Why Obama Should Stand Firm on a Public-Section Insurance Option Part 2

( * Please note parts 1 and 2 of this piece were posted simultaneously. This is part 2– part 1, which you really should read first– is right below)

Conservatives often argue that it just isn’t fair to force private health insurers to compete against a government plan because . . .

Well, to be perfectly candid, they know that most for-profit insurers would lose. They don’t put it that way, of course. They argue that the government plan would enjoy “unfair advantages.” It wouldn’t’ have to pay profits to shareholders, for instance, and it wouldn’t have to pay seven-figure salaries to its secretaries. It also wouldn’t have lay out hundreds of millions to advertise –or to lobby Congress.

But have the private insurers’ apologists considered the possibility that private insurers pay their executives too much? Maybe you don’t have to ante up $11 million to attract a good man. (I know you can get a good woman for less.) Perhaps for-profit insurers squander money on needlessly lavish advertising. Maybe these companies shouldn’t be spending quite so much trying to grease the palms of our elected officials.

As for profits for shareholders, certainly those who invest in a business have a right to expect dividends and/or capital gains. But one could argue that it’s up to the private sector company to produce those profits by being more efficient than government. Conservatives themselves often argue this position.

It makes sense to give for-profit insurers a chance to prove that they can add value to the system, if only because many employees who have private insurance today do not want to give it up until they see how health care reform is working out. But, if over time, for-profit insurers fail, and more Americans find that they can get better coverage for less from Medicare-for-all—or from not-for-profits in the private sector–they should have that choice. Taxpayers cannot afford to bail out another industry that can’t figure out how to do its job without short-changing its customers.

This isn’t to say that Medicare-for-all is a sure-fire winner. Today’s Medicare is a deeply flawed system. It needs fixing.

We Must Begin to Make Medicare More Efficient

Ultimately I disagree with the Institute’s report on just one major issue: the assertion that public-sector insurance plans always do a better job of containing costs than private insurers.

Berkeley political scientist Jacob Hacker makes the argument in “The Case For Public Plan Choice In National Health Reform ,” . where he argues that “Although you would not know it from the debate over Medicare’s finances, Medicare has become increasingly effective at restraining the ‘excess growth’ of spending.

Hacker, who wrote the paper for the Institute for America’s Future, uses the chart below to compare the growth in Medicare spending to the growth in private insurers’ reimbursements: “As Figure 2 shows, private plans’ spending per enrollee has grown substantially faster than Medicare spending per enrollee, especially in the last decade or so. Private insurance outlays per enrollee grew an average of 7.6 percent a year between 1983 and 2006, compared with 5.9 percent growth in per enrollee spending under Medicare—a 22 percent difference. (1983 was the year in which Medicare’s prospective payment system for hospitals was implemented; 2006 is the last currently available data year.)

The gap is even bigger in recent years,” Hacker adds. “Between 1997 (when the Balanced Budget Act of 1997 further constrained Medicare spending) and 2006, private health insurance spending per enrollee grew at an annual rate of 7.3 percent, compared with an annual growth rate of 4.6 percent under Medicare—a full 37 percent difference.”


But, of course, when you make a chart, everything depends on the beginning and ending points that you choose. The chart above appears to have been cut from the chart below —which offers a more continuous, year-by-year overview of Medicare spending versus spending by private insurers, all the way back to 1970.

Image002Compare the yellow and purple lines, and it becomes evident that while Medicare has done a better job of clamping down on costs in some years—private insurers were more successful in other years.

Hacker is right when he points out that from 1997 to 2006 Medicare has brought health care inflation down significantly. But as the legend reveals, this was largely due to the fact that Medicare reimbursements grew by only 1.2 percent a year for just two years–from 1997 to 1999 .

And this was not, as Hacker suggests, because “Medicare had become increasingly effective at restraining excess” spending. Rather, it was because the Balanced Budget Act (BBA) of 1997 slashed Medicare reimbursements to hospitals, physicians, home health agencies, and skilled nursing facilities, with planned net spending reductions of $116.4 billion from 1998 to 2002 .

Meanwhile, the American Hospital Association complained of "service closures and cutbacks as hospitals and other health care facilities attempt[ed] to wrestle with the BBA's dramatic reductions ." 

Many thought the across –the- board cuts were crude. It is difficult to assess whether they lowered the quality of hospital care, but according to a 2006 article published in Health Services Research, “hospital financial health deteriorated over the time period, calling into question the sustainability of quality patient care in the face of further reimbursement cuts. As cuts continue, it will be an ongoing challenge for hospitals to continue to provide high-quality care using fewer resources .” 

Congress listened, and “as a result of significant protests from the American Hospital Association, Congress passed the Balanced Budget Refinement Act in 1999 to restore $8.4 billion and subsequently passed the Benefits and Improvement Protection Act in 2000 to restore a further $11.5 billion of the original $116 billion reductions.”

Meanwhile private insurers had been cowed by complaints about “managed care” and they, too were becoming more generous. Thus, Medicare spending resumed its climb, rising by more than 5.5 percent a year from 1999 to 2006.

Private insurers had enjoyed their day in the sun a few years earlier when their spending slowed.. From 1993-1997 their reimbursements creeped up by only 2.8 percent a year. (Hacker does not include these four years in his snapshot of “recent years.”) This was the heyday of “managed care,” when HMOs began saying “no” to many procedures. Then came he backlash, and as HMOs lost market share at the end of the 1990s, they began saying “yes” more often. After they threw in the towel, their reimbursements climbed by well over 8 percent a year.

Over the same period as Hacker notes, Medicare spending grew by “only” about 5.5 percent a year. Medicare managed this feat largely by holding virtually all doctors’ fees flat even while their overhead climbed. (This was another crude solution.) But now the jig is up: physicians are rebelling. Many primary care doctors are no longer taking new Medicare patients. The Medicare Payment Advisory Commission has recommended that Medicare begin raising fees at the bottom of the physicians income ladder while cutting for some services at the top.

In sum, neither Medicare nor private insurers have been successful in putting a lid on costs for more than a few years at a time. And when they have tried, critics insist that they are threatening patients’ health .

Step back, look at the larger chart, and you find that over time (1970 to 2006) Medicare payments soared by an average of 8.7 percent a year, while private insurers have been laying an addition 9.7 percent a year. The one point difference just doesn’t suggest that a public sector plan is intrinsically better suited to holding down costs. (Even in recent years (from 1999 to 2006) Medicare spending has continued to grow at roughly 5.5% a year, hardly a sign of progress.)

In the end, what the chart reveals is that whether Medicare or private insurers are paying, health care costs have been levitating to a point that U.S. healthcare has become unaffordable. We cannot sustain 8.7 annual healthcare inflation or 9.7 percent growth—not unless wages and GDP are spiraling at the same rate. And we know that they won’t.

Before we roll out Medicare- for- all, we need to face the face the facts: Medicare is a spectacularly wasteful system. Research suggests that one out of three Medicare dollars are spent on unnecessary, unproven, redundant and over-priced tests, treatments and products that are no better than the older treatments that they are trying to replace . We can no longer afford to put a match to health care dollars. White House budget director Peter Ortszag has made the numbers crystal clear: Medicare spending is not sustainable. As Archer acknowledged in Tuesday’s conference call: “ Medicare will have to get tougher. I believe it will.”

Medicare needs structural changes, both in term of what it covers, and how it delivers care. This is why Medicare reform will be key to national health reform: we need a far more efficient model for a public-sector plan. It will not be easy—and it can’t be done by simply hacking away at what Medicare covers, or how much it pays healthcare providers, indiscriminately. Cuts need to be made judiciously, with a scalpel, not an axe.

Again, we can learn from Massachusetts: “It’s not like the fat sits out here easily identified and you just slice it off, Jon M. Kingsdale, executive director of the agency that administers Massachusetts Commonwealth Care told the New York Times. “It’s marbled throughout the meat”

76 thoughts on “Why Obama Should Stand Firm on a Public-Section Insurance Option Part 2

  1. Thank you for this. We have a patient right now, that without going into any detail, is chronically ill and is being denied standard treatment by a managed medicaid company. The solution, change to government only medicaid. So often it seems the only strategy the market has for making money with insurance is to get rid of the patients who actually use the insurance. This is not a winning strategy for the country as a whole. It seems much better to me to share risk along the largest possible pool to take care of everyone.

  2. Doc–
    Welcome and thank you for the comment.
    I agree “managed medicaid” is a bad idea.
    Medicaid itself pays too little and gets so little oversight.
    At least when Medicare is turned over the private insurers, Medicare patients have a voice that will be heard if they are not happy. (And right now many are very unhappy with
    Medicare Advantage.)
    But Medicaid patients don’t have a voice.
    When insurers deny them care, this is not be a big story.
    I believe that Medicaid should be folded into Medicare, providers should be paid equal fees for caring for poorer patients, and finally, as you say, private insurers just are not likely to do a good job with Medicaid patients.
    These patients are often very sick and time-consuming for many reasons.
    It is difficult to make a profit on them.

  3. I think Doc is hinting at an important issue. When considering the costs on those two charts is there any adjustment for the populations in the plans?
    Very few older people have private insurance as their primary, most have Medicare/Medicaid.
    Conversely employees covered by company plans, administered by for-profit firms, tend to have younger and healthier participants.
    I’m not even sure that a simple age adjustment would be adequate. Young people who can no longer work would not remain in most company plans.
    We did have some comparisons when the Blues were non-profit. In NY Blue Cross and HIP tended to get a lot of participants since they were widely seen as cheaper and better than commercial insurers.
    So, without some more detailed explanation about the statistics I don’t thin we can draw any accurate conclusions.

  4. Maggie said ”
    In sum, neither Medicare nor private insurers have been successful in putting a lid on costs for more than a few years at a time. And when they have tried, critics insist that they are threatening patients’ health”
    But putting aside the brazen greed of private insurance ccompanies look who has been in charge of Medicare over the past 8 years in particular?
    The new Government team will get it right.
    Tell your Senators and Congressman or Congresswomen to give them a real chance at meaningful LONG OVERDUE reform.
    Enough is Enough!
    Dr. Rick Lippin

  5. First, let me start by saying that it is not only important that there be a federal insurance option, but that that option be either part of Medicare or administered in common with Medicare.
    There are several aspects of Medicare that the new program – let’s call it Medicare Part E (E for everyone) – must take advantage of to succeed.
    First, it must be part of Medicare’s arrangement with providers. Providers must accept all of the Medicare/new federal health plan or accept none. We need to stop providers like Partners from using market power to blackmail the new plan for higher fees.
    Second, it must share Medicare’s very efficient system for overhead expenses, including payment and billing by providers.
    Third, it must share Medicare’s excellent reputation with the general public. We need to tell the public that when they join the new plan, they are joining Medicare, the same Medicare that has the highest level of satisfaction of any insurance program in America – significantly higher than the relatively high level of satisfaction that people with employer based insurance have.
    In addition, it must be open to employers as well as individuals, since employers deserve a chance to save money as well.
    Conservatives and insurance industry forces tend to oppose most of these steps. If the government creates and insurance program, they want the government to abandon everything that the government does right in order to handicap the program – murder it in its cradle, if they can, so they can avoid competition. Medicare Part E must do what Medicare does right, since that is the whole point of the program.
    On the other hand, we need to implement some important reforms in Medicare while we are at it.
    Most importantly, Medicare must go to work on targeted changes in reimbursement patterns to attack areas of care that show high amounts of wasted cost while having no better or even worse results than other, less expensive approaches. It is only by abandoning crude across the board cuts in favor of focused “smart” cuts that Medicare can save money while actually improving care. If Medicare, including a new Medicare for Everyone, can take the lead on this, private insurers will be glad to follow, and US health care will be much better for it.
    Next,we need to make some changes in the costs recipients pay, since some low income people are now being priced out of Medicare by increased premiums and co-pays.
    Then we need to revise Medicare’s payment system in a variety of other ways. MedPac has just released a new analysis of Medicare payment policy, and has recommended several changes, including – and I know quite a few hospital CEO’s who would endorse this enthusiastically – increasing overall payments to hospitals. Changes in reimbursement patterns across medical specialties and involving many procedures are also in order.
    Finally, we also need to re-evaluate Medicare Advantage. It is inappropriate that Advantage vendors are using the extra – 14% extra overall, according to MedPac – money they are paid to lure customers in and then often offering inferior coverage, as has already been mentioned earlier in this thread. However, the MedPac analysis does offer some interesting insights about the ability of some vendors to use Medicare Advantage to lower costs while offering better care. It is no surprise to see who this subgroup of Advantage vendors are – the large traditional HMO’s like Kaiser, Group Health of Puget Sound, and so on. They actually cost less than regular Medicare – they average 98% of costs of regular Medicare – and offer more effective service. Rather than destroy Medicare Advantage completely, which I would have advocated last week, we may need to carefully examine the costs and benefits to allow some vendors to continue to “manage” care, while eliminating most others.

  6. it is a bit early to be thinking about the end game here and while I’m not about to cede the quest for efficiency to anyone, I’m wary of anyone who’d reject a plan to expand coverage to the uninsured because it didn’t achieve other goals. perhaps we should have a referendum among the uninsured on that question.
    anyhow, apples-to-apples competition is a nice idea, but that would require all insurers to charge all applicants a common rate. else, if government charged all the same and other insurers didn’t, you’d have a real moral hazard issue that would insure the government plan would lose.

  7. I love this idea of medicare E, sounds simple and would be blockbuster to get through public. I hope they use something related to Medicare as people already trust it.

  8. I suggest that rather than Medicare, the plan to emulate might be the Federal Employees Health Benefits Program. Funny, how when conservatives in Congress are scaremongering over the concept of government-run health plans, the never seem to find fault with the one that they use themselves?

