January 27, 2009
Personal Health
By JANE E. BRODY
Ask mothers why babies are constantly picking things up from the floor or ground and putting them in their mouths, and chances are they’ll say that it’s instinctive — that that’s how babies explore the world. But why the mouth, when sight, hearing, touch and even scent are far better at identifying things?
When my young sons were exploring the streets of Brooklyn, I couldn’t help but wonder how good crushed rock or dried dog droppings could taste when delicious mashed potatoes were routinely rejected.
Since all instinctive behaviors have an evolutionary advantage or they would not have been retained for millions of years, chances are that this one too has helped us survive as a species. And, indeed, accumulating evidence strongly suggests that eating dirt is good for you.
In studies of what is called the hygiene hypothesis, researchers are concluding that organisms like the millions of bacteria, viruses and especially worms that enter the body along with “dirt” spur the development of a healthy immune system. Several continuing studies suggest that worms may help to redirect an immune system that has gone awry and resulted in autoimmune disorders, allergies and asthma.
These studies, along with epidemiological observations, seem to explain why immune system disorders like multiple sclerosis, Type 1 diabetes, inflammatory bowel disease, asthma and allergies have risen significantly in the United States and other developed countries.
Training the Immune System
“What a child is doing when he puts things in his mouth is allowing his immune response to explore his environment,” Mary Ruebush, a microbiology and immunology instructor, wrote in her new book, “Why Dirt Is Good” (Kaplan). “Not only does this allow for ‘practice’ of immune responses, which will be necessary for protection, but it also plays a critical role in teaching the immature immune response what is best ignored.”
One leading researcher, Dr. Joel V. Weinstock, the director of gastroenterology and hepatology at Tufts Medical Center in Boston, said in an interview that the immune system at birth “is like an unprogrammed computer. It needs instruction.”
He said that public health measures like cleaning up contaminated water and food have saved the lives of countless children, but they “also eliminated exposure to many organisms that are probably good for us.”
“Children raised in an ultraclean environment,” he added, “are not being exposed to organisms that help them develop appropriate immune regulatory circuits.”
Studies he has conducted with Dr. David Elliott, a gastroenterologist and immunologist at the University of Iowa, indicate that intestinal worms, which have been all but eliminated in developed countries, are “likely to be the biggest player” in regulating the immune system to respond appropriately, Dr. Elliott said in an interview. He added that bacterial and viral infections seem to influence the immune system in the same way, but not as forcefully.
Most worms are harmless, especially in well-nourished people, Dr. Weinstock said.
“There are very few diseases that people get from worms,” he said. “Humans have adapted to the presence of most of them.”
Worms for Health
In studies in mice, Dr. Weinstock and Dr. Elliott have used worms to both prevent and reverse autoimmune disease. Dr. Elliott said that in Argentina, researchers found that patients with multiple sclerosis who were infected with the human whipworm had milder cases and fewer flare-ups of their disease over a period of four and a half years. At the University of Wisconsin, Madison, Dr. John Fleming, a neurologist, is testing whether the pig whipworm can temper the effects of multiple sclerosis.
In Gambia, the eradication of worms in some villages led to children’s having increased skin reactions to allergens, Dr. Elliott said. And pig whipworms, which reside only briefly in the human intestinal tract, have had “good effects” in treating the inflammatory bowel diseases, Crohn’s disease and ulcerative colitis, he said.
How may worms affect the immune system? Dr. Elliott explained that immune regulation is now known to be more complex than scientists thought when the hygiene hypothesis was first introduced by a British epidemiologist, David P. Strachan, in 1989. Dr. Strachan noted an association between large family size and reduced rates of asthma and allergies. Immunologists now recognize a four-point response system of helper T cells: Th 1, Th 2, Th 17 and regulatory T cells. Th 1 inhibits Th 2 and Th 17; Th 2 inhibits Th 1 and Th 17; and regulatory T cells inhibit all three, Dr. Elliott said.
“A lot of inflammatory diseases — multiple sclerosis, Crohn’s disease, ulcerative colitis and asthma — are due to the activity of Th 17,” he explained. “If you infect mice with worms, Th 17 drops dramatically, and the activity of regulatory T cells is augmented.”
