Is the Healthcare Economy Rightsizing?

Brian KlepperMore than at any time in recent memory, powerful forces are buffeting
the health care sector. We are in

the midst of profound upheaval,
driven by
market and policy responses to the industry's long-term 
We can already see evidence that the dysfunction of our traditional
health system is accelerating. It also seems clear that the center
cannot hold indefinitely.

Dog Eat Dog

It is useful to remember that the health care industry's
different stakeholders are adversaries. While they clearly share a
common understanding that a wholesale meltdown is possible, there is
little real motivation for collaboration and no unity. Independent of
role, the industry as a whole has been focused on, and extremely
effective at, securing dollars from purchasers: government, employers
and individuals. But each silo within the industry has been separately
focused on growing its own slice of the health care pie. In every
niche, there are courteous conceits –
access, appropriateness, efficiency and value – reserved
for the good manners of public relations. But these are meaningful in
practice only if they do not conflict with the professional's or the
firm's economic performance.

Back in December when the bloom of the Obama election was still on the rose, the rhetoric of health industry representatives
reflected widespread, earnest agreement that we must finally move
toward meaningful reforms. But as the details of reform have taken shape
, their impending realities have started to chill the industry's public stance on change. And so the gloves are coming off to protect self-interest as the system seeks solutions.

Steven Pearlstein of the Washington Post detailed the
campaign by conservative commentators led by Rush Limbaugh to discredit the stimulus bill's allocation for comparative effectiveness research.
The mantra was that this effort was really cost-benefit analysis
intended to deny people care. But the funding for the disinformation
effort came from the drug and device industries. The funders worried
that credible data showing which drugs and devices actually worked best
would wreck their sales, margins and, most importantly, their business
paradigm of the last twenty years.

Short of an enterprise-wide catastrophe that sinks all ships,
fundamental differences in goals will also make any real collaboration
and compromise among the power players difficult. A New York Times story
last week focused on two important unions, the Service Employees
International Union (SEIU) and the American Federation of State, County
and Municipal Employees (AFSCM), that suddenly and without comment,
quit the multi-constituency Healthcare Reform Dialogue (HRD). HRD, a
health care reform coalition,
has tried to bring together employers, unions, and health industry players
to find consensus on reform approaches. It is hard to not interpret
this seemingly insignificant event, the shattering of unity by apparent
intense disagreement, as a foreshadowing of the ferociousness yet to
come on health care reform.

Then there's the simmering rage that lower- and middle-class Americans
harbor for the industry. Most lawmakers are finally realizing that this
is a sleeping dragon. True, nurses, pharmacists and doctors, in that order, continue to engender the greatest consumer trust of professionals.
But many health care corporate segments  – certainly the health plans
and the drug companies – are widely seen as taking advantage whenever
they can. Remember audiences' overwhelmingly supportive reactions to
Helen Hunt's frustration with her HMO in the 1997
movie, As Good As It Gets?

So we have the industry's fragmentation and fear of reduced margin, and
the consumers' seething. Now add an unexpected national economic
downturn, and the industry is finding that tolerance of its exorbitant
costs is evaporating and that its very structure is in question. Health
care has out-priced the mainstream of its purchasers, a sin that is
finally being revisited on every sector of the industry.

A Deteriorating Marketplace

We see circumstantial evidence that the health care industry is under
unprecedented siege in the marketplace, the fruit of longstanding
business practices that, as John Sinibaldi
so eloquently pointed out last week, have consistently favored health care vendors over patients and purchasers.

Health plan enrollment is now like a sieve. At a
recent conference of senior health plan executives, all admitted that
enrollment had recently dropped precipitously. Some members are
switching to other plans. But many more are dropping out because their
premiums became unaffordable, or because they've lost their jobs. The
execs also agreed that the multiplier used by industry professionals to
estimate the number of total lives from employee lives, stable at 2.2
for many years, has plummeted over the last few years to 1.8. If true,
that would signal that increased costs have driven fewer businesses to
subsidize dependent coverage, resulting in a 20% drop in total
enrollment – the casualties would be mostly children here – that is NOT
being reflected in the uninsurance surveys. In a related vein, HHS data
from before the economic downturn show that only 39% of Florida's small
businesses – they comprise 95% of all Florida businesses – still offer
health coverage to their employees. This is significantly below the coverage values reported by the Kaiser Family Foundation, which makes it difficult to believe that these dynamics are accurately reflected in the surveys of those populations.

As coverage erodes, we
are most concerned about the hospitals and health systems that are the
anchor health care resources in most communities. With the economy and
stocks tanking, the investment income that was keeping many health
systems afloat has disappeared. The ranks of the uninsured and
underinsured have exploded, so uncompensated care costs and bad debt
are skyrocketing. Few health systems have gotten serious about huge
supply chain margins, often north of 50 percent, so there's nowhere to
turn in the short term. While safety net short term acute care
facilities have been under duress for many years, now these trends are
conspiring to also threaten the community facilities that cater to
those with more resources. One recent survey of 4,500 health systems,
published before the economy really began to plummet, found that more
than half were "technically insolvent or at risk of insolvency."

As the economy has worsened, and jobs and money evaporate,
many patients are breaking physician appointments or are unable to pay for services received. Bad debt has become much more of a problem for physician practices, so many have become more aggressive in collections. We
have received anecdotal reports that some physician practices are
demanding payment in full prior to procedures, and are balance-billing
their health plan patients in direct violation of their contractual
agreements. The health plans aren't positioned to police every
practice's policies. But if this trend is widespread in the system, it
suggests that the niceties of business practice are going by the
wayside as practices struggle to maintain.

Finally, the combination of health coverage erosion and high care costs
is fueling an arms race that, until fixes are in place, patients will
lose. The two fastest growing segments of the health care financial
sector are individual credit scoring and collections, specifically
aimed at capturing available dollars for the system. In this economy,
aggressive collections practices will drive many more patients into
bankruptcy, intensifying consumer dissatisfaction and further fueling
the engines of change.

Is Health Care A Bursting Bubble?

One of us recently had a 3.5 hour diagnostic procedure at a local
hospital outpatient surgery center. The EOB (Explanation of Benefits)
from the health plan showed the hospital had submitted a facility
charge of just over $13,000 –
more than four months of total income for one-third of American households – and
the health plan paid approximately $1,300, which means that willing
vendors and purchasers agreed that the procedure's market value was 10%
of the charge.

