Obama trusts foreign and unaccountable bureaucrats more than transparent U.S. entities.
Last week, the White House announced its proposed budget for FY 2013′s global health expenditure, set to begin on October 1. The headline is a reduction in funding of 3.5 percent, or $310.4m ($8,826.5m FY2012, $8,516.1m FY 2013). While no doubt conservatives in Congress will want the budget cut further, they should also challenge the priorities in this budget.
The budget for the U.S. malaria program is to be cut by 4.8 percent, and the tuberculosis program by 10 percent. Yet the former is the best-performing U.S. health program, and the latter its most underfunded. At the same time as these U.S. programs are cut, multilateral initiatives such as the vaccine alliance (GAVI) and the Global Fund have their budgets increase by a staggering 45 percent and 27 percent respectively. Both are good initiatives but both, especially the latter, have problems.
As I have pointed out on numerous occasions, the Fund is working with unaccountable, corrupt, and inefficient United Nations bureaucrats and continues to work with corrupt nations (something the U.S. malaria and TB programs do not), even after they are exposed as such. As other nations withheld money from the Fund last year due to corruption allegations, and the Fund’s head was forced out because his decisions were to be subjected to better scrutiny, Obama decides to increase U.S. taxpayer support.
One wonders what those working in the U.S. malaria program must think when their stellar work is rewarded with cuts, while corrupt multilaterals get more funding. European leaders may publicly applaud Obama’s support of these multilateral initiatives, but secretly they’ll be pleased that Obama is bailing them out.
Conservatives in Congress should demand no increase in the budget to the Global Fund (and a 50 percent cut if Global Fund doesn’t properly address the corruption problems), rather than the increase Obama proposes.
Congressional conservatives should also, as a sign of their desire to assist the less fortunate, demand the reinstatement of the U.S. government’s desired malaria budget and an increase in the TB budget. They can do this, save more lives, and cut the budget more than Obama proposes.
The 2013 budget President Obama released this week once again abdicates the responsibility we have to save Medicare from fiscal insolvency. Responsible reform would ensure that seniors would continue to have access to the care they need without bankrupting younger generations who foot the bill. As I explain here, the budget’s proposed “savings” in the form of provider payment cuts have almost no chance of passing Congress. Moreover, piling on cuts to the Affordable Care Act’s looming burden on hospitals and nursing homes will only make it more difficult for seniors to get the care they need.
A new AEI report released today is a reminder that effective, bipartisan solutions exist. The report finds that competitive bidding, a reform proposal to Medicare that introduces market pressures to lower prices, can save $339 billion over a decade, even accounting for the unrealistic cuts in payments to doctors and hospitals imposed by the Affordable Care Act. Competitive bidding does this without compromising affordable health premiums or endangering care for seniors.
This is the same approach taken by Senator Ron Wyden (D-Oregon) and Representative Paul Ryan (R-Wisconsin) in their bipartisan Medicare reform proposal. Unsurprisingly, the president ignored this bipartisan proposal, just as he ignored his own Simpson/Bowles deficit reduction commission. The contrast between serious proposals to save entitlements and the president’s politicized budget could not be clearer.
To pay for the increases in federal health spending promised 75 years from now, federal income taxes that year would have to be 175 percent higher than they are today. If you don’t like that idea, how about tripling the 15.3 percent bite that Uncle Sam takes out of every worker’s paycheck? Or, if you would prefer to spread the increase across all federal revenue sources, it would require that each one be increased by 75 percent (figure 20.7a).
As I’ve explainedrepeatedly, the alternative fiscal scenario is the most credible current projection of how much we will have to pay for Medicare, Medicaid, and Exchange subsidies under the Affordable Care Act. Even the actuarial experts who work for the government do not believe the baseline forecast. Yet the percentages I cite above greatly underestimate the size of the tax rate increases actually needed to raise the revenue to cover these promises, since they do not take into account the behavioral effects of higher taxes. I assure you that increasing federal income tax rates by 175 percent will not produce a 175 percent rise in income tax revenues. So think of all these figures as very conservative estimates of the tax increases looming over the horizon should we fail to get health entitlements under control.
Ask all your friends how comfortable they would feel imposing such punishing tax levels on their grandchildren. And if there’s no public sentiment for raising taxes by the gargantuan amounts required, then why are today’s policymakers making such promises? And if there’s no credible way we can tax our way out of this mess, why hasn’t the president offered a bold plan to substantially dial down on our promises (e.g., increase the Medicare retirement age) or fundamentally reform Medicare? The economy assuredly is a critical issue in the upcoming election. But well-informed voters also should be demanding that those wishing to inhabit the Oval Office answer some very tough questions about health entitlements as well.
Attention, children and grandchildren of Baby Boomers: save early and save often. Within 75 years, the average monthly premiums required for Medicare and out-of-pocket spending for Medicare-covered services (i.e., deductibles and coinsurance) will equal the average monthly Social Security check (figure 20.7b).
You heard that right. A typical senior counting on Social Security to pay for food, clothing, and shelter will be out of luck. That is, even assuming that Uncle Sam honors the promise to keep sending out Social Security checks, virtually every penny of the average check will be wiped out by the amount seniors will need to pay their premiums for Medicare Part B (outpatient services) and Part D (prescription drugs) and the average amount of cost-sharing paid by a typical senior for deductibles and the 20 percent coinsurance required on Part B services.
Currently, such typical Medicare costs (which do not even include elderly spending on private Medicare supplemental policies or spending on services not covered by Medicare) absorb 30 percent of the typical Social Security check. This is a sea change in the fiscal plight of seniors, and one more reason it is regrettable that the president elected to duck America’s “humongous healthcare problem” in his most recent State of the Union address.
Admittedly, under “current law” the Medicare cost burden facing seniors will grow “only” by about three-fifths between now and 2085. But few people believe current law will stick. According to the Medicare Trustees, “current-law costs are almost certainly understated as a result of the substantial physician payment reductions required under current law and are further understated if the productivity adjustments to other Medicare price updates under the Affordable Care Act cannot be continued in the long range.” This is why the Medicare actuary developed an “alternative fiscal scenario” whose results also are reported in the latest Medicare Trustees report. The most recent report issued by the Congressional Budget Office confirms the credibility of those alternative projections. CBO systematically reviewed all the evidence from Medicare’s past demonstration projects on disease management, care coordination, and value-based payment. This is the same laundry list of ideas that was stuffed into the Affordable Care Act in the expectation that surely one of these might actually bend the cost curve. This expectation appears to have been a triumph of hope over experience, as the CBO analysis concluded “In nearly every program involving disease management and care coordination, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program.” There was exactly one value-based purchasing program (out of four) that saved money.
Also, the 20 percent of seniors who rely exclusively on Social Security income in retirement are subject to lower premiums and cost sharing than others, so the picture for them will not be quite as bleak as shown. Nevertheless, future seniors with supplemental retirement savings who rely on Social Security to help pay at least some bills will be in for a rude awakening.
In short, there are two reasons policymakers need to take seriously the Wyden-Ryan bipartisan proposal to address Medicare’s long-term fiscal unsustainability. Financing the projected growth in Medicare over the next 75 years (which will rise from 3.6 percent of GDP in 2010 to 10.6 percent of GDP by 2085 under the alternative fiscal scenario) will require levels of federal taxation that are unprecedented in this country. There is no public opinion evidence I’ve seen that a majority of Americans (or even close to a majority) wish to be taxed at such levels. Moreover, the Affordable Care Act actually made the challenge of solving the Medicare entitlements crisis much greater by diverting a half trillion in potential savings and using these to expand coverage rather than shore up Medicare. But even if Congress magically could find a way to obtain the revenues to pay for Uncle Sam’s share, there is the inconvenient truth that a substantial fraction of seniors will simply be unable to afford their share of the massive increases in Medicare spending they will face.
The claim that 20-somethings are more likely to believe they will see flying saucers than collect from Social Security is exaggerated. Nevertheless, until and unless policymakers step up to the plate on this issue, those in their twenties (and especially their children) might do well to save as if Social Security will not be around. Should the Supreme Court strike down the Affordable Care Act this June, it might give policymakers a serendipitous opportunity for a do-over.
A new study published in the Lancet medical journal estimates that the actual number of malaria deaths is double previous estimates.
