Yes West Virginia, Health Care Is Unaffordable

Newtown, CT - March 9, 2018

Here’s a trick question. If a salaried employee making $35,000 has a monthly premium for her health care benefits completely subsidized by the employer, is her health care coverage affordable? Yes, if she has a deductible of $500, and no if that deductible is $5,000. Too often we look at health care affordability in premium terms and the debates in and around Congress and the administration are focused on premium subsidization. But premium subsidization only covers a portion of the affordability of health benefits. Out of pocket costs are the real barrier to access to care. The sum of premium paid and potential total out-of-pocket should be the primary way in which we measure health care affordability. By that measure, health care for West Virginia teachers and many others isn’t affordable and that’s why they’ve been on strike.

For years now, studies from the Kaiser Family Foundation have shown that the increase in total potential costs associated with health care coverage have exceeded wage growth. The result is that net take home pay, after medical expenses, has gone down or, at the very best, stagnated. The warning signs have been abundant but too many ignored them. Perhaps because national statistics don’t hit home in a state. After all, they represent the average and the average is almost always wrong for any individual case. Perhaps if the state had a publicly reported affordability index it would have seen the warning signs flashing long before the teachers finally said they had had enough.

Flashing lights and warning signs are great, but when they light up like a Christmas tree what actions can policy makers take to stall or even reverse the trend? Of course, much has been written about the solutions to bending the cost curve and the goal here isn’t to repeat them. Instead, let’s be clear about the options and tradeoffs because there aren’t that many.

One option is to increase the benefits load in order to decrease the amount of total out-of-pocket costs AND to subsidize premiums. You can’t do one without the other if you’re to affect affordability, because decreasing deductibles and co-insurance will immediately increase premiums, and the consumer’s pocket is picked either way. That option, at the federal level, has fizzled, and there’s little appetite in most states to increase taxes in order to subsidize health insurance. Another option is to increase wages, which the state of West Virginia seems to be doing with the teachers. However, this creates a form of moral hazard in that the culprits for increased costs get off scot-free and will simply do it again, leading to a vicious inflationary cycle.

The second option is to tackle the root causes of premium increases, which are divided into two parts:  the price of services and the quantity of services. As some of our (and other’s) national work has recently shown, private sector pricing has been increasing at twice the rate of public sector pricing, creating a compounding growth that defies any reasonableness test, and certainly has no basis in the reality of underlying economic inflation. In other words, it’s entirely self-manufactured by an industry that has become accustomed to impunity for fleecing the general public. There are ways to contain price inflation. One of those is to have broad and unfettered price transparency. Some states have taken a leadership role in that respect, but many have so far failed their residents. One should expect that health plans would aggressively pursue price transparency to encourage plan members to shift to lower priced, higher value hospitals, health systems and physician practices. And yet that’s happening less and less as the number of gag clauses embedded in payer-provider contracts multiply.

Beyond price inflation is the imperative to make sure that every service delivered to every patient is needed and provides some value to improve the health of the patient. And yet we know that isn’t the case today. Estimates of waste vary between 20% to 30% of total costs of care. Think about it, if health plans in West Virginia were able to take out that waste, premiums and total costs of care would become affordable to all those teachers (and everyone else). So far, however, estimates of this waste have been haphazard and incomplete.

So what are we to do? Well, for starters, in the next 60 days Altarum will be releasing its new Health Care Value Check-up Tool, that is designed to comprehensively assess the amount of total costs of care that can be ascribed to (a) over provision of low value care, (b) pricing failures, (c) care associated with avoidable complications, and (d) under provision of high value care. We will be calculating the amounts of costs of care that fall into each category for several states and broadly publicizing the results. At the same time, we’re hard at work defining an affordability index that can be calculated state by state, as well as state-based health sector spending trends.

The combination of these tools should provide all states with the metrics and actionable data they need to take the appropriate steps to avoid health care from becoming unaffordable and, where it has already reached that level (and it’s not just in West Virginia), steps to reverse that trend. This week, the leadership of the Department of Health and Human Services has come out guns blazing, making it clear to those who have massively benefited from the status quo that the gig is up. They now need to back their words with solid action. Our combination of tools may just be the ammo they need and we’re happy to provide it.