Health Care Reform: The Tradeoffs Before Us

1. Health Care Reform: The Tradeoffs Before Us Merton D. Finkler, Ph.D. Professor and Chair of Economics Lawrence University Tuesday, October 26, 2004

2. Overview • A Brief History of Health Care Policy Reform • Nature of the Problem: Cost, Quality, and Access • Primary Choices: Single Payer, Consumer Directed Choice, and Managed Competition • Bush Plan • Kerry Plan • The Tradeoffs: Access vs. Cost vs. Quality • Primary Conclusion: Neither Bush nor Kerry plan will contain health care expenditures. Both shift costs. No one should be surprised.

3. The History of Health Care Policy in the United States • Universal coverage/care finds its way onto the political agenda every 10 – 15 years • Policy history reflects incremental change; each time we add either more coverage or expand eligibility • Benefit changes must generate enough income for the winners to justify support • History of cost containment is component-focused: Whack a Mole Strategy

4. The Politics of Health Care

5. J. D. Kleinke - Oxymorons • “Health care in America combines the tortured, politicized complexity of the U.S. tax code with a cacophony of intractable political, cultural, and religious debates about personal rights and responsibilities.” • Central reality: “the primary producers and consumers of medical care are uniquely, stubbornly self-serving as they chew through vast sums of other people’s money.”

6. Health Care Expenditures • HC$ = ($/service)x(services/person)x(people served) • 1990 – 2001 • 33% - general inflation • 22% - medical prices> inflation • 16% - population/ demographic change • 29% - intensity of service • Growth in Inflation-Adjusted HC$ per person driven by new technology and services per person • Average - 3.6% per year since 1960 but not smooth • Not Unique to the US (1960 -2002) • US HC$ growth = GDP growth + 2.7% • Other G6 countries HC$ growth = GDP growth + 2.0%

7. The Cost of Health Care

8. 10% of the Population Accounts for 69% of Health Care Expenses

9. Health Spending Exceeds Wage Growth

10. Wage Share of Labor Compensation Has Declined Steadily Since 1968

11. The Burden of Illness for Those with Chronic Disease – The Largest Opportunity • Working age pop. with chronic disease generates expenses 3 x non-chronic pop. • Chronic disease accounted for 56% of growth in health care spending from 1987-2000 • Burden of illness includes both outlays for medical services and lost productivity • Ave. impairment 2 to 11 days / 30 workdays • Total burden – over $1 trillion per year

12. The Burden of Unhealthy Workers

13. Quality –”Is American Healthcare the Best in the World?” • Variety of definitions of quality exist • Comparisons of life expectancy and infant mortality suggest 2nd tier rank for US but largely unrelated to medical care • Studies of the outcomes for specific diseases put US in a variety of spots • Very little opportunity to buy based on quality • “To Err is Human” – IOM report (1999) • 44K to 98K preventable deaths/year - errors • Patient safety has received much more attention • MBGH report (2003) estimated cost of poor quality at $1,700 per person per year. • Rand Study suggests big gaps in appropriate care –Americans receive 55% of recommended care

14. Rand Health: National Report Card on Quality – JAMA 2003

15. More Spending Doesn’t Always Mean Higher Quality of Care

16. Access – Insurance and Medical Care • The Uninsured – CPS Survey • Almost 45 million uninsured • 80% + have at least one worker in family • Poor more likely to lack insurance • Rich gain advantages of tax exemption for insurance- • $188 B of foregone taxes per year • Access to Care – • Indicators include usual source of care, unmet need and delayed care • 25% of uninsured people with poor or fair health went without needed care – unchanged 1997 to 2003

17. Uninsured by Income Level

18. Insurance Improves Access

19. Four Ways to Control HC$ Growth • ↑ the efficiency of the delivery system • ↑ the financial incentives for patients to reduce their use of medical services • ↑ the administrative controls on the use of services • Limit the resources available to the health care system • Paul Ginsburg, “Controlling Health Care Costs,” New England Journal of Medicine, October 14, 2004

