PrintAugust 11, 2009
How to 'bend the curve down' in healthcare costs
After weeks of hearing Democratic lawmakers repeat the mantra that Obamacare would "bend the curve down" in healthcare spending over time, the non-partisan Congressional Budget Office (CBO) served them a cold glass of reality. A July 26th letter from the CBO regarding the America's Affordable Health Choices Act, passed by the House Committee on Ways and Means on July 14th states:
"The net effect of the coverage specifications, which affect both spending and revenues would add an estimated $1,042 billion to cumulative deficits (over the 2010-2019 period).... The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade."
With the administration's claim -- that we can simply increase the number of individuals covered by government insurance and decrease the growth rate of healthcare spending over time -- now behind us, we can begin to have a reasonable discussion on why healthcare coverage costs what it does, why it is rising so rapidly and what can be done to stem this cost growth without increasing government spending over time and reducing the quality of healthcare services for all Americans.
First, it's worth recognizing that healthcare costs are rising as a percentage of gross domestic product (GDP) all over the world - not just the United States. The following figure represents data from Hagist and Kotlikoff who studied the growth in healthcare spending for 10 developed countries over the time period 1970 - 2002 and projected government healthcare spending over the next 50 years.
The authors found that, "Government health care expenditures have grown much more rapidly than the economy in all developed countries. Between 1970 and 2002 these expenditures per capita grew at almost twice the rate of gross domestic product (GDP) per capita in 10 countries studied: Australia, Austria, Canada, Germany, Japan, Norway, Spain, Sweden, the United Kingdom and the United States."
This extra-inflationary growth in healthcare spending over time can mainly be attributed to advances in medical technology - not the waste and excess of private insurance companies. Douglas Elmendorf, the director of the CBO has stated:
"Spending on health care has generally grown much faster than the economy as a whole, and that trend has continued for decades. In part, that growth reflects the improving capabilities of medical care -- which can confer tremendous benefits by extending and improving lives. Studies attribute the bulk of cost growth to the development of new treatments and other medical technologies."
Next we should note that the Unites States spends more per capita on healthcare than other countries because we provide and consume more healthcare services at baseline. Countries that utilize forms of socialized healthcare spend less than the United States because they ration care, to some degree or another, by restricting what services patients can have access to through a variety of mechanisms.
A review of data from the Organization for Economic Cooperation and Development (OECD) shows that the United States ranks at the top in terms of access to advanced medical technology such as CT scanners, MRI machines, and Cardiac Catheterizations. As a result of this access to technology, we enjoy among the highest rates of cancer survivorship and survival from medical illness around the world.
An authoritative study from the Eurocare-4 working group, which appeared in Lancet Oncology, found that the United States outperformed European countries in 5-year relative survival rates for all malignancies in men (66.3 versus 47.3) and women (62.9 versus 55.8) and was among the highest performers in terms of 5-year relative survival rates for colorectum, lung, soft tissue, skin melanoma, breast, uterine, prostate, thyroid, and non-hodgkin's lymphoma.
In addition to these live sustaining measures, increased utilization and access to healthcare services improves the quality of life for many patients suffering from painful and debilitating diseases such as joint, eye and cardiovascular disease. Regarding "disease specific outcomes", which were not taken into account in the WHO rankings, the US performs at the top.
The second component, which can explain the difference in baseline healthcare costs for the United States compared to other developed countries, is the medical-legal environment that healthcare is practiced in. The United States has the least tort-adverse healthcare system in the world. Studies estimate that $200 - $500 billion of the annual US health care budget is attributable to defensive medicine.
So the question is, can we cut costs and expand access to care for more Americans while maintaining what is good about our current healthcare market and respecting the values of individual liberty, freedom, and personal responsibility that this country was founded upon? The answer is yes but we have to decrease government imposed restrictions on consumer choice in the healthcare market and enact nationwide tort reform.
The most efficient way to reduce the number of uninsured Americans would be to ensure that people have access to a wide range of affordable health insurance policies.
The general public and media are mostly unaware that state legislatures have a significant impact on the cost of health insurance premiums in the small group and individual health insurance markets. Because regulations vary from state to state, the cost of health insurance premiums can differ widely depending on the state where one lives. A sampling of state-mandated services (some ridiculous) include: acupuncture, breast reduction, contraceptives, dieticians, drug abuse treatment, hair prosthesis, in vitro fertilization, massage therapy, etc. While all these services have individual value they should NOT be compulsory benefits that individuals interested in purchasing medical insurance should be burdened with. They exist because special interest groups have successfully lobbied politicians to cover them.