  9. Ill and Uninsured in Illinois,
    The FEHBP is PRIVATE INSURANCE paid for 75% by taxpayers on behalf of the employer (the federal government) and 25% by federal employees. Medicare Part A (hospitalization), which accounts for roughly 50% Medicare’s cost, is paid for 100% by taxpayers in the form of a 2.90% payroll tax applied to all wages split evenly between the employer and the employee. Part B (physician services and other non-hospital related costs except prescription drugs) and Part D (prescription drugs) are both paid for 75% by taxpayers out of general federal tax revenue and 25% by beneficiaries.

  10. Medicaid is easily analyzed from a primary care perspective: Medicaid is a joke. No PCP I know takes Medicaid. Next case.
    Medicare is different. It doesn’t pay well, but it pays enough to keep most PCPs in business if they control their costs. Why? They have nowhere else to go, unless they go concierge. Unfortunately, more will go that way. Crucially, however, Medicare does not pay enough to induce medical students to want to go into primary care. See yesterday’s match results. If before we had hoped to have enough PCPs to satisfy societal needs in year x, that goal has now been postponed to year x+1 at the earliest.
    Of course it is important that people get insurance. Of course a public option is the way to go. We’ re beating a dead horse here, solving 1+1=2 over and over again.
    Sorry about the mini-rant rant, but I’m upset at the match results.

  11. Robert, Rick, Pat S. Jim, Ray, Ill and Uninsured, J. Rossi– (and Doc, see my earlier reply to you near end of thread)
    Thank you all for your comments.
    Robert –The charts are not comparing the absolute dollars spent by Medicare and private insurers.
    The charts compare GROWTH of spending year to year.
    Thus, the population doesn’t matter. The absolute number of dollars spent by Medicare may well be higher (assuming they have at least as many, if not more patients than private insurers, and Medicare’s patients are sicker because older)
    but that is not what these graphs compare.
    They compare the percentage hike in spending each year.
    I am hoping for real Medicare reform–but it won’t be easy.
    Patiients who are accustomed to having everything covered, whether or not it is effective, will resist change– as will those physicians who have been making a nice profit in very lucrative treatments that are no more effective than oldder, less expensive treatments. . .
    Pat S.–
    Excellent points – and I agree with each of them.
    I’m also not suprised
    that the non-profits are are doing something useful with Medicare Advantage.
    They definitely should be part of National Health Insurance
    AS President Obama, White House Budget Director Peter Orszag and others have made clear: We Don’t Have Enough Money to Cover Everyone Unless We
    Make Structural Reforms to Cut Spending.
    Covering Everyone First is Not An Option.
    This is the lesson that
    Massachusetts teaches.
    In fact they are not “covering everyone”– they are giving everyone insurance that many people cannot afford to buy or if they buy it, can’t afford to use.
    This is “pretending to cover evryone.”
    Meanwhle Mass has already begun to cut the benefits in the coverage, and whll have to continue to cut benefits, raise co-pays and premiums and cut fees to physicians.
    Doctors are already beginning to rebel. It’s hard to get an appointment with a doctor in many parts of Massachusetts.
    Try to imagine all of this happening nationwide. (The conservatives would say “aha! this is what happens when you let governmetn get involved in medical care. National Health Insurance would be repealed within a couple of years. (See what Pat S. says in his comment on this thread about the coservatives wanting to murder national health reform in its cradle.)
    Voters would vote the health care reformers out of office, and the conservatives would take over Congress once again.
    I very much doubt the Mass plan will last even 5 years–and Mass is a very wealthy quite enlightened state.
    And, yes, many reform plans assume that all insuers will charge everyone in a given community the same rate for a plan that matches the coverage that the government plan offers.
    If insurers offer more coverage (let’s say they add discounts on gym membership,or dental), then they could charge more.
    Note– I say “in a given community” because the cost of insurance varies according to differences in local prices based on cost of living. A dcotor’s overhead is higher in Manhattan than in Alabama, so his fees are higher, and thus insurance premiums must be higher.
    Ray– I agree “Medicare E” is a nice, simple concept to sell to the public.
    Ill and Uninsured —
    The “Federal Employees Plan” refers to a menu of different plans offered by private insurers.
    Sentaors do not have the same plan as mid-level govt employees.
    I don’t know what the Senators’ plan is like but I have been told that the lans that many federal employees have are not that good–definitely not as good as Medicare.
    As Pat S. says, we want the public-sector opton to be a plan run by Medicare (or a parallel federal agency) not somehing farmed out to for-profit insurers.
    J. Rossi–\
    I am quite certain that Medicare will adjust its fee schedule this year, raising fees for primary care physicians and others who practice cognitive care–and I’m fairly sure it will lower some fees at the top of the ladder for very lucrative but not terribly effective services. White House budget director Peter Orszag will be very influential (he has written hundreds of pages about what’s wrong with our healthcare system) and he understands that, at the very least, this needs to be done..
    However, I’m not certain that a 10 percent increase (I’m pulling that number out of the air) will attract more students to primary care. I think we’ll have to change working conditions, and provide additional financial incentives (such as loan forevgiveness and bonuses for better outcomes) to students willing to go into primary care, family practice etc., and join large “accountable care organizations” where they won’t be paid fee-for-service, but will be on salary (or paid bundled payments for episodes of care), will have regular hours, and lots of support in the form of specialists and nurse practioners who collaborate with them,
    good electronic medical records, and someone else worrying about the business end of thigs.
    This should improve patient care and make primary care a much more attractive career.
    And I agree, it’s frustrating that people are even thinking about simply handing national health insurance over to the for-profit insureres, to run as they see fit . .
    But conservative Congressmen believe, as an article of faith, that it’s always better to have things run by for-profit businesses. Many of them probably believe their own cant about “socialized medicine.”

  12. “First, it must be part of Medicare’s arrangement with providers. Providers must accept all of the Medicare/new federal health plan or accept none. We need to stop providers like Partners from using market power to blackmail the new plan for higher fees.”
    Pat S,
    As you know, I oppose this. My issue is not about keeping private insurers in business, though I want to see them stay in business, it’s about resource allocation and, ultimately, quality of care. We all know that Medicare overpays for some services and underpays for others, especially primary care. This has been the case for years, yet little or nothing has been done about it. Moreover, if hospitals, especially academic medical centers, had to accept Medicare rates from all comers, they would not be able to provide the quality of care they do now according to some of their CEO’s. They make this claim even assuming there were no longer any uncompensated care and Medicaid rates were increased to the Medicare level. Only safety net hospitals that treat large numbers of uninsured and Medicaid patients would be better off than they are now if they were paid Medicare rates for all patients.
    If Medicare Part E negotiated rates with doctors and hospitals rather than dictate rates to them and if the providers could refuse to participate (but still accept seniors on Medicare) if they couldn’t work out a satisfactory arrangement, it would be useful to learn how effective and appealing a so-called narrow network product that did not include providers like Partners would be. Even though Tufts felt that it could not afford to pursue a strategy of standing up to Partners, Medicare Part E certainly could. If we had a voucher approach to insurance, the value of the voucher could be set at the cost of providing the public option plus or minus risk adjustment payments depending on each patient’s risk score.
    Separately, reflecting on your post on the prior thread about the Mayo culture doing less, providing better service, but charging considerably more for each individual procedure, there were several points that struck me. First, I was surprised how difficult it is even for Mayo to completely replicate its culture at its satellite facilities. Second, the ability to get people out of the hospital faster, as you suggest, means adding additional costs for support staff to provide that level of service. Third, I don’t remember if it was addressed in the past, but perhaps you could refresh our memory regarding how much of Mayo’s revenue is accounted for by donations, investment income from its endowment, and profitable discretionary services typically not covered by insurance such as executive physicals. It’s hard for me to envision Medicare paying Mayo and other efficient providers significantly more per service than higher cost institutions. Conversely, it seems like it would be well near impossible to get a high cost hospital to reinvent its culture and become a low cost efficient provider unless, perhaps, if failing to do so meant elimination from every insurer’s provider network including Medicare’s.
    At the end of the day, I think we would be net better off if we ensure that we have plenty of competition and choice among insurers as well as providers even if it means the system might cost 5% or so more to sustain. Finally, in the current commercial health insurance space, non-profit insurers have approximately 40% market share, mostly controlled by the Blues other than the 14 licensees owned by for profit Wellpoint. Insurance premiums are competitive between the two sectors as the for profits earn somewhat higher margins but have SG&A costs that are several percentage points lower in relation to premium revenue.

  13. From a docs standpoint, this doesn’t sound like a bad idea, but Medicare also needs to get straight the RBRVS schedule before it starts offering a Medicare policy to individuals below the age of 65. If you wish to finish off primary care and other cognitive medical fields for good, that is all you need to do is drop the prevailing payment levels for all services to Medicare levels and it will be financially untenable for many docs to continue in business. So in addition to the cost restraints that are needed through comparitive eficacy research, we will need a reworking of physician payments as well. All these items coming together in one fell swoop is what makes this such a daunting task.

  14. Maggie, We’re had this conversation before. On correcting the shortage of PCPs, your ideas sound reasonable, but they are not consistent with the data. They are in the realm of a hope and a prayer. The only sufficient cure for the PCP shortage is a HUGE pay increase, which is not likely to be coming soon. Dr. Mark Ebell has done this study-twice. Residency fill rates are tightly correlated with pay. Improved working conditions, EMR s, etc, sound good. They make for an interesting narrative, but the data just don’t support that narrative.

  15. Keith & Barry–
    Thanks for your comments.
    I definitely agree. But it’s certain that the physician fee schedule will be revised this year.
    We will finally have a President who understands that Medicare needs to begin following the Medicare Payment Advisory Commission’s recommendations.
    Orzsag does too.
    They will raise fees for primary care docs, and under Medicare reform, do other things to make primary care more attractive to doctors and students.
    I also agree that there is a lot to do– this is why I don’t think they will try to roll out universal coverage with a Medicare for all option until the end of Obama’s first term.
    This is what Obama has said all along, and Orszag confirmed this recently, saying 2013 is “still the goal.”
    I agree with Pat S. on this.
    But you are right –Medicare needs reform.
    It hasn’t happened up until now because Bush was president and conservatives controlled Congress.
    Once Obama appoints a new head of the Centers for Medicare and Medicaid,
    you will see reform begin.
    Rumor has it that Don Berwick is a leading candidate. That would be wonderful.
    Providers who want Medicare patients are going to have to take patients in the new public insurance plan– this is
    what will ensure that the public insurance plan offers patients a strong network of doctors and plenty of chocies.
    Healthcare reform is all about doing what is best for patients.
    At the same time, doctors who are now underpaid need to be better compensated–everyone in the administration understands this.
    And doctors who are overpaid will see their fees cut.
    As for hospitals–right now there are still too many unnecessary hospitalizations, and once a patient is admitted, too much is done to him.
    Medicare and Medicare for all are going to begin paying more for good outcomes–and less for bad outcomes.. Hospitals are going to be measured against benchmarks like Mayo. Ultimatley, those that are not delivering
    value –and do not improve significantly– will no longer be certified to accept Medicare patients.
    Some will close.
    We have too many hospital beds in this country–particularly in certain areas where there also is much overtreatmnt.

  16. Barry –
    A lot of questions, but good ones.
    First, I think that to suggest that because Medicare’s payment system is not working ideally, we should not allow an additional federal insurance program to operate inside it is to approach the problem backwards. What we need to do is to address the whole problem of Medicare reimbursement. As the MedPac report suggests, we need to change hospital reimbursement – now at 96 to 98% of costs – so hospitals can stay in business. We need to reform payment to doctors so that primary care providers are paid more, especially for doing things we want them to do, like more intensive outpatient management of patients with chronic illnesses, care of people now excluded from the system or on Medicaid, end of life counseling, etc. At the same time we need to pay less to some specialties and for high cost procedures, especially high cost procedures where reimbursement rates were set when the procedures were new, difficult, and exotic but have now become routine. We need – and I am a broken record on this – to set reimbursement to encourage the use of less expensive, safer, and equally or more effective alternatives and to discourage more expensive unnecessary management strategies.
    In the best of worlds Medicare E would not have to be linked to Medicare A and B for providers, but as we have seen many providers are more than willing to use their power to extract fees that are significantly over expenses if they can. Negotiating prices rather than setting prices sounds good, but adds significant costs of operation and can allow special interests to hold the health of the entire country hostage.
    I would note that to have a level playing field, Medicare Part E should be self-supporting based on its fees, collected from either the insured or, for low income people and some small businesses, the government. At the same time, private insurers should be required to adopt community rating and guaranteed issue policies, to prevent cherry picking clients while dumping the rest on the public insurer.
    We are in agreement about the use of a voucher system pegged to the public option and incorporating risk adjustments.
    More on Mayo:
    In the first place, although Mayo is compensated at a lower rate for Medicare than many providers on the coasts or in the Sunbelt, in the Midwest Medicare compensation is adequate for providers except for hospitals, where it is slightly low. Mayo, which is a huge outpatient clinic as well as a large hospital system, is shifting profits from outpatient services to compensate for any possible losses on inpatient. Medicaid is another story, and Mayo has had some fairly well known fights, especially with Illinois Medicaid, over compensation.
    Mayo’s clinical operation is indeed cushioned by the presence of its huge endowment. However, Mayo as a policy tries, and usually succeeds, to run the clinical operation with just the fees it collects. Its secret is not the endowment but the fact that all of its revenues, including fees for the technical and professional components of high end specialty care, are pooled, so that the profits from high end care, often siphoned out of other systems by private practitioners and free standing and office based facilities, helps pay the costs for less profitable parts of the system. Mayo reserves the endowment for research and education activities. Some of its infrastructure has been built with donations, but that is true of almost every hospital in the country.
    The problem of transplanting culture is one that has proven hard for almost all systems. Kaiser has a lot higher costs in LA than the Bay Area, the UCLA medical center is more expensive than UCSF, some of Mayo’s branches are less efficient than the main clinic and other branches, and so on. This is why I think we need to drill deeper into the problem of efficient care, and address the problem at its root, reforming management in specific situations where scientific evidence shows us that there are important changes in practice that could lead to better results and lower costs. We need to rebuild the system brick by brick, not trying to paper over the whole system at once.
    That, in the end, is why I think it is so important to incorporate any optional federal plan into Medicare, since the power of such a system would be enough to institute necessary changes in practice patterns, as well as to negotiate for drug and equipment prices, to revise patterns of payment for various specialties, etc.
    I know that you have written about your concerns that this power could be short circuited by lobbying, political contributions, and so on; and that is a danger. But there is no one else that has the power to make the changes we need, so that is our only choice.
    As Maggie said in her reply to my guest post, if we do not address these problems now, the massive costs of health care and its rapid growth will eventually destroy the health system, making health care not accessible for most Americans most of the time. We need our politicians in both parties to recognize that, for the politicians to make the public aware of that, and for our leaders to stand up to interests that are making the problem worse so that we can fix this problem before we are reduced to a third world standard of care.

