Health care reform is in the air, which means we have finally moved beyond the financial crisis and gotten to the heart of the Democrats’ campaign promises. Never mind that the financial situation is not much better than when we began; we have breathing room right now, let’s take it.
With the possible exception of Richard Shelby – sorry, wrong link, I meant to link to Shelby’s interview claiming that America has “the best health care system the world has ever known” and instead found myself staring at his press release taking credit for bringing Federal funds to “rural communities that lack essential health care services” – most folks seem to understand that our healthcare system is broken. We spend far more on healthcare than other nations and yet are less healthy, which is about all the metrics you need to recognize that something needs to change.
But what? Most of the debate has focused on changing the payment system. Right now, most Americans are covered through an insurance plan from an employer, some Americans are covered through a health plan they pay for themselves (typically small businesspeople and COBRA recipients), and far too many Americans are uninsured. The last group tends to receive substandard care most of the time and, when the pain becomes unbearable, expensive care in the emergency room (which they cannot afford, since anyone who could afford retail emergency room care could surely afford insurance).
The neatest solution would probably be something like the French model, where the government provides a fairly robust health insurance package as a social benefit and private insurers compete for supplemental plans (orthodontia, cosmetic surgery, etc), but this would also be incredibly disruptive – every American who currently has health insurance would have to change, and many would likely be scared that the new government system would have all the efficiency of the DMV. Of course, the policy nerds can point out that (a) the government would not administer the health care (as happens with the UK’s National Health Service), only the payment system; (b) the current insurance system already resembles the DMV, only a particularly ill-tempered DMV where the inspector gets to keep the cars of applicants who fail to navigate the bureaucracy. Doesn’t matter. Key lessons of the early 1990s: don’t mess with the health care of the insured and don’t use the middle name “Rodham.” Creeps people out.
We have an administration populated by the folks who lived through those days, and they will be damned if they see this on TV:
So we are much more likely to end up with a compromise: some sort of government-run program side-by-side with the current private insurance system. Since we already have a government-run health insurance program (this thing called Medicare), you might think it would be as simple as expanding the program to make everyone eligible. After all, Medicare currently has the worst insurance pool; expanding it to include working-age people should be a winner for all. Except the insurance industry doesn’t want to compete with Medicare, so they want to force the government to recreate Medicare, only gratuitously more expensive. Sort of like going to eleven.
Perhaps we will end up with real Medicare, perhaps we will have a Hamburger Helper Medicare. It is important (for reasons well described here), and access will be improved…but no payment structure will do much to rein in healthcare costs until and unless the payor is willing to exert its power against providers. You know, the good guys: the nice people in the white coats that you visit when you are afraid for your health. Their system – the current system – is going to have to change dramatically. As Atul Gawande points out in the New Yorker:
Providing health care is like building a house. The task requires experts, expensive equipment and materials, and a huge amount of coördination. Imagine that, instead of paying a contractor to pull a team together and keep them on track, you paid an electrician for every outlet he recommends, a plumber for every faucet, and a carpenter for every cabinet. Would you be surprised if you got a house with a thousand outlets, faucets, and cabinets, at three times the cost you expected, and the whole thing fell apart a couple of years later? Getting the country’s best electrician on the job (he trained at Harvard, somebody tells you) isn’t going to solve this problem. Nor will changing the person who writes him the check.
So where is the expense? It’s a lot of work to find out, which is one major reason so many commentators skip the step and go straight to the conclusions. Luckily, the McKinsey Global Institute (PDF available for free) went through the economic data and culled some important statistics.
First of all, it’s real – we spend far more than one would expect on healthcare, given our wealth relative to other OECD countries. We don’t have better outcomes; our life expectancy at birth is 77.9 years, below both the OECD average of 78.6 (which includes Turkey’s 71.4) and every single other G-7 nation (Japan = 82.3, Canada = 80.3, Italy = 80.2, France = 79.8, Germany = 79.0, UK = 78.9). Even if you believed it was some sort of genetic issue and focused only on the white life expectancy at birth, the US’ 78.3 would be inadequate (not to mention that doing so highlights our shameful black life expectancy at birth, which at 73.2 lags Mexico, Poland, and Slovakia). Furthermore, our growth rate in health care costs is second only to Portugal (they are obviously operating off of a much lower base), so we are building on our dubious record. How much more? We spend $2.1 trillion on healthcare, and fully $650 billion more than we would expect. That’s enough to fund an entirely new TARP, if you’re into that sort of thing.
Secondly, by far the biggest area of overpayment concerns outpatient care, where we spend $850bn versus expectation of $414bn; the $436bn overpayment here is two thirds of the overall overpayment. Everything else – getting massively ripped off for prescription drugs, supporting the overhead of the medical insurance industry and its matching cost centers, dealing with extra malpractice insurance – pales in comparison with this number. Even if you factor in the ~$100bn of savings on hospital care that McKinsey estimates from our higher proportion of outpatient procedures than other nations, it is still a staggering amount of excess for no result.