This is obviously sad news, but the advances made over the past few years are real (whatever the baseline disease rate one chooses). However, it means that failures in existing programs must be combated with renewed vigor, as I point out in my new outlook published next week.
The saga over the quality of medicines produced by Indian company Ranbaxy looks to be coming to a close. Back in 2004 and 2005, a Ranbaxy whistleblower contacted me to provide information about quality infringements at one of Ranbaxy’s plants. Despite FDA warnings and the WHO’s awareness of the problem, the problem was not fully resolved.
Ranbaxy is a good company and it is endeavoring to set things right. But its problems demonstrate the cost of not successfully inculcating good standards through all levels of management. My reading of the infringements made by Ranbaxy staff suggests that they may have saved the company at most a few thousand dollars from their regulation-infringing cost-cutting. Yet the loss of business has now run in the millions of dollars—and who knows what the cost of poor quality medicines has been to patients. It should be noted that none of the drugs the FDA tested failed quality control. But, as drug experts explain to me, there are some flaws it is hard to test for; it is possible dangerous products slipped through, especially if the production processes are careless.
The United States now sources 80 percent of its intermediate drug chemicals from overseas, a growing number from China. Chinese companies probably suffer worse quality control problems than most of the large Indian companies—but so far no whistleblowers have emerged. I expect many more Ranbaxy-type problems to crop up in the near future, with the likelihood of serious implications for at least some American patients.
News is filtering in about another fatal incidence of fake drugs, this time lethal heart medication in Pakistan. In my forthcoming book “Phake: The Deadly World of Falsified and Substandard Medicine,” I discuss the kinds of dangers the poor in emerging markets face every day from bogus medicines of all varieties. Counterfeiters don’t care what your disease or condition is, they just care that they can make a pill look like the drug you need. Lethal fakes of painkillers, antibiotics, hyper-tensives, heart medication, and every other type of medicine exist and, in some instances, dominate markets. But while our risk is lower, even in North America it is not zero. In 2006-7, 149 Americans died from fake heparin, a blood thinner. A couple of years earlier Vancouver native Marcia Bergeron died from a fatal arrhythmia brought on by heavy metal contaminants in her bogus heart medicine—exactly the alleged cause of death of the patients in Pakistan.
Back in January 2010, I wrote that the best evidence suggested that the so-called “game changers” included as part of the health reform legislation were unlikely to do much to restrain healthcare costs. The main reason that policies such as disease management and preventive care wouldn’t save much money is that it costs money to apply these methods to every patient, but only a relative few will benefit from them. Furthermore, it is hard to predict who those patients will be.
Now, following a review of experimental demonstration projects on disease management, care coordination, and value-based payment in Medicare, the Congressional Budget Office reports: “CBO reviewed the outcomes of 10 major demonstrations that have been evaluated by independent researchers. The evaluations show that most programs have not reduced Medicare spending.” Some demonstration projects fared better than others. For instance, programs promoting stronger patient–doctor interaction were more likely to generate savings, but even most projects of this type didn’t break even.
If we knew then what we know now—that the long-term care programs added to healthcare reform to sweeten the budget numbers were unsustainable, and that so-called game changers such as disease management didn’t change the game much at all—it is almost certain that the Affordable Care Act would not have passed through Congress.
What makes this all so galling is that we did know then what we know now: there were plenty of people raising warnings regarding these issues, but Congress and the Obama administration chose to ignore them.
Extraordinary. The president’s State of the Union address made no mention of what is purportedly his signature domestic policy achievement: the Affordable Care Act. In fact, the speech nearly ducked entirely the single largest problem most in need of the forward-looking bipartisan team effort repeatedly invoked by the president: America’s “humongous healthcare problem.” According to the Congressional Budget Office’s latest long-term spending projections, the federal government is slated to increase in size by more than 40 percent (relative to the economy) over the next 75 years. Fully 100 percent of that increase can be attributed to growth in federally-financed healthcare entitlements (figure 20.7c).
Of course, these estimates only represent CBO’s “extended baseline scenario.” Moreover, they exclude the 40 percent or so of Medicaid spending that is paid for by the states as well as non-mandatory health spending such as public health. Inclusion of these missing components would add several more percentage points of GDP to the totals shown.
More importantly, the CBO, like the Centers for Medicare and Medicaid Services and even the Medicare Trustees, recognizes that some of the vaunted “savings” promised in the Affordable Care Act are unlikely to come to fruition. For example, Congress for a decade now has repeatedly granted physicians a temporary reprieve from spending cuts mandated by the Balanced Budget Act of 1997. To comply with such statutory requirements now would require a nearly 30 percent reduction in physician fees paid by Medicare. In light of the devastating consequences to access that would result from imposition of such draconian reductions, no one seriously believes they will ever happen. Under a more realistic alternative fiscal scenario that assumes no physician fee reduction and other companion adjustments to how Medicare constraints really would play out as well as other assumptions, CBO projects that federal spending will have climbed to 75.9 percent of the economy by 2085!
One might suppose that a looming fiscal tsunami of that magnitude might be front and center in a president’s efforts to even-handedly describe the state of the union and what he planned to do about it. But, judging from the laundry list of new spending initiatives proposed by the president, he is not particularly alarmed by this massive increase in the size of government. There appeared to be not a single problem on his list of priorities for which additional federal spending was not his suggested solution. That attitude does not bode well for making any progress on health entitlements. To be fair, the president did say he would be willing to contemplate addressing the Medicare and Medicaid entitlements problem if and only if Congress were willing to raise taxes on the 1 percent of Americans who already pay (again, according to the CBO) 29.5 percent of all federal taxes. Perhaps I misunderstood, but the president appeared to be saying that if Congress were unwilling to play the game according to his rules, the president would be happy to pick up his marbles and go home. It is hard to picture President Lincoln telling Congress he would be willing to address the attack on Fort Sumter only if he first got from them a pet piece of legislation, or FDR insisting on approval of one more component of the New Deal before he would lift a finger to respond to the attack on Pearl Harbor. Admittedly, the impact is much further in the future, but having the federal government sop up so much of GDP within 75 years would have adverse consequences that arguably would rival the nation’s being split in two or facing a Nazi empire in Europe.
More stunning still is that a serious bipartisan proposal to address the Medicare problem just recently got put on the table by House Budget Committee Chairman Representative Paul Ryan and Senator Ron Wyden. Instead of hectoring Congress to learn a lesson from the U.S. military on teamwork, the president might have invoked the Wyden-Ryan proposal as a living, breathing example of the kind of teamwork that will be essential to resolve the entitlements tsunami. Readers can judge for themselves why the president failed to do so. What we can be certain of is that unless and until the country has a president willing to confront this problem squarely, our nation’s best days may no longer lie ahead.
Michael Greve is a first-rate constitutional scholar, so I take on his argument that “the states will lose on Medicaid” with some trepidation. I’m no lawyer, so I’m in no position to quarrel with his legal argument. But I do know a thing or two about the Medicaid program and my analysis of the Affordable Care Act (ACA) leads to a very different conclusion. In my simple man-on-the-street view, states face a relatively simple (albeit stark) choice when it comes to Medicaid. They can either accept the new Medicaid spending required under the ACA or they can reject the “deal” offered by Congress, in which case they must forego all federal funding of Medicaid. This includes not only the very generous federal funding of some of the eligibility expansions (90 percent in perpetuity after 2020) but also whatever federal matching funds they had come to rely on for traditional Medicaid prior to ACA. No matter how we measure the burden of Medicaid for the average state, ACA increases the burden compared to what would have happened under the status quo (before ACA Medicaid expansions begin). But to reject Medicaid would impose obligations that are astronomically higher (figure 5.5c).
I have provided estimates for the three best measures of the Medicaid burden facing each state. All the changes shown are relative to a 2011 baseline, which are the latest official figures available through the National Association of State Budget Officers. The first commonly used metric (reported by NASBO itself in its annual state budget reports) is Medicaid as a percentage of the entire state budget inclusive of federal funds. In 2011, that average burden was 23.6 percent of state spending. Without ACA, I estimate that by the year 2019 the burden would increase by more than one-quarter simply because Medicaid spending routinely grows faster than state expenditures in general. With the ACA however, the increase in that burden would be more than 45 percent. If states reject the ACA, the increase would be just under 30 percent since states thereby avoid all the costs associated with increasing eligibility levels to 133 percent of poverty. In that regard, this metric does not accurately convey the enormous leverage Congress has attempted to wield to get states to do its bidding.
