Seven Factors Driving Up Your Health Care Costs

By Julie Appleby
PBS NewsHour/Kaiser Health News, October 24, 2012
There is no one villain in the battle against rising health care costs. Currently, the United States spends more on health care services than any other country, exceeding $2.6 trillion, or about 18 percent of gross domestic product. Most years, medical spending rises faster than inflation and the economy as a whole. Many factors — and nearly everyone — contributes to those increases.
Here are seven ways you or your medical providers play a role, based on a recent report from the Bipartisan Policy Center, a think tank in Washington, D.C.
1. We pay our doctors, hospitals and other medical providers in ways that reward doing more, rather than being efficient.
2. We’re growing older, sicker and fatter.
3. We want new drugs, technologies, services and procedures.
4. We get tax breaks on buying health insurance — and the cost to patients of seeking care is often low.
5. We don’t have enough information to make decisions on which medical care is best for us.
6. Our hospitals and other providers are increasingly gaining market share and are better able to demand higher prices.
7. We have supply and demand problems, and legal issues that complicate efforts to slow spending.
http://www.pbs.org/newshour/rundown/2012/10/seven-factors-driving-your-h…
The Bipartisan Policy Center report on which this article was based:
What Is Driving U.S. Health Care Spending?
America’s Unsustainable Health Care Cost Growth
http://bipartisanpolicy.org/system/assets/drupal/BPC%20Health%20Care%20Co…

Julie Appleby is a highly credible health care reporter who has done an excellent job of reporting the views expressed in this report released by the Bipartisan Policy Center, an organization founded by Bob Dole, George Mitchell, Howard Baker and Tom Daschle. As we shall see, when we look at these seven health care cost factors, “bipartisan” has now come to mean a right-wing position between the extreme conservative views held by most of today’s elected Republicans, and a moderate-right view held by the majority of Democrats. This corruption of bipartisanship has had a devastating impact on our efforts to achieve health care justice for all.
Let’s look at each of the seven factors supposedly driving up our health care costs, keeping in mind the fact that other industrialized nations have much more effective health care financing systems which are able to deliver care to everyone at an average of half what we spend. The numbers here refer to each item in the article.
1. It seems that almost everyone in the policy community believes the meme that our health care costs are too high because we pay for care based on fee-for-service – a system that rewards doctors and hospitals for providing a greater volume of more complex health care services and products. The primary flaw in this explanation is that many other nations also use fee-for-service yet are still able to control their total health care costs. The primary defect is not in the way we determine what health care is worth, but in the fundamental dysfunction of our health care financing system.
2. We are getting older, obesity is increasing, and more chronic conditions are diagnosed. However, with minor variations, the same supposed changes are happening in other nations as well, yet without the need to drive health care costs up as rapidly as we do. We still fall short on life expectancy when compared to other nations, so living more years has not been the problem. Obesity is a problem, as it is in other nations, but the answers lie more in public health measures encouraging better nutrition and more exercise, and less on care provided within our health care delivery system, except for preventive programs. Much of the reported increase in chronic disease is related to the emphasis on recording in more detail diagnoses which then permits higher billing for more complex conditions and also provides a basis for greater rewards under pay-for-performance and other so-called quality schemes. Refined diagnoses are possible for example when using much more inclusive laboratory criteria for the defining diabetes or hypercholesterolemia (just a touch of disease), or also by including osteoarthritis as a diagnosis in the elderly – a condition that has always been there but frequently not reported unless it was the primary presenting complaint. Our disease epidemic is more in augmented documentation than it is in exploding pathophysiology.
3. Almost everyone says that our newer expensive technologies and our plethora of expensive new drugs are major reasons for our high health care costs. Guess what. Other nations use the same technology and the same drugs, yet do not spend nearly as much as we do on health care. Some of the new technologies replace older technologies, and the actual costs (not prices) are often not higher. Also the breakthrough drugs of prior decades become the low-cost generics of today. Yes, advances do add to medical spending in all nations, but not nearly to the extent suggested by the policy community and politicians.
