The Center for Medicare and Medicaid Services, in new projections released today in Health Affairs, estimates that health spending will more than double to $2.8 trillion by 2011 and climb to more than 17 percent of the GDP over the next decade, up from 13.2 percent currently.

Uwe Reinhardt, Ph.D., James Madison Professor of Political Economy, Princeton University, comments:

$2.8 trillion sounds like an awesome lot; but Americans better get used to the idea. Several factors drive that spending figure:

1. There’s expensive new technology on the horizon, and not all of it is money saving. Much of it enhances the quality of care and life, at greater expense.

2. We are facing a growing labor shortage in health care, and not only in nursing. There is likely to be even a renewed physician shortage. We must get used to paying health workers more.

3. By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It’s the American way.

All of these factors spell increased health spending, and I see nothing on the horizon to slow it down, short of seriously rationing health care by ability to pay even for insured Americans (e.g., through MSAs). And even that may not work, because with MSAs the piece of health spending called “catastrophic” would be likely to increase more rapidly.

Even so, there’s a brighter side. We have no cause to jump off a bridge.

According to the CBO, GDP in 2001 was $10.193 trillion. It is projected to be $16.676 trillion in 2011. According to the most recent CMS data, total national health spending in 2001 was $1.378 trillion. It is projected to be $2.8 trillion by 2011. Thus, in 2001 we had (10.193 – 1.378) = $8.815 trillion of non-health GDP left over after the health sector took its slice of 31.2% of the GDP pie. In 2011 we are projected to have (16.676-2.8) = $13.876 trillion of non-health GDP left over. This is an increase of (13.876-8.815) = $5.061 trillion in non-health GDP, or a percentage increase of (5.061/8.815) = 57.4%. It is equivalent to an average annual compound growth rate of 4.6% over the period 2001-2011. That ain’t bad, is it? We can live with it.

I see it in your eyes: you are asking me, “But what about inflation?” Ok, here are the numbers. The CBO projects an average annual increase in the GDP deflator of about 2% over the period 2001-2011. If we deflate the non-health GDP projected for 2011 by that inflation factor, the $13.876 in 2001 dollars projected above becomes $11.383 in constant year-2001 dollars. Thus, in terms of real purchasing power, non-health GDP in 2011 is projected to be (11.383-8.815) = $2.568 trillion more than it was in 2001. This represents an increase in real non-health GDP of 2.568/8.815 = 29%. It is equivalent to an average annual compound increase of 2.589% over the period 2001-2011. Still ain’t bad, is it?

I sense that you are still not happy. You wonder about population growth. “Aren’t there more people to claim all that extra non-health GDP? May there be less per capita, then?” you wonder. Ok–here it goes. Our population is projected to grow at an average annual compound rate of slightly less than 1% (0.9% really). Therefore, we can say that real (constant dollar) non-health spending per capita in the US is projected by the CBO to increase by about 2.589% – 1% = 1.589% per year between 2001 and 2011 (1.6% between friends). That ain’t bad either, is it?

Can we really look up to God and cry over it? Can we tell God that, in view of the looming $2.8 trillion in health spending in 2001, we cannot possibly give the elderly prescription drug coverage or extend health insurance coverage to all uninsured Americans, because that would spend us into the poorhouse?

My conjecture is that God won’t be impressed, nor will President Bush’s most highly regarded philosopher: Jesus Christ. I think we had better do the Judeo-Christian thing vis a vis the uninsured, lest there be locusts and frogs and stuff all over the country, as once it was in Egypt.

Kip Sullivan responds to Uwe Reinhardt:

Uwe Reinhardt’s previous statement:

<< By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It's the American way. >>

Kip Sullivan’s response:

Uwe,

I agree with your demand that Congress insure the uninsured. But I disagree with the remarks above about Americans’ attitudes toward managed care. These remarks rest on two assumptions: (1) That managed care has been demonstrated to cut national health care expenditures or, at minimum, total health spending by the private sector, and (2) that managed care cuts out only “useless care,” not necessary care, and, therefore, has not damaged quality of care.

You didn’t articulate these assumptions, so I’m asking you if you endorse those assumptions. Do you? If you say yes, I will challenge you on both of them. I believe the evidence supports the following conclusions:

(1)(a) the evidence that managed care saved money for the private sector is inconclusive; (b) the evidence indicates permitting managed care companies to enroll Medicare beneficiaries has added to, rather than reduced, Medicare’s costs; and

(2) the evidence supports the conclusion that the spread of managed care damaged quality of care.

These are complex issues, and I’m pressed for time these days, so I might take awhile responding to you. But I think these issues are too important, and your view too incorrect, to let your comment go by unquestioned.

Thanks much.

