Economics

The Gold Plated Health Care System: What the New Numbers Tell Us about the State of the Economy

For the third year in a row, national health spending in 2011 grew less than 4 percent, according to the CMS Office of the Actuary.  However, the report said modest rebounds in pharmaceutical spending and physician visits pointed toward an acceleration of costs in 2012 and beyond.  CMS’s analysts make much of the cyclical character of health spending’s relationship to economic growth and also forecast a doubling of cost growth in 2014 to coincide with the implementation of health reform.

This non-economist respectfully disagrees and believes the pause could be more durable, even after 2014.   Something deeper and more troublesome than the recession is at work here.  As observed last year, the health spending curve actually bent downward a decade ago, four years before the economic crisis. Health cost growth has now spent three years at a pre-Medicare (indeed, a pre-Kennedy Administration) low.

More Than The Recession Is At Work

Hospital inpatient admissions have been flat for nine years, and down for the past two, despite compelling incentives for hospitals to admit more patients. Even hospital outpatient volumes flat-lined in 2010 and 2011, after, seemingly, decades of near double-digit growth.  Physician office visits peaked eight years ago, in 2005, and fell 10 percent from 2009 to 2011 before a modest rebound late in 2011 — all this despite the irresistible power of fee-for-service incentives to induce demand.

The modest rebound in pharmaceutical spending (2.9 percent growth) in 2011 appears to have been a blip.  IMS Health reports that US pharmaceutical sales actually shrank in 2012, for the first time in recorded history, and that generic drugs vaulted to the high 70s as a percent of prescriptions!

There is no question that the recession’s 7-million increase in the uninsured depressed cost growth.  But the main reason health cost growth has been slowing for ten years is the steadily growing number of Americans — insured or otherwise — that cannot afford to use the health system.  The cost of health care may have played an unscripted role in the 2008 economic collapse.  A 2011 analysis published in Health Affairs found that after accounting for increased health premium contributions, out-of-pocket spending growth and general inflation, families had a princely $95 more a month to spend on non-health items in 2009 than a decade earlier.  To maintain their living standards, families doubled their household debt in just five years (2003-2008), a debt load that proved unsustainable.  When consumers began defaulting on their mortgages, credit cards and car loans, the resultant chain reaction brought down our financial markets, and nearly resulted in a depression.

By sucking up consumers’ income since 2008, the rising cost of health benefits has weighed heavily upon the recovery.  According to the 2012 Milliman Cost Index, the cost of health coverage rose by 32.8 percent from 2008 to 2012, while family income did not grow at all in real terms.  The total cost (employer and employee contributions plus OOP spending) of a standard PPO policy for a US family of four was $20,700, almost 42 percent of the US household median income in 2012.

2014 And After

CMS actuaries already see health costs rising, but expect the rate fully to double in 2014 (to 7.8 percent).  One worrisome 2011 datum:  the 6.2 percent rise in Medicare spending, sharply higher than the 3.8 percent increase in private insurance costs.  Medicare saw 1.1 million new beneficiaries and experienced a 3.6 percent increase in per-beneficiary expense in 2011.  If these trends continue or accelerate through 2014, CMS might be close to the mark.

But as to how the rest of US health costs will behave after the 2014 coverage expansion, to paraphrase Hollywood producer William Goldman, “Nobody knows anything”.  (Goldman’s comment was about the profound lack of clarity about how a movie will open).  Among the larger unknowns:  how much Medicaid expansion states will ultimately agree to after the surprising Supreme Court decision rendering the expansion “optional”.

post-election analysis of state plans to participate in the ACA Medicaid expansion found the entire sunbelt except California either undecided or leaning against. Since then, Arizona and New Mexico have decided to participate in the Medicaid expansion.  More troubling, however, such rust belt stalwarts as Pennsylvania, Michigan, Indiana, Ohio and Wisconsin are listed as “on the fence

States experienced a bracing 22 percent increase in state Medicaid spending in 2011 (1.7 million new beneficiaries plus expiration of the temporary bump in the federal matching rate (FMAP) contained in earlier economic stimulus legislation). That explosive growth, plus the fact that Medicaid enrollment continued growing briskly two years into the alleged “recovery,” as well as the  ten million or more people presently eligible for Medicaid and not enrolled (and thus not covered by the generous 90 percent-plus FMAP for newly eligible) — all would give a responsible state finance officer pause, regardless of how much Earl Grey tea is being served in the legislature or Governor’s Mansion. If enough states opt out, then many fewer people would be newly covered, and demand growth would be correspondingly muted.

