By Uwe Reinhardt
The New York Times
September 24, 2010

… the nation bravely set upon the mission of reducing the left-hand side of the dreaded health care equation — that is, National Health Care Spending = National Health Care Incomes — without the temerity of touching its right side. For obvious reasons, touching the right side always turns out to be the third rail of health reform.

Last year, health care spending in the United States absorbed slightly more than 17 percent of G.D.P. (For most other industrialized nations, the figure is still around 10 percent or less.)

What would the critics have the president and Congress do?

To explore that question, let us deconstruct national health spending, as shown in the chart below. Here we artificially assume that there is a well-defined thing called “health care,” measurable in standard units that have a defined single price per unit. Thus the rendering is merely conceptual, a guide to order the discussion.

NHE = Pg x Qg x Ng + Pp x Qp x Np
where
NHE = national health expenditures
Pg = prices for health care paid by public insurers
Pp = prices for health care paid by private insurers
Qg = volume of health care used per capita under public insurance
Qp = volume of health care used per capita under private insurance
Ng = number of persons served under public insurance
Np = number of persons served under private insurance

What, then, can any president and Congress do to the variables on the right side of that equation to reduce the future trajectory of national health spending on the left-hand side, especially in the current political climate?

As we have learned in the last year, any attempt to bend down the future trajectory of public-sector fees (Pg) will be met with outcries:

(1) that hospitals and doctors will be driven into bankruptcy;
(2) that publicly-insured individuals will lose access to physicians who will refuse to work for the low public-sector fees;
(3) that doctors, hospitals and other providers who do treat publicly-insured patients have no choice but to recover more of their costs from private payers, who are assumed to have little countervailing market power to resist such increased charges.

Therefore, strike Pg from a strategy of bending the cost curve.

The future trajectory of the volume variable, Qg, might possibly be bent down ever so slightly through cost-effectiveness analysis of alternative therapeutic approaches, or by more widespread use of living wills – an idea once actively promoted by Newt Gingrich.

But those ideas were met in the past year by dark allusions to “rationing,” to Nazi-style death panels and to “killing Granny.” Therefore, strike lowering Qg, as well, from a strategy for bending the cost curve.

Another option is to reduce the time path of the number of people served by public insurance (Ng).

This could be done by raising eligibility thresholds for Medicaid, or raising the eligibility age for Medicare, or partially privatizing Medicare through Medicare Advantage plans, or by converting the program from a defined benefit to a defined contribution program. But any of these options would merely move health spending off the books of government and into private-sector health spending.

There is no robust empirical evidence to suggest that such a shift would lower national health spending, unless the move increased the number of uninsured Americans for whom, on average, per capita health spending is less than half of the spending incurred on similarly situated insured Americans.

In fact, shifting Medicare beneficiaries out of traditional Medicare into private Medicare Advantage plans in past years is known to have increased the burden on taxpayers and is apt to have increased overall health spending. Therefore, strike Ng as well, unless we want the number of uninsured to climb.

In sum, any attempt to reduce health spending on the public-spending side (Pg x Qg x Ng) is limited by powerful political constraints and is unlikely to reduce overall health spending – especially if the providers of health care have the market power to recoup from private payers any reductions in public health spending coming their way.

This leaves private-sector spending as a potential source of reductions in health spending. But what control does any president or Congress have over those variables (Pp x Qp x Np)?

The last president with the temerity to control spending in the private sector directly was Richard Nixon, who imposed outright price controls on the sector the mid-1970s. One can only imagine what storm of protest that approach would unleash today.

Can private insurers or patients be counted on to bend down the future path of private-sector health care prices Pp? I doubt it.

For one, neither has left a stellar record in this regard over the last three decades. Furthermore, the cost-shift argument alluded to above suggests that in most local health care markets, private payers have rather limited power to exert much downward pressure on the prices they are charged for health care.

Thus, if the future path of private-sector health spending will be deflected downward at all, it will most likely come through reductions in the per-capita utilization (Qp). That may be achieved through ever-higher cost-sharing by patients at point of service – that is, through ever-higher deductibles and ever-higher coinsurance, if not outright lack of health insurance.

Some analysts think that higher cost-sharing will also force down prices (Pp), as patients, using their own money, shop around for a deal. But that could happen only if the veil of secrecy that has traditionally kept private-sector prices opaque from patients could be lifted.

