Health Affairs
January/February 2003
Trends In U.S. Health Care Spending, 2001
by Katharine Levit, Cynthia Smith, Cathy Cowan, Helen Lazenby, Art Sensenig,
and Aaron Catlin (from the Centers for Medicare and Medicaid Services)

Abstract

U.S. health care spending grew 8.7 percent to $5,035 per capita in 2001. Total public funding continued to accelerate, increasing 9.4 percent and exceeding private funding growth by 1.2 percentage points. This acceleration was due in part to increased Medicaid spending in the midst of a recession and payment increases for Medicare providers. Prompted by sluggish economic growth and by faster-paced health spending, health spending’s share of GDP spiked 0.8 percentage points in 2001 to 14.1 percent.

Conclusion

While health spending accelerated in 2001, growth remains less than the long-run historical rate of 10.2 percent experienced from 1960 to 2000. A gap in growth between health care sponsors’ decelerating revenues and increasing health care costs has emerged in 2001, forcing these sponsors to reexamine spending priorities. Many employers may have already taken preemptive actions by 2002 that shift a portion of rising costs to workers. At the same time, federal and state government obligations could increase if a prolonged recession causes the number of uninsured people to rise. States may have to resort to more austere decisions to balance Medicaid budgets in FY 2002 than they did in 2001.

Managed care’s influence has waned in the past few years, contributing to acceleration in hospital and overall spending. Hospital spending growth was proportional to its share of total health spending in 2001, a condition not met in recent years. Hospitals are seeing growth in demand for services and higher input prices, including rising wages resulting from shortages of health care workers, which further contributes to escalating costs.

The disparity between GDP growth and health care spending trends caused health spending’s share of GDP to spike in 2001. Historically, large increases in the health share of GDP have prompted private initiatives or public policy changes that slowed the pace of health spending growth. In uncertain economic times, health care sponsors may be less able to shoulder the escalating costs of health care, forcing trade-offs between health care and other competing priorities. As health care costs rise, consumers may be asked to contribute more toward existing coverage, or their choice of plans, providers, and benefits may be narrowed.

http://www.healthaffairs.org/1100_table_contents.php

he American Journal of Public Health
January 2003
National Health Insurance or Incremental Reform: Aim High, or at Our Feet?
By David U. Himmelstein, MD and Steffie Woolhandler, MD, MPH

Abstract

Single-payer national health insurance could cover the uninsured and upgrade coverage for most Americans without increasing costs; savings on insurance overhead and other bureaucracy would fully offset the costs of improved care. In contrast, proposed incremental reforms are projected to cover a fraction of the uninsured, at great cost.

Moreover, even these projections are suspect; reforms of the past quarter century have not stemmed the erosion of coverage. Despite incrementalists’ claims of pragmatism, they have proven unable to shepherd meaningful reform through the political system.

While national health insurance is often dismissed as ultra left by the policy community, it is dead center in public opinion. Polls have consistently shown that at least 40%, and perhaps 60%, of Americans favor such reform.

And from a message by Sen. Edward M. Kennedy:

“Health care is not just another commodity. It is not a gift to be rationed based on the ability to pay. It is time to make universal health insurance a national priority, so that the basic right to health care can finally become a reality for every American.”

http://www.ajph.org/current.shtml

The Mercury News
Jan. 4, 2003
Garamendi returning, faces industry challenges
By Deborah Lohse

John Garamendi, elected in November to the insurance commissioner job he held a decade ago, has a plateful of problems awaiting him as he takes office Monday in Sacramento.

Most of all, Garamendi — a Democrat widely viewed as a future gubernatorial candidate — plans to pound the pulpit for “universal health insurance,” which he envisions as coverage that every Californian will have whether they are employed or not.

Garamendi plans to continue his decades-long quest for “universal health care” similar to the national systems of Canada or other nations.

“I am going to drive health care,” he said — partly because health care costs affect several other types of insurance and partly because he considers it his would-be legacy as a politician.

“I am a statewide elected official. I have a platform. This is a fundamental problem in society, and I’m going to go after it.”

http://www.bayarea.com/mld/mercurynews/business/4873290.htm

Comment: In his last term as California’s insurance commissioner, John Garamendi was the individual responsible for requiring Blue Cross to release about $3 billion in past tax benefits at the time of their conversion to for-profit WellPoint. These funds provided the endowments for the California HealthCare Foundation and the California Endowment, and established the precedent that for-profit conversions must include provisions that accrued tax benefits are to be used for the public good.

Keep your eye on California. With a state legislature that is dedicated to universal coverage and an insurance commissioner who is a dedicated activist, passionate about reform, California just might do it.

