Health Scare

By

The last time anyone in American politics spoke seriously of a
health care "crisis" was during the recession of the early 1990s.
At the time, unemployment was rising just as high medical costs
were driving insurance premiums to unprecedented levels. As a
result, millions of people lost their coverage and millions more
worried they might be next.Newspapers captured the situation: Hard Times Leave More Uninsured"
(The Hartford Courant); "Possibility of Losing Coverage Worries
Caregivers, Parents" (Houston Chronicle); "Need Health Insurance?
Good Luck" (USA Today). So too did the stories of people like Megan
Janes-Smith, a recently unemployed 31-year-old living in Kalamazoo,
Michigan. As she explained to a reporter, her husband's employer
didn't offer coverage and her three-person family didn't have the
$900 a month to buy coverage on their own. So she put off the
x-rays recommended to treat her chronic shoulder condition, put up
with the pain from her recurring sinus infections, and put out of
her mind worries about the hospital bills she'd face in a medical
emergency. "I'm trying not to lose my sanity," she said.

It took Washington a while to realize what was happening. Although
policy wonks had been discussing the affordability of health
insurance for years, politicians hadn't made a big deal out of it
until late 1991. That's when an unheralded Pennsylvania Democrat,
Harris Wofford, used the issue to defeat a heavily favored
Republican in his bid for the U.S. Senate. Wofford's win catapulted
health care to the top of the domestic political agenda. Soon both
parties were promising ambitious government programs; even George
Bush Sr. unveiled a proposal to give insurance to another 30
million or so people. By late 1993, when Bill Clinton formally
introduced his own health care plan to Congress, few disputed one
Republican senator's assessment that, "We will pass a law next
year."

It didn't happen, of course. And in part because the Clinton plan
was such a political fiasco, you rarely hear such grandiose talk
today. Indeed, this month, as Congress debated whether to include
health insurance benefits in an economic stimulus package,
advocates proposed only modest, short-term initiatives intended to
get the newly unemployed through the next several months. But that
could all soon change. With premiums and unemployment on the rise
once more, millions of people are losing their insurance, while
millions more are starting to worry about it again. You can see it
in those "old" headlines, which actually appeared in 2001. And you
can tell by listening to Megan Janes-Smith of Kalamazoo, who lost
her insurance earlier this year. Since March, according to an
estimate by Families USA, more than half a million people have lost
their health insurance. A recent analysis by Jonathan Gruber and
Larry Levitt for the Kaiser Family Foundation estimated that 1.2
million people have lost insurance over the last year. And by the
end of 2002, say other experts, the total number of uninsured
Americans--now around 40 million-- could rise to 45 million. What
Washington doesn't yet understand is that we are already in another
health care crisis. And this one might be even worse than the
last.

As Joel Miller, policy director at the National Coalition on Health
Care, puts it, we are about to enter the policy equivalent of "the
perfect storm." One element is the recession. Since most
non-elderly Americans get their insurance through their jobs,
anything that increases joblessness inevitably reduces the ranks of
the insured--either because people don't find new work, or because
they end up in jobs that don't offer affordable insurance.

In theory, these people could go out and buy insurance on their own.
In practice, that's simply not financially possible for most of the
newly unemployed. Insurers generally charge individuals buying
insurance more than they charge businesses buying coverage for
their employees, in part because their actuarial tables show that
individual buyers are less healthy on average. And if an insurance
company decides you have a particular propensity for running up
medical bills--and you can be sure it will try to find out--it will
adjust its rates accordingly. Consider what happened earlier this
year when the Kaiser Foundation created seven hypothetical
consumers, each with past or present medical problems, and had them
apply for coverage from 19 companies in eight markets across the
country. The average premium was about $4,000 a year, often for
reduced benefits. And those who got coverage offers--however
expensive--were the lucky ones. Insurers rejected outright nearly
half of the applications from a hypothetical 48-year-old woman
who'd beaten breast cancer seven years before--and all the
applications from a hypothetical 36-year-old man with HIV.

