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Can the Gang of Six Change the Way We Pay For Health Care?

A bipartisan group of senators is proposing to reduce the federal deficit by $3.7 trillion over the next ten years. This is seen as a way to overcome the debt ceiling impasse and deal with the nation’s long term financial crisis at the same time. What does this mean for health care?

The proposal would require Congress to find $300 billion in health care spending cuts in order to avert a planned cut in Medicare doctors’ fees. It may also require another $200 billion in cuts. And remember, this is on top of about $550 billion in Medicare cuts already legislated as part of last year’s health reform bill. If I were running a hospital, I would be feeling very nervous right now.

In general, the plan follows the outlines of the Bowles-Simpson (Obama debt commission) proposal. Yet when Erskine Bowles and Alan Simpson were in Dallas earlier this year, they said their health care proposal was nothing more than a line on a piece of paper. “We need you to tell us how to make that work,” Sen. Simpson told me.

Readers of this blog know that we regard all of the deficit reduction proposals as nothing more than lines on a piece of paper when it comes to health care. That includes the health reform law. The Obama administration’s talk about “value purchasing” is nothing more than empty rhetoric, backed by the threat of senseless price controls that the Medicare actuaries office says will put hospitals out of business and severely reduce access to care for the elderly and the disabled.

In general, there has been no serious proposal to reduce health care spending over the next ten years on Capitol Hill. Not on the right. Not on the left. Not Republican. Not Democrat.

So let us veer from the pack and ask what is shaping up to be the most serious question of the moment: How should the federal government pay hospitals?

Jul 20, 2011 | 31 comments | by

What Difference Has RomneyCare Made?

Most conservative critics of the Massachusetts health reform have focused on any piece of bad news about the program they can find. After all, if this is the model for the federal legislation everyone calls “ObamaCare” it’s got to have a lot of defects. Right?

Not so fast. The real story coming out of Massachusetts is that the whole thing is a yawner. Health reform in the Bay State has been mainly about money: who writes the checks and who cashes them. That shouldn’t be a surprise. That’s usually what health reform is about. But what about the effect on patients? As it turns out, there has been very little change at all.

Does that mean that health reform at the federal level might also be benign? I wish. Unfortunately, ObamaCare introduces new and dangerous distortions that you don’t find in Massachusetts — partly because states don’t have the same powers as the federal government. More about that below.

Jul 13, 2011 | 15 comments | by

Getting There

Imagine you are in a room full of diverse people, with differing political views and differing levels of understanding of economics and social science. You are discussing health care.

Yet despite all this diversity there is amazing agreement. You agree on the problem, you agree on the general direction of a solution and then ….. WHAM …. you discover an opinion gap so wide it’s like the difference between night and day.

This happens to me all the time. I find that I am in general agreement with the Obama administration, my friends at Dartmouth and even Don Berwick on four of five steps needed to get from where we are now to a better health care system. Here, for example, is how to reform Medicare:

  1. We agree there is a lot of waste in the system — maybe even one of every three dollars;
  2. We agree that quality of care differs across the system, by wide margins;
  3. We agree that we can generally identify the best (low-cost, high-quality) providers: doctors, clinics, hospitals and even entire health care regions;
  4. We deplore the fact that the best providers are generally paid less than mediocre ones and we agree that this must change; and finally,
  5. ??????

There is so much agreement on items 1–4 that we even illustrate the points with the same examples (e.g., Geisinger, Cleveland Clinic, etc.). At this point people begin losing interest. Minds begin to wander. But it is the last detail that will crucially determine whether the reform succeeds or fails.

Okay, reader. What’s your number five? I’ll give you mine below the fold and readers can find more details here.

Jul 11, 2011 | 43 comments | by

How Health Insurance Undermines Quality Competition

In a previous post, I argued that wherever providers compete for patients based on price, they also compete on quality. It turns out that the reverse is also true: when they don’t compete on price, they don’t compete on quality either.

This post is based on a paper I originally wrote with Gerald Musgrave and Devon Herrick for Health Affairs. Two parts of the paper were instead posted as blog entries (here and here) at the Health Affairs blog. This is Part III.

To bring readers up to speed, let me briefly review the general model.

In a third-party payment system, the provider’s fee, including the money price paid by the patient, tends to be set by an entity outside the doctor-patient relationship. For a given unit of service and a given total fee, that leaves a time price, quality and amenities. Of these three variables, however, only two are typically visible or inferable. The quality variable is normally hidden. As patients respond to what is visible and move back and forth among providers, there will be a tendency toward uniform wait times and uniform amenities. (Think of these as the market clearing time price and the market clearing level of amenities.) Or, if there is a trade-off between waiting and amenities, the rate of substitution will tend to be uniform.

Jun 29, 2011 | 32 comments | by

Is Medicare A Good Deal?

Think about everything you will pay to support Medicare: the payroll taxes while you are working, the premiums during retirement, and your share of the income taxes that subsidize the system. Then compare that to the benefits of Medicare insurance, say, from age 65 until the day you die.

Are you likely to come out ahead? That depends in part on how old you are. If you are a typical 85-year-old, for example, you can expect about $55,000 of insurance benefits over and above everything you have been paying into the system. If you’re a typical 25-year-old, however, you will pay an extra $111,000 into the system, over and above any benefits you can expect to receive.

By the way, this is not the sort of calculations you want to try at home on a pocket calculator. It’s too complicated. Fortunately the heavy lifting has already been done by Andrew Rettenmaier and Courtney Collins in a report for the National Center for Policy Analysis. See the table.

Jun 27, 2011 | 38 comments | by

Rationing By Waiting

Economic textbooks stress the role of prices in allocating resources. Yet the reality is that we pay for almost all of the goods and services we buy with both time and money. The size of the time price, versus the money price, varies a lot from good to good, market to market and even by the hour of the day.

