An Analysis Of Whether Higher Health Care Spending In The United States Versus Europe Is ‘Worth It’ In The Case Of Cancer

Tomas Philipson, Michael Eber, Darius N. Lakdawalla, Mitra Corral, Rena Conti and Dana P. Goldman
Health Affairs, April 2012
The United States spends more on health care than other developed countries, but some argue that US patients do not derive sufficient benefit from this extra spending. We studied whether higher US cancer care costs, compared with those of ten European countries, were “worth it” by looking at the survival differences for cancer patients in these countries compared to the relative costs of cancer care. We found that US cancer patients experienced greater survival gains than their European counterparts; even after considering higher US costs, this investment generated $598 billion of additional value for US patients who were diagnosed with cancer between 1983 and 1999. The value of that additional survival gain was highest for prostate cancer patients ($627 billion) and breast cancer patients ($173 billion). These findings do not appear to have been driven solely by earlier diagnosis. Our study suggests that the higher-cost US system of cancer care delivery may be worth it, although further research is required to determine what specific tools or treatments are driving improved cancer survival in the United States.
Cancer Survival
Survival data for patients diagnosed with cancer were obtained from the Surveillance, Epidemiology, and End Results (SEER) database for the United States and from the EUROCARE (European Cancer Registry on Survival and Care of Cancer Patients) databases for countries in Europe.
Twenty-three countries are included in the EUROCARE databases, but only ten reported data consistently over the 1983–99 period: Finland, France, Germany, Iceland, Norway, Scotland, Slovakia, Slovenia, Sweden, and Wales. Our analysis relies on these ten countries, which account for 36 percent of the total European Union population. – Additionally, whereas most of the European countries we analyzed are covered by national registries that include the full population of each country, coverage from France and Germany is based on regional registries, which might not fully represent the experience of these countries.
The term survival gains refers to increases in years of life expectancy from cancer diagnosis seen over time. We decided to focus on examining survival gains over time because doing so provides insight into the progress that countries have made relative to their own baselines
Value Of A Statistical Life
A statistical life worth $5–$12 million equates to $150,000–$360,000 for each statistical life-year. We conservatively chose a value of $150,000 per life-year for our survival calculations.
Costs Of Cancer Care
These costs include expenses associated with treatment, including radiation and drug regimens, as well as diagnosis, such as mammography and prostate-specific antigen screening.
Net Value Calculations
To calculate the value of survival gains in the United States relative to that in the European countries, we subtracted the additional costs of care in the United States from the value of additional US survival gains expressed as gains in years of life expectancy.
Sensitivity Analysis: Population Mortality Rates
Next, we examined changes in cancer-specific population mortality rates in the United States and Europe. We used the World Health Organization Cancer Mortality Database to address the question of whether our conclusions are a result of earlier diagnoses and hence do not necessarily reflect improvement in life expectancy.
For example, if cancer cases are simply detected six months earlier, with no corresponding change in patients’ prognosis, it may still appear that survival from the date of diagnosis has risen by six months. This illusory gain in survival is known as lead-time bias. However, simply diagnosing people earlier would have no effect on the rate at which people die from disease.
By analyzing population mortality rates, which are insensitive to lead-time bias, we show that US cancer mortality rates fell faster than cancer mortality rates in the European Union. This must be due to real improvements in cancer survival (see the Technical Appendix for further explanation of this approach).
Results
Value Of Cancer Survival
For cancer patients diagnosed during 1995–99, adjusted average survival was 11.1 years from diagnosis in the United States, compared with 9.3 years from diagnosis among the European countries—a difference of 1.8 years. This difference reflected higher US survival levels for most cancer types, with the exception of chronic myeloid leukemia, acute myeloid leukemia, Hodgkin’s lymphoma, and testicular cancer, for which the European countries experienced improved survival. All survival differences were statistically significant except for those for Hodgkin’s lymphoma and thyroid cancer.
Costs Of Cancer Care
Meanwhile, US spending on cancer care, in 2010 US dollars, increased from $47,000 per cancer case to $70,000 per case from 1983 through 1999—a 49 percent increase. In the ten European countries, spending on cancer care in 2010 US dollars increased from $38,000 per cancer case to $44,000—a 16 percent increase.
Net Social Value
The net value of US survival gains in excess of European survival gains… was $61,000 on average, ranging between $51,000 and $94,000 over the seventeen-year analysis period.
Sensitivity Analysis: Population Mortality Rates
To examine the effect of earlier diagnosis on the value of additional survival gains—the lead-time bias—we also looked at population mortality rates for cancer over time in the United States and in Europe, which are not sensitive to changes in the time of cancer diagnosis. According to this analysis, cancer mortality rates fell faster in the United States than in the ten European countries over a similar time period, 1982–2005.
For example, faster declines in population mortality rates in the United States corresponded to 222,000 prostate cancer deaths averted and 87,000 breast cancer deaths averted in that time period. Converting the declines in mortality rates into gains in life expectancy showed a gain of 1.8 years in life expectancy for prostate cancer patients and a gain of 0.8 years in life expectancy for breast cancer patients. This suggests that lead-time bias did not confound our results (see the Technical Appendix for further discussion).
Discussion
The high costs of cancer care in the United States are frequently cited as evidence of a poorly functioning health care system, compared to those of other developed countries. Using conservative market estimates of the value of a statistical life, this study presented evidence that US cancer survival gains are worth more than the corresponding growth in the cost of US cancer care according to the most recent data available for analysis, 1983–99.
Our sensitivity analyses demonstrated that our findings are probably not confounded by lead-time bias. Overall, we found that the United States generated more than $500 billion of additional value for cancer patients, net of its higher costs of treatment.
http://content.healthaffairs.org/content/31/4/667.abstract
Technical Appendix to this article
Population Mortality Rates
Measures of survival from cancer diagnosis may be influenced by changes in the reference point of cancer diagnosis associated with increased screening. This would serve to inflate estimates of improvements in patient outcomes as measured by survival. Consider as an example a completely untreatable cancer that is typically detected 24 months before patient death. A new technology that detects this cancer 36 months until death would appear to increase survival by 12 months, even though the actual prognosis is unchanged for these patients. This is a phenomenon often referred to as “lead-time bias” in the epidemiological literature. Note that this new detection technology would not change the rate at which people die from this cancer. As a result, population mortality rates are not sensitive to lead time bias or its sources.
If US data show both survival gains and mortality reductions, this is likely to reflect real improvements in health; the alternative interpretation requires a scenario in which the diagnosis rate is rising in the US while the actual number of cancer cases is falling.
Appendix Table 1 shows changes in mortality rates in the US over 1982-2005 in excess of changes observed in European countries by cancer site. Additionally, the corresponding numbers of deaths are shown. For prostate cancer, the US experienced an additional reduction of 15.8 deaths per 100,000 male population relative to Europe over the period 1982-2005, which corresponded to 222,000 deaths averted. For breast cancer, US trends in population mortality corresponded to 87,000 deaths averted. In contrast with the survival analysis, the US exhibited more rapid improvement in colorectal cancer mortality rates than European countries. Stomach cancer mortality rates exhibited substantially more rapid declines in the European countries examined; however US mortality rates for stomach cancer remained lower than rates for any European country included in the analysis, despite the slower observed declines.
In addition, we calculated, using the declines in mortality rates estimated from the model, as well as US mortality rates obtained from CDC National Vital Statistics Reports, the expected change in life expectancy for prostate and breast cancer patients associated with the declines in population mortality rates to compare with the results of the primary survival analysis. We examined the average rate of deaths averted over the analysis period 1982-2005 for both prostate cancer and death cancer. This corresponded to 385 prostate cancer deaths averted per 100,000 prostate cancer cases and 139 prostate cancer deaths averted per 100,000 breast cancer patients. Additionally, we calculated the total US death rate from prostate cancer in 2005 to be 1380 deaths per 100,000 prostate cancer cases and the total death rate from breast cancer to be 1850 deaths per 100,000 breast cancer patients. We assumed a prevalence of 2,400,000 prevalent prostate cancer cases in the United States and 2,600,000 breast cancer cases in the US based on estimates from US SEER data. Assuming a constant risk of death, these methods imply that the additional mortality rate reductions observed in the US corresponded to a gain of 1.8 years in life expectancy for prostate cancer patients and a gain in life expectancy of survival of 0.8 year for breast cancer patients.
Appendix Table 1: US Changes in Population Cancer Mortality Rates Relative to European Changes, 1982-2005
Listed for each cancer are the additional deaths avoided (incurred) in US, with the P value for change in US death rates in excess of EU change
Breast  86,913  (0.001)
Colorectal  281,932  (0.07)
Hodgkin  -8,025  (<0.001)
Leukemia  23,347  (0.64)
Melanoma  15,050  (0.04)
NHL  67,826  (0.001)
Prostate  221,747  (<0.001)
Stomach  -224,212  (0.001)
Testis  -4,175  (0.08)
Thyroid  -11,556  (<0.001)
Uterus  14,990  (0.76)
http://content.healthaffairs.org/content/suppl/2012/04/09/31.4.667.DC1/2011-1298_Philipson_Appendix.pdf

And…

Is high spending on cancer care ‘worth it’?

