Mismatch Between Premium Inflation and Health Care Inflation

Today’s Managing Health Care Costs Indicator is $15,073

Click image to enlarge.  Source 
Kaiser Family Foundation and the Health Research Education Trust (KFF/HRET) released their 2011 health insurance survey results – and the increase in premium inflation is disheartening.  KFF/HRET reports that overall health care premium costs have increased by 9%, to over $15 thousand for a family plan. This is despite reports of diminished health care demand – with fewer discretionary surgeries at hospitals.  It’s also despite a reduced fertility rate associated with the Great Recession. 

·        Health care premiums have more than doubled over the last 10 years.  Employers are paying 113% more for premiums than 10 years ago; employees are contributing 131% more.
·        31% of employees have at least a $1000 deductible for single coverage, and 12% have at least a $2000 deductible for single coverage.
·        60% of all firms offered health care coverage; this was only 48% for firms with 3-9 employees.

How could health care premiums be going up even if utilization is going down?

è Cost per unit could be increasing, even though utilization is going down.  There’s a lot of evidence of this – see my post of September 27
è Younger or healthier people are dropping their insurance. This would be consistent with layoffs of the most junior workers.  America’s Health Insurance Plans suggests that this is the problem.
è Family size has increased. This certainly happened with the Affordable Care Act (ACA) requirement that adult children could continue on their parents’ policies until age 26.   Higher family size could also represent more single people losing their insurance, or more families with two working spouses where one lost a job, and was added to the spouse policy.
è Health plan actuaries could have overestimated future costs, and thus charged  higher premiums than would be justified.  The ‘underwriting cycle” for health insurance premiums does not match actual health care costs perfectly – there is some lag. Further, health plans facing future constraints on their profitability could seek to increase their premiums now – especially when many will attribute price increases to health care reform.
è Coverage mandates can increase the cost of care.  The ACA increases costs through mandates including a prohibition of excluding preexisting illness, removal of lifetime maxima and requiring for full coverage of preventive care. Most actuaries estimate the cost of these mandates at 1% -  so this wouldn’t explain the high rate of overall premium inflation.

The increase in health care premiums during 2011 is ill-timed.  The economy is shaky – even more so with the threat of a Greek default in the Eurozone.  Unemployment remains high, consumer confidence low, and employers are reluctant to hire new employees.  Further, families are increasingly unable to pay their larger share of health care costs.  They are facing the double whammy of high premium increases, a larger share of premium costs, and higher member cost share when care is delivered.
Click image to enlarge.  Source 

The IOM, Infographics, and Demogoguery

Today’s Managing Health Care Costs Indicator is $55

The Institute of Medicine has a new report out, “The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary.”  The book is available for free download.

The report is based on a series of meetings held in 2009, and it’s 852 pages long.  I’ve looked through  the table of contents and glanced at some of the articles.   This looks like this could be the textbook I’ve always wanted for my course “Managing Health Care Costs,” although it’s mighty hefty.

The IOM has produced some infographics to highlight the increase in health care costs, and this has been picked up by Ezra Klein and others.  Infographics can be demagogic, and an egg should not go up in price at the same rate as dramatically improved cancer therapy.  In fact, the current infographic posted at the IOM website doesn’t include this screenshot above - which suggests that if egg prices rose like health care, a dozen would be $55.

Health care isn’t the only thing that has increased its share of my family’s budget.  For instance, we paid under $40 a month for telephony and nothing for television or internet in 1990 – but we now pay over ten times that for 4 cell phone accounts, internet service, a residual land line, and more channels of cable than I care to think about. 

I like the infographics, though – they draw our attention to this important issue today.  

KFF published its findings on the (large) increase in the cost of health care.  More after I absorb this.

The Continuing Saga of “It’s the Prices”

Today’s Managing Health Care Costs Indicator is 3.8%

I’m still making my way through the September Health Affairs, and Roehrig and Rousseau have used National Health Expenditure data to demonstrate what portion of the increase in the cost of health care is due to increasing prevalence of disease, and what portion is due to increased prices.

