Health Care Spending Spikes: Why?

You may have read that health care spending in the private sector picked up both in the fourth quarter of 2013, and during the first two months of this year. Recent data from the Bureau of Economic Analysis (BEA) show that during the last three months of 2013 spending on health care rose at an annual rate of  5.3%  The trend continued this year, with spending climbing 6.2%, on a year-over-year basis in January, and 6.7% in February.

This came as a surprise. Since December of 2007, after adjusting for inflation, health care outlays have been rising by only 2.6%  As former CBO director Peter Orszag observed in a Bloomberg column published yesterday,  “the sudden jump has led some some commentators to declare an end to the era of slower health-cost increases, which has lasted for the past several years. ”  Yet, Orszag notes, “Medicare spending growth is still low, even through last month. Indeed, in the first half of this fiscal year, nominal Medicare spending was only 0.6 percent higher than in the corresponding period a year earlier.”

Why Have Outlays Risen for Those Under 65, But Not for Seniors?

BEA suggests that the jump during the first two months of this year reflects the fact that, thanks to the Affordable Care Act (ACA),  more Americans had comprehensive insurance that gave them access to a wide range of services.

Those who became insured in January and February are the folks who signed up at the very beginning of the enrollment period. No doubt many of them had been postponing needed care for a long time. As soon as they were covered, they began visiting doctors, scheduling elective surgeries, and filling prescriptions.

Going forward, won’t the fact that more Americans are insured mean that health care spending will continue to rise? Yesterday, the Congressional Budget Office (CBO) released a report that said “No.” The ACA will cost about $1 billion less than originally projected, the CBO reported, even though we will be covering more people. This is largely because premiums on the Exchanges turned out to be lower than expected.

Spending Spike at the End of 2013 May Well Be Temporary 

The uptick in January and February can be explained by pent-up demand but Americans began layout more for healthcare “well before January,” BEA points out. How does one explain the surge in private sector spending in the final quarter of 2013?

Some observers suggest that the spike in health-care spending that we saw during the last three months of 2013 may have reflected the panic that spread during the months before the ACA kicked in.. The Wall Street Journal’s  ”MarketWatch” puts it this way:  spending  may have risen in the fourth quarter as consumers and companies prepared for the official rollout of the law on January 1. It might not  last.”

This makes sense.

My guess is that many people who knew that their policies were going to be cancelled in January used that insurance during the final months of 2013 because they didn’t know: a) whether they would find new coverage in their Exchange and b) whether they would like it as well as their old policy.

Keep in mind that in the final quarter of 2013, the Exchanges were not working well. Those who needed to sign up for new coverage were anxious, and the media was stirring the pot by telling them that, in the Exchanges, out-of-pocket expenditures would be sky-high. If you were thinking about having a hip replacement, you might well decide to schedule it in October, rather than taking a chance that under your new Obamacare policy, you would have to pay down a $10,000 deductible before your insurer laid out a penny for the surgery. Many people who couldn’t get through on the Exchanges didn’t even know if they would find new coverage.

In fact average deductibles and co-pays in the Exchanges would turn out to be relatively lowOnly bronze plans come with high deductibles (averaging $5,081 a year). And just 19% of Exchange shoppers wound up with Bronze plans.

 Sixty-two percent picked silver, and the  average Silver plan calls for a deductible of  $2,905–40% lower than the average Bronze plan– and roughly $700 less than the typical deductible in the individual market pre-Obamacare.  Gold and platinum plans ask for even less cost-sharing. Many offer “zero-deductible” coverage. But in the fall of 2013, relatively few people knew the facts. They only knew what they heard on Fox. . 

Meanwhile Americans who had received cancellation notices were worried, not just about out-of-pocket expenses, but about losing their doctors.  Reform’s opponents were warning that insurers selling policies in the Exchanges had created “narrow networks” of providers. Americans who bought new insurance might not be able to continue seeing the specialists they trusted. They might not have access to a hospital that they knew.This would be another reason to scheduled more appointments and procedures in the final quarter of 2013, while you could still use your old policy.

This also helps explain why Medicare spending did not rise in the final quarter of 2013: Medicare beneficiaries had little reason to worry about losing their doctors in 2014.

