February 16, 2007
What's Happened to the WSJ?
I'm a bit freaked out to read such a cogent and smartly argued health care op-ed on the editorial page of The Wall Street Journal, but Nobel Laureate Daniel McFadden goes ahead and shocks me anyway. The piece recounts the author's research group, which has tracked the implementation and performance of Medicare Part D. McFadden, like most of us, is relatively pleased with Part D's performance, though it's worth saying that he seems to think liberals believed the program wouldn't work at all, rather than would simply cost more than it had to. The left made the latter charge, and I think it remains correct.
Regardless, these are quibbles, particularly in the face of such an anti-WSJ conclusion. First, he notes the cost benefits increased insulation from certain prices can bring:
Dana Goldman at RAND Corporation has found that making at least some drugs available to seniors at lower cost more than pays for itself in decreased incidence and cost of health problems. For example, reducing the copay on statins to $10 from $45 for a 30-day supply increased plan prescription drug payments, but the increased adherence of patients to the therapy at the lower copayment reduced cardiovascular incidents and attendant hospitalization costs, so that total annual health costs per patient in his study fell to $5,180 from $5,470.
A recent study of the VA population indicates that statins increase adult life expectancy by nearly two years, apparently because they act as anti-inflamatories as well as reducing cholesterol. Anecdotal evidence indicates that Part D coverage will reduce medical problems and hospitalization costs enough to offset a significant portion of its cost. However, reduced adherence to therapies by consumers who hit the gap will probably have a significant adverse effect on health outcomes that we will begin to see in 2007. A humorous proposal is that employers could lower their total health-care bills by putting statins and anti-hypertensives in the water cooler.
So just forcing them to pay the full price for protected-patent statins won't lower total costs? Weird. More surprising yet is the conclusion:
the success of Part D depends substantially on thoughtful and muscular management of the market. The former head of Medicare, Mark McClellan, and a dynamic, no-nonsense 75-year-old government bureaucrat, Abby Block, bullied insurers to make sure there were, in her words, "no bad choices." It is unclear whether their successors will be as successful in standing toe-to-toe with the industry and making sure consumers' interests are protected.
A health insurance market like Part D probably requires this level of active management to work well; after-the-fact oversight in the style of the SEC or FTC is inadequate. If privatization is going to work elsewhere in health care, active market management will be needed.
So, in other words, the federal government has to step in and force the private market to act as much like the federal government would as possible. Indeed, elsewhere in the piece, McFadden suggests "we need to wring out some of the inefficiencies. Something like 30% of our health costs come from administrative overhead, legal costs and defensive medicine. These could be largely eliminated in a comprehensive reform; we just need to emulate best practice in other developed countries." Eagle-eyed readers would know what that means: If insurers weren't spending endless hours trying to deny care and price out the sick, admin would be far lower. McFadden's solutions, in fact, are wrapped in the occasional bit of free market rhetoric, but generally militate towards substantial, public-oriented reform of health markets. As I said, not what I expect from the WSJ. They're going soft.
Also at Tapped.
"in other words, the federal government has to step in and force the private market to act as much like the federal government would as possible"
So, your're arguing that the only reason consumer healthcare worked in this instance, was because that well-known liberal, Mark McClellan, was driven by an overriding desire to quash market mechanisms wherever they appeared? hmmm...
Posted by: Chris | Feb 16, 2007 5:06:37 PM
Mixed systems work? Euronly as young as you feel.
Posted by: Tim Finnegan | Feb 16, 2007 5:38:17 PM
I, for one, thought it wasn't going to work at all, in the sense that a huge number of seniors would not sign up for coverage.
Posted by: Nicholas Beaudrot | Feb 16, 2007 11:41:06 PM
I am of the school that says the vast majority of savings to be had in health care will come from the provider side, not from private insurance. Why? For starters, because only about 37% of health care in the US is paid for by private insurance. About half of this is self-insured, which means there is no insurance profit. For the other half, the insurer takes about 20% of its premiums for administration and profit combined. That means something like a whopping 5% of total health care expenses is the total possible direct savings from getting rid of all private insurance administrative expenses and profit.
But this number is too high, because claims will still have to be processed and paid, actuaries will still have to make estimates about future costs, questions and complaints will still have to be addressed, etc.
So if we move to single payer, the total direct savings from getting rid of all private insurance administration cannot be higher than 5% of current total costs, and is very likely closer to 3%, maybe even as low as 1-2%. I'm all for grabbing those savings, but it turns out that most of it can be had without even going to single-payer. Simply (a) make coverage universal, (b) standardize one or more basic plans available to all (with supplemental or "premium" plans available to those who want to pay more), (c) remove underwriting, (d) remove the ability of insurers to reject applicants on health grounds, (e) remove or greatly reduce the role of brokers, and (f) install a system like MA's health connector which provides easy access to information on plans in one place, reducing sales and marketing expenses.
