With the US economy dragging itself to its feet, the housing and stock markets crawling back, and the Republican presidential candidates (and their nationally syndicated Falstaff) doing everything imaginable to alienate most American women, President Obama has been having quite a run of good luck.  But there is one piece of good news clearly not welcome around the White House: new data showing that health care costs are stabilizing.

I know, I know – this is health care, costs are always out of control, and the sky is always falling.  What could I possibly be talking about?

I’m talking about the actual numbers.  The accompanying graphs reveal that health spending has actually been stabilizing for several years, and the system we all love to hate is finally re-entering the economy’s normal orbit after three decades of skyrocketing growth.

This of course is hardly a cause for celebration around the Obama Administration, for obvious political reasons.  Why else would economists from the same department tasked with implementing health reform choose to tell us that this long-awaited good news is actually – well – bad news.

Huh?  In both graphs below, newly released data through 2010 show that health spending over the past several years has been normalizing to the rate of overall inflation rather than outpacing it – or grossly outpacing it – as has been the case, nearly without interruption, since the 1970s.

It must be the recession! the government’s economists declare in their article accompanying the release of the numbers in the January issue of Health Affairs, an explanation dutifully repeated by the major media.  And of course it must be a travesty. Everything in health care is a travesty, after all – at least for the grim-faced technocracy addicted to health care’s myriad dysfunctions – and especially for those in an administration struggling to maintain political support for a plan branded for already insured voters as the “Affordable Care Act.”

Fortunately, the government number-crunchers are dead wrong, as is evident with only a cursory glance at their own data.

The graph on the left is based on numbers that economists from the Centers for Medicare and Medicaid Services published in Health Affairs. The graph shows the growth rate of annual national health expenditures trending down from 2007 to 2010, tracking perfectly spending declines during the Great Recession. To align this data with the conventional wisdom that health care costs are always out of control – and to assure us that only the recession could have interrupted health care’s otherwise perfect slow-motion economic disaster – the researchers also compress three prior decades of health care spending inflation into three single data points and label them as “1980, 1990 and 2000.”  That’s why we, not the editors of Health Affairs, added the vertical gray bar, to show where the scale on the x-axis changes.

Wait a minute! Doesn’t it seem odd that professionally competent economists writing for a responsible peer-reviewed journal would compress part of data on the x-axis of their main exhibit without readily noting it?  We thought so too; and so my research assistant spent 12 minutes downloading the government’s source data and breaking apart the actual numbers so we could look at the detailed trend. The result is the more complete graph on the right, derived from the same government database used in the published analysis – and yes, it tells an entirely different story.

Expanded to reveal what actually happened between 2000 and 2007, and we find that health spending has been cooling, slowly and steadily, since 2002. Oops! Turns out the recession has had nothing to do with a 10-year trend – one driven not by government inaction and then the recession and threat of “ObamaCare” – but by slow, steady, cumulative improvements in medical care and, as importantly, by the introduction of marketplace disciplines into the demand for and purchase of that medical care.

If the recession were actually relevant to these numbers and the demand for medical care were as elastic as for, say, autos or appliances, the trend line in both graphs would have fallen off a cliff in 2008 and 2009, along with the rest of consumer spending.  Rather, the numbers stabilized during the recession, as part of trend that began back in 2002.  I suppose the authors could have been even more reckless with their speculations, and argued with greater empiric precision that the perennial health care cost spiral finally stopped accelerating because of 9/11.

Better Medicine and Real Market Forces

What is really behind this economic normalization of health spending? What has occurred during the past decade, absent any government “overhauls” of the system? Three things (1) medicine has slowly, cumulatively been getting better; (2) insurers have been getting smarter about benefit design and consumer behavior; and (3) health care consumers have been watching their once blank-check insurance coverage morph into tough, cost-sharing plans – with economic consequences attached to every choice.

These numbers are not the result of an insurance pricing cabal falling apart, nor a collective pre-emptive reaction to the coming of “Obamacare,” nor the result of any grand “disruptive” strategy by health care executives and entrepreneurs thinking they are implementing last year’s business school twaddle.  This is health care simply self-correcting, slowly and tediously, nearly a decade after the failure of the great managed care experiment of the 1990s.  Contrary to the perennial doomsaying of the health care technocracy – and the whining of an older generation of physicians and hospital administrators hit by the recent intrusions of accountability and computerization – the health care system is, almost in spite of itself, getting better.  If the 1990s were all about micro-managing the supply-side of health care (e.g., insurers beating down on hospitals about lengths-of-stay), the 2000s have been all about macro-managing the demand side of the equation (e.g., insurers introducing large co-payments for expensive branded drugs when generics are available). And as proven in reverse by the other “war on drugs,” it is clear which strategy – managing supply versus managing demand – works better in a mostly free society.

Health care’s long, slow shift from supply to demand management was getting off the ground between 2000 and 2003 (cf. the graph on the right one more time) – as most of “managed care” was giving way to a renewed era of unlimited consumer choice and access – for an extra price.  Those with insurance were free again to choose whatever medical care they wanted, but this time using some of their own money. High-deductible health plans, Health Savings Accounts, “tiered” drug plans, new co-payments for just about everything – these were all hitting the marketplace the same years that health care inflation, as per the honest version of the numbers on the graph on the right, was starting to cool. So maybe, people discovered, going “out of network” really isn’t a matter of life-or-death, if it costs an extra $100.  Maybe the generic version of that drug might work just as well as the fancy new branded one advertised on TV.  Maybe a Physician’s Assistant in an urgent care clinic can diagnose a bad sinus infection for $25, a whole lot faster than an emergency room physician can for $1,250.