You can tell from the graphic and the title – prices trump again.   Over the 260 conditions the authors reviewed, the overall cost increase in the decade from 1996-2006 was 3.8%.  Roughly three quarters of this difference was due to increasing costs, and only a quarter was due to increased prevalence.  Shockingly, as our population becomes more obese and we worry about our sedentary kids, the increased prevalence of disease wasn’t even more disease – it was rather a higher penetration of treatment of existing disease.  For instance, while there was more hypertension, hyperlipidemia and diabetes – but this was offset by lower prevalence of cigarette-related lung disease and strokes.

Not all unit cost increases are bad.  New drugs that make various cancers and HIV into treatable chronic diseases represent important advances that we want and need. (Of course, over time these will also raise true clinical prevalence of disease. See, for instance, the increase in prevalence of Chronic Myelogenous Leukemia). However, our payment system rewards increased use of technology and increased use of new procedures, and we preferentially disseminate innovation that continues to ratchet up the cost of care.  

This article provides further evidence that we won’t be able to solve our health care cost crisis by focusing all of our attention on improving American lifestyles.  We’ll also have to address our high and rising unit costs.

Below are graphics for the decomposition of increase in costs for a few other conditions:

Note that the large decrease in prevalence of chronic obstructive pulmonary disease still couldn't overcome the increased cost per case - so overall per capital spending growth was still positive. 


Today’s Managing Health Care Costs Indicator is $320 billion

Barack Obama’s plans to pay for the American Jobs Act would lead to a $4 trillion drop in the deficit –through a combination of decreased expenditures and increased revenue collection (a.k.a. taxes).   Because of the elimination of some current tax expenditures (also a.k.a. tax increases), many feel that this bill is dead on arrival in the Republican-controlled House of Representatives.  Still, this is likely to be the foundation on which an eventual compromised is reached – so we could think of this as the opening bid on the Democratic side.

The Obama proposal includes $320 billion in decreased health care costs, $248 billion from Medicare, and $72 billion from Medicaid.  In all instances, these cuts prevent growth – not cutting existing costs.  There are few winners in these proposals – since they save serious dollars.  My take on impact of these proposals on various stakeholders:

Home Care
Cut $135 billion in pharmaceutical expenses by making the dual-eligibles (Medicare and Medicaid) eligible for Medicaid-level pricing.
This returns prescriptions for these members to the Medicaid schedule – as they were before Medicare Part D was enacted in 2003

Cut $3.5 billion from a public health and disease prevention fund

Institute $100 copay for home care (more than 5 visits) beginning in 2017. (This will yield $400 million in savings)
Part of the goal of this is to reduce fraud by making Medicare beneficiaries more cognizant of home care bills

15% surcharge on “rich” Medigap plans, which will yield $2.5 billion in new federal revenue
This will raise revenue –but it will also discourage “first dollar” coverage, which many believes leads to overutilization. Providers will likely see increased price sensitivity

Raise Medicare premiums for those who are well off ($20 billion over a decade)

Change Medicaid state reimbursement formulas ($14.9 billion over 10 years).  This will advantage states with high rates of enrolling Medicaid eligibles.
Medicaid is the weakest element of the Affordable Care Act – since the states can choose not to fund this

Fix the physician SGR (Sustainable Growth Revenue) formula, so that there would not be massive cuts in Medicare physician fees ($300 billion cost over a decade)
This reflects political and other reality – a 29.6% fee schedule cut in January would lead to substantial access issues for Medicare members

Post acute care (rehab hospitals, home care, nursing homes) cuts ($42 billion over ten years.
This is consistent with recommendations of MedPAC.  Some worry it could take away the ability of some frail elderly to avoid institutionalization

Bring biosimilar equivalents to market sooner

Provider Organization Narrow Network: Path to Savings?

