health care costs

As we seem to be approaching the end game for the current effort at health care reform in Congress, it is worth reviewing what the debate is all about. As I outlined in a blog post back in August (“common ground on health care”) the basic objectives of reform are two-fold: 1/ expand coverage to more of the 45 million or so Americans who currently lack health care coverage and 2/ control costs in the system (if you can call our current mess a “system”). I quoted Paul Krugman’s good short summary of the basic elements of the approach being taken in Congress (“Health reform made simple”):

The essence is really quite simple: regulation of insurers, so that they can’t cherry-pick only the healthy, and subsidies, so that all Americans can afford insurance.

Everything else is about making that core work. Individual mandates are a way to prevent gaming of the system by people who don’t sign up until they’re sick; employer mandates a way to hold down the on-budget costs by preventing a rush by employers to drop insurance; the public option a way to create effective competition and hold costs down further.

But what it means for the individual will be that insurers can’t reject you, and if your income is relatively low, the government will help pay your premiums.

That’s it. Any commentator who whines that he just doesn’t understand it is basically saying that he doesn’t want to understand it.

Now that it appears that the public option is out, the focus as we move into conference between the House and Senate will be on other measures in the bill, particularly those that might help control costs. For those following this debate, I thought I would provide links to some of the better pieces on medical cost control that I’ve read over the past few months. If you read these I think you will have a pretty good sense of some of the problems and some possible solutions. They are non-partisan and non-ideological.

I would start with the excellent piece by Atul Gawande in The New Yorker (“The Cost Conundrum: What a Texas town can teach us about health care”). It has received a great deal of attention, in part because President Obama insisted early in this health care reform process that all the members of his administration working on these issues read it. It looks at health care delivery in McAllen, Texas which is second only to Miami in having the highest health care costs in the country, with Medicare spending per enrollee almost twice the national average. Its abnormal costs cannot be explained by demographics or the habits of its inhabitants. Rather the article attributes its soaring costs to the mercenary culture that has developed in the health care delivery system in McAllen. The author contrasts that with the Mayo Clinic which has evolved one of the highest-quality, lowest-cost health care systems in the country.

Another good piece on medical costs is How American Health Care Killed My Father by David Goldhill in The Atlantic. The story starts with his personal experience with the system (referring to a different New Yorker piece than the one I cite above):

…My dad became a statistic—merely one of the roughly 100,000 Americans whose deaths are caused or influenced by infections picked up in hospitals. One hundred thousand deaths: more than double the number of people killed in car crashes, five times the number killed in homicides, 20 times the total number of our armed forces killed in Iraq and Afghanistan. Another victim in a building American tragedy.

About a week after my father’s death, The New Yorker ran an article by Atul Gawande profiling the efforts of Dr. Peter Pronovost to reduce the incidence of fatal hospital-borne infections. Pronovost’s solution? A simple checklist of ICU protocols governing physician hand-washing and other basic sterilization procedures. Hospitals implementing Pronovost’s checklist had enjoyed almost instantaneous success, reducing hospital-infection rates by two-thirds within the first three months of its adoption. But many physicians rejected the checklist as an unnecessary and belittling bureaucratic intrusion, and many hospital executives were reluctant to push it on them. The story chronicled Pronovost’s travels around the country as he struggled to persuade hospitals to embrace his reform.

It was a heroic story, but to me, it was also deeply unsettling. How was it possible that Pronovost needed to beg hospitals to adopt an essentially cost-free idea that saved so many lives? Here’s an industry that loudly protests the high cost of liability insurance and the injustice of our tort system and yet needs extensive lobbying to embrace a simple technique to save up to 100,000 people.

He goes on the recount his own investigations into the problems with our health care system:

I’m a businessman, and in no sense a health-care expert. But the persistence of bad industry practices—from long lines at the doctor’s office to ever-rising prices to astonishing numbers of preventable deaths—seems beyond all normal logic, and must have an underlying cause. There needs to be a business reason why an industry, year in and year out, would be able to get away with poor customer service, unaffordable prices, and uneven results—a reason my father and so many others are unnecessarily killed.

Goldhill does a good job describing the intractability of cost control in our current fee-for-service system which encourages treatment rather than results and where consumers directly see few of the costs they incur because of employer and government provided insurance.

That is probably a good segue into the excellent short piece by David Leonhardt (one of the New York Times’ best business writers) briefly summarizing some of what we know about efforts to control medical malpractice liability costs (if this is a subject that really interests you, Leonhardt’s links are useful):

Here, then, is the brief version of the facts:

The direct costs of malpractice lawsuits — jury awards, settlements and the like — are such a minuscule part of health spending that they barely merit discussion,
economists say. But that doesn’t mean the malpractice system is working.

The fear of lawsuits among doctors does seem to lead to a noticeable amount of wasteful treatment. Amitabh Chandra — a Harvard economist whose research is cited by both the American Medical Association and the trial lawyers’ association —
says $60 billion a year, or about 3 percent of overall medical spending, is a
reasonable upper-end estimate. If a new policy could eliminate close to that much waste without causing other problems, it would be a no-brainer.