While health insurers scrambled to create new benefit designs to harness the power of these emerging consumer market disciplines, they were also running out of healthy new customers to sign up; and those they already covered were getting older and sicker.  Luckily, the insurers had all those new drugs at their disposal, many going generic, and some widely prescribed ones even going over-the-counter. Combine all these changes in the market in the early 2000s, and insurers finally started managing the bottom line by actually managing disease, not just money, the dominant strategy of faux managed care in the 1990s.

Because of the myriad moving parts in the health care system – in particular the pitifully belated introduction of computers, data, and informatics – we cannot disaggregate these factors to determine which of these factors have actually helped or hindered this economic normalization, and to what to degree.  But the aggregate impact is clear, and the normalization of health spending is indeed good news – notwithstanding a false explanation by government economists with a political agenda to find a black lining in any silver cloud crossing the health care landscape.

The only bad news is that this slow, steady correction over the past decade is too slow, not nearly deep enough, and does not address the real drivers of waste in health care: the juggernaut of administrative madness that is the employer-mediated, hyper-regulated, fragmented, localized health insurance colossus – the same wreck into which the Obama Administration wants to jam another 30 million people.

Most importantly, this trend a decade in the making contains our best bets for true health system reform. And if we really wanted to bend the health care cost curve in a more dramatic way, i.e., downward, and actually make insurance “affordable” – we would double down on all these bets. We would change the tax code so that people, not their employers, can fund their own tax-advantaged mix of health insurance and spending accounts. And we would allow them to purchase that insurance and fund those accounts in a national, competitive market, just like we do today with car insurance, with the typical plan design converging on one consumer dial: deductible vs. premium, with the rest going into a spending account.  Hand the average American family the $15,000 their employer is spending on their health care now, turn them loose with it in a truly reformed health insurance market, and watch what happens.

In very short order, the marketplace would finally break apart the health insurance colossus into the two very different things it has been trying for too long to be: insurance against serious medical problems, and a glorified group buying club for medical products and services.  This would amount to full liberation of the consumer market forces that are clearly starting to work, if only at the margins, in the byzantine health care mess we all love to hate.  Then we will see what happens to those health spending numbers.

With any luck at all, ten years from now we will have to futz with the y-axis on the graph, to illustrate the magnitude of the decline in overall health care spending.

J.D. Kleinke is a Resident Fellow of the American Enterprise Institute. He has been instrumental in the creation of four health care information organizations; served as a health care business columnist for the Wall Street Journal; advised both sides of the political aisle on pragmatic approaches to health policy and legislation; and authored three books about health care and medicine. His latest book is Catching Babies, a novel about the training of obstetrician/gynecologists.

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51 Responses for “It’s NOT the Economy, Stupid!”

  1. BobbyG says:

    JD, you NEVER disappoint. Some great quotes in this one…

    “These numbers are not the result of an insurance pricing cabal falling apart, nor a collective pre-emptive reaction to the coming of “Obamacare,” nor the result of any grand “disruptive” strategy by health care executives and entrepreneurs thinking they are implementing last year’s business school twaddle.”

    “started managing the bottom line by actually managing disease, not just money, the dominant strategy of faux managed care in the 1990s.”

    Lordy!

    Like I’ve said before, we need you to be more visible more frequently on the national level.

    • BobbyG says:

      “The only bad news is that this slow, steady correction over the past decade is too slow, not nearly deep enough, and does not address the real drivers of waste in health care: the juggernaut of administrative madness that is the employer-mediated, hyper-regulated, fragmented, localized health insurance colossus – the same wreck into which the Obama Administration wants to jam another 30 million people.”
      __

      Indeed.

      What happens in a few months if SCOTUS strikes the “Individual Mandate” AHIP payoff?

  2. Julie Ann says:

    What health care really needs it less dependency on the big pharma companies – imagine what costs would really look like if natural solutions and common sense was applied before drugs!!

  3. Lynn in SC says:

    We can’t deal with our national debt until we deal with health care spending. Although the rate of increase has decelerated the US spends twice what other economically developed nations do and get poor results than they do. Managing disease is the first step. Can you imagine what we could do if we actually tried to slow the rate of cost increases.

  4. Jonathan H says:

    “as is evident with only a cursory glance at their own data.”

    I wish you had gone beyond that cursory glance. The 1970s numbers are strongly skewed by inflation, and in general the lack of adjustment for CPI and GDP growth makes these charts impossible to interpret for real impact on the bottom line. Adjust for these things, and you will get a much flatter line for health care cost growth, and also one that shows less of a clear trend. See here, for example: http://hspm.sph.sc.edu/courses/econ/classes/nhe00/

    It is certainly true that health care cost trend has been moderating since around 2002. But it was coming off an anomalous 4 year period of runaway growth after the collapse of 90s style managed care, due to public backlash. It remains the case that costs have pretty reliably increased 1-2% faster than inflation-adjusted GDP. I would love it if someone ran those numbers for every year in the last decade with a regression plotted.