Today’s Managing Health Care Costs Indicator is 30%

That’s how much CEO Ralph de la Torre has promised the new Steward Care health insurance product will save small employers. The narrow network health plan, which requires use of Steward hospitals and physicians in most instances,  is set to start enrolling members as of January 1, although it still requires Massachusetts Division of Insurance approval for this offering.

I’ve been skeptical of the promises of Cerberus Capital that it will reformulate the former Catholic hospital network here into a high quality low cost provider.    The for –profit company has not shed employees, promised unions it would respect existing contracts, has paid for expensive pension plans, and states that it’s also paid $80 million in taxes since the health system is no longer a nonprofit .  None of that helps lower the cost of health care.

Nonetheless, this promise to offer substantially lower premiums could be game changing in this market.    How could Steward offer so much lower rates in a sustainable manner?

  • Dramatically reengineer processes  Steward could remove extra steps and dramatically diminish waste in its system. The hospitals in this new network have long had lower reimbursement than some of their competitors, so they have had less to invest in technology and processes that increase cost.  However, to offer care for almost a third less will require substantial more work to prevent unnecessary ED visits and hospitalizations, and over time would probably require more use of non-physicians and better standardization to prevent expensive non-evidence-based care.  This is the approach that would most increase the total value of health care delivered.
  • Fill existing capacity Much health care has high fixed costs,  so the extra cost to take care of more patients might be a third or less of the full cost.  For instance, the resource cost to do an extra MRI scan when the machine is already on site and the staff are already paid is very small indeed.  Many of the Steward hospitals have historically had low occupancy rates – so this could be part of the strategy.  However, the elements of care that have the highest fixed costs (inpatient days, high cost imaging) are those that are generally overused already, so if Steward is increasing cost-effectiveness it could have even more spare capacity to fill.
  •  Risk selection.  It’s less expensive to take care of healthier patients, and it’s possible that those individuals and small businesses with substantial existing disease won’t feel comfortable with such a narrow network.  Hence, Steward will get more than its share of healthy members, effectively shifting cost to insurance plans that have a broader network. Many feel this is how HMOs appeared to save money in the early 1990s when they represented a minority of the market. 
  • Steward might not save enough money to sustain low rates.    The low-priced narrow network is an important strategic gambit –and it’s possible that Steward will initially offer very attractive rates, and will have to raise these substantially after suffering losses.  The 1990s saw a bevy of provider sponsored health plans that suffered bankruptcies and were unable to pay their bills – often because they were unable to deliver care for the low rates they promised.  The Division of Insurance should be certain that this plan is adequately capitalized so that it does not collect premiums and find itself unable to pay the bills.  That’s a challenge, because a health plan like this that goes wrong could lead to very disruptive hospital bankruptcies.

I’m hopeful that Steward will make this work through process improvement and filling existing capacity.  I expect there will be some element of risk selection that will help it out.   I worry that Steward won’t be able to sustain such dramatically lower rates.  

Posts last March on the for-profit Caritas conversion to Steward Health Care

If Air Travel Worked Like Health Care

As a frequent traveler, I sometimes whine about the indignities of emptying everything from my pockets, and the inconvenience of canceled and delayed flights.  Tonight, a flight sat on the ground at LaGuardia for 90 minutes, and the person in front of me reclined further than I thought the seats allowed.

On the other hand, I can look up availability and pricing readily on Kayak.com, and figure out what seats are best on seatguru.com. If I have luggage, it gets transferred from plane to plane with no effort on my part, even if I'm using different airlines.  Last week Virgin America not only delivered me from the West Coast to the East Coast for under $500, but gave me free wi-fi while I borrowed a free Chrome netbook with a battery that lasted the entire trip.

Here's a disturbing video superimposing the dysfunction we expect from the health care system upon the airlines.   My airline travel could be far worse!