Going forward we may see another blip in healthcare spending as the newly insured receive care that they had deferred. But most of those who were anxious to see a doctor enrolled in the Exchanges in October, November and December, and began getting care in January and February. Those who signed up for insurance in during the final surge of enrollments are more likely to be young and healthy. My guess is that spending will slow next month.

 

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A New IOM Report Reveals Why Medicare Costs So Much (Hint–It’s Not Just the Prices)

George W.  Bush is 67. Chances are Medicare paid for the stent operation that I describe in the post above.  For years, medical researchers have been telling us that this procedure will provide no lasting benefit for a patient who fits Bush’s medical profile.   Nevertheless, in some hospitals, and in some parts of the country, stenting has become as commonplace as tonsillectomies were in the 1950s.

Location matters. Last month, a new report from the Institute of Medicine confirmed what Dartmouth’s researchers have been telling us for more than three decades: health care spending varies  across regions. More recently, as Dartmouth’s investigators have drilled down into othe data,, they have shown that even within a region, Medicare spends far more per beneficiary in some hospitals than in others.

In a recent Bloomberg column, former CBO director Peter Orszag notes that “Because this variation doesn’t appear to be reliably correlated with differences in quality, the value [that we are getting for our health care dollars] seems to be much higher in some settings than in others.” He asks the logical question: “What is causing this and what might we do about it?”

Some health care analysts claim that as a nation, we spend far more on health care than any other developed country because we over-pay for everything—from statins to surgery. (A landmark article that appeared in Health Affairs in 2003 put it this way “It’s the Prices Stupid!” )

Others put more emphasis on overtreatment. Up to one-third of Medicare dollars are squandered, physicians like Dartmouth’s  Dr.  Elliott Fisher, Boston surgeon Atul Gawade and former Medicare director Dr. Don Berwick argue.  As Fisher puts it, “hospital stays in the U.S. may not be as long as in some other countries, but more happens to you while you’re there.” (Note: the authors of “It’s the Price’s Stupid” also point out that care in the U.S. is “more intensive.”)

I agree that both theories are true: We have managed to devise a health care system where we both over-pay AND are over-treated. The  Institute of Medicine report that came out at the end of July supports this thesis.

              The Difference between Medicare and Commercial Insurers

The IOM report reveals that both Medicare and commercial insurers are spending about 40 percent more per patient in some areas and in some hospitals than in others. “This has persisted over decades;” Orszag observes.  “Regions that spent the most in 1992 tended to remain big spenders in 2010.”

But, he adds, “There is one important difference between Medicare and commercial insurance, the Institute found, and that is in the causes of spending variation. With commercial insurance, spending is higher in some areas because of markups — that is, the difference between the charge for a service and the cost of providing that service.

“Seventy percent of the variation in commercial spending was attributed to differences in markups, which in turn probably reflect local differences in market power among hospitals and other providers relative to insurance companies and beneficiaries.”

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The Independent Payment Advisory Board and Medicare Spending: New Research Suggests a Change in Our Medical Culture

Launch of the ACA’s controversial Independent Advisory Board– a  panel charged with  recommending ways to curb Medicare inflation — has been delayed until 2016. Does this means that the IPAB’s critics have won?

No. IPAB was, from the beginning, only meant to serve as a backstop. The law says that the board will be asked to recommend places where we could pare Medicare spending if—and only if—Medicare inflation begins to outstrip inflation in the rest of the consumer economy.

But over the past three years Medicare spending has decelerated; it is no longer growing faster than the economy as a whole. This is why Medicare’s chief actuary has decided to put IPAB on hold.

Some observers argue that as the economy recovers from the Great Recession, the nation’s health care bill is bound to climb. I disagree. Particularly in the case of Medicare, I don’t think that the economic downturn explains most of the slowdown. 

 I believe that reform is already having  an effect on health care inflation:  Four years of debate over the Affordable Care Act has made us more aware of the waste in our health care system. Patients are asking more questions, and providers know that they are going to be held accountable for that waste.

                                 We Still Need IPAB as a Backstop

That said, in the future, spending could pick up–and we may need IPAB. This is why President Obama has made it clear that he will veto any attempt to eliminate the Board.