  17. Maggie:
    Great post. I have been having trouble getting people on the liberal side of the spectrum to understand the cost containment piece that is necessary to reform. Indeed, one of my union officials even published in our trade paper that increases in health care costs are a myth perpetrated by employers who don’t want to raise wages.
    Clearly we cannot afford to give everyone everything. So, how do we decide what is covered and what is not? This seems like a scary converstation; politically very dangerous if not handled properly. Do you know of anyone in either Congress or the Obama Administration that is talking about this, even if behind closed doors?

  18. John R. Graham –
    The “dead weight of taxation” is an interesting theory that has not been able to stand the test of exposure to real world data. Historically, economic growth and prosperity are not linked to fluctuation of tax rates within any reasonable range. Many periods of rapid growth and great prosperity have been linked to very high tax rates or to rising tax rates. The late 40’s and the 50’s, the 90’s, and the EU performance in the Bush era (when the “high tax” EU outperformed the “low tax” US) are all examples.
    In addition, spending on health care is fungible. Health costs are health costs whether paid by the government through taxes, individuals and employers through private insurance, or individuals paying doctors and hospitals directly. The key point is how any system addresses the three big problems in US health care: lack of access for millions of uninsured and underinsured people, the true dead weight of the huge and growing cost of US health care on the economy, and the failure of that very expensive system to achieve levels of effectiveness in care that are typical of other developed countries. There is a lot of evidence to show that our current system has failed, and lots of evidence that well run government systems have a potential to succeed in dealing with these problems. It is time to give it a try, as part of an optional competitive program.
    There have been a lot of studies about the hidden costs of health payment systems, including Medicare. As the charts Maggie has in her post show, over history Medicare has been at least as effective as private insurance at holding down costs. There is no good evidence that fraud is any higher in Medicare than in private payment systems, just that it is more likely to be found out. Some more careful accounting studies show that costs of overhead are higher for Medicare than is often claimed, but those same studies show that private insurance is also more expensive than usually reported. In all studies, Medicare is the most efficient in terms of costs of operation by a significant margin.
    As far as cost shifting, that is a legitimate problem. It needs to be fixed. MedPac, the government agency that makes Medicare policy, has suggested a plan to fix it. Both Maggie and I address the problem of reform of the Medicare payment system in our earlier comments.

  19. Martha–
    Thanks for the kind words.
    Yes, there are people in Washington thinking about this.
    In order to figure out which treatments work for particular patients, and which treatments don’t,
    Prsident Obama has tripled the amount of money the government will spend on “comparative effectiveness research” —
    reserach that compares rival treatments for a particular problem.
    Often, the less expensive, older treatment works just as well for most patients, and since it has been around longer and we know more about long-term risks and side effects, it is safer.
    A small group of patients who fit a particular medical profile may benefit from the newer treatment — and they should get it. But their doctor should document that they fit this medical profile before Medicare pay sfor it.
    Washington has now set up a panel of health care experts to look at the comparative effectiveness research we now have– and to use the new funding to
    contract for more reserach–to be done by people who have no financial stake in the outcome.
    My guess is that Medicare won’t use this reserach to refuse to cover certain treatments (unless reserach shows they are very risky) but it will use this medical evidence to hike co-pays on less effective treatments and lower-co-pays on more effective treatments.
    This will steer patients to more effective treatments, much as lower co-pays on generics has steered them to generic drugs.
    Medicare also is going ot be adjusting the fees it pays physicians. It will be raising fees for primary care doctors– and is likely to lower fees for some very lucrative procedures that are only marginally effective . . .

  20. Pat S,
    While I think we will probably have to agree to disagree on whether or not a “Part E” public option should be folded into existing Medicare, I want to say that I’ve found your comments since you’ve been making them here (including earlier comments under your full name) to be among the most sensible and well written that I’ve seen on this and a half dozen other healthcare blogs that I read regularly.
    There has certainly been plenty of verbiage spewing forth from single payer zealots who think getting rid of insurance companies, their profits and their administrative costs will make healthcare and health insurance affordable. Some keep pushing preventive care as a huge money saver. Others vilify drug and device manufacturers. Some think tort reform (which I support) will rescue us. Free market types want everyone to have significant “skin in the game” no matter their income level.
    Though I have written (and still believe) that there is no one silver bullet that will make healthcare affordable and grow at a rate the economy can sustain but lots of silver pebbles, I think your “brick by brick” analysis, especially as it relates to using comparative effectiveness research to drive payment policy, and, presumably, move physician practice patterns in the direction we want offers tremendous promise. The nine specific examples you cited in your earlier guest post all deserve early attention from policymakers. Medicare is already big enough to drive payment policy in a new, more cost-effective direction. I hope CMS, the Obama Administration, and the new Congress are all up to the job.

  21. The public option should be available to everyone, but it must be VERY bare bones acute care. It should apply to everyone in Medicare, Medicaid, VA uninsured.
    This will neutralize the insurance lobby. They can still sell a full menu of medical treatment plans above the bare bones one. Every country has a two tier system. Why not design for it on the front end. Otherwise, we just have to continually cut fees (as they are doing in Massachusetts )to cover the huge losses until the public plan is bare bones, and end up at the same place, with a two tier system anyway. As Senator Kennedy has already demonstrated, even now, it is two tiered for the connected.
    As an aside, when you correct for the staggering hours doctors here work, including training hours, pension benefits, age at which one begins practice, sunk costs, I doubt there is much diffence in doctor pay. Hospital charges, however are several fold higher here and hospital stays are the shortest in the western world, on average.
    Doctors make better targets then hospitals since hospitals are thought of as emploment programs. Also, where doctors increase utilization to diffuse irrational risk, hospital administrators hire more underlings to serve as scapegoats in the event of controversy.
    Despite Maggie’s great faith in the giant clerical ediface of government (and her paradoxical distrust of even medium sized corporations), the public would rather have all medical options on the table, not just the ones with the political clout to survive in government medicine. This is the plan I would personally opt for, since I think I agree with Maggie that most of the expensive extra stuff is a waste. (To the extent that she feels that way.)
    We just can’t afford all the medical care we want. The lesson from General Motors and the UAW, from Massachusetts, and from elsewhere should be: we can’t afford goldplated healthcare. Many finacial writers have pointed out that GM had become a giant HMO, with a sideline in cars. Hospitals have become giant collection agencies with a sideline in Surgery. Most of the people working at the hospital are working the byzantine payment systems and documenting compliance with the latest fad in regulation or quality management.
    This is to say nothing about the unfavorable demographics we face, the increasing economic competition from the rest of the world, declining natural resourses, global warming, and the unsustainability of private and pension plans built on an assumption that the future was going to be so bright that you would have to wear shades.
    We might be able to afford more medical care if there was less red tape. We might be able to afford more if the best quality improvment scheme we could think of made getting paid for your work akin to getting a rebate when you buy a washing machine. Theoretically possible, but practically a real project. We might be able to afford more is so many many many stupid things were not being done. We might stop doing those things if we had iron clad tort protection like doctors do in the VA and around the world. But back here on earth, this is not going to happen.
    So, we need to cut back on the coverage, and give it to everyone.
    Funding with a tax on the successful will leave the rest of us unconcerned with devestating costs of free medical care. I would favor a VAT.
    In the end, the federal insurance program is going to be Medicare by default, as our population ages. Price fixing by Medicare is really what fueled the bubble in Medicine, and price fixing at a low level will deflate it.
    Almost all the players in the medical bubble have more political clout than the doctors, so when the reform is all done, doctors will have a pretty unattractive job. We don’t care that a doctor with twenty years of training will be paid a peak salary similar to a first year law associate, but we should.
    After taking out practice expenses we pay practically nothing to doctors from our gigantic healthcare bill. Alternatively, we could pay doctors nothing, and still have expodentially unsustainable costs. It would save a lot more money to empower doctors instead of villifying them. Primary care pay is attrocious, but specialty pay is not great either, especially in the Northeast. (Highest quarter for hospital charges, lowest quarter for doctor pay in the country.) Elsewhere Maggie has mentioned the long hours and hassles of private practice. (don’t you love that federalized word, reminds me of provider. Politically correct, but, trust me, when you are old and sick, you will wish we had the old system where at least some of the providers were experienced doctors. )
    This is of course the point. This is not an un-intended consequence. The intended but not advertised purpose of reform is to drive out private medicine. Many reformers live in an alternative universe in which salaried doctors solve all our problems. The Cleveland Clinic is excellent. Some of the similarly named clinics in the Boston area are atrocious. Inefficient. Not great care. Expensive.
    Our hospital system is constantly buying up practices. The dirty secret is that employee “provider” productivity declines to zero after 3 in the afternoon. We end up hiring twice as many doctors for the same care, but now it is less efficient and more diffident. Once you make the doctor a professional eunich, utilization of silly testing skyrockets. When you substitute PA’s and NP for doctors, utilization skyrockets. I wish it were another way.
    I know you don’t believe me, but there will be a shortage of critical specialties as physicians are herded into specialty groups. Specialists are outnumbered in these organizations and are treated by the PCP’s with the same distain the public is developing for doctors in general. The need for surgery will increase as the population ages. When you make the surgeon’s job shift work, you are going to need a lot more of them. Check with any residency program. The go getters are already seeing the writing on the wall.
    You are not going to like the brave new world as much as you think you will.

  22. To control the pain we must attend to the specialist because we can give him what is appropriate and what we need, for example I take Oxycontin, which is a medicine used to counter the chronic pain that I have for years, but I rioja prescribing doctor, I take it in moderation because I read in findrxonline.com which is a medicine that causes anxiety, and we must control it as it can affect your nervous system, so do not take medicines without consultation because it really can be dangerous.

  23. Christopher George —
    I agree with all you say about the damage that the high cost of our health care system is doing and will do to our economy. At Maggie’s invitation, I may work on a longer comment on that, and on thinking about solving that.
    However, I think that a two tiered system for health care – “bare bones” for many people but “gold plated” for others – will not be an acceptable solution either politically or ethically in the US. While many countries offer options in care, they tend to rarely be very widespread in application, accounting, for example, for well under 10% of health care in England and Germany. When two tier systems have become much more widespread, the result has been political dissatisfaction and eventual revision, as happened in the Netherlands in the recent past.
    Much less costly health care does not mean less effective health care or making practice for doctors and other providers unpleasant or underpaid. European systems have achieved much lower costs, substantially more effective medical care, and high levels of satisfaction for providers.
    The key is not to use blunt instrument cost control – across the board cuts – but to use smart cuts directed at actually improving care. This may mean that some doctors, especially highly paid specialists or doctors accustomed to routinely using management options that are expensive but not very effective, may make less, but some doctors may well make more.
    As far as your comment on doctors’ incomes in the Northeast, it is true that doctors in the Northeast (and in parts of California and the Sunbelt) make lower incomes than doctors in some other places. This is because there are so many doctors there, a fact that probably also influences why doctors there tend to order more intense high tech management in those regions as well, accounting for the Dartmouth data results. Doctors elsewhere are often paid less for each service unit, but make more money because they do more work by seeing more patients, even though they order less work per patient.

  24. Medical practices in the NE and California have very high overhead and the worst liability laws in the nation. Could this partially explain the differences with other states? The Supreme Court recently ruled that FDA approval of a drug does not excempt the manufacturer from liability. By extension, goverment controls on diagnostic testing will not excempt doctors from being sued. As long as there is a 1% chance that a headache could be a tumor a doctor in the NE will order the test and let medicare and the participant refuse.We must look deeper into the reasons behind the high cost in order to come up with true solutions not just cost shifting. I am for a VAT tax not a tax that decriminates agains the residents of high state taxes and high real state costs like the NE. What ever happened to the “Essentials”?

  25. Christopher George,
    You make some good points. I am a family physician, in the game 20 years this July. My professional experience has deteriorated to a significant degree. My experienced colleagues feel the same way. Most of us would quit if we did not have families to feed. Several of my old colleagues have pulled the plug and gone into urgent care or hospitalist or ER work. I even know an FP who paid to do a 6 month mini-residency is derm and is now dedicating her professional life to acne and wrinkles. Responding to market forces, she is. Is this what this country wants from its doctors?
    Primary care is in a death spiral. See this year’s residency match results. The meta-conversation on this blog in Pollyannaish in the extreme. ” If we just set up system like Mayo, Kaiser, etc., all will be well.” It is simply not true. The fundamental reality is that in primary care, the day-to-day (and night-to-night) activities the we engage in are difficult and unpleasant to a much greater extent than is the case with specialists. Why? Lots of reasons. Paperwork, poorly insured or underinsured patients, coordination of care, complexity of diagnosis and treatment, especially of the old and sick, and night call come to mind. And the lack of respect and, yes, the relatively low pay.All these factors are much much worse than they were 20 years ago. Medical students understand this all too well. A few days on the wards or in the clinic with a primary care doc (“I see how you do it, I just don’t see why you do it”)and a quick Google search to compare salaries and their minds are made up.
    A collapse of primary care would hit this country hard, financially and health-wise. I see scant evidence that the decision-makers are ready to make the radical changes required to prevent it.