Equally unclear is how rapid the uptake of exchange-based coverage will be in 2014 and after, and how much “pent up demand” there will be among the newly covered.  Despite the ACA’s laudable intention to cap cost sharing as a percentage of family income, those receiving subsidized coverage under the exchanges will still carry an amount of family financial responsibility that could retard demand growth.  Demand growth from the newly covered could also be offset by the continued explosive increase in privately insured folks covered by high-deductible plans (which quadrupled from 5 percent to 19 percent of all workers from 2007-2012).

It is also not clear how much capacity the health system, particularly the primary care part, will be able to absorb if there is a significant demand spike.   If the Massachusetts experience is any guide, we can expect sharp increases in waiting time for primary care physician visits and in hospital ER volumes to accompany the ACA coverage expansion.   There will certainly be lots of empty hospital beds, but people have to pass through a clotted primary care system to get to them.

Finally, there is the nasty issue of the sustainability of the recovery. A renewed economic downturn would crush state finances, as well as push more Americans into high-deductible health plans or out of coverage altogether.

Cost Reduction, Not Merely Reduced Cost Growth, Is Needed

As previously argued, the real problem is that health care simply costs too much. Both directly through cost share/premium share and indirectly by suppressing wage growth, health costs weigh heavily on present economic growth.  US society might finally have reached an ugly and poorly distributed equilibrium of demand and ability to pay.

This isn’t an “entitlement problem.”  It’s about a gold-plated health system we can no longer afford. Until the $5,000 CT scans, $10,000 ER visits, $60,000 joint replacements, and $120,000 ICU stays begin to disappear from the American landscape, we’re likely to remain in the economic doldrums.

To restore economic growth will require marked reductions in health costs, not shaving a point or two off of future growth. Both Medicare DRGs and RBRVS-based physician payment remain “cost-based” methodologies, which grandfather in unnecessarily high costs. Medicare’s administered prices form the benchmark in many private insurance plans.  Even if it worked,  a “bolt-on” incentive system tied to administered prices, like the ACO, can only moderate the rate of increase in costs, not markedly reduce them.  In other words, a more sophisticated administered price model with a “rate governor” on it isn’t going to get the job done.

Reference Prices, Not Administered Prices

The urgent need, both for private and public payment, is to move from administered to reference prices, where consumers have multiple provider choices, and benefit from selecting less costly options.  This seems to be the direction major purchasers are headed, to judge from the recent activity of Catalyst for Payment Reform.

Even as payer and provider markets consolidate to narrow consumer choice, there still remains two- to four-fold variation in the prices of many elective services — imaging, surgical procedures, obstetrical deliveries, etc. — in local communities.  Even though elective care may comprise less than half of providers’ total business, it is strategically important because it produces the lion’s share of most provider profits.

Benefits designs that help families save money will produce a lot of positive feedback because so many families remain cash-strapped.   If we give consumers a meaningful incentive and good outcomes information so they can choose high-value alternatives, high-cost providers will be forced to reduce their expenses or lose business.  At present, there is no reward for being the high-value producer of health services.

To switch from administered to reference pricing will require a lot of changes.  Patient cost sharing under conventional private insurance will have to be restructured to enable shared savings for intelligent, high=value choices.  In high-deductible plans, mechanisms already exist to pay bonuses to peoples HRAs or HSAs if they choose less costly options.  In regular plans, it must be possible to eliminate cost sharing if people make intelligent, cost conserving choices, or to share savings with them through premium reductions or cash bonuses.

