Health Care Crowd Out

Today’s Managing Health Care Costs Indicator is
$30 billion

Peter Orszag, most recently the head of Obama's Office of Management and Budget, has a column in today's New York Times  demonstrating that increasing costs of health care have a substantial impact on other social priorities.

He reports research that shows that in 1985 states spent 50% more on higher education than on Medicaid, and the ratio has now flipped. During this time period, 43 states have cut their support for higher education, and salaries for academics at public universities have slide well behind those at private universities.   Public universities represented 40% of the top ranked colleges a quarter century ago.  Now, they represent 12%.

If state colleges and universities were being supported at the rate they were supported in 1985, higher education would be getting $30 billion more in state aid a year ($2000 per student.)

Orszag concludes that controlling health care costs might be the best way to improve post-secondary education in America.

Census Data: Government Role in Health Insurance Grew in 2009

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Today’s Managing Health Care Costs Indicator is 50.7 million

The census report came out yesterday, showing a distressing increase in the number of Americans without health insurance in 2009.  There were50.7 million uninsured Americans in 2009, 15% of the population.  The decrease in employer-based health insurance is even steeper than it appears, since the number of Americans on government insurance (Medicare, Medicaid and military) has grown sharply. The total number of insured Americans declined for the first decline since 1987, even while 5.7 million more Americans were on government insurance programs. 

These numbers understate the magnitude of the transition in health insurance.  For one thing, those who have insurance are likely to have less coverage than in previous years.  Those with $1000 or greater annual deductibles doubled in the last year.  Also, the census category  of “government sponsored” insurance doesn’t include government employees.   There are 2.5 million full time federal employees  3.8 million full time state employees  11.0 million full time local government employees   Assuming that the full time governmental employees get their insurance from their employer, and that no part time employees get governmental insurance, the percentage of those with governmental insurance goes up from 28% to 33%.  And that’s not counting another government health care expense -- the tax subsidy for employer-based health insurance, valued at $200 billion per year. Finally, last year those who had lost jobs were eligible for subsidies to purchase insurance (COBRA); these subsidies have since expired.  

The rise in the uninsured makes controlling health care inflation even more important.  Rising health care costs are directly associated with the rise in the number of uninsured.   Support for health care reform in the US has declined .  Support for universal health insurance could collapse altogether if we don’t rein in health care cost increases.  

Health Care Reform Will Lower Long Term Medical Costs

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This image from The Washington Post

There has been a lot of blathering about how the new estimates from the CMS actuary show that health care reform will increase the cost of health care.   In fact, the Wall Street Journal's headline is "Health Outlays Still Rising".

Here's the commentary in the WSJ:

The report by federal number-crunchers casts fresh doubt on Democrats' argument that the health-care law would curb the sharp increase in costs over the long term, the second setback this week for one of the party's biggest legislative achievements.

The graphic above is from a pithy post by Ezra Klein of the Washington Post, who points out that there is a cost spike from providing subsidies to cover 10% of the population.  It's striking that in the out years (and that's what counts), the costs are lower under health care reform even with the near-universal coverage.

The costs are lower because of diminished provider payments, which will extend the life of the Medicare trust fund, as well as make it possible to cover most of the currently uninsured while lowering the federal deficit.    The reform bill is far from perfect - but is looking like a very good deal indeed. 

Malpractice Reform: A Good Idea, But Impact on Costs Likely to be Disappointingly Small

Today’s Managing Health Care Costs Indicator is
$55.6 billion


Or maybe it isn’t.

The September Health Affairs   has a series of articles on the impact of malpractice liability on overall health care costs.   The headline article uses published literature to estimate the total costs of the malpractice tort system – and calculates this at $55.64 billion.  You can see that the overwhelming majority of this cost, $45.6 billion (82%), is the cost of defensive medicine.  11% is legal costs, and 7% is actual payments to patients who are found to have suffered from provider negligence. 