So far the quest to get this done has had only limited and temporary success.

One should, of course, not labor under the illusion that reducing use of health care (Qp) through higher cost-sharing by patients would avoid rationing health care. As every economist knows, using price and ability to pay is merely one of several approaches to rationing scarce resources among unlimited wants.

Thus, absent some miracle – for example, that bundled payments per episode of illness to so-called Accountable Health Organizations will actually serve to bend down the future time path of health spending noticeably – the nation is likely to rely in the years ahead on rationing more and more of health care by income class.

Perhaps this is what the legendary “median voter” now wants.

http://economix.blogs.nytimes.com/2010/09/24/the-perennial-quest-to-lower-health-care-spending/

Comment:

By Don McCanne, MD

Of course, other nations do provide all of their citizens with health care at a much lower level of national health expenditures (NHE). So what is there in this conceptual rendering (Professor Reinhardt’s formula) that other nations have discovered and applied that we haven’t?

In his May 8, 2009 blog, Professor Reinhardt provided a taxonomy of public and private financing and health insurance. Essentially all other nations have found success by using some form of social insurance. Even when private insurers are used, they function much more in the G (government) portion of the equation than they do in the P (private) portion.

Professor Reinhardt also co-authored a landmark article titled, “It’s the Prices, Stupid.” Thus the secret of other nations: Even if they use private insurance plans, they control national health expenditures through various means of government control of prices. In contrast, the volume of heal
th care and number of persons remain relatively fixed. Private control of prices (market control) has played a negligible role in controlling NHE.

Although Professor Reinhardt can describe several models through which this can be accomplished, some of us remain convinced that the simplest and most efficient model would be a single payer national health program – an improved Medicare that covered everyone. Regardless, the Patient Protection and Accountable Care Act won’t get us there.

http://community.nytimes.com/comments/economix.blogs.nytimes.com/2010/09/24/the-perennial-quest-to-lower-health-care-spending/?permid=2#comment2

The Perennial Quest to Lower Health Care Spending

By Uwe Reinhardt
The New York Times
September 24, 2010

… the nation bravely set upon the mission of reducing the left-hand side of the dreaded health care equation — that is, National Health Care Spending = National Health Care Incomes — without the temerity of touching its right side. For obvious reasons, touching the right side always turns out to be the third rail of health reform.

Last year, health care spending in the United States absorbed slightly more than 17 percent of G.D.P. (For most other industrialized nations, the figure is still around 10 percent or less.)

What would the critics have the president and Congress do?

To explore that question, let us deconstruct national health spending, as shown in the chart below. Here we artificially assume that there is a well-defined thing called “health care,” measurable in standard units that have a defined single price per unit. Thus the rendering is merely conceptual, a guide to order the discussion.

NHE = Pg x Qg x Ng + Pp x Qp x Np
where
NHE = national health expenditures
Pg = prices for health care paid by public insurers
Pp = prices for health care paid by private insurers
Qg = volume of health care used per capita under public insurance
Qp = volume of health care used per capita under private insurance
Ng = number of persons served under public insurance
Np = number of persons served under private insurance

What, then, can any president and Congress do to the variables on the right side of that equation to reduce the future trajectory of national health spending on the left-hand side, especially in the current political climate?

As we have learned in the last year, any attempt to bend down the future trajectory of public-sector fees (Pg) will be met with outcries:

(1) that hospitals and doctors will be driven into bankruptcy;
(2) that publicly-insured individuals will lose access to physicians who will refuse to work for the low public-sector fees;
(3) that doctors, hospitals and other providers who do treat publicly-insured patients have no choice but to recover more of their costs from private payers, who are assumed to have little countervailing market power to resist such increased charges.

Therefore, strike Pg from a strategy of bending the cost curve.

The future trajectory of the volume variable, Qg, might possibly be bent down ever so slightly through cost-effectiveness analysis of alternative therapeutic approaches, or by more widespread use of living wills – an idea once actively promoted by Newt Gingrich.

But those ideas were met in the past year by dark allusions to “rationing,” to Nazi-style death panels and to “killing Granny.” Therefore, strike lowering Qg, as well, from a strategy for bending the cost curve.

Another option is to reduce the time path of the number of people served by public insurance (Ng).