The Cost of Smoking

Today’s Managing Health Care Costs Indicator is $40

Click Image to Enlarge.  Source
I’m taking a break from this month’s Health Affairs today to highlight some posts from The Incidental Economist blog – which has grown to be among my favorites.

Don Taylor, author of “The Price of Smoking” reprises his calculations for the real cost of smoking per pack.

These are
  • $33.00 – the cost of lost life years, lost wages and disability due to smoking  
  • $5.50 – the cost borne by the family – mostly through increased spouse mortality
  • $1.50 – the external cost, which includes increased health care costs (a mere $0.48), nonsmoker subsidy of smoker life insurance ($1.78), lost Social Security contributions ($1.02) and productivity losses ($1.00).   You might notice that this sum is equal to far more than a buck and a half – that’s because smokers ‘save’ the system money through lower pension and Social Security payouts and through taxes they pay for cigarettes. 

Smoking is the most important remediable cause of lost life years – and we should use all the arrows in our social policy quiver to get people to quit smoking.   That includes powerful choice architecture decisions to make smoking inconvenient, and higher taxes to discourage price-sensitive teens from getting hooked.   But the US has among the lowest smoking rates of developed countries, but the highest health care costs.  
Click image to enlarge.  Source 
By Taylor’s calculation, elimination of smoking alone would not solve our health care cost crisis.

Curing Obesity Won’t Solve the Health Care Cost Crisis

Today’s Managing Health Care Costs Indicator is $7 billion

Kenneth Thorpe has a cheery simulation in this month’s Health Affairs postulating  that if we enroll 2.6 million Americans aged 60-64 in a nutrition training program (run by the YMCA) we could save $7 billion over their lifetimes.

The simulation is based on the National Diabetes Prevention Program.,  a huge well-designed study that resulted in 7% body weight loss sustained over 2.8 years of followup and reduced the prevalence of diabetes among the participants from 58% (and by 71% in those over 60).   The intervention cost $1340 per person

Be sure to read the fine print. 

  •       This is based on a study done on 92 participants in the YMCA program, published in the American Journal of Preventive Medicine.
  •       The savings are available over the beneficiaries’ lifetimes –which makes it hard to imagine what the denominator is, since we don't usually think of the average liability for a person’s Medicare costs at the moment she turns 65.
  •        The intervention in the NDPP cost $1340 per person and involved individual training, while the intervention at the YMCAs cost $240 per person and used classroom education, which a smaller number of sessions.
  •       The simulation assumes that this intervention could be scaled from 92 people to 2.6 million enrollees
  •       The $7 billion assumes 70% of those who are eligible (at risk for diabetes) enroll.  Enrolling this many people in a program would be a staggering feat.  Weight Watchers enrolls 1.2 million members, and has 56,000 employees.

Here’s the real kicker.  If we accept all of these assumptions, believe that the very small YMCA trial is adequate proof of concept, and enroll overweight people at risk for both diabetes and heart disease, this program would save $3.7 billion over 10 years, or $370 million per year.  Medicare will spend $569 billion in 2012.

That means that this intervention would shave 0.06% off of total Medicare spending.

This program is probably a very good idea – and keeping people from getting diabetes (or delaying onset) could clearly save money and make peoples’ lives better.  But let’s not congratulate ourselves for finding a solution to cost increases in Medicare without dealing with the tougher issues.

It’s the Prices, Stupid – Revised for 2011

Today’s Managing Health Care Costs Indicator is $442,450

In 1993, Anderson and Reinhardt wrote a seminal article in Health Affairs, titled “It’s the Prices Stupid.”  They described differences between the US health care system and those of other developed countries.  Contrary to the beliefs of many, our problem is not one of utilization, but rather of high cost per unit of services delivered.  We use fewer office visits, fewer hospitalizations, shorter lengths of stay, and fewer prescriptions than other similar countries.

In 2009, George Halverson touted data from the International Federation of Health Plans 
showing use price disparities across countries.  US costs – just about off the charts.  