4. Many blame the tax benefits provided for employer-sponsored health plans as an incentive to purchase “Cadillac plans” that provide far more coverage than most people need. Yet actually our private plans have been shifting more costs to patients through higher deductibles and other cost sharing, while paring back on benefits and restricting access through measures such as limited provider networks and tiering of products and services. Again, other nations have not adopted these perverse barriers to care to the same extent that we have, yet they still provide care at a much lower level of spending. Contrary to popular lore, patient insensitivity to costs is not the primary reason why our health care spending is so high.
5. The lack of transparency is often blamed for our high costs. If patients only understood better all of their options and were better informed on the potential adverse consequences of their decisions, then they wouldn’t be demanding all of this unnecessary care. Those who make this claim are ignoring the fact that it now has been decades since we recognized that patients must provide their informed consent for health care. Doctors do explain the options and the potential problems of various diagnostic and therapeutic interventions. Paternalistic medicine has been largely replaced by the patients’ need to know. Better information is already resulting in greater value in our health care spending.
6. Consolidation amongst hospitals and physician groups has provided them with greater market leverage that results in higher prices. But where is this occurring? It is the private insurers that have been far less effective in negotiating savings with the providers. If you look up the S&P health care indices, commercial carriers (private insurers) have continued to increase health care spending at intolerable escalating rates, while the Medicare index has demonstrated that public agencies are much more effective than the private sector in keeping the rate increases down to more tolerable levels (bending the cost curve). Administrators of public health care financing programs are able to override the unfair advantage that market consolidation permits.
7. It is often said that our supply-side excesses result in excessive spending. Actually, as far as hospital beds and health care professionals, we do not have excesses when compared to other nations, except perhaps in certain resources such as imaging. We do have a maldistribution of resources, the worst being a disproportion between primary care professionals and specialist physicians. We need to reinforce our primary care infrastructure and reduce the overemphasis on some, but not all, of the specialized fields. The malpractice problem does need to be addressed through measures such as alternative dispute resolution, but the savings expected by reducing CYA medical management has often been overstated since we will always have low-yield testing, even if the malpractice threat goes away, since those tests potentially can result in important beneficial outcomes, even if less frequent. It’s just that the emphasis will be on protecting the patient rather than on protecting the doctor.
Following is the “Conclusion and Next Steps” from the report of the Bipartisan Policy Center (link above):
“The drivers of health care cost growth are complex and multi-faceted. Just as no single driver is responsible for our high and rising health care costs, no single policy solution will be adequate to meet this challenge. For this reason, the BPC Health Care Cost Containment Initiative plans to produce a comprehensive, bipartisan package of health care cost containment options that, if implemented together, could reduce system-wide health care costs, slow cost growth and improve the efficiency and quality of care in the United States.”
The Bipartisan Policy Center is politically influential and may well be a major player as Congress begins to embark on these right-wing “bipartisan” solutions to health care costs. The primary reason that this framing of the problems is considered right-wing is that it diverts our attention away from the real solutions as it attacks these problems in a way that will perpetuate our perverse, dysfunctional health care financing system – further reinforcing the private insurance industry that has been a major source of our problems, while using the underfunded and therefore inadequate Medicaid program as a safety net.
What we really need is no secret. We need an administratively efficient financing system that will reduce one of the largest sources of excess health care costs in the United States – the administrative waste of the fragmented multi-payer system which is heavily dependent on the inefficient private insurers, and the waste of the administrative burden that this system places on our hospitals and health care professionals. We need a public administration which would improve the allocation of our health care resources through regional planning, including improving and expanding our primary care infrastructure. Our public administrators can also use their power as a beneficent monopsony to get pricing right – improving cost effectiveness while promoting high quality, evidence-based medicine.
Julie Appleby has done a great job in distilling the contents of this Bipartisan Policy Center report. Now it’s our job to provide the proper perspective. She reports. We decide.