Adapting Medicare to a reference pricing model would be much messier because so many beneficiaries are insulated from cost pressure by first-dollar MediGap coverage, their own employer-based coverage (if they are still working), or by many Medicare Advantage plans.  Consumer savings options through restructured cost sharing needs to be a part of any meaningful Medicare reform.   It’s worth noting that the ACE (Acute Care Episode) demonstrations recently concluded by CMS did provide fee-for-service Medicare beneficiaries significant incentives to choose a “bundled payment” participant.

Leverage Docs, Don’t Drive Them Into Employment

We will also need to leverage what remains of the physician-based infrastructure in many communities.   Private medical practice is collapsing into hospital employment.   Independent physicians are not wedded to using the hospital’s expensive imaging, surgical, and lab services, and could compete effectively with hospitals in elective care if more of them organized to do so. Putting independent practitioners and freestanding ambulatory services providers with their low unit costs out of business is counterproductive, as is paying hospitals more for services their physicians provide than we pay for comparable services in the community setting.

Payment reform needs to be built around enhanced consumer choices and sharing cost savings with them.  Consumers need to be active agents in a reformed health system, not inert “passengers” statistically attributed to ACOs.   We will know we’ve begun the turn when health care employment begins falling, rather than rising at 30,000 a month as it has for this entire “recovery”.   Maybe then there will be enough free cash flow in household budgets to spend on something besides health care.

Jeff Goldsmith is president of Health Futures Inc, which specializes in corporate strategic planning and forecasting future health care trends. He is also the author of “The Long Baby Boom: An Optimistic Vision for a Graying Generation.”

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bob hertzMGJeff GoldsmithAdam H.Barry Carol Recent comment authors
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bob hertz
Guest

The $75,000 figure is what Medicare actually paid out.

As you note, the billings might have been $200,000 in order to get reimbursement of $75,000.

My point is that even $75,000 is too much.

bob hertz
Guest

Check out a blog called Misunderstood Finance on the subject of 10% of Medicare beneficiaries making up 70% of the program’s cost. In practice, that means 5 million patients with an average cost of $76,000. That is where reform must be concentrated. I like reference pricing and more intelligent coinsurance, but I fear that many of the more expensive cases will blow by those reforms in short order. One feature of the ACA that I really disliked was the removal of insurance company maximums on paying for one year of care. The insurance companies that used to have a maximum… Read more »

John Ballard
Guest

I’m reminded of a cartoon I saw years ago of two kids at a lemonade stand with a sign that said “LEMONADE — $1.00 a glass.” One was saying to the other “Don’t worry. All we need to sell is two glasses then we can go out of business.” Too many years in the food business on my part. I know stuff is expensive, but medical billing is so wildly variable that high end numbers need not be as big as they are. By the time billing gets into multi-thousands overhead and basic expenses were covered long ago. At some… Read more »

Barry Carol
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Barry Carol

John – Every state that operates an exchange will have one exchange for the individual insurance market and a separate exchange for the small group market. Large states like NY and CA may have more than one of each covering just a region within the state. The exchanges should not affect Medicare or the VA. Medicaid will expand eligibility via new rules that qualify people with incomes up to 138% of the federal poverty level (FPL). There will also likely be private exchanges and insurance policies sold outside of an exchange structure altogether. However, for those who qualify for a… Read more »

John Ballard
Guest

Thanks. Now that you mention it, I recall reading about both individual and small group exchanges.

Peter1
Guest
Peter1

“I recall reading about both individual and small group exchanges.”

Why do we cling to this notion that we need to carve up risk groups so as to be able to charge one group more than the other. Where do you think they’ll put the high risk/pre-existing people – that’s right, in the individual exchange.

We are trying to solve an access problem with more insurance solutions, where risk management was never about access – won’t work.

Other countries don’t cut out people into smaller groups and they do this for about half the cost.

Margalit Gur-Arie
Guest

Exactly…. Not to mention the overhead associated with this endless bureaucracy.

MG
Guest
MG

It is an entitlement problem when you get down to it and at the federal level we are spending at a 4:1 ratio on the elderly (65 and older) vs. children (18 and older). Any society that does this for a prolonged period will fail economically because it is insufficient to keep up with physical/human capital and invest significantly in R&D.

The problem is only going to get more challenging to demographically as the numbers start to look really ugly by the end of the decade.

