Healthcare reform has become one of the most discussed domestic issues in recent years and with good reason—changes to our healthcare system are badly needed. But the very factor that most drives the need for reform is often the least discussed: Healthcare is expensive and it's not getting cheaper. While there are many key features of healthcare reform that must be considered and addressed, from insurance mandates to the impact on providers, the fact remains that financial considerations have often derailed prior reform efforts.

After Barack Obama and Congress take office early next year, some form of federal reform is likely. Three financial considerations deserve special consideration in conjunction with reform proposals:

• How many currently uninsured people will receive coverage?
• Will value-based innovations such as consumer-driven health, wellness, value-based insurance design, and other medical manage­ment concepts help reduce costs?
• How will new reform work alongside preexisting dynamics that may serve to drive up costs?

The most critical overarching question to ask in evaluating prospects for any healthcare reform plan is simply: Does it include an achievable strategy to sustain its funding beyond the first few years? Efforts within the United States and around the globe consistently show that the long-term view is the only hope for a prudent, equitable, and sustainable model of healthcare delivery. Reforms that have not addressed long-term financial viability have failed.

The uninsured: A vast unknown

Most estimates currently put the number of uninsured individuals in the United States at about 46 million. This number is difficult to verify. We don’t know how many uninsured there are because, for the most part, they are not in the system and many may never have been. Also, the exact number is constantly changing, as individuals obtain or lose coverage through employer-based or other types of coverage.

Many of the problems encountered by healthcare reform efforts in Massachusetts and elsewhere stem from the so-called "woodwork effect." This phenomenon holds that there is an easy way to quantify the number of uninsured (or underinsured): Make healthcare available to a new population in a high-profile and relatively easy way. Only then will you discover how many individuals didn't have access to it in the first place, as the uninsured "come out of the woodwork" seeking the highly publicized care. While this makes intuitive sense, it does not bode well for those looking to estimate costs ahead of enacting reform.

At the local level, Massachusetts focused primarily (and necessarily) on the political task of marshalling the constituencies it needed to implement its reforms. The question of long-term sustainability was left for later consideration. When the legislation was written, the state estimated that there were 400,000 uninsured in Massachusetts. That number now appears closer to 650,000, more than 60% higher. Targeting users of the state’s Uncompensated Care Pool for its initial enrollees in Commonwealth Care, the new subsidized program, the state estimated the number of new enrollees from this effort would amount to 145,000 in the first year. The actual enrollment came in at 175,000, more than 20% higher.¹

Now, in the turmoil of budget shortfalls based on its low estimations, Massachusetts faces that all-too-familiar bugaboo of health insurance: costs running virtually out of control. The cost problem is twofold. First, any cost estimate requires an estimate of health-cost trend, a difficult task even if good data exists. Then comes the difficulty of accurately gauging the size of the uninsured population, a problem that suffers from a lack of reliable data. It follows that no healthcare reform effort should expect to have any good sense of real costs until its program has been around a few years. For this reason, reformers might do well to think in terms of decades, rather than a handful of years.

Medical management innovations: No guarantees yet

Wellness. Disease management. Consumer-driven health plans. Value-based insurance design. There has been no lack of effort on the part of the healthcare and insurance industries in recent years to tackle the problem of spiraling costs, and the work to date holds much promise.

Yet every time we look at these innovations, we find ourselves unsure of the one thing we most want to know—their effect on cost. Most innovations show at least modest potential for cost savings but the long-term effect on costs is not yet clear.

Consider value-based insurance design. This concept intends to ensure that people with a likelihood of contracting chronic or severely debilitating conditions address them earlier and more effectively or avoid getting them altogether. It does so by providing cost incentives to health-plan members that support and reinforce specific evidence-based practices addressing those chronic condi­tions or their prevention.

The cost offsets prescribed by value-based insurance design can create new costs as people who would not otherwise incur claims tap into the healthcare system. For some, catastrophic and expensive incidents, such as heart attacks, would be prevented or ameliorated. At the same time, costs would be created for people who might never have had a heart attack even if they hadn’t received the drugs or treatments.