It is important to know that IPAB exists, as a reminder to drug companies, device makers, nursing homes and others that, one way or another, we can no longer afford a system that is wasting $1 out of $3 of our health care dollars on over-priced, unnecessary tests and treatments that, too often, put patients at risk without benefits.

If, and when, IPAB is asked to recommend cuts it will use medical evidence to decide where to trim. IPAB is likely to recommend lower payments for certain services and products that medical research tells us are now “overvalued”–based, not on cost-benefit analysis, but on patient outcomes. If patients who fit a particular medical profile are not helped, Medicare should not cover the treatment for those patients.

As I have explained in the past, IPAB is not the panel of bean counting bureaucrats that Obamacare’s opponents suggest.  IPAB will not “ration” care; it is charged with making care more rational by letting Science–rather than lobbyists– decide what Medicare should cover.  Moreover, Congress can veto IPAB’s recommendations, if legislators can agree on  ways to achieve equal savings– without rationing care, or shifting costs to seniors.

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Join the debate on “Reining in Medicare Costs without Hurting Seniors”

The January 26 post below (“How to Rein in Medicare costs without Hurting Seniors“) has drawn some 43 comments (including mine, as I responded to readers). I thought of turning a couple of my replies into posts, but then decided it might be more interesting for you to read them in the context of what other readers said.

I would love to see more readers participate in this thread. Comments are still open.

It’s a lively thread that takes on a number of third-rail issues: Does Medicare spend too much on pricey cancer drugs, end-of-life care and brand name hospitals?

 Should we try to spend less on end-of life care? Many say “Yes,” but Zeke Emanuel (a medical ethicist and oncologist who was part of the Obama team during the president’s first term), says “No.” I link to a column where he notes that “It is conventional wisdom that end-of-life care is an increasingly huge proportion of health care spending. . . Wrong. Here are the real numbers: end-of-life care (not just for the elderly, but for all Americans) accounts for just 10% to 12% of  total health care spending. This figure has not changed significantly in decades.”

He goes on to suggest that while we probably can’t make end-of-life “cheaper,” we can make it “better . . .  Here are four things the health care system should do to try to improve care for the dying, even if they won’t save money.”

A number of readers comment on what is driving Medicare spending. Is it “patient expectations,”  “doctors’ fear of litigation,”  “regulations that dictate nurse-staffing ratios,” “practice patterns that doctors learned long ago,” or is the biggest problem “promotional efforts by manufacturers?”

Other questions come up: Does anyone really have any idea how much Medicare will cost in 2022?  By then will Medicare have begun negotiating with drug-makers and device-makers for discounts on drugs (the way the VA does now, saving 40%)?  How far will Medicare go in using medical evidence to decide what to cover?

One doctor/reader points out that in his field Medicare has begun to refuse to pay for procedures when research shows that they are not effective. He and another reader agree that in this way Medicare can provide “political cover” for private sector insurers who will follow Medicare’s lead.

We also discuss the deficit, and whether we should be trying to address the deficit now — or wait until the recession ends and unemployment falls. Also, is the deficit already dissolving as CAP suggests? 

And is the deficit our biggest problem? On this question, you will find links to Paul Krugman, Peter Orszag (who analyzes the slow-down in health care spending over the past three years as a “structural change, not just the result of the recession) and Ezra Klein,

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U.S. Media Loves “Fiscal Cliff” Metaphor; The Economist Recognizes that It’s An Imaginary Line in the Sand

In the U.S., pundits cannot resist the fiscal cliff metaphor: it’s colorful, punchy and easy to understand. It’s just two words long. What’s not to like?

It’s not true.

The metaphor assumes that if Republicans and Democrats fail to reach an agreement on the budget by the end of the year, the U.S. economy falls over a cliff,  crashes, and burns.  The “cliff “metaphor complements the equally imaginative “iceberg metaphor” that some fear-mongers use to portray the deficit. (Think Titanic) 

It’s all a bit more complicated than the metaphors suggest.

What few conservatives mention is that the deficit has already begun to dissolve:  since 2009 the deficit has fallen from 10% of GDP to 7% in the fiscal year that ended on September 30th.  By historic standards this is still enormous, and must be addressed. But  the numbers demonstrate that, over time, we can reduce the deficit without renting the nation’s safety nets.

