The core problem with US healthcare is that it costs too much, and until that’s fixed the crisis will continue.
Sunday, October 4, 2009 at 11:13AM I'm participating in an email forum on healthcare. It provoked me to think about this more carefully and decide what I think the key problem is. First the question, and then my answer.
Congress is working on broad legislation to change how healthcare is paid for in America and perhaps also how it is delivered. Perhaps because problems are defined in substantial part by analysis of data from the real world, and solutions are largely defined by politics, there is no assurance that the resulting legislative solutions will ameliorate the most important problems. What do you think is the most important problem, if any, with the US healthcare system, and what would be the most effective legislative solution for it?
- The most important problem is that ~15% of Americans are not covered by a plan that has negotiated reduced fees with providers, as a result of which many of them delay/forego important medical services and then require too much expensive ER treatment that is paid for indirectly by those who do have coverage. The best legislative solution would be . . . .
- The most important problem is that medical care is simply too expensive in America because certain parts of the system (which ones?) are overpaid. The best legislative solution would be . . . .
- The most important problem is that many people's access to healthcare is insecure because it's tied to employment, because they have pre-existing conditions, or for some other reason. The best legislative solution would be . . . .
- The most important problem is overutilization of medical services and products that cost far more than their value to particular patients under the circumstances. The best legislative solution would be . . . .
- The most important problem is that providers do not have immediate access to all relevant parts of a patient's medical records. The best legislative solution would be . . . .
- The most important problem is that patients and/or providers have suffered a loss of liberty because they are only cogs in a vast bureaucratic machine. The best legislative solution would be . . . .
- The most important problem is that the federal government is already too much involved in healthcare; we would have better healthcare and/or lower costs if the government's role were reduced or eliminated. The best legislative solution would be . . . .
- The most important problem is that the quality of healthcare available to Americans who can afford it is not improving as fast as it could. The best legislative solution would be . . . .
- The most important problem is a shortage of primary care givers and an oversupply of specialists. The best legislative solution would be . . . .
- The most important problem is none of those but is ____________________. The best legislative solution would be . . . .
Skeptic answers:
#2. The most important problem is that medical care is simply too expensive in America because certain parts of the system (which ones?) are overpaid. I don't know which specific parts are "overpaid," maybe all of them compared to what their customers can afford. I am mindful that my "cost" is somebody else's "revenue," and that cost reduction necessarily means income reductions for people in the healthcare system. But we need to do that, and if it isn't a bloody brawl we didn't do it right.
This chart from the Kaiser Family Foundation, via Ezra Klein, shows that real American per-capita healthcare costs have risen at an average annual rate of 3.6% since 1960.
At 3.6% per-annum growth, per-capita healthcare costs double in 20 years (Rule of 72) and redouble in another 20 years. That's how US healthcare costs have gone from 7% of GDP in 1970 to 15.3% in 2004 and to 17.6% in 2009. [Please see 7/23/2012 Update for more complete data and a working link.] There is no evidence that we are 2 to 3 times healthier as a result.
In stark contrast, average real hourly earnings for the 5/6 of Americans in the private workforce who are not bosses have not changed since 1973.
Some say the reason these money incomes stagnated is that increasing costs of employer-provided healthcare gobbled up potential wage increases. Probably that was one of the causes, but I have no data. If middle class money incomes had increased at the same rate as healthcare costs, hardly anybody would think there is a healthcare crisis today. But they didn't, and there is.
Hello, healthcare system, your customers can't afford what you're selling! Not even with taxpayer subsidies because the taxpayers are mostly the same folks who can't afford to pay you directly. When 5/6 of your customers have had on average no income increases you cannot get more revenue from them unless they spend less on other things—things like the 2/3 of their incomes that typical families spend on rent, food, and transportation. So how has it been possible for the healthcare sector to keep growing like a cancer? Because markets don't work in healthcare. Prices are administered. Even the fraction of aggregate personal income that is steered into healthcare is administered. Administered by Congress, Medicare authorities, insurance companies, drug companies, hospitals, and employers, rather than being negotiated between patients or groups of patients and providers. There are few normal downward sloping demand curves in healthcare, which is nicely illustrated by the counterpoint that there is effective price competition for LASIK surgeries and other procedures not generally covered by insurance.