But without insurance, we would have been legally responsible for that
bill, with the willingness to negotiate utterly at the discretion of
the health system. Setting aside the fact that charges are crazily tied
to the evolution of Medicare cost reports and grow out of stuffing
every bit of
possible cost into each charge, the EOB begs three questions.

  1. Is it appropriate to add a 1,000%
    surcharge for the sin of uninsurance. For not-for-profit health systems
    especially, is it appropriate to do so while receiving a tax break for
    providing community service?

  2. When a provider chooses to pursue a receivable figure that is more than
    the established market value (as determined through the contractual
    figure with the health plan), can that effort properly be understood as
    inflating the market?
  3. Can a system maintain stability when it inflates value beyond the means of most of its purchasers ?

The definition of a market bubble is a high variance between the
intrinsic value of a product and its market valuation. Bubbles always
burst eventually, as inflated market values tumble back towards
intrinsic value. We're seeing this with homes and banking stocks. Are
we there yet with health care services? Could America's health system

The Threat
It's hard to imagine the health care system in free fall. The
federal government pays for approximately half of health care already,
through allocations for Medicare, Medicaid, SCHIP, the VA, and the
Federal Employees' Benefit Program. The stimulus bill allocates a "down
payment" of $634 billion for health care reform over the next ten
years, assuming that somehow this money will go to save health care
dollars.  But it could just as easily become a bail out for the failing
health care sector, massively larger than the bailouts for the banks or
the autos, and "too large to fail." Keep in mind that health care is
now 16 percent of the US economy, one dollar in seven and one job in
eleven, so large that any significant disruption in the sector would
inevitably cascade to all other parts of the economy.

And the threat goes both ways. Health care could push the larger
economy over the cliff, or the reduced resources associated with the
downturned economy could precipitate the collapse of a health care
sector that has become accustomed to inflated reimbursements. Either
way, American society is vulnerable and in very big trouble.

It goes without saying that, as the funding dries up, the safety net
provider organizations that deliver the lion's share of care to the
medically indigent will fail first, as did Martin Luther King in Los
Angeles, and as Grady in Atlanta almost did. A year ago, the safety
nets' distress at the edges of the system were already the most
tangible signs of the unfolding crisis. Now, the problems we've
described above are with mainstream providers who cater to the middle
class. What we have not seen yet is the impact on the health care
supply chain, which accounts for 40 percent of health care dollars and
which are also tremendously over-valued.

The Opportunity

Instability in systems that are directly connected with important
societal benefit is never good, because powerless people suffer
disproportionately according to caprices of fortune and the system's
rules. American health care certainly fits that bill at the moment. A
majority of the American people are very unhappy with the system, and
nearly every sector of the health care industry is under increasing and
unsustainable stress. American health care's storm clouds are
gathering. It's very ugly right now, and getting worse.

The good news is that, as the system becomes becomes
increasingly unstable, the opportunity also increases for a full scale
overhaul of health care that rightsizes the longstanding waste and
pricing of American health care to more sensible proportions, and
develops both policy- and market-based solutions that build on
experience and that can have lasting utility.  If our leaders are
unwise and susceptible to special interest influence, it could also go
the other way. But times like this are our best shot, because the
problems are so glaring and the solutions that are in the common
interest so straightforward.

Whatever path we go down, health care is certainly poised for
significant change. Part of our national effort for that change must
include a transition plan that consciously seeks to reduce
to a minimum the turmoil

Brian Klepper PhD is a health care market analyst and a Founding Principal of Health 2.0 Advisors, Inc . David C. Kibbe MD MBA
is a Family Physician and Senior Advisor to the American Academy of
Family Physicians who consults on health care professional and consumer

34 replies »

  1. For the people to trust again, first we must fix the current failed tax system that drowned for 9 years, and then the People may trust Government Officials with the Health Care Dollar
    There is a unity lost between Governing Parties that is needed to help the people feel secure. The moral building block for Health Care.
    To see the true Health Care Tax forum you must stop thinking in 3-D,This multi tax forum is against a $100 Trillion Dollar system.. …
    To force pay into another system of failures within Health Care Insurance Groups.
    This economy will not balance with this concept of a tax forum against the Health Care System. The issue of how to force pay into this system of Health Care may have worked but I am still troubled over the progressive tax forum within this Bill. It covers so many items and Countries that it only forces the system to adjust itself. In some areas, increases against the people and the troubled economy, and in other areas, less effects will be felt.
    But this is my big problem, Government Officials seek help and they are to proud to ask us, “the true working force of Government.” It is understandable they have failed the People and within the United States Of America all we ask is to see us as who we are and not try to bring us into this world of the intellectual. I guess our Prime Directive is that of Star Trek, so it must be understood that for millions of people we are just as happy as can be making $13.00 per hour and we have no interest in this world of politics, and how to be a Enstine. Government Officials must understand that there is a level of people within different parts of this Country, that seek to be only that they find to make them happy.
    As for this economy well, it is said that the U.S.A. Arms Division has created enough arsenal to destroy every last creature in the world 2 times over,built with tax dollars. This would be funny if not for the irony of it. And now as time has passed Government Officials keep failing. Before 9/11 all the way to today.
    As it is in a world of a system, when employees continue to fail, one or two things happen, one; you get fired, two; if you see into a person a good, then it is political correct to implement a penalty or roll back in pay. But this implement of penalty is more favored in the course of action in the Federal Employment World. So how to fix the economy and unite it with the Health Care issue. It would be in the Countries best interest to implement a 10% per cent penalty against every State, County and Government Official within this Matrix of failures. Hey what is that old saying, what is good for the Goose is good for the Gander. I am serous about this, it is past due to show that our Government Officials they have failed, their system failure reaches into this world of warnings that they brush aside as if the information is not worthy noting. From Pearl Harbor to 9/11/2001 to 3/07/2010 of our tax system and Health Care Reform. This 10% per cent penalty should go into the Health Care Forum.
    The big problem that Government Officials have is that they have no street credit. President Obama still has some but if he does not take his family and step away from these dueling Parties, that fight over this Health Care Dollar, and stand with Us he will lose all credit from the streets to the county.
    President Obama, I would say to you, you have one last chance to regain the hopes and dreams of the American People. To reach out in a concept that states, if there is 250 million people in trouble because of these failures, I would give all my money to them and then I would say to all that I gave money to, “I have no money left, would you all please give me $1.00 back and then I would have $250. million dollars to start all over again.”
    As for this $100,trillion dollar in site………….
    Results 1 – 10 of about 685,000 for net worth of medicine development industry
    Just to show how deep this Health Care Tax split petition reaches. The term split petition is used because of the Tax factor plan that is not seen because of the intent not to show a capital Taxing of close to a $100 trillion dollar package, a yearly system income, not profit…..
    Some have stated that I clam to have spiritual in site or something of the sort. I assure you this is not true, so when I state that I asked God to help, it is my way of saying hey Bobby show me how to work on theses Chevy engines. But I do thank you for the consideration. Consider me a cross of Jethro Bodine from the Beverly Hill Billies with my 10th. Grade education and Vin Diesel from the move Pitch Black.
    So drop on by and see page 100 at our site and follow the blue pill link
    Health Care within a moral value, is to ,
    Henry Massingale
    FASC Concepts in and for Pay It Forward
    http://www.fascmovement.mysite.com on google. yahoo, and Aol.com
    please take the time and visit all my new friends on the net and if you wish to post with FASC Concepts you will be most welcomed. So join us and share your ideas as one in one voice.