This could be done by raising eligibility thresholds for Medicaid, or raising the eligibility age for Medicare, or partially privatizing Medicare through Medicare Advantage plans, or by converting the program from a defined benefit to a defined contribution program. But any of these options would merely move health spending off the books of government and into private-sector health spending.

There is no robust empirical evidence to suggest that such a shift would lower national health spending, unless the move increased the number of uninsured Americans for whom, on average, per capita health spending is less than half of the spending incurred on similarly situated insured Americans.

In fact, shifting Medicare beneficiaries out of traditional Medicare into private Medicare Advantage plans in past years is known to have increased the burden on taxpayers and is apt to have increased overall health spending. Therefore, strike Ng as well, unless we want the number of uninsured to climb.

In sum, any attempt to reduce health spending on the public-spending side (Pg x Qg x Ng) is limited by powerful political constraints and is unlikely to reduce overall health spending – especially if the providers of health care have the market power to recoup from private payers any reductions in public health spending coming their way.

This leaves private-sector spending as a potential source of reductions in health spending. But what control does any president or Congress have over those variables (Pp x Qp x Np)?

The last president with the temerity to control spending in the private sector directly was Richard Nixon, who imposed outright price controls on the sector the mid-1970s. One can only imagine what storm of protest that approach would unleash today.

Can private insurers or patients be counted on to bend down the future path of private-sector health care prices Pp? I doubt it.

For one, neither has left a stellar record in this regard over the last three decades. Furthermore, the cost-shift argument alluded to above suggests that in most local health care markets, private payers have rather limited power to exert much downward pressure on the prices they are charged for health care.

Thus, if the future path of private-sector health spending will be deflected downward at all, it will most likely come through reductions in the per-capita utilization (Qp). That may be achieved through ever-higher cost-sharing by patients at point of service – that is, through ever-higher deductibles and ever-higher coinsurance, if not outright lack of health insurance.

Some analysts think that higher cost-sharing will also force down prices (Pp), as patients, using their own money, shop around for a deal. But that could happen only if the veil of secrecy that has traditionally kept private-sector prices opaque from patients could be lifted.

So far the quest to get this done has had only limited and temporary success.

One should, of course, not labor under the illusion that reducing use of health care (Qp) through higher cost-sharing by patients would avoid rationing health care. As every economist knows, using price and ability to pay is merely one of several approaches to rationing scarce resources among unlimited wants.

Thus, absent some miracle – for example, that bundled payments per episode of illness to so-called Accountable Health Organizations will actually serve to bend down the future time path of health spending noticeably – the nation is likely to rely in the years ahead on rationing more and more of health care by income class.

Perhaps this is what the legendary “median voter” now wants.

http://economix.blogs.nytimes.com/2010/09/24/the-perennial-quest-to-lower-health-care-spending/

Of course, other nations do provide all of their citizens with health care at a much lower level of national health expenditures (NHE). So what is there in this conceptual rendering (Professor Reinhardt’s formula) that other nations have discovered and applied that we haven’t?

In his May 8, 2009 blog, Professor Reinhardt provided a taxonomy of public and private financing and health insurance. Essentially all other nations have found success by using some form of social insurance. Even when private insurers are used, they function much more in the G (government) portion of the equation than they do in the P (private) portion.

Professor Reinhardt also co-authored a landmark article titled, “It’s the Prices, Stupid.” Thus the secret of other nations: Even if they use private insurance plans, they control national health expenditures through various means of government control of prices. In contrast, the volume of health care and number of persons remain relatively fixed. Private control of prices (market control) has played a negligible role in controlling NHE.

Although Professor Reinhardt can describe several models through which this can be accomplished, some of us remain convinced that the simplest and most efficient model would be a single payer national health program – an improved Medicare that covered everyone. Regardless, the Patient Protection and Accountable Care Act won’t get us there.

http://community.nytimes.com/comments/economix.blogs.nytimes.com/2010/09/24/the-perennial-quest-to-lower-health-care-spending/?permid=2#comment2

States Ask for Phase-In on Insurance Change

By Robert Pear
The New York Times
September 22, 2010

State insurance regulators told the White House on Wednesday that health insurance markets in some states would be disrupted unless President Obama gave insurers a temporary dispensation from one major provision of the new health care law.