Kip Sullivan

Uwe Reinhardt responds to Kip Sullivan:

The original remarks are reproduced, and Dr. Reinhardt’s additional comments are marked ***

Kip Sullivan responds to Uwe Reinhardt:

Uwe Reinhardt’s previous statement:

<< By trashing managed care as they did, Americans have signaled that they do not want to have any cost control at all in health care. They seem willing to spend (more correctly: to have someone else spend) whatever it takes, even on care that is known to be only marginally useful or even useless. Yes, Americans do sincerely believe that, if insured, they have a Constitutional right even to useless care. It's the American way. >>

Kip Sullivan’s response:

Uwe,

I agree with your demand that Congress insure the uninsured. But I disagree with the remarks above about Americans’ attitudes toward managed care. These remarks rest on two assumptions: (1) That managed care has been demonstrated to cut national health care expenditures or, at minimum, total health spending by the private sector, and (2) that managed care cuts out only “useless care,” not necessary care, and, therefore, has not damaged quality of care.

You didn’t articulate these assumptions, so I’m asking you if you endorse those assumptions. Do you? If you say yes, I will challenge you on both of them. I believe the evidence supports the following conclusions:

(1)(a) the evidence that managed care saved money for the private sector is inconclusive;

*** What, then, is your explanation for the deceleration of the growth in health spending during the 1990s?

(b) the evidence indicates permitting managed care companies to enroll Medicare beneficiaries has added to, rather than reduced, Medicare’s costs; and

*** I can buy that. it also, of course, has added benefits. If you don’t believe me, ask the elderly. Why else would they whine when they have to go back to Medicare?

(2) the evidence supports the conclusion that the spread of managed care damaged quality of care.

*** I don’t buy that one.

These are complex issues, and I’m pressed for time these days, so I might take awhile responding to you. But I think these issues are too important, and your view too incorrect, to let your comment go by unquestioned.

Thanks much.

Kip Sullivan

North County Times
3/10/02
By Bruce Kauffman

OCEANSIDE —- An advocate for reform of the nation’s health care system said Saturday that medical bills will become the number one cause of bankruptcy in America if administrative costs are not curbed and insurance coverage is not made more available.

Speaking at a conference presented by the North Coast chapter of the League of Women Voters, Don McCanne, a retired Orange County physician who is active in Physicians for Social Responsibility, criticized insurers and the health-care industry for spending up to roughly one of every four dollars in resources on administration.

“Just handling the money burns up a lot of funds,” McCanne said.

McCanne said bringing administrative overhead down to 10 percent would save a quarter of a trillion dollars, money that could pay the health care needs of a “rapidly expanding group” of people with inadequate or no insurance. That group may include some 85 million Americans, he said.

Said another speaker, Gregory Knoll, director of the consumer center for health education and advocacy of the Legal Aid Society of San Diego: “Here’s the deal —- access to quality health care ought to be a constitutional right. If we don’t look at how we’re going to change this system and delve into it and make it work for everybody, we’ve got a problem.”

http://www.nctimes.net/news/2002/20020310/53941.html

Comment: At the conference the point was made that employers and insurers were shifting more costs and risks to employee-beneficiaries. For individuals with significant medical problems, the out-of-pocket expenses are beginning to exceed disposable income. An continuation of this trend may result in insolvency for enough individuals such that unpaid medical bills could move into first place as a cause of bankruptcy.

Also, the shifting of costs from administration to patient care was shown to be achievable based on the preliminary results of the California Health Care Options Study. Replacing the fragmented, inefficient system of private and public plans and no health plans at all, with a single, publicly administered insurance program, would save enough to pay for comprehensive health care benefits for everyone.

The Alan Guttmacher Institute
March, 2002

“From adolescence on, most men need information and counseling about sexual and reproductive matters, and they need somewhere reliable to go for related education and health care.”

“Obstacles to care include the tendency of many men not to seek regular, routine checkups; the fact that health insurance often does not cover the services men need; and the high proportions of men–particularly poor men–who do not have health insurance.”

http://www.guttmacher.org/pubs/exs_men.html

Comment: The impact of lacking adequate health insurance coverage is ever pervasive.

COMMONWEAL
February 22, 2002

“HEALTH CARE FOR ALL”
“A conservative case” By Donald W. Light

“Now that South Africa has legislated universal access to medical services, the United States remains the only industrialized or second-tier country in the world that fails to guarantee its citizens access to medical services. This is a curious omission for a country based on rights and liberty. It is equally strange from an economic and business point of view. For while foreign competitors get full medical benefits at one-third the cost, American employers are weighed down by ever-growing expense for health care.”

“Universal access to needed medical services is essential to achieve the four traditional conservative moral principles: the anti-free-riding principle, the principle of personal integrity, the principle of equal opportunity, and the principle of just sharing.”

“For too long, we have ignored or opposed efforts to simplify the American health-care system, at a cost of ill-spent billions. Today’s system not only fails hospitals, physicians, patients, and families, but is collapsing under the burden of its own complexity and inefficiency. It is possible to design a low-cost universal plan that maximizes choice. The time to do it is now.”

http://www.commonwealmagazine.org/ and click on the image of the magazine, and then click on “HEALTH CARE FOR ALL.”

Comment: Most proponents of capitalism believe that human capital is one of our most important investments and a key to the success of capitalistic economies. Dr. Light states well the conservative case for universal access to needed medical services which can only enhance an individual’s opportunity and productivity. Everyone concerned about health care reform should read this article.