Most of us accept this reality as a normal part of life without experiencing any emotional stress or moral outrage. I’ve never heard anyone say that paying with time is more moral or just or fair than paying with cash. Certainly no one ever argues that paying with time rather than money is more efficient.

Except in health care. As loyal readers of my blog discovered long ago, health policy analysis attracts an unusual breed of thinker:

  • They almost universally believe that if health care has to be rationed, it’s always better to ration by waiting instead of rationing by price — even when the service is something almost everyone could easily afford (e.g., a doctor’s visit).
  • They believe that paying for care with time, rather than money is more efficient, even though the most rudimentary economic analysis shows that belief is wrong.
  • And they believe that people who pay for care with time are “insured” while people who pay with money are “uninsured” — even if the same people end up getting the same care under either system.

[Note to self: Does health policy analysis attract people with peculiar personality disorders? Or do they just get crazy after they become immersed in the field?]

“I ain’t saying you treated me unkind….
You just kinda wasted my precious time.”

Jun 22, 2011 | 28 comments | by

Death by Regulation

“How many of you have not been able to get a drug you needed to properly deliver anesthesia to a patient?” I asked.

Every hand in the room went up.

“How did that affect your patients?” I asked. “Two of our patients died,” one woman answered.

I was speaking to a group of nurse anesthetists, enrolled in a business management program at Marshall University in West Virginia. I wish I could say their experience is unusual. It isn’t.

About 90 percent of all the anesthesiologists in the country report they are experiencing a shortage of at least one anesthetic. Drug shortages are also endangering cancer patients, heart attack victims, accident survivors and a host of other ill people.  The vast majority involve injectable medications used mostly by medical centers, in emergency rooms, ICUs and cancer wards. Currently, there are about 246 drugs that are in short supply and, as the chart shows, the number has been growing for some time.

So what’s going on?

Jun 20, 2011 | 15 comments | by

Free Health Care

This past weekend, Wal-Mart was offering health care screenings to male customers at no charge. Sam’s Clubs across the country gave any customer willing to take the time:

  • BMI Index measurements,
  • Blood pressure tests,
  • Cholesterol readings,
  • PSA (prostate cancer) tests, and
  • TSH (thyroid stimulating hormone) tests.

And that’s not all. Sam’s Clubs have more free screenings planned for the future. Here’s the schedule:

  • July: Kids Health Screenings
  • August: Vision Health Screenings
  • September: Diabetes Screenings
  • October: Women’s Health Screenings
  • November: Digestive Health Screenings

Further, at the store I visited there was no waiting. And if there happened to be a wait, I suspect it would be handled the way Wal-Mart handles prescription drugs. In order to reduce both the time cost and the money cost of care, Sam’s Club Pharmacy promises:

  • Hundreds of generic prescriptions for just $4,
  • Prescriptions filled in just 20 minutes, and
  • Text alerts to tell you when your prescription is ready, so you can shop while you wait.

Now if this doesn’t knock your socks off, you must be living in a cave somewhere. Certainly, you haven’t been paying attention to health policy news.

How many times can a man turn his head
And pretend that he just doesn’t see.

Jun 15, 2011 | 23 comments | by

Reforming Medicare the Right Way

With all of the heated rhetoric coming from Washington these days you would think there is a huge difference in the way Republicans and Democrats want to reform Medicare.

But did you know that over the next decade there is no difference at all between the agendas of the two parties? Although the House Republicans voted to repeal ObamaCare they did not vote to repeal the cuts in Medicare spending intended to pay for ObamaCare. So for the next ten years, there’s not a dime’s worth of difference between the two parties, to quote an all but forgotten political refrain.

Even more surprising, there is no difference between what the House Republican budget proposes and what Democrats voted for in last year’s health reform bill for anyone over the age of 55. It’s only young people who have a real stake in this fight. But as former Medicare Trustee Thomas Saving and I reported in The Wall Street Journal the other day, the cuts the two parties are proposing are so draconian, that there is little chance they will ever see the light of day.

In a way, that’s bad news. Absent politically unsustainable spending cuts, Medicare’s unfunded liability is almost $90 trillion at today’s prices, looking indefinitely into the future. That’s about six times the size of the entire U.S. economy. And Medicare spending is growing at twice the rate of growth of our national income. Clearly that cannot go on forever.

So what can be done? Fortunately, there are three common sense steps we can take that will give us substantial reform with a minimum of pain.

There is no sickness or toil or danger
In that bright land to which I go.

Jun 13, 2011 | 15 comments | by

What ObamaCare Means for Seniors

While charges and counter-charges about Medicare are flying back and forth in Washington, hardly anyone seems to have noticed that Medicare’s financial problems have already been solved. They were solved by the health reform bill enacted last year, what some people call ObamaCare.

So why isn’t this front page news? Why aren’t people dancing in the street? Why isn’t the Obama administration boasting about this accomplishment far and wide? Probably because Medicare’s financial problems are slated to be solved by the unconscionable rationing of health care for the elderly and the disabled.

The most recent Medicare Trustees report conveys the same message as the last one: On the day that Barack Obama signed the health reform bill, Medicare’s long-term unfunded liability fell by $53 trillion. That sum is about three times the size of the entire US economy. And, it gets better. Once the baby boomers work their way through the system, Medicare spending will grow no faster than the payroll taxes, premiums and general revenue transfers that pay for that spending.

So what does this mean for senior citizens who rely on Medicare? No one knows for sure. But it almost certainly means they will get less health care.

Don’t Stop Thinking About Tomorrow

Jun 08, 2011 | 16 comments | by
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