The number of state mandates and regulations, especially guaranteed issue and community rating, can have a significant impact on the availability and cost of health insurance. A simple solution to cut costs and expand access would be to allow consumers to purchase health insurance across state lines. This would decrease the cost of available insurance options and have the added benefit of increasing competition within the private insurance industry where a few insurers typically dominate a state market.
The following figure was composed of data from the 2007 America's Health Insurance Plan's (AHIP) report titled, "Health Insurance: Overview and Economic Impact in the States." The figure is a random compilation of average healthcare premiums among states for their individual single and family markets.
Expanding access for individual's to purchase health insurance outside their state would lead to a significant decrease in the number of uninsured individuals and increase quality and transparency in the medical marketplace. While not all individuals would be able to purchase plans that provide the same level of benefits, the goal should be for all individuals to have plans that cover major and unavoidable medical expenses.
Consumer driven healthcare represents the epitome of freedom in the medical decision making process and therefore should be embraced by all Americans. We must remember that freedom allows an individual to choose from all options available to him in any given situation, accepting that not each individual will have the same array of options because of reasons which are either natural or acquired. Freedom does not entitle an individual to any particular service at the expense of another.
In his famous work, The Constitution of Liberty, Hayek addressed this concern about healthcare allocation by stating:
"Though we all dislike the fact that we have to balance immaterial values like health and life against material advantages and wish that the choice were unnecessary, we all do have to make the choice because of facts we cannot alter."
The reality is this: With healthcare prices increasing at staggering rates somebody will have to make choices regarding the consumption of healthcare services -- either it will be the individual in consultation with his doctor who decides what he can and can't purchase or else it will be the alphabet soup of government agencies who will decide based on allocation formulas and political payoffs. The following figure is an organizational chart of the house Democrats' health plan.
The last piece of the equation to decrease healthcare inflation in a meaningful way is to pursue aggressive tort reform to decrease defensive medicine practices. Democratic lawmakers will avoid this issue at all costs because they are indebted to the trial lawyers who are among their largest contributors. Kathleen Sebelius, Obama's head of Health and Human Services was herself the head of The Kansas Trial Lawyers Association from 1977-1986.
Defensive medicine is medical practice based on fear of legal liability rather than on patients' best interests. It has been driven to absurd levels in America by the threat of frivolous lawsuits which cost physicians and hospitals so much to contend that they end up settling in many cases where they have not acted negligibly just to save money. This has resulted in ballooning medical expenditures.
The Massachusetts Medical Society found that 83% of physicians surveyed reported practicing defensive medicine. One quarter of all CT scans, MRIs, Ultrasounds and specialty referrals were ordered for defensive reasons. This number is astounding, and if we extrapolate it to total healthcare spending we're looking at close to $ 500 billion annually! A more conservative estimate from The Pacific Research Institute puts the costs of defensive medicine at more than $ 200 billion annually.
Tort reform should focus on caps on damages and abolition of punitive or exemplary damages as well as restrictions on contingent and conditional fees. Although historically prohibited by common law, the USA now allows lawyers' fees to depend on the outcomes of their cases. Empirical research suggests that restrictions on contingent fees generally lead to the elimination of the weakest claims.
When President Obama addressed the American Medical Association on June 15th he said,
"I want to be honest with you. I'm not advocating caps on malpractice awards which I personally believe can be unfair to people who've been wrongfully harmed."
Kessler and McClellan used longitudinal data for almost all elderly patients admitted to a hospital with serious cardiac illness, matched with information on the existence of tort reforms from the US state in which the patient was treated. They reported that reforms that directly limited liability, such as caps on damages, reduced hospital expenditures by 5-9% in the late 1980's and led to NO important differences in mortality or serious complications. Based on this data in conjunction with President Obama's remarks it is clear that The Administration is not serious about addressing the rising costs of healthcare spending if it will harm any of their key constituency groups.
The reform proposals offered in this editorial will reduce cost in the near future, slow the growth of healthcare spending over time, reduce government intervention in the health services marketplace and increase freedom and choice for patients and providers. Most importantly, these reforms are free and maintain the ideals of individual freedom and liberty this country was founded upon.
The alternative approach to healthcare reform being offered by Obama and the Democrats will result in out-of-control government spending, paralyzing taxation and the creation of a government run healthcare bureaucracy with far-reaching arbitrary powers from which the individual cannot escape and the overextended machinery of government is likely to increase rather than mitigate.
Andrew Foy, MD and Brent Stransky are co-authors of "The Young Conservative's Field Guide", which will be available in stores and on-line September 8th. The authors can be contacted through their websites at aHardRight.com.