The Deseret News
March 7, 2002
By Twila Van Leer

“Americans have no constitutional right to health care, but the perception is so strong that such care should be a basic right that the country is likely to have a socialized system sometime in the near future, Dr. C. Everett Koop said Thursday.”

“Answering the question raised in the title of his talk, ‘The Right to Health Care: Has the Time Come?’ Koop had an emphatic ‘no. The time never will come when health care is a right.'”

“Regardless, public polls have shown increasingly large numbers of Americans who believe health care should be a basic right, he said. ‘And they think they should get health care as good as a millionaire gets.'”

“Koop urged those in the medical ranks to ‘take the high road of professionalism,’ to adopt the higher ethic of self-sacrifice… ‘Do the right thing for those for whom health care is not yet a right.'”

http://deseretnews.com/dn/view/0,1249,375014476,00.html?textfield=Koop

Comment: Is Koop campaigning to get his old job back?

Senate Finance Committee
March 7, 2002
“The Administration’s FY 2003 Budget Proposals for Prescription Drugs”

Excerpts of testimony of Bob Kerrey, representing the Concord Coalition:

You have invited me to testify on the question of adding a prescription drug benefit to Medicare. My simple advice is don’t do it. Not unless you are prepared to make fundamental reforms in the way Americans finance the cost of their health care.

Members of the Finance Committee, I do not think that doing nothing is an option. Americans can afford a prescription drug benefit but I do not believe we can afford to add it to Medicare as it is currently structured. More challenging I do not believe we can solve this problem by focusing on benefit changes or reductions in reimbursements to providers. Instead I believe we need to focus our attention on fundamental reform of the way Americans become eligible under Federal law for health insurance.

Though intuition is often a good guide when making decisions sometimes it fails us. In this case intuition signals that we should narrow the scope of our Federal health care entitlement programs in order to save money. However, I believe the counter-intuitive choice, namely to expand the entitlement, is the least costly choice.

I urge you to consider that for budgetary, economic and moral reasons we cannot get from where we are now to where we want to go by adding a new and expensive benefit to an entitlement program. Nor can we get there by just reforming existing programs. We can only get there by fundamentally altering the way we become eligible for insurance in the first place.

Beginning with a universal entitlement does not mean higher spending or more governmental interference with the choices made by patients or providers. In truth it could mean a lot less of both. It would mean that we would start thinking about ourselves as a single group of 280 million Americans who are all part of the same health system and who all need to face the challenge of matching our appetite for quality with our capacity to pay.

http://finance.senate.gov/hearings/testimony/030702bktest.pdf

Comment: Raise the flags and fire the flares!

The Concord Coalition has been the leading voice for responsible restraint in the funding of our programs of social insurance, Medicare and Social Security. Former Sen. Kerrey, in representing the Coalition, has clearly stated that a universal health insurance program is probably the most fiscally responsible approach to “matching our appetite for quality with our capacity to pay.”

To the towers and ring the bells! All of America must hear this great news!

The Associated Press
March 7, 2002
By Curt Anderson

“The decision to go with a consensus approach (on an economic stimulus plan) came after House GOP leaders ran into criticism at a Wednesday meeting of the rank-and-file, when some lawmakers questioned an earlier, tentative decision to vote on a bill combining a controversial health care tax credit with an extension of jobless aid.”

http://www.washingtonpost.com/wp-dyn/articles/A53875-2002Mar7.html

Comment: The extension of jobless aid had strong bipartisan support, but it was being held hostage to health care tax credits that were supported by special interests. These credits would have expanded and compounded the problems with our flawed policies in health care coverage. It is reassuring to know that enough of our elected representatives understood the problems with these seemingly benign but very treacherous tax credits so that they were able to take a strong stand in preventing this “compromise” in the name of political expediency. This skirmish was won, but the battle continues.

Medscape
February 26, 2002

Book Reviews
By J.D. Kleinke

Quotes from the review by Peter Frishauf:

“Noted health economist J.D. Kleinke once saw managed care as the solution to America’s healthcare problems… In 1998, he declared victory for the managed care solution in a controversial book, Bleeding Edge: The Business of Health Care in the New Century. Kleinke was wrong, as he acknowledges in his interesting new book, Oxymorons: The Myth of the U.S. Health Care System.”

One reason cited in Frishauf’s review:

“Parasitic middlemen, pointless regulation, and waste suck billions of dollars from premiums that could be redeployed to pay for care. Kleinke identifies 2 intertwined constituencies as prime culprits: the 5000 state insurance bureaucrats who preside over a ‘mess of state-based benefit mandate laws,’ and 50,000 health insurance brokers ‘in bed with them.’ The brokers, I was astounded to learn, collect commissions ranging from 3% to as much as 20% of the total cost of plans — a ‘shadow tax’ of some $300 billion per year on premiums, more than twice what the nation spends on all prescription drugs! Insurance companies, it seems, have been unable to break the stranglehold of brokers, and those that attempt to offer plans without brokers face massive retaliation.”

http://www.medscape.com/viewarticle/423369?srcmp=pc-030102&WebLogicSession=PIY1zyJbzgG1V0H6WXcC53TCwQTRlAlT1hVP7PHJ8sBGl6Ql58rh|-1144767244009827815/-1408233355/6/7001/7001/7002/7002/7001/-1

The New York Times
March 4, 2002

“2 Powerful Groups Hold Sway Over Buying at Many Hospitals” By Walt Bogdanich

“These two private groups (Premier and Novation) act as middlemen for about half the nation’s nonprofit hospitals, negotiating contracts last year for some $34 billion in supplies, from pharmaceuticals to pacemakers, bandages to beds.

