Hospital Computing and the Costs and Quality of Care: A National Study

By David U. Himmelstein, MD, Adam Wright, PhD, Steffie Woolhandler, MD, MPH
The American Journal of Medicine
November 20, 2009
BACKGROUND
Many believe that computerization will improve health care quality, reduce costs, and increase administrative efficiency. However, no previous studies have examined computerization’s cost and quality impacts at a diverse national sample of hospitals.
DISCUSSION
We used a variety of analytic strategies to search for evidence that computerization might be cost-saving. In cross-sectional analyses, we examined whether more computerized hospitals had lower costs or more efficient administration in any of the 5 years. We also looked for lagged effects, that is, whether cost-savings might emerge after the implementation of computerized systems. We looked for subgroups of computer applications, as well as individual applications, that might result in savings. None of these hypotheses were borne out. Even the select group of hospitals at the cutting edge of computerization showed neither cost nor efficiency advantages. Our longitudinal analysis suggests that computerization may actually increase administrative costs, at least in the near term.
The modest quality advantages associated with computerization are difficult to interpret. The quality scores reflect processes of care rather than outcomes; more information technology may merely improve scores without actually improving care, for example, by facilitating documentation of allowable exceptions.
Why has information technology failed to decrease administrative or total costs? Three interpretations of our findings seem plausible. First, perhaps computerization cannot decrease costs because savings are offset by the expense of purchasing and maintaining the computer system itself. Although information technology has improved efficiency in some industries (eg, telecommunications ), it has actually increased costs in others, such as retail banking.
Second, computerization may eventually yield cost and efficiency gains, but only at a more advanced stage than achieved by even the 100 “Most Wired” hospitals.
Finally, we believe that the computer’s potential to improve efficiency is unrealized because the commercial marketplace does not favor optimal products. Coding and other reimbursement-driven documentation might take precedence over efficiency and the encouragement of clinical parsimony. The largest computer success story has occurred at Veterans Administration hospitals where global budgets obviate the need for most billing and internal cost accounting, and minimize commercial pressures.
CONCLUSIONS
Whatever the explanation, as currently implemented, health information technology has a modest impact on process measures of quality, but no impact on administrative efficiency or overall costs. Predictions of cost-savings and efficiency improvements from the widespread adoption of computers are premature at best.
http://www.amjmed.com/home
PNHP press release:
https://pnhp.org/news/2009/november/projections-of-savings-from-health-it-are-baseless-harvard-researchers-say
VA’s VistA:
http://www.innovations.va.gov/

As currently implemented, health information technology (HIT) has no significant impact on administrative efficiency or overall costs, even in the “100 Most Wired” hospitals. Members of Congress should quit pretending that expanding HIT will produce savings that will help pay for the increased spending called for in their legislation.
This should not be interpreted as a blanket condemnation of HIT. The system used by the Veterans Administration hospitals has improved quality, though their system was designed specifically to enhance patient care. Profitable, proprietary, commercial HIT systems are usually designed to improve billing and cost accounting (and to make money for the vendors), whereas patient care information management in these proprietary systems is designed to mesh with these business functions that are given a higher priority.
We should really think about whether we want to continue to use our public funds to promote private, entrepreneurial HIT systems that have a business orientation, or if we should use those funds for further development of less expensive, open-source HIT systems designed specifically to enhance the quality of patient care, just as the VA health system has done. Their award-winning system, VistA, is available for use in the private sector (VA’s VistA – link above). Isn’t it more logical to look at a system that actually works, and one that that’s already paid for and that we own?
The following is from the PNHP release (link above):
Dr. Steffie Woolhandler, professor of medicine at Harvard and study co-author, said several factors may explain why health IT has failed to reduce administrative costs.
“Any savings may have been offset by the costs of purchasing and running new computer systems,” she said. “In addition, most software is designed around the accounting and billing needs of hospitals, not the clinical side.”
She noted that a computer success story in recent years has been at the Veterans Administration, where global budgets eliminate most billing and internal cost accounting, allowing physicians to focus instead on delivering care.
“The VA system now has our nation’s highest quality and patient approval ratings,” Woolhandler said. “Congress should take note: to get the most benefit from our health care dollars and from health IT, we should adopt a single-payer, Medicare-for-all program. Nothing short of that will allow us to reap the full potential of computerization or to provide comprehensive, quality and affordable care to all.”