Beth Capell, Ph.D. corrects Don’s flawed memory:

A few corrections:

John Garamendi was not responsible for the Blue Cross conversion: that was the responsibility of the Dept. of Corporations Commissioner Gary Mendoza, who Garamendi defeated in November.

The Department of Insurance regulates health insurance for fewer than a million Californians by best estimates. This is the Department now headed by Garamendi.

Instead, more than 20 million Californians have their care regulated by the Department of Managed Health Care, created as a result of the efforts of CaPA, Health Access and others in the long fight for the HMO Patient Bill of Rights.

Nonetheless, I have just come from listening to Garamendi’s inaugural address in which John took particular care to focus on the importance of health coverage for all and having a single 24 hour source of coverage for all Californians.

Beth Capell, Ph.D.

Don’s comment: The refund that John Garamendi supervised was a $1.3 billion refund mandated by California’s Prop. 103 (part of which was overturned since the courts ruled that insurers were entitled to reasonable profits).

Sorry. I’m human.

For the LWV biography of John Garamendi:
http://www.smartvoter.org/2002/11/05/ca/state/vote/garamendi_j/bio.html

The Washington Post
January 5, 2003
Outlook
They Can See It Coming

We decided to ask forward-looking writers and thinkers: What can’t we see that’s coming?

Marcia Angell, former editor-in-chief of the New England Journal of Medicine:

I see the rapid collapse of our health-care system in 2003. The inherent failings of this system were partly masked by the prosperity of the late ’90s. But with increasing unemployment, businesses no longer have to compete to attract workers by offering full health benefits. They’re free to drop benefits altogether or limit them severely, and they can require workers to pick up more of the tab themselves.

So people end up paying for their health care out of pocket or doing without. That’s what I mean by the collapse of the system. About the only part that is working is Medicare, and that is a publicly funded, single-payer program within the system.

I don’t think we’re going to wake up some Tuesday morning and say, “Oh look, the health-care system collapsed,” but it will become glaringly obvious over the next year that it is woefully inadequate. And since so much of our health-care dollar is diverted to profits and overhead, it will also become clear that it is grossly inefficient.

The question is what will take its place. Either the United States can join every other advanced nation and develop a national single-payer health-care system, or we can keep going the way we are and eventually have a three-tier system in which the wealthy get whatever health care they want, the middle-class gets some kind of stripped-down managed care, and the rest get nothing. In that respect, we would be just like a Third World country.

A national single-payer system — essentially Medicare for everyone — would be both better and cheaper.

The Washington Post
January 5, 2003
Outlook
They Can See It Coming

We decided to ask forward-looking writers and thinkers: What can’t we see that’s coming?

Marcia Angell, former editor-in-chief of the New England Journal of Medicine:

I see the rapid collapse of our health-care system in 2003. The inherent failings of this system were partly masked by the prosperity of the late ’90s. But with increasing unemployment, businesses no longer have to compete to attract workers by offering full health benefits. They’re free to drop benefits altogether or limit them severely, and they can require workers to pick up more of the tab themselves.

So people end up paying for their health care out of pocket or doing without. That’s what I mean by the collapse of the system. About the only part that is working is Medicare, and that is a publicly funded, single-payer program within the system.

I don’t think we’re going to wake up some Tuesday morning and say, “Oh look, the health-care system collapsed,” but it will become glaringly obvious over the next year that it is woefully inadequate. And since so much of our health-care dollar is diverted to profits and overhead, it will also become clear that it is grossly inefficient.

The question is what will take its place. Either the United States can join every other advanced nation and develop a national single-payer health-care system, or we can keep going the way we are and eventually have a three-tier system in which the wealthy get whatever health care they want, the middle-class gets some kind of stripped-down managed care, and the rest get nothing. In that respect, we would be just like a Third World country.

A national single-payer system — essentially Medicare for everyone — would be both better and cheaper.

Los Angeles Times
January 4, 2003
A Rational Health System

Re “Rx for Universal Care,” editorial, Dec. 29: Although every caring person agrees that the debate on universal care needs to be moved into the mainstream arena, considerable confusion remains. Should we build on the current system of employer-sponsored plans and public programs or should we replace them with a single-payer system?

Although continuing to use private plans would perpetuate the tremendous administrative excesses that waste resources that should be directed to patient care, fewer public tax dollars would be required to expand coverage to everyone. But most individuals and businesses should be concerned not only about their tax expenditures for health care; they should be concerned about their total health-care expenditures, both public and private. An increase in tax funding should not be objectionable when it is offset by an even greater reduction in private health-care spending.

In a universal system, rationing is determined primarily by the capacity of the system. A system that reduces administrative waste increases its capacity. We may be so averse to the words “tax” and “government rationing” that we may want to continue with a system that wastes more funds and results in greater rationing. But then again, maybe we’re ready to agree that rational policy should prevail over rhetoric.