By Sharon Begley
Reuters, April 9, 2012
With the United States spending more on healthcare than any other country — $2.5 trillion, or just over $8,000 per capita, in 2009 — the question has long been, is it worth it? At least for spending on cancer, a controversial new study answers with an emphatic “yes.”
Cancer patients in the United States who were diagnosed from 1995 to 1999 lived an average 11.1 years after that, compared with 9.3 years for those in 10 countries in Europe, researchers led by health economist Tomas Philipson of the University of Chicago reported in an analysis published Monday in the journal Health Affairs.
Philipson is a fellow at the conservative American Enterprise Institute and at the Manhattan Institute, served in the administration of President George W. Bush and was a healthcare adviser to Sen. John McCain’s 2008 presidential campaign.
Experts shown an advance copy of the paper by Reuters argued that the tricky statistics of cancer outcomes tripped up the authors.
“This study is pure folly,” said biostatistician Dr. Don Berry of MD Anderson Cancer Center in Houston. “It’s completely misguided and it’s dangerous. Not only are the authors’ analyses flawed but their conclusions are also wrong.”
For the new analysis, Philipson and his colleagues analyzed the survival of cancer patients diagnosed from 1983 to 1999 with any of 13 common cancers, including breast, prostate, colorectal, and leukemias.
Survival means how long a patient lived after being diagnosed. Philipson’s team focused in particular on survival gains; that is, how long did patients diagnosed in later years live compared with those diagnosed earlier in the period? Such gains, they argued, show what progress countries made in treating cancer.
While that may seem straightforward, survival data is among the most problematic cancer statistics, Philipson’s team acknowledges. In particular, they are plagued by something called lead-time bias.
If a tumor is diagnosed very early in its existence – if it has a long “lead time” – the patient may survive, say, two years if the tumor is very aggressive. If an identical tumor is found in that patient’s identical twin later, the twin will survive, say, six months. But the twins die at the same age. The first survived longer with cancer due to lead-time bias, but did not have a longer lifetime.
Crediting medical care with “improving survival” is therefore misleading, cancer experts have long argued. Lead-time bias makes it seem patients live longer, but the only thing that is longer is the number of years they know they have cancer, not their lifespan.
The authors of the “worth it?” study nevertheless base their analysis on survival data. They argue that because U.S. cancer mortality rates fell faster than those in Europe, the survival gains must be real and not an artifact of lead-time bias.
Others call that approach fatally flawed. “Lead-time bias is an issue,” said MD Anderson’s Berry. “I can see no hint of logic in their statement that ‘lead-time bias did not confound our results.'”
Even more problematic, said Berry, is a problem cancer experts have only recently recognized: overdiagnosis. Because cancer screening is much more widespread in the United States than in Europe, especially for breast and prostate cancer, “we find many more cancers than are found in Europe,” he said. “These are cancers that tend to be slowly growing and many would never kill anyone.”
Screening therefore turns thousands of healthy people into cancer patients, even though their tumor would never threaten their health or life. Counting these cases, of which there are more in the United States than Europe, artificially inflates survival time, experts said.
“As long as your calculation is based on survival gains, it is fundamentally misleading,” said Dr. H. Gilbert Welch, a healthcare expert at the Dartmouth Institute for Health Policy & Clinical Practice.
n the new analysis, the survival gains in the United States compared with Europe were greatest for prostate cancer, at more than triple the gains for breast cancer, the cancer with the second-greatest U.S. survival edge. “These are the two cancers where screening has raised the most serious issues about lead-time bias and overdiagnosis,” said Welch.
http://www.reuters.com/article/2012/04/09/us-cancercare-idUSBRE8380SA20120409

And…

Considering When It Might Be Best Not to Know About Cancer

By Gina Kolata
The New York Times, October 29, 2011
After decades in which cancer screening was promoted as an unmitigated good, as the best — perhaps only — way for people to protect themselves from the ravages of a frightening disease, a pronounced shift is under way.
Now expert groups are proposing less screening for prostate, breast and cervical cancer and have emphasized that screening comes with harms as well as benefits.
Two years ago, the influential United States Preventive Services Task Force, which evaluates evidence and publishes screening guidelines, said that women in their 40s do not appear to benefit from mammograms and that women ages 50 to 74 should consider having them every two years instead of every year.
This year the group said the widely used P.S.A. screening test for prostate cancer does not save lives and causes enormous harm.
Two recent clinical trials of prostate cancer screening cast doubt on whether many lives — or any — are saved
A new analysis of mammography concluded that while mammograms find cancer in 138,000 women each year, as many as 120,000 to 134,000 of those women either have cancers that are already lethal or have cancers that grow so slowly they do not need to be treated.
Cancer experts say they cannot ignore a snowballing body of evidence over the past 10 years showing over and over that while early detection through widespread screening can help in some cases, those cases are small in number for most cancers. At the same time, the studies are more clearly defining screening’s harms.
In recent years, researchers have found that many, if not most, cancers are indolent. They grow very slowly or stop growing altogether. Some even regress and do not need to be treated — they are harmless.
http://www.nytimes.com/2011/10/30/health/cancer-screening-may-be-more-popular-than-useful.html?ref=preventiveservicestaskforce
And…

Critical Diagnosis

By Tomas J. Philipson, Paul Howard
American Enterprise Institute, February 2, 2010
But the U.S. commitment to fighting cancer is second to none. We have recently documented enormous societal gains from the war on cancer. We found that from 1988 to 2000 life expectancy for all cancers combined increased by about four years–translating to about 23 million additional life-years and roughly $1.9 trillion of added social value of cancer care, even after subtracting research costs and spending on medical care for cancer patients.
The U.S. experience greatly contrasts with Europe’s, where centralized government funding for cancer care and price controls on new medicines have slowed the battle against cancer, leading to worse outcomes for patients. In a recent study demographers Samuel H. Preston and Jessica Yu documented that the U.S. outperforms almost all European countries in its cancer screening and treatment efforts.
It is important to recognize that innovation and access to care are complementary, not contradictory goals. Rather than opting for an expensive new insurance entitlement that the nation cannot afford, Congress’ main objective should be to help those who cannot afford health care, not take over the market for those who can. Stimulating the demand of the low-income uninsured is a laudable goal and is pro-innovation since it raises demand. Restricting care for those who can afford it by using government price controls to strong-arm producers is not. Cancer serves as a great example of the value of the U.S. model over the European model. In health care, as in most other markets, you get what you pay for.
http://www.aei.org/article/health/healthcare-reform/private-insurance/critical-diagnosis/

And…

We Can’t Lose Our Global Leadership In Medical Innovation

By Tomas Philipson
FOXNews.com, April 23, 2010
Because the most significant components of Obamacare do not take effect for several years, there is still time to reshape it, both to expand affordable safety-net coverage and encourage innovation. But first we must reject the common assumption that the only form of solidarity worth pursuing is universal coverage – the “right” for all citizens, regardless of their means, to access low-cost medical care. Instead, we must emphasize our solidarity with future generations. Whatever short-term benefits in coverage reforms might bring, our children and grandchildren will inevitably pay the price if the U.S. adopts European-style price controls at the cost of the medical innovations that have done so much for the world.
http://www.foxnews.com/opinion/2010/04/23/tomas-philipson-obamacare-health-care-europe-medical-innovation/