Peter1
Guest
Peter1

“It is an entitlement problem when you get down to it and at the federal level we are spending at a 4:1 ratio on the elderly (65 and older) vs. children (18 and older).” ” Any society that does this for a prolonged period will fail economically…” Certainly demographics play a part, at least temporarily, but who pays for the education of the young up front and continuing until death? Is there nothing owing from that? The failure of this economic model is a lot more than too many old people versus young. For 30 + years the war on… Read more »

John Ballard
Guest

I’m not sure how they fit into this conversation, but here are two situations of which I am personally familiar that strike me as an irrational struggles involving providers, insurers and the drug companies that ratchet up costs and jerk around the patient at the same time. ~~~~~~~~~~~~~~~~~~~~~ Last time I went to the doctor he asked if I had received a shingles vaccination. No, I didn’t know about such a thing — did he do that? (They have flu shots and others in the office.) Well, no, that is done now in pharmacies, but he can write a prescription.… Read more »

Adam H.
Guest
Adam H.

Great article & great comments. The open discussion is very respectable here.

Barry Carol
Guest
Barry Carol

“Payment reform needs to be built around enhanced consumer choices and sharing cost savings with them.” I agree. What’s long been missing from the equation though is price transparency meaning disclosure of actual contract reimbursement rates as opposed to list prices. Assuming comparable quality, it’s hard to make an intelligent provider choice if price discovery by either patients or referring doctors is impossible before services are rendered. Even Medicare pays some providers more than others in the same city or region based mainly on costs. Tiered networks are a step in the right direction. They require patients to pay more… Read more »

John Ballard
Guest

I think we need to get rid of this approach by regulation or legislation if necessary. There has to be other effective ways to reward doctors for good work though I’m not a fan of Press Ganey patient satisfaction scores either. BINGO. Two bingos, actually. There should be regulation (price controls, if you will — that’s plain talk, like it or not) and I think the legislation has already happened in the form of IPAB. As that group finds its sea legs and survives the next few years that group will have its hand on the throttle a firmly as… Read more »

Peter1
Guest
Peter1

““Payment reform needs to be built around enhanced consumer choices and sharing cost savings with them.” I agree.” Barry, I agree but we never see the “sharing” part, we only see the penalty part. My wife needed a mammogram, and scheduled an appointment with the clinic in the hospital she works at. Through a chance meeting with another employee she accidentally found that BCBS would not pay for the procedure if done in the hospital, and she would have to pay $500. After some not so easy tooth pulling investigation with BCBS found that the procedure would be covered at… Read more »

Margalit Gur-Arie
Guest

Global budget with cap is not going to work unless it is one global budget for everybody. If you just cap Mediaid/Medicare, the costs will be shifted to the commercial market as they already are even without capping. If you are going to keep all the moles whacked, you have to use a broad plank, not the little plastic hammer that comes with the box.

John Ballard
Guest

Margalit, you’re right about having the same cap for everybody, but only if the goal is delivering universal care. Sadly I don’t believe our system will ever achieve more than a safety-net for those at the bottom — if that much — once the financial limits are met. There will always be a population able to buy whatever level of care they can afford, from cosmetic surgery to keeping themselves or some cherished family member in a persistent vegetative state for years. The commercial market is unavoidable. Some have advocated “Medicare for all” but the best we can afford will… Read more »

Margalit Gur-Arie
Guest

“…. the best we can afford will more likely be Medicaid for all. If that. ” Why John? I come from a tiny and poor country plagued by wars of all kinds and shapes, and they can afford a heck of a lot more. In between Israel and the US lies the European continent with a fraction of the resources the US has, and they can afford a lot more. We are the largest and richest economy on this globe and we spend 10 times more than everybody else combined on weapons, so why is Medicaid the best we can… Read more »

John Ballard
Guest

I was being ironic. I guess it didn’t show. Of course we can afford it.
But the politics we have is so irrational that I won’t be shocked to see weapons training in middle school and tearing up science books, replacing them with little copies of the book of Genesis.
As for medical care, how many states have opted not to take part in Medicaid now that SCOTUS has given them the option?
Scuse my cynicism.

