I have been engaged in an email debate with a libertarian about the value of “freedom of choice”, impact of payment sources on health care expenditures and inflation thereof, and potential impact of consumerism on health care costs.
He is of the opinion that health care costs are best addressed by patients paying their own way – at least that’s what I think he is saying. Leaving aside the question of how someone of modest means pays for a knee replacement much less a heart transplant, the debate spurred me to further investigate who pays what, and who incurs what kind of charges.
My theory is that consumer-directed health plans will have little to no impact on total health care costs, that they are really cost-shifting from employers to employees. I’m not making a value statement about cost-shifting, just stating a fact. By the way, most employers also don’t believe CDHPs will have any material impact on health care expenses.
The thinking behind my theory is the belief that most costs are incurred by people who spend way more than their health spending account would hold, and therefore their behavior is not influenced to any significant degree by the funds leaving their spending account.
Here’s the support for my theory. (thanks to George Halvorson of the Kaiser Family Foundation for some of the statistics)
Healthy people – 70% of people spend less than $1000 per year on health care costs. These folks are not contributing to the nation’s, or their employer’s, health care costs in any meaningful way. So, while they may make a “better decision” about health care because they are spending their own dollars, the impact is on the margin.
Catastrophic patients – about 5% of the population, those with really expensive acute or chronic conditions, such as serious heart disease, advanced arthritis, cancer, or significant multiple morbidities, are also not affected – they’ll blow through their MSA account balance in a month or two, after which the insurance company or Medicare or Medicaid pays the rest. So, no funds out of their pockets, and realistically, no way for them to pay the huge costs of their health care. By the way, the top one percent of the population that falls into this category spends 40% of all health care dollars, the top five percent that falls into this category spends over 50% of all health care dollars.
OK, that leaves the medium users. The remaining part of the population consumes more than $1000 in health care (a typical MSA plan deductible), and therefore might be more influenced by finances than the other two groups. But there’s a problem here. Studies indicate that a significant percentage of people with high deductible plans tend to not fill prescriptions, not seek care, and otherwise “under-utilize” health care due to financial reasons.
Well, their costs are constrained, at least for today. But what if they are not taking their hypertension medications and suffer a stroke? What if they don’t get a mammogram and their breast cancer is not diagnosed until it is marginally “curable”? They’ll become part of the top 5%, where costs are really uncontrollable.
Some libertarians will claim that their decisions are their responsibility. Not so in health care. There is ample evidence that the costs of the uninsured are borne by private payers; in fact about a thousand dollars of the average family’s insurance premium goes to pay for uncompensated care. So, free marketers, who base their policy theories on the merits of the invisible hand, miss the fundamental problem – there is not, and never will be, a free market in health care. One can intellectually debate the merits and benefits of the free market, but that discourse is irrelevant in the real world.
In the real world, people seek care, all of us end up paying for it, and in the US we pay 40% more for health care than in any other industrialized country. And none of the so-called free-market initiatives will in any meaningful way change that.
True change will come from applying more science to the art of health care. Data mining, outcomes analysis, intelligent reimbursement based on that analysis, and financial incentives for insureds that factor in lifestyle choices are all necessary. But consumerism alone will do nothing to hold down health care inflation.
What does this mean for you?
Avoid ideologically-based solutions, and stick to the facts. If the facts don’t support your position, find another position.

Medicare Part B premiums will increase 13.2% next year due to rapid growth in physician office visits, lab tests, and outpatient hospital expenses. The average monthly premium will jump $10.30 to $88.50 for Part B, which covers physician charges and some outpatient hospital expenses.
Deductibles will also increase, although CMS is claiming that many beneficiaries will actually see lower total costs due to the implementation of the Part D program that covers prescription drug.
What’s driving these increases?
On the surface, program costs and Medicare regulations. By law, beneficiaries have to pay 25%, with the rest of the costs borne by the taxpayers.
Looking just a bit deeper, utilization is the culprit. Medicare fixes physician prices at the RBRVS-based fee schedule, therefore by definition increases of this magnitude have to be driven by higher usage of services. Physician services were up 6.3% last year, are trending at 5.3% this year, and outpatient hospital increases are similar.
Some physicians have been claiming that the increases are due to higher quality care, better diagnostics, and treatments in an outpatient setting that are cheaper and more efficacious than the “old” inpatient protocols.
Regardless, the net is that taxpayers and beneficiaries are paying more for coverage.
Complicating the matter is the pending 4.3% decrease in the fee schedule slated to go into effect on 1/1/06. If Congress reverses the cut, then 2007 premium and deductible increases will be even higher than projected.
If they don’t, a lot of docs are going to be mighty upset.
What does this mean for you?
If there was ever an example of how price fixing does not manage expense, here it is. No payer does a better job of controlling the price per unit than CMS. And their expenses are still increasing at unsustainable levels.
It’s about utilization.