The provision requires insurance companies to spend at least 80 cents of every premium dollar on medical care, rather than administrative expenses, executive salaries and profits.

State officials said they feared that some companies would withdraw from the individual insurance market next year because they could not meet the 80 percent requirement.

Kevin M. McCarty, the Florida insurance commissioner and vice president of the National Association of Insurance Commissioners, said the new law was causing “a paradigm shift” in the insurance industry, and he predicted: “Some companies’ business plans simply will not be successful. There will be some casualties. They either have to adjust their business plans or perish.”

http://www.nytimes.com/2010/09/23/business/23states.html?emc=tnt&tntemail0=y

And…

Distribution of National Health Expenditures, by Type of Service, 2008

Kaiser Slides

30.7% – Hospital care
21.2% – Physician and clinical services
10.0% – Prescription drugs
5.9% – Nursing home care
2.8% – Home health care
12.9% – Other personal health care
16.5% – Other health spending

http://facts.kff.org/chart.aspx?ch=857

CMS, Office of Actuary, National Health Statistics Group:
http://www1.cms.gov/NationalHealthExpendData/downloads/tables.pdf

Comment:

By Don McCanne, MD

It is mind-boggling to think that 21 percent of our national health expenditures (NHE) are directed to physicians and clinical services, whereas many private insurers are now protesting that they cannot survive on 20 percent of the funds which they control – the insurance premiums that they collect.

Taking a closer look at those numbers, one-fifth of all health expenditures go to physicians and clinical services, whereas these insurers who are having difficulties complying with an 80 percent medical loss ratio are consuming over one-fifth of the funds used only for benefits covered by their plans – not one-fifth of the NHE. In fact, 30.9 percent of private insurance premiums do go to physicians and clinical services.

Since these numbers are more comparable, let’s look at them to see the value that we are receiving.

Physicians make most of the decisions on what care their patients receive, thus they are controlling much of spending of the insurance premiums. Not only are they making these spending decisions, they are also providing their professional expertise and clinical skills for which they are compensated – 31 percent of the premium dollars. In a sense, the physicians are making the business decisions of health care spending as an uncompensated additional service – decisions which are very important for the patients’ health.

What about these insurers who need more than 20 percent of the premiums for their own intrinsic needs? They are using two-thirds as much of the premiums as physicians are receiving, but for what? It’s not for making decisions on how the funds will be spent; physicians are doing that. Do they really need that much just for claims processing? What other important services do they provide? Taking away our choices by establishing restrictive provider networks? Why should we be paying for a detrimental service that we don’t even want?

What’s the solution? What will give us greater value? Shall we pay these insurers half again as much and throw out the doctors and have the insurers take over the practice of medicine? Or shall we throw out the insurers and replace them with public stewards who can provide better administrative services at a small fraction of the cost?

What will the White House decide? Let the insurers have as much as the physicians are receiving? Right now they’re listening to the whining of the insurers, and single payer advocates are still not welcome.

States Ask for Phase-In on Insurance Change

By Robert Pear
The New York Times
September 22, 2010

State insurance regulators told the White House on Wednesday that health insurance markets in some states would be disrupted unless President Obama gave insurers a temporary dispensation from one major provision of the new health care law.

The provision requires insurance companies to spend at least 80 cents of every premium dollar on medical care, rather than administrative expenses, executive salaries and profits.

State officials said they feared that some companies would withdraw from the individual insurance market next year because they could not meet the 80 percent requirement.

Kevin M. McCarty, the Florida insurance commissioner and vice president of the National Association of Insurance Commissioners, said the new law was causing “a paradigm shift” in the insurance industry, and he predicted: “Some companies’ business plans simply will not be successful. There will be some casualties. They either have to adjust their business plans or perish.”

http://www.nytimes.com/2010/09/23/business/23states.html

And…

Distribution of National Health Expenditures, by Type of Service, 2008

Kaiser Slides

30.7% – Hospital care
21.2% – Physician and clinical services
10.0% – Prescription drugs
5.9% – Nursing home care
2.8% – Home health care
12.9% – Other personal health care
16.5% – Other health spending

http://facts.kff.org/chart.aspx?ch=857

CMS, Office of Actuary, National Health Statistics Group:
http://www1.cms.gov/NationalHealthExpendData/downloads/tables.pdf

It is mind-boggling to think that 21 percent of our national health expenditures (NHE) are directed to physicians and clinical services, whereas many private insurers are now protesting that they cannot survive on 20 percent of the funds which they control – the insurance premiums that they collect.