This widely-reported study suggests that the high costs for cancer care in the United States are well worth it, providing $800 billion in the value of additional survival gain for prostate and breast cancers alone. A critical review of this study casts great doubt on this conclusion.
The authors purport to show that cancer care in the United States accounts for increased survival time compared to ten selected European nations, and that this benefit is valued at $150,000 per additional year of survival.
It is important to understand the difference between survival and mortality. Survival relates to how long a person lives after the diagnosis of cancer is made. Mortality refers simply to how long a person lives. Lead time refers to how much of a head start a person gets on cancer treatment based on how early in its course it is diagnosed.
Having a survival of five years doesn’t mean much if mortality is unchanged. A group of individuals with the same cancer who die at the same time have the same mortality, yet if some have the cancer diagnosed earlier than the others, the five year survival is better for those diagnosed earlier even though the duration of life is not extended.
In this study the authors decided to look at survival rather than mortality in spite of problems with the lead time. They provide an Appendix which purportedly shows that “By analyzing population mortality rates, which are insensitive to lead-time bias, we show that US cancer mortality rates fell faster than cancer mortality rates in the European Union. This must be due to real improvements in cancer survival.”  Thus they contend that their estimates of survival were reflected in an improvement in mortality.
Having read their Appendix several times, I remain unconvinced of this argument. In fact, contained in their Appendix was the statement, “We examined the average rate of deaths averted over the analysis period 1982-2005 for both prostate cancer and death cancer.” Death cancer? The fact that this was published on the Health Affairs website without correction makes me wonder if anyone really read their Appendix critically.
Assuming that it was reviewed (though not by the Health Affairs editors), let’s look at Appendix Table 1 which purportedly shows the improved mortality in the United States compared to nine European nations. Of the eleven cancers listed, four showed additional deaths that were supposedly avoided, three showed additional deaths that actually were incurred, and the other four were not statistically significant at a p value of .05. Removing breast and prostate cancer for reasons mentioned below, that leaves only two cancers with additional deaths that were supposedly avoided. Not very convincing evidence for lower U.S. cancer mortality to say the least.
The two cancers that the authors highlighted were breast cancer and prostate cancer. According to H. Gilbert Welch (a highly credible authority from the Dartmouth Institute for Health Policy, and author of “Overdiagnosed”), “These are the two cancers where screening has raised the most serious issues about lead-time bias and overdiagnosis.”
Even the authors of the Health Affairs report state, “If US data show both survival gains and mortality reductions, this is likely to reflect real improvements in health; the alternative interpretation requires a scenario in which the diagnosis rate is rising in the US while the actual number of cancer cases is falling.” In fact, because of an increase in intensive screening, the diagnosis rate is rising, whereas the very large number of cancers detected that would have remained harmless  – especially many of the prostate and breast cancers – in a way might be considered to be a decline since, with no change in survival or mortality, these individuals more appropriately should have been classified with the population group without cancer, and never counted as cancer patients in the first place. Treatment of these harmless cancers certainly should not be counted as having increased cancer survival in the United States.
Regarding the integrity of this study, of some concern is that one of the authors, Mitra Corral, is an employee of Bristol-Myers Squibb, a company that produces cancer drugs and could benefit from the high visibility that Health Affairs gives this article touting the financial benefits of our higher spending on cancer care.
Of greater concern is the background of the lead author, Tomas Philipson, who is associated with conservative think tanks – specifically the American Enterprise Institute and the Manhattan Institute. These and other conservative sources have been dismissing health care reform with the claim that we don’t need reform because we have the best health care system in the world. They then use our “superior” cancer statistics to prove it. Because our system is so great, the implication is that we don’t need to fix it. Is this policy science, or is it ideological demagoguery?
With reluctance, we might accuse Professor Philipson of allowing his ideology to tarnish his academic purity, but we don’t have to. His own words will suffice, “But first we must reject the common assumption that the only form of solidarity worth pursuing is universal coverage – the ‘right’ for all citizens, regardless of their means, to access low-cost medical care. Instead, we must emphasize our solidarity with future generations. Whatever short-term benefits in coverage reforms might bring, our children and grandchildren will inevitably pay the price if the U.S. adopts European-style price controls at the cost of the medical innovations that have done so much for the world.”

Lower Mortality Rates At Cardiac Specialty Hospitals Traceable To Healthier Patients And To Doctors’ Performing More Procedures

By Liam O’Neill, and Arthur J. Hartz
Health Affairs, April 2012
Physician-owned cardiac specialty hospitals advertise that they have outstanding physicians and results. To test this assertion, we examined who gets referred to these hospitals, as well as whether different results occur when specialty physicians split their caseloads among specialty and general hospitals in the same markets. Using data on 210,135 patients who underwent percutaneous coronary interventions in Texas during 2004–07, we found that the risk-adjusted in-hospital mortality rate for patients treated at specialty hospitals was significantly below the rate for all hospitals in the state (0.68 percent versus 1.50 percent). However, the rate was significantly higher when physicians who owned cardiac specialty hospitals treated patients in general hospitals (2.27 percent versus 1.50 percent). In addition, several patient characteristics were associated with a lower likelihood of being admitted to a cardiac hospital for cardiac care, such as being African American or Hispanic and having Medicaid or no health insurance. After adjustment for patient severity and number of procedures performed, the overall outcomes for cardiologists who owned specialty hospitals were not significantly different from the “average outcomes” obtained at noncardiac hospitals. In contrast to previous studies, patient outcomes were found to be highly dependent on the type of hospital where the procedure was performed. To remove a potential source of bias and achieve a more balanced comparison, the quality statistics reported by physician-owned cardiac hospitals should be adjusted to incorporate the high rates of poor outcomes for the many procedures done by their cardiologists at nearby noncardiac hospitals.
http://content.healthaffairs.org/content/31/4/806.abstract

Primarily because of conflict of interest considerations, physician-owned specialty hospitals, such as the cardiac specialty hospitals reported in this study, have remained controversial.
Physician owners tout the lower mortality rates and higher quality ratings in their own cardiac specialty hospitals. This study confirms a very high patient selection bias with the disturbing result that these same physicians have offsetting higher mortality rates when they admit Medicaid, uninsured, and minority patients to noncardiac hospitals. Thus, overall these physicians are not improving their own personal performances but rather are cream skimming their patients whom the admit to their cardiac hospitals in which they have an ownership interest.
The single payer model supported by Physicians for a National Health Program not only provides the administrative efficiencies of establishing a single, equitably-funded, universal risk pool, but it also calls for elimination of for-profit ownership and for separate budgeting of capital improvements. Under such a model a cardiac specialty hospital would be built only if it best served the interests of the patients – all patients. It would not be built for the purpose of advancing the fame and fortune of physician owners.

By James C. Capretta and Robert E. Moffit
National Affairs, Spring 2012

(Following is a distillation of the authors’ 19 page article.)

When the Patient Protection and Affordable Care Act (commonly known as “Obamacare”) was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over.

The “repeal and replace” formulation quickly caught on, but it was not without its critics. That Obamacare should be “repealed” was obvious, given how strenuously conservatives and many independents objected to the new law. But “replace”?

[R]epeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform.  After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed.

WHAT NEEDS FIXING

But for all its considerable strengths, the system suffers from pervasive weaknesses as well. The most serious of these is rapidly rising costs.

Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.

The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers’ taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage.

Proponents of Obamacare like to create the impression that there are tens of millions of Americans trapped by their pre-existing conditions, sick and stuck with lousy insurance and no options. In truth, the vast majority of working Americans have good and secure coverage today, including many millions of people with expensive health conditions.

But a small percentage of our large population is still a lot of people. There is no denying that cracks in the system exist, and that many Americans fall through them. This is particularly true of people who need to move from job-based coverage into the individual market. People who leave the work force and need to buy insurance on their own can face sky-high premiums for weak coverage just because they happen to suffer from a health condition over which they often have little control.

Starting in the middle of 2009, the president and his top aides took to calling their plan “insurance reform,” as if the law’s most important elements were simply new rules designed to protect hapless consumers from unscrupulous insurance companies.

This is, of course, a gross mischaracterization of what Obamacare actually does. Among other features, the law implements a massive expansion of taxpayer obligations. It adds two new entitlement programs at an expense of at least $1 trillion over a decade. In that same period, it raises taxes by more than $500 billion. Most egregiously, it puts the federal government in command of the health sector, giving bureaucrats immense new power to decide matters ranging from what services must be covered in every American’s insurance plan to how doctors and hospitals organize themselves and do business.

PILLARS OF REFORM

The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care — the essential prerequisite for a functioning marketplace that imposes cost and quality discipline. In most sectors of our economy, the normal dynamics of supply and demand keep costs in check and reward suppliers that find innovative ways to deliver more for less.

Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.

In the context of Medicare and Medicaid, meanwhile, the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money.

