Oops, Maybe ObamaCare’s Cost Controls Won’t Work after All
One of ObamaCare’s big selling points was that it would launch lots of pilot programs so that Medicare bureaucrats could learn how to reduce health care costs and improve the quality of care. Yesterday, the Congressional Budget Office threw cold water on the idea.
In 2010, Peter Orszag and Ezekiel Emanuel explained the promise of ObamaCare’s pilot programs:
[The law's] pilot programs involving bundled payments will provide physicians and hospitals with incentives to coordinate care for patients with chronic illnesses: keeping these patients healthy and preventing hospitalizations will be financially advantageous…And the secretary of health and human services (HHS) is empowered to expand successful pilot programs without the need for additional legislation.
Atul Gawande wrote even more glowingly:
The bill tests, for instance, a number of ways that federal insurers could pay for care. Medicare and Medicaid currently pay clinicians the same amount regardless of results. But there is a pilot program to increase payments for doctors who deliver high-quality care at lower cost, while reducing payments for those who deliver low-quality care at higher cost. There’s a program that would pay bonuses to hospitals that improve patient results after heart failure, pneumonia, and surgery. There’s a program that would impose financial penalties on institutions with high rates of infections transmitted by…
You get the idea.
The thing is, pilot programs in Medicare are not new. And in a review of dozens of Medicare pilot programs released yesterday, the Congressional Budget Office revealed they aren’t very successful, either:
The disease management and care coordination demonstrations comprised 34 programs…
In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating organizations were considered…
Only one of the four demonstrations of value-based payment has yielded significant savings for the Medicare program.
No big deal, you say. Startups fail all the time. What’s important is not that 37 startups failed, but that one succeeded.
That’s how things are supposed to work. But as Alain Enthoven explained to Gawande, the really perverse thing about Medicare pilot programs is that even the successful ones die:
Gawande got it wrong about pilots…The Medical Industrial Complex does not want such pilots and often strangles them in the crib. For example, nothing lasting and significant came of the pilot to reward people for getting their heart bypass surgery at regional centers of excellence. I don’t remember the details of how it died, but I believe it was tried and went nowhere. No doubt every hospital thought it was a center of excellence and wanted to be so rewarded.
Another more recent example is durable medical equipment. David Leonhardt had an excellent article in the New York Times on June 25, 2008 called “High Medicare Costs Courtesy of Congress.” Someone had sold the good idea that prices of durable medical equipment should be determined by competition, and there was a provision in law for pilots to test competition. The industry lobbied hard to stop it and promulgated scare stories. “Grandma won’t get her oxygen.” Leonhardt recounts how Democratic and Republican leaders got together and postponed the pilot— and, I suspect, postponed it forever. There were proposals to test health plan competition, fought off by the industry of course. So this is not a fertile political environment for pilots. In fact, one of the most important lessons that has come out of the current “reform” process is the enormous power of the medical industrial complex and their large financial contributions and armies of lobbyists to block any significant cost containment.
Rather than a reason for more government interference in health care, the death of these pilots is a consequence of government interference. If the federal Medicare program weren’t such an enormous player in the U.S. health care sector, industry lobbyists (and their servants in Congress) wouldn’t have so many ways to protect themselves from competition by more efficient providers.
Enthoven summed up ObamaCare’s approach to cost control best:
The American people are being deceived. We are being told that health expenditure must be curbed, therefore “reform is necessary.” But the bills in Congress, as Gawande acknowledges, do little or nothing to curb the expenditures. When the American people come to understand that “reform” was not followed by improvement, they are likely to be disappointed. Our anguish is only intensified by the fact that the Republicans are no better at fiscal responsibility, probably worse as they demagogue reasonable attempts to limit expenditures.
Congress is sending the world an unmistakable signal that it is unable or unwilling to control health expenditures and the fiscal deficit. That is not going to make it easier to sell Treasury bonds on international markets. I fear this will lead to higher interest rates.
FYI, Enthoven wrote those words in 2009.
No Wonder Romney Didn’t Mind Forcing People to Purchase Health Insurance
To Mitt Romney, $10,000 is no big deal.
