COVID-19 - Out-of-Pocket Expenses for Hospitalizations

Thanks to an analysis by the Peterson Center on Health Care at the Kaiser Family Foundation, Americans can get a sense of the potential costs of coronavirus treatment for people with employer health insurance coverage.  While private insurers have agreed to waive copayments and deductibles for COVID-19 tests, America's Health Insurance Plans (AHIP) has made it clear that out-of-pocket costs for hospitalizations would not be waived, meaning that people who have plans with high copayment costs could find themselves with high expenses.  Here's what AHIP has to say:

Now, let's look at the analysis by the Peterson Center.  The analysis opens by noting that the total average cost of treatment (combination of employer plan and employee's out-of-pocket expenses) for pneumonia with major complications and accompanying co-morbidities was $20,292 in 2018 with a range from $11,533 to $24,178 (25th and 75th percentiles).  Here is a graphic showing the total average cost of treatment depending on the level of complexity:

In the case of China, the average length of hospital stay for a patient diagnosed with coronavirus was 11 to 12 days with around 2.3 percent of Chinese COVID-19 hospitalized patients receiving mechanical ventilation support.  In the case of the United States, when ventilator support is required for pneumonia, the average length of hospital stay increases substantially as follows:

1.) Pneumonia with or without major complications or comorbidities - 3.1 days

2.) Respiratory system diagnosis with ventilator support for less than 96 hours - 5.8 days

3.) Respiratory system diagnosis with ventilator support for more than 96 hours - 22.6 days

Obviously, the total cost of treatment rises substantially when mechanical ventilation is required.  Here are the average costs of hospital stays where ventilation is needed (2018 data):

1.) Pneumonia with or without major complications or comorbidities - $12,692

2.) Respiratory system diagnosis with ventilator support for less than 96 hours - $34,223

3.) Respiratory system diagnosis with ventilator support for more than 96 hours - $88,114

Out-of pocket expenses can be significant for patients with employer coverage.  Here is a graphic showing average out-of pocket spending for inpatient admission for pneumonia among enrolees in large employer plans by degree of complexity (2018 data):

The analysis notes that there are three reasons why out-of-pocket expenditures could be higher during this outbreak:

1.) many patients will have higher deductibles, particularly those with private coverage through small businesses and in the individual market.  The Peterson analysis is based on claims from large, more often generous private plans.

2.) The COVID-19 pandemic is occurring early in the calendar year meaning that many people have not yet accrued much health spending to fulfill their deductible.

3.) The Peterson analysis does not include balance billing where an out-of-network provided sends an additional bill directly to the patient for an amount not covered by the health plan.

Let's put these numbers into perspective.  According to Magnify Money (data from the Federal Reserve and Federal Deposit Insurance Corp.), a median American household has $12,330 in total savings in bank accounts and retirement savings accounts.  At the bottom end, 29 percent of households have less than $1,000 in savings.  The analysis by Peterson suggests that hospitalization as a result of a COVID-19 infection could result in severe financial difficulty for a very significant portion of American households, particularly since many of these households likely find themselves without their regular income thanks to the shuttering of the United States economy.  It is no wonder that a survey by the Kaiser Family Foundation found that 36 percent of Americans were worried about being able to afford testing or treatment related to the COVID-19 pandemic.

Where are American Taxpayer's Spending Their Health Care Dollars?

Those of my readers that live in the United States are well aware of the high cost of health care in America.  One of the high costs of health care is not one that consumers of American health services generally give consideration to; the high cost of administering health services in the United States.  A recently released study by David U. Himmelstein MD, Terry Campbell and Steffi Woohandler MD breaks down the major components of health care administration in the United States and their costs on a per capita basis and then compares these costs to Canada and its universal health care/single-payer system.

