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POLICY: Not So Fast By Eric Novack

Dr. Eric Novack is an orthopaedic surgeon practicing in Phoenix, Arizona. A frequent contributor to THCB, he has been following the recent debate over universal insurance with a growing sense of disbelief. Eric is also the host of The Eric Novack show, which airs every Sunday
on KKNT 960 AM in Phoenix. You can find an archive of his recent shows here.

Wow.  Wow.  The Rocky Mountain News, in an editorial today, writes what many of us have known for a long time:

As the clamor for a universal (meaning: single-payer) health-care system rises, one factoid needs to be discredited: the notion that the federal administration of medical services would be dirt cheap.

"\[T]he overhead for Medicare," says Dr. Stephen Rous of Brown University, a single-payer advocate, "is 1 percent to 2 percent. The overhead for various private insurance plans (HMOs, etc.) is 15 percent to 25 percent."

Not so fast. Medicare indeed reports administrative costs of less than 2 percent – it claimed $5.2 billion in costs and paid $273 billion in benefits in 2003. But those figures don’t include the costs of paying claims and tracking down fraud – those are accounted for by the Justice Department and other federal agencies, not Medicare. Nor do they include the building costs and taxes paid by insurance companies, doctors and private hospitals.

The Council for Affordable Health Insurance, a free-market think tank, pegged the actual cost of Medicare compliance at 5.2 percent. And since Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700, the gap shrinks even more.

Even the council pegs overall private costs as more than those for Medicare. But as the debate over the proper medical system for Americans moves forward, the least we can ask for is an honest comparison of the sort the council attempted.

At a time when I am becoming skeptical about our ability to have an honest debate about healthcare, it is nice to see occasional rays of sunshine.

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  1. > That, of course, assumes that they are as efficiently
    > run and have a similar cost structure which they
    > probably aren’t and don’t.
    This has been part of my point: some hospitals have operating margins of 15%, but on average it is closer to 5%. Around 1/4 of hospitals have operating margins of zero or less. Some of this may be due to poor accounting for charity care, but there’s also the efficiency question. I think if we get anywhere near universal coverage, the rationale for not-for-profit status at the very least narrow drastically, and I expect many (most?) hospitals wouldn’t have a defensible not-for-profit mission anymore. If NFP status goes away, the weaker institutions would be forced to change, for the better I think.
    t

  2. Your #3 is close to what I’m thinking, but I don’t see a reason to earmark these corporate taxes vis a vis any other corporate tax.
    I really don’t either. I just threw that out as a possible way to win political support for the concept against entrenched hospital interests that will fight like hell to hang onto their tax exemption.
    Conceptually, if the average for profit hospital earns a pretax margin of 15%, for example, (before bad debt writeoffs at contract rates, not chargemaster) than non-profits should have to prove that they provided services (again, at contract rates) to the community and/or low and moderate income people, equivalent to the for profit hospital’s average pretax margin. That, of course, assumes that they are as efficiently run and have a similar cost structure which they probably aren’t and don’t.

  3. Well, Barry, what you’ve said is certainly better than silence. With respect to #1, I don’t see why that should be tax exempt activity. With respect to #2, maybe it’d be ok to allow a tax deduction for whatever they can prove along these lines. Your #3 is close to what I’m thinking, but I don’t see a reason to earmark these corporate taxes vis a vis any other corporate tax.
    t

  4. As a 60-something FP, I would be happy to earn less caring for patients as long as everyone else in the United States earning more than $80,000 a year will
    take exactly the same percentage cut in their take-home earnings.

  5. “If 100% of the people are ‘covered’ what is the mission of tax-exempt healthcare organizations that might justify that status?”
    Darn good question, Tom. I suggest the following possibilities:
    1. Help low income people cover the cost of at least some worthwhile services that are not included in the basic benefits package.
    2. If the basic package were high deductible catastrophic coverage, with a separate policy to cover expenses of between, say, $1 and $5,000 per person offered on a sliding scale, means tested basis, non-profits could write off at least some of the expenses that low and moderate income people might otherwise be financially responsible for.
    3. We could also, of course, withdraw the tax exemption, let those institutions pay taxes on their profits, and treat any proceeds from those taxes as an offset to the cost of taxpayer funded healthcare, akin to premiums paid by Medicare beneficiaries for Part B and Part D benefits.

  6. > it still does not cover 100% of the people
    So here’s a question I have asked, and have been deafened by the silence I get in response:
    “If 100% of the people are ‘covered’ what is the mission of tax-exempt healthcare organizations that might justify that status?”
    Ideas?
    t

  7. And here’s the paper on vouchers….
    http://www.robert-h-frank.com/PDFs/Emanuel-Fuchs.NEJM.3-24-05.pdf

    Jack – Thanks for this link. This is the best discussion I’ve seen on health reform. I especially like the following: (1) preservation of choice which is consistent with our culture, (2) creating a highly visible linkage (value added tax) between the cost of health insurance and the cost of healthcare, (3) it recognizes the need to keep long term care a means tested benefit, and (4) it establishes a mechanism (modeled after the Federal Reserve) to assess costs vs benefits of new treatments, promulgate information about best practices and challenge unwarranted geographical practice variation.
    While I personally would not have a problem with a value added tax (up to a point), I’m afraid that the rate that would be required to raise the revenue necessary to get the job done would be at least 15% and could be as high as 20%. This is because we will almost certainly exempt food and other necessities that consume most of the income available to the poor. The broadest based value added taxes in Europe, I believe, apply to only about 40% of GDP at most which is why their rates are generally so high also. I think we might be better served by a health insurance payroll tax of, perhaps, 10% applied to wages up to, maybe $150-$175K (which I think could raise revenue equal to 5.0%-5.5% of GDP and a dedicated value added tax of about 5% (6% at most) that could raise another 2.0%-2.5% of GDP. We also might have to leave Medicare in place indefinitely but do a better job with respect to cost-benefit analysis of new treatments, push for universal living wills, and try to move to health courts to settle malpractice disputes.
    In any proposed reform, I think it is always instructive to ask who are the losers? The losers among the taxpaying population will likely be: (1) young healthy people who don’t think they need health insurance and either would rather not buy it at all or buy it in the underwritten market where it can be relatively cheap, (2) high income people who would pay more in taxes under vouchers than they (through their employer) currently pay for health insurance, and (3) union workers (and many retirees) who currently have gold plated coverage that is probably superior than what the basic benefit package would include under a voucher system.
    There will also be the challenge of keeping the tax based revenue stream growing sufficiently to cover the increasing cost of healthcare unless we can find ways to bring the cost growth into closer alignment with growth in nominal dollar GDP.
    Assuming we can make the financing work, my bottom line reaction to vouchers as proposed in the article is, even though I’m probably one of those who will pay more in taxes, sign me up!

  8. You are absolutely correct Joe, it is called “Follow the Money.” Above I provided the link to http://www.ThrowTheRascalsOut.org/NYT_Health_Care_Racket.htm.
    Here is another:

    A Health Care Plan So Simple, Even Stephen Colbert Couldn’t Simplify It

    In his State of the Union address, President Bush proposed tax cuts to make health insurance more affordable for the uninsured. The next day, Stephen Colbert had this to say on his show on Comedy Central: “It’s so simple. Most people who can’t afford health insurance also are too poor to owe taxes. But if you give them a deduction from the taxes they don’t owe, they can use the money they’re not getting back from what they haven’t given to buy the health care they can’t afford.”
    See the complete article at http://www.ThrowTheRascalsOut.org/NYT_A_Health_Care_Plan_So_Simple.htm

  9. I think you guys vastly overestimate the lobbying power of docs in the USA. AMA hasnt had any real power since the early 60s. Hell they fought tooth and nail against Medicare but in reality their power was already so diminished by that time they had no chance.
    Less than 30% of docs are members of the AMA. They are largely symbolic these days.
    The real power in lobbying that will stop any attempt at single payer is the insurance industry. Insurance lobbyists outnumber AMA lobbyists by factor of at least 20 to 1. The lobbying budget for the insurance industry is at least 50 times larger than the lobbying budget for the AMA and any doctors groups.
    The real power in DC is insurance, not doctors. Doctors lost their lobbying ability long ago.
    Bear in mind that its absolutely illegal for doctors to unionize.
    BTW, the SEIU 1199 union that is fighting spitzer’s healthcare reforms in New York is NOT a doctors union. Look at their membership list, you wont see a single doc listed. Its all nurses, lab techs, and other ancillary hospital personnel.

  10. “With all due respect, no matter how you choose to spin it, the data does not demonstrate that the US compared with the rest of the world today, a “success and competence of the U.S. health care system regarding life expectancy and infant mortality.””
    Jack, in your continued zeal to “first try to disagree” with me, you fail again to think about what I write.
    My earlier comment nowhere compares the U.S. performance to other countries except to note that there are important differences in data gathering with respect to infant mortality.
    Ironic that you immediately spin the OECD data to suit your agenda.
    Example?
    “From the same OECD data cited above, comparing 1963 and 2003; Infant mortality is higher in the US than any other industrialized nation in the world, twice that of Sweden”.
    Jack, in 1963, Sweden’s rate was 15.4 per 1,000 live births, US was 25.2 – a difference of 9.8. In 2003, Sweden’s rate improved to 3.1 while US improved to 6.9 – a difference of 3.8, thus the difference was reduced by 61%. This shows neither failure nor poor performance.
    Another example?
    “probably due to a portion of mothers in the 45 million uninsured that are going without prenatal care”
    That’s not in the OECD data Jack.
    Another example?
    “18,000 people who die prematurely because they have no health insurance.”
    Because they have no health insurance? Is that on the death certificate? Anyway, that’s not in the OECD data either Jack.
    But this is boring. It is an abuse of data, not to mentions words, to suggest that the US health care system has failed to perform well because it does not perform better than any other country on these two measures.
    It’s clear that, increasingly, poor behavior has adversely affected Americans’ health over the past 40 years. You seem to agree. It follows that the impact of these behaviors is reflected in our public health data. Those data do not accuse our health care system; they are obstacles that we ask our health care system to overcome. And our system has shown remarkable improvement in the face of this added headwind.
    I understand exactly why you and some others cling to the notion that comparative nations’ statistics on two measures – infant mortality and life expectancy – somehow demonstrate that the US health system is “failing”. Fortunately that’s false. Our system is not meeting expectations and is in need of reform, but it is not failing.

  11. In another blow to the free-marketers, at least in my mind, is an excellent article in the NYT (not my favorite paper) called “The Health Care Racket.” Here are excerpts:

    “Like denial management, however, marketing and underwriting cost a lot of money. McKinsey & Company, the consulting firm, recently released an important report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excess administrative costs, with more than half of the total accounted for by marketing and underwriting — costs that don’t exist in single-payer systems.”
    and
    “And this is just part of the story. McKinsey’s estimate of excess administrative costs counts only the costs of insurers. It doesn’t, as the report concedes, include other “important consequences of the multipayor system,” like the extra costs imposed on providers. The sums doctors pay to denial management specialists are just one example.”

    See complete article at: http://www.ThrowTheRascalsOut.org/NYT_Health_Care_Racket.htm

  12. I don’t reject the motion that they could be wrong, Barry, they probably are! But they could be wrong in the opposite direction as well. In any event, I do reject the notion that if the system does not function exactly as promised from the start, that it can’t be tweaked to improve it. We are tweaking the current system on a daily basis; why would tweaking be verboten with a single payer system?
    As to the elimination of co-pays and deductibles, I don’t believe that will pass in the beginning. But they do have very good reasons for their belief, including that they delay needed care and in the long run add to the costs of medicine.
    And I’m glad to hear that about Medicare D. Instead of a $780 billion giveaway it is only a $500 billion boondoggle. Reassuring. But I still contend that letting patients simply buy their drugs at the drug store and having them bill Medicare (minus a co-pay) as they did in the past would be cheaper and better than establishing a new industry to add to health care costs.
    Indeed other options could work, but vouchers add another level of administration. I think “simple” is key, and Medicare-for-all is the simplest and less costly. Yeah, opt out of it if you choose, but don’t keep it from the rest of the public. And again; please start your experiments in Wisconsin.

  13. Jack,
    I know you are a staunch single payer advocate and have cited PNHP numerous times to illustrate how such a system might work. I want to reiterate just three concerns (there are others as well) with their analysis.
    1. Their estimate of potentially administrative cost is wildly overstated which has already been discussed in detail on this thread.
    2. Their proposal to completely insulate people from out-of-pocket costs by eliminating deductibles and co-pays could drastically increase utilization from already excessive levels.
    3. Their proposed financing mechanism of a 7% payroll tax (presumably on all wages with no cap) and a 2% income tax (which I interpret as a two percentage point increase in all tax brackets) would likely raise, at most, 4.5% of GDP (possibly as much as 5%) which is nowhere near enough to do the job they are proposing. Your home state of Wisconsin has a proposal that includes a 12% payroll tax to replace employer provided healthcare, and critics believe that is inadequate as employer costs currently average 15% of payroll.
    Since nobody can know for sure how any reformed system would actually work in the U.S. with our culture, our expectations, our litigation system, and our provider compensation levels, it is quite possible and even likely that the PNHP authors just might possibly be WRONG on one or more of their key assumptions. In your zeal and conviction for single payer, you seem to flat out reject the notion of that being within the realm of possibility.
    Separately, I note that the Medicare Part D drug benefit, which was much maligned as a giveaway to Big Pharma and insurers wound up costing about 30% less (in both monthly premiums and total program cost) than the so-called experts initially forecast. Yet liberals still contend that government could have provided the benefit even more cheaply with a one size fits all plan. The VA’s highly restrictive formulary is not a valid model and would not be accepted by Medicare beneficiaries.
    I think you should keep an open mind and entertain the possibility that other options (like premium support or vouchers might work better) or, at least, support experimentation at the state level to get some real world experience with what actually works and what doesn’t.

  14. Dr. Thom will like Matthew’s posting today about China’s rural HMO project. It seems that Chinese farmers can do a passable job of UR (Utilization Review) when the see the connection between their premiums and what’s done for/to them. Read it quick before the WSJ puts it behind their firewall…
    t

  15. Let’s see if I have this straight. From the same OECD data cited above, comparing 1963 and 2003;
    1) Infant mortality is higher in the US than any other industrialized nation in the world, twice that of Sweden, probably due to a portion of mothers in the 45 million uninsured that are going without prenatal care because their incomes are too high to qualify for Medicaid and too low to afford insurance; and
    2) Life expectancy is worse than in any other industrialized nation, probably influenced in part by the 18,000 people who die prematurely because they have no health insurance.
    But not to worry. Because since 1963 we and the rest of the world have improved our technology and numbers.
    With all due respect, no matter how you choose to spin it, the data does not demonstrate that the US compared with the rest of the world today, a “success and competence of the U.S. health care system regarding life expectancy and infant mortality.”
    I’d say that as we all have aged, the US has not aged as well.
    See the PowerPoint presentation at http://www.ThrowTheRascalsOut.org/PNHPNovember2003.ppt, slides 81 and 83

  16. > folks have a fairly sensitive BS meter
    > and word gets around.
    The work of Dr. John Wennberg, his colleagues and others on practice variation says that the BS meters fail in some important (even spectacular) ways. Here’s a readable summary.
    > In order for any system to be cost efficient,
    > [Dr Donohue] must be killed. I’ll do it for free!
    Patient walks in and says “On Donohue I saw…” Doc, interrupting, says “Turn off your TV and call me in the morning.” “But, but Doctor! It was on Teeee Veeee! Have YOU ever been on Teeee Veeee?”
    Back in the late 19th century, doctors decided together as a profession that the only medicines they would ever reccommend would be those:
    1) whose ingredients are disclosed, and
    2) marketed only to physicians
    Such medicines were called “ethical medicines”. I think I should like to see this concept resurrected and even expanded-upon. Ethical Talk-Show Hosts. Hmmmmmm. Then there’s the doctors who hawk various supplements (and worse). Donohue should be referred to one of these guys for a colonic purge at every opportunity. They all deserve each other.
    > Our concern is that the documentation requirements
    > to prove I P’ed enough to get P’ed will be so onerus
    > (intentionally or unintentionally) that it will be
    > inefficient and seen as a backdoor way to cut my pay
    > further.
    Well, I note that medical practice has avoided “rigorous” documentation requirements longer than most public-service type industries having a health and safety risk. Ask the leadership of any airline, for example. My wife works at a cheese distributing company and they have one FTE dedicated to tracking lot numbers from plant to retail store. Others implement the GMP (Good Manufacturing Practices) programs, which are documentation-heavy. Her company is just a packer — the actual manufacturers have greater requirements. Then there are electric utilities, auto manufacturing, the list goes on. And it isn’t all bad, is it?
    Documentation is a key feature of accountability, and accountability is a key virtue in the Church of Democratic Proceduralism. All I can say is “Use the Templates” you’re paying so dearly for, and stay engaged in the profession to make the documentation actually useful.
    > The incentive better be there (Medicare better P me
    > alot more than it does now if I am to jump throught
    > the additional hoops)or the good providers will opt
    > out.
    Realistically I don’t think either will happen. The good docs will figure out how to keep on being good and keep the doors open (as you evidently are), and Medicare will probably keep paying about what its paying.
    Healthcare has bumped into the demand curve now. This means there will not be new money flowing in, and the internecine rivalry will become more apparent. Oh, things may get re-jiggered by Medicare on the margins, but there’ll be nothing dramatic unless the panel that controls the RBRVU schedule suddenly decides that every minute of physician time has the same value. I shall watch to see whether the American College of Physicians manages to convince the American College of Surgeons and the Radiological Society of North America of this. Should be more fun to watch than Hulk Hogan vs. Andre the Giant…
    t

  17. Tom
    Even with complex decision making processes like those required for oncology and radiology, patients can sense when a physician is not keeping their interests paramount. I think this is mostly because a physician with this pattern of behavior rarely does it once. The physician who doesn’t give you a pneumovax probably won’t also send you for a test or do some of the other things that the patient’s friends or family has had done. In the 15 or so years of practice, one of the few consistant trends I have seen is that progressively more patients come to me with dissatisfaction over their providers for just this kind of thing. I don’t know, maybe its the primary care perspective, but at the entry level of the system, folks have a fairly sensitive BS meter and word gets around.
    I am however in total agreement with you as far as using groupings of Medicare HMO type of plans in a managed competition model. They are by far the best third party arrangements I participate in, limited only by the congenital distrust, no, not distrust, that has too many negative connotations; let’s just say the proclivity of insurance companies to completely ignore physician input. E.G. we split drug costs in one of our contracts, but the insurer still has not given up any real-time access to information regarding our utilization. “Doctors have never asked it of us before” A leaden bureaucracy of fools.
    Medicare HMO’s give me the most freedom to outcompete my fellows on delivery efficient of quality care.
    I should have been more specifice regarding P4P. Our concern is that the documentation requirements to prove I P’ed enough to get P’ed will be so onerus (intentionally or unintentionally) that it will be inefficient and seen as a backdoor way to cut my pay further. It takes two sides of a sheet of paper to get paid to trim toenails, the certification requirement for ACQA diabetes management are rediculously complex and emphasize the documentation not the actual good the care does. These are examples that cause concern. The incentive better be there (Medicare better P me alot more than it does now if I am to jump throught the additional hoops)or the good providers will opt out.
    By the way, this discussion has never addressed one of the true drivers of overutilization in our system: Dr Donohue. In order for any system to be cost efficient, he must be killed. I’ll do it for free!