  26. With respect to what a minimum benefit package might look like and cost, I wonder what the difference in cost might be between an insurance plan that duplicated the coverage that is currently available to congressmen and senators vs. a policy that would cover, say, anything the UK system is willing to pay for but not more. While it is clear that there is plenty of “waste” in our system, removing a meaningful part of it will require some pretty tough measures from comprehensive tort reform to removing high utilizing doctors and hospitals from insurance networks including Medicare to just refusing to pay for services, tests, procedures, drugs and devices that cannot pass a cost-effectiveness test. This is going to be a tall order and, while I’m hopeful that we can start to do some of it over the intermediate term, I’ll believe it when I see it.

  27. Christopher:
    You suggested having a private insurance plan above the bare bones public plan.
    What about the reverse: have a private plan, below the bare bones public plan?
    The public plan would cover the catstrophic expenses, say, $50,000 and above.
    The private plan would cover expenses of $50,000 and below.
    This would help prevent private insurers from abandoning the high cost cases.
    Don Levit

  28. The phrase “gold plated benefits’ has been mentioned on this post in several places. It is also demagogued quite a bit in the lay press.
    Typically, this type of package is equated with indemnity insurance–a dying product line in possession of probably <10% of plan holders.
    I am bothered by this term. It is a loaded phrase that is as bad as any out there currently ("big govt," "socialized medicine," etc)
    Frankly, defining a plan of core benefits, ie, effective rx, and non-core, ie, ineffective rx is hard enough (in the end it is all gray).
    To say that well child care, mental health and dental benefits, and perinatal treatments are "non-core" is a tough nut in my book.
    In the end, we will have to assign some kind of actuarial minimum and go from there, but to rip the UAW and juxtapose their "gold plating" to the rest of the country is over the top. They are the exception, not the norm (make it all union plans for that matter--they are the minority). Bottom line, most folks are struggling with their premiums, are underinsured, and just plain worried.

  29. J. Rossi, Chritopher, Pat S.
    J. Rossi– The “fundamental reality” of primary care that you outline: “the day-to-day (and night-to-night) activities that we engage in . . . difficult and unpleasant to a much greater extent than is the case with specialists. . . Paperwork, poorly insured or underinsured patients, coordination of care, complexity of diagnosis and treatment, especially of the old and sick, and night call come to mind . .”
    describes primary care as it is practiced in solo and small practices–not primary care as practiced at Kaiser, Mayo, the Cleveland Clinic, Geisinger, or any of the large multi-specialty practices that Pat and I have been talking about.
    At these places, primary care doctors do not do the paperwork; the back office does it. They are on salary, and don’t have to worry about collecting fees. Whether or not the patient has insurance is not their problem.
    On the whole, these primary care docs have regular hours.
    Co-ordinating care with other doctors is much,much easier when you all work for one organization–an organization that expects you to collaborate–and are all looking at the same electronic medical records.
    And when it comes to complicated diagnosis, you have a great many colleagues in many different specialities to confer with.
    I have great sympathy with primary care doctors trying to do the job alone or in small groups. They are over-worked and underpaid–and, as you say, a 10% pay hike would not adequately compensate them for what they are trying to do.
    Doctors tell me that this is a particular problem for your generation (doctors who graduated from med school 20 years ago).
    Today, many more doctors go to work for a large group or a hospital– they expect to work on salary, have no interest in trying to run a small business on their own, and understand how difficult it would be, especially in priamry care.
    In your generation, more doctors tried to follow the traditional path– and were blindsided by the growing amount of paperwork, rising overhead, etc.
    Doctors who are a generation older than you can retire–many have substantial savings. Some bought their offices, for instance, in the early 1980s, and that real estate has appreciated greatly.
    Your generatio is caught “in between”; probably you and many of your generation would not want to work at a Kaiser-you prefer to be independent.
    But that is the future.
    21st century medicine is a team sport. And the way medicine is delivered is going to change drastically– except in isolated rural areas, small practices just aren’t practical (And in rural areas, those practices will have to subsidizied– complete loan foregiveness for docs who set up practices there, etc.)
    Finally, Christine Cassell, the head of the American Board of Internal Medicine tells me that students who train at academic medical centers see the worst of primary care–typically they train in “the basement where they are seeing uninsured paitents and Medicaid patients, without support, no records, nothing.” Upstairs, the doctors teaching at the Academic Medical Center see insured patients.”
    But she told me, students who train as residents in primary care at places like Kaiser and the Mayo Clinic have an entirely different, much more positive view of primary care.
    Academic medical centere are going to be changing the way they train primary care physicians. So we really dont’ have data on how young residents are going to view primary care going forward.
    Many family practiotioners tell me that they think loan-forgiveness will be key-much more important than huge salary hikes.
    Finally, I’m really not being Pollyannaish– a great many doctors in European countries have very satisfying careers in primary care.
    Yes, they make less than U.S. doctors (though the difference between primary care doctors here and there is not as great as the difference in how much specialists are paid.)
    And perhaps the money just isn’t as important to them.
    On the whole,though I would have to say that anyone who goes into medicine for the money–now or 25 years ago–is making a terrible mistake.
    It is such very hard work –intellecutally, emotionally, even physically– that a person would be bound to be unhappy unless he or she really loved practicing medicine.
    Christopher & Pat S.
    I have to agree with Pat S. two-tiered care is not acceptable, politically or ethically. And what he says about other countries is true: what makes healthcare as successful as it is in many developed countries is the social solidarity behind it. People feel that it is fair, the way most Americans feel that Medicare and Social Security are fair.
    Social programs that divide a population rarely work for very long.

  30. In terms of two-tiered care, please see Zeke Emanuel’s piece:
    “What sort of replacement should we want for our troubled health care system? Many argue that justice requires prohibiting private payment for medical services to enforce a Canadian-style single-tiered health care system. This egalitarian approach, while well intentioned, fails to recognize 3 fundamental claims of justice: Public resources are limited, society cannot provide everything, and individual liberties include the freedom to pay for benefits the state does not provide. A tiered system, like English or Israeli systems, can provide broad but necessarily finite universal public coverage without trampling freedom of choice. Many questions remain for American health care reformers, but on the question of tiering, the principles of justice call for a multitiered health care system.”
    In same issue, see alternate view by Brett. Well worth reading!

  31. Bare bone coverage was meant to be an improvement over the NO coverage which most all of the non-medicare patients in our ER currently enjoy. I was also hoping to avoid the endless controversy about whether dematology, or fetility or family planning procedures or marital counseling or dentistry or braces or drug rehab or gym memberships or physical therapy or gastric bypass are medical care or not.
    It would be a fabulous improvement to the current system. It would end the wretched one-two punch of devastating illness and eye-popping bills that un-insured patients now face.
    I really like the disaster coverage option (It is what I bought for my family); unfortunately, I think that people like me that want little primary care, no cosmetic angioplasty of my coronaries ( as one of my British trained teachers used to say, all you want in the ICU is a bed near the defibrillator. ) no back surgery, no second or third corrective back re-operations, no bone marrow transplant for my (God forbid) gastric cancer would opt for the disaster plan, leaving the supplemental plan undersubscribed with low utilizers.
    I meant no disrespect by the term gold plated. My point was only that health care costs has been implicated as a cause for our non competetive industries. Go visit Henry Ford Hospital. It excites envy from Mary Hitchcock Hospital, which in turn looks like the Taj Mahal. William Beaumont hospital is also very nice. You won’t mistake either one with Kings County Hospital.
    GM gave the UAW massive perks because they couldn’t afford wage increases, and the executives wanted to keep the profits rolling. They figured they would be retired by the time the bill came due. The union leaders were probably thinking the same thing! My point is that if GM can’t afford very generous health benefits, maybe the country at large can’t afford them either.
    I would love a one sized system. My father practiced in a teaching hospital setting and always treated those on “Relief” the same as the US Senators and the Captains of Industry … at a time when Cleveland was a great world leader in both heavy industry and machine tools. Part of the reason we were relatively rich in Cleveland and America generally was that the machine tool manufacturers and industry generally in Germany, Poland, France, England, Japan, and The Czech Republic (formerly the best in the world) were destroyed in the war. When my father was in training, he studied journals on his nights on call. There just was not very much that could be done for a sick patient. Now, medical care is around the clock in the hospital. It was a lot easier to do everything for everybody when there was not much you could do.
    Economists like Krugman who pine for the fifties forget that our prosperity was in part due to the our unique position as the only undamaged industrialized nation following World War II.
    To the degree that there is a moral issue, I am in favor of the best medical care for everyone. I just don’t think we can afford it. I also think the vast majority of the money is wasted.
    So, assuming we have to choose, which I really really think we do, I would cover acute care for everyone. It has the virtue that it works. If I get into a car accident, take me to my hospital. How many doctors in France would say that? The rest of it really doesn’t work that well.
    Once we have those electronic medical records and we get over the shock that we have to stack the upgrades and patches and security alerts like cordwood, you will find that doctors, those most familiar with medicine, are generally very modest consumers of their product. Maybe they know something?
    There appear to me to be two schools of reform thought. I would prefer empowering doctors to do what is best for patients, within reason. This would involve shielding them from all lawsuits except where actual malpractice in the ordinary pre-1960’s sense of the word. Doing something drastically and obviously reckless. Despite what you have read, this almost never happens.
    A side benefit of tort reform, which is not often mentioned: No doctor today will ever tell you that you are healthy. We always tell them we don’t see anything wrong, but we don’t know. Get more follow up. We rarely tell patients to see if it goes away by itself..call in the morning ..we test RIGHT NOW.This is because heaven forbid, something serious is wrong, litigation! It is very reassuring to be told you are normal.
    Tort reform would make primary care a real money saver. Currently, if I call my primary with a headache. She knows that I am a hypochondriac, or she reads my (currently paper) chart and see that I have had three ER visits for headache in the last two years. She can’t tell me to see her in the morning, because if I have a brain tumor I might end up owning her house, So she sends me to the ER, and I get my fourth negative CT scan. My headache gets worse when she tells me to go to the ER. She must really think I have a brain tumor! With tort reform I am told I am likely normal, and to call in the morning. This is a great relief currently denied to patients.
    Our tort system is why primary care doesn’t reduce ER utilization.
    The other school seems to be to demonize the doctor, reduce his influence, undermine his authority, and empower the Extra-ordinary Committee on Medical Security. (With apologies to Felix) This is the agenda in the Hollywood media. The typical doctor on TV is now the guilty party on Law and Order. Usually he is faking drug data for an evil Pharma company or murdering to cover a long record of dangerous sham surgery. Watching TV now is like watching 60 Minutes in the Sixties, with doctors substituted for car companies as the bad guy. Paradoxically, this is going to be way more expensive.
    Maggie, I agree with you if you are saying that doctors don’t go into medicine for money. The people that do go into medicine as a calling will not tolerate the constant drumbeat of demonization.
    As a matter or policy, I would rather see a world in which half the students in Glenville or Wheeling knew calculus, than one in which their grandparents all had their cataracts removed. If we can do both, great. Currently we are doing neither.
    Dr. Pat, we have had the same flight from primary care. Two of my favorite and most respected doctors left to become hospitalists and dermatologists!
    On an unrelated note:
    Many of the often quoted statistics puzzle me somewhat. How much practice variation did you really expect between locations? Twenty five years after George Crile Jr. performed lumpectomies on his first and second wives’ breast cancer (at the world famous Cleveland Clinic) they were still teaching the discredited radical mastectomy in one of the best marketed and curiously influential hospitals in Boston. So, as doctors move around the country, we are going to have variation; but who is right and who is wrong. News flash..we don’t always know. The answer to that question also changes with additional data.
    I see plenty of errors at the hospital. I am not sure how The Institute of Medicine study helps. The study relies on residents in the midst of training to review medical charts and make a guess how appropriate each of the potentially hundreds of decisions made during the patient’s care were. If they thought there was an error, then they guessed what the outcome of an alternate treatment plan. This is where the 100,000 excess death number comes from. Many if not most of the authors were lawyers. No meaningful statistics. Very high inter observer error. No measurement even of intra-observer error. No measure of reliability of the guess, or its how this might compare to ten years. ago. The implication is that American healthcare is slipshod. Compared to what? Am I the only one that wonders how such a flawed paper had enjoyed the fame it has? If the thesis is that Europe is better, the paper doesn’t allow any such comparison.
    Hospitals are very dangerous places? I already knew that.

  32. Maggie, Thanks for your comments on primary care. I don’t think you and I are going to agree on this particular issue.

  33. Chris
    Keeping in mind 80% of dollars spent on 20% of beneficiaries, of which most have chronic disease AND are treated as outpatients (where, by the way, a majority of the excess spending and waste occurs–less so on inpatient side), I am not so sanguine that “acute” driven coverage is optimal.
    It is escalating OOP costs, co-pays, etc., that are killing folks. Maggie has mentioned this many times on her posts–a significant portion of seniors are on fixed incomes <35K/year, dual eligibles are money sinks, and percentage of household dollars on HC are unsustainable. Policies need to be structured in such a way that more than just acute care and a trifle of primary care svc's are included. How to do that will require experimentation--there are no conclusive answers and data is lacking (another reason why we cant fix system overnight).
    Of course, another issue is health literacy, compliance, health disparities, patient centered care and decision making (PCMH not the panacea here), and the fact that even providing the insurance does not ensure good outcomes with right care, right time, right person.