Here is a bar graph comparing the health care administration costs in 2017 for five of its major components with the United States in blue and Canada in orange:

As you can easily see, the per capita costs for administering America's health care system are far higher than Canada's.  In fact health care administration costs in the United States account for 34.2 percent of national health care expenditures (or $812 billion in 2017) compared to only 17 percent for Canada.  This means that more than one-third of all spending on health care in the United States is consumed by administrative costs and not on treating patients.  Not only are American health care administration costs high, but America's per capita health care administration costs have risen by 3.2 percentage points since 1999 with 2.4 percent of that increase being accounted for by the growth in private insurer's overhead costs thanks to its expanded responsibility for the administration of both Medicare and Medicaid plans.

Back in 2014, Dr. Himmelstein also compared administrative costs for hospitals in eight advanced nations; the United States, Canada, France, Germany, the Netherlands, England, Scotland and Wales. He found the following:

Not only did the United States have, by a wide margin, the highest per capita total hospital expenditures among the eight nations, hospital administration costs as a percentage of total hospital costs were also the highest at 25.32 percent compared to only 12.42 percent for Canada and 19.79 percent for the Netherlands, the second-highest nation in the group.  To put this into concrete numbers, United States hospital administration costs rose from $97.816 billion in 2000 to $215.369 billion in 2011.  As I noted above, this means that a significant portion of hospital costs in the United States are not going to improve patient care, rather, they are going to feed the administrative "monster" that is consuming hundreds of billions of health care dollars every year.  In addition, American hospital administrative costs increased significantly over the decade from 2000 to 2011 from 1.0 percent of GDP to 1.4 percent of GDP.

  Let's close with this quote from Dr. Himmelstein:

“We can afford universal coverage with a single payer plan, not just universal coverage but first dollar coverage for everybody in our country if we adopted a single-payer Medicare for all approach.  If you’re going to cover everybody without getting those savings you’re going to have to spend more or you’re going to have to have big co-payments and deductibles that deter people from getting the care that they actually need.”

It is obvious from this study that, until administrative costs are controlled, American consumers of health care will continue to suffer from a health care system that is by no means world-leading....except when it comes to paying high administrative costs.  Unfortunately, Washington seems incapable of understanding the problem or coming up with a concrete solution to the problem.  But, then again, when you see this from the anti-Medicare For All lobby (aka the benign-sounding Partnership for America's Health Care Future), why should we be surprised:

The Economic Impact of Medicare for All

With relatively little fanfare given its importance to American taxpayers and their families, Rep. Pramila Jayapal (D-Wash.) introduced H.R. 1384 to Congress in late February 201.  The goal of the bill is to establish an improved Medicare for All national health insurance program.  While there is no summary of the text of the bill on the Congressional website yet, here are some quotes from Rep. Jayapal's website about the issue:

"Today’s healthcare system fails to provide quality, affordable healthcare as a right to all people living in the United States. Nearly 30 million Americans are uninsured and at least 40 million more cannot afford the costs of their co-pays and deductibles.

The quality of our healthcare is much worse than other industrialized countries—the life expectancy in the U.S. is lower than other nations, while our infant mortality rate is much higher. Yet the U.S. spends more money per capita on healthcare than any other industrialized nation. We waste hundreds of billions of dollars every year on unnecessary administrative costs, while healthcare industry executives measure success in profits, instead of patient care.

The current healthcare system in the United States is ineffective, inefficient and outrageously expensive. It is time to remove the profit motive in healthcare, to resolve the inefficiencies and to guarantee quality healthcare to every person living in the United States.

The Medicare for All Act of 2019 improves and expands the overwhelmingly successful and popular Medicare program, so that every person living in the United States has guaranteed access to healthcare with comprehensive benefits.

“Today in America, 30 million people are uninsured. 40 million are underinsured. We have the most expensive healthcare system in the world and yet our outcomes are the worst of all industrialized countries. I and the more than 100 co-sponsors of this bill refuse to allow this to continue.  It’s time to put people’s health over profit. Our bill will cover everyone. Not just those who are fortunate enough to have employer-sponsored insurance. Not just children. Not just seniors. Not just those who are healthy. Everyone. Because healthcare is a human right. We will need every single person in the country to help us, to stand with us, to organize and to fight for this,” said Rep. Jayapal. “Because the industry lobby is going to pour hundreds of millions of dollars into killing this bill, saying it costs too much, scaring you into thinking you’re giving up something, pitting the healthy against the sick and the young against the old. It’s time to ensure that healthcare is a right and not a privilege, guaranteed to every single person in our country.  It is time for Medicare for All.”

