Is Slowing the Rate of Increase in Healthcare Costs Enough?

Several trade organizations including AHIP, the organization that represents healthcare insurers, and PhRMA, the organization that represents pharmaceutical manufacturers, have proposed a healthcare reform plan that they’re willing to support which would reduce the increase in the cost of healthcare by 1.5%:

WASHINGTON -(Dow Jones)- Health-care trade organizations have formed a plan to reduce projected increases in health costs by $2 trillion over 10 years and will meet Monday with President Barack Obama to present the plan.

Health industry groups have pledged to reduce the rate of cost increases for treating patients by 1.5% each year, eventually resulting in the $2 trillion in savings, according to the White House. Participants in the plan are a diverse array of groups including the American Medical Association, the American Hospital Association, America’s Health Insurance Plans and the Service Employees International Union.

Getting control of escalating health-care costs is a centerpiece of Obama’s proposal to overhaul the nation’s health-care system and expand health coverage to those currently uninsured. The vast savings envisioned by the industry groups, if realized, would represent a major step toward achieving that goal.

Timeo danaos et dona ferentes, as Virgil paraphrased from the Iliad’s Greek. I fear the Greek even when they’re bearing gifts. As I understand the proposal they’re bringing forward it rests on three legs. First, there would be a mandate for everybody in the United States to have health insurance. Second, all insurance would be privately provided. There would be no “public option”, no government-provided plan as it has come to be called. And, third, the rate of increase of costs would be slowed. Don’t mistake that last leg as a commitment to reduce costs. It isn’t. It’s a commitment to reduce the rate of increase not to reduce the costs.

Paul Krugman welcomes the news but is similarly skeptical:

What’s presumably going on here is that key interest groups have realized that health care reform is going to happen no matter what they do, and that aligning themselves with the Party of No will just deny them a seat at the table. (Republicans, after all, still denounce research into which medical procedures are effective and which are not as a dastardly plot to deprive Americans of their freedom to choose.)

and urges the Obama Administration to “hang tough” and reject the second leg of the tripod plan. My guess is that will be a deal-breaker for the industry advocacy groups. Their view is that mandatory insurance conjoined with the option for the insurance to be provided by the government is just the nose of the camel in the tent and they’re probably right.

I’ve got to admit that I’m confused by all of this. The cost of healthcare insurance rises with the cost of healthcare. A commitment to slow but not reduce costs is a commitment that healthcare insurance will be increasingly unaffordable not less so.

Here in the United States we already spend three times as much per capita as most OECD countries do, with similar or poorer outcomes. I’m typically a “half a loaf is better than none” kind of guy but a commitment that what’s already intolerable will get more so over time isn’t much of a commitment at all.

To my eye this is the plan that should have been been arrived at 15 years ago. The cost basis now is far too high for it to be acceptable.

4 comments… add one
  • Drew Link

    “The cost of healthcare insurance rises with the cost of healthcare.”

    As you have observed (and I), this is because we do not really have “insurance,” we have a broad based health maintenance program. Add the absence of real price discipline, and you have programatic disaster.

    “A commitment to slow, but not reduce (per capita) costs is a commitment that healthcare insurance will be increasingly unaffordable not less so.”

    Indeed. So see two basic elements of change required above.

    I’d be willing to examine the data that we spend three times as much for similar outcomes, but I am dubious about the intended implication of the statement. I can bore you with an anecdote that shows how it happens:

    My father, a primary care physician, once noted to me that “back in the day” if a child fell on the playground and bumped their head the advice to the parents would be to watch them for 24 hours for vomiting, extreme headache or obvious signs cognitive dysfunction; slurred speech etc. If so, off to the hospital. 99.99% of the time that worked.

    Today? Straightaway to the imaging people you go. MRI’s CAT’s. You might even be admitted for the night to the hospital for observation. Cost? Maybe $1500 bucks. Outcome? Except for the .01%, the same.

    I can hear the lefties howling about “avoidable consequences just for money!”

    I say shove it, and shut up. Everytime you get in a car, let your kid out in the neighborhood or feed them the crap we eat today your risk is statistically greater…….and avoidable.”

    Of course, health care is “free” so that’s different………..And here we are.

  • Brett Link

    First, there would be a mandate for everybody in the United States to have health insurance.

    I understand the idea behind this. At least in theory, the inability to cut off or refuse customers regardless of medical history will force companies into a situation where, in order to be profitable, they will need to either minimize the costs of sick patients, or increase the money they get out of healthy patients (either by raising premiums or increasing their pool of healthy customers). Therefore, companies will have to compete for healthy customers, offering various bonuses and possibly lower premiums, while at the same time they’ll exert a downward pressure on health care providers to lower medical costs for sick, money-costing patients, also helping to drive costs down.

    But will it actually work out that way? Companies can certainly compete in a zero-sum game for healthy patients, but at the same time, in the absence of regulations requiring a certain type and amount of coverage per insurance “package”, there will be a strong incentive on their part to offer minimum benefits for maximum costs. I could see this leading to a situation in which premiums actually rise for healthy people, simply because every company needs to balance out the costs of their sick patients.

    The Swiss get around this with their program, but only with high per capita medical costs (they’re lower than the US’s, but not by much), and with heavy regulation on what is in a health care insurance plan.

    That’s ignoring, of course, the possibility of skirting the “no refusal” law by offering different plans for different groups, which conveniently happen to omit costly coverage for costly patients (and if that forces them on to the state and federal health care programs, all the better). That’s another layer of regulation you’ll need.

    Or, of course, there’s the possibility of them simply breaking the law, by using indirect methods to discourage certain classes of customers. This would be illegal, of course, but they’d probably try to find loopholes in the law to exploit (and since the health insurance lobby is very well-funded and wide-reaching, you can guarantee that they’ll get an audience among the Congressmen), and if the sanctions are too low they’ll pay the fines and continue to ignore the rules (this has happened with environmental regulations in the past). It’s not as if the simple existence of a regulation means that the protection is there; laws against illegal actions towards preventing unionization hasn’t stopped many companies from taking them, for example.

    You’re going to need not just extensive regulation on this, but a solid regulatory body as well – and like all regulatory bodies, it will be neither perfect nor completely immune to political influence, particularly if the administration that appoints its executive officers is in bed with the companies it is supposed to be regulating.

    And, third, the rate of increase of costs would be slowed.

    One would hope. I’m not so confident, though; both Massachusetts and Switzerland have done this, and their costs are still quite high.

    Furthermore, this sounds like a recipe for increasing HMO-ization of health insurance companies, since they will be under strong market pressure to drive down costs at the health provider level. Expect more things like Kaiser Permanente, where they basically have their own hospitals and health service (a mini-NHS, so to speak), which allows them to implement cost control to a greater degree. Expect more severe penalties for going “out-of-network”. Expect, to a great degree, a strong bureaucratic role in determining when and where you get health care.

    To be honest, just having single-payer sounds much more pleasant. At least with single-payer, I can go to whatever doctor I want as long as they will treat me for the services covered by the universal health insurance plan, and the rates are set with major bargaining power.

  • Brett, here’s a graph you might find interesting. With us paying $6,711 per capita the Luxemburgers (at $4,611) pay 2/3’s what we do and the Swiss (at $3,847) pay a little more than half. The countries we really more closely resemble (France, Germany, the UK) pay less than half what we do per capita.

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