The Future of Health Care

California Gov. Arnold Schwarzenegger was the first governor to propose sweeping health-care reforms in his state this year. But he won't be the last, predicts Mark McClellan. McClellan is former head of the Food and Drug Administration and of the Centers for Medicare & Medicaid Services (CMS), where he successfully introduced Medicare's new prescription-drug program. Now a senior fellow with the Brookings Institution and the American Enterprise Institute, two top think tanks representing both ends of the political spectrum, the respected doctor and economist will be giving his prescriptions for fixing the U.S. health-care system. McClellan outlined his expectations for 2007 in a conversation with Kiplinger's Personal Finance.

Despite lots of talk on Capitol Hill, McClellan thinks much of the action will be in the states this year. "Most states have pretty good budget outlooks," he says, "so more of them are thinking about improving their health-care coverage."

But at least one part of the California proposal could be problematic. The plan would bar insurers from rejecting people for coverage for any reason, and it would allow health plans to set premiums based only on how old an individual is and where he or she lives. In states that have tried similar approaches -- notably New Jersey -- individual policies are so expensive that most people can't afford them. "You can't get an individual insurance plan for less than $600 or $700 per month in New Jersey, and the market is essentially gone," says McClellan.

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Help for consumers. No matter what kind of insurance you have, expect to become more involved in your health-care decisions. Tiered pricing of prescription drugs is just one example, says McClellan. "A generic drug will be free, but you'll have to pay a large part of the cost difference for a brand-name version. Is the additional cost worth it to you?"

To help you make a decision like that, you'll be getting a lot more information. McClellan successfully introduced the MyMedicare.gov Web site, which provides Part D beneficiaries with personalized information about coverage options and drug prices.

Medicare has also begun reporting on the quality of care, and this year will start sharing measures of patient satisfaction. That will make it easier for consumers to select a doctor and a hospital, and it will also enable doctors to receive bonuses based on the care they provide. "For two years I've been talking about paying for better care rather than more services," says McClellan. "Doctors want to practice good medicine, but they need incentive."

You'll also get more help in using the new resources. "Historically, Medicare staff had to spend a lot of time talking to doctors instead of patients," says McClellan. But when Part D, with its wide array of choices, was introduced, "we redirected a lot of attention to helping consumers directly."

He predicts that you'll see "more consumer-focused resources" in other parts of the health-care system. And more people will hire advisers to help them navigate their health-care choices and finances, much like a financial planner handles other money issues. "These decisions are important and have as much financial impact as your investment decisions," says McClellan.

Employer innovations. Increases in the cost of employer-provided health insurance tend to get a lot of media attention. But McClellan is more interested in the innovative ways companies are controlling their costs.

For example, Pitney Bowes found it was possible to predict which employees were going to incur high health-care costs -- such as those who were pre-diabetic or neglected to take medications. "So the company invested in clinics and preventive services," says McClellan. "As a result, says the company, the increase in their health-care costs has been substantially reduced."

Pitney Bowes also introduced consumer-directed health care with a twist. "If you want a costly medication and there are less-expensive alternatives available, you pay more for it," says McClellan. "But for some conditions, such as diabetes and heart disease, the company basically gives away whatever employees need, regardless of cost. That pays for itself by helping to improve the chances that people will actually take their medicine."

Preventive care was one of McClellan's priorities at CMS, because it "has the potential to lower costs." As a result, Medicare now covers a slew of new preventive measures.

State struggles. Last year Massachusetts passed a law requiring all state residents to have health insurance or face a penalty. The hope was that healthier people would buy coverage, thereby improving the risk pool and lowering the cost for everyone.

The downside, says McClellan, is that "you have to make sure that an affordable policy is available so that healthy people don't get annoyed because they have to pay hundreds of dollars a month for coverage." But coverage in Massachusetts is expensive because insurers aren't permitted to reject individuals because of their health. The state also has a long list of services that must be covered, including expensive procedures such as in vitro fertilization. As a result, "there are lots of questions about whether the cost of the program will be manageable," says McClellan.

But, he says, other states can still learn from Massachusetts, especially its proposal to shift money once used to reimburse hospitals for uninsured patients to help low-income people buy insurance. "They're taking a lot of money that was already in the health-care system and redirecting it to help people get basic care," says McClellan. "That could be a very good direction for other states." Arkansas, for example, recently introduced a plan that lets small and midsize businesses buy into a state-sponsored purchasing pool.

This year, Congress will reauthorize the State Children's Health Insurance Program, which offers matching funds to help states provide health coverage for children whose family income is as much as three to four times the poverty level. McClellan thinks the program could be expanded to help working adults with lower incomes and no children. "It would have a good bipartisan flavor," he says.

Insuring the sick. One way to make sure that people in poor health qualify for coverage is to expand state high-risk pools. In these pools, individuals who are rejected by regular insurers are guaranteed insurance at a rate that's generally limited to 125% to 150% of standard coverage. "Risk pools can work if they're well funded, but that can be challenging for states," says McClellan. Florida's high-risk pool, for example, has been closed to new participants for years. But McClellan thinks that beefing up the pools makes more sense than New Jersey's approach of requiring insurers to cover everyone and charge everyone the same rate.

An alternative to high-risk pools is to subsidize insurers that cover people with medical problems. "You give those individuals access to the same plans as everyone else but provide a bigger state subsidy in order to make it attractive for a health plan to cover them," says McClellan.

Medicare recently began doing this with its Special Needs Plans, which give insurers higher subsidies for patients with chronic illnesses. "In the case of someone with multiple illnesses, or an 85-year-old woman who requires nursing care, the subsidy could be 10 to 12 times higher," says McClellan.

In fact, he says, there is a trend toward plans that actually specialize in high-cost patients, who require a lot of medications and stand to benefit most from coordinated care among physicians. Says McClellan, "That's where the savings are -- 80% of medical expenses are incurred by 20% of the patients."