“Each group has the same basic mission: to use the market power of its more than 1,500 hospitals to find the best medical products at the lowest prices.

“But many in the medical world – Mr. Kiani among them – question whether that mission is being compromised by financial ties that the groups, Premier and Novation, have to medical supply companies, ties that, according to an investigation by The New York Times (news/quote), are both extensive and highly unusual.

“The problem begins with this simple fact: The buying groups are financed not by the hospitals that buy products but by the companies that sell them. In other words, the groups take money from the very companies they are supposed to evaluate objectively. Each year, companies pay Premier and Novation hundreds of millions of dollars in fees that represent a percentage of hospital purchases. The more hospitals spend on medical supplies, the more dollars Premier and Novation get from the suppliers.

“In a few cases, Premier or some of its officials have also received stock or options from companies with which Premier contracts.

“Critics say such conflicts of interest can mean that the buying groups do not always choose the products that are best for patients, hospitals or the taxpayers and insurers that pay their bills.”

“Larry Dickson oversees purchasing through Novation for Providence Health System in Seattle.. He says he cannot get specific information on fees, despite the critical role he plays in supplying his hospitals.”

Larry Dickson, purchaser for Providence Health System:

“Why is this so secret? There is an accountability question that is very much concerning a lot of people in health care. And if you ask, and the response you get is, ‘That’s none of your business,’ that raises more questions than it answers.”

http://www.nytimes.com/2002/03/04/business/04BUY.html

Comment: This is yet one more example of marketplace dynamics in our health care system. Theoretically, these middlemen organizations negotiate discounts with the manufacturers of the medical supplies. Bulk purchasing and negotiated pricing are very legitimate methods to help control health care costs. But, because of this business model, most of the benefit passes to the shareholders and executives, with only enough savings passed on to the hospital-providers to create some semblance of lower pricing. With only two major middlemen, this oligopolistic market borders on a monopoly, preventing the realization of the full potential benefit for the hospitals and ultimately the patients.

Another concern about oligopolistic middlemen medical suppliers, which would apply to the oligopolistic pharmacy benefit managers as well, is that competitive bidding will negatively impact the manufacturers that do not receive the contracts, and some of them could actually fail. Those that would remain might defensively increase merger activity and would thereby create an oligopoly of manufacturers. With the oligopolistic middlemen already in place, prices would be driven up sharply.

Consider the following:

National Bureau of Economic Research NBER Working Paper No. 8802 “Health Care and the Public Sector” By David M. Cutler, Ph.D., Professor of Economics, Harvard University

“The make or buy decision in health care has been a subject of debate for decades. The traditional debate pitted arguments of monopoly and monopsony on the one side, and innovation on the other. Government intervention was justified because of monopoly power of physicians and the information problems noted above (in his paper). By controlling medical provision, it was believed that the government could use its monopsony power to purchase such services at a low price. The counter-argument focused on incentives for efficiency. Without market incentives, it was feared that government production would be technologically inefficient and innovation would be stifled.

“Empirically countries where the public sector runs the medical system spend less on medical care than countries with private providers. In OECD countries, for example, the correlation between the public sector share of financing and the share of GDP devoted to medical care is -0.41. More formal analysis controlling for additional variables also finds this conclusion (Globerman and Vining, 1998). There is also evidence for the inefficiency view. People in many European countries are disenchanted with the quality of medical care, and these countries have struggled to increase the efficiency of the medical care system in recent years (Cutler, 2001).

“A recent literature emphasizing the role of public sector contracting has expanded the dimension of this analysis, considering issues of allocational as well as technical efficiency (Hart, Shleifer, and Vishny, 1997; Shleifer, 1998). Consider the question of whether a government should provide hospital services itself or contract with a for-profit hospital company to provide the services. For-profit companies will respond to financial incentives more rapidly than government-run companies, since for-profit managers receive more of the payoff from responding to these incentives. Thus, contracting to a for-profit provider will be preferred IF the incentives that the firm faces are the correct ones. If the incentives are not correct, however, having more responsive for-profit firms may lead to poor outcomes, and providing the service in house might be preferred.”

http://papers.nber.org/papers/w8802

Further comment: Although Dr. Cutler is referring to health care services, his comments can apply to the narrower topic of medical supplies and pharmaceuticals. “Contracting to a for-profit provider (e.g., middlemen firms) will be preferred IF the incentives… are the correct ones.” But we now have more than ample evidence that the incentives of for-profit firms derive from maximizing profit. This can only result in compromise of the public interest to negotiate the maximum benefit for the patient. So the middleman function should be provided “in house,” that is, by a public negotiator.

