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Health Economics 101

Health Economics 101

By Paul Krugman
The New York Times
November 14, 2005

Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn’t we do the same thing for health care? Some correspondents were belligerent, others honestly curious. Either way, they deserve an answer.

It comes down to three things: risk, selection and social justice.

First, about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing, unless you’re very wealthy – or you have good insurance.

But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as “adverse selection,” in which bad risks drive out good.

To understand adverse selection, imagine what would happen if there were only one health insurance company, and everyone was required to buy the same insurance policy. In that case, the insurance company could charge a price reflecting the medical costs of the average American, plus a small extra charge for administrative expenses.

But in the real insurance market, a company that offered such a policy to anyone who wanted it would lose money hand over fist. Healthy people, who don’t expect to face high medical bills, would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be a self-selected group of people likely to have high medical costs. And if the company responded to this selection bias by charging a higher price for insurance, it would drive away even more healthy people.

That’s why insurance companies don’t offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.

This screening process is the main reason private health insurers spend a much higher share of their revenue on administrative costs than do government insurance programs like Medicare, which doesn’t try to screen anyone out. That is, private insurance companies spend large sums not on providing medical care, but on denying insurance to those who need it most.

What happens to those denied coverage? Citizens of advanced countries – the United States included – don’t believe that their fellow citizens should be denied essential health care because they can’t afford it. And this belief in social justice gets translated into action, however imperfectly. Some of those unable to get private health insurance are covered by Medicaid. Others receive “uncompensated” treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.

At this point some readers may object that I’m painting too dark a picture. After all, most Americans too young to receive Medicare do have private health insurance. So does the free market work better than I’ve suggested? No: to the extent that we do have a working system of private health insurance, it’s the result of huge though hidden subsidies.

Private health insurance in America comes almost entirely in the form of employment-based coverage: insurance provided by corporations as part of their pay packages. The key to this coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn’t taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year. And even with this subsidy, employment-based coverage is in rapid decline.

I’m not an opponent of markets. On the contrary, I’ve spent a lot of my career defending their virtues. But the fact is that the free market doesn’t work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.

That system is now failing. And a rigid belief that markets are always superior to government programs – a belief that ignores basic economics as well as experience – stands in the way of rational thinking about what should replace it.

Q and A with Paul Krugman, from The New York Times.com

On “Pride, Prejudice, Insurance”: Health Care Crisis in the U.S.
Nov. 8, 2005

Nell Farr, Elk Grove, Calif.: Your fine column contained this line: “. . . Americans too young to receive Medicare and insufficiently destitute to receive Medicaid . . .” This implies that those under 65 receive Medicaid if only they are poor enough. Many people believe this is true. It is not. Only if a person under 65 is on some Federal aid program such as AFDC or a disability program is he/she eligible for Medicaid. Others have an option of a free clinic, if available, or an E.R. for an emergency condition. However, E.R.’s only stabilize a person if further care or diagnostic work is indicated, such as a mammogram or even chemo for cancer, usually such a person is totally out of luck. They die.

Your columns are usually 100 percent factually correct, and I was disappointed to see this line that reinforces the mistaken belief of most Americans.

Paul Krugman: It’s a bit more complicated than that. As I understand it Medicaid covers many children even if the parents aren’t on AFDC, and in some cases covers parents too. But you’re right that an American can easily be ineligible for Medicaid no matter how desperate his or her financial straits. In fact, that’s a big part of the awfulness of how the government is responding to the aftermath of Katrina. But I didn’t have space to go into all of that. Remember, 700 words.

Michael Pistorio, Des Plaines, Ill.: While I completely agree that it is a travesty for Americans to be devoid of a national health care solution, I question the rationale of comparing the costs of an American system to that of a foreign system. My reasoning lies behind the simple fact that the U.S. has a population considerably larger than the most populated country that you mentioned, and with this said, I would think that the reason other countries have lower costs is due to the smaller number of prospective participants. Please help me understand.

Paul Krugman: All of these comparisons are per capita: spending per person. So population is taken into account. Or, if you prefer, add up total spending by Western European countries, which have about the same combined population as the United States; you’ll find that they spend only about 60 percent as much on health care, but that everyone is insured, life expectancy is higher, and infant mortality is lower.

Philip Lohman, Lakewood, Calif.: You missed making your best argument: the huge difference between levels of overhead in health systems. Somewhere around 30 percent of all expenditures on health care in the U.S. are for administration. This money buys hundreds of millions of pieces of paper and phone calls, plus the salaries of the legions of employees of insurance companies, H.M.O.’s, P.B.M.’s and all the others who are required to make the whole creaky, maddeningly complex mess function. What it doesn’t buy is a single office visit or prescription.

Similar administrative costs in other countries are around a third of this. Compared to private insurance, Medicare, perpetually described as a boondoggle by conservatives, is a model of efficiency. I was managememt consultant in healthcare for twenty years. Some days I couldn’t bring myself to believe the lunacy of the whole system.

Paul Krugman: I agree, but I’m puzzled that you think I missed your point. The column clearly identifies administrative costs as a key problem with the U.S. system.

Carol Bouville, Gaithersburg, Md.: Why is the obvious so hard for us Americans to accept? We used to not want any government-sponsored child care either because it was too socialistic. I suspect that has a lot to do with not getting government involved in universal health coverage. After all, our leaders are my age and came of age when anything that mimicked socialism was verboten. I lived in France for 18 years. Yes, it was cumbersome sometimes to get around in the health care system, but at least it was very cheap and available – and good, too. We never had to worry about losing our coverage or about not being able to pay for necessary treatment or meds. I argue that because of that peace of mind, we had a better quality of life than most Americans. Why don’t people demand access to health coverage and refuse to vote for anyone who doesn’t pledge to make the single-payer system a reality? What do we have to do to make that happen?

Neeta Moonka, MD, Demarest, N.J.: Thank you for this column. I am a physician who has been convinced of the need for a single-payer plan in this country since before I went to medical school in 1981. Please know the patchwork of employer based insurance, Medicare, Medicaid, not to mention the uninsured, takes its toll on doctors as well.