  2. I am a physician. When I was in active practice I was making an excellent income.
    I never had to worry about the cost of my medications.
    Once I retired my income dropped and I also had to buy all of my ever increasing list of medications.
    As the cost of medications was a substantial part of my family’s budget, I started searching for Online certified
    pharmacies that have lower prices. After investigating numerous pharmacies in the USA, Canada

  3. One of the charms of the blogosphere is that it reminds is there are many parallel universes out there. There’s a wealth of poll data showing that Americans don’t see the health system in crisis and dissatisfaction with the system is a bit less than it was in the early 90s. More importantly, most folks are quite satisfied with the care they’re getting, although they’d like to pay less for it. The folks who are unsatisfied tend to be uninsured and tend, surprise, to lack political power. Which is why the political system can afford to ignore them and focus instead on sweetening things for those who already have some power and some insurance — an attitude that brought us the medicare drug benefit. sure the system is clunky and delivering less than optimal care. but there are other folks on other blogs who are equally concerned with the flaws in the power grid. As the great political philsopher and economist Herb Stein said, anything that’s intolerable won’t be around for long (or something approximating that). It is clear that the current system is far from the intolerable level.

  4. Here is a problem:
    What’s more fearful is how much our current system costs individuals and hurts economic security. The US is fatter than any other nation because people don’t have relationships with general doctors, rather they use the expensive specialty care system to ameliorate symptoms.
    Here is the solution: The foundation of any reform needs to emphasize prevention and primary care and convey the benefit of doing so, both in terms of cost savings and productivity. The ‘culture’ of medicine will change only if, like in the financial markets, incentives are aligned properly.
    Will healthcare finances be the next expose` on cable news shows like we have seen regarding AIG, Wall Street and Bernie Madoff?

  5. Dear Tim: Thanks for your thoughtful comments about the effects of the profit motive in health care. It’s time that we consider a public health model as a foundation of a national health care service, in my humble opinion. But it’s going to be an uphill struggle, as was civil rights, tobacco reform, and the election of President Obama. Kind regards, DCK

  6. What would be solved; the cost of care, access, less disease, medical bankruptcy, less poor using the ER?

  7. Nate said: “…Make EVERYONE pay for 50% of their care like we did in the 60s and problem would be solved.”
    and I would add: “in one second!”

  8. People want electricity, gas, phones and water, they don’t want to get sick.

  9. “Health care is an essential service, the theory went, just as are electricity, gas, phones and water. Regulating health care as an essential service would assure that it would be rationally distributed and adequately funded.”
    This would be great if it was also paid like all these utilities. THe average person doesn’t use as much electricity and water as they like then expect someone else to pick up the bill. Nor do they pay a 20% surcharge to have someone else pay their utilitiy bills. Make EVERYONE pay for 50% of their care like we did in the 60s and problem would be solved.

  10. “Then 1998 on Private insurance premiums took off as providers shifted cost to private plans to cover the shortfall from public financing.”
    A failure of private plans NOT Medicare. Medicare was trying to rein in costs but also has to live within a private for profit system. Your example shows the failure of a two tier system.
    “The point is 14 states spend 25% less then MA.”
    So, I guess hosptials charge 25% less in those states, docs earn 25% less, and insurance companies make 25% less profits as well? And I guess for the same policy to the same person insurance premiums are 25% less?

  11. Mike,
    All systems have their flaws, through each system’s advocates rarely own up to them. In America’s governmentally-financed systems, special interest influence on Congress spins policy and regulation to advantage, and the result is cost as explosive as it is in the commercial sector. The bottom line is that inflation in Medicare and private-sector health plans have effectively tracked with each other for the last 30 years. See http://www.thedoctorweighsin.com/journal/2007/7/5/mr-orszags-surprise.html.
    If single-payer, by itself, was inherently more efficient, we’d have experienced MUCH lower costs in Medicare and Medicaid in the past.
    The answers are not merely in different financing mechanisms. We need changes in the ways we supply and deliver health care, because that’s where the greatest costs are created. And, as the Dartmouth Atlas and other credible research makes clear, that is where the excesses in the system are most heavily focused.