In answer to the question, “Are we too clean?” Dr. Elliott said: “Dirtiness comes with a price. But cleanliness comes with a price, too. We’re not proposing a return to the germ-filled environment of the 1850s. But if we properly understand how organisms in the environment protect us, maybe we can give a vaccine or mimic their effects with some innocuous stimulus.”
Wash in Moderation
Dr. Ruebush, the “Why Dirt Is Good” author, does not suggest a return to filth, either. But she correctly points out that bacteria are everywhere: on us, in us and all around us. Most of these micro-organisms cause no problem, and many, like the ones that normally live in the digestive tract and produce life-sustaining nutrients, are essential to good health.
“The typical human probably harbors some 90 trillion microbes,” she wrote. “The very fact that you have so many microbes of so many different kinds is what keeps you healthy most of the time.”
Dr. Ruebush deplores the current fetish for the hundreds of antibacterial products that convey a false sense of security and may actually foster the development of antibiotic-resistant, disease-causing bacteria. Plain soap and water are all that are needed to become clean, she noted.
“I certainly recommend washing your hands after using the bathroom, before eating, after changing a diaper, before and after handling food,” and whenever they’re visibly soiled, she wrote. When no running water is available and cleaning hands is essential, she suggests an alcohol-based hand sanitizer.
Dr. Weinstock goes even further. “Children should be allowed to go barefoot in the dirt, play in the dirt, and not have to wash their hands when they come in to eat,” he said. He and Dr. Elliott pointed out that children who grow up on farms and are frequently exposed to worms and other organisms from farm animals are much less likely to develop allergies and autoimmune diseases.
Also helpful, he said, is to “let kids have two dogs and a cat,” which will expose them to intestinal worms that can promote a healthy immune system.
Wednesday, January 28, 2009
Friday, January 23, 2009
How Do Hospitals Get Paid? A Primer
January 23, 2009, 6:40 am
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economics professor at Princeton. For previous posts in his series on why the United States spends so much on health care, click here.
Few Americans probably have any inkling of how their neighborhood hospital prices the myriad of distinct services rendered patients. I doubt many patients can understand the long hospital bills that feature exotic items such as “cath porta cath perit” or “OP6-central line reposit,” and so on. Even fewer still likely understand why a Tylenol pill or a rubber glove can carry the humongous price tags hospitals put on them.
Americans can be forgiven their ignorance on this issue because, as I put it in a recent paper on the subject, the pricing of hospital services is best described as “Chaos Behind a Veil of Secrecy.”
For starters, a hospital is paid by several quite distinct methods, depending on who is paying.
The federal Medicare program for the elderly typically pays hospitals a flat fee per hospital case, with a different per-case price for each of close to 600 distinct diagnostically related cases (D.R.G.’s) — such as a hip replacement without complications or one with complications, and so on.
These payments originally were set by Medicare in 1983 to reflect the cost then of producing each D.R.G. case. They have been updated annually and periodically recalibrated by the federal government, with the advice of Congress’s Medicare Payment Advisory Commission, a permanent body of private stakeholders with its own research staff. Through lobbying and other informal political channels the hospital industry can, of course, influence these administered prices as well. Over time, the attempt has been to keep these rates close to the average cost of providing the services per case, although many hospitals claim that often the case payments they receive are below their own full costs.
From the federal-state Medicaid program for the poor, blind and disabled, hospitals receive either (1) case-based payments (D.R.G.’s) or (2) a set amount of dollars per day of inpatient stay (per-diem payments) or (3) fees for individual services and supplies (fee-for-service or F.F.S. payments). The levels of these payments are set unilaterally by the state governments. In many states these payments are much lower than the full cost of providing the services.
Private insurers pay hospitals predominantly on the basis of per-diems or fee-for-service schedules. On average these payments exceed the hospital’s cost of providing the underlying services. The profits built into these payments cover the losses hospitals book on serving Medicare and Medicaid patients, who are billed high prices but often do not pay their bills in full. Private insurers also feed the net profits that most for-profit and not-for-profit hospitals book.
The per-diems or myriad fees that private insurers pay hospitals are negotiated annually between each hospital and each insurance carrier. A given hospital may thus negotiate one by one with several dozen or even several hundred insurers.