Matthew Holt
Guest

Global budget with a cap is the only way….which is sorta what the IPAB may evolve into. Or in Palin terms “Death Panel + option to trade up to more expensive, painfil & quicker death” (or am I being overly cynical about cancer care and more….)

John Ballard
Guest

Mathew, of all the people with access to the Web I value your input more than most. You very likely are the most well-informed. And in this case I think you are on to something. In fact, as I understand it, under ACA terms IPAB already has legal authority for such a budget with cap. What have been “recommendations” (like the old Medpac, which I notice has been pruned back if the website is any indication) will soon become firm guidelines with Congress voting to object instead of quietly ignoring recommendations. The budget will be easily identified as whatever adjustments… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

Global budgets grandfather in all the absurd prices and waste, and rely on political mechanisms to contain future growth. Isn’t going to work in a $2.7 trillion health economy. Particularly with our political system, per Peter1. The US health system is bigger than France, Matthew. It’s making its own weather.

A CT scan ought to cost $100 bucks and , and we aren’t going to get there with a global budget and federal price fixing, particularly if the system is constructed by the US Senate’s Finance Committee and administered by HHS.

Margalit Gur-Arie
Guest

I can’t think of any one stakeholder that would be even remotely interested in having a CT scan cost $100 other than ordinary people, and for better or worse, CMS has the closest alignment of interests with people and some round about accountability to voters. CMS is also the only national body with a published and enforced fee schedule. May not be perfect and may not be quite $100 per scan, but if this was the only fee schedule, that $2.7 trillion would be significantly lower, wouldn’t it?

Jeff Goldsmith
Guest
Jeff Goldsmith

And there weren’t any cell phone makers producing powerful mobile computers with touch screens for $200 either (after Verizon’s “subsidy”). Five years ago, the technology in your iPhone 5 or Galaxy Note would have cost about $3000. The difference: consumers buy smart phones, and the government buys CT scans. There are low cost producers of CT scans that PRESENTLY undersell their local hospitals by 80%. The $100 wouldn’t include the radiologist’s fee, but I’ll be that would come down right smartly if there were actually a market for CT scans, as opposed to a price control scheme. . .

Margalit Gur-Arie
Guest

Jeff, according to the OECD about 80% of CT scans were done in hospitals in the US in 2010. I am not sure that competition in the discretionary market for CTs will make a huge difference. I am however pretty sure that the ACOization of health care will make CTs and everything else more expensive, as the volume of service is reduced, and at the same time will kill any remaining free-standing competition. On a side note, I find it sad that everybody is accepting as an immutable fact that our government is dysfunctional and hence we have to find… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

Haven’t given up on reforming public healthcare financing, but after the dog’s breakfast we got in 2010, it’s hard to imagine a fresh run at reforming Medicare and Medicaid going well. ACA’s advocates believe all those Innovation Center experiments will yield some silver bullet cost containment solutions. Given how many of these ideas have already failed, once or repeatedly, it’s hard to sustain their faith. The two political parties seem to feel that the solution to federal government’s dysfunction is for one party to control both houses of Congress and the Presidency. When the Repubs had it, we got the… Read more »

Matthew Holt
Guest

Hey–I’m saying what I’d do if I were King. I’m not saying it’s going to happen soon nor that it wouldn’t be an almighty f***up. with all the problems you suggest. But I don’t see any other way of rationally restraining the money in the system. Eventually that must be what the IPAB or something like it will impose.

Because the $100 CT scan isn’t coming anytime soon

Jeff Goldsmith
Guest
Jeff Goldsmith

If you were King, we’d all be looking for your head on a stake, wouldn’t we? Look what we did to George III. The essence of the problem in health care is that government CANNOT constrain the cost of health care. Administered price systems are captured by the industry (see Klepper, Brian on RUC, etc.). I used to do this for a living (for teaching hospitals) and was really effective at it. It’s hard to game a consumer market without cheating and getting caught. We’re never going to have a consumer market for ICU stays, but we already have them… Read more »

