By Gerard F. Anderson, Peter Hussey, and Varduhi Petrosyan
Health Affairs, January 2019

Abstract

A 2003 article titled “It’s the Prices, Stupid,” and coauthored by the three of us and the recently deceased Uwe Reinhardt found that the sizable differences in health spending between the US and other countries were explained mainly by health care prices. As a tribute to him, we used Organization for Economic Cooperation and Development (OECD) Health Statistics to update these analyses and review critiques of the original article. The conclusion that prices are the primary reason why the US spends more on health care than any other country remains valid, despite health policy reforms and health systems restructuring that have occurred in the US and other industrialized countries since the 2003 article’s publication. On key measures of health care resources per capita (hospital beds, physicians, and nurses), the US still provides significantly fewer resources compared to the OECD median country. Since the US is not consuming greater resources than other countries, the most logical factor is the higher prices paid in the US. Because the differential between what the public and private sectors pay for medical services has grown significantly in the past fifteen years, US policy makers should focus on prices in the private sector.

From the introduction

Much has happened in the US and other OECD countries in health policy and health care delivery in the intervening fifteen years. Since 2003 there has been much greater attention given to the cost of treating people with chronic conditions, a greater emphasis on value-based care, more people entering managed care programs, the passage of the Affordable Care Act, the introduction of electronic medical records, consolidation of hospitals and insurers, and many other changes designed to lower the level of spending in the US. As a result, it is important to assess whether the general conclusion that prices are responsible for most of the difference in health spending remains valid and what, if anything, has changed.

Health spending

US per capita health spending was $9,892 in 2016. The US spending level was 25 percent higher than that of Switzerland ($7,919), the country with the next-highest expenditure per capita; 108 percent higher than that of neighboring Canada ($4,753) and 145 percent higher than the OECD median of $4,033. The US spent 17.2 percent of its GDP on health care in 2016, and the OECD median was 8.9 percent.

Public versus private spending

The US financed 50.9 percent of its health care from private sources in 2016, compared to the OECD median of 25.0 percent. It is noteworthy that the differential between the prices paid by public and private insurers in the US has increased drastically since the 2003 article was written. In 2000 the price differential between what public and private insurers paid was approximately 10 percent. The Medicare Payment Advisory Commission recently estimated that private insurers pay prices that are 50 percent higher than what Medicare pays. Increased attention needs to be paid to the prices paid in the private sector.

Spending on pharmaceuticals

In 2015 per capita spending on pharmaceuticals varied from $171 in Poland to $1,011 in the US, with most of the OECD countries spending $400–$600. Recent studies found that prices for brand-name pharmaceuticals were responsible for most of the difference in pharmaceutical spending, with the US providing a considerable portion of the profits to the pharmaceutical industry.

Supply of physicians

In 2015 the US had 19 percent fewer practicing physicians per 1,000 population than the median OECD country (2.6 versus 3.2). The median OECD country had 12.1 medical school graduates in 2015 per 100,000 population, while the US had only 7.5. The US also had the lowest percentage of generalist physicians among the twenty-eight countries with data available, according to the OECD definition: 11.9 percent. The OECD median was 27.9 percent.

Supply of nurses

The US nurse-to-population ratio declined from 2000 to 2015, when it was 7.9 per 1,000 population—20 percent below the OECD median (9.9 per 1,000).

Hospitals

The US had 26 percent fewer inpatient acute care hospital beds per 1,000 population (2.5) than the median OECD country (3.4) in 2015.

Medical technology

The US was second (after Japan) in MRI units per million population and third (after Japan and Australia) in CT scanners per million population in 2015.

Explanations for differences

There is a growing literature on administrative costs. A Commonwealth Fund comparison of health insurance administrative costs showed that the US spent $737 per capita on administration, compared to $94 per capita in the median OECD country. The next-highest-spending country after the US (Switzerland) had administrative costs of only $280. In 2017 Steffie Woolhandler and David Himmelstein estimated that the US would save about $617 billion (about 20 percent of its total health spending) if it moved to a single-payer system. A study comparing administrative costs of physicians in Canada and the US found that US physicians spend considerably more on administrative services than Canadian physicians do.

Health spending versus health care provision

The 2003 article discussed how the buy and sell sides of the marketplace operate. The subsequent literature has validated the arguments made in the 2003 article. First, many OECD countries continue to use their monopsony power to control prices, while the US continues to have geographic areas with providers able to obtain “rents” from having monopolies in their community. Second, the current literature continues to show that the US buy side continues to be highly fragmented by international standards.

