qotd: Himmelstein and Woolhandler explain savings from single payer

The Boston Globe

May 30, 2012

Single-payer health care would save billions for Massachusetts

By David U. Himmelstein and Steffie Woolhandler

The House and Senate health care proposals would set imaginary limits for spending growth enforced by secret "improvement plans" and wrist slaps for hospitals that overcharge; establish tiered payment schemes to consign the poor and middle class to second-tier hospitals and doctors; push most residents of the Commonwealth into HMOs (oops, we forgot, now they're called "accountable care organizations," or ACOs); and wipe out small doctor's offices by "bundling" their pay into ACO payments. Apparently the legislators' theory is that forcing health care providers to consolidate cuts costs. Oligopoly saves money?

Here are six alternative steps the Legislature could take that would actually save money while still preserving care.

*  Cut out the middlemen. Why exactly do we pay private insurers 10 cents of every premium dollar? The plan that covers all 13 million residents of the Canadian province of Ontario has overhead of only 1 percent. Adopting that single-payer approach in Massachusetts would save about $2 billion in insurance overhead in 2013 alone.

*  Pay hospitals the way we pay fire departments: real global budgets that cover all operating costs, not the per-patient schemes that are masquerading as global payments. Billing, collections, and paperwork consume nearly one quarter of hospitals' revenues. Eliminate billing for individual patients and you'd cut that nearly in half. The savings: about $3 billion in 2013.

*  End the medical arms race and enforce real health planning. Hospitals and clinics vie for affluent patients needing lucrative high-tech care. They reap surpluses, a.k.a. profit, which they use to buy fancy machines and superluxe buildings – usually situated where there's already a surplus of such facilities. Inevitably, the surplus facilities induce unnecessary, even harmful overcare. Meanwhile, underserved communities and under-provided services like mental health and substance abuse are starved of investment. Hospital payments should go for patient care, not new buildings. Money for new buildings and technology should flow to a separate fund, and be allocated according to need, not profitability, through a transparent public process. Investing in what's needed instead of what's profitable would save billions and improve care for both the poor and the affluent.

*  Right-size the physician work force: more primary care, fewer specialists. Massachusetts hospitals take pride in training super-specialists who go on to provide profitable but often unneeded care (see above). Meanwhile, the primary care shortage persists. The public, through Medicare, already pays for residency training and should use the power of the purse to make hospitals train the doctors that the public needs. And physicians' fee schedules should be altered to assure that best students are attracted to the most needed, important, and difficult fields – primary care – and that doctors make as much for talking to patients as for putting them through a scanner.

*  Negotiate drug prices statewide. Canadians pay 40 percent less for drugs than we do because they use single-payer buying power to drive down prices from pharmaceutical companies. Why can't we?

*  Cap health executives' incomes. Why should a hospital CEO make more than the president of the United States?

(David U. Himmelstein, M.D. and Steffie Woolhandler, M.D., M.P.H. co-founded Physicians for a National Health Program. They are professors at the City University School of New York School Public Health and visiting professors at Harvard Medical School. They worked as primary care doctors in Massachusetts from 1982-2010.)

http://bostonglobe.com/opinion/2012/05/30/single-payer-health-care-would-save-billions-for-massachusetts/yNTLRlKucgdJCUCU3P5arM/story.html

Comment:  To explain simply what is meant by "single payer," we often allude to an "Improved Medicare for All." That seems to suggest that we merely need to tweak Medicare and then provide it to everyone - that simply eliminating private insurers is all we need to do. This article by PNHP co-founders David Himmelstein and Steffie Woolhandler briefly describes how the single payer model is much more than that, especially pointing out how it would be tremendously effective in slowing the nearly intolerable increases in health care spending, while dramatically improving the functioning of our health care delivery system.

First, a little background. When the Massachusetts health reform legislation was ready to be enacted, it was criticized for failing to address one of the most important reasons for reform - it did not include effective measures to contain costs, a flaw challenged by single payer supporters. Rather than taking another look at single payer, Gov. Romney's advisor, MIT economist Jonathan Gruber, famously said that first we should get everyone covered by passing this, and then we'll work on controlling spending.

