More Truths About Rising Health Prices

What is the biggest threat to the U.S. economy? According to Congressional Budget Office Director Peter Orszag, it is not credit famine, the long-term price of energy, competition from China, the loss of jobs overseas, or even a surfeit of Chrysler SUVs.

It is, Orszag declared in October, “the nation’s looming fiscal gap — which is driven primarily by rising health care costs.” Healthcare inflation cannot be ignored, Orszag added, because “If we fail to put the nation on a sounder fiscal course. . . we will ultimately reach a point where investors [will] lose confidence and no longer be as willing to purchase Treasury debt at anything but exorbitant interest rates.”

Today, investors outside the U.S. hold $2.74 trillion of Treasuries, or 52 percent of the $5.22 trillion in debt that the U.S. has issued. But now foreign buying of our Treasuries is falling. And, as Orszag has explained elsewhere, if we have to pay “exorbitant interest rates” to persuade foreign investors to  continue buying  our Treasuries, “over time, foreign investors would claim larger and larger shares of the nation’s output and fewer resources would be available for domestic consumption.”  Put simply, our standard of living would fall.

Why does Orszag single out soaring health care costs as the driving force behind our fiscal woes? Because healthcare spending accounts for over 16 percent of GDP, and it continues to grow faster than other sectors, outpacing both growth in GDP and workers’ wages. At $2.3 trillion a year and counting, our national health care bill is rising so fast that it threatens to crowd out other priorities—like spending on education, the environment, and infrastructure repair. Some in the health care industry point out that spending on medicine creates jobs, but as the cost of care levitates, we spend less in other sectors, and jobs in those areas disappear.

Moreover, unlike spending to repair bridges, strengthen schools, or protect the environment, Orszag suggests that the “excess” growth in health care spending is not adding to the wealth—or the health—of the nation. “The gains from higher spending are not clear” the Congressional Budget Office noted recently. “Substantial evidence exists that more expensive care does not always mean higher-quality care.”

Some observers took Orszag’s statement about the importance of health care spending as a signal that he was calling for universal coverage. He was not—not without simultaneously contain costs. 

Orszag made it clear, as he has before, that if we don’t put a brake on health care inflation we won’t even be able to sustain the national health care programs we have now—Medicare and Medicaid—let alone cover everyone: “Rising health care costs and their consequences for Medicare and Medicaid constitute the nation's central fiscal challenge,” the CBO observed in a recent report. “Without changes in federal law, the government’s spending on those two programs is on a path that cannot be sustained.”

Well-meaning reformers sometimes have suggested that if we just rolled out “health care for all” medical care would magically become less expensive. After all, if everyone is insured, they argue, everyone will receive more timely care, and fewer people will wind up needing expensive hospital care.
But as I pointed out in a recent post, the research points in the other direction: “Studies consistently show that when a large portion of the previously  uninsured population becomes insured, total  health care spending rises by 10 to 13 percent. “ This is because while the uninsured are more likely to land in the hospital, they also die significantly sooner than the rest of us—saving society the money that might have been spent treating them for Alzheimer’s or other diseases of old age.”

Indeed, as Paul Ginsburg points out in “High and Rising Health Care Costs: Demystifying Health Care Spending," the Center for Healthcare Systems Change (HSC) report that I quote in part 1 of this post, “over the  past decade, the decline in the percentage of  Americans who have insurance has slowed the rate of health spending growth. “ If everyone had been insured, our national health care bill would be even higher.

Orszag knows this.  Universal coverage is possible only if we contain the cost of care. But, here is the good news: there is so much “excess” in our health care system that, Orszag observes, “there are opportunities to reduce costs without impairing health outcomes overall.”  Less costly care does not mean lower-quality care.  We can provide good, comprehensive care for everyone.

Orszag on Medical Technology

“High and Rising Health Care Costs: Demystifying Health Care Spending,” reviews the literature on health care spending and makes the consensus clear: the major factor driving sky-rocketing health care spending is advanced medical technologies.

Orszag agrees. In a presentation to Stanford University’s Center for Public Health last month, he pointed to several studies which suggest that “technology-related changes in medical practice” account for 38 percent to 65 percent of the growth in health care spending from 1940 to 1990.   