Increases in Medicare Part B (outpatient services) reimbursements are limited by law to changes in the CPI, but Congress waives that every year and allows larger increases. Medicare Parts A (hospital services) and D (drugs) have no such limit, and Medicare authorities are forbidden by law to negotiate drug prices. Even the income differentials among medical specialties are lobbied rather than set by market forces. There is general agreement that we have too few primary care physicians like pediatricians and gerontologists and more than enough of some of the higher-paid specialties, whose work seems to expand to consume any amount of resources without reducing prices. Yet, nobody seems able to increase reimbursements for primary care physicians and reduce them for specialties that may be overpopulated. (How American Healthcare Killed My Father in the Atlantic provides a credible overview of this and other problems in the system.)
Since I see no prospect for functioning markets in healthcare, I'm just focusing on how to administer better. The best legislative solution would be for Congress to impose uniform rules on health insurance similar to those for Medigap policies: Everybody is eligible (no pre-existing conditions or employment status considered) during annual open enrollment periods, and insurers have to offer standard contracts. This would eliminate underwriting costs and force insurers to compete on price for identical products. Add a public option, and private insurers would really have to get busy turning themselves into austere public-utility-like transactions processors and eliminating things like "innovations" in marketing and claims denial that give no value to patients. Taxpayer subsidies for non-standard Medicare policies should be eliminated.
Congress should also stop waiving every year the law that requires increases in Medicare reimbursements to be limited to inflation and should repeal the provision that forbids Medicare from negotiating drug prices. Provider incomes must stagnate and go down along with their customers' incomes. But that doesn't mean they'll be worse off because, just like the working and middle classes whose incomes have already stagnated, the professional and managerial class will still enjoy hedonic improvements in the goods and services they are able to buy with their stagnant money incomes. ;-)
Will drug companies stop developing and making drugs if US selling prices come down? No, but they may raise their prices to Canadians and Europeans when Americans stop subsidizing them, which would be fine with me.
Will there be too few docs if their real money incomes stagnate and even shrink? No. What else are they going to do? Write novels? Emigrate to Canada? Go straight from college into the labor force? Become lawyers? US docs are paid way more than their counterparts in other OECD countries, and if necessary we can open the immigration doors a little wider to foreign docs. If we're going to have globalization and wage convergence, every American should face vigorous foreign price competition, not just the working class and middle class whose lobbyists failed them.
Will providers stop taking Medicare patients? No, they can't. (Well, mine might, but in the aggregate, no.) About one-third of all patients are on Medicare, Medicaid, or some other government-paid program. If those patients are not treated somewhere in the system, there are going to be an enormous number of underemployed medical professionals beating the bushes for salaried jobs or some other source of revenue or offering big discounts to insurers in order to fill their schedules.
Maybe our cost cutters will overplay their hands and have to retreat occasionally. That's OK. You never know where the price line is unless you go over it occasionally.
Do I think this will happen to any significant degree? No. What needs to be done would be very painful to the healthcare industry, which owns all parts of Washington, DC not owned by Wall Street. For me the most telling sign that a healthcare bill on the President's desk is a bad bill is that the health insurers let it get there—if they do.
I would not enact a mandate for 45 million uninsured Americans to buy into this broken system. If the cost problem is not fixed first, the mandate would be worse than a tax; it would deliver people into the hands of insurance companies that view them as legitimate prey. Furthermore, a mandate would probably fail. The Senate Finance Committee markup bill requires families with annual pre-tax incomes over $66,000 to purchase insurance without any taxpayer subsidies. Since insurance for a family costs on average almost $13,000 (other sources say more) and would be an incremental family budget item of about 25% of after-tax income, Congress might as well require pigs to fly!
Skeptic
Re: "legitimate prey," whether Cigna's coverage decision was right or wrong, this conduct, reported in LAT, was despicable.
Surrounded by supporters, Hilda Sarkisyan marched into Cigna Corp.’s Philadelphia headquarters on a chilly fall day, 10 months after the company refused to pay for a liver transplant for her daughter.
"You guys killed my daughter," the diminutive San Fernando Valley real estate agent declared at the lobby security desk. "I want an apology."
What she got was something quite different.
Cigna employees, looking down into the atrium lobby from a balcony above, began heckling her, she said, with one of them giving her "the finger."
Skeptic
Ezra Klein has a 1990-2007 graph and story that strongly suggest increases in healthcare costs were to a large extent taken out of potential wage increases. A recent Wall Street Journal article, summarized here, reports on a trend among employers to reduce permanently their contributions to employee healthcare and retirement plans. From the WSJ article (subs. req'd):
The deep recession appears to be drawing to a close, but not its effect on the workplace.