John Ballard
Guest

The US health system is bigger than France… It’s making its own weather. Great quip. That’s in the wish-I’d-said-that category. So what I’m hearing is that you favor administered pricing for tax dollars and reference pricing for the private sector. If so, that makes sense. It sounds like current Medicare — with the system working of a list of recognized prices with the beneficiary, provider and/or supplemental insurance dealing with anything else. That makes sense. I remember ten years ago when I first started working in the senior care environment I asked a sharp old guy to explain to me… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

If we restructured Medicare’s cost sharing provisions and outlawed first dollar coverage (e.g. by Medicare supp or Medicare Advantage plans), we could absolutely have reference pricing in the Medicare system as well. The transition would be a bitch, because teaching hospitals would try to stop it. . . Paul Ryan’s modified Medicare reform proposals, which have a ton of other problems we cannot get into in a tiny box like this, would have used a reference pricing model for Medicare beneficiaries selecting private plan coverage. The Exchanges are basically going to use reference pricing, with the Bronze Plan as the… Read more »

John Ballard
Guest

I think I got it. Thanks. So will MA and supplemental plans be competing among the exchanges? Or will the exchanges only deal with others? My impression is that the exchanges are essentially private individual plans for those who either don’t have access or for whatever reason choose not join a group plan. Am I missing something? One other question: are Tri-care or VA gonna be affected by ACA? If so, how? As a veteran I don’t pass the means test for VA but I have friends who are quite pleased with their VA coverage, especially what seems to be… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

What Ryan proposed was creating a mechanism where Medicare beneficiaries use an exchange to select their coverage- either FFS Medicare or private plans, but to have them compete on a reference price,where the cheapest plan got the most tax subsidy, whether it was private or public. Still not sure how this works, exactly, to be honest. The public exchanges in ACA are intended only for covering the uninsured, directing those under 138% of poverty to Medicaid and those over to private plans. Medicare Supp, MA, VA and TriCare are not directly affected by ACA, but there are questions about whether… Read more »

Whatsen Williams
Guest
Whatsen Williams

Hospital employed physicians, paradoxically, run up the costs. They have incentives and administarive guides to keep the scanners running 24/7 and the ORs lit 24/7. The amount of unnecessary surgery and medication and scanning in these hospital meccas is not fathomable.

After, how arentheynto pay for the extensive EHR networks that cause their employees to lose efficiency?

John Ballard
Guest

But the main reason health cost growth has been slowing for ten years is the steadily growing number of Americans — insured or otherwise — that cannot afford to use the health system. Well, yeah… Thanks for noticing. I want to learn more about “administered” and “referenced” pricing. It sounds like the first means take-it-or-leave-it and the second might look something like a menu of options, a list of alternatives, listed with both descriptions and prices, something like a menu. Somebody, anybody, splain it to me, and if possible furnish a link to some examples. (I still wonder when health… Read more »

Jeff Goldsmith
Guest
Jeff Goldsmith

You got it. Administered prices are basically government set prices, like Medicare DRG’s or RBRVS, and very much as you put it: take it or leave it.
Consumer choice plays no role in an administered price model.

Reference prices are multiple choice with a fixed contribution that covers the reference price, and consumers are free to “buy up” to more expensive alternatives with their own money. The Catalyst for Payment Reform web link gives some excellent examples of how it works.

Peter1
Guest
Peter1

Maybe the end game results of the 30 year onslaught against middle class incomes is coming to a head.

“To restore economic growth will require marked reductions in health costs, not shaving a point or two off of future growth.”

Let’s see, reduce the profits/incomes of lobbyist represented industry power brokers – what political system will we use for that?

BobbyG
Guest

Interesting.

“This isn’t an “entitlement problem.” It’s about a gold-plated health system we can no longer afford. Until the $5,000 CT scans, $10,000 ER visits, $60,000 joint replacements, and $120,000 ICU stays begin to disappear from the American landscape, we’re likely to remain in the economic doldrums.”
__

Avg CABG? $74k Hip job? $30+k. etc. etc.

Only perhaps 0.01% of the population can “afford” to pay such out of pocket. Moreover, full actuarial “risk based pricing” will only serve to price them out.

Let them die or suffer.

THEM.

Not ME.

I DESERVE full “coverage.”

And there you have it.