This month’s Health Affairs is entitled “The New Urgency to Lower Costs,” and Columbia professors Miriam Laugesen and Sherry Glied (now an assistant secretary of HHS)  revisit the topic of unit prices– and find similar results .  They show that orthopedists make $442,450 on average in the US – a third higher than the next highest country.  Primary care physicians on average make $186,582 in the US, 15% higher than in the UK, and double the income of primary care physicians in Australia.  All of these costs are net of expenses.

The authors have also tried to account for the high cost of medical education in the US, which is often cited as a cause of high physician income in the US.  They calculate that amortized over 30 years of practice this would be $21,300 (primary care) or $24,400 (orthopedics) – and higher salaries far exceed this differential.   (I think the emotional impact of tuition loans is higher than the emotional impact of foregone earnings during training, so I think the authors are undercounting this differential).  

The authors also compare costs for total hip replacement, an elective procedure that doesn’t differ from market to market. In all countries there is much higher cost for private payers than for public payers – but again, the cost in the US is far higher than the costs elsewhere.

As I’ve mentioned before, there is not a single ‘silver bullet’ to address the high cost of health care in the US.  We often focus on unhealthy lifestyle behaviors and overutilization. Both are very comfortable for providers, since they are not responsible for lifestyle and it’s generally other providers who are overutilizers.  We won’t get closer to the costs of European and other developed countries, though, until we address unit cost issues.  AND – we won’t fully address unit cost issues without having a negative impact on physician income.

Baicker and Chandra go to the Federal Reserve

Today’s Managing Health Care Costs Indicator is $247,000

Katherine Baicker and Amitabh Chandra, both of Harvard, gave a paper to the Federal Reserve meeting in the Rockies last week.  The paper got a reasonable amount of press – but most of the focus was on the two pages where they challenge the conventional wisdom that accountable care organizations will necessarily lower health care costs.    

That coverage was accurate – but the paper was dramatically richer.

The title, “Aspirin, Angioplasty, And Proton Beam Therapy: The Economics Of Smarter Health Care Spending”  is a good place to start. Baicker and Chandra make the important point that we are purchasing high tech expensive medical care (like angioplasty and proton beam therapy), often when they haven’t even been shown to improve care.  On the other hand, it’s hard to get us to embrace inexpensive low technology innovations like aspirin to prevent heart attacks, or handwashing to prevent surgical infections.

They point out graphically that small incremental investments in low technology (aspirin and handwashing) could have huge health care benefits, while large incremental spending on high technology (angioplasty and proton beam therapy) would have only small benefits. A 1990s evaluation suggested that medical advances leave us currently paying about $247,000 per quality adjusted life year saved.

Curve A below represents appropriate productivity efficiency in health care, where investments are first made in low tech high return items like handwashing and aspirin.   This is a conventional economics efficiency frontier – each dollar is promoting further value, but the value declines with more investment as the marginal returns diminish.   Curve B represents an economists nightmare – where investments are prioritized to high technology which itself is either unproven or not shown to be of huge value, and later investments are made for the high value (but inexpensive) interventions like proton beam therapy for prostate cancer.  As you can see, each additional dollar does yield more social benefit – but we end up allocating extra dollars to health care, and we neglect schools or roads or other social needs.

Click image to enlarge.
Other key points from this paper:

  • Expert opinion health care often cites that 30% of health care spending is % waste, but it’s hard to remove that waste
  • The federal government’s tab is $250b annually to provide tax subsidies for employer sponsored insurance
  • Americans have historically had first dollar coverage, which leads to more moral hazard and can lead to overuse of less valuable care.  Of course, we’ll see how this changes with the advance of high deductible health plans.
  • Health insurance is “social insurance” which redistributes from the healthy to the sick.  For all the talk about accountability, we really don’t want to disrupt this redistribution.
  • Income tax rates would have to increase by 70% to fully fund the cost of health care if it continues to increase at a rate 1% greater than overall inflation.  This type of income tax increase could lead to reductions of 3-14% in GDP. I found this number especially sobering.
  • The authors point out that as long as Medicare and the FDA cannot consider cost when they determine coverage and approval, we will purchase lower value health care. 
  • Information is a public good, and will require government investment to subsidize comparative effectiveness research.