A better metric for that purpose is state Medicaid revenues as a percentage of own source state revenue. According to NASBO, federal funds currently make up more than one-third of the typical state’s budget and more than three-fifths of Medicaid. Own source revenues consists of all the other non-federal dollars in a state’s budget, whether these be obtained through general revenues, user or excise taxes, or even intergovernmental transfers from local governments to state government. These are revenues that for the most part have to be raised from a state’s own citizens. Currently, state revenues for Medicaid constitute 13.4 percent of all own source revenues. Under the status quo, however, this share will rise by 44 percent between 2011 and 2019, while under the ACA, it will rise by 52 percent. Thus, ACA is essentially forcing states to swallow an increase in their Medicaid burden that will be about one-fifth larger than it would have been under the status quo (i.e., 8.2 percentage points above the 44.7 percentage point increase states would have expected to accept under the current rules of the road). Here the consequences of rejecting Medicaid become more stark: this burden would increase 247 percent for the average state electing not to accept the conditions laid out in the ACA. Perhaps the analogy is a bad one, but in my non-lawyer’s view of the world, this is roughly equivalent to the neighborhood kid asking for a $20 “donation” by threatening to inflict $250 damage on your property if you decline. Is such a donation voluntary or coerced?
The choices look even more bleak when we consider the last measure of Medicaid burden: State Medicaid revenues per resident. Leaving aside the federal tax dollars shipped to the U.S. Treasury to bankroll Uncle Sam’s matching contributions, the average state collected $477 per capita to pay for the state share of Medicaid. Under the status quo, that will grow to nearly $930 by 2019, a 95 percent increase; under the ACA, it will more than double. But what happens to the average state electing to reject ACA? State Medicaid revenues per resident will balloon by 371 percent! Imagine you had a mortgage and were expecting to pay $9,500 a year for 30 years. The bank advises you that it would like to change the terms of your loan and charge you $10,600 instead; if you refuse, you have come up with a balloon payment of $37,000 to avoid losing your house. Would you feel that acceding to these new terms was voluntary?
These figures are state averages. For curiosity, I looked at the lowest income state, Mississippi, and a very high income state, New York, discovering that their state Medicaid revenues per residents would climb 654 percent and 523 percent respectively were they to reject ACA. I do not pretend to know the precise dividing line between coercion and a voluntary agreement. But thinking about this in the context of everyday life, if this is not coercion, what is?
One could argue that states long ago put themselves in this bind by agreeing to Medicaid in the first place. That may be true, but the Medicare actuary states that “in terms of the magnitude of changes to the program’s projected expenditures and enrollment, it is likely that the Affordable Care Act will be the largest legislative change to Medicaid since the program’s inception.” In that regard, the incremental magnitude of the increased expenditures expected of states is different than under previous Medicaid expansions. Moreover, having observed the policy process over decades, I can report repeated instances in which Medicaid expansion always was the default option in any state discussions of how to cover the uninsured. Medicaid rules notwithstanding, it was a no-brainer to opt for a coverage vehicle in which Uncle Sam would pick up 60 percent or more of the tab for whatever expansion was under discussion. This perverse incentive works at the federal level as well. Given that the states would always be on the hook for roughly half of the projected cost, it was always less expensive for Congress to generously expand Medicaid eligibility by ratcheting up the mandatory eligibility or benefits required under Medicaid than to contemplate any sort of subsidized coverage program fully financed from federal tax coffers. Thus, both sides of the federalism divide have been jointly culpable in slowly but surely ratcheting up Medicaid’s share of GDP sevenfold between its inception in 1966 and 2019, when ACA is fully implemented.
The problem with salami tactics like those encouraged through federal matching programs such as Medicaid is that eventually we will run out of salami. It’s very generous for the federal government to offer 90 percent matching in perpetuity for those newly eligible under the ACA. But it is not at all clear Uncle Sam is in a position to fund this promise, especially in light of the fiscal tsunami posed by Medicare in the decades ahead. And even Michael Greve would concede that the federal government is absolutely under no legal or constitutional obligation to honor the commitment codified in the ACA. Should Uncle Sam renege on this promise, the burden on states will be even more onerous than I have already described. In that context, perhaps the Supreme Court will do everyone a favor by halting this charade before Uncle Sam is forced by fiscal pressures to admit to the states a promise was made that federal taxpayers cannot afford.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 5.5c and Excel spreadsheet containing the estimated impact of the Affordable Care Act on state Medicaid expenditures for data, sources, and methods.
In last week’s blog post, I showed that both ambulatory care and health facilities spending, relative to the national average, rose more quickly in Massachusetts during the Romney administration than did such spending in Texas under Governor Rick Perry or in Utah under Governor Jon Huntsman. In this article, I use newly-released figures from the Centers for Medicare and Medicaid Services to show what was happening to state health spending per resident in the New England states surrounding Massachusetts. It turns out that while Romney governed Massachusetts (2003-2007), health spending per resident was rising faster than the national average throughout New England, with the notable exception of Vermont (figure 12.6j).
That said, only New Hampshire outpaced Massachusetts in terms of the rate at which health spending per person outstripped the rate of growth in per capita health spending for the nation as a whole. In short, Governor Romney did not “bend the cost curve” even relative to his peers in the region. The above figures take into account any border-crossing that might otherwise have artificially inflated health spending in Massachusetts relative to much more isolated states such as Utah and Texas. Nevertheless, my earlier observation still holds true: governors have control over some, but not all of their state health expenditures.
But it is important to recognize that differences in economic growth may play an important role in determining the relative rates of spending growth across states. Indeed, when we compare per capita health spending across countries, for example, roughly 90 percent of the differences can be attributed to differences in GDP per capita. Thus, another measure we might use to gauge the relative performance of states relates to the burden of health spending on its citizens. Did the relative burden of health spending rise or fall during the Romney administration? It is easier to answer this question than to figure out what it means. Our rough measure of this burden is calculated using resident health spending as a percentage of gross state product. I again have indexed this burden so you can see how it rises or falls relative to the national average (the national burden rose from 11.6 percent of GDP in 1991 to 14.9 percent by 2009). Note that at the state level, we only track personal healthcare expenditures, i.e., spending on hospitals, physicians, pharmaceuticals, etc., but this excludes spending on Medicaid, Medicare, and private health insurance administrative expenses, as well as spending on public health, medical research, and health-related construction. Once again, the burden of spending rose more quickly in Massachusetts than in the nation overall, although there were other states in the region (Maine, New Hampshire, and Rhode Island) where this burden rose just as quickly.
What conclusions can we draw from this? First, the states that did the most to expand health insurance coverage (Maine and Massachusetts) experienced the greatest increase in health spending per capita. It may seem intuitively obvious that expanded coverage is not self-financing, but there were many reformers who argued the opposite on grounds that the uninsured incur all sorts of avoidable costs due to their delaying and deferring needed care. Such arguments were made even though we have long known that compared to people with full-year private coverage, annual health spending for the full-year uninsured is less than half as high. This figure takes into account all sources of payment, including subsidized care for the uninsured as well as their out-of-pocket spending. Thus, even though the uninsured admittedly have greater use of the ER than those with private insurance and a higher rate of medically avoidable hospital admissions, they nevertheless have lower spending overall. What is apparent from the Massachusetts numbers is that universal coverage is not a free lunch. Expanding coverage inevitably will cost more as the spending of those who previously were uninsured gradually rises towards the average level of those with public or private coverage. Thus, the policy question is whether the benefits of universal coverage are worth these added costs. Vermont might be viewed as a counter-example, except that the state’s Health Care Affordability Act did not take effect until 2007. Thus, the state’s relative deceleration in health spending actually began several years before this law took effect and the spending curve flattened out post-2007. Even if relative spending had declined slightly post-2007, remember that all of these trends are relative to the national average: a slightly declining line merely means that health spending grew less slowly than elsewhere, not that it actually declined.
Second, rising incomes cannot explain the relative rise in health spending in Massachusetts. The figures showing a rising burden imply that the state’s health spending grew faster than the state’s economy. But in fairness to Governor Romney, the health burden in Massachusetts had been rising for many years prior to his coming into office. At best he failed to slow that growth. On the other hand, the relative burden declined post-2007, which some might want to attribute to “Romneycare.” As I explain in a forthcoming piece in The American next week, there really is no good way of determining whether this decline was related to Romneycare or the recession (or some combination).
