Health care costs you more than you know

Not long ago, a 23-year-old woman joined my company as an assistant in the advertising sales department at a starting salary of $35,000. Smart, ambitious and poised, she should have a promising future. Unfortunately, her earnings prospects are threatened. Like many Americans, she's unaware of how much of her compensation is being eaten up by health care costs, and how much this share will grow as long as the increase in health costs exceeds growth in gross domestic product. That's just math.

The Affordable Care Act does require employers, beginning this year, to note on W-2s how much both the employee and the employer contributed to health care costs. Maybe that will help diminish the ignorance regarding true health care costs. But even with greater awareness, many Americans still might not understand that the largest effect of the cost of our health care system is to reduce the amount of money they actually take home.

I have estimated that our 23-year-old employee will bear at least $1.8 million in health care costs over her lifetime. That's assuming that such costs don't grow by more than current government estimates, that she never has a working spouse, and that she and her dependents don't ever contract a serious illness.

Even after decades of financial engineering, including both the already-implemented and the planned aspects of the Affordable Care Act, the American health care system can be called successful mainly in its ability to hide its enormous cost.

My new employee thinks that she is paying roughly $2,600 for health care in her first year on the job — her $500 deductible plus her $2,100 share of the company's health insurance premiums. In fact, she's paying more than $10,000 into the country's health care system.

As her employer, our company will pay $6,190 of her health care costs, money that might otherwise go to her in salary. (From my point of view as a chief executive of a company, health care is just a different form of compensation.) She is also paying more than $1,500 in federal and state taxes to finance Medicare and Medicaid.

Clearly, personal health insurance is not the only way our employees pay into our health care system. There is the 1.45 percent of every paycheck that goes to Medicare, as well as the portion matched by the employer. Furthermore, a large slice of her general taxes are, in fact, health care costs: roughly 20 percent of federal spending and 10 percent of state spending support Medicare and Medicaid. She must pay for all of this.

For employees like her, however, the greatest impact of exploding health care costs will arrive in the form of stagnating wages. Before the Affordable Care Act became law, President Obama's Council of Economic Advisers warned that its projections to 2040 showed that "essentially all of the rise in average compensation due to increasing productivity over time would go to health insurance, and essentially none would go to take-home wages."

This year, a standard deductible family policy for our company will carry premiums of roughly $23,000. How has health care gotten so expensive that even a middle-income worker faces such a burden?

In the world of health care analysis, there are basically two schools of thought. The first is that health care is so fundamentally different from other goods and services that a normal market can't drive down its prices. This school of thought makes a number of assumptions:

Health care consumers are desperate and have no leverage to avoid high pricing. An individual's need for care depends on luck and genes, so that social fairness requires pooling risk. An aging population needs ever more care. New technologies offer beneficial advances, but only at great expense. For-profit motivations conflict with fundamental human needs, requiring extensive regulatory oversight. Managing the insurance system requires costly and complex administration (with direct annual administrative costs now running at roughly $1,900 per household).

An alternative to the conventional wisdom is that consumer ignorance is what differentiates health care from other industries. This results in a lack of discipline that allows for pervasive excess care and exorbitant prices. If people understood how much they were paying for health care, they would insist on greater control of these resources, creating incentives for the kind of competition in price and quality we have seen develop in other industries — even those that were once assumed to be too complex for the average consumer to readily understand, such as personal computing.

Our system takes resources from all of us, pools the cost of certainties disguised as risks, extracts enormous costs of administration and complexity and then returns — to almost all of us — a fraction of the money we've put in.

Try to imagine what homeowners' insurance would look like if we expected everyone's house to burn down and then added coverage for each homeowner's utility bills and furniture wear-and-tear. This would be insanely expensive without meaningfully reducing anyone's risk. That, in short, is how health insurance works.

Through private insurance, Medicare and Medicaid, our health system relies on centralized cost control and clever adjustments to payment formulas to try to tame the beast. Traditional health experts may repackage their ideas, but they are never discouraged by past failure. So the new Accountable Care Organizations are a reinvention of HMOs. The Independent Payment Advisory Board is the new Medicare Payment Advisory Commission, or MedPAC. Bundled payments are the new Prospective Payment System.

We often see some early benefit from the introduction of new ideas, but over time such initiatives are always subjugated by our system's nefarious economic incentives. Implement cost-control reforms, and watch providers circumvent new rules and guidelines. Reduce reimbursement rates for procedures, and witness providers expand the definition of required services. Convert fee-for-service reimbursements into bundled payments, and soon more severe diagnoses are given. Attempt to use government buying power, and see providers turn to lobbyists to keep prices up. We are approaching a half-century of fighting this losing battle.

Some believe the only hope for cost control is to adopt a single-payer system as used in several other countries, even though the increasingly high costs of many of these systems look good only when compared with our unique disaster.

Here's a completely different idea, one that might actually work. Let's give every American health insurance, but only for truly rare, major and unpredictable illnesses. In other words, let's cover everyone but not everything. It would take a generation to transition fully to such a system, but eventually the most routine and expected medical treatments, from checkups and minor illnesses all the way to common chronic conditions and expected end-of-life care, would be funded from our individual health savings; only the most major needs — for example, cancer, stroke and trauma — would be paid out of insurance.

Defining insurable events more narrowly and enabling Americans to use the premium savings to build health savings would reduce the distortions inherent in our insurance approach. Most important, it will also compel providers to compete on the basis of price, quality and service, as they meet the one force that creates real incentives for good performance, innovation and safety: the consumer.

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