Since the downturn began, thousands of employers have cut pay, increased workers' share of health-care costs or reduced the employer contribution to retirement plans.
Two-thirds of big companies that cut health-care benefits don't plan to restore them to pre-recession levels, they recently told consulting firm Watson Wyatt. When the firm asked companies that have trimmed retirement benefits when they expect to restore them, fewer than half said they would do so within a year, and 8% said they didn't expect to ever.
So if the costs of employer-based healthcare and retirement plans go down, would wages start to rise faster than CPI? I'm not so sure. We will still have the downward pressure of globalizing labor markets, and with unions almost out of the picture wage increases are largely administered by employers.
Skeptic
Faced with a choice between lowering healthcare costs to help sick people and raising them to benefit providers, House Democrats are—once again—lining up behind rising prices, according to this report on the healthcare reform bill that emerged from the Speaker’s office last week:
For months, many leading Democrats, including President Obama, have pushed for the creation of a government-run insurance plan to compete with private insurers.
A main argument was that a public plan would save people money. It would not be under pressure to earn profits, pay high private-sector salaries or deny needed care.
But after House Democratic leaders unveiled their health care bill on Thursday, the Congressional Budget Office said the public plan would cost more than private plans and only six million people would sign up.
One reason the public plan would not save customers money is that it would have to negotiate payment rates with doctors and hospitals just like private plans.
The House speaker, Nancy Pelosi, wanted a more “robust” public plan with payment rates tied to Medicare. But in the end she could not muster the votes, largely because of opposition from lawmakers in states where Medicare rates are lowest.
Who are these lawmakers who want higher healthcare prices?
Skeptic
Robert Reich takes up the cost issue and encourages Harry Reid to draft a bill--or at least an amendment--that provides a robust public option available to everybody, knocks out the provision extending the monoloply for generic drugs to 12 years, and holds Medicare reimbursement rates to the COLA formula enacted years ago. Reich says Reid should use the reconciliation procedure (requiring only 51 votes for passage) and get tough with Blue Dogs--if they don't support this kind of cost containment, they should get no help from the Democratic Senatorial Campaign Committee. Cross posted at HuffPo.
Skeptic
I've spent some time looking for historical data on physician incomes and didn't find anything comprehensive. The best I could do was this composite of data from two sources for 1985-2000, Health Affairs using the American Medical Association's (expensive) Socioeconomic Monitoring System and the Kaiser Family Foundation.
It appears that the mean inflation-adjusted incomes rose nicely until the early 1990s and then stagnated. This is consistent with news reports in the 1990s that "managed care," threatened in the Clinton healthcare reform proposal, was actually adopted by insurers and employer-sponsored plans. This put downward pressure on average physician incomes.
This government report, also based on AMA statistics, shows more detail for the period 1982-2000. A chart there says mean physician inflation-adjusted incomes grew smartly from 1985 to 1989, and then stagnated. I have no data for the 21st Century. If anybody knows of a good data set, I would appreciate your leaving a link in comments.
BTW, this Kaiser Family Foundation report has a nice pie chart showing where our healthcare dollars went in 2007. Physicians and clinics got only 21%, hospitals got 31%, and all other sectors were smaller. Clearly, there is no one simple answer to cost containment/reduction.
Skeptic
Here's an example of how Americans are not well served by healthcare price administration. MRI machines are sold in Japan for half what they sell for in the US. That can happen because a prospective US purchaser can count on a much larger revenue stream from MRI procedures and, after deducting variable costs, there is much more cash left over to pay back the capital cost of the machine and yield a nice profit. I understand that in the US it is common for groups of doctors to buy MRI machines because they can be very attractive investments if the utilization rate is kept high; that would not happen in Japan because the rate of return on investment would be much lower. Why do MRI procedures in the US cost up to 10 times what they do in Japan? Because the Japanese government sets the prices for these procedures, and it has been very aggressive in containing healthcare costs. The US government has been more diligent in protecting the incomes of healthcare providers and equipment, device, and drug manufacturers.
Hat tip to Mort for flagging this example.
Skeptic
Ezra Klein has more here on the inverse relationshp between employer healthcare costs and wages.
From 1989 to 1995, median wages actually fell a bit. Then, managed care kicked in. Annual growth in health-care costs fell from more than 10 percent in the early 1990s to less than 5 percent in the late '90s. Meanwhile, wages shot through the roof, rising more than 11 percent from 1995 to 2000. Then we ended the managed-care experiment, and health-care costs resumed their normal speed of growth. Predictably, wages slumped back down from 2000 to 2006. "By every observable indicator," says Harvard's David Cutler, "managed care was a huge success. It cut spending, cut the growth of spending and didn't seem to kill anyone. And yet everyone hated it."
