POLICY: Why health care costs so much

This one is the cross-post from Ezra’s blog yesterday.  I was going to do something different last night, but the wind was right and so I went paragliding instead! And it was great! I will have more on the FDA later today or tomorrow

Health Affairs (the essential peer reviewed health policy journal) has an article from the very well respected Center for Studying Health System Change (HSC) which announces that the decrease in the increase of health spending has stalled (here’s the slightly more digestible press release). No kidding, the press release starts off with this line. See if you can get the gobbledygook here:

"The reprieve from faster-growing health care costs stalled in 2004 as costs per privately insured American grew 8.2 percent"

The good news is that nominal GDP growth  (real growth plus inflation) was 5.2% in 2004, so health care costs (the 8.2%) were less than double that. So in the bizzaro world of American health care, it’s still something of a success when health care is expanding only are only a little under double the rate of the rest of the economy or less than three times the inflation rate. That’s why health care takes up 15% of the economy now when it was around 5% in 1970.

But the two key questions are a) do we have to spend so much more? and b) what are we getting for the money?

The short answer to a) is no, we don’t have to spend so much.  Most other countries spend between 6% and 10% of their GDPs on health care, and some, such as Canada and Japan in the 1990s, actually reduced the share of GDP they spent on health care.  The more complex answer to a) depends on what you think we ought to be spending our money on.  Back in the time of Vietnam and the Cold War the US spent nearly 10% of GDP on "defense".  Now we spend money on frappuchinos and viewing pictures of Paris Hilton on-line. These are all political choices, and it’s clear that Americans view medical care as to some extent a luxury good that they are happy to spend money on. In her book Medicine and Culture the late Lynn Payer described the difference between the British stiff-upper lip, the French consternation about balance in the liver, and the American desire to operate on any patient who’d lie still for a moment, and she ascribed most of the difference in medical practice, and thus costs, to culture. More recently Uwe Reinhardt has shown that it’s not just culture but also prices — we pay our health care workers and supplier more than foreigners do and that’s a big factor in our overall larger costs.

The other factor that allows us to spend so much more is that there is neither a competent market mechanism that stops us spending too much, nor a central budget authority doing so. Market mechanisms work in one of two ways, either on average we just can’t consume more (i.e. pictures of Paris Hilton) or we can’t afford to all consume as much as we might possibly want (i.e. we can’t all afford Prada dog-caddying purses or whatever Paris carries her dog around in). In health care our ability to consume is essentially limitless, especially if we’re sick, and usually some other sucker is paying the tab. So we are dependent either on the producers of care to say "that’s enough" (which is the British stiff upper lip approach which results in what Americans call rationing and Brits call compassionate care for the sick and elderly), or on the sucker that’s paying the tab to cry "Uncle!". Briefly (and this is a much more complex subject), because of our diffuse system of third party payment, none of the said suckers have either had the ability or the will to really reduce payment. And the producers here have always known that putting up their costs will result in someone ponying up. Even though as the prices go up more people get excluded out of the system on the margins, those who can stay in it will more than make up the financial difference. So costs go up, as we do more things with more technology at a higher price. And because not everyone is in the system, and there’s not one universal pot of money or line-item budget, or no effective consumer pricing mechanism (and there can’t be for reasons that I wont go into here), no one is there to cry "Uncle!". Of course in other countries that’s usually the job of the other cabinet ministers who say things like, hey if you put all the taxes towards health care there’s nothing left for education, roads, invading Iraq or whatever. When Congress votes on a new healthcare bill no-one seems to care too much about that bottom line, as the Medicare Modernization Act cost fiasco proves. Note that this is not how Walmart governs relations with its suppliers.

