On Wednesday, Rep. Lois Capps will host her first town-hall meeting on the hot topic of health care. Since she has selected a venue that will dramatically limit the number of attendees, the audience most likely will be made up almost entirely of people calling for a government-run (single-payer) health-care system — and the reason cited inevitably will be the high cost of our current private system. Therefore, I thought it would be useful to take a closer look at the “high cost” of health care.
The cost of America’s exemplary private health-care delivery system is comprised of two competing components. The larger component by far is the cost of health-care claims, which represent about 86 percent of the total cost of the system. The other component is administration. According to the Centers for Medicare & Medicaid Services, administrative costs in the private health-care system average 14 percent per year. These costs include:
» taxes paid to government
» actuarial and underwriting costs of providing insurance coverage
» disease-management and wellness programs
» government compliance
» services such as premium billing, claims payment, customer/member service (i.e., explaining benefits and how to access them), negotiating with and quality tracking of providers, networks, etc.
It is significant that of the 14 percent in administration costs, one-third (4.2 percent) is in the form of taxes paid to the government. Therefore, only about 10 percent of the cost of our private health-insurance system is consumed by administrative overhead. That is excellent, and no serious person who has looked at the issue believes that the government would do a better job of controlling costs. This is especially true in light of the government’s track record.
Therefore, if we want to reduce the cost of health care in America, we need to focus on where most of the money in the health-care system is going, and that brings us to the 86 percent that goes toward claims (the actual cost of health-care delivery services).
The bottom line is that health-insurance premiums are high and rising because health-care claim costs are high. So the question we need to ask is: What can individuals, families and small businesses do to reduce the 86 percent of costs that are directly associated with health-care claims?
Most experts agree that the answer is in changing personal behavior. If Americans quit smoking, for example, it would have a significant and positive effect on bending the health-care cost curve down. In fact, according to the Centers for Disease Control and Prevention, smoking alone costs the United States $167 billion each year, of which $75 billion is in the form of direct medical costs and $92 billion in lost productivity.
Progressive employers who offer wellness programs and incentives to help their employees quit smoking could achieve substantial reductions in their annual health-care costs. The same is true for the self-employed covered by an “individual policy.” Making wiser lifestyle choices, such as exercising regularly, eating a proper diet and avoiding consuming excessive amounts of alcohol, would pay substantial monetary dividends over the long haul.
Best of all, none of those behavioral reforms would require a new government program, expensive bureaucracy or a taxpayer-funded “public-insurance option” created and administered out of Washington, D.C., to become a reality.
Another argument we hear by those calling for a government-run health-care system is how citizens of other countries spend less money on health care. That is true unless you include the amount of taxes those citizens pay to support their country’s government-run health-care system.
Sweden is a country often cited as an example of having a great health-care system. According to an annual survey of effective tax rates by KMPG, a person earning $100,000 has 37.5 percent deducted as income tax with another 5 percent deducted for employee social security. Sweden’s effective tax rate on income is the highest in the world. In America, a person earning $100,000 has 17.5 percent deducted as income tax. One could just as easily say that in America we spend more on health care because we have more to spend. Even more importantly, in America, we are free to spend as much as we want on health care. That isn’t necessarily true in nations that have a government-run health-care system.
So, while Americans may spend more than any other country on health care, Americans also need to become more informed health-care consumers. As it was once uttered by infamous, greedy capitalist Gordon Gekko, “information is the most valuable commodity.” I agree, and an informed health-care shopper is a more efficient health-care shopper, and an efficient health-care shopper will spend less money on health care than a less-efficient health-care shopper.
Too often missing from the health-care debate is the importance of America developing a more decentralized, consumer-driven and market-oriented health-care system. Such a system has great potential to lower our overall health-care costs. Today, there are hundreds of new consumer-driven health-care market innovations that are simultaneously lowering the cost and increasing the value of health care in America. Many of them are directly attributable to the Internet economy. In a recent debate on the subject, I suggested that the future of U.S. health care is a Blackberry and not a phone booth.
The point I was making is that advancements in technology already are and will continue to drive down health-care costs, increase access and improve quality. The only thing that can and will interfere with that positive story is a massive new government-run health-care behemoth that looks, acts, costs, talks and walks like Medicare.
However, it is also important that we are honest with ourselves that transitioning to a more consumer-driven, market-oriented health-care delivery system is going to require a paradigm shift in how we, as individuals and employers, choose to buy health insurance. That is essential; in fact, it is the first step toward accepting more personal responsibility over the type, frequency and quality of health care we decide to consume as Americans.
— Joe Armendariz is a Carpinteria city councilman and co-founder of Armendariz Partners, a public affairs consulting firm.