Incredible
“The Affordable Care Act gives states incredible freedom to tailor reforms to their needs.”—HHS Secretary Kathleen Sebelius, February 10, 2011
“We’ve taken incredible steps to reduce health care costs and improve care…”—HHS Secretary Kathleen Sebelius, November 14, 2011
Is the Administration Cooking the Books on Govt’s Share of Health Spending?
Something smells fishy here.
Today, the federal agency that runs Medicare and Medicaid released its estimates of national health expenditures in 2009. Interestingly, the U.S. Centers for Medicare & Medicaid Services re-categorized about 6 percent of national health expenditures — well over $100 billion — from “government” to “private,” at the very moment that the government share of NHE appeared set to hit 50 percent.
Last year, CMS projected that government health spending would “account for more than half of all U.S. health care spending by 2012.” But it looks like we were set to reach (have reached?) that milestone much sooner. See the below table, which I made using CMS’s estimates from 2008 and Exhibit 5 (p. 16) from today’s report.
Turns out, it was the private sector spending that $100 billion each year, not the government. Who knew?
This 6-percentage-point drop in government’s share of health spending was apparently due to “the renaming of some service and payer categories.” A footnote leads to a page on the CMS site that isn’t active yet, so we can’t see what was recategorized from government to private spending.
Exhibit 5 of today’s report also reveals that total health care spending grew by 4 percent in 2009, while government health spending grew by 9.9 percent and private spending shrank by 0.2 percent. Indeed, today’s report contains this money quote:
Federal health spending increased 17.9 percent between 2008 and 2009 …. In contrast, the shares of spending of households… private businesses… and state and local governments… fell by roughly one percentage point each between 2008 and 2009.
I can’t say for sure that there’s something fishy going on here. But this re-categorization comes at an awfully convenient time for an administration struggling with public dissatisfaction over its, ahem, government takeover of health care. My spidey sense is tingling.
The Cognitive Dissonance of ObamaCare Supporters
“The Affordable Care Act offers new benefits like preventive care with no out-of-pocket cost and tools to help fight unreasonable premium increases that will save money for consumers.” — Jessica Santillo, a spokeswoman at the Department of Health and Human Services
KFF/HRET Survey Part II: Isn’t This Good News, Too?
As I blogged earlier, yesterday the Kaiser Family Foundation and the Health Research & Educational Trust released their survey of employer-sponsored health benefits in 2010.
For most of this survey’s history, it included a very useful graph of the average growth rate of employer-sponsored insurance premiums. Here’s the graph from their 2007 survey:
(The grey and light-green lines represent year-to-year growth in overall inflation and wages, respectively.)
Unfortunately, 2007 was the last year that KFF/HRET included that graph in their annual survey. Had they included that graph this year, it would have shown an even more heartening moderation of premium growth:
A lot of things can drive premium growth. I discussed a couple of them in my last post. Some factors that could cause premium growth to moderate might not be all that welcome; if insurers dumped all their sick enrollees, for example. But absent dramatic evidence of that, isn’t this good news? And isn’t good news worth highlighting?
Paul Ryan’s Roadmap, and the Difference between Costs and Spending
Rep. Paul Ryan (R-WI) ably defends his “Roadmap for America’s Future” in today’s Washington Post. He doesn’t mention Paul Krugman’s attacks thereon, nor should he. (To read why, consult The Atlantic‘s Megan McArdle and Ted Gayer of the Tax Policy Center.)
I haven’t officially weighed in on the health-care aspects of the Roadmap, but hope to do so in the near future. For the moment, I’ll use Ryan’s oped to stress a distinction that is crucial to thinking clearly about health care costs.
Ryan writes of the dangers of an un-reformed Medicare program (emphasis added):
Under an ever-expansive, all-consuming central government, costs will be contained with Washington’s heavy hand imposing price controls, slashing benefits and arbitrarily rationing seniors’ care.
While those forms of government rationing may reduce spending, that’s not the same as reducing costs. On the contrary, those rationing measures may increase health care costs.
Suppose Medicare set its prices for hip and knee replacements so low that no medical-device manufacturer would provide the hardware and no surgeon would perform the procedures. Medicare spending on hip and knee replacements would fall. But costs may rise: more seniors would be walking around — or not walking around — in severe pain. Pain and reduced mobility are costs, even if they don’t show up in the federal budget or household budgets. (Indeed, those costs would be so severe that overall Medicare spending could rise as seniors bought more wheelchairs, sought treatment for pressure sores, etc.). This is the main reason conservatives criticize Canada’s Medicare system and the British National Health Service: reducing health care spending often increases costs.