Mercer
November 18, 2009

* Employers hold cost growth to 5.5 percent in 2009, the lowest increase in a decade

* Growth in use of wellness or health management programs accelerates as large employers look to hold down cost without cost-shifting

* Small employers added consumer-directed health plans in 2009, helping to push up enrollment in these high-deductible plans to 9 percent of all covered employees

However, benefit cost growth outpaced inflation in 2009 by a widening margin.

The ongoing workforce health management (or “wellness”) movement gained considerable momentum in 2009, as offerings of virtually every type of health management program – from health risk assessments to disease management programs to behavior modification programs – rose significantly. While not conclusive, survey results suggest these programs are having an impact: Medical plan cost increases in 2009 were about two percentage points lower, on average, among employers with extensive health management programs than among those employers offering limited or no health management programs. And nearly three-fourths of employers that have measured the return on their investment in health management programs say they are satisfied with the year-over-year savings, lower utilization rates or improved health risks.  However, only about a third of all large employers have formally measured ROI.
 
“A lot more employers were willing to place their bet on health management in 2009,” said Linda Havlin, a worldwide partner and Mercer’s global health and benefits intellectual capital leader. “But they will want to see continual gains. Measuring health management ROI is inherently challenging and continues to evolve.”

Small employers held down cost increases by sharply raising deductibles for in-network PPO services. Consistent with past years, employers kept premium contributions relatively stable, choosing to keep the cost of coverage affordable while shifting the burden to those who use health services.

While growth in CDHP offerings in 2009 was evident only among small employers, the plans are still more common among larger employers: CDHPs are offered by 20 percent of employers with 500 or more employees, and 43 percent of those with 20,000 or more employees.

http://www.mercer.com/summary.htm?idContent=1364345

Comment:

By Don McCanne, MD

In their just released 2009 report on employer-sponsored health benefit programs Mercer seems to be celebrating the fact that this year employers have held the line on benefit cost increases. Is their optimism warranted?

Overall, the cost growth for 2009 is 5.5 percent, the lowest increase in a decade. However that increase outpaced inflation by a widening margin. The gap means that health care continues to consume an increasing percentage of wages, whether paid by the employee directly or through forgone wage increases.

Mercer cites two mechanisms for slowing cost increases: 1) small employers simply shifted more costs to the employees by raising deductibles, and 2) larger employers expanded their wellness and health management programs.

Since high deductible plans have lower premiums, small employers were able to avoid the full increases in health care costs, but their employees were further burdened by greater out-of-pocket expenses. Many large employers already offer high deductible plans and have been benefiting from this cost shift to the employee. Although Mercer frames this as being beneficial since it slows the increase in employers’ costs, it is detrimental for their employees since it expands the incidence of underinsurance.

Mercer suggests that wellness programs may have been the primary reason for the slowing of costs for large employers, but is that a valid conclusion? Most wellness interventions would demonstrate benefits in the out-lying years, but the early impact would be negligible on changing the need for health care services. Although many employers express satisfaction with these programs, most of them have not made any effort to measure the actual impact.

There is a far more logical explanation for the two percentage point advantage that they report in their health care costs. The health insurance underwriting cycle is a pattern of repeated larger gains and smaller gains that are due in part to periods of aggressive marketing by the insurers to gain greater market share. In those aggressive years, lower returns are the trade off. Once market share is established, premiums are pushed up to provide greater profit margins.

Insurers and plan administrators have found a new niche in wellness services. They are heavily marketing these products now and so are expected to be in the trough of the underwriting cycle. Once the market for these products stabilizes, we can expect the cycle to move into a peak, catching employers off guard when their health benefit program costs sharply increase in spite of having instituted these wellness programs. It is likely that the response of the employers will be to change their benefit designs which inevitably will result in even more underinsurance.

The point is that health care costs are continuing to increase at intolerable rates and that the purported slowing noted in this report is merely an artifact of the underwriting cycle combined with an expansion of underinsurance.

In an improved Medicare for all program underinsurance and underwriting cycles wouldn’t even exist, but Congress is insisting that we build on our current dysfunctional financing system, in spite of its perversities. How smart is that?