  34. Christopher George,
    I think you make many reasonable points, but I don’t think the term, “bare bones” coverage captures what you are trying to convey. Perhaps either “adequate” or “good enough” might be better. When congressmen and senators suggest that the American people should have the same coverage as they do, I don’t think most of them have a clue how robust that coverage is or what it would cost to provide. It makes a nice, easy to understand sound bite, though. It’s a classic example of the blind spot most progressives have with respect to the cost of providing comprehensive (by their definition) health insurance and healthcare for all. If some corporate employers, for example, pay for executive physicals at the Mayo Clinic for their several dozen most senior executives but not for everyone else, is that a “two tier” system that should upset the rank and file? I certainly don’t think so. Should health insurance cover in vitro fertilization, acupuncture, massage therapy, etc., etc.? If people who can afford to want to spend their own money for supplemental insurance that will cover these extras or self-pay on an as needed basis, they should be able to do so.
    This is why, in an earlier post, I suggested that we might examine the cost of providing a plan that would cover whatever the UK system would pay for. That, presumably, means no futile care at the end of life, no ultra expensive cancer treatments that can’t pass NICE’s QALY metrics, no dialysis beyond a certain age. In other words, it means rational rationing. I keep hearing that Americans are not ready to embrace such an approach, but I always thought that our political leaders were elected to LEAD, not to read polls, tell people what they want to hear, and kick the can down the road in the hope that the system won’t blow up on their watch.

  35. Barry:
    I think that good enough sounds much better. Anything sounds better than bare bones. I think we would have fewer political problems is we just adopted the NICE standards– not standards like NICE, the NICE standards themselves. Otherwise, I fear the only bad treatments that will be cut out, will be those which don’t have strong political backing.
    The political process is what gets us tobacco subsidies, corn price supports masquerading as an ethanol mandate, and a disease specific carve-out for renal failure.
    Oh well.
    I think there is a lot of un-necessary care in the outpatient world. That said, the “bare bones” most essential care would be covered by the plan wherever the care was given.
    Everything else would be supplemental insurance or cash. I would imagine that most would have insurance, as they do now.
    Another advantage of some private exposure is the price discovery it would afford. We know that dermatology services are highly valued, because people pay through the nose for them after waiting months for an appointment. Not very effective in my experience. (As the saying goes, treat it before it goes away.)
    A related problem is the insidious way in which the presence of insurance creates demand for essentially worthless services. We used to have a pathologist that submitted every tissue sample to flow cytometry, unnecessarily.
    Uninsured patients should not be allowed to be charged a fictitious inflated price –they should get the going rate.
    The Federal Plan must be quite focused in my view because otherwise, huge costs will leave the country insolvent. That it will also result in across the board cuts which will leave critical specialists insolvent will be a secondary consideration.

  36. J. Rossi, Brad F., Barry, Christopher,
    J.Rossi– Okay, we should agree to disagree on primary care. Let me just add that I do realize that we have a crisis in primary care and that we need to rethink it– beginning with how we train primary care physicians.
    Brad F., Barry, Christipher —
    First, Christopher, on the idea of people have “good enough” coverage and then “most people” buying supplemental insurance.
    Consider the fact that median household income in the U.S. is around $50,000. Half of all households earn less.
    A “lower income” working class family living on $35,000 a year–before taxes– has very, very little discrentionary income left to buy supplemental insurance.
    Even a “middle-class” family earning $48,000 probably wouldn’t be able to affod it.
    When you speak of “most people”– you are thinking of the upper -middle-class– households earning over, say $70,000.
    A great many elderly people can’t afford Medigap policies. (Median income for seniors is $20,000–and that includes earnings, dividends, capital gains, retirment income, Social Security, food stamps etc.)
    I agree with Brad that “gold-plated” is a loaded term.
    Certainly mental health care and well child care should be included in a basic package of healthcare benefits. Probably some dentistry should be included too– an infected tooth can kill you.
    If a treatmetn is effective in improving health, it’s not a “frill” To my mind, frills are purely cosmetic treatment, convenience (you can have your elective surgery next week) concierge service (your doctor responds 24/7) and hotel-like amenities in hospitals. These are the things that don’t have to be included in a basic, comprehensive package.
    But that package should be more than “good enough”–which implies that some of us deserve more than others– it should be “very good”–though it can never be perfect.
    And of course ineffective, unproven treatments should Not be covered in a any package of benefits– more on this below.
    Thanks, Brad for the links to these two very intersting articles on “tiered medicine.” Since not everyone can access them–and I think Barry and Christopher, among others, would be interested — let me just quote a chunk from each.
    The authors who argues in favor of tiers
    write: “Some
    health care options should not be included
    in public coverage because
    they provide insufficient benefits. At the margins, private hospital rooms” for example, “are not more important than many non-medical goods” such as “cellular phones that are properly distributed by the market.”
    In other words they are saying that some people can afford cellular phones, some can’t–and we accept that. Simiularly, they argue, basic health coverage shouldn’t include private rooms. If someone wants a private room and can pay for it fine, if he can’t afford it, too bad.
    Here I disagree. I think if someone is dying, he and his family should have the privacy of a private room. Similarly, if someone is constantly in and out of pain, has great difficulty sleeping, they, too, need a private room.
    Finally, if a child is seriously ill, and the parents are terrified, they also need a private room.
    In others words, private rooms should be distributed according to medical need, not according to ability to pay. But the authors of the piece favoring two tiers do not accept what they describe as “the claim that patients’ medical needs are the [only) relevant basis for determining their
    access to care.”
    In response Brett argues against a two tier system saying: “the kinds
    of interventions that would be appropriate for a second
    tier remain elusive: Effective evidence-based interventions
    should be included in the first tier, and ineffective
    or unproven interventions should not be provided in any
    tier, even if a patient is willing to pay for them.”
    To illustrate his point he notes that the authors of the first paper suggest only a few
    such things that belong on the optional tier (you get it only if you can pay for it): ” CT scans to screen for coronary
    disease, cetuximab for colon cancer, lung volume reduction
    surgery for emphysema, and full-mouth reconstructive
    “These examples are not persuasive.,” Brett writes.
    “For example, if CT coronary screening is eventually
    shown to reduce coronary morbidity or mortality, it
    should become a core benefit; if it does not confer clinical
    benefit, it should not be offered to anyone. Lung volume reduction surgery has been evaluated by a large, publicly
    funded randomized trial that showed the procedure
    to be effective only for specific patient subgroups (and clearly harmful for others).These results led to appropriate
    restrictions of the indications for the procedure.”
    In other words, “basic coverage” should cover everything that is effective for a particular patient.
    What does that leave for the other tier?
    In effective procedures?
    But we shouldn’t be practicing ineffective medicine on anyone, because every treatment carries risks and side effects, and if their is no benefit, we are, by definition exposing patients to harm without benefit.
    I would add only that unproven, but promising treatements should be available But ONLY IN CLINICAL trials where we can learn something about them.
    There, the treatments would be free for anyone who qualifies for the trial.
    If we have people buying proven treatments in the market (directly, out of pocket, becasuse they are wealthy, or through an insurer who has been forced, by public and media pressure, to cover an unproven treatment, we can easily wind up with a situation where patients receive–and are harmed by–an unproven treatment for years.
    Here I’m thinking of the bone-marrow transplants for breast cancer patients. For about a decade, the treatment was hyped and women endured painful treatments and side effects that left them so sick that they couldn’t say good-bye to their families as they died.
    Eventually it became clear that the treatment offered No Benefit to any of theses patients–but it took a long time for a consensus to develop because there hadn’t been adequated controlled trails. Once the procedure was available on the open market, women refused to go into trials. Everyone wanted the procedure–no one wanted to be in the control group.
    On adapting NICE standards in the U.S. two points
    a) We have much more money to spend on healthcare than the U.K. Resources are finite, yes, but we can afford to spend roughly 16% to 17% of GDP–as we are now. If we cut out the waste–the over-priced, ineffective and unncessary treatments that we now Know aren’t doing any good– (see the list in Pat S. post as a place to start) 16% of GDP is enough to provide comprehensive, effective care for everyone in the U.S.
    We don’t have to ration care by age (as they do in the U.K.) refusing organ transplants for people over 70 (I think the cut-off is 70) for example.
    i agree that when organs are scarce, they should be rserved for hte young (regardless of income) who have not had a chance at a full life.
    But if additional organs are available (as in many cases they are) they should be given to patients based on their health and the likelihood that they will benefit, not their age.
    A very healthy active 75-year old who has a organ transplant could easily live another 15 very productive years.
    Would you want to live in a society where he dies, because he cannot afford to pay for it, and the organ instead goes to a very wealthy but overweight 75 year old suffering from gout and beginning to lose his memory?
    Again, it seems to me medical need and ability to benefit from the procedure should be the criteria for care.
    Moreover, when it comes to end-of-life care, yes, we spend too much on futile care, but it is not so simple to know when it is futile.
    As palliative care specialist Diane Meier points out– we spend a great deal on people in the ICU, as we should, because they are the sickest people in the hospital. And quite often, we just don’t know which ones will recover and be able to resume their lives.
    In some cases it is obvious, but in many others it just isn’t. You cannot underestimate the ambiguities of medicine.
    And it’s not just whether the person will survive, there are question about quality of life. If he has had a stroke, and is paralyzed, but his mind is still sharp, and he will be able to read and talk to his grandchildren, it is “worth” saving him?
    In addition many religions argue that we should let God make these decisoins. I don’t happen to be religious, but I do think we have to respect other people’s beliefs, particualrly at such an important time.
    Also some African Americans are very reluctant to simply “let grandfather die” because, frankly, they don’t trust white doctors. They are suspcious that, if the patient were white, doctors would make a greater effort to save him.
    And of course we do know that their are disparities in care based on race, so there is some basis, in reality, for their fears. (This is why we need more African-American doctors, Latino doctors etc.)
    Finally, palliative care seems to me the best answer to these situations. A palliative care team knows how to present the options to a patient and family, counsel those who have reservations based on reglious belifs, and bring the patinet (and family if appropirate) into the decision-making process
    Clearly, the decision should not be about saving money.
    So no, we can’t just import NICE’s rules. We can certainly integrate some of them into our system, but our resources are not as limited (assuming we excise waste–making the “smart cuts” as Pat S. says,–and there is a lot of low-hanging fruit).And there are cultural differences that have to be respected.

  37. In measuring the quality of health care programs I would tend to argue that the proof of the quality is in the outcomes.
    From that point of view, health care in Germany, France, Britain, and Canada is more “gold plated” than our health care, since both overall and in many individual conditions people there have superior outcomes. Those outcomes occur independent of economic status, since the bottom fifth of economic status in Britain has better outcomes than the top fifth in the US. They occur independent of racial and minority status, since white people have worse results here than overall results – including substantial non-white groups – in the European countries. They occur independent of health habits, since many outcome studies measure performance after diagnosis and admission with various diseases and conditions, not just overall population statistics.
    I would suggest that true second class care includes being given treatments and drugs that are less effective, tests and surgery that are not indicated based on outcome results, and care that in some cases actually makes you sicker, all the while paying between 70% to 100% higher costs of care and excluding large numbers of people from access to health care.
    People in leadership and opinion forming positions in the US, including politicians, media figures, journalists, and medical professionals, need to educate the public about these facts. People need to learn that health care is not measured by who has the nicest buildings, the most elaborate equipment, the most expensive prescriptions, and the most technically sophisticated tests and surgery.
    I agree completely with Maggie that new technology and medications must be evaluated by scientific studies that validate positive impact on outcomes before being turned loose on the public.
    I disagree with Maggie that keeping the cost of health care at 16% of GDP should be satisfactory. Holding the cost level may be satisfactory for the moment, and is an improvement over 7% increased cost compounded year after year. However, there is no reason we cannot aim to at least match Switzerland’s 13% of GDP, which is based entirely on private insurance programs.
    In fact, we should be thinking about reducing costs to 10% of GDP, matching or approaching France, Germany, and other developed countries while offering true high quality care to all Americans. I think that that is within range if we switch emphasis from having the fanciest bells and whistles to having the best outcomes.

  38. Pat,
    I wonder if you can provide some insight into the importance of cost differences per procedure and per drug in the U.S. vs. Canada and Western Europe. My perception is that hospital charges (both inpatient and outpatient) for a given procedure are far higher in the U.S. One would think that a hip replacement is a hip replacement and a triple bypass CABG is a triple bypass CABG assuming comparable age and general health status. I know that we are paying far more for brand name drugs than other countries that control prices, but patent expirations and tiered co-pays driving patients toward generics where they exist are mitigating this issue. Ultra high cost specialty drugs are a separate issue, though I don’t think the inter-country differences per dose are as big as they are for brand name drugs. Here, the more important issue is do they make it onto the formulary for payment or not.
    As a rough proxy for cost structure, I’m especially interested in differences in hospital staffing as measured by total number of employees per licensed bed assuming normal occupancy rates. I know that within each country, this metric will be much higher for academic medical centers than for community hospitals. If there are significant differences among countries, what drives them? If we could theoretically import the French or German system, including their practice patterns, tomorrow and assume that neither the litigation environment or patient expectations were complicating factors driving increased utilization, how much more expensive might our system be as a percentage of GDP vs. France and Germany solely because of price differences for individual services, tests, procedures, drugs and devices combined with our higher incidence of poverty, and its associated healthcare costs?
    It seems that a very significant percentage of healthcare costs are attributable to episodes of care that include a hospital inpatient stay or an outpatient visit. Hospital charges, even at actual insurer reimbursement rates, not hugely inflated chargemaster rates, are just killing us financially, yet most hospitals complain that they earn little or no margin. According to studies I’ve seen from the Kaiser Foundation and elsewhere, uncompensated care causes hospital prices to be only about 6% higher than they otherwise would be.

