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Tag: Health care spending

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.

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Could Wasteful Healthcare Spending Be Good for the Economy?

Suppose I throw a rock through a store owner’s window. You admonish me for this act of vandalism. But I reply that I have actually done a good deed.

The store owner will now have to employ someone to haul the broken glass away and someone else, perhaps, to clean up afterward. Then, the order of a new glass pane will create work and wages for the glassmaker. Plus, someone will have to install it. In short, my act of vandalism created jobs and income for others.

The French economist, Frédéric Bastiat called this type of reasoning the “fallacy of the broken window.” All the resources employed to remove the broken glass and install a new pane, he said, could have been employed to produce something else. Now they will not be. So society is not better off from my act of vandalism. It is worse off — by one pane of glass.

But there is a new type of Keynesian (to be distinguished from Keynes himself) that rejects the economist’s answer. Wasteful spending can actually be good, they argue. If so, they will love what happens in health care.

By some estimates one of every three dollars spent on health care is unnecessary and therefore wasteful. ObamaCare’s “wellness exams” for Medicare enrollees — so touted during the last election — is an example. Millions of taxpayer dollars will be spent on this service, yet there is no known medical benefit. Similarly, ObamaCare is encouraging all manner of preventive care — by requiring no deductibles or copayments — which is not cost effective.

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Cigarettes Should Cost $25 a Pack

Henry David Thoreau said, “There are a thousand hacking at the branches of evil to one who is striking at the root.”

We have hacked at healthcare costs for what seems like thousands of times, with very limited success. It is time to strike at the root. Rather than focus on reducing costs after preventable diseases have taken hold, it is time to focus attention on eliminating the disease.

Let us look at two specific examples.

1. The CDC (Center for Disease Control and Prevention) has estimated that the cost of smoking(estimated cost of smoking-related medical expenses and loss of productivity) exceeds $167 billion annually. The CDC has also estimated that 326 billion cigarettes (combustible tobacco, to be more precise) went up in smoke in 2011. In other words, every cigarette consumed costs the nation about 50 cents; every pack, $10.

Put another way, while the smoker paid approximately $5 a pack up front, there was also an additional $10 secret surcharge — the cost of which is born by all of us (such as taxpayers, anyone who buys health insurance, even private companies who suffer from lower productivity as a result). It is as if we are telling the smoker, “I know you can’t afford to pay $15 for a pack. So we will give you $10 so you can afford to smoke.” We are not this generous even with people who don’t have one square meal a day. We spent $78 billion on food stamps, with constant pressure to bring that down further even if some people will be left without food as a result.

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Setting the Record Straight on Medicaid’s “Success”

In last Sunday’s New York Times, Paul Krugman extolled the virtues of Medicaid. Here are some excerpts from this astonishing column:

“Medicaid has been more successful at controlling costs than any other major part of the nation’s health care system.”

“How does Medicaid achieve these lower costs? Partly by having much lower administrative costs than private insurers.”

“Medicaid is much more effective at bargaining with the medical-industrial complex.”

“Consider, for example, drug prices. Last year a government study compared the prices that Medicaid paid for brand-name drugs with those paid by Medicare Part D — also a government program, but one run through private insurance companies, and explicitly forbidden from using its power in the market to bargain for lower prices. The conclusion: Medicaid pays almost a third less on average?”

In the days since this column was published, I have spoken with many experts on Medicaid who are uniformly appalled by it. While I may not reach the same audience as the New York Times (at least not yet!), I feel compelled to set the record straight on Medicaid’s “successes.”

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A Sign of the Times

Coming Soon, North Shore University Health Systems Medical Office Building.

For me, this is sad news. I am not saddened that North Shore University Health is opening yet another medical office building. It is where they are opening that gets me. They are taking over a two story building that used to house a Border’s Bookstore. My Border’s Bookstore. Sure, Border’s may have been a bit corporate, but this was still a great bookstore. They sold best sellers there, of course, but they also carried all the classics and lots of eccentric titles. Heck, they even briefly carried one of my own books! They had a vast selection of books about military history and an amazing travel section. My wife lost herself for hours in gardening and my sons ogled the aisles of mystery and fantasy novels. Border’s also had vast CD and DVD departments (with classical CDs and Criterion Collection movies) and the café sold a chocolate bundt cake that was out of this world. Maybe best of all, the building had an odd layout with lots of nooks and crannies and surprises around the corner. For a corporate bookstore, it oozed charm. Medical office buildings never ooze charm.

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The Way Out of the Wilderness

In 1932, the Committee on the Cost of Medical Care identified rising medical costs as a threat to the financial security of millions of Americans. In a series of studies that created the field of health services research, the Committee recommended several strategies for cost containment that reads like a blueprint for today’s cost containment efforts: prevention, price controls, capitation, elimination of unnecessary care, and integration. If it sounds like a précis of my previous two blogs – cut prices and cut quantities – it should. We have known for a long time that those are the only ways to cut spending. And yet here we are, 80 years later, facing a spending crisis that threatens to take down the entire economy.

In my lifetime, we have been subjected to a steady drumbeat of rising medical costs. There have been respites – for a couple of years after Medicare introduced DRGs and for about five years in the 1990s during the heyday of HMOs. While DRGs and HMOs shifted costs down, they did not seem to reverse underlying growth trends, although HMOs did not thrive for long enough to be certain.