In the single payer model of reform, the system becomes the single, monopsonistic purchaser of services and goods (supplies, pharmaceuticals, etc.). The negotiations are made with all manufacturers. By shifting emphasis from an oligopoly of manufacturers to a monopsonistic purchaser, the public single payer negotiator will gain control of the negotiating process. Because the negotiator is representing the public good, negotiations will be in the interests of the patients. That means fair prices, not only for the benefit of patients, but also for the manufacturers since it is in the public interest to assure the financial viability of the producers of the products.

Dr. Cutler’s comments about the European disenchantment with quality as representing the inefficiency view of public sector health care must be viewed from the perspective that European health care budgets are significantly smaller than the amount that is already dedicated to health care in the United States. A system of public funding in this country could avoid patient disenchantment by locking into the budget our current high level of funding.

Since the incentives of the for-profit firms can never provide the motivation to place the interests of patients over the interests of investors, let’s finally quit trying to make that model work. Instead, let’s go ahead and use an in-house negotiator that places the interests of patients above all else, avoiding disenchantment by targeting our abundant resources for health care. Let’s adopt a publicly administered, single payer health care system.

Kip Sullivan responds on health care oligopolies:

If I were the New York Times reporter who wrote this sentence, I would have written it this way: “The problem is two-fold: (1) The buying groups are financed by companies that stand to gain from the buying groups’ decisions, and (2) the buying groups are the natural outgrowth of a health-care system which has forced all players into a race to get big.” The article discusses the problem of oligopoly, but it doesn’t call the reader’s attention to the basic cause of rampant consolidation in the hospital industry.

The most fundamental problem is that the introduction of HMOs into the US health care system by the HMO Act of 1973 eventually made size the highest priority for all participants in the health care system. That was not, of course, the stated goal of HMO proponents. HMO proponents argued that HMOs would save money because they would improve medical practice — ignorant and greedy doctors would be induced or forced to cut out unnecessary services and beef up the provision of preventive services. In fact, HMOs saved money by rationing and extracting large discounts from providers. Both tactics were executed most successfully by the largest HMOs and, eventually, the largest traditional insurers which morphed into managed-care plans. HMO advocates most definitely did not argue that the creation of an HMO industry would confer oligopsony power upon the nation’s dominant health insurers, and that this power would be used to force doctors to cut medical services and to extract discounts from providers. But they might as well have, because that’s what we got.

It didn’t take long for the rest of the health care system to respond in kind. By the mid-1980s, the pace of consolidation had picked up throughout the entire health care industry, and by 1993, when politicians everywhere endorsed managed competition, the pace became just plain frantic. With the possible exception of the federal and state enforcers of anti-trust laws, there is no force capable of stopping this rush to feudalism. But even if anti-trust authorities wake up, it’s unlikely anti-trust suits will ever force a significant deconsolidation of the system. Anti-trust suits are just too slow and too expensive.

My off-the-cuff opinion is that deconsolidation is only possible under a single-payer system, and even then it won’t be easy to accomplish. My on-the-cuff opinion is that it’ll never happen under the current system.

Uwe Reinhardt responds to Kip Sullivan’s comments on health care oligopolies:

One can put a somewhat different spin than Kip’s on the consolidation in the hospital industry.

Like the airline industry, the hospital industry is characterized by high operating leverage–that is, high fixed costs relative to variable costs. When such an industry slides into a state of excess capacity–as it had by the mid 1980s–it would engage in price wars under competition. Until 1990s, the hospitals weathered this condition, because the private insurance industry paid them 130% of average cost, which was enough to finance an average occupancy ratio of 60% or so. (Medicare probably paid full cost calculated at full occupancy).

When the demand side started to force real price competition on the hospitals sector, it initially was driven into price wars that pushed many hospitals into the red. The only way to react to this threat is what the airlines did earlier: consolidate or slice up the market. The airlines did both–and used frequent flyer miles to cement a clientele in place. Hospitals simply aggregated into larger oligopolies.

Under a single payer system you would ultimately need capacity planning. No single payer would sit by idly, covering the full costs of half empty hospitals.

Thus, the choice in the 1980s was never competition vs. regulation, but oligopoly vs. regulation.

Uwe R.

The New York Times
March 4, 2002

“2 Powerful Groups Hold Sway Over Buying at Many Hospitals” By Walt Bogdanich

“These two private groups (Premier and Novation) act as middlemen for about half the nation’s nonprofit hospitals, negotiating contracts last year for some $34 billion in supplies, from pharmaceuticals to pacemakers, bandages to beds.

“Each group has the same basic mission: to use the market power of its more than 1,500 hospitals to find the best medical products at the lowest prices.

“But many in the medical world – Mr. Kiani among them – question whether that mission is being compromised by financial ties that the groups, Premier and Novation, have to medical supply companies, ties that, according to an investigation by The New York Times (news/quote), are both extensive and highly unusual.

“The problem begins with this simple fact: The buying groups are financed not by the hospitals that buy products but by the companies that sell them. In other words, the groups take money from the very companies they are supposed to evaluate objectively. Each year, companies pay Premier and Novation hundreds of millions of dollars in fees that represent a percentage of hospital purchases. The more hospitals spend on medical supplies, the more dollars Premier and Novation get from the suppliers.