I therefore request universal compliance with Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.
Health Cost Projections to 2019: The Doc Fix Trick Again
Congressman Paul Ryan (R-WI) takes the President to task for cooking the books on projected health care costs, most egregiously with the “doc fix” — namely, assuming Medicare slashes physician payments by 21.3% this year and subsequently lets them fall continuously in real terms.
What nobody seems to have noticed is that the same phony “doc fix” taints the new “Health Spending Projections Through 2019” from Centers for Medicare and Medicaid Services (CMS).
Drew Altman, president and CEO of the Kaiser Family Foundation, tries to downplay the CMS forecast “that the public sector will start paying more than half of the nation’s health care bill starting in 2012, and that government spending will grow faster than private spending from 2009 to 2019 (an average of 7.0% per year vs. 5.2%).”
Worrying about such spending trends is a foolish “ideological battle over the role of government,” says Altman, because rapid increases in government health spending is “just the byproduct of economic and demographic trends” (recession and an aging population). “Is government health spending out of control?” he asks; answering “NO” in capital letters. “The report simply underscores the need to control health care costs in the public and the private sectors alike.”
On the contrary, the reason government health care spending is projected to slow down to 7% a year is, the CMS explains, “due principally to the 21.3% reduction in physician payment rates . . . mandated in current law.”
The Best and Worst Ways to Reform Health Care
From my health care reform oped in today’s Daily Caller:
President Obama wants to work with Republicans on health care reform. “I am going to be starting from scratch,” he says, “in the sense that I will be open to any ideas that help promote” controlling health care costs and making health insurance more widely available.
As it happens, many of the worst ideas are in the legislation Obama supports. Republicans have embraced some of the best ideas, but also some of the worst.
The best health care reform ideas ideas give consumers the money, let them choose a health plan regulated by a state of their choice, and reduce the federal government’s role in providing medical care to the needy. The worst ideas? Creating or expanding government health care programs, mandates, price controls on health insurance, and federal med mal reform.
Obama’s ‘Best’ Idea? Rationing Care via Clinton-esque Price Controls
Hoping to revive his increasingly unpopular health care overhaul, President Obama has invited Republicans to a bipartisan summit this Thursday and plans to introduce a new reform blueprint in advance of the summit. On Sunday, the White House announced that a key feature of that blueprint will be premium caps, a form of government price control that helped kill the Clinton health plan when even New Democrats rejected it.
The New York Times reports on President Obama’s blueprint:
The president’s bill would grant the federal health and human services secretary new authority to review, and to block, premium increases by private insurers, potentially superseding state insurance regulators.
It bears repeating what Obama’s top economic advisor Larry Summers thinks about price controls:
Price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time.
For example, as I have written elsewhere, artificially limiting premium growth allows the government to curtail spending while leaving the dirty work of withholding medical care to private insurers: “Premium caps, which Massachusetts governor Deval Patrick is currently threatening to impose, force private insurers to manage care more tightly — i.e., to deny coverage for more services.” No doubt the Obama administration would lay the blame for coverage denials on private insurers and claim that such denials demonstrate the need for a so-called “public option.”
As the Progressive Policy Institute’s David Kendall explained in a 1994 paper, the Clinton health plan contained similar price controls. Kendall explains why they would be a disaster:
In spite of the late hour in the health care debate, Congress has not yet decided how to restrain runaway health care costs. The essential choices are a top- down strategy of government limits on health care spending enforced by price controls or a bottom-up strategy of consumer choice and market competition. History clarifies that choice: Previous government efforts to regulate prices in peacetime have invariably failed. Moreover, government attempts to control prices in the health care sector would undermine concurrent efforts to restructure the marketplace…
The idea of controlling costs by government fiat is seductively simple. But it rests on a conceit as persistent as it is damaging: that government bureaucracies can allocate resources more wisely and efficiently than millions of consumers and providers pursuing their interests in the marketplace. The alternative — one rooted in America’s progressive tradition of individual responsibility and free enterprise — is to improve the market’s ground rules in order to decentralize decision-making, spur innovation, reward efficiency, and respect personal choice.
