Thursday, September 15, 2011

Beat The Deficit And Health Costs With Trade

Trade in health services can allow Republicans to have their cake (of no new taxes) and Democrats to eat it too (no cut in entitlements) - all the while keeping the US deficit stable.  Here's how it all adds up:
  • Keeping the US deficit stable requires control over spending, including on entitlement programs that already make up about 40% of the federal budget, and are rising.
  • Of the entitlement programs, health care expenses are by far the dominant problem. CBO's long term outlook (p. 8, Table 1.2) shows social security rises from 4.8% of GDP in 2011 to "only" 5.3% in 2021 and 6.1% in 2035. In contrast public health expenses (Medicare, Medicaid, etc.) rise from 5.6% of GDP in 2011 to 7% in 2021 and 10% in 2035.
  •  The high US health costs are primarily due to over-pricing as I explained on June 17, and not because Americans receive excessive or unneeded care.  Our medical care is over twice as expensive as in West Europe and 5-10 as much as in popular Asian medical travel destinations with equal or better outcomes.
  • An obvious (but overlooked) solution is for the US to incorporate the best features of West European and other foreign health systems.  Many such changes as I listed on March 28 will be slow and take over a decade to show results, while others just won't happen due to entrenched practices, politics or industry resistance.  
  • But trade in health services per my narrative on April 7 rapidly increases provider supply and injects competition.  This can dramatically lower price points starting in as little as a year.  Foreign managed hospitals with operational systems that are radically more efficient and cost effective will force incumbents to transform. The resultant savings of trillions of dollars can preserve entitlement programs while containing the deficit.  The reduced health care overhead also makes US labor more competitive and attractive to employers, creating many times more jobs overall than unproductive ones lost in the health sector.
What are the consequent savings?  I had outlined these on July 31, 2010 over the next decade under some realistic assumptions for the four types of health services trade:
  • Remotely delivered services.  Types of off-shored telemedicine can easily replace a fourth of primary care visits and diagnostic radiology analysis, as well as a tenth of specialist visits, and all at a fifth of the cost.  This will save $267B of health care expenditure including $133B in public funds.
  • In medical travel, US patients go to reputed hospitals abroad for major surgeries and medical procedures, often performed by US or UK trained doctors, at a fraction of the cost.  There are some 30 major procedures of which a fourth can be off-shored for $950B in overall savings, half of this in public funds.
  • Allowing and encouraging foreign entities to set up hospitals here will improve coverage in under-served areas and introduce greater competition in MSAs, 90% of which face highly concentrated markets for hospitals.  But most importantly, this will bring badly needed reverse innovation to the egregiously expensive and inefficient US hospital system.  We project resultant savings of $2.73 trillion, including $1.36 trillion in public funds.
  • The final piece is allowing highly qualified foreign doctors trained in one of the pre-approved list of accredited foreign institutions to practice in the US.  They shouldn't require a US medical residency, but would have to clear the applicable US board exams.  Their visas can also be tied to practicing in designated under-served areas.  The US has 2.4 doctors per 1000 people compared to the OECD average of 3.4.  Boosting this US ratio from 2.4 to 3.0 will require 200,000 additional doctors, but this increased number will ensure better access by patients, as well as reduce the scarcity related prices for doctor services.  These prices can go down by 23.5% to the Medicare rates dictated by the (never implemented) SGR formula that are still generous by European standards. That saves $1.26 trillion, with $630B of this in public funds.
    This means that over the next decade trade in health services alone can save $5.2 trillion of health care expenditures, including $2.6 trillion in public funds. This exceeds the $2.4 spending reduction deal reached by Congress and Obama to raise the debt ceiling.  It also goes a long way towards achieving the $4 trillion deficit reduction recommended by the bipartisan Simpson-Bowles Commission (p.14) in December 2010.  A more aggressive trade in health services may even by itself achieve the entire $4 trillion of savings.  Or the many other health reforms being discussed can close the gap, without needing any revenue (tax) increases or other cuts elsewhere.

    Also, as I said at the beginning, none of the trade initiatives is a deal breaker for leaders and lawmakers of either party.  The Republicans don't have to agree to raising taxes, or to a bigger governmental role, as in single payer or "Medicare for all" (which is a lot more efficient than our private insurance model, but never mind.)  Lower prices result from introduction of more genuine market competition that Republicans (at least ostensibly) support. Democrats on the other hand can see the entitlement benefits protected and maintained, or even expanded within the same spending limits.

    There is of course still the unstated concern of politicians about the consequences of these measures on lavish financing and contributions to them by the health care industry.  This is where as I said on April 21 the influential payers who benefit so handsomely from such price reductions can make offsetting contributions through bodies such as the NBGH to help leaders do the right thing.

    The US has ignored this immensely promising solution of trade in health services to our deficit and rampant health expenditures for too long.  All it needs is political will and for this, with other options running out, the timing may now be right.