Non-Environmental Cost-Benefit News

by Alan Sager, Ph.D. and Deborah Socolar, M.P.H.

I. HEALTH CARE COSTS ARE STILL SOARING UNSUSTAINABLY

• The expected $621 billion rise in U.S. health care spending from 2000 to 2005, we find, will consume nearly one-quarter of the nation’s projected economic growth (rise in GDP) of $2,579 billion ($2.6 trillion).
• This rests on a reliable federal projection that 2005 health spending will reach $1,921 billion ($1.9 trillion). That is 15.5 percent of the economy, up sharply from 2000’s 13.2 percent share.
• Had health spending in those five years grown only as fast as GDP, the U.S. would have saved $280 billion in 2005 (one-seventh of expected health cost), and $1 trillion in five years. Health spending growth averaged 8.1 percent yearly—more than two-thirds (69 percent) over GDP’s 4.8 percent.
• If defense spending reaches $540 billion in 2005, health spending will still be 3.6 times that. Health spending is now twice education spending.
• In January 2005, federal researchers published detailed data on 2003 health spending. That report, the press releases, and some news accounts focused on small differences, single-year changes, and other details. They missed the big-picture cost and coverage problems that concern most Americans.
• Administration officials called the findings “good news,” an unduly positive view that stressed 2003’s slightly slower rise in costs. Many press reports drew incomplete or incorrect conclusions. The data’s main implication is that costs continue rising unaffordably. U.S. health costs suffered the third-largest percentage rise in a decade and the second-largest dollar rise ever.
• The accuracy of federal predictions of health spending permit and oblige the U.S. to now address current costs, not 2003’s much lower costs.
• Rising health costs force many people to drop insurance and make it harder to cover all Americans. The unsustainable rise in health costs also threatens the stability of hospitals, doctors, nursing homes, drug makers and other caregivers. It burdens all who pay for care, and weakens the U.S. economy.
• Still, many caregivers and access advocates have endorsed spending more
to advance their distinct aims—partly because traditional cost controls have offered little to either group. It is essential, instead, to contain cost in ways that squeeze out waste, and mobilize the savings to finance high-quality care for all Americans—while paying all needed caregivers adequately.

II. BUT NEW STRATEGIES COULD CONTAIN COST, FINANCE NEEDED CARE FOR ALL PEOPLE, AND STABILIZE CAREGIVERS
• Traditional competitive and regulatory cost controls have failed in health care. The administration urges a new strategy, cost shifting, which it touts as “empowering consumers.” By promoting underinsurance, this strategy pushes patients to deny themselves care. There is no evidence that this is clinically safe or durably contains costs. Patients are the wrong target for cost controls.
• The alternative is to engage physicians in marshaling inevitably finite dollars to care for all Americans. Doctors are key to cutting cost because their decisions control 87 percent of personal health spending.
• One-half of health spending goes to clinical and administrative waste, excess prices, and theft. Physicians can identify clinical waste. Careful cost controls should rest on physicians’ decisions about services needed by each patient. Pathology is remorseless but resources are finite, so trade-offs are essential. There are no blank checks. Trustworthy methods of paying doctors should minimize incentives to over- or under-serve. Variations on this approach have been called “bedside rationing” or “professionalism within a budget.”
• It will be hard to engage doctors in this job, but their support is vital to gain backing for effective ways to contain cost and cover all Americans.
• The new Medicare law mandates a “national public debate” on how to make
care affordable. But it focuses on the wrong questions, and on one crude
cost-cutting tool—asking patients to gamble by excluding certain services
from coverage. This process should explore other ways to cut waste and
cost, and ways to foster careful physician decisions about appropriate care.
• In 2002, U.S. health spending per person was 2.1 times the average in
Canada, France, Germany, Italy, Japan, and the U.K.—nations with greater
elderly shares that cover all their people well. Current U.S. spending should be adequate to cover all Americans.
• U.S. health care lives on the hope that more money for business as usual will continue to flow. U.S. caregivers and payers are therefore spectacularly unprepared to economize if a serious recession were to hit. The economy’s fragility makes it vital to forge a contingency plan to live with no growth in real health spending. Caregivers must work with patients and payers to develop such a plan—one that avoids serious damage to both coverage and quality.
• Winning affordable high-quality care for all requires negotiating political deals. An acceptably-functioning free market is impossible in health care, so public action is essential to contain cost and expand coverage. Political deals must offer value to patients, caregivers, and payers. Agreement will be easier to negotiate if each party accepts the principle of “one hand for yourself and one for the ship” to balance private and public interests.