At the same time, though, the current system appears to treat actual malpractice too lightly. Trials may get a lot of attention, but they are the exception. Far more common are errors that never lead to any action.

After reviewing thousands of patient records, medical researchers have estimated that only 2 to 3 percent of cases of medical negligence lead to a malpractice claim. For
every notorious error … there are dozens more. You never hear about these other
cases.

So we have a malpractice system that, while not as bad as some critics suggest, is expensive in all the wrong ways.

The malpractice problem is as not as straightforward as the polarized views on the subject might suggest. For example, liability caps don’t seem to have as much effect as their advocates claim and hurt those most deserving of compensation. But it malpractice reform is an important part of the problem from the standpoint of providers and needs to be addressed. (And $60 billion a year is still a lot of money.) I’m certainly not an expert on this subject, and don’t want to make this a post about malpractice reform. But there are a few approaches I think might be worth pursuing. The first is a more general problem with tort liability in this country. I would go to the “British Rule” where the prevailing party gets attorneys fees. That tends to discourage frivolous lawsuits while encouraging those with strong merit. In malpractice cases I think we might take advantage of comparative effectiveness research (which would be encouraged by the legislation working its way through Congress) to create some “safe harbors” for providers who conform to “best practices.” It might also be helpful to have some experts who are appointed by the court rather than the parties to cut down on some of the sham “science” in those cases. More fundamentally, we might consider instituting some form of “no fault” compensation for those injured by medical errors as an alternative to litigation (which might also encourage more transparency with regard to those errors and their causes).

Getting back to Congressional legislation, and again to Atul Gawande, he makes a good case in yet another New Yorker piece (“Testing, Testing: The health-care bill has no master plan for controlling costs. Is that a bad thing?”), that the Senate bill is a good start on cost control. Gawande uses the history of government efforts to improve agricultural efficiency as a model for improving health care delivery.

There are, in human affairs, two kinds of problems: those which are amenable to a technical solution and those which are not. Universal health-care coverage belongs to the first category: you can pick one of several possible solutions, pass a bill, and (allowing for some tinkering around the edges) it will happen. Problems of the second kind, by contrast, are never solved, exactly; they are managed. Reforming the agricultural system so that it serves the country’s needs has been a process, involving millions of farmers pursuing their individual interests. This could not happen by fiat. There was no one-time fix. The same goes for reforming the health-care system so that it serves the country’s needs. No nation has escaped the cost problem: the expenditure curves have outpaced inflation around the world. Nobody has found a master switch that you can flip to make the problem go away. If we want to start solving it, we first need to recognize that there is no technical solution.

Much like farming, medicine involves hundreds of thousands of local entities across the country—hospitals, clinics, pharmacies, home-health agencies, drug and device suppliers. They provide complex services for the thousands of diseases, conditions, and injuries that afflict us. They want to provide good care, but they also measure their success by the amount of revenue they take in, and, as each pursues its individual interests, the net result has been disastrous. Our fee-for-service system, doling out separate payments for everything and everyone involved in a patient’s care, has all the wrong incentives: it rewards doing more over doing right, it increases paperwork and the duplication of efforts, and it discourages clinicians from working together for the best possible results. Knowledge diffuses too slowly. Our information systems are primitive. The malpractice system is wasteful and counterproductive.
And the best way to fix all this is—well, plenty of people have plenty of ideas.
It’s just that nobody knows for sure. …

Pick up the Senate health-care bill—yes, all 2,074 pages—and leaf through it. Almost half of it is devoted to programs that would test various ways to curb costs and increase quality. The bill is a hodgepodge. And it should be.

The bill tests, for instance, a number of ways that federal insurers could pay for care. Medicare and Medicaid currently pay clinicians the same amount regardless of results. But there is a pilot program to increase payments for doctors who deliver high-quality care at lower cost, while reducing payments for those who deliver low-quality care at higher cost. There’s a program that would pay bonuses to hospitals that improve patient results after heart failure, pneumonia, and surgery. There’s a program that would impose financial penalties on institutions with high rates of infections transmitted by health-care workers. Still another would test a system of penalties and rewards scaled to the quality of home health and rehabilitation care.

Other experiments try moving medicine away from fee-for-service payment altogether. A bundled-payment provision would pay medical teams just one thirty-day fee for all the outpatient and inpatient services related to, say, an operation. This would give clinicians an incentive to work together to smooth care and reduce complications. One pilot would go even further, encouraging clinicians to band together into “Accountable Care Organizations” that take responsibility for all their patients’ needs, including prevention—so that fewer patients need operations in the first place. These groups would be permitted to keep part of the savings they generate, as long as they meet quality and service thresholds.