  18. There is so much noise about life expectancy and infant mortality in the U.S., a few facts will be helpful. These data are from OECD.
    In 1963, U.S. life expectancy at birth was 70 years. In 2003, it was 77.5 years. That’s an improvement of 7.5 years or 11%. In 1963, infant mortality in the U.S. was 25.2 per 1,000 live births; in 2003 it was 6.9 per 1,000 live births. That’s an improvement of 18.3 or 73%. In the U.S. about half of babies born under 16 ounces are saved. This is also a death rate of 50%. But in the U.S. all such babies are counted as live births – not true in other countries. So there is a difference in the way statistics are kept and which introduces a bias that does not favor the U.S.
    These results were achieved over the past 40 years in which Americans increasingly embraced poor health habits – bad diets, inadequate exercise, inadequate sleep, alcohol & drug abuse, domestic violence, poor maternal health, problems of excessive weight – with all the associated pathologies such as diabetes, joint problems, hypertension, etc, – and any number of other behavioral pathologies that are harmful to health.
    So do life expectancy and infant mortality data show that our health care system a failure? No. They show it’s a resounding success. That the health care system is not meeting our expectations perhaps results because (1) it has been so successful and (2) its high cost.
    Nevertheless, the record clearly demonstrates the success and competence of the U.S. health care system regarding life expectancy and infant mortality.

  19. Sorry Pete, my last response was to your question instead of Tom’s. But remember that I said I was an old geezer. The second thing to go in life is memory.

  20. Tom, you are correct in your surmising. I believe overutilization is a major cost waste, but I believe that most of that overutilization is due to physicians owning their own diagnostic testing devices that are are profitable to USE. So they do it more often than they should. They are cash cows. I don’t have the exact numbers either, but if you looked at all testing outside of THAT arena I believe that 90% is justified and perhaps 10% is defensive. Shoot me if I’m wrong, but after 35 years in the health care industry (10 with a medical device manufacturer and 25 as a cardiac laboratory owner), I have seen far too many abuses to cut any slack here.
    And yes, with every other industrialized country in the world with single-payer of one sort or another, and the their better outcomes and fewer dead bodies on the street, I am indeed a true believer in that system. And that comes from an old geezer on Medicare.

  21. > What I and my partners fear is that P4P actually
    > means non-payment for non-proveable performance.
    This is probably what it will mean for the forseeable future: a documentation-heavy emphasis on process. But this stems from a very common attitude in the sciences and in medicine. I worked for a long while in a radiology research lab at a major university here in St. Louis. My lab director, Dr. G. James Blaine (that’s DSc, not MD), taught me “If you didn’t write it down, you didn’t do it, and if you didn’t measure it, you don’t know it.” What’s changed now is that there’s a way to enforce good documentation practices, and that’ll take some getting-used to.
    We should indeed pay for outcomes rather than process — but outcomes should be normed to the risk-adjusted expected rates in your panel, yada, yada, yada. My personal hope is we get there sooner rather than later. Note that this accepts review by payer/administrators as good. My guess is that the process documentation will still be required even when the emphasis shifts to outcomes. From a research perspective, this makes perfect sense. But as you say, we can’t do it yet. What I say is “That’s no excuse to do nothing.”
    > Even the least discriminating, least educated has
    > been saturated enough in our consumer driven culture
    > enough to sense when services are being withheld or
    > driven for reasons other than their own benefit.
    Very respectfully, you are no doubt correct about this for a good many things — the sorts of things a patient can evaluate, and which tend not to occurr in extremis. This does not include many big expensive and risky things: I’m thinking specifically of situations in Oncology, and I’m positive you can think of more. And what about your geriatric patient example of pnuemovax? Many docs have evidently “withheld” vaccination, but the patients have not known enough to ask for it, or go find a doc who reccommends it. Consider also that patients will shop around for a doc who will give them what they want, especially drugs, PT, time off work, labs, etc. And then there’s the “Do everything you can for Mom!” thing at the end of life. You might be glad if the feeling-guilty children did shop for another doc at this point, but then there is your actual patient lying there.
    What do you think?
    t

  22. Jack,
    I feel like I’m taking crazy pills. (for you Zoolander fans 😉 )
    You didn’t list med-mal in your 4 because it’s not a “major” cost issue. Then you don’t answer the one question I asked, so I’ll post it again, word for word:
    Do you think the minority of physicians who are ordering tests for profit costs the system more money than the defensive medicine practiced (and taught) by virtually every physician currently in practice?
    Since you won’t give a straightfoward answer to the question, I will be left to surmise. You must feel that defensive medicine costs (not major?), are less than “profit influenced testing” costs (major?) for our health care system as a whole. I don’t have numbers or studies, but I would be very, very suprised if that’s true. I would also be very suprised if you think it’s true. Do you think it’s true?
    Additionally, I find your faith in a single payer system spending 15% of GDP, covering everyone, and
    sustaining itself (without having to ration care through canadian style budget starving) as incredible. A true believer you are.
    Pete

  23. 1. The U.S. spends considerably more on healthcare than would be predicted by our wealth as measured by per capita GDP vs other developed countries.
    >>> I’ll withhold on that one.
    2. In general, our population is not sicker than that of other countries.
    >>> We just die earlier and have a poorer infant mortality rate. The 45 million without insurance just don’t get as sick as often (??).
    3. The excess spending relates mainly to doing more procedures and paying considerably more for services.
    >>> Others would disagree. Even http://www.pnhp.org, a clearly staunch single-payer proponent puts the highest waste on the bureaucracy created by the 1500 health insurers. Overutilization is also on their list.
    4. Doctors (both PCP’s and specialists) earn considerably more here than elsewhere, with income expressed as a multiple of per capita GDP.
    >>> Canada has a salary cap of $400K, though I would agree that physician income is higher here than elsewhere. But that often has to do with how many tests they order and profit by. But more Canadian physicians are now heading north than south. The trend has reversed.
    5. While nurses salaries are comparable (relative to per capita GDP) nurse staffing ratios are higher here than elsewhere.
    >>> I’ve heard the opposite, especially with the nursing shortage, but I won’t argue the point.
    6. We pay considerably more for brand name prescription drugs, though our generics range from 10% more expensive to 50% cheaper than in other countries.
    >>> The drug industry is another story. If there was ever a need for socialized anything, this is it. Taxpayers pay for 1/3 the R&D and then pay through the nose for the resulting drugs.
    7. Administrative costs are higher here with underwriting, sales and marketing costs singled out. However, I suspect that much of that infrastructure would remain to market supplemental policies if we ever went to taxpayer financing for primary coverage.
    >>> I would agree that “some” would remain, but at drastically lowered levels.
    8. Doctors who own an equity interest in an imaging center or ASC are much more likely to refer patients to use those facilities than docs who don’t. However, this profit seeking only accounts for $8 billion of the excess spending, according to McKinsey.
    >>> Well, $8 billion here and $8 billion there and, well, you know the rest. But I think it is far more than that.
    9. We actually underspend on long term care (despite all the questionable practices that go on in nursing homes) vs what our wealth would predict we would spend. I think this probably relates to a lack of insurance coverage except for the very poor and Medicare under very limited circumstances. Some $68 billion of LTC costs are paid out of pocket. While the study did not speak to the issue specifically, I think it is quite likely that a significant amount of our excess utilization relates to defensive medicine and more heroic services at the end of life and the very beginning of life.
    >>> I agree with the end-of-life costs being high, and as we have discussed before, I would support a mandatory no-code after the age of 90 unless the family is willing and able to bear the costs going forward. I won’t comment again on the defensive medicine issue.

  24. Jack Lohman writes:
    > What type of system would be better
    > than a properly funded single-payer system?
    To reiterate: something like Alain Enthoven’s policy proposal he has called “Managed Competition” seems to me the best idea in theory. The best way I can think of to get there from where we are would look like “Medicare HMOs for All”. Whether it could survive our political process is another question.
    You are flatly wrong that “massive administrative costs foisted upon” anyone even exist. The costs are not massive, and they haven’t been foisted on anyone. And if you think a government-run system will not try to supervise through documentation the work of docs and others just as the commercial insurers do, you are wrong, wrong, wrong.
    The 1,500 insurers whine is a canard even for a solo doc. I have found it straightforward to get credentialled into any number of insurers, bill them, and even get paid. Stunning! It might be a little tough for the average non-college-bound high-school grad to pull off without any training, but then so evidently are most jobs. In any case, she can be taught to do it, and the evil insurance company’s physician relations reps will help them do it. It has been possible for many years now to bill all 1,500 insurance companys using the same billing form: from a business process perspective it hardly matters that there are 1,500. With electronic billing, it matters still less. Administration isn’t what drives costs in the system.
    What drives costs is utilization. Fraudulent utilization is a problem, yes. Massive? In the scheme of things, probably not (but this does not make individual cases any less disgusting). Plain old non-fraudulent (over)utilization driven by many forces, and great inequities in availability of services are the problems we are facing.
    t

  25. Thanks for the responses. Primes are going to have to take one for the team with P4P just like any other stakeholder in the system. What I and my partners fear is that P4P actually means non-payment for non-proveable performance. Currently Medicare’s information system is so desperately poor, there is no way to accurately gather this data based on claims data. They should start with something simple and easily verifiable, like paying the docs a $10 bonus for each patient over 65 who has not had a pnuemovax. Hell, pay ’em $100, it would save Medicare millions.
    I must disagree with Tom Leith on one point, though. Patients are very, very sensitive to when a physician is not working in their best interests. Even the least discriminating, least educated has been saturated enough in our consumer driven culture enough to sense when services are being withheld or driven for reasons other than their own benefit. They may seem to comply in the short term, but they will quickly seek out another provider once they are out of earshot of their physician.
    I have a career’s worth of experience with managed care plans as a prime and I can tell you that the way to make them profitable is to provide high quality patient centered care. We routinely get “honored” by various insurance companies as being among the highest “cost effective” providers. When you look at the numbers, we are actually fairly high utilizers. What we do well is reduce the “screwing around” that pads so much of the revenue of various organizations.

  26. Jack,
    You might want to check out this study by McKinsey that Ezra Klein linked to on his blog that examines why healthcare in the U.S. is so expensive. I think registration is required, but it’s free.
    The brief summary of its findings are as follows:
    1. The U.S. spends considerably more on healthcare than would be predicted by our wealth as measured by per capita GDP vs other developed countries.
    2. In general, our population is not sicker than that of other countries.
    3. The excess spending relates mainly to doing more procedures and paying considerably more for services.
    4. Doctors (both PCP’s and specialists) earn considerably more here than elsewhere, with income expressed as a multiple of per capita GDP.
    5. While nurses salaries are comparable (relative to per capita GDP) nurse staffing ratios are higher here than elsewhere.
    6. We pay considerably more for brand name prescription drugs, though our generics range from 10% more expensive to 50% cheaper than in other countries.
    7. Administrative costs are higher here with underwriting, sales and marketing costs singled out. However, I suspect that much of that infrastructure would remain to market supplemental policies if we ever went to taxpayer financing for primary coverage.
    8. Doctors who own an equity interest in an imaging center or ASC are much more likely to refer patients to use those facilities than docs who don’t. However, this profit seeking only accounts for $8 billion of the excess spending, according to McKinsey.
    9. We actually underspend on long term care (despite all the questionable practices that go on in nursing homes) vs what our wealth would predict we would spend. I think this probably relates to a lack of insurance coverage except for the very poor and Medicare under very limited circumstances. Some $68 billion of LTC costs are paid out of pocket.
    While the study did not speak to the issue specifically, I think it is quite likely that a significant amount of our excess utilization relates to defensive medicine and more heroic services at the end of life and the very beginning of life.

  27. http://money.aol.com/news/articles/_a/doctors-insurers-butt-heads-over-billing/n20070214111209990010
    Doctors, Insurers butt heads over billing codes: AOL money and finance.
    The cost added to health care due to this nonsense could be eliminated with a single payer system. The insurance industry is rotten to the core. Their political influence is the thing standing in the way of real health care reform.
    As for some of the studies mentioned in many posts one must always consider WHO did the study. Have any of them been done by biased think tanks with misleading names?
    Here is a good example of one exposed biased study that has been used against citizens whose health was harmed due to substandard construction of their new home. This article was written by a WSJ reporter who did extensive research into the validity of the study and the conflict of interest of the contributors to the study.
    http://www.imakenews.com/pureaircontrols/e_article000741671.cfm?x=b8V9g0h,bvtvCt3
    http://www.imakenews.com/pureaircontrols/e_article000732125.cfm?x=b8PcTc0,bvtvCt3

  28. You are right that defensive medicine should be on the list, Pete, but as #5. Surely med-mal is a factor, but it is not the monster driving the health care increases. Malpractice awards have remained steady at 0.05% for the last five years, and increases in rates have more to do with insurance losses in other markets than doctor mistakes. Doctors are just easy prey. I didn’t list med-mal reform because I was only listing the major costs, and I’m glad you caught it. But I have (on other threads) supported a special medical court staffed with retired physicians and nurses. I also support any punitive awards (after economic losses, reasonable pain and suffering and reasonable legal expenses are deducted) going into the health care fund rather than the patients/attorneys pockets.
    And yes, I do believe that profits are a higher motivator than med-mal when in-house equipment is purchased. But that does not apply to those physicians who do not own their own lab.
    I do not believe that 20% is inevitable if we move to single-payer. It hasn’t happened in any other country and they have better outcomes than we do. Do I believe they cut too many corners? Indeed. But keeping it at 15% and covering 100% does not translate to rationing.
    I disagree. The foundation of the problem is that our politicians are bought and paid for by the health care industry (yes, “industry!”), and the $100M in campaign dollars is going to negate anything this dedicated group of bloggers propose.