A series of recent articles has examined the relationship between the market power of providers in a community and health outcomes and found association with higher prices but very little correlation with health outcomes. These studies show that insurance companies are strengthening their market power through consolidation, while hospitals and physicians’ practices merge into giant conglomerates, strengthening their sell-side market power and driving up the prices.

In the US the evidence suggests that consolidation of insurers does not necessarily lead to lower premiums, copayments, or deductibles, but it shifts profits from providers to insurers, thereby transferring revenues from providers to insurers and not to society.

It’s still the prices, stupid

In 2000 the US had fewer physicians per 1,000 population, physician visits per capita, and acute care beds per capita, as well as fewer hospital admissions per 1,000 population and acute care days per capita, compared to the median OECD country. The US was still not devoting more real resources to health care than most other OECD countries in 2015 or 2016. At that time, the US had 26 percent fewer hospital beds per capita, 20 percent fewer practicing nurses, and 19 percent fewer practicing physicians per capita, compared to the OECD median country. Because the US is still not devoting more real resources to medical care than the typical OECD country, we believe that the conclusion that “it’s the prices, stupid,” remains valid. What is different between 2003 and 2016 is that the differential between what public and private insurers pay for health care services has become wider. Lowering prices in the US will need to start with private insurers and self-insured corporations.

https://www.healthaffairs.org…

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Comment:

By Don McCanne, M.D.

The really important finding of this update of the classic study, “It’s the Prices, Stupid,” is that the conclusion has not changed: Health care spending in the United States is the highest largely because our prices are the highest.

There are a couple of quotes in this update that warrant special attention:

“In the US the evidence suggests that consolidation of insurers does not necessarily lead to lower premiums, copayments, or deductibles, but it shifts profits from providers to insurers, thereby transferring revenues from providers to insurers and not to society.”

Got that? The consolidation of the private insurers has not resulted in benefits to health care consumers nor to society at large. It has shifted profits from providers to insurers. It makes you wonder why the American Medical Association and the American Hospital Association continue to support a financing system heavily dependent on private insurers when those insurers are draining the providers of their profits, which then must be compensated for by yet higher prices.

“What is different between 2003 and 2016 is that the differential between what public and private insurers pay for health care services has become wider. Lowering prices in the US will need to start with private insurers and self-insured corporations.”

Got that one too? The private insurers have been more successful in enabling the increase in health care prices than has the public sector. Success here of course means more profit from higher prices, but not success in controlling excess health care spending to benefit society.

The authors conclude that lowering prices will need to start with private insurers and self-insured corporations, but the past three-quarters of a century has provided more than ample evidence that private insurers and self-insured corporations have been incompetent or derelict in their efforts to control prices; both have been far more concerned with tending to maximizing their own profits.

Single payer advocates understand that reducing prices does not mean cutting physician and hospital payments to unacceptably low levels, but rather it means reducing prices by increasing efficiency of the financing system by eliminating profound administrative excesses, negotiating fair rates, eliminating diversion of funds to passive investors, and use of global budgets similar to financing of other publicly-funded facilities like fire departments.

There are two models that have been proven to be effective: a national health service (socialized medicine) or a single payer social insurance program like an improved Medicare that covers everyone (Single Payer Medicare for All). For the United States, the latter would be less disruptive, not to mention that it already has a following within the nation in a large part because of the popularity of our traditional Medicare program.

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By Liz Farmer
Governing, January 9, 2019

The cost of retiree health care is spiraling out of control. In just two years, according to a recent S&P Global Ratings report, unfunded retiree health-care liabilities across the 50 states increased by $100 billion to now just under $700 billion.

The problem is becoming so alarming that Dearborn, Mich., recently borrowed money to help fill the gap, a move deemed risky by financial analysts. A more acceptable approach taking hold, thanks in part to the Affordable Care Act (ACA), is scrapping government-sponsored health plans and instead paying for retirees to purchase a plan on a private health insurance exchange. The change is expected to save some cities hundreds of millions of dollars and make their annual retiree health-care costs more predictable.

Retiree health care, also known as other post-employment benefits (OPEB), is one of the fastest-growing line items in government budgets. That’s because retirees are living longer and medical costs are rising faster than the rate of inflation.

In recent years, some governments have tried to manage costs by simply cutting health-care benefits — something they legally can’t do with pensions. In 2014, Memphis, Tenn., eliminated its 70 percent subsidy for retiree health insurance, and instead, plugged those savings into its vastly underfunded pension system. But unions fought the cuts, suing and pressuring the city to reinstate health care for retirees. With the subsidy gone, agencies were having problems with recruitment and retention, particularly police and fire departments where officers tend to retire well before the Medicare-eligible age of 65.

