Wall Street Journal Editorial Board member Susan Lee proposes in today’s WSJ ($) that the U.S. tax code be overhauled to mitigate the negative effects of the third party payor system that most Americans use to pay for health care:

Anybody who gives a few hours of thought to the current health-care system can identify the mother of these problems — the widespread existence of a third-party payer system. Third party-payers come in the form of government, employers (who self-insure) or insurance companies. This arrangement insulates consumers of health care from its true cost and encourages overconsumption.

And as Ms. Lee notes, such an inefficient system makes perfect sense under the current U.S. Tax Code:

This kind of employer-sponsored plan actually makes sense since employer payments are excluded from taxes while direct, or out-of-pocket, payments by employees are made with after-tax dollars. In fact, the tax exclusion is the chief reason that employers pay $5 out of every $6 spent in the private market.

Inasmuch as the tax system causes the unfortunate third party payor system, Ms. Lee touts a reform that economists John Cogan, Glenn Hubbard and Daniel Kessler have proposed — expand tax deductibility to out-of-pocket expenses and individually purchased health insurance. The syllabus for their proposal is here, and incorporates the recent legislation creating Health Savings Accounts (“HSA’s), which are more fully explained in this previous post. Ms. Lee points out that the Messrs. Cogan, Hubbard, and Kessler’s study indicates that such a proposal would have two effects:

The expansion of tax deductibility would have two effects. First would be the commonsense — and perverse — impact of increasing consumption and costs. Expanding tax deductibility would lower overall health care prices to consumers and thus increase demand.
But the second effect goes the other way, reducing heath-care consumption and costs. Currently, by making employer plans cheaper than individually purchased ones, the tax exclusion creates a bias toward employer plans and away from direct purchase. So extending the tax exclusion to direct purchases of health care would level the playing field. . .
For both the self-employed and those with employer-provided insurance, making out-of-pocket costs deductible will lower the price of direct health-care purchases relative to purchases made through insurance. Thus, insurance with higher deductibles and coinsurance, and fewer covered services — that requires lower premiums — will become more attractive. The shift will reduce the consumption of health- care services and reduce costs.
Lower premium prices are the key to this shift. When out-of-pocket costs are reduced by the proposed tax deduction, it will make less economic sense to pay the higher premiums charged for high deductible, high coinsurance policies. And, as it turns out, premium costs are very sensitive to the level of deductions and coinsurance.
Since low coinsurance and deductions are the engine behind rocketing costs and wasteful medical practices, providing consumers with the incentive to shift to policies with high coinsurance and deductibles is an elegant remedy. Extending the tax deductibility will do just that. Better yet, it is done without resorting to a larger government role in the health-care system.

The probable financial benefits of such a move are not insubstantial:

Although the theoretical impact of these two effects are ambiguous, the economists’ empirical work demonstrates that the second effect will very likely overwhelm the first. For the first effect — extension of the tax deduction will increase consumption and costs — the economists estimate that it will cause annual health care spending to rise by about $5 billion. Then add another $1 billion in the increased coverage coming from those who are currently uninsured, and the total increase comes to $6 billion.
As for the second effect — extension of the tax deduction will decrease costs because people shift to higher deductible, higher coinsurance policies — the economists estimate that if the average deductible rises from $250 to $500, health-care spending would decline by $43 billion. If coinsurance rates also rise to 25%, health care spending would decline by $69 billion.
The bottom line is that the net reduction of spending on health care would be $63 billion a year.

Ms. Lee then notes a study by Kaiser Permenante Institute for Health Policy staff economists Laura Tollen and Jason Lee that indicates that higher coinsurance and deductibles make health care consumers more aware of the true cost of medical services and thus, will reduce non-essential heath-care utilization. Stated simply, when consumers have more “skin in the game,” they will become more cost conscious and make better choices.
Finally, Ms. Lee notes that decreasing reliance on the employer funded health insurance system — a system that arose during World War II to attract scare labor during a time of wage controls — would have another fringe benefit:

But extending the tax exclusion has another nice effect. Under the current system, health insurance is a form of compensation to employees. That is, money wages are reduced by the amount of insurance the employer provides. Once the tax exclusion is extended, however, workers no longer have an incentive to take compensation in the form of pricey health insurance. They will shift to plans with higher deductibles and coinsurance and — given a competitive market — the savings from lower insurance premiums will be passed on to them in the form of higher money wages.