  29. Jack,
    How is defensive medicine not in your top 4? I’ll ask you point blank: Do you think the minority of physicians who are ordering tests for profit costs the system more money than the defensive medicine practiced (and taught) by virtually every physician currently in practice? I’d like to hear your answer.
    Do you think DrThom’s opinions on defensive medicine and the need for med-mal reform are a diversion? If not, then why isn’t the move to specialty courts one of your top 4 priorities? (I know why it’s not a priority for congress, but I’m not sure why it doesn’t make your top 4). And why do you need to be continually remided of this?
    moving on…
    Re: overutilization. Isn’t this the real problem? If we go to single payer or canadian style or whatever you want to call it, 20% of GDP is inevitable given our current medical culture. (patient expectations included in the definition of culture) If we don’t overhaul the system, we’re going to 20% anyway. We have more health care available than we can pay for. And it will keep getting worse. New diagnoses, new drugs, new procedures, new technology, all of it is the real problem with costs. If we want state of the art to continue, and to extend it to everyone, the system will collapse. So we move to rationing. The word is loaded, but it is what it is. If we don’t ration, we go bankrupt.
    If you don’t believe that now, wait until you see what additional treatments we can offer 25 years from now. I’d love to see a statistic looking at the average number of diagnoses/procedures/prescriptions per 50 year old comapred to 25 years ago.
    To me, the discussion in this thread is important, but largely window dressing. The foundation of the problem is this: How do we decide what beneficial treatments will NOT be provided, and who will make those decisions? That’s where the money is (literally) in controlling costs. As has been stated on THCB several times, the cost of health care drives the cost of insurance. So let’s focus on the driver.
    On a pessimistic note, is it even politically possible to discuss rational rationing? Or is canadian-style “budget starving” the only way it happens?
    Pete

  30. So from all of this Tom, what do you see as the best fix to the system (other than “more of the same”)? I do not favor continued tweaking and leaving the employers and private insurers in the loop, even if you choose to call that a “public” scheme.
    I see as the biggest wastes the following:
    1) The massive administrative costs foisted upon hospitals and physicians to pay for the extra personal needed to deal with the existing 1500 private insurance companies, where the elimination of same would decrease,
    2) The higher reimbursements required to offset the costs of the heavy marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits,
    3)the vast numbers of diagnostic tests that are over-ordered by physicians because they have purchased expensive technology for their office, and
    4) the fraud and abuses, including the nursing home industry.
    What type of system would be better than a properly funded single-payer system?

  31. Jack Lohman writes:
    > It would be wrong to label [single payer] a social
    > choice scheme. Makes it sound like we are just
    > trying to socialize medicine (which single-payer
    > is not) rather than make it affordable and accessible
    > and eliminate its waste.
    It is never wrong to call things what they are.
    A single-payer system is precicely a Social or Public Choice scheme. Any time you want to constrain or guide people’s actions by force of law or through tax policy, you are in the realm of Social Choice no matter whether the subject is tailpipe emissions or healthcare.
    If it is true that people confuse “single payer” with “socialized medicine” (whatever that means) we must find a way to educate them.
    The main thing that is “trashing America’s health care system” and has “succeeded in pushing this nation’s health care costs to 15% of GDP” is overutilization. There are many things that drive overutilization — several have been touched-upon in this thread. And this is what harrumph is getting at. He thinks we spend a lot and don’t get enough for it, and evidently thinks we would get even less for it without the efforts of insurance companies to control utilization. Not that every effort by insurance companies is defensible.
    If your goal is “100% of the population has access and it all costs about the same as what we’re spending now” then you will focus your energy on reforms that control utilization. Opponents will call this “rationing” and howl about “socialized medicine” as they have been doing for at least 75 years.
    So long as you focus with great jealousy on someone else’s “ill-gotten gains”, you miss the big picture. If you want great drugs and equipment, then you will want to pay enough for them to keep smart people engaged. If you want all this to be planned and executed very well, then you will want to pay for great managers the way you want to pay for great doctors. If you want to control costs, you will focus on proper utilization. And if you want people who can’t pay for it to get it anyway, you will socialize risk of illness in spite of the protests. If you want to do all this more or less simultaneously, your program will look a lot like Alain Enthoven’s policy proposal he has called “Managed Competition”.
    t

  32. Posted by Barry Carol:
    “At least John Edwards, in his plan (which Im not that enthusiastic about) was honest enough to admit that it would probably cost an incremental $90-$120 billion per year to cover the uninsured, and we would have to raise taxes to cover that cost. My sense is that his estimate is probably in the ballpark or, perhaps, slightly low, but not too much.”
    Some figures on U.S. Defense funding.
    “Total Funding $419.3 Billion.
    Operations and maintenance $124.3 Bil.
    Military Personnel $108.8 Bil.
    Procurement $79.1 Bil.
    Research, Development, Testing & Evaluation $69.5 Bil.
    Military Construction $12.2 Bil.
    Department of Energy Defense Activities $17.0 Bil.
    This does not include many military-related items that are outside of the Defense Department budget, such as nuclear weapons research, maintenance and production (which is in the Department of Energy budget), Veterans Affairs or the wars in Iraq and Afghanistan (which are largely funded through extra-budgetary supplements, e.g. $120Bi in 2007).
    Military spending relative to other countries:
    Military spending as a percentage of GDP
    United States military budget is larger than the military budgets of the next fourteen biggest spenders combined, and nearly seven times larger than the official budget of China. Military spending accounts for more than half of the United States’ federal discretionary spending, which is all of the U.S. government’s money not spoken for by pre-existing obligations.”
    Gee, I wonder where a good place would be to shift tax dollars from for healthcare? Do you think if given a vote Americans might re-think our focus on endless war?

  33. And let me add that — lumped into all of the waste — is the vast numbers of diagnostic tests that are over-ordered by physicians because (a) they have purchased expensive technology for their office (CT, echocardiographs, etc), and (b) they are profitable as hell even when the excuse of “defensive medicine” is conveniently used. Mostly they are cash cows that add to the bottom line and increase physician salaries. Doctors should be paid very well, but not on the number of tests they order or don’t order. This may only represent 5% (or whatever) of the total, but it is nonetheless 5%, and overuse can result in harm to the patient.

  34. harrumph,
    I think that for the most part we avoided making the mistake again. Yes, there was much talk of the percent of total costs that go to admin, and there was talk of reducing that percent. The implicit assumption in most of the discussions of medical and administrative loss ratios is that when we change from one number to another (say from ALR of 10% to 5%) other things remain equal, so that the result is a 5% reduction in total costs. You are absolutely right that this assumption needs to be made explicit and that it need not be born out in reality. It could be that the administrative expense we got rid of was the part that prevented fraud or encouraged the use of preventive care, and so medical expenses grew even more than admin expenses shrunk, with no net savings or improvement to public health.
    That said, it isn’t dumb to talk of reducing ALR when what we’re trying to reduce is not the part of admin that has an impact on the quality/efficiency of care, but the part that is, as it were, friction in the system. For example, I would argue that eliminating underwriting and broker fees won’t lead to more wasteful medical spending, but will instead simply reduce ALR and thus total costs.
    So, thank you for the reminder, but the discussion above I think was actually pretty sensible and the main points survive when re-examined. We were focused specifically on getting rid of the frictive bits in our current system, the stuff that doesn’t add value compared to a well-designed universal coverage scheme. We also spoke of the need for information technology and other measures which would presumably increase admin costs. It just needs to be made explicit again that the net effect of these and other measures may be to reduce net health care costs and lower the MLR at the same time.

  35. Harrumph, who gives a damn about a “medical loss ratio?” I care about the heavy marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits that are trashing America’s health care system. These are all expenses that have absolutely nothing to do with the providing of patient care. They, and the massive hospital and clinic inefficient billing costs, have succeeded in pushing this nation’s health care costs to 15% of GDP. Over 45 million Americans are without health care and a like amount of Americans are declaring bankruptcy every year because of our special-interest form of health care delivery are being thrown to the wolves. Many of us “single-payer advocates” oppose that.
    There is a better way, and those of us with a comfortable policy need to do some deep soul searching.

  36. Unbelievable. Less than a week passes and the discussion drifts back to this medical loss ratio BS. I’ll just repost my previous comment. Nothing against Drs. Woolhandler and Himmelstein–they’re lovely people–but they just haven’t conceptualized this whole “administractive overhead” thing correctly.
    The problem with their argument and that of many single payer advocates (with whom I’m actually quite sympathetic) is not a problem of empirical data. It’s a problem of logic. Unless you’re happy with the words “efficiency” and “savings” being devoid of meaning, you’d better stay away from arguments that implicitly rely on the assumption that administrative “overhead” constitutes waste.
    —-
    This is a great topic, but unfortunately the way it’s framed completely misses the point. This whole idea of using a medical loss ratio as an indicator of efficiency is fundamentally flawed. Efficiency is product divided by cost. That product can be anything you want: larger quantity of health care, better quality, public health, whatever…AS LONG AS IT’S A PRODUCT. The medical loss ratio has no product term. The medical loss ratio is a cost divided by a cost…an accounting artifact that imparts no useful knowledge whatsoever. No matter how you choose to split up the costs (e.g., where do the costs of record-keeping go? the cost of EHR’s? the costs of monitoring responsible use of services?)…numerator or denominator, it makes no difference…you’ll never shed any light on anything important until you start putting products rather than costs the numerator.
    Here’s an example of why the medical loss ratio is so worthless. Let’s say we somehow get 100% of your insurance premium dollar into the pockets of providers. That’s a medical loss ration of 100%. But is the way to improve efficiency really to give more money straight to providers? Is the definition of efficiency “the extent to which we pay the doc whatever he charges for as many patients as he can drag into the scanner?” I doubt anyone would agree with this definition…but this definition is exactly what using the medical loss ratio to measure “efficiency” implies.
    Let’s see what happens when we put a product in the numerator. Let’s use “health,” however you want to measure it. Say HMO A has administrative overhead equal to 15% of revenues and turns $100 of premiums into 50 units of health. HMO A’s efficiency is therefore 0.5 unit health per dollar. Say HMO B spends 25% of revenues on administration and turns $100 of premiums into 75 units of health. HMO B’s efficiency is 0.75 unit health per dollar…better than HMO A (0.75 > 0.5). But look what we’d conclude by taking the medical loss ratio approach, using costs divided by costs: HMO B looks worse because of its lower medical loss ratio (0.75 vs. HMO A’s 0.85).
    Higher administrative costs do not imply lower efficiency. Whether they do or not is situationally dependent and only empirical data from each situation will meaningfully guide you. Expensive good management that invests in, say, an EMR that doesn’t suck will produce more health per dollar than stupid wasteful management (or no management whatsoever…hello Medicare).
    One more time: no outcomes data, no argument. If you want to use the Canadian health care system as a model, argue that the life expectancy (a product) is a direct result of health care spending. Then compare total health care spending, do the division, and STOP. That’s a badass argument you’ve just made. You deserve a pat on the back. But don’t then torpedo your own argument with the massive distraction of bringing up administrative expenses…they’re neither inherently good nor inherently evil.
    If you’ve absorbed the lesson here, you’ll never, ever again trot out the medical loss ratio as a marker of efficiency. Instead, you’ll need to do the harder, logically consistent thing and actually look for markers of health to put in the numerator. In the denominator, that part’s easy: just stick with total costs (like, say, the sum of all the premiums paid to an HMO in a year).

  37. >>> “A single risk pool is about equity in a social choice scheme, not economy of anything.”
    It is agreed that “economies of scale” are not the leading reason for a single-payer system. Efficiency is. It would be wrong to label it a social choice scheme. Makes it sound like we are just trying to socialize medicine (which single-payer is not) rather than make it affordable and accessible and eliminate its waste.

  38. Barry writes:
    > Perhaps Dr. Thom or Tom Leith could
    > speak to [practice expenses] more
    > precisely than I can
    Your analyis has it about right, except that a more-typical rate for outsourced billing and collections is 5% of revenue actually collected. If the firm were doing the coding as well as the billing and collections it could run in the 8-10% range. But this particular arrangement is unusual — almost nobody wants to code from a doc’s exam notes, especially when the doc isn’t right there to ask questions of. Highly-reimbursed specialists can often negotiate a discount from the 5%.
    As you say, even in a single-payer regime, the recordkeeping will still have to be done. The great bulk of the gains from administrative simplification in a single payer system with respect to billing have already been gotten because of HIPAA in our multi-payer mess. And anyone still billing on paper deserves his fate.
    I figure a PCP needs $200/hr here in St. Louis for about 1800 hrs/year to have a $125K personal income, out of which he buys his health insurance and the rest. Of course, Manhattan docs need quite a lot more. What Dr. Thom’s imputed rate of $90/hr for a facility visit misses is travel time and the fact that a 20 minute visit with the patient translates into 30 minutes or so (in a good case) by the time orders and documentation are done. Add in 30 minutes of travel time, and he’s down to $30/hour. You can’t get a plumber for that.
    Now consider that around 70% of nursing home patients are Medicaid beneficiaries, and that Medicaid pays about half what Medicare pays for the same visit.
    It is pretty clear to me that Primary Care is underutilized and undercompensated, both. But the pie will not get any bigger: it’ll just have to be sliced differently. The fireworks should be amusing.
    > What they should do is identify me as an efficient
    > provider, based on something simple like therapy
    > dollars spent per patient visits.
    Sounds like evil managed care all over again, Dr. Thom. Docs shouldn’t have an incentive to withhold services, and patients are in a very poor position to judge the appropriateness of what a doc does. But with a different set of metrics, I’m right there with you.
    Jack Lohman writes:
    > we also need a single-risk pool to
    > maximize the economies of scale.
    A single risk pool is about equity in a social choice scheme, not economy of anything.
    t

  39. John,
    Very good points as usual.
    In thinking about a switch to taxpayer financing, while there a lot of moving parts, there are basically two approaches. The first is single payer which eliminates or at least minimizes the role of private insurers in the market. Some refer to this as Medicare for all. The other is premium support or vouchers which would preserve a major role for private insurers and could be thought of as Medicare Advantage for all.
    Assuming the government sets the minimum basic benefit package that must be offered, the only area where single payer may provide some cost advantage is in greater simplicity surrounding billing because there would be only one payer and one set of rules. As discussed earlier, the cost differences related to this issue are nowhere near what single payer advocates suggest. Any gap could shrink further as real time claims adjudication technology emerges, industry consolidation drives up the market share held by the top 10 insurers, and insurance offerings are streamlined and simplified.
    Assuming the current Medicare system stays in place for the 65 and older population, provider reimbursement rate differences between a Medicare for all and Medicare Advantage for all system would probably not be significant. Insurers would have the flexibility to pay higher rates where Medicare is currently too low and negotiate lower rates where it is currently too generous.
    One area where single payer advocates argue that government could reduce costs is in squeezing out excess capacity of hospital beds, MRI machines, etc. by requiring a Certificate of Need for new facilities and/or forcing the closing of existing “excess” facilities. Putting aside resistance from providers for the moment, it for the public at large to accept this, there needs to be an honest assessment of the likely impact on wait times and access to care. Only government (as opposed to insurers) could even consider doing this as part of its “efficiency police” role.
    An easier mission for the government efficiency police would be subjecting new drugs and devices to rigorous cost / benefit analysis to determine whether or not to pay for them. If the decision is to not pay for them, people could, at least in theory, pay for them out of pocket.
    In reading through the Physicians for a National Health Plan proposal, my reaction is that they are wildly overestimating the potential savings from lower administrative costs, underestimating the magnitude of the taxes that will be needed to finance the system in place of current insurance premiums and out-of-pocket payments by consumers, and hugely underestimating the cost of covering long term care and eliminating deductibles and co-pays, not to mention bringing the 47 million currently uninsured into the system. If PNHP were a stock whose value would be determined by consumer satisfaction and covering its cost out of the revenue its proposed taxes generate, I would be an aggressive short seller.
    At least John Edwards, in his plan (which Im not that enthusiastic about) was honest enough to admit that it would probably cost an incremental $90-$120 billion per year to cover the uninsured, and we would have to raise taxes to cover that cost. My sense is that his estimate is probably in the ballpark or, perhaps, slightly low, but not too much.
    Personally, I would prefer any basic plan be limited to expenses above $5,000 per person. The first $5,000 of coverage could be offered on a means tested, sliding scale basis to people with income up to 300% of the FPL. The rest of the population could buy that coverage if they wanted it (at high cost probably) or self-insure.

  40. jd,
    Good job summarizing the discussion. The one perspective I’d add is that the general public may not view a 3% reduction as anywhere near enough, and that could be a crucial political problem.
    3% translates to a mere $15 monthly reduction to a $500 monthly individual premium and even less for the large majority of Americans insured in group plans subsidized by their employers. In the aggregate 3% is a lot of money but people don’t experience the aggregate, they experience their own situation. Saving $15 – or less – a month is not likely to impress the general public, and with no more than 3% relief to insurance premiums IMO it’s an open question whether the public would support reforms that involve fundamental changes.
    After all, the main source of the rising public discontent with “health care” lies in their own higher costs of insurance – and that discontent has injected real political vigor into this whole discussion for the first time in my memory. Another important concern is the uninsured (tempered by the knowledge that “uninsured” does not mean “unable to obtain health care”). But 3% is clearly not enough to pay for 18% more people in the system, either. So there is a real political problem if the savings are no more than 3%. One response to that problem is for the advocates of a universal system to overstate the value of the expected savings.
    Its also important to keep in mind that the public doesn’t really care if their health care is expensive. The public cares if their insurance is expensive. I think there is a regrettable absence of leadership on this very point – educating the public as to why the difference between health care and health insurance actually matters – so I expect that the public will remain indifferent to the cost of health care. This is why I worry that the eventual political “solution” to the problem of health care costs will be some insurance contraption that may succeed in restoring some of the public’s insulation from health care costs, but will do nothing to reduce or control health care costs. Health care costs would continue to rise and the burden on the taxpayer would continue increase.
    Is there enough money in the system now to pay for all we need to do? Probably, but only if fundamental changes were made to the delivery system and the level of provider compensation. (Yeah, that’s gonna happen.) And of course, the $60 trillion unfunded Medicare liability is hanging over the whole landscape like a vulture waiting to be fed.