The newly unemployed, even those with serious medical conditions, do
have one other recourse for obtaining private insurance: the
federal program called COBRA. But as the acronym suggests, it is
beguiling and merciless. Established in 1985, COBRA allows
qualifying employees who have lost their jobs to buy into their
company's group health care plans, at roughly the same rates, for up
to 18 months (or longer in some states). The good news is that
nearly five million people used COBRA to extend their health
insurance in 1999. The bad news is that tens of millions more who
lost their jobs didn't use COBRA. A big reason is expense. Yes, you
get to buy into your old company's health insurance plan. But while
your employer used to pick up part or most of the tab, now you have
to pay the entire premium yourself--which generally comes to a few
hundred dollars a month. The other reason for limited COBRA
enrollment lies in that key word above: qualifying employee. COBRA
only applies to companies with more than 20 workers and, naturally,
only to companies that already offer their workers insurance. And
studies show that of low-income Americans--i.e., the ones who most
need affordable insurance--only one in three have a family member in
a COBRA-eligible job.

If joblessness were the only factor behind the rise of the
uninsured, though, the United States wouldn't be facing a health
care crisis. We could concentrate political resources on getting
the economy going again, then hang on until most people return to
the workforce. But joblessness isn't the only factor. Indeed, even
if the economy were still going strong, the United States would
still have a serious problem. The reason is the second element of
Miller's "perfect storm": The price of health care is, once again,
going through the roof.

The last time medical costs rose so quickly, in the 1980s and early
1990s, employers responded by switching from traditional
"fee-for-service" insurance plans to managed care. Fee-for-service
had essentially paid for whatever tests and treatments doctors and
hospitals ordered, at whatever price they cared to charge--a recipe
for spiraling inflation in a country with an ever-older population
demanding ever-more-expensive treatments. Managed care sought to
change these incentives. Health maintenance organizations would
negotiate discounted rates with certain doctors and hospitals, then
steer beneficiaries to these providers exclusively. The insurers
would provide these same doctors and hospitals with financial
incentives to contain expenses themselves, plus they would allow
expensive tests and specialty treatment only in those cases the
insurance companies themselves deemed medically necessary.

At first, managed care worked wonders on the bottom line. In 1988
health insurance premiums were rising an average of 12 percent
annually; by 1996 (after most employers had switched to managed
care) the rise in premiums was down to 0.8 percent--less than the
rate of general inflation. But managed care's miraculous
cost-savings have proven temporary. When HMOs first arrived on the
scene, the new austerity sparked a wave of hospital closings and
mergers. But now the hospitals and doctors that remain have
consolidated into larger, more powerful bargaining units
themselves, which means they can hold out for more lucrative
contracts with insurance companies. In one particularly vivid
example of how power has shifted, last year the Partners HealthCare
System--led by Boston's two largest teaching hospitals--won higher
payment rates from the state's third-largest insurance company by
walking out on negotiations and threatening to stop accepting the
company's coverage. A few years ago such hardball tactics would
have been unthinkable; a hospital that walked away from
negotiations would have found itself without patients, and out of
business.

And doctors and hospitals aren't the only ones pushing back. As
costs subsided in the late '90s, consumers stopped worrying that
they'd lose their coverage and began focusing on the shortcomings
of managed care. People don't like being told they can't see a
specialist on their own, or that they can only go to certain
hospitals, or that treatment decisions are subject to approval from
a faceless insurance company bureaucrat. This festering resentment,
fed by isolated but disturbing horror stories of people suffering
grave injuries or deaths because of treatment denials, prompted
lawmakers in many states to enact regulations insulating patients
from managed care oversight. And while efforts to produce a
national patients' bill of rights have failed in Congress, many
consumers have successfully pressured their employers to offer plans
with fewer restrictions. Perhaps the most visible sign of this
market shift has been a mass migration from HMOs to
preferred-provider organizations (PPOs), which allow beneficiaries
to see doctors outside the insurance network for slightly higher
co-payments. From 1996 to 2000, the percentage of people enrolled
in PPOs nearly doubled, while the percentage in HMOs fell by
one-third.