By Liz Alderman
The New York Times, October 24, 2012

Life in Greece has been turned on its head since the debt crisis took hold. But in few areas has the change been more striking than in health care. Until recently, Greece had a typical European health system, with employers and individuals contributing to a fund that with government assistance financed universal care. People who lost their jobs still received unlimited benefits.

That changed in July 2011, when Greece signed a loan agreement with international lenders to ward off financial collapse. Now, as stipulated in the deal, Greeks who lose their jobs receive benefits for a maximum of a year. After that, if they are unable to foot the bill, they are on their own, paying all costs out of pocket.

About half of Greece’s 1.2 million long-term unemployed lack health insurance, a number that is expected to rise sharply in a country with an unemployment rate of 25 percent and a moribund economy, said Savas Robolis, director of the Labor Institute of the General Confederation of Greek Workers. A new $17.5 billion austerity package of budget cuts and tax increases, agreed upon Wednesday with Greece’s international lenders, will make matters only worse, most economists say.

“In Greece right now, to be unemployed means death,” said Dr. Kostas Syrigos, (the chief of oncology at Sotiria General Hospital in central Athens).

“We are moving to the same situation that the United States has been in, where when you lose your job and you are uninsured, you aren’t covered,” Dr. Syrigos said.

http://www.nytimes.com/2012/10/25/world/europe/greek-unemployed-cut-off-from-medical-treatment.html?hp&_r=0&pagewanted=all

Comment:

By Don McCanne, MD

Greece’s austerity program has been devastating. Greece’s lenders have imposed on them the requirement that individuals lose their health insurance after one year of unemployment. As Dr. Kostas Syrigos states, “We are moving to the same situation that the United States has been in, where when you lose your job and you are uninsured, you aren’t covered.”

So the European nation that is suffering most from the current financial crisis has had to drop its health care coverage standards to that of the United States. Isn’t there a lesson here for us?

But you say that the Affordable Care Act has fixed that. If you lose your employer-sponsored coverage you can always buy insurance in the exchanges (but not if you can’t pay your share of the subsidized premium). If you lose most or all of your income, you can always sign up for Medicaid (but not if your state declined to participate in the expanded program).

Greece is right to hold us up as the example of the worst health care coverage standards of all industrialized nations. The irony is that we are wealthy enough and are already spending enough money to do something about it, but we don’t. We still can, by enacting an improved Medicare that covers everyone. Can’t we learn from Greece’s experience?

Amid Cutbacks, Greek Doctors Offer Message to Poor: You Are Not Alone

By Liz Alderman
The New York Times, October 24, 2012
Life in Greece has been turned on its head since the debt crisis took hold. But in few areas has the change been more striking than in health care. Until recently, Greece had a typical European health system, with employers and individuals contributing to a fund that with government assistance financed universal care. People who lost their jobs still received unlimited benefits.
That changed in July 2011, when Greece signed a loan agreement with international lenders to ward off financial collapse. Now, as stipulated in the deal, Greeks who lose their jobs receive benefits for a maximum of a year. After that, if they are unable to foot the bill, they are on their own, paying all costs out of pocket.
About half of Greece’s 1.2 million long-term unemployed lack health insurance, a number that is expected to rise sharply in a country with an unemployment rate of 25 percent and a moribund economy, said Savas Robolis, director of the Labor Institute of the General Confederation of Greek Workers. A new $17.5 billion austerity package of budget cuts and tax increases, agreed upon Wednesday with Greece’s international lenders, will make matters only worse, most economists say.
“In Greece right now, to be unemployed means death,” said Dr. Kostas Syrigos, (the chief of oncology at Sotiria General Hospital in central Athens).
“We are moving to the same situation that the United States has been in, where when you lose your job and you are uninsured, you aren’t covered,” Dr. Syrigos said.
http://www.nytimes.com/2012/10/25/world/europe/greek-unemployed-cut-off-…

Greece’s austerity program has been devastating. Greece’s lenders have imposed on them the requirement that individuals lose their health insurance after one year of unemployment. As Dr. Kostas Syrigos states, “We are moving to the same situation that the United States has been in, where when you lose your job and you are uninsured, you aren’t covered.”
So the European nation that is suffering most from the current financial crisis has had to drop its health care coverage standards to that of the United States. Isn’t there a lesson here for us?
But you say that the Affordable Care Act has fixed that. If you lose your employer-sponsored coverage you can always buy insurance in the exchanges (but not if you can’t pay your share of the subsidized premium). If you lose most or all of your income, you can always sign up for Medicaid (but not if your state declined to participate in the expanded program).
Greece is right to hold us up as the example of the worst health care coverage standards of all industrialized nations. The irony is that we are wealthy enough and are already spending enough money to do something about it, but we don’t. We still can, by enacting an improved Medicare that covers everyone. Can’t we learn from Greece’s experience?

By Mark Pauly
National Bureau of Economic Research, October 2012

Abstract
 
The conventional model for the use of cost effectiveness analysis for health programs involves determining whether the cost per unit of effectiveness of the program is better than some socially determined maximum acceptable cost per unit of effectiveness. If a program is better, the policy implication is that it should be implemented by full coverage of its cost by insurance; if not, no coverage should be provided and the program should not be implemented.  This paper examines the unanswered question of how cost effectiveness analysis should be performed and interpreted when insurance coverage can involve non-negligible cost sharing.  It explores both the question of how cost effectiveness is affected by the presence of cost sharing, and the more fundamental question of cost effectiveness when cost sharing is itself set at the cost effective level.  Both a benchmark model where only “societal” preferences (embodied in a threshold value of dollars per unit of health) matter and a model where individual willingness to pay can be combined with societal values are considered. A common view that cost sharing should vary inversely with program cost effectiveness is shown to be incorrect. A key issue in correct analysis is whether there is heterogeneity either in marginal effectiveness of care or marginal values of care that cannot be perceived by the social planner but is known by the demander. The cost effectiveness of a program is shown to depend upon the level of cost sharing; it is possible that some programs that would fail the social test at both zero coverage and full coverage will be acceptable with positive cost sharing.  Combining individual and social preferences affects both the choice of programs and the extent of cost sharing.

