One of the largest components in rising health care costs is in the area of drugs and prescriptions. Having sold health insurance for years, I have heard comments from more than one health insurance company that the primary reason they needed to increase premiums was based upon an escalating cost for the prescription drug component. Are new drugs priced too high and do certain segments of our population pay more than their fair share?
Before we try to answer this, let’s take a look at our current use of drugs and see how they affect all of our lives. Due to the availability of prescription treatments for illnesses and medical conditions, we no longer have to experience the continual health threats of high blood pressure and cholesterol, or take allergy injections for seasonal hay fever. With drugs, we have slowed the frightening mortality of HIV and AIDS, and allowed cancer to become a survivable disease. Even the devastating effect of strokes, when caught early enough, can be warded off with a simple over the counter medication. There are so many drug treatments for previously life threatening conditions that this single medical advance accounts for much of our increase in longevity.
New drugs brought to market are expensive, but so is new computer technology or new electronics. It’s just that the development costs for new drug treatments is much higher, and the time frame from cutting edge to commodity is much longer in pharmaceuticals. Once generics are available, however, these amazing drugs are readily available for very reasonable costs, and some even make it to over the counter versions. Much like the way hospitals have to recover the expense to buy their equipment in patient charges, drug companies must recover their research and development costs for our amazing new treatments before their patent runs out and generics overtake their sales with low cost options. Not only do they have to make back the R&D costs for successful drugs, but all failed attempts have to be paid for from the few drugs that do make it to market.
Perhaps drug companies charge unusually high prices when they do bring a new treatment to market not because they are greedy, but because they don’t know when they will be able to come up with their next best seller. Do we really want to discourage them from taking the financial risks, or doing the necessary research to develop new cures, and miss the potential of having more of the advances which have changed our health and our ability to treat so many illnesses, when in time, even these high priced new medicines will eventually become readily affordable for most people.
Wednesday, November 18, 2009
Inside Health Insurance: Part 4—Controlling Provider Costs—Hospitals and facilities
Unless you are really sick, or need a “procedure,” you likely won’t be utilizing a hospital or qualified facility in the normal course of your well care or treatment for routine seasonal illnesses. But if or when you do, you will quickly find that these costs are some of the highest expenses incurred in a major medical situation. If the inpatient treatment is prolonged, it is very easy to go deeply into a six figure bill.
Most hospitals, like doctors and health insurance companies, are in business to make a profit for the services they provide. Some equipment used in hospitals or outpatient facilities can cost millions of dollars, but is essential in order to provide the accurate diagnosis or treatment we have come to expect as routine. Think about medicine one hundred years ago compared to today. Our level of sophistication is so far superior to even fifty years ago, we have been able to increase life expectancy significantly in just the last few generations. We can easily treat illnesses now that doctors once were not even able to identify. As medicine continues to advance, it is exciting to think that one day we may have a cure for cancer, or be able to repair a cut or broken bone instantly.
What this means is that our minimum standards have risen with the increases in medical understanding and technology. Even in small town hospitals, they have basic equipment that was not even invented in the time of our grandparents. What this also means is that the cost to patients who use these facilities has to cover the investment required to offer that high standard of care, using those expensive pieces of equipment. With enough paying customers covering the cost to the hospital over time, this shared expense is reasonable. But when a large number of people do not or cannot pay the hospital for the treatments they receive, that expense has to be averaged into the bill of all paying customers, and thus the cost goes up even further.
Having patients with health insurance ensures the hospitals and facilities that there will be money available to pay their bills, and this alone can help keep costs down. The more “freebies” a hospital has to provide out of their own pocket, the more it affects costs to everyone.
In order to cut the hospital part of medical expenses, only one of two things can be done. Either reduce the minimum quality of care and use less sophisticated equipment, which will result is missed diagnosis, more fatalities, shorter life span, and a decline in the overall health of our population; or, allow hospitals to refuse to offer service to those who cannot pay. While the business decision may be easy, the moral implications of the latter are not so clear cut. Maybe if government focused more on letting insurance companies and health practitioners do what they do best as a business, and they simply supplement the gaps, rather than attempt to take over the entire process, this system is not as broken as it may appear.
