and now the actual percentage increases are leveling out.   She expects that comparable growth will be much lower once Obamacare is in effect and “all the sick people will be free to move about the country.”

Massachusetts now turning to phase 2: mitigating health care costs They are moving toward medical care homes, accountable care organizations, simplified billing, and more primary care.  There will also be a move away from the fee for service model.  These are all provisions in the ACA.

Bottom Line: It Will Take Time and Work

The ACA is just a start, and does not go as far as the nation will need to go to contain costs, largely because the US government has not had the political will to exert pressure on providers, and efforts to begin to do this, as other nations do, were demagogued as “care rationing” and “death panels.”

But the economics show that more, not less will need to be done. Whether you like the ACA or not, it represents an inevitable first step. Here are some of the things the ACA is doing so far to help mitigate cost increases:

Prevention: The ACA emphasizes prevention because we know it is far less expensive to prevent disease than to treat it, making many preventive services are available without cost-sharing so patients avoid chronic conditions and the painful and costly complications they often lead to.

Supporting Better Outcomes: Several initiatives in the health-care law are designed to support physicians, hospitals and other providers in their lifesaving work. For example, the Partnership for Patients is a nationwide effort to reduce patient infections and hospital readmissions. Together with hospitals and clinics, they are helping to share and replicate the most significant improvements that some of the country’s best hospitals have already achieved that can save lives and money. By helping these innovations spread, the Partnership for Patients alone could reduce costs to Medicare by $50 billion in the next 10 years.

Care Coordination: According to Kathleen Sebelius,  the health-care law gives us tools to improve chronic-disease management, coordinate care among multiple providers and foster innovation. Experts who have studied the law, from the Medicare trustees to the independent Congressional Budget Office, say that it will mitigate skyrocketing Medicare costs. Last January, 272 of America’s top economists wrote to the House Budget Committee that the ACA “contains essentially every cost-containment provision policy analysts have considered effective in reducing the rate of medical spending.”

Conclusion: America Has Just 3 Options

This article has shown that doing nothing is not an option. What then are the options? There are only 3 left to us:

  1. Allow health-care costs to continue to skyrocket, until it bankrupts the nation;
  2. Make some of the most drastic and painful cuts to health-care ever proposed;
  3. Reform health care systemically to find better ways forward.
The ACA represents option 3, the first step in an ongoing process of reform to bring America back from the brink of impending implosion. No, it isn’t perfect; yes, it’s the product of Washington DC “sausage making.” But it is an essential first step that preserves the market mechanisms over socialized medicine while expanding coverage, improving outcomes and beginning to lower costs.