Yes, by going to single payer there would be additional savings from reduced admin on the provider side. But how much, really? It's nice to think that providers are these put-upon folks whose staffs are desperately trying to thwart insurer's tricks in order to get what is rightfully theirs, and that under a single-payer system this would go away. A nice story, but almost entirely false.
First, the premise is false, because providers are still extremely well-paid despite all the whining. The average GP/PCP salary is over $150,000 and the average specialist makes over $300,000. The average night in a hospital, excluding the cost of surgery and drugs, is over $1,000. Do you really think the billing department is more than a tiny fraction of this?
Yes, there is administrative waste, especially in hospitals, but very little of it relates to billing. Most of it is the result of poor cost and quality controls which don't force hospitals to be as efficient and effective as they could be.
And what about that billing staff? Those personnel devoted to maximizing payment from private insurers also spend a lot of time on Medicare and Medicaid (if the provider even accepts Medicaid, but that's another story). If 100% of providers' money is coming from government programs in the future, it is a near certainty that the billing staff will not be laid off in large numbers. Instead most will turn their attention to maximizing revenue from the government. This is already happening, so it doesn't take a crystal ball to see it.
A small part of why we spend so much on healthcare is the administrative hassle brought by private insurance. A massive part of why we spend so much on health care is that we spend far more on providers and prescription drugs than any other country in the world. Why? Because there are too few effective cost controls, not too many.
If insurers were so effective at denying care, don't you think we'd have the opposite problem from the one we have today? Our problem is not that we spend too little, but that we spend too much. And we spend it in the wrong places, at the wrong times, and in the wrong way. Our payment schemes incentivize acute care rather than preventive care, chronic care treatment rather than cures, chemo rather than cancer surgery, bariatric surgery rather than health coaches to motivate lifestyle modification...the list goes on.
One last word on the scapegoat that private health insurance has become: the net margins in this industry are around 5%, and that's the long term historical average. That is about the same as the hospital industry, maybe slightly more, and far less than the pharmaceutical industry. Health insurance is a low margin business on the whole, and has been for a long time.
What that means is that they are pricing in line with the medical cost trend (less in 94-98, more in 2001-2004, and about even today). To connect the dots, what that means is that if insurers paid more in claims, they would also have to charge more in premiums. Stunned, yet?
This whole "greedy bastards" meme has gotten totally out of hand. Insurance companies are not angels by any means, but you can argue for reform without making a charicature out of them. You'd be less disillusioned with the result as well, because you'd realize that you will never get massive savings without changing the incentives and reimbursements to the providers and suppliers of health care.
I know, this sounds crazy to most of you. But as the debate over national health care develops, I think some things that it seems "everybody knows" are going to turn out not to be true after all.
Posted by: jd | Feb 17, 2007 2:35:46 AM
Once you adjust for malpractice insurance, GPs incomes in the USA are within 5% of their Canada/EU counterparts. Its teh specialists that make a killing, not the GPs.
What we need to do is decrease specialist income. That will force more docs to become GPs killing 2 birds with one stone. Thats the model that Canada/EU uses. In the UK, GPs acutally make MORE money than specialists (approx 200k with recent pay for performance standards)
Medical school should be financed by the federal government, malpractice should be covered by the fed (just like EU) and docs should get paid a flat salary so they wont have any incentive to increase services to recoup fee for service type wages. I suggest about 120k for GPs, maybe 160k for specialists. Thats pay before taxes with all expenses removed. Thats very comparable with what the docs in Canada/EU make.
Posted by: joe blow | Feb 17, 2007 4:43:00 PM
A little more than a year ago Ezra told us of the "failed implementation and bafflingly high costs" of the Medicare Part D program. Now we're told he's "pleased" with the program's performance. Then we were told about the initial "administrative glitches", now there's an approving quote about the administrative mastermind, Ms. Block. A little more than a year ago, Ezra predicted that "After a year or so of implementation, so many enraged seniors will pour out of the program and return to the private market that Medicare's entire reputation could conceivably be wrecked."
I suppose we can pair the dishonest presentation of McFadden's WSJ article with Ezra's dishonest presentation of his own past statements. For those who would rely on the selected quotations: don't; haven't you learned your lesson? Click through and see what McFadden really has to say.
Posted by: Thomas | Feb 18, 2007 1:29:07 AM
Posted by: judy | Sep 26, 2007 12:04:43 PM
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