“In a few cases, Premier or some of its officials have also received stock or options from companies with which Premier contracts.

“Critics say such conflicts of interest can mean that the buying groups do not always choose the products that are best for patients, hospitals or the taxpayers and insurers that pay their bills.”

“Larry Dickson oversees purchasing through Novation for Providence Health System in Seattle.. He says he cannot get specific information on fees, despite the critical role he plays in supplying his hospitals.”

Larry Dickson, purchaser for Providence Health System:

“Why is this so secret? There is an accountability question that is very much concerning a lot of people in health care. And if you ask, and the response you get is, ‘That’s none of your business,’ that raises more questions than it answers.”

http://www.nytimes.com/2002/03/04/business/04BUY.html

Comment: This is yet one more example of marketplace dynamics in our health care system. Theoretically, these middlemen organizations negotiate discounts with the manufacturers of the medical supplies. Bulk purchasing and negotiated pricing are very legitimate methods to help control health care costs. But, because of this business model, most of the benefit passes to the shareholders and executives, with only enough savings passed on to the hospital-providers to create some semblance of lower pricing. With only two major middlemen, this oligopolistic market borders on a monopoly, preventing the realization of the full potential benefit for the hospitals and ultimately the patients.

Another concern about oligopolistic middlemen medical suppliers, which would apply to the oligopolistic pharmacy benefit managers as well, is that competitive bidding will negatively impact the manufacturers that do not receive the contracts, and some of them could actually fail. Those that would remain might defensively increase merger activity and would thereby create an oligopoly of manufacturers. With the oligopolistic middlemen already in place, prices would be driven up sharply.

Consider the following:

National Bureau of Economic Research NBER Working Paper No. 8802 “Health Care and the Public Sector” By David M. Cutler, Ph.D., Professor of Economics, Harvard University

“The make or buy decision in health care has been a subject of debate for decades. The traditional debate pitted arguments of monopoly and monopsony on the one side, and innovation on the other. Government intervention was justified because of monopoly power of physicians and the information problems noted above (in his paper). By controlling medical provision, it was believed that the government could use its monopsony power to purchase such services at a low price. The counter-argument focused on incentives for efficiency. Without market incentives, it was feared that government production would be technologically inefficient and innovation would be stifled.

“Empirically countries where the public sector runs the medical system spend less on medical care than countries with private providers. In OECD countries, for example, the correlation between the public sector share of financing and the share of GDP devoted to medical care is -0.41. More formal analysis controlling for additional variables also finds this conclusion (Globerman and Vining, 1998). There is also evidence for the inefficiency view. People in many European countries are disenchanted with the quality of medical care, and these countries have struggled to increase the efficiency of the medical care system in recent years (Cutler, 2001).

“A recent literature emphasizing the role of public sector contracting has expanded the dimension of this analysis, considering issues of allocational as well as technical efficiency (Hart, Shleifer, and Vishny, 1997; Shleifer, 1998). Consider the question of whether a government should provide hospital services itself or contract with a for-profit hospital company to provide the services. For-profit companies will respond to financial incentives more rapidly than government-run companies, since for-profit managers receive more of the payoff from responding to these incentives. Thus, contracting to a for-profit provider will be preferred IF the incentives that the firm faces are the correct ones. If the incentives are not correct, however, having more responsive for-profit firms may lead to poor outcomes, and providing the service in house might be preferred.”

http://papers.nber.org/papers/w8802

Further comment: Although Dr. Cutler is referring to health care services, his comments can apply to the narrower topic of medical supplies and pharmaceuticals. “Contracting to a for-profit provider (e.g., middlemen firms) will be preferred IF the incentives… are the correct ones.” But we now have more than ample evidence that the incentives of for-profit firms derive from maximizing profit. This can only result in compromise of the public interest to negotiate the maximum benefit for the patient. So the middleman function should be provided “in house,” that is, by a public negotiator.

In the single payer model of reform, the system becomes the single, monopsonistic purchaser of services and goods (supplies, pharmaceuticals, etc.). The negotiations are made with all manufacturers. By shifting emphasis from an oligopoly of manufacturers to a monopsonistic purchaser, the public single payer negotiator will gain control of the negotiating process. Because the negotiator is representing the public good, negotiations will be in the interests of the patients. That means fair prices, not only for the benefit of patients, but also for the manufacturers since it is in the public interest to assure the financial viability of the producers of the products.

Dr. Cutler’s comments about the European disenchantment with quality as representing the inefficiency view of public sector health care must be viewed from the perspective that European health care budgets are significantly smaller than the amount that is already dedicated to health care in the United States. A system of public funding in this country could avoid patient disenchantment by locking into the budget our current high level of funding.

Since the incentives of the for-profit firms can never provide the motivation to place the interests of patients over the interests of investors, let’s finally quit trying to make that model work. Instead, let’s go ahead and use an in-house negotiator that places the interests of patients above all else, avoiding disenchantment by targeting our abundant resources for health care. Let’s adopt a publicly administered, single payer health care system.