From the Introduction

Of course, the answer to the question of the relationship between cost effectiveness values and cost sharing depends both on the perspective taken and the empirical facts.  So I first outline the simple and correct application of a decision rule to treatment choices based on cost effectiveness in the “binary coverage” setting, when insurance either covers 100 percent of the cost of a given type of care or leaves it entirely uncovered,  and the extra welfarist approach is taken.  I show that this approach usually is based on two assumptions: a single value for expected improvement in health outcomes is to be applied to all patients, and a single monetary value for those expected marginal benefits prevails.  This is the approach, avowedly “extra-welfarist,” much favored at present in the United Kingdom by the NICE advisory body.

However, I then show that opening the door to consideration of cost sharing means that many things, including this perspective, might appropriately be modified.  Modifications are needed if there is heterogeneity in either effectiveness of the treatment across patients or in the values citizens place on health outcomes, and that heterogeneity is determined to be relevant to policy.  I show that the ideal level of “interior” cost sharing depends on whether consumer values are assumed to be relevant, on how much consumer values really vary, and most especially on whether the extent of variation in expected effectiveness across patients is perceived by patients but cannot be known by the insurer.  I briefly consider as well the possibility that social values are variable or uncertain.

Conclusion
 
These are somewhat discouraging conclusions.  They definitely imply that there is no simple but correct way to move from findings of a typical cost effectiveness study to saying what the coinsurance rate should be for a non-poor population.  The most one could hope for would be a binary decision of whether or not a particular treatment should or should not be covered by insurance with a particular predetermined cost sharing rate (usually but not necessarily zero).  They also imply that the cost effectiveness of a treatment cannot be properly determined unless coinsurance is set at the optimal level.  So, unless there is perfect information to identify heterogeneity of benefits, considerations of consumer demand (in the classic economic sense of the shape of the demand curve) need to be added, regardless of the normative model.

The fundamental problem is the assumption of a uniform benefit of uniform value which is central to the societal cost effectiveness model.  This assumption is presumably made for administrative and expository reasons, not because anyone believes that marginal health benefits are uniform, or that the marginal value of a health benefit (to a consumer or society) is independent of the current level of health or allocation of resources.  It was hard enough to get policymakers to accept the need for considering costs and the need to establish a money value for health outcomes, however arbitrary, and in the United States neither of these concepts is as yet effective.  But paradoxically it might be more feasible to get political acceptance if more attention to reasonable variation in effectiveness and value were explicit rather than suppressed in the analysis.  As always, there is a case to prefer approximating the perfect rather than precisely hitting the imperfect as a method of policy analysis.

http://papers.nber.org/papers/w18481

Comment:

By Don McCanne, MD

Mark Pauly has contributed extensively to the policy literature on the moral hazard of health insurance (the hazard that individuals will obtain care that they do not need if they do not have to pay for it), a concept which has been used to support cost sharing (deductibles, co-payments and coinsurance) as a means to create consumer price sensitivity. Pauly now expands on the concept by applying it to cost effectiveness analysis.

With our very high health care costs, it is inevitable that more attention will be paid to cost effectiveness. Although most cost effectiveness analyses are aimed at whether or not a particular health care service or product provides adequate societal value (measured benefit per unit cost, especially costs that society pays through public programs or private insurance), Pauly now suggests that the value to the individual, as expressed by the level of cost sharing tolerated, should also be introduced in determining cost effectiveness.

First, a few words about cost effectiveness. Most health care professionals do attempt to provide cost effective care. If a very expensive procedure likely would provide no health care value, the practitioner would advise against its use. Likewise, low cost but high volume interventions that are eventually shown to be ineffective also would be abandoned by the practitioner.

Sometimes we simply don’t know whether the benefit is worth the cost. This is where cost effectiveness analysis can be helpful. If a cancer drug regimen that costs $300,000 results in maybe three months of poorer quality life due to side effects, but prolongs life by only three days, most reasonable individuals would decide that this is not cost effective and should not be paid for through our collective funds, whether government taxes or private insurance funds. Three months of hospice is better than three months and three days of therapeutic misery.

An example of a low cost, high volume intervention might be the use of an anti-hypertensive drug that in long term studies showed absolutely no benefit in reducing morbidity or mortality. Obviously that would not be cost effective, and its use would be abandoned.

Okay. So we determine that most medical interventions fall somewhere
between 100 percent cost effective and not cost effective at all. Then we are supposed to determine a level of cost sharing for each intervention that would motivate the patient to make a correct decision on whether or not to accept the care based on consumer-directed cost effectiveness decisions that still provide adequate societal value? Come on!