In a tough year, employers hold the line on health benefit cost increases

Mercer
November 18, 2009
* Employers hold cost growth to 5.5 percent in 2009, the lowest increase in a decade
* Growth in use of wellness or health management programs accelerates as large employers look to hold down cost without cost-shifting
* Small employers added consumer-directed health plans in 2009, helping to push up enrollment in these high-deductible plans to 9 percent of all covered employees
However, benefit cost growth outpaced inflation in 2009 by a widening margin.
The ongoing workforce health management (or “wellness”) movement gained considerable momentum in 2009, as offerings of virtually every type of health management program – from health risk assessments to disease management programs to behavior modification programs – rose significantly. While not conclusive, survey results suggest these programs are having an impact: Medical plan cost increases in 2009 were about two percentage points lower, on average, among employers with extensive health management programs than among those employers offering limited or no health management programs. And nearly three-fourths of employers that have measured the return on their investment in health management programs say they are satisfied with the year-over-year savings, lower utilization rates or improved health risks. However, only about a third of all large employers have formally measured ROI.
“A lot more employers were willing to place their bet on health management in 2009,” said Linda Havlin, a worldwide partner and Mercer’s global health and benefits intellectual capital leader. “But they will want to see continual gains. Measuring health management ROI is inherently challenging and continues to evolve.”
Small employers held down cost increases by sharply raising deductibles for in-network PPO services. Consistent with past years, employers kept premium contributions relatively stable, choosing to keep the cost of coverage affordable while shifting the burden to those who use health services.
While growth in CDHP offerings in 2009 was evident only among small employers, the plans are still more common among larger employers: CDHPs are offered by 20 percent of employers with 500 or more employees, and 43 percent of those with 20,000 or more employees.
http://www.mercer.com/summary.htm?idContent=1364345

In their just released 2009 report on employer-sponsored health benefit programs Mercer seems to be celebrating the fact that this year employers have held the line on benefit cost increases. Is their optimism warranted?
Overall, the cost growth for 2009 is 5.5 percent, the lowest increase in a decade. However that increase outpaced inflation by a widening margin. The gap means that health care continues to consume an increasing percentage of wages, whether paid by the employee directly or through forgone wage increases.
Mercer cites two mechanisms for slowing cost increases: 1) small employers simply shifted more costs to the employees by raising deductibles, and 2) larger employers expanded their wellness and health management programs.
Since high deductible plans have lower premiums, small employers were able to avoid the full increases in health care costs, but their employees were further burdened by greater out-of-pocket expenses. Many large employers already offer high deductible plans and have been benefiting from this cost shift to the employee. Although Mercer frames this as being beneficial since it slows the increase in employers’ costs, it is detrimental for their employees since it expands the incidence of underinsurance.
Mercer suggests that wellness programs may have been the primary reason for the slowing of costs for large employers, but is that a valid conclusion? Most wellness interventions would demonstrate benefits in the out-lying years, but the early impact would be negligible on changing the need for health care services. Although many employers express satisfaction with these programs, most of them have not made any effort to measure the actual impact.
There is a far more logical explanation for the two percentage point advantage that they report in their health care costs. The health insurance underwriting cycle is a pattern of repeated larger gains and smaller gains that are due in part to periods of aggressive marketing by the insurers to gain greater market share. In those aggressive years, lower returns are the trade off. Once market share is established, premiums are pushed up to provide greater profit margins.
Insurers and plan administrators have found a new niche in wellness services. They are heavily marketing these products now and so are expected to be in the trough of the underwriting cycle. Once the market for these products stabilizes, we can expect the cycle to move into a peak, catching employers off guard when their health benefit program costs sharply increase in spite of having instituted these wellness programs. It is likely that the response of the employers will be to change their benefit designs which inevitably will result in even more underinsurance.
The point is that health care costs are continuing to increase at intolerable rates and that the purported slowing noted in this report is merely an artifact of the underwriting cycle combined with an expansion of underinsurance.
In an improved Medicare for all program underinsurance and underwriting cycles wouldn’t even exist, but Congress is insisting that we build on our current dysfunctional financing system, in spite of its perversities. How smart is that?

By Alan M. Garber, Victor R. Fuchs, Kenneth J, Arrow

November 17, 2009

President Barack Obama
The White House
Washington, DC 20500
 
Dear Mr. President,

As the full Senate prepares to debate comprehensive health reform legislation, we write as economists to stress the potential benefits of health reform for our nation’s fiscal health, and the importance of those features of the bill that can help keep health care costs under control. Four elements of the legislation are critical: (1) deficit neutrality, (2) an excise tax on high-cost insurance plans, (3) an independent Medicare commission, and (4) delivery system reforms.