As for the cliff, there is no precipice—just an imaginary line, drawn in the sand, as Republicans and Democrats play “chicken.”

The Economist understands all of this. The lead story in the most recent issue focuses on the “cliff” and points out that “worries” about what will happen if we go over that precipice are “understandable”  but “overblown.” The “risk of economic catastrophe is minimal.” Any damage would be short-term. 

I don’t always agree with the Economist: the UK publication has its own sometimes eccentric slant on things. But on the whole, it is a thoughtful publication—well-researched and fact-checked.  Moreover, in this case, distance may give the Economist a perspective on the problem that some in the U.S. lack.

                                   Exaggerating the Threat to the Middle-Class      

Yesterday’s New York Times suggests that if we cross that line in the sand, an already beleaguered the middle-class will suffer great hardship, and this “Complicates Democrats’ Stance in Talks.” 

The analysis suggests that Democrats don’t dare just stand back and let Bush’s tax cuts expire– as they will if party leaders don’t reach a settlement by year-end: “Only a small handful of policy voices on the left are making the case for the tax cuts to fully expire. In part, that is because the economy is still growing slowly, and tax increases have the potential to weaken it.” But it is also because “If the two parties fail to come to a deal by Jan. 1, taxes on the average middle-income family would rise about $2,000 over the next year. That would follow a 12-year period in which median inflation-adjusted income dropped 8.9 percent, from $54,932 in 1999 to $50,054 in 2011.”

This assumes that once we miss the January 1 deadline, tax hikes for the middle-class would become permanent—which, of course, is not true. Talk about how much more a family would pay over the course of 2013 falls somewhere between hyperbole and hysteria, ignoring what everyone knows:

If the Bush tax cuts expire, Democrats will presumably simply propose to restore them in January for those [families] earning less than $250,000,” the Economist observes, “daring Republicans to block them.” 
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“Fiscal Cliff” Talks: An Update

Today, for the first time since the election, President Obama and House Speaker John Boehner met alone, face-to-face, at the White House to discuss ongoing negotions over the budget.   (I can’t help but see the photo, which shows Obama with a hand on Boehnr’s shoulder, as a reference to the “Saturday Night Live” skit that appeared last night.  

I’m more and more hopeful about the budget negotiations. Recentlly, I wrote that Obama had “won round one,” explaining that I believed CNN’s report that  the Republicans and Democrats have reached a deal on taxes. “Both sides agree the wealthy will pay more, so now fiscal cliff talks come down to how much Republicans can wring out of the White House in return for giving in on taxes.”  Based on everything I know about the economics and the politics of the situation, this makes sense. /

Since then Boehner has said:  “No progress has been made.”

This does not change the story:  If, as CNN’s sources say, (and I believe) Republicans have conceded that taxes cuts for the top 2% must expire Janauary 1, while cuts for the remaining 98% will continue, that doesn’t mean they are ready to make the agreement public.

Understandably, Republicans are not willing to acknowledge that they lost round one of negotiations until they can also announce that they won something in round two.  Nor does  President Obama want to blind-side Boehner by letting it leak that a tax deal is in place. That would be counter-productive.

                          The Inside Story and the Outside Story

Recentlly, the Washington Post’s Ezra Klein reported:  “Right now, the fiscal cliff negotiations are proceeding on two tracks.

“One track includes the press releases, public statements and legislative tactics the two parties are deploying to prove the purity of their faith and their commitment to beating the other side to a bloody pulp. Watch these closely and it’s easy to get depressed.  . . ‘There isn’t a progress report;’ Republican House Speaker John Boehner sighed Friday, ‘because there’s no progress to report.’

“The other track includes the offers, counteroffers and red lines proposed by Boehner and President Obama. If you look at these closely, a deal is taking shape.”

 I agree with Ezra about the “two tracks”. But I don’t agree regarding the “shape” of the deal that is emerging.

First, I agree that  the majority of Republicans in Congress have accepted the fact that the Bush-era tax breaks for folks earning over $200,000 (and couples earning over $250,000) will have to expire. I won’t try to guess when politicians will complete the two stages of bargaining and be ready to announce a deal. We may go right up to the January 1 deadline.

