The Health Shopper

Arnold Schwarzenegger's healthcare proposal for California has him dubbed "Schwarzenkennedy" by the Wall Street Journal. The headline for the article doesn't reference John F. Kennedy — or even Schwarzenegger's wife, herself a Kennedy — but rather his chief of staff Susan Kennedy, who used to work for former Gov. Gray Davis. The editorial warns that his plan for healthcare in California is a threat to health consumers because it taxes doctors and hospitals (although it refers to the tax as a "fee"). "That's right, institutions operating at or near a loss would have to pay the tax. So California doctors could soon be spending more time with their accountants than with patients–assuming they can afford to keep their practices running at all." By threatening the already endangered bottom lines of hospitals, the Schwarzenegger health plan may threaten health consumers too. As we noted in a recent post, in Japan, where a health system similar to Arnie's is already in effect, "doctors say they have little time for patients.” Californians should question whether placing a tax on doctors and health charities is a solution to the state's healthcare woes.

Friday’s Wall Street Journal contained a fascinating article about the Japanese health care system. Japan, like many developed countries, provides universal health insurance coverage that is funded and administered by the state. Unlike England, though, the Japanese approach is premised on a “third way” system that combines universal health coverage with private physicians (i.e. the physicians are not employed by the state). Although larger in scale, Japan’s “third way” system is similar in many respects to Governor Schwarzenneger’s recent universal health care proposal. As a result, it is worthwhile and interesting to consider some of the issues Japan is grappling with at the moment.

The central challenge in Japan—and the crux of the Journal article—involves how to improve health care while containing costs. Cancer, far more than heart disease, is the leading cause of death in Japan.

Through its universal health insurance program, Japanese bureaucrats are charged with the responsibility and power to ensure a “minimum standard of care for all.” Rules of the game, and in particular what is covered and how doctors get paid, are mainly set by the central government in Tokyo.

Sound familiar? It should, as this is the direction we would be headed in within the U.S. if recent state level universal coverage proposals and federal prescription drug purchases for Medicare beneficiaries are enabled. The Journal article lists many of the downsides to the system, particularly in light of cancer coverage:

• “Japan saves by requiring less training of doctors and paying them less”
• Japanese “doctors say they have little time for patients”
• Until recently, many Japanese cancer patients weren’t even told that they had the disease—family members “often felt it was cruel to burden the patient with information” about the cancer diagnosis.

The Journal article further indicates that new classes of chemotherapy drugs and the spread of the Internet have “spawned a new class of activist cancer patients.” This patient activist movement has grown largely in response to the central government’s reluctance to embrace and approve a new class of promising cancer drugs. The article mentions that “a movement for more drugs and better care culminated in May 2005 when 2,000 patients and family members packed a hall in Osaka for the first national convention of cancer patients.”

Now is the time to consider how this type of system would play out in the United States. People need to ask themselves how they would feel about the state or federal government telling them that a promising new cancer drug is, by law, simply not available to them or their loved one who is dying of cancer.

It is far too simple to vilify justifiably profitable companies such as Genentech that are developing new classes of innovative drugs. The reality, however, is that more government involvement in health care will result in fewer Genentechs and less innovation in health care.

Governor Schwarzenneger is fond of providing friends with a copy of Milton Friedman’s Free to Choose.  One would assume, therefore, that the Governor is a strong advocate of choice and that he is aware of the extent to which sprawling government regulation can erode personal liberty.  Well, the Governor’s personal principles sure aren’t evident in his recent, sweeping plan to mandate universal health insurance coverage in California.

The Governor’s surprising proposal is heavy on cost containment and demand side regulation, but relatively light on supply side innovation and consumer empowerment.  In fact, the Governor’s proposal would effectively crush the supply side of California’s health care economy.  Let’s take a look at how the proposal breaks-down within these three categories:

1) Demand Side Regulation:

• A universal health insurance mandate
• “Leverage state purchasing power through Medi-Cal”
• Requiring private insurers to guarantee coverage, with limits on what they can charge, regardless of health status
• A 4% payroll tax on employers with 10 or more employees
• Minimum health insurance coverage mandates
• Increasing Medi-Cal rates
• Cost containment through the California Diabetes Program
• A government-led media campaign targeting diabetes
• A government-led anti-tobacco campaign
• State subsidized insurance coverage for lower income adults
• A state-run purchasing pool
• Require insurers to spend 85% of every premium dollar on health spending and patient care
• Reimbursement mandates for out of network claims
• A new “24 Hour Coverage” program integrating health and worker’s compensation
• Mandated HMO benefit reviews
• Promotion of “evidence based care” as a cost containment mechanism

2) Supply Side Innovation:

• Removing statutory and regulatory barriers to lower cost models of health care such as retail-based medical clinics.

3) Consumer Empowerment:

• Align state law with federal law for the deductibility of HSA contributions
• Mandate Section 125 plans for employers.
• Through state-run initiatives, enhance electronic data exchange, personal health records, electronic medical records, e-prescribing and broadband capabilities.
• Through state-run initiatives, promote transparency initiatives in the areas of provider quality, price and health outcomes.

The costs of the Governor’s program are pegged at $12.147 billion.  $5.474 billion of this would be subsidized by the federal government.  $4.472 billion would be financed through a tax imposed on doctors and hospitals.  Doctors would pay a tax of 2% of gross revenue while hospitals would pay a tax of 4% of gross revenue.

The $4.472 billion provider tax is a concern.  First, most providers are operating with very thin margins, so the taxes represent an extraordinarily high portion of actual income.  The new provider tax would likely be passed along to consumers.  Further, the consumers who feel the greatest burden are likely to be those paying cash since providers have little to no pricing power with the state or private insurers.

Charity care is would also be adversely affected by the provider tax.  For example, would a charity clinic be willing to pay an additional $4,000 tax on $100,000 in charity care that they recognize as revenue? 

The question on the provider front is whether California will be able to maintain world class facilities and to attract the best and brightest physicians.  The provider tax is a strong disincentive.

The Governor’s proposal could also have a profound affect on the private health insurance marketplace in California.  David Henderson, a research fellow at the Hoover Institution, has a recent commentary that does an excellent job shedding light on the implications of health insurance mandates. 

In a nutshell, demand side controls and increased regulation are not the answer.  Empowering individuals with the ability to choose and allocate their own health care resources will do much to address the “health care crisis” by providing suppliers to compete based upon quality and price.

In case you hadn't heard, Vimo releases great industry reports from time to time. Our VP of Partners, Tom Cochrane, has just released our most recent report HSA Funding: Are Health Care Consumers Leaving Money on the Table?  It warns that low corporate contributions to health savings accounts threaten the CDHP model.

The report reveals a significant gap between the number of people enrolled in high deductible health plans and the number of people that hold a Health Savings Account. The report also shows that funds on deposit in the average HSA are roughly half of what is required to cover the typical health plan deductible for these consumers. Both findings hint at disturbing trends that may jeopardize the "Consumer-Driven Health" movement.

This newest report from the Vimo Research Group is free, and available for immediate download at http://www.vimo.com/reports/hsafunding.pdf.