Of course not everyone is covered in Massachusetts, while cost increases continue out of control. In response, the Massachusetts House and Senate have prepared separate but similar bills to control spending, while ignoring the remaining uninsured. Instead of adopting structural changes that would reduce waste - as Himmelstein and Woolhandler recommend - they would apply spending restrictions that could threaten solvency of components of the health care delivery system, while compounding the problems of patient access already evident in the inadequacies of the primary care infrastructure.

As everyone knows, the Affordable Care Act (ACA) was patterned on the same model as used in Massachusetts. Single payer advocates were vehemently proclaiming that ACA would leave too many out of the system, and that it would fail to address rising health care costs - the two primary problems that motivated reform. But we were excluded from the process.

As our members of Congress toiled over the markup of the legislation, measures were included that nominally would control costs. However, with the possible exception of the Independent Payment Advisory Board (IPAB), none of the included measures would have a significant impact on health care costs. Even the IPAB would have the serious flaw of cutting solely Medicare and not private insurer payments to the health care delivery system, threatening underfunding and likely impairing access due to the exodus of physicians from the Medicare program.

The primary reason that the meager measures to contain spending are inadequate is that ACA left in place and built upon our existing dysfunctional financing system with its profound waste. What we needed instead was a complete overhaul of the financing infrastructure, including not only changing to an administratively simplified single payer but also measures such as those listed by Himmelstein and Woolhandler.

Eliminating private insurers and switching to a single public insurer is the most important and effective measure of single payer, but the other measures are essential if we want to join the other wealthy nations that provide quality care to everyone at an average of half of what we are currently spending.

When you advocate for single payer by pushing an "Improved Medicare for All," be sure in the same breath to let your listeners know the extent of our recommendations: "An Improved Medicare for All that would totally overhaul our dysfunctional financing system so that it works best for patients."

In this age of sound bites, if you have another breath, you can point out that single payer would also have a highly favorable impact on the health care delivery system, by enhancing primary care, and by efficiently expanding facilities and high-tech capacity based on medical need instead of profit and extravagance.

Above all, it's crucially important to communicate that single payer is not just your mother's Medicare.

qotd: PwC predicts medical cost increases

PwC (PricewaterhouseCoopers)

Health Research Institute

May 2012

Medical Cost Trend: Behind the Numbers 2013

Healthcare spending growth in the United States has slowed considerably over the past three years. And despite expectations that the trend would bounce back up in 2012, it did not. In fact, we see no major change on the horizon for 2013.

Medical cost trend measures spending growth on health services and products—a critical factor in calculating insurance premiums for employers and consumers. For 2013 PwC's Health Research Institute projects a medical cost trend of 7.5%. Perhaps most notably, the historically large gap between healthcare growth and overall inflation has closed slightly.

As a result, the United States finds itself at a crossroads with respect to medical inflation. History suggests that the current slowdown is merely a dip mirroring broader economic trends and that medical cost growth will return to "normal" when the rest of the economy recovers fully. Looking even further out, if the Affordable Care Act is fully implemented, tens of millions of newly-insured Americans receiving care for the first time in years could cause a spike in spending in 2014 and beyond.

But across the healthcare landscape behaviors are beginning to change. Employers are pushing wellness programs with real enforcement muscle. Healthcare providers and drug makers are embracing the quest for value. And patients are becoming more cost-conscious medical consumers.

It is always dangerous to predict that medical cost trend could be approaching a more sustainable level. Yet if the structural forces in the industry take hold, the U.S. health system may be entering a "new normal."

Executive summary

The focus on medical cost containment strategies is continuing, aided by the sluggish economy, reforms in the healthcare industry, and efforts by employers to hold down costs.

More than half of the employers surveyed by HRI are considering increasing employees' share of health benefit cost and expanding health and wellness programs in 2013.

In estimating the medical cost trend growth for 2013, HRI relied on multiple sources including interviews with health plan actuaries and industry leaders, a review of available surveys and analyst reports, and PwC's own 2012 Health and Well-Being Touchstone Survey of 1,400 employers from more than 30 industries. In this year's report, we identified:

Four factors that will deflate medical cost trend in 2013:

* Medical supply and equipment costs abate under market pressure. Supplies can account for more than 40% of the cost of certain procedures. Recent hospital consolidation and physician employment are enabling administrators to move away from "physician preference" purchasing and negotiate for significant savings. In addition, insurers are pressuring hospitals to hold down these expenses.

