SECOND OPINION
Reducing medical plan costs

By Cliff Slater

There are three options to curbing the spiraling expense of our insurance.

Medical plans have increased three times and prescription drug riders 10 times over the last 30 years —even after allowing for inflation. And it is going to get worse. What can we do? Here are three options:

First, let us all understand the economic principle that once the "ownership" costs of, for example, automobiles, health club memberships or medical plan memberships have been paid for, the additional cost of using them is very little. This encourages their use more than if we averaged the ownership costs and had to pay each time we used them.

This principle is at the root of the success of Medical Savings Accounts (MSAs) now taking hold in the U.S. For MSAs, companies buy catastrophic health insurance for their employees, which covers only those annual costs in excess of $2,000.

This plan costs about half that of the premium for a conventional plan, and the other half of the premium is paid into each employee's MSA account. Employees use this to pay all their routine non-catastrophic medical costs. Employees keep any remaining balances at year-end and can let it build up in their MSA account with all the same tax advantages as an IRA.

Since employees with MSAs keep the money they do not spend, they are more sensitive to what they are being charged, and this helps reduce medical costs for everyone.ÊThe federal Kennedy-Kassebaum legislation allowing MSAs the same tax deductibility as regular plans was originally limited to only 750,000 employees of small companies across the country, but that limit has recently been removed.

Second, medical plan costs could reflect the health cost differences between those members who live healthy lives and those who do not. For example, whether one smokes or not could be reflected in plan costs. Similarly, since a plan member's degree of physical fitness and the degree to which they are overweight both correlate with the medical costs they incur, they could also be considered.

A basic rate for trim, fit non-smokers and an added premium of as much as double for overweight, unfit smokers would not only help reduce total costs but also encourage people to change to a more healthy lifestyle.

Third, we could curb the extraordinary awards being made by juries in malpractice cases. According to Jury Verdict Research, the average medical malpractice jury award rose almost 75 percent from 1995 to 2000 to an average of $3.5 million per case, with some awards going as high as $40 million. Since one jury awarded $2.9 million to a lady who spilled hot coffee in her lap in a McDonalds, we should not be surprised.

Threatened by such huge awards, physicians practice overly defensive medicine, which results in much higher medical bills than would be the case if there were some restraints on lawsuits.

California tackled this problem by passing the Medical Injury Compensation Reform Act, which limits compensation for non-economic damages to $250,000. These damages are non-monetary losses such as pain, inconvenience, emotional distress and loss of companionship. The law still allows unlimited damages for economic losses. Naturally, this legislation has reduced California medical plan costs.

Unfortunately, Hawai'i is the one state in the nation where these ideas cannot be implemented. Hawai'i's Health Care Act does not allow MSAs, nor can we charge differentially between those who choose to live healthy lives and those who do not — that would be discriminatory — nor can we limit court awards.

However, with Hawai'i's medical costs escalating by double-digit percentages annually, the Legislature will have to make changes to allow new ideas. Otherwise we will face further crimping of our economy since businesses cannot absorb these cost increases.

Cliff Slater is a regular columnist whose footnoted columns are at http://www.lava.net/cslater.