I have only one question regarding the foregoing commen sense proposal: Why isn’t either Presidential candidate embracing such a commen sense proposal?

In this TCS Central piece, Arnold Kling addresses what he would like to hear President Bush say in his upcoming speech accepting the Republican nomination for President. On the key issue of financing Social Security and health care, Mr. Kling advises Mr. Bush to say the following:

Going forward, the most important issues are Social Security and the government’s role in health care. The Administration should focus on pursuing modernization and reform in those two areas.
On Social Security, the President should say that the system works for today’s seniors, but it does not work for younger people. As important as it is to keep our promises to those who are in retirement or close to it, it is just as important that we not leave Social Security as it is for people in their 20’s, 30’s, and 40’s.
The American people need to know that the money that workers put into Social Security now does not belong to them, but instead goes into the general Treasury, where Congress spends it as it pleases. You might think that the money you put into Social Security goes into an account where it belongs to you and nobody else can touch it. However, it does not work that way. It can work that way. It should work that way. It will work that way once reforms are enacted. Privatization is the ultimate lockbox.
Social Security also needs to be more flexible. Our existing system was designed when reaching the age of 65 meant that your active life was probably over, and you were likely to die within a decade. Going forward, we need a system that can accommodate everything from early retirement to seniors taking on second careers and new challenges in their 80’s. Personal accounts are the key to giving people more options as they age.

Then, Mr. Kling turns to financing health care:

On health care, reforms should adhere to some basic principles. These principles will promote personal choice and continued innovation.
The first principle is to give as much decision-making authority as possible to patients and doctors. Today, treatment choices can be distorted by Medicare regulations, fear of lawsuits, and other mechanisms. Reform should aim to minimize such sources of distortion.
The second principle is that taxes should be used to pay for health care only for those who truly need assistance. To the extent that the government pays health care expenses for everyone, your medical bills will go down but your tax bills will go up by much more. We need only limited paternalism.

A good start would be enhancing the recently established Health Savings Accounts, which are addressed in this prior post.

Arnold Kling is thinking about health care finance again, and that’s a good thing. The entire article is well worth reviewing, as Mr. Kling does a particluarly good job of summarizing the defects in the America’s health care finance system:

* Many people lack health insurance. This includes Do-Nots as well as have-nots.
* Poor people, although covered by government programs, are not able to access health care providers in a timely fashion. They obtain too little preventive care and consequently make too much use of hospitalization. In order to improve on certain key health care indicators, such as infant mortality, the United States has to find a way to bring poor people under the umbrella of our health care system.
* The system of employer-provided health insurance distorts choices. It makes it costly for people to change jobs, especially to become “free agents.” It puts ordinary firms in the health insurance business, penalizing small firms, for which this is more of a burden. It injects ordinary corporations into the decision-making process of consumers with regard to choice of insurance and even (through “preferred-provider” systems) with regard to choice of doctor.
* Our system tends to subsidize “first-dollar” coverage rather than catastrophic coverage. Catastrophic coverage is like auto insurance that pays in the case of an accident. First-dollar coverage is like auto insurance that pays for gas and tolls. First-dollar coverage results in more paperwork and reduced incentives to control costs.
* People with break-the-bank illnesses, such as diabetes or cancer, cannot switch insurance companies.
* Consumers have little incentive to take responsibility for their health. Smoking and obesity make little or no difference to insurance premiums.
* Consumers have little incentive to take financial responsibility for health insurance. Instead of encouraging consumers to save to pay for the high cost of insurance when they are older, we tell them that they can count on Medicare.

Mr. Kling does not view increasing government’s role in health care finance as a viable option. Rather, he views government’s best role as that of a facilitator of consumer choice:

However, the solution is not to enlarge government’s role. What I would like to see is a role for government in health care that is streamlined, rationalized, and bounded. I call this approach “limited paternalism.”
My belief is that most consumers are capable of making the best decisions about health care most of the time. The buzzword for this is consumer-driven health care.