  41. Barry,
    “All this talk about “waste” in healthcare reminds me of a CEO years ago who told a group of us that half of the money his company spent on advertising was wasted. The problem was that he and his people couldn’t figure out which half!”
    That’s a good line.
    In the late 1980’s the New England Journal of Medicine published two major studies (carotid endarterectomy and coronary artery bypass graft) that showed only 1/3 of the procedures studied had been performed for unequivocal, medically justifiable reasons. In an accompanying editorial Arnold Relman, then editor of the Journal, acknowledged that perhaps as much as half of all medical procedures are performed for equivocal reasons – but that physicians did not know which half.

  42. Barry, remember that as health care costs went up, so did insurance company profits because they take a percentage. They liked that for a while, until the gigantic backlash. Now they too see the handwriting on the wall and are doing everything possible to at least stay in the game. But no, it is not easy for the current gamers to eliminate the $300 billion because it is they that they’d have to eliminate.
    In addition to all of the excellent points you raised above, we also need a single-risk pool to maximize the economies of scale.

  43. All this talk about “waste” in healthcare reminds me of a CEO years ago who told a group of us that half of the money his company spent on advertising was wasted. The problem was that he and his people couldn’t figure out which half!
    More seriously, advocates for any cause (which Woolhandler and Himmelstein are for single payer) have lots of flexibility to manipulate statistics to make the point they want to make. If it were so easy to take $300 billion plus out of our healthcare system without harming or inconvenincing patients, healthcare payers would have done it years ago.

  44. Another excellent piece “Administrative Waste Consumes 31 Percent of Health Spending” is at http://www.pnhp.org/publications/nejmadmin.pdf.

    “PNHP Co-founders Drs. Steffie Woolhandler and David Himmelstein published this definitive study of the administrative costs of the U.S. health system in the August 21, 2003 edition of the New England Journal of Medicine. After analyzing the costs of insurers, employers, doctors, hospitals, nursing homes and home-care agencies in both the U.S. and Canada, they found that administration consumes 31.0 percent of U.S. health spending, double the proportion of Canada (16.7 percent). Average overhead among private U.S. insurers was 11.7 percent, compared with 1.3 percent for Canada’s single-payer system and 3.6 percent for Medicare. Streamlined to Canadian levels, enough administrative waste could be saved to provide compressive health insurance to all Americans.”

  45. >>> “There is a real chance that we’ll get universal care without reform to the cost drivers, bringing us from 17% of GDP to 20% rather than 12%.”
    jd, I agree with everything you said above, except for your last statement above. I agree that politics could deter a full recovery of the potential savings, because our politicians receive open bribery in the form of “free speech” campaign contributions. (Thus we should all be simultaneously pushing for campaign finance reform, as Peter suggests.)
    All other countries’ bribery is much less and under-the-table. Thus I believe we could cover 100% of the people for 15% of GDP rather than Canada’s 10% for the same. We’ll cut our 30% waste to 20%, but still have a universal system for all.
    For those who haven’t seen it yet I would refer you to the Physicians for a National Health Program at http://www.pnhp.org/facts/singlepayer_faq.php.
    >>> “Aside from much greater use of information technology, ……”
    Barry, you are absolutely on target with this assessment. I do believe the affected interests are going to be kicking and screaming, but I hope it happens soon.

  46. jd,
    Excellent distillation and analysis. I’m also watching the situation in New York closely and am still hopeful, but you are probably closer to it than I am.

  47. There is a real chance that we’ll get universal care without reform to the cost drivers, bringing us from 17% of GDP to 20% rather than 12%.
    I don’t think there is a real chance this will happen, I think this is exactly what will happen.

    Again, Dr. Thom, I agree with you 100%. Let’s say we move to a universal system along the lines jd described consisting of a couple of different plans coupled with supplemental insurance that people could buy on their own. Let’s also say that we finance most of the coverage for the broad middle class with a payroll tax, probably in the 13%-15% range. We could assume that Medicare stays basically as is, and care for the poor and near poor is financed mainly be progressive income taxes on higher income people (defined as the top 5%).
    As people see, in a transparent way, how much they are paying for healthcare, understand that it is crowding out wage growth and their ability to buy other things that they want, and learn of the waste and fraud (like overutilization in nursing homes, etc.) and the broad geographic disparities in Medicare spending per person (Miami vs Minneapolis), they will come to conclude that the value proposition is poor and will agitate for reform. Healthcare spending of 20% of GDP would likely be a breaking point, in my opinion. Remember that total federal taxation has averaged 18% of GDP since World War II and peaked at slightly over 20% in 2000 during the Internet boom.
    Three prior examples of reform driven by either crisis or outrage are the following:
    1. Proposition 13 in California in 1978. Property taxes were being driven skyward by inflation fed increases in house prices, and property taxes, at the time, were rising far faster than homeowners’ ability to pay them. At the same time, politicians did not have the courage, honesty or decency to actually vote for theses increases; they were just being driven by a formula.
    2. Federal Tax Reform – Same thing here. Historically high inflation rates were driving nominal dollar wages up without increasing purchasing power. Taxpayers were moving into ever higher tax brackets without politicians having to affirmatively vote for higher taxes. Starting in 1982 and culminating in the passage of legislation in 1986, we got broad based reform, including annual inflation adjustments to the tax brackets to end so-called bracket creep.
    3. Social Security reform in 1983 – Again, thanks to historically high inflation, coupled with benefit checks rising in lockstep with that inflation, the “Trust Fund” was starting to look like it might be close to running out of money to pay benefits. A Commission led by Alan Greenspan proposed a package of reforms including a gradual increase in the retirement age (beginning in 2003), a series of payroll tax increases (over the next six years or so) and other tweaks to fix the problem (or at least so they thought).
    Aside from much greater use of information technology, I think doctors (and hospitals) are going to have to accept P4P metrics as well as pricing and quality transparency. Lawyers are going to have to accept health courts. Insurers will have to accept universal coverage, community rating and pricing transparency. Drug and device manufacturers will need to be subject to rigorous cost-benefit analysis to determine what will and won’t be paid for. Consumers will have to give up the tax preference for employer provided healthcare, accept higher taxes (probably) to switch to a universal system, and take on higher deductibles and co-pays (perhaps means tested). The better off elderly will have to pay more for their care, and, perhaps also accept higher (means tested) deductibles. I’ve said before that doctors drive virtually all healthcare costs. Therefore, they should provide the leadership for reform but recognize up front that they have to take their fair share of the hits (P4P and transparency).

  48. There is a real chance that we’ll get universal care without reform to the cost drivers, bringing us from 17% of GDP to 20% rather than 12%.
    I don’t think there is a real chance this will happen, I think this is exactly what will happen. The question I have is, once we have universal coverage what conditions would have to develope before reform to cost drivers take place. Is it a % of GDP that needs to be reached? a real change in foreign purchases in dollar denominated assets? thoughts?

  49. Ugh, I really shouldn’t comment when I’m sleepy (it’s 1AM on the East Coast). Total expenditures are now a little over $2 trillion, not $3 trillion. And the percentage of GDP is closer to 16% than 17%. Everything else I said is flawless. Carry on.

  50. Jack, John, Barry, everyone:
    I think we’re getting closer to agreement on a few points, and I hope it doesn’t get lost in all the back-and-forth. Let me see if I have it right:
    1. The direct administrative savings from a move to single payer will amount to 1-3% of total healthcare expenditures, given that there will still be some administrative costs and private insurers only consumed about 5% to start with.
    2. Some of those savings could be had even if we don’t go to single payer, so long as we standardize basic insurance offerings under a universal care system (reduced costs for underwriting and elibility determination, reduced broker fees, and reduced admin once most people are covered under a few basic plans and only the wealthy and unhealthy have nonbasic coverage). I’m just guessing here, but my bet is that we’d achieve about half the admin savings you’d get from single payer…probably less than 1% of total costs.
    Both the savings and the difference between the two options may not sound like much, but as Jack pointed out, each percentage point of a $3 trillion industry is $30 billion. Nothing to sneeze at.
    So, is the extra disruption to go to single payer worth it to get the extra admin savings? It depends on your priorities, your politics, and what you think the additional consequences of the switch are.
    A few further things about which I think we can agree:
    3. The major savings to be had from any reform, single-payer or otherwise, is in reducing fraud, waste, gaming, lack of timely preventive care, and failure to follow best practices (when these exist).
    4. After the managed care backlash of the late 90s, insurers are not well-positioned to be the efficiency police: their market power is limited; providers immediately seek to undermine the measures they do implement whenever these involve sticks rather than carrots; and the public will not tolerate additional cost control measures that come from insurers when these appear to deny care, regardless of what the statistics say about the effectiveness of that care.
    Where does that leave us? Pay for performance? Vastly improved use of information technology? Government intervention to take the role of the efficiency police from private insurers? Some of each?
    We all know that the real problem with any reform is just this: to get our expenditures from 17% of GDP to, say 12% will mean that hundreds of billions of dollars no longer flow to drug companies, insurers, doctors, hospitals, brokers, etc., etc. Each of these groups is going to lobby to keep the money flowing, as we’re already seeing in NY. (Oh, and so much for my hope that SEIU 1199 would show some flexibility in the interest of reform).
    I don’t think that any of us disagrees that we can get from 17% to 12% without harming (in the aggregate) the health of the American people. Personally, I am confident that universal care models that use private insurance and those that don’t can both accomplish that objective, in principle. My confidence comes from the fact that other nations use both systems, and they work. Not perfectly, and perhaps not in a way that Americans would be comfortable with, but from a health and cost outcomes perspective they work.
    But I also don’t think any of us has really answered the question of how you get close enough to the ox to gore it without getting killed. Seeing the reaction to Spitzer’s attempt at reform has got me feeling pessimistic again. There is a real chance that we’ll get universal care without reform to the cost drivers, bringing us from 17% of GDP to 20% rather than 12%.

  51. I suppose that $50B to $100B is not a lot, but it is waste nonetheless. With 15% of GDP compared to 10% of GDP, I’d say it is the industry protectors who are not facing realities.

  52. Jack,
    I think the nursing home abuses and the need for better oversight generally were just as great during the Clinton Administration even though the Treasury was overflowing with Internet boom driven capital gains taxes toward the end of it.
    On the administrative cost / billing bureaucracy issue, I’m sure others are far more expert than I am, but I strongly believe that single payer advocates are overestimating the potential savings by a factor of between 5 and 10 times. There are some savings there, but nowhere near what they think — on either the provider side or the insurer side.

  53. >>> “….. if you read Dr. Thom’s post about rampant overuse of services in nursing homes while skimping on physician reimbursement rates, it does not exactly inspire confidence in government to create rules and provide oversight that will result in an efficient, cost-effective system.”
    The sad part is that I accept every word that he says about nursing homes, and they truly need stronger oversight. They don’t need privatized insurance; they need a good whistleblower law with rewards so the employees themselves hold their employers at bay. But we need that for physician offices and hospitals as well.
    But oversight often takes a back seat when deficits are high, and you can thank George W and his tax breaks to the rich for our current shortage in cash. Don’t mean to get political on you, but it is a major source of irratation.
    Aside from that I just think you miss some of the major deficiencies pointed out; namely our billing bureaucracies.

  54. I read the root article (not the ensuing comments), which is standard right-wing boilerplate and totally misses the point. The Council for Affordable Health Insurance is a right-wing spin factory, but even if their argument was true it doesn’t really matter. Insurer overhead is the smallest component of administrative waste in the U.S. health system. Much more important are the huge staffs doctors and hospitals have to employ to deal with insurance bureaucracy, and the cost to business to administer their own health benefits.
    It doesn’t even have to be a hypothetical academic exercise. These guys could have saved themselves a ton of time by just looking at the administrative cost of Canada’s single insurer, it has overhead of less than 1 percent.

    Jack – As you would say, gimmie a break. According to the California Healthcare Foundation, physicians and clinical services account for 22% of healthcare costs. Physician practice expenses account for about 50% of their revenue. Malpractice insurance premiums are 5 percentage points of that for doctors overall but considerably more for high risk specialties. Office rent, equipment, and supplies probably account for another 10 – 15 percentage points. The 30% of revenue that accounts for the rest of expenses include clinical assistants and administrators that do lots of other things besides bill (make appointments, transcribe records, etc.). Perhaps Dr. Thom or Tom Leith could speak to this much more precisely than I can, but I’ve seen data that suggest that doctors who outsource their entire billing function are charged about 8% of practice revenue. That would translate to 1.76% of healthcare costs (22% x .08). Probably half of that is accounted for by billing on behalf of Medicare and Medicaid patients including sending co-pay bills either to Medicare beneficiaries or their supplemental insurer (if they have one). With close to one million docs practicing in several hundred thousand locations at least, the opportunity to save administrative costs by eliminating clerical personnel is extremely modest at best.
    For hospitals, there are many fewer locations, but the same arguments apply. For most hospitals, Medicare and Medicaid combined already account for half of their revenue. Any billing office efficiencies that could potentially be achieved under single payer would be little more than a rounding error.
    The same is true of nursing homes. Private insurers have essentially no role here. Even long term care insurers send their payments directly to the policyholder’s POA holder who pays the bills on the patients behalf.
    The same is true of pharmacies. With some 55,000 pharmacy counters nationwide, most individual pharmacies have one pharmacist and one or two techs on staff at any given time. There is no opportunity to take cost out of this sector as far as I can see.
    For drug and device manufacturers, administrative costs are not an issue.
    Bottom line: potential administrative savings from moving to single payer look minimal to me. Furthermore, the new swipe card technology that is close to fruition will resolve most of the problems for physician staff to verify insurance coverage without any hassle.
    Separately, if you read Dr. Thom’s post about rampant overuse of services in nursing homes while skimping on physician reimbursement rates, it does not exactly inspire confidence in government to create rules and provide oversight that will result in an efficient, cost-effective system.

  55. Thanks Mr. Leith for you optimism.
    The posts about Medicare/medicaid overutilization in facilities is right on. I have seen it myself. You could multiply my nursing home fees by a factor of ten and that amount would pale in comparison to how much I would save the government by putting the kybosh on these shenanigans.
    Nursing home abuse of Medicare/Medicaid is a huge subject. Suffice it to say, primes will do the right thing if the government would only remove the barriers to that supervision they put in place, such as underpayment.
    CMS knows there is a massive amount of uneccessary services provided in these facilities. In the next breath they say they will pay me 30 dollars for a 20 min visit and throw me in jail if I submit it incorrectly. Sorry, with profession specific expenses, I can’t stay in business at $90/hr, even with no staff.
    What they should do is identify me as an efficient provider, based on something simple like therapy dollars spent per patient visits. Then send me a letter stating,” As an efficient provider, we will multiply your reimbursement by a factor of 3 in the nursing home setting…that is, as long as you are identified as an efficient provider.” If I am too “efficient” the patients will stay away from me, so I can’t bill for services. I’ll be forced to walk a middle road, which is the way it sould be. CMS will be the winner. There is sooooooooooooo much unethical use of these services that paying the provider a few more bucks to appropriately supervise these services will provide an enormous return.
    I’ll do a good job, just don’t ask me to pay for the privilege.

  56. Ummm.. Eric? Are you paying attention here? Any response…? Just wondered if you might have something to say after a post that generated 60+ comments…

  57. A friend sent me the following comment after he read the opening to this link:


    I read the root article (not the ensuing comments), which is standard right-wing boilerplate and totally misses the point. The Council for Affordable Health Insurance is a right-wing spin factory, but even if their argument was true it doesn’t really matter. Insurer overhead is the smallest component of administrative waste in the U.S. health system. Much more important are the huge staffs doctors and hospitals have to employ to deal with insurance bureaucracy, and the cost to business to administer their own health benefits.
    It doesn’t even have to be a hypothetical academic exercise. These guys could have saved themselves a ton of time by just looking at the administrative cost of Canada’s single insurer, it has overhead of less than 1 percent.

  58. John,
    Interestingly, corporations started to proactively scale back their retiree health benefit obligations beginning in 1993 when a new accounting rule required disclosure of the present value of the unfunded liability for retiree healthcare on their balance sheet. Now, starting in 2007 for the larger government entities, GASB-45 requires state and local governments to do the same. The new rule will be fully phased in by 2009 (for smaller government entities). For NJ for example, the most recent data for unfunded retiree healthcare (and pension) liability is pegged at $78 billion, up from an earlier preliminary estimate of $20 billion. Rating agencies intend to use this information as part of the decision making process they go through to develop debt ratings, which, in turn, affect the interest rates that governments must pay to sell bonds. The upshot will likely be that these benefits will be scaled back, either through collective bargaining or legislative action, at least for new employees while existing employees will probably be required to contribute more toward the cost of their health insurance. This is yet another example of the value of transparency.
    I think some of the same pressures could be brought to bear on the Medicare program if its unfunded liability (which is about 5-6 times the size of Social Security’s) receives more visibility and publicity. Unsustainable trends are just that – unsustainable. Sooner or later, the political process will force the legislature to take corrective action as it did with Social Security reform in the aftermath of the 1983 Greenspan Commission findings and recommendations.

