Health Care 2004:
Opportunities for Reform and Innovation
2004-09
More than 260 health care experts, legislators, small business owners, media and health care professionals gathered at the Red Lion Hotel in Seattle on April 22 for Health Care 2004, a half-day conference sponsored by Washington Policy Center. The sold-out conference consisted of a legislative update and three panels addressing health savings accounts, importing prescription drugs from Canada, and medical malpractice reform. Nationally recognized health care expert Grace-Marie Turner of the Galen Institute delivered the keynote address. This Policy Note summarizes the panel discussions and Grace-Marie Turner’s remarks. For more on health issues, visit www.washingtonpolicy.org.
Summary of Update
The 2004 Legislature considered several health care bills during the 60-day session. A bill to legalize purchasing prescription drugs from Canada, HB 2469, passed in the House but did not come to a vote in the Senate. In addition, a measure to revise the health benefit plans available to small businesses, HB 2460, passed both houses in an amended form and was signed by Governor Gary Locke. The National Federation of Independent Business (NFIB) said that the amended bill does not go far enough to help small businesses buy health care for their employees. Currently, the NFIB is supporting an initiative, I-895, to allow insurance companies to offer health-care plans that are free of state coverage mandates. Also, a bill addressing mental health parity, HB 1828, was introduced to require the provision of mental health benefits on the same basis as medical and surgical benefits. In the 2004 session, HB 1828 passed the House but did not come to a vote in Senate. Senator Parlette explained the Senate’s action by saying that there needed to be more policy discussion of mental health issues before an informed decision could be made. During the interim, a mental health taskforce initiated by the House will study this further and the Senate will also conduct interim work on mental health issues.
Moderated by Paul Guppy, Washington Policy Center
Panelists:
Summary of Panel Discussion
Health Savings Accounts (HSAs) recently became a reality in the United States as part of the Medicare bill that was signed into law on December 8, 2003. Health Savings Accounts allow individuals to put money into a savings account on a tax-preferred basis to pay for routine medical expenses. Individuals are still insulated from major health expenses because they must purchase a high-deductible health insurance policy to be eligible to hold a Health Savings Account.
Up to $2,600, indexed for inflation, can be put into an individual’s health savings account each year (and up to $5,150 can be deposited for a family HSA). This money can be put into the account by an employer seeking alternatives to traditional health insurance, may be contributed by the employee, or can be contributed by both the employee and the employer. The money in the Health Savings Account is the individual’s private property and unspent funds rollover from year to year. Funds put into a health savings account are tax-free, the interest earned in the account is tax-free, and the money spent from the account is tax-free as long as it is used for health care.
While many employees view health insurance as “free” if it comes with their job, it actually costs companies an average of $9,300 a year to pay for family coverage. HSAs provide employers with a new option: They can still provide coverage for major medical expenses, but they also allow employees to keep the portion of the money that otherwise would be spent on premiums in a savings account. Employees can use this account to pay for routine medical expenses and can save any portion of the money that isn’t spent in a year. This provides an incentive for employees to use health care services wisely. One analysis found that a person with average health expenses who started an HSA in their 30’s would be able to save up to $200,000 in their health savings account by the time they retired. Upon retirement, the money saved in the HSA can be used to pay for Medicare premiums, for expenses Medicare won’t pay for, and certain other health-related expenses.
HSAs make health care users more responsible by helping patients realize how much health procedures actually cost. For example, when they have to pay for the full cost of a procedure from their personal health savings account, they may think more about whether they really need to go to the doctor and get X-rays when they stub their toe. Instead, they might tape it and wait a few days to see if it gets better.
The first health savings account policy was sold on January 1, and they have already become a hot commodity in the health insurance market. Employers like HSAs because they are less expensive and offer more choice, allowing businesses to continue to offer health insurance to their employees. Workers like the plans because they allow them to take their health insurance funds with them when they leave their company or retire.
HSAs are not a universal panacea and will not work for everyone. It is a useful option, however, for businesses that cannot currently afford to offer high-cost, low-deductible health insurance for their employees or companies that need help reducing their health care costs. HSAs are particularly attractive to individuals who do not have the option of job-based health coverage. They can buy a high deductible health insurance policy and save money in their tax-preferred savings account for routine and future health care needs. Early evidence with HSAs is showing that at least 30 percent of those enrolling were previously uninsured.