    • Jonathan H says:

      JD Kleinke asserts that the administration and its defenders want to downplay a drop in medical cost trend in defiance of the evidence, because it is inconvenient. I’m not sure what’s “obvious” about why this fact would be inconvenient, and he unfortunately doesn’t provide any reasons.

      That the Obama administration would want to disregard the evidence in order to deny a stable trend surprised me, since I have never heard this argument before, nor seen any behavior to support it. Why would they not take credit for the drop instead? For example, like this recent article has done, arguing at length that the ACA is already laying the foundation for sustained lower costs: http://www.nejm.org/doi/full/10.1056/NEJMp1201853?query=featured_home&

      I also find the argument weird because many conservatives (not liberals) are arguing that the reduction in health care cost growth since 2007 is a blip caused by the recession. http://www.nationaljournal.com/daily/recession-slows-health-costs-but-just-wait-until-2014-20110728

      It seems like Kleinke and other conservatives share one objective: deny the administration credit for any cost decline. Kleinke does it by saying the downward trend has been going on for 30 years and is due to market forces. Other conservatives argue that while there is a new drop since Obama came into office, it has entirely to do with the recession and is happening despite the ACA, not because of it.

      I wish I could read the original article, but I could not find it since neither it nor the authors were mentioned by name. So I don’t know who these government economists and couldn’t assess if they are politically motivated in their judgment…are they political appointments?

      • Nate Ogden says:

        PPACA was passed on real fears that were blamed on bad arguments. We were told PPACA was needed to solve our problems. If the system was improving before the implementation of PPACA that would undermine the need for PPACA.

        Obama’s ideal situtation would be for things to imrpove after 2014 when the exchanges kick in, then they could take credit. Nothing implemented so far under PPACA could begin to take credit for any improvement in cost.

        I don’t think PMPM is the safest gauge of change right now, we are experiencing a huge influx in baby boomers, I would suspect the average age of medicare has declined and will through the start of the baby boomer influx. I would be shocked if there wasn’t a decline in PMPM until the influx turns and we see a huge increase in cost as the average age increases.

        Medicare is going through the same process a growing employer does. If you have a stable work force then add 10% that are all younger your PEPM will drop.

        “deny the administration credit for any cost decline. ”

        What has this administrtion done that would reduce cost? I have implemented the changes and have seen the effect, Cost was going down for many employers well before he was elected. ACA so far has;

        Required kids be covered till 26 = increase cost
        Eliminate annual and lifetime max = increase cost
        Preventive 100% = increase cost
        Grandfather Regs = increase cost
        SBC requirements = increase cost

        What is unforetunate is what we could have saved had Obama not driven up cost with all of the above. How many more people could we insure if we could reduce the cost of insurance 20%?

        • Nate Ogden says:

          in a back handed way Obama could take credit for some cost savings due to employers being more focused. The fear of what he has been doing has been spuring business owners to be more aggresive. The increase in self funding would be an example of this.

          • Jonathan H says:

            It’s more than that. not just employers but providers are focused more on costs in response to ACA. That’s where the credit is due to Democrats (we keep putting it all on Obama, which isn’t accurate).

          • Nate Ogden says:

            what is it providers have done? ANd where are these providers as I sure haven’t seen any assistance from them. I have heard from their attornies threatening us if we don’t pay more. I have not seen any meaningful effort by providers to reduce cost.

  5. Nate Ogden says:

    “We would change the tax code so that people, not their employers, can fund their own tax-advantaged mix of health insurance and spending accounts.”

    What do you mean by this? People contribute now to their HSAs and FSAs. In fact the majority of HSA contributions are from the individual and all but a few percent of FSA contributions are from Individual. The only type of spending account that matches what you say is an HRA.

    People can also pay their individual premiums pre-tax in all but some very rare circumstances.

    “does not address the real drivers of waste in health care: the juggernaut of administrative madness that is the employer-mediated, hyper-regulated, fragmented, localized health insurance colossus

    This also doesn’t make sense, the employer system is far more efficent then Medicare, Medicare loses more to fraud PEPM then the entire administrative cost of the employer system you knock. Are you saying we should scrap the employer system and replace it with a government ran system with cost a multitude higher?

    “And we would allow them to purchase that insurance and fund those accounts in a national, competitive market, just like we do today with car insurance,”

    JD this error is really bad. There is no such thing as a national auto insurance carrier, every state licenses who can sell auto insurance in that state and regualtes it pretty aggresivly. I can’t think of a state that doesn’t approve rates. On the other hand majority of employer insurance is through ERISA plans exempt from almost all State regualtion. You are 100% reversed in your comment. Auto Insurance is State Level, most Health is National.

    “Hand the average American family the $15,000 their employer is spending on their health care now, turn them loose with it in a truly reformed health insurance market, and watch what happens.”

    Actually JD we have already been through this and it didn’t turn out very well. Few years ago the IRS passed some very restrictive guidelines for HSA and FSA accounts. Inventory control systems, more aggresive substantation. The problem was employers were turning healthcare dollars over to employees and they were buying beer.

    Another very common and well known example of this not working is Taft Hartley plans, when you work with lower paid workers they don’t save the money they spend it. You see this in loans from their 401Ks, waiving insurance coverage to cash out the H&W etc.

