The Cost Issue in Healthcare
Ezra Klein is a liberal blogger who has made a name for himself as a sort of health care “policy wonk”. In my own biased opinion, he has tended to focus almost exclusively on the evils of the insurance industry in creating our current rotten system. But yesterday, for the first time that I know of, he posted some international health costs data.
As he says:
On Friday, I sat down with Kaiser Permanente CEO George Halvorson to talk about health-care reform. The conversation was long and ranging and will take a while to transcribe. But before we really got into the weeds, Halvorson handed me an astonishing packet of charts. The material was put together by the International Federation of Health Plans, which is pretty much what it sounds like: an association of insurance plans in different countries. But it showed something I’ve never seen before, at least not at this level of detail: prices…
The packet’s 36 pages are mostly graphs showing the average prices paid in different countries for different procedures, diagnostics and drugs. There is a thudding consistency to the pages: a series of crude bars, with the block representing the prices paid by American health-insurance plans looming over the others like a New York skyscraper that got lost in downtown Des Moines.
I have several observations about this. First, these ratios are quite accurate from my own experience in the industry. Second, a common criticism of the health care reform is that if costs are not contained in some way by the reform itself, the system will not work in the long run on the financing side. Third, I will point out that the slide deck (and you should look at the whole deck here [PDF]) separates Medicare rates from commercial rates. Note that 1) Medicare rates themselves are higher than for the other countries 2) commercial rates are higher than Medicare rates and 3) commercial rates are higher than the 5 percent bump to Medicare that the public option people propose as the reimbursement rate for the public option.
Another blog below asks us if the health care reform will work. My short answer is: no. To see why, I encourage you to read all of the comments to Mr. Klein’s blog. When you cut through all of the snark you will find that many people have very very good points to make but that no one is really talking to anyone else. Out of this chaos shall come — chaos. Call me an evil capitalist businessman, but if health reform were a business problem I was called upon to solve, I would approach it entirely differently. What I see here is that we have hardly left the brain storming sessions.
on November 4th, 2009 at 2:19 pm
The price differentials are shocking. Makes me want to move to Canada–sort of.
But okay U. if this is a business problem as you say, tell us how you would approach it.
on November 4th, 2009 at 2:35 pm
I would like to hear the Kaiser CEO on Medicare fraud. 60 Minutes/CBS has detailed the fraud in Miami/So. Florida. NYT also reported that cost of Medicare in San Francisco is half of the cost in Miami. Fraud? SF has over 1/3 rd of its citizens enrolled in Kaiser which has salaried physicians versus the fee for service which appears to be the vehicle for easy fraud. A salaried doctor has no insentive to perform unnessary proceedures. Since SF is more expensive than Miami in all other costs and in all other areas except Medicare.. we need to ask how much does this fee for service cost the entire nation? Kaiser is triving on 14000 salaried doctors.
on November 4th, 2009 at 3:19 pm
I only wish that the populace was a concerned about the “cost issue” of Iraq, Afghanistan, bank bailouts and our inordinately low taxation rates.
Don’t forget that in the 1950s, when post-war prosperity was in full bloom — and a Rebpulican was president — the top marginal tax rate was 95%.
If healthcare is not as important as Pax Americana and capitalism, then this country needs to look long and hard to determine if it still has a soul. We need to keep in mind that the issue is healthCARE and not for-profit health INSURANCE.
on November 4th, 2009 at 3:46 pm
Very interesting graphs – raises lots of questions. For example:
I’d like to better understand precisely what it is the bars on those bar graphs represent. Is it the amount paid by the consumer? By the consumer and the insurance company together? (Presumably that is the case for the US bars). If it is Medicare, then it’s out-of-pocket+government subsidy, right? Does it represent the entirety of the revenue stream coming in to the provider for each named service (such as C-section live birth)? Are there additional government subsidies buried – for example, does the government pay the salaries of doctors, nurses and other providers in some countries (believe the answer is yes), and are those costs also reflected in the bar graphs?