Readers may wonder how the many fees that hospitals receive under the fee-for-service method are negotiated separately with each hospital. Generally, the fees are not negotiated individually, but as across-the-board discounts off a giant schedule of list prices that each hospital maintains — like list prices at car dealers that no one actually pays. These schedules of list prices are known as the hospital’s “charge master.” (For an illustration, see this list of prices for some 7,500 items charged by Dameron Hospital in California.) For uninsured patients the discount is negotiated by the hospital on a patient-by-patient basis, with appeal to the patient’s ability to pay.
Each hospital has its own charge master and updates it periodically by its own unique process. Consequently, across hospitals in a given state, the list price for a particular item – e.g., a normal chest X-ray — can vary tenfold or more. In most states — California being one exception — hospitals are not required to make these charge masters public.
Over all, then, annually establishing the prices that a given insurer will pay a particular hospital and the prices charged the uninsured is an enormously cumbersome and highly labor-intensive process not used by any other health system in the industrialized world. It adds a significant component to the high administrative cost that is unique to the American health system.
One interesting aspect of this process is the wide variation in how much a basic medical service costs at different hospitals — a variation that does not appear to be tied to quality.
Tables 6.3 to 6.5 below exhibit ranges or averages of the total payments that two private health insurers make to hospitals in their state for standard medical cases. The data in the table should be understood as the total payments — per diems or fee-for-service — per standard case. I had asked for these data in my role as the chairman of the New Jersey Commission for Rationalizing Health Care Resources in 2007. The tables below are taken directly from the commission’s final report.
Source: New Jersey Commission for Rationalizing Health Care Resources
Source: New Jersey Commission for Rationalizing Health Care Resources
Source: New Jersey Commission for Rationalizing Health Care Resources
No one really understands the determinants of the wide variations in prices paid hospitals by a given insurer for basically the same medical episode. Presumably these variances reflect the relative bargaining strength of the two parties in each instance. Large insurance companies with relatively more market power vis-a-vis doctors and hospitals usually pay lower prices for given services than do smaller insurers with less market power. And traditionally, the uninsured, lacking any market power, have been charged the highest prices (i.e., granted the lowest discounts off the charge master), although in recent years more and more hospitals have switched over to a means-tested schedule of discounts off the charge master.
Critics of the federal Medicare program routinely call Medicare a “dumb” price setter. Perhaps it is. But it stretches one’s cerebral processes to conclude that the varied prices emerging from the cumbersome private market process described above are any smarter or more conducive to a rational, efficient health system. This does not mean, of course, that some economists and other defenders of the system would not try.
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economics professor at Princeton. For previous posts in his series on why the United States spends so much on health care, click here.
Few Americans probably have any inkling of how their neighborhood hospital prices the myriad of distinct services rendered patients. I doubt many patients can understand the long hospital bills that feature exotic items such as “cath porta cath perit” or “OP6-central line reposit,” and so on. Even fewer still likely understand why a Tylenol pill or a rubber glove can carry the humongous price tags hospitals put on them.
Americans can be forgiven their ignorance on this issue because, as I put it in a recent paper on the subject, the pricing of hospital services is best described as “Chaos Behind a Veil of Secrecy.”
For starters, a hospital is paid by several quite distinct methods, depending on who is paying.
The federal Medicare program for the elderly typically pays hospitals a flat fee per hospital case, with a different per-case price for each of close to 600 distinct diagnostically related cases (D.R.G.’s) — such as a hip replacement without complications or one with complications, and so on.
These payments originally were set by Medicare in 1983 to reflect the cost then of producing each D.R.G. case. They have been updated annually and periodically recalibrated by the federal government, with the advice of Congress’s Medicare Payment Advisory Commission, a permanent body of private stakeholders with its own research staff. Through lobbying and other informal political channels the hospital industry can, of course, influence these administered prices as well. Over time, the attempt has been to keep these rates close to the average cost of providing the services per case, although many hospitals claim that often the case payments they receive are below their own full costs.
From the federal-state Medicaid program for the poor, blind and disabled, hospitals receive either (1) case-based payments (D.R.G.’s) or (2) a set amount of dollars per day of inpatient stay (per-diem payments) or (3) fees for individual services and supplies (fee-for-service or F.F.S. payments). The levels of these payments are set unilaterally by the state governments. In many states these payments are much lower than the full cost of providing the services.
