Is cost cutting good politics?
Over in the Coffee House yesterday, Max Sawicky made some typically intelligent remarks about how spending on health care will impact the federal budget in the long run. He then went on to suggest that only a universal health care system – and, very specifically, a single-payer style system – could contain costs in the long run.
I’m not so sure other universal health care systems couldn’t contain costs as well, depending in part on how narrowly you define “single-payer,” but that’s a discussion for another time. More immediately, I think, this raises an interesting question about political strategy.In the abstract, universal health care’s ability to control costs is one of its most potent political arguments. There are lots of people out there who, though not exactly wild about seeing government assume greater influence over the delivery of medical care, feel there’s no way to construct a rational payment system for medical services as long as we have so many different sources of money flowing into the system, private and public. The analogy you often here in the policy world is that health care spending is like a balloon; squeeze in one place, it just pushes out a little more in the other directions. Universal health care – and only universal health care – lets you get your hands around the entire balloon and just contain it.But there's also a downside...
... to linking universal health care with cost control – at least if you want to think purely in terms of political strategy. When people talk about reducing health care costs, they inevitably talk a lot about reducing “waste.” But there’s a famous quote – I’ve heard it attributed to the economist Uwe Reinhardt, though perhaps somebody else originated it – that in health care every dollar of waste is also a dollar of somebody’s income. So the more you try to control costs by eliminating waste, the more you are bound to irritate special interests.
To take one example in the news, President Bush is currently proposing cuts in Medicare, most of which will come via reduced payments to hospitals. These make for easy billboard material – and perhaps justly, given the colossal amount of money he’s squandered by insisting private insurers handle the Medicare drug benefit. Still, if I understand the news reports, these cuts were all recommended by the Medicare Payment Advisory Commission, which is non-partisan and pretty well-respected. If they say the cuts makes sense, there’s a decent chance they do. But you can bet the hospitals are already gearing up their lobbying machines to fight this. And that will make the cuts much more difficult to pass.
Perhaps a more relevant example is the Clinton health care fight. The Clintons committed early on to producing a plan that was serious about containing costs – serious enough, at least, to persuade skeptics like the Congressional Budget Office that the plan could live within its means. (This was back in the day when CBO projections actually restrained executive branch behavior.) But many of the policy decisions they made in pursuit of that goal had negative political consequences. Leaks about possible reductions in Medicare, which the Clintons had targeted as a source of funds, angered the elderly; as a result, the AARP sat out most of the fight, until it was already lost. Fears about managed care – which the Clintons hoped would do the heavy lifting of reducing payments to doctors and hospitals – were the grist for the (misleading) Harry and Louise commercials and a significant source of alienation among the middle class.
By contrast, one reason that Bush was able to push through his Medicare drug bill was that, in the end, he let its cost explode. As you may recall, initially the insurers were not too wild about taking on the drug business; they only embraced it after the Republicans promised them fat subsidies. (This, of course, is a big reason folks like me argued for eliminating the insurers from this role altogether.) Back in 1965, LBJ and his congressional allies greased the skids for the original Medicare the same way, giving doctors and hospitals enormous leeway over pricing in order to soften their resistance.
Of course, the federal government spent the 70s and 80s taking away that leeway in an effort to control Medicare spending, which it’s now done successfully. (One suspects a similar fate awaits the Medicare drug benefit -- which is why, perhaps, folks like Ted Kennedy supported it despite its flaws.) In retrospect, Medicare would have worked better if effective cost control had been part of the program from the beginning.
On the other hand, if the federal government had been serious about cost control in the first place, the opposition to Medicare in the 1960s would have been even stronger. You have to wonder whether it would even have passed.
So, yes, a good universal health care system would control costs. But we shouldn’t kid ourselves about what that means politically. It sounds great as a campaign slogan – and it’s the right thing to do. But it could also makes things really difficult once you have to pass legislation. (Which, by the way, is a problem I'd love to have at this point.)
I would like to see a healthcare delivery system financed like the German system: universal health insurance geographically based and financed through both public and private mechanisms. Insureds may hold both if necessary.
Will it reduce costs? I don't think so. I have long held the opinion that the percent of GDP subsumed by health care expenditures is just that: the sum of all those goods and services delivered. Yes, indeed. It represents earnings for a lot of people both big and small. Jobs, jobs, jobs.
I also find that people's eyes glaze over if I go into great detail about the innerworkings of our delivery system because so little of it is transparent to the patient or consumer. Is it good politics, you bet. Will changes or so-called reforms ever occur? Only on the margin or incrementally. So long as the delivery of health care - call it medical if you want-- remains a cottage industry, the U.S. will see few if any changes.
A parting thought : if HSAs are such a good deal, then why are they not available to Medicare enrollees? Think about consumer directed medical care for elders.
Until we get over the notion of coverage for routine medical care and create a critical mass in favor of catastrophic insurance for everyone, we will keep muddling on and keep politicking this till the end of time.