The second pillar of reform should be personal responsibility and continuous-coverage protection. Obamacare attempts to address the challenge of covering people with pre-existing conditions with heavy-handed mandates, especially the requirement that all Americans enroll in government-approved insurance plans (the so-called “individual mandate”). A replacement program for Obamacare should come at the problem from the opposite direction, with government forsaking coercion and instead extending a new commitment to the American people: If you stay continuously enrolled in health insurance, with at least catastrophic coverage, you will never again face the prospect of high premiums associated with developing a costly health condition.

Because some workers who leave job-based plans for the individual market could be quite sick, a credible Obamacare replacement plan would also need to include a new approach to covering the high insurance costs for these Americans. Different proposals have offered different mechanisms, but all would move the burden away from the sick patients themselves to a larger and broader pool of people, either through regulation or through a direct government program such as a high-risk pool. For people who have not been continuously insured, these protections generally would not apply.

The third pillar of reform must be a genuine partnership with the states.

To respect federalism and reap its benefits, nothing in an Obamacare replacement agenda should compel state adoption, instead leaving the participation of state governments completely voluntary. Those states that do participate in any federal initiative should be given meaningful control over the most important components of regulation, especially the power to design and operate their own health-insurance markets (within minimal federal standards).

States should be given two tasks: informing consumers of their insurance options, and easing their enrollment into the plans they choose by cooperating with the federal government to facilitate the payment of credits and vouchers directly to private insurers.

Defined-contribution financial support, protection for Americans who remain continuously enrolled in insurance plans, and genuine federalism are the essential overall concepts that must define any serious health-care reform. But policymakers will also need to apply these principles to the transformation of today’s funding and financing mechanisms: the tax exclusion for employer-provided health coverage, and the Medicaid and Medicare systems.

TAX REFORM AND HEALTH REFORM

The fourth pillar of a real reform agenda would therefore address the tax treatment of empl
oyer-sponsored plans. Today’s arrangement is somewhat counterintuitive: Because the tax exclusion for health-care premiums is open-ended, workers and employers have an incentive to make health benefits a disproportionately large share of total compensation. And because employers obtain and manage health plans for their workers, there is far too much distance between those who purchase care and those who consume it.

The most plausible way to implement such a change would be to transform today’s tax exclusion for employer-provided insurance into a standard tax credit that would extend to all Americans, regardless of employment status, which they could then use to purchase the private coverage of their choice.

IMPROVING HEALTH CARE FOR THE VULNERABLE

The fifth key component of a genuine health-care reform plan must be an overhaul of Medicaid. Medicaid is actually three separate programs: health insurance for lower-income working-age adults and their children, health and long-term care for the non-elderly with severe disabilities, and long-term care for the frail elderly. For the purposes of replacing Obamacare, the relevant program to change is insurance coverage for working-age adults and children; the other parts will need reform as well, but should be addressed in a separate legislative effort.

In replacing Obamacare, policymakers should move lower-income people out of the limited sphere of Medicaid options and into the same private health-insurance markets in which their fellow citizens purchase coverage.

There is more than one way to accomplish this objective. …existing financing for acute care provided through Medicaid and the State Children’s Health Insurance Program would be transformed into a large pool of funding to be re-allocated to current beneficiaries and other low-income Americans in the form of a federal health-care subsidy (the equivalent of a “refundable tax credit”) for private insurance.

A similar approach would give Medicaid recipients the same federal tax credit that workers would receive in a reformed marketplace for health insurance. The federal government could then convert Medicaid into a per-person allotment to the states, funded through a block grant, that would supplement the base credit for a state’s low-income residents. The federal allotment to the states would be set so that, when combined with the federal support for the base tax credits or vouchers for the Medicaid-eligible population, total federal spending on the Medicaid population in a state would equal the amount that would have been spent under pre-Obamacare Medicaid. After the first year, the federal allotment to the states could be set to grow commensurate with the economy or some other reasonable measure of inflation.

The same move toward market incentives and efficiency should characterize our approach to Medicare reform in the wake of Obamacare’s repeal. The sixth pillar of a replacement plan must therefore be a premium-support reform of Medicare.

Of all the changes that are necessary to bring more cost discipline to health care, moving Medicare toward a defined-contribution structure, and away from today’s open-ended defined-benefit structure, is certainly the most vital. Medicare is the largest payer for services in most markets; the system of hospital and physician care in most communities has been built up around Medicare’s financial incentives.

In lieu of today’s open-ended benefit, a premium-support system would allow new beneficiaries (after the transition) to decide how to use a fixed-dollar contribution provided by Medicare. Each beneficiary would choose from a menu of approved insurance plans. If a beneficiary’s premium for his chosen plan was higher than the Medicare contribution, he would pay the difference out of his own pocket. If he chose a less expensive plan, he would pay lower premiums and keep the savings. This structure would provide a powerful incentive for the program’s participants to find high-value plans that charge low premiums for quality care, and therefore for insurers to offer such plans.

FISCAL RESPONSIBILITY FOR A CHANGE

Finally, as a key criticism of Obamacare is the danger it poses to federal finances, the seventh pillar of a serious health-care reform plan must be the full offset of all new costs through spending cuts.

A HISTORIC OPPORTUNITY

The enactment of Obamacare has created a political opening for a credible alternative to the health-care status quo. But it would be foolish to assume that this opening will last very long; once it has closed, it is not likely to appear again.

Conservatives thus have a rare opportunity to advance their vision of reform. It will entail some controversy and political risk, which cannot be avoided in a policy arena as complex as health care. But the policy and political upsides are well worth the effort. A market-driven alternative can beat Obamacare on every metric that matters. It will be less costly to taxpayers, more flexible in meeting the diverse needs of citizens, less bureaucratic, and consistent with the Constitution and our values.

James C. Capretta is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center. Robert E. Moffit is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.

http://www.nationalaffairs.com/publications/detail/how-to-replace-obamacare

Comment: 

By Don McCanne, MD

Why on earth would a single payer advocate grant so much space on health care reform to prominent conservatives, allowing them to frame the problems in a manner that supports their specific policy recommendations? By better understanding their framing and the flawed policies that flow from that, we can explain to the nation why they are so terribly wrong, and why the policies of a single payer national health program are an imperative.

Everyone agrees that the status quo in our health care system is totally unacceptable. We are spending far more than other nations on a system that falls intolerably short in performance. So how is this framed?

Single payer supporters see the problems as too many individuals without insurance, too many with inadequate insurance, quality deficiencies related to improper allocation of our health care resources, and the tremendous administrative waste inherent in our current financing system. A single payer national health program would correct these defects.

The authors of this article – James Capretta and Robert Moffit – present a framing of the problems from the perspective of their conservative organizations – the American Enterprise Institute and the Heritage Foundation. To them, the primary problem is that excessive government involvement is driving our unacceptably high health care spending, coupled with the problem that we fail to use adequate market forces to control these excesses. They are not totally insensitive to the needs of the uninsured and low-income individuals – needs that can never be met in a totally free market – so they do recommend some government involvement in oversight and in tax policies.

When you step back for perspective, it seems like the differences aren’t so much in the goal of trying to get everyone insured, but more in the process of how we do that. Well, the contrasting approaches – government versus market – do have a significant influence on the outcomes of reform. The conservatives first look at using markets, and then try to make reform comply. The single payer advocates first look at what patients need, and then look for a pathway to get there. Other nations have shown that successful pathways are always laid out by the government and not by unregulated markets. Even when private insurers are used, they travel through a governme
nt pathway.

Capretta and Moffit would invoke the principle of defined contribution. Instead of providing a package of health care benefits that patients need, they would provide a set amount of money – the defined contribution – that would leave most of us directly exposed to health care costs on the disproven theory that we could still obtain the care that we need but at a better price because of our shopping acumen in the health care markets. What is proven is that the cost sharing of a defined contribution approach erects financial barriers to appropriate health care, whether through unaffordable insurance premiums, or through unaffordable deductibles, coinsurance and co-payments, or through provider network restrictions, or through the limitation of benefits.

Their proposal supposedly is aimed at increasing the numbers of insured, though independent analyses of similar proposals have shown that their policies would produce little net gain towards this goal. They would use competitive market incentives to lower the price of insurance products which inevitably would result in grossly inadequate products that have been well documented to fail to provide sufficient financial security in the face of medical need. Further, they would leave the choice of whether or not to be insured to individuals themselves and to financially-challenged state governments. After decades of increasing health care costs and flat wages, and now eliminating the tax subsidy of employer-sponsored plans, far too many individuals would decide that they would have no other option than to go without coverage.