  39. Barry –
    Good questions. I’ll answer the easy one first.
    Prices for proprietary drugs are between 25% and 40% higher in the US than in other developed countries. The main reason is that most other countries engage in aggressive negotiation for prices on a large scale nationwide or regional basis. Reliable estimates suggest that we could save around $70 billion a year by negotiating aggressively on a large scale basis, especially if private insurers would be willing to join in as a group and follow price leadership from the federal government. This would require changing the laws forbidding Medicare to negotiate for prices under Part D that were put in place by the Bush administration and conservatives in congress when Part D was created, and creating legal changes that would allow private insurers to avoid antitrust issues.
    That is not a small amount of money, but amounts to only about 3% of total US health costs. However, as I have often said, I believe that lowering health costs requires addressing many smaller issues rather than trying to engage in massive change across the whole system at once, and this is a good example.
    The fact that prices for generic and over the counter drugs are actually much lower in the US than elsewhere suggests that competition can have a useful effect on drug prices in the US. The fact that US pharmaceutical companies spend more on television advertising than on research suggests that price discounting would not have a significant effect on drug development, which actually occurs primarily at public institutions, including universities and federal agencies like the NIH.
    Differences in hospital staffing and staffing costs are harder to address. The most recent good comparative data I can find is from the early 90’s. It does show that staffing in other countries was significantly lower, on a per bed basis, than in the US, ranging from about 88% (Britain) to as low as 50% (France, which has recently been trying to increase hospital staffing.)
    However, this information is complicated by other facts.
    First, many other countries have more organized distribution of resources than the US, employing patterns of regionalization which lead to providing high tech treatment and diagnosis in fewer hospitals and centralizing high tech services, allowing greater staffing efficiency.
    Second, because of that pattern and other issues, hospitals in other countries tend to be smaller on average, with many local low tech centers with fewer numbers of beds. There is a paradoxical inefficiency in larger hospitals caused by the need for much larger support service staffs. For example, dietary in a small hospital may require only a couple of people, while dietary in large hospitals may require dozens or even hundreds of people. Larger hospitals may require additional layers of bureaucracy to deal more complicated transmission between parts of the hospital, as well as additional supervisors to deal with the larger staff. The same study I found citing the overall country comparisons also found that on average small hospitals required less than half as many staff people per bed compared to larger hospitals.
    Third, a related issue in the US of competition between hospitals leading to duplication and underutilization of services causes higher overall use of staffing as well. A hospital that is in competition with other nearby hospitals offering the same services faces additional costs from duplication of facilities and often faces inefficiencies caused by relative underutilization of beds and resources. Staff has to be maintained even if utilization falls below ideal levels, since to abandon staffing is to limit the availability of services and lose in competition.
    However, I believe that the biggest cause of increased staffing in the US is increased use of high tech management. A system that routinely uses high tech management much more often must provide the staff to make that management available. The fact that 70% of the coronary artery bypass surgery done in the world is done in the US creates large numbers of staff positions required to provide OR services, post op ICU care, and to deal with complications. In addition, this service is supported by cath labs, nuclear cardiology labs, stress labs, echo labs, and so on. The same idea applies to heavier use of CT, MR, and other high tech facilities, more aggressive use of IV chemotherapy, and so on. All of these services require having many more staff people available for more hours a week than would be necessary if we used less.
    This pattern of what I – and many scientific observers – consider to be overuse of high tech in the US adds a huge amount of cost, and part of that cost is additional staffing.
    When we also consider the fact that management patterns for chronic disease in the US result in increased utilization of ER’s, ICU’s, and hospital admissions compared with patterns elsewhere that result in keeping patients healthier, allowing more outpatient treatment and causing hospital admissions to have lower levels of acuity, we find one more reason why US staffing would need to be higher.
    In addition, US hospitals employ many more people to perform billing services and related functions necessary to deal with the tremendously greater complexity involved in billing caused by our complicated reimbursement system. Some countries employ almost no billing people, and in all others the numbers of billing people are much fewer. For example, it is not uncommon in the US for ER’s to employ several people whose only job is to see that new patients are slotted into the correct billing systems to avoid having large numbers of patients with no compensation. Improving billing processes, including improving efficiency in dealing with private insurers and making Medicaid work better would reduce costs and staffing.
    (One side note: although US hospitals tend to have more overall staff per bed, a lot of that staffing is in the form of non-nursing staff, especially technical staff involved in high tech management, supervisory staff, and billing staff. In many cases they use fewer nurses per bed, especially in high intensity settings. This is an attempt to save money in order to cover costs elsewhere. There has been a lot of research suggesting that US hospitals are understaffed with nurses, including compared with other countries, and that this results in higher numbers of complications and even deaths.)
    I doubt that for the time being we will be able to effect inefficient patterns of regional health care and duplication by competing institutions. I think that those patterns are too ingrained in US health care to be addressed easily. We may be able to get to that problem at a later time, but not now.
    I think, coming back to a familiar note, that what we can do is address individual practice standards, changing them to provide more effective and more cost effective care. Part of that may result over time in increased efficiency of staff use.
    In addition, we have seen changes in management instituted in the past – especially the introduction of the DRG system and the increased use of outpatient and short stay management that marked health care reforms in the 80’s and 90’s and resulted in lower costs – cause hospitals to decrease costs fairly impressively. Application of better and more efficient standards of care would probably result in some decrease in size of many hospitals over time, as well as decreases in high tech equipment.
    This would, of course be offset to some extent by increased access to care by large numbers of people who benefit from universal care. However, the application of better management to larger numbers of people would still result in increased efficiency on a per patient and per bed basis.
    I would be interested if you have any specific information on this that you would like to share.

  40. Pat,
    Thanks very much for your answers to my questions about drug prices and hospital costs.
    Regarding proprietary drugs, I think the companies believe the money they spend on DTC advertising and marketing to doctors more than pays for itself in higher sales. If DTC advertising were eliminated and the number of drug detailers were significantly reduced, costs would be cut by billions but sales would probably decline even more which makes me question the industry’s ability to absorb lower prices per pill / dose if they did that. Moreover, I think if that happened, combined with drug price negotiation here by CMS with private insurers following along, the industry would probably be able to argue successfully that they need higher prices from Europe, Canada, Japan, Australia, etc. to mitigate lower prices in the U.S. When all is said and done, U.S. prices may not decline as much as you and others think they would or should. Regarding innovation, from what I can see, the trend in new drug development is toward biologics (especially to treat cancer) and away from chemical compounds as the industry gradually shrinks the number of chemists it employs while increasing the hiring of biologists.
    Your analysis of hospital costs is the best I’ve seen. I’m not aware of any data or studies that deal with this topic in the way you did, especially in comparison to hospitals in other countries. It’s going to be a huge challenge to squeeze out the wasteful utilization including over reliance on high tech management. With widespread implementation of electronic records, it should be easier to track utilization, not only by specialists and hospitals but by referring primary care physicians. If we can incorporate risk adjusted utilization into payment policy (a variant of P4P), the PCP’s should, at the very least, have a greater incentive to learn who the most competent and cost-effective specialists and hospitals are and do everything they can to avoid sending patients to the high utilizers.
    Your discussion of the diseconomies of scale in large hospitals vs. smaller facilities makes me wonder if the same phenomenon also applies to large multi-specialty group physician practices. I remember a doctor on another blog a year or so ago claiming that economies of scale tend to evaporate once the practice reaches five or six physicians. After that, the complexity of the organization requires additional support staff while supplies and equipment are not a large enough percentage of the cost structure to afford any advantages from being able to buy in larger quantities than solo or small group practices can. In addition, a wide range of capabilities under one roof should make it easier to refer patients to specialists to drive revenue and more convenient for the patient. I remember reading about the infamous NYC Medicaid mills in the 1980’s that basically ping ponged patients down the hall from one specialist to another to drive revenue whether they needed to see them or not.
    I think your “brick by brick” approach makes a lot of sense, along with tort reform, insurance billing standardization, and drug and device price negotiations. However, given the power of doctors generally and the point made by both of us that doctors’ decisions to order tests, prescribe drugs, admit patients to the hospital, consult with patients and perform procedures themselves drive the vast majority of healthcare spending makes me think that squeezing out the “waste” in the system is going to be harder and take longer than most people think. The process could be helped along, however, if CMS can identify services, tests and procedures that are not cost-effective and either refuse to pay for them altogether, except, perhaps under very limited circumstances or vary co-pay requirements like we already do for prescription drugs. The Congress would also have to ignore the pleadings of lobbyists and support CMS in such an effort.

  41. US hospital stays are much shorter, with the charges per day much much higher than anywhere in the western world.

  42. Hello Maggie:
    I found this through THCB. Very helpful.
    One thing confuses me though: After reading a lot of Marcia Angell and reading posts here and at THCB, it seems like several people think something like [I hate to say it] “single payer” might make a lot of sense.
    Is it really just the phrase people hate so much or is it the way the proponents always write their comments in CAPS!!!? 🙂 I am only partially kidding. I live in CA where HR 810 proponents say we will get a new guvernator to sign it.
    Maybe it should be called “GetTheForProfitEntitiesOut” plan.

  43. Hospital stays are longer in other countries and there are more hospital admissions in other countries. There are also more doctor visits in other countries while again the costs involved are much higher in the US.
    Many countries appear to use hospital admissions more for what we would call observation or minor tune-ups, and doctor visits tend to be to primary care doctors and again be low intensity in terms of management.
    The key to this whole question is that the US uses much higher tech approaches to health care than almost anywhere else (there are some exceptions in the way Japan uses imaging.) Unfortunately, this actually leads to worse results.
    In order to fix US health care we need to focus on results, not process. We need to collect information that will allow us to do that. If we do, I suspect that we could make health care universal, make health care more effective, and save enough money to bring our costs in line with the higher cost foreign countries.

  44. Barry, Pat Christopher and Roger
    Pat– Thanks for your reply to Barry-I think it answer most of his questions, so I’m going to weigh just to respond to his later message and question:
    No, large integrated mutli-specialty practices do not lose economies of scale becuause they are large.
    The problem with our large hospitals is that they are disorganized and often there is so little collaboration between docotors and betrween doctor and hospital. Often, many of the doctors who have privileges are in private practice; they don’t work for hte hospital, and don’t feel a need to particpate in the hospital’s attempts to create order with checklists or other attempts at improving systems. (If the hopsitals don’t like this, these doctors will take their patients elsewhere.)
    At large multispecialty centers doctors are usually on salary working for the center. These means more collaboration, better use of electronic medical records and As resereach has shown, large multispecialty systems offer the greatestvalue in term of outcomes and efficiency.
    Christopher– hospital stays in Europe are longer than in the U.S. but as Dr.Elliot Fisher points out “More happens to you when you’re in a U.S. hospital” — more tests, more procedures, more
    surgeries, and more specialits consulting, each ordering their own tests.
    This is one reason why each day in a U.S. hospital is so expensive.
    Roger Williams–
    Welcome–and thank you.
    I think people are weary of single payer advocacy because advocates tend to insist that his is “the only way” to get to single payer (ignoring the fact that a hybrid system could also take us there–if ultimately most people chose the govt’t plan.
    And secondly, single payer advocates won’t accept the fact that most people who have employer-based insurance don’t want to give it up
    If you poll them ask them “do you want universal insurance” they’ll say yes. If you explain that means they have to give up their employer-based insurance, they say no.

  45. Barry, Pat Christopher and Roger
    Pat– Thanks for your reply to Barry-I think it answer most of his questions, so I’m going to weigh just to respond to his later message and question:
    No, large integrated mutli-specialty practices do not lose economies of scale becuause they are large.
    The problem with our large hospitals is that they are disorganized and often there is so little collaboration between docotors and betrween doctor and hospital. Often, many of the doctors who have privileges are in private practice; they don’t work for hte hospital, and don’t feel a need to particpate in the hospital’s attempts to create order with checklists or other attempts at improving systems. (If the hopsitals don’t like this, these doctors will take their patients elsewhere.)
    At large multispecialty centers doctors are usually on salary working for the center. These means more collaboration, better use of electronic medical records and As resereach has shown, large multispecialty systems offer the greatestvalue in term of outcomes and efficiency.
    Christopher– hospital stays in Europe are longer than in the U.S. but as Dr.Elliot Fisher points out “More happens to you when you’re in a U.S. hospital” — more tests, more procedures, more
    surgeries, and more specialits consulting, each ordering their own tests.
    This is one reason why each day in a U.S. hospital is so expensive.
    Roger Williams–
    Welcome–and thank you.
    I think people are weary of single payer advocacy because advocates tend to insist that his is “the only way” to get to single payer (ignoring the fact that a hybrid system could also take us there–if ultimately most people chose the govt’t plan.
    And secondly, single payer advocates won’t accept the fact that most people who have employer-based insurance don’t want to give it up
    If you poll them ask them “do you want universal insurance” they’ll say yes. If you explain that means they have to give up their employer-based insurance, they say no.

  46. Of course the private sector can not compete with a government program because the private sector cannot run at a deficit year after year like Medicare. I’m glad you agree Medicare is broken but the answer is not to fix it and then put everyone on it. Since when does standardization work for anything, let alone healthcare? Forcing everyone into a one-size-fits-all health plan will not help anyone, especially those with specialized needs. A consumer driven system makes the most sense but it is also more work than just sticking everything under a government umbrella…

  47. Looks like the insurance companies will come and say they’ll cover everyone and no pre-exsiting clauses.Then What? Will this work without a public plan to compete?

  48. Jenny F & Ray
    Jenny F– Medicare is not funded by deficit spending. And once it is reformed, it will be on solid footing financially.
    Nor will it be offering “one-size-fits-all medicine.” The President has just set aside a large fund for comparative effectieness research so that we can figure out which treatments work best for Patents Who Fit A Particular Profile.
    Yes, the insurers will offer to take everyone (they are licking their chops at the prosect of all of those new cusomters, coming to them with govt subsidies in hand) but so far, they have not agreed to charge everyone in a given community the same price for the same policy.
    They will probably want to charge sick customers much more –which means they will need larger subsidies.
    Finally, even if insurers agree to charging everyone in a community the same amount, they need to be regulated in many other ways:
    For example, They need to be told what Must be covered. (If we have a public sector alternative, that’s easy– at a minimum they most cover everything that Medicare for Everyone covers–with the same deductible and co-pays. Otherwise, if private insurers didn’t cover, say knee replacements, everyone who needs a knee replacement would go to the public plan, making it much more expensive. The private insurers can’t have low-premium, high-deudtible plans because they would be likely to siphon off young people from the general pool . . .
    Basically, if Congress has a public plan to protect from unfair competition (so it won’t become too expensive for tax-payers) then Congress will have to regulate insurers pretty tightly. If it doesn’t have a public plan to protect, I don’t trust Congress to regulate the insurance industry. Lobbyists will make deals with Congressmen, and insuers will do everything possible to make as much money as possible while providing as little ccverage as possible.