I see that Klein attributes the differentials to price controls – that the government sets the price for medical services in these other countries. What are the effects of that policy? Are doctors’ and nurses’ wages artificially constrained? Is their adoption rate of new technology the same?
Not in cross-examination mode here – just trying to understand how it is that we’re apparently so out of alignment with the rest of the world.
on November 4th, 2009 at 3:52 pm
I am very interested in U’s ideas: “if health reform were a business problem I was called upon to solve, I would approach it entirely differently.” Capitalism comes across as incarnate evil when it is needed as a major part of the solution.
I am not taken with Canada or the UK’s solutions. If my daughter lived in either country, she would not be able to get the cancer drugs she needs. Single payer creates more problems than it solves, istm. I don’t have answers, and want everyone to have access to health care, but do not consider government the golden answer, quite the opposite. Creative, multi-varied solutions needed.
I’d like to hear about being able to purchase health insurance across state lines, for example. At heart, what is possible? Is it the government either sets a global budget and that’s it, which amounts to government rationing, or insurance companies do the rationing? Limits exist, but how to get the best value with some measure of freedom to keep decisions between doctor and patient instead of doctors becoming frustrated functionaries of a third party?
I want to learn about meaningful options, U.
on November 4th, 2009 at 4:25 pm
Unagidon, you need to answer the charge that one reason costs can’t be addressed by insurers is because (a) insurers lack the wherewithal to make cost changes in a private market setting and (b) even if they had the wherewithal, the public at large, backed by state legislators will not allow them to do so because of issues of trust (some deserved, some not). This is the story of what happened between 1999 and now — insurers have been systematically deprived of tools to manage costs through market forces and state regulation.
If insurers could control costs they would. They have no interest in seeing cost increases of the magnitude they face. It’s bad in the short run and it’s especially bad in the long run (fewer people buying insurance). What is your plan in the absence of reform to bring costs down?
I have come to the unhappy conclusion that, whatever the timeframe and whatever the method, cost control is going to happen only through some kind of government action. What health care reform does is to, essentially, stop the meat ax kind of cost control that occurs through shifting more and more of those costs onto individuals and preventing individuals from getting coverage altogether if they are sick.
on November 4th, 2009 at 5:04 pm
It will work for what it is intended to do — assert governmental control over all aspects of the healthcare industry.
And it will work for the goal of achieving universal healthcare coverage, and fairly easily at that.
It is easy to achieve universal coverage when all you have to do is make it illegal to not have “insurance.”
That this will make “healthcare” vastly more expensive for many people, that this will force them to pay out thousands of more dollars a year than they currently do by coercing them to buy coverage that they neither need nor want, thereby preventing them from building savings or even utilizing that money to pay for things like rent or student loans, all of that is a small price (for the rest of us) to pay. So what if we are also loading trillions of dollars of debt onto their backs in addition? Government demands a sacrifice.
on November 4th, 2009 at 7:14 pm
It is my understanding – please correct me if I am wrong – that insurance companies are regulated by the governments of the 50 states, and that they cannot sell policies across state lines. This seems to limit the risk pool and drive up costs.
In other words, why do we not allow Kaiser Permanente (for example) sell health insurance across state lines, in all 50 states and Puerto Rico, Guam, and Samoa as well?
on November 4th, 2009 at 7:30 pm
Bender – I do not see your reasoning.
It seems there are two approaches I like.
1 – We could direct the government to add a bit to everyone’s income taxes, and with that money establish a basic, minimal policy with all Americans in the same risk pool. That way, all Americans could use that policy to its maximum before their private insurance would kick in. For example, the National policy might cover up $5000 worth of routine care during a year. The policy I would purchase privately, or the one my employer would purchase for employees, would not even be called upon until someone exceeded the National policy’s $5000 maximum. On the other end of things – catastrophic insurance – the National policy would cover up to some pre-set maximum, maybe $1 million. As with the basic coverage, my private insurance then, would only be called upon if my medical bills exceeded the national policy’s $1 million maximum.