Mr. Kling’s consumer-driven health care finance system would have the following components:

* Direct provision of health care services to the poor. For example, government-subsidized clinics in poor neighborhoods with nominal charges (say, $10 per visit).
* Aim to switch from a system of employer-provided health insurance to consumer-purchased health insurance, by ending the tax deductibility of insurance for corporations and eliminating requirements that companies provide health insurance.
* Mandatory catastrophic health insurance for all families not eligible for Medicaid. Rather than expand Medicaid and other government programs upward to the middle class, as some Democrats propose, tighten eligibility for these programs and require co-payments for all but the poorest participants. Eventually, phase out Medicaid and replace it with health care vouchers.
* Phase Out Medicare, and instead mandate health care savings accounts (explained in this earlier post). This would change the medical portion of retirement security from a defined-benefit plan, which Congress will tend to pack with benefits that it cannot pay for, to a defined-contribution plan, which is much sounder financially and much fairer generationally.
* Institute government-provided “catastrophic reinsurance” for very high medical expenses. The Kerry campaign has proposed this for expenses of over $50,000 per year. The purpose of catastrophic re-insurance is to enable private insurance companies to compete for business without having to screen out high-cost individuals. Of all the mechanisms for spreading the cost of break-the-bank illnesses among the general public, catastrophic reinsurance would involve the government in the least number of individuals and the least number of medical decisions. While the rest of the Kerry health care plan tends to be the opposite of what I would like to see, this proposal strikes me as a good plank in any health care reform platform.

Read the entire piece as well as Mr. Kling’s follow up blog post on the article. I believe that the Bush Administration and the Republican-controlled Congress’ failure to address health care finance reform in a meaningful fashion is one of the big reasons undermining independent voters’ confidence in the Administration during this political season.

This Wall Street Journal ($) article provides an excellent analysis of what Pitney Bowes — the mailing service and equipment company — learned regarding the question of why health costs keep rising relentlessly in America: A dysfunctional market creates few incentives for any of its participants to deliver efficient care. In fact, competition among insurers, health-care providers and producers of drugs and equipment often led to higher, rather than lower, prices.
Although the Bush Administration continues to ignore the problem, the struggle by American businesses to rein in health-care costs is nearing crisis levels. American employers still pay the majority of health-care costs for more than 130 million Americans and have borne the brunt of double-digit annual increases in benefit costs. Companies as large as General Motors Corp. reports that it spends “significantly” more on health care than steel, and recent data suggests that health care costs to employers could rise as much as 10% next year. Even a big company with an entire team dedicated to rooting out the source of rising health-care costs has little power to change these dynamics.
Pitney-Bowes has an internal team that aggressively pursues ways to contain ballooning health costs. But such a solution is easier wished for then achieved:

Last year, [the Pitney-Bowes team] scored a small victory. Employees who went to a hospital in 2003 stayed for an average of 3.7 days, unchanged from a year earlier. The overall number of admissions didn’t rise, either.
So Pitney Bowes was startled to nonetheless discover that the average cost of each hospital visit jumped 9% to $10,600. The average cost per day jumped 17%. One of the biggest culprits? Increasingly powerful hospital groups in California, whose price increases pushed the company’s average cost of a hospital admission in that state to $20,500, twice what it paid elsewhere.
By combing through claims data from its 46,000 U.S. employees and their dependents, Pitney Bowes can pinpoint some of the big contributors to the nation’s surging health-care bill: Local hospital mergers; entrepreneurial doctors prescribing costly MRIs and CT-scans at their own private clinics; marketing for expensive drugs such as the heartburn medicine Nexium, which became Pitney Bowes’s third-highest drug expenditure last year after an advertising blitz by maker AstraZeneca PLC.

Indeed, despite the Pitney-Bowes team’s efforts, health care costs at the company continue to skyrocket:

. . . the total cost of claims Pitney Bowes paid directly — covering about 80% of its employees — rose 11.5%, more than it expected. About 20% of Pitney Bowes’s employees are covered by health-maintenance organizations, for which the company pays a simple premium. That brings the average increase in prices for the entire company down to 7.5%. Pitney Bowes also managed to reduce its overall costs by increasing employee contributions and winning discounts on certain drugs and services.
The Pitney Bowes team . . . has helped moderate the expansion in Pitney Bowes’s $135 million health-care budget. But despite its most vigilant efforts, Pitney Bowes’s health-care costs continue to climb faster than the rate of inflation and faster than increases in most other business expenses.

Read the entire article because it provides an excellent overview of the economic pressures that will continue to drive health care prices higher in America’s health care finance system that is predominated by private third party payors. As noted on this blog before, unless or until the payment of health costs are placed back in the hands of the consumer, these market anamolies that continually drive up costs and limit competition in certain sectors of health care administration will continue to proliferate. The failure of the Bush Adminstration and the Republican-controlled Congress to address this key issue in a meaningful fashion remains a glaring weakness that the Democrats can exploit in the upcoming Presidential election.