Forget moral hazard. Through cost effectiveness analyses we can determine whether or not medical interventions should be available to patients, and we don’t need to have patients making spending decisions to determine health care value. Even if the benefit may not be uniform between patients, the decisions should be made at the clinical level based strictly on medical benefit and not on cost. Cost decisions should be made at the societal level.

The purpose of cost sharing is to reduce health care spending. Our message earlier this week demonstrated that controlling moral hazard through cost sharing introduces behavioral hazard; that is, decisions that patents make when exposed to out-of-pocket costs as a consequence of accessing health care can be detrimental. Policies that promote detrimental medical decisions are bad policies.

Keep in mind that we spend almost twice as much per capita on health care as the United Kingdom, yet we have ever-increasing cost sharing whereas their system pays 100 percent of the cost of covered services. There are many features of their national health services that result in lower costs, but one that applies to today’s discussion is their application of cost effectiveness and evidence-based analyses through their National Institute for Health and Clinical Effectiveness (NICE). Eliminating ineffective and detrimental care reduces costs, with a net gain in quality.

Just think of what we could have if we established a single payer financing system. We could reduce administrative and clinical waste while eliminating financial barriers to care so that everyone would have access to cost effective and evidence-based, high quality care – care that is really NICE.

Cost Effectiveness Analysis and the Design of Cost-Sharing in Insurance: Solving a Puzzle

By Mark Pauly
National Bureau of Economic Research, October 2012
Abstract
The conventional model for the use of cost effectiveness analysis for health programs involves determining whether the cost per unit of effectiveness of the program is better than some socially determined maximum acceptable cost per unit of effectiveness. If a program is better, the policy implication is that it should be implemented by full coverage of its cost by insurance; if not, no coverage should be provided and the program should not be implemented.  This paper examines the unanswered question of how cost effectiveness analysis should be performed and interpreted when insurance coverage can involve non-negligible cost sharing.  It explores both the question of how cost effectiveness is affected by the presence of cost sharing, and the more fundamental question of cost effectiveness when cost sharing is itself set at the cost effective level.  Both a benchmark model where only “societal” preferences (embodied in a threshold value of dollars per unit of health) matter and a model where individual willingness to pay can be combined with societal values are considered. A common view that cost sharing should vary inversely with program cost effectiveness is shown to be incorrect. A key issue in correct analysis is whether there is heterogeneity either in marginal effectiveness of care or marginal values of care that cannot be perceived by the social planner but is known by the demander. The cost effectiveness of a program is shown to depend upon the level of cost sharing; it is possible that some programs that would fail the social test at both zero coverage and full coverage will be acceptable with positive cost sharing.  Combining individual and social preferences affects both the choice of programs and the extent of cost sharing.
From the Introduction
Of course, the answer to the question of the relationship between cost effectiveness values and cost sharing depends both on the perspective taken and the empirical facts.  So I first outline the simple and correct application of a decision rule to treatment choices based on cost effectiveness in the “binary coverage” setting, when insurance either covers 100 percent of the cost of a given type of care or leaves it entirely uncovered,  and the extra welfarist approach is taken.  I show that this approach usually is based on two assumptions: a single value for expected improvement in health outcomes is to be applied to all patients, and a single monetary value for those expected marginal benefits prevails.  This is the approach, avowedly “extra-welfarist,” much favored at present in the United Kingdom by the NICE advisory body.
However, I then show that opening the door to consideration of cost sharing means that many things, including this perspective, might appropriately be modified.  Modifications are needed if there is heterogeneity in either effectiveness of the treatment across patients or in the values citizens place on health outcomes, and that heterogeneity is determined to be relevant to policy.  I show that the ideal level of “interior” cost sharing depends on whether consumer values are assumed to be relevant, on how much consumer values really vary, and most especially on whether the extent of variation in expected effectiveness across patients is perceived by patients but cannot be known by the insurer.  I briefly consider as well the possibility that social values are variable or uncertain.
Conclusion
These are somewhat discouraging conclusions.  They definitely imply that there is no simple but correct way to move from findings of a typical cost effectiveness study to saying what the coinsurance rate should be for a non-poor population.  The most one could hope for would be a binary decision of whether or not a particular treatment should or should not be covered by insurance with a particular predetermined cost sharing rate (usually but not necessarily zero).  They also imply that the cost effectiveness of a treatment cannot be properly determined unless coinsurance is set at the optimal level.  So, unless there is perfect information to identify heterogeneity of benefits, considerations of consumer demand (in the classic economic sense of the shape of the demand curve) need to be added, regardless of the normative model.
The fundamental problem is the assumption of a uniform benefit of uniform value which is central to the societal cost effectiveness model.  This assumption is presumably made for administrative and expository reasons, not because anyone believes that marginal health benefits are uniform, or that the marginal value of a health benefit (to a consumer or society) is independent of the current level of health or allocation of resources.  It was hard enough to get policymakers to accept the need for considering costs and the need to establish a money value for health outcomes, however arbitrary, and in the United States neither of these concepts is as yet effective.  But paradoxically it might be more feasible to get political acceptance if more attention to reasonable variation in effectiveness and value were explicit rather than suppressed in the analysis.  As always, there is a case to prefer approximating the perfect rather than precisely hitting the imperfect as a method of policy analysis.
http://papers.nber.org/papers/w18481