Third, these figures reinforce my earlier observations about health services regulation. Having spent much of the past decade looking at such regulations in detail, I do not believe it is accidental that the six states shown generally rank among the most regulated states in the country (MA=49, RI=47, VT=44, CT=36, ME=35, NH=4, where 50 denotes the most regulated state in the country). While a definitive conclusion would require a careful analysis of time series data that relate changes in health services regulation to changes in health spending, this strong—albeit imperfect—correlation between health regulation and health spending seems unlikely to be purely coincidental.
Healthcare spending may not be the most important issue in the 2012 election. But whoever is elected president in 2012 will have to begin addressing the very serious issue of healthcare entitlements, as these commitments are the ones making the biggest contribution to the fiscal tsunami we will face if we take no action. Mitt Romney assuredly expanded coverage in his state, but the result was faster-than-average growth in the state’s health expenditures and faster-than-average growth in the burden of health spending relative to the state’s income. All indications are that the Affordable Care Act will play out in similar fashion. Massachusetts voters might have viewed this as a fair trade, but voters will have to decide whether the incremental gains in coverage under the ACA are worth the multitude of adverse effects being left in its wake.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint versions of Figure 12.6j and Figure 12.6k and Excel spreadsheet containing indexes for a) health spending per resident; b) Medicaid spending per resident; c) resident health spending as a percentage of gross state product, and d) resident health spending by type of service for data, sources, and methods.
Mitt Romney has been attacked by many for his record on healthcare while he was governor of Massachusetts. But with three governors in the Republican race, it is useful to compare the track records of all three as they relate to health spending. No matter how the figures are sliced and diced, it is clear that health spending, relative to the national average, rose more quickly during the Romney administration than during either the administrations of Governor Rick Perry or Governor Jon Huntsman. For example, ambulatory healthcare spending per capita was declining relative to the national average when Governor Romney first took office, but has steadily increased every year since then, climbing from 19 percent above the national average in 2003 to 29 percent above the national average by 2007 (figure 12.6c).
In contrast, ambulatory health spending in Texas was steadily declining prior to the arrival of Governor Rick Perry and continued to do so for the first four years of his term. Subsequently, it has risen only slightly, from a low point of 8.8 percent below the U.S. average in 2006 to being 6.3 percent below the average by 2009. Jon Huntsman inherited a somewhat similar situation except that relative spending already had begun to rise slightly before he took office and continued to rise for his first two years, followed by a noticeable relative decline.
The pattern for health facilities is somewhat different, but the big-picture result is the same. In this case, Governor Romney inherited rising relative expenditures on health facilities, which fell slightly in his second year, but then continued to rise (figure 12.6d).
Governor Rick Perry inherited relatively stable health facilities expenditures (i.e., rising at about the same rate as the rest of the nation). Relative spending has declined in subsequent years. Governor Huntsman inherited a stable pattern of health facilities expenditures which continued throughout his tenure.
What conclusions can we draw from this? First, the figures shown focus on the gross domestic product attributable to the two large categories of health spending shown and divides this amount by state population to obtain per capita estimates. This is similar but not equivalent to each state’s expenditures on these services. It reflects sales generated within a state, but not necessarily only to that state’s residents. Thus, it is not an exact measure of how much Massachusetts residents spend relative to those in Texas. But it is a rough approximation. And unless there is a great deal of year-to-year variation in the fraction of cross-border spending by a state’s residents, the trends in per capita health-related GDP should approximately mirror trends in health spending. It would be quite unusual for per capita health-related GDP to be steadily rising when correctly measured health spending of that state’s residents was falling, for example.
Second, the figures only include spending on ambulatory care services (including services of physicians, dentists, and other health professionals) and spending on health facilities. Notably excluded are spending on prescription drugs and durable medical equipment (which account for one seventh of national health spending), among other things. So the figures admittedly do not provide the whole picture of health spending, but they do include the lion’s share of medical costs.
Third, state governors clearly are not responsible for aggregate health spending in their state. That said, state policy most assuredly has some effect on health spending. Medicaid spending accounts for nearly one fourth of state government spending, exceeding the amounts spent on elementary and secondary education. Even though the federal government contributes a larger share of Medicaid spending than state and local governments, state policymakers historically have had a great deal of discretion over eligibility standards, benefits, and payment rates. Likewise, in most states, state employees, dependents, and retirees typically constitute the largest single group obtaining employer-sponsored health insurance. All told, state and local policymakers control more than one quarter of health spending through Medicaid, state employee health benefits, and other categorical health spending (e.g., local health departments). Thus, gubernatorial health policy decisions most assuredly have some impact on trends in health spending.
As well, there are vast differences across states in their degree of health services regulation, with some states requiring the state’s permission for every hospital bed built and others imposing no state restrictions whatsoever on health facilities expenditures. Here the story gets quite interesting. As of 2009, Utah had the 13th least regulated health system in the country whereas Massachusetts had the second most regulated health system and Texas was in between, having the 29th most regulated system. As one example, Utah and Texas eliminated their certificate-of-need restrictions on hospitals in the mid-1980s, whereas Massachusetts not only retained its CON program, but made the program even more stringent two years after enacting their health reform law. One would be hard put to infer from the figures shown above either that the Massachusetts CON program was effective in restraining spending or that failure to have CON programs has led to an “explosion” in health spending in either Utah or Texas.
Healthcare spending is surely not the most important issue in the 2012 election. But for those who care about this issue, the available evidence suggests that Jon Huntsman and Rick Perry boast much better records than Mitt Romney in holding down health expenditures.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint versions of Figure 12.6c and Figure 12.6d and Excel spreadsheets on a) total population, total GDP, GDP for ambulatory health care services, and GDP for hospitals and nursing & residential facilities; b) per capita GDP, ambulatory healthcare services, and hospitals and nursing & residential facilities, and c) index per capita amounts for these measures of merit for data, sources, and methods.
The initial debate over premium-support-style reform of Medicare, as most recently embodied by last week’s Ryan-Wyden proposal, remains largely driven by ideological passions, oversimplified budgetary scoring models, and policy concepts devoid of structural details. Hence, it too quickly descends into the sort of no-holds-barred fight for political dominance that Butch Cassidy faced when challenged by Harvey Logan for control of the Hole-in-the-Wall gang in the 1969 movie, “Butch Cassidy and the Sundance Kid.”
If only the president and Congress could settle Medicare reform issues as quickly and as elegantly! Perhaps we should take a little more time to re-examine past assumptions, determine priorities, and present tradeoffs more honestly. Most of all, let’s stop assuming that we can get from point A to point Z without spelling out and using many more letters of the health policy alphabet to settle on some rules of engagement. The Ryan-Wyden proposal makes an honest effort to start this process at the “high-concept” level. But even that political movie will need a more detailed script that begins to answer at least 13 more questions.
Consider what remains mostly unknown, uncertain, or unresolved—if not simply airbrushed out of the fuzzy picture—regarding a baker’s dozen of elements of a premium support plan that could be implemented, made operational, and not contradict its promises:
(1) Is the primary policy goal of premium support (or other Medicare reform alternatives) to achieve more efficient and higher-value health care? Or is it simply to lower the future rate of growth of Medicare spending? Or, more cravenly, just to keep currently happy beneficiaries reassured of little if any disruption to their existing health care arrangements? If we pretend that none of those goals are in any conflict with each other, the resulting prescription for solving several simultaneous equations remains likely to be contradictory, unaffordable, and unsustainable.
(2) Clearer answers to resolve the tradeoffs between those major policy goals and their relative order of precedence will go a long way in determining other settings for the various elements of premium support. For example, promising too many “guarantees” to beneficiaries of generous benefits, limited cost sharing, protective regulation, and standardized coverage will negate other policy objectives. They will conflict with efforts to achieve lower Medicare spending growth rates, reduce tax burdens on younger workers, shrink massive budget deficits, and increase choice and competition through better private plan alternatives.
(3) Just how “low-income” will low-income Medicare beneficiaries needing greater premium support turn out to be? Ryan-Wyden tends to start drawing special assistance income-level ceilings at dual-eligible seniors covered by Medicaid as well Medicare. Subsidies that creep further up the income ladder will hit younger taxpayers harder and reduce beneficiary incentives to make more cost-conscious care and coverage choices on the margin.