20. Efficient Use of Resources • Identify and discourage high cost, low value services – evidence-based medicine • ↓ expensive adverse events for those with chronic illness – disease management • ↓ the risk profile of population – primary prevention • ↓ bargaining power of healthcare providers – anti-trust and purchasing groups • Pay for good performance – compatible incentives • Requires strong, committed leadership at various levels

21. The OPM Principle

22. Consumer Directed Health Care Gives Incentives for Patients to Economize • Health Savings Accounts • Large deductible – low premium insurance • Increased cost sharing – consumer’s decide • Response to OPM (other people’s money) disease • Information at improve decision-making • Concerns • Attractive to young and healthy • Worsens tradeoffs for those with chronic disease • Addresses the 50% who only spend 3% of total • Very limited availability and enrollment so far • Money taken out of the general pool and given to individuals

23. Cheap Insurance

24. Administrative Rules / Managed Care • PPO, POS, and HMOs – Selective contracts • HMOs often feature fixed payment to providers, limited choice of provider, and directed practice • Offered good coverage for prevention • Kept growth low in the 1990s • Differed in their ability to deliver quality • Rejected by many who wanted more choice of physician and treatment at someone else’s expense

25. Single Payer - Monopsony • Canadian- style plan – State as sole purchaser • Total expenditures controlled by province or country • Priorities set by professionals or politicians • Most run out of funds each year – explicit rationing • Presently Medicare and Medicaid expenditures sum to about $2,500 per capita and cover about 23% of population. Canada’s Medicare spends about $3,000 per capita and covers entire population. • Total U.S. spending per capita is approaching $6,000 per year • To whom will we say no?

26. Reducing the Number of Uninsured • Ideal: To provide insurance to those not previously covered • Problems: • Induce a switch from private coverage • Employers drop coverage • Benefits don’t accrue to the needy • Three ways to implement • Mandate or bribe individuals • Mandate or bribe businesses • Enroll people in public programs

27. The Bush Plan • Key Theme: Encourage consumers to economize on care since they are spending their own dollars • Tax credits for low income families (<$25K) • Tax credits for businesses that provide Health Savings Accounts (High Deductibles) • Tax deductible contributions to these HSAs • Encourage joint purchasing for small business & exemption from state laws

28. Effects of Bush Plan • # of Uninsured – Drop by 1.3 to 10 million depending upon shifting out of private plans • Federal Cost – (net of offsets) $50B to $125B – less than half targeted to those presently w/o insurance • Shift burden on to consumers of care • Few cost containment provisions, more tax-exempt spending • Largely targets the young and healthy • Reinhardt “a 401k for the chronically healthy” • Conclusion – not too expensive, not too effective

29. The Kerry Plan • Theme: Use all three approaches to target uninsured • Federalize Medicaid for children • Enroll uninsured parents < 200% of FPL • Add FEHBP II for small businesses that do not offer insurance including tax credit for those with salaries <300% of FPL • Premium support for uninsured between ages 55 and 64 • Government Stop-Loss Insurance for expenses >$30K if use disease management (Top 1% of spenders)

30. Effects of the Kerry plan • Estimated reduction in # of uninsured by 25 to 27 million • Cost shifting from employee to taxpayer and from state to federal government • Primary beneficiaries of Medicaid expansion are low income and in fair or poor health • Cost estimates range from $650B to $1,249B for Federal expenditures (w/o offsets) • Does largely address the uninsured problem but not cost or political feasibility

31. Effects on those with chronic disease • Bush plan – does not target; many with chronic disease would have to decide whether to purchase medicine or not. • Medicare Modernization Act – initiates demo projects for voluntary chronic care improvement programs for fee-for-service enrollees • Kerry plan –One disease management component as part of stop loss federal re-insurance program