Mark Pauly has contributed extensively to the policy literature on the moral hazard of health insurance (the hazard that individuals will obtain care that they do not need if they do not have to pay for it), a concept which has been used to support cost sharing (deductibles, co-payments and coinsurance) as a means to create consumer price sensitivity. Pauly now expands on the concept by applying it to cost effectiveness analysis.
With our very high health care costs, it is inevitable that more attention will be paid to cost effectiveness. Although most cost effectiveness analyses are aimed at whether or not a particular health care service or product provides adequate societal value (measured benefit per unit cost, especially costs that society pays through public programs or private insurance), Pauly now suggests that the value to the individual, as expressed by the level of cost sharing tolerated, should also be introduced in determining cost effectiveness.
First, a few words about cost effectiveness. Most health care professionals do attempt to provide cost effective care. If a very expensive procedure likely would provide no health care value, the practitioner would advise against its use. Likewise, low cost but high volume interventions that are eventually shown to be ineffective also would be abandoned by the practitioner.
Sometimes we simply don’t know whether the benefit is worth the cost. This is where cost effectiveness analysis can be helpful. If a cancer drug regimen that costs $300,000 results in maybe three months of poorer quality life due to side effects, but prolongs life by only three days, most reasonable individuals would decide that this is not cost effective and should not be paid for through our collective funds, whether government taxes or private insurance funds. Three months of hospice is better than three months and three days of therapeutic misery.
An example of a low cost, high volume intervention might be the use of an anti-hypertensive drug that in long term studies showed absolutely no benefit in reducing morbidity or mortality. Obviously that would not be cost effective, and its use would be abandoned.
Okay. So we determine that most medical interventions fall somewhere between 100 percent cost effective and not cost effective at all. Then we are supposed to determine a level of cost sharing for each intervention that would motivate the patient to make a correct decision on whether or not to accept the care based on consumer-directed cost effectiveness decisions that still provide adequate societal value? Come on!
Forget moral hazard. Through cost effectiveness analyses we can determine whether or not medical interventions should be available to patients, and we don’t need to have patients making spending decisions to determine health care value. Even if the benefit may not be uniform between patients, the decisions should be made at the clinical level based strictly on medical benefit and not on cost. Cost decisions should be made at the societal level.
The purpose of cost sharing is to reduce health care spending. Our message earlier this week demonstrated that controlling moral hazard through cost sharing introduces behavioral hazard; that is, decisions that patents make when exposed to out-of-pocket costs as a consequence of accessing health care can be detrimental. Policies that promote detrimental medical decisions are bad policies.
Keep in mind that we spend almost twice as much per capita on health care as the United Kingdom, yet we have ever-increasing cost sharing whereas their system pays 100 percent of the cost of covered services. There are many features of their national health services that result in lower costs, but one that applies to today’s discussion is their application of cost effectiveness and evidence-based analyses through their National Institute for Health and Clinical Effectiveness (NICE). Eliminating ineffective and detrimental care reduces costs, with a net gain in quality.
Just think of what we could have if we established a single payer financing system. We could reduce administrative and clinical waste while eliminating financial barriers to care so that everyone would have access to cost effective and evidence-based, high quality care – care that is really NICE.

By Nick Zieminski
Reuters, October 22, 2012

U.S. corporate executives are more worried about providing healthcare benefits to their employees than about issues like wages, taxes or attracting qualified workers, according to a survey by the world’s No. 1 staffing company, Adecco SA.

In Adecco’s poll of senior executives, 55 percent named healthcare benefits as their biggest current business challenge, and about a third say they are holding back hiring because of healthcare reforms introduced by U.S. President Barack Obama.

Healthcare’s prominence as an issue has risen since the 2008-2009 recession, Adecco found: in 2007, only 35 percent called healthcare their top worry.