    Both BobbyG and yourself appear to desire reducing or eliminating the role of employers in insurance. I’m curious who you think is responsible for the past 10 years of reduced trend? The government is controlling healthcare spending. Patients are, insurers aren’t. Its employers driving change, you remove them from the equation and cost will take off like never before.

    • BobbyG says:

      “Both BobbyG and yourself appear to desire reducing or eliminating the role of employers in insurance”
      ___

      Yes.

      Elhauge, 1994 “Allocating Health Care Morally”

  6. Stanley says:

    Ok, so American health care costs might be starting to stabilize. Has American health started to stabilize as well?

    Or can nobody afford care any more? Does this take into account the growing uninsured that can no longer afford care?

    There could be many things driving down demand, you point to a few possibilities and assertions: (1) medicine has slowly, cumulatively been getting better; (2) insurers have been getting smarter about benefit design and consumer behavior; and (3) health care consumers have been watching their once blank-check insurance coverage morph into tough, cost-sharing plans

    But then you offer no evidence or facts to back up these assertions. Very little correlation, and even less causation.

      • BobbyG says:

        Data “are”

      • Jonathan H says:

        The more relevant data on the uninsured for the argument JD Kleinke advances is not demographics, but trend data. If over the course of the last 10 years the uninsured percent of the population increased, then that would undermine his argument (since the uninsured use less health care services on average). Such data exists, and shows that the uninsured increased from 2000 to 2010 significantly, as did the number on Medicaid (which also costs less than commercial insurance, further suppressing overall health care expenditures). See here: http://www.kff.org/uninsured/upload/8264.pdf

        So, this is at the very least a 4th source of lower costs, and cuts into the effect that 1-3 could have. But I think the problem is worse than that.
        As I explained before, I think the size of the effect is exaggerated here, so there is less to explain than meets the eye from a superficial glance.

        As for each of the points, I have not seen data to support #1. #2 may have some role to play, though most of the changes have been of pretty recent vintage. Consumer-directed health plans are still a minority of the insured, and were a tiny minority even as late as 2005. They couldn’t have moved the needle until the last few years.

        For argument #3, (health plan cost sharing is responsible) the problem is that cost sharing as a percent of total expenditures has NOT gone up over the last 10 years. So the third argument doesn’t make sense, because the condition necessary for it to be true (higher overall cost sharing among those with health insurance) does not hold. It may hold recently among commercially insured, but it doesn’t hold for Medicaid and Medicare (in fact, for Medicare the trend has been in the opposite direction). If you are trying to explain national health expenditures, as Kleinke is, then you need to look at net changes in cost sharing for all segments.

        This analysis seems solid at first, but falls apart as one tries to grasp it, and dissipates into air.

  7. Nate Ogden says:

    “Does this take into account the growing uninsured that can no longer afford care?”

    Forgoing insurance in no way means someone is unable to afford care. In fact a large portion of the uninsured are so by choice becuase their annual healthcare cost is substantially less then what their premium would be. Only 4 million of the uninsured can not afford care.

  8. J.D. Kleinke says:

    I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct to consumers… and the resulting admin costs are miniscule compared to health insurers, whose actual operations are deeply embedded in local markets.

    And while ERISA plans do allow employers to escape state regulation, the actual nature of and related cost bloat for those plans goes in the other direction: it atomizes not to a coherent national system, but to 10,000 little health care systems (each trying to mediate issues like birth control for their employees)…not to mention the 5,000 other “systems”: 50 states X small and big groups X all national, regional and local carriers.

    I am hardly advocating that government take over this mess; I’m advocating that we radically simplify it…and the first step is getting employers out of the middle of it (and our personal lives) and we let people manage their own health care with their own deferred cash compensation.

    • Nate Ogden says:

      You have never worked in inurance have you?

      “but that’s a tiny paperwork exercise: ”

      The insurers would disagree with you, how can you argue a no fault state is only tiny paperwork different then the other states? How are a no fault policy standard to those states that determine fault?

      “the resulting admin costs are miniscule compared to health insurers,”

      Health insurance averages over one claims per month per member, auto one every how many years? Could you come up with a more apple and orange comparison?

      “whose actual operations are deeply embedded in local markets.”

      Then why do the large health insurers have only a few operation centers that serve many states?

      ” the actual nature of and related cost bloat for those plans goes in the other direction”

      your lack of experience is leading you to make some very inaccurate assumptions. Self funded plans operating expenses are a fraction of medicare, they are the most efficient health plans in the entire country.

      Where do you think innovation comes from? One large government plan or 10,000 little plans all trying different ways to control cost?

      How do we have thousands of banks all operating efficently as part of one system, should we eliminate all of them and have one uber efficient national bank? Of course that is laughable. Thousands of banks are far more efficient then one central mega bank would ever be.

      ” I’m advocating that we radically simplify it”

      How is 300 million individual policies simplier then 30 million group and individual policies?

      How does 1 individual go up against a hospital with billions in revenue and more attorneys then they have family members?

      Its very easy when you never work in a system to say we just get rid of that and everything will be much easier. You obviously are unaware of the ramiifcations because you have never seen them.

      Millions of people are very capable of purchasing their own insurance plan and managing their health. Many millions more are not. If someone hasn’t graduated high school and can’t read how do you propose it is “simplier” for them to manage their own health?