  59. Barry,
    “Retiree health benefits, by contrast, are generally paid out of corporate cash on a pay as you go basis.”
    True. Medicare is also pay-as-you-go.
    Yesterday I was reading the 2005 Senate Budget Committee testimony of a Thomas Saving (great name or what?) who is professor of economics at Texas A & M and a Public Trustee of the Medicare Trust Funds.
    Saving testified that Medicare’s estimated pay-as-you-go cost in the future (or, in actuarial terms, the “unfunded future liability”) is in excess of $60 trillion, as in “60” followed by 12 zeroes. To get some idea of the relativity, federal tax receipts for fiscal 2006 are expected to be about $3 trillion. This $60 trillion is the calculated present value of the future cost that present and future workers are now obligated to somehow pay to all present and future Medicare participants.
    Apart from debating whether Medicare-for-all may, or may not, be a better way – will Medicare-for-anyone be viable?

  60. Peter,
    Pensions work very differently from health insurance. In the case of traditional defined benefit pensions (monthly check based on salary level and years of service), companies have generally built up a separate pool of assets (pension fund) to pay benefits as they come due. Assumptions are made with respect to prospective investment returns, salary growth, inflation, etc. to calculate what is called the Projected Benefit Obligation (PBO) and the Accumulated Benefit Obligation (ABO). The former includes future service, while the latter only includes prior service obligations. Companies will make periodic contributions from corporate cash flow into the pension fund to try to maintain 100% funded status or something close to it. In the 1960’s and 1970’s, about 40% of the private sector workforce was covered by a defined benefit pension. Now its closer to 20% as plans have been frozen or replaced with defined contribution plans (for future service) which give the employer more cost predictability. In a defined contribution plan, contributions are made into an individual employee account that the employee owns once he or she satisfies the vesting criteria. The accumulated pool can sometimes be taken as a lump sum distribution at retirement or converted to an annuity which will provide a monthly income for life. It doesn’t have anything to do with the age distribution of the workforce in the context that you are thinking of.
    Retiree health benefits, by contrast, are generally paid out of corporate cash on a pay as you go basis. The same is true in the case of public sector retiree health benefits. The exception is that tax law allows a trust called a VEBA (Voluntary Employee Benefits Association) to be created to pre-fund retiree health obligations for people covered under collective bargaining agreements. Employers could form these for other employees as well, but they would not receive a tax deduction, so nobody does it.
    The other general point about pensions is that costs are much more controllable in that the employer has to agree to any improvements in a plan, and benefits can be cut or even eliminated (for future service only) if business conditions warrant. If the employer goes bankrupt, defined benefit pensions will be covered (up to a cap) by the Pension Benefit Guaranty Corporation (PBGC). Retirees who previously had employer provided healthcare will lose those benefits in a bankruptcy situation except to the extent that a VEBA trust exists to cover them.
    I think the only viable ways to at least partially mitigate growth in healthcare costs are rationing (both implicit and explicit), require consumers to have more financial skin in the game coupled with adequate price and quality transparency tools, and develop IT tools that can track utilization by doctor (since they drive almost all healthcare costs). If doctors thought they risked losing patients because they are identified as high utilizers, they are likely to, other things equal, find safe ways to reduce utilization. Health courts and universal living wills could help them do that.

  61. “I don’t think that physicians have the will or ability to manage this risk either (and I think history bears this out). Much easier to get paid on volume…without regard to cost or quality.”
    Agree, Matt, and it’s also much easier for insurance companies to get paid on volume.
    To be successful at insuring risk an insurer must be able to exercise some choice over the kinds of risks they will insure and the amount they will charge. The risks they insure must be well-defined, stable, and “actuarially” quantifiable. Given these requirements and the continuing erosion of insurers’ ability to define and price stable risks, I don’t think it’s a big surprise that most companies don’t have much appetite left for insuring health risks vs. simply performing admin tasks such as claims. Insurers’ restrictive positions toward health risks both reflect and contribute to the direction the political debate is taking on health care. Wall Street’s opinion about the future of the health insurance business is reflected in the standstill-performance of the big insurers’ stocks -Aetna, CIGNA, Humana, United – over the past year or so.

  62. “Don’t get it big head John. It is a rare instance in which you are right”
    It is certainly a rare instance in which you can recognize whether I may be saying something that has merit because, as you point out, the first jerk of your knee is to “try not to agree”. That describes a person who is pretty tightly wrapped in their own opinions.
    So we’re not making progress? Oh, well.

  63. 1. “We are talking about controlling costs aren’t we?”
    Well, Peter I have been talking about controlling costs. You are talking about making more people pay for them.
    Yes, insurance works by spreading the costs of the few among the many.
    No, making more people pay the costs of the few in no conceivable way constitutes “controlling” the costs of the few.
    2. The question on fraud was whether it would diminish in a government-run program. Experience with government-run programs suggests that fraud does not diminish. My opinion – it borders on comedy to suggest that the government will control fraud better than anyone else.
    3. Your statement about politics was “I also think that Medicare’s/Medicaid’s role is too political and too influenced by bribes to politicians. Change that and you change their mission and performance.”
    Maybe you have ideas that would reduce politics and bribery. Good luck with that. But I think you have the good sense to realize that politics, influence-peddling, petty graft, and bribery will never vanish from any system that involves so much money as health care – whether privately-run or government-run.
    Also IMO, to rest any expectation of change in politicians’ “mission and performance” upon some hoped-for meaningful reduction to government-as-usual politics, is idealistic and not achievable on the planet where we live. And while politics and graft are enormous obstacles to progress, history also shows they can be overcome.

  64. “So Matt, if insurance companies won’t or can’t underwrite health risk – isn’t your statement a good argument for physician capitation?”
    Insurance companies have become great risk shifters and dodgers – some even going so far as to retroactively cancel coverage for those who incur big claims – but poor risk managers (i.e. controling health cost and quality for a given risk pool).
    My statement is a good indication that many large employers don’t believe that health plans provide value much beyond (low margin) adminstrative tasks. And – as jd pointed out – there are solid reasons beyond this why a large, multi-state employer would choose to bear this risk instead of allowing an insurer to.
    I don’t think that physicians have the will or ability to manage this risk either (and I think history bears this out). Much easier to get paid on volume…without regard to cost or quality.

  65. Couldn’t agree more jd – thanks for the explanation.
    I probably should have replaced “faith” with “value”… as there are many rational reasons why large employers self-insure.
    What you have described here is I think really key: “the self-insuring company removes most of the profit from the insurance process…”
    In other words, less risk means less reward! Big employers are catching on to the game.
    While I also agree that health insurance profit is only a small portion of the reason that healthcare costs are the problem that they are, they represent a piece of the pie that doesn’t exist in gov’t run systems (or is inherently re-invested in the system).

  66. “I try not to agree with John, but . . .”
    Perfectly understandable.
    As an old saying might have gone in a parallel universe, some are naturally open minded, some learn to be open minded, others must have open-mindedness thrust upon them.
    If we are perhaps making progress, that’s all to the good.

  67. I try not to agree with John, but in this case I have to. It is for these three reasons that, as long as employers are responsible for health care, the compulsion for maximizing profits is going to drive the entire system toward managed-care-for-all. Physicians had best wake up and smell the coffee. If I were them I’d prefer a Medicare-for-all system and get the employers out of the loop.

  68. Posted by: John Fembup
    “See how the argument goes, Barry? Medicare and Medicaid can’t control their costs because there aren’t enough young people and working people participating in them. If they only had larger populations of younger and working people, they could control their costs”
    Well I don’t see any other insurer controlling their costs either – unless if you mean passing on double digit premium increases every year is cost control, this dispite not insuring the poor and those on Medicare. But bringing in the 20 somethings is what BCBS of NC is trying to do, at least that’s what their ads say. So it looks like they see that as a necessity as well. Isn’t that what insurance is about – bring in low risk to pay for higher risk? In fact I think that’s the way pensions work – bring in the young to pay for the old. Single pay works better at controlling costs which is proven over and over by other countries using it. It does not come without its own issues. We are talking about controlling costs aren’t we? If this system did that we would not be in this discussion.
    “fraud and abuse would also subside”
    Well the fraud from those trying to get medicare/medicaid that don’t qualify. If everyone is covered, no reason for that fraud. As for fraud by providers – happens in single pay as well. I think the fraud by providers is the part of the iceberg under the water.
    “Oh, yeah, and don’t forget to eliminate the politics from federal programs that involve hundreds of billions of entitlement dollars.”
    The pressure on NOT instituting cost controls comes from providers and their lobbyist carpet baggers as well from recipients who don’t want their benefits cut or denied. One losses cash the other access, different issues with different consequences. At least we could get the provider end out of the bribery side. As for bribery from votes, people and politicians will need to understand trade-offs and be prepared for the consequences. Poliicians never want to discuss trade-offs. But I think politicians will be less likely to pander for cash/votes and take the necessary tough stands if they don’t need to dial for dollars and therefore attract better candidates. That’s why public funding for elections is important. Long term goal, not holding my breath.

  69. Dr. Thom —
    I’m implementing the same kind of thing for a doc here in St. Louis. A few things:
    1) It’ll change the skills-mix you need in your support staff. You’ll need someone who can form abstract mental models of the new workflows (plural) probably in terms of the existing paper/physical recordkeeping systems you have now, and get them to teach the other staff. The short-term trick here is to find a person with the right skills. The longer-term trick is to keep her/him engaged and interested enough to stick around. Do not underestimate this. No matter what the sales guys say, it is NOT intuitive.
    2) Related to #1 — it isn’t the beastie that works so much as the people who work it. Just like your paper systems. The difference is you can’t “see” what happens in a computer system, and so it takes a different sort of skill to get the best out of it.
    3) You can come up with a little script for your check-in process that sounds better than an airport check-in. It needn’t be so different from the patient’s perspective than it is now. It’ll be a long time before most patients have a swipe-able card, and there’s no need to make them swipe it in any case. You may well be able to confirm eligibility before check-in off the stored credentials you have, and only have to ask whether anthing’s changed if it bounces. Keep it all a little Wizard of Oz: “Pay no attention to that woman behind the frosted glass!”
    All your workflows should be reexamined in light of the new system’s capabilities AND (many totally unreasonable) restrictions.
    4) I think your “savings” are more likely to come from seeing 1 – 2 more patients/day per doc because of improved productivity than it is to come from aggregate salary reductions of your support staff. You probably will have better performance collecting co-pays, deductible amounts, and straight self-pays. This can help a lot too.
    You may find you are able to add docs without adding support staff. But, see #1.
    If you’re not doing electronic billing already, it’ll drasticlly iprove your cashflow. But I suspect you already are. Nexgen will help you code more correctly, and this will save staff time and improve cashflow.
    5) I am pleased to hear your’re thinking already in terms of better DM for your chronics. One aspect of better DM is getting `em in to see you regularly, so you may find you have more 99213s coming in. And the documentation produced by consciencious use of the system will help in whatever P4P regime takes hold where you are.
    Additionally, I think a good, strong DM program is great marketing for primary care. If you have the Rx module, you might hear of a drug recall on the news at 6, and have your nurse calling your affected patients about it in the morning. This is impressive — imagine: “My doctor called me about it the very next morning!” This is priceless on a couple of dimensions.
    6) You and your whole staff will positively hate it for about six months because it WILL slow you down at first. Then you’ll begin to wonder what you ever did without it.
    7) I am suprprised the depreciation period is not five years.
    Yes, I’m a bit of a cheerleader, and no I’m not implementing nexgen.
    t

  70. matt,
    You write, That most big employers use health plans only for ASO business means – to me at least – that they have little faith in health plans to do anything beyond administration.
    It isn’t about faith, it’s about three things (1) improving cash flow, (2) improving profit, and (3) reducing state regulation.
    Self-funded employer health plans are regulated under ERISA, not state law. This is a huge benefit for the large national or multi-state companies that constitute the bulk of the self-insured.
    On top of that, self-insuring companies get to control and profit from the plan reserves. Instead of going to an insurer, the interest goes to the company.
    Finally, the self-insuring company removes most of the profit from the insurance process. Not all of it, though, because almost every self-insuring company outsources core functions of the plan (like claims processing). These Third Party Administrators (TPAs) make a profit like any other company, but their margins are based on far smaller PMPM revenues since their revenue only covers admin cost and not medical claims costs as well.
    Also, don’t forget that when a company is big enough, it doesn’t really need insurance. This is because it has a large risk pool to smooth out the bumps of high-cost claims so that it isn’t in any short-term risk of having a cash flow (let alone bankruptcy) problem due to medical costs. Long term, there can still be problems, but insurance doesn’t reduce the long-term risk of cost increases…whether private or public. Today’s claims have to be paid either by yesterday’s premiums or tomorrow’s, so long-term cost trends are felt just as much by an employer that self-insures as by one that buys insurance.

  71. Dr. Thom,
    That sounds like exciting, albeit expensive, technology. Best of luck with it. In reading about some similar capabilities offered by doctors at Beth Israel Deaconess Medical Center in Boston, one tricky issue relates to the communication of test results. Some of the doctors disable this feature because they prefer to communicate results, especially if they are not good, in person. At any rate, I hope your system lives up to its advertised capability.

  72. Barry
    Our new EMR system (nexgen) is designed to take advantage of the real time verification that you refer to. To be honest, I voted in favor of an all cash system, opting out of Medicare (I believe we will not be taking any new Medicare patients come Jan 1), but our specialists would have none of it. Initially, the patient will swipe his card at the POS and the receptionist will be able to ascertain the existence and extent of coverage. The challenge will be making the whole experience somewhat more personal than airport check-in while at the same time reducing billing errors which increase my ARs. I hope to save money by boosting productivity and decreasing labor costs through attrition.
    Once the in-office capability is in place, we have purchased a real-time internet capability where the patient can sign on to our website, see my schedule and following the guidlines schedule the appointment for themselves, enter the specifics of their medical condition, enter their insurance info and respond to various messages about the extent of their coverage. There will also be email retreval of lab results complete with pertenent web links and the capability for e-visits. All pretty slick. If it works as advertised, I should be able to take my chronic disease management to a new level.
    If the beastie works, that is. I have never in my life seen medical management technology that has not made my life more difficult. So while I enthusiatically embrace the technology, I remain skeptical.
    Of course, our government penalizes me for improving the outcome of their beneficiaries by forcing me to depreciate a significant portion of this 1.5 million dollar investment over 15 years. Yet for some reason I am doing it anyway, I’m such a sucker. As a capital investment from a business point of view, EMR makes no sense compared to what I could be doing with the cash. The system incentivizes me to simply buy a PET scan and turn the crank; but as I have said, that is not what we are about.

  73. “Value comes from taking on and managing risk (i.e. controlling health costs and improving beneficiary health) for their clients…and not from underwriting away risk (or shifting it to consumers).”
    So Matt, if insurance companies won’t or can’t underwrite health risk – isn’t your statement a good argument for physician capitation?
    How do you think physicians would react to the opportunity of providing value thru rusk underwriting, and capturing all that revenue?

  74. That most big employers use health plans only for ASO business means – to me at least – that they have little faith in health plans to do anything beyond administration.
    Value comes from taking on and managing risk (i.e. controlling health costs and improving beneficiary health) for their clients…and not from underwriting away risk (or shifting it to consumers).
    The largest, savviest purchasers of health insurance have voted, and it seems that health plans provide little value to them.
    We have exactly the health system that we pay for in the US: gazillions of well-compensated ultra specialists, “Top 100” heart center doing 10X utilization of invasive procedures, not enough nurses and primary care capacity, billionaire health plan executives…and 47 million people uninsured.

  75. In the private sector fraud CAN result in jail time if state health care laws are strong and violated and enforced. Doctors are, however, much more concerned with federal Medicare fraud and mail fraud laws. Actual Medicare fraud by patients probably represents less than 2% of all fraud, but I don’t have the exact numbers on it.
    This is probably much more than others wanted to hear, but thanks for keeping me in check John.

  76. “Medicare is the most successful public-private partnership ever”
    Medicare today has tens of trillions of dollars of unfunded future liabilities. That counts as “success” in a government program.
    “if it were not covering only people over 65 and end-of-lifers the costs would not be so “out of control.”
    Indeed they wouldn’t. Having a bunch of 20-somethings in there would control the cost for the over-65’s – and would make them live longer, healthier lives too!
    “If standard policies covered these high-maintenance patients their costs would be much higher than they are.”
    Figures. After all, they’d be government policies.
    “fraud is a function of the providers, not the patients.”
    It’s not either-or, it’s both. And you left out insurer/payer fraud. Other than that, I agree.
    “Fraud will decrease when you move from a private to a govenment sponsored payment system, because the penalties elevate to jail time.”
    Whereas in the private sector, fraud never earns jail time.
    Thanks Jack.

