Saturday, October 20, 2012

Part Remedy Beats Poison

A rare  Sep. 25 Op-Ed in the conservative Wall Street Journal counters attacks on the Affordable Care Act (Obamacare) by Romney-Ryan, and demolishes their own alternative proposals.  The authors are Ezekiel (older brother of Chicago mayor Rahm) Emanuel, Neera Tanden and Donald Berwick, former administrator of Medicare (CMS) under President Obama.

They repudiate the key premise of Romney-Ryan that delivering Medicare benefits through competing private insurers will lower costs.  Adding a layer of middlemen while fragmenting buyer power will bump up costs instead, as logic and prior experience with private Medicare Plus indicate.  This is apart from other problems with "Vouchercare" as described by Paul Krugman in his Times Aug. 30 column. And on Oct. 4 in "Romney's Sick Joke" Krugman scathingly exposes Romney's false claims about covering pre-existing conditions and the uninsured under his plan.

Still, Obamacare has severe shortcomings, thanks mostly to a handful of Democratic lawmakers who joined Republicans in killing vital features like a strong public option.  Private insurers rightly saw the public option as threatening most of their business.  That's because of its greater efficiency through simplified choices and procedures, and centralized buying that would counter the market power of providers facing little competition.    In his Sep. 29 Times Op-Ed J.D. Kleinke describes Obamacare as essentially a brainchild of conservatives that they now hate because Obama embraced it.  It does nothing about exorbitant prices that are the (hidden) root cause of high US costs

Instead, savings are sought by reducing the amount of services consumed, hopefully by cutting down waste and unnecessary treatment so as not to compromise patient well-being.  What's wrong with that?  Well, nothing, so long as it is done in addition to lowering prices closer to European levels that achieves far more cost reductions without hurting patients.  But that's not the case - in an "instead of" approach, the "less care" advocates use their pitch to divert attention away from over-pricing.  This benefits the health industry (who are thus paid over double of what they "deserve") while imposing an enormous burden on payers, including taxpayers, employers and individuals.

Almost no health pundit or politician points out that Europeans already receive more treatment overall than Americans.  Americans do get more imaging tests (MRIs, PET and CAT scans) and heart bypasses and joint replacements, but this is more than offset by their getting less of other types of care.  OECD Health Data 2012 shows this.  Americans see their doctors 40% less often and are hospitalized 20% less than citizens in other advanced economies.  Yet US health expenses in 2010 were $8,233 per capita and 17.6% of GDP, as compared to the OECD average of $3,268 per capita and 9.5% of GDP. 

So just to be clear, imagine this: If we simply cut our prices to OECD levels without any changes to the amount of care we receive, our health expenses drop to less than half of what they are now.  Instead, our policy makers and pundits focus on "cutting waste" by reducing the amount of services rendered, pushing them further below OECD averages, while hardly touching our sky high prices.  Higher prices are partly due to private insurers with their complex offerings, payment bottlenecks and need for profits that introduce middleman inefficiencies.  But much more of the proceeds go to providers who simply get to charge more because of their market power, lack of competition and political clout in thwarting Medicare from cutting payments.

If neither Obamacare nor Romney-Ryan's "Vouchercare" directly address prices, is there a difference in controlling these under the two alternatives?  The answer is yes. 

That's because Obamacare like Medicare at present prevents providers from getting extra payments from patients.  At some point rising costs and the drain on public resources imposes constraints on healthcare prices through taxpayer resistance, especially if the defined benefits cannot be decreased.  In addition, Medicare is still by far the biggest buyer of health services, with corresponding leverage over providers. 

The Romney-Ryan plan in contrast does away with both these points of leverage.  Its intent to let private insurers compete to offer Medicare plans has the opposite effect of fragmenting buyer power in negotiations with providers.  Moreover, with the "better" and costlier plans that can be offered under their plan the insurers (and hence providers) get to realize additional payments from patients, in addition to Medicare vouchers.  Finally, insurers will naturally try to maximize profits by cherry picking the actuarially attractive patients, leaving the "money losers" in the traditional Medicare plan. Of course there is talk of risk adjustment to increase voucher payments for sicker patients, but to the extent these tricky adjustments are imperfect there will be scope for insurers to game the system.  So we end up with higher costs and less check on prices under Romney-Ryan proposals, with either the extra costs borne by Medicare recipients or by the government. The WSJ on Oct. 16 also confirms this as resulting in higher premiums, based on a study by the non-partisan Kaiser Family Foundation.

In sum, with all its flaws Obamacare in addition to its primary objective of extending health insurance to most Americans also has some secondary effects on curbing prices.  The Romney-Ryan plan rolls back the safety net while having fewer checks on prices, with the resultant higher costs met either by public funding, or (as Republicans prefer) by private payers.

A concluding side question: If prices are by far the main villain behind high US costs, why don't we hear much about this fact, leave alone have any serious proposals to lower them?  You don't see high prices mentioned in discussions in the media (it's just "costs"), including in recent Presidential or Vice Presidential debates. It's because the extra revenues generated by over-pricing has created enormous surpluses, a fraction of which goes to sustain an ecosystem of beneficiaries who  want to let the good times roll.  These include politicians, health experts, private insurers, trial attorneys, and even HHS / Medicare officials looking for subsequent industry fed opportunities through a revolving door.

So to the above question the short though dramatic answer is that there is a conspiracy of silence on the issue of over-pricing. The ones who suffer are mainly of course the payers.  Can payers or a body of them not exert counter leverage that can correct prices?  Not so far, but they certainly can and should.  I have talked about this in the past and will elaborate in my next post.

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