Ninth District advisers discuss health care issues, hear plan for reform

Presentation to Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor

Published April 1, 1992  | April 1992 issue

Three times annually, the Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor meets with President Gary Stern and bank staff to report on the state of the Ninth District's economy. The Minneapolis Fed's Advisory Council, similar to others formed in 1985 at each of the 12 Federal Reserve district banks, consists of 12 members serving three-year terms. Advisers are selected to represent geographic, economic and gender/racial sectors in the Ninth District.

Just as the national debate over health care reform has intensified in recent months, so has concern about the issue grown within the Minneapolis Fed's Advisory Council on Small Business, Agriculture and Labor. At its February meeting, the council heard a presentation outlining the causes of America's health care ills and suggesting a plan for reform.

John Kralewski, director of the Division of Health Services Research and Policy at the University of Minnesota's School of Public Health, who made the presentation before the council, said he is encouraged by the growing awareness of health care issues. He said he hopes that people's concern will soon translate into serious reform.

However, Kralewski told the advisers that for those who are waiting for government to provide a remedy, a federal solution to the problem is unlikely—at least within the next few years. The best chance for major reform is at the state level, he said.

Problem: uncontrollable costs

That there are major problems with the health care industry is evident: Health costs are rising at a 16 percent to 18 percent rate in recent years, Kralewski said, at a time when the consumer price index has hovered at about 3 percent to 4 percent. Consumers, businesses and all levels of government are in some way adversely impacted by these spiralling costs, he said. For example, on average, U.S. companies spent an amount equal to 26 percent of their net income on health care in 1990. In Minnesota, Edina- based Regis Corp. plans to drop its employee health insurance plan as of April 30 because of excessive cost. Regis employs about 14,000 at 1,000 hairstyling salons throughout the country, but less than 10 percent of those employees were reportedly enrolled in the plan.

There are many reasons for the increased costs, according to Kralewski, but he listed the following:

  • America's aging population—more and more money is spent on one sector of the population that continues to grow;
  • Rapid advances in technology—transplants have become so pervasive and are so expensive, for example, that "the only thing that's keeping the system from going completely broke is a lack of donors," he said;
  • Uncontrolled use of newer and more expensive procedures—there are approximately 40 CT scan machines in the Minneapolis/St. Paul metro area, a comparable Canadian city has two;
  • Fee-for-service payment system—studies show that when physicians require extra income they order more services for their patients.

The fallout from this price explosion is that insurance costs are increasing, employers are shifting more insurance costs to employees, some employees are paying more money for less services than before, the ranks of the uninsured continue to grow and some government medical programs—like Medicaid in some states—are simply going broke, Kralewski said.

For some states, the Medicaid crunch has led to major changes in operation. Oregon, for example, has enacted a controversial plan that limits the types of medical services available to Medicaid recipients. If a medical procedure is not on the state's list of approved services, the treatment is not paid for by Medicaid, regardless of the consequences.

Solution: pooling plus competition

But rather than control costs by placing limits on services, Kralewski offers some ideas for health reform that try to reduce costs through competitive forces. He told the advisers of a state-based health plan that would provide routine office care from a pool of physicians on a fee-for- service basis, with advanced care provided by physicians who would make competitive bids for the state's business.

Kralewski said such a plan would not only reduce the costs of providing health care, but would also provide coverage to all citizens. Under such a plan, participants would pay a $10 fee per visit to a primary physician, but all specialized care would be paid through the health plan. The financing for such a plan would come from taxes and employer contributions, in addition to payments by users (depending on ability to pay).

The advantage of gathering thousands of residents into one large pool is that the state would then have tremendous bargaining power with physicians, according to Kralewski. Physicians who wanted the business of the state's pool would not only have to provide a competitive price, but would also have to provide quality service in order to be considered, he said. Additionally, if physicians are forced to perform more procedures at a cheaper price in order to recover the income they previously would have earned, Kralewski said they will then become even more proficient. Studies show that, in general, the best physicians are those who perform procedures more frequently, he said.

Any reform plan must also attempt to control costs by bringing together overlapping resources within a community and housing them in a central place, like x-ray and laboratory services, nursing personnel and administrative capabilities. In rural areas, for example, that may mean that all health offices—like private doctors' offices and clinics—should be housed in a central unit like a hospital.

Kralewski said that if an effective state-based plan was enacted, it could expect to reduce the rate of cost increase by 20 percent to 30 percent. And the most important element of any plan to reduce health costs has to focus on the physician, he said, because physicians, and not consumers, are the ones who order health services. He also advised employers to pool their employees—much like a state health plan—then bid out for health services, rather than allowing employees to pick and choose any physicians they wish.

One issue Kralewski didn't specifically address was the health care component of the workers' compensation system, which, according to Bernard Brommer, president of the Minnesota AFL-CIO, is a rapidly escalating element in health care costs. The workers' compensation system requires total coverage for health care costs due to workplace injuries without deductibles and co-payments, he said, and also because there is also litigation in workers' compensation cases, there is the potential for medical care providers to enhance utilization and charges for workers' compensation care.

Workers' compensation and health insurance proposals have been at the forefront of recent legislative sessions in Minnesota. And Brommer said health care issues have been and will continue to be a significant cause of friction in collective bargaining relations between labor and management—in Minnesota and across the country. "Financial resources to create new jobs or buy new equipment are being used to pay for increases in health care," he said.

Kay Fredericks, president and CEO of Trend Enterprises in New Brighton, Minn., said her company's employees used health care services more carefully after the company adopted a small co-payment for each visit to a doctor. She said that employees and employers would both benefit if consumers would become more informed about their health care options and would regularly question their doctors about the needs and risks of certain procedures. Kralewski agreed with the need to educate—and thereby empower—consumers of health care, including employers: "All I do when I get a pain is present myself and someone else spends the money."

Some of the advisers had questions and concerns about the economic health of small-town hospitals. In Ashland, Wis., a town of 9,000 in the northern part of the state, the local 100-bed hospital is operating successfully, according to Tad Bretting, president and CEO of C.G. Bretting Manufacturing. He said the key to the hospital's success is that the hospital has a committed staff that is willing to work for less money as long as the hospital supplies the staff with top-notch equipment.

Small hospitals also have to be mindful of cost control and revenue collection, according to Susanne Boxer, president and CEO of Houghton National Bank in the Upper Peninsula of Michigan. She said she served on the board of a not-for-profit hospital owned and operated by the Sisters of St. Joseph. The hospital was sold to a group of community leaders because the Sisters' commitment to serve the community's health care needs was not matched by an equal commitment to collect payment for their services.

Harold Gershman, president of Happy Harry's Bottle Shop in Grand Forks, N.D., said that Grand Forks' United Hospital is establishing a referral relationship with neighboring rural hospitals whereby those hospitals send patients who need specialized care to United.