  12. Perhaps someone can answer this. If the single payer system is the way to go, why is Medicare facing bankruptcy?

  13. Brian and David,
    Your comments and insights about the health industry market bubble are right on! Unfortunately, as a nation we are ill-prepared for the bursting of the bubble, and woefully short of solutions, not unlike the banking industry when that sector recently imploded.
    During my career as a health executive, I’ve made a point of studying the impact of organizational structure in the efficient delivery of health services.
    One point that has received scant attention of late is the role of profit-making organizations in the health care delivery system. During the 90s, proprietary hospital operators were lionized for their business “efficiencies”, and were held out by many as the saviors of the industry. I think we’d all agree that the industry still awaits its savior.
    Meanwhile, numerous studies have found that for-profit operators of health services have not only failed to deliver their much-hyped efficiencies, but in many instances have failed to deliver on clinical outcomes.
    To cite just one example: “Given the fourfold increase of for-profit hospice providers entering the market in the past decade, the findings reveal early evidence that ownership type may influence the services that hospice patients receive”, commented study author Elizabeth Bradley, associate professor in the Department of Epidemiology and Public Health at Yale School of Medicine, referring to the study’s key finding that terminally ill patients who receive end-of-life care from for-profit hospice providers receive a full range of services only half the time compared with patients treated by nonprofit hospice organizations.
    While I don’t intend to imply that health care delivery organizations should be based upon the not-for-profit community model, I am suggesting that health care reformers pay greater attention to the influence of organizational structure and of competition on the cost and outcomes of medcial care.
    In the 1970s, a common intellectual and academic premise was that health care should be regulated as if it were a public utility. Health care is an essential service, the theory went, just as are electricity, gas, phones and water. Regulating health care as an essential service would assure that it would be rationally distributed and adequately funded.
    Perhaps it is time to revisit this premise once again as part of the discussion on how to reform the US health care system.

  14. “That said, look at U.S. health care expenditures compared to other developed countries — we spend nearly double per capita and get results that are very mediocre. That to me describes a “bubble”.”
    This is a total Non sequitur argument. You can’t compare the aggregate results of 10,000 health systems to those of 1 health system then use the poor results to incriminate all of the 10K plans. That is the same as saying since the average IQ is lower then mine I’m more intelligent then all of you.
    There are thousands of health care systems in the US that don’t spend anywhere close to double other developed countries. Our problems are mainly due to the failure of Medicare, Medicaid, MA, and other liberal states.
    Can you imagine a scenario where in order to solve a problem you replicate what caused it over the entire system? Political decisions and government plans are what got us here and they sure are not the answer to get us out.
    Pop the public healthcare bubble and the rest of the system will live on fine.
    Peter have you ever mapped Medicare reimbursements to private insurance premium? Private insurance premiums where stable until the last time government whacked Medicare reimbursements, 1997 I think? Then 1998 on Private insurance premiums took off as providers shifted cost to private plans to cover the shortfall from public financing.
    If you think Utah is an anomaly then use and of the other 10 lowest states. Arizona is only $129 more, Idaho is close as is NM and NV. The point is 14 states spend 25% less then MA. Medicare would look even worse.
    You used total premium not employer but the point about inflation is still accurate but still proves the point America does not have a HC crisis public plans and liberal states like MA do.
    I and most Americans rather of our current employer based system then some public single payor plan. All the progressive arguments about it being cheaper or better or solving ANY problem are all propaganda and lies. Why do you want to replicate Medicare which is a complete failure instead of UT, AZ, ID or any of the other plans that have performed considerably better?
    “Now more than half of large companies have HDHPs, and only 1/5 of employers who offer these fund HSAs.”
    Be careful when making this argument as it means nothing. Just because an employer buys an HSA plan doesn’t mean they are offering an HSA or the employee is liable for the deductible. Almost all of my clients buy HSA qualified plans then hire me to self fund back down to a normal deductible. To any academic or policy wanker reading numbers in their ivory office it would appear these employees are subject to 5K deductibles. In fact they all have $250-1000 deductibles. This is a HUGE trend in the market with hundreds of TPAs doing the same thing.
    “Coverage that is offered in both arenas now have skinnier benefit structures, with higher out of pockets”
    It appears you are advocating for the inefficient 100% coverage no OOP plans. Is there a reason you think we are better off over paying 20% for basic services? Every time you have your insurance company pay a bill instead of paying it yourself you pay a 20% convenience fee. Why should we not exclude all routine and known care from our insurance policies and pay the bill directly with the premium savings? We come out 20% ahead yet you mention it like it is a bad thing. If you’re a big government progressive hurt by the reduction in tax dollars then I understand. Other then that or you’re a stock owner of large insurance companies this is a positive trend.
    “It makes more sense to believe that their investments in health IT (to lay in the infrastructure for data collection) and comparative effectiveness research (that can drive evidence-based decision support) reflect a hope that better tools and information, combined with financial incentives for results, will organically reduce significant inappropriateness and waste.”
    Being big government socialist yes it easy to believe they think spending billions to MAYBE save billions is a great solution. In the mean time the evil free market will use more logical solutions that actually get results, like increasing co-pays when a $4 generic is available. Implementing deductibles and co-insurance so consumers actually take a second to think about what they are spending. NO AMOUNT of health IT or comparative effectiveness will ever come close to saving as much as a consumer liable for their consumption. In the 60s when American’s paid for 50% of their HC OOP we didn’t have this problem, over utilization started as the percent we paid OOP dropped to 18% like it is these days.

  15. Vince,
    Thanks for your comment. I understand your reasoning. Here’s why I disagree.
    1) Demand may be inelastic. Money isn’t.
    A couple years ago, David Cutler from Harvard wrote a piece saying that all this money we’re spending on HC is good for the economy. I wrote a response – Enthoven signed on as a co-author – called “Running on Empty” arguing that, if the money ran out, it would only cause the sector and then the economy generally to crash. Now the reverse scenario is occurring. Resources in the rest of the economy are drying up. The impacts are being visited on HC.
    2) While the fact half of HC dollars are governmental will provide a buffer, the other half – and the lion’s share of enrollment erosion – is commercial, which will continue to rapidly erode in the current environment.
    The erosion is coming within the pool of about 140-150 million Americans who are covered on the private/commercial side. The last time I saw credible federal data on health plan enrollment erosion was around 2005, and it was running 4.5%/year. Now more than half of large companies have HDHPs, and only 1/5 of employers who offer these fund HSAs. Fewer small employers offer coverage at all. Coverage that is offered in both arenas now have skinnier benefit structures, with higher out of pockets, and significant reductions in dependent subsidies. So health plan enrollment erosion is almost certainly higher, as is the likelihood that the individual will experience financial distress in the event of a significant medical event.
    These dynamics will translate to increases in both bad debt and uncompensated care, which will mean drops in available revenues for providers of all types. More to the point, the implications are significant for many organizations in the HC continuum whose revenues, margins, stock price, market capitalization and credit are fueled by premium and out-of-pocket payments. Yesterday was a new report, this time from the AHA, showing that Q4 2008 margins were down 12.4% for American hospitals, with more than half in negative territory. Uncompensated care costs were up 6.6% and average borrowing costs were up 12%.
    The impetus for change will come as the care delivery systems – not the health plans or the suppliers – begin to experience greater difficulties, and as more and more middle class consumers are financially buffeted by access barriers and cost that is significantly beyond their means.
    3) Reports that the Obama Health Team, including Zeke Emanuel’s address to the AMA, only seek to reduce the growth of HC cost, are counter-intuitive.
    If this is the current, official mantra, it contradicts the earlier stated positions of both Zeke and Peter Orszag, and, logically, can only be intended to mollify entrenched interests. Reports by Brent James and others that waste almost certainly comprises more than half of all HC expenditures, or about $1.4 trillion in 2009, suggest that HC bloat is one of the stakes being driven into the heart of the American economy. It is far-fetched to think that the Obama health team believes otherwise. It makes more sense to believe that their investments in health IT (to lay in the infrastructure for data collection) and comparative effectiveness research (that can drive evidence-based decision support) reflect a hope that better tools and information, combined with financial incentives for results, will organically reduce significant inappropriateness and waste.
    In other words, I continue to believe that, despite the best efforts of the Administration, since the health care financing of most Americans remains rooted in the marketplace, the potential for instability is high in a significantly stressed system that has been exacerbated by a economic downturn.