(4) Recent rhetorical boasts that a reformed Medicare program under Ryan-Wyden will provide the “toughest consumer protections” ever might send a chill down the spines of those hoping for more differentiated coverage choices and more vigorous competition among Medicare insurers and health care providers. Ensuring necessary regulation is not the same as reupholstering traditional Medicare regulation with additional layers of edicts from CMS.
(5) Competitive bidding mechanisms conceptually should determine relative levels of premium support by taxpayers in different health care market areas. But they need clear operating rules guided by key policy goals. If the foremost goal is lower costs, setting the winning bid price at the least-costly one submitted might drive down premiums over time, at the risk of failing to ensure sufficient capacity to serve all beneficiaries. At the opposite end, using competitive bidding to arrive at an “average” price of subsidized coverage based on all bids would keep more “competitors” in business, more beneficiaries happy, and the traditional Medicare program more insulated from competition. But that would come at the expense of reduced pressure for greater efficiency gains and resulting higher Medicare costs to be picked up mostly by taxpayers, and increasingly by Medicare premium payers as well. Ryan-Wyden suggests that it might favor using the lower of the second-lowest bid in a market area, or the cost of traditional Medicare fee-for-service (FFS), to set the premium support amount. The 1999 bipartisan Medicare commission’s model relied more on an enrollment-weighted average of all competitive bids. (Is anyone else out in Medicare nerd land considering a reverse second-item auction, if not a Dutch auction, but for the unfortunate imagery of reduced plan choices?)
(6) The tradeoffs between taxpayer costs, Medicare spending levels, beneficiary insulation from market–based price tags, and relative stability on the supply side of health care also will shape such policy design decisions. What percentage of total Medicare premiums will be subsidized (the 1999 bipartisan commission started at 88 percent)?
(7) Could a supplemental tier of separately-priced benefits also be offered by private insurers that first must follow bidding rules in selling an initial common core of standard Medicare benefits?
(8) How much variation (“actuarial equivalence”) will be allowed in offering basic benefits?
(9) How might levels of premium support be adjusted downward in later years (to meet budgetary targets)?
(10) What degree of means testing for access to greater taxpayer subsidies will prove both economically necessary and politically tolerable?
(11) The power of competitive pressure unleashed through a premium support reform might be shaped by design factors that could overcome the ingrained inertia of most Medicare beneficiaries to choose one plan and stick with it as long as possible. For example, initial random assignment of newly eligible Medicare enrollees into both private plans and Medicare FFS—as a default setting subject to informed consent and opt-out guarantees—might reduce the passive bias of the current program toward enrollment in the dominant incumbent option, the traditional FFS public program. On the other hand, the limits of political tolerance will be tested by premium spikes in Medicare FFS in some markets where it is less cost-competitive, or by the absence of private plan options in other areas (such as several rural states represented by members of the Senate Finance Committee?) where limited health care provider options make network contracting by private insurers less viable.
(12) Another unaddressed issue in many premium-support-style proposals involves how the administrative managers of Medicare FFS might be empowered (i.e., turned loose) to adjust their program configurations to respond to new competitive pressure from private plan alternatives. Political resistance to untying the hands of government “bureaucrats” in order to allow them to act like managers seeking to retain or expand market share (if not “profits”) is strongest among the many micromanagers of Medicare on Capitol Hill. But it also strikes a chord among risk-averse FFS beneficiaries. On balance, level-playing-field competition between the public and private faces of Medicare requires that past constraints on the former’s flexibility to adjust premiums, cost sharing, and benefits, plus selectively contract with providers, should be relaxed from congressional shackles as long as sufficient disclosure of new policies and practices is ensured and the FFS program is broken up into regional, if not smaller, units.
(13) The biggest challenge may involve the need to deliver Medicare cost savings soon enough and large enough. That would mean applying premium support to newly eligible enrollees earlier rather than later, or even to current enrollees, so that the “benefits” of competitive cost pressures make a difference before fiscal pressures overwhelm the program another ten years from now. The Ryan-Wyden plan, like most other “reform” proposals, takes a dive on this issue, even though this contradicts the purported message that choice and competitive should be good for everyone, not just new beneficiaries much further over the election year horizon.
The above policy menu is complex and relatively uncharted. It certainly merits much more discussion, initial experimentation, and careful monitoring, but those uncertainties should not dissuade policymakers from allowing it to unfold sooner rather than later. (Even health policy analysts at several Washington-based think tanks have gotten into the Medicare reform act, under the nomenclature of “defined contribution” financing for Medicare.) What is more certain is not only that the status quo is unsustainable, but that a more cautious move in the direction of premium support should and could have started over a decade ago, as proposed both by a majority of a 1999 presidential commission and in several bills offered by then-senators John Breaux and Bill First.
In any case, the public service done by Representative Ryan and Senator Wyden is not to offer the ideal, intricately-designed version of Medicare reform, but rather to help unlock the mostly stale policy discussion about how to avoid dealing with the growing mismatch between our past political promises to older Americans and our future institutional and economic capabilities to deliver them through traditional mechanisms. Medicare is destined to change substantially, by necessity. Ryan and Wyden suggest a pathway for doing this more intelligently, compassionately, and sustainably, in accord with our broader values and the rest of a hopefully more competitive and market-driven health care system. But there’s lots more heavy lifting and serious work ahead than just a quick “clean and jerk” move toward more exaggeration, wishful thinking, and blame-shifting. Denial is no longer an option.
The first flurry of political reactions to last week’s Ryan-Wyden proposal for a revamped premium-support version of Medicare reform suggests that old habits die hard—particularly the bipolar tendency to view such modest adjustments either as a fundamental threat to guaranteed benefits and protections of the traditional Medicare program under current law or as a definitive step to vigorous choice and competition that ensures seniors will receive healthcare of better value at lower costs.
The initial stance of the Obama White House was a predictable recycle of past political hyperbole, with spokesman Dan Pfeiffer claiming that the new plan would end Medicare as we know it, raise premiums, and cause the traditional Medicare program to “wither on the vine.” (At least there was no direct mention of its failing to relieve the heartbreak of psoriasis….).
A slightly more temperate discussion of “premium support” was staged at the Brookings Institution on Friday morning, but even a balanced panel of longtime health policy experts appeared to be speaking from parallel universe frames of reference.
The traditionalist home team still favors lots of regulation, standardized benefits, taxpayer cross-subsidies, and top-down management. Nearly every senior is portrayed as potentially about to be victimized by rapacious private health insurance scoundrels, but for the vigilant protection of the Medicare bureaucracy and its political defenders. The reformist visiting team wants more privately supplied variation, cost-conscious consumer choice, and means-tested floor guarantees, but fewer price-controlled ceilings—without seeming too hard-hearted or radical.
However, the Strurm und Drang of well-rehearsed Medicare politics posing as policy analysis should not obscure some serious achievements signaled by the new Ryan-Wyden collaboration that make the next stage of Medicare reform they propose more realistic and likely, albeit less transformative.
First, the revised premium support proposal acknowledges that the traditional Medicare fee-for-service program cannot, will not, and should not be abolished ten years from now, even for new entrants, from a cold start. The more relevant issue is how should both the “public” and “private” arms of Medicare change to adjust to economic reality and respond to increased competitive pressure to perform more efficiently and less expensively. The only workable mechanism for moving in this direction that does not become politically arbitrary and less defensible involves establishing need-adjusted levels of taxpayer subsidies for somewhat more diverse Medicare coverage options (“premium support”) that are anchored to the actual costs to deliver a common, baseline health benefit in better ways.
Second, Ryan-Wyden avoids trying to guarantee the market share of any particular way—public or private—to deliver politically promised benefits. Instead of steering future competition one way or another, it would allow Medicare beneficiaries to decide for themselves, within more realistic and sustainable fiscal limits. The key is to get the structure of competition in Medicare right, in order to reveal how much of a gap there might be between what voters might like to “guarantee” as coverage, how much it is likely to cost, and how much taxpayers are ready and willing to pay to support it. (Hint—those lines do not cross until they first become more transparent and then are bent by the forces of choice, competition, and compromise).
