The Cancer of Health Costs

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Sometime in the next two months, the Congress will pass, and President Obama will sign, a health care bill that will increase coverage for approximately 30 million Americans (so that 94 percent of the population has insurance). 


 But, while the legislation will provide means for improving the health of individuals, it fails to deal with the cancer in the health care system and in the economy: rising health care expenditures. (The bill will, in theory, not add to the federal deficit, but that is a different question than the rate of increase of combined public and private health care expenditures.) 

This failure of the current bill to "bend the cost curve," at least under estimates of the Congressional Budget Office and the Office of the Actuary at the Centers for Medicare and Medicaid Services, is now well understood. 

The recent reactions to this sobering fact from two well-regarded health analysts--Uwe Reinhardt a Princeton health economist and Atul Gawande a Harvard surgeon and New Yorker writer-- illustrates the issues which will be with us long after the signing pens are distributed to grinning Democrats at the White House (given block "no" votes will any Republicans be invited?). 

 First, some numbers. 

 • Even with the legislation, health care expenditures as a percent of GDP are expected to rise from 17.6 percent in 2009 to 20 percent in 2018 to 25 percent in 2025 (up from about 7 percent of GDP in 1970).

 • In absolute numbers, the U.S. will spend $2.5 trillion in 2009 and 4.7 trillion in 2018, with a total of 35.3 trillion spent between 2009-2019. Public programs will become more than 50 percent of that spend in the middle of the next decade.

 • The rate of increase in health care expenditures is estimated to be 6.2 percent in the next 10 years, 2x inflation for much of that period, continuing a decades long trend of health costs rising as a multiple of core inflation. 

• Between 1999 and 2009, the average annual premium from employer sponsored family insurance rose from $5,800 to $13,400, and will increase to $27,000 over the next decade. For businesses during this period, health coverage expenses will rise from 10 percent of total labor costs to 17 percent. 

As Gawande writes in the current issue of The New Yorker, cost "is the spectre haunting health care reform....Health-care costs are strangling the country....Health-care spending will essentially devour all our future wage increases and economic growth. State budget costs for health care will more than double, and Medicare will run out of money in just eight years. The cost problem, people have come to realize, threatens not just our prosperity but our solvency." 

 In a recent interview on Bloomberg, Professor Reinhardt, one of the deans of health care thinkers, said that people had to be "from another planet" to believe that health care cost could be addressed before addressing questions of access. He believes that only after most of the population is covered, when the stresses of health costs are felt, will the political system be able to address costs. 

 Dr. Reinhardt believes that part of the cost problem is that there is wide variation in prices people pay for health care--much higher than in more "statist" Europe. This is due to lack of understanding why variation in procedures and prices exists. It is also due to the enormous complexity in the system which makes it hard for individuals or organizations to compare the costs of procedures or insurance packages on an apples to apples basis. 

 So, at some point, Professor Reinhardt suggests there will be a grand political bargain to deal with causes---through more productivity, better competition and some budgeting. The point here is: how likely is it that our political system is capable of a major reform which dramatically changes how people deliver and pay for health care. In the current bill, the costs of increased access come from some modest Medicare cuts (compared to overall program costs and growth) and taxes on the wealthy. 

 Even this has caused a near nervous breakdown in the Congress. Our political system is so partisan, polarized and strident, that it will require some remarkable feats of leadership to deal with the really hard question of cost control on a macro-basis that affects all participants in the health care system. Is it too much to say you have to "be from another planet" to believe that bipartisan leadership will emerge anytime soon (even to create a bipartisan commission, as with base closing, whose recommendations must be voted up or down by Congress). Want to place your bet on a successful health reform act of 2014? 

 At the other end of the spectrum is Dr. Gawande. He looks at the health care bill and finds many seeds from which a thousand flowers may bloom. For example, a pilot program to pay more for doctors who deliver high quality, low cost care and to penalize those who do the opposite. Or a program to penalize hospitals with high rates of infections transmitted by health care workers. Or a program to move away from "fee-for-service" payment to a single thirty day fee for all inpatient and outpatient services related to a particular type of operation to give clinicians incentives to work-together and minimize complications and return visits to the hospital. Or programs to create single insurance forms....conduct comparative effectiveness studies of different treatments for same illness...evaluate wellness programs in different communities....use health IT to increase productivity...and. 

 Writes Gawande: "Even Democrats have become nervous....If nothing is done, the United States is on track to spend an unimagineable ten trillion more on health care in the next decade than it currently spends, hobbling government, growth and employment. Where we crave sweeping transformation, however, all the current bill offers is pilot programs, a battery of small-scale experiments. The strategy seems hopelessly inadequate to solve a problem of this magnitude. And yet--here is the interesting thing---history suggests otherwise." 

 That history, summarized succinctly, is about the transformation of U.S. agriculture which in 1900 consumed more than 40 percent of family income, by 1930 consumed 24 percent and today eight percent of household income. Labor involved in agriculture went from about 50 percent of the work-force in 1900 to 20 percent in 1930 to two percent today. These changes, argues Gawande, came from many different experiments and programs, some sponsored by the government, others due to private innovation. There was no master-plan, no grand bargain. When things worked, they drew support.

 I leave it readers who are interested to read Gawande's summary and see if agriculture in 1900 really bears any resemblance to health care in 2009. But, there one obvious problem: the timeline. If there is a perfect analogy (which there is not), the agriculture example of thousands of flowers blooming took decades. 

 Relying on truly systematic experiments where lessons are learned and replicated makes some policy sense if it can happen in a politically polarized nation. But it almost certainly raise timing questions when the health cost cancer is aggressive. Major changes apparently occurred in agriculture after 30 years. We don't have 30 years. 

 The purpose of this comment is not to criticize Uwe Reinhardt or Atul Gawande. They are extremely intelligent, thoughtful and concerned analysts of our health care system. They represent two somewhat limiting cases in dealing with health care costs: a major reform through the political system and a more bottoms up process of experimentation and replication. And they would both probably agree that each approach may be appropriate at the right time.

 I cite them only because they are so respected and because they illustrate how difficult it is the U.S. political system to deal with an urgent problem that has been front of mind for U.S. policy makers for decades and yet has not yielded to any political solutions. 

 So, in the near future, there will be that smiling signing ceremony at the White House to celebrate serious treatment of the access illness in the health care system. But the shadow falling over the the room is the knowledge that they have not found a treatment for the disease of metastasizing health care costs.
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Presented by

Ben W. Heineman Jr.

Ben Heineman Jr. is is a senior fellow at the Belfer Center for Science and International Affairs, in Harvard's Kennedy School of Government, and at the Harvard Law School's Program on Corporate Governance. He is the author of High Performance With High Integrity.

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