Health & Human Services

A Cure for Costs

rising price of health care.
by | May 2004

California may be slumped in the fiscal dumps right now, but that hasn't kept crazy ideas, brilliant insights, cutting-edge movements and--dare we say it?--interesting initiatives from surfacing. And when California takes action, other states take notice. That's why it is hard to dismiss a current push to control health care costs in the Golden State.

Health care issues are at the top of state agendas today. Maine's new Dirigo program, for example, is trying to bring universal health care to its citizens. There's also an abiding interest--concern might be the better word--over Tennessee's Medicaid expansion, otherwise known as TennCare. And there are plenty of post-mortems over Oregon's attempt to expand coverage by rationing health plan benefits.

Until now, though, most of the major health care reforms have aimed at the access side of the issue--including one in California, a contested year-old law that would force more state businesses to offer coverage. But the most current effort in California is different from most experiments in that it focuses directly on controlling costs.

That would seem to be a Quixotic quest. How can one state--even one as big and bold as California--control something as volatile, pernicious and logic-defying as health care costs?

At this point, it can't. But that's not to say it won't. The comprehensive approach to controlling health care costs got its start with the California Foundation for Taxpayer and Consumer Rights. The FTCR put together some ideas, held town-hall meetings throughout the state and invited employers, doctors, nurses, patients, hospitals and anyone else with a stake in health care to participate in both the meetings and the planning.

What they came up with is a three-pronged strategy--based on measures used in other states' programs or for other issues--that has been forwarded to the legislature.

The first part has to do with hospital oversight. Using as its model a Maryland program that has been in place since 1971, the proposal suggests independent oversight of hospital finances. Hospitals have become one of the faster-rising cost pieces of the health care puzzle and an independent commission, the FTCR argues, could help stabilize costs and allow for long-range planning that would make hospitals both fiscally stable and safer.

Second, health insurance companies would also be regulated. Borrowing a page from auto insurance regulation, the FTCR plan would subject insurance companies to oversight and be asked to justify administrative costs and profits before raising rates. According to the FTCR, as much as 25 cents of every premium dollar a health insurance company takes in goes toward advertising, overhead and profits. In 2003, health insurance overhead expenses increased by more than 16 percent to become the fastest-growing component of health care costs, eclipsing even annual prescription drug increases.

Finally, the FTCR is pushing for prescription drug discounts. The proposal would tamp Rx costs down through the use of negotiated bulk purchasing discounts. Among its models for this approach are CalPERS, the public employee retirement system, as well as the U.S. Department of Veteran Affairs. It's also the way Canada keeps its drug prices down. All of them use bulk purchasing and receive hefty discounts--as much as 30 percent to 60 percent off the price most of us pay at the drugstore. The proposal calls for expanding such programs so that patients and businesses have access to discounted prescription drug rates.

The FTCR is not just making noise. There's an underlying goad in the proposal. In its report "Crisis and Opportunity: Forging a Universal Health Care Consensus," the nonprofit organization throws down the gauntlet: If the legislature fails to pass the necessary reforms, the FTCR "will propose a ballot initiative to allow California patients to have the final say in the policy debate."

This initiative threat could be the real dog in the fight--and an unfortunate one. The FTCR's ideas aren't perfect. There are good arguments to be made against them--or at least for modifying them. If costs continue to rise while premiums are frozen, for instance, insurers might discourage consumers with poor health from enrolling in their plans, thus increasing the number of uninsured. An initiative would remove the give-and-take of compromise--something that's necessary if a majority of consumers and providers is to accept the change and help reforms move forward in a positive way.

That said, there's something appealing about a "threat" to go directly to the people to resolve a crisis over escalating premiums and increasing out-of-pocket costs. The rising cost of health care-- which now stands at 15 percent of the nation's economy, an all-time high--is something that hits not only the poor and uninsured, who tend not to come to the polls in great numbers, but also the vast majority of middle-class voters, who do.

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