Bill Hess, Wasilla, Alaska: Your comments on nationalized insurance resonate with me. I am sitting here, feeling a notable amount of pain, thinking it would be good to go see a doctor and ask about it, but I dare not – I can’t afford to. Not because I don’t have insurance, but largely because I do. I am 55 years old and when I first got my insurance over a decade ago, it was a good deal. In the time since, my insurers have continually forced me to pay more for less, to drop my dental care altogether, to increase my deductible while still cutting back on my medical benefits. Yet the rate I pay has more than doubled to over $600 a month – that’s just for me. Fortunately, my wife and grown children receive care under the U.S. Indian Health Service.

I have a prostate problem for which I take three medications, all of which I must purchase myself along with any other medications I might find myself needing at any time. Last spring, my urologist ordered up a cat scan to double check a few things, which turned out okay. Two weeks later, I was struck by some intense abdominal pain. The physician who saw me felt it necessary to order up still another cat scan, which revealed nothing that wasn’t on the original, but did add several thousand to the medical bills I was already facing, bills denied by my insurance company.

So I have been trying to pay off this big debt and now I dare not go see a doctor again, as long as I am able to function and move around. I simply cannot afford to. An older brother recently had part of his colon removed due to cancer and another brother suffers a variety of often severe colon ailments. My father has had part of his colon removed as well. This puts me in the group of at-risk people who are advised to get a colonoscopy, but I checked into it and, even with my insurance, I would be facing a few more thousand in additional medical debt that would be uncovered by my insurance.

I know what happens when my insurance company receives one of my medical bills – they do not say, “Let’s see what we can do to help this guy and keep him healthy for as long as we can.” They say, “Let’s see if we can deny all of this, or as much as possible, and lets keep raising his rate dramatically every few months so that, hopefully, by the time he really needs care and we would have to put out some bucks we will already have forced him to drop our coverage.”

They may not actually vocalize it in those terms, but I sincerely believe both scenarios to be an accurate reflection of their policy.

Mark Sengel , Banglamung, Thailand: Thanks for your focus on health care. I am 50 and teach in Thailand. The hospitals here are excellent and tens if not hundreds of thousands of foreigners are coming here from all over the world to have root canals, colonoscopies, and back surgery. Meanwhile, everyone I know in America feels their choices are limited. They choose to stay in jobs they don’t like, they don’t start businesses, and they live in places they don’t really want to in order to get health care. Most have no idea how they are going to retire, estimating they need hundreds of thousand dollars just for health care if they are going to retire in their early 60’s. And these are people that are way ahead of the average American. What is the endgame?

Lynne Koester, Yuba City, Calif.: Would it be feasible to convert Medicare into a national health insurance system? I realize that its present per-patient cost is high because of the age of those who qualify for Medicare, but if the pool were enlarged by including most all Americans, wouldn’t the per-patient cost decrease? By eliminating the profits built into private health insurance companies, we could save even more money. Plus, when ill, many uninsured people presently use a hospital emergency room because they do not have medical insurance, but if they were covered by a national health insurance, they could be treated in a doctor’s office, which is less costly than a hospital.

Paul Krugman: Yes, indeed. One way to implement national health care would simply be to expand Medicare to everyone.

Of course, doing that would require additional funds, probably in the form of an increase in the payroll tax. And that would elicit howls from the right. But the apparent rise in tax rates would be an illusion: it would simply substitute an explicit tax for the implicit tax that companies and workers pay in the form of insurance premiums. Given international experience, I have no doubt that overall spending on health care would actually fall, and that job creation would actually rise, after the supposed tax increase.

It’s a simple solution, building on a program that we already know works. It would make the vast majority of Americans better off. And it’s considered a complete non-starter politically. Now why is that?

Notes on International Comparisons of Health Care
Nov. 7, 2005

Some readers may want to follow up on my Nov. 7 column on international comparisons of health care. Here are a few useful links.

Trends in employer-based insurance: The underlying data come from the Census. Here is a shorter, useful summary of the data.

International comparisons of health spending: The Factbook of the Organization for Economic Cooperation and Development, an international research organization supported by member governments, is available at www.sourceoecd.org. It provides comparative data on many economic, environmental, and social trends. Data on health care spending per capita are measured using “purchasing power parities” – that is, they are adjusted for international differences in the cost of living.

Two things stand out. First, the United States is off the scale in terms of the amount we spend per person. Second, the U.S. system is unique in its reliance on private spending.

Quality of Health Care: “Taking the Pulse of Health Care Systems: Experiences of Patients With Health Problems in Six Countries,” is a new study published in Health Affairs. Check out Exhibits 6 and 7, in particular.

Taiwan: A very interesting study, also [in Health Affairs], is “Does Universal Health Insurance Make Health Care Unaffordable? Lessons from Taiwan.” Since it’s predictable that some of the usual suspects will attack my column by citing newspaper articles about runaway costs in Taiwan, it’s particularly interesting to read the paper’s discussion of how “political theater” – overstating the quite mild financial difficulties of the Taiwanese system – was used to sell a modest increase in premiums.

Comparing Total Annual Drug Costs Among Medicare Advantage Plans

Comparing Total Annual Drug Costs Among Several Managed Care Plans
Washington Post
November 15, 2005

Premiums for Medicare Advantage drug plans, shown in parentheses below, range from zero to $85 a month. Premiums aside, total out-of-pocket costs can vary widely, based in part on whether a person is basically healthy, needs only episodic drug treatment or has chronic medication needs.