Taking a closer look at those numbers, one-fifth of all health expenditures go to physicians and clinical services, whereas these insurers who are having difficulties complying with an 80 percent medical loss ratio are consuming over one-fifth of the funds used only for benefits covered by their plans – not one-fifth of the NHE. In fact, 30.9 percent of private insurance premiums do go to physicians and clinical services.

Since these numbers are more comparable, let’s look at them to see the value that we are receiving.

Physicians make most of the decisions on what care their patients receive, thus they are controlling much of spending of the insurance premiums. Not only are they making these spending decisions, they are also providing their professional expertise and clinical skills for which they are compensated – 31 percent of the premium dollars. In a sense, the physicians are making the business decisions of health care spending as an uncompensated additional service – decisions which are very important for the patients’ health.

What about these insurers who need more than 20 percent of the premiums for their own intrinsic needs? They are using two-thirds as much of the premiums as physicians are receiving, but for what? It’s not for making decisions on how the funds will be spent; physicians are doing that. Do they really need that much just for claims processing? What other important services do they provide? Taking away our choices by establishing restrictive provider networks? Why should we be paying for a detrimental service that we don’t even want?

What’s the solution? What will give us greater value? Shall we pay these insurers half again as much and throw out the doctors and have the insurers take over the practice of medicine? Or shall we throw out the insurers and replace them with public stewards who can provide better administrative services at a small fraction of the cost?

What will the White House decide? Let the insurers have as much as the physicians are receiving? Right now they’re listening to the whining of the insurers, and single payer advocates are still not welcome.

Gregory D. Curfman, M.D., Stephen Morrissey, Ph.D., and Jeffrey M. Drazen, M.D.
Editorial, The New England Journal of Medicine
September 19, 2010

In this issue of the Journal, we publish the results of a clinical trial investigating step-up control in adult patients with asthma whose disease was not well controlled by low-dose inhaled glucocorticoids. This study, which compared the utility of treating such patients with inhaled tiotropium bromide, inhaled salmeterol, or higher doses of inhaled glucocorticoids, was conceived and implemented by the National Heart, Lung, and Blood Institute’s Asthma Clinical Research Network (ACRN). The study constitutes comparative effectiveness research, in which the products of a number of different companies are compared in a well-defined clinical setting. Simply put, the companies’ products are put “at risk” in a trial to determine whether the various treatments are superior or noninferior to one another.

The study design, a three-way crossover, required that the investigators have active drug and placebo for tiotropium and salmeterol. As is common is such situations, the investigators took a mature version of the study protocol to the manufacturers of these drugs and asked them to supply active drug and matching placebo inhalers. Boehringer Ingelheim (the manufacturer of tiotropium) agreed to provide the materials, but GlaxoSmithKline (the manufacturer of Salmeterol) refused. Because of Glaxo’s refusal, the investigators had to spend $900,000 from the National Institutes of Health (NIH) — and therefore from taxpayers — to repackage the active drug and to create a visually identical placebo for use in the trial. The NIH deserves credit for providing the funds to obtain the Glaxo drug when the company declined. In the end, the study results provided the truth — that tiotropium is not inferior to salmeterol for this indication.

Many drug companies realize that it is in their best interest to provide these materials, not only because the research that is completed by an independent group may show findings in their favor, but also because it is part of their responsibility to the community to allow their products to be tested against the competition by legitimate third parties. They recognize that their mission, like GlaxoSmithKline’s stated goal, is “to improve the quality of human life” rather than to simply increase market share.

The most precious commodity that drug manufacturers possess is the trust of their research subjects, and to maintain this trust they need to be willing to put their products at risk. When they refuse to provide their drugs to legitimate investigators, the researchers will get their studies done without company help. It will take more time and cost more money, but in the end, the research will be done and the company will be perceived as having acted in its own self-interest rather than having worked to enhance the health of the community.

http://www.nejm.org/doi/full/10.1056/NEJMe1010348

Comment:

By Don McCanne, MD

Everyone agrees, or should agree, on the need for more comparative effectiveness research. We need more information about which medications provide greater benefit to patients, and which ones provide greater value – lower costs without compromises in therapeutic benefit.