2 – Same payment plan as option 1, but only lower income folks could use the national policy. For folks above the income limit, the slight increase in taxes notwithstanding, things would stay the same i.e., I or my employer would need to continue buying insurance as currently.
In any case, it seems we would do better to allow insurance companies to sell policies across state lines.
The national policies would not pay for elective abortions, and would be available to all people residing in our land.
While option 1 would cut more into the business of private insurance companies, it would also help them control risk by providing some predictability. Both of these options would help the poor, and both would help control costs, first by keeping routine health care matters out of the emergency rooms, and also by keeping downward pressure on private insurance rates.
on November 4th, 2009 at 7:43 pm
Please bear in mind that my numbers might be off; I am not an insurance man nor a medical type.
In other words, while $5000 might be too high or too low for an annual maximum for routine care, and while $1 million might be too high or too low for a catastrophic maximum, the idea is that the national policy would pick up the lower portion of routine care, above which private insurance would kick in. Likewise, the national policy would provide catastrophic care up to a point, above which private insurance would cover things.
Ultimately this sort of plan would blossom so that the national policy gets better, but initially it would mainly just cover the basics, that is to say if someone did not have the money for private insurance, they would simply accept the limitations of the national policy. For those who can afford more insurance, they can buy it on their own.
It would be a starting point at least, and does not take 1900 pages to describe.
on November 4th, 2009 at 10:37 pm
The idea of selling insurance across state lines alone is absolutely terrifying to me. I was not born yesterday. The reason why this is favored by the insurance companies, and why it is essentially the only substantive aspect of the Republican “plan”, is because the immediate effect will be to start a race to the bottom among the states to create the most business-friendly, anti-consumer environment for health insurance companies. Some small, thinly-populated state, in exchange for a pittance of tax revenue, will allow itself to become the launching point from which health insurers are allowed to rape and pillage the rest of the country. This is the same reason why all of your credit cards are issued from South Dakota (or Nevada) and all major corporations are domiciled in Delaware. There is no reason to think that, absent iron-clad regulation at the federal level, the same would happen in short order with health insurance. I have no problem with, and even support the idea of, insurance plans sold across state lines provided they are standardized plans, much as we have in New Jersey, with the coverages set by legislation and from which the insurers are not allowed to deviate. Otherwise this plan does nothing but takes those who live in states with progressive, humane health insurance regulation, like New Jersey, and throws us to the lions and their barbaric masters in states with essentially no regulation whatsoever, such as Arizona.
on November 4th, 2009 at 10:46 pm
Ken, nothing you suggested has any impact on provider costs. MEP: yep, this is the issue with selling insurance across state lines. It has no consumer protections. It also does nothing to drive down provider costs.
on November 5th, 2009 at 7:18 am
Thank you for all your comments.
I will talk about what I would do if I were king a bit later. But I wanted to address some of the poster’s comments.
Ed: Salaried doctors might be part of the cost solution, but remember that the profit making entity isn’t the salaried physician but the organization that is paying the physician. The hospital or physician group can very well bill by service and then pay its own physicians a salary to keep its own costs down.
Jimmy Mac: Of course some of my colleagues in the business are worried about their skins in all of this and are resistant to change. But the entrepreneurs among us are not worried at all. All this chaos will bring opportunities because despite what the right says, there is nothing whatsoever “socialistic” going on in health care reform.
Jim: The bars represent what the provider ultimate gets for the service, so it is the cash flow from the provider’s point of view (and the payer’s point of view when we look at costs). Definitions of service and the conversion of those units into dollars has been standardized. They represent full payments (I won’t say full costs) for specific services and do not have any unexpressed subsidies as you asked about.
However, there is an important unexpressed subsidy that might play a role here. In the civilized world, the government generally pays for or heavily subsidizes medical education. here we don’t. The massive debt that our medical practitioners incur in their education (and I am not only talking about physicians) is often cited by them as a big part of the reason why they need to charge so much. I don’t quite buy this, but it is a factor.
