Bending the Health Care Cost Curve

On One Hand . . .

A Friday report from the Medicare Board of Trustees shows that there was a slowdown in the growth of Medicare costs in 2012. The Medicare trust fund is now projected to last until 2026, two years longer than previously estimated. Medicare spending is now growing at the historically low rate of 1.7% per year. Of course, a decline in the rate of growth doesn't mean the problem is solved. Costs are still going up. But at least they are heading in the right direction. The report attributes the decline in costs to a combination of the current recession, which is causing people to cut back on health care, and the Affordable Care Act (ACA).

Dr. Ezekiel Emanuel, one of the authors of the ACA, points out that there are two types of cost control embedded in the ACA, payment reductions and what he calls “structural and incentive changes.” The two primary payment reductions affecting Medicare are:

• Reduced payments for Medicare Advantage. Medicare Advantage allows seniors to purchase private insurance in lieu of traditional Medicare. It costs the government 14% more than Medicare even though it doesn't produce any better outcomes. That 14% is presumably being pocketed by the private insurance companies, and the government is taking it back.
• Reduced payments to Medicare providers, i.e., hospitals, home care agencies, etc. Emanuel says these organizations have profited from increased productivity in recent decades, but have not passed these savings on to the consumer. Therefore, Medicare is paying them less.

In short, the ACA made $716 million in automatic cuts to the Medicare program in 2012. This chart shows that these two payment reductions account for the bulk of these Medicare cuts. They are the primary reason for the slowdown in the growth of Medicare spending.

The structural and incentive changes include things like bundled payments, where Medicare pays a fixed rate for an episode of care rather than fee-for-service, and Medicare's Independent Payment Advisory Board, which can make specific treatment recommendations in order to reduce excess cost growth. Most of these changes are several years away.

These cost controls are an important positive changes, since they have reduced costs without eliminating benefits to Medicare recipients. However, they're only a fraction of the amount that could be saved if the country were to move to a single payer system. First of all, they only affect Medicare, which insures 17% of Americans. Secondly, they are relatively modest cuts when you consider the excess profits currently being taken by hospitals and insurance companies.

The bottom line is that these data seem to show that the ACA is working in controlling Medicare costs, but it is only a modest first step compared to what we could and should be doing.

On the Other Hand . . .

Elisabeth Rosenthal has a long article in the Sunday New York Times about the high cost of medical care in the U. S., similar to the February Time feature by Steven Brill. Her article focuses on colonoscopies, presumably because it is a vivid metaphor for what the for-profit health care system is doing to all of us. However, her chart shows several common medical costs in which the average U. S. price tag is as much as 25 times higher than the price in other countries.

The sub-heading of the article says, “Colonoscopies explain why U. S. leads the world in health expenditures,” but they do no such thing. Merely listing the costs of medical procedures does not explain why those costs are so much higher in this country. Most of Rosenthal's argument is a tautology: Prices are high because prices are high. The closest she comes to offering an explanation is buried in the nineteenth paragraph:

A major factor behind the high costs is that the United States, unique among industrialized nations, does not generally regulate or intervene in medical pricing, aside from setting payment rates for Medicare and Medicaid, the government programs for older people and the poor. Many other countries deliver health care on a private fee-for-service basis, as does much of the American health care system, but they set rates as if health care were a public utility or negotiate fees with providers and insurers nationwide, for example.

Of course, she manages to make this point without mentioning the poisonous words “single payer,” which all the other countries cited in her article have. But the Medicare data show us what could happen if the government were to take a more active role in combating greed in the health care system.

You may also be interested in reading:

A New Time Magazine Article on Health Care Costs with Stewart Discussion

An Explanation of Washington Post Graphs on the Cost of Procedures

Medicaid Expansion Update

Legalized Bribery

Legalized Bribery

Ever wonder why health care costs so much in this country, and why we get such poor outcomes in return? Here's a small piece of the puzzle.

The New York Times reports that an obscure paragraph in the recent “fiscal cliff” bill extends a delay in implementation of Medicare price controls on Sensipar, a drug used by kidney dialysis patients, for two years. The drug is manufactured by Amgen. The delay will cost Medicare—and ultimately taxpayers—$500 million. The section of the bill (Section 762) is not tranparent and does not mention Amgen by name. It's one of many examples of pork that are buried in a bill that was supposed to reduce the deficit.