The second question is harder to answer. In some ways it’s easy to say that we don’t do as well as other countries on several outcomes measures and that we’re not getting our money’s worth.  On the other hand several of the things that used to kill people are now relatively easily surmountable — at a cost.  And then there’s the paying for comfort issue.  It used to be that if you had real heart trouble, you needed to have your chest cracked and have a full CABG.  No fun.  Now getting a stent put in is a relatively painless procedure that they don’t even put you to sleep for. Does that lower the bar on the decision to do invasive cardiology? Indeed. Does it cost more for the payer per individual? Probably, as in the end many of those stent patients need a by-pass anyway. Does it cost the payers and society more overall? You betcha. And the parking lots outside the cardiologist suites are filled with physicians’ Porsches as are those outside the executive offices at J&J and BSC.

Is that a good or a bad thing?  Complex. In aggregate the cheapest thing is to let the heart (and therefore patient) go when it’s time, but we’re never going to do that. So should we restrict procedures to only those in real trouble, and only give them a CABG?  Fine if you say so, but let me ask you two questions. What do you define as real trouble?  And would you rather have a stent put in while you lie there listening to Lite jazz, or have your chest cracked?

And that uncertainty is what drives our system and drives that cost barometer up.

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11 replies »

  1. Thank goodness that someone finally flipped the common sense switch in congress about subsidizing Viagra.
    HMOs also market to the young in hopes of creating magic revenue streams, while raising fees to cover nebulous “technology” costs (mostly paying for administration and incompetence rework). The mission of recruiters is to hire people who will make “business decisions” – which has led to the absurdity that skilled people are screened out from jobs that require their skills because their bias toward their skill might inhibit them from making pure “business” decisions.
    HMO leadership is setting this tone, but they were hired for their ability to grow profits. Ultimately, the responsibility lies with the physician shareholders who hire the leadership that will help them get rich. There are too many insulating layers between these physician shareholeders and the marketing department (and the HR recruiter with marching orders) to trigger any sort of crisis of conscience. Instead, the organization is saturated with cynicism because there’s no way to miss that they work for an employer who is hardselling the young, offloading the old, and hiring business weenies to run the whole show.

  2. Tim,
    I don’t like the government handling anything, but unfortunately what I’m seeing in the insurance market suggests to me that insurers are not capable of creating a competitive market themselves. What is killing us now is that because every state regulates differently and there are tons of insurance pools, insurance companies can stack the deck in favor of the young and healthy or the largest pools and make it up with middle class folks like us. There is virtually no limit on their ability to raise premiums or requirement for them to cost justify the raises. If we had one market and consumer-friendly regulations consistent throughout the U.S. we might see some actual competition and focus on cost control. 10 years ago I didn’t know anyone who didn’t carry insurance. Today, I have several middle-class friends who are praying not to get sick because they’ve dropped insurance. The current system is broken.

  3. Great news. The House just killed coverage of Viagra in Medicare and Medicaid. Hopefully the Senate will get some common sense too. Believe it or not I’d support loss of Viagra coverage from all insurance premiums. I’m sorry for guys with sexual dysfunction, but it isn’t a life or death matter and those of us struggling to pay for insurance coverage don’t deserve to see our premiums rise for elective prescriptions. I am definitely an advocate of the “make them pay to play” mentality when it comes to Viagra and other ED drugs. Affordable health care requires some common sense decisions like that (and when it comes to women’s benefits the policies have always been bottom line focused). After paying for birth control pills most of my adult life, because they were considered “elective” drugs (even though not having children cut my medical costs significantly), I have no problem watching the guys get their benefits cut.

  4. Sue, I too am self employed with the same insurance options as you. And I agree with your assessment. I did not mean to imply that there is not room for considerable improvement. What we have now is a very heavily regulated industry with little thought as to the big picture. It seems to me that the biggest cause of many of the problems you mention are not the result of the “market”, but the result of the actions of politicians and regulators. Moving to a national health system will only put more into the hands of politicians and regulators.

