by Mark Coyne
The core of the health care debate revolves around the perceived spiraling cost of health care in America. There are many quotes in the media, and from politicians, that health care costs are increasing by more than 10 percent a year, and consistently increasing by more than wage growth – which is unsustainable in the long term. The basic point being made is correct, the overall cost of health care is increasing by an unsustainable rate versus wages, but the reason for that growth is less well understood. The reason is important as it goes to the root problem in the American health care system and therefore has a huge impact on what the solution should be.
The frequently quoted cost of health care is the amount of premium that an average insured individual or family pays each year. What is important to remember about premiums is that:
1. They are based not only on unit cost, but also utilization, i.e. the amount of units consumed, and therefore their trend includes both aspects.
2. They only show part of the health care cost story since all health care consumers pay additional out of pocket costs.
3. They can be easily reduced by shifting cost away from the premium to out of pocket expenses such as deductibles, co-pays and coinsurance, effectively lowering the premium but not impacting the overall health care cost trend.
A better measure of actual medical care cost trend is to use the same approach used to measure growth in unit costs for any other good or service, i.e. inflation or the consumer price index (CPI). As luck would have it, the government (the Bureau of Labor Statistics) actually monitors this number for the health care industry and issues a Medical Care CPI number that includes all healthcare costs such as physician salaries, hospital costs, medical equipment costs and drug costs.
What is interesting about analyzing this number is that it has stayed remarkably constant over the past 10 years with a variation between 2.8 percent and 4.7 percent from 1997 to 2007. This is certainly nothing like the 10+ percent we hear in from politicians, and is actually only a little more than overall CPI. Bottom line, actual unit medical care costs are not out of control, the procedure you got last year is not that much more expensive this year and your physician is not earning significantly more than they did last year.
So where is the disconnect? Well, as mentioned before, premiums – which are typically quoted as representing health care costs – include not only the unit price, but also the utilization of units. It doesn’t take a genius to draw the conclusion that if underlying unit costs are relatively consistent and below the growth trend of premiums, then what must be changing is the amount of units that are being consumed each year. It is not that the medical procedure you had last year is costing more, it’s that you are receiving more of them than you did last year, that is why your premium keeps going up!
Of course, I don’t mean this literally, you may not think that you are receiving any more care than you did before, but when aggregated to the level of an insurance pool and averaged out across every member of the pool, as a group more care is being delivered than in the prior year.
Why is this important? Because it shows that solutions that focus only on reducing the underlying unit cost while ignoring the utilization will ultimately fail to have any long-term impact. For example, government or insurer attempts to simply reduce costs by reducing payments for a service will not change the basic upwards trend, it will simply delay it, distort the trend temporarily and ultimately result in payments for services that are below cost (some would argue that Medicare is already at this point).
This is perhaps the most important place to start when understanding the problems in health care. Unfortunately, the solutions shift from the typically popular ones of insurance company bashing, medicare payment reductions, increasing coverage, improving benefits, etc. to a stark understanding that we need to address the processes of rationing health care, improving population health, and increasing the financial responsibility of individuals in their health care so they do not perceive it as ‘free’ once a premium check is paid.
These are politically difficult issues to address, so don’t expect the politicians to tell you about them any time soon, but unless you see direct attempts in the health care reform to address these issues you can be sure that your premiums will continue to up.
Mark Coyne is President of Zepherella.
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You don’t address why the number of procedures went up. There are many reasons. One is that doctors get paid too little, so they increase volume. Another is that doctors expenses have increased (like malpractice premiums) while fees have remained flat or declined. Its because Americans are unhealthy and with better treatments come more choices. It’s because there hasn’t been meaningful tort reform and so ER docs and toehr providers “do more” to avoid lawyers.
So rationing is not the only option. How about accepting that medicine is not as perfect as the law, or accounting or any other discipline.(Sarcasm intended).
Who and what are driving this overutilization?
I want my thyroid checked again.
I want my head CT again.
I want my back MRI’d again.
I want my lipids checked every year.