I have held that reform of the US health care system will not occur until a meaningful number of middle-class voters lose coverage, causing them to focus on health care availability, price, and access. Bob Laszewski of Health Policy and Strategy Associates is of the opinion that large employers will be the force behind any real health care reform.
I have too much respect for Bob to disagree with his views, and in any event it appears both events are now occurring.
California HealthLine reported on last week’s health care summit in Washington DC, where business leaders and elected officials gathered together to decry the cost of health care and access issues, and discuss potential solutions. Not much new here, expect that Starbuck’s, Pitney Bowes, Costco, Honeywell and Verizon were all in attendance along with several senators and governors. It is indeed good news that there is more dialogue, but the key message here is the combined meeting of business leaders and elected officials. While the public musings and declarations are helpful, it is likely that the executives were even more forceful in their private conversations with the politicos.
I can envision a moment before the recorders were turned on when Pitney Bowes (headquartered in Connecticut) execs were telling elected officials about the impact of health care costs on their business call centers, and more specifically about cost-benefit evaluations that indicate off-shoring these functions is starting to look more appealing, in large part due to health care costs.
Verizon and Honeywell’s representatives looked on, nodding in agreement, while the politicians adopted the “deer in the headlights” look associated with fear of lost jobs and votes.
Meanwhile, the number of employers offering health insurance declined from 69% in 2000 to 60% in 2005.
73% of the employers not offering coverage said high insurance costs were very important in their decision to not offer insurance.
Interestingly, only 16% of employers believe consumer-directed health plans (CDHPs) are “very effective” in lowering insurance costs. Even more telling, this was the highest score given to any cost-containment strategy.
Clearly, employers are giving up on health insurance because they can’t afford it, and don’t see any promising approaches on the horizon that will make any appreciable difference.
What does this mean for you?
Large employers, small employers, and employees are all paying a lot of attention to health care coverage and cost. The stars are not yet in alignment, but are certainly moving closer to the point where the momentum behind real health care reform will become irresistible.

Katrina and the federal government’s reaction to same will put Medicaid reform and other health care measures on the back burner for the foreseeable future. And, two of the key Senators on the Senate Finance Committee charged with finding $10 billion in reductions in Medicaid over the next five years have come out against the cuts.
Is an article in California HealthLine, Sen. Gordon Smith (R) was quoted in a letter to the chairman of the committee:
“Smith said, “I do want to reform Medicaid. But this is not the time to take on Medicaid, nor other entitlements for the poor. … To do it now is counterproductive and insensitive.”
In addition, Senate Minority Leader Harry Reid (D-Nev.), House Minority Leader Nancy Pelosi (D-Calif.), Sen. Kent Conrad (D-N.D.) and Rep. John Spratt (D-S.C.) on Wednesday in a separate letter asked Republican leaders to focus on Hurricane Katrina-related legislation instead of the planned agenda. They wrote, “Under the present circumstances, we believe it would be misguided to proceed with fast-track consideration of legislation that would place at risk services to those in need and divert resources that are necessary to fund the federal response to this tragedy.”
Katrina may well impact state Medicaid budgets as well, with the storm’s victims seeking medical care for acute and chronic conditions from the storm.
More to come.