Looking closer at the choice that lower-income individuals would have under this proposal, they would be offered subsidies or vouchers which could be used to purchase whatever cheap plans the insurers could create to sell at the low competitive market price set by the subsidy or voucher – coverage that could never provide adequate health care benefits. Capretta and Moffit propose that health care consumers would have the choice of using their own funds to buy-up to a plan that actually provided adequate coverage, but is that really a choice when they are having difficulties simply paying for their food and rent?

In past articles, we have covered extensively the inadequacies of market-priced insurance products for middle-income workers and their families. These products attempt to balance the premiums, which turn out to be too high, with the health care benefits, which turn out to be too spartan. With median household income at $49,000 and the average cost of health care for a worker’s family of four now over $19,000, no amount of free market magic can ever make these numbers compute.

The experience of the past half century has already proven that our supposed markets for private health insurance and for health care itself have been totally ineffective in controlling health care costs, yet Capretta and Moffit are calling for even more of the same flawed market pseudo-incentives. They ignore the fact that administered pricing by public agencies has been effective in other nations and would certainly be so here as well.

Okay, so the conservatives’ solution is to try to protect freedom and markets at the cost of adequate health care for the majority of us, so why should we bother even reading their polemic? Could there be a middle ground somewhere between single payer and market dynamics? Well, that supposed middle ground is the Affordable Care Act, based on an earlier version of the proposal of the Heritage Foundation which the Obama administration presented as a centrist approach to reform. Yet Capretta and Moffit now claim that this model “puts the federal government in command of the health sector” – a concept anathema to the ideologues in their camp.

The reason that we need to understand thoroughly their views is that we have to be able to explain why their approach is intolerably flawed. It would grant free rein to the private insurance industry to wreak even more havoc on our health care, while falling short of achieving the conservatives’ goal of removing the government and its power to tax from the health care equation. As if our financing system were not already bad enough, they would introduce changes that would prevent the system from working adequately for all but the very wealthiest of us.

It would be worth reading and critically interpreting their entire article to better understand the extent to which they would go to control health care spending by making it much less affordable for most of us – in the name of consumer empowerment. There are far too many flawed policies to begin to cover them in today’s comment – policies such as offsetting all costs through spending cuts instead of taxes, and privatizing Medicare through defined contributions for private plans.

Even if today’s breed of conservatives takes over all branches of the government, people power through an informed electorate will be essential in blocking the institution of such harmful health care policies, just as the people were able to prevent George W. Bush from privatizing Social Security. Being informed is key.

On the other hand, if we elect enough political leaders who are truly concerned about the future of health care in America, regardless of political affiliation, then we do have a chance of sorting good policies from bad policies, and enacting the good ones. But we do have to know which are which.

How to Replace Obamacare

By James C. Capretta and Robert E. Moffit
National Affairs, Spring 2012

(Following is a distillation of the authors’ 19 page article.)

When the Patient Protection and Affordable Care Act (commonly known as “Obamacare”) was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over.

The “repeal and replace” formulation quickly caught on, but it was not without its critics. That Obamacare should be “repealed” was obvious, given how strenuously conservatives and many independents objected to the new law. But “replace”?

[R]epeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform.  After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed.

WHAT NEEDS FIXING

But for all its considerable strengths, the system suffers from pervasive weaknesses as well. The most serious of these is rapidly rising costs.

Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.

The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers’ taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage.

Proponents of Obamacare like to create the impression that there are tens of millions of Americans trapped by their pre-existing conditions, sick and stuck with lousy insurance and no options. In truth, the vast majority of working Americans have good and secure coverage today, including many millions of people with expensive health conditions.

But a small percentage of our large population is still a lot of people. There is no denying that cracks in the system exist, and that many Americans fall through them. This is particularly true of people who need to move from job-based coverage into the individual market. People who leave the work force and need to buy insurance on their own can face sky-high premiums for weak coverage just because they happen to suffer from a health condition over which they often have little control.

Starting in the middle of 2009, the president and his top aides took to calling their plan “insurance reform,” as if the law’s most important elements were simply new rules designed to protect hapless consumers from unscrupulous insurance companies.

This is, of course, a gross mischaracterization of what Obamacare actually does. Among other features, the law implements a massive expansion of taxpayer obligations. It adds two new entitlement programs at an expense of at least $1 trillion over a decade. In that same period, it raises taxes by more than $500 billion. Most egregiously, it puts the federal government in command of the health sector, giving bureaucrats immense new power to decide matters ranging from what services must be covered in every American’s insurance plan to how doctors and hospitals organize themselves and do business.

PILLARS OF REFORM

The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care — the essential prerequisite for a functioning marketplace that imposes cost and quality discipline. In most sectors of our economy, the normal dynamics of supply and demand keep costs in check and reward suppliers that find innovative ways to deliver more for less.

Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.

In the context of Medicare and Medicaid, meanwhile, the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money.

The second pillar of reform should be personal responsibility and continuous-coverage protection. Obamacare attempts to address the challenge of covering people with pre-existing conditions with heavy-handed mandates, especially the requirement that all Americans enroll in government-approved insurance plans (the so-called “individual mandate”). A replacement program for Obamacare should come at the problem from the opposite direction, with government forsaking coercion and instead extending a new commitment to the American people: If you stay continuously enrolled in health insurance, with at least catastrophic coverage, you will never again face the prospect of high premiums associated with developing a costly health condition.

Because some workers who leave job-based plans for the individual market could be quite sick, a credible Obamacare replacement plan would also need to include a new approach to covering the high insurance costs for these Americans. Different proposals have offered different mechanisms, but all would move the burden away from the sick patients themselves to a larger and broader pool of people, either through regulation or through a direct government program such as a high-risk pool. For people who have not been continuously insured, these protections generally would not apply.

The third pillar of reform must be a genuine partnership with the states.

To respect federalism and reap its benefits, nothing in an Obamacare replacement agenda should compel state adoption, instead leaving the participation of state governments completely voluntary. Those states that do participate in any federal initiative should be given meaningful control over the most important components of regulation, especially the power to design and operate their own health-insurance markets (within minimal federal standards).

States should be given two tasks: informing consumers of their insurance options, and easing their enrollment into the plans they choose by cooperating with the federal government to facilitate the payment of credits and vouchers directly to private insurers.

Defined-contribution financial support, protection for Americans who remain continuously enrolled in insurance plans, and genuine federalism are the essential overall concepts that must define any serious health-care reform. But policymakers will also need to apply these principles to the transformation of today’s funding and financing mechanisms: the tax exclusion for employer-provided health coverage, and the Medicaid and Medicare systems.

TAX REFORM AND HEALTH REFORM

The fourth pillar of a real reform agenda would therefore address the tax treatment of employer-sponsored plans. Today’s arrangement is somewhat counterintuitive: Because the tax exclusion for health-care premiums is open-ended, workers and employers have an incentive to make health benefits a disproportionately large share of total compensation. And because employers obtain and manage health plans for their workers, there is far too much distance between those who purchase care and those who consume it.

The most plausible way to implement such a change would be to transform today’s tax exclusion for employer-provided insurance into a standard tax credit that would extend to all Americans, regardless of employment status, which they could then use to purchase the private coverage of their choice.

IMPROVING HEALTH CARE FOR THE VULNERABLE

The fifth key component of a genuine health-care reform plan must be an overhaul of Medicaid. Medicaid is actually three separate programs: health insurance for lower-income working-age adults and their children, health and long-term care for the non-elderly with severe disabilities, and long-term care for the frail elderly. For the purposes of replacing Obamacare, the relevant program to change is insurance coverage for working-age adults and children; the other parts will need reform as well, but should be addressed in a separate legislative effort.

In replacing Obamacare, policymakers should move lower-income people out of the limited sphere of Medicaid options and into the same private health-insurance markets in which their fellow citizens purchase coverage.

There is more than one way to accomplish this objective. …existing financing for acute care provided through Medicaid and the State Children’s Health Insurance Program would be transformed into a large pool of funding to be re-allocated to current beneficiaries and other low-income Americans in the form of a federal health-care subsidy (the equivalent of a “refundable tax credit”) for private insurance.

A similar approach would give Medicaid recipients the same federal tax credit that workers would receive in a reformed marketplace for health insurance. The federal government could then convert Medicaid into a per-person allotment to the states, funded through a block grant, that would supplement the base credit for a state’s low-income residents. The federal allotment to the states would be set so that, when combined with the federal support for the base tax credits or vouchers for the Medicaid-eligible population, total federal spending on the Medicaid population in a state would equal the amount that would have been spent under pre-Obamacare Medicaid. After the first year, the federal allotment to the states could be set to grow commensurate with the economy or some other reasonable measure of inflation.

