Fixing Obamacare – Why It Won’t Be Easy

by Elliott Morss, Morss Global Finance

Introduction

In the run-up to the election, Trump and Congressional Republicans emphasized that the first order of business would be to get rid of Obamacare. They pointed to the premium rate jumps announced for the current year and those projected for next year as indicated I the following table.

Average Monthly Premiums for Second-Lowest Cost Silver Plans for a 27-Year-Old (Before Tax Credits), 2016–2017

Source: Affordable Care Act Research

 So Trump and Republicans look at these numbers and say we have to get rid of Obamacare? But what is behind these rate jumps? It turns out it has very little to do with Obamacare. Instead, it is the direct result of changing demographics, unhealthy American life styles, manpower imbalances, and the oligopolistic practices of the health care providers. These points are elaborated on below.

Expensive Health Care

The following table indicates how much more expensive US health care is relative to other countries.

Source: The Commonwealth Fund

The next table shows that even though the US spends far more on health than other countries, the results are not impressive. In the following paragraphs, we ask why not, and what will Trump do to turn these statistics around?

Source: The Commonwealth Fund

Changing Demographics

Between 45 and 65, average medical costs increase by 107%. At 65, average health costs are $3,499, up 107% from what they are at 45. By 85, those costs are up to $7,625, or by another 118%. The share of Americans 65 and up is projected to grow from 7% in 2015 to 10% in 2030, from 47,830,000 in 2015 to 74,108,000 in 2030. In short, costs health costs increase with age, and both the number and share of older Americans is growing with no end in sight.

Unhealthy American Life Styles

We hear a lot about unhealthy American life styles. As I have noted, we are really talking about a serious and dangerous addiction – overeating leading to obesity. More than 2 in 3 US adults are overweight or obese. More than 1 in 3 adults are obese with more than 1 in 20 adults being extremely obese.[1] And the trend in obesity among children is not promising. Their obesity rate, an indicator of the future adult rate is not falling.

Source: The State of Obesity

According to John Mauldin, the Cleveland Clinic says six chronic health conditions cause most of our problems:

• High cholesterol
• High blood pressure
• Excess weight
• Diabetes
• Asthma
• Tobacco use

Note that high cholesterol, high blood pressure, and diabetes are largely derivatives of being overweight.

The Medical Costs of Obesity

There are a growing number of excellent studies on the risks and costs of obesity. I quote from one of them (The State of Obesity):

“Obesity is one of the biggest drivers of preventable chronic diseases and healthcare costs in the United States. Currently, estimates for these costs range from $147 billion to nearly $210 billion per year. In addition, obesity is associated with job absenteeism, costing approximately $4.3 billion annually and with lower productivity while at work, costing employers $506 per obese worker per year.”

Other studies document that being overweight makes most health problems worse:

• Heart disease is the leading cause of death in the US and strokes are the third leading cause. Being overweight increases the risk of both;
• Cancer is the second leading cause of death in the US. 20% of cancer in women and 15% of cancer in men is attributable to obesity;
• Diabetes kills almost 4 million people annually and accounts for 11% of US health care costs. There is a direct link between diabetes and being overweight: 80% of people with the primary type of diabetes are overweight;
• Obese people are 83% more likely to develop kidney disease than those not overweight.

The Congressional Budget Office (CBO) first examined health care spending by adults of different weights using data from the 2007 Medical Expenditure Panel Survey. The results are presented in the following table.

US Health Expenditures, by Weight, 2007 (2009 US$)

Source: CBO

The Table indicates that in 2007, annual health expenditures of a morbidly obese person would be $7,010 or 74% more than a Normal person. The CBO took their analysis one step further. They looked at spending on obesity-related diseases (coronary heart disease, type II diabetes, certain cancers, hypertension, dyslipidemia, stroke, liver and gallbladder disease, osteoarthritis, certain gynecological problems, and some depressive disorders). Spending on these diseases is presented in the following table.

Health Spending on Obesity-Related Diseases, (2009 US$)

Source: CBO

As the table shows, people in all the weight categories get these diseases, but they are highest for obese people. Looking only at these diseases, it appears that the per capita health expenses of Morbidly Obese people exceed Normal by $1,680 (154%).

Back Office Paperwork

Because there are so many insurance companies, both public and private, a large number of health care workers do nothing but interact with their insurance company counterparts. Blumenthal, Cutler and Liebman estimate that the administrative costs in private insurance average 14 percent of benefits or approximately $108 billion.[1] Holahan and Blumberg quote a study by the Congressional Budget Office that found Medicare administrative costs at 2% and private insurance at 11%.[2] I conclude that if private insurance companies used the same reimbursement forms and standardized what they paid for, administrative savings should be at least 5% or more than $100 billion annually.

Manpower Issues

Dr. John Wennberg argues that the role of primary care physicians should be enhanced. Rather than being “ticket providers” to specialists, he wants the primary care provider to be the manager of the team dedicated to taking care of America’s chronically ill over time. Wennberg believes unnecessary referrals to specialists are an important reason for why health costs are so high—and why quality is often low.

But there is more to it than this. Following medical school, US doctor candidates must do residencies at teaching hospitals. This is a big business and is heavily subsidized by the Federal government. Mullan and Wiley report that in 2007, Medicare paid hospitals almost $9 billion for residency training. Teaching hospitals love this support. They also love the 80 hours a week these students put in working at the hospitals. Teaching hospitals have a lot of clout in getting funding for the students/workers they need. If the manpower needs of the teaching hospitals reflected overall US needs, there would not be a problem. But there is a problem. 99% of people who see doctors are office visits – they don’t need hospitals. Training in teaching hospitals reflects their needs: intensive hospital care and more lucrative care associated with specialization.