  5. Tim, until I left corporate life and started my own business I shared your beliefs. People who thought there was a health care crisis were just hangers on who felt they should be “entitled” to free healthcare. If we actually had a consumer-driven health care market I’d still support that view, but we don’t. We have a market where the costs of those who can’t pay are being borne by those carrying insurance and paying taxes. The HSA concept is great if you’ve a plan that fully covers you except for the deductible, but if the insurance company chooses to exclude coverage for pre-existing conditions you may have a huge expense liability. Middle-aged consumers get hit by that hardest. If you look at $13,000/day hospital bills, few people have the ability to pay for extended care without insurance. I’ve spent 20 years in corporate life accepting a compensation package that included insurance benefits. For the last four years of self-employment I’ve carried my own insurance and paid several thousand dollars in premiums every year. My insurance policy has a $5K deductible and goes up about $600 every six months. The dollars that I’ve spent and my employers have spent on insurance count for nothing in my continued health care. If the HSA option had been available 20 years ago, I wouldn’t be complaining. I’m not threatened by changes in Social Security because I fully participated in the 401K options I was offered understanding that the retirement my parents had wouldn’t be mine. I feel that I had adequate warning and time to save for retirement. The problem with today’s health care is that our system is system is shifting away from easy access to good insurance coverage and unlike the 80s where people with retirement benefits who were close to retirement still got retirement, there is no safety for the middle-aged who many insurance companies don’t want to insure. Those of us advocating an overhaul of the system which provides better protections for the hard-to-insure don’t want a free ride. We just want the same access to healthcare that half the country has. The current market makes it very easy for insurance companies to cherry-pick who they want to insure and to place disportionate costs on people they want to drop. In short, it isn’t a free market. The way health care billing is handled consumers are further divorced from the process. There is a lot of waste in the administrative side of the system and very little market pressure to reduce costs. If we don’t change, we will see more and more people shut out of the system (and many of those people will be middle class, not poor because they won’t qualify for government-underwritten insurance). I don’t mind paying my fair share, but right now my property taxes pay for illegal immigrants who get free health care from our county hospital (who won’t verify immigration status to protect the illegal immigrants’ rights which eliminates their ability to apply for federal funds set aside to offset this), my insurance premiums pay for the higher rates the hospitals charge to cover the uninsured and malpractice claim recipients, plus the costs of being in a smaller pool. My federal taxes pay the costs of programs which fund illegal immigrant care to hospitals who will verify immigration status and file for reimbursement, plus the cost of health insurance for all the government workers and politicians getting access to levels of health insurance coverage no longer widely available in the private sector. And my Medicare contributions buy Viagra for all the male retirees who will be otherwise psychologically impaired without access to this critical drug (even though for years my insurance company refused to pay for birth control pills, citing these as option vs. required medication). In short, right now I’m paying for a ton of people while personally remaining underinsured and overbilled. I have no trust in a system that has evolved to this level of chaos. The “market” isn’t capable of fixing this.

  6. The elephant in the living room here is rationing. As technology and science advances, more expensive therapies become available. As populations age, demand increases. The bottom line is whether government will ration health care in a technocratic way, or the market will be allowed to deal with the situation.
    I think it’s rather cynical to proclaim health care a “right” and then ration that right away to some degree with nationalized health care. The alternative market approach is more honest; make good choices and work hard and become able to pay your health care costs — make poor choices, don’t work hard, and you’ll end up unable to pay for health care you need.
    The socialized approach ensures some level of equal outcome (although the rich will always get better health care). The market approach provides equal opportunity. Both are messy and will inevitably result in individual tragedies. Sadly, life is not fair and mankind’s efforts to make it so have not been very successful.