Baicker and Chandra conclude that there are a few important steps to take to encourage smarter spending on health care
-        Public payers (Medicare and Medicaid) should bundle provider payments  
-        Patients should have more cost-sharing – but it should be nuanced to encourage more attention to the value of care
-        We should provide patients with far better information about the cost and quality of the care that they could receive.

Health Care Crowds Out Other Worker Compensation

Today’s Labor Day Managing Health Care Cost Indicator is 170%

I show this slide a lot; it's from the Kaiser Family Foundation, and shows how the cost of health care premiums have increased more dramatically than either overall inflation or worker income.  I point out that worker productivity has increased.  The increased value of labor, though, has been largely absorbed by the increased cost of health care. Hence, most people don’t feel like they have improved their income much or even at all over the last few decades-- and they're right 

SourceClick Image to Enlarge

My colleague Steve Nyce has coauthored a white paper “Treating our Ills and Killing our Prospects,” highlighting research he has done into the broader social consequences of the high rate of inflation in health care costs.

One of the interesting analyses he has performed is to show how the increased cost of health care differentially affects those in the lower earning deciles.  Essentially, the high trend rate of health care costs eats up only a small portion of income for high income workers, while the high trend rate sometimes accounts for more than 100% of gain in compensation for low-wage workers.   In fact, the projections of health care cost increase suggest that health care will account for 170% of potential compensation increases for those with the lowest 10% of income from 2009-2030!

 Click Image to Enlarge

Rapidly escalating health care premium costs contribute to the increasing disparity between rich and poor.

Doctor Billings Gone Wild

Today’s Managing Health Care Costs Indicator is $56,890

That’s how much a New Jersey physician billed Aetna for a bedside consultation, according to a lawsuit quoted in this month’s Managed Care Magazine (free registration required)  The physician, and a number of others cited in this article, were ‘out of plan,’ and therefore not subject to Aetna’s fee schedules.

New Jersey has a consumer protection law which makes it difficult for health plans to allow patients to be balance billed for the difference between a health plans allowable rate and the amount billed by a physician.  At the same time, there are no limits to the amount a physician is allowed to bill.  This is a well-meaning consumer protection, but it’s unbalanced, and can lead to dramatic high bills – and high costs for all insurance rate-payers.  New Jersey should couple this regulation with billing caps, but these are not surprisingly opposed by physicians. 

Aetna alleges that some physicians have set up arrangements where they refer to ‘out of plan’ colleagues or facilities which can bill unlimited amounts, increasing total revenue. (That would be increasing total cost, from the perspective of those concerned about health care inflation).

A physician who does bariatric (weight loss) surgery lucidly explained how health plan fee for service rules and ongoing negotiations encouraged him to have a high “rack rate,” the initial billing rate before discounts or negotiations:

Typically, we bill $24,000 and we expect to get half. That means we get paid $10,000 to $11,000 for the same services we charged $24,000 for last year.  So then we bump our charges up to $30,000.

This surgeon does not participate in any health plan – so all of his billing is ‘out of plan’ and not subject to health plan llimits.  The health plan medical directors interviewed complained that out of plan physicians rarely offered substantial discounts off their billed charges.

The CommonHealth blog  is collecting stories from the Boston market, and reported last week on a $23,000 estimate for an infant circumcision.

There is no perfect answer here, and there are times when health plans arbitrarily set fee for service rates too low.  But the kind of unbridled billing described in the Managed Care article contributes to health care inflation.   Overbilling makes health care less affordable, and is not a victimless crime.