Please click here for the full chartpack (MS Excel)

Medicare Part D will bring us national health insurance

Medicare complexity may scare off seniors
By Brooke Adams
The Salt Lake Tribune
11/08/2005

As a tax attorney, Bill Vogel was not easily stumped by complex calculations. Wife Donna, a retired nurse recruiter, navigated the health care world with ease. But the two Salt Lake City residents admit that selecting a Medicare prescription drug plan has left them confused – and angry. “There is one good aspect to this. We will have national health insurance sooner than later,” Bill Vogel predicts. “Seniors will be sick of this, the complications, the paperwork.”

http://www.sltrib.com/ci_3193444

Comment: The one saving grace of the Medicare Part D drug program is that it represents an implicit admission that drugs must be a part of any comprehensive program of health care coverage.

As enrollment begins, the complexities of the program have proven to be a nightmare for Medicare beneficiaries. Part D is an unstable, highly flawed program which will require major changes. As examples, there are two specific features which in themselves will mandate a return to the drawing boards.

Beneficiaries can choose a private Medicare Advantage plan to access drug coverage. To advance the conservative agenda of privatizing Medicare, these plans are paid far more than would be spent in the traditional program (risk adjusted) so that they can offer drugs as an incentive to join the plans. These excessive payments will not be tolerated for long. When an equitable method of funding the plans is established, they will not be able to compete with the traditional program because of their higher administrative expenses, and they will withdraw from the market.

For those who remain in the traditional program, numerous stand-alone Part D drug programs will be available. A Kaiser Family Foundation survey suggests that Part D participation will be quite low. Who will enroll? Those who have high drug costs – a classical case of adverse selection. It is likely that the privatizers in Congress would then attempt to pass more of the costs on to the beneficiaries. Even if they didn’t, there would be a major effort to reduce Part D funding simply because the program is “too expensive.”

Tax attorney Bill Vogel is right. We will have national health insurance, and it will include a comprehensive drug benefit.

Part D? It wasn't supposed to help YOU

Saul Friedman
Newsday

October 29, 2005

Long Beach widow Eula P., 81, writes that she’s neither “stupid nor senile,” but she still can’t figure out the new prescription drug benefit for Medicare beneficiaries. “What were the people in Washington thinking?”

Well, if you remember why Texas Congressman Tom DeLay and his fellow Republicans hammered the drug bill through the House under cover of night, you’ll also understand why, even at this late date and despite the government’s hype, the program remains a puzzle – especially for the sick and elderly population it’s supposed to serve.

First, the new law was more a gift to the insurance and drug industries than it was a benefit for Medicare enrollees, because most of the estimated $720 billion spent under the new law will go to those industries.

Furthermore, the law undermines Medicare as a government health program
by requiring enrollees to buy private insurance in which Medicare plays no role. And for the first time, the Medicare principle of universality was lost when a means test was instituted for low-income beneficiaries.

Thus, while the benefit is called Part D, it is not really a Medicare benefit. As the nonprofit Center for Medicare Advocacy notes, “Medicare drug coverage will be provided by private health insurance companies. Not by the Medicare program. This is different from how Parts A and B of Medicare work.” Indeed, each of the dozens of insurance plans can set and change its benefits.

Next year, beneficiaries will be locked into their choice. But the insurers can change the drugs they offer or require that you use doctors, hospitals and labs in their network. And, like HMOs of the past few years, they can raise premiums, cut benefits or get out of the business if they decide they’re not making enough profit, leaving beneficiaries scratching for coverage. Medicare will be powerless to take action against an offending company.

There are 46 different plans offered in New York alone. The Medicare Website, which is supposed to calculate your savings under each plan, bases its figures on monthly premiums as low as $4.10 in New York.

But most premiums are considerably higher. The yearly deductible is $250, and there is a huge gap in coverage (the “doughnut hole”), during which most people will be stuck with 100 percent of their drug bills. And while original Medicare is valid nationwide, Part D plans may not be. No wonder there is confusion over a profusion of choices and a fragmented system.

The most frequently asked question comes from some of the more than 350,000 seniors who are members of New York’s Elderly Pharmaceutical Insurance Coverage, or EPIC plan. They ask, “If I am satisfied with EPIC, do I need to sign up for Part D?” The answer at this writing is no, because both the EPIC fee and deductible plans are “creditable” coverage under the law, which means they are considered at least as good as Part D. So you will not be penalized if you don’t sign up during the initial enrollment period, then change your mind later.

An EPIC spokesman notes, however, that low-income beneficiaries who qualify for extra help will have their EPIC annual fees waived if they join one of the Part D plans. And their Part D deductible and premium will be negligible.

But there may be an added advantage to having both EPIC and Part D. According to EPIC, its plan will “wrap-around” Part D. Thus, if EPIC members sign up for a relatively inexpensive drugs-only Part D plan, EPIC will pay for costs not covered by Part D, including the co-payments (25 percent), the yearly deductible ($250) and even the “doughnut-hole” gap in coverage, less any EPIC co-pay or deductible.

To clarify another issue raised by readers, if they get their drugs from their current HMO, through their VA coverage, retiree insurance, or supplemental insurance, and if the coverage is “creditable” – at least as good as Part D – they will be so notified by their insurer, and they need not change. But if they have no drug coverage, they should sign up for at least one of the drugs-only Part D plans, or face a stiff penalty after May 15.

The most troubling potential consequence of the fragmentation and privatization of Part D was exemplified by a penned note from 65-year-old Patricia C., of Long Beach. She lives on $720 a month and has been getting her drugs from Medicaid for 20 years. Now, as of Jan. 1, she’ll be shifted to one of the Part D plans, although she doesn’t know which one to choose, and she can’t afford the premium or deductible. (The government will pick your insurance carrier unless you do.)

Fortunately, people who are eligible for both Medicaid (a program for the very poor) and Medicare are entitled to get their Part D coverage with no premium, no deductible and no doughnut hole gap in coverage. But what sort of system requires a very old, very sick person who has depended on Medicaid, to go shopping for new insurance? More than 6.4 million Americans on Medicaid are to be shifted to Part D coverage on Jan. 1, a tidy windfall for the insurance companies.

