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From the Desk of Jack Healy

Why Are Manufacturers Subsidizing Medical Costs?

By Jack Healy, Director, Manufacturing Advancement Center, jackh@massmep.org

The Administration's suggestion to institute Universal Electronic Records and Medical Insurance Portability as cost saving measures for arresting the inflation of medical costs is delusional, at best. Such measures will take years and additional monies to implement, for very small returns, as all administration costs in total represent only 10% of total medical costs. Such marginal cost saving initiatives, along with revisions to the Health Savings Accounts, represent the national response to medical costs which are continuing to rise at 8% a year. Such increases are consuming company margins that would have been previously designated for investments in plant or equipment.

Unfortunately, Health Saving Accounts are not comprehensive health plans, as they were established more for tax avoidance than real medical coverage. The belief that a well-informed consumer armed with higher deductibles can stem this current cost challenge is misplaced. Any premium savings resulting from various changes to medical insurance instruments, such as medical savings accounts, cannot and will not be sustained without significant structural changes within the medical system.

The Move to Managed Care
In times past there were actually real savings with respect to changing insurance coverage. One of the first moves usually implemented by consultants when turning a troubled company around in the mid 1980's was to move the company's health benefits into a managed care plan. This often represented hundreds of thousands of dollars in immediate savings that fell to the bottom line by simply moving the employee health coverage out of a medical insurance plan, such as Blue Cross, and into an HMO. The savings benefits derived from the empowerment of HMO's to manage medical costs have now been largely dissipated by both the continued medical inflation and the increased regulation of managed care plans. But for a number of years, managed care, although much maligned, has been singularly successful in arresting medical inflation while still delivering quality care.

There is no new managed care remedy on the horizon and medical savings plans are not the answer, especially in today's system where existing medical insurance plans are expected and taxed to pay for indigent care provided for all the uninsured. 

Manufacturers Lead the Way
Manufacturers who are looking for cost relief in their medical insurance premiums should be leading the charge for healthcare reform to protest the fact that they are indirectly subsidizing the other businesses who choose, for whatever reason, not to provide healthcare coverage for their own employees. The following table shows how extensive this problem is.

Massachusetts: Year 2003
Percent of private-sector employees that are enrolled in Health Insurance at establishments that offer health insurance by industry groupings.

Total

Agri, Fish & Construction

Mining & Manufac.

Retail & other services

Professional Service

All Other

59.2%

55.9%

80.9%

37.2%

60.8%

66.1%

Source: Agency for Healthcare Research and Quality

Employers who pay nothing for their employees' healthcare, regardless of the industry sector, not only enjoy the subsidy from the other industries, but such firms often count on the taxpayer to directly pay for their employees healthcare through the various public assistance programs. Despite competing globally against competitors who pay no direct medical costs, Massachusetts manufacturers have and are continuing to subsidize the uninsured healthcare market.

Where is the Reform?
All of this makes the healthcare reform that the Massachusetts Legislature is currently wrestling with of interest not only to Massachusetts but also to the country as a whole. Such reforms have the opportunity to eliminate the current market distortions by moving to universal healthcare. The economic pressure now being presented by the global marketplace is dooming the current system of selective employer sponsored healthcare. How we respond to these pressures remains to be seen but we should expect that universal healthcare must be a major component.

In a report from the Massachusetts Taxpayers Foundation, it was noted that current legislation being reviewed contains provisions for individual mandated healthcare,"An individual mandate is widely acknowledged as critical to the effort to ensure universal health coverage and, according to the Urban Institute, is the least expensive of the options for achieving that coverage." The report went further to point out that such a mandate "would support -- rather than undermine -- the existing employer-based system."

Without such a significant structural change, it is safe to assume that manufacturers, not only in Massachusetts but throughout the country, will continue to cope with medical inflation simply by increasing employee deductibles and limiting, or completely dropping, coverages. Not a very bright future.

Check out this AME sponsored presentation, "Seeking Perfection in Healthcare: Applying the Toyota Production System to Medicine." This approach shows some of the costs savings that are possible by having hospitals go Lean and represents a significant area for substantial and necessary change. Like manufacturing, the medical community must recognize the need for continuous improvement and the resulting savings or we will all be looking for national healthcare.

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