Recently while on a return flight home from a business meeting in California, I had the pleasure of sitting next to Dr. Henry “Hank” Foster. Now to some, the name Henry Foster may not sound familiar, but I assure you that to many, the name means quite a lot. On top of being a renowned OBGYN and the only black graduate from his medical class at the University of Arkansas in 1958, Mr. Foster also served as a policy advisor for the Clinton administration, and was President Bill Clinton’s nominee to be Surgeon General in 1995.
To me, “Hank”, as he asked to be called, was my neighbor on a three hour flight who quickly became a friend. I always look forward to the randomness of potential acquaintances to be met by happenstance on a flight – sometimes the randomness can prove to be an annoyance, but in this case, it proved to be an absolute pleasure.
Throughout the course of our brief, although in-depth, conversation, the topic of healthcare, and its current state in the U.S., came up. When discussing not only the ACA, but also the newest version of its replacement, the AHCA, Hank said something to me that I will not soon forget. While he claimed that his statement was an adaptation from something said by Winston Churchill, his comment with regards to healthcare in the US was this: “Americans will almost always do the right thing – so long as they’ve tried all the wrong things first”.
THE WRONG THING
Seven years ago, the Affordable Care Act was signed into law by President Obama after being passed by both the House of Representatives and the Senate with not one single republican vote. This completely partisan piece of legislation, while intending to do some good, and with many admirable parts, was, in effect, dead on arrival. What I mean by that is that with the country so deeply divided on the topic of healthcare, and with the state of U.S. politics so polarized, the need for leaders to come together and work together to fix the healthcare problem was and is still is too far from reach. It’s not that the ACA was all-in-all bad, but the law had limited potential for success because, as is the case with most things, the original draft, needed some improvement and the powers that be, who have the ability to improve it, had no desire to do so.
Fast forward to 2017, and the House of Representatives has just passed the American Healthcare Act – the ACA replacement bill but this time without a single Democrat vote. Rather than fix the original broken legislation, the new leadership chose to attempt to repeal it, or at least a large part of it, by means of budgetary reconciliation, and in turn put into place a bill that, much like its predecessor will have little chance of accomplishing anything. While the bill still has a long way to go, and even if it does make it out of the U.S. Senate will most likely look very different than it does today, the premise of the ‘replacement bill’ is much the same as the original. It primarily focuses on one piece of the problem rather than the entire puzzle.
HEALTHCARE vs. HEALTH INSURNACE
Almost 20 years ago, I entered into the insurance industry. While studying for my licensing exam, I learned the basic definition of insurance which is, in effect, the transfer of risk. While this may be the term and intent, insurance, and more specifically Health Insurance, has become a risk finance mechanism rather than a risk transference.
The first and most obvious problem facing the current state of the Healthcare system in the United States is not the financing mechanism, rather the system itself. To keep us in the dark on this, pundits and lobbyists have done a phenomenal job of marketing and spin. Take Healthcare and Health Insurance for example. To many Americans these two words are synonymous and are often times used for purposes of the same meaning when in reality, they are very different words and have two very different definitions. HEALTHCARE is and should be associated with describing the actual care received by participants in the HEALTHCARE system – for example, doctor visits, surgery, hospitalization and even prescription drugs are all aspects of Healthcare. HEALTH INSURANCE is the function by which accessing the Healthcare system is financed.
So often I hear people talk about healthcare reform but in reality, as a country we only seem to want to focus on Health Insurance reform. If the focus is only on one part of the problem, then the other part(s) go untouched and unresolved. As we continue to think through the solution to rising Health Insurance costs, perhaps we should think through the differences between healthcare and health insurance and begin using those two terms in an appropriate way.
THE OBVIOUS PROBLEM THAT EVERYONE SEEMS TO IGNORE
I’ve always been fascinated with innovative business leaders – those that seem to have the pulse of their specific industries and because of this are always on the cutting edge. The Dyson organization has always impressed me – not because they have my family so convinced in their superiority that we have not one, not two, but three of their vacuum cleaners in our home – but because of their constant ingenuity. Years ago, I read an interview given by the founder of the Dyson in which he outlined their reason for success. He stated (and I’m sure I’m paraphrasing) that they “focused on the obvious problems that their competitors ignored.” How does this apply to the current state of Healthcare in the US? I’m sure most of us can agree that there are really two legislative teams in the healthcare battle and they are most definitely competitors; however, they would serve themselves well by heeding the words of the Dyson founder in that they should focus on the obvious problem that everyone in Washington seems to ignore.
Health Insurance companies are, for the most part, publicly traded corporations with fiduciary responsibility to their shareholders, not their insureds. Don’t get me wrong, I consider myself a true blue capitalist and support the fact that organizations must be profitable ones; however, there is an absolute conflict and adverse incentive for insurance companies in today’s climate. Regardless of one’s political affiliation or opinion, access to adequate healthcare in a country as great as the United States should be attainable for all; however, until the Affordable Care Act it simply was not.