      We still have members who sign their application with an X. Your obviously unaware how much assistance some employers provide their employees.

      If you want the most efficient system possible you would have employers purchase high deductible, basic policies for all their employees. This would provide substantial savings of scale, it would have a vested interest bargaining for the best cost, and it would provide someone to advocate on hehalf of them members and help them solve problems.

      Under this very high deductible individuals should be responsible for their own care.

      Your aware the administrative cost of a large self funded plan is 1/4th that of an individual policy right?

      Do you have any studies or anything that would back up your contention that 300 million individual polices would be more efficient? How can you even imagine that math working out?

      What is bloat of ERISA plans? Have you ever even looked at an ERISA plan in your life?

    • Nate Ogden says:

      “I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct to consumers…”

      State Farm has 40 million auto insured
      As of December 2008 State Farm had 67,000 employees and 17,000 agents.

      17,000 agents doesn’t sound like national makreting.

      What does Anthem and United sell? I don’t see them having claim offices in every major city. Your just wrong JD, auto insurance is much more local then health insurance. Look how many offices and employees spread out progressive and all state have?

  9. BobbyG says:

    “your lack of experience”
    ___

    THAT is simply priceless.

    “How do we have thousands of banks all operating efficently as part of one system”
    ___

    Do you even listen to yourself at all, ever?

    F-E-D-E-R-A-L R-E-G-U-L-A-T-O-R-Y S-T-A-N-D-A-R-D-S

    Moreover, are you arguing that one’s access to financial system commerce should be a function of his/her employment benefits?

    • Nate Ogden says:

      “Moreover, are you arguing that one’s access to financial system commerce should be a function of his/her employment benefits?”

      Are you not aware that in millions of cases it already is? Credit Unions, based on employement. Is that your only means to have a bank account or access to financial services, no, its one of multiple ways individuals can gain access. Is employement the only way someone should be able to buy insurance? No its just one of multiple ways to get a policy.

      Just like 401K plans sponsored by employers are more efficent in regards to fees then individual IRAs, group policies are more efficient then individual policies.

      Are you keeping up?

  10. Nate Ogden says:

    BobbyG I should have made the statement more simple so you could grasp it. The Fed system that allows thousands of banks to operate efficentyly is not different then the EDI standards of healthcare, just a smaller data set. If Thousands of financial institutions can operate why do we need single payor or to reduce the number of plans?

    Now can you keep up?

    • BobbyG says:

      All you can do, in the end, is insult virtually everyone with whom you disagree.

      At least I can count myself in good company on that point.

      • Nate Ogden says:

        how was he insulted? Any time someone is corrected its an insult?

        You fail to make the distinction between people that I disagree with and people that make factual mistakes advancing their political cause. If you could ever carry a factually accurate conversation you would see the difference.

        I notice no one is discussing the HSA and FSA funding? Or the individual premium pre-tax. The three mistakes from a day or two ago were never disputed, I was just mean for pointing them out.

        Why is it so many simple facts that are easily found online are misrepresented here? And why are you so sensitive about having them corrected?

        • BobbyG says:

          C-O-N-D-E-S-C-E-N-I-O-N

          Look it up.

          to recap

          “your lack of experience”
          ___

          I find that insulting to him and his work. It’s by now your well-documented M.O. here.

          At least we can check out JD’s chops.

          http://www.jdkonline.com/

          Where’s your CV? List of publications? I love how you assume the self-appointed mantle of Mordant Correctionist-in-Chief here.

          • Nate Ogden says:

            List of publications? That’s an interesting measure of one’s qualificaiton. If I actually do something for 20 years I am not qualified. If I write alot about something I have never done I am qualified?

            What is his experience in designing, managing, and being accountable for health plans? If he has never done those things how can he know what will and will not work?

            There are a few things I know very well, when someone that does not know those things well misspeaks why would I not correct them?

            Lets take for Example Ezra Klein and his HSAs are sexist rant. Ezra thought HSAs discriminated against women becuase women have more annual preventive health needs. He apparetnly wasn’t aware these were already covered and usually at no cost, this was pre PPACA. So Ezra says we need to change HSAs because they are sexist, why would we spend time passing a law to fix the sexism of HSAs when he was wrong? I guess this is where I disconnect with liberals, for some reason you embrase the mistakes and continue inspite of them. I find it more logical to get the facts correct and proceed from there.

            Why do we want to pass more laws allowing people to contribute to their HSA and FSA when they already can? JDs need to address that problem is a waste of time, the problem doesn’t exist.

            If he wants to pass laws on the mistaken belief that self funded plans are less efficient why would we want that? Why do you support solutions based on inaccurate facts?

          • Nate Ogden says:

            For example he says;

            “We would change the tax code so that people, not their employers, can fund their own tax-advantaged mix of health insurance and spending accounts.”

            between RR 61-146, simple cafteria plans, and existing HSA/FSA laws what tax code changes? All these options are already offered to the individual.

            When someone says we have to change the tax to allow something that is already allowed that makes me think they have other goals in mind. Why does Ezra really want to create more HSA regulation? To solve a sexism problem that doesn’t exist or something else?

            Does JD really want to give individuals tax parity with employers or maybe just revoke the employer exemption? If we get the underlying facts correct then we can get the real answers.

            You always prefer to go forward with the incorrect facts though.