Carolyn, Ken, and MEP: Selling insurance across state lines might increase the size of the risk pool, but the reason that your insurance is so expensive in New York City is that you are using expensive New York City providers. Part of the underlying story of Klein’s graphs is that there are significant regional differences in costs themselves (sometimes even within a city). Sometime the argument about selling insurance across state lines sounds to me like the argument that we should normalize real estate prices across state line so that people in New York City can pay Hope Arkansas level rents for their apartments on Park Avenue.
It is true that some providers and hospitals are better than others and that this might lead to cost differences. But the quality differences are not very transparent. There is no free market for medical services as there is for, say, automobiles where you can go on line and do price and quality comparisons. From my point of view, a lot of the price differences have more to do with location and local provider monopolies than absolute differences in quality of care.
Bender: Bad guys in government are not competing with good guys in business for control of the American health system and even the most fearful of my colleagues know this. The American private insurance industry exists to provide employer based health coverage. It has not existed to provide universal health care coverage. But a number of things that have been happening is recent years has meant that it now matters to the insured on a cost basis what the uninsured are paying (or not paying). Like any capitalist enterprise, insurance companies are hard put to figure out what to do for people that are unable to pay for insurance (just as the fast food industry would be hard put to figure out what to do for people that couldn’t pay for fast food). So now the government not only enters, but has to enter, since the government is the representative of last resort for the people who are not being served by the market. Government may or may not do this well, but the time has come for them to do something. This is simply a fact, whether people want to recognize it or not.
on November 5th, 2009 at 7:35 am
It seems to me that cost transparency, or even the ability to know how much a procedure is going to cost before you get it, is essential before any kind of reform can take place. It’s not enough to say “we’ll cover x number of people currently without insurance”. Right now average (insured and uninsured) families are playing a kind of shell game when they go to the doctor. They go, have something done, and then wait for the bad news to appear in the mail.
You would never get your car fixed like this. Can you imagine having your brakes changed and then waiting until you get the bill in the mail to find out how much it costs? Or finding out weeks later that the pads they needed were “special order” and not in the included service contract list, so they’re going to cost extra? And yet this is exactly what we do with healthcare. I took our child to the “in network” urologist for an ultrasound, then found out when we got the bill that the anesthesiologist wasn’t in network, and neither was the floor nurse. So we end up owing thousands of dollars we didn’t expect. This is how healthcare operates in the US, and it’s insane, frankly. Until we get some kind of price transparency we won’t be able to fix anything.
on November 5th, 2009 at 9:51 am
And yet the overall cost of living in every single one of the compared countries is higher, in some cases substantially higher, than the US.
This is the problem with these statstics. First, they can’t capture the full economic cost of the system. Having lived in Europe, I can tell you that while you can get treatment, sometimes you wait longer – sometimes significantly longer – for non-urgent, but life affecting problems. When businesses labor costs are higher because workers are less productive due to injury or sickness that doesn’t get captured in the stats.
Also, based on this kind of analysis, I reccommend the complete takeover of the American Higher Education system by the US government. The health insurance companies are pikers when it comes to gouging consumers compared to Harvard, Yale, Georgetown, and Notre Dame et al. Compare the expense of sending a kid to any of these schools to major foreign universities.
on November 5th, 2009 at 12:34 pm
Sean, there are a lot of differences that are hard to quantify. But taking your example of education: When you go to Harvard, you know what you will pay. Not so with medical services (Carolyn Disco is absolutely correct — lack of transparency is a huge issue in many different ways). And unlike with medical care, you don’t have to go to Harvard or its equivalent. You can go to the University of Massachusetts or a community college, and you can work to cover costs of college, even taking off time to do so to avoid debt, and complete coursework over a longer period of time. In other words, even if Harvard is a complete rip off, it doesn’t have the power to ruin people’s lives financially (as if, ha ha) the way being admitted to one of Harvard’s overpriced medical facilities does.
And as for waiting longer in England — how about waiting forever because you have no way to pay for care you need for a “life affecting” issue?
And I don’t know how we got this idea that people don’t wait in the U.S. They do. I had to wait two months for an appointment with a dermatologist for my child’s skin condition, and most dermatologists simply refused to see me at all. I felt like scheduling a cosmetic consult and dragging my son with me and asking them to take a look as long as he was there.