This NY Times article reports on the finding of an internal Department of Health and Human Services investigation that Thomas A. Scully, the former top Medicare administrator, threatened to fire Richard S. Foster, the program’s chief actuary, if Mr. Foster told Congress the true probable cost of the drug benefits to be provided under the Bush Administration’s Medicare prescription drug benefit legislation passed last year. Here is an earlier post on this flap.
Interestingly, the report concluded that neither the threat nor the withholding of information violated any criminal law. The report accepted the Justice Department’s view that Mr. Scully had the final authority to determine the flow of information to Congress and that the actuary had no independent authority to disclose information to Congress. Mr. Scully, who resigned in December, 2003, denied threatening Mr. Foster but acknowledged having told him to withhold the information from Congress.

Laurence Kotlikoff writes this rather ominous Tech Central Station piece regarding the financing debacle related to Medicare, in which he observes the following:

Buried deep in the bowels of the recently released Medicare Trustees’ Report is the first-ever official estimate of Medicare’s true long-run costs. Previous reports have considered only short- and medium-term costs. The new “infinite horizon” estimate adds up all future costs, telling us the amount of money we’d need today to cover Medicare’s commitments. This present value bill is unimaginably large — $73.6 trillion to be precise! It’s almost seven times GDP, twice the size of private net wealth, and 14 times official federal debt.
Can we pay this colossal sum? Medicare’s trust fund is a paltry $256 billion. And the present value of its future payroll taxes is only $12.0 trillion. Historically, we’ve used general revenues to cover the gap between Medicare’s expenditures and receipts. But continuing to do so will require a 50 percent immediate and permanent hike in federal income taxes! Alternatively, we can wait and raise taxes by an even larger percentage in the future.

Professor Kotlikoff’s solution is to limit benefit growth, and here is how he proposes to do it:

All Medicare participants would receive individual-specific vouchers on October 1st of each year to purchase insurance coverage for the following calendar year. The size of the voucher would be based on the participant’s current medical condition (an idea first suggested by Peter Ferrara of the Institute for Policy Innovation and John Goodman of the National Center for Policy Analysis). A healthy 67 year-old might get a voucher for $7,500, whereas an 85 year old with pancreatic cancer might get a voucher for $85,000. The vouchers would take account of the participant’s age, region, sex, and other factors that affect health costs. Because those in the worst medical shape would get the largest vouchers, insurance carriers would be happy to sign them up.
All insurance carriers would have to cover a basic set of medical services and prescription drugs. But Medicare participants would be free to pay out of pocket for additional coverage. The government would keep up-to-date records about each participant’s health status, release this information to insurance companies at the participant’s request, and assign insurers for those who don’t sign up on their own.
The government would cap total MSS voucher expenditures so that expenditures per beneficiary grow no faster than wages. Medicare participants would see their real medical benefits rise, just not as fast as in the past. And they’d realize that no matter how sick they got, they’d always receive a voucher large enough to purchase insurance coverage for the following year.

Compare Professor Kotlikoff’s plan with the one that John Kerry is proposing. And then compare it to the one that the Bush Administration is proposing . . . er, except that the Bush Administration is not proposing any reform for this mess. Rather, the current administration’s idea of reform is its dubious Medicare prescription drug legislation of last year.

Michael E. Porter is one of 15 current University Professors at Harvard and one of America’s foremost business theorists. This Boston Globe article reports on Professor Porter’s latest research project — America’s dysfunctional health care finance system.

In a long essay in the June edition of Harvard Business Review, the 57-year-old Porter argues for redefining healthcare competition on the level of specific diseases and treatments, rather than on the level of health plans, networks, or hospital groups. ”The wrong kinds of competition have made a mess of the American healthcare system,” contend Porter and his coauthor, Elizabeth Olmsted Teisberg of the University of Virginia. ”The right kind of competition can straighten it out.”

The article notes that the health care finance problem is the type of particularly knarly issue that Professor Porter enjoys taking on:

What attracted Porter to the healthcare sector, in fact, was its standing as a competitive industry that seemed to defy the laws of competition. In properly functioning businesses, from personal computers to mobile phones, product and process improvements drive down prices and costs, quality rises, markets expand, and uncompetitive players go out of business. In healthcare, costs are forever climbing, services are restricted or rationed, many patients receive poor care, preventable medical errors persist, and there are wide discrepancies in costs and quality among providers and across geographic areas.