During the same presentation, Orszag used the chart below to illustrate how cutting-edge care does not always mean better care.  In states like New York, Massachusetts, Florida, California, and Texas, where Medicare spends far more on aggressive, high-tech care (see dots on the far-right of the chart), the quality of care is often lower than in states like Iowa, Minnesota and Northern New England, where Medicare spends much less on very similar patients. (Spending is adjusted for differences in local prices, race, age and overall health of the population).

As I noted in Part I, the problem is that we use costly new medical technologies (which include drugs, devices, tests, equipment and surgical procedures) so inefficiently.  Frequently, excess capacity leads health care providers to prescribe new products and services for a much broader swathe of patients than actually benefit.  We now have medical evidence that too many cath labs and too many specialty heart surgery centers have led to too many angioplasties; many patients would have fared just well with simpler, less risky treatments.

“The variability in benefits that different patients achieve from similar interventions is at the heart of the conflicting views of the value of medical technology.”  Ginsburg observes.  “Championing technology does not have to be inconsistent with advocating vigorous attempts to limit use to patients most likely to benefit.”

How Can We Slow Health Care Inflation?

Some believe that private insurers are responsible for the high cost of care in the U.S.  But in fact, it is Medicare, not the insurers that sets the pace for our soaring medical bills. When it comes to decisions about what to cover—and how much to pay—these days, private insurers merely follow Medicare’s lead.

Granted, private insurers add to the administrative costs in our health care system.  But these costs are a constant: they do not contribute to health care inflation.  And it is the growth in the nation’s health care bill that threatens the economy.

In “High and Rising Health Care Costs: Demystifying Health Care Spending,” Ginsburg explains: “Another key conceptual distinction is between the level of spending during a period of time and trends in spending over time.”  Healthcare spending represents a danger to the economy not so much because it is so high Ginsburg notes, but because “it is increasing rapidly over time.”

“The distinction is important,” he adds, “to understanding what is driving spending and what can be done to address it. For example, many [supporters of a single-payer plan]  believe that the fragmentation of health care financing and delivery in the United States is a factor behind high spending per person”—and, I would add, this is absolutely true.  Having so many different insurers—all spending money marketing and advertising their programs to consumers and employers and all requiring that hospitals and doctors fill out thousands of different reimbursement forms—does add to the total cost of care.

“But,” Ginsburg points out, “this may not be an important factor behind the growth in spending over time. If fragmentation leads spending to be X percent higher than it could be, that X percent could be relatively constant over time.” By contrast, “other factors, such as medical technology, lead both to high spending per person—and spending increasing over time as new technologies are developed and diffuse."

Here I would point out that the amount that private sector insurers add to our healthcare bills is, in fact, “relatively constant” over time.  Insurers are not “developing” new administrative costs the way the health care industry is spawning new technologies.

Why, then, have insurance premiums risen so sharply in recent years? Because the amount that insurers are laying out for medical care has been rising, in tandem with health care inflation.  As the chart below shows, insurers’ reimbursements have been rising by 8 percent to 8.5 percent a year since 1999. That was the year that the insurance industry responded to the backlash against HMOs and more or less gave up on “managing care.” Rather than saying “no” to many new technologies, it said “yes”—and passed the additional cost along in higher premiums.

Meanwhile, the share of our premiums that insurers skim to cover their administrative costs has remained relatively stable.  As I explained in a post nearly two years ago, on average, insurers keep 15 percent to 20 percent of our premiums to cover their “administrative expenses”—including salaries, executive bonuses, lobbying, marketing, advertising, underwriting and profits for shareholders.  (They pay out the other 80 percent to 85 percent of our premiums in reimbursements to doctors, hospitals and patients. These are public figures.)

Many people believe that those administrative costs account for a major portion of our national health. But as the pie chart below reveals, when you total it up, the 15 percent to 20 percent of our premiums that each insurer holds onto adds up to only about 4.5 percent of the $2.2 trillion that we, as a nation laid out last year for health care—or roughly $100 billion.  There is no question but what $100 billion is a nice chunk of change, and I should add, I don’t think we’re getting a reasonable value for the money from most insurers.