Kip Sullivan responds on health care oligopolies:

If I were the New York Times reporter who wrote this sentence, I would have written it this way: “The problem is two-fold: (1) The buying groups are financed by companies that stand to gain from the buying groups’ decisions, and (2) the buying groups are the natural outgrowth of a health-care system which has forced all players into a race to get big.” The article discusses the problem of oligopoly, but it doesn’t call the reader’s attention to the basic cause of rampant consolidation in the hospital industry.

The most fundamental problem is that the introduction of HMOs into the US health care system by the HMO Act of 1973 eventually made size the highest priority for all participants in the health care system. That was not, of course, the stated goal of HMO proponents. HMO proponents argued that HMOs would save money because they would improve medical practice — ignorant and greedy doctors would be induced or forced to cut out unnecessary services and beef up the provision of preventive services. In fact, HMOs saved money by rationing and extracting large discounts from providers. Both tactics were executed most successfully by the largest HMOs and, eventually, the largest traditional insurers which morphed into managed-care plans. HMO advocates most definitely did not argue that the creation of an HMO industry would confer oligopsony power upon the nation’s dominant health insurers, and that this power would be used to force doctors to cut medical services and to extract discounts from providers. But they might as well have, because that’s what we got.

It didn’t take long for the rest of the health care system to respond in kind. By the mid-1980s, the pace of consolidation had picked up throughout the entire health care industry, and by 1993, when politicians everywhere endorsed managed competition, the pace became just plain frantic. With the possible exception of the federal and state enforcers of anti-trust laws, there is no force capable of stopping this rush to feudalism. But even if anti-trust authorities wake up, it’s unlikely anti-trust suits will ever force a significant deconsolidation of the system. Anti-trust suits are just too slow and too expensive.

My off-the-cuff opinion is that deconsolidation is only possible under a single-payer system, and even then it won’t be easy to accomplish. My on-the-cuff opinion is that it’ll never happen under the current system.

Uwe Reinhardt responds to Kip Sullivan’s comments on health care oligopolies:

One can put a somewhat different spin than Kip’s on the consolidation in the hospital industry.

Like the airline industry, the hospital industry is characterized by high operating leverage–that is, high fixed costs relative to variable costs. When such an industry slides into a state of excess capacity–as it had by the mid 1980s–it would engage in price wars under competition. Until 1990s, the hospitals weathered this condition, because the private insurance industry paid them 130% of average cost, which was enough to finance an average occupancy ratio of 60% or so. (Medicare probably paid full cost calculated at full occupancy).

When the demand side started to force real price competition on the hospitals sector, it initially was driven into price wars that pushed many hospitals into the red. The only way to react to this threat is what the airlines did earlier: consolidate or slice up the market. The airlines did both–and used frequent flyer miles to cement a clientele in place. Hospitals simply aggregated into larger oligopolies.

Under a single payer system you would ultimately need capacity planning. No single payer would sit by idly, covering the full costs of half empty hospitals.

Thus, the choice in the 1980s was never competition vs. regulation, but oligopoly vs. regulation.

Uwe R.

The New England Journal of Medicine
February 21, 2002
Volume 346:635-640
By Sara Rosenbaum, J.D.

“Medicaid, codified under Title XIX of the Social Security Act, provides federal financial assistance to states operating approved medical-assistance plans. Unlike eligibility for Medicare, eligibility for Medicaid is means-tested (i.e., there are financial criteria for enrollment); like Medicare, however, Medicaid is an individual legal entitlement.”

“In August 2001, apparently in response to recommendations by the National Governors Association, the Bush administration announced a section-1115 demonstration initiative known as Health Insurance Flexibility and Accountability (HIFA).”

“The initial purpose of HIFA may have been to permit reductions in coverage as a trade-off for a limited expansion of eligibility.”

“HIFA appears to be an attempt to restructure Medicaid as a program that provides “premium support,” with the states subsidizing the enrollment of low-income persons in private insurance plans that offer more limited coverage than the traditional Medicaid program. Were most or all states to apply for participation in the HIFA program (section 1115 does not impose an upper limit on the number of participating states), then eventually the principles of Medicaid coverage would parallel those of private insurance coverage. In 1997, Congress took a step in this direction when it enacted the State Children’s Health Insurance Program. This program gives states the option of buying private insurance for uninsured children in families near the federal poverty level, rather than expanding Medicaid to cover them.

“The long-term consequences of such changes for the millions of beneficiaries with chronic illness or disability are unclear. As of the end of 2001, Congress had held no oversight hearings on HIFA. Nor has there been congressional scrutiny of the program’s emphasis on demonstration projects that help low-income workers buy coverage through their employers when it is available – despite concern about ‘health insurance crowd-out.’ This phenomenon occurs when public funds are substituted for employers’ contributions to health insurance coverage.

“In view of the fundamental disagreement over which features of Medicaid are problematic, much less how to change them, broad congressional action is unlikely in the near future. It remains to be seen whether Congress will permit the Bush administration to transform Medicaid into a premium-support program and to do so with a minimum of oversight.”

http://content.nejm.org/cgi/content/full/346/8/635 (Available for subscribers or by purchase only.)