  77. I’ll throw something out there.
    Let’s end the provider – commercial insurance relationship. Why? Because the provider will only charge what the PATIENT can pay and the patient will put tremendous pressure on the insurance company to reimburse the patient at 100% of their cost (or why have insurance in the first place?).
    Let’s examine this technique a little further. Patient comes in the doctors office has to pay 100% (this could vary depending on the practice and procedure) of the charges up front and after services are rendered the patient is given a correctly coded claim to submit to their insurance company for reimbursement.
    Why would this work to reduce spending, costs, expenses…etc?
    Most if not all providers charge “cash / self pay” patients less then patients that have insurance. This is because the providers are getting 100% of what they charge up front with virtually no admin cost. Having patients pay up front would reduce needless medical visits, patients would be more critical of the care they receive, doctors would be more mindful of doing procedures and ordering tests because of the costs to THEIR patient (competition), healthcare charges would be far more transparent and providers would spend far less in admin costs; at least the ones related to insurance. All of this would reduce the patient’s bill and therefore reduce the insurance reimbursement to the patient. Insurance companies would also have to simplify their benefit package, contractual language and over all administration of benefits. In turn consumers would be more proactive in the healthcare they receive and the benefits they pay for. Eventually this would lead to a simplified and more efficient healthcare market.
    The only exception to this rule would be Medicare, Medicaid or any catastrophic instance.
    This is a short version because I do not have the time to go into every aspect, but you guys get the point. I will note that this of type model will never work (now) because as Jack says “follow the money”. Doctors get rich off of insurance companies and insurance companies get rich off the people paying the premiums.
    All right go ahead, rip it to shreds.

  78. You are assuming that converting to a Medicare-for-all system casts it in stone and no further tweaking will be possible. I disagree, but let’s use Wisconsin to experiment.

  79. Actually, Medicaid has millions of children among its enrollees, and they are relatively inexpensive to insure. I believe something like 70% of the Medicaid dollars are spent on the elderly and disabled with long term care (and home care), by far, the biggest single piece of that. Even within the Medicare program, of the 42 million or so beneficiaries, the least expensive (healthiest) 50% of them account for only 3%-4% of the cost of the program.
    Both Medicare and Medicaid, if they wanted to, could make living wills a condition of insurance, at least for the adults. Indeed, United HealthGroup’s Evercare division manages care for frail elderly people under Medicaid contracts. It has living wills for everyone of them, and they tell me that it’s their biggest single cost saver in that division. Efforts to combat fraud in New York’s Medicaid program are pitiful as documented by the New York Times. The magnitude of the dollars spent under these programs give government a lot of market power which, in my opinion, it has not used to anywhere near the extent it could have to control costs, despite relatively meager reimbursement rates for many services, especially within Medicaid.
    I’m trying hard to keep an open mind as I have to do out of necessity in the investment business. It is certainly possible that a single payer system could finance healthcare at lower overall cost than the current system mainly by squeezing provider payments and, to a lesser extent than many advocates think, lower administrative costs. The risks are causing an adverse impact on innovation over the intermediate to longer term in the areas of drug and device development and new, less invasive surgical techniques, plus longer wait times for non-life threatening procedures as demand rises (from the previously uninsured) and supply is constrained or shrinks. We might also find that we don’t have enough primary care physicians to handle their increased patient load. If we try to cover long term care, millions of caregivers who are currently caring for their loved ones themselves at little or no cost to taxpayers, will come out of the woodwork and demand services overwhelming the nursing home and assisted living sectors.
    The bottom line is the evidence from Medicare and Medicaid suggests that government has not demonstrated that it can provide healthcare for all on a cost-effective basis without very significant adverse tradeoffs that the American people are unlikely to accept. I would rather pursue experimentation at the state level and take 5-7 years to get it right than implement single payer (or even premium support) in 1-2 years and get it horribly wrong.

  80. Those are not conflicting statements if you understood my intent, but they could have been made clearer:
    >>> Fembup: “If they only had larger populations of younger and working people, they could control their costs – and fraud and abuse would also subside.”
    Fraud will not decrease because of younger versus older patients. Fraud will decrease when you move from a private to a govenment sponsored payment system, because the penalties elevate to jail time.

  81. Jack Lohman on February 12:
    “But don’t think for a moment that fraud would decrease; fraud is a function of the providers, not the patients.”
    Jack Lohman on February 3:
    “Under a Medicare-for-all system we’d not have as much fraud and overutilization because the penalties for felony fraud include jail time and exclusion from the system.”

  82. Medicare is the most successful public-private partnership ever, and indeed if it were not covering only people over 65 and end-of-lifers the costs would not be so “out of control.” If standard policies covered these high-maintenance patients their costs would be much higher than they are.
    Importantly, if we were to allow employer opt-in and the Medicare service got bad or too restrictive, the employers could opt out.
    But don’t think for a moment that fraud would decrease; fraud is a function of the providers, not the patients.

  83. “Because they deal with the two most expensive and non-revenue generating populations in the country – those populations that insurance companies don’t want and don’t have to bear the cost of.”
    See how the argument goes, Barry? Medicare and Medicaid can’t control their costs because there aren’t enough young people and working people participating in them. If they only had larger populations of younger and working people, they could control their costs – and fraud and abuse would also subside. Oh, yeah, and don’t forget to eliminate the politics from federal programs that involve hundreds of billions of entitlement dollars.
    I think that about sums up the logic.
    Logic aside, I think the government will step in, as I’ve already said. I hope people really want what they are asking for. I think we’ll get it.

  84. Posted by: Barry Carol;
    “Since neither Medicare nor Medicaid, both of which are, in effect, single payer systems for the large populations that they serve, have demonstrated any ability whatsoever to control utilization (costs)”
    Because they deal with the two most expensive and non-revenue generating populations in the country – those populations that insurance companies don’t want and don’t have to bear the cost of. I also think that Medicare’s/Medicaid’s role is too political and too influenced by bribes to politicians. Change that and you change their mission and performance.
    “I think everyone basically agrees that cost increases in excess of nominal dollar GDP growth are unsustainable over the long term, and that doctors drive virtually all costs one way or another,…I think it is unfortunate that doctors generally do not see costs as their problem or concern.”
    Your observations are also correct for the Canadian single pay system. Docs never wanted it and continue to try and erode it. We have to realize that doctors (for the most part) are not our friends when it comes to cost control.
    “As jd said, doctors need to step up and provide the leadership to reform the system”
    Barry, we don’t have enough time for a paradigm catharsis of doctors and their financial lobbyist the AMA. There’s just not enough money to spend waiting for that to happen.
    >>>”1. Make living wills and advance directives a requirement.
    2. Reduce defensive medicine by replacing the current jury based malpractice litigation system with special health courts.
    3. Build a system of interoperable electronic medical records to reduce duplicate testing and avoid adverse drug interactions, especially in hospitals.
    4. Attack fraud vigorously using sophisticated information technology and more auditors and investigators.
    5. Give consumers skin in the game and adequate information tools.
    At the same time, use information technology to track utilization of healthcare services by referring doctor as well as by provider.<<<"
    All this can be done with a single pay system as well. And for the most part it is being done by Canada's system.
    Barry I know you think that private not government can "solve" this, but we've seen no evidence of that yet and I don't believe what you propose goes fast enough or hard enough to controlling costs that will ultimately drive us to ruin and more severe actions than just single pay.

  85. Barry, I especially like your IT suggestions, though I would like to see that database built either by Medicare or contracted out to a qualified source. To allow the current mish-mash of 100 or so programs to proliferate would take ten years to settle in. Or, find the best of them and pay an attractive price to allow the government to open source it. We could also expand the current open source VisTa system by the VA.

  86. Correction:
    It was John, not jd, who called for physician leadership to reform the system.

  87. Since neither Medicare nor Medicaid, both of which are, in effect, single payer systems for the large populations that they serve, have demonstrated any ability whatsoever to control utilization (costs), why should we expect that they would suddenly gain such capability if we entrusted them with providing (at taxpayer expense) health insurance for all?
    I think everyone basically agrees that cost increases in excess of nominal dollar GDP growth are unsustainable over the long term, and that doctors drive virtually all costs one way or another, though they capture only about 20%-25% of the dollars as fees for services, tests and procedures. I think it is unfortunate that doctors generally do not see costs as their problem or concern, and they resent and resist any attempt by insurers or the government to question, interfere with, or get in the way of their decision making. When they say: I expect the system to trust us to do the right thing for our patients, they are also saying: reimburse us for all costs, no matter how high, plus a respectable (or even handsome) profit margin. Perhaps there should be a class or two in medical school that teaches that resources are finite, and nobody should expect a blank check with no oversight.
    As jd said, doctors need to step up and provide the leadership to reform the system even if it ultimately means lower incomes for some of them. I think we eventually will wind up with either a single payer or premium support system, both of which will be taxpayer funded. I offer the following ideas that are intended to (1) safely take costs out of the system and (2) give patients a reason to care about costs and the tools to help them make better healthcare decisions:
    1. Make living wills and advance directives a requirement of insurance or change the law to establish flexible default protocols that would give doctors the ability to apply common sense depending on circumstances in end of life situations without having to worry about being sued.
    2. Reduce defensive medicine by replacing the current jury based malpractice litigation system with special health courts. This will be vigorously opposed by trial lawyers, so it probably needs to be pushed through at the state level first to gain some real world experience that can be replicated more broadly later.
    3. Build a system of interoperable electronic medical records to reduce duplicate testing and avoid adverse drug interactions, especially in hospitals. The key issue here is implementation costs, who pays, and the time to get an effective system up and running.
    4. Attack fraud vigorously using sophisticated information technology and more auditors and investigators. Criminals are, at least implicitly, pretty good at assessing risk vs reward. If the perceived probability of being caught increases significantly and punishment for those who are caught is swift and appropriate, fraud will decrease. I would bet a lot of money on it.
    5. Give consumers skin in the game and adequate information tools. For a taxpayer funded system, this means that the broad middle class has to pay the cost in a transparent way (like a payroll tax) of insuring the broad middle class. Progressive income taxes on wealthier people can pay for the bulk of the cost of insuring the poor and near poor, but the middle class has to pay its own way.
    At the same time, use information technology to track utilization of healthcare services by referring doctor as well as by provider. This is particularly relevant to PCP’s that make a lot of referrals. If a doctor shows up as a high utilizer, prospective patients should know that before they sign on as patients.
    The doctor specialty societies should develop performance metrics that they can live with. We also need to develop a decent system of individual health risk scoring so doctors with a lot of high risk patients aren’t penalized for high utilization. Risk adjusted utilization is what we should be after.
    I would be interested in the comments from others, especially doctors and insurance experts.

  88. “Not my responsibility, yea right.”
    ??
    Peter, notice please I said that “pressure from large buyers makes producers look for efficiencies. But the producer, not the buyer, must install them.” I nowhere suggest that insurers cannot “support” fundamental reform of the health care system.
    Instead, my argument is that it’s illogical to hold insurers accountable for those fundamental reforms. Insurers can’t do it – they are buyers of health care, not producers. Besides, decades of experience shows they can’t do it. Insurance is a different business from health care with different expertise. Health care professionals should be accountable for fundamental reform of the health care system.
    In the continued absence of meaningful leadership from health care professionals someone else will make those reforms for (or, to) them, and the only force I can see with the power to do that for the entire marketplace is the government.

  89. >>> “Payors (in this context, I mean both insurers and the purchasers of insurance) will and should continue to be involved in driving healthcare reform. …. This is because only they have a direct incentive to get the most value out of healthcare expenditures. Providers only have a secondary interest in maximizing value. ”
    jd, Payors, as you describe them, are totally dispensable and shouldn’t even be in the loop because they provide zero direct health care services. As I mentioned above, we need administrators instead. In my view, business leaders should be pushing to get ut of the health care loop because providing it makes them uncompetitive with foreign product.
    And the providers are the last people in the world to rely on, as it is they who are benefiting from the exorbitant increases. I would agree that the private insurer’s contribution to our waste is not the biggest problem, it is the overuse of profitable tests that is the biggest offender, so putting providers (the foxes) in charge would be fruitless.
    Tom, you are correct that it is often a swap of referrals within the “club,” though there are often several clubs. I don’t know the extent to which this adds to the overall cost.
    And Barry, I don’t think a “good care – bad care” selection to insurance is what we need. I would prefer “appropriate care” through a single-payer system but with the option of the patient to move out of the system for extraordinary care. I agree with jd, if we must have insurance, “within each plan, they could offer varying deductibles and co-pays,” though these still have a negative trait of delaying needed care until it is far more costly to treat. I’d also have trouble putting together a list that excluded certain coverages that would not lead to bigger problems if not dealt with early.
    >>> “I think we are near the point at which the federal government will decide to step in to control costs because it has become politically expedient.”
    I would certainly hope so, but I’d feel a lot better if the $100M per year in campaign cash were not flowing from health care interests. As it is, Bush is suggesting a mechanism to protect insurance companies, and as always, it will mean cutting from those who don’t contribute (Medicare and Medicaid patients).

  90. John Fembup,
    “Also, were it in fact the insurance companies’ responsibility to control health care costs, then with equal illogic might we ask auto makers to reduce the cost of gasoline?”
    John, do you think vehicles are safer and cause less injury, and reduce insurance costs, and reduce healthcare expense and ……. from this –
    “The Insurance Institute for Highway Safety is an independent, nonprofit, scientific and educational organization dedicated to reducing the losses — deaths, injuries, and property damage — from crashes on the nation’s highways.”
    “The Highway Loss Data Institute’s mission is to compute and publish insurance loss results by make and model. Both organizations are wholly supported by auto insurers.”
    Not my responsibility, yea right.

  91. jd,
    “automakers don’t have gasoline costs comprising 85% of their expenses or 80% of the prices they charge consumers. If this were so, you better believe they would take a more active interest in the cost of gasoline.”
    Well, yes, that’s correct – but even if they were much more interested, what exactly could they do to reduce the oil company’s costs of exploration, extraction, refining, and delivering gasoline? My guess – not much. Their business is auto assembly, not petroleum production. They just don’t have the expertise in the other guy’s business.
    The earlier example isn’t perfect, but I think still works to illustrate the basic illogic of expecting a player in one business to be the actual agent of change to production costs for another kind of business. Sure, pressure from large buyers makes producers look for efficiencies. But the producer, not the buyer, must install them.
    I’m not talking here about buyers negotiating a better price. That’s a side issue, because pricing concessions affect mainly the producers margins. A company that discounts by more than its margin is selling its product below its cost and will not long survive. A company whose only pricing strategy is to cede its margins will also not survive – it will just take longer to die. The trick is to maintain margins by lowering one’s costs of production. The fact that health care has been seemingly impervious to most pressures to reduce production costs has led many people to assert that “the laws of supply and demand don’t apply in health care.” I disagree. In health care in this country there seems to be no level of demand for money that has not been met with an adequate supply. At the same time, the supply of physicians per capita has not kept pace with the growth and gradual aging of the population. The frightful cost of high-tech medicine creates its own shortages thru rationing by price. That sets up classic conditions for price inflation – too much money chasing too few services.
    Anyway, I think we need to know: (1) are we getting our money’s worth (2) if not why not and what if anything can be done about it? (3) can the supply of money going into the system be reduced? and (4) then what can we expect to happen?
    Not even the largest insurance company can effectively reduce the overall supply of money flowing into the system (insufficient market share), nor can any consortium of insurance companies achieve that result (antitrust law). The federal government has a huge interest in this because it already pays for half of all the health care delivered in the U.S.
    For 40 years there has been theoretical and academic and political debate all around these issues but nothing in either the delivery system or the financing system has fundamentally changed. Costs have reached a point where people are screaming about their bills – insurance or health care or both – almost as much as employers and other payers. I think we are near the point at which the federal government will decide to step in to control costs because it has become politically expedient. Political expediency is the main reason I fear that (in the absence of meaningful leadership from physicians) we’ll end up not with a well-thought out system, but a Rube-Goldberg tax-funded universal insurance contraption designed by politicians primarily to buy votes. Oh yeah, and patronage jobs to the end of time.
    In summary I don’t think it’s a coincidence that insurance companies have been largely unsuccessful in controlling health care costs. I just don’t think they can do it, and I don’t think its reasonable to expect them to. That doesn’t mean I think they should stop doing all the things they are trying; only that I expect those things will have marginal not fundamental effects. Health care is not their expertise. Insurance is their expertise.
    If health care professionals really mean what they seem to be saying in support of a single-payer system, I think they (and we) will soon get it. As the saying goes, when you ask for something, be sure you really want it.