The obvious problem with the ACA, however, is that it did nothing to impact healthcare, rather it primarily focused on the financing mechanism, health insurance. If we can all agree that insurance companies must collect more in premiums than they pay out in claims, then we should also be in agreement that best way to find success in reducing those premiums would be to reduce the cost of that which is financed by them. If we are in agreement on this, then we can see that the blaring issue with the ACA was that it focused primarily on the insurance premiums, not the costs driving those premiums up.
Insurance companies – while bemoaning the ACA and its potential impact on them – actually have fared well because of the law. Under the Affordable Care Act, the primary piece that was meant to ‘reign in’ insurance companies was the MLR (Managed Loss Ratio) requirement. What the MLR provision of the law stated was that insurance companies had to spend a specific percentage of the premiums they collect on actual claims, thus capping their expense and profit margin percentage. The MLR ratio was set to be 80% to 85% (depending on whether the policy was written on an individual, small or large group). In other words, the ACA says that insurance companies must spend between 80% to 85% of all premium dollars on the payment of claims. While this may seem like a good idea, as is the case in most things, the devil is in the details. What congress failed to understand was that these billion dollar organizations are actually run by pretty savvy business professionals. And, if you are one of these business pro’s and you are likely driven by your ability to impact your shareholders stock price, if the government set a percentage of profit margin, would you want that percentage to be based on a lower or higher premium cost? To use an analogy, it’s as if the US Government said, “We don’t care what you charge for the car, we’re only going to regulate the interest rate in which it is financed.”
The unintended consequence of the ACA was that insurance companies would no longer be interested in driving the actual cost of healthcare down as that would in turn reduce the actual dollar amount that they could earn. Instead, they need the cost of healthcare to rise so that the 15% to 20% of premiums that they don’t have to use to pay claims would be a higher number. As a result, since the ACA was signed into law on March 23, 2010, the five largest publicly traded insurance companies have seen an average stock price increase over of 200%. When you regulate only the percentage of profit, but not the specific dollar amount of profit, that dollar amount will likely increase.
THE GOVERNMENT SOLUTION?
The initial problem with the ACA ‘replacement bill’ – the American Healthcare Act (AHCA) – is that it, like the bill that came before, also does not address the main driver of health insurance premiums which is the cost of healthcare. Sure, the bill still has to get through the Senate and if it does it will likely look very different than it does today; however, if we really want to focus on the annual cost of health insurance for a family (rising north of $20,000 per year on average) we should first address the lunacy that a one day stay in a hospital could cost more than $50,000. There are multiple drivers to the overall cost of healthcare, so many that there’s no way to address them all in this article; however, the government seems want to put all of their focus on the financiers, and not the actual drivers of cost. Again, the insurance companies are happy to play along as they ultimately are the winners in this system, but in the end, everyone else will find themselves on the losing side as costs will continue to rise and access will continue to decline.
MACRO vs. MICRO
As is the case in most things, the solution to big problems starts at the micro level, not the macro one. Over the past century, nearly every administration has attempted to address the rising costs of healthcare at a macro level. For decades, the solution was to try to provide discounts on services based on steerage. This model resulted in HMO’s and PPO’s. In the 90’s and early 2000’s the thought was to address the users themselves by providing tax incentives for consumerism. This ushered in Health Savings Accounts (H.S.A’s), Flexible Spending Accounts (F.S.A’s) and Health Reimbursement Accounts (H.R.A’s). And for the past seven years, the idea was to solve the problem by regulating the financiers themselves – insurance companies.
There are three pillars to the healthcare system, the providers, the patients and the payors. Washington has and I’m sure will continue to address one of these problems at any given time; however, until we address them all together we will find that there whatever solution is attempted, the yield will be minimal.
Healthcare in the United States is massive – equating to nearly 20% of our GDP. With this sector being such a driver within the U.S. economy, Washington will continue to try to solve the ever increasing costs associated with it; however, for there to ever be a solution that actually has results, the focus must be on each person and organization to do what they can to impact their own costs associated with healthcare. As employers, we must work to begin solving the problem within our own organizations rather than waiting on Uncle Sam to solve it for us. As business leaders, many hope that the government would allow flexibility and ingenuity within our businesses – this flexibility actually exists, and it’s time to start exercising that. Employers in the U.S., even under current regulations, have significant ability to impact the drivers of cost of healthcare. The problem is that both the Healthcare and Health Insurance Industries do not want you to know that. The driver for the Helathcare providers is to increase profits, and the purpose of Health Insurance Companies today is to finance risk rather than transfer it. What if, instead we focused on reducing the risk. There are many resources available to help employers contain and control the costs associated with healthcare. There are also alternative ways to pool and finance risks. We must focus on the problem(s) within our own companies rather than the larger problem at the broader level – once we begin to do that, we will begin to see impactful results.
THE RIGHT THING
In conclusion, I hope that congress will take a step back and rather than focus on just the health insurance industry, instead take a hard look at the costs driving health insurance premiums. It’s not likely that they will anytime soon, but in the meantime, we can begin addressing the problem at the local, more micro level. While America’s government is busy trying all the wrong things, we can be the Americans that ultimately do the right thing and in the end, we just might find the ultimate solution to the healthcare problem in the United States.