Not for lack of trying have medical costs continued to increase. We promote prevention, regulate prices, capitate providers, and review utilization to eliminate wasteful spending. We have seen horizontal integration that led to market power and higher costs, and vertical integration that more often than not created unmanageable bureaucracies. Most of today’s proposals for cost containment can be encapsulated by two words: “Try harder.” The Affordable Care Act gives us free preventive care, stricter price controls, ACOs, and the Comparative Effectiveness Institute. We need radical change but all we get is creeping incrementalism. I will take creeping incrementalism over the do-nothing approach of the previous decade, if only because we could use another respite. But the ACA is no permanent fix.

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How Do We Bend the Cost Curve? Reduce the Waste.

Health care had its own version of the LeBron James “Decision” last month with the Supreme Court upholding the critically important elements of the Affordable Care Act. Now that the uncertainty is behind us―at least until the November elections―health care leaders can continue preparing their organizations for the changes ahead.

Fixing the system requires reforms at the macro level. But it also takes a symphony of smaller actions happening in concert. As experience bears out, it is difficult to agree upon a collective action with so many competing interests in health care and the partisanship that has gripped politics. But there is a song that we can all agree upon, loud and in unison. Reduce the waste.

Nearly a third of our health care costs come from wasteful spending and inefficiencies that could be avoided. Left unchecked, this is a nail in the coffin of our system; but, if tackled, is a huge cost containing opportunity. By identifying waste in the delivery system and systematically reducing it, we could lower costs without resorting to budget cuts and fees that compromise the quality of care.

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The Most Powerful Health Care Group You’ve Never Heard Of

Excessive health care spending is overwhelming America’s economy, but the subtler truth is that this excess has been largely facilitated by subjugating primary care. A wealth of evidence shows that empowered primary care results in better outcomes at lower cost. Other developed nations have heeded this truth. But US payment policy has undervalued primary care while favoring specialists. The result has been spotty health quality, with costs that are double those in other industrialized countries. How did this happen, and what can we do about it.

American primary care physicians make about half what the average specialist takes home, so only the most idealistic medical students now choose primary care. Over a 30 year career, the average specialist will earn about $3.5 million more. Orthopedic surgeons will make $10 million more. Despite this pay difference, the volume, complexity and risk of primary care work has increased over time. Primary care office visits have, on average, shrunk from 20 minutes to 10 or less, and the next patient could have any disease, presenting in any way.

By contrast, specialists’ work most often has a narrower, repetitive focus, but with richer financial rewards. Ophthalmologists may line up 25 cataract operations at a time, earning 12.5 times a primary care doctor’s hourly rate for what may be less challenging or risky work.

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Innovation is Key to Controlling Health Care Costs

In the battle over health care that lies ahead, how strongly will the public rally around the need for innovation in confronting health care costs?  Does the public view innovation as relevant to the challenge in the first place?

These aren’t idle questions. The news that growth in overall national health care spending has been moderating has raised speculation that innovations in payment and health care delivery are already paying off, notwithstanding the unquestioned impact of the Great Recession.

Looking ahead, uncertainty over the fate of the Affordable Care Act and the likelihood of federal budget cuts yet to come has many fearing that innovations will be vulnerable. And it is not just federal spending that will be at risk. Hospitals and health plans will all be watching their margins carefully to assess how far and how fast they can keep making investments that support innovation (such as investments in healthcare IT, analytics and care coordination) but that may take months or years to generate a return.

All of which places the role of innovation in controlling costs center stage. After all, this is what undergirds the Triple Aim that so many health care leaders have embraced as the only realistic alternative to arbitrary cutbacks in health care services and spending. Health care leaders can defend innovation if they have public support. But do they?

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You Get What You Pay For

Two recent research papers remind us that it may be difficult to cut U.S. healthcare spending without harming quality. The first, written by a research team led by University of Chicago economist Tomas Philipson, appears in the latest issue of Health Affairs and has deservedly garnered a fair bit of media attention. The authors examine cancer spending and survival times for patients in the United States and ten European countries during the period 1983-1999 (later data were not available.) Their data confirm what we already know about health spending; the average cost of treating a cancer patient was about $15,000 higher in the United States. But the data also show that the typical U.S. cancer patient lives nearly two years longer; most of the difference is attributable to prostate and breast cancer patients. The gain appears to be due to greater longevity rather than early diagnosis. Using generally accepted measures of the value of a life, they conclude that the benefits of additional health spending outweigh the costs by a factor of 4:1 or higher. The latter calculation does not consider QALYs (quality adjusted life years) and so may be overstated. The authors acknowledge that other nations may do a better job of cancer prevention, so that their overall approach to cancer may be superior to that in the U.S., but they can find no evidence of this one way or another.

Philipson’s study suggests that U.S. healthcare consumers may get a substantial bang for their higher bucks. Maybe the U.S. system is not so inefficient after all. What about efficiency within the U.S. system? Some providers are far more expensive than others. Is the higher cost worth it? A new study by a team led by MIT economist Joseph Doyle, and released as an NBER Working Paper, suggests that you may get what you pay for within the United States. Doyle and his colleagues ask whether higher cost hospitals in the United States achieve better outcomes than lower cost hospitals. It is not easy to answer this question, because higher cost hospitals may admit more severely ill patients. This results in a statistical problem known as selection bias that is difficult to eliminate with available severity measures.

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