Monday, March 01, 2010

More lessons from the laboratories of democracy

In talking about health care I've been talking about how federalism's beauty is that it allows us to observe the experimentation that is going on in the states and learn from what has worked and what has not. Health care is a beautiful opportunity for learning from those experiments. Tellingly the Democrats want to ignore those lessons. Hmmmm. I wonder why.

In Massachusetts, Governor Romney helped to institute a program very similar to the model for the Democrats' plans for the nation. And the results have not been pretty.
Last month, Democratic Governor Deval Patrick landed a neutron bomb, proposing hard price controls across almost all Massachusetts health care. State regulators already have the power to cap insurance premiums, which Mr. Patrick is activating. He also filed a bill that would give state regulators the power to review the rates of hospitals, physician groups and some specialty providers. Those that are deemed too high "shall be presumptively disapproved."

Mr. Patrick ad-libbed that he had "a whole bunch of pals here who are in the health-care field, and I saw the color drain out of their faces." Little wonder. The administered prices of Medicare and Medicaid already shift costs to private patients while below-cost reimbursement creates balance-sheet havoc among providers. Now the governor wants to import these distortions to save the state's heavily subsidized insurance program as costs explode.

It doesn't even count as an irony that former Governor Mitt Romney (like President Obama) sold this plan as a way to control spending. As with all new entitlements, the rolling cost crisis began almost immediately. For fiscal 2010 taxpayer costs are $47 million over budget, in part due to the recession, and while the $913 million Mr. Patrick requested for 2011 is a 5% increase over 2010, spending has grown on average 6.7% per year.

Meanwhile, average Massachusetts insurance premiums are now the highest in the nation. Since 2006, they've climbed at an annual rate of 30% in the individual market. Small business costs have increased by 5.8%. Per capita health spending in Massachusetts is now 27% higher than the national average, and 15% higher even after adjusting for local wages and academic research grants. The growth rate is faster too.
Now imagine those numbers on a national scale if we followed Massachusetts down its path. The mind shudders.

However, those laboratories also tell us about reforms that work. And we need to study those results. Look at Indiana which, under the leadership of my new favorite possible potential presidential candidate, Mitch Daniels, added health savings accounts to their health care plans for state employees. Daniels describes today how these health savings accounts work.
In Indiana's HSA, the state deposits $2,750 per year into an account controlled by the employee, out of which he pays all his health bills. Indiana covers the premium for the plan. The intent is that participants will become more cost-conscious and careful about overpayment or overutilization.

Unused funds in the account—to date some $30 million or about $2,000 per employee and growing fast—are the worker's permanent property. For the very small number of employees (about 6% last year) who use their entire account balance, the state shares further health costs up to an out-of-pocket maximum of $8,000, after which the employee is completely protected.
Unions don't like these accounts because they'd prefer to negotiate better coverage for their members. However, regular state workers seem to love these plans with over 70% of them signing up for the accounts. Daniels describes what the result has been.
What we, and independent health-care experts at Mercer Consulting, have found is that individually owned and directed health-care coverage has a startlingly positive effect on costs for both employees and the state. What follows is a summary of our experience:

State employees enrolled in the consumer-driven plan will save more than $8 million in 2010 compared to their coworkers in the old-fashioned preferred provider organization (PPO) alternative. In the second straight year in which we've been forced to skip salary increases, workers switching to the HSA are adding thousands of dollars to their take-home pay. (Even if an employee had health issues and incurred the maximum out-of-pocket expenses, he would still be hundreds of dollars ahead.) HSA customers seem highly satisfied; only 3% have opted to switch back to the PPO.

The state is saving, too. In a time of severe budgetary stress, Indiana will save at least $20 million in 2010 because of our high HSA enrollment. Mercer calculates the state's total costs are being reduced by 11% solely due to the HSA option.

Most important, we are seeing significant changes in behavior, and consequently lower total costs. In 2009, for example, state workers with the HSA visited emergency rooms and physicians 67% less frequently than co-workers with traditional health care. They were much more likely to use generic drugs than those enrolled in the conventional plan, resulting in an average lower cost per prescription of $18. They were admitted to hospitals less than half as frequently as their colleagues. Differences in health status between the groups account for part of this disparity, but consumer decision-making is, we've found, also a major factor.

Overall, participants in our new plan ran up only $65 in cost for every $100 incurred by their associates under the old coverage. Are HSA participants denying themselves needed care in order to save money? The answer, as far as the state of Indiana and Mercer Consulting can find, is no. There is no evidence HSA members are any less likely to defer needed care or common-sense preventive measures such as routine physicals or mammograms.
Amazingly, given incentives, people like to save their own money and will shop around for cheaper prices. Their savings benefit both themselves and the state government. Getting beyond the third party dilemma affects costs. When you aren't paying for your health care, you don't care how much something costs. When it's your own money and you have the potential to keep that money, you start caring. And by doing so, you not only save money for yourself, but for the government also.

This is a lesson that we could be learning from and applying in national health care reforms, but the Democrats are so indebted to the unions plus they are so determined to think that people are too stupid to search around for better deals on health care that they insist on adopting their own paternalistic provisions.

Contrast the histories of health care reform in both Indiana and Massachusetts. Where would you prefer to live - in as state that is facing a fiscal meltdown or the one that has been running a surplus? Federalism allows for both choices and for other states to learn from their examples.