The Manhattan-based Medicare Rights Center reports that many of these beneficiaries, whose lives depend on uninterrupted medication, will face
potentially catastrophic consequences if even a small percentage slip though the cracks during the transition. “The poorest, sickest and oldest Americans face grave risk of losing their life-saving medications once the clock strikes 12 on New Year’s,” said Robert Hayes, president of the center. He urged the Bush administration to extend the time of transition beyond Jan. 1.

Write to Saul Friedman, Newsday, 235 Pinelawn Rd., Melville, NY, 11747-4250, or by e-mail at saulfriedman@comcast.net.

Pride, Prejudice, Insurance

By PAUL KRUGMAN
November 7, 2005
The New York Times

General Motors is reducing retirees’ medical benefits. Delphi has declared bankruptcy, and will probably reduce workers’ benefits as well as their wages. An internal Wal-Mart memo describes plans to cut health costs by hiring temporary workers, who aren’t entitled to health insurance, and screening out employees likely to have high medical bills.

These aren’t isolated anecdotes. Employment-based health insurance is the only serious source of coverage for Americans too young to receive Medicare and insufficiently destitute to receive Medicaid, but it’s an institution in decline. Between 2000 and 2004 the number of Americans under 65 rose by 10 million. Yet the number of nonelderly Americans covered by employment-based insurance fell by 4.9 million.

The funny thing is that the solution – national health insurance, available to everyone – is obvious. But to see the obvious we’ll have to overcome pride – the unwarranted belief that America has nothing to learn from other countries – and prejudice – the equally unwarranted belief, driven by ideology, that private insurance is more efficient than public insurance.

Let’s start with the fact that America’s health care system spends more, for worse results, than that of any other advanced country.

In 2002 the United States spent $5,267 per person on health care. Canada spent $2,931; Germany spent $2,817; Britain spent only $2,160. Yet the United States has lower life expectancy and higher infant mortality than any of these countries.

But don’t people in other countries sometimes find it hard to get medical treatment? Yes, sometimes – but so do Americans. No, Virginia, many Americans can’t count on ready access to high-quality medical care.

The journal Health Affairs recently published the results of a survey of the medical experience of “sicker adults” in six countries, including Canada, Britain, Germany and the United States. The responses don’t support claims about superior service from the U.S. system. It’s true that Americans generally have shorter waits for elective surgery than Canadians or Britons, although German waits are even shorter. But Americans do worse by some important measures: we find it harder than citizens of other advanced countries to see a doctor when we need one, and our system is more, not less, rife with medical errors.

Above all, Americans are far more likely than others to forgo treatment because they can’t afford it. Forty percent of the Americans surveyed failed to fill a prescription because of cost. A third were deterred by cost from seeing a doctor when sick or from getting recommended tests or follow-up.

Why does American medicine cost so much yet achieve so little? Unlike other advanced countries, we treat access to health care as a privilege rather than a right. And this attitude turns out to be inefficient as well as cruel.

The U.S. system is much more bureaucratic, with much higher administrative costs, than those of other countries, because private insurers and other players work hard at trying not to pay for medical care. And our fragmented system is unable to bargain with drug companies and other suppliers for lower prices.

Taiwan, which moved 10 years ago from a U.S.-style system to a Canadian-style single-payer system, offers an object lesson in the economic advantages of universal coverage. In 1995 less than 60 percent of Taiwan’s residents had health insurance; by 2001 the number was 97 percent. Yet according to a careful study published in Health Affairs two years ago, this huge expansion in coverage came virtually free: it led to little if any increase in overall health care spending beyond normal growth due to rising population and incomes.

Before you dismiss Taiwan as a faraway place of which we know nothing, remember Chile-mania: just a few months ago, during the Bush administration’s failed attempt to privatize Social Security, commentators across the country – independent thinkers all, I’m sure – joined in a chorus of ill-informed praise for Chile’s private retirement accounts. (It turns out that Chile’s system has a lot of problems.) Taiwan has more people and a much bigger economy than Chile, and its experience is a lot more relevant to America’s real problems.

The economic and moral case for health care reform in America, reform that would make us less different from other advanced countries, is overwhelming. One of these days we’ll realize that our semi-privatized system isn’t just unfair, it’s far less efficient than a straightforward system of guaranteed health insurance.

The Deadly Doughnut

By Paul Krugman
The New York Times
November 11, 2005

Registration for Medicare’s new prescription drug benefit starts next week. Soon millions of Americans will learn that doughnuts are bad for your health. And if we’re lucky, Americans will also learn a bigger lesson: politicians who don’t believe in a positive role for government shouldn’t be allowed to design new government programs.

Before we turn to the larger issue, let’s look at how the Medicare drug benefit will work over the course of next year.

At first, the benefit will look like a normal insurance plan, with a deductible and co-payments.

But if your cumulative drug expenses reach $2,250, a very strange thing will happen: you’ll suddenly be on your own. The Medicare benefit won’t kick in again unless your costs reach $5,100. This gap in coverage has come to be known as the “doughnut hole.” (Did you think I was talking about Krispy Kremes?)

One way to see the bizarre effect of this hole is to notice that if you are a retiree and spend $2,000 on drugs next year, Medicare will cover 66 percent of your expenses. But if you spend $5,000 – which means that you’re much more likely to need help paying those expenses – Medicare will cover only 30 percent of your bills.

A study in the July/August issue of Health Affairs points out that this will place many retirees on a financial “roller coaster.”

People with high drug costs will have relatively low out-of-pocket expenses for part of the year – say, until next summer. Then, suddenly, they’ll enter the doughnut hole, and their personal expenses will soar. And because the same people tend to have high drug costs year after year, the roller-coaster ride will repeat in 2007.

How will people respond when their out-of-pocket costs surge? The Health ffairs article argues, based on experience from H.M.O. plans with caps on drug benefits, that it’s likely “some beneficiaries will cut back even essential medications while in the doughnut hole.” In other words, this doughnut will make some people sick, and for some people it will be deadly.

The smart thing to do, for those who could afford it, would be to buy supplemental insurance that would cover the doughnut hole. But guess what: the bill that established the drug benefit specifically prohibits you from buying insurance to cover the gap. That’s why many retirees who already have prescription drug insurance are being advised not to sign up for the Medicare benefit.