Here are the details. Currently, Medicare pays for dialysis drugs individually. They determined that this created an incentive to overprescribe medication that was useless and possibly harmful. The change, now postponed, was that Medicare would pay a single, bundled rate for dialysis treatment.  That was a threat to Amgen's profits.

According to the Times, this decision was made by Senator Max Baucus (D-MT), chair of the Senate Finance Committee, and Senator Orrin Hatch (R-UT), the ranking Republican on the committee. It was subsequently approved by Senate Minority Leader Mitch McConnell (R-KY) and Vice President Joe Biden, who negotiated the “fiscal cliff” agreement. Amgen has made over $5 million in political contributions since 2007, including $67,750 to Senator Baucus, $59,000 to Senator Hatch, $73,000 to Senator McConnell, and $141,000 to President Obama's two presidential campaigns.

Sen. Mitch McConnell
(or possibly a turtle)

The Times quotes aides to Senators Baucus and Hatch and an Amgen spokesperson as saying that the delay was justified because it would “give Medicare and health care providers the time they need to accommodate complicated changes in federal reimbursement for kidney care.” The price restraints were originally scheduled to begin in 2012. Congress granted Amgen a two year delay until 2014. The “fiscal cliff” bill extends that delay until 2016. How much time do they need?

An aide to Senator Baucus added that, “What is the best policy for Montanans and people across the country is at the heart of every decision Chairman Baucus makes.” But none of the people contacted attempted to justify the decision on medical grounds.

Amgen is the world's largest biotech corporation, with $15.6 billion in revenue in 2011. It has 74 lobbyists in Washington, including former chiefs of staff of both Senators Baucus and McConnell. Senator Hatch's leading staff member on health care policy is a former Amgen employee.

On December 19, Amgen pleaded guilty to illegally marketing Aranesp, an anti-anemia drug, for purposes the FDA had explicitly not approved. The $762 million settlement was a new record for a biotech company.

I think incidents like this pose a serious threat for single-payer advocates. One of the major arguments against single payer, which resonates strongly with the general public, is that the federal government can't be trusted to run a health care system that will provide quality medical care at a reasonable price. We usually try to counter that argument by pointing out that all other countries with single-payer systems achieve better health outcomes than we do at lower cost.

However, the United States is not like other industrialized countries. It's possible that our level of political corruption is so much higher than other countries as to make us not comparable to them. If so, it's impossible to predict how single payer would fare in this country. Of course, despite our corruption, Medicare is still cheaper than private insurance. However, if Congress ever passes a single payer bill, it is important that it contain safeguards that insulate the system from corporate and political interference.

Update (1/31/13)

The liberal organization Progressives United has latched onto this story and is asking people to sign a petition to the CEO of Amgen asking him to give back the $500 million. (Good luck on that!) The petition can be found here.

Accountable to Whom?

An article by Ezekiel Emanuel and Jeffrey Liebman promises “the end of health insurance companies.” According to these former Obama administration advisors, they will be made obsolete by accountable care organizations (ACOs).

The Affordable Care Act provides for the establishment of ACOs to serve Medicare and Medicaid patients. Essentially, a group of health care providers (doctors and/or hospitals) form an ACO and sign a contract with the government to provide care for a large group of patients. They receive a bundled payment based only partially on services provided. Some part of the payment is based on the quality of the health care they provide and their ability to control costs.

In theory, cost control can be done by better coordination of patient care, for example, with the help of computerized records. Since so much of medical care is unnecessary or harmful, a lot of money could be saved, provided the incentives were greater than the profit to be made through overtreatment. It should at least be possible to measure whether money is being saved in comparison to the current fee-for-service system.

Measuring quality of care is more difficult. But it is crucial, since without it, the incentive structure of ACOs might encourage them to withhold necessary care from their patients. But what are the criteria of good health, and how could they be measured without incurring additional expense? Health care research focuses on hospital admissions and readmissions as an indicator that the patient is not healthy, but this is an imprecise measure of health which only becomes apparent after the patient's situation has deteriorated. Like other health indicators, it can be manipulated by denying treatment.