When Mayor Jim Strickland took office in 2016, he immediately tasked the city’s new chief human resources officer, Alexandra Smith, to fix the problem. That’s when the idea of turning to a health insurance exchange first emerged.

Private exchanges are different than the public, ACA exchanges. The idea is the same in that they pool risk and allow users to shop for their own health plans. But private exchanges are run by insurance and benefits companies. They have been around for much longer, generally catering to the 65 and older crowd looking for a health plan to supplement their Medicare coverage.

In recent years, governments, such as Cobb County, Ga., and the state of Ohio, have turned to these private exchanges for their Medicare-eligible retirees as a way to cut down on costs. But thanks to the ACA, private exchanges can expand their market to include users who are not yet eligible for Medicare. That’s opening up new options for governments that are paying for health care for younger retirees.

For Memphis, joining an exchange gave the city a chance to control their health-care costs because the insurer — rather than the city — is on the hook for big claims.

Shifting that responsibility, says Smith, dropped the city’s OPEB liability by $300 million to total $415 million. Costs going forward will also be more predictable, around $19 million per year. “The volatility we would have had by having retirees on our group insurance plan would have been much higher,” she says. “Now we’re able to better predict what our annual payments are.”

It also gave the city something to offer its younger retirees. While Memphis didn’t reinstate its 70 percent subsidy, it offers $5,000 annually for individuals and $10,000 for public safety retirees in the form of a health reimbursement account for those who aren’t eligible yet for Medicare. The money helps cover a significant portion of the premiums for retirees who buy a plan on the exchange.

Meanwhile, the idea is gaining traction. Ohio’s police and fire pension has already made the jump, and the state’s public employee pension plan is considering a similar move.

http://www.governing.com…

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Comment:

By Don McCanne, M.D.

Public employers, in order to help control the costs of their retiree health benefit programs, are dropping the retirees from their own government-sponsored health plans and instead giving retirees a health reimbursement account (HRA) that can be used to purchase health plans through a private insurance exchange. The plan in Memphis provides an example as to how that can work out for the employers and for the retirees.

Instead of paying a 70 percent premium subsidy towards the government-sponsored health plan, Memphis is paying into the HRAs an amount that reduces their post-employment benefit obligation by $300 million, a savings for Memphis of 42 percent! That’s great for their city budget, but what does that do for the retirees?

To begin with, private insurers generally have significantly greater administrative costs, higher executive compensation schedules, plus a need to divert funds to investors (or build capital margins for nonprofits), plus there are the additional administrative costs of the private exchanges. If the retirees have 42 percent fewer funds for their retiree coverage and the coverage is now more expensive than the previous government-sponsored plan, then what gives? It would require some combination of much higher insurance premiums (likely greater than the funds in their HRAs), much greater deductibles and other cost sharing, and a reduction in the health benefits covered by the private plans. All of these can place a significant financial burden on individuals now trying to get by on their modest pensions. They might have to deplete their assets, if they have any, and health care access may be impaired because of these financial barriers. This can’t be good.

We have to end our dependence on an overpriced, inefficient, inequitable, fragmented health care financing system dominated by private insurers. We can do that by enacting and implementing a Single Payer Medicare for All program. Although support is increasing, inertia remains a problem, and we may have to start taking to the streets to get it to happen.

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Politico, Harvard T.H. Chan School of Public Health, January 2019

POLQ1. The new Congress could take action on health care. Here is a list of some things they could do. Because they can only take action on a few of them at a time, we are only asking whether or not you think each of the following should be an EXTREMELY IMPORTANT priority. How about (INSERT ITEM – e.g., c, below)? Should that be an EXTREMELY IMPORTANT priority or not?

c. Providing health insurance coverage for everyone through a taxpayer-funded national plan like Medicare for all

Yes, should be an extremely important priority
Total – 68
Dems – 84
Reps – 39
Inds – 70

No, should NOT be an extremely important priority
Total – 30
Dems – 14
Reps – 60
Inds – 28

Don’t know/ Refused
Total – 2
Dems – 2
Reps – 1
Inds – 2

https://cdn1.sph.harvard.edu…

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Comment:

By Don McCanne, M.D.

The results of this poll should not surprise Medicare for All advocates since it looks like many other poll results in recent years. About two-thirds of respondents think that providing health insurance coverage for everyone through a taxpayer-funded national plan like Medicare for all should be an extremely important priority. The various poll results have been remarkably consistent, although this one emphasizes that respondents believe Medicare for All is “an extremely important priority” considering the number of issues that require Congressional attention.