Including these four elements in the reform legislation – as the Senate Finance Committee bill does and as we hope the bill brought to the Senate floor will do – will reduce long-term deficits, improve the quality of care, and put the nation on a firm fiscal footing. It will help transform the health care system from delivering too much care, to a system that consistently delivers higher-quality, high-value care. The projected increases in federal budget deficits, along with concerns about the value of the health care that Americans receive, make it particularly important to enact fiscally responsible and quality-improving health reform now.

In developing our analysis and recommendation, we received input and suggestions from Administration officials, including the Office of Management and Budget and others, as well as from economists who disagree with the Administration’s views.

The four key measures are:

* Deficit neutrality

Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the 10-year budget window, and deficit reducing thereafter. Covering tens of millions of currently uninsured people will increase spending, but the draft health reform legislation contains offsetting savings sufficient to cover those costs and the seeds of further reforms that will lower the growth of spending. Deficit neutrality over the first decade means that, even during the start-up period, the legislation will not add to our deficits. After the first decade, the legislation should reduce deficits.

* Excise tax on high-cost insurance plans

The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages for the health care system that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers.

* Medicare Commission

Rising Medicare expenditures pose one of the most difficult fiscal challenges facing the federal government. Medicare is technically complex and the benefits it underwrites are of critical importance to tens of millions of seniors and Americans with disabilities. We believe that a commission of medical experts should be empowered to suggest changes in Medicare to improve the quality and value of services. In particular, such a commission should be charged with developing and suggesting to Congress plans to extend the solvency of the Medicare program and improve the quality of care delivered to Medicare beneficiaries. Creating such a commission will make sure that reforming the health care system does not end with this legislation, but continues in future decades, with new efforts to improve quality and contain costs.

* Delivery system reforms

Successful reform should improve the care that individual patients receive by rewarding health care professionals for providing better care, not just more care. Studies have shown that hundreds of billions of dollars are spent on care that does nothing to improve health outcomes. This is largely a consequence of the distorted incentives associated with paying for volume rather than quality. Health care reform must take steps to change the way providers care for patients, to reward care that is better coordinated and meets the needs of each patient. In particular, the legislation should include additional funding for research into what tests and treatments work and which ones do not. It must also provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections. Aggressive pilot projects should be rapidly introduced and evaluated, with the best strategies adopted quickly throughout the health care system.

As economists, we believe that it is important to enact health reform, and it is essential that health reform include these four features that will lower health care costs and help reduce deficits over the long term. Reform legislation that embodies these four elements can go a long way toward delivering better health care, and better value, to Americans.

Sincerely,

Dr. Henry Aaron, The Brookings Institution
Dr. Kenneth Arrow, Stanford University, Nobel Laureate in Economics
Dr. Alan Auerbach, University of California, Berkeley
Dr. Katherine Baicker, Harvard University
Dr. Alan Blinder, Princeton University
Dr. David Cutler, Harvard University
Dr. Angus Deaton, Princeton University
Dr. J. Bradford DeLong, University of California, Berkeley
Dr. Peter Diamond, Massachusetts Institute of Technology
Dr. Victor Fuchs, Stanford University
Dr. Alan Garber, Stanford University
Dr. Jonathan Gruber, Massachusetts Institute of Technology
Dr. Mark McClellan, The Brookings Institution
Dr. Daniel McFadden, University of California, Berkeley, Nobel Laureate in Economics
Dr. David Meltzer, University of Chicago
Dr. Joseph Newhouse, Harvard University
Dr. Uwe Reinhardt, Princeton University
Dr. Robert Reischauer, The Urban Institute
Dr. Alice Rivlin, The Brookings Institution
Dr. Meredith Rosenthal, Harvard University
Dr. John Shoven, Stanford University
Dr. Jonathan Skinner, Dartmouth College
Dr. Laura D’Andrea Tyson, University of California, Berkeley

Letter:
http://iis-db.stanford.edu/pubs/22739/Economist_Letter_to_the_President.pdf

The source of the letter:
http://healthpolicy.stanford.edu/publications/letter_to_president_barack_obama_urging_four_elements_be_included_in_health_reform_legislation_to_control_costs/

OECD Tax Database (Table 0.1):
http://www.oecd.org/document/60/0,2340,en_2649_34533_1942460_1_1_1_1,00.html

Bundled payments and ACOs:
https://pnhp.org/news/2009/november/rand-and-br-on-savings-through-bundled-payments

Comme
nt:

By Don McCanne, MD

For socially conscious health care reform advocates, the primary goal of reform is to see that every individual receives the health care that he or she needs, But what has really driven the reform process has been the concern over the very high costs of health care that have challenged individuals, employers and the stewards of our government health programs.

