Healthcare: What We Spend, How We Pay

Recalling the Shift to Consumer-Directed Healthcare


I recently came across an old ledger book that my father once used to record our family’s tax information, including potential itemized deductions. As I brushed away the dust and turned through the tattered, yellowed pages, I was particularly intrigued to see how the entries outlining medical expenses, including charges for drug co-pays and doctor and dentist visits, have changed over time.

In 1970, when I was 15 years old, our family of four had out-of-pocket medical expenses of $268. Charges for doctor’s visits ranged from $20 to $30. Dental service charges were $55 and $65. Drug co-pays ranged from a low of $1.75 to $3.65. Together, all our medical expenses represented 2.1 percent of our family income that year.

That led me to wonder how our family’s experience compared to the broader national average in 1970. While looking through the Center for Medicare Services (CMS) National Health Expenditure Database, I learned that the average consumer out-of-pocket expenses for health services and supplies was $118 per capita in 1970. This represented 2.85 percent of the mean household income. So it was clear that the experience of my family was fairly typical for the times. In 2007 (the most recent year in the CMS database), consumer out-of-pocket spending had increased to $889 per capita, representing about 3.16 percent of the mean household income. Given the reports of runaway healthcare costs over the past few decades, how is it possible that out-of-pocket medical expenses have remained relatively constant as a percentage of household income? The numbers are telling.

Looking back to 1970, as a nation we spent $67.1 billion for healthcare services and supplies, or about 6.5 percent of the gross domestic product (GDP). Medicare and Medicaid were both relatively new programs, having been instituted through legislation passed in 1965. Back then, both Medicare and Medicaid accounted for only 19 percent of total spending. Private insurance accounted for 23 percent. The largest share of the cost, at 37 percent, was born by consumers as out-of-pocket payments.

In the nearly 40 years since 1970, the sources and distribution of spending for the healthcare system have changed dramatically. In 2007, total spending for health services and supplies is 31 times greater than 1970, at $2.98 trillion. These services now account for 21.5
percent of GDP. Medicare and Medicaid have seen the fastest growth, accounting for 37 percent of total spending. Private insurance accounts for another 37 percent. Consumer out-of-pocket spending has fallen to only 13 percent of the total. While $889 per capita in out-of- pocket spending may feel significant, this represents only an eightfold increase since 1970 as compared to an overall increase of 31 times!

To a large degree, consumers have been shielded from the dramatic increase in healthcare costs, as third-party payers absorbed more and more of them. While consumers may ultimately bear that burden through higher taxes and perhaps slower wage growth, those indirect impacts are nearly invisible to the average patient. This lack of direct visibility has also prevented the basic laws of supply and demand to operate in the healthcare market and has contributed to rapidly growing expenses for healthcare services.

The current environment may, however, represent the low point for consumer out-of-pocket spending. Medicare’s trust fund is projected to become insolvent as early as 2016. Without substantial changes in the Medicare program, the cost of providing health care to the Baby Boomer generation will require massive tax increases. Private insurance is also under stress as employers increasingly find the growing cost of healthcare benefits to be unsustainable. Healthcare costs for American companies often place their products at a disadvantage to foreign competitors. While the American auto industry has a number of issues, a cost differential of $1,300 per vehicle for employee and retiree medical costs at GM is difficult to overcome when compared with a foreign competitor such as Toyota.

Healthcare plan designs are changing to shift greater payment responsibility to the consumer. Traditional plans now include higher co-pays and co-insurance. In addition, a growing number of companies offer high-deductible health plans and consumer adoption is increasing. While it is difficult to predict the ultimate form that healthcare reform may take, the continued shift of increased consumer responsibility may be the only economically viable alterna- tive. In addition, early experience with high-deductible health plans has also demonstrated greater consumer engage- ment by helping to control spending growth. Studies by UnitedHealth Group and CIGNA suggest that high-deductible health plans can reduce total healthcare costs by three to five percent annually.

My own family of four today is certainly living in this world of greater consumer responsibility. Some generic drug co-pays are still as low as $5, but other branded drugs may carry a co-pay of $90. A visit to the doctor results in a $25 co-pay and 20 percent co-insurance if in the network. Co-insurance outside of the network increases to 40 percent. Given that some members of my family have chronic conditions, our family out-of- pocket medical expenses are nearly $8,000 per year.

A healthcare market that incorporates greater consumer payment responsibility requires new approaches and tools. Healthcare providers have historically been focused on claim submission and collection from third-party payers. Consumer billing is almost an afterthought — it’s conducted after the service and often after the adjudication. The resulting paper-intensive process of mailing monthly billing statements is costly and unproductive. Estimates of uncollected balances run as high as 40 percent of all physician post-service billing. As consumer responsibility increases, providers recognize the need to develop a mechanism to make payment arrangements at the time of service, increasing collections and reducing administrative costs.

Consumers will also need payment devices to help them navigate this new and unprecedented environment. Payment cards are increasingly becoming the payment vehicle of choice in a point-of-service payment environment. These payment cards need to access tax-advantaged healthcare spending accounts (HSA, HRA, FSA) as well as other unrestricted accounts (DDA). In addition, lines of credit dedicated to healthcare spending are becoming more prevalent to deal with especially large consumer costs.

As part of TSYS Healthcare, and personally, I am excited about the opportunities that this transformation will create. The dusty old ledger of years past is a reminder that all of us in the healthcare services industry must place an increased focus on efficiency and effectiveness of the payment process.

Duane White, a 24-year veteran of the financial services and healthcare industries, is senior advisor of TSYS Healthcare. Mr. White’s immediate focus is on the development of TSYS’ fully integrated multi- purse and split-tender solutions specifically for the healthcare industry. He also works with the healthcare provider community to address how TSYS can meet their needs for electronic payments.



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