  

Here is a two page summary of the Medicare for All Act of 2019 thanks to Common Dreams:

  

One of the first question people have is how much this will cost taxpayers.  Fortunately, the Political Economy Research Institution (or PERI) at the University of Massachusetts Amherst have completed a detailed analysis of the economic impact of a Medicare for All system.  In this study, the authors note that 9 percent of Americans are uninsured (up to 13.7 percent in the last quarter of 2018) and 26 percent are underinsured.  While the demand for health care services will increase once these people access a Medicare for All system, the overall demand for health care services in the United States will only rise by 12 percent.  That said, the authors note that there is a significant cost savings potential under a Medicare for All system with the following savings:

1.) Administration - 9 percent savings

2.) Pharmaceutical - 5.9 percent savings

3.) Uniformity of Medicare rates - 2.8 percent savings.

4.) Waste and Fraud - 1.5 percent savings

All in all, the authors estimate that overall U.S. health care costs could fall by roughly 19.2 percent relative to the existing system.  With current Health Consumption Expenditures (other than public health programs) reaching 3.24 trillion in 2017, with a 12 percent overall demand increase and a 19.2 percent cost saving, total Health Consumption Expenditures would fall to $2.93 trillion, a saving of $310 million.  It is also interesting to note that United States Health Consumption Expenditures in 2017 were equal to 17.2 percent of GDP (up from 6.2 percent of GDP back in 1970), far higher than the eight other large industrial economies which range between 8.9 percent of GDP for Italy and 11.3 percent of GDP for Germany.  Under the analysis by PERI, U.S. Health Consumption Expenditures will fall to 15.8 percent of GDP under a Medicare for All system. 

Medicare for All will be funded in two ways:

1.) The same public health care revenue sources that prettily provide 60 percent of health care financing including funding for Medicare and Medicaid - this will provide $1.88 trillion in funds.

This leaves a shortfall of $1.05 trillion ($2.93 trillion minus $1.88 trillion) in additional funding requirements which would require additional revenue generation.

2.) Additional Revenue Generators:

a.) Firms that are not offering coverage for some or all of their employees will pay $500 per uncovered worker with small businesses being exempted.  The authors also developed proposals for an 8.2 percent payroll tax or 1.78 percent gross receipts tax that would apply to new businesses.  This would generate an additional $623 billion in revenue.

b.) A 3.75 percent sales tax on non-necessities (excluding housing and utilities, education, food consumed at home) which would raise $196 billion in revenue.

c.) A net worth tax of 0.38 percent on net wealth greater than $1 million which would apply to only the wealthiest 12 percent of households.  This would raise $193 billion in revenue.

d.) Tax long-term capital gains as ordinary income which would raise $69 billion in revenue.

Here is a table summarizing the revenues generated through the four proposed funding sources:

Let's close with this graphic from the Kaiser Family Foundation which shows the net favourability of a national Medicare for All plan after hearing these arguments positives and negatives about this type of plan (i.e in favour minus oppose):

H.R.1384 has been referred to the Committee on Energy and Commerce and the Committees on Ways and Means, Education and Labor, Oversight and Reform and Armed Services, the places where all good bills go to die.

Health Care Premium Uncertainty - What Lies Ahead for American Consumers?

While Washington self-implodes over the health care issue, a brief analysis by Kurt Giesa at Oliver Wyman Health summarizes the factors behind potential rate increases across the U.S. health care insurance sector.  Here is a brief look at the problem that will face health care consumers in 2018.

The analysis by Oliver Wyman suggests that up to two-thirds of the health insurance rate increases in 2018 are due to two factors:

1.) The uncertainty regarding continued funding of the cost-sharing reduction (CSR) payments:

Obamacare's Cost-Sharing Reduction subsidies were implemented to lower the out-of-pocket costs  for Silver plans purchased on the Health Insurance Marketplace with the size of the subsidy varying with income level.  For instance, for those households making between 100 percent and 250 percent of the Federal Poverty Level, CSR subsidies lower coinsurance, lower copay amounts and lower the maximum amount that the affected household will pay in out-of-pocket expenses by raising the actuarial value of the plan.

