Response to Jonathan Cohn's "case for thinking big" on health care By Don McCanne

Okay. If we're going to get anywhere in our discussion on how to fix
our health care system, we'd better look at some numbers that will
give us a better perspective of the problem.

This year, according to CMS, our projected health care spending is
$2.2 trillion, or $7500 per each individual in the United States.
With a median household income of about $46,000, it is easy to
understand why a family of four would have difficulty paying its
equal (not equitable) share of $30,000. (Before you divert the debate
into the subject of apples and oranges, keep in mind that that the
topic is health care reform, and the numbers are being used to
demonstrate merely the magnitude of the problem.)

When there is general agreement that everyone should be covered,
these numbers lead us to the insurance function of pooling risk - for
all of us. Traditionally, health insurance provided for a transfer
from the many who are healthy to the few with significant health care
needs. Distributing costs evenly over the risk pool worked.

Something happened in the interim. Health care costs skyrocketed, but
we were caught off guard because they were gradually phased in at
high single or low double digit annual rates. But here we are. At
$7500 per person, health care simply costs too much for average
income individuals to pay their equal (again, not equitable) share of
any system of universal coverage. Like it or not, we are now faced
with the need to transfer not only from the healthy to the sick, but
also from the wealthy to average- and lower-income individuals with
health care needs.

Our current fragmented system of multiple private plans and public
programs is not serving us well in this transfer function. Economists
may not have a definition of unaffordability, but polls show that
over 90 percent of us recognize it when we see it in our health care
system.

Actually, we could resolve this problem quite readily by establishing
a single national risk pool and fund it equitably through progressive
tax policies. Not only would that make health care affordable for
each individual, based on ability to pay, it would also establish a
single payer that could use its monopsony powers to slow health care
inflation to a more sustainable rate (which raises other issues that
may be covered this week).

Regarding reform, there are two basic models under consideration.
Either we could establish a single national health insurance program,
or we could build on our current system of private plans and public
programs (with many sub-variations such as employer mandate,
individual mandate, Medicaid and SCHIP welfare programs, or a new
Medicare-as-an-option program available to everyone).

A crucial question is how well would private plans serve us in a
universal system? Well, let's see how they are serving us now. 59
percent of us are insured through our employment, yet employer-
sponsored plans are paying only 19 percent of our health care costs.
Already we have a problem. Private insurers have skimmed off the
healthiest sector of our society - healthy, gainfully employed
individuals and their young, healthy families - and they are
sticking us with the other four-fifths of our nation's health care
bill. The insurers have already defeated the insurance function of
transferring funds from the many who are healthy to the few who have
significant health care needs.

And how efficient are the insurers in performing this transfer
function for their cream-skimmed risk pools of healthy individuals?
In 2005, the six largest private insurers in the nation had an
average medical-loss ratio of about 80 percent. This means that they
used about 20 percent of health insurance premiums for their own
intrinsic purposes - administrative functions and profits. Further,
about 12 percent of premiums were used by physicians and hospitals to
pay for the administrative burden of billing and insurance functions
related to the private plans. So one-third of these private insurance
premiums were burned up in administrative costs. Who says that the
private market is always more efficient than the government?

This leads us to one of the most important questions facing those
concerned about the reform process. When private insurers have
abandoned their crucial function of transferring risk, and they have
demonstrated their profound administrative inefficiencies, why would
any policymaker insist that private insurers must be a part of any
model of reform? The resources we waste on them would be far better
spent on health care for the uninsured and underinsured.

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