  16. Nate, “What demographers call Utah’s special story — its population is the youngest in the nation by far…”
    Could their lower health costs have anything to do with this?
    Because my previous links and this;
    “According to the Kaiser Family Foundation, the employer-paid portion of health insurance premiums for a Utah family was $10,975 in 2006, or double the rate in 2000. In 2006 alone, health care costs in Utah increased by twice the rate of earnings and more than double the rate of inflation. In Utah, 60% of businesses offer coverage to their employees today, down from 70% eight years ago. Gaps in coverage exist between large and small firms. While 90% of companies with 50 or more employees provide coverage, only 32% of firms with fewer than 50 employees provide health care for their workers.”
    Don’t seem to support your argument that Utah has found the magic insurance formula for lower health expenditures. Maybe you can tell me how Utah does it.

  17. Brian,
    I’d say you describe a scenario that is “possible”, but highly improbable.
    Economists have traditionally viewed demand in the health care sector as relatively inelastic; this becomes INCREASINGLY true with aging baby boomers driving demographic trends. Yes, to some extent people can put off or delay expenses, but much of that results in more care being needed at later stages of illness. When the tech bubble burst in 2000, investors retreated to health care because of the fundamental stability of demand in the health care sector — demand that drives need for hospital stays, drugs, devices, procedures, etc.
    The Obama administration views health care as part of the economic problem, but also as part of the economic SOLUTION. Lots of jobs being created in health care with more coming from HITECH legislation.
    As I understand goals of Obama admin, they want to reduce rate of growth of health care spending — not reduce health care spend overall (altho I think reducing rate of growth is not aggressive enough.
    Thus, Obama admin is not inclined to want to create nor allow the free fall scenario you describe.
    That said, look at U.S. health care expenditures compared to other developed countries — we spend nearly double per capita and get results that are very mediocre. That to me describes a “bubble”.
    Can you imagine a scenario where a political decision is made to get U.S. “in line” with other countries, i.e., a political decision to make U.S. system more like Canada, UK, Japan, you pick it. Under such a scenario, probably 40% of costs “could ” be whacked overnight. Possible? Yes. Probable. No.

  18. Peter,
    A survey is as scientific as a playground poll. Unless your asking people who their favorite band is they serve no purpose but that of propaganda. This problem is amplified when you ask questions in a subject matter the pollee has limited knowledge of. Would you ask a waiting room full of patients to diagnosis your rare disease? They would all gladly guess for you and seem really sure of their answers but at the end of the day still have no idea what they are talking about. Your average person on the street has NO idea what insurance cost and even less why it cost that.
    Looking at hard data;
    “In 2004, as an example, per capita spending ranged from roughly $4,000 in Utah to $6,700 in Massachusetts”
    “According to OECD data, the United States spent$6,102 per capita on health care in 2004 — more than double the OECD average and19.9% more than Luxembourg, the second-highest spending country.”
    Page 7 gives you the list. Before people go all crazy this is a very simplistic point, to be accurate you would need to adjust for age, OOP, and a thousand other variables. But the overall point is accurate. If you eliminated the cost shifting from artificially low public reimbursement and costly government regulation Utah would cost the same as most of your industrialized nations.
    America DOES NOT have a healthcare crisis, Medicare, Medicaid, and MA do.
    This is also a great example of why reform is doomed to failure and keeps harming our systems more then it helps, you have debates and legislation built on surveys and feelings instead of hard facts. I have never debated a progressive about healthcare that even had a basic understanding of facts. The entire liberal movement for reform is based on politics, junk science, and emotions. To be fair the only chance they have to save their systems is to trick people into doing it. Like Kyoto was a farce of an environmental bill healthcare reform won’t do anything to improve healthcare.
    “but find the ones about single-pay uninformed and just fear mongering.”
    How many other people on this board have spent the last 15+ years working in both private insurance system and Medicare, a legitimate example of single pay. I would challenge you to find anyone more informed then me to debate my comments. There is a HUGE difference between dreams and reality. It is easy to say we are going to create this single pay system that will do X, Y, Z. Anyone that works in the current systems knows it NEVER happens the way it was intended. Do you think Ted Kennedy MEANT to kill people when he forced employers to offer HMOs? Teddy’s own words HMOs where the answer to our healthcare crisis and everyone should be in one. There is ZERO chance of single pay working in this country like politicians promise you.
    Do any amount of homework and compare what politicians have promised us in 40+ years of healthcare reform to the actual results.