It is possible to imagine ACOs working well under Medicare with proper oversight from government. Nevertheless, there are problems. If an ACO is to be responsible for prevention as well as treatment, subscribers must remain in the system long enough for the ACO to reap the savings that come with prevention. This is possible in a single payer system, but not in this country where there is a lot of client turnover. Also, to be accountable for all their clients' health care needs, an ACO must include specialists in all health problems, which means it must be quite large. But large organizations have greater market share, which discourages competition and leads to higher prices—just the opposite of what ACOs are supposed to do.

However, Emanuel and Liebman are suggesting that ACOs will dominate the private health care market as well. In fact, hospitals are already buying out competitors and hiring more doctors, and insurance companies are merging with hospitals in anticipation of forming ACOs. This trend is evident in the Pittsburgh area. The University of Pittsburgh Medical Center (UPMC), the largest hospital chain, has bought out competitors and has gone into the health insurance business as well. Meanwhile Highmark, the region's largest health insurer, has purchased West Penn Allegheny, the only major hospital chain not owned by UPMC. Not surprisingly, this morning's paper reports that Pittsburgh has the highest hospital care costs of any city in the U. S.

Apparently we can look forward to a brave new world in which, when we purchase health insurance, either alone or through our employer, we affiliate with an ACO which promises to keep us in good health. But Austin Frakt, a health care policy expert who is sympathetic to ACOs, suggests that they “are fine and good for Medicare, but somebody needs to think through the consequences for the private side of the market.”

The dominant characteristic of today's corporations is that they are not accountable to anyone except perhaps their stockholders. A combined health insurance-medical care corporation will have strong financial incentives to charge as much as possible for health insurance while providing as little health care as possible in return. At least under the current system, the patient is caught between two corporations pushing in different directions. If their insurance company is trying to deny them care, there is a good chance that their doctor will come to their defense and insist that they receive medically necessary treatment. If the insurance company and the doctors are all part of the same corporation, who will defend the patient's interests? Without third party oversight, what is to keep the patients from being harmed when their very lives may be at stake?

It is possible that a conscientious employer might provide oversight of an ACO with which it affiliates, since companies may want to keep their employees healthy. However, this is certainly problematic, and, in any case, individual health care subscribers are on their own under this system. I don't see how the entire country can shift to ACOs without substantial government oversight. This, of course, will be strongly resisted by hospitals and insurance companies, in part because it would start to take on the characteristics of a single payer system.

Many countries—Germany, Japan and Switzerland are examples—have systems in which both health care providers and insurers are private entities. But these countries have tight government regulation of medical services and fees. These private entities are required to cover everyone and they are permitted to make only modest profits, if any. And why should they make large profits? Under a single payer system, insurance companies are completely unnecessary, while doctors and hospitals can be limited to a “reasonable” fee for their services. If they want to increase their income, maybe they should be allowed to compete for higher wages by demonstrating that they can keep their patients healthy and, as a consequence, control costs.

Although I have serious doubts as to whether ACOs will work in our private health care system, they may be a good idea when embedded within a single payer system.

Moving Backward

If you are a supporter of single payer who believes that change in the U. S. health care system will be gradual and incremental, you probably support the Affordable Care Act, and you probably think any policy changes that move us in the direction of single payer are progress, while you oppose any changes that move us toward privatization. Medicare is the largest single payer system we have in this country. The members of the Elephant Party are nearly unanimous in their support of Rep. Paul Ryan of Wisconsin's plan to privatize Medicare. Up until now, they have been unsuccessful in getting any Jackasses to sign onto the Ryan plan. That has all changed. Sen. Ron Wyden of Oregon, a member of the Jackass Party, has joined with Ryan to propose a “compromise” plan to “save” Medicare. While it stops short of privatizing Medicare, it is a major step in that direction.

When the Affordable Care Act was being debated, supporters of single payer favored a public option to compete with private health insurance plans. Our thinking was that if the public option proved more attractive to subscribers, it would move the country in the direction of single payer. The Ryan/Wyden plan offers seniors a “private option” as an alternative to the single-payer Medicare, possibly in the hope that competition from the private sector will eliminate Medicare from the U. S. health care system (although they deny that intention).

The Ryan/Wyden plan is a premium support program, similar to school vouchers. Seniors will be given a certain amount of money to spend on health care. They will choose among several alternatives, including traditional Medicare and various private health care plans, most of which will cost more than the amount they have been given.