Comment: Recent attempts to reform health care coverage have been left primarily to the employers and health plans interacting in the health care marketplace. Health security for average-income individuals and families is being threatened by the market’s response in shifting risk to the patient-employee-beneficiary.

In the meantime, in Washington, less attention has been given to low-income health care disparities because of the “success” of Medicaid and S-CHIP in meeting those needs (though there have been notable attempts on the state level to expand S-CHIP to the parents of the covered children). But what is happening to these programs designed to assure that the most vulnerable do have health care coverage? They are falling victim to the administration’s favored policy principles of “accountability and flexibility,” using the model of “premium support.” What this means is that these chronically under-funded programs will not only face further budget limitations, but they will also provide fewer benefits. This will be disastrous for low-income individuals in America because of unaffordable out-of-pocket expenses and fewer providers willing to accept patients on these programs.

More than ever, the moral imperative is quite clear. Since we already have the resources to provide comprehensive care for everyone, we must accelerate our efforts to reform the way in which we pay for health care since that has been the primary cause of misallocation of our resources. In the meantime, it is absolutely essential that we protect the programs that we do have until we can enact an equitable system of funding comprehensive coverage for everyone.

Professor Donald Light, responding on premium support and HIFA (Health Insurance Flexibilty and Accountability):

A major consequence of any premium support approach that depends on individuals neogtiating in the individual market and with providers is that purchasing power will plummet for the same amount of money. Hospitals, clinics, labs and physicians charge individuals about 4-5 times as much as their regular negotiated rates with plans and insurers. Insurance companies charge much higher premiums for less coverage on the argument that they are at serious risk when they insure one patient at a time. This argument, to my knowledge, is completely false from the perspective of the overall risk pool that an insurer subscribes. In short, a HIFA approach saddles the poorest citizens with the highest bills for the least care.

Subcommittee on Health
Committee on Energy and Commerce U.S. House of Representatives
February 28, 2002

Mary R. Grealy, President, Healthcare Leadership Council:

“The members of the HLC also support the President’s inclusion of more than $90 billion in his recent budget to begin mapping the way to coverage for a significant number of the uninsured. The majority of this funding would provide a refundable health tax credit that could be advanced to families to help them purchase insurance plans in the non-group insurance market. The HLC believes this is an important step toward providing easier access to health care coverage for the millions of working Americans who are without it.”

Judith Feder, Ph.D., Dean of Public Policy, Georgetown University:

“Although seemingly addressing the same problem, two different policy mechanisms can have very different impacts. Tax credits reach a large number of people, but most of them are not uninsured. Indeed, only a small proportion of the uninsured population-disproportionately young and healthy-are likely to participate in the new program and those who do will receive only modest benefits. And, at the same time it expands coverage, the pursuit of tax equity actually undermines coverage already in existence. As a result some of its coverage gains are offset by coverage offsets. In large part, this outcome reflects the fact that tax credits are not simply aimed at expanding coverage; they also aim at greater tax equity-that is, equalizing tax preferences wherever health insurance is purchased.

“The sole purpose of a public program is to expand coverage. It concentrates a comprehensive benefit on a narrowly defined population, the vast majority of whom are uninsured. If the nation’s primary goal is to expand meaningful coverage for those who need it the most, the public program is by far the more effective mechanism.”

http://energycommerce.house.gov/107/hearings/02282002Hearing499/hearing.htm

Comment: This hearing was significant because it heard testimony from several individuals on one of the most important subjects in health care today: providing coverage for the uninsured.

Much of the testimony on behalf of tax credits was based on political ideology as is exemplified by Mary Grealy’s comment that, “HLC believes this is an important step.”

Other testimony objectively defined the problem of the uninsured and provided solid evidence of the potential impact of various policy approaches on expanding coverage. Judith Feder’s testimony reveals that tax proposals are poorly targeted, whereas public programs such as Medicaid and S-CHIP are much more effective in expanding coverage for the uninsured.

In approaching health care reform through incremental steps, there is no question as to the proper approach. By defining the problem and analyzing the impact of various health policy approaches, it is clear that expanding public programs would work, and using tax credits wouldn’t. Ideology for the sake of ideology must be dismissed.

But the most disconcerting feature of the hearings is that testimony was limited to incrementalisim. The consensus, if you believe it, is that any single program of universal health care coverage must be left off of the agenda. All parties have entered an implied agreement that we will meet in the center through incrementalisim. But this is absolutely untrue. The Robert Wood Johnson coalition on the uninsured demonstrates this. The dozen organizations involved are spending $10 million to publicize the plight of the uninsured, but they are in agreement that they are not in agreement on what we should do about it. The only agreement that they have reached is that they will keep single payer advocates out of the process.

The preliminary results of the California Health Care Options Project demonstrate that single payer proposals would provide comprehensive care to everyone and reduce health care costs. The other proposals that build on our current, flawed system are not universal, nor comprehensive, and they would all increase health care costs.

It’s long past time to open the door and allow single payer advocates to place their models on the table. We should be looking at all policy approaches. And the only precondition to the process that we should insist on is that everyone would agree to place the interests of the patient above that of their own special interests.