If all of this makes the drug bill sound like a disaster, bear in mind that I’ve touched on only one of the bill’s awful features. There are many others, like the clause that prohibits Medicare from using its clout to negotiate lower drug prices. Why is this bill so bad?

The probable answer is that the Republican Congressional leaders who rammed the bill through in 2003 weren’t actually trying to protect retired Americans against the risk of high drug expenses. In fact, they’re fundamentally hostile to the idea of social insurance, of public programs that reduce private risk.

Their purpose was purely political: to be able to say that President Bush had honored his 2000 campaign promise to provide prescription drug coverage by passing a drug bill, any drug bill.

Once you recognize that the drug benefit is a purely political exercise that wasn’t supposed to serve its ostensible purpose, the absurdities in the program make sense. For example, the bill offers generous coverage to people with low drug costs, who have the least need for help, so lots of people will get small checks in the mail and think they’re being treated well.

Meanwhile, the people who are actually likely to need a lot of help paying their drug expenses were deliberately offered a very poor benefit. According to a report issued along with the final version of the bill, people are prohibited from buying supplemental insurance to cover the doughnut hole to keep beneficiaries from becoming “insensitive to costs” – that is, buying too much medicine because they don’t pay the price.

A more likely motive is that Congressional leaders didn’t want a drug bill that really worked for middle-class retirees.

Can the drug bill be fixed? Yes, but not by current management. It’s hard to believe that either the current Congressional leadership or the Mayberry Machiavellis in the White House would do any better on a second pass. We won’t have a drug benefit that works until we have politicians who want it to work.

$230 billion spent on insurance paperwork

SAN FRANCISCO, Nov. 11 (UPI) — Billing and insurance paperwork consume at least one out of every five dollars of private insurance health spending in California, a study finds.

The findings suggest that about $230 billion in healthcare spending nationally is devoted to insurance administration, according to study leader Dr. James G. Kahn, of the University of California, San Francisco.

“Over the last decade, administrative costs have accounted for 25 percent of health care spending,” said Kahn. “Little has been known, however, about the portion attributable to billing and insurance-related functions.”

Kahn analyzed data from private insurers, physician offices and hospitals and focused on spending in doctor’s offices and hospitals, which represent 80 percent of all privately insured health spending.

He found private insurers use about 10 percent of premiums for billing, marketing, financial activities and profit; while physician offices spent 14 percent of their income on insurance paperwork and hospitals spend 9 percent on insurance paperwork.

The findings appear in Health Affairs.

Part D? It wasn’t supposed to help YOU

Saul Friedman
Newsday

October 29, 2005

Long Beach widow Eula P., 81, writes that she’s neither “stupid nor senile,” but she still can’t figure out the new prescription drug benefit for Medicare beneficiaries. “What were the people in Washington thinking?”

Well, if you remember why Texas Congressman Tom DeLay and his fellow Republicans hammered the drug bill through the House under cover of night, you’ll also understand why, even at this late date and despite the government’s hype, the program remains a puzzle – especially for the sick and elderly population it’s supposed to serve.

First, the new law was more a gift to the insurance and drug industries than it was a benefit for Medicare enrollees, because most of the estimated $720 billion spent under the new law will go to those industries.

Furthermore, the law undermines Medicare as a government health program
by requiring enrollees to buy private insurance in which Medicare plays no role. And for the first time, the Medicare principle of universality was lost when a means test was instituted for low-income beneficiaries.

Thus, while the benefit is called Part D, it is not really a Medicare benefit. As the nonprofit Center for Medicare Advocacy notes, “Medicare drug coverage will be provided by private health insurance companies. Not by the Medicare program. This is different from how Parts A and B of Medicare work.” Indeed, each of the dozens of insurance plans can set and change its benefits.

Next year, beneficiaries will be locked into their choice. But the insurers can change the drugs they offer or require that you use doctors, hospitals and labs in their network. And, like HMOs of the past few years, they can raise premiums, cut benefits or get out of the business if they decide they’re not making enough profit, leaving beneficiaries scratching for coverage. Medicare will be powerless to take action against an offending company.

There are 46 different plans offered in New York alone. The Medicare Website, which is supposed to calculate your savings under each plan, bases its figures on monthly premiums as low as $4.10 in New York.

But most premiums are considerably higher. The yearly deductible is $250, and there is a huge gap in coverage (the “doughnut hole”), during which most people will be stuck with 100 percent of their drug bills. And while original Medicare is valid nationwide, Part D plans may not be. No wonder there is confusion over a profusion of choices and a fragmented system.

The most frequently asked question comes from some of the more than 350,000 seniors who are members of New York’s Elderly Pharmaceutical Insurance Coverage, or EPIC plan. They ask, “If I am satisfied with EPIC, do I need to sign up for Part D?” The answer at this writing is no, because both the EPIC fee and deductible plans are “creditable” coverage under the law, which means they are considered at least as good as Part D. So you will not be penalized if you don’t sign up during the initial enrollment period, then change your mind later.

An EPIC spokesman notes, however, that low-income beneficiaries who qualify for extra help will have their EPIC annual fees waived if they join one of the Part D plans. And their Part D deductible and premium will be negligible.

But there may be an added advantage to having both EPIC and Part D. According to EPIC, its plan will “wrap-around” Part D. Thus, if EPIC members sign up for a relatively inexpensive drugs-only Part D plan, EPIC will pay for costs not covered by Part D, including the co-payments (25 percent), the yearly deductible ($250) and even the “doughnut-hole” gap in coverage, less any EPIC co-pay or deductible.

To clarify another issue raised by readers, if they get their drugs from their current HMO, through their VA coverage, retiree insurance, or supplemental insurance, and if the coverage is “creditable” – at least as good as Part D – they will be so notified by their insurer, and they need not change. But if they have no drug coverage, they should sign up for at least one of the drugs-only Part D plans, or face a stiff penalty after May 15.