  92. Barry,
    Ideally, I think it would be more efficient if insurers offered, say, three or four plans that differed in scope of coverage – a good, better, best approach, if you will. Within each plan, they could offer varying deductibles and, perhaps, co-pays. Competition would then be on the basis of scope of coverage, deductibles, co-pays, customer service, network quality, and, of course, price.
    Unless those three or four benefit designs were the same for every insurer, you would end up with almost as much complexity as we have now. The only way to get them to offer the same three or four options is from government intervention, because their incentive will always be to tweak the basic plans to fit the desires of specific groups and niches in the market.
    I think another option would be better: institute one or two basic plans as the minimal options in a universal care system (for now, this would be by state rather than nationally, though a national option would be more efficient). But beyond that, let a thousand flowers bloom in terms of additional benefits. This way, any time someone went to visit a doctor or hospital, it would be clear that some package of benefits was covered for certain. You would still have complexity for the non-core benefits, but I think this would cut down signicantly on administrative costs in the vast majority of cases. But by “significantly” I think we’re talking less than 1% of total healthcare expenditures.
    My understanding is that United HealthGroup is getting close to having real time claims adjudication capability systemwide. The swipe of a card through a reader would verify (1) the insured has coverage with us, (2) this is or is not a covered service under his or her policy, and (3) indicate the insured’s financial responsibility, if any, based on contract rates (not list price).
    It’s not just United, but CIGNA and others that are working hard to achieve this. But as far as I know these would just be preliminary determinations. There would still be a review process and final determinations (and payments) would still not occur at the point of sale.

  93. > Example: a patient who hasn’t walked in 20 years
    > receives physical therapy intended to restore the
    > ability to walk.
    A primary care doc I know complains also of exactly this and says he can’t get referrals because he won’t play the game with them. He says its not that the nursing homes own the PTs or anything like this — its simply a big network of people referring to each other. The only “kickback” is membership (so to speak) in the network. If you don’t want to play, you can’t get legit referrals either. Unless the “payer” is Medicaid. You can have all of those you want.
    > nursing homes place patients in front of the TV
    > and bill Medicare for a “therapy session.”
    My understanding is that a doc is supposed to visit his nursing home patients once a month whether they need it or not basically to supervise their care. This same doc from the last story says because it requires travel-time and pays at rates reduced from an office visit, the rounding visits don’t happen nearly this often. Maybe if they did, nonsense like this couldn’t happen. On the other hand, refer to the first story…
    t

  94. John,
    I understand your skepticism about the ability of insurers (private or public) to control costs. I know that providers undermine, in hundreds of direct and hidden ways, the efforts of payors to control costs.
    However, I disagree with your comparison with automakers and the control of gasoline prices. The reason is that automakers don’t have gasoline costs comprising 85% of their expenses or 80% of the prices they charge consumers. If this were so, you better believe they would take a more active interest in the cost of gasoline. In fact, they would engage in all sorts of creative strategies, including alliances with oil companies and even mergers so that those oil companies didn’t profit at their expense.
    Payors (in this context, I mean both insurers and the purchasers of insurance) will and should continue to be involved in driving healthcare reform. This is because only they have a direct incentive to get the most value out of healthcare expenditures. Providers only have a secondary interest in maximizing value. Their primary economic interest is to maximize healthcare revenues. So, without payor pressure, providers cannot be expected to take action. It is not in their economic self-interest.
    Now, providers certainly need to be at the table, but their lack of leadership is not a mystery. It is rather a direct consequence of their role in the healthcare marketplace.

  95. “the cost of private insurance is a real but relatively minor part of the problem. Instead, the main problem is the failure of insurance–both private and public–to control medical costs by coordinating care, reducing fraud, incentivizing prevention instead of last-minute heroics, etc.”
    jd, I think you and Barry are correct about the relative impact of administration costs on total costs, but I think the above characterization misstates the main problem. The main problem is the cost of health care (and, secondarily, the unending growth in that cost). It is a mistake to think insurers can cure that problem. They have achieved only marginal effect on costs. And physicians lobby daily against their efforts, in every examination room in the country.
    Health insurance is expensive because health care is expensive. The cost of health insurance rises every year because the cost of health care rises every year. If the cost of health care could be stabilized or reduced, the cost of health insurance would follow; but the reverse is not true. Physicians – who I believe should comprise the health care policy leadership in this country – have declined to engage this problem in an organized, meaningful, and positive way for more than 40 years. I remarked earlier that even Moses escaped the wilderness after 40 years. OK, maybe health care is a harder problem. But still.
    Also, were it in fact the insurance companies’ responsibility to control health care costs, then with equal illogic might we ask auto makers to reduce the cost of gasoline? Apple Computer to reduce the cost of electricity? & so on? I don’t think so. The responsibility for explaining and rationalizing health care costs belongs with health care professionals and, ideally, we should expect exactly that kind of leadership from them.
    But the professionals have shown little inclination or ability either to explain or control spending. As a result, someone else is going to control it for them. It’s beginning to look more and more like the government will have to do it. That necessarily means much more government controls on health care provider incomes. Many more health care professionals are beginning to express support for a “single-payer” system, thus expressing preference for government controls vs. insurance company controls. So long as the providers do not step up and assert leadership on this issue I see no other alternative. Do you?
    BTW, everyone should keep in mind is that comparing administrative costs only as a percentage of the medical expenses necessarily produces very different answers for Medicare and private insurance. This is because the “denominator” is so much higher for Medicare. The administration cost for Medicare will always come out much lower than private insurance when expressed as a percentage of the underlying medical cost.

  96. I understand your concerns Barry, and there’s another situation where nursing homes place patients in front of the TV and bill Medicare for a “therapy session.” But the best way to mitigate these overuses (and fraud) is to have an independent oversight commission, which incidentally is a good way to re-employ some of the displaced administrative personnel when converting to a single-payer plan. We don’t have to (and shouldn’t) pay extra via a private insurer to accomplish this.

  97. Jack,
    While I’m normally not a big fan of anecdotes, I want to pass a couple of stories along to illustrate my fear about the waste and overutilization of services that could occur under a single payer system, and, if it did, it would swamp any possible savings from lower administrative costs.
    My wife’s college roommate worked for a couple of years as a LPN in a nursing home in the Midwest. She witnessed countless examples of services performed solely to drive revenue for the nursing home. Example: a patient who hasn’t walked in 20 years receives physical therapy intended to restore the ability to walk. The service was performed and was coded properly, so there was no fraud in that sense. However, there was a zero probability that the patient needed it and would benefit from it. However, since Medicare (in this case) was paying, what the heck. Let’s do it, was the attitude.
    Second story. The mother of a former colleague was in a nursing home in Texas with Alzheimer’s for the last seven years of here life as a private pay patient. Her son (my former colleague) was monitoring her affairs from NJ. Her son noticed bills for a number of brand name drugs for which generic equivalents existed. When he called to inquire, it turned out that the prescribing doctor thought the patient was on Medicaid and asked my colleague, what are you worried about, it’s all free. When the doctor learned that she was a private pay patient, the prescriptions were immediately switched to generics. Again, the issue isn’t fraud. It’s an attitude that it’s government money, and it’s OK (from a provider perspective) to spend it freely.
    I have more confidence in private insurers to provide the oversight to mitigate these abuses. Too often, the attitude within Medicare and Medicaid, is just write the check, pay the claim and then brag about their low administrative costs. This is why I prefer a premium support or voucher model with a strong role for private insurers to single payer even if administrative costs would be slightly higher. The last thing taxpayers need is a big dumb payer that either can’t or won’t provide adequate oversight.

  98. As a point of interest, here’s a note I received from a cardiologist friend of mine:

    The latest outrage is the “radiology benefits manager” companies, which contract with insurance companies to reduce utilization of services on an “at risk” basis. They get paid a percentage of the charges they deny. No pretension of providing care, just take the money and run.
    Insurance companies are just needless parasites. If we got rid of employer paid health insurance and had a single payer system (not a single government health care system) we could cut them out.

  99. This is all very interesting, Guys, but I am not convinced that insurance company marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits, represent only 2% or even 5% of removable private administrative costs of health care expenses. Certainly it would mitigate the total (public and private), and I would accept that its portion of the private side could drop to 10% of private insurance costs ($100B), but why in the hell do we want these unnecessary costs in the system anyway? It just diverts resources away from people who are now uninsured.
    And Barry, we should not rely on “the inability of our private and public insurance systems, together, to control costs.” When employees complain to their union or company management that the Insurance company is standing in the way of their health care, insurance companies have a tendency to give in. And when you control costs, isn’t that tantamount to “rationing?”
    Even if the number is 5%, that’s $50 billion dollars of excess dollars ($1T*.05) going to corporations that are dispensible!
    And here we go again: “pay a given provider different rates for the same service depending on such factors as whether or not the provider accepts plans that are part of a more restrictive network. We’re back to rationing.
    >>> “Where it gets interesting is that ASO contracts provide the better run insurers with profit margins as high as 20% on this business.”
    Sorry, I find this incredibly generous of us.
    >>> “There are some good reasons to eventually move to taxpayer funding of health insurance and away from the employer and individual purchase model. Huge administrative savings is NOT one of them.”
    I think $50 billion is a significant part of the equation, but agree with the conclusion.

  100. Administrative costs for large self-insured plans run approximately 5%-6% of total costs. My own company, which has a large retiree population, is closer to 4.5% for administrative costs. I believe John Fembup mentioned that his company’s administrative costs are in the 5% range, and I’ve seen data from Wisconsin that suggests the broader average is about 6%.
    Since self-insured plans all enter into ASO contracts with private insurers to actually administer their plan, I believe these healthcare costs are included as part of the insurer sector, since there is no self-insured category in the payer data that we’ve seen. Where it gets interesting is that ASO contracts provide the better run insurers with profit margins as high as 20% on this business. Since the revenue is for administrative services, it shows up as part of the insurer’s administrative costs. However, none of the outlays for healthcare costs on behalf of the employer appear in the insurer’s revenue. For United, to take one example, they administer $35 billion of healthcare spending on behalf of self-insured clients that does not flow through United’s income statement. That equals approximately 50% of United’s 2006 reported revenues of $71 billion.
    There are some good reasons to eventually move to taxpayer funding of health insurance and away from the employer and individual purchase model. Huge administrative savings is NOT one of them.

  101. jd,
    Since I think you mentioned in the past that you work in the insurance field, I wonder if you could speak to the potential for private insurers to reduce provider costs by streamlining insurance offerings. My understanding is that United, Wellpoint, Aetna, Cigna, Humana, et. al. pay a given provider different rates for the same service depending on such factors as whether or not the provider accepts plans that are part of a more restrictive network. Also, self-insured employers have some role in determining what percentage of usual and customary charges they are willing to pay, which, if true, adds to the confusion.
    Ideally, I think it would be more efficient if insurers offered, say, three or four plans that differed in scope of coverage – a good, better, best approach, if you will. Within each plan, they could offer varying deductibles and, perhaps, co-pays. Competition would then be on the basis of scope of coverage, deductibles, co-pays, customer service, network quality, and, of course, price. My understanding is that United HealthGroup is getting close to having real time claims adjudication capability systemwide. The swipe of a card through a reader would verify (1) the insured has coverage with us, (2) this is or is not a covered service under his or her policy, and (3) indicate the insured’s financial responsibility, if any, based on contract rates (not list price).
    Perhaps Dr. Thom could weigh in as to whether such an approach would meaningfully contribute to simplifying life, at least for his office staff, or not.
    BTW, the one-third of healthcare costs accounted for by hospitals, I believe, includes out-patient services, which, at least for a large for profit group like HCA, account for about 37% of hospital revenues now and are growing faster than in-patient revenue.

  102. Correction:
    I wrote above that at the national level 25% of all healthcare expenditures were paid by private insurance. Well, that’s just wrong, according to CMS. Their numbers for 2005 tell pretty much the same story as California: 37% of all total healthcare expenditures were paid by private insurance.
    The CMS data, as presented in HealthAffairs, also confirms the 5% figure for the percent of total healthcare expenditures due to the net cost of private insuranc. If private insurance companies have an average AER of 15% and profit of 5%, as I stated above, then the total cost of private insurance would have been 37% X 20%, or 7.4%. I believe that part of the reason why this is not the case is that included in the private insurance number is self-funded employer-sponsored insurance. Nearly half of all those enrolled in commercial group insurance are covered by self-funding organizations, and these insurers do not make a profit (because the company would only be profiting off itself). They probably also have lower admin costs, since they don’t have to do underwriting and use less marketing, etc.
    In any case, the point Barry raised and I tried to reinforce still stands: the cost of private insurance is a real but relatively minor part of the problem. Instead, the main problem is the failure of insurance–both private and public–to control medical costs by coordinating care, reducing fraud, incentivizing prevention instead of last-minute heroics, etc. The other failure of our system is that it tends to reward insurers for avoiding risk by avoiding the sick, rather than reducing risk by promoting healthier behaviors. Universal healthcare can solve this problem immediately by forbidding insurers from engaging in underwriting and from turning down citizens who choose their plans.

  103. Peter L,
    It’s true that inflation-adjusted physician pay is now stagnant or declining, at least for GPs, and we can expect it to continue. I welcome it, though we would probably need to reduce the cost and ordeal of medical school to avoid a physician shortage.
    But don’t forget that direct physician expenses are not where the greatest reductions need to be made. Our hospital expenses (inpatient and outpatient) are the greatest problem.
    Insurance, physician and drug costs get the attention, but hospitals account for 1/3 of all healthcare costs and this number may exclude outpatient care.

  104. It seems clear that Medicare has significant overhead costs that are accounted for elsewhere, making any comparison with the private sector apples to oranges.
    If expansion of Medicare is to be the model:
    1 it must expand its preventative services to at least what the government itself states is recommended.
    2 it must change then stabilize it’s payment model, especially to take office administrated meds out of the formula or there will not be enough providers for all those newly insured.
    3 Folks must be prepared for an unprecedented intrusion of the government into their personal lives as their compliance affects the cost of health care.

  105. The push for universal coverage is about just that: universal coverage. I have over 30 years of experience in healthcare, including urban teaching hospitals with busy ERs and clinics, home care, nursing home, and for the past decade, mostly medical practices. There are some 46 million uninsured. Whether many go on or off is irrelevant. The number creeps up every year. It’s become a competitive disadvantage for many businesses with older work forces, such as GM. Even Wal-mart, the scrooge of them all, has been leaning in this direction.
    Physicians incomes are already flat and declining, and this will continue. Get used to it, and plan for it. The market can’t and won’t bear it, and just like any other business, the customers are pushing back. You can whine about it, or act to come out the best you can. That will mean investments now for the long term. How you work will change, and in big ways. It’s up to you to adapt.

  106. Barry,
    I don’t know what form of health outcomes measurement would be ideal, but I am sure that rather than removing variables, the solution will be to add them. So, instead of looking just at life expectancy, we would look at life expectancy accounting for things like the murder rate and other social factors that we don’t want to blame on the healthcare system. And of course, any metric is going to oversimplify. As a result, whoever ends up on the invidious end of the comparison is going to complain that it isn’t fair.
    Also, excellent points on the actual total cost of insurance administration. The 2% estimate of removable admin cost on the insurance side (from getting rid of underwriting, broker fees, some advertising, etc.) is about right. I don’t think it includes reductions on the provider side, though.
    You can also think of it this way: health insurers take about 20% of premiums that don’t go directly towards medical care (15% SG&A costs and 5% profit). Nationally, private insurance covers about 25% of all healthcare expenditures. About 50% is government, and 25% other sources (out of pocket and charity). These are slightly different than the California numbers you cited, but in the same ballpark.
    Well, 20% of 25% is 5%. That’s the share of total healthcare spending that goes towards private health insurance administration and profit. So, your 2% estimate of what we could remove by going to universal healthcare sounds about right, though we should also include admin reductions on the provider side from streamlining health benefits.
    What this should make abundantly clear is that the main problem we face is not insurance overhead. Rather, it is the inability of our private and public insurance systems, together, to control costs. They don’t adequately align incentives to reward care in proportion to its public benefit, reduce fraud and system gaming, and so on.
    Not that we can’t or shouldn’t simplify our insurance system to make it more efficient, but that is just the tip of the iceberg when it comes to the benefits and challenges of universal healthcare.

  107. Jack,
    A couple of things. First, according to data from the California Healthcare Foundation that I cited on another thread, private insurers only pay for 35% of all healthcare costs. Federal and state government combined cover 46%, individual out-of-pocket costs account for 14%, and “other private” covers the remaining 5%. Other private consists of philanthropy and non-patient revenues.
    The 15%-20% of insurer revenue that you attribute to administrative costs (and profit) includes both good and not so good administrative costs. Remember also that non-profit insurers account for a significant percentage of the total commercial insurance market. So, if we take the mid-point of the 15%-20% of revenue spent on administrative costs and profit, combined with the fact that private insurers cover only 35% of healthcare costs, that implies that total insurance company administrative costs and profit equates to 6% of healthcare costs. The blended after tax profit margin of the total insurance sector, including the non-profits, is probably no more than 3% of gross revenue after tax (5% or so for the for profit companies). Brokerage commissions and underwriting costs relate mainly to the individual and small group (ISG) marketplace. The bottom line is that, in all likelihood, perhaps 2% of healthcare costs are being consumed by what we would both probably agree are low (or no) value added administrative costs. This would be consistent with the Lewin Group’s estimate of the potential administrative cost savings under the Wyden plan ($29 billion) which are net of the cost of operating the regional entities that would administer the plan and pass premiums on to individual insurers, including adjustments for the riskiness of the populations that they actually wind up with.
    I do think there are some opportunities to drive costs lower for certain specialties like radiologists. I also note that many, if not most, of the other countries make much more use of salaried doctors in hospitals. While salaried doctors might make it easier for hospitals to price care on an episode or case rate basis without the need for separate billing by doctors, I’m not sure if it would save money or not at the end of the day. I agree with Dr. Thom that we would need more doctors working for a salary to care for a given patient population as compared to the number of doctors who are working for themselves.