In spite of strong political polarization in this country, about two-fifths of Republicans agree with the 84 percent of Democrats and 70 percent of Independents who concur that Medicare for all is an extremely important priority.

Give the Republicans a decade of having the security of Medicare for All and then ask them if they would want it taken away. The support certainly would have solidified by then.

It is interesting that some Republican politicians keep insisting that we need to reform “entitlements” – cut Social Security and Medicare benefits – yet Republican voters along with all other voters do not want their benefits tampered with. Former Speaker Paul Ryan advocated strongly for “entitlement” reform yet ended up walking away saying that this failure was his one great defeat, yet his Republican voters did not step up to agree with him.

People support Medicare. If everyone were included, the support would be unanimous, except perhaps for a rare nut or two (and, even then, they would be eligible for psychiatric help).

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U.S. House of Representatives, Committee on the Budget

January 8, 2019

Dr. Keith Hall
Director
Congressional Budget Office
Washington, DC 20515

Dear Dr. Hall:

The Affordable Care Act substantially increased the number of Americans who have health insurance and created important consumer protections, such as caps on out-of-pocket costs and prohibiting discrimination against people with pre-existing conditions. However, millions of Americans remain uninsured, and millions more – even though they have insurance – struggle to afford their health care costs. Many members of Congress are considering new approaches to achieve the goal of affordable, high-quality coverage available to everyone. There are several possible pathways toward this goal, ranging from incremental improvements to the Affordable Care Act to a more comprehensive overhaul of the nation’s health care system. One approach that has garnered considerable interest is a single-payer system. Supporters often point to the experience of other countries that have achieved near-universal coverage through single-payer systems. The single-payer systems in other countries differ in important respects, however, and do not necessarily provide a clear blueprint as to how such a system in this country would be designed. Members of Congress developing proposals to establish a single-payer system will face many important decisions that could have major implications for federal spending, national health care spending, and access to care.

To assist Congress with that work, I request that the Congressional Budget Office provide a report on the design considerations that policymakers would confront in developing proposals to establish a single-payer system in the United States. The report would cover the following issues: how the system would be administered; who would be eligible for coverage and how they would be enrolled; what services would be covered and what cos-sharing requirements, if any, would be imposed; what role, if any, private insurers would play; whether other public programs (such as Medicaid, the Veterans Health Administration, the Indian Health Service, and the Military Health System) would continue to exist; how provider payment rates would be established; what participation rules would be established for providers; what methods would be used to contain costs; and how the system would be financed. The report would not necessarily provide CBO’s estimate of the effects of any particular proposal for a single-payer system on federal spending to national health care spending but would, to the extent feasible, provide a qualitative assessment of how the choices with respect to major design issues would affect such spending. The staff contact for this request is Erika Appel, who can be reached at (number omitted to avoid a deluge of calls – DMc).

Sincerely,

John A. Yarmuth
Chairman

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Comment:

By Don McCanne, M.D.

Speaker of the House Nancy Pelosi has already stated that the Budget Committee would be holding hearings on Medicare for All. This letter indicates that the process has already begun since the committee does need basic information on what a single payer system is, and the nonpartisan Congressional Budget Office (CBO) serves as an impartial resource for such information. The fact that single payer Medicare for All is now receiving formal consideration in Congress is an important milestone in our journey toward health care justice for all.

Concerns are already being expressed over the background of Keith Hall, the Director of the CBO, who is a Republican and was the chief economist for the White House Council of Economic Advisers under George W. Bush, and was a senior research fellow at the Mercatus Center at George Mason University – a free-market oriented institution that recently released a report critical of Sen. Bernie Sanders’ Medicare for All legislation.

The probability is that the report will be credible since the CBO staff has continued to demonstrate professional integrity and impartiality regardless of the political inclinations of the director. Prior CBO controversies such as the application of dynamic scoring likely will not play a role here. In the unlikely event that they digress and redefine single payer as a more conservative or libertarian model, or if they distort socialist features as being a nefarious route to totalitarianism, the uprising by Medicare for All activists would put their report to rest. But that won’t happen. Likely, at the very worst, we might have to correct some minor distortions or errors, and we do have the credibility to do that. Furthermore, this is only a report and not legislation. The real test comes when the final, definitive legislative is crafted.

Whether or not the report turns out to be useful, we already have a plethora of health policy data that can guide Congress as they create the design and transform it into legislative language. Whatever bill(s) may be produced will have plenty of exposure during this session of Congress, allowing for our input to perfect them for the next session of Congress when we may finally have a real chance of achieving our goal of Medicare for All.

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