After a decade in which UK PMI premiums have doubled, it is hardly surprising that intermediaries are finding the going rough. The exception has been overseas PMI. Here sales are brisk, despite typical top-line premiums for a 50 year-old couple in the USA of £7,000. These very high US rates are certainly set to stay, say health economists. And IFAs may need to arm themselves with explanations as clients learn the cost of equipping themselves for life in the only country which devotes 15 per cent of gross domestic product to healthcare.
To drive the point home, informed politicians and health policy experts in Washington agree that healthcare costs are set on an unstoppable upward curve. Curiously, America’s equivalent of the man on the Clapham omnibus is gloriously unconcerned. The reason is that the man in his Chrysler on Route 66 knows that his employer must buy PMI for him and his immediate family. Costs are directly tax deductible. Big corporations go one stage further, running their own insurance schemes in other words, picking up medical bills direct on behalf of their staff and their dependants. Once the employee reaches age 65, state-run Medicare kicks in, giving the retiree free access to as many specialists as a hypochondriac could dream of.
Monica Tencate, senior health policy adviser to the Senate committee on health, education, labour and pensions, says the festering crisis in healthcare costs has yet to surface. “Citizens think healthcare is great. They have access to some of the most advanced medicine in the world. It’s only the health policy planners and the physicians who worry,” she says.
So far, that is. The huge cost of Medicare has forced President Clinton into tightening the scheme, but it is still projected to grow by 4.3 per cent a year between 2002 and 2009. Much of the tightening has come from withdrawing cover for prescribed drugs.
This means that unwell elderly individuals may have to find as much as $20,000 or $30,000 a year from their own pocket to buy the latest products of an industry which is currently showing 24 per cent profitability. Medicines in the US can cost almost double the price charged by pharmaceutical companies in either Canada or Mexico. (Wholesale importation of medicines is banned but there is a lively cross-border trade in products intended for personal use.) Adding fuel to the cost-of-care crisis is the deep rooted American tradition of freedom of choice – freedom to consult who you want, when you want and all covered by your employer-purchased PMI or Medicare. Strangely, in the land of Bill Gates and a thousand burgeoning Microsofts, medical record keeping is not electronic, possibly a result of fears of breaching patient confidentiality. (An Aids patient received substantial damages when a hospital visitor glanced at a badly angled computer screen on a reception desk and learned of a patient’s diagnosis.) The upshot is that records are not reliably passed between doctors, leading to regular duplication of tests and many avoidable cases of drug interactions. This only adds to the healthcare bill.
From the British perspective, one has to ask whether the American pattern of escalating premiums, like back-to-front baseball hats, has already crossed the Atlantic. A crucial – and disturbing – similarity is that the user of the service is separated from the buyer. Such an arrangement breaks the laws of good economic models, according to John Welch, bureau chief of the Washington DC office of healthcare insurance consultants William Mercer. “We have thrown theory out of the window – that is why our system has evolved into a total mess,” he says.
Speaking at his offices in Washington DC to a group of British journalists and economists, Welch pointed out the inherent inefficiencies in American healthcare:
Supply-side business – hospitals dictate volume and cost of business
Purchasers and providers are not connected
Healthcare services are oversupplied
Uninformed buyers – patients are not told the cost of treatment because billing is direct to the insurer
Personal health is an emotional issue – patients leave no possible avenue of treatment unexplored.
IFAs will recognise that all five points listed by Welch apply to the independent system in Britain.
He gave the group, organised by UK not-for-profit insurer Western Provident Association, several examples of the laissez-faire attitude of insurers. In one “real life incident” Welch learned that an unremarkable Mid-West hospital was set to charge a man who had broken his arm in a sailing accident $275,000. The patient was free to receive treatment wherever he wished but Welch suggested to the patient’s corporate director that he contacted the world-renowned Mayo Clinic. “The Mayo said `We do a package deal on that for $130,000’ and the hospital in the Mid-West immediately cut a deal at $210,000,” Welch recalled.
How did America, one of the world’s most efficient demand-driven economies, ever get into the position where the suppliers of services – hospitals and individual doctors – so dominate? The answer lies 50 years back, explains Robert Moffit, director of Washington’s Heritage Foundation think-tank.
As America put its vast economy on a war footing, a wage freeze was brought in. It was accepted at first. But the unions later protested and employers too demanded flexibility. Rather than concede their demands, President Roosevelt introduced laws requiring companies to provide medical cover for their staff and families – a benefit for the unions and some flexibility for management. US tax authorities treat the benefit as a business expense, just like wages. The average cost per employee for full insurance exceeds $4,000 a year.
As Moffit reminds us: “Pearl Harbour was 7 December 1941. Isn’t it time we moved on?” Employer schemes deter mobility of labour. Anyone falling ill while between jobs risks being left in the cold. Confusion surrounds the situation regarding a chronically ill person – a diabetic requiring expensive treatment, an HIV patient or a heart disease victim – under these circumstances. It seems that much depends on the willingness of the new employer to include the individual for a pre-existing condition within his own scheme or exerting pressure on the group insurer to cover a foreseeable additional expense.
Besides, what happens if the US economy slumps? At present it boasts a mere two per cent unemployment level. The employer-pays scheme will look less attractive to citizens if unemployment rates rise. Even in today’s healthy economy, 40m US citizens lose cover at one stage in the year. Some choose to pay their own medical fees whereas most rely on the joint state and federal Medicaid programme, basically a safety net for the poor under-65s.
In addition, all hospitals take in some patients for free. These are termed `uncompensated’. An informal mix of charity, Medicaid and requests to donate $10 or $20 helps to keep down the uncompensated total. But uncompensated care still accounts for 13 per cent of hospital expenditure. Some of this is unavoidable, even where hospital administrators adopt a harsh attitude towards people who cannot pay. Laws prevent hospitals turning away the sick or prematurely discharging unstable patients.
The study tour group, which also included a leading British surgeon, was impressed with the facilities at a publicly funded hospital, the DC General. Standards of cleanliness, which can be such an abysmal feature of British NHS units, were universally high and there were no signs of overcrowding or understaffing.
Even more impressive was the private Washington Hospital Centre, which is licensed for 900 beds. In parts it so resembles a five-star hotel – thick carpeting, panelled doors, luxuriously appointed bedrooms and corridors that it is known locally as Four Seasons East, after its site in the US capital. Typical of the no-expense touch is intensive care monitoring equipment concealed behind a calming watercolour painting, which is slid away as required.
Barely surprising then, that PMI rates in the US, where `average’ surgeons can pick up $500,000 a year, are causing concern among experts. Patients are forced to accept managed care packages from nominated – cheaper – healthcare providers. The cost spiral has spurred the growth of healthcare management organisations (HMOs) which block-book care with hospitals and surgeons. Employers, bridling at mounting bills, are moving to schemes where the employee must make a contribution. So-called co-pays can amount to 20 per cent of the employee’s care bill.
The view from Washington is that the healthcare system badly needs an injection of efficiency. Citizens of the world’s greatest freewheeling economy are only just getting round to remembering that healthcare is no different to any other product or service– the user of the service needs to be linked to the purchase. Many US insurers went bankrupt because this rule was overlooked. President Clinton knows, recently achieving a one per cent reduction in Medicare spending by imposing price deals on hospitals.
In Britain, moves to managed care by Bupa and PPP show just how important the US experience has been. But hopefully we can learn the lessons without the pain.