by Elliott Morss, Morss Global Finance
During his campaign, Trump said he would get rid of Obamacare on his first day in office. He did not and instead suggested that he might keep part of the Affordable Care Act (ACA). He then said he will not enforce the penalties for those who do not sign up for healthcare insurance.
And last week, he conceded: …it’s an unbelievably complex subject. Nobody knew that health care could be so complicated.” Oh? But Trump continues to insist his legislation will provide lower cost health insurance for all. Is there any way he can do this?
If Trump is going to bring down health care costs, his policies must address the causes for their growth. So far, the only thing we have heard from Trump and other Republicans on how they plan to do this is by fostering greater competition among insurers by allowing them to compete nationally. Will this work? At present, each state has its own regulations on what health insurance covers. Are these state rights going to be eliminated in favor of Federal control? This does not sound like something Republicans would support.
But there are other problems. Selling insurance in a new region/state takes more than just getting a state license. It also involves setting up favorable contracts with doctors and hospitals so that customers will be able to get access to health care. Establishing these networks of health care providers is time-consuming and expensive for new market entrants.
“The barriers to entry are not truly regulatory, they are financial and they are network,” said Sabrina Corlette, the director of the Georgetown University Health Policy Institute. In 2012, Ms. Corlette and co-authors completed a study of a number of states that passed laws to allow out-of-state insurance sales. Not a single out-of-state insurer had taken them up on their offers.
What Are the “Drivers” of Escalating Health Costs?
It is well-known that US health care is more expensive than any other developed country. And as the following chart from Kaiser suggests, the services provided do match up to other developed countries.
Republicans are currently arguing about whether tax credits are subsidies, a subject that has nothing to do with escalating health costs. Table 1 tracks the growth of health costs.
Table 1. – Growth in Health Care by Supplier
Source: Centers for Medical Care and Medicaid Services
Home health care tops the list, an item that will definitely continue to grow as the US population ages. Not surprisingly, prescription drugs are at the top of the list. What will bring prices down? Research has shown that having more than one drug for the same ailment brings down prices, but this will not happen overnight. Trump has said he is working on a plan to reduce the cost of prescription drugs. No details yet.
Going forward, demographics are working against the US. Older people need more health care than others. Between 45 and 65, average medical costs increase by 107%. By 85, those costs are up by another 118%. And the numbers of US citizens aged 65 and up continue to increase: from 48 million in 2015 to 66 million in 2025 (up 38%). Their share will grow as well: from 15% in 2015 to 19% in 2025.
And then there is the inescapable problem of the US obesity epidemic. The Trust for America’s Health tracks the problem. They estimate obesity “costs the country between $147 billion and $210 billion each year.” The Congressional Budget Office (CBO) found 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). If you add these obesity-related diseases to those directly linked to obesity, the total is $350 billion annually.
The CBO found Medicare administrative costs at 2% and private insurance at 11%.
And Paul Krugman points out:
“…the United States spends nearly six times as much per capita on health care administration as the average for Organization for Economic Cooperation and Development nations. Nearly all of this discrepancy is due to the sales, marketing, and underwriting activities of our highly fragmented framework of private insurance, with its diverse billing and review practices.”
Because there are so many insurance companies, a large number of health care workers do nothing but interact with their insurance company counterparts. 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.
Why Healthy Americans Need to Sign Up for Health Care
Under Obamacare, most healthy Americans had to sign up to make the numbers work. Their better health means they will need to use health care services less often and this will bring down the average cost for the country overall. Some claim that this requirement is “un-American”, that nobody should be forced buy something they do not want.
But there another side to this issue. When healthy American without insurance get sick or incur an injury, the will go to hospital emergency wards. According to the Centers for Disease Control and Prevention (CDC), Americans made 136 million visits to one of the country’s nearly 5,000 emergency rooms in 2012. Approximately 20 million of them arrived by ambulance. About 43% of all hospital admissions originate in an emergency room.