The most troubling potential consequence of the fragmentation and privatization of Part D was exemplified by a penned note from 65-year-old Patricia C., of Long Beach. She lives on $720 a month and has been getting her drugs from Medicaid for 20 years. Now, as of Jan. 1, she’ll be shifted to one of the Part D plans, although she doesn’t know which one to choose, and she can’t afford the premium or deductible. (The government will pick your insurance carrier unless you do.)

Fortunately, people who are eligible for both Medicaid (a program for the very poor) and Medicare are entitled to get their Part D coverage with no premium, no deductible and no doughnut hole gap in coverage. But what sort of system requires a very old, very sick person who has depended on Medicaid, to go shopping for new insurance? More than 6.4 million Americans on Medicaid are to be shifted to Part D coverage on Jan. 1, a tidy windfall for the insurance companies.

The Manhattan-based Medicare Rights Center reports that many of these beneficiaries, whose lives depend on uninterrupted medication, will face
potentially catastrophic consequences if even a small percentage slip though the cracks during the transition. “The poorest, sickest and oldest Americans face grave risk of losing their life-saving medications once the clock strikes 12 on New Year’s,” said Robert Hayes, president of the center. He urged the Bush administration to extend the time of transition beyond Jan. 1.

Write to Saul Friedman, Newsday, 235 Pinelawn Rd., Melville, NY, 11747-4250, or by e-mail at saulfriedman@comcast.net.

And now (trumpets please): Managed Consumerism!

Managed Consumerism In Health Care
James C. Robinson
Health Affairs
November/December 2005

The future of market-oriented health policy and practice lies in “managed consumerism,” a blend of the patient-centric focus of consumer-driven health care and the provider-centric focus of managed competition. The optimal locus of incentives will vary among health services according to the nature of the illness, the clinical technology, and the extent of discretion in utilization. A competitive market will manifest a variety of comprehensive and limited benefit designs, broad and narrow contractual networks, and single-and multispecialty provider organizations.

After having tried every alternative, it is to be hoped that a market-oriented health care system will do the right thing and combine the best elements of the demand-side approach embodied in consumerism with the best elements of the supply-side approach embodied in managed competition.

http://content.healthaffairs.org/cgi/content/abstract/24/6/1478

And…

Which Way For Competition? None Of The Above By Robert A. Berenson

Despite growing documentation that the conditions needed to support competition in health care do not exist, consumer-directed health care has been offered as the new market-based solution to cost inflation.

Consumer-directed care threatens important societal values-in particular, the goal of establishing relationships between patients and clinical professionals based on trust.

http://content.healthaffairs.org/cgi/content/abstract/24/6/1536

Comment: It is astounding to watch the extent to which market-oriented policy analysts go to preserve the concept that costs must be controlled by private competition. The alleged “moral hazard” of traditional indemnity insurance allowed access to beneficial health services, resulting in increased costs from ever expanding diagnostic and therapeutic options. To slow the increase in costs, supply-side managed competition was introduced, and everyone was unhappy with the restrictions imposed. The current trend is to shift to demand-side consumer restraints that reduce access to care by the inhumane approach of making it unaffordable. The explosion in personal financial hardship for those with heath care needs will soon demonstrate that this model won’t work.

Now Berkeley professor Jamie Robinson recommends that we combine these two failed experiments (and CDHC has already failed – but we’re waiting for more pain to be shared before we all agree) into one model: managed consumerism!

Just one example of his concept: He categorizes clinical interventions into patient-preference sensitive, provider-supply sensitive, both, or neither, and then defines the optimal benefit and network designs for each of these four categories as “medically necessary,” “moral hazard,” “supplier-induced demand,” and “discretionary care.” These categories are valid, but the inference that we can combine managed competition and consumer directed mechanisms into a single competitive market that moves patients and providers into and out of these categories based on changing need, thereby achieving the highest quality at the lowest cost… well, the fumes of the Berkeley weed must have drifted into his office.

Supporters of market competition give lip service to quality, but their models are really all about controlling costs. Their models fail because they do not address the most important issue: the large numbers of the healthy must pay for the smaller numbers of the sick. No competitive market model will ever resolve that dilemma, and they know it. That is why they always include in their models public funding, whether it be tax credits, Medicaid, Medicare, SCHIP, catastrophic reinsurance, or whatever. 60% of health care is already funded through our tax system, and that will only increase.

Let’s dump this silly game of market-competition Scrabble, and lets’ get on with enacting a system that will actually benefit patients while controlling costs: single-payer national health insurance.

PNHP Members Urge Gov. Romney on Single-Payer

Physicians for a National Health Program
Massachusetts Chapter
46 Highland Ave.
Cambridge

Governor Mitt Romney
State Capitol
Boston, MA 02133

November 3, 2005

Dear Governor Romney, Speaker DiMasi and Senate President Travaglini:

We urge you to abandon your ill-conceived proposals for health care reform and to adopt, instead, a single payer program of universal coverage for the Commonwealth.

As physicians and health professionals, we witness the heavy toll of unnecessary suffering endured by patients who delay care and even forego vital treatment due to costs. While the uninsured bear the heaviest burden, many with insurance also find care unaffordable due to co-payments, deductibles and restrictions on coverage. Reforms should address the grave problems of both groups.

Your plans to loosen regulations on health insurance, allowing ever-skimpier coverage, would perpetrate a cruel hoax. Such cut-rate policies would cost families thousands of dollars yet offer miserly care and little protection from financial ruin in the face of serious illness. Many who currently enjoy adequate coverage would doubtless be forced into plans with gaping holes and onerous restrictions on choice. If there is one thing worse than being uninsured it’s paying dearly for worthless coverage.

Your view that we can achieve universal coverage by forcing people to buy themselves insurance ignores the most basic facts about who is uninsured. Only 12.4% of the 748,000 uninsured in our state are both young enough to qualify for low-premium plans (under age 35) and affluent enough (family incomes greater than 499% of poverty) to readily afford them. Yet even this 12.4% figure may be too high if insurers are allowed to charge higher premiums for persons with health problems; only half of uninsured persons in those age and income categories report that they are in “excellent health” (The statistics in this paragraph were obtained by analyses of data that the Census Bureau collected on Massachusetts residents in March 2005).