  19. Nate, thanks for your comment’s change of tone (no insults). I can agree with some of what you say but find the ones about single-pay uninformed and just fear mongering. Citizens in countries that have government run/controlled health insurance aren’t demanding a U.S. style system, but like any other system are demanding constant modification and better management to justify cost/benefit. If the U.S. designed a single-pay system that; “doubled your taxes, meant wait times of months for minor conditions, would not allow you to receive potentially life saving treatments that have not been approved or deemed cost effective, and removed any freedom of choice?” then that would indeed be a failure. But as everyone seems to think over-utilization is a large part of the problem then there will need to be tough decisions about what is covered and what is available, that’s the essence of cost control that any corporation would do..
    I did some research on your comments about Utah, and don’t understand how you feel the state should be a model for the rest of the country. Looks like they are in the same boat as the rest of us.
    This web page:
    Links to this web page:
    And here’s another about Utah healthcare:
    “Well, then I guess you can continue to sit back on your couch and do nothing…”
    Deron, I became a vegetarian a number of years ago and eat a large amount of local and organic food. I don’t drink soft drinks, or use much sugar or any HFCS. I don’t eat any fast food from the Hardees or
    MacDonalds type chains or eat white bread. I exercise regularily at the local health club both on strength and cardio. I don’t take any drugs. The last time I needed a doctor of any sort was 15 days ago when the local bug found it’s way into my lungs and I needed an antibiotic to kick it out. You would be jealous of my blood pressure reading. I am actually YOUR poster child for personal responsibility. I also write letters to my federal and stated reps on health issues and send campaign donations to those I agree with. My household is listed as Independent and voted for libertarian for state governor and a republican for local government. I also attend most local commissioner and planning board meetings for my county and have participated in local campaigns to enact local ordinances against polluting industries. I also worked single handedly to get auto engine anti-freeze collection and recycling at our local landfill where before we had none. I continue to work with the local landfill on recycling issues.

  20. The answer to the Posting’s Question is: No. Employment in the health system is rising, not falling. Unlike financial services and real estate, demand for most health services (hospital admits, doctor visits, prescriptions) is falling in the low single digits, and not consistently. About half of hospitals still have rising admissions, as do many physicians.
    ARRA pumped billions into healthcare that probably were more desperately needed elsewhere, and combined with the outflow of illegals from our border states, will probably prevent much of the sharp rise in uninsured from curtailed Medicaid eligibility (offset by the SCHIP expansion we would otherwise expect. The number of uninsured will go up some but not “explode” as the authors suggest.
    Bad debts have been rising for several years, evidence of a growing affordability problem, but they are not “skyrocketing”. The biggest hit the system has taken so far has been from the capital market meltdown, both in sharply higher borrowing costs and diminished investments. Market values of most healthcare equities themselves have plummeted along with the rest of the market, but have held up somewhat better than manufacturing, finance and the other sectors. Not a lot of dollar healthcare stocks.
    In fact, healthcare is the strongest sector of the economy, notwithstanding the serious equity and cost concerns the authors cite. It is not going down the tubes; it is in a shameful “low level equilibrium” propped up by the perverse incentives discussed above and a ton of government funding.
    I think this is a hysterical and sloppy post, frankly, which does little to point toward solutions. Sorry Bryan and David, the health system is not “going down the tubes”. Not yet, anyway. It is strong enough and government subsidized enough that if it does, most of the rest of society will have collapsed ahead of it, and we’ll all be growing our own arugula in our backyard plots and foraging for meat in the alleys.
    Healthcare will be the least of our worries.

  21. “Implosion sounds about right. From the ashes will rise universal single-pay.”
    Well, then I guess you can continue to sit back on your couch and do nothing while the politicians fumble around and do nothing.

  22. Excellent post. It frustrates me to see all the nonsense that we hear on cable about healh care reform and how devastating it will be for Americans. 95% of public has no clue about the sysytem. I think people like you should lead to be frontliners along with Maggie Magar and others. I live in an area where 85% have health insurance ( through employment) but no one has a clue about the brewing storm and worse they are content because they are young and healthy in general and if told they have to change some of their benefits will revolt. Public is not for change on healthcare as of now and unless that changes we are at the mercy of congress.

  23. “the casualties would be mostly children here – that is NOT being reflected in the uninsurance surveys.”
    I don’t remember the exact number but the reason kids aren’t showing up as uninsured is becuase they where added to SCHIP. SCHIP growth has been HUGE. Every study of actual SCHIP growth and proposed growth have shown that a large portion of new enrollees where not uninsured by moved from individual and employer plans.
    “How do we transform an adversarial system to non-adversarial so as to benefit the parties from the cooperation?”
    In my opinion this is how we got here. Adversarial relationships are what controls cost. Look how BCBS and Partners in MA created a non adversarial relationship to fleece premium payors. Part of the reason cost skyrocketed is the financial adversarial realtionship between providers and consumers deminished. In 1960 when American’s paid 50% of their HC OOP they where adversarial, now that they only pay 18% they really don’t care.
    Ying & Yang, you MUST have opposing forces of equal strength to maintain balance. Like all other examples in life if a majority forms it will act in it’s best interest against the minority. Patients need drawn back from the provider side to the payor side to restore balance.
    “Do we fear that the care providers would go on a care and medical billing rampage?”
    Provider billing abuse killed indeminity plans. We tried “trusting” providers and they raped the system. For a current example just look at Medicare, DME, imaging, electric wheel chairs, at one point in time or another providers have rampaged through those segments until CMS clamped down, often foolishly by reducing reimbursement for legitiment treatments. Every time they have been given a chance providers have abused the system. Not all providers but more then enough to bankrupt it if left unchecked.
    “Does anyone believe that the average patient can understand the complexities of 21st century medicine?”
    Yes I beleive that 100%, seeing has how the “average” patient doesn’t have anything more then a couple office visits and some Rx there is no reason they can’t be responsible for their decisions. Remember the 80/20 rule, 80% of expense is incurred by 20% of the group. There is no reason to let the average 80% off the hook of personal responsibility.
    “How do we pay for this? The rest of the developed world spends less than half of what the US spends and they cover everyone.”
    The solution you propose is what bankrupted the system. Private employer based insurance in Utah is not unsustainable, Despite huge cost shifting from Medicare and Medicaid it is in fact very viable and not far off the cost of HC spending in the rest of the world. THe only unsustainable plans in America are Medicare, Medicaid, MA, NY, and a couple others, oddly the same ones you want to model the new system after. American does not have a health care cost crisis except for the fact that liberal healthcare has been a complete and utter failure. Remove the drain of these plans and America would compare favorably with any other plan in the world.
    “From my sporadic reading, the support for universal coverage, “even if it means higher taxes” has been rising.”
    Who wants a time machine for free? Well of course everyone is going to support that. I wouldn’t mind dating supper models while your at it to. Now ask the question in a format that could reasonably be delivered;
    Would you support Universal Healthcare if it doubled your taxes, meant wait times of months for minor conditions, would not allow you to receive potentially life saving treatments that have not been approved or deemed cost effective, and removed any freedom of choice?
    Suddenly people aren’t so excited about Universal Healthcare. 80% of insured are happy with their insurance and don’t want it to change, a poll about a subject a person actually has knowledge of is always more valuable then a bunch of what ifs.
    Provider and large insurance company sitting down for the good of the patient sends shivers down my spine. Last time I saw that the local public hospital canceled my PPO contract so they could push more business to the local insurance company they sat down with. You seem like an honest inteligent guy Deron but anything comming out of that meeting bigger then agreeing to compete in a respectful manner would scare me. There are lots of closed markets around the country where a insurer, usually a Blue, have a monopoly becuase of their close relationship with providers and it is always to the detreiment of the person paying the bill. Dogs and Cats just aint meant to get along like that. It aint natural and strange things come of it!
    How about open solutions where insurers don’t push patients to certain providers and providers don’t lock out insurers/payors with discount discrepencies? A transparent system where providers published their rates and insurers published their reimbursements and patients where free to choose and pay the difference would be nice….nostoligic for the old UCR days I guess.