Professor Porter and his collegue, Elizabeth Olmsted Teisberg of the University of Virginia, note that the antidote to what ails the health care finance industry is simple:

Porter and Teisberg have a deceptively simple diagnosis: Healthcare competition today works on the wrong level. The players — health plans, payers, providers, and doctors — engage in what the authors call ”zero-sum competition,” dividing value rather than creating it. They seek to transfer costs onto one another, limit access to care, hoard information, and stifle innovation, all to the detriment of patients.

The right kind of competition should occur at the level of preventing, identifying, and treating patients’ conditions and diseases, Porter and Teisberg assert. They call for collecting and disseminating information about the outcome of medical procedures, so patients can make intelligent choices about physicians and hospitals. They also recommend transparency in billing and pricing to reduce cost shifting, discrimination, and other inefficiencies. And they propose increased specialization by healthcare providers, resulting in more centers of excellence in conditions and treatments that compete for patients.

”There’s only one kind of competition that’s directly connected to healthcare value,” Porter maintained in an interview. ”And that’s the competition about who can do the best job of your prostate surgery, with the least complications and the best recovery records. That’s where the competition needs to be. Yet that kind of competition has been all but eliminated in the system, in a misguided effort to save costs.”

Although the Porter-Teisberg model reduces the government’s role in the health care finance system, the government would nevertheless have an important policing role:

Government would have a role, not as a ”single payer” or an insurer of last resort, but by blocking network restrictions, hospital consolidation, and multiple hospitalization bills, and helping to set a framework for reform through its Medicare program. The role of health plans, meanwhile, would be more akin to that of coaches and advisers, helping their members navigate the system and find the best care.

And what does Professor Porter think about the current level of debate over health care finance reform in the Presidential campaign?:

”The debate now is totally about cost shifting and not value creation” in healthcare. Could his proposal influence that debate?
”I hope so,” Porter said. ”I would love to challenge both candidates to see what they’re going to do to engage these issues.”

The type of innovative approach that the Porter-Treisberg model advocates –along with such concepts as the Health Savings Accounts described in this earlier post — is what is necessary to overhaul the increasingly obsolescent American health care finance system. Inasmuch as that system already accounts for almost 20% of federal expenditures and those expenditures are increasing rapidly, my sense is that we all would be better advised to require our Presidential candidates to address these tough issues rather than the relatively unimportant but trendier business issues such as “outsourcing” and “energy independence.”
Hat tip to Tom Mayo’s HealthLawBlog for the link to the article on the Porter-Teisberg study.

In this post, Cal-Berkeley economics professor Brad DeLong examines an interesting aspect of John Kerry’s health care finance plan:

[T]he Kerry campaign has dusted off and brought forward a very clever idea from Brandeis’s Stuart Altman to not eliminate but at least diminish the magnitude of these two ways that market-based health-care reforms self-destruct. The idea? Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a ‘premium rebate’ pool to pay annual health-care bills over $50,000. This greatly diminishes the cost to insurers and HMOs of covering the really sick. The cost of treating the really sick will then be on the taxpayer rather than on the insurance-purchasing consumer. Insurance rates will fall. And the incentive for the young without many assets to go naked and uninsured will diminish as well.
Thus two of the big problems with our health care system become smaller problems. If this plan is enacted, we will no longer have to worry as much (i) adverse selection–the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover the sick people–and (ii) cost shifting–the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that–often–those who need health care the most have a hard time getting it. The second means that–often–those who could afford or would buy insurance if it were priced at its fair actuarial value don’t because of this cost shifting.

This is an interesting proposal. In short, the government would offer reinsurance for catastrophic health care costs. In so doing, this would reduce the incentive for health insurance companies to avoid providing insurance for high-risk applicants. At least in theory, the cost of health insurance should decline, which would make it more attractive to consumers. In effect, the Kerry proposal would make the government’s role in health insurance similar to its role in automobile insurance, where the government subsidizes coverage for the highest-risk applicants.
Indeed, as Professor DeLong points out, the Kerry proposal is consistent with the interests of the Bush Administration’s approach to health care finance. Why then has not the Administration adopted such a proposal? Simply another example of the void of creative policy development that is currently taking place under this Administration.

