The Perfect Storm
E very professional meeting, including the most recent Symposium on Advanced Wound Care, has two types of dialogue: The scheduled formal program and the informal hallway discussions. The former is carefully planned; the latter is always a surprise. This year, the hallway buzzword was busy. Overflowing practices are the norm, patient acuity is at an all time high, and demand for healthcare professionals who have the knowledge, skills, and credentials to care for persons with wounds, ostomies, and continence-related concerns continues to grow.
This, of course, is just the beginning. Every industrialized country is starting to witness the effects of a "graying population" and its attendant healthcare costs while feeling the pressure of a growing, global nursing shortage. While concerns about a financially sustainable healthcare system are also global, the situation in the US is already close to emergency status. Health insurance premium increases of more than 10% per year are the norm. The number of small businesses offering any healthcare benefits has dropped almost 10% to about 66% in the past 4 years.1 On a per capita basis, US spending on healthcare is 50% higher than the second-highest spending country (Switzerland). Yet between 1993 and 2003, the number of uninsured has grown from 37 million to 43 million people and obtaining coverage (even when you are relatively healthy and able to pay hefty premiums) is exceedingly difficult.2 Prescription drug costs, as well as procedure, hospital, and provider charges, have increased substantially.
Ironically, only those who are uninsured or underinsured pay the full healthcare bill. While individuals make payment arrangements (with interest) for the entire amount billed, insurance companies only pay a pre-negotiated fraction. To navigate the healthcare finance maze, hospitals now spend one out of every four healthcare dollars on administration costs, not on patient care. This is not an American phenomenon, but rather, the result of adopting a market-driven healthcare system. For example, after managed competition was introduced to overhaul the National Health System (NHS) in Britain, healthcare costs actually increased because the new system required more regulation and government monitoring (at tax payer cost) and the number of managers in the NHS tripled.3 In the US, the actual amount spent on patching existing system flaws tends to be overlooked. For example, tax dollars are used to legislate healthcare (eg, drive-through deliveries), to provide emergency and non-emergency care for the under- and uninsured (eg, clinic grants), and to provide health insurance grants for children. The collective costs of debating, issuing, and adopting ever-changing rules and regulations (just to name a few) are staggering and translate into millions of dollars not spent on patient care.
When it comes to not spending healthcare dollars on healthcare, one group of players wins the prize. While everyone is watching premiums go through the roof and feeling the pain of being nickled-and-dimed with co-payments and out-of-pocket expenses, the insurance industry is sitting pretty - so pretty that the deputy insurance commissioners of Pennsylvania recently ruled that the (not-for-profit) insurance company Blue Cross and Blue Shield needs to "apply for approval of reserves and surpluses and provide a business plan explaining how excess funds will be distributed to benefit plan participants and the underinsured and uninsured citizens of the Commonwealth in a manner befitting charitable and benevolent institutions."4 Why this need to curtail the free-market model? In addition to their $2.4 billion reserve for unpaid claims and liabilities, the most recent Blue Cross Blue Shield surplus totaled $3.5 billion. The company quickly filed a lawsuit against the Commonwealth of Pennsylvania and the matter will probably not be resolved for a while. Meanwhile, the surplus was created despite the generous salaries and benefits commonly awarded executives in the industry.
In a recent press release, Rhode Island's Secretary of State Matt Brown called the Blue Cross executives' salaries "absurd."5 Brown writes, "Like most Rhode Islanders, I was stunned to learn that Blue Cross paid its President, Ron Battista, $2.8 million and its top 10 executives over $5.5 million last year. It's unconscionable that Blue Cross increased Ron Battista's pay 24% and top executives' pay 30% over 2 years while raising premiums over 30% for small business this year alone - forcing them to drop coverage or lay people off."5 However, chances are that Ron and the other "Blues" executives will argue that their compensation pales in comparison to the salaries of their colleagues in the for-profit sector. Indeed, according to Families USA, the average compensation of the highest-paid executive in the 11 largest companies that participate in Medicare's private insurance plans was $15.1 million in 20026 - a figure that does not include unexercised stock options. In 1 year, that totaled more than 166 million healthcare dollars not spent on healthcare. During this time, health insurance company execs were, of course, busy lobbying the federal government for an increase in Medicare payments; they recently received a 10% increase. Given the recent rosy financial reports, chances are that their salaries will increase again this year. For example, Aetna reports operating earnings of $288.4 million and a net income of $295.5 million in the first quarter of 2004 "excluding favorable reserve development - due, in part, to higher revenue from increased medical membership."7
Slowly but surely, state governments are starting to take a hard look at the situation. However, this generally means increased spending of healthcare dollars on lobbying. In the 3 months leading up to a California Senate Insurance Committee crucial health insurance vote, the largest California health insurers paid lobbyists $1 million to influence the vote8 - another 1 million healthcare dollars not spent on healthcare! Incidentally, the California Senate proposal included requiring health insurers to justify overhead expenses, including lobbying fees, and to receive approval before passing costs on to patients and business owners in the form of higher premiums.
During the past 11 years, the group that lobbied successfully against any kind of national healthcare system because it would cause "bureaucrats to make medical decisions, hospitals to close, and patients to lose their ability to chose their own providers" managed to accomplish all of the above while turning a nice profit. The argument that a free-market system will reduce costs while improving care has turned out to be a fallacy. Indeed, the General Accounting Office reports continue to show that Medicare administrative costs average 1.1% to 3%, whereas private health plans spend an average of 9.5% on administration. Furthermore, health insurance overhead costs (including lobbying fees) increased 12.5% in 2001 and 16.4% in 2002.8
When you are dealing with the realities of this market-based system and have to watch patients struggle to pay their premiums and prescription drug costs, these numbers are enough to make you ill. Having said that, these companies are in the business of making money and keeping stockholders happy. That's their objective. The price tag of freedom inherent in a free-market model is reduced security. Politicians and industry executives argue that measures to stabilize the market and increase security of the system - eg, price increase controls or regulations to protect providers and consumers - impede the "freedom" of the free market. In a free market, some win and some lose. If we Americans decide that healthcare is a necessity that must be accessible to all and not just a commodity, the freedom of this market - including the freedom of suppliers and providers - must be restricted. Finding the right balance between these two opposing forces, especially given the billions of dollars at stake, will not be easy. The tidal wave of the perfect storm that may hit as a result of exorbitant costs, an aging population, and provider shortage is on the horizon. And the life rafts currently in use are taking on water. - OWM
1. Andrews M. Affordable health care. Fortune, Small Business. 2004;May:44-53.
2. Miller J, Miller M. Singled out. New York Times Magazine. 2004;April 18:48-51.
3. Light DW. Universal health care: lessons from the British experience. Am J Publ Health. 2003;93(1):25-30.
4. Johnson SJ, Rohrbaugh RL. Reserve and surplus levels of hospital plan and professional health services plan corporations: Application Notice 2004-01. Available at: http://www.pabulletin.com/secure/data/vol34/34-3/122.html. Accessed May 10, 2004.
5. Rhode Island Department of State Press Release. Secretary of State Matt Brown says "absurd" blue cross executive pay points to need for insurance commissioner. Providence, RI. March 17, 2004.
6. Families USA. Top dollar: CEO compensation in Medicare's private insurance plans. Available at: http://www.familiesusa.org. Accessed May 11, 2004.
7. Aetna. Aetna Reports First Quarter Results. Available at: http://www.aetna.com/news. Accessed May 9, 2004.
8. Foundation for Taxpayer and Consumer Rights. CA Health Insurers spend $1 million lobbying in 90 days. Available at: http://www.consumerwatchdog.org. Accessed May 11, 2004.