Two other articles, that might be overlooked in the press coverage, put this number in perspective.  

An elegant study from the University of Southern Maine  looked at 400 million paid claims  (35 million completed episodes) from Cigna – and used an episode grouper software program to identify cost per case for different conditions and physicians who had differential malpractice risk category assignments and thus different malpractice rates.  (This represents risk as defined by insurance company actuaries, which is likely very different than a physician’s perception of her risk of being sued.   See below for more on that). 

One headline from this study is that defensive medicine is not fiction –it really exists.  There were many combinations where there was a positive correlation between resource utilization and malpractice risk. The researchers confirmed this by ascertaining that the increased utilization was often in evaluation and management or imaging, where we would expect defensive medicine costs to be higher. 

Another headline could be that the cost of defensive medicine is often overstated.

This study showed that a 10% reduction in malpractice rates was associated with about a 0.132% decrease in the overall cost of care.  Decreasing malpractice insurance rates by 30% would only decrease medical costs by 0.4% in this model. Of course, perhaps physicians’ beliefs about their likelihood of being sued are not highly correlated with their actual likelihood of being sued.

The Center for Study of Health System Change  reports on a physician survey – and found that physicians practicing in a “low risk” environment, one where malpractice reform led to fewer suits, lower damages and lower malpractice premiums, retained a high level of malpractice concern.  Hence, simply reforming malpractice insurance might not actually lower the cost of defensive medicine as long as physician angst remains high.

None of this suggests that we shouldn’t commit ourselves to malpractice reform – we should.  If nothing else, we’d like to see a system where patients who have suffered harm receive more than 7% of the total costs!  But we shouldn’t count on malpractice reform by itself causing such profound changes in physician habits that we will solve our cost problem by this intervention alone.

Kaiser Family Foundation HRET Annual Survey of Employer Health Insurance

Today’s Managing Health Care Costs Indicator is $13,770

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The annual Kaiser Family Foundation –HRET survey of employer benefits came out on Thursday, and it showed that the increase in cost of health care coverage was smaller than in most recent years (up 5% for family coverage, and 3% for individual coverage).  However, employees are paying a significantly larger share of the total cost of coverage, and the health plans have higher deductibles and more patient cost-sharing than in past years. . 

Overall, families pay for 30% of the total health care premium (up from 27% last year). That means that last year, a family on average would have paid $3552, and this year they would pay $3997, a 13% increase.   It’s worse still for low wage families, which were responsible for 35% of the family premium.   Family premiums are also more for workers at small employers (<200 workers) -- $14,038. 

Even as they increase in price, health plans are also shaving benefits.  27% of single workers have a deductible of over $1000 in 2010, compared to 22% in 2009 and 10% in 2006.   High deductible health plans have increased their market penetration (13% compared to 8% in 2009). 

About the only surprising finding is that a larger portion of insurers are offering health insurance – from 60% to 69%.    The denominator here is the individual employer –and this increase in health care offering was driven by employers with 3-9 employees, so it doesn’t mean that the overall rate of insured workers went up.  In fact, 59% of workers received insurance coverage from their jobs in 2009 and 2010.

The KFF-HRET survey makes it clear that health care is just too expensive.  The inflation rate of health plans appears to have moderated.  But there is little good news for workers,  who paid an increased portion of the premium for health plans that offer fewer benefits than in previous years.  

The AARP Faults Drug Companies for Price Increases

Today’s Managing Health Care Costs Indicator is 8.5%

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The AARP  reported last week that brand name prescription drug prices rose 8.5% last year.    That’s substantially more than the total increase in the cost of pharmaceuticals - which was 3.2% for 2008 (last publication of National Health Expenditures  or 5.7% (CVS-Caremark- figure above).

What’s the difference?

The overwhelming majority of prescriptions (about 70%) are for generic medications.  However, the overwhelming majority of costs (about 80%) are for that minority of medications that are available in brand name formulations only.  So – generic substitution can lead to giant savings, but these can also be wiped out quickly when brand name prices go up.