Most hospitals, like doctors and health insurance companies, are in business to make a profit for the services they provide. Some equipment used in hospitals or outpatient facilities can cost millions of dollars, but is essential in order to provide the accurate diagnosis or treatment we have come to expect as routine. Think about medicine one hundred years ago compared to today. Our level of sophistication is so far superior to even fifty years ago, we have been able to increase life expectancy significantly in just the last few generations. We can easily treat illnesses now that doctors once were not even able to identify. As medicine continues to advance, it is exciting to think that one day we may have a cure for cancer, or be able to repair a cut or broken bone instantly.
What this means is that our minimum standards have risen with the increases in medical understanding and technology. Even in small town hospitals, they have basic equipment that was not even invented in the time of our grandparents. What this also means is that the cost to patients who use these facilities has to cover the investment required to offer that high standard of care, using those expensive pieces of equipment. With enough paying customers covering the cost to the hospital over time, this shared expense is reasonable. But when a large number of people do not or cannot pay the hospital for the treatments they receive, that expense has to be averaged into the bill of all paying customers, and thus the cost goes up even further.
Having patients with health insurance ensures the hospitals and facilities that there will be money available to pay their bills, and this alone can help keep costs down. The more “freebies” a hospital has to provide out of their own pocket, the more it affects costs to everyone.
In order to cut the hospital part of medical expenses, only one of two things can be done. Either reduce the minimum quality of care and use less sophisticated equipment, which will result is missed diagnosis, more fatalities, shorter life span, and a decline in the overall health of our population; or, allow hospitals to refuse to offer service to those who cannot pay. While the business decision may be easy, the moral implications of the latter are not so clear cut. Maybe if government focused more on letting insurance companies and health practitioners do what they do best as a business, and they simply supplement the gaps, rather than attempt to take over the entire process, this system is not as broken as it may appear.
Inside Health Insurance: Part 3—Controlling Provider Costs--Doctors
There are lots of factors which go into our overall expenditures on heath care, but the amount we pay doctors is why we so quickly judge our health providers as greedy people who are getting rich on the backs of ordinary people. Everyone knows that doctors are at the top of the economic and social strata in their communities, but before you get carried away with income envy, let’s put some perspective on it.
No one would disagree that advanced education is a major contributor to higher lifetime income potential. Exceptions do occur, where people with unusual drive or talents find a way to rise to the top, in spite of limited education, and many highly educated people end up only earning average incomes; but statistically, this conclusion is a proven fact. Given that doctors must go through seven years higher education, plus several more years as interns or residents before they can practice general medicine, and even more if they want to specialize, that means that most doctors end up with up to two to three times the higher education of the average college graduate, and this alone can account for much of the increased income they ultimately earn.
Another consideration which affects income is value of service. Most people do get paid what they are worth, at least in economic terms. No matter how well you do your job, if there are hundreds of potential people who can step in and do the same thing, your job value is going to reflect that lack of demand. Whatever your job, if you work for a company which produces a product or service for profit, your value will also be adjusted to a relative proportion of what your task contributes to the revenue potential from the sale of that item. Whatever part of your salary and benefit cost that goes into the production of your company’s product or service, must be recouped in the sales price, thus significantly impacting the value of your time to what the market will pay for products in your industry.
Professional sports figures can get paid an exorbitantly high salary just to play a game, but what they really get paid for is their ability to help make millions for their team owners in ticket sales, sponsorships, and TV revenues. Similarly, well known celebrities, who can increase movie revenue potential by tens of millions, are rewarded handsomely by those who stand to profit from their public appeal at the box office. We readily accept the imbalance in these celebrity salaries, but we judge as unfair the income of the doctor, who spent over twenty years in educational preparation for their profession, but can save our life, increase our longevity, and treat our sicknesses to improve our quality of life.
Do doctors get paid too much for what they do? That is a matter of perspective. If you are in need of a specialist or a surgeon who has the training and experience to cure your disease and save your life, what is the value you place on your own life to have the best medical care possible? How much would you pay to live another year, or two, or ten? Do you want a second class doctor to take care of you, just to save a few bucks, but possibly risk your life? The path to become a doctor has been made incredibly hard, and many eager college students begin that path, but only a few complete it. This difficult journey ensures that the doctors who do end up in practice in your community are the very best that our country can produce. And no matter what you may think about their fees when you are well, when you are in need of their services in a critical way, their value to you suddenly becomes priceless.
