WPRI Report:

Why Milwaukee Health Care Costs are High: What to Do About It

       By Linda Gorman, Ph.D.

     May 9, 2008

Table of Contents:

I.      Executive Summary 
II.     Introduction
III.    What Not to Blame for Wisconsin's Higher Health Care Costs
IV.    Does Lack of Competition Drive Wisconsin's Costs?
V.     Consumer Directed Health Care: Cost Control and Comprehensive Reform
VI.    Endnotes

EXECUTIVE SUMMARY

The Milwaukee health care market is plagued with unusually high costs.  As a result, the cost of health care and health insurance is affecting the bottom line for both businesses and families.  The cost of health care is one of the more unattractive elements facing those choosing to live and work in Milwaukee.

How high are Milwaukee’s costs?  A GAO estimate pegged Milwaukee health care cost at 27% above the average paid for federal employees around the country.  Mercer Health and Benefits found Milwaukee health care costs to be 39% above other areas in the Midwest.  A Mercer/Foster Higgins survey placed Milwaukee’s costs at 55% above other Midwest metro areas.  Even in the market for individual insurance, coverage is costly.   Assurant Inc., a Milwaukee-based insurer, has posted prices for Milwaukee purchasers that exceed what would be expected for this market.   By any definition, Milwaukee is an expensive health care market.

Why are costs are so high?  This report shows that it has nothing to do with the demographics or even the health risks presented by the population.  It is also instructive that the costs associated with the uninsured population have little to do with Milwaukee’s elevated health care costs.

The most significant factor driving health care cost in Milwaukee is the relative lack of competition. While the area’s union heritage has made rich benefit packages the rule rather than the exception, since at least the 1980s Wisconsin state government has created regulatory barriers making it difficult for new providers to enter the market for health care services. Although the rate setting process was finally eliminated, its residual impact continues to echo through the Milwaukee health care market. Competition has also been stifled by the vertical integration of the Milwaukee health care market.  While the alignment of providers and hospitals into an integrated network has ostensibly been done to save cost, the impact is just the opposite.  Vertical integration stifles entry into the market, thus limiting competition and driving costs up.

This report offers two tangible solutions for Milwaukee’s elevated health care costs.  Both entail infusing the market with more competition.  First, Milwaukee employers should insist on insurance coverage that allows referrals to competing health care facilities.  This will undoubtedly result in the introduction of health care entrepreneurs into the Milwaukee marketplace, which will benefit consumers and lower overall costs.

Second, employers should move aggressively to participate in consumer directed health care plans.  These plans tend to have higher deductibles and employer-provided or self-funded savings accounts.  It is important that consumers be encouraged to apply their own money, even if it is in the form of an employer-funded savings account, to pay for their health care decisions.  Well-informed consumers who have skin in their health care decisions hold the potential to revolutionize the health care market.

INTRODUCTION

There is no shortage of evidence that Wisconsin’s health care prices have risen far more rapidly than average over the last two decades.  A 2005 United States Government Accountability Office (GAO) report using 2001 Federal Employees Health Benefit Program (FEHBP) claims data from “several large PPOs” found that found that 8 of the 10 highest-priced metro areas were in Wisconsin. A similar ranking of hospital prices put Milwaukee and La Crosse at 5^th and 10^th respectively.[i]

• In August, 2004, the GAO issued a preliminary report on the geographic variations and pricing in the Federal Employees Health Benefits Program (FEHBP), a collection of insurance plans from which government employees may select their health insurance coverage.[ii] The report analyzed spending and prices using 2001 claims data for people under 65 enrolled with the largest national insurers participating in the FEHBP in over 200 metropolitan statistical areas. Some services, including drugs and laboratory charges, were excluded. It concluded that health care spending and prices in Milwaukee were higher than average: hospital inpatient prices were 63 percent higher, physician prices were 33 percent higher, and total spending was 27 percent higher.
• In 2003, Mercer Health and Benefits found that Milwaukee health care costs were 39 percent higher than in other areas of the Midwest.[iii] A 2003 report by Merton D. Finkler [iv] comes to similar conclusions using different data.
• In March of 2002, the 16^th annual Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans reported that the cost of health care in southeastern Wisconsin was 55% higher than in metropolitan areas of the Midwest.
• In 1990, FEHBP expenses for HMO membership were below the median, putting Milwaukee at number 14 in a group of 20. By 2000, Milwaukee’s premiums had risen by almost 97 percent putting it second in the rankings.[v]  This trend suggests rapidly rising costs.