  49. Maggie:
    If Medicare is not funded by deficit spending, then how is it funded?
    The payroll taxes that are intended to be earmarked for Medicare are, instead, spent on other government expenses.
    Treasury bonds (debt) are issued in lieu of this hard-earned cash.
    Treasury bonds is debt that the Treasury owes to the Medicare Trust fund.
    This debt does not increase the current budget deficit, for, from the government’s perspective, somehow, a corresponding asset is created when the bonds are issued.
    The Medicare Trust fund “surplus” actually “reduces” the current deficit.
    From an accounting perspective, the current deficit is not increased until the current expenses exceed the current income in the Medicare Trust fund.
    However, the total debt is increased when these Treasury bonds are issued.
    Sounds complicated, doesn’t it?
    When an important issue like this is made more compicated than needed, it’s usually to keep the public confused.
    Don Levit

  50. Don–
    You are entirely right;
    Medicare funds have been
    “borrowed” to pay other
    government expenses.
    And then Treasuries have been issued as IOUs’ to the Medicare Trust Fund.
    I don’t consider this as deicit spending that is financing Medicare–it is financing other government expenses.
    But it certainly was a terrible idea.
    Going forward, I don’t see this administation continuing this practice.
    Not the sort of thing that
    Peter Orszag would approve.
    He understands that Medicare needs to be on a sound financial footing.
    Medicare spending has to be reined in so that taxes and the trust fund can cover it. And Medicare funds should not be up for grabs.

  51. “Medicare spending has to be reined in so that taxes and the trust fund can cover it.”
    Maggie and Don,
    I think we’ve discussed this before, but the 2.90% Medicare portion of FICA taxes, split evenly between the employer and employee and applied to all wages, finances only Medicare Part A (hospitalization) which accounts for roughly half of Medicare’s program costs. Part B (non-hospital costs except prescription drugs) and Part D (prescription drugs) are both financed 75% by general federal revenues and 25% by beneficiary premiums. All programs financed in whole or in part by general (non-dedicated) federal revenues are partly deficit financed by definition as long as federal expenditures exceed tax revenues as they do now by a large margin.

  52. “In order to fix US health care we need to focus on results, not process
    Pat S I couldn’t disagree with you more. The result of our healthcare experience was successful, couldn’t have had a better outcome. The process to get there was as backwards and useless as a football bat.

  53. Lisa —
    I see what you are saying, but I think we are saying much the same thing.
    When I say “outcomes” I mean comparative outcomes. The winners of comparitive outcome studies are the management patterns that reach the goal — a successful outcome — in the safest, shortest, most direct, and least expensive way.
    Doctors in the US tend to get absorbed in the idea of the elegance, beauty, and theoretical sophistication of their processes — making complicated high tech approaches seem the best way to approach a problem. Who would not think that “fixing” diseased arteries with surgery or interventional techniques wasn’t better than “just” treating the patients with medicine while leaving the underlying problem untouched?
    Health care systems in other countries, which are often subject to the advice and regulation of standards boards, tend to focus on what the outcomes are: is the outcome equal to or better than other approaches? For example, the greatly reduced use of coronary artery bypass and coronary artery dilation and stenting in most other countries is a direct result of data that shows that more conservative medical treatment results in the same or better results.

  54. Barry:
    Excellent point about the deficit financing.
    I read today that the average benefit for a Medicare beneficiary is $10,460, of which is paid for by $4,346 of payroll taxes, $1,212 of premiums paid by beneficiaries, and $849 from other sources.
    The balance of $4,053 is financed from general revenues.
    I understand that none of the payroll taxes actually go into the Trust fund.
    If that is the case, the liability is even higher, save for the accounting device which produces a “wash” when one government agency borrows from another.
    Don Levit

  55. Don, Jenny, Maggie —
    Medicare financing is very complicated indeed, as Barry noted in another spot.
    Part A is financed by the Medicare tax. It currently runs a surplus. That surplus is stored in the form of US T-bonds. It could be stored in any form, but, as almost everyone has learned in the last few months, if you want to be sure you will see your money again, T-bonds are the way to go.
    The money taken in by the treasury in exchange for the T-bonds is indeed used to fund deficit spending. This idea has been popular with every administration since Johnson, but was especially popular with Reagan and Bush II, who used social security and Medicare surpluses to help finance massive deficits.
    However, to suggest that Medicare Part A is financed by deficit spending is currently incorrect. It may become correct if the money in the fund is exceeded in the future, but not now.
    However, Part B and Part C (Medicare Advantage) are another story. They are funded by a combination of subscriber payments and funding from general revenues. In the sense that any spending from general revenues is part of deficit spending, Medicare B and C are funded partly by deficit spending. So are all federal programs, including military spending, that are not funded by dedicated taxes or fees.
    It is also true that almost any form of univeral coverage, including a theoretical universal coverage program based entirely on private insurance, would be partly funded by general revenues and as such would involve “deficit spending.”
    However, it is very important to note that Medicare is not the only part of the health care system that is “broken.” Private insurance, in that it fails in being able to provide for coverage for everyone, often fails to provide workable coverage for an even larger group, costs the earth for the combination of employers and individuals who pay for it, and since a period in the late 80’s and early 90’s when it followed the lead of HMO’s has failed to do any kind of job in control of costs and the growth of costs, is certainly broken as well.
    When blame for the “broken” state of US health care is being assigned, every player — Medicare, Medicaid, the federal and state governments, private insurers, doctors, hospitals, other providers, the drug industry, the medical equipment and supply industry, and agencies charged with the attempt to supervise the whole mess — is guilty.
    When we are talking about “fixing” the health system, we need to keep that in mind, and be willing to use any tools at hand to fix it.

  56. Barry & Don–
    To say that part of Medicare is financed by “deficit spending” is true insfar as all government spending that dips into general revenues is financed by deficit spending.
    But that’s simply to say that our federal government runs a deficit.
    And up to a point, that’s not a bad thing. (We’ve gone well beyond that point–thanks to the open-handed and wasteful spending of the last administration.)
    Pat S.–
    Thanks for the very clear description of how all govt spending that comes from general revenues is part of “deficit spending.”
    To me, this is very different from saying “Medicare is running a deficit”–which is isn’t. Though if we wait 10 years, Medicare Part A will get there.
    And yes, Medicare is no more wasteful than private insurres. The insurers did a significantly better job of containing costs for four years (1993-1997) when HMOs were managing care. But, often they didn’t manage care wisely.
    Rather than asking: is it effective? then only looked at cost.
    Over all, from 1970 to 2003 Medicare has done just slightly better in controlling costs, with spending rising an avearge of about 8% a year vs. 9% a year for private insuers.
    But the slight difference realy doesn’t matter. Whether it’s 8% a year or 9% a year, it’s runaway inflation and simply unaffordable.
    And finally, all of the parties you name are responsible for the current mess. That’s what my book is about. Though you have left one one group: patients.
    On the whole, patients do not drive healthcare spending–certainly not the big-ticket items. They simply follow their doctors’ orders when he tells them that they need to be in the hospital, undergo a certain procedure, etc.
    But many U.S. patients have become accustomed to being overtreated. They do not understand that more care and more expenisve care is not necessarily better care. And they beocme quite indignant if you talk about cutting back on unnecessary care.
    They also don’t like hearing that their doctor may be wrong.
    True healh care reform will require a huge amount of education–another reason why it will take time.

  57. Maggie:
    I came across some information today which seems to confirm similar material I have from the Treasury Department.
    This is from the Social Security web site, and can be found at:
    Under “trust fund (OASDI and Medicare). Four separate accounts in the U.S. Treasury in which are deposited THE EQUIVALENT of taxes received under FICA, SECA, contributions dealing with coverage of state and local government employees, etc., and transfers of federal general revenues.”
    The key question, imo, is “What is the substantive difference between general fund transfers and the equivalent of FICA, SECA,taxes etc.?”
    I say very little, for both transactions are financed by Treasury bonds (debt).
    Don Levit

  58. Don Leavit —
    I am very confused by your discussion of treasury bonds and social security and Medicare.
    Social security and Medicare are BUYERS of treasury bonds, not ISSUERS of treasury bonds. The treasury bonds do indeed represent federal debt and are part of deficit spending, but Medicare as a buyer of treasury bonds is no more engaging in US government deficit spending than other buyers of treasury bonds, be they you, me, or the government of China.
    I will grant that the decision to blend spending and revenue for self financed programs into the general budget (made by LBJ to conceal costs of the Viet Nam war but followed by every president since) creates a misleading accounting of government spending. It makes deficits look smaller, sometimes creates apparent surpluses when there are none, and makes military spending seem a much smaller part of the activity of the government financed by income taxes and deficits than it really is.
    I am not an accountant and do not understand some accounting rules, but it seems to me that placing money in a savings account, even a savings account whose assets are treasury bonds, does not count as deficit spending.
    I agree with Barry’s contention that the spending in Medicare Parts B, C, and D is partly supported by deficit spending, since it is not covered by the payroll tax. But suggesting that Part A’s treasury bond assets are deficits is confusing me. The fact that the money is freed up to finance the war in Iraq does not seem to make Medicare a deficit spender, but rather the US military.

  59. The issue of the bonds held by federal trust funds such as Social Security and Medicare is a confusing one for many people. If you or I or the Government of China own Treasuries and wants to sell them, the aggregate amount of federal debt held by the public does not change. When one of the federal trust funds needs to sell bonds to meet obligations like Social Security or Medicare payments that exceed current year dedicated taxes that finance them, which hasn’t happened yet, it will need to sell Treasury bonds, notes or bills to public investors in order to get the cash it needs to redeem the bonds held by the trust funds and pay its bills. When that happens, the total debt held by the public and the annual cost of servicing it (paying interest and redeeming or refinancing securities as they mature) rises. By contrast, when the Treasury adds special purpose bonds to a trust fund and adds annual interest to the trust fund balance, no taxes need to be raised and no securities need to be sold in the public capital markets. This is why critics don’t consider the special purpose bonds to be “financial assets” in the same sense that Treasury securities held by the public are.
    As Pat S notes, President Johnson started this accounting approach to conceal the cost of the Viet Nam War and every president since continued the practice because it makes the annual deficit look smaller and reduces the amount that needs to be raised from income taxes and other non-dedicated taxes.
    Personally, I view spending the annual trust fund surpluses on other government programs and issuing special purpose bonds in their place as similar to an individual putting an IOU in his child’s college savings account each month instead of depositing actual cash into a money market fund or stock mutual fund. When the child reaches college age, the parent is going to have to find actual cash or assets (like equity in a home) that can be borrowed against to pay college expenses. If actual cash were deposited to the college account each month as it was supposed to, borrowing to redeem the IOU’s would not be necessary. The downside is that if the cash were deposited each month, the family could not have spent as much or lived as well because it would not have as much cash available to fund its lifestyle. Similarly, if the federal government saved the annual trust fund surpluses as it was supposed to, it would have had to either raise other taxes or spend less on other government programs.

  60. Pat:
    You bring up two distinct issues: Deficit spending and debt spending.
    The reason that Medicare contributes to debt spending (increasing the total debt) is that the payroll taxes provide only its equivalent to the Trust Fund.
    The actual taxes stay in the Treasury, and are used for other general expenses, such as defense. The Treasury bonds (debt) are issued in lieu of the taxes.
    In other words, the government leverages the payroll taxes 100%, by issuing debt.
    There are 2 distinct forms of debt: debt owed to the public (investors, etc.), and the debt government owes itself (intragovernmental borrowing, such as in the Trust Funds).
    The interest on the public debt is an expense in the budget.
    The interest for intragovernmental debt is not relevant, for accounting purposes, for with intragovernmental debt, an asset is created with the corresponding liability.
    The asset can be nothing other than intangible goodwill, the full faith and credit of the U.S. government.
    That is why the interest on intragovernmental debt, although almost as high as public debt, is not considered a current budget expense.
    Of course, we haven’t even discussed paying back the principal, but are principles even relevant?
    Don Levit

  61. Don and Barry —
    We can discuss whether the “full faith and credit” of the US government has a “sometimes” clause in it or not for a long time. I tend to think that any defaults on t-bonds, even to other government agencies, would create a new world of pain that would make what we are going through now look mild.
    Meanwhile, I would favor a better accounting of spending that did not mix the money from the self-funding taxes with general revenue. It would make clear to everyone where the lion’s share of the income tax goes, as well as where the lion’s share of the debt has come from. A world in which people were clearly told “your income tax dollars are going mostly to military spending, military related spending, and interest on debt accumulated due to military spending, not on paying for fictitious welfare cadillacs” would be a more honest world in which people might make better decisions.

  62. Dr. Pat,
    I don’t think we need to worry about defaults on the special purpose bonds. I do think it is probable, however, that, over time, entitlement programs will be changed in myriad ways to reduce their long term costs and make them more sustainable. The Social Security program was changed following the Greenspan Commission in 1982. FICA taxes were raised in several steps while the retirement age for full benefits was increased from 65 to, ultimately, 67 by 2027. Higher income Medicare beneficiaries started to pay more in Part B premiums starting in 2007 and fully phased in this year. There is consideration of doing the same thing for Part D. Healthcare reform, including (hopefully) substantive changes in payment policy led by CMS could materially reduce Medicare’s long term cost (from what it would have otherwise been) while the Medicare portion of FICA taxes could also be raised to some extent if necessary and if we want to continue to finance Part A solely with a dedicated tax.