David Wessels over at the Wall Street Journal ($) has this column in yesterday’s edition that focuses on John Kerry’s health care finance plan. The entire column is well worth reading, and here are a few snippets:

But Mr. Kerry knows that for many American workers and businesses, the big worry is cost. So he has added another dish to his health-care table. He proposes that the federal government shoulder most of the cost when someone gets really sick. It would pay 75% of medical bills over $50,000 a year for any person covered by an eligible (more on that later) private employer. He says this would cut premiums for employers and employees by 10% or, as he boasts on the stump, by $1,000 per family.
The notion is so old it sounds novel. The Kerry campaign credits Stuart Altman, a veteran health-policy wonk at Brandeis University, for the plan. Mr. Altman drew it from memories of his years as a Nixon administration bureaucrat. A similar scheme was written into an ultimately unsuccessful bill in 1974 by Wilbur Mills, then chairman of the U.S. House Ways and Means Committee.
The concept is simple: Government becomes the ultimate reinsurance company, spreading the risk of expensive illness among taxpayers instead of sticking it with an unlucky employer. “We’re always worried that insurers will dump sick people,” notes David Cutler, a Harvard University health economist. “So the idea is that we won’t make them pay for really sick people.”
If Mr. Kerry wants to spend money so employers and insured workers pay less, then subsidizing firms that employ sicker and, often, older workers is reasonable.
But …
It’s expensive: $257 billion over 10 years, estimates Kenneth Thorpe, a former Clinton administration health economist now at Emory University.
It doesn’t save society any money and does nothing to restrain the American appetite for more drugs, more tests and more exams, whether or not they’re worthwhile. It simply shifts some costs now paid by employers and employees to taxpayers.

Mr. Wessels then closes by focusing in on one of the key issues, one that is sadly not a part of the usual public debate on health care finance:

If the proposal becomes law, Mr. Kerry and his advisers may discover it could do something they haven’t anticipated: provoke a broad public debate over how much health care is enough.
If the government starts picking up the tab for the one-half of 1% of privately insured Americans whose medical bills exceed $50,000, it will open the door to questions — and possibly rules — about whether such care is wise in every case. Should stomach-stapling surgery be covered? How about bypass surgery in 90-year-olds? Who decides when to pull the plug?
As The Wall Street Journal illustrated in articles last year, decisions in the U.S. on who gets expensive care and who doesn’t are made quietly and differently by intensive-care coordinators, transplant schedulers, and insurance bureaucrats. This Kerry proposal could break that debate wide open.

As Brad DeLong points out in this insightful post and as noted in this earlier post here on Health Savings Accounts, this key issue and others relating to the overhaul of America’s flawed health care finance system desperately need to be addressed in this campaign season. Although I have reservations about the Kerry plan’s reliance on third party payor systems as the primary mechanism for controlling health care costs, I agree with Professor DeLong that Kerry should be complimented for facilitating the debate of these key issues that the Bush Administration has largely ignored.

This Wall Street Journal ($) article reports on innovative techniques that several corporate health care finance departments are undertaking in an attempt to mitigate the adverse effects that the third party payor system has on the consumer’s decision regarding health care choices. The entire article is well worth reading, and here is one of the strategies noted:

In the fall of 2001, Pitney Bowes Inc.’s corporate medical director, John Mahoney, proposed an unusual experiment: Slash the amount that employees pay for diabetes and asthma drugs, and see what happens.
On its face, the proposal seemed it would only add to the company’s escalating health-care costs. But there was a simple logic to Dr. Mahoney’s theory: If diabetic or asthmatic employees found drugs more affordable, they might take them more regularly. Over time, taking better care of their chronic conditions might reduce expensive complications.
But Dr. Mahoney says even he didn’t expect the dramatic savings that resulted. Since 2001, the median medical cost for a Pitney Bowes employee with diabetes has fallen 12% from about $1,000 a year. The median cost for a patient with asthma has dropped 15% from $900 annually. Overall, the company says it will save at least $1 million in 2004, with continued savings in future years.
Pitney Bowes’s move is indeed radical. Amid health-care cost increases of 11% to 15% annually, many employers are taking the more obvious approach: have employees shoulder some of the financial burden by raising premiums, deductibles and co-pays. Such moves appear to be helping to slow health-care cost increases in the short term. But Pitney Bowes’s experience shows that spending more upfront to make it easier — and cheaper — for employees to manage some chronic illnesses may actually bring about greater savings in the long run.
“There’s a reluctance among many people to take this kind of a chance because conventional wisdom says it’s going to increase your costs,” says Dr. Mahoney, a former White House physician in the Ford administration.
“But health care is kind of like a balloon. When you squeeze costs in one place, they often pop up in another.”