To get an HSA in Washington, you can call your insurance company and ask if they offer HSAs. Currently, Premera, Aetna, Definity and others offer health savings accounts in Washington. Beginning in September, First Choice Health will also offer HSAs in our state.
Moderated by Jim Frogue, American Legislative Exchange Council (ALEC)
Panelists:
Summary of Panel Discussion
It is generally illegal in the United States to import prescription drugs from Canada, although a number of people do so. Brand name drugs are cheaper in Canada because the government sets prices for drugs. Generic drugs actually cost more in Canada because the government sets their price at 70% of the brand name drug it is replacing. Many generic drugs are sold on the Internet to Americans who think they are getting a bargain but may not be.
Buying prescription drugs from Canada is not the solution. A recent Congressional Budget Office study showed that savings would be negligible. The quantity of drugs sold by U.S. manufacturers to Canada is only a very small proportion of the total number of prescription drugs used in America. As a result, exporting drugs from Canada back to the U.S. would quickly use up the Canadian supply. In 2003, for instance, Canadians spent $14.6 billion on prescription drugs while Americans spent more than $160 billion. The Canadian market never will be able to supply enough drugs for both Canada and its much larger neighbor, the United States.
The higher cost of drugs in the United States reflects the fundamentally different nature of the American and Canadian health care systems as well as the built-in cost of research and development included in American prescription drug prices. Countries with price controls fund very little of the cost of drug development, leaving much of the burden to Americans to pay for future life-saving drugs. In the U.S., the development of new prescription drugs is primarily funded by private investors hoping for a profit. If the U.S. adopts price controls, it will no longer be a good investment to develop new drugs and so investors will no longer fund their development at current levels to search for cures to cancer, Alzheimers, diabetes and other deadly diseases.
While the Canadian government guarantees the safety of the limited amount of drugs needed for its own citizens, there is no guarantee that drugs that are illegally imported from Canada are safe. Drugs bought through Canadian websites may merely have been routed through Canada and may actually be from Iran, Argentina, South Africa or Brazil. Drugs from such countries may be counterfeit and contaminated – in Brazil, for instance, over 50% of some classes of drugs are counterfeit. The profits for counterfeiting drugs are higher than counterfeiting money and the punishments are far less (the maximum sentence for counterfeiting a medicine is three years in jail – often offenders can get off with just probation).
University of San Francisco Professor Rick Roberts’ story illustrates the dangers of counterfeit drugs in the U.S. He became ill in 1988 with AIDS and failed to respond well to a number of initial treatments. He became seriously ill with AIDS "wasting disease" in 2000 and convinced his health plan to authorize a year of innovative drug treatments costing at least $4,000 a month. He initially responded well to the treatment, but after several months he began to notice a stinging at the injection site. He mentioned the problem to the pharmacist, who responded: “You might have gotten some of the fake stuff.” Roberts discovered that the FDA, the pharmaceutical manufacturer and the pharmacy had been aware of the counterfeit drugs, but they were under no legal obligation to inform him – the patient.
After months of intensive lab work, they discovered that he had received two different types of counterfeit medicine – the first was the hormone that women produce when they are pregnant and the second was 1/6 of the strength of the growth hormone that he was supposed to be taking and had been contaminated.
Counterfeits such as this are more likely when drugs are brought in illegally from other countries. Roberts warned that if Congress were to pass misguided legislation legalizing imports from Canada, the "bad guys" would take advantage of the new pipeline to flood the American market with counterfeit and contaminated drugs. He concluded by declaring that he had found from his own experience: “No discount is worth risking your life.”
Moderated by Hon. Phil Dyer, Kibble & Prentice
Panelists:
Summary of Panel Discussion
Medical malpractice lawsuits are civil cases that seek two types of damages: economic damages for lost wages and medical bills, and non-economic damages for pain and suffering, mental anguish and emotional distress. As insurance premiums and the rate of litigation dramatically rises, many doctors are asking for a $250,000 cap on non-economic damages.