When it comes down to individual cases, we are left with a conundrum: Is the cost of treating catastrophic illnesses greater or less than the cost of preventing them? Similar uncertainties have been raised in studies of wellness, disease management, and consumer-driven health plans.²

This is not to say that a good case can't be made for any of these innovations in terms of contributing to better and longer lives. Certainly quality-of-life benefits deserve equal footing with cost sav­ings. That's exactly what healthcare is about, after all. But when considering reform, it's important to remember that, lacking better data, we can't count on the promise of long-term cost offsets. They could exist, but we simply don't have the evidence yet. And that leaves us, again, with the need to formulate a realistic, long-term plan for reform that can be sustained in the event that wellness, value-based insurance design, and other much-heralded medical management approaches do not, in fact, decrease overall health costs.

The cake problem: To have or to eat

Finally, there's the delicate problem of wanting more than can be afforded. Healthcare reformers routinely promise benefits that their proposals can't necessarily deliver. It's altogether too common to see lip service paid to cost cutting, even as popular benefits that are sure to drive up costs are mandated. This is a problem of politics in practice, often driven by lobbyists or politicians with an eye toward the next election.

In healthcare, costs have numerous ways of sneaking into the picture. The market forces often depend on paradoxical incentives. For example, providers tend to be paid for treating the sick rather than the healthy, and the more they treat them—in terms of tests, procedures, and consultations—the more they are paid. They're not paid to keep patients healthy, but to return them to health. Potentially successful strategies for changing that paradigm have emerged, such as wellness programs with their focus on preventive approaches or capitation schemes that reward high levels of efficiency (which can be achieved, in part, by keeping people healthy). But, as noted above, the results are not yet in on many of these approaches.

A more difficult benefit design question arose this fall in the United Kingdom. The National Institute for Health and Clinical Excellence (NICE), which evaluates the value of healthcare, is capping most payment at £15,000 for treatments that will extend life for six months or less.³ This limit affects cancer patients in particular because of the high cost of specialty drugs. As we go to press, it is unclear whether the NICE approach to end-of-life costs will stand up to the criticism. Regardless, the question of how much to pay at the end of a life is just as relevant in the United States and will become more pressing as costs increase and as more Baby Boomers become Medicare eligible.

Another problem is that technology in the healthcare indu­s­tries tends to lag behind that in other industries. For various reasons, healthcare is not as highly automated or computer literate as it should be, and it seems to be falling further behind. In most businesses with a dependence on sophisticated technology, costs tend to start high and then fall dramatically. Such was the case with consumer electronics such as laptop computers, cell phones, and audio and video gear. But in health­care, technology costs start high, stay high, and tend to grow over time.

Finally, any healthcare reform effort will need to address the question of whether to make coverage mandatory or optional. Mandatory coverage widens the pool of contributors and spreads overall risks. Optional coverage is frequently an attractive alternative for people who are currently healthy and don't see the need for the expense of coverage, thereby affecting the size of the uninsured pool (bringing us back to the earlier point about the uncertain size of this population). In a nutshell, this captures one of the toughest problems of healthcare reform—the difficulty of tackling the tradeoffs among overall costs, the size of the pool, and overall benefits.

In the end, preserving choice in a meaningful way could be the hardest part of healthcare reform. But it's important to look carefully at healthcare reform proposals and ask what assumptions have already been made that may compromise the ability to control costs, and the reform itself, over the long term. Because controlling costs is critical to successful delivery of healthcare, it’s important to ask the hard questions: What needs to be done to level cost trends? How do we evaluate long-term prospects? How do we decide which costs to take on and which benefits to forego? What steps that we take today will still be working 20 years from now?

Catherine Murphy-Barron is a consulting actuary in the New York office of Milliman. She focuses primarily on health insurance and managed care consulting. Her experience includes assisting clients with pricing, benefit-plan design, cost projections, risk analysis, and claim liability estimates. She helps clients with reimbursement and incentive system development, regulatory filings, and experience analysis.

1 Health Connector Facts and Figures," June 2008, www.mahealthconnector.org.

2 K. Fitch and B. Pyenson, "Taking Stock of Wellness," Benefits Quarterly, Second Quarter 2008.

3 Gardiner Harris, "British Balance Benefit vs. Cost of Latest Drugs," New York Times, Dec. 2, 2008.