Interesting times for health care

There have been a pair of interesting health care industry stories in the last few weeks. The first, which everyone seems to have heard about and many commented on, is the problems that Delphi (and its erstwhile parent, General Motors) are having with paying for the health care of active and retired hourly workers:

DETROIT General Motors is heading into a critical week as the largest carmaker in the world faces tough negotiations with its workers’ union and the bankruptcy filing of its top components supplier, Delphi.

The company, which had more than $1.2 billion in losses in the first six months of this year, is seeking help from the United Auto Workers union to reduce its health care and pension costs, while working to limit the negative repercussions of the bankruptcy filing Saturday by Delphi.

When GM spun off Delphi in 1999, the automaker agreed to pay health care and pension benefits for Delphi retirees in the event of a bankruptcy filing within eight years. Financial analysts have projected that this provision could cost GM $6 billion at a time when it can ill afford more problems.

Delphi had been seeking some type of bailout from its former parent company to avoid bankruptcy, but those negotiations failed.

GM has nearly $16 billion in cash on hand but can ill afford to pay Delphi’s pension burdens at a time when it needs all of its funds for future product programs. The automaker is trying to reverse a sharp decline in market share and compensate for shrinking sales in its most profitable models: full-size trucks and sport utility vehicles.

The other story, which may be even more significant, hasn’t received nearly as much attention. The state of Florida is apparently converting its Medicaid system from a defined benefits plan to a defined contributions plan:

WASHINGTON, Oct. 19 – The Bush administration approved a sweeping Medicaid plan for Florida on Wednesday that limits spending for many of the 2.2 million beneficiaries there and gives private health plans new freedom to limit benefits.

The Florida program, likely to be a model for many other states, shifts from the traditional Medicaid “defined benefit” plan to a “defined contribution” plan, under which the state sets a ceiling on spending for each recipient.

Children under the age of 21 and pregnant women will be exempt from the limits.

The Florida plan says, “The state will set aside a specific amount of money for each person enrolled in Medicaid,” based on the person’s medical condition and historic use of health care.

Just so that we all know who the players are, the Medicare system is the system through which the health care of the elderly is paid for by the federal government. The Medicaid system is the system through which the poor receive assistance. It’s largely paid by the states and has become a big part of many states’ budgets.

Although who’s covered and what’s paid for by Medicare is nearly the same nationwide there’s quite a bit of difference in what’s covered and how much is paid among the various states’ Medicaid systems. The Louisiana Medicaid system is one of the more generous systems which, along with the relatively lower cost of living in Louisiana compared to many other states, made New Orleans a pretty good place to be if you were poor and aggravated the disaster caused by Hurricane Katrina last month, the aftermath of which is still being digested.

Although there’s considerable overlap between Medicare and Medicaid, Medicaid typically pays for some things that Medicare doesn’t cover. For example, Medicare doesn’t cover the cost of living in an assisted living facility. Medicaid typically does—if you qualify. Consequently, there’s a substantial amount of strategic poverty.

The net effect of Delphi and GM’s moves is that fewer workers will be covered by employer-sponsored healthcare plans and those who are will be paying a greater proportion of the costs. This has been a nationwide trend for some time. See the figure below.

Source: Economic Policy Institute

According to the Bureau of Labor Statistics this trend has continued in 2005.

It’s a little harder to reckon what the effects of Florida’s move will be. With the highest dependency ratio (ratio of those under 18 plus those over 64 to those from 18 through 64) in the nation clearly this will provide relief to the state’s taxpayers. The effects that it will have on Florida’s healthcare system are less clear.

I believe that libertarians and free market advocates who view these moves as a triumph will be disappointed. If, as people become responsible for a greater proportion of their own healthcare costs, waste and excess consumption is wrung from the system and the rate of increase in costs slows, then those arguing that the market will take care of the problem of rising costs in the healthcare system will have been proven correct. If, on the other hand, as costs are wrung from the system physicians, hospitals, and other healthcare providers merely raise their prices to make up for the lost revenue, the problem will get that much worse.

I tend to believe that as more and more people pay a greater and greater proportion of their incomes in healthcare costs that the political pressure for the government to do something about it will become irresistible. Consequently, I also believe that those who care about what that “something” is would make a better use of their energies by trying to influence what the shape of the “something” will be in anticipation rather than attempting to resist the changes that are going to come in how healthcare is provided and paid for in this country.