Obama’s 2010 healthcare law, upheld this year by the U.S. Supreme Court, is expected to raise insurance costs for employers because it calls for wider coverage of more people, including those with pre-existing medical conditions.

http://www.reuters.com/article/2012/10/22/us-adecco-election-survey-idUSBRE89L12T20121022

Comment:

By Don McCanne, MD

The Affordable Care Act (ACA) was designed to not disturb the largest sector of health insurance coverage already in existence: employer-sponsored health plans. Although costs were said to be almost intolerable for many employers, ACA included provisions to improve private health plans which will further increase costs for employers. Thus it is no surprise that health care has moved up on the executives’ list of concerns as their biggest business challenge.

Before the Democrats settled on the ACA model of reform, employers were looking for better ways of controlling costs. One of the models under consideration was single payer, an attractive option because of its greater efficiencies and assured coverage of everyone.

Business executives might have been more interested in the single payer model except for two perceived drawbacks: 1) They were not assured that they wouldn’t have to foot much of the bill for a national health program through higher payroll taxes, higher taxes on executive compensation, and higher corporate taxes, and 2) Many of them are ideologically conservative and did not want to see a government-run health care financing system.

With the passage of ACA health care moved from a top concern of 35 percent of the executives to a top concern of 55 percent of them. That suggests that they may believe they made a bad decision in passively allowing ACA to move forward, though there was token opposition from the U.S. Chamber of Commerce and the National Federation of Independent Business.

Another change taking place is that businesses are relying more on Medicare for their retirees as they pare back their health benefit programs for former employees. Obviously they recognize that Medicare provides a greater value for them than did their private programs, especially because of the federal funding of Medicare. It would not be much of a reach for them to decide that Medicare would also provide a greater value for them if it became the health benefit program for their active employees.

If we were to move forward with an improved Medicare that covered everyone, then the employers would need to be convinced that the taxes to fund the universal risk pool would be equitably distributed, and that they would not have to bear an unfair excessive financial burden for the program. Without getting into details on tax policy, suffice it to say that such a goal is readily achievable.

That would leave only ideology as a hurdle. Successful businessmen certainly place great importance on value. When it is demonstrated to them that an improved Medicare for all would control their health care costs well into the indefinite future, they would be very foolish to reject such a good deal. They really wouldn’t have to give up their ideology. They could take it to the smoking lounge and vent with their business colleagues, over a cigar and a snifter of brandy, how terrible it is that they had to accept the terms of a single payer system, but, after all, business is business.

Healthcare costs top U.S. executives’ concerns: Adecco survey

By Nick Zieminski
Reuters, October 22, 2012
U.S. corporate executives are more worried about providing healthcare benefits to their employees than about issues like wages, taxes or attracting qualified workers, according to a survey by the world’s No. 1 staffing company, Adecco SA.
In Adecco’s poll of senior executives, 55 percent named healthcare benefits as their biggest current business challenge, and about a third say they are holding back hiring because of healthcare reforms introduced by U.S. President Barack Obama.
Healthcare’s prominence as an issue has risen since the 2008-2009 recession, Adecco found: in 2007, only 35 percent called healthcare their top worry.
Obama’s 2010 healthcare law, upheld this year by the U.S. Supreme Court, is expected to raise insurance costs for employers because it calls for wider coverage of more people, including those with pre-existing medical conditions.
http://www.reuters.com/article/2012/10/22/us-adecco-election-survey-idUS…

The Affordable Care Act (ACA) was designed to not disturb the largest sector of health insurance coverage already in existence: employer-sponsored health plans. Although costs were said to be almost intolerable for many employers, ACA included provisions to improve private health plans which will further increase costs for employers. Thus it is no surprise that health care has moved up on the executives’ list of concerns as their biggest business challenge.
Before the Democrats settled on the ACA model of reform, employers were looking for better ways of controlling costs. One of the models under consideration was single payer, an attractive option because of its greater efficiencies and assured coverage of everyone.
Business executives might have been more interested in the single payer model except for two perceived drawbacks: 1) They were not assured that they wouldn’t have to foot much of the bill for a national health program through higher payroll taxes, higher taxes on executive compensation, and higher corporate taxes, and 2) Many of them are ideologically conservative and did not want to see a government-run health care financing system.
With the passage of ACA health care moved from a top concern of 35 percent of the executives to a top concern of 55 percent of them. That suggests that they may believe they made a bad decision in passively allowing ACA to move forward, though there was token opposition from the U.S. Chamber of Commerce and the National Federation of Independent Business.
Another change taking place is that businesses are relying more on Medicare for their retirees as they pare back their health benefit programs for former employees. Obviously they recognize that Medicare provides a greater value for them than did their private programs, especially because of the federal funding of Medicare. It would not be much of a reach for them to decide that Medicare would also provide a greater value for them if it became the health benefit program for their active employees.
If we were to move forward with an improved Medicare that covered everyone, then the employers would need to be convinced that the taxes to fund the universal risk pool would be equitably distributed, and that they would not have to bear an unfair excessive financial burden for the program. Without getting into details on tax policy, suffice it to say that such a goal is readily achievable.
That would leave only ideology as a hurdle. Successful businessmen certainly place great importance on value. When it is demonstrated to them that an improved Medicare for all would control their health care costs well into the indefinite future, they would be very foolish to reject such a good deal. They really wouldn’t have to give up their ideology. They could take it to the smoking lounge and vent with their business colleagues, over a cigar and a snifter of brandy, how terrible it is that they had to accept the terms of a single payer system, but, after all, business is business.