Moreover, it is  possible that when it comes to cutting government spending, too many Republicans will remain stubbornly, and foolishly, intransigent — insisting on concessions that would inflict pain on the middle-class.

If that happens, I predict that President Obama will let us sail over the so-called “fiscal cliff.”  He knows this wouldn’t do any permanent damage to the economy.  As Rutgers reported today, even Wall Street does not seem panicked by the prospect: “Investors have peered over the cliff and realized they are looking at a gentle slope . . . . some investors say lawmakers still have time in early 2013 to strike a deficit-reduction deal without imperiling the economy. A survey of 62 Wall Street money managers released on December 5 showed market losses would be manageable if the U.S. goes over the fiscal cliff, even though worries still run deep.

Many on Wall Street understand that, early in the spring, the administration could undo Draconian spending cuts, while lowering tax rates for the 98%. Public pressure will ensure that happens. (In the meantime, the Treasury Secretary could lower withholding rates so that middle-class Americans didn’t suddenly see their paychecks trimmed.)

But taking a ride down that slope would do lasting damage to the GOP.  Polls show that voters would blame Republicans. This is why I think that, in the end, Republican leadership in Congress will do whatever it must to make a deal before January.  As I indicate in the post below. Tea Party extremists in the Republican party are being side-lined.

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Truth Squad: Is “Obamacare” Pushing Health Care Spending Higher? What Will Happen in 2014?

In last Tuesday’s debate Mitt Romney suggested that, under Obamacare, health insurance premiums have spiraled by $2,500 per family. Not true.  (Hat tip to Healthcarefinancenews.com.)

 First let’s get the number right: According to an annual survey of employer plans  by the Kaiser Family Foundation and Health Research & Educational Trust, since the Affordable Care Act (ACA) passed in 2010, the average annual premium for family coverage has risen by $1,975 not $2500.  $1975 is a hefty sum, but 20% less than Romney claimed.

More importantly, $1,975 represents the combined increase in contributions made by employers and employeeswith employers picking  up the lion’s share of the hike. “In reality, premiums paid by employees haven’t changed that much.Factcheck observes. In fact, when you look at the rise in how much employees contributed, “the federal health care law was responsible for a 1 percent to 3 percent increase because of more generous coverage requirements.” In other words, employees were paying a little more, but getting value for their dollars.

After telling a whopper about how much employee’s health care premiums have risen in the past, Romney went on to assert that if Obamacare is  “implemented fully, it’ll be another $2,500 on top” of that. His evidence?  None.

                                              The Media Spreads the Myths

Yet the media continues to swallow the notion that under “Obamacare” health care spending will levitate. A few days ago, the Washington Post’s Robert J. Samuelson wrote: “Almost every expert agrees that controlling health costs is the crux of curing chronic budget deficits. Health-care spending already exceeds a quarter of federal outlays. With Obamacare’s coverage of the uninsured starting in 2014 and retiring baby boomers flooding into Medicare, the share is headed toward a third.”

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Paul Ryan’s Plan for Medicare: A Disaster for Seniors (Why Doctors Might Stop Taking Medicare)

“Robin Hood in reverse, on steroids”–that’s how Robert Greenstein, President of the Center on Budget Policy and Priorities (CBPP),  has described vice-presidential candidate Paul Ryan’s blueprint for the 2013 budget: It could likely produce the largest redistribution of income from the bottom to the top in modern U.S. history.”

I quoted Greenstein in April, in a post that originally appeared on HealthInsurance.org. There, I explained that Ryan’s budget would shift Medicare costs to seniors  and slash Medicaid, while simultaneously offering tax breaks for Americans perched on the top of a our income ladder.

Under the newest version of the Ryan plan, Washington would give seniors a voucher equal to the cost of the second-cheapest private-sector Medicare plan in their region. In theory, this gives seniors “choice” — the opportunity to pick a Medicare policy that best suits their needs, and their pocketbook.

If they don’t want to buy a plan from a for-profit insurer, they could, if they wish, use the voucher to buy traditional government-sponsored Medicare–though if it costs more than that second-cheapest private plan in their area, they will have to make up the difference.