Two aspects of health spending—one that receives little attention, another that receives much—are worth highlighting, and offer great opportunities for savings. Administration and profit. The fastest-rising category of spending in 2003 was “program administration and net cost of private insurance.” This includes insurance industry profits along with the cost of administering public and private coverage. These costs increased to $119.7 billion in 2003, a rise of 13.2 percent from 2002, while spending on personal health care rose by 7.3 percent. Expenditures for insurance administration and profit thus rose 80 percent faster
in 2003 than spending on actual care. Further, over the decade from 1993 to 2003, while personal health spending rose by 86 percent, program administration and the net cost of private insurance rose by 125 percent. This spending has now surpassed annual spending on nursing home care.
Containing these costs—and also the even bigger administrative costs in
physicians’ offices and hospitals—will help make health care for all Americans affordable. Simple reforms would cut the paperwork and bureaucracy that divert resources from care—for example, by replacing thousands of different insurance companies and hundreds of thousands of insurance plans with a single payer. But it will be very difficult politically to enact and implement such reforms until patients, doctors, and other parties are provided with much greater certainty about how health care would actually work after the reform is implemented. In
particular, all parties need better information on how costs would actually be controlled, how caregivers would be paid, how coverage for all would be assured, what services would be provided, and how those decisions would be made. (The second part of this report begins to explore some of those issues.)

Prescription drugs. The 2003 data report a deceleration in the rate of growth in retail prescription drug spending, and this has been widely noted. Nonetheless, the reported spending—on retail prescription drugs alone 13 —reached 10.7 percent of national health expenditures, up from 10.3 percent a year earlier, 7.6 percent in 1998, and 5.8 percent in 1993. We have estimated total U.S. prescription drug spending, including drug costs in hospitals and nursing homes as well as retail. This quadruped between 1994 and 2004. Even at the new, lower rate of increase, prescription drug spending will double in seven years. Total drug spending would then reach $500 billion in 2011, the year the first baby boomers pass age 65. (The new Medicare drug benefit will accelerate this rise.) Total drug spending would then reach about 17 percent of health spending. The challenge before us is to make all existing medications affordable to all Americans who need them, while spurring breakthrough research. Happily, both can be achieved.

The report examines growing requirements for higher patient payments, described by some as “empowering consumers.” The authors conclude that this is a “pass-the-buck policy which forces patients to deny themselves care” and promotes under-insurance. The report cites evidence that this approach is not clinically safe, and cannot durably contain costs or protect needed caregivers. In addition, this leaves savings—if any—unavailable to expand coverage.

Documenting that doctors’ decisions control about 87 percent of personal health spending, the Health Reform Program report discusses why patients are the wrong target for cost controls, and physicians are key. The study concludes that to make care affordable, “Americans must rely ultimately on careful decision-making by well-informed physicians paid in ways that minimize incentives to either over- or under-serve.” To cut waste, said Socolar, the best tool is “not the bludgeon of HMO regulations, risky policies requiring sick people to pay more, or the gamble of omitting coverage for certain services, but thoughtful physician decisions about what care is appropriate for which patients.”
The nation’s precarious economy makes it urgent to develop a contingency plan for flat real health spending, the report concludes. “This means negotiating and testing political deals to balance private and public interests to win affordable, high-quality care for all. With spending
already adequate to care for all Americans, there is great reason for optimism.” The authors find that federal health officials were overly optimistic in recent statements highlighting 2003’s slightly slower health spending increases as “good news.” The report’s single-year focus also unintentionally obscured the continued unsustainable rise in health costs, Sager and Socolar assert. In addition, they note, a journal news release and some coverage erroneously called the 2003 rise the “slowest in seven years.” Although health spending’s rise for the first time in seven years did not accelerate, the new report shows that 2003 brought the third-largest percentage rise in a decade and the second-largest dollar rise ever.

Sager and Socolar said the key to controlling costs in the future may lie in changing the ways doctors make decisions. But they cautioned that before that could happen, physicians needed more information on the relative costs and benefits of different treatments.

Health Reform Program Boston University School of Public Health
715 Albany Street, 3 T W; Boston, Massachusetts 02118; 617 638 5042
www.healthreformprogram.org
http://dcc2.bumc.bu.edu/hs/Health%20Costs%20Absorb%20One-quarter%20of%20GDP%20growth%20Release%20-%20ch%E2%80%A6.pdf