By Katherine Baicker, Sendhil Mullainathan and Joshua Schwartzstein
Working Paper 18468
National Bureau of Economic Research, October 2012

ABSTRACT

This paper develops a model of health insurance that incorporates behavioral biases. In the traditional model, people who are insured overuse low value medical care because of moral hazard. There is ample evidence, though, of a different inefficiency: people underuse high value medical care because they make mistakes. Such “behavioral hazard” changes the fundamental tradeoff between insurance and incentives. With only moral hazard, raising copays increases the efficiency of demand by ameliorating overuse. With the addition of behavioral hazard, raising copays may reduce efficiency by exaggerating underuse. This means that estimating the demand response is no longer enough for setting optimal copays; the health response needs to be considered as well. This provides a theoretical foundation for value-based insurance design: for some high value treatments, for example, copays should be zero (or even negative). Empirically, this reinterpretation of demand proves important, since high value care is often as elastic as low value care. For example, calibration using data from a field experiment suggests that omitting behavioral hazard leads to welfare estimates that can be both wrong in sign and off by an order of magnitude. Optimally designed insurance can thus increase health care efficiency as well as provide financial protection, suggesting the potential for market failure when private insurers are not fully incentivized to counteract behavioral biases.

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6.3 Evidence on Private Plans

These results suggest that competitive forces do not lead to efficient equilibrium insurance contracts when insurees are naive about their biases, but that the insurer will have an incentive to counteract biases when this saves the insurer money. These results may shed light on why more health insurance plans do not incorporate behavioral hazard into their copayment structures. Recall the evidence from Table 2 (from full paper at link below), which summarizes the features of several major insurance plans. Co-payments are rarely a function of the health benefit associated with the care for a particular patient.

Nevertheless, insurers could increase profits by promoting adherence to medications and treatments that save money over a reasonably short horizon (relative to the typical tenure of their enrollees), and the model suggests that insurers will invest in encouraging care in such instances.

http://www.nber.org/papers/w18468.pdf

Comment:

By Don McCanne, MD

Moral hazard in health insurance is said to occur when patients obtain unnecessary care merely because they don’t have to pay for it. Requiring patients to pay for at least a portion of their care, through deductibles, co-payments and coinsurance, supposedly disincentivizes patients from obtaining such unnecessary care, but does so at the cost of patients declining care that is quite appropriate and should be obtained. This paper attempts to compensate for that by adding behavioral hazard to that of moral hazard when determining when and how much financial exposure patients should have when accessing care. If the behavior of patients might cause them to underuse care, then cost sharing should be adjusted downward accordingly.

That’s the theory. In practice it would greatly add to the administrative burden of private health care financing to try to identify not only each instance when a patient might be inclined to overuse care unnecessarily (moral hazard), but also each instance in which a patient might avoid beneficial care because of cost barriers (behavioral hazard), and then to modify the patient’s share of each cost entailed based on these economic hazards.

Current estimates on how much could be saved by avoiding moral hazard are flawed anyway, primarily because they ignore the deleterious effect of behavioral hazard. Yet private insurance products incorporate cost sharing that does ignore behavioral hazard, except in very limited instances such as preventive services or cost sharing for important maintenance drugs. Once you make the adjustments in cost sharing that would prevent most or all behavioral hazard, the savings would dramatically diminish and might even be totally offset by the costs of the administrative excesses.

The most effective way to prevent behavioral hazard is to remove all financial barriers to care. The moral hazard remaining does not even apply to the eighty percent of health care that is consumed by patients with greater needs who have long exceeded their deductibles and stop loss. It’s simply not worth applying cost sharing measures to the remaining twenty percent of care for those of us who are relatively healthy, when the resulting decrease in our total national health expenditures would be almost negligible.

Besides, who are all of these people who are demanding care that they simply do not need? Thinking back through my decades of family practice, no one individual comes to mind.