February 8, 2006 8:14 AM | Reply | Permalink
"Fears about managed care – which the Clintons hoped would do the heavy lifting of reducing payments to doctors and hospitals – were the grist for the (misleading) Harry and Louise commercials and a significant source of alienation among the middle class." Interesting to remember, as of course that was the least radical part of the plan, especially given the growing dominance of HMOs in company health benefits then and ever since. Not that single-payer plans wouldn't be attacked (oh, big government, taking over your choices, etc.), as the right is able to switch tactics or truths on a dime. Indeed, that should remind us of the machinery of money, power, and complacent media that we're up against.
John
http://www.haberarts.com/
February 8, 2006 8:15 AM | Reply | Permalink
Isn't part of what makes the healthcare debate so complicated is that many of its different parts are blended together? The goal of America's healthcare system should be to keep Americans healthy and when they get sick allow them to get healthy again. These two goals seem to get lost in the moving parts.
For most Americans including the end user there are at least four groups involved in the healthcare system. Their employer, the health insurance chosen by the employer, the doctor or other healthcare provider and the patient. This leaves out the government and the drug companies and medical device makers.
As employers started both looking to contain their costs and then to get out of paying for healthcare all together the issue of who has health insurance and who doesn't came to the fore. This in turn lead to the question of how much health insurance, not healtcare, costs.
Doctors would like to have freedom in their choices of treatments and patients want choice in their election of their doctors. What can be done to limit the bureaucracy of these two sets of choices and squeeze uncessary costs out of the sytem so that doctors can choose and patients accept treatments that will keep them healthy?
Daniel A. Greenbaum
February 8, 2006 8:28 AM | Reply | Permalink
Yes...universal healthcare will deny suppliers of care the chance to supply care and that will be tough to sell among suppliers. But, patients who would have been consuming that supply of care then can't. And that will be tough to sell to potential healthcare consumers, which is to say everyone. Cost containment through universal healthcare means taking away business from those who want to supply it and the opportunity to consume care for those that want to buy it. In combination, that is a very, almost impossible, political sell.
---
Trapier K. Michael
www.Marketplace.MD
www.blog.marketplace.md
February 8, 2006 9:27 AM | Reply | Permalink
That's the broken window fallacy. Of course, sometimes the broken window fallacy makes good politics--even in a case like this were those "goods and services" don't represent better quality medical care but instead overhead and paperwork.
But what about all the factories closed and outsourced because their owners didn't want to pay the taxes necessary for health care expenditures? Wasting money for the sake of jobs doesn't work in a globalized economy.
February 8, 2006 9:40 AM | Reply | Permalink
To have a choice implies the ability to make it based on accurate and adequate information.
The demand for medical care reflects what a patient/consumer is willing to pay to get it. Concrete example: I need cardiac bypass surgery. What price do I face and how much do I want to pay for it? How do I decide which surgeon and company will give me the most value, i.e. how many has she performed, how well and for how much?
While you are thinking about that let's talk about the heart surgeon's demand curve. What is she willing to pay for the operating room, the assistants, the pharmaceuticals she will use, and what is her profit margin?
Throw in the insurance company, public or private or both, and you have a third party that charges me monthly premiums and tells the doctor what price it will pay her.
What just happened to the information I need to make a good decision?
Just to make it more complicated, consider that my employer hires the insurance company. My employer gets to see prices and outcomes, and decides.
It is easy for one to speculate on the efficiency of various health care financing mechanisms without having experienced the demand for medical care in an urgent therefore inelastic demand environment. What I mean is that it is easy to say HSAs are the way to go until one really must go there.
It is a tought nut to crack and that is why it is "good politics" to talk about cutting health care costs. You never have to say I'm sorry.
February 8, 2006 10:02 AM | Reply | Permalink
I tend to think that ideal campaign strategy for serious health care reform is that we can't afford NOT to reform it. People are afraid of radical change--but with the double-digit growth in health care costs, we can actually portray the current system as radical change.
There is something to this, though. There's a lot of stakeholders in the medical industry--insurers, doctors, hospitals, patients, pharmaceuticals, and employers. A proposed program that only pissed off one of these groups--probably the insurers, since I'm convinced they'll be pissed off at ANY change to the status quo--is a lot easier to pass than one that pissess off all of them. If that makes the program more wasteful in the short run, that can be changed in the future.
But the important thing is to make sure it can be changed in the future. Creating new programs or new frameworks for paying for health care is probably more difficult than just adjusting funding levels for programs that already exist. You might be able to make the system more efficient by taking a "divide and conquer" approach to the various stakeholders by bribing them with financial promises that will be changed in the future.