Skeptic
Robert Reich explains why the pending healthcare legislation, including the latest Senate "compromise," will not slow the flow of economic and political power to a few giant healthcare insurers.
From the start, opponents of the public option have wanted to portray it as big government preying upon the market, and private insurers as the embodiment of the market. But it's just the reverse. Private insurers are exempt from competition. As a result, they are becoming ever more powerful. And it's not just their economic power that's worrying. It's also their political power, as we've learned over the last ten months. Economic and political power is a potent combination. Without some mechanism forcing private insurers to compete, we're going to end up with a national health care system that's controlled by a handful of very large corporations accountable neither to American voters nor to the market.
Skeptic
David Brooks has come out against the pending Senate bill after a pro/con analysis that largely reflects my view that the Senate bill has become a sell-out to health insurers instead of being the grand bargain giving them more customers and us meaningful cost controls. On the same op ed page, Paul Krugman says Senators should vote for the bill in hopes that its huge deficiencies can be fixed in future years. More often than not, I'll take Krugman's advice over Brooks', but not this time.
Skeptic
Here is a link to support for the statement in the original post that "about one-third of all patients are on Medicare, Medicaid, or some other government-paid program." Actually, it was 46% in 2007 according to the chart Paul Krugman took from the Centers for Medicare and Medicaid Services.
Skeptic
An email from Karen points out the second link after the first chart in the main post is broken and offered an alternative. Thanks, Karen. I decided to dig back into official data and found a good report at the Centers for Medicare and Medicaid Services. The following charts are based on Table 1 of this CMS pdf. The first shows total HCE as a percent of GDP. The second shows annual HCE expenses in nominal dollars. Comparing the two reveals that the noise in the HCE/GDP ratio is almost all due to GDP expansions and recessions rather than changes in the rate of increase in HCE. The ratio leveled off in the 1990s when GDP growth was booming and rose sharply when GDP declined in the recessions of 2001 and 2007.
Skeptic
Los Angeles Times reports today on a study published in JAMA comparing eleven rich nations on factors contributing to the large system-wide cost differences between USA and ten peer nations. Summarizing the LAT summary, contributing substantially to the much higher USA costs are higher prescription drug prices, higher administrative costs, and across-the-board higher incomes for doctors, nurses, and other providers. Hypotheses rejected in the study were: Americans use more health services, we don't spend enough on social programs, we have too many specialists and not enough primary care physicians, American docs order too many tests (to inflate earnings or prevent lawsuits), and cutting back on "wasteful" utilization would make a substantial cost difference.
Reader Comments (1)
Very, very good post.
In my case, since post breast cancer, I've either had a $500/mo premium with a $5000 deductible and a varying annual or lifetime cap, depending on which state I've been in, of between $50-75,000 and $500,000 more or less. Even with a small tax deduction, in years when I've had to had diagnostic tests, but no treatment or prescriptions, the real cost after taxes with copays and deductibles can easily run $15,000 or up as a normal out of pocket expense. Ultimately I did have to back burner my self employment and seek institutional employment, but even there, with an employer paying the $500 premium for me in the case of a small institution that had too many preexisting conditions on the small staff to get coverage (not in California), the cost to me was very high. Only now that I've gone into employment in a larger institution abroad, with an international insurer (which, incidentally is much easier to deal with and pays much faster than the US insurers at the last larger US institution I was employed by) and finally have a $250 deductible has the cost of my medical care come down into the reasonable range. And part of that is because I've done much of my constantly required (and I do mean required, given that if I hadn't had one of the tests and excised an aggressive precancerous polyp in 2007 I would have had 3 years to live) testing abroad in excellent hospitals that cost 1/5th of US costs. This still leaves unaccounted for, the cost of my alternative medicine, recommended by no less than a US oncologist and sanctioned by my endocrinologist internist, at about $3000/year. And, I'm healthy!!!! What would this cost if I was actually under treatment or sick!!! I do not believe that I am atypical, nor that I have an unhealthy lifestyle, nor did my family have any history of illness before this generation when my younger sister has Parkinson's and I've had cancer. This is an impossible situation. And, if I can do it intelligently, I will stay out of the US until I go onto whatever is left of Medicare.