I want to see a cardiologist for my atypical chest pain.
I want to see a neurologist for my head ache.
I want to see my doctor for a work excuse.
And then there is:
Better get a thyroid test just in case it is off.
Better get that MRI or CT – don’t want to miss anything and get sued or be perceived as a doc who is not thorough.
Just send the patient to a neurologist – I don’t have the time to deal with this.
Better check all those labs over an over – don’t want to miss anything no matter if it very unlikely.
Here is a list of expendable health costs that add up to over 50%. This savings can be easily achieved by restraining the lawyer. This involves no new discovery, no sacrifice in quality or utilization. It is cost free, and has only an upside except for one. Health care segment make work will be eliminated, and millions will lose their jobs.
http://supremacyclaus.blogspot.com/2009/06/lower-health-care-cost-by-50-by-getting.html
The main element in insurance prices is not price but volume. I would suggest that the main driver of that is really very simple: Americans want more medical care. We watch medical procedures for entertainment. We are obsessed with the latest technology and want it for ourselves. Just as we buy cell phone features we not only have no need for but don’ even use, we demand medical services for their own sake without any serious consideration of necessity or even utility. I know multiple people who got themselves a medicare provided motorized wheelchair who don’t need it and don’t use it–but they just wanted it. Of course their want is unconstrained by cost because they don’t pay for it.
One fallacy of the debate is the failure to question the assertion that climbing expenditures are a crises that demands centralized action for reform and that current trends will lead to some kind of collapse unchallenged. The great economist, Herbert Stein pointed out a truism that we should not forget:
“Unsustainable trends will not continue.”
Current expediture trends will not continue for the simple reason that they can not whether or not Congress acts and irrespective of how Congress acts. The question is, what kind of change will occur, who will control it, and who will benefit. Who will be left in charge of your healthcare. How much freedom will you have left.
Lets consider what would happen if there were no massive healthcare reform. If we can imagine that, even if we don’t like the vision, then we can also imagine much much more conservative, less harmful, and reversible changes that we could make to nudge it towards a more congenial vision of evolution.
Another way of looking at it is this. Change is going to happen. First dollar insurance coverage that pays for everything that the gluttonous American public wants is going to mostly go away. Do you want it to be replaced by first dollar insurance that pays for what the government wants you to have? Big fee/tax to pay for it, little out of pocket when you get sick, but tight rationing. Or do you want high deductible insurance with expeditures achieved by putting your skin back in the game? More control over the kind of insurance you like. More co-insurance and deductibles but protected from bankruptcy. More choice and freedom. Do you want the chance to chose your own way? Or would you rather be relieved of the burden of freedom and have your employer, legislator, commissar decide for you?
What will happen when a critical number of states, with price pressure driving the public to push the legislators to ignore the bribes, uh, I mean contributions, from insurers, open up their individual markets to out of state insurances? What will happen when citizens of other states see the choice and cost advantages? I suspect reform of that market will evolve without federal action.
What will happen to the ridiculous pricing policies of many of my colleagues when a critical number of people have consumer directed plans and price shop? I suspect you will see some price transparency and packaged deals being offered.
Even the government sector will eventually have to accept reality. The dire predictions about what medicare and medicaid will take out of government in 30 years will beyond any doubt not occur for the simple reason that they can not. The political class will shovel out the money as long as it is there, and when it is not, they will stop shoveling of necessity. If the current political culture in Washington were to really get a lasso on the medical gluttony train now, while the dollar is still sound and the chinese will still buy our bonds, then they will only do so for the purpose of handing it out to some tribe of grifters–like bankers, bankrupt industrial unions, overpromised public pensions, and overpriced private colleges.
The commentary meshes nicely with the recent NEJM article regarding regional variation in health care costs. The authors identified a significant portion of inter-regional variation that could be eliminated through more efficient utilization.
It’s free on their front page… check it out.
-g
…not sure how to put this but does anyone actually have EVIDENCE for any of these claims? It all sounds like a bunch of elderly men shaking their canes at things they don’t trust or understand.
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