October 02 , 2009
How to Really Control Health Care Costs
President Obama rallied support for proposals for reforming healthcare with his speech to a joint session of Congress. He made the case for expanding access to insurance very well, and laid out some fine principles for how the system should be structured in going forward.
But what he really wants to do is to solve two big problems at once. There are two big issues in health care. The first is how to provide insurance for the 47 million who lack health insurance, and the second, how to bring down the long-term growth of health care costs. These long-term effects are behind the gloomy projections of massive increases in health care costs in the next 25 years. Much of the economic growth that will occur will be swallowed up by the rising tab, leaving very little change in living standards by all other measures. Obama is going to settle for solving the first problem but not the second.
The issue of access to insurance is actually not that hard to work out. There need to be four major reforms, and the Republicans actually agree with most of them. First is that people should be able to buy insurance without exclusions for pre-existing conditions, and without losing their coverage if they get sick. Second, if insurance companies must sell policies to both the well and the sick, then people should have to buy policies even when they are well. Insurance only works if everyone is in the pool, not just those who have an immediate need for healthcare. Third, if someone cannot afford the cost of an insurance policy, then the government should provide enough subsidy to make it affordable. This is where the cost for health reform comes from. The cost of this subsidy will be very high, likely over 100 billion dollars per year. But that’s less than what Bush spent on the Iraq War. Finally, to keep insurance companies honest, people should have the right to buy insurance from the government, essentially to buy into the Medicare program, if a better and cheaper private policy is not available. This last element is what the Republicans are dead set against, as they feel it will result in the destruction of the private health insurance industry.
The access issue then is not that hard to solve. It can be done if there is the will to do it. The issue of cost control is much more difficult. Obama has focused on trying to improve efficiency with electronic medical records, outcome studies to better clarify what treatments work best for some conditions, and prevention strategies. But none of these approaches can really stop the relentless growth in costs. At best, they may yield some one-time savings, at worst they do nothing at all or even raise costs. Prevention strategies, for example, are actually very expensive. Screening the population for colon cancer may reduce deaths from colon cancer, but is very expensive in terms of costs.
Republican proposals for controlling health care costs are fairly limited in scope. The only idea they have is to create financial incentives for patients to use less care. They advocate “ Health Savings Accounts” or HSA’s. In these, a patient would have a high deductible insurance policy, say 5000 dollars. But they would also have an HSA in which 5000 dollars has been deposited. This money would be available to cover the deductible expenses, but if not spent, the patient would get to keep it. Such a scheme would make a patient think twice about going to the doctor. In the real world, the schemes don’t work. They don’t save much money, because the vast majority of spending is determined by the physician, not the patient. Unlike any other industry, like cars or travel, it is the provider of the product that determines the demand, not the consumer. If your physician says you need certain tests or procedures, they get done. The patient does not determine what is needed. And in the hospital, where a huge fraction of dollars is spent, the doctors make all the big decisions.
So how can we control costs? There are really only two ways. Either we drive down the cost of each unit of service, or we reduce the total quantity of service provided. Driving down prices for each service would mean paying doctors less and paying hospitals and drug companies less for each pill or day in the hospital. Only a government insurance would have the clout to negotiate that nationwide, but even there only a limited amount of savings is likely.
The real way to drive down costs in the long run is to reduce the quantity of service. To do that in a way that does not harm the patient, and is not the result of bureaucrats denying care to patients they have never seen and are not treating, means that the physicians themselves will have to do it. But how?
Physicians are human beings, and like all of us, they respond to economic incentives. The health care system can pay for service provided, for efficiency of care, or for quality of care. Whatever is being paid for is what the doctors will provide. Currently, we mostly have a fee for service system, which results in maximizing the quantity of services provided, but does not improve quality or efficiency. To really control healthcare costs, the payment systems will have to be restructured to shift away from fee for service and instead pay for efficiency of care.
There are some areas in healthcare where that already happens. In HMO-based group health plans, the physicians usually get paid a salary or fixed monthly payment. The doctors also have ownership of a pool of funds meant to pay for the annual healthcare of their patients. At the end of the year, any leftover funds go back to the doctors as bonuses. Essentially, if the doctors take care of their patients using less resources, less hospital days, less specialist care, less expensive medications, less surgeries, etc., then the doctors make more money.
In real life, these systems can be extraordinarily efficient. In the best settings they spend far less on health care than high cost fee for service systems due. In the end, we will end up with these sorts of systems being the norm. But it will take another 10 years of rising costs before the politicians are forced to do this, which will be met with stiff opposition by physicians and hospitals in all likelihood. Comments can reach me at Nali@socal.rr.com.
