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WPRI Report:
By Linda Gorman, Ph.D. May 9, 2008
Table of Contents:
I. 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.
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 5th and 10th
respectively.[i]
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 13th
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, 45th 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 12th 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
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