The big pharmas aren’t in an enviable position.  Many ‘blockbuster’ drugs have gone generic over the past few years, and Pfizer is preparing itself for Lipitor (atorvastatin) going generic at the end of next year.   The AARP study shows that drugs about to go generic have had large cost increases in recent years.   Why is this?

It’s not to fund the research (long since paid for), but it could help underwrite new research.  It’s not to pay for marketing – the pharmas cease large-scale promotion of a drug in the months before it goes generic.  Brand name price increases are certainly not to address additional production costs – generic manufacturers will be able to produce these for pennies a pill in just a few months.  

The pharmas cannot suggest an increase in ‘value’ provided by a brand name as it nears patent expiry which could justify an increase often over 10%. 

Once again –what causes the prices of drugs about to go generic to increase?

There are a few different underlying reasons.  The first is revenue maximization.  The ability to get a high margin is about to evaporate – make hay while the sun shines!  A darker potential reason is that  the pharmas are seeking to make drugs about to go off patent look as unattractive as possible.  When  Lipitor is about to lose its patent protection, even while a similar drug simvastatin is available for pennies a pill , Lipitor goes up in price by 24%.  Sure, that will move some patients to simvastatin.   But that will diminish profits for the ‘first mover’ generic competitor, as some patients will switch to another statin medication that retains patent protection.   Flomax went up 92% over 5 years; most of that price increase was in the two years before patent expiration.   

Many pharmacy benefit managers would move drugs about to lose their patent protection to a “preferred” tier to gain savings after the drug goes generic.  However, the manufacturers would like patients to move away from drugs about to lose their patent protection – preferably to a medication that will retain patent protection for a number of additional years. 

There aren’t perfect answers here.   Most other developed countries have rigorous price controls for pharmaceutical agents, but this can stifle innovation.   Clearly, “me too” drugs can offer an opportunity to create some price competition, which helps improve value.  The pharmas used to introduce controlled release formulations for a drug about to lose patent protection; we have seen fewer of these end-runs around generic substitution recently.  New regulations to make it more difficult for the brand name pharmas to pay a generic manufacturer for a delay can drive some additional volume to the lower-cost generic earlier.
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Should teachers support repeal of health care reform?

 Nebraska’s (Republican) Governor Dave Heineman is on the mark when he points out that costs of health care “crowd out” other important social needs. That’s the reason why it is so important to decrease the rate of medical inflation.

Here is his quote

"Increased funding for Medicaid is likely to result in less funding for education," Heineman says in the letter sent Wednesday to associations representing teachers, school boards and school administrators. "Don't sit on the sidelines," it says later. "I strongly urge you to support the repeal of the recently enacted federal health care law."

Is Heineman right that school committees in Nebraska should fear the health care reform act?

The Kaiser Family Foundation  has calculated how much each state will spend to comply with health care reform (largely Medicaid expansion), and how much new federal money will come into the state.  In the case of Nebraska, KFF projects that the state would spend $106 million from 2014-2019, the federal government will spend over $2.3 billion, or over 95% of the total new spending.  This $2.3 billion will lead to new jobs – and with a 6.84% income tax, the increased income tax alone would equal the cost of the state Medicaid outlays as long as 2/3 of the spending is on salaries. That’s not counting a “multiplier” effect where one person’s new income leads to increased incomes for everyone from whom she purchases goods or services, and it’s not considering state sales tax of 5.5%.

Across the country, most analysts believe health care reform will increase the cost of overall health care by a very modest amount.   The reform bill also includes some serious cost control, including cuts in payments to Medicare Advantage health plans, cuts to providers, funding for comparative effectiveness research, and a Medicare innovation center.  The answer to health care crowding out other important social services isn’t repealing health care reform, but building on it.   Teachers should not be on the picket lines pushing for repeal.