No one would disagree that advanced education is a major contributor to higher lifetime income potential. Exceptions do occur, where people with unusual drive or talents find a way to rise to the top, in spite of limited education, and many highly educated people end up only earning average incomes; but statistically, this conclusion is a proven fact. Given that doctors must go through seven years higher education, plus several more years as interns or residents before they can practice general medicine, and even more if they want to specialize, that means that most doctors end up with up to two to three times the higher education of the average college graduate, and this alone can account for much of the increased income they ultimately earn.
Another consideration which affects income is value of service. Most people do get paid what they are worth, at least in economic terms. No matter how well you do your job, if there are hundreds of potential people who can step in and do the same thing, your job value is going to reflect that lack of demand. Whatever your job, if you work for a company which produces a product or service for profit, your value will also be adjusted to a relative proportion of what your task contributes to the revenue potential from the sale of that item. Whatever part of your salary and benefit cost that goes into the production of your company’s product or service, must be recouped in the sales price, thus significantly impacting the value of your time to what the market will pay for products in your industry.
Professional sports figures can get paid an exorbitantly high salary just to play a game, but what they really get paid for is their ability to help make millions for their team owners in ticket sales, sponsorships, and TV revenues. Similarly, well known celebrities, who can increase movie revenue potential by tens of millions, are rewarded handsomely by those who stand to profit from their public appeal at the box office. We readily accept the imbalance in these celebrity salaries, but we judge as unfair the income of the doctor, who spent over twenty years in educational preparation for their profession, but can save our life, increase our longevity, and treat our sicknesses to improve our quality of life.
Do doctors get paid too much for what they do? That is a matter of perspective. If you are in need of a specialist or a surgeon who has the training and experience to cure your disease and save your life, what is the value you place on your own life to have the best medical care possible? How much would you pay to live another year, or two, or ten? Do you want a second class doctor to take care of you, just to save a few bucks, but possibly risk your life? The path to become a doctor has been made incredibly hard, and many eager college students begin that path, but only a few complete it. This difficult journey ensures that the doctors who do end up in practice in your community are the very best that our country can produce. And no matter what you may think about their fees when you are well, when you are in need of their services in a critical way, their value to you suddenly becomes priceless.
Inside Health Insurance: Part 2—Current State Regulation
Insurance is a tightly regulated industry with states in control of all the activities of every company which does business within its borders. Everything about a policy, including what is covered, what is excluded, and even a limit of how much can be charged, is ultimately under the auspices of each state insurance department. The only variables an insurance company can adjust, in order to manage their profit, is by reducing costs, or more carefully underwriting individuals before adding them to the pool. Even changes to the plan, such as increases in co-pays or deductibles, must undergo a review and approval by the state insurance department before those changes can be passed on to the group. What insurance companies cannot do is to arbitrarily raise premiums, unless they do so across all insured on similar plans, and even then, not without the consent of the state insurance department.
When you feel that your health insurance carrier is raising your premiums or lowering your coverage just to increase profits, understand that each state carefully reviews the financials of each company to confine their profits and activities within an acceptable range. Only justified increases; such as from higher than expected claims by the group, higher provider payouts, or rising prescription drug costs, will result in an approved increase of premiums. At the same time, your state insurance department is also making sure that in the future, the company who offers your health insurance will be financially sound enough to pay anticipated claims, and increases in premiums or changes in coverage may be required in order for the company to meet the cash reserve requirements of that state.
While many states mirror the way others regulate health insurance carriers, those states that choose to can impose their own rules and restrictions as they feel necessary for the protection and benefit of their residents. This difference, like the geographical and regional variations we enjoy in this nation, allow for customization of health insurance regulation as required by unique needs and circumstances in that state. If you appreciate what our founding fathers did in their original intent to loosely connect a union of individual states through a minimal national government, then you will also support that states retain control over insurance practices in their jurisdictions, rather than making a one size fits all insurance plan and forcing it across the entire country.
When you feel that your health insurance carrier is raising your premiums or lowering your coverage just to increase profits, understand that each state carefully reviews the financials of each company to confine their profits and activities within an acceptable range. Only justified increases; such as from higher than expected claims by the group, higher provider payouts, or rising prescription drug costs, will result in an approved increase of premiums. At the same time, your state insurance department is also making sure that in the future, the company who offers your health insurance will be financially sound enough to pay anticipated claims, and increases in premiums or changes in coverage may be required in order for the company to meet the cash reserve requirements of that state.