All of which has made insurance less onerous--and more expensive.
According to a recent study published in Health Affairs, based on a
survey of 2,000 companies, insurance premiums rose 11 percent from
spring 2000 to spring 2001. That's the largest increase by far
since the '80s. Depending on whose projections you believe,
premiums will go up even faster next year, by 20 percent in some
areas of the country. At the tail end of the '90s, when premiums
first started kicking up, employers were willing to eat some of
these increased costs because they were so desperate for workers.
No longer. Now employers are going back to doing what they've
usually done when the cost of insurance goes up: They're passing
that cost along to their employees, in the form of higher
co-payments, deductibles, or premium shares. According to a recent
survey by Watson Wyatt Worldwide, more than half of all employers
will require workers to pay a higher proportion of health insurance
premiums next year than they did in 2001. Some companies,
naturally, just aren't offering insurance at all, which is one
reason the number of uninsured Americans is shooting back up.

This is exactly the situation government programs are supposed to
remedy. In addition to Medicare--which provides universal insurance
coverage for the elderly--the government has two public insurance
programs, both aimed at helping the poor. One is Medicaid, which
unlike Medicare is only partially financed by the federal
government and is actually administered by the states. The other is
also a federal-state partnership, the State Children's Health
Insurance Program--known as chip or S-CHIP.

Generous funding of these programs in the last few years has yielded
truly impressive results: For example, four years after its
creation, S-CHIP. now enrolls 3.3 million children. But this
expansion was probably a one-time phenomenon--the fluky, if
beneficial, result of overflowing state budgets during the '90s
economic boom. There was so much money sloshing around that even
relatively conservative states (though, notably, not the one then
headed by our current president) found innovative ways to expand
insurance eligibility. But now that the economy has come down to
earth--and then some--state budgets are falling too. Which means
that at the very time people need government safety-net insurance
programs more than ever, most states are cutting them back.

This is the third element in our perfect storm, and it's a doozy.
Going into this fiscal year, according to a Kaiser Foundation
survey, 20 states were already expecting Medicaid deficits--and
that was before September 11, and before anybody realized that the
"slowdown" was really a recession. Ultimately, these deficits will
lead to cuts, as they already have in places like Illinois. During
the late '90s, as part of the state's welfare-to-work initiative,
Illinois provided Medicaid coverage to 100,000 women who were former
welfare recipients, even after they left the public-assistance
rolls. Two weeks ago Governor George Ryan announced he was pulling
the plug on that initiative, saving the state $17 million but more
than likely consigning most of these women--who now work in
low-wage jobs with no fringe benefits--to the ranks of the
uninsured. One day earlier, Ryan approved another $30 million cut,
under which Illinois will pay less money to the private insurance
companies that cover Medicaid recipients on the state's behalf.
That cut, too, will almost certainly lead to more people going
without insurance. "That's where we have to make the cuts and
that's where we're going to make the cuts, and we have no choice,"
Ryan said.

That sounds like a cop-out, but it is largely true. Many states have
constitutions that prohibit running deficits. So while a few can
supplement their health programs by drawing on rainy-day funds they
wisely accumulated during the '90s, most would have to raise taxes
or cut other spending in order to avoid Medicaid cuts. Neither
strategy is terribly appealing in a recession, which is why the
states begged the federal government to include Medicaid subsidies
as part of the current stimulus package. Alas, the White House and
Congress have resisted. Republicans (and too many Democrats) have no
interest in handouts to the states that would require retracting
some of this summer's tax cut. Meanwhile, the $28 billion in this
year's budget that Congress had allocated for aid to the uninsured
has disappeared, since by prior agreement the money could only be
spent if the federal discretionary budget were still in surplus.
Making matters worse, federal funding for S-CHIP. will decline
after next year unless Congress appropriates more money.