  63. Barry, Don, Pat.S
    Thanks for continuing the comments t onhis very interesting thread.
    Don & Pat S.: I agree with Pat S. when he writes that “Medicare as a buyer of treasury bonds is no more engaging in US government deficit spending than other buyers of treasury bonds, be they you, me, or the government of China.”
    Barry– you write that you expect entitlement programs to change in many ways, and note that “The Social Security program was changed following the Greenspan Commission in 1982. FICA taxes were raised in several steps while the retirement age for full benefits was increased from 65 to, ultimately, 67 by 2027.”
    I would note that 1982 was the beginning of one revolution, 2009 is the beginning of another, going in the opposite direction.
    i also expect changss in our attitude toward entitlement programs, but I suspect –specially in the context of this very deep recessio– ghg ,many Americans are going to be more and more interested in weaving a tight social safety net.
    While the Japanese eoonomy has suffered a long and deep recession, its people have not suffered greatly.
    Similarly, today Europans are not nearly as vulnerable as Americans. Their governments have made sure that they have healthcare, education, housing–whatever the state of the eocnomy.

  64. Pat:
    I agree with you that we need more transparency and clarity between the self-funding taxes and the general revenue portion for funding Medicare.
    I read today the 2008 Annual report of the Boards of Trustees for Medicare.
    On page 195, is written “The trust fund perspective reflects both categories of revenues for each trust fund. For the Hospital Insurance, revenues from the public plus transfers/credits from other government accounts exceeded total expenditures by $16.4 billion in 2007.
    The footnote explains that “Surpluses of revenues from the public over expenditures to the public are invested in special Treasury securities and thereby represent a loan from the trust funds to the general fund of the Federal Government. These loans reduce the amount that the general fund has to borrow from the public to finance a deficit.”
    So, the report seems to be saying that the surplus in the Trust Funds which is represented by the special Treasury securities are loans from the Trust Funds to the Federal Government.
    Instead of borrowing money from the public, the Trust Funds are borrowing money from the Federal Government.
    These are very special loans, however – very different from the loans you and I understand. As Barry Carol explained,
    these loans are not paid back until the surplus is eliminated.
    And, they are paid back only to the extent the Treasury securities need to be redeemed to pay current benefits.
    So, the full extent of the loans is minimized and not fully reflected until many years after the loan is originated.
    How’s that for clarity and transparency?
    Don Levit

  65. “So, the full extent of the loans is minimized and not fully reflected until many years after the loan is originated. How’s that for clarity and transparency?”
    The trust funds are also credited each year with an appropriate interest rate on their special purpose bonds. So, when we reach the point where current year benefits exceed revenue from current year dedicated taxes, the Treasury needs to redeem enough special purpose bonds to close the gap between revenue and benefit expense for that year. Generally, it will need to sell bonds, notes, or bills to public investors to do that except, in rare instances, when surplus revenues in the consolidated budget can make up the shortfall.
    On the issue of transparency, I think dedicated taxes are a good way to finance programs like Medicare and Social Security because it allows people to see the costs in their payroll withholding of FICA taxes each week, month or whatever pay cycle they are on. Similarly, charging for such services as drivers licenses, car registration, hunting licenses in order to fund those services improves the efficiency of resource allocation. The gas tax to fund transportation projects and highway tolls to cover the cost of bonds to build and then maintain highways are another example of dedicated revenues.
    With respect to healthcare, I think Dr. Ezikiel Emanuel is on the right track when he proposed a dedicated Value Added Tax to fund healthcare vouchers. While I would prefer a payroll tax approach myself, a highly visible and dedicated tax will help the average person to better understand how much healthcare costs and how much he or she is personally paying for it. By contrast, funding via general revenues keeps the cost hidden which helps to fuel demand because too many people either think someone else is paying on their behalf or they don’t understand how much they are paying personally. The bottom line is that while trust fund finance may be a bit hard to understand for the average person, the dedicated tax that underlies it is actually a good idea for these particular programs. By contrast, general revenues (personal and corporate income taxes at the federal level) are, in my view, a more appropriate way to fund defense, law enforcement, and means tested programs that serve the poor.

  66. The way I read it the trust funds’ relationship with the treasury is that it is similar to my relationship with the mutual fund that held the money I saved to pay for my kids education:
    the money was invested in the fund, interest/profits were reinvested in the fund for greater yields, and money was taken out only as it was needed to cover costs of education.
    It worked perfectly.
    I have some problems with VAT since it collects a larger percentage of income from lower income people than higher income, although it certainly collects more actual money from higher income folks. Also, although all taxes produce less revenue in down economic cycles, VAT tends to fluctuate even more severely because to some extent there is a voluntary aspect to the tax, especially for higher income people. Since high income people’s spending has a much higher elective component, they tend to pull back during poor economic times.
    I agree with the idea of a dedicated health tax. I just would like to see it as a seperate part of income tax, similar to the NYC income tax added on top of the NY state tax.

  67. Pat:
    The money in the mutual fund is a privately owned asset, your asset.
    In contrast, the money in the Trust Funds is owned by the federal government.
    When Social Security was passed, the adherents had certain worthwhile objectives.
    For example, In recommending that Social Security be financed through payroll taxes, the Committee on Economic Security explained “contributory annuities are unquestionably preferable to noncontributory pensions. They come to the workers as a right, whereas the noncontributory pensions must be conditioned upon a means test.”
    As President Roosevelt explained “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions.”
    The Advisory Council believed “The method of financing Social Security by dedicated taxes has given the system considerable protection from having to compete against other programs in the general budget.”
    These worthwhile goals are in stark contrast with how Social Security and Medicare actually operate.
    According to the Fiscal Year 2008 Financial Report of the U.S. Government, On page 33, it states “that the dedicated payroll taxes are merely credited to the trust funds. “THE TRUST FUND BALANCES DO NOT REPRESENT CASH.”
    Page 96 “The term Trust Fund means only that the law requires that a Particular fund be accounted separately.
    Does this sound like the government takes its responsibilities seriously, in order to give the citizens a moral right to collect their benefits?
    Are the payroll taxes really dedicated so that the citizens have considerable protection from having to compete againt other programs in the general budget?
    Don Levit

  68. My observations:
    1.) Given the collapse of many personal retirement plans in this recession, social security will be paying generous benefits in the foreseeable future, since any politician opposing that will need new employment soon.
    2.) The US cannot default on its obligations, including the obligations to the endowment programs, since to do so would cause havoc in credit markets that would make the last year seem mild.
    3.) Given that, the US is going to have to figure out how to pay its obligations under social security. There is some possibility of more cuts in benefits, but that would be hard politicaly. Raising the cap on social security payroll tax to cover more income would be another alternative. Obama has endorsed using that approach, and suggested an interesting wrinkle whereby income between the current cap and about $250,000 would be exempt, with taxes resuming above that to some unspecified level. Then social security could continue to be self financing and the “trust” fund could be left alone for another period of time.
    Barry and I have already agreed that the popular talk radio spector of the US defaulting on its social security obligations is unlikely, since the political and economic ramifications would be drastic.
    Medicare is another issue. It is less well funded and is due to exceed its ablility to pay its responsibilities much sooner than social security.
    One of the potential benefits of Medicare Part E would be to increase the supply of money going to Medicare from payments by or in the name of the insured. Since many of these customers may possibly use much less health care than typical Medicare enrollees do now, there is some possibility that they could generate some surplus in the program. For this to work, of course, we would need a level playing field that stopped private insurance from dumping poor risks on the public plan.
    I will say that the idea of a voucher plan, even using VAT to finance it, would help all that to become a reality a lot sooner.

  69. Don, Barry & Pat
    For the U.S. to default on SS would send a signal to the rest of the world that we cannot afford to send.
    The dollar would tank. Say good-bye to the U.S. standard of living.
    No politician is going to let SS go under. No poitiicans is going to let Medicare go under.
    And Pat is right: people age 55 to 65 who lost 40% of the savings in their 401-k are not going to get most of that money back.
    Many have already sold, taking large losses. It’s unlikely that they will be able to get the timing right and get back into the market at the right time. Many have been so badly burned that they’ll never go into the stock market again.
    These people are going to need SS and Medicare –just to survive.
    SS needs only a minor fix.
    Obama’s idea of beginning to tax income over $250,000 is a good one.
    Medicare costs can be reined in. As I keep saying, it’s the inflation that is the problem.
    IF we cut much of the obvious waste that I, Dr. Pat, Barry and others have written about on HealthBEAT
    we can cover everyone in the country for the money that we are now spending.
    Going forward, the trick will be to make sure healthcare inflation does not exceed GDP growth.
    Let’s say that over the next 15 years, GDP growth averages 2% to 3% a year.
    That means trimming healthcare inflation that now runs 7% to 8% a year by about 5%.
    Clearly, that’s possible if we a)take a close look at overtreatment and b) send a signal to the drug industry, the device industry, the hospital industry that we are not intersted in any more $100,000 drugs that give people a few more months of life (they should spend their resarch dollars elsewhere); that we are not interested in any artificial knees “made especially for women” that are no better than the plain vanilla knee and cost twice as much; that we are not intersted in hospitals that look like luxury resorts, and that we will not authorize any construction of new wings etc. without taking a close look at need and expected cost.
    Just as we need to send a signal to the auto industry (we want mid-size and small fuel-efficient cars) we need to send a signal to the healthcare industry (we want affordable care. Don’t bother investing in gold-plated care– we can’t afford it. We want the tpe of care people have in countries like Germany, Switzerland and France–where they have better outcomes, fewer frills and much less use of advanced technologies.)

  70. Don, Barry & Pat
    For the U.S. to default on SS would send a signal to the rest of the world that we cannot afford to send.
    The dollar would tank. Say good-bye to the U.S. standard of living.
    No politician is going to let SS go under. No poitiicans is going to let Medicare go under.
    And Pat is right: people age 55 to 65 who lost 40% of the savings in their 401-k are not going to get most of that money back.
    Many have already sold, taking large losses. It’s unlikely that they will be able to get the timing right and get back into the market at the right time. Many have been so badly burned that they’ll never go into the stock market again.
    These people are going to need SS and Medicare –just to survive.
    SS needs only a minor fix.
    Obama’s idea of beginning to tax income over $250,000 is a good one.
    Medicare costs can be reined in. As I keep saying, it’s the inflation that is the problem.
    IF we cut much of the obvious waste that I, Dr. Pat, Barry and others have written about on HealthBEAT
    we can cover everyone in the country for the money that we are now spending.
    Going forward, the trick will be to make sure healthcare inflation does not exceed GDP growth.
    Let’s say that over the next 15 years, GDP growth averages 2% to 3% a year.
    That means trimming healthcare inflation that now runs 7% to 8% a year by about 5%.
    Clearly, that’s possible if we a)take a close look at overtreatment and b) send a signal to the drug industry, the device industry, the hospital industry that we are not intersted in any more $100,000 drugs that give people a few more months of life (they should spend their resarch dollars elsewhere); that we are not interested in any artificial knees “made especially for women” that are no better than the plain vanilla knee and cost twice as much; that we are not intersted in hospitals that look like luxury resorts, and that we will not authorize any construction of new wings etc. without taking a close look at need and expected cost.
    Just as we need to send a signal to the auto industry (we want mid-size and small fuel-efficient cars) we need to send a signal to the healthcare industry (we want affordable care. Don’t bother investing in gold-plated care– we can’t afford it. We want the tpe of care people have in countries like Germany, Switzerland and France–where they have better outcomes, fewer frills and much less use of advanced technologies.)

  71. Pat:
    I agree with you that the government will not default on Social Security or Medicare.
    All it has to do is merely issue more Treasury bonds to cover any deficits between income and expenses.
    It would seem to me to be a no-brainer to do so, for the government has nothing to lose, at least from an accounting standpoint. The non marketable Treasury securities is an asset to the Trust Fund and a liability to the Treasury, for a net effect of zero!
    Regarding Medicare Part E, the payments to the Trust Fund would be in the name of the insured, not by the insured.
    The insured pays the taxes into the Treasury, which spends the insured’s hard-earned dollars on other governmental expenses.
    When one sees that there is no lock box on either the Trust Funds’ “surplus” or their contributions from payroll taxes, it puts the current stock market meltdown in a new light.
    While the stock market may have been reduced by 45%, the hard dollar assets in the Trust Funds have been leveraged 100% (remember, no assets set aside to fund future benefits).
    Even if the government had to make up the difference for the losses in the stock market, it would still be ahead of the game.
    Don Levit

  72. Don —
    I think you don’t understand what I mean by Medicare Part E. Part E would be a voluntary buy in program — a federal insurance option — under a universal coverage plan, and as such would collect a large amount of its income from private individuals and employers, although some from the government covering low income people. It is designed to fit into Obama’s universal coverage plan, under which some people would have their private insurance paid for by the government as well.
    It would be part of Medicare in that it would be administered by Medicare, would run its claims through Medicare, would share the fee schedule and qualifications system of Medicare, etc. However, it would run as a program competing for paying enrollees looking for a better deal than they could get from private insurance, and would collect fees accordingly.

  73. Pat:
    Thanks for correcting me on your vision of Medicare Part E.
    In regards to saving dollars for cost effective treatment, count me in as a supporter.
    We need to be just as careful in how we set aside dollars to pay for the benefits, even cost effective benefits.
    Right now, we’re not being good stewards.
    Don Levit

  74. Don–
    Yes beng “a good stewad” is what it is all about.
    I agree that the idea of stewardhip has gone out of fashion, in the public sector as well as among money-mansgers in the private sector.
    In the private sector, my favorite sources among money-mangers tend to be people over 60–ofen well over 60, As one of them
    explained to me: “We dressed up–wore white shirts and black suits, out of respect for the money–other people’s money.”
    More recently, the phrase “other people’s money” has become a joke.