  11. BobbyG says:

    Ahhh… gotta love Nate.

    “There are a few things I know very well, when someone that does not know those things well misspeaks why would I not correct them?”

    Your acerbic know-it-all partisan attitude tends to negate your asserted points.

    “What is his experience in designing, managing, and being accountable for health plans?”

    Can we verify yours?

    _________?

    http://www.chimss.org/downloadlibrary/doclibrary/Kleinke.pdf

    “…The principal goal of the consumer finance industry is to increase the number of transactions. By contrast, the principal goal of the health insurance industry is to slow down transactions or lose them altogether. Anyone who believes otherwise is ignorant of the central metric by which a health insurer is judged by Wall Street: its “medical loss ratio.” This accounting term describes the percentage of the in- surer’s premiums paid out in medical claims. The lower the medical loss ratio, the higher the insurer’s profits and, in turn, its stock price. The conflict between this metric and the other business objectives of an insurer is the active fault line running beneath the entire health insurance industry. Insurers must simultaneously please their members and providers with better service (which implies more and faster claims payments) and their employer-customers with lower medical costs (which implies fewer and slower claims payments). Given which constituency pays the bulk of the industry’s premiums, is it any wonder which one wins? If this were not the case, then the industry would not have lobbied so uniformly and furiously against all of the thirty-day claims payment rules proposed by numerous states. And, if this were not the case, the large insurers would have gotten together in the 1980s, when the large banks did, and created a uniform and open transaction system that everyone could use, at every point of care in the United States. After the installation of such a system, every provider then—and everyone with an Internet connection today—would have simple and secure access to the health insurance equivalent of an ATM, through which we could track the status of all of our transactions in real time…”

    Yeah. That was 2005. Change some aggregate numbers and some names, not much has changed (and the status quo peeps are doing their best to see that it stays that way).

    But, hey, what does Kleinke know?

  12. steve says:

    Way more than 4 million cannot afford health care insurance, unless you mean mini-med plans.

    Steve

    • Nate Ogden says:

      I have done the math on here numerous times Steve, only 2% of the population is uninsured becuase they can either not get accpeted or afford insurance.

      The rest are uninsured by choice. There is a reason the media never explains the numbers to you.

  13. CMS did what they do every year: Provide extra detail for recent years and add intervals between earlier, older years. Moreover, you imply that they attempted to deceive in the way they charted the data, yet no such chart appears in their article!

    Please have a look at our blog responding to your Wall Street Journal op-ed, a similar version of this blog. http://healthpolicyforum.org/post/myth-runaway-health-spending-crisis-really-ending

    • Nate Ogden says:

      “with no negative health consequences”

      How do we define this? I have hoped we reached a point in the discussion where we all know we need to accept some negative health consequences in order to afford a better system all around.

      Is a cancer patient dieing 3 months sooner becuase they were denied a $100,000 per month experimental treatment a negative health consequence?

      We all need to be more aware of how we speak to the public and the promises we make. Unlike Cleveland Clinic claims every life does not deserve world class care all the time. As long as this is the goal we are not going to be sustainable.

      On a smaller scale is forcing someone to take the generic version twice a day a negative compared to allowing them to fill the ER version at 5 times the cost? While the ER will have better complaince and be better treatment its not at 5 times the cost.

  14. Great article showing that Spinning (by the right and the left) is the most practiced sport in DC.

    Now, if everyone could just stop calling it “Healthcare costs” and start using the real name “Healthcare Prices”, it would be great.
    No one knows what a cost of anything is, not the hospital administrator, not the doctors and allied personnel, of course not the patient, and particularly not the government.

  15. John Ballard says:

    @Bobby G I admire your tenacity, but dealing with Nate is an exercise in futility. He really doesn’t get it, so I make it my business to keep out of the threads any time I see the name (this time being an exception). I’ve noticed, however, that he is a diligent student and does a lot of studying. His resources are much better now than, say, a year or two ago, and he makes more good observations. I notice he even cited Enthoven a few days ago in another thread. Keep up the good work, but don’t waste a lot of valuable energy with this guy.
    Carry on.

    • BobbyG says:

      I hear ya, John, and, yeah, I know. In fairness, he has increasingly brought more substance to a lot of his comments lately, but his reflexive and juvie ad hominem attacks on everyone tend to nullify him.

      But, it’s just a blog.

      • Nate Ogden says:

        “short for argumentum ad hominem, is an attempt to negate the truth of a claim by pointing out a negative characteristic or belief of the person supporting it”

        “his reflexive and juvie”

        Thank you for using it in a sentenance their Bobby so we all had a clear example of what an ad hominem attack looks like:)

        This would be another right?

        “He really doesn’t get it,”

        I think I am catching on to how civil debate is suppose to work. If your a liberal everything is fair game, Bill Maher. If your a conservative don’t you dare say something we disagree with, Rush.

  16. Barry Carol says:

    I agree with Nate’s comment that large self-funded health insurance plans have very low administrative costs. These ERISA plans are exempt from state insurance mandates, they own their reserves, and they take all the claims risk except to the extent that they choose to reinsure against very high claims either individually or in aggregate. That all said, I think we would be better off if the tax preference for employer provided health insurance were eliminated or at least phased out as part of tax reform that gets us to lower marginal income tax rates and a much broader tax base.