While many states mirror the way others regulate health insurance carriers, those states that choose to can impose their own rules and restrictions as they feel necessary for the protection and benefit of their residents. This difference, like the geographical and regional variations we enjoy in this nation, allow for customization of health insurance regulation as required by unique needs and circumstances in that state. If you appreciate what our founding fathers did in their original intent to loosely connect a union of individual states through a minimal national government, then you will also support that states retain control over insurance practices in their jurisdictions, rather than making a one size fits all insurance plan and forcing it across the entire country.
Inside Health Insurance: Part 1--Finances
To better appreciate how health insurance works; let’s take a look at what makes the financial side feasible. The underlying principle that guides any kind of insurance is based upon the law of large numbers. By pooling the risk of many, with each paying into what becomes a big pot of money, this law predicts with statistical certainty, that the amount needed by those who need to take OUT of the pot to pay for health care, will be less than the amount of money placed INTO the pot by the entire group, thus making sure all claims can be paid. In any given year, exactly who puts in and who takes out is uncertain. You may contribute for many years before you need to take anything substantial out, but because the pot is receiving from many like you who don’t use it often; it is sufficiently funded for those who need it.
What insurance companies have learned is that by “underwriting,” or determining the risk potential of applicants, before accepting them into the group, they can more accurately predict the probability of there being enough money to cover all potential claims. By imposing pre-existing condition waiting exclusions, or declining to cover someone with known immediate and expensive needs, it protects, not just the insurance company, but the whole group of people who depend upon the insurance company’s financial health in order to pay for their claims when they need it. Insurance companies are masters of statistics, and have experts who determine how to charge each participant proportionately, in order to make all the numbers work out for the insured and the insurance company.
Most carriers who offer health insurance are private businesses who seek to make a profit. Although technically, the Blue Cross and Blue Shields are non-profit, they do need to take in more premium dollars than they pay out to providers or they will have to close up their doors and go home, and millions of Americans would lose their health insurance coverage. Similarly if private insurers are forced into practices which reduce or eliminate their profitability, they will exit the market, reducing competition and further causing cost of insurance and care to rise.
Even though most people hate to pay insurance premiums when they are healthy, they are thankful for the coverage when they have an expensive or catastrophic claim. Having a financially healthy company behind your health insurance plan is the ONLY way to be certain that no unforeseen medical situation will threaten your health or your personal financial well being.
What insurance companies have learned is that by “underwriting,” or determining the risk potential of applicants, before accepting them into the group, they can more accurately predict the probability of there being enough money to cover all potential claims. By imposing pre-existing condition waiting exclusions, or declining to cover someone with known immediate and expensive needs, it protects, not just the insurance company, but the whole group of people who depend upon the insurance company’s financial health in order to pay for their claims when they need it. Insurance companies are masters of statistics, and have experts who determine how to charge each participant proportionately, in order to make all the numbers work out for the insured and the insurance company.
Most carriers who offer health insurance are private businesses who seek to make a profit. Although technically, the Blue Cross and Blue Shields are non-profit, they do need to take in more premium dollars than they pay out to providers or they will have to close up their doors and go home, and millions of Americans would lose their health insurance coverage. Similarly if private insurers are forced into practices which reduce or eliminate their profitability, they will exit the market, reducing competition and further causing cost of insurance and care to rise.
Even though most people hate to pay insurance premiums when they are healthy, they are thankful for the coverage when they have an expensive or catastrophic claim. Having a financially healthy company behind your health insurance plan is the ONLY way to be certain that no unforeseen medical situation will threaten your health or your personal financial well being.
Inside Health Insurance: Introduction
While we all are thankful to have great doctors practicing in well equipped hospitals with skilled staff, the concern for how to pay for this first class care, and the financial impact of some catastrophic illness or injury, scares us to death. This fear is what motivates many to acquire health insurance in the first place.
Over the next several postings I want to address some of the misconceptions about how health insurance works and why some of the proposed “fixes” will actually make the system worse, or even lead to the total collapse of our private health insurance industry. I plan to examine how health insurance has protected both the health and financial well being of tens of millions of Americans, helped to restrain rising health care costs, and contributed to a steadily increasing quality of care for everyone.
As I attempt to take each point separately, understand that they are interconnected and to fully appreciate the total picture I want to paint, I will title each post as a chapter segment, to help clarify the need to read all of the posts in order to get the whole story.