Behind public insurance programs lies one last safety net for those
without private insurance: emergency rooms, which have become the
health care provider of last resort for millions of uninsured
Americans. But our emergency rooms are in no shape to deal with the
surge in patients from this year's flu season, let alone a surge
from next year's layoffs. This is another downside to managed care.
In order to live within newly strict budgets, hospitals have cut
back on the surplus supplies, surplus space, and surplus personnel
they once maintained. But while this has made hospitals more
efficient, it has also rendered them incapable of handling sudden
increases in patient volume--and so they've simply started turning
patients away. A recent survey conducted by Democratic staff from
the House Government Reform Committee found that overcrowding
caused "[s]ubstantial problems accessing emergency services" in 22
states. Some of the worst problems occurred in urban areas with
high numbers of uninsured patients: Boston, Denver, St. Louis,
Cleveland. Typical is Northridge Hospital Medical Center outside
Los Angeles, more than one-third of whose emergency patients are on
government insurance or are uninsured. In October, according to the
Los Angeles Times, overcrowding forced it to divert ambulances more
than half the time.

Even when the economy rebounds, employers will remain reluctant to
pay high medical bills. And businesses can't very well reprise the
strategy of the early 1990s. Even if they could convince employees
to tolerate restrictions on treatment and choice of doctors, the
shift in bargaining power away from the HMOs and back to the
doctors and hospitals means managed care can't deliver the same
kind of savings it once did. So employers will likely pass cost
increases along to their employees, in the form of higher premiums
and co-payments. Just ask the teachers who were striking in New
Jersey over the last few weeks, whose main beef is a proposal to
have them pay more of their health care costs.

Ultimately, there does have to be some cost-sharing-- especially if
employees are demanding expensive benefits such as free choice of
doctors. But it's important to do so in a way that doesn't prevent
people without money, or people with serious medical conditions,
from getting the care they need. And that, unfortunately, is
exactly where we are headed. As The New York Times reported last
week, several major insurers, including Aetna, Humana, Cigna, and
the UnitedHealth Group, are rolling out a new type of plan that
fundamentally changes the way insurance works. Under the new
schemes, which some call "health savings accounts," an employee
would receive an "allowance" of $2,000 or $3,000 to spend on
medical care. If the employee ran up bills larger than that, he or
she would have to pay them out of pocket, as much as $5,000, at
which point the employer would pick up the rest.

It's not too hard to see why this sort of insurance would appeal to
the employer and to the insurance company: They'd both be spending
less money. Employees who don't go to the doctor's office often
would come out ahead too, at least in the short term. But if you
happen to be one of those unlucky souls who has an expensive
medical condition, the new accounts could spell disaster. In one
example cited by the Times, a family of three that included someone
with chronic medical conditions would probably spend about $2,200
more per year than they would under a traditional insurance plan.
In other words, the plans would take financial risk off the healthy
and put it onto the sick--exactly the opposite of the social role
insurance is meant to perform. The fact that so many of the
nation's big insurance companies are introducing these plans
suggests that, unlike medical savings accounts--a related idea
hatched in right- wing think tanks that never really took off
commercially--this new scheme has market appeal. Over time, it's
not hard to imagine this style of insurance completely taking over,
in the same way managed care swept through the market in the '90s.

About the only consolation might be that this new system would
probably prove highly unpopular. The funny thing about illness is
that it's pretty democratic--it affects everyone you know at some
time, and some people you know all the time. A health insurance
system that made illness such a crushing financial burden would
inevitably affect not just the working poor, but large chunks of
the middle class. And that would eventually produce a political
backlash, even if Washington didn't immediately recognize it.

Which is more or less what happened last time. The signs of
trouble--soaring premiums, overflowing emergency rooms--had been
evident since the late 1980s. By early 1991, 36 million Americans
had no health insurance, with more on the way. But it wasn't until
that fall, when Wofford made the issue the centerpiece of his
Senate campaign, that the political world took notice. A USA Today
headline summed up the resulting avalanche of press coverage: "The
Voters Send Message: Fix The Health-Care Crisis." Soon enough, both
parties were touting ambitious proposals to help the uninsured.

Those proposals, of course, failed--with devastating political
effects. Which is why for the last eight years, the Democrats have
only nibbled around the problem of inadequate health insurance--a
program for poor children here, a drug benefit for seniors
there--and the Republicans, for the most part, have tried to avoid
it altogether. But in the next few years, we are in store for
another upheaval in American health care--and it might just shake up
American politics as well. After all, the conventional wisdom that
says bold thinking about health care is a political loser has been
wrong before. Just ask Harris Wofford.

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