In this late phase of the reform process many have expressed doubts over the adequacy of the various policies in the reform proposal that allegedly are designed to control health care costs well into the future. In response, twenty-three of the nation’s most distinguished economists have signed on to this letter addressed to President Obama expressing support for four elements that they believe are of critical importance and should be included in the reform legislation. Let’s look closer at these four elements.

* Deficit neutrality

The economists call for budget neutrality initially, to be followed by deficit reduction. Of course they are referring only to the federal government budget and not to private sector spending. The great risk of limiting consideration to public spending is that, in the absence of effectively controlling actual health care costs, the government budget can be controlled only by shifting the costs to the private sector. Individuals and businesses certainly do not want to see an increase in their health care spending, especially while the government is reducing its spending in the later phase, that of deficit reduction.

Isolating health care spending for budget neutrality while continuing with deficits in other government programs (war, financial institution bailouts, interest on the debt, expanding our prison population, etc.) does not seem just. Appropriate use of debt is fundamental to any business, and there is no reason that reasonable debt should not be a part of the government’s management of its financial obligations to health care.

That said, our total government debt is the result of prior devious efforts to reduce revenues (i.e., taxes) in order to force the reduction in funding of government programs. With inadequate revenues and with exploding debt, deficit hawks in Congress can be relied upon to underfund crucial programs such as health care, but theirs is a pathological process since they only look at spending and refuse to consider revenues.

Those who argue that taxes collected for government health care spending remove money from the economy are flat out wrong. Health care is one of the most important and beneficial components of our economy, constituting over 17 percent of our GDP (Gross Domestic Product). Those taxes are moved back into our economy.

Those who scream that we are being taxed to death need another dose of reality. The average total tax revenues of OECD nations (Organization for Economic Cooperation and Development) was 35.9 percent of GDP in 2006. For the United States, the total tax revenue was 28.0 percent of GDP, placing us near the bottom of OECD nations. (OECD Tax Database – link above)

Suppose we increased our tax revenues to the average of OECD nations, which would still be far, far short of those nations with more highly socialized systems. At 7.9 percent (35.9 average minus 28.0 U.S.) of our GDP of about $13.8 trillion, that would increase government revenues by about $1.1 trillion in a single year, ten times the amount they are considering for health care reform. Our entire federal spending is under $3 trillion. We could eliminate entirely the deficits and provide surpluses while keeping tax revenues at well below the OECD average, if only the deficit hawks would look at the revenue side of the ledger.

* Excise tax on high-cost insurance plans

Why would any health insurance plans have very high premiums? One reason is that insurers use medical underwriting to assess high premiums for individuals with preexisting disorders. It would be unfair to tax those premiums for an individual with other burdens, but with adequate regulatory reform medical underwriting should be eliminated anyway.

The more common reason for high premiums is that the plan covers other services and products such as dental care, eye care, maternity benefits, mental health services, and pharmaceuticals. Applying an excise tax to these premiums would result in eliminating such benefits from the plans and shifting these expenses to the individual in the form of greater out-of-pocket spending. The proposals under consideration place a cap on out-of-pocket expenses for covered services, but that cap is unaffordable for many, and these expenses would not apply to the cap. Thus they would impose an even greater financial burden.

Since the excise tax would discourage access to these important health care services, it should be rejected as the flawed policy concept that it is.

* Medicare Commission

Although the Medicare Commission purportedly would be to improve quality and value, its primary purpose would be to limit spending within the Medicare program. Medicare has already served as a leader in innovations to reduce health care spending, with the private insurance industry following. In fact, many providers believe that Medicare has been too aggressive, often resulting in lower reimbursement rates than in the private sector. Granting the Commission more power to use newer innovations to further reduce spending will inevitably increase the animosity held towards Medicare by the providers. A decline in willingness to accept Medicare beneficiaries could further impair access.

This is not to say that the concept of a commission is a bad idea. If the commission worked with the entire health care delivery system in applying potentially beneficial innovations, higher quality and greater value are possible. If the commission became too aggressive, the push-back by providers and their patients would moderate their excesses.

If the power of the Medicare Commission were limited only to Medicare, then there is a potential that cost-cutting aggressiveness might threaten to convert Medicare into a quasi-welfare program not unlike Medicaid, a transformation that would not please our Medicare beneficiaries. It is more likely that the Commission simply would be enmeshed in studies of relatively ineffectual measures that would have little net impact on costs.