February 8, 2006 10:07 AM | Reply | Permalink
Just talking about "costs" in medical care is a bit misleading. There's a pretty important difference between the cost of actually delivering medical care (drugs, equipment, supplies, buildings, salaries of doctors, nurses, p.a.s, orderlies etc) and the cost of administering the delivery of medical care (clerks, coders, reviewers, administrators, evaluators, sales representatives...). The claim made for single-payer is first of all that by reducing administrative costs you'll be able to deliver more actual care for less money. The current patchwork system in the US spends about 15 percentage points more on administration than anywhere else in the world, so that's a lot of fat to trim.
Once you've eliminated the byzantine payment arrangements, which in many cases involve multiple entities getting paid for the same service to maximize payouts (Consider an operation performed at a surgical center that's located inside a hospital but owned by a physician group practice, with personnel and supplies coming from the center, the group practice and the hospital, each with its own cost structures and markup...) it's a lot easier to get a handle on where the "real" costs and incentives go and how to contain them.
But ultimately, paying these kinds of inflated charges wouldn't trouble people nearly as much if they got decent care out of it without the prospect of bankrupcty if something goes wrong.
February 8, 2006 11:51 AM | Reply | Permalink
Two things that influence the cost of insurance on anything is the size of the risk pool, and the cost of administering the collection and dispersal of premiums. Insurance companies make most of their profit by investing premium payments and collecting the income from those investments, and only pay out claims when they have to. The longer they can wait to pay out, the longer they can use the money for profitable investments. And if they make bad investments they'll raise premiums to ensure profitability. Wall Street insists on that kind of thing.
When it comes to health care, insurance companies are really leeches on the system. They add no value. And they have no real incentive to cut the cost of medical care itself, only to cut their own administrative costs of which the medical care is only one part. So they focus on their back office expenses, deny or delay payouts, and try to make good investments. If not, they just raise premiums.
With a single payer system, the risk pool is larger which increases the premiums collected but spreads costs among more people, and administration costs are reduced by just collecting and distributing premiums and forgoing the profit making investment end of the operation. Temporary excess premium income could still be invested in T-Bills or similar to generate additional funds or lower premiums, but not distributed to private investors. Thus any funds that were not needed to pay for services would be returned to the pool or the insured, instead of private shareholders.
February 8, 2006 12:21 PM | Reply | Permalink
David Rabbin
From first hand experience let me tell you that health care costs rise not only for fast paybacks for lots of costly R&D but just out of the pure greed of those on the top of the healthcare industry!A one card national program may let us get our hands on the balloon but if you squeeze it too hard like a balloon it just pokes out somewhere else!
Example Medicare part D was designed by those on the top of the feed line of the pharmaceutical industry! Meaning that many of those who need the most help will pay more for prescriptions than others, who are on the absolute bottom. Those caught in between the below poverty level and those at the poverty levels congress set still are on the bottom and still can’t afford the higher costs for prescribed medicines! As well as afford deductibles put on them by Medicare for other health services!
The bottom line is this Medicare and Medicaid is going broke why look at what your paying for your health services you can’t afford it your insurance company can’t afford it and the government can’t afford it. All this wonderful technology is to save lives is great but if no one can afford it what good is it?
The problem is human greed by too many in the healthcare industry and by a congress that just can’t seem to figure that out which is why they balk so much about examples of failure of other nations who do have socialized medicine. It just goes against the free market system of free enterprise and capitalism! But in health care I personally feel not to do something to get a handle on that balloon means that the healthcare industry and the ways of the this administration and our current law makers that only favors industry and forgets the needs of the sick of this nation could use a lesson in morality before they decide who gets what the patient or the industry.
February 8, 2006 12:33 PM | Reply | Permalink
Can you isolate real costs? Isn't it the case with hospitals especially that they allocate costs because they cannot clearly identify inputs?
I agree with you.. We do not get value for the dollar spent in this country on medical care. Until we decide that the incremental approach to reform won't work, this system is what we have.
February 8, 2006 12:46 PM | Reply | Permalink
Matthew Holt The Health Care Blog
John, I agree with you about the political problems of doing this, but on what planet did Medicare successfully contained its costs?
February 9, 2006 10:45 AM | Reply | Permalink
David Rabbin
There on the planet of not paying or not paying attention to what the Healthcare and Insurance industry charges for services nor do they get a good handle on what's really needed by those who need help for sickness and injury! Think of it, one small pill of Plavix to help keep an artery clean has a cost of 140.00 for 30 small pills! less than 1oz of actual chemical with its inhert ingredents. Medicaid has paid for such drugs and now Medicare will. Its hard or the patinet afford it for self let alone the Medicare to pay for so many. In the old days alchemist tried to make gold out of lead. Looks like they finally got it done by making gold out of pockets of the sick and Medicare Medicaid instead of out of lead! That being understood along with other rules made up by our Congress Medicare cannot successfully contain its costs and eventlually with the help of congress it will go broke and so will we as we watch the old and sick of our nation die! I think we need to get a handle on the congress and on big industry whose profits have risen faster than other industry of the world! What good is the best medical care in the world if no one can afford it?
David
February 10, 2006 12:59 PM | Reply | Permalink