The main reason that so many emergency room visits are for non-urgent care is that hospital ERs are required by federal law to provide care to all patients, regardless of their ability to pay. Since they can’t be turned away, patients without insurance, or the necessary funds to pay out-of-pocket costs, often utilize emergency rooms as their main health care provider. This puts tremendous strain on ERs, and limits their ability to attend quickly to health emergencies.
It is estimated that more than $18 billion could be saved annually if those patients whose medical problems are considered “avoidable” or “non-urgent” were to take advantage of primary or preventive health care and not rely on ERs for their medical needs.
Given all this, I have a proposal for those that do not sign up for health insurance. Having access to emergency rooms is hardly an inalienable right. Require those without insurance to sign up as a precondition for access to emergency rooms.
The health problems of a vast majority of people who see doctors could be handled by nurses or nurse practitioners. Nevertheless, primary care physicians have been reluctant to give up these visits. And on top of this, many patients are referred to specialists when they don’t need them. And of course, both of these practices causes medical costs to escalate.
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.”
The job of a hospital manager is to get a return on all of the hospital’s assets: beds, machines, doctors, and specialists. Could this contribute to high medical costs? Yes.
You have probably never heard of John Wennberg. 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. This is a significant health care sample inasmuch as their treatment accounts for about 32% of total Medicare spending, or approximately $150 billion annually. Much of the money spent goes to physician and hospital fees associated with repeated hospitalizations.
- Remarkably little correlation between the prevalence of severe chronic illness and per capita Medicare spending across regions.
- A near threefold variation across hospitals in dollar spending, average hospital days, and physician visits.
Why would such variations occur? Wennberg concluded “the variation …cannot be explained by illness, medical evidence, or patient preference”. One might think it had to do with the severity of the disease. But Wennberg studied such a large sample that differences in severity would have averaged out. More expensive diseases? No. The 2008 Atlas compared costs across hospitals for patients with similar chronic illnesses. More expensive regions? No. The data shows large variations of care within the same regions.
The overriding conclusion is that the supply of doctors, hospitals, diagnostic machines, etc. explains variations in use. For example, the supply of hospital beds explains 54% admissions for all medical conditions while the supply of cardiologists explains 49% of cardiac appointments.
- 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;
- Overtreatment harms patients, and it contributes to the chaotic quality of American health care. Also, overtreatment wastes taxpayer dollars;
- Various estimates for the amount we waste on overtreatment in this country range between 20 to 30 cents on every health care dollar spent.
- If the US modeled its health care on efficient providers such as the Mayo Clinic, the Geisinger Clinic, and the Cleveland Clinic, we could shave 30% to 40% off the cost of caring for Medicare’s chronically ill patients—and need fewer physicians in the United states than we already have.
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. Some of Wennberg’s cost-cutting proposal were initially included in Obamacare. The government has real control over Medicare payments. Title III of the legislation is: “Improving the Quality and Efficiency of Health Care” Part I of that Title is “Linking Payment to Quality Outcomes Under the Medicare Program”.
Increasingly, Medicare payments were intended to be based on the results of the supply-driven research by Wennberg and others.
But as is increasingly true of much legislation, the “stakeholders” were supposed to work out the details of the legislation. In the case of medicine, the stakeholders are highlighted in red. In Table 2. So what has happened? Most cost-cutting measures have been eliminated.
Table 2. – Lobbying Expenses by Industry, 2016
Source: Open Secrets
The Republicans healthcare plan has just been released. There will be numerous changes before its adoption. But the requirement that you have to buy insurance has been scrapped. So will we get, as Trump promised, “lower cost health insurance for all?” No.
In the above, I have listed a number of reasons healthcare costs have been rising. Does the new legislation address any of these issues? No.
The CBO estimates that in 2016 the Federal subsidies, taxes, and penalties associated with health insurance coverage will result in a net subsidy from the Federal government of $660 billion, or 3.6 percent of GDP. That amount is projected to rise at an average annual rate of 5.4 percent, reaching $1.1 trillion (or 4.1 percent of GDP) in 2026.
Without the requirement that everyone obtain health insurance, either the subsidies will increase or the number covered will have to fall.