  108. I would not label the data coming from WHO, Johns Hopkins and the others as being bad and shoddy, but let’s say that you are correct and our infant mortality and life expectancy takes a back seat to no one. Then all we have to discuss are the economics, and I haven’t heard too many people balk at our 15% of GDP vs Canada’s 10% (and others even lower than that).
    All private carrier administrative costs are not bad. Only those that are dispensable are. And they represent from 15% to 20% of our health care costs, and if that isn’t a diversion of resources I don’t know what is. I would also add (as I have elsewhere) that there is more fraud and overuse in the private sector than in Medicare because of the steep federal penalties involved.
    I do agree with you on the need for a P4P system (if it doesn’t deter care for difficult patients). But before we get close to that we need to develop a national outcomes database.

  109. This has turned into a very interesting discussion. Thanks Eric for getting it started.
    The main problems with our current healthcare system, aside from high costs compared to other systems, I think are as follows:
    1. 47 million uninsured.
    2. Costs increasing faster than GDP, which is unsustainable over the long term.
    3. Employer based insurance (as opposed to taxpayer financing or individual purchase) is not the best way to acquire health insurance because of the complications caused by job loss or a desire to change jobs or start a business.
    The single payer advocates push their cause with bad data and shoddy analysis. Infant mortality and life expectancy metrics are seriously flawed due to the numerous other variables (culture, genetics, lifestyle, socio-economic status, etc.) that affect health outcomes aside from healthcare. They also argue that all administrative costs are bad and siphon resources away from actual healthcare. Insurers, they say, are parasites, scum and add no value.
    However, it costs money to manage disease effectively, to mitigate fraud, to develop useful data as to which procedures are cost-effective and which aren’t. All of these costs count as administrative. There are administrative costs that could be safely eliminated such as broker commissions and underwriting costs. These would be partially offset by regional intermediaries like the Health Connector (Massachusetts) or Health Markets (Edwards approach). The Lewin Group, which analyzed Senator Wyden’s healthcare plan, estimated that it would save $29 billion of administrative costs which is nice but nowhere near enough to cover the currently uninsured without increasing total expenditures.
    With respect to the national systems, according to the article that jd linked to, France finances its system primarily with a 13% payroll tax which covers only 75% of medical costs. The rest is paid by other government spending, supplemental insurance, and individual out of pocket payments. Canada finances its system mostly with general federal and provincial tax revenue, but Canadian Medicare, according to the article, covers only 72% of healthcare costs. The rest is paid by private insurance and out of pocket payments.
    Medicare generally tries to pay all providers in a given area the same for the same service. Yet, we all know that some doctors are considerably better than others. Should a veteran doctor with a stellar reputation at or near the top of his or her field be paid the same as a rookie who graduated near the bottom of the class from a mediocre medical school? I expect to pay a senior law partner a higher hourly rate than a young associate, and I expect to pay more for a room at the Ritz Carlton or Four Seasons than a Holiday Inn in the same city. The key, though, is to develop a credible and relevant measure of quality for doctors and hospitals. Then, we can provide price and quality transparency, and let them compete on metrics that the experts in the field endorse as relevant and sensible.
    As for our higher costs vs other countries, the Wall Street Journal, within the last couple of months, had articles discussing the German system (focused on a doctor shortage) and the Japanese system which focused on cancer treatment. Within both articles, it was mentioned that doctors in each country, earn, on average, about half of what their U.S. counterparts do. I also remain convinced that our approach to end of life (and beginning of life) care is much more costly than what other countries do, and our culture of defensive medicine also contributes materially to higher costs. Neither of the latter two factors would be fixed by a single payer or a taxpayer financed multi-payer system unless they were addressed with specifically targeted reforms which could also be done under the current system.

  110. “Let’s see what happens when we put a product in the numerator. Let’s use “health,” however you want to measure it. Say HMO A has administrative overhead equal to 15% of revenues and turns $100 of premiums into 50 units of health. HMO A’s efficiency is therefore 0.5 unit health per dollar. Say HMO B spends 25% of revenues on administration and turns $100 of premiums into 75 units of health. HMO B’s efficiency is 0.75 unit health per dollar…better than HMO A (0.75 > 0.5). But look what we’d conclude by taking the medical loss ratio approach, using costs divided by costs: HMO B looks worse because of its lower medical loss ratio (0.75 vs. HMO A’s 0.85).”
    An interesting point. When I speak with physicians across the spcialty spectrum (and I’m one also) the spoken or unspoken assumption is that nothing short of direct patient care adds to the health of the patient. Its what leads to the assumption that anything that takes a doc away from direct patient care is a “hassle factor”.

  111. Give me a break.
    >>> “Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700….”
    First, Medicare spends more for the coverage it gives to people 65 years and older and the end-of-lifers. Fold into their system all of the young bucks and that “pre-capita” expenditure will decrease dramatically! Today’s insurers do not cover those over 65 and very few end-of-lifers.
    And I haven’t seen any credible expenditures at $2700 per patient. What is this writer smoking?
    That said, I believe that before anything else is done we MUST get all of the wasted expenditures out of the system before we do anything else. There is absolutely no need for it to be there except to satisfy some campaign contributors.
    We need administration; not insurance companies. We should totally eliminate the unnecessary costs that are consumed by marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits. None of these would exist under a single-payer system like Canada’s. With a strong political will we could mimic Canada’s system and extend health care to 100% of the public, and we’d spend the same amount of dollars we are spending today to cover only 85% of the people. To boot, we can do it without Canada’s wait times! The money saved would be spent on more doctors and more nurses to serve more patients.

  112. I did find a further link on the CIHI site that discusses and presents administration costs per capita, not percentages. For those data/report/study wonks it might be interesting to work through.
    http://secure.cihi.ca/cihiweb/en/downloads/spend_PublicHealthNHEX_e.pdf
    One thing I will say is that for all the comparisons of U.S. healthcare expenditures per GDP, the U.S. always comes out much higher. Assuming (if) these comparisons were data flawed, they would be flawed for the United State as well. Would this create a leveling effect which would still make the comparisons valid? I will also say that the present cost increases for healthcare by any accounts are not sustainable and are affecting affordability and access. If costs keep rising faster than peoples ability to pay for them then the amount of increasing healthcare to GDP % will draw expeditures from other industries – will that negatively affect profits/sales of other sectors in the economy?
    Barry, the link to your study said:
    “we estimated that 19.7–21.8 percent of spending on physician and hospital services in California that are paid for through privately insured arrangements is used for billing and insurance-related functions.”
    Seems like quite a high number.
    It also stated its “Study limitations”.
    I found this statement interesting:
    “Our analysis excludes several sources of BIR administrative costs: external brokers’ fees, oversight provided by employee benefits staff, and administrative costs of independent practice associations (IPAs). It thus understates total BIR costs in the private insurance system.”
    and this:
    “Also, our analysis of total BIR costs in privately insured hospital and physician care understates and mischaracterizes the distribution of systemwide BIR costs. Most importantly, hospitals and physicians incur BIR costs on all care, not just privately insured care. Thus, the total BIR burden on providers (in dollar terms) is well above that on private insurers—perhaps twice as much. Further, there are substantial, if less well understood, BIR costs in other care settings, in which one-third of all health care spending occurs.
    Do you think the statement below is valid?
    “If a single-payer system of health care financing were adopted, a substantial portion of BIR could certainly be eliminated; less comprehensive financing reforms might yield smaller savings.”
    And this:
    “There is much uncertainty about the extent to which current BIR spending creates value.”
    I will end with this taken out of the study:
    “The empirical record is complicated. In comparison to the health care systems of other advanced economies, it is difficult to argue that the United States has an efficient health care system: Its high level of clinical health care spending does not seem to be matched by superior outcomes.”

  113. I agree that deciding what you include in the data affects the interpretation. The Canadaian Institute for Health Informatiom (CIHI) did a discusion paper on this issue and they are trying to develope criteria for what to include. If you want the link I can provide, but I tried to get through it and could not understand much. Here is the introduction:
    >>>”Health Expenditure—includes any type of expenditure for which the primary objective is to improve, or prevent the deterioration of, health status.
    “This definition allows economic activities to be measured according to primary purpose and secondary effects. Activities that are undertaken with the direct purpose of improving or maintaining health are included. Other activities are not included, even though they may impact health. For example, funds aligning with housing and income support policies which have social welfare goals as their primary purpose are not considered to be health expenditures, yet they are recognized as powerful factors in determining population health.”

  114. jd,
    What would you use as the preferred measure of health outcomes in place of the seriously flawed infant mortality and life expectancy stats that single payer advocates always cite?

  115. The previous poster (doubt s/he will call him/herself “harrumph!” again) made some very important points that are usually missed regarding administrative expense ratio (AER) and medical expense ratio (MER). Even those of us who know better find ourselves drawn into the wrong arguments.
    The whole point of HMOs was to add medical management for the sake of improving health outcomes and reducing total cost. The AER goes up by a few points, while medical costs go down by an even larger amount so that the total premium actually goes down relative to a less-managed insurance plan with similar covered benefits. If the HMO does what it promises, the higher AER does not mean it is less efficient than an old-fashioned indemnity insurer, nor does the lower MER mean that it is being greedy. It means that the HMO is encouraging preventive care, discouraging more expensive and less well-tested options, etc. Almost nobody understands that HMOs do not have higher profit margins than older forms of health insurance. Whether HMOs often or ever do what they originally promised in terms of optimizing the value and effectiveness of care is another issue.
    But there is a sense in which the AER can be used as a gauge of efficiency. Most managed care companies try to do roughly the same things: they offer disease management for major conditions, selective care management, hospitalists, quality improvement programs aimed at providers to raise HEDIS scores, and so on. Under these conditions of rough comparability, comparing one AER against another can make sense as a measure of efficiency, and are in fact used by health plans to benchmark. This is only true if a number of other conditions hold as well, such as (a) rough comparability in market pricing, and (b) comparability in accounting for administative expenses. (b) is a big problem when comparing AER and MER for different companies, as well as public programs.
    But the long and the short of it is what harrumph says: comparing medical or administrative expense ratios is useless as a measure of efficiency unless you also compare health outcomes and total healthcare expenses.

  116. This is a great topic, but unfortunately the way it’s framed completely misses the point. This whole idea of using a medical loss ratio as an indicator of efficiency is fundamentally flawed. Efficiency is product divided by cost. That product can be anything you want: larger quantity of health care, better quality, public health, whatever…AS LONG AS IT’S A PRODUCT. The medical loss ratio has no product term. The medical loss ratio is a cost divided by a cost…an accounting artifact that imparts no useful knowledge whatsoever. No matter how you choose to split up the costs (e.g., where do the costs of record-keeping go? the cost of EHR’s? the costs of monitoring responsible use of services?)…numerator or denominator, it makes no difference…you’ll never shed any light on anything important until you start putting products rather than costs the numerator.
    Here’s an example of why the medical loss ratio is so worthless. Let’s say we somehow get 100% of your insurance premium dollar into the pockets of providers. That’s a medical loss ration of 100%. But is the way to improve efficiency really to give more money straight to providers? Is the definition of efficiency “the extent to which we pay the doc whatever he charges for as many patients as he can drag into the scanner?” I doubt anyone would agree with this definition…but this definition is exactly what using the medical loss ratio to measure “efficiency” implies.
    Let’s see what happens when we put a product in the numerator. Let’s use “health,” however you want to measure it. Say HMO A has administrative overhead equal to 15% of revenues and turns $100 of premiums into 50 units of health. HMO A’s efficiency is therefore 0.5 unit health per dollar. Say HMO B spends 25% of revenues on administration and turns $100 of premiums into 75 units of health. HMO B’s efficiency is 0.75 unit health per dollar…better than HMO A (0.75 > 0.5). But look what we’d conclude by taking the medical loss ratio approach, using costs divided by costs: HMO B looks worse because of its lower medical loss ratio (0.75 vs. HMO A’s 0.85).
    Higher administrative costs do not imply lower efficiency. Whether they do or not is situationally dependent and only empirical data from each situation will meaningfully guide you. Expensive good management that invests in, say, an EMR that doesn’t suck will produce more health per dollar than stupid wasteful management (or no management whatsoever…hello Medicare).
    One more time: no outcomes data, no argument. If you want to use the Canadian health care system as a model, argue that the life expectancy (a product) is a direct result of health care spending. Then compare total health care spending, do the division, and STOP. That’s a badass argument you’ve just made. You deserve a pat on the back. But don’t then torpedo your own argument with the massive distraction of bringing up administrative expenses…they’re neither inherently good nor inherently evil.
    If you’ve absorbed the lesson here, you’ll never, ever again trot out the medical loss ratio as a marker of efficiency. Instead, you’ll need to do the harder, logically consistent thing and actually look for markers of health to put in the numerator. In the denominator, that part’s easy: just stick with total costs (like, say, the sum of all the premiums paid to an HMO in a year).

  117. “The Council for Affordable Health Insurance, a free-market think tank, pegged the actual cost of Medicare compliance at 5.2 percent. And since Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700, the gap shrinks even more.”
    First lets see if 5.2% would be a good figure given what was also said;
    >>>”The overhead for various private insurance plans (HMOs, etc.) is 15 percent to 25 percent.”
    Sounds like 5.2% is a quite good when compared to private insurance. I would also discount the red herring that Medicare spends more than twice as much per recipient as the average private provider. Twice as much of what? Claims? Overhead? Is the fact that Medicare spends twice as much because they are treating the aged that private insurance can shed once their insureds reach 65?
    I would like to submit this report by the New Jounnal of Medicine:
    http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=retrieve&db=pubmed&list_uids=12930930&dopt=Abstract
    Costs of health care administration in the United States and Canada.
    Woolhandler S, Campbell T, Himmelstein DU.
    Department of Medicine, Cambridge Hospital and Harvard Medical School, Cambridge, Mass, USA.
    Quote:
    BACKGROUND: A decade ago, the administrative costs of health care in the United States greatly exceeded those in Canada. We investigated whether the ascendancy of computerization, managed care, and the adoption of more businesslike approaches to health care have decreased administrative costs. METHODS: For the United States and Canada, we calculated the administrative costs of health insurers, employers’ health benefit programs, hospitals, practitioners’ offices, nursing homes, and home care agencies in 1999. We analyzed published data, surveys of physicians, employment data, and detailed cost reports filed by hospitals, nursing homes, and home care agencies. In calculating the administrative share of health care spending, we excluded retail pharmacy sales and a few other categories for which data on administrative costs were unavailable. We used census surveys to explore trends over time in administrative employment in health care settings. Costs are reported in U.S. dollars. RESULTS: In 1999, health administration costs totaled at least 294.3 billion dollars in the United States, or 1,059 dollars per capita, as compared with 307 dollars per capita in Canada. After exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada. Canada’s national health insurance program had overhead of 1.3 percent; the overhead among Canada’s private insurers was higher than that in the United States (13.2 percent vs. 11.7 percent). Providers’ administrative costs were far lower in Canada. Between 1969 and 1999, the share of the U.S. health care labor force accounted for by administrative workers grew from 18.2 percent to 27.3 percent. In Canada, it grew from 16.0 percent in 1971 to 19.1 percent in 1996. (Both nations’ figures exclude insurance-industry personnel.) CONCLUSIONS: The gap between U.S. and Canadian spending on health care administration has grown to 752 dollars per capita. A large sum might be saved in the United States if administrative costs could be trimmed by implementing a Canadian-style health care system. Copyright 2003 Massachusetts Medical Society (End Quote)
    Looks pretty good for single pay doesn’t it.

  118. Barry-
    I have to admit that I did not finish the article, yet. However, I came across an interesting quote from the article.
    “The primary purpose of BIR activities is to move money from payer to provider in accordance with agreed-upon rules.”
    I don’t know if the article addresses this issue later on or not because as I have stated I did not finish reading the article. However, from experience I can tell you with confidence that reimbursement “rules” are rarely “agreed” upon (even if the provider is PPO with the carrier) and in fact I would argue that reimbursement related issues are one of the highest administrative costs, at lest in physician type setting. The issues just don’t stop at commercial insurance but extend to Medicare as well.

  119. For a very interesting discussion of administrative costs incurred by commercial insurers, Medicare, Medicaid, physicians, and hospitals, see this paper. The verdict is less than clear, and I would be interested to hear the reaction others may have.
    It looks to me like Medicare’s administrative costs, if looked at on a per beneficiary basis, are not much different from commercial insurers, and, in any case, it is questionable how much costs savings might be obtainable from physicians’ practices under a single payer system in light of the dispersal of doctors and their staffs across hundreds of thousands of physical locations. It doesn’t look like hospitals could achieve large savings either.

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