Proposals to raid the existing free care pool in order to partially subsidize cut-rate policies would actually worsen the plight of many who are currently uninsured. Under such reforms, patients now eligible for free or low-cost services would often face greater restrictions on care and higher out-of-pocket costs. The only real winners would be the private insurers who would surely gain millions from the sale of near-useless policies.

Replaying Dukakis’ failed employer mandate, i.e. making employers pony up more money for coverage, will not lead to universal coverage. As Dukakis found, relentlessly rising health costs quickly stir rebellion among powerful employers, making the program unsustainable.

While we welcome the expansion of Medicaid as a stopgap measure to cover more poor families, we know that this strategy ultimately leads to a dead end. Inevitably, the next economic downturn will bring a flood of additional families pushed onto the Medicaid rolls just as state tax revenues fall. As in the past, Medicaid will be cut when the need is greatest.

In contrast, a single payer reform would create a stable long-term financing mechanism for health care. It could cut costs by streamlining health care paperwork, making universal, comprehensive coverage affordable. The Commonwealth’s three largest private insurers spend more than $1.3 billion annually on billing, marketing, high executive salaries and other administrative costs. That’s ten times as much overhead per enrollee as Canada’s national health insurance program. And hospitals and doctors spend billions more fighting with insurers over payments for each aspirin tablet, x-ray and doctor’s visit. If we cut bureaucracy to Canada’s levels we could save at least 14% of current health expenditures, enough to cover all of the uninsured in Massachusetts and to improve coverage for the rest of our patients as well.

And single payer is popular. Sixty-two percent of Massachusetts doctors support it (according to a recent study in the Archives of Internal Medicine), joining the Massachusetts Nurses Association and dozens of other labor, seniors and consumer groups.

We recognize that a single payer reform threatens the multi-billion dollar insurance industry, and would force down the high profits enjoyed by drug companies. But such interests must not be placed ahead of the health of the people of Massachusetts. Only a single payer system can assure universal and comprehensive coverage at an affordable price. The people of the Commonwealth deserve no less.

Sincerely,

[This letter was signed by nearly 300 Massachusetts doctors.]

Fact Sheet on the Uninsured and Proposed Health Reforms
Physicians for a National Health Program — Massachusetts Chapter

1- According to data from the U.S. Census Bureau, which surveyed 3,550 Massachusetts residents in March, 2005: 748,101 Massachusetts residents — 10.6% of the population — were uninsured in 2004. This survey uses in-person interviews with interviewers available for many languages. It is considered the standard national source of data on the uninsured. Politicians’ claims that there are fewer uninsured are based on telephone surveys conducted by the state that miss the thousands of uninsured families without telephones (or with only cell phone) and many who do not speak English.

2- According to the Census Bureau data most of the uninsured have low incomes.

17% (126,155 people) had incomes below poverty ($9,310 for a single person)
26% (193,380 people) were near poor (100% -199% of poverty)
18% (136,100 people) were lower middle class (200% -299% of poverty).
10% (73,590 people) had incomes 300% -399% of poverty.
6% (45,016 people) had incomes 400%-499% of poverty
Only 23% (173,858 people) had incomes at least 5 times poverty

Hence, few could afford even the stripped down coverage that has been proposed by Governor Romney and Speaker DiMasi. Given the very high costs of housing and heating in Massachusetts, only people in the top income group could reasonably pay the $2400 annual per person premiums that Governor Romney hopes private insurance plans will agree to offer

3- Even these income figures overstate the numbers likely to find coverage they can afford. Older persons and those with chronic conditions will surely find premiums far higher than $2400. Only 65,305 (8.7% of the total who are uninsured) of the uninsured are between 18 and 35 years old and have family incomes above five times poverty. Another 27,124 (3.6% of the uninsured) are children living in higher income families. Thus, overall, only 92,429 people (12.3% of the uninsured) are likely to qualify for and be able to afford the low-premium coverage.

4- The Governor’s proposed $2400 annual policy is sure to provide only the skimpiest of coverage. At present no such policy is available in Massachusetts and the Governor and Blue Cross have refused to release details about their proposed policy. In New Hampshire (where health costs are lower) a policy costing $2484 is available (through ehealthinsurance.com) for a single 30 year old non-smoking woman, offering the following coverage:

$1000 deductible before insurance pays anything
20% co-payment on covered services for the next $5000
Inpatient mental health — capped at $2500 each year ($10,000 lifetime cap for combined inpatient and outpatient) — patient pays everything else
Outpatient mental health — 50% of charges (including drugs), maximum $40 per day
No coverage at all for: routine preventive or gynecologic exams or maternity care

Such coverage would neither pay for routine preventive care nor protect people from huge unpaid bills if they were to become seriously ill (or even pregnant). In essence, the Governor would require people to pay $2400 per year for virtually worthless coverage.

5- The Governor and legislative leaders falsely imply that many of the uninsured are currently “free riders” on the system. Only the poor and near poor are generally eligible for free care at present. While some of the lower middle class can qualify for partial subsidies from the state’s free care pool, they pay a hefty portion out-of-pocket. Many hospitals vigorously pursue payment from uninsured higher-income people, often charging much higher prices than health insurers pay, and referring unpaid bills to collection agencies.

1 in 5 Health Care Dollars Used for Insurance Paperwork

1 in 5 Health Care Dollars Used for Insurance Paperwork

Study Suggests that National Heath Insurance Could Save Enough to Provide Coverage for All

PRESS RELEASE
EMBARGOED UNTIL: Thursday, Nov. 10, 2005 9:30 a.m.