And if we should be training more primary care physicians and fewer specialists, things are getting worse. Mullan and Wiley:

“…the pattern of residencies offered by hospitals has become more and more specialized at the expense of primary care. Between 2002 and 2007, hospitals opened 7,754 more new residency positions, 88.3% of which were in specialty care…. During the last decade, 20 family medicine residency programs have been closed and 645 less residents are being trained in family medicine today than 10 years ago. In 1998, 54% of internal medicine residents planned careers in primary care, whereas only 23% did in 2007.”

Oligopoly

Oligopoly can be defined as “a state of limited competition, where a market is shared by a small number of producers or sellers who conspire to set prices.” That describes the heath care market perfectly. The producers/sellers include: hospitals, doctors, nurses, drug companies, and diagnostic equipment makers. The following table summarizes what they have been able to accomplish:

Source: The Commonwealth Fund

Now, the original Obamacare bill had cost-cutting mechanisms built in based on the pioneering work of Dr. John Wennberg referenced earlier. Wennberg and colleagues at The Dartmouth Institute for Health Policy and Clinical Practice collected data on the health care patients with chronic illness received in their last two years of life. They found remarkably little correlation between the prevalence of severe chronic illness and per capita Medicare spending across regions. More specifically, their data showed a near threefold variation across hospitals in dollar spending, average hospital days, and physician visits.

Why would such variations occur? Wennberg found that the supply of doctors, hospitals, diagnostic machines, etc. explains variations in use. That means that if you have a pain in the right side of your abdomen, your primary care physician will recommend that you have your appendix out whether you live in Boston or South Dakota. But Wennberg et al found that is where the similarities end. In South Dakota, your doctor would refer you to a surgeon who would remove your appendix with one overnight in the hospital. In Boston, you would see a couple of consulting physicians and have several diagnostic tests before the surgery. You would stay in the hospital after the surgery for upwards of a week.

The Wennberg conclusion: “Whether from the patient’s perspective (satisfaction, technical quality, health outcomes) or from physicians’ perspective (quality of communication among physicians, continuity of care), higher spending and greater use of supply-sensitive care is not associated with better care. Greater per capita use of supply-sensitive care and more spending do not result in lower mortality or improved quality of life; nor do they lead to improvement in the quality of care. Various estimates for the amount the US wastes on overtreatment in this country range between 20 to 30 cents on every health care dollar spent.”

For example, at Duke University Hospital, considered one of the best in the country, chronically ill patients dying between 2001 and 2005 spent, on average, only 3.4 days in the ICU in their last six months of life. In contrast, patients at the UCLA Medical Center, also considered one of the nation’s best hospitals, spent, on average, more than 11 days in the ICU during the last six months of life.

How does he explain such variations? He argues that health treatment is “supply sensitive”. He quotes Milton Roemer, a health policy researcher: “A built hospital bed is a filled hospital bed”. Wennberg finds that:

• The supply of hospital beds explains 54% admissions for all medical conditions;
• The supply of cardiologists explains 49% of cardiac appointments.

In short, Wennberg questions whether patients who receive more supply-sensitive care have better outcomes, live longer, or have a better quality of life. He concludes:

• Supply-sensitive care accounts for well over half of Medicare spending, with most going to patients with severe chronic illness;
• Whether from the patient’s perspective (satisfaction, technical quality, health outcomes) or from physicians’ perspective (quality of communication among physicians, continuity of care), higher spending and greater use of supply-sensitive care is not associated with better care;
• Greater per capita use of supply-sensitive care and more spending do not result in lower mortality or improved quality of life; nor do they lead to improvement in the quality of care;
• If the US modeled its care on efficient providers such as the Mayo Clinic, the Geisinger Clinic, and the Cleveland Clinic, Wennberg believes the US could shave 30% to 40% off the cost of caring for Medicare’s chronically ill patients;

So what happened? The “oligopolists” got Congress to eliminate the cost-cutting measures. Keep in mind, the American governance system is broken. The major “stakeholders” in supplying US health have been involved in every phase of the bill’s implementation. The only “major stakeholder” that will not be included are the American people.

The following table gives a listing of the “health care stakeholders” and their Federal lobbying outlays. $655 million healthcare lobbying in DC. Neither Democrats nor Republicans are working for the American people on this matter. And whatever Trump tries to do to reduce health costs, he will be bucking up against these very well-established groups.

US Lobbying Expenditures, 2015

Source: Open Secrets

Conclusions

Obamacare is not the problem. Instead, it is the underlying demographics, unhealthy American life styles resulting in the most overweight and obese population in the world (except for a few South Pacific islands), manpower imbalances, and oligopolistic practices causing the growth in US health care costs.

There are certainly ways to address these issues. The time for talk about getting rid of Obamacare has ended. The question now is: what will Trump and the Republican Congress do?

1. “Health CEOs for Health Reform – A Better Health System for All”, New America Foundation, June 2009.
2. John Holahan and Linda Blumberg, “Can a Public Insurance Plan Increase Competition and Lower the Costs of Health Reform?” the Urban Institute Health Policy Center, 2008.
3. National Institute of Diabetes and Digestive and Kidney Diseases