The bill has ideas for changes in other parts of the system, too. Some provisions attempt to improve efficiency through administrative reforms, by, for example, requiring insurance companies to create a single standardized form for insurance reimbursement, to alleviate the clerical burden on clinicians. There are tests of various kinds of community wellness programs. The legislation also continues a stimulus-package program that funds comparative-effectiveness research—testing existing treatments for a condition against one another—because fewer treatment failures should mean lower costs.

There are hundreds of pages of these programs, almost all of which appear in the House bill as well. But the Senate reform package goes a few U.S.D.A.-like steps further. It creates a center to generate innovations in paying for and organizing care. It creates an independent Medicare advisory commission, which would sort through all the pilot results and make recommendations that would automatically take effect unless Congress blocks them. It also takes a decisive step in changing how insurance companies deal with the costs of health care. In the nineteen-eighties, H.M.O.s tried to control costs by directly overruling doctors’ recommendations (through requiring pre-authorization and denying payment); the backlash taught them that it was far easier to avoid sicker patients and pass along cost increases to employers. Both the House and the Senate bills prevent insurance companies from excluding patients. But the Senate plan also imposes an excise tax on the most expensive, “Cadillac” insurance plans. This pushes private insurers to make the same efforts that public
insurers will make to test incentives and programs that encourage clinicians to keep costs down.

Which of these programs will work? We can’t know. That’s why the Congressional Budget Office doesn’t credit any of them with substantial savings. … But there can’t be a master plan. That’s a crucial lesson of our agricultural experience. And there’s another: with problems that don’t have technical solutions, the struggle never ends.

I think this is an important piece and strongly recommend it.

Finally, for those of you distressed at the apparent loss of the public option, Timothy Noah makes the case in Slate (“Mr. Level Playing Field”) that the public option, at least the watered-down “level-playing-field” option limited to individuals participating in the insurance exchanges, wouldn’t have had much of an effect on cost control after all. Actually, I’m not sure I entirely buy that. I have not lost all faith in the markets and they may be telling us that the insurance companies dodged a bullet. Since everyone’s favorite senator, Joe Lieberman, said on October 27th that he would filibuster a health reform bill if it included a public option of any kind, look what has happened to the shares of health insurance companies (through last Friday’s market close):

[click to enlarge]

By comparison, the Dow was up only 2.3% during that time and the NASDAQ only 1.4%. That suggests that the markets believe the public option would have had a non-trivial impact on the profitability of the health insurance companies. There is an alternative explanation, however: With the resolution of the public option issue (regardless of which way it was resolved), the path was cleared for adoption of health care reform legislation which will deliver millions of additional customers to the insurance companies. Even if a public option had been included, the shares of the insurance companies might have gone up with the prospect of passage enhanced. I suspect the truth is a combination of the two: The insurance companies would benefit from the legislation even if the public option was included but without it they will benefit more.

Overall, I think the iconic status of the public option among progressives probably exaggerates its actual importance. I certainly understand the reluctance to hand more money over to the insurance companies. As someone who purchases insurance in the individual market, I would have been very receptive to a public option. But according to the Congressional Budget Office (not necessarily definitive but nonetheless informative) the public option would have saved the federal government only $25 billion over 10 years. That’s a lot of money, but only a drop in the bucket when compared with US health care spending of $2.5 trillion this year alone. And according to the CBO it would have had virtually no effect on the number of people buying insurance through the government-run insurance exchanges. So if progressives were strong supporters of this legislation when it included the public option, they should still be strong supporters today.

We can still hope that some stronger cost control measures come out of the conference committee. The three ways in which I would particularly like to see the Senate bill strengthened would be to: 1/ have the mandatory insurance payout ratio raised up from the 80% in the Senate bill (less than the industry’s current average 81% payout ratio) to the 85% in the House bill or even higher (90% sounds good), 2/ give Medicare the ability to negotiate the price of drugs (how absurd is it that the federal government, as a large buyer of a product, is prohibited by law from negotiating the price?) or at the very least to allow consumers to import drugs from other approved countries (where governments do have the ability to negotiate lower prices – ultimately a poor substitute for getting it right in this country) and, 3/ eliminate the current antitrust immunity for the insurance industry (which is already in the House bill but not the Senate bill). (This may not be related to cost control, but I also hope the conference finds ways to accelerate implementation of some of the key elements of the legislation like establishment of the insurance exchanges which now is pushed off until 2013 – after not only the 2010 election cycle but also the 2012 election cycle.)

These articles are not definitive but they are a good introduction to the issues involved with health care cost control. If we don’t control the growth of health care costs it is going to bankrupt not only the federal and state governments but American businesses and consumers. Now that the public option appears to be dead there is really no excuse for Republican obstructionism in Congress. Even if some members of Congress might have preferred a different approach, the basic structure of the legislation would have been fairly non-controversial in the absence of that lock-step Republican partisanship. The legislation pretty much follows the model signed into law in Massachusetts by then-governor Mitt Romney – hardly some kind of radical socialist. Any member of Congress who isn’t serious about controlling health care costs is not serious about governance (and certainly not serious about the long-term federal budget deficit). Unfortunately that is probably a good summary of today’s Republican Party.