Contacts:
James G. Kahn, M.D. (415) 407-5809
Steffie Woolhandler, M.D. (617) 312-0970
Don McCanne, M.D. (949) 493-3714
Nicholas Skala (312) 782-6006

The Cost Of Health Insurance Administration In California: Estimates For Insurers, Physicians, And Hospitals

Billing and insurance paperwork consumes at least one-fifth of California’s privately-insured health spending (currently estimated $26 billion), according to a new study published today in Health Affairs. If the state adopted a universal single-payer insurance system, the state would save from $18 to $21 billion per year by eliminating this paperwork, the author estimates.

Projected nationally, these figures indicate that approximately $230 billion of health spending was devoted to insurance administration in 2005, with estimated savings of between $161 billion and $184 billion from reduced billing, marketing and other insurance paperwork tasks.

Researchers led by University of California, San Francisco professor James G. Kahn analyzed administrative expenses at hospitals, doctors’ offices and private insurance companies, separating billing and insurance costs from other administrative tasks such as quality improvement efforts.

Using conservative estimates, they found that:

* Private insurers spent 8 percent of their premiums on billing, marketing and other financial activities.
* Physician offices spent 14 percent of revenues and hospitals 7 to 11 percent of revenues on these activities.
* Overall, 21 percent of private health spending went to billing-related tasks, and an additional 13 percent of spending went to non-billing administrative functions.
* Only 66 percent went to medical care.

The study provides strong validation of a controversial New England Journal of Medicine study by Harvard researchers Drs. David Himmelstein and Steffie Woolhandler. That 2003 study found that health care bureaucracy accounted for 31 percent of U.S. health spending — about $400 billion — vs. 16.7 percent in Canada. The Harvard group’s figures included several categories of administrative overhead costs that were not assessed in the California study, e.g. administrative spending by nursing homes, private employers and home health agencies, as well as health industry profits. The Harvard researchers estimated that national health insurance could streamline the health payment system, saving $286 billion in 2003, $6940 for each uninsured American.

A February 2005 study by the Lewin Group, a Virginia-based consulting firm, found that a single-payer plan would save California $344 billion over 10 years, even while providing coverage to all state residents.

Dr. Kahn commented “These estimates confirm the very significant resources consumed by insurance administration in our current fragmented health care financing system. The costs to providers — physicians most of all — are especially high. The potential for savings with simplified financing is huge.”

According to Dr. Steffie Woolhandler, a Harvard Associate Professor and expert on health care administration: “This study offers further proof that hundreds of billions of health care dollars are wasted each year on useless paperwork, CEOs’ incomes and insurance company profits. The money squandered is more than enough to cover the uninsured and to eliminate exclusions, co-payments and deductibles that often bankrupt even insured families in the face of serious illness. But only national health insurance can slash health care bureaucracy. Computerized billing — the strategy pushed by the Bush administration — can’t do the job; 80% of medical billing is already computerized yet bureaucratic costs continue to rise.”

“Only national health insurance can squeeze the bureaucratic waste out of health care and use the savings to give patients the care they need,” said Dr. Don McCanne, a retired California physician and Senior Health Policy Fellow at Physicians for a National Health Program. “Americans spend twice as much per capita on health care as Canadians who have universal coverage. The administrative savings of national health insurance would make high-quality, comprehensive coverage with no waits for care affordable.”

###

Physicians for a National Health Program is an organization of 14,000 physicians advocating for non-profit national health insurance. PNHP has chapters and spokespeople across the country. For contacts, call (312) 782-6006

Landmark study: Much administrative waste really is caused by private insurers

The Cost Of Health Insurance Administration In California: Estimates For Insurers, Physicians, And Hospitals
By James G. Kahn, Richard Kronick, Mary Kreger and David N. Gans
Health Affairs
November/December 2005

Estimates of administrative costs in the U.S. health care system have been the subject of considerable controversy during the past decade. Single-payer analysts Steffie Woolhandler, David Himmelstein, and their colleagues have argued that moving to a Canadian-style system would reduce U.S. administrative costs by 10-15 percent of total health spending.

The hypothesis suggested by Woolhandler and colleagues, and supported by common sense, is that the complexities of a highly fragmented, multiple-payer system account for the “excess” administration.

To inform discussions of reform-related cost savings, it is valuable to document the portion of administrative costs attributable to the U.S. system of paying providers.

Administrative costs account for 25 percent of health care spending, but little is known about the portion attributable to billing and insurance-related (BIR) functions. We estimated BIR for hospital and physician care in California. Data for physician practices came from a mail survey and interviews; for hospitals, from regulatory reporting; and for private insurers, from a consulting company. Private insurers spend 9.9 percent of revenue on administration and 8 percent on BIR. Physician offices spend 27 percent and 14 percent, and hospitals, 21 percent and 7-11 percent, respectively. Overall, BIR represents 20-22 percent of privately insured spending in California acute care settings.

In comparison to the health care systems of other advanced economies, it is difficult to argue that the United States has an efficient health care system: Its high level of clinical health care spending does not seem to be matched by superior outcomes.

To the extent that competition does not foster cost control and quality improvement, and to the extent that a simpler system with fewer insurers would allow a reduction in BIR, then reductions in BIR are an attractive target for reform initiatives.

http://content.healthaffairs.org/cgi/content/abstract/24/6/1629

Comment: This landmark study supports prior evidence that the United States wastes a tremendous amount of resources on health care administration. What is particularly noteworthy in this study is that it breaks out the administrative costs that are specifically due to billing and insurance related functions for health care covered by private insurance plans in California, a microcosm of health spending in the United states.

Let’s state that again. Billing and insurance related functions represent over one-fifth of privately insured spending.

Is that clear? The billing and insurance administration functions of private insurers combined with the resultant billing and administrative burden placed on physicians and hospitals constitute over one-fifth of privately insured spending.

How many times have you heard that, even if the administrative waste is real, the U.S. health care system is so complex that you could never recover those costs with a single payer system? Do not ever again let such a statement go unchallenged. Under a single payer system, much of the billing and insurance related functions would disappear. This study confirms the enormity of the savings that would ensue.