As centrally planned economies crumble around the world, many in the United States seem bent on erecting a command and control economy in health care. This policy briefing examines the reasons why government price regulation would fail to constrain health care costs and create many adverse side effects…
Ultimately, government price regulation will always fail because it does not change the underlying economic forces driving up prices. If we are serious about slowing the growth of health care costs, we have to change the ways we consume and provide medical care. Price controls evade the hard but essential work of structural reform in health care markets: They are a quintessentially political response to an economic problem. The alternative is to allow well-functioning markets to set prices and allocate resources, while ensuring that all Americans have access to affordable health care coverage. The market-oriented approach leaves decisions to cost-conscious consumers and health care providers rather than bureaucrats.
Any of that sound familiar? It’s worth reading the whole thing.
This is not hope. This is not change. (Much less a game-changer.) It is, to pinch a phrase, a return to “the failed theories that helped lead us into this crisis.”
Mandating Coverage of Pre-Existing Conditions = Price Controls
Kevin Williamson’s article “Priceless Is Worthless” from the December 21 issue of National Review sat on my nightstand for two months. When I finally read it, I was glad I hadn’t pitched it. It was like someone had taken Friedrich Hayek’s “The Use of Knowledge in Society” and made it accessible and entertaining:
For the Soviets, there were no real prices, so there was no feedback loop between producers and consumers: If we’d had that model for soft drinks, we’d still be drinking New Coke, and the cola executives in Atlanta would be strutting around in their nifty military uniforms, with epaulets and braid, telling us to drink our New Coke and like it, because they had determined, RATIONALLY, that this is what we want. A good rule of thumb: Fear the man who says he will make things rational by ignoring reality–and ignoring prices is ignoring reality.
Williamson warms my libertarian heart when he exposes laws requiring insurers to cover pre-existing medical conditions as price controls:
You’d never take a bet that you knew you were going to lose, right? Insurance companies won’t do that, either, unless they get paid to do so–specifically, unless they are allowed to charge at least as much for covering Preexisting Condition X as it’s going to cost them to treat Preexisting Condition X. Ignoring the reality of prices–waving the magic wand and saying: “There shall be no price put on preexisting conditions”–does not solve the problem. Health care costs money. The price is right, and you cannot politically engineer your way out of that reality, no matter how many sickly toddlers you parade around on CNN.
Free-market health care reforms would take a great leap forward if all conservatives and libertarians would just start calling such laws what they are: price controls.
Whip (Health Care) Inflation Now?
During the runaway inflations of 1974 and 1979, Presidents Ford and Carter suggested that inflation was caused by the profligacy of American households. President Ford’s infamous “Whip Inflation Now” speech, for example, said, “Here is what we must do, what each and every one of you can do: To help increase food and lower prices, grow more and waste less; to help save scarce fuel in the energy crisis, drive less, heat less.”
Much of the recent discussion of health care costs likewise treats this as a problem caused by a demonic private insurance industry, and therefore requiring such “reforms” as expanding Medicaid to the non-poor and Medicare to the non-old.
The facts are quite different, as shown in “The Evolution of Medical Spending Risk” by Jonathan Gruber of MIT and Helen Levy of the University of Michigan, in the latest Journal of Economic Perspectives.
Gruber and Levy calculate that real private health care spending per person (in 2007 dollars) “increased from about $700 to $3,500 between 1960 and 2007, a five-fold increase.” They note that “private out-of-pocket spending has not quite doubled.” Yet “government health spending over the same period . . . increased from about $250 to $3,5000, a 13-fold increase.”
In fairness, the quality of health care has been hugely improved since 1960. And prices of physician services (which are often incorrectly compared with the overall consumer price index) have risen no faster than prices of non-medical services.
In any case, President Obama’s claim that the pace of total public and private spending on health care could somehow be “contained” by greatly increasing government spending clearly flunks 3rd grade arithmetic.
Unless the hidden agenda is to impose draconian wage and price controls and political rationing on health care providers, all the rhetorical pretense about proposed health care legislation being a way to hold down overall spending on health care is like saying the solution to chronic drunkeness is more booze.
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