    If employers continue to offer their employees health insurance plans and provide a defined contribution to help finance it, there would probably be a much greater interest among employees in high deductible plans virtually overnight. Employees would start to care a lot more about healthcare costs and where they get care while they would probably insist that their doctors, especially PCP’s, help them to make more cost-effective choices. The doctor’s advice could be particularly valuable with respect to hospital based services, tests and procedures both inpatient and outpatient, as that’s where the big ticket expenses are for the most part.

    As an aside, I think Nate has posted many valuable comments here regarding the health insurance marketplace. Since he has worked “in the trenches” for years, I appreciate his insights and I’m glad he is willing to take the time to comment though I recognize that his communication style sometimes makes people uncomfortable. Keep the comments coming Nate. I appreciate them even when we disagree.

    • Nate Ogden says:

      I lost the original post, anyways quick question, with lots less explanation, for those that favor eliminating the employer write off.

      When I do the math all they pay is FICA & FUDA, wages are still a write off. So they would pay 8% more then what they pay now.

      If the employee still keeps their section 125 favorded status though then the employer saves the FICA and & FUDA so you have accomplished nothing….

      …except we know from experience if you give employees the cash millions will choose to pocket it and go without insurance. Any additional tax revenue will come at the expense of more uninsured.

      Anyone that supports eliminating the dedcution please pencil out for us how we benefit from doing so

  17. Barry Carol says:

    Nate –

    I’m sure you know a lot more about this than I do but here’s my take on employer provided health insurance whether it’s treated as taxable income to the employee or not.

    When a new employee joins and becomes eligible for health insurance either immediately or after a waiting period like three months, if he doesn’t sign up for coverage when it’s first offered, he will have to pass underwriting if he wants it later unless he can show that he had alternative coverage such as inclusion in his spouse’s plan. I also think an employer could only offer the defined contribution if the employee signs up for the employer’s health insurance plan or one of the offered options if there are more than one unless he has creditable alternative coverage.

    Separately, without an insurance mandate, there are a number of alternative approaches to induce people to buy health insurance. Aside from subjecting them to underwriting later if they fail to buy it when first eligible, they could be charged more for each month that they delay signing up which is the way Medicare parts B and D work. They could be required to pay up to, say, three years of premium for the time they went without insurance because they chose not to buy it. At the very least, they could be required to wait for an annual open enrollment period.

    If they are going to be eligible to buy insurance without pre-existing condition limitations after they get sick, my own preference is to require them to pay the premium for the period they went without it up to three years though they could pay the back premium out over time. At the end of the day, I would prefer to see all benefits except the value of defined benefit pension plans and defined contributions to a 401-K plan treated as taxable income and offset by lower marginal income tax rates and a higher standard deduction. The pension assets will be taxed when drawn down in retirement.

  18. Peter1 says:

    I like the graphs on health care spending but where are the graphs on health care costs and access? If spending has been transferred to patients and away from insurance why is this touted as a success.

    I’m also skeptical of JD’s “conclusions” that do not appear to come from on the ground investigation but ideological dot connecting from a graph.

    “I know full well that auto insurance is regulated at the state level, but that’s a tiny paperwork exercise: the core of the industry operates via national operations and marketing, and a dozen carriers sell highly standardized policies direct to consumers… and the resulting admin costs are miniscule compared to health insurers, whose actual operations are deeply embedded in local markets.”

    JD, car insurance has a very measurable and finite risk valuation with rates determined very easily up front – and at a point car insurers just tell you to, “write the vehicle off”. Would you want that for people? I can also drive a less expensive car to save on insurance, but I can’t buy a less expensive body.

    And while you’re extolling the benefits of car insurance applied to health insurance why don’t you also give us the benefits of a mandate that exists in car insurance?

  19. Matthew Holt says:

    Now it’s clear why JD joined the righties at AEI–they give him his own research assistant! No need to do the ugly calculations himself like he would if he was struggling away at say New America. Where do I sign up?

    • Jeff Goldsmith says:

      Actually Matthew, since, as you know, this is something I’ve been watching for years, it’s a lot more complex than JD indicates, and the narrative a lot less satisfying.

      The ideological foodfight above notwithstanding:

      A lot of the double digit growth came from two sectors of healthcare that were growing in the mid teens for most of the inflation fest that was the 70′s-90′s- imaging and pharma, together roughly one-fifth of health spending.

      Pharma is literally bleeding IP- losing patented, branded drugs far faster than it is replacing them. Branded drugs continue running off for another five years, at which point, according to IMS, generics are 85% of all scripts. Great for consumers, bad for inflation- not market forces at all but a catastrophic failure of discovery which calls into question why we continue letting people deduct their R+D costs. Low single digit growth, and a loss of 60% of the sector’s equity value during the past twelve years.

      The other sector, imaging, appears to have been a classic bubble, driven by progressive refinements of mature technology platforms and a ton of self-referral by cardiologists, orthopedic surgeons and oncologists. That bubble popped in 2005 thanks to DRA’s technical payment cuts and a revision of technical fee office expenses. Cardiologists have come streaming out of private practice onto hospital employment. High tech imaging volume- low single digit or in some markets, negative growth, instead of double digits for most of the previous 25 years.