Donna Shalala is an articulate, convincing, intelligent spokesperson for health care reform. She manages to be politely partisan, reflecting her long history as a liberal Democrat, using history to illustrate her perspective on appropriate solutions for the nation’s health care problems. She is also fun; Shalala knows her football, has a great sense of humor, and loves to engage in both.
Such are my views after interviewing the current president of the University of Miami and ex-Secretary of Health and Human Services, sitting with her at a banquet honoring recipients of the Choice Awards for Excellence in Workers Compensation, and listening to her keynote speech at that event.
Without directly endorsing a single payer system, Shalala made a strong argument for single payer national health care, noting that the Federally-run Medicare program’s health care costs are increasing at a rate well under that of private insurance while incurring administrative expenses that are one-third those in the private sector.
As an avowed capitalist, I’m a big believer in the free market, consumer choice, the invisible hand et al. Unfortunately, health care is not a typical economic good, where the buyer selects the product or service by balancing cost and quality/outcome/appeal. This is for a rather simple reason – in health care, the heaviest users of health care services pay little to nothing for the (most) services. The person ordering and/or performing the service, the physician, has no incentive or little interest in considering cost.
The payer, which is the insurer/employer, is a transaction processor/funds transfer agent who is also tasked with “managing” the usage of health care by the recipient that is ordered by the recipient’s physician.
Not a very clean system from an economist’s point of view.
Whether you agree or disagree with Shalala’s politics, her presentation on the history of managed care was compelling. It made it abundantly clear that the free market system is unable to constrain the growth in health care costs.
The follow on to that issue is industrial competitiveness. For companies such as GM, IBM, and CostCo who actually contribute significant sums to pay for their employees’ health insurance (and pay taxes to subsidize Medicaid programs used by other companies who do not provide coverage) health care costs are a major competitive problem. Toyota, Daewoo, Hyundai, VW et al have significantly lower health care costs than GM’s $1500 per vehicle.
So, the “free market” that some are so ardently advocating as the solution to the nation’s ills is actually hurting US employers whose underlying costs are higher than their competitors.
What does this mean for you?
Both Shalala and Bob Laszewski of Health Policy and Strategy Associates have stated that when enough large employers get behind health care reform, it will happen.
That day is fast approaching.

While the number of people with employer-sponsored health insurance has declined in California, the overall rate of uninsurance has not dropped, due to a rise in enrollment in the government’s Medi-Cal program. Moreover, in 2003 almost 800,000 Californians had access to insurance at their employer but could not afford the premiums. Average contributions increased from $114 to over $200 from 2001 to 2003.
These contributions went to health insurance costs that ranged from $3700 for an individual to over $10,000 per family in 2004.
In total, 54.5% of employed individuals had employer sponsored health insurance, a drop of two points from 2001 to 2003.
Lots of statistics, but what do they mean. Here’s my take.
1. Employees are paying roughly 25% of the cost of their insurance, when it is available.
2. The burden of providing health insurance is shifting towards state-sponsored programs from employer-sponsored programs.
3. This shift is likely to continue, and in fact to accelerate due to rising premiums.
I find it fascinating that we continue to debate the merits of a state-based system of health insurance v. employer based v. individual portable programs. Meanwhile, market forces are driving the nation in the direction of a state-sponsored system. So, while we engage in intellectual debates, outside factors drive reality.
Alain Enthoven of Stanford contends that we need to eliminate the employers’ role in health insurance. I disagree. Dr, Enthoven may well win the debate, assisted by these underlying external forces.
What does this mean for you?
If you are a health plan, you know quite well the challenges of adding lives and revenues in what is a mature market. That’s why health plans are moving so aggressively into government-sponsored programs. Continue that work, but don’t forget the employers – they still pay most of your premiums.

Pres. Bush noted in a speech earlier this week that health care is a drag on the economy and family budgets. Ben Bernanke, Chair of the Council of Economic Advisers, said ” These are issues that we are going to have to address because they are significant.”
According to California HealthLine, Bush’s proposals “include tax-free health savings accounts, tax credits to help low-income individuals purchase health insurance, association health plans, support for new technology to reduce medical errors and limits on medical malpractice lawsuits.”
These are at best tweaks around the margins. Take limits on med mal lawsuits. Total costs for all expenses associated with medical malpractice, including defense, insurance, etc., amount to 0.46% of total medical costs. Medical malpractice is NOT driving health care cost inflation.
New technology will do little, if anything to address the underlying drivers of health care costs which are technology and price per service.
It is troubling that the President has done so little to address an issue which is at the heart of the nation’s economy as well as the wellbeing of its citizens.

For those interested in consumer directed health care and attitudes towards same, you may want to listen in on a telecon hosted by Harris Interactive and GreatWest Life on 7/28. Here’s the details.
Great-West Healthcare will release findings of its “Consumer Attitudes Toward Consumer-Driven Health Care” study on Thursday, July 28, 2005. The company will hold a conference call at 9 a.m. MDT (11 a.m. EDT) that same day, hosted by Cindy Donohoe, vice president of marketing and product development at Great-West Healthcare, and Kinga Zapert, Ph.D., vice president, health care division, Harris Interactive, Inc., to discuss the results. Those wishing to participate via telephone should call 866-261-3331 (moderator: Cindy Donohoe). This number can be accessed 10 minutes before the call begins, as well as during the call.
I’m on vacation then, so enjoy.