Don McCanne MD President, Physicians for a National Health Program San Juan Capistrano

*

Your editorial has it exactly backward. The plan discussed would cost more money than a single-payer system. It would increase administrative costs and add to the increasing complexity and inconsistencies of the present system. The math is simple: Administrative costs take 3% of the Medicare single-payer health-care dollar; they take 20% to 30% of the health-care dollars of the current multipayer system. The single-payer administrative savings can provide broader coverage for all at much less cost. Any needed increase in taxes would probably not exceed money we are already paying as part of many other insurance coverages: personal auto, homeowners liability, workers compensation, etc.

Your dismissal of a single-payer system on grounds that it has failed to gain needed support is irresponsible. If The Times threw its support behind a single-payer system your reason for rejecting it would immediately become untrue.

George E. Delury Carpinteria

*

Your editorial quotes the head of Blue Shield of California as advocating a mandatory medical insurance system requiring all but the smallest employers to either provide it or contribute to a state insurance pool. There already is a universal medical program being planned in the form of a bill to be carried by state Sen. Sheila Kuehl (D-Santa Monica). This would cover all Californians and be funded by the money already being spent in this state for medical care and health insurance.

The medical insurance industry is opposed to this legislation because it would eliminate all insurance providers that do not provide direct services. The plan would use existing doctors, hospitals, laboratories and other licensed providers of medical services. What would be eliminated are the marketing, competition, redundant administrations, stockholder profits, multiple requirements and billing programs and other costs generated by the for-profit medical insurance system. Except for the relatively small cost of a state oversight and billing system, the money would be spent on patient care and everyone would have medical coverage.

Melvin H. Kirschner MD Van Nuys

*

http://www.latimes.com/news/opinion/letters/la-le-mccanne4jan04,0,1491525.st ory?coll=la%2Dnews%2Dcomment%2Dletters

Los Angeles Times editorial, “Rx for Universal Care,” Dec. 29: http://www.latimes.com/news/opinion/editorials/la-ed-health29dec29,0,3837039 .story?coll=la-news-comment-editorials

Comment: In the editorial, “Rx for Universal Care,” the Los Angeles Times called for moving the debate on the uninsured into the mainstream. Of great significance, based on today’s published responses, the editors apparently believe that the debate must no longer be limited to incremental proposals.

It is time to put every option on the table. The mainstream media can only enhance our prospects for a better health care system for all by imparting more knowledge and understanding of our options. The democratic process is greatly enhanced by having an informed public. The Los Angeles Times is to be commended for its leadership in this process.

Uwe Reinhardt’s response to Theodore Marmor on physician reimbursement under Medicare:

Actually, I agree with Ted on the second-best solution. It would not be difficult to make the current system work much better–e.g., by taking out the assumed 1% reduction in fees for hypothetical annual productivity gains. In the end, a fee schedule needs to be negotiated. To set a formula and then to put the system on auto pilot for a long time, as we have done, inevitably invites problems.

I think the development of the Medicare fee schedule in the 1980s and 1990s was a solid achievement in policy analysis and implementation. The irony was that the RBRVS Bill Hsiao came up with on the seemingly scientific approach his team used resembled very much the negotiated relative value scales used in Canada. Negotiated fee schedules do tend to reflect the relative work effort that the negotiators believe to go into particular types of activities.

What the AMA now proposed really must be stopped. It is quite mischievous.

Best

UER

San Francisco Chronicle
January 2, 2003
The Universal Approach
Affordability is basic in health-care reform
By Jerry Flanagan and Frank Smith

California needs a system-wide plan to resolve growing inequities in health care. One middle-ground solution would be a public-utility model, which would strictly regulate profiteering in health care to achieve universal coverage and cost-efficiency. It would retain private delivery with strict public control and address the public’s biggest concern: affordability.

Such a model would appoint an independent commission to implement a three-part plan:

— Cost control and stability: The overall aim of rate-setting would be to assure that providers, hospitals and health plans are sufficiently reimbursed to maintain financial stability and that net revenues do not exceed reasonable requirements for profit and reinvestment.

— Universal access: A new state health plan would provide care for all who do not have access to, or choose not to utilize, benefit plans provided by employers. Competition between the state and private plans would help stabilize premium costs.

— Modernize quality oversight: A single state agency would be responsible for setting quality standards, collecting data and reporting outcomes. Outcome reports would be fed back into the rate-setting process so that providers and plans with the highest outcomes would be rewarded.

http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2003/01/02/ED216823.DTL

Comment: The “public utility” model of health care reform is now receiving considerable attention in California. It emphasizes cost stabilization through regulatory rate setting. And for those without private insurance, it would mandate participation in a public plan.