Here are some examples with varying household incomes (as a percentage of the Federal Poverty Level or FPL):

- 100-200 percent of FPL, out-of-pocket limit won’t be more than $2,250 for an individual  or be more than $4,500 for a family.

- 200-250 percent of FPL, out-of-pocket limit won’t be more than $5,200 for an individual or be more than $10,400 for a family.

More than 250% percent of FPL, out-of-pocket limit won’t be more than $6,600 for an individual or be more than $13,200 for a family.

2.) The impact of the relaxation of the individual mandate and how it will impact enrolment and risk pools:

According to the individual shared responsibility provision of Obamacare, each member of a family unit must have at least one of the following over the 12 month tax period:

- Have qualifying health coverage called minimum essential coverage

- Qualify for a health coverage exemption

- Make a shared responsibility payment with your federal income tax return for the months that you did not have coverage or an exemption.

Under proposed changes, enforcement of the individual mandate could end, changing the system that currently allows insurers to average out the higher-risk policy holders.

Adjustments in health care insurance premiums are calculated by actuaries on an annual basis, taking into account the risk of expected and unexpected occurrences like a severe influenza season and a higher than normal number of large claims.  For the 2018 year, actuaries are facing a perfect storm due to the unknown issues associated with potential changes to the Affordable Care Act under the Trump Administration.  Modelling by the author suggests that rate increases could well range between 28 and 40 percent with two-thirds of those increases related to the uncertainty around CSR payments and the lack of enforcement of the individual mandate as noted above.

Here is a graphic showing how these two issues will contribute to the anticipated health care insurance premium increases in 2018:

As you can see, only 5 to 8 percent of the premium increases in 2018 are related to the cost of care (i.e. the increase in medical costs), a small part of the overall projected increase.  Note, however, that the increase in medical costs is roughly 2.5 to 4 times the official inflation rate.  Non-enforcement of the Obamacare individual mandate could contribute 9 percent to premium increases and the lack of funding for Cost Sharing Reduction subsidies could add between 11 and 20 percent to premiums.  We are already seeing signs of this:

1.) North Carolina - the state's largest insurer is warning its Obamacare policy holders that it may have to hike rates by more than 20 percent in 2018, the second year in a row that premiums have risen by 20 percent plus.  It will "only" need to raise premiums by 8.8 percent if Cost Sharing Reduction subsidies for low income enrolled are funded by Washington. 

2.) Pennsylvania - the state's Insurance Commissioner Teresa Miller warns that the five insurers that sell plans in the state will have to raise premiums by 36.3 percent if the individual mandate is repealed and Cost-Sharing Reduction subsidies are not paid.  It will "only" need to raise premiums by 8.8 percent if Washington changes nothing.

I like that - an increase of only 8.8 percent in our less than 2 percent inflation world. 

With Congress fiddling while the health care system burns, this analysis clearly shows who is going to pay for all of this health care system uncertainty - Main Street Americans.  Why should we be surprised?

The Grim Future of Health Care in America

At a recent post-election DealBook Conference sponsored by the New York Times, host Andrew Ross Sorkin interviewed Aetna's Chairman and CEO, Mark Bertolini, discussing the subject of the future of health care in America.  In the interview, the two gentlemen discuss the future of Obamacare, a subject that is particularly pertinent given that Donald Trump has pledged to end what has proven to be a somewhat less than successful attempt at providing universal health care for Americans.

Before we go any further, let's look at what happened back in August 2016.  Aetna announced the following:

"Following a thorough business review and in light of a second-quarter pretax loss of $200 million and total pretax losses of more than $430 million since January 2014 in our individual products, we have decided to reduce our individual public exchange presence in 2017, which will limit our financial exposure moving forward. More than 40 payers of various sizes have similarly chosen to stop selling plans in one or more rating areas in the individual public exchanges over the 2015 and 2016 plan years, collectively exiting hundreds of rating areas in more than 30 states. As a strong supporter of public exchanges as a means to meet the needs of the uninsured, we regret having to make this decision.