* New methods to deliver primary care gain popularity. One of the slowest areas of cost growth has been in physician services, and this trend is expected to continue in 2013 as consumers choose alternatives to the traditional doctor's office visit. Lower-cost options such as workplace and retail health clinics, telemedicine, and mobile health tools continue to gain market share because employers and consumers view them as cost effective and convenient.

* Price transparency exerts pressure. As comparative cost information becomes more readily available, purchasers such as employers and individual patients can shop for non-emergency services such as tests and elective procedures. Providers meanwhile are under pressure to justify prices. More than 30 states require some reporting of hospital charges and reimbursement rates. Congress is considering legislation that would prohibit cost confidentiality clauses in insurance and hospital contracting.

* The pharmaceutical patent cliff continues to foster the use of cost-saving generics. Many blockbuster drugs have recently gone off patent, which will have a major effect on lowering drug spending in 2013.

Two factors that will inflate medical cost trend in 2013:

* Uptick in utilization trend is expected in 2013. The recession of 2007–2009 contributed to a significant slowing in healthcare consumption, as many people who lost jobs or were afraid of losing employment delayed care. As the economy continues to strengthen, utilization is expected to rebound.

* Medical and technological advances accelerate growth of higher-cost care. Remarkable new discoveries and technological advances let many in society live much longer—but often at a significantly higher cost. New technologies, such as robotic surgery and positron emission tomography services, have grown rapidly, with 36% of hospitals performing robotic surgery in 2010. Several health plans reported an uptick in high-cost cases, many surpassing the million-dollar mark.

What this means for your business

Employers and insurers will want to capitalize on the recent slowdown, while doctors, hospitals, and pharmaceutical companies will need to retool their business models to succeed in the new environment.

http://www.pwc.com/us/en/health-industries/behind-the-numbers/key-findings.jhtml

Comment:  This annual PwC projection of medical cost trends with employer-sponsored health programs seems to celebrate the slowing of cost trends at the 7.5 percent level for 2013. Yet that is well in excess of the rate of inflation. Our nation's employers and their private insurer partners have remained ineffective in controlling health care cost escalation.

PwC discusses four factors that they say should deflate the medical cost trend, but when you look closer at them, they would barely tweak costs.

* Hospital consolidation may place administrators in a better negotiating position for purchasing supplies and equipment, but since these are not services but rather products with relatively fixed production costs, negotiable margins will be quite narrow. Very little savings will be reflected in the bottom line of total costs.

* Retail health clinics might charge lower fees than primary care practices, but not much lower. Also, most health care still needs to be delivered within the traditional system of primary care professionals, specialists, and hospital and outpatient services. A discount on flu shots and exams for common colds in a convenience clinic will not make much of a dent in spending on the 80 percent who are relatively healthy, yet still receive most of their care through traditional health care professionals and facilities. It won't have any impact at all on the 80 percent of health care that is consumed by those with more significant health care problems.

* There is much discussion of price transparency, as if patient/consumers are going to drive down prices through health care shopping. Most prices paid are determined not by price checks but by administered rates of government programs or negotiated rates through third party payers, including private insurers and employers with self-insured programs. Ubiquitous price shopping is merely a dream of ideologues.

* It is true that many blockbuster drugs are coming off of patent and will be much less expensive as generics. But when you look at some of the newer agents and the research that is down the line, the quest of the pharmaceutical and biotech industry is for drugs and biologicals with five and six digit prices, or maybe four digits for products with low production costs and higher utilization. The PwC report mentions $300,000 and $400,000 drugs that are already on the market. The industry has no interest in producing new $20 drugs.

The report also mentions factors that will inflate health care costs, including increased utilization as the economy recovers, and increased spending on newer expensive technology. Also spending increases will occur if the states are successful in enrolling significant numbers of previously uninsured individuals in their insurance exchanges, and if employers increase coverage to avoid penalties should the Affordable Care Act survive its challenges.