32. Estimated Effects of Plans

33. Cost in Perspective

34. Medicare in Brief • Now, Parts A – D after Medicare Modernization Act • A – Hospital/SNF insurance – payroll tax funded (50% of Medicare expenditures) • B – MD and Outpatient Hospital – 25% premium and 75% general tax revenue (33% of Medicare $) • C – Medicare Advantage (managed care) – funds combine A and B (14% of Medicare $) • D – New Prescription Drug Program – funded similar to part B • Medicare covered 41 million people (2004) – 13% of US population • Cost - approaching 320B$ for FY 2005

35. 2004 Medicare Trustees Report • Total Medicare $ to rise from 2.6% of GDP to 3.4% of GDP by 2006 and to 7.7% by 2035 • Part A – trust fund exhausted by 2019 but outlays for Part A > revenues (including interest) by 2010 so start liquidation of assets • Part B – now 9% of Federal Income Tax; 14% by 2010; and 29% by 2030 despite 17% rise in premium to enrollees this year. • Part D – Funded similar to Part B but potentially even greater draw on general revenue (estimated $123B – 2013)

36. Federal Budget and Medicare • 13% of Federal Budget – FY 2005 • Estimated 16% by FY 2007 • Short Run: More than 25% of projected increases in Federal spending will come from Medicare in next 4 years • Assuming 5% cut in payments to MDs • No additional benefits • Long Run: Trustees estimate 1.1% (not 2.7%) excess HC$ growth which suggests 15% increase in taxes • Something has to give long run: benefits, eligibility, or taxes must change.

37. The Fundamental Question: Who Will Pay for Expanded Coverage and Service? • Bush: Shifts burden onto consumers • Kerry: Shifts burden onto Federal Tax payers • Tax Policy Center estimates $550 to $650B in revenue generation from rollback of tax cuts to those earning $200,000+ per year to cover all Kerry programs.

38. Political Reality • An aging society; new drugs, diagnostics, and treatments; and popular desire for the latest and best – at someone else’s expense – means continued growth in demand • Presidential candidates focus on promising to do things for voters – not on taking things away from them. Not surprisingly; they duck the question. • Alfred E. Neuman’s Cosmic Law of Health Care: Every $ of HC Spending= Someone’s HC Income* *(including waste, fraud and abuse)

39. Conclusions • The links between money and politics suggest small changes in health care policy • No political will exists to face the cost of expanding coverage • Thus, we will continue to have more care and high healthcare expenditures. • Pluralistic American preferences mean it remains difficult to reach a consensus on one approach.

40. Prognosis: Stalemate • “To be serious would require admitting that the basic problem does not lie with insurance companies, trial lawyers, hospitals, or any of the usual suspects. It lies with public opinion. We Americans want the impossible. We want our health care system to provide everyone with good care covered by comprehensive insurance, prevent insurance companies or government bureaucrats from dictating our choice of doctors, hospitals or treatments, and hold down costs. Well, we can have any two of these goals – but not all three. If everyone has coverage and choice, costs will skyrocket. No one is empowered to control them. But controlling costs involves limits on insurance or choice. • Robert J. Samuelson – Washington Post, September 22, 2004

41. Predictions • Result 1: Minor changes in public policy • Result 2: Continued growth in cost of care • Result 3: Continued significant gaps in access to and quality of care • Result 4: Postponement of paying the bill for expansion • A healthy economy with lots of borrowing from the Chinese and the Japanese has allowed us to postpone the tough choices.

42. The Big Tradeoff

43. American Values • “You can always count on Americans to do the right thing - after they’ve tried everything else.” – W. Churchill • “When faced with second-best trade-off between cost-conscious choice and no choice at all, however, Americans may grumble but select the former.” – J. Robinson

44. Former Governor Richard Lamm • “The dilemma of democracy is that citizens want more services as consumers than they are willing to pay for as taxpayers.” • “The ultimate challenge to an aging, technology-based society is to adjust public expectations to what the society can realistically afford.”

45. The Budget Cake is Only so Big