The same move toward market incentives and efficiency should characterize our approach to Medicare reform in the wake of Obamacare’s repeal. The sixth pillar of a replacement plan must therefore be a premium-support reform of Medicare.

Of all the changes that are necessary to bring more cost discipline to health care, moving Medicare toward a defined-contribution structure, and away from today’s open-ended defined-benefit structure, is certainly the most vital. Medicare is the largest payer for services in most markets; the system of hospital and physician care in most communities has been built up around Medicare’s financial incentives.

In lieu of today’s open-ended benefit, a premium-support system would allow new beneficiaries (after the transition) to decide how to use a fixed-dollar contribution provided by Medicare. Each beneficiary would choose from a menu of approved insurance plans. If a beneficiary’s premium for his chosen plan was higher than the Medicare contribution, he would pay the difference out of his own pocket. If he chose a less expensive plan, he would pay lower premiums and keep the savings. This structure would provide a powerful incentive for the program’s participants to find high-value plans that charge low premiums for quality care, and therefore for insurers to offer such plans.

FISCAL RESPONSIBILITY FOR A CHANGE

Finally, as a key criticism of Obamacare is the danger it poses to federal finances, the seventh pillar of a serious health-care reform plan must be the full offset of all new costs through spending cuts.

A HISTORIC OPPORTUNITY

The enactment of Obamacare has created a political opening for a credible alternative to the health-care status quo. But it would be foolish to assume that this opening will last very long; once it has closed, it is not likely to appear again.

Conservatives thus have a rare opportunity to advance their vision of reform. It will entail some controversy and political risk, which cannot be avoided in a policy arena as complex as health care. But the policy and political upsides are well worth the effort. A market-driven alternative can beat Obamacare on every metric that matters. It will be less costly to taxpayers, more flexible in meeting the diverse needs of citizens, less bureaucratic, and consistent with the Constitution and our values.

James C. Capretta is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center. Robert E. Moffit is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.

http://www.nationalaffairs.com/publications/detail/how-to-replace-obamacare

Comment: 

By Don McCanne, MD

Why on earth would a single payer advocate grant so much space on health care reform to prominent conservatives, allowing them to frame the problems in a manner that supports their specific policy recommendations? By better understanding their framing and the flawed policies that flow from that, we can explain to the nation why they are so terribly wrong, and why the policies of a single payer national health program are an imperative.

Everyone agrees that the status quo in our health care system is totally unacceptable. We are spending far more than other nations on a system that falls intolerably short in performance. So how is this framed?

Single payer supporters see the problems as too many individuals without insurance, too many with inadequate insurance, quality deficiencies related to improper allocation of our health care resources, and the tremendous administrative waste inherent in our current financing system. A single payer national health program would correct these defects.

The authors of this article – James Capretta and Robert Moffit – present a framing of the problems from the perspective of their conservative organizations – the American Enterprise Institute and the Heritage Foundation. To them, the primary problem is that excessive government involvement is driving our unacceptably high health care spending, coupled with the problem that we fail to use adequate market forces to control these excesses. They are not totally insensitive to the needs of the uninsured and low-income individuals – needs that can never be met in a totally free market – so they do recommend some government involvement in oversight and in tax policies.

When you step back for perspective, it seems like the differences aren’t so much in the goal of trying to get everyone insured, but more in the process of how we do that. Well, the contrasting approaches – government versus market – do have a significant influence on the outcomes of reform. The conservatives first look at using markets, and then try to make reform comply. The single payer advocates first look at what patients need, and then look for a pathway to get there. Other nations have shown that successful pathways are always laid out by the government and not by unregulated markets. Even when private insurers are used, they travel through a government pathway.

Capretta and Moffit would invoke the principle of defined contribution. Instead of providing a package of health care benefits that patients need, they would provide a set amount of money – the defined contribution – that would leave most of us directly exposed to health care costs on the disproven theory that we could still obtain the care that we need but at a better price because of our shopping acumen in the health care markets. What is proven is that the cost sharing of a defined contribution approach erects financial barriers to appropriate health care, whether through unaffordable insurance premiums, or through unaffordable deductibles, coinsurance and co-payments, or through provider network restrictions, or through the limitation of benefits.

Their proposal supposedly is aimed at increasing the numbers of insured, though independent analyses of similar proposals have shown that their policies would produce little net gain towards this goal. They would use competitive market incentives to lower the price of insurance products which inevitably would result in grossly inadequate products that have been well documented to fail to provide sufficient financial security in the face of medical need. Further, they would leave the choice of whether or not to be insured to individuals themselves and to financially-challenged state governments. After decades of increasing health care costs and flat wages, and now eliminating the tax subsidy of employer-sponsored plans, far too many individuals would decide that they would have no other option than to go without coverage.

Looking closer at the choice that lower-income individuals would have under this proposal, they would be offered subsidies or vouchers which could be used to purchase whatever cheap plans the insurers could create to sell at the low competitive market price set by the subsidy or voucher – coverage that could never provide adequate health care benefits. Capretta and Moffit propose that health care consumers would have the choice of using their own funds to buy-up to a plan that actually provided adequate coverage, but is that really a choice when they are having difficulties simply paying for their food and rent?

In past articles, we have covered extensively the inadequacies of market-priced insurance products for middle-income workers and their families. These products attempt to balance the premiums, which turn out to be too high, with the health care benefits, which turn out to be too spartan. With median household income at $49,000 and the average cost of health care for a worker’s family of four now over $19,000, no amount of free market magic can ever make these numbers compute.

The experience of the past half century has already proven that our supposed markets for private health insurance and for health care itself have been totally ineffective in controlling health care costs, yet Capretta and Moffit are calling for even more of the same flawed market pseudo-incentives. They ignore the fact that administered pricing by public agencies has been effective in other nations and would certainly be so here as well.

Okay, so the conservatives’ solution is to try to protect freedom and markets at the cost of adequate health care for the majority of us, so why should we bother even reading their polemic? Could there be a middle ground somewhere between single payer and market dynamics? Well, that supposed middle ground is the Affordable Care Act, based on an earlier version of the proposal of the Heritage Foundation which the Obama administration presented as a centrist approach to reform. Yet Capretta and Moffit now claim that this model “puts the federal government in command of the health sector” – a concept anathema to the ideologues in their camp.

The reason that we need to understand thoroughly their views is that we have to be able to explain why their approach is intolerably flawed. It would grant free rein to the private insurance industry to wreak even more havoc on our health care, while falling short of achieving the conservatives’ goal of removing the government and its power to tax from the health care equation. As if our financing system were not already bad enough, they would introduce changes that would prevent the system from working adequately for all but the very wealthiest of us.

It would be worth reading and critically interpreting their entire article to better understand the extent to which they would go to control health care spending by making it much less affordable for most of us – in the name of consumer empowerment. There are far too many flawed policies to begin to cover them in today’s comment – policies such as offsetting all costs through spending cuts instead of taxes, and privatizing Medicare through defined contributions for private plans.

Even if today’s breed of conservatives takes over all branches of the government, people power through an informed electorate will be essential in blocking the institution of such harmful health care policies, just as the people were able to prevent George W. Bush from privatizing Social Security. Being informed is key.

On the other hand, if we elect enough political leaders who are truly concerned about the future of health care in America, regardless of political affiliation, then we do have a chance of sorting good policies from bad policies, and enacting the good ones. But we do have to know which are which.