A survey found that 49% of Washington physicians are in the process of evaluating whether to reduce their services because of the cost of medical malpractice insurance premiums. Currently, 25% of the family practitioners in Washington who deliver babies are stopping or will stop in the next year because of the cost of medical liability insurance, according to the Washington Family Physicians. There isn’t a town or city in the state that doesn’t have a shortage of two or three types of physicians, whether it is cardiologists in Yakima, dermatologists in Tacoma or endochrinologists in Everett.
According to Dr. Klein, 80% of plaintiffs in medical malpractice cases have no injury and the actual settlements are driven more by the severity of the patient’s health condition than by whether medical negligence occurred. At the same time, the tort system is extremely expensive, costing doctors more than $6.3 billion a year and costing every American $917 annually. More than 50% of the judgments are for non-economic damages, the area many doctors are trying to limit. Of the money rewarded for malpractice claims, $0.28 cents of every dollar goes to the injured patient, while $0.72 goes to the system – lawyers and insurance companies.
In addition to monetary costs, the high rate of medical malpractice litigation leads to defensive tests and procedures that are not necessarily needed and makes doctors hesitant to sign on to complex cases.
The panelists suggested that Washington follow California in instituting a $250,000 cap on non-economic damages. This reform has helped reduce California’s medical liability premium rates by 40%. Throughout the U.S., states with effective tort reform have health care costs that are lower by a net 5 to 9%.
Washington state is currently on the American Medical Association’s crisis list because of its high medical malpractice insurance rates. In 2004, a tort reform bill, SB 5728, was introduced in the Washington legislature. According to Tom Curry, the Washington State Medical Association met with those opposing tort reform in meetings hosted by the state attorney general and insurance commissioner to try to work out a solution. An agreement was not reached, and the tort reform bill passed in the Senate, but did not come to a vote in the House.
According to a recent survey, voters in Washington largely support tort reform. Seventy-five percent of Washington voters said they feel jury awards have gone wild and that limits are needed, and 78% of voters feel that without limits on non-economic damages, the price of health care will increase significantly. In addition, 78% of Republicans, 55% of Independents and 52% of Democrats said they would support a $250,000 cap on non-economic damages.
The panelists agreed on the necessity of legislative action either at the state or the federal level. If the legislature continues to refuse to act, Tom Curry suggested that the health care industry explore other options such as initiatives. He said doctors should study better ways of handling medical malpractice, such as medical tribunals or pre-screening groups.
The number of Americans without health insurance remains persistently high. There are two ways of addressing this problem: creating new government programs and putting more people on existing programs, or trying new consumer-based alternatives. Government-provided coverage has expanded, but there are still more than 43 million Americans without insurance. Most states can’t afford to put more people on Medicaid so new ideas are needed. It is clear it is time to try a new approach.
To explain, Turner showed a graph correlating the incomes of people and whether or not they had health coverage. People on the far right (with higher incomes) and far left (with lower incomes) of the graph are most likely to have health coverage. In the middle was a large gap of people, which she called the “Galen Gap,” who are most likely to be without health coverage. She explained that people with higher incomes often receive health insurance through their jobs and people with very low incomes often qualify for Medicaid, the State Children’s Health Insurance Program, or other government health programs. In the middle, however, are a large number of people who don’t get health insurance through their jobs but earn too much to be covered by Medicaid.
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Turner said that for decades, political leaders have been trying to fill the gap from the left, using strategies such as raising the number of people who qualify for Medicaid and creating new programs like SCHIP. But states can’t afford to add millions more people to their rolls so we should focus on filling this gap from the right, by offering refundable tax credits to help with costs and new purchasing arrangements to help with access. Consumer driven health care plans such as HSAs could be one option for those empowered with the credits.
However, the opponents of HSAs claim that they are a tax shelter for the “healthy and wealthy.” According to Turner, that argument doesn’t line up with the facts. Consumer driven health care enrollees tend to be older (more than 50% over age 40) and sicker, tend to use preventive services more often, and despite this, consumer driven plans help consumers save money. When enrolled in consumer driven health plans, patients choose generic drugs up to 50% more often and have a satisfaction rate as high as 98%. The popularity of consumer driven health care plans continues to grow, and they are now available on-line from at least 140 venders around the country.