      Another smaller counter-narrative factor- the decline in population growth from about one percent a year to .7%, compounding the above trends.
      People who are living in parents’ basements have less sex, make fewer families, and we really have choked off immigration, illegal or otherwise, by not having any work for people.

      Finally, and not because of “market forces”, consumers simply ran out of cash and stopped paying their bills, like mortgages. That began a lot earlier than the recession, It’s why physician office visits peaked in 2005, two years before the official recession. They also stopped filling and refilling prescriptions, following up on physician referrals and postponing recommended elective care. The greatest source of bad debts in hospitals and doctors offices: not the uninsured but people who cannot pay the the deductibles, etc.

      And thanks to an inequitable distribution of the cost sharing burden, the people who did the most postponing were the people on the lower end of the income distribution, who had as much as 25% of their total disposable income at risk for cost sharing, because it is unrelated to income. The high deductible health plans only resumed growing in prevalence in 2007, according to McKinsey, after plateauing earlier in the decade.

      Healthcare wasn’t “getting better” as JD said. It, and its users, were getting tired (and probably sicker. . . ). Not market forces, but a tired, bloated industry running out of gas.

  20. MG says:

    I am kind of mystified as to what “slow, steady, cumulative improvements in medical care” have been improving medical care to account for the slowdown in costs or evidence that supports American are leading healthier lives making smarter lifestyle choices since ’02.

  21. Take a look at our Health Sector Economic Indicators briefs which come out monthly and give a timely reading on health care spending, prices, employment and utilization. February is here: http://bit.ly/eJE3yV
    March briefs come out this Thursday.
    Comments welcome!

  22. Aaron Catlin says:

    Mr. Kleinke,

    In your recent post on The Health Care Blog, you made several inaccurate statements regarding the annual release of the National Health Expenditure (NHE) Accounts and the accompanying Health Affairs article, unfairly impugning the Centers for Medicare & Medicaid Services’ (CMS) Office of the Actuary (OACT) and questioning our independence, competence, and impartiality. The purpose of this note is to point out the three major inaccuracies in your post and to correct these misstatements for your readers.

    1. Your assertion that the findings of the NHE are a “false explanation by government economists with a political agenda” is simply incorrect and should be retracted.

    OACT has long provided timely, impartial, and authoritative actuarial, economic, and statistical analysis to the Executive and Legislative branches and the public at large. Independent analysis is part of the core of our mission and something that we take very seriously, and we cannot allow our work to be characterized as politically motivated. The Health Affairs article clearly states that the views expressed were those of the authors alone; further, all peer reviews were conducted either by OACT staff or by anonymous reviewers assigned by Health Affairs. In short, we stand by the article, and no one affiliated with the Administration was involved with writing or reviewing it.

    2. Your accusation that OACT intentionally compressed part of the historical data is not true.

    You state in your post: “Doesn’t it seem odd that professionally competent economists writing for a responsible peer-reviewed journal would compress part of data on the x-axis of their main exhibit without readily noting it?” Your readers should know that the chart you reference in this statement does not appear in the Health Affairs article describing the NHE, nor does it appear in any of the supporting data or information that is published on the CMS website. You created this chart using data from Exhibits 1 and 2 in the article, which are data tables that show spending levels and growth rates for seven years (1980, 1990, 2000, and 2007-2010). The titles of these exhibits clearly describe what is being presented and specifically note that the levels are for “selected calendar years” and that growth rates are calculated “from previous year shown.”

    Publication requirements allow us to present only a fixed number of columns in the data tables that appear in the article. Exhibits 1 and 2 in their current form have been included in all NHE articles since 1988, and they in no way reflect any attempt to hide previous years or mislead the reader as you imply. Additionally, as you note in your blog, OACT makes the entire history of the NHE Accounts (1960 – 2010) available for anyone to download from the CMS website.

    3. The main premise of your blog posting—that the government economists who wrote the national health spending article for Health Affairs were “dead wrong” when they attributed the recent slower growth in health spending primarily to the recent economic recession—is incorrect.

    The January 2012 NHE article focused on the growth in national health spending in 2009 and 2010, which were the two slowest years for growth in the 51-year history of the NHE Accounts. As noted in the article, high unemployment, a substantial loss of private health insurance coverage, and relatively low median household income (all of which were the result of the recent recession) contributed to the historically low growth in national health spending in those years. Numerous independent, external data sources, many of which are cited in the article, indicate a substantial slowdown in the use and intensity of health care goods and services, including inpatient admissions, outpatient visits, outpatient surgeries, elective procedures, physician office visits, and the volume of prescription drugs purchases. While we agree that other market factors, such as those suggested in your blog, may be contributing to a longer-term slowdown in national health spending, that particular point was not the focus of this article and, thus, does not invalidate our findings as you suggest.

    We hope that our clarification of these issues is helpful for the readers of your blog and trust that any future discussion of OACT’s work will reflect a more accurate depiction of our impartiality and technical competence.

    Respectfully,

    Richard S. Foster, F.S.A., M.A.A.A.
    Chief Actuary
    Centers for Medicare & Medicaid Services

    Stephen K. Heffler, MBA
    Director, National Health Statistics Group
    Office of the Actuary
    Centers for Medicare & Medicaid Services

    Aaron C. Catlin, MSM
    Deputy Director, National Health Statistics Group
    Office of the Actuary
    Centers for Medicare & Medicaid Services

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