How to Replace Obamacare

By James C. Capretta and Robert E. Moffit
National Affairs, Spring 2012
(Following is a distillation of the authors’ 19 page article.)
When the Patient Protection and Affordable Care Act (commonly known as “Obamacare”) was signed into law in the spring of 2010, congressional opponents vowed that the fight was not over.
The “repeal and replace” formulation quickly caught on, but it was not without its critics. That Obamacare should be “repealed” was obvious, given how strenuously conservatives and many independents objected to the new law. But “replace”?
[R]epeal will not be enough, for a simple reason: Although Obamacare would worsen many of the problems with our system of health-care financing, that system clearly does call out for serious reform.  After all, a repeal-only approach would leave many of the most grievous flaws in our system of financing health care unaddressed.
WHAT NEEDS FIXING
But for all its considerable strengths, the system suffers from pervasive weaknesses as well. The most serious of these is rapidly rising costs.
Of course, government health-care programs and policies are largely responsible for these rising costs in the first place. To begin, the design of Medicare is terribly flawed: Because the program pays providers of care based on the volume of their services, it creates a massive incentive for inefficiency and overuse. And because Medicare is the biggest payer in most health-care markets in America, that incentive badly distorts the economics of the entire sector. Furthermore, the Medicaid program inflates costs by (among other policies) having states control how the program is run while the federal government pays most of the bills. The result is that neither party has both the incentive and ability to keep costs in check.
The third driver is the tax exclusion for employer-provided insurance: The federal government does not count the amount that employers spend on health insurance for their employees toward workers’ taxable income. This tax exclusion inflates costs by effectively rewarding higher-premium plans and by encouraging employer-purchased insurance, thereby preventing a real consumer market in coverage.
Proponents of Obamacare like to create the impression that there are tens of millions of Americans trapped by their pre-existing conditions, sick and stuck with lousy insurance and no options. In truth, the vast majority of working Americans have good and secure coverage today, including many millions of people with expensive health conditions.
But a small percentage of our large population is still a lot of people. There is no denying that cracks in the system exist, and that many Americans fall through them. This is particularly true of people who need to move from job-based coverage into the individual market. People who leave the work force and need to buy insurance on their own can face sky-high premiums for weak coverage just because they happen to suffer from a health condition over which they often have little control.
Starting in the middle of 2009, the president and his top aides took to calling their plan “insurance reform,” as if the law’s most important elements were simply new rules designed to protect hapless consumers from unscrupulous insurance companies.
This is, of course, a gross mischaracterization of what Obamacare actually does. Among other features, the law implements a massive expansion of taxpayer obligations. It adds two new entitlement programs at an expense of at least $1 trillion over a decade. In that same period, it raises taxes by more than $500 billion. Most egregiously, it puts the federal government in command of the health sector, giving bureaucrats immense new power to decide matters ranging from what services must be covered in every American’s insurance plan to how doctors and hospitals organize themselves and do business.
PILLARS OF REFORM
The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care — the essential prerequisite for a functioning marketplace that imposes cost and quality discipline. In most sectors of our economy, the normal dynamics of supply and demand keep costs in check and reward suppliers that find innovative ways to deliver more for less.
Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.
In the context of Medicare and Medicaid, meanwhile, the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money.
The second pillar of reform should be personal responsibility and continuous-coverage protection. Obamacare attempts to address the challenge of covering people with pre-existing conditions with heavy-handed mandates, especially the requirement that all Americans enroll in government-approved insurance plans (the so-called “individual mandate”). A replacement program for Obamacare should come at the problem from the opposite direction, with government forsaking coercion and instead extending a new commitment to the American people: If you stay continuously enrolled in health insurance, with at least catastrophic coverage, you will never again face the prospect of high premiums associated with developing a costly health condition.
Because some workers who leave job-based plans for the individual market could be quite sick, a credible Obamacare replacement plan would also need to include a new approach to covering the high insurance costs for these Americans. Different proposals have offered different mechanisms, but all would move the burden away from the sick patients themselves to a larger and broader pool of people, either through regulation or through a direct government program such as a high-risk pool. For people who have not been continuously insured, these protections generally would not apply.
The third pillar of reform must be a genuine partnership with the states.
To respect federalism and reap its benefits, nothing in an Obamacare replacement agenda should compel state adoption, instead leaving the participation of state governments completely voluntary. Those states that do participate in any federal initiative should be given meaningful control over the most important components of regulation, especially the power to design and operate their own health-insurance markets (within minimal federal standards).
States should be given two tasks: informing consumers of their insurance options, and easing their enrollment into the plans they choose by cooperating with the federal government to facilitate the payment of credits and vouchers directly to private insurers.
Defined-contribution financial support, protection for Americans who remain continuously enrolled in insurance plans, and genuine federalism are the essential overall concepts that must define any serious health-care reform. But policymakers will also need to apply these principles to the transformation of today’s funding and financing mechanisms: the tax exclusion for employer-provided health coverage, and the Medicaid and Medicare systems.
TAX REFORM AND HEALTH REFORM
The fourth pillar of a real reform agenda would therefore address the tax treatment of employer-sponsored plans. Today’s arrangement is somewhat counterintuitive: Because the tax exclusion for health-care premiums is open-ended, workers and employers have an incentive to make health benefits a disproportionately large share of total compensation. And because employers obtain and manage health plans for their workers, there is far too much distance between those who purchase care and those who consume it.
The most plausible way to implement such a change would be to transform today’s tax exclusion for employer-provided insurance into a standard tax credit that would extend to all Americans, regardless of employment status, which they could then use to purchase the private coverage of their choice.
IMPROVING HEALTH CARE FOR THE VULNERABLE
The fifth key component of a genuine health-care reform plan must be an overhaul of Medicaid. Medicaid is actually three separate programs: health insurance for lower-income working-age adults and their children, health and long-term care for the non-elderly with severe disabilities, and long-term care for the frail elderly. For the purposes of replacing Obamacare, the relevant program to change is insurance coverage for working-age adults and children; the other parts will need reform as well, but should be addressed in a separate legislative effort.
In replacing Obamacare, policymakers should move lower-income people out of the limited sphere of Medicaid options and into the same private health-insurance markets in which their fellow citizens purchase coverage.
There is more than one way to accomplish this objective. …existing financing for acute care provided through Medicaid and the State Children’s Health Insurance Program would be transformed into a large pool of funding to be re-allocated to current beneficiaries and other low-income Americans in the form of a federal health-care subsidy (the equivalent of a “refundable tax credit”) for private insurance.
A similar approach would give Medicaid recipients the same federal tax credit that workers would receive in a reformed marketplace for health insurance. The federal government could then convert Medicaid into a per-person allotment to the states, funded through a block grant, that would supplement the base credit for a state’s low-income residents. The federal allotment to the states would be set so that, when combined with the federal support for the base tax credits or vouchers for the Medicaid-eligible population, total federal spending on the Medicaid population in a state would equal the amount that would have been spent under pre-Obamacare Medicaid. After the first year, the federal allotment to the states could be set to grow commensurate with the economy or some other reasonable measure of inflation.
The same move toward market incentives and efficiency should characterize our approach to Medicare reform in the wake of Obamacare’s repeal. The sixth pillar of a replacement plan must therefore be a premium-support reform of Medicare.
Of all the changes that are necessary to bring more cost discipline to health care, moving Medicare toward a defined-contribution structure, and away from today’s open-ended defined-benefit structure, is certainly the most vital. Medicare is the largest payer for services in most markets; the system of hospital and physician care in most communities has been built up around Medicare’s financial incentives.
In lieu of today’s open-ended benefit, a premium-support system would allow new beneficiaries (after the transition) to decide how to use a fixed-dollar contribution provided by Medicare. Each beneficiary would choose from a menu of approved insurance plans. If a beneficiary’s premium for his chosen plan was higher than the Medicare contribution, he would pay the difference out of his own pocket. If he chose a less expensive plan, he would pay lower premiums and keep the savings. This structure would provide a powerful incentive for the program’s participants to find high-value plans that charge low premiums for quality care, and therefore for insurers to offer such plans.
FISCAL RESPONSIBILITY FOR A CHANGE
Finally, as a key criticism of Obamacare is the danger it poses to federal finances, the seventh pillar of a serious health-care reform plan must be the full offset of all new costs through spending cuts.
A HISTORIC OPPORTUNITY
The enactment of Obamacare has created a political opening for a credible alternative to the health-care status quo. But it would be foolish to assume that this opening will last very long; once it has closed, it is not likely to appear again.
Conservatives thus have a rare opportunity to advance their vision of reform. It will entail some controversy and political risk, which cannot be avoided in a policy arena as complex as health care. But the policy and political upsides are well worth the effort. A market-driven alternative can beat Obamacare on every metric that matters. It will be less costly to taxpayers, more flexible in meeting the diverse needs of citizens, less bureaucratic, and consistent with the Constitution and our values.
James C. Capretta is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center. Robert E. Moffit is a senior fellow in the Center for Policy Innovation at the Heritage Foundation.
http://www.nationalaffairs.com/publications/detail/how-to-replace-obamacare