Third, Ryan-Wyden begins to move away from earlier temptations to assure cost savings through arbitrary formulas to index the future rate of growth of Medicare program spending (but not entirely; there is some backsliding toward a GDP + one percent annual growth ceiling, potentially enforced by a congressional fallback mechanism). The petty tyranny of federal budget scoring rules usually produces the illusion of aggregate fiscal progress that is sustainable only on a spreadsheet, and melts away in the real world of political give-and-take and economic uncertainty. Lasting Medicare savings will have to be achieved the old-fashioned way, through efficiency, innovation, and reallocation of resources used for healthcare consumption and delivery (including—gasp—even toward non-healthcare services alternatives, on occasion).
Fourth, Ryan-Wyden signals additional convergence toward a growing policy consensus on such Medicare housekeeping measures as (1) consolidating cost sharing across parts A, B, and D, and any other as-yet unused letters of the alphabet, (2) offering full cash rebates to beneficiaries who choose lower-cost plan options below premium support benchmark levels, and (3) re-targeting the exhaustible supply of taxpayer subsidies to be more sensitive to relative levels of health risk and income among beneficiaries.
All told, this is close enough for government work, but that would subject vital Medicare reform to the soft bigotry of low expectations. We still have to do even better, despite the political obstacles ahead, before external constraints reduce our future policy options. More on that tomorrow.
Yesterday’s outline of a bipartisan path to Medicare reform, as described by Representative Paul Ryan (R-Wisconsin) and Senator Ron Wyden (D-Oregon), does not mean that peace is at hand in the chronic Medicare policy wars of the last two decades. Although it only takes two (from different parties) to offer a “bi”partisan plan, it will require many more members and their supporters to change course and seek a sustainable and effective compromise. Nevertheless, the Ryan-Wyden vision of “Guaranteed Choices to Strengthen Medicare and Health Security for All” provides the opportunity for a change in tone and a search for common ground that offers more light than heat. Political conflict could evolve from arguing over WHETHER there are unavoidable problems in traditional Medicare that require substantial structural changes to debating WHY certain reforms are necessary and HOW best to implement them.
The full origins of longstanding descriptions of the fatal flaws of the Republican and Democratic parties, respectively, remain in dispute and reach back to Everett Dirksen and even John Stuart Mill. However, I usually prefer to go with the version articulated by one of my first mentors in Washington—author and columnist Stan Evans—who once explained:
We have two parties here, and only two. One is the evil party, and the other is the stupid party. I’m very proud to be a member of the stupid party. Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.
But every rule of thumb has its exceptions. And in this case, Paul Ryan is leading congressional Republicans in an intelligent direction. Ron Wyden is departing from his party’s reactionary defense of the welfare state’s road to fiscal perdition and intergenerational theft.
The latest Ryan-Wyden proposal for Medicare is stronger on flashy political symbolism than on the heavy lifting of long-overdue structural re-design. In subsequent posts, I’ll first highlight its initial achievements in finding areas of convergence on policy and abandoning unrealistic postures. Then, I’ll discuss where Ryan-Wyden still needs to go to transcend half-finished shortcuts that lead to policy roundabouts and political dead ends, whether it can deliver its political guarantees, and how to begin to answer the much harder questions ahead.
Joe Antos is right: waiting another decade to bend Medicare’s cost curve is not an option. Consequently, the Widen-Ryan reform proposal is a very promising development. Here’s why. Despite the Affordable Care Act, Medicare’s unfunded liabilities are large and growing. Absent fundamental Medicare reform, the mismatch between what Medicare takes in from Part A payroll taxes and what it spends on Part A, B, and D services will, by 2085, exceed 25 percent of taxable payroll (figure 20.6b.1).
In recent years, the Medicare actuary has issued two sets of projections. The official projections contained in the annual Medicare trustees report are required to reflect current law. Yet even according to current law, the 2011 report shows the Medicare shortfall growing to more than 12 percent of taxable payroll within 75 years. This is a useful reminder that notwithstanding the promise of substantial Medicare savings, the Affordable Care Act did little to actually bend the Medicare cost curve. Most of the vaunted savings from the new health law would arrive in the form of draconian cuts in payments to doctors and hospitals. Medicare actuaries project that under current law, Medicare and Medicaid would pay less than 35 percent of the amounts paid by private health insurers for inpatient hospital services in the year 2085. They also project that Medicare payment rates to physicians would be less than 30 percent of private health insurance levels.
These cuts are so deep that no one seriously believes they will take effect. Indeed, in every year since 2002, Congress has overridden a statutorily required reduction in Medicare physician fees; indeed, lawmakers are this week scrambling to prevent the 27.4 percent reduction in physician fees from taking effect on January 1, 2012. Since Congress effectively has ignored its own law more than a dozen times during this period, there is no good reason to suppose they will behave any differently once they are inundated by pleas for relief from the cuts required by the Affordable Care Act.
The alternative fiscal scenario uses much more realistic estimates of where payment levels will be set in future years. This more realistic projection shows a steady increase in Medicare’s unfunded liabilities. To say that these liabilities will reach more than one quarter of taxable payroll by 2085 does not imply we should raise payroll taxes to address this shortfall. It merely is a convenient metric to gauge how the size of the problem is growing over time relative to the nation’s ability to pay. Leaving aside the temporary payroll tax cut, Social Security normally collects 6.2 percent from employees and another 6.2 percent from employers, for a total of 12.4 percent of earnings up to $106,800.
Thus, filling the Medicare fiscal gap would require the equivalent of tripling current Social Security payroll deductions. However, rather than focus on who to soak to bankroll this shortfall, we instead would be better served by aggressive efforts to prevent the shortfall from occurring. This in turn requires fundamental Medicare reform, not tinkering at the edges. There’s no denying the bipartisan Wyden-Ryan reform initiative could be tweaked even further. But all in all, it offers a very consequential and promising step forward.
The Medicare reform proposal released today by Representative Paul Ryan (R-Wisconsin) and Senator Ron Wyden (D-Oregon) recognizes that even the federal government cannot guarantee to pay for health services, or anything else, without limit. The new proposal is more realistic in some respects than the Medicare reform advanced by Ryan in the House budget resolution, but it leaves many questions unanswered. Those details, and the public’s reaction to them, will determine whether the premium support concept that caps the federal subsidy will be adopted.
Under the new proposal, traditional fee-for-service Medicare would continue to be available to future generations of seniors, but it must now compete head-to-head with private plans. That is very similar to the competitive bidding model advanced by AEI experts Robert Coulam, Roger Feldman, and Bryan Dowd. In contrast, the House plan would have made traditional Medicare unavailable to new beneficiaries as of 2022—clearly unpopular with seniors, who view this as undermining their program and are likely to express their displeasure at the polls.
Some conservatives will criticize this change as backsliding. They correctly see the traditional Medicare program in its current form as inefficient and anti-competitive. But pretending that the program will disappear in ten years feeds the worst tendencies of politicians, who would avoid making important but difficult decisions needed to set traditional Medicare on a fiscally sustainable path.
The reality is that traditional fee-for-service Medicare likely will have some 50 million enrollees in 2022, and will remain a dominant force in the health sector for decades. Ryan and Wyden hint at the need for common-sense reforms to traditional Medicare, including a new structure of deductibles and copayments, a cap on catastrophic costs, and a new physician payment system. They skirt the central problem: disorganized fee-for-service and top-down limits on prices paid for services drive up the use of more, and more complicated, services. The program’s survival depends on our willingness to make substantial changes over the next few years so that traditional Medicare can provide cost-effective care without draining the Treasury.
With the massive baby boom generation beginning to turn 65, we have almost run out of time to put Medicare on a sustainable basis. Fortunately, the influx of baby boomers slows the growth of Medicare spending for a few years because younger beneficiaries need less healthcare. That buys Congress a little more time to face financial reality and reform the program.
Between 2005 and 2010, Medicare spending per beneficiary increased 39 percent, but between 2010 and 2015 the increase is projected to be about 7.5 percent. However, that assumes Congress will allow a 27.4 percent cut in physician fees to take effect in January. Under the more reasonable assumption that a doc fix is enacted, I estimate that Medicare spending between 2010 and 2015 is likely to increase by about 16 percent—still much lower than the preceding five-year period. Soon after that, costs begin to rise steeply as the boomers begin to reach their 70s.