  7. I can’t tell you about Wal-Mart but I can tell you about 7-Eleven because I have first hand experience in the “Original Pilot Test” of MSAs (now HSA) in January of 1996, the first month of MSA eligibility.
    7-Eleven has 28,000 stores and the people they hire could easily be from the ranks of the unemployed and on Medicaid. They teach people how to get up and go to work, important skills for successful employment. Once these skills are mastered, they may move on to higher paying positions in a small business. In short, these employees are like tourists in the tropics, they come and they go. Sure Senator Kennedy (D-MA) stopped short of manditory health insurance paid by employers restricted to Group Health Employee insurance companies, thank goodness. That stuff is way over-priced and the security is poor, to say the least.
    For example: The first employee at 7-Eleven was a single parent mother with 2 little boys. A group health employee plan was over $400 a month so she was uninsured. MSA Qualifying coverage was $78 a month and the employee paid 100% of the premium. The employer paid $100 a month to the single parent mother, tax free, in her MSA (now HSA), each month, for first dollar coverage for medical, vision and dental expenses.
    The head guy for 7-Eleven Franchise, on the 33rd floor of their property in Dallas, the floor with all the palm trees, was motivated because Senator Kennedy hated MSAs so much. I told him that Hillary Clinton and Senator Kennedy said the MSA was a tax dodge for the healthy and wealthy. He laughed and said, “Jay Lenno has never confused our 7-Eleven employees as being amongst the rich.”
    Around here we like vouchers where consumers may choose their insurance carrier instead of being mandated by Washington Congresspeople to purchase insurance from an employer who only cares about the bottom line and could go broke. I bet Blue Cross of MA would love it though. Remember how Senator Kerry just kept saying he has Blue Cross during the last Presidential election?
    7-Eleven would prefer President Bush’s plan with refundable tax credits, paid in advance, directly to the carrier of the poor citizens’ choice, combined with a tax free HSA. I have estimated how much this will save 7-Eleven and you don’t even want to know.
    So, if you really care about the uninsured problem in America Gregory, jump on board President Bush’s health care agenda and take anything Senator Kennedy says with a grain of salt. Kennedy is just really bitter because his staff always claimed he was the MSAs (now HSA) biggest enemy. It was so funny at the State of the Union address in ’04 when president Bush proclaimed that HSAs were passed for all Americans. The camera went to Senator Ted Kennedy, on Fox News, and boy was he mad. Kennedy tried to repeal the HSA, but got nowhere.
    The uninsured bill is called HR 1872.

  8. Gregory, the problem is that we reward the Wal-Mart business model by shopping there. We reward politicians whose current tax policies incentivize loss of U.S. jobs to low wage countries by continuing to vote for them. We reward lawyers who file malpractice and class action suits by using their services or as jury members awarding large settlements. We reward illegal immigrants by looking for ways to allow them to “cut” in the immigration line and obtain the same level of services that legal residents get. We reward an inefficient healthcare system by paying the prices until we can’t afford it and then expecting others to pay for us when we run out of money. In short, we have no one but ourselves to blame for the current system. Wal-Mart is a symptom of a much larger policy problem.

  9. At Walmart, many of its employees are forced to enroll in Medicaid for health coverage. Sen. Ted Kennedy, Sen. John Corzine and Rep. Anthony Weiner introduced the Health Care Accountability Act which would require states to report annually on the number of workers relying on taxpayer-funded health programs. Kennedy said programs like Medicaid provide a critical safety net for low-income women and children, the disabled, and the elderly and shouldn’t be a profit center for large companies like Wal-Mart. Kennedy and the other bill sponsors estimate that 600,000 of Wal-Mart’s 1.3 million workers do not have company insurance. As a result every worker in America is paying a part of their taxes to pay for Wal-Mart. While the bill stops short of requiring large companies to provide affordable health coverage for their workers it would shed light on their practices.
    Wal-Mart company spokesman Nate Hurst said some uninsured Wal-Mart workers, may turn to state Medicaid programs which were designed to provide medical coverage at very low cost to relatively low-income residents, at better premiums and related costs than even Wal-Mart can negotiate. While Wal-Mart touts Medicaid as an option, it doesn’t offer health coverage to part-time employees until they’ve worked for two years. Full-time employees can’t get coverage until they’ve worked six months. Once they become eligible, many employees find they can’t afford coverage. In Georgia, which was the first state to start collecting data, more than 10,000 Wal-Mart employees are on a state health care program. No other employer in the state had more than 700 employees enrolled in the state program.