Why on earth would a single payer advocate grant so much space on health care reform to prominent conservatives, allowing them to frame the problems in a manner that supports their specific policy recommendations? By better understanding their framing and the flawed policies that flow from that, we can explain to the nation why they are so terribly wrong, and why the policies of a single payer national health program are an imperative.
Everyone agrees that the status quo in our health care system is totally unacceptable. We are spending far more than other nations on a system that falls intolerably short in performance. So how is this framed?
Single payer supporters see the problems as too many individuals without insurance, too many with inadequate insurance, quality deficiencies related to improper allocation of our health care resources, and the tremendous administrative waste inherent in our current financing system. A single payer national health program would correct these defects.
The authors of this article – James Capretta and Robert Moffit – present a framing of the problems from the perspective of their conservative organizations – the American Enterprise Institute and the Heritage Foundation. To them, the primary problem is that excessive government involvement is driving our unacceptably high health care spending, coupled with the problem that we fail to use adequate market forces to control these excesses. They are not totally insensitive to the needs of the uninsured and low-income individuals – needs that can never be met in a totally free market – so they do recommend some government involvement in oversight and in tax policies.
When you step back for perspective, it seems like the differences aren’t so much in the goal of trying to get everyone insured, but more in the process of how we do that. Well, the contrasting approaches – government versus market – do have a significant influence on the outcomes of reform. The conservatives first look at using markets, and then try to make reform comply. The single payer advocates first look at what patients need, and then look for a pathway to get there. Other nations have shown that successful pathways are always laid out by the government and not by unregulated markets. Even when private insurers are used, they travel through a government pathway.
Capretta and Moffit would invoke the principle of defined contribution. Instead of providing a package of health care benefits that patients need, they would provide a set amount of money – the defined contribution – that would leave most of us directly exposed to health care costs on the disproven theory that we could still obtain the care that we need but at a better price because of our shopping acumen in the health care markets. What is proven is that the cost sharing of a defined contribution approach erects financial barriers to appropriate health care, whether through unaffordable insurance premiums, or through unaffordable deductibles, coinsurance and co-payments, or through provider network restrictions, or through the limitation of benefits.
Their proposal supposedly is aimed at increasing the numbers of insured, though independent analyses of similar proposals have shown that their policies would produce little net gain towards this goal. They would use competitive market incentives to lower the price of insurance products which inevitably would result in grossly inadequate products that have been well documented to fail to provide sufficient financial security in the face of medical need. Further, they would leave the choice of whether or not to be insured to individuals themselves and to financially-challenged state governments. After decades of increasing health care costs and flat wages, and now eliminating the tax subsidy of employer-sponsored plans, far too many individuals would decide that they would have no other option than to go without coverage.
Looking closer at the choice that lower-income individuals would have under this proposal, they would be offered subsidies or vouchers which could be used to purchase whatever cheap plans the insurers could create to sell at the low competitive market price set by the subsidy or voucher – coverage that could never provide adequate health care benefits. Capretta and Moffit propose that health care consumers would have the choice of using their own funds to buy-up to a plan that actually provided adequate coverage, but is that really a choice when they are having difficulties simply paying for their food and rent?
In past articles, we have covered extensively the inadequacies of market-priced insurance products for middle-income workers and their families. These products attempt to balance the premiums, which turn out to be too high, with the health care benefits, which turn out to be too spartan. With median household income at $49,000 and the average cost of health care for a worker’s family of four now over $19,000, no amount of free market magic can ever make these numbers compute.
The experience of the past half century has already proven that our supposed markets for private health insurance and for health care itself have been totally ineffective in controlling health care costs, yet Capretta and Moffit are calling for even more of the same flawed market pseudo-incentives. They ignore the fact that administered pricing by public agencies has been effective in other nations and would certainly be so here as well.
Okay, so the conservatives’ solution is to try to protect freedom and markets at the cost of adequate health care for the majority of us, so why should we bother even reading their polemic? Could there be a middle ground somewhere between single payer and market dynamics? Well, that supposed middle ground is the Affordable Care Act, based on an earlier version of the proposal of the Heritage Foundation which the Obama administration presented as a centrist approach to reform. Yet Capretta and Moffit now claim that this model “puts the federal government in command of the health sector” – a concept anathema to the ideologues in their camp.
The reason that we need to understand thoroughly their views is that we have to be able to explain why their approach is intolerably flawed. It would grant free rein to the private insurance industry to wreak even more havoc on our health care, while falling short of achieving the conservatives’ goal of removing the government and its power to tax from the health care equation. As if our financing system were not already bad enough, they would introduce changes that would prevent the system from working adequately for all but the very wealthiest of us.
It would be worth reading and critically interpreting their entire article to better understand the extent to which they would go to control health care spending by making it much less affordable for most of us – in the name of consumer empowerment. There are far too many flawed policies to begin to cover them in today’s comment – policies such as offsetting all costs through spending cuts instead of taxes, and privatizing Medicare through defined contributions for private plans.
Even if today’s breed of conservatives takes over all branches of the government, people power through an informed electorate will be essential in blocking the institution of such harmful health care policies, just as the people were able to prevent George W. Bush from privatizing Social Security. Being informed is key.
On the other hand, if we elect enough political leaders who are truly concerned about the future of health care in America, regardless of political affiliation, then we do have a chance of sorting good policies from bad policies, and enacting the good ones. But we do have to know which are which.

State calls Aetna health insurance rate hike ‘unreasonable’

By Jan Norman
The Orange County Register, April 5, 2012

Connecticut-based Aetna Life Insurance Co. has raised its health insurance premiums on small employers with 73,000 members an average 30.3 percent over two years, which the California Department of Insurance on Thursday called “unreasonable.”

The latest increase effective April 1 is an average 8 percent annually with a 30.3 percent hike over 24 months for small employers with Aetna’s PPO health insurance policies.

The department found that Aetna made projections about medical cost increases higher than the U.S. Bureau of Labor’s medical cost inflation index and unsupported by Aetna’s actual claims experience.

Aetna released the following statement:

“While rate increases are never easy, our rates are based on actuarially sound data and reasonable projection of future cost, which will impact approximately 16,000 customers.  Our Medical Loss Ratio is at 86.7%, which is higher than any of the filed rates by our competitors. Medical loss ratio is the percentage of health insurance premiums that insurers use to provide health care to their customers.”

In making its finding, the Department of Insurance noted that the Aetna subsidiary that sells health insurance in California made a 27.7 percent profit in 2011 and paid $1.7 billion in dividends to its parent company.

http://www.ocregister.com/articles/insurance-347932-aetna-health.html

Aetna California rate filing  (185 pages):
http://www.insurance.ca.gov/0250-insurers/HlthRateFilings/upload/AetnaHAO0010.pdf

Comment:

By Don McCanne, MD

We are inundated with stories about “unreasonable” rate increases by private health insurers, so why should we bother with this one?

Remember that the default benchmark for defining “essential health benefits” to be offered in the state health insurance exchanges will be the small group plan with the largest enrollment in the state. This two year 30.3 percent premium increase is for small employers with Aetna’s PPO health insurance policies. These plans will typify the new national standard for private health insurance exchange plans.

If you believe Aetna, their medical loss ratio (MLR) is 86.7 percent which is well within compliance of the 80 percent MLR requirements for individual and small group plans. Since medical loss ratios are dependent on how much the insurers spend on actual health care, this premium increase should signal what we might expect for small businesses, certainly if the individual mandate is struck down by the Supreme Court and adverse selection continues.

Even if the mandate is upheld and insurers are able to include healthier individuals mixed in with the sick, actual health care costs continue to increase well in excess of the rate of inflation and will still result in “unreasonable” premium increases.

The insurers are correct when they say that health insurance premiums are increasing because health care costs are increasing. But what is especially relevant are the reasons that Aetna gives for our high health care costs and what Aetna is doing to try to control them (obviously not very successfully).

Read pages 43-49 (labeled 1-7, but 43 pages into the filing) of the Aetna California rate filing (link above). You will see that Aetna has absolutely no control over many major factors contributing to health care inflation. You will also  see that Aetna is fumbling around with many programs that will have little impact on health care costs, except that they do increase administrative expenses. You will also see that several of their measures smack of the intrusive and choice-limiting insurer behaviors of the managed care revolution.

Instead of sympathizing with Aetna in their ineffectual struggles to control health care spending, we should look at their waste and their intention to sacrifice high system performance on behalf of their own business interests. Foremost we should look at those perverse cost increases over which Aetna pleads they have no control and then imagine the power that our own single payer national health program would have in the same situation.

You really have to read the 7 pages to better understand the power that we would have, though keep in mind that this was written by Aetna in their own defense. Fortunately, you don’t even need to read between the lines to see why we should fire all of the private insurers and put in place our own beneficent single payer monopsony. Then we would have much more control of our own health care destiny.