We would need a universal Medicare for all program for the Commission to have a real impact that would be both beneficial and cost saving.

* Delivery system reforms

These economists recommend that we reward health professionals for providing better care. The problem is that we don’t know how to do that. They recommend funding research into what tests and treatments work and which ones do not, as if that isn’t what research has been all about anyway. Maybe it would be helpful to directly compare expensive patent drugs to generics, but the overall spending impact will be modest since this year’s patented drugs are next year’s generics.

They also recommend bundled payments, accountable care organizations, plus penalties for re-admissions, hospital acquired infections and other PACs (potentially avoidable costs). In my message two days ago I already discussed the reasons why these measures cannot be relied upon to reduce health care costs (Bundled payments and ACOs – link above).

Is this really the best that these noted economists can come up with? They have made the same mistake as the politicians. Their perception of reform is to build on our existing dysfunctional financing system (an egregiously flawed concept that you would think our leading economists would understand).

If we had an improved Medicare for all we could have 1) deficit neutrality through global budgeting, 2) rational tax policies that are equitable, 3) public administration using the guidance of commissions as appropriate, and 4) our own beneficent monopsony t
hat can realign incentives to promote the delivery system reform that we need. And, oh yes, every single person would be included. It doesn’t take an economist to understand that.

Letter to President Barack Obama urging four elements be included in health reform legislation to control costs

By Alan M. Garber, Victor R. Fuchs, Kenneth J, Arrow

November 17, 2009

President Barack Obama
The White House
Washington, DC 20500
 
Dear Mr. President,

As the full Senate prepares to debate comprehensive health reform legislation, we write as economists to stress the potential benefits of health reform for our nation’s fiscal health, and the importance of those features of the bill that can help keep health care costs under control. Four elements of the legislation are critical: (1) deficit neutrality, (2) an excise tax on high-cost insurance plans, (3) an independent Medicare commission, and (4) delivery system reforms.

Including these four elements in the reform legislation – as the Senate Finance Committee bill does and as we hope the bill brought to the Senate floor will do – will reduce long-term deficits, improve the quality of care, and put the nation on a firm fiscal footing. It will help transform the health care system from delivering too much care, to a system that consistently delivers higher-quality, high-value care. The projected increases in federal budget deficits, along with concerns about the value of the health care that Americans receive, make it particularly important to enact fiscally responsible and quality-improving health reform now.

In developing our analysis and recommendation, we received input and suggestions from Administration officials, including the Office of Management and Budget and others, as well as from economists who disagree with the Administration’s views.

The four key measures are:

* Deficit neutrality

Fiscally responsible health reform requires budget neutrality or deficit reduction over the coming years. The Congressional Budget Office (CBO) must project that the bill be at least deficit neutral over the 10-year budget window, and deficit reducing thereafter. Covering tens of millions of currently uninsured people will increase spending, but the draft health reform legislation contains offsetting savings sufficient to cover those costs and the seeds of further reforms that will lower the growth of spending. Deficit neutrality over the first decade means that, even during the start-up period, the legislation will not add to our deficits. After the first decade, the legislation should reduce deficits.

* Excise tax on high-cost insurance plans

The Senate Finance Committee’s bill includes an excise tax on high-cost health insurance plans. Like any tax, the excise tax will raise federal revenues, but it has additional advantages for the health care system that are essential. The excise tax will help curtail the growth of private health insurance premiums by creating incentives to limit the costs of plans to a tax-free amount. In addition, as employers and health plans redesign their benefits to reduce health care premiums, cash wages will increase. Analysis of the Senate Finance Committee’s proposal suggests that the excise tax on high-cost insurance plans would increase workers’ take-home pay by more than $300 billion over the next decade. This provision offers the most promising approach to reducing private-sector health care costs while also giving a much needed raise to the tens of millions of Americans who receive insurance through their employers.

* Medicare Commission

Rising Medicare expenditures pose one of the most difficult fiscal challenges facing the federal government. Medicare is technically complex and the benefits it underwrites are of critical importance to tens of millions of seniors and Americans with disabilities. We believe that a commission of medical experts should be empowered to suggest changes in Medicare to improve the quality and value of services. In particular, such a commission should be charged with developing and suggesting to Congress plans to extend the solvency of the Medicare program and improve the quality of care delivered to Medicare beneficiaries. Creating such a commission will make sure that reforming the health care system does not end with this legislation, but continues in future decades, with new efforts to improve quality and contain costs.