That leaves Congress with barely enough time to truly reform Medicare. The Ryan-Wyden plan hints at that, and backs it up with a cap on Medicare spending limited to the growth in GDP plus 1 percent after 2022. That is a weaker constraint on spending than under the House proposal, but more likely to garner political support.
Waiting another decade to bend Medicare’s cost curve is not an option. If the president and the new Congress fail to take decisive action early in the new term, the corrective fiscal surgery will be far more severe. Paul Ryan and Ron Wyden have set out a useful marker that could be the basis for real Medicare reform in 2013.
Ezekiel Emanuel last month pointed out that if we want to rein in health expenditures, “real savings require changing the way we care for these chronically ill patients.” But to better understand the determinants of health spending, it is important to distinguish spending on chronic health conditions from spending on patients with chronic health conditions. The two are not the same. Admittedly, 9 of every 10 dollars in adult health spending can be attributed to those who have at least one chronic condition (right side of figure 2.5a).
Also, this share of health spending is disproportionate, insofar as only 60 percent of civilian adults not living in institutions have at least one chronic condition. This disproportionate share is observable across all ages, as the percentage with at least one chronic condition ranges from a low of 36 percent of young adults to approximately 92 percent of the elderly. Consequently, those with at least one chronic condition account for more than 60 percent of total personal healthcare spending among young adults and 99 percent among the elderly.
However, only half of adult health spending pays for actual medical services related to chronic conditions. Thus, while wrestling to contain such chronic care spending through better prevention and more efficient treatment certainly must be part of any strategy to get more value for money in healthcare, it is only half the battle. (Note that these figures only relate to the civilian non-institutionalized population, i.e., those outside of nursing homes or long-term mental facilities; all the percentages shown would be higher were those in institutions included.) Even people with chronic conditions require medical services for acute care needs entirely unrelated to their diabetes, cancer, asthma, or other similar conditions expected to last at least a year.
Moreover, this 50 percentage average masks a lot of variation across age groups. For adults younger than age 35, just less than 30 percent of spending is specifically attributable to treating chronic conditions (left side of figure 2.5a). Thus, if they are serious about cost containment, employers with younger workers should be focusing much more attention on the components of spending that may have nothing to do with better chronic disease management. Conversely, among the elderly, the share of personal healthcare expenditures having to do with chronic conditions is approximately double the level seen in young adults. Chronic conditions are a major reason that health expenditures increase so dramatically by age. Among adults having no chronic conditions, annual health expenses in 2005 averaged less than $1,000 per person, with elderly individuals experiencing only slightly higher spending than their adult counterparts in the lowest age category. Thus, for Medicare, placing much greater emphasis on chronic diseases makes a great deal of sense. By the same token, steps taken to reduce the prevalence of chronic conditions before age 65 will unquestionably reduce the average annual amount spent per person on Medicare. So chronic disease costs assuredly matter, but we cannot and should not ignore the equally sizable share of health spending unrelated to chronic care.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 2.5a, and Excel spreadsheet on health expenditures for chronic conditions by age in 2005 for data, sources and methods.
Today is World AIDS Day and President George W. Bush writes in the WSJ about the progress made against the disease around the world. He appeals for continued HIV funding through the plan (PEPFAR) his administration established eight years ago. While PEPFAR has been a huge success, new infections continue to rise; what was seen as generous assistance a few years ago has now morphed into something else. The largesse of the American people, which is still praised around the world, is now seen as a right by those receiving treatment and by international aid actors always clamoring for money. Since there is no cure, are U.S. taxpayers on the hook for billions of dollars of treatment funding every year from now? Cutting funding to PEPFAR may not be warranted right now even in these straightened financial times, but at some stage we should demand that the countries with the infected take up the cost for treating them.
Fidel Castro’s vastly over-rated healthcare system may finally have achieved something noteworthy: killing Venezuelan dictator Hugo Chávez. According to an investigative report authored by Leonardo Coutinho and Duda Teixeira that appeared in Brazil’s premier newsmagazine Veja on Saturday (November 19), Cuban doctors at that country’s premier medical facility bungled the initial treatment of Chávez’s prostate cancer and may have rushed him to an early grave.
The Brazilian report, which quotes several of that country’s cancer specialists and urologists, delivers a damning assessment of the Cuban care:
[In July 2011] Chavez was hospitalized in Havana [at the Center for Medical and Surgical Research (CIMEQ)] to remove the prostate tumor. Surgery, not recommended for cases of neoplasia in this gland with metastasis, may have been a very serious medical error that accelerated the spread of cancer. A second surgery was carried out…. From that moment on, European physicians with imported equipment directed the therapy. The Cubans were relegated to the role of observers. [Emphasis added]
The Veja report cites Brazilian medical specialists to describe the substandard equipment and treatment at CIMEQ, a facility reserved for the dictatorship’s elite and dollar-paying tourists.
A second fatal decision was self-inflicted. Chávez must have known from the beginning that his cancer was terminal, because he opted to continue receiving treatment in Cuba in order to keep his country in the dark about his true condition. For example, Veja reveals for the first time that foreign minister Nicolas Maduro traveled to Brazil in early July to consult with that country’s leading oncologists at the Sîrio-Lebanese Hospital of São Paulo. Rather than transfer to that renowned Brazilian facility, where the current and previous presidents of Brazil have been treated for cancer, Chávez preferred to risk care in Cuba to keep his people from knowing the truth.
Will Sicko movie-maker Michael Moore return to Cuba to interview the miracle workers who gave Chávez the care he deserved? Now that’s a sequel worth seeing.
Polio is making a comeback. According to Thomas Moran of the World Health Organization, there has been a four-fold increase in polio in Nigeria in the past year. There were still only 43 cases this year, but while this is fortunately still a small number, the chances have risen significantly that the disease will take hold in other African countries soon. As experts at WHO and elsewhere have explained to anyone bothering to listen, curbing the polio virus in Nigeria is key to eradicating the crippling disease in Africa. Nigeria’s neighbors, especially Cote D’Ivoire, Mali, and Niger, have had more cases in the past few years, and all because Nigeria never managed to eradicate the disease. Poverty and political dysfunction create the right breeding ground for the disease to survive and Pakistan, India, and Afghanistan are the only other countries where the disease is still a major health risk today.
Polio vaccination is a miracle. There is no need for an injection: just suck on a vaccine-encrusted sugar cube and you’re protected for the next decade. Yet, when I was in Kano, in Northern Nigeria a few years ago, I saw muscular upper bodies moving with acrobatic abilities on their hands—a novelty until you realize they have no legs. These are the crippling results of polio.
When a World Health Organization campaign was launched in 1988 to eliminate polio from the 123 countries still afflicted, it almost succeeded. By 2003 only seven countries still had cases and the end was in sight.
But clerics in Kano counseled parents against the vaccination, proclaiming it an American plot to sterilize Muslim youth and give them HIV. When Muslim parents obeyed, the southern-based and largely Christian Nigerian government refused to demand vaccination in the north, since it did not want to create religious tension. By 2007, Nigeria had over 70 percent of the world’s cases and was exporting polio. After the boycott it moved from Nigeria to Ivory Coast, from West Africa to Sudan, then across the Red Sea into Saudi Arabia and Yemen—which had been polio-free for a decade—even jumping continents to surface in Indonesia. Since the 2003 boycott, about 25 countries previously declared polio-free have been reinfected.
To its credit the Nigerian government and affected state governments have done more recently, and according to WHO Nigerian authorities have been carrying out large scale vaccination programs to prevent the disease from spreading further. At a Commonwealth meeting in October, the leaders of Canada, the UK, and Australia, as well as Nigeria, pledged millions of dollars towards the global effort to eradicate polio. All this is welcome, but it’s such a tragedy that these pledges are necessary today, when success was so near eight years ago.
Ezekiel Emanuel reminded New York Times readers last week of something health economists have known for eight decades. Health expenditures are highly concentrated, with just 10 percent of the population accounting for nearly two-thirds of annual health spending. Wall Street protesters have sparked a fierce debate over trends in the share of income and wealth controlled by the top 1 percent. But no informed American aspires to be in the health spending 1 percent.