  24. Let me tell you how real reform is going to start. I got a voicemail from a top executive at a health insurance that my medical group is contracted with. I have proposed that we sit down and systematically diagnose and treat the deteriorating provider/payer relationship, in the name of improving the lives of our mutual customers, the patients/insureds.
    I have been a medical group administrator for years, exposed to all major system stakeholders on a daily basis. I have spent quite a bit of my free time of late reading all of the comments on THCB and other blogs.
    I intend to go to the table with this guy and get the ball rolling on something big, which will hopefully create a template for future conversations. At this point, you are all saying that I have a better chance of winning the lottery. I am here to tell you that I don’t care what the odds are, because complaining and bickering has gotten us nowhere.
    With that said, I would greatly appreciate any input and suggestions on what this initial conversation should look like. I will have this guy’s undivided attention and I intend to use it wisely.

  25. Wait a second, let’s pause before any unfounded statements what Americans want and what not. From my sporadic reading, the support for universal coverage, “even if it means higher taxes” has been rising. Best example I could quickly find is:
    I basically agree with Barry Carol’s post above (the only thing I’d quibble about is “as long as national evidence based standards were followed” – there are no unequivocal clear guidelines for most clinical situations, or at least very many important qualifiers, making decision making in diagnostic situations so complex and ambiguous).
    A possible fix:
    The time would be ripe to introduce a bare bones plan (e.g. as Obama’s public plan) that clearly covers the necessary as established by a board that includes a variety of physicians and patient advocates and that focusses on evidence. Make reasonable noninterventionalist guidelines for end of life care (e.g., MD as hell, no PEG tubes for patients with dementia) that can be modified only by a living will of the patient.
    Based on the medicare fee schedule, incr. the value of PC and cognitive medicine and decrease reimbursement of procedures to a reasonable rate (i.e. a doctor is reimbursed only slightly more for procedures than he/she is for seeing patients).
    Allow this plan to operate under different tort law, maybe similar to the VA, that ensures that every physician who can prove a reasonable effort cannot be found negligent for errors in judgment or honest, nonnegligent oversights (but could be subject to board action for egregious and/or repeated mistakes).
    People can make a choice: participate in a tax funded system that does sthg similar to what some described here as “lean medicine”. Or continue, at your own cost, with a 12 K +/year private insurance where you can get your MRIs, holters, stress tests etc. for dizziness, even if you are 25 and have a normal exam. Some people are going to pay the price for that.
    Most physicians will serve both plans and might even prefer to serve the public plan despite lower reimbursement because it makes providing care more meaningful and takes away the fear of litigation. I don’t agree with colleague MD as hell that doctors are “demeaned and disrespected” (they are still, on average, very well paid and well respected), but I can understand his frustration when you consider the pressures a physician faces with third party payor paperwork, litigation and unreasonable patients desiring gold plated wellness care.

  26. There is a widely held belief, especially among doctors, that treatment decisions should be made without interference from payers. In other words, the doctor, maybe in consultation with the patient and maybe not, will decide what treatment is best and the payer, whether CMS, Medicaid, or private insurers should just pay promptly and without question. In a real world of finite resources, the system doesn’t (and can’t) work that way.
    While there are many grey areas in medicine, there is also plenty of evidence to apply to both treatment decisions and payment policy. If the evidence shows, for example, that PSA tests are not cost-effective, insurers shouldn’t pay for them. Patients who want one can self-pay. If Prilosec or its generic equivalent is just as good as Nexium for acid reflux, we should refuse to pay for Nexium or at least make the patient pay much more for it out of pocket. If standard radiation or seed implantation is “good enough” to treat prostate cancer vs. proton beam therapy for five times the price, we should be able to refuse to pay for the latter or let the patient pay the difference. Both CMS and private insurers know all this, but private insurers are deemed to lack the “moral authority” to do so unless CMS does it first. Therefore, CMS must take the lead on implementing evidence based payment reform.
    I support the doctors regarding the need for tort reform that would make it impossible to successfully sue for a failure to diagnose a disease or condition as long as national evidence based standards were followed. However, their long history, spanning decades, of opposition to any reform(s) that might threaten their power, their independence or their income is not helpful to put it mildly.
    There are plenty of reasons why healthcare in the U.S. is much more expensive than elsewhere including (1) multiple insurers create administrative complexity though the potential for simplification exists within a multi-payer system, (2) our litigation system drives doctors to practice defensive medicine, (3) specialists earn about twice as much per year on average than their counterparts elsewhere, (4) brand name drug prices are much higher here as other countries, in effect, free ride on U.S. R&D, (5) patient expectations help to drive demand for non-invasive diagnostic tests and brand name drugs that are advertised on television, (6) we have a more diverse population including more people living in poverty who tend to be sicker on average than people in the middle class or upper middle class, and (7) we expect / demand / receive more intensive care at the end of life resulting in more aggressive medical practice than is typical in other countries.
    Finally, it is virtually impossible to enter a hospital in the U.S. for even a simple procedure without generating a bill in the thousands of dollars at list price. When hospitals are not killing us with hospital acquired infections, they’re killing us financially with outrageous and totally unjustifiable bills. It’s no wonder the system is imploding.

