The future of health care in a modern workplace

By most estimates, there has been a doubling of premium costs for employers since 1997. In addition, employees are bearing more of the burden of rising benefit costs as evidenced by the increases in co-pays and deductible amounts for inpatient, outpatient hospital stays as well as pharmaceutical and ancillary services. A key question that all concerned with the future of employer-based health coverage is what will the US health care financing and delivery system look like in 10 years? Will the federal and state governments play a more central role and how much will costs increase by 2017? To answer a complex policy and social question, we must first understand how we have arrived at this time and place in our private health care market place.

History of the tax code and health benefits

To fully understand the state of health care in America today, you must understand the origins of our current employer-based health care system. Health benefits are given favored tax treatment in both the federal tax code and among the various state tax codes. We can trace the origins of the federal tax code to the World War II era and the use of health benefits in lieu of wages. Congress and the Roosevelt Administration had imposed wage freezes as a result of the war and wanted to provide both employers and their employees a means to provide benefits as a result of wage price controls. The federal tax code has, for all practical purposes, remained the same for the past 60 years. Congress and successive Administrations have attempted to modify the tax code to encourage coverage, but the underlying employer based tax benefits have remained a fixture in the tax code.

The Medicare Modernization Act (MMA) of 2003 provided a fundamental change in health benefit policy and marked the first fundamental shift in federal policy by moving the locus of health benefits to the employee and the individual. Health Savings Accounts (HSA) were enacted as a provision of MMA as result of pressure from conservative Members of Congress in exchange for their support for the new drug benefit entitlement now know as Medicare Part D. HSAs became law in 2004 and have quickly expanded among not only Fortune 500 companies, but also among small employers and individuals that were previously uninsured. By most industry estimates, 20-25 percent of new HSA enrollees were previously uninsured. The future of HSAs seems promising, but impediments remain that can addressed by the Congress and the Administration and will likely continue to be debated as the 2008 election cycle approaches.

The economics of third party payment

One fundamental issue that economists and academics have raised about the US based health care system is that the individual is not aware of the costs of services. The problem of third party payment, or a disconnect between the end-user, the provider of services and the payor, is one that was best articulated by the economist Gordon Tullock. Tullock argued that there is little incentive in an insurance-based system for user of services (the employee) to question price or even inquire about it. Perhaps the late Nobel Laureate Milton Friedman said it best when he stated there is little incentive to question price when someone else is paying the bill.

Many economists would argue that the problem of third party payment is a flaw in our health care financing system that can be traced to our federal and state tax code system. In addition, there has historically been little in the form of price transperency or disclosure to the end user of health care services. In short, how can you ask for price when none is readily available? HSAs are a first step in bringing price transparency to routine medical services. Consumers are beginning to ask for price data and providers, (especially physicians and ancillary health care providers) are beginning to post prices for routine services. The market place for health care service is also beginning to develop with the rapid expansion of retail-based health care providers and the partnering of large consumer retailers and drug chains. Consumers are using their HSA accounts to access routine services where prices are readily available in these new retail establishments. We can expect to see an expansion of retail health care providers that have the potential to make access to health care services and pricing as simple as going to your local department store.

How consumer-driven health care can break the cycle

Consumer-driven health care (CDHC) provides a potential solution to breaking the cycle of third party payment and providing tools necessary for employees to begin taking financial responsibility for health care spending. It is with CDHC that the future of a privately based health care financing and delivery system rests. HSAs are a central feature of the future of health care in a modern workplace as evidenced by the dramatic growth in accounts and preliminary utilization data. While there are certainly many critics from a variety of groups about the appropriateness of HSAs for select targeted populations, there are many millions of consumers and employers who are very satisfied with HSA usage and features.

HSAs and associated Health Reimbursement Accounts (HRA) provide the employee the ability to control and own their health care accounts (in the case of HSAs) and ultimately make decisions for themselves. The most recent statistics from the US Treasury Department indicate that there are over 4 million HSA account holders. It is estimated that by 2010 there will be close to 20 million HSA accounts. With this many individuals and employers gravitating towards CDHC, what are the implications for our current tax-code based health care financing system?

In his most recent State of the Union, President Bush proposed a departure from our current tax code to allow the deduction for health benefit coverage to be employee or individually based as opposed to employer based. The Bush Administration’s proposal would seek to transfer the deductibility of health benefits to the individual and promote the continued expansion of HSAs in the market place. While the economics and rationale of placing the favored tax treatment in the hands of the consumer of service is laudable, the political realities of the vested interests in Washington would seem to dictate a status quo tax code. A Democratically-controlled Congress is unlikely to enact a fundamental shift in employer based health benefit coverage, which naturally sets the stage for what is expected to be a vigorous policy debate when there will be a new President and new Congress in January of 2009.

Conclusions

The modern workplace is a dynamic place with employees changing careers often. The changes in health benefit coverage and emergence of the HSA as tool for employers and employees to manage health care costs is expected to dramatically grow. The rapid expansion of the HSA has provided employers and employees data that supports the continued use of accounts that promote not only individual ownership, but also price disclosure and the development of a health care market that does not have the problematic issue of third party payment prevalent in our current health care financing system. The policy debate and questions about the future of our health care system will in many respects rest upon the success of the HSA. The stakes are enormous for not only benefit professionals, but for the US economy as a whole. So, the 2008 election cycle will provide a focus on health care policy discussions and perhaps lead us toward an enhancement of current market-based financing initiatives or lead us down a road toward a federally financed health care system. The current employer based health care benefit system will certainly be different in 2017, regardless of who runs the Congress or the White House.

David Randall is Executive Director of The Consumer Driven Health Care Institute (CDHCI) based in Washington, DC. He can be reached at (202) 558-2304 or via email at: info@cdhci.org and www.cdhci.org