Romney and Ryan are convinced that the private sector is always more efficient than government. Thus, for-profit insurers will be bound to offer better care at a lower price. Their faith is remarkable, given that past attempts to privatize Medicare (Medicare + Choice and Medicare Advantage) have largely failed on both counts.

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Breaking the Curve of Health Care Inflation

The evidence is building:  As we move toward making the Affordable Care Act a reality,  Medicare spending in slowing, and even in the private sector, for the first time in more than a decade, insurers are focusing on reining in health care costs .  

The passage of reform legislation two years ago prompted a change in how both health care providers and payers think about care.  The ACA told insurers that they would no longer be able to shun the sick by refusing to cover those suffering from pre-existing conditions. They also won’t be allowed to cap how much ithey will pay out to an desperately ill patient over the course of a year –or a lifetime.  Perhaps most importantly,  going forward, insurance companies selling policies to individuals and small companies will have to reimburse for all of the “essential benefits” outlined in the ACA–benefits  that are not now covered by most policies.  This means that, if they hope to stay in business, they will have to find a way to ”manage” the cost of care–but they won’t be able to do it by denying needed care.

As for providers, they, too, will be under pressure. A growing number will no longer be paid “fee for service” that rewards them for “volume”–i.e. “doing more.” Bonuses will depend on better outcomes, and keeping patients out of the hospital–which means doing a better job of managing chronic illnesses.  Meanwhile, Medicare will be shaving 1% a year from annual increases in payments to hospitals. If medical centers want to stay in the black, they, too, will have to provide greater “value” for health care dollars– better outcomes at a lower cost.

This summer the Supreme Court’s decision sealed the deal. The ACA is constitutional. Health care reform is here to stay.

(Granted, if Mitt Romney wins the White House in November, all bets are off. But the Five Thirty Eight f’orecast, which has an impressive track record, suggests that Obama has a 70 percent chance of winning.  That said, liberals  should not be smug. The economy remains the greatest threat to President Obama’s re-election.)

Medicare Spending

The Obama administration should be broadcasting the news: Medicare spending is no longer growing at an unsustainable rate. Wednesday, Bloomberg columnist Peter Orszag commented on the “sharp deceleration” in Medicare’s outlays. A common way to evaluate the growth in spending for Medicare is to compare the increase per beneficiary to income per capita,” the former director of the Office of Management and Budget (OMB) wrote.  “Over the past 30 years, this excess cost growth for Medicare has averaged about 2 percent a year. The goal of many policy proposals, including provisions in the 2010 Affordable Care Act, is to reduce the future excess cost growth to about 1 percent annually.”

What is astonishing is that Medicare is now exceeding that goal. Over the past year, “excess cost growth has been much less than the target of 1 percent,” Orszag reports. “According to the most recent figures from the Congressional Budget Office, total Medicare spending this year through June rose 4 percent from the previous year. Meanwhile, the number of Medicare beneficiaries rose by almost 4 percent, too, and income per capita rose by about 3 percent. So excess cost growth has been significantly below zero let alone below the target of 1 percent a year.” 

This suggests that the nation’s Medicare bill does not have to pose a threat to the economy, even as the  number of Americans on Medicare’s rolls grows. Widely accepted reserach reveals that at least one-third of Medicare dollars are wasted on over-priced products and unnecessary reatments. Cut that fat, and we can accommodate an aging population.

Sweden faced the problem of a greying population years ago, and has managed to avoid what many who would like to slash “entitlement programs”  insist is an “inevitable” explosion in medical spending as a nation grows older. Healh care spending in Sweden has remained remarkably stable since the 1980s, costing roughly 9% of GDP, and when it comes to quality of care–and patient satisfaction– Sweden’s health care system is rated as one of the best in the developed world. Continue reading

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You Heard It Here First: Medicare Spending Slows

Sunday, a New York Times editorial confirmed that “Since January 2010 the growth in Medicare spending has actually slowed to an annual rate of about 4 percent, less than half the annual rate for the previous decade. No one is quite sure why, but one theory holds that hospitals are scrambling to squeeze a lot of fat out of the system even before the health care reforms pressure them to do it.”

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