Although the GAO adjusted for differences in age and sex distributions across enrolled metropolitan statistical area populations in creating an expected spending rate for each area, it ignored marriage, education, income, and job characteristics. Its study population included only federal employees who chose to enroll in national preferred provider organizations (PPOs); it is possible that this population differs in important ways from the total insured population in a given area. The data were adjusted using Medicare cost data for such things as the labor-related costs for a specific service. If Wisconsin providers use a mix of labor and capital health care inputs that differs from that assumed in the Medicare cost adjustments, their costs could be over or under estimated.

The GAO also excluded enrollees with high total health care spending because “spending for those enrollees could distort average spending in an area with low enrollment.” The question is whether such high cost patients were equally distributed across all Metropolitan Statistical Areas or whether the groupings were endogenous products of regional variations in medical care.

The GAO study made no attempt to account for any possible health care outcome differences. An increasingly sophisticated literature on quality differences suggests that in addition to far lower waiting times, the high intensity health care practiced in many parts of the U.S. may have previously unsuspected benefits for patients. If superior medical care is more costly but delivers better results, it is possible that the higher hospital costs in Wisconsin are offset by faster recoveries or lower death and disability rates.

Nevertheless, in August, 2005, the GAO published a more complete study of the prices paid by the FEHBP, Competition and Other Factors Linked to Wide Variation in Health Care Prices.[vi] It concluded that “less competition and less HMO capitation were associated with higher prices.”

Though each of these reports has limitations, when combined with other indicators they suggest that Wisconsin hospital charges have lately climbed in the national rankings.

Evidence on Cost From the Individual Insurance Market

Prices for individual health insurance also suggest that Wisconsin is an expensive place to purchase health care. Table 1 shows the monthly premium for a 37 year-old man interested in purchasing an Assurant Health OneDeductible PPO health insurance policy in various cities. The prices quoted are those shown on the Assurant website in late May, 2007. Assurant Health is a major underwriter for individual health policies. Its prices are quoted simply because it has a website that makes it easy to compare the same policy across different zip codes. Assurant does not offer policies in states that have destructive insurance market regulation. This explains why there are no quotes from New York, Massachusetts, New Jersey, and several other states.

Although it is possible that 37 year-olds consume different amounts of medical care in different regions of the United States, it is more likely that the price differences for individual policies reflect differences in medical cost, differences in the ability to overcharge private payers in an effort to make up for government underpayments, and differences in regulatory environments.

The quoted OneDeductible PPO price is for a fairly rich policy. It qualifies for a health savings account. The prices quoted are for people in excellent health who are willing to select the least expensive PPO network in a given area. Higher deductibles apply for out-of-network charges. In some areas there is only one network, in others there are as many as five networks. For comparison, Table 1 also gives the price for a much more limited plan designed to make insurance accessible to people on more limited budgets. The RightStart PPO has a $1,000 deductible, no office copays, 50 percent coinsurance to an annual maximum out-of-pocket amount of $2,000, a lifetime maximum of $2 million and an annual maximum of $100,000.

State regulatory environments matter because some insurance and provider mandates add significantly to insurer costs. Smoking cessation treatments, available the local Wal-Mart, are far more expensive when insurers are required to provide them adding, according to an estimate by The Council for Affordable Health Insurance, 1 to 3 percent to policy costs. Other expensive regulations include mandates requiring that dentists be included in plans, and mandates that require insurers to cover contraceptives, in-vitro fertilization, prescription drugs, rehabilitation, and well-child care.

Wisconsin is also expensive when estimated health insurance costs for large employers are compared. The Kaiser Family Foundation publishes average premiums for a single person enrolled in an employer provided plan at StateHealthFacts.org. Table 2 gives those rates for 2005 in the states given above. Overall, Wisconsin is expensive, ranking 13^th behind Alaska, Rhode Island, the District of Columbia, Massachusetts, Maine, New Hampshire, and Vermont. Costs in Alaska are $5,088. Costs in Vermont are $4,392. The U.S. average is $3,991.

Costs also vary within Wisconsin. Table 3 compares Assurant Health costs for the same 37 year-old in a variety of Wisconsin zip codes. Note that in 2007 the most expensive premium rates tend to cluster in areas controlled by integrated health systems. The Marshfield Clinic controls care in the middle of the state. Aurora Health Care runs an extensive and expanding integrated network in the southeast.  