Over the next several postings I want to address some of the misconceptions about how health insurance works and why some of the proposed “fixes” will actually make the system worse, or even lead to the total collapse of our private health insurance industry. I plan to examine how health insurance has protected both the health and financial well being of tens of millions of Americans, helped to restrain rising health care costs, and contributed to a steadily increasing quality of care for everyone.
As I attempt to take each point separately, understand that they are interconnected and to fully appreciate the total picture I want to paint, I will title each post as a chapter segment, to help clarify the need to read all of the posts in order to get the whole story.
Thursday, November 5, 2009
What’s a Life Worth?
Talking about the need for life insurance requires someone to think about things that are not always comfortable. It is impossible to consider life insurance without an implied admission that you will eventually die, or that you could die sooner than you hope. The other unsettling part about contemplating the need for life insurance is that we must somehow place a numerical value on our lives, or at least what we think our lives mean to our loved ones. Avoiding the issue, however, does not take care of the very real problem that if we were to die prematurely, we will either leave loved ones, who depend on us, in financial devastation, or we may leave our unfinished financial affairs for some other person to sort out.
Let’s just admit that we know we are going to die eventually, hope that it will be many, many happy years from now, after we have lived a very full and meaningful life; but, just in case, no matter when we die, we want to exit gracefully. The best way to ease our loved ones' emotional loss, in the event of our untimely death, is by things which we can do while we are living. If we openly and frequently express our love to them, they won’t wonder how we really felt, once we are no longer around to tell them. By purchasing life insurance, sufficient for them to pay all your bills, take plenty of time off to grieve, and then resume their lives without having to make huge changes or sacrifices in their standard of living, we can continue to show them what they meant to us, long after we are gone. On the other hand, not having life insurance for those things, and forcing them to fend for themselves and clean up our financial messes, leaves them with a completely different conclusion about our concern for their well being.
I have heard it said that buying life insurance is one of the most unselfish acts we do, because it is typically purchased for the benefit of others. Your goal is to live and prosper and share your success with your family for many years to come. Don’t think of the purchase of life insurance as an exception to that plan, but as an integral part of a secure financial future which helps you prepare for the unexpected. Should your beneficiaries ever receive that money, it will remind them of the thoughtful sacrifices you made during your life, to ensure they would be well taken care of in any circumstances. It is like the proceeds of your policy is working on your behalf to finish what you started for your family; to complete what you would have done, if you were still with them.
Determining how much insurance to buy may require doing a little math, and figuring out what kind of policy you need means getting into some level of details; but doing so does not reduce your worth to a dollar figure. It simply determines how much your family would need to continue on in your absence at the standard of living you are willing to make sure they can afford. And if you make a good plan, what that gift would mean to your family, is absolutely priceless.
Let’s just admit that we know we are going to die eventually, hope that it will be many, many happy years from now, after we have lived a very full and meaningful life; but, just in case, no matter when we die, we want to exit gracefully. The best way to ease our loved ones' emotional loss, in the event of our untimely death, is by things which we can do while we are living. If we openly and frequently express our love to them, they won’t wonder how we really felt, once we are no longer around to tell them. By purchasing life insurance, sufficient for them to pay all your bills, take plenty of time off to grieve, and then resume their lives without having to make huge changes or sacrifices in their standard of living, we can continue to show them what they meant to us, long after we are gone. On the other hand, not having life insurance for those things, and forcing them to fend for themselves and clean up our financial messes, leaves them with a completely different conclusion about our concern for their well being.
I have heard it said that buying life insurance is one of the most unselfish acts we do, because it is typically purchased for the benefit of others. Your goal is to live and prosper and share your success with your family for many years to come. Don’t think of the purchase of life insurance as an exception to that plan, but as an integral part of a secure financial future which helps you prepare for the unexpected. Should your beneficiaries ever receive that money, it will remind them of the thoughtful sacrifices you made during your life, to ensure they would be well taken care of in any circumstances. It is like the proceeds of your policy is working on your behalf to finish what you started for your family; to complete what you would have done, if you were still with them.
Determining how much insurance to buy may require doing a little math, and figuring out what kind of policy you need means getting into some level of details; but doing so does not reduce your worth to a dollar figure. It simply determines how much your family would need to continue on in your absence at the standard of living you are willing to make sure they can afford. And if you make a good plan, what that gift would mean to your family, is absolutely priceless.
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