  27. “The public is not clamoring for universal coverage.”
    This is probably true. Each member of the public only wants coverage for themselves… oh wait… that sounds like universal coverage.
    Most other developed countries have no problem defining health care and paying for it as a right for all of their citizens. They all do this for less than half of the money the US spends to provide dodgy coverage for some of their citizens. This is not rocket science. The medical industrial complex has taken over health care for their own profit but they have gone too far and they have broken the system.
    It will change.

  28. The 10% on that EOB sounds low, but my brother had one that was just as ridiculous:
    some type of laser eye procedure that was preventitive [=elective] to prevent a cornea tear in 10 years or so. I think it was some type of cauterization.
    He was in the chair for 5 minutes max.
    me: How much did it cost?
    him: can you guess?
    me: maybe $700
    him: the bill said $2900
    me: how much did you pay? [this was covered]
    him: can you guess?
    me: maybe $500
    him: I only paid the $10 co-pay
    I never found out how much the insurance negotiated the payment down to, but in my mind it should have cost a few hundred dollars and he should have been expected to pay it.
    Maybe the doctor bills $2900 to get $700 from the insurance company.
    Of course, this is utterly unsustainable!

  29. Brian and David
    Excellent. At least all agree that-
    – we are in crisis
    – change in now inevitable
    In my opinion,in a democracy, the most important sentences in your piece are-
    Then there’s the simmering rage that lower- and middle-class Americans harbor for the industry. Most lawmakers are finally realizing that this is a sleeping dragon.
    I believe both Big Insurance and Big PhRMA are both on the ropes. They have lost their credibility and their clout.
    Consumers are thoroughly disgusted with their practices behaviors,and brazen greed.
    Good Luck,
    Dr. Rick Lippin

  30. The nation is having the wrong discussion. You all are trying to cover everyone in the country for healthcare. Yet you have yet to define healthcare. No one has discussed why people go to the doctor or clinic in the first place. What motivates people to seek care? Thre is no single answer. Many millions of people use no healthcare services at all for much of their lives. Are you going to make them go to the doctor? ( BTW, it will not be a doctor actually). Other countries cover everyone because they use services differently. This country cannot cover everyone if the utilization patterns remain the same. Right now primary care is dwindling away. Just what service do you think you will buy with universal coverage?
    I do not wish to seem too bold, but I think you need to post that EOB where your center settled for 10% of charges. I for one do not believe it. No medical practice settles for that. Closer to 50% would be believable.
    The public is not clamoring for universal coverage. This is purley political. And most people think they will get the same care for less than before. That is delusional. The doctors in this country are fed up. We have been cheated, extorted, demeaned and disrespected. This is mostly due to the character of our detractors. Root out the bad apples in medicine, for there surely are some. But the corruption in government funded healthcare will not go away if all the power (money) is in the hands of Harry Reid and Nancy Pelosi. Good Lord, it will be Christmas come early for them!
    As I posted on another thread, please focus on the PEG tube. Formulate a policy and a standard about who gets one and who does not. Make it law. If you cannot do this, then sit down. You know nothing about what the problems in healthcare really are. If you can do this, I have a list of other ticklish life or death questions you can solve.

  31. Great analysis of our current ‘non-system’ of health care. Yes it is not sustainable. Yes it is a bubble. Yes it will collapse because nobody can afford it. The current economic crisis will just accelerate the bursting of the bubble.
    The question then becomes on of opportunity. The government will have to pick up the pieces and reinforce the ‘safety net’. The ultimate goal should be single payor health insurance provided by the government where everyone is covered. How do we get there? The financial meltdown and healthcare meltdown provides a good opportunity for the government to start covering more people and to impose rational pricing for proven effective treatments. The insurance companies need to go out of business but they will fight tooth and nail so they should just be gradually marginalized. They will soon be reduced to providing ’boutique’ insurance for rich folks as a supplement to the basic services provided by the government.
    How do we pay for this? The rest of the developed world spends less than half of what the US spends and they cover everyone. There is lots of money in the system. All we need to do is look at Canada, Germany, the UK, France, etc. for lessons on how to pay for things and how much to pay. We will have lots of money left over.
    The losers… insurance companies, drug companies, overpaid specialists, device makers, etc. I wouldn’t invest in them now.

  32. Brian and David,
    Having formerly worked in a health care system fraught with head-butting opponents, I appreciate your analysis but what is the solution?
    I totally agree with your description of a health care system in turmoil. The question remains, what to do. How do we transform an adversarial system to non-adversarial so as to benefit the parties from the cooperation? I have seen all together enough talk about how bad things are or how much worse they are going to get.
    When you do a phenomenology of health care, you realize that there are really only three parties – care providers, patients, and payers. Everyone else connected with health care seems to work with or for one of these three parties. Malpractice lawyers are not one of the parties, they are simply a manifestation of a breakdown between patients and providers or payers. Again, when an adversarial relationship develops between doctor and patient, the lawyer is a natural consequence. Reduce or eliminate the adversarial relationship and we can reduce lawsuits.
    Look again at the relationship between providers and payers. Why do we have payers dictating care to doctors, hospitals, etc.? Why is the choice of care not left to doctors and patients where one would naturally think that the responsibility should lay? Do we fear that the care providers would go on a care and medical billing rampage? As bad as medical costs are today, is there any evidence that insurer control over care really helps? Most would probably agree that the payer managed health care system is in default. Medical costs continue to rise.
    Another element in the phenomenology of health care. Who assists the patients in deciding appropriate care? Does anyone believe that the average patient can understand the complexities of 21st century medicine? Should we make the patient responsible for care as some have suggested?
    Going back to the care providers for a moment, can we as patients and a society depend on them to always make the correct decisions regarding appropriate care? How quickly can a busy physician with a large practice get the clinical findings to build a diagnostic impression or diagnosis? What happens when the physician is busy, overburdened, has a patient who doesn’t follow orders, or is plain wrong? Don’t we want to catch these instances that happen every day as quickly as possible?
    I think that finding agreement in the answers to these and similar questions will help find our way our of the morass so well described in Brian and David’s piece.