What Not to Blame for Wisconsin’s Higher Health Care Costs

Over the last decade, analyses of Wisconsin health care costs have generally assumed that Wisconsin’s problems are identical to those at the national level. They have prescribed nationally popular remedies, generally policies that load the private sector with regulations designed to make people do what health policy analysts want.

Health reformers often cite particular population risk factors as drivers of high health care costs. As the following sections show, Wisconsin fares well with respect to a number of populaton risk factors. Since the state is roughly average, these factors likely are not good explanations for its recent cost increases.

An Aging Population

A simple comparison of Wisconsin demographics to those of other states suggests that if Wisconsin does have much higher than average health care costs, the higher costs are likely not related to differences in the age of its population. Wisconsin does have a higher fraction of elderly people aged 65-74, the peak years for health care spending. However, its elderly residents appear to fare reasonably well on standard health risk measures.

Figure 1 shows the relative age distributions for Wisconsin, Minnesota, the United States, Utah, and Florida. Utah has the youngest population in the United States. About 34 percent of its people are under 18. Florida has the largest proportion of people over 65, 9 percent. About 6 percent of Wisconsin residents are 75 years old or older, 7 percent are 65-74, 61 percent are 19-64, and 26 percent are 18 or under. In Minnesota, the same age groups account for 5, 5, 64, and 26 percent of the population. This suggests that people leave Minnesota as they age and that Minnesota has a substantially larger proportion of working age adults, a group that typically uses less health care. For the United States as a whole, the percentages of the population over 75, aged 65-74, aged 19-64, and 18 and under are 6, 6, 61, and 27.

Figure 1 : Population by Age

Because populations vary, people in different circumstances have different demands for health care. Geography affects health care costs through population movement, varying occupational injury rates in local industries, and differential likelihoods of automobile accidents. Pathogens vary with location. Plague is endemic in Western rodents, and cases of Lyme disease cluster along the northern Atlantic seaboard and Great Lakes.[vii]

Health Risk Factors

In almost every state, energetic reformers blame high health costs on unhealthy population behaviors. As Table 4 shows, Wisconsin’s population is not particularly unhealthy. It has an average proportion of smokers, couch potatoes, and exercisers. The proportion of the population that is obese is moderate, lower than the proportion in Minnesota, and roughly in the middle of the 50 states. The number of diagnosed diabetes cases is also low, 45^th among the 50 states in 2002. Though a higher proportion of Wisconsin residents likely have more than two drinks a day than in any other state, its motor vehicle death rates are only slightly above the national average, possibly due to its age structure. Wisconsin is below average in the proportion of its population classified as disabled. Neighboring Minnesota has a slightly younger population, and it is therefore not surprising that fewer Minnesotans report having no leisure-time physical activity. What is surprising is that Minnesota reports both a higher proportion of disabled people than Wisconsin, and a more active population.

Wisconsin has average rates of overweight and an average proportion of smokers. It is average or below average on the number of obese people in its population. It has below average hospitalization rates for stroke, below average use of illegal drugs, and a low murder rate.

Being born to an unmarried mother is a health risk factor for infants. Wisconsin’s infant mortality rate is below average, as is its proportion of births to unmarried mothers. The high infant mortality rate for Wisconsin’s black infants, almost 19 per 1,000 births in 2002, is considerably above the national average of 14.4. This may reflect the fact that in 2003 an estimated 82.3 percent of Wisconsin’s black infants were born to unmarried mothers, the highest rate in the United States.

On the negative side, Wisconsin’s suicide rate is almost double the national average, though still significantly below rates prevailing in the West. It also has an elevated accidental death rate. In 2001, Cox, Tseng, and Powell reported that Wisconsin’s age-adjusted mortality rates for poisoning, drowning, and burns had improved relative to national averages over the 10 years from 1986 to 1996. Although Wisconsin’s age-adjusted rates for deaths due to falls had increased by 38 percent at a time when the national average was relatively stable,[viii] the authors concluded that most of the increase was due to falls by elderly people.

To those who equate the quality of state services with spending, Wisconsin also performs well. It ranked 12^th in the nation in total state expenditures per capita in 2006, spending almost 33 percent more per person than the national average of $4,529.

Table 4