  10. There is another bright spot in the Medicare Rx Bill and that is tax-free HSAs. The bill was passed because of the HSA inclusion.
    Matthew didn’t spend enough time on fraud making costs go up in my opinion. I have a friend, retired hospital administrator on Medicare, who was just in an auto accident in Colorado. The other driver was ticketed and State Farm is suppose to pay the bills. My friend has already had one spinal surgery. His passenger, who was also hurt, is on Medicaid. His Medicare customer service is a nightmare, but that’s a different story. Medicaid insists on paying all the bills even though State Farm is admitting they will. Medicaid can’t be stopped. It’s just a government program that has run amuk. Colorado has no fault auto insurance laws. Medicaid says, “We don’t care about state law.”
    Help the poor tax payers and stop a government program that cares little about saving the poor tax payers hard earned dollars.
    Does Medicaid pay this way in all the states?

  11. You say that when Congress votes on a new healthcare bill no-one seems to care too much about that bottom line, as the Medicare Modernization Act cost fiasco proves.
    However, the PricewaterhouseCoopers study that the Community Oncology Alliance (COA) commissioned shows that an estimated $13 billion will be saved from Medicare spending for cancer care through 2013. This is $8.8 billion more than the original intent of Congress in passing the Medicare Modernization Act (MMA).
    There is at least one silver lining in the new Medicare bill. It offers patients benefits benefits they did not have before, some coverage for oral-chemotherapy drugs (full coverage in 2006). Compared to infusional-chemotherapy, oral-dose anti-cancer drugs can make receiving cancer treatment more convenient for patients by allowing flexibility in taking medication without disrupting work or other activities. This can often result in less time (or no time) spent in office-based oncology practices because of the absence of intravenous administration and its related side-effects.
    None of the private-practice oncologists are suggesting giving themselves a pay cut, even though Medicare has boosted reimbursements for administering chemo by 130%. On average, oncologists in private practice made $310,371 in 2002. None of them are thinking of giving a patient oral-chemotherapy, instead of infusional-therapy. I wonder if the extra $130 paid per infusional-chemotherapy recipient per treatment day, helped them to make that decision? (CMS Demonstration Project)
    There has been a recent survey of breast cancer oncologists based in academic medical centers and community based, private practice oncologists. The academic center-based oncologists do not derive personal profit from the administration of infusion chemotherapy, the community-based oncologists do derive personal profit from infusion chemotherapy, while deriving no profit from prescribing oral-dosed chemotherapy.
    The results of the survey show that for first line chemotherapy of metastatic breast cancer, 84-88% of the academic center-based oncologists prescribed an oral dose drug (capecitabine), while only 13% perscribed infusion drugs, and none of them prescribed the expensive, highly remunerative drug docetaxel. In contrast, among the community-based oncologists, only 18% prescribed the oral dose drug (capecitabine), while 75% prescribed infusion drugs, and 29% prescribed the expensive, highly remunerative drug docetaxel.
    What the new Medicare bill did was to remove the profit incentive from the choice of cancer treatments, which were financial incentives for infusional-therapy over oral-therapy or non-chemotherapy, and financial incentives for choosing some drugs over others. Patients should receive what is best for them and not what is best for their oncologists.
    The Community Oncology Alliance (COA) says that the government is reducing payment for cancer care under the new Medicare bill (MMA). However, that’s not what they are doing. They are simply reducing overpayment for drugs. The government can’t afford to overpay for drugs, in an era where all these new drugs are being introduced, which are fantastically expensive.
    The costs of a month’s worth of the new drugs Herceptin and Avastin average $8,000. This is not reimbursement or overreimbursement for services; this is simply the cost of the drugs. The thing about drugs like Herceptin and Avastin is that they are pretty much taken chronically, in some cases perhaps for years. The “old” drugs would typically just be given for six months or so.
    So cancer patients have a choice. Keep overpaying their oncologists and not have access to new generations of cancer therapeutics. Or keep payments in line with actual costs and perhaps have something left over to help pay for the new drugs.
    By continuing the additional $130 per infusional-chemotherapy per recipient treatment into 2006 will exacerbate existing economic and clinical problems instead of resolving them by increasing the temptations for physicians to overuse injectable drugs and promise to aggravate the economic problems Congress attempted to fix with the new law.

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