Until we are ready to change to a much more efficient single payer national health program, we can anticipate that intolerable health care inflation rates will stay with us. As more of us suffer from the results - impaired access and financial hardship - we may finally reach a threshold wherein we are ready to act. Until then, don't get sick.

qotd: Tradeoff between risk protection and moral hazard

The National Bureau of Economic Research

May 2012

Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance

By Amanda E. Kowalski

Abstract

Insurance induces a well-known tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of the tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows for the calculation of both sides of the tradeoff simultaneously, allowing for a relationship between moral hazard and risk protection. An important feature of this model is that it considers nonlinearities in the consumer budget set that arise from deductibles, coinsurance rates, and stoplosses that alter moral hazard as well as risk protection relative to no insurance. I illustrate the properties of my model by estimating it using data on employer sponsored health insurance from a large firm. Within my empirical context, the average deadweight losses from moral hazard substantially outweigh the average welfare gains from risk protection. However, the welfare impact of moral hazard and risk protection are both small relative to transfers from the government through the tax preference for employer sponsored health insurance and transfers from some agents to other agents through a common premium.

4.3 The Estimated Tradeoff Between Moral Hazard and Risk Protection

The third panel of Table 10 gives the tradeoff between the welfare gain from risk protection and the deadweight loss from moral hazard. The distribution of the tradeoff at any quantile generally is not equal to the difference between DWL (deadweight loss) and RPP (risk protection premium) at those quantiles. However, as shown in the penultimate column, the mean tradeoff is equal to the mean DWL minus the mean RPP. For all offered and hypothetical plans considered, the results show that the average deadweight loss exceeds the gain from risk protection. The average net welfare loss in each of the offered plans is around $5, or 0.25% of money at stake.

We see that the welfare gains that we estimate from insurance in Table 11 are very similar to predicted insurer spending reported in Table 8; demographic groups with higher predicted insurer spending derive a larger welfare gain from insurance than demographic groups with lower predicted insurer spending. As we see in Table 12, demographic groups with larger predicted insurer spending also have larger deadweight losses. Risk protection does not appear to vary with predicted insurer spending because the magnitudes of the risk protection premium are so small, but there is also some variation in the risk protection premium across demographic groups. 

NBER:

http://papers.nber.org/papers/w18108?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Full paper (highly technical):

http://www.econ.yale.edu/~ak669/kowalski05_17_12submit.pdf

Comment:  The mainstream policy community likely will take from this study the fact that it supports the prevailing notion that losses from insured patients using more health care than they otherwise would have (moral hazard) are greater than the gains in protecting personal finances in the face of medical need (risk protection). Such an interpretation would be unfortunate simply because it is inadequate and therefore misleading.

Most importantly, the net welfare loss of using more care when there is risk protection is so small that it is almost negligible. In fact, the population studied (employees of a large retail trade firm) did not have high health expenditures and therefore would be the most likely to respond to direct costs incurred below their deductibles. Yet the data show that mean value of the extra care obtained above the value of the risk protection premium was almost negligible. 

Most of health care spending is incurred by those with greater health care needs, a group that was not represented in this study of healthier individuals. People with greater health care needs exceed their deductibles and consequently do not experience consumer sensitivity to most of their health care prices.

Another important issue is that the extra health care accessed as a result of moral hazard should not be automatically dismissed as excess care. Half of it is not since it includes beneficial services, even though these services risk being dismissed merely because they are not reflected in improved mortality data. Even the care that might not seem to be beneficial still provides reassurance to concerned patients that their presenting complaints do not warrant further diagnostic or therapeutic intervention. Reassurance provided by health care professionals should not be considered to be a moral hazard.

The lesson to take home from this study is that the cost of trading up for more risk protection is almost negligible when the price paid is a very small increment in additional spending on largely beneficial health care that might otherwise have been foregone.

This is crucial in the continued debate over health care reform. There is considerable political pressure to shift price sensitivity to health care consumer/patients through consumer-directed high-deductible plans, health savings accounts, vouchers for Medicare plans, lower-tier plans in insurance exchanges, and other devious innovations that insurers will no doubt introduce in the future. These concepts are to deter the false bogeyman of moral hazard, but at the profound cost of threatening financial security for those of us with health care needs.

Regular readers already know how we can circumvent this nonsense - simply enact a single payer national health program that eliminates cost sharing. Countries that spend on average only half of what we do have shown that it can be done. The moral hazard is in not doing it.