During the process of creating the Patient Protection and Affordable Care Act (PPACA), it was not only the private insurance industry that was given carte blanche by the White House, but it was also the pharmaceutical industry. The representatives of both industries professed to supporting solutions that would benefit the American patient, and, in return, they were given legislation that will infuse hundreds of billions of dollars into their own coffers.

GlaxoSmithKline now gives us a hint of their sincerity. Although they state that their mission is “to improve the quality of human life,” it is clear that increasing market share is a much higher priority for them. They will not participate in a study that potentially could dent the sales of a blockbuster product.

The pharmaceutical firms and the private insurance industry got a great deal from President Obama and Congress, and patients got a bad deal. We desperately need to set aside the health care financing structure of PPACA, and enact a program that would benefit patients first – an improved Medicare for all.

Products at Risk

Gregory D. Curfman, M.D., Stephen Morrissey, Ph.D., and Jeffrey M. Drazen, M.D.
Editorial, The New England Journal of Medicine
September 19, 2010

In this issue of the Journal, we publish the results of a clinical trial investigating step-up control in adult patients with asthma whose disease was not well controlled by low-dose inhaled glucocorticoids. This study, which compared the utility of treating such patients with inhaled tiotropium bromide, inhaled salmeterol, or higher doses of inhaled glucocorticoids, was conceived and implemented by the National Heart, Lung, and Blood Institute’s Asthma Clinical Research Network (ACRN). The study constitutes comparative effectiveness research, in which the products of a number of different companies are compared in a well-defined clinical setting. Simply put, the companies’ products are put “at risk” in a trial to determine whether the various treatments are superior or noninferior to one another.

The study design, a three-way crossover, required that the investigators have active drug and placebo for tiotropium and salmeterol. As is common is such situations, the investigators took a mature version of the study protocol to the manufacturers of these drugs and asked them to supply active drug and matching placebo inhalers. Boehringer Ingelheim (the manufacturer of tiotropium) agreed to provide the materials, but GlaxoSmithKline (the manufacturer of Salmeterol) refused. Because of Glaxo’s refusal, the investigators had to spend $900,000 from the National Institutes of Health (NIH) — and therefore from taxpayers — to repackage the active drug and to create a visually identical placebo for use in the trial. The NIH deserves credit for providing the funds to obtain the Glaxo drug when the company declined. In the end, the study results provided the truth — that tiotropium is not inferior to salmeterol for this indication.

Many drug companies realize that it is in their best interest to provide these materials, not only because the research that is completed by an independent group may show findings in their favor, but also because it is part of their responsibility to the community to allow their products to be tested against the competition by legitimate third parties. They recognize that their mission, like GlaxoSmithKline’s stated goal, is “to improve the quality of human life” rather than to simply increase market share.

The most precious commodity that drug manufacturers possess is the trust of their research subjects, and to maintain this trust they need to be willing to put their products at risk. When they refuse to provide their drugs to legitimate investigators, the researchers will get their studies done without company help. It will take more time and cost more money, but in the end, the research will be done and the company will be perceived as having acted in its own self-interest rather than having worked to enhance the health of the community.

http://www.nejm.org/doi/full/10.1056/NEJMe1010348

Comment:

By Don McCanne, MD

Everyone agrees, or should agree, on the need for more comparative effectiveness research. We need more information about which medications provide greater benefit to patients, and which ones provide greater value – lower costs without compromises in therapeutic benefit.

During the process of creating the Patient Protection and Affordable Care Act (PPACA), it was not only the private insurance industry that was given carte blanche by the White House, but it was also the pharmaceutical industry. The representatives of both industries professed to supporting solutions that would benefit the American patient, and, in return, they were given legislation that will infuse hundreds of billions of dollars into their own coffers.

GlaxoSmithKline now gives us a hint of their sincerity. Although they state that their mission is “to improve the quality of human life,” it is clear that increasing market share is a much higher priority for them. They will not participate in a study that potentially could dent the sales of a blockbuster product.

The pharmaceutical firms and the private insurance industry got a great deal from President Obama and Congress, and patients got a bad deal. We desperately need to set aside the health care financing structure of PPACA, and enact a program that would benefit patients first – an improved Medicare for all.