* Delivery system reforms

Successful reform should improve the care that individual patients receive by rewarding health care professionals for providing better care, not just more care. Studies have shown that hundreds of billions of dollars are spent on care that does nothing to improve health outcomes. This is largely a consequence of the distorted incentives associated with paying for volume rather than quality. Health care reform must take steps to change the way providers care for patients, to reward care that is better coordinated and meets the needs of each patient. In particular, the legislation should include additional funding for research into what tests and treatments work and which ones do not. It must also provide incentives for physicians and hospitals to focus on quality, such as bundled payments and accountable care organizations, as well as penalties for unnecessary re-admissions and health-facility acquired infections. Aggressive pilot projects should be rapidly introduced and evaluated, with the best strategies adopted quickly throughout the health care system.

As economists, we believe that it is important to enact health reform, and it is essential that health reform include these four features that will lower health care costs and help reduce deficits over the long term. Reform legislation that embodies these four elements can go a long way toward delivering better health care, and better value, to Americans.

Sincerely,

Dr. Henry Aaron, The Brookings Institution
Dr. Kenneth Arrow, Stanford University, Nobel Laureate in Economics
Dr. Alan Auerbach, University of California, Berkeley
Dr. Katherine Baicker, Harvard University
Dr. Alan Blinder, Princeton University
Dr. David Cutler, Harvard University
Dr. Angus Deaton, Princeton University
Dr. J. Bradford DeLong, University of California, Berkeley
Dr. Peter Diamond, Massachusetts Institute of Technology
Dr. Victor Fuchs, Stanford University
Dr. Alan Garber, Stanford University
Dr. Jonathan Gruber, Massachusetts Institute of Technology
Dr. Mark McClellan, The Brookings Institution
Dr. Daniel McFadden, University of California, Berkeley, Nobel Laureate in Economics
Dr. David Meltzer, University of Chicago
Dr. Joseph Newhouse, Harvard University
Dr. Uwe Reinhardt, Princeton University
Dr. Robert Reischauer, The Urban Institute
Dr. Alice Rivlin, The Brookings Institution
Dr. Meredith Rosenthal, Harvard University
Dr. John Shoven, Stanford University
Dr. Jonathan Skinner, Dartmouth College
Dr. Laura D’Andrea Tyson, University of California, Berkeley

Letter:
http://iis-db.stanford.edu/pubs/22739/Economist_Letter_to_the_President.pdf

The source of the letter:
http://healthpolicy.stanford.edu/publications/letter_to_president_barack_obama_urging_four_elements_be_included_in_health_reform_legislation_to_control_costs/

OECD Tax Database (Table 0.1):
http://www.oecd.org/document/60/0,2340,en_2649_34533_1942460_1_1_1_1,00.html

Bundled payments and ACOs:
https://www.pnhp.org/news/2009/november/rand-and-br-on-savings-through-bundled-payments

Comment:

By Don McCanne, MD

For socially conscious health care reform advocates, the primary goal of reform is to see that every individual receives the health care that he or she needs, But what has really driven the reform process has been the concern over the very high costs of health care that have challenged individuals, employers and the stewards of our government health programs.

In this late phase of the reform process many have expressed doubts over the adequacy of the various policies in the reform proposal that allegedly are designed to control health care costs well into the future. In response, twenty-three of the nation’s most distinguished economists have signed on to this letter addressed to President Obama expressing support for four elements that they believe are of critical importance and should be included in the reform legislation. Let’s look closer at these four elements.

* Deficit neutrality

The economists call for budget neutrality initially, to be followed by deficit reduction. Of course they are referring only to the federal government budget and not to private sector spending. The great risk of limiting consideration to public spending is that, in the absence of effectively controlling actual health care costs, the government budget can be controlled only by shifting the costs to the private sector. Individuals and businesses certainly do not want to see an increase in their health care spending, especially while the government is reducing its spending in the later phase, that of deficit reduction.

Isolating health care spending for budget neutrality while continuing with deficits in other government programs (war, financial institution bailouts, interest on the debt, expanding our prison population, etc.) does not seem just. Appropriate use of debt is fundamental to any business, and there is no reason that reasonable debt should not be a part of the government’s management of its financial obligations to health care.