The most important reason that this model is receiving attention is that it is recognized that our health care system must be made affordable. Although rate setting of prices is an important factor in determining program costs, it is difficult to see how the other factor, utilization rates, would be controlled under this model. It can be anticipated that the number of services would increase, and global health care costs would continue to escalate. Rate setting through quality standards and rewards that addressed over-utilization might have some impact, but we still do not know how to differentiate, with any precision, a high rate of beneficial services from excessive, inappropriate utilization.

Regulated public-utility rates can control electricity, natural gas or water over-utilization through punitive rates for higher utilization levels. But in health care, requiring individuals with greater needs to pay more would impair access due to lack of affordability. Though a health care public-utility commission might set rates, it shouldn’t establish policies that prevent appropriate utilization.

The public-utility model might be used to set health plan rates, but then that merely includes the insurer along with the providers in the battle for the division of funds under the global budget that would be determined by the authorized premium rate multiplied by the number of plan participants. (Currently, the insurer escapes this by calculating anticipated payments for plan benefits and then adding on administrative costs and profits.)

Why leave in place the flawed policies, inequities, and expensive administrative inefficiencies inevitable with this fragmented system? Instead, why not accept the concept that a global budget is inevitable, and then allow a public administrative agency to mediate the fight over the funds? At least it would be the patients’ health care providers instead of large private insurance bureaucracies that would be receiving the funds. More funds for providers could pay for greater utilization by patients.

Uwe Reinhardt, Ph.D., James Madison Professor of Political Economy and Professor of Economic and Public Affairs, Woodrow Wilson School, Princeton University, responds on the AMA proposal to balance bill Medicare patients:

The AMA must be jesting–but then, the AMA has done many humorous things in the recent past, so this scheme is within that tradition.

Suppose a kindly nation decided to give every family in New York City a $2,000 per month subsidy for the rental of an apartment, but allowed landlords to balance bill on top of that allowance anything that the market would bear. Would that make sense? What would happen to rentals in NYC? Yet the analogue is what the AMA is proposing. Basically, they want to undo Medicare, but not give up the lush public subsidy that comes with Medicare. I have trouble keeping a straight face just thinking about it.

If we do want to depart from the current model of price controls–which has been poorly run, I admit–then I’d propose the following:

1. Every physician must use the Medicare relative value scale (RBRVS).

2. But every physician is allowed to set, at the beginning of each year, his or her own monetary conversion factor to be applied to that RBRVS. The physician would have to use the resulting fee schedule for the entire ensuing year, and for all of his or her Medicare patients (in other words, price discrimination among Medicare patients by the individual physician would be prohibited).

3. Each physician’s conversion factor would be made public through sundry media, to wit:
a. via an 800 number
b. on a web site
c. by posting it in 5 inch letters visibly in the waiting room of his practice.

This would be a market-based pricing system, in lieu of the current administered price-control system, but it would provide transparency and thereby allow the competition everyone talks about.

I had proposed this scheme to the Physician Payment Review Commission, but it was then brushed aside as a flaky idea. The irony of ironies would be if now the AMA prevailed with its truly ridiculous scheme.

Happy New Year!

Uwe

January 2, 2002
Theodore R. Marmor, Ph.D. responds to Dr. Reinhardt’s comments on physician compensation under Medicare:

Here are some brief comments on Uwe’s double contribution.

Uwe’s brief, sharp analysis of the social foolishness of the AMA’s position is very welcome. It has been a long time since the country has had a discussion of what methods to use in paying doctors. Providing a down-payment subsidy on unrestricted fees in a national health insurance program serves no useful purpose other than raising physician incomes. Furthermore, Uwe’s suggestion of an effort to model a reasonable income for physicians in any area and use that as the basis of a firm fee schedule, one that assumes a reasonable amount of daily work, and leaves the reasonable physician with a decent income, is also a worthwhile policy to explore. I agree as well with the idea that doctors are either in or out of a major plan like Medicare; the problem he describes here is important. So, in all these ways, I share Uwe’s views and none of them raise democratic theory issues, as he worries with tongue and cheek.

I do want to urge, however, that Uwe not spend his time developing the 2nd best option–the market-mirroring one where public presentation of prices would be required along with what I regard as the unimplementable regulation that these published prices be required for all patients. I draw that lesson from months of monitoring my father-in-law’s surgical partnership in l967, where the fees they ‘charged’ had little to do with the fees they ended up accepting. They set high fees, used that in the Medicare program, but in fact they discounted fees all over the place to deal with individual circumstances. Anyway, since Uwe’s first-best is in my view best and his second is not a close cousin, I urge further discussion of making the current administered prices model better. After all, the rest of the OECD world has learned how to play the administrative price game; it takes continual adjustment.

Cheers to Uwe

Theodore R. Marmor
Professor of Public Policy & Management
Professor of Political Science
Yale University School of Management