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.

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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 

Source.  Click 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.

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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.

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