When I wanted to see my gynecologist last year because of a concern I had to wait two months for an appointment, with a doctor I have an existing relationship with.
So in both cases I waited.
on November 5th, 2009 at 3:08 pm
If you haven’t already read this, see what Nicholas Kristof had to say today:
http://www.nytimes.com/2009/11/05/opinion/05kristof.html?_r=1
on November 5th, 2009 at 8:18 pm
Barbara – I was not focusing on that part of the equation (provider costs), but it is good that you mention it. One point is clear: Everyone having a basic, minimum policy for routine care will help control costs because these folks would otherwise wait until they were very sick and then use the emergency rooms.
Other ways to reduce provider costs:
1 – A national, centralized medical records database will help control provider costs.
2 – Tort reform with the goal of reducing frivolous lawsuits and excessive damage awards will help reduce provider costs.
Another, albeit more radical way to control costs is to have all the doctors be salaried public servants, employed by the federal government; that would help control doctors’ pay. Also, if the federal government bought and owned all the medical clinics in the country, that would improve their buying power for supplies and equipment. However, whatever the merits and downsides, these last two measures are very extreme and highly unlikely.
Any other specific ideas or suggestions for controlling providers’ costs?
on November 5th, 2009 at 9:38 pm
Barbara, since you keep asking, as a businessman here is what I think we should do.
We should set up a national single payer reinsurance pool (or what people call a high risk pool) for what we call catastrophic claims. It’s a simple actuarial fact that the larger the risk pool the better and this one should include everyone from the president to Rafael the illegal-alien bus boy. If is truly insurance, it will cover 1) only unforeseen catastrophes (with current suffers of pre-existing catastrophic conditions grandfathered in) and 2) it will exist to keep people from sinking into hopeless debt. This kind of insurance is very cheap. We could fund it, say, by taxing AM radio talk shows or something.
In order for this kind of thing to work, on (let’s call it) the back end, you need some kind of universal primary care on the front end. This is a business fact; the catastrophic claims system will not work efficiently if you don’t have a front end mechanism to identify illnesses and conditions early and treat them when they are relatively cheap.
The catastrophic piece will have a floor but no cap (that is, there would be some dollar threshold where it would kick in). The primary care piece would have a ceiling (it would cover for everyone some basic level of primary care, and again this would be defined in dollars. The primary care piece again would not be insurance, but it would be rather cheap. The primary care piece and the catastrophic claims piece should be free and would provide a basic level of coverage.
It would also leave a gap, which would be the hole between the cap on the primary care piece and the floor of the catastrophic care piece. What about this hole? It could be filled with private insurance. Or people could opt out and self insure. People who had no money for the hole could also be subsidized by the government, but the service level would be cost controlled, say, through an HMO arrangement or narrow network system.
What should these caps and floors be? If a businessman were putting this thing together, the first thing he would have asked is “how much money have I got to work with”? We built a terrible rotten Medicare drug bill a few years ago but the one bright spot in it is that the legislators started with the money and then worked up from the floor and down from the ceiling. There was still a hole in the middle that probably wouldn’t be there if the government could have actually negotiated drug prices. But it’s the same idea.
The hole could gradually shrink as costs are cut. That’s an entirely different subject although I will say here that “tort reform” is a fantasy when it comes to cost cutting (it doesn’t cut costs) and a records database, while it would make things cheaper and more efficient would not, ever, pack the punch that the US needs to control costs.
on November 6th, 2009 at 6:58 am
One other thing. As I’ve said before, selling insurance over state lines will not really work. The reason that there are price differentials between states is that there are price differentials between hospitals and doctors. It is simply more expensive to see a doctor in New York than in Arkansas. You will not get Arkansas rates from an Arkansas payer to see your doctor in New York. What could happen is that in the larger risk pool, New York rates could go down. But Arkansas rates would then go up to compensate and the Arkansas members would be subsidizing the New York members.