Of the $850 billion in outpatient spending, a bit more than half ($484bn) is attributable to doctors’ and dentists’ office visits. Why so much (keeping in mind that this is more than we would expect to spend on all outpatient expenses together)? Well, to start with, our doctors make more money. A lot more. Generalists earn 4.1x the per capita GDP, versus an OECD average of 2.8x, and specialists earn 6.5x, versus an OECD average of 3.9x. That’s $60bn right there. Plus, we have trained a generation of doctors to refer patients to themselves, thanks to the growth of stand-alone physician owned imaging or surgical centers. To go back to Gawande’s article:
Then there are the physicians who see their practice primarily as a revenue stream. They instruct their secretary to have patients who call with follow-up questions schedule an appointment, because insurers don’t pay for phone calls, only office visits. They consider providing Botox injections for cash. They take a Doppler ultrasound course, buy a machine, and start doing their patients’ scans themselves, so that the insurance payments go to them rather than to the hospital. They figure out ways to increase their high-margin work and decrease their low-margin work. This is a business, after all. [...]
In a few cases, the hospital executive told me, he’d seen the behavior cross over into what seemed like outright fraud. “I’ve had doctors here come up to me and say, ‘You want me to admit patients to your hospital, you’re going to have to pay me.’ ”
In the rest of the economy, this sort of thing is admirable, or at least par for the course. It’s no accident the Coke cans are at eye level in the supermarket aisle, labels turned to the shopper, while the ginger ale is on the shelf; Coke pays for that real estate, and the promotional end caps, and everything else that keeps them right where shoppers want them. The warm and fuzzy Microsoft ads where the guy goes shopping and ends up with a Dell or HP? Those aren’t random choices from the Best Buy PC department; that’s who kicked in to buy the ads. Should doctors be any more saintly than cola marketers or operating system designers?
Moving away from the hospitals, we spend $252bn on drugs and consumables versus the $98bn we would expect to spend. Some of this might be a good thing – we get new drugs more quickly, thanks to a comparatively speedy FDA (damn that socialist government monopolizing the drug approval business – why can’t it be like the the securities rating industry), so our mix skews a bit more towards on-patent than off-patent drugs. Shame we don’t seem to benefit in life expectancy, but OK. Unfortunately, our branded drugs are 77% more expensive, and drugs overall are 50% more expensive. In essence, we have allowed our market to subsidize the rest of the world’s pharma consumption. Quite decent of us.
And then we were dealing with overhead. Given the correlation between private insurance and extra costs, our system does not perform terribly – but that’s about the best that can be said for it. We spend $145bn on administration – but we should only be spending $54bn if we behaved the way other countries do. It is $91bn of waste just sitting there waiting for the politician who finds a way to tell the American public that each year we throw away an amount roughly equal to our entire Federal spending on education just processing and allocating the provision of healthcare (using 2006 numbers to stay comparable to the McKinsey study).
A comprehensive solution is going to need to deal not only with the access issue (the crux of the debate about today’s uninsured) but also with the cost issue. Back to Gawande’s article:
I asked him whether expanding public-insurance programs like Medicare and shrinking the role of insurance companies would do the trick in McAllen.
“I don’t have a problem with it,” he said. “But it won’t make a difference.” In McAllen, government payers already predominate—not many people have jobs with private insurance.
How about doing the opposite and increasing the role of big insurance companies?
“What good would that do?” Dyke asked.
The third class of health-cost proposals, I explained, would push people to use medical savings accounts and hold high-deductible insurance policies: “They’d have more of their own money on the line, and that’d drive them to bargain with you and other surgeons, right?”
He gave me a quizzical look. We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? “I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”—that sort of thing? Dyke shook his head. “Who comes up with this stuff?” he asked. “Any plan that relies on the sheep to negotiate with the wolves is doomed to failure.”
And with that, here are Taunter’s Three Thoughts for cutting into our cost structure:
- Physicians: Recruit, Recruit, Recruit. We are a prosperous nation with a willingness to pay for healthcare; we should be poaching doctors from all over the world. We currently grant waivers for some primary care physicians to come to the US; let’s crank it up and use competition to bring down costs.
- Drugs: Most Favored Nation for the United States. Any pharmaceutical company can charge any price it wishes for any drug in the US. However, no drug may cost more in the US than its cost in the lowest-priced other OECD country. If Merck wants to sell a drug in the US for $100/pill, it is welcome to give it a shot. But if it decides to sell it for $5/pill in Germany, the most they can charge in the US is $5. We might as well get the benefit of other nations’ volume discounts.
- Overhead: Standardize. We aren’t going to get rid of the private health insurance industry. But we can make for some far more transparent competition if we began to cut down the number of variables and allowed people to understand exactly what the product they were buying would do. Right now a consumer buys an insurance policy, makes payments for years (or, more typically, his employer makes payments for years), and only far down the road when he is sick does he discover the carrier’s reimbursement policy for his specific condition (which he could not have known or expected when contracting the insurance, since that would have made the condition pre-existing and voided the coverage in the first place). Some mechanism to ascertain the level of coverage among a few standard options would allow for a better sense for consumers of what is being received. It would be a minor savings compared with what could be obtained with single payor, but it would be a step in the right direction.