Providing affordable, high-quality health care options to consumers is not possible without a balanced risk pool. Fifty-five percent of our individual on-exchange membership is new in 2016, and in the second quarter we saw individuals in need of high-cost care represent an even larger share of our on-exchange population. This population dynamic, coupled with the current inadequate risk adjustment mechanism, results in substantial upward pressure on premiums and creates significant sustainability concerns.

The vast majority of payers have experienced continued financial stress within their individual public exchange business due to these forces, which also are reported to have contributed to the failure of 16 out of 23 co-ops. We are encouraged by a recent announcement that the U.S. Department of Health and Human Services will explore new options to modify the risk adjustment program, and remain hopeful that we can work with policymakers from both parties on a sustainable public exchange model that meets the needs of the uninsured.

We are committed to a health care marketplace that gives every American the opportunity to access affordable, high-quality care. We will continue to evaluate our participation in individual public exchanges while gaining additional insight from the counties where we will maintain our presence, and may expand our footprint in the future should there be meaningful exchange-related policy improvements.

Aetna will reduce its individual public exchange participation from 778 to 242 counties for the 2017 plan year, maintaining an on-exchange presence in Delaware, Iowa, Nebraska and Virginia. The company will continue to offer an off-exchange individual product option for 2017 to consumers in the vast majority of counties where it offered individual public exchange products in 2016." (my bold)

Now, let's go to the interview.  When asked what will happen to Obamacare now that Donald Trump is president-elect, Mr. Bertolini states the following:

"So I think there will be a repeal first, and I think that the repeal will be at a minimum in name because what's going to happen over the next year is, um, we have people signed up so we have to honour that commitment through 2017.  We'll have to act quickly to get something in place for 2018.  So, I think things like guaranteed issue, um, no pre-existing conditions, I think things like 26-year olds on their parents' policy, I think the expansion of Medicaid are all very important programs that we need to continue.  So, how do those get passed going forward?  And then we have this population that uses the exchange, which are people between 45 and 65 who have chronic illness and can't afford their own insurance outside of the exchange and need to be subsidized .  So, I think on the first population, it's easy to make that happen, we can keep those program changes in place and, as a matter of fact, they weren't part of the ACA in a lot of ways anyway."

When asked what does this all mean for Aetna's business strategy, here's what he had to say:

"Eighty-one percent of Americans hate their health insurance.  They hate the health care system.  We have too many uninsured.  It's not affordable even for people making six figures so it still has to be fixed.  We still need to insure everybody.  The approaches will be different from a policy standpoint and a fading standpoint but we still need to have a product that's affordable, more personalized, simpler to use, that people can buy like they buy everything else today."

Now, let's look at Aetna's bottom line.  Here's what Mr. Bertolini has to say about what is going to happen to health insurance premiums:

"If you're on the exchange, 25 percent looks like a pretty good number this year.  It's going to be bigger next year unless we fix it."

So, the 12 million income-challenged Americans (family income below 400 percent of the poverty line) with the most health care problems can expect at least a doubling of their premiums over the next two years if the American health care system isn't "fixed".

Here is the interview in its entirety:

d in your browser.

While it's slightly off-topic, let's close with this graphic from the Kaiser Family Foundation showing how much average annual health insurance premiums (worker and employer contributions) have risen between 2006 and 2016 to give us a sense of the historical changes in health care premiums for workplace health insurance:

Somebody is getting wealthy off of America's health care system.

It's pretty obvious that the future of the health care system in the United States is grim and is likely to worsen given the aging demographic and mounting federal debt level which will make it increasingly difficult to expand Medicare and Medicaid coverage since these two programs plus additional spending on health care accounted for 40 percent of mandatory spending in 2015 and are expected to grow from 5.8 percent of GDP in 2015 to 7.4 percent of GDP in 2026.