Here is a simplified version of Austin Frakt's summary of the plan:

• Private medicare plans will compete with traditional Medicare in an exchange. Private plans must offer the “actuarial equivalent” of what is available from Medicare. In other words, the private plans don't have to offer the same coverage as Medicare, but the coverage they offer must be of equal value.
• The premium support citizens receive is equal to the cost of either the second cheapest private plan in the exchange or Medicare, whichever is lower. If you choose a more expensive plan, you pay the difference. If you choose the cheapest plan, you get a rebate.
• Private plans may not reject an applicant for any reason; that is, discrimination on the basis of pre-existing conditions is not permitted.
• If this price competition doesn't work to contain the cost of Medicare, the cost will be capped at a growth rate equal to the growth rate of the GDP, plus 1%. This will be done by reducing support for the sector or sectors (hospitals, drug companies, etc.) most responsible for the cost increase.
• Anyone now over 55 will not participate in the new plan, which will not be implemented before 2022.

There are several potentially serious problems with the Ryan/Wyden plan. Again, I am indebted to Frakt for his thoughtful posts about premium support programs (which he favors, by the way).

• Although private insurance companies will be forbidden to turn away people with pre-existing conditions, they will find all kinds of ways to enroll only the healthiest people, i.e., by directing their advertising at affluent citizens. Traditional Medicare will be left with the sickest people, who will pay the highest fees. A process called “risk adjustment” is supposed to deal with this problem by increasing the rebate to plans that cover less healthy people, but this is after-the-fact and it's not clear how it will work.
• Private insurance companies often treat their customers badly. The deny necessary care and provide poor customer service. This can also be used to drive away the least healthy people.
• When it comes time to design the plan, Medicare will have no money to spend on lobbying and campaign contributions, while the insurance companies will be stuffing Congress-critters' pockets with cash. This virtually guarantees that the playing field will be tilted in favor of the private plans.
• Since private plans don't have to offer the same coverage as Medicare, but only the actuarial equivalent, it will be hard for seniors to compare the plans. The insurance companies have almost unlimited advertising budgets with which to confuse and mislead consumers. Most seniors citizens do not have a friend with a Ph.D. to help them pick the best plan, so many of them will make bad choices.

The combined effect of these problems will be to leave Medicare with fewer and less healthy customers. This will increase Medicare's costs, while weakening its bargaining power when negotiating with hospitals or drug companies over the prices of goods and services. This could eventually lead to the demise of Medicare.

When Walmart goes into a new community, they offer consumers heavily advertised “sales” for the first couple of years. (Since they have thousands of outlets, they can afford to run some of them at a loss for a short time.) The purpose is to drive other local retail stores out of business. Once they have eliminated the competition, they quietly raise their prices. It's possible that the insurance companies will begin by setting their prices unrealistically low, in the hope of sending Medicare into a death spiral.

It's going to be difficult to oppose a premium support plan. Critics will ask: "What can be wrong with offering people more choices? If you are really confident that single payer is more cost effective, why do you worry that people will switch to private health insurance?"  Some of our objections will sound as if we oppose giving people more choices because we are afraid they will choose unwisely. This seems paternalistic, and conflicts with most Americans' mistaken view that they are too smart to be influenced by advertising.

I apologize for the length of this post, but I believe that premium support programs are a serious threat to move our health care system in the wrong direction. The New York Times has come out in favor of premium support. The insurance companies have almost unlimited funds with which to bribe Congress and the President to pass such a program. In fact, I'm afraid that dismantling Medicare is almost inevitable. If that happens, it will be nearly impossible to pass single-payer health care in this country. How can you demand Medicare for all when there is no Medicare?

Early news reports have suggested that Senator Wyden is seen by his fellow Jackasses as a traitor for breaking ranks and suggesting major changes to Medicare. (Paul Krugman refers to him as a "useful idiot.") My guess is that the reality is quite different. They are probably grateful to him for offering them cover while they quietly line up to follow his lead. The insurance companies have millions of dollars to pass out. Right now, the Elephant Party is getting most of that money. But the Jackasses want it, and if they signal a willingness to pass premium support, they are likely to get a lot more of it. The results will be disastrous for single payer, and possibly for the country.