The 1 percent of the population that has the highest annual health expenses accounts for one-fifth of health spending (figure 12.1a). Their annual spending in 2011 likely exceeded $115,000. (These figures exclude those institutionalized in nursing homes and long-term mental hospitals; their inclusion would drive these figures even higher). Those in the top 5 percent account for just under half of all spending, with average annual expenditures that exceed $50,000. With the average U.S. worker earning less than $45,000 a year, these numbers demonstrate the desirability of some kind of health insurance coverage. Few but the wealthiest families are in a position to self-insure spending at these amounts. It would be only a slight exaggeration to observe that only the 1 percent could comfortably afford to be in the health spending 1 percent.
At the other end of the distribution, individuals in the bottom half of spending account for only 3 percent of annual health costs. Their average annual spending is less than $360. Leaving aside administrative costs, an actuarially fair premium to cover only the catastrophic expenses of the top 1 percent would be almost $1,161 a year. To cover the risk of being in the top 5 percent would require annual premiums of approximately $2,700. The challenge in a voluntary health insurance system is to convince a sizable share of those who have expected expenses of less than $360 to spend more than $2,700 to secure protection against risks that have only a 5 percent chance of occurring. The more low-risk individuals who opt out, the higher will be the premiums needed for those who remain.
However, this greatly exaggerates the challenge when people are separated into different age groups. In that case, the difference between the lowest and highest spenders shrinks considerably. Indeed, for decades the non-group insurance market has successfully provided voluntary coverage through a combination of medical underwriting and pre-existing condition exclusions—together the equivalent of a homeowners insurance company checking to ensure the house is not burning down before it agrees to insure that risk—and premiums that steadily rise with age.
How to deal with the health spending 1 percent has been a contentious issue among policymakers. Someone who already has crossed the 1 percent spending threshold is by definition uninsurable: at that point, such individuals arguably need healthcare, not health insurance. But we have become so accustomed to health coverage that functions as prepaid healthcare rather than as insurance against unknown risks that this distinction escapes many people (including policymakers). In a perfect world, we would have universal coverage against the risk of landing in the health spending 1 percent. Most people would gladly pay $1,161 to avoid facing bills of $116,000. But not everyone can afford to do so. And many recognize that even if they ran up bills that large, they would not necessarily have to pay them: uncompensated care write-offs, retroactive Medicaid, and other safety net programs result in nearly two-thirds of uninsured medical bills being paid by someone other than the uninsured patient’s family. Unfortunately, these well-intentioned efforts to dissipate the adverse effects of being without health insurance concomitantly diminish incentives to obtain health insurance in the first place. The foregoing demonstrates why one Republican presidential candidate observed, a half decade ago, that ”Health is about 30 times more difficult than national security.” Perhaps it’s worth having a Republican presidential candidate debate on this issue alone.
Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at AEI. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 12.1a, and Excel spreadsheet on the concentration of health spending in 2008 for data, sources, and methods.
The incredibly sloppy and hurried drafting of the Patient Protection and Affordable Care Act (PPACA) is the gift that keeps on giving to opponents of ObamaCare. A “glitch” in drafting provisions for premium assistance in the healthcare law approved by Congress in March 2010 was first identified at an AEI forum that December by Vanderbilt law professor James Blumstein and former Justice Department attorney Thomas Christina, and later reported in early September by David Hogberg of Investor’s Business Daily. It was highlighted again last week in a Wall Street Journal op-ed by Jonathan Adler and Michael Cannon (“Another ObamaCare Glitch”). But the larger story is the continuing pattern by Obama administration officials and leaders of the previous Congress to stretch the law until it breaks and to try to bluff their way past political barriers to a sweeping, over-reaching health policy agenda.
ObamaCare hopes to use new insurance-coverage tax credits for tens of millions of Americans as a carrot to draw them into expanded coverage for Medicaid and highly regulated “exchange” plans. It also provides a stick to force employers to offer “qualified” coverage or face penalties, and to compel states to establish their own exchanges under tight federal rules or face a takeover by exchanges run directly from Washington. But the rush to pass something by any means necessary in the previous Congress in early 2010 meant that all the wires to this fiscal and regulatory bomb were not connected. It’s going to be another dud. The employer mandate penalty won’t apply in states where there is no state exchange established to distribute the tax credits. The threat of federally run exchanges is hollow without any money available from taxpayers. And the individual mandate has many other problems of its own (It’s unconstitutional, unpopular, weak, and largely unenforceable—but otherwise doing just swell).
Similar fiascos over the last year have included (1) the crash of the CLASS Act Ponzi scam for an inherently unsustainable long-term care program, (2) redefining “affordability” for employer coverage as applying only to the cost of single premiums for workers with dependents, (3) limiting grandfathering rules so narrowly that most workers will no longer be able to keep their coverage they like, (4) defining income eligibility rules for Medicaid so poorly that many higher-income, early retirees with Social Security benefits could also qualify for Medicaid and exchange-plan subsidies, and (5) having to waive broadly around annual limits for employers’ insurance benefits to prevent disastrous loss of more limited coverage for thousands of plans and millions of workers.
Folks, we are not making this up (but cannot rule out the possibility that the architects and advocates of ObamaCare continue to hope that they can continue to do so with a straight face). The provisions of the PPACA include more “oops” moments than a Rick Perry presidential debate response.
As Hardy once said to Laurel, so too should each voter keep reminding the designers of ObamaCare: “Well, here’s another nice mess you’ve gotten me into.”
Last week in my article for The American, “Does the Constitution Make You a Cash Cow?“, I found it “a bit depressing that nowhere in any of the cases on ObamaCare does there seem to be a serious argument that the individual mandate is an intolerable intrusion on economic liberty, imposed for the benefit of whichever interests capture the healthcare regulators.”
I erred. An amicus brief filed in the D.C. Circuit on behalf of the Association of American Physicians & Surgeons and the Alliance for Natural Health USA does indeed argue that ObamaCare is unconstitutional on both Equal Protection and Fifth Amendment Taking grounds.
So my compliments to Larry Joseph, the attorney for the AAPS and ANA.
For years, the FDA’s risk aversion was confined mostly to the agency’s focus on drug safety. But now, this culture is applying equally to its evaluation of drug efficacy, as the agency shows an increasing unwillingness to take a chance that the magnitude of the benefit that it observes in clinical data may not be as strong as it seems.
To guard against this “risk,” the FDA has pushed sponsors harder to conduct “perfect experiments” where patients are neatly randomized to artificial treatment groups for purposes of getting a pure statistical answer. That’s the case even if it means that the clinical trial, and in turn the information it yields, has less correlation to the kinds of practical information that doctors and patients are going to need to make prescribing decisions. Clinical trials, especially in cancer, increasingly randomize patients to treatment arms that don’t approximate how doctors treat patients in the real world. For this reason, more and more of these trials must be run in Eastern Europe, where patients are more likely to enroll in trials that randomize to outdated treatment regimens just to get access to the drugs.
The most vivid example of this regulatory approach was evidenced with the FDA’s recent handling of drugs for the treatment of Hunter’s Syndrome and Gaucher’s Disease. The agency required rigorous, and, some argued, unethical trials where babies with these degenerative diseases were randomized for up to a year to receive infusions of a promising medicine or an inert placebo. Many of the babies on the placebo arm were permanently impaired by forgoing active therapy. The drugs worked. Having run a perfect experiment, FDA had incontrovertible evidence of the drug benefits. Its final regulatory decision was an easy one for the FDA. But at what cost?
There are statistical constructs that would allow FDA to have its cake and eat it too—to get firmer answers to questions of a drug’s benefits, while enabling these decisions to be reached perhaps more quickly, and in clinical trials that don’t require patients to subject themselves to hard clinical or ethical choices to be randomized to sham treatments. But the agency has been painfully slow to embrace new science when it comes to clinical trial design. The FDA commissioner recently committed to put out guidance on these “enriched” trial designs. FDA first promised those guidance documents in 2005.
In the case of Avastin, these enriched trial designs might allow doctors to more easily glean which subgroups of patients are getting a benefit from the drug. Even the FDA commissioner acknowledged that some patients seemed to be responding to the medicine. But when these patients are averaged across all of those included in the trials, this evidence of benefit starts to get diluted. In announcing its decision on Avastin, FDA made an odd distinction between the information it uses to guide its regulatory decision and information issued by institutions such as the National Comprehensive Cancer Network, that “provide clinicians with ready access to synthesized information they can use in making patient decisions.” It begs the question what FDA thinks its role is in clinical medicine—and in this case, how much practical value the agency believes its own judgment has for patients.
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