But here is my point: compare how much insurers add to the tab to how much the rising cost of medical technology boosts the bill.  In recent years, the whole $2 trillion-plus pie has been expanding by 6 percent to 8 percent annually—driven in large part by inefficient use of ever more expensive technologies.  Even if we switched to single-payer tomorrow, and eliminated the $100 billion in extra costs that private insurers bring to the party, the $150 billion to $200 billion annual rise in health care spending would wipe out that savings in less than a year.  This illustrates what a powerful force health care inflation is. Unless we tame it, it will undo our best efforts at reform the system.

In “High and Rising Health Care Costs: Demystifying Health Care Spending,” Ginsburg points out that while the insurers’ slice of the health care pie has not been expanding much in recent years, three other pieces of the pie have been growing:  hospital care (which now accounts for 32  percent of spending), physician and clinical services (22 percent) and drugs and devices (roughly 16 percent). Often, health care analysts estimate that prescription drugs account for only 10 percent to 11 percent of the bill, but that includes only the drugs that patients buy retail at a pharmacy. Add in the cost of drugs administered in a hospital, a doctors’ office, or a nursing home, plus a wide array of medical devices (from stents to knee implants) and you arrive at approximately 16 percent.

These are the three biggest slices, and they are growing faster than the remainder of the pie, in large part because they reflect both the spiraling cost and soaring use of advanced medical technologies. Doctors and hospitals are not, by and large, being paid more for what they do, but they are doing more to more patients. 

Meanwhile, often the patients do not benefit. Take another look at the chart above showing the “Relationship Between Quality of Care and Medical Spending, By State.”  More intensive care often is not better. As Ezekiel Emanuel, director of bioethics at the National Institute of Health points out in his 2008 book Healthcare Guaranteed:, “Recently, a study by Dartmouth researchers showed that patients who had suffered heart attacks did no better at hospitals in which they saw more physicians. Similarly, hospitals in which patients underwent more tests and interventions were not the places where patients were more likely to survive after a heart attack; in fact, seeing fewer physicians was associated with a higher chance of surviving a heart attack.” 

The solution seems clear. As CBO director Peter Orszag testified before the Senate Committee on Finance last year, “we need to adopt “costly new medical services more selectively in the future than we have in the past..." and the diffusion of existing costly services” should be “slowed.” He acknowledged that this approach “would mean fewer medical services, but evidence suggests that savings are possible without a substantial loss of clinical value.”  Too often, “newer, more expensive services are used in cases in which older, cheaper alternatives could offer comparable outcomes for patients.” And sometimes, better outcomes. Because the one thing that can be said with certainty about the newest treatments is that we know less about them. And thus they are riskier.

But if we became more careful in our use of medical technologies, wouldn’t this discourage innovation? Writing for the Centers for Health Systems Change (HSC) Ginsburg tackles that question: “The subtext is whether steps that would make new technologies less profitable for their developers—for example, through guidelines leading to their being applied to fewer patients—would reduce the development of the valuable new technologies. Although it goes without saying that less profitable research and development will reduce resources going into these activities, it is far less certain that it would reduce the flow of high-value new technologies.”

U.S. healthcare is awash in innovation, and as Ginsburg notes “the law of diminishing replies certainly applies to [medical] research and development.” Too many new products are of marginal or no value, leading Ginsburg to question whether putting a brake on pricing would reduce the flow of the most valuable technologies.

Moreover, we shouldn’t encourage manufacturers to pour resources into developing technologies that only a few can afford. “The inability to afford health insurance now affects many in the middle class,” Ginsburg observes. “For many, whether advances in medical technology are valuable or not has little relevance if their inability to afford insurance puts those technologies beyond their reach.”

The goal is not simply to contain spending, Orszag concludes, but to “restrain the growth of costs without harming the incentives to provide appropriate care and develop valuable treatments.” He recognizes that this will not be easy; and it cannot be done quickly. “Moving the nation toward that possibility—which will inevitably be an iterative process in which policy steps are tried, evaluated, and perhaps reconsidered—is essential to moving the country toward a sounder long-term fiscal footing.” 

Pilot projects will be needed as we experiment with ways to measure outcomes and restructure payment systems to encourage effective treatments.  As we learn more, guidelines will have to be revised.  But “selective” medical care—delivering the right care, to the right patient at the right time—will not only save money, it will also save lives.