That said, our total government debt is the result of prior devious efforts to reduce revenues (i.e., taxes) in order to force the reduction in funding of government programs. With inadequate revenues and with exploding debt, deficit hawks in Congress can be relied upon to underfund crucial programs such as health care, but theirs is a pathological process since they only look at spending and refuse to consider revenues.

Those who argue that taxes collected for government health care spending remove money from the economy are flat out wrong. Health care is one of the most important and beneficial components of our economy, constituting over 17 percent of our GDP (Gross Domestic Product). Those taxes are moved back into our economy.

Those who scream that we are being taxed to death need another dose of reality. The average total tax revenues of OECD nations (Organization for Economic Cooperation and Development) was 35.9 percent of GDP in 2006. For the United States, the total tax revenue was 28.0 percent of GDP, placing us near the bottom of OECD nations. (OECD Tax Database – link above)

Suppose we increased our tax revenues to the average of OECD nations, which would still be far, far short of those nations with more highly socialized systems. At 7.9 percent (35.9 average minus 28.0 U.S.) of our GDP of about $13.8 trillion, that would increase government revenues by about $1.1 trillion in a single year, ten times the amount they are considering for health care reform. Our entire federal spending is under $3 trillion. We could eliminate entirely the deficits and provide surpluses while keeping tax revenues at well below the OECD average, if only the deficit hawks would look at the revenue side of the ledger.

* Excise tax on high-cost insurance plans

Why would any health insurance plans have very high premiums? One reason is that insurers use medical underwriting to assess high premiums for individuals with preexisting disorders. It would be unfair to tax those premiums for an individual with other burdens, but with adequate regulatory reform medical underwriting should be eliminated anyway.

The more common reason for high premiums is that the plan covers other services and products such as dental care, eye care, maternity benefits, mental health services, and pharmaceuticals. Applying an excise tax to these premiums would result in eliminating such benefits from the plans and shifting these expenses to the individual in the form of greater out-of-pocket spending. The proposals under consideration place a cap on out-of-pocket expenses for covered services, but that cap is unaffordable for many, and these expenses would not apply to the cap. Thus they would impose an even greater financial burden.

Since the excise tax would discourage access to these important health care services, it should be rejected as the flawed policy concept that it is.

* Medicare Commission

Although the Medicare Commission purportedly would be to improve quality and value, its primary purpose would be to limit spending within the Medicare program. Medicare has already served as a leader in innovations to reduce health care spending, with the private insurance industry following. In fact, many providers believe that Medicare has been too aggressive, often resulting in lower reimbursement rates than in the private sector. Granting the Commission more power to use newer innovations to further reduce spending will inevitably increase the animosity held towards Medicare by the providers. A decline in willingness to accept Medicare beneficiaries could further impair access.

This is not to say that the concept of a commission is a bad idea. If the commission worked with the entire health care delivery system in applying potentially beneficial innovations, higher quality and greater value are possible. If the commission became too aggressive, the push-back by providers and their patients would moderate their excesses.

If the power of the Medicare Commission were limited only to Medicare, then there is a potential that cost-cutting aggressiveness might threaten to convert Medicare into a quasi-welfare program not unlike Medicaid, a transformation that would not please our Medicare beneficiaries. It is more likely that the Commission simply would be enmeshed in studies of relatively ineffectual measures that would have little net impact on costs.

We would need a universal Medicare for all program for the Commission to have a real impact that would be both beneficial and cost saving.

* Delivery system reforms

These economists recommend that we reward health professionals for providing better care. The problem is that we don’t know how to do that. They recommend funding research into what tests and treatments work and which ones do not, as if that isn’t what research has been all about anyway. Maybe it would be helpful to directly compare expensive patent drugs to generics, but the overall spending impact will be modest since this year’s patented drugs are next year’s generics.

They also recommend bundled payments, accountable care organizations, plus penalties for re-admissions, hospital acquired infections and other PACs (potentially avoidable costs). In my message two days ago I already discussed the reasons why these measures cannot be relied upon to reduce health care costs (Bundled payments and ACOs – link above).

Is this really the best that these noted economists can come up with? They have made the same mistake as the politicians. Their perception of reform is to build on our existing dysfunctional financing system (an egregiously flawed concept that you would think our leading economists would understand).

If we had an improved Medicare for all we could have 1) deficit neutrality through global budgeting, 2) rational tax policies that are equitable, 3) public administration using the guidance of commissions as appropriate, and 4) our own beneficent monopsony that can realign incentives to promote the delivery system reform that we need. And, oh yes, every single person would be included. It doesn’t take an economist to understand that.