Private insurers pay hospitals predominantly on the basis of per-diems or fee-for-service schedules. On average these payments exceed the hospital’s cost of providing the underlying services. The profits built into these payments cover the losses hospitals book on serving Medicare and Medicaid patients, who are billed high prices but often do not pay their bills in full. Private insurers also feed the net profits that most for-profit and not-for-profit hospitals book.
The per-diems or myriad fees that private insurers pay hospitals are negotiated annually between each hospital and each insurance carrier. A given hospital may thus negotiate one by one with several dozen or even several hundred insurers.
Readers may wonder how the many fees that hospitals receive under the fee-for-service method are negotiated separately with each hospital. Generally, the fees are not negotiated individually, but as across-the-board discounts off a giant schedule of list prices that each hospital maintains — like list prices at car dealers that no one actually pays. These schedules of list prices are known as the hospital’s “charge master.” (For an illustration, see this list of prices for some 7,500 items charged by Dameron Hospital in California.) For uninsured patients the discount is negotiated by the hospital on a patient-by-patient basis, with appeal to the patient’s ability to pay.
Each hospital has its own charge master and updates it periodically by its own unique process. Consequently, across hospitals in a given state, the list price for a particular item – e.g., a normal chest X-ray — can vary tenfold or more. In most states — California being one exception — hospitals are not required to make these charge masters public.
Over all, then, annually establishing the prices that a given insurer will pay a particular hospital and the prices charged the uninsured is an enormously cumbersome and highly labor-intensive process not used by any other health system in the industrialized world. It adds a significant component to the high administrative cost that is unique to the American health system.
One interesting aspect of this process is the wide variation in how much a basic medical service costs at different hospitals — a variation that does not appear to be tied to quality.
Tables 6.3 to 6.5 below exhibit ranges or averages of the total payments that two private health insurers make to hospitals in their state for standard medical cases. The data in the table should be understood as the total payments — per diems or fee-for-service — per standard case. I had asked for these data in my role as the chairman of the New Jersey Commission for Rationalizing Health Care Resources in 2007. The tables below are taken directly from the commission’s final report.
Source: New Jersey Commission for Rationalizing Health Care Resources
Source: New Jersey Commission for Rationalizing Health Care Resources
Source: New Jersey Commission for Rationalizing Health Care Resources
No one really understands the determinants of the wide variations in prices paid hospitals by a given insurer for basically the same medical episode. Presumably these variances reflect the relative bargaining strength of the two parties in each instance. Large insurance companies with relatively more market power vis-a-vis doctors and hospitals usually pay lower prices for given services than do smaller insurers with less market power. And traditionally, the uninsured, lacking any market power, have been charged the highest prices (i.e., granted the lowest discounts off the charge master), although in recent years more and more hospitals have switched over to a means-tested schedule of discounts off the charge master.
Critics of the federal Medicare program routinely call Medicare a “dumb” price setter. Perhaps it is. But it stretches one’s cerebral processes to conclude that the varied prices emerging from the cumbersome private market process described above are any smarter or more conducive to a rational, efficient health system. This does not mean, of course, that some economists and other defenders of the system would not try.
U.S. Health Care Costs Part VII: Reining in Doctors Who Cost Too Much
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here, here, here and here.
Last week I wrote about the inexplicably high variation in per-capita health spending across the United States. The rich and highly heterogeneous reader responses have been illuminating and, in some cases, disturbing.
The ideal health systems recommended by readers ranged from government-run, single-payer systems to completely free-market systems in which individuals are responsible for their own health care. Both approaches, of course, ration health care — the first based on the capacity of the existing health care system, and the second based on individual patients’ ability to pay. A judgment of which system is better depends strictly on one’s moral values, not on economics.
I was surprised, though, that so few readers suggested that America’s health care spending issues might have something to do with our fee-for-service payment system.
Studies have shown that physicians are not impervious to the financial incentives inherent in fee-for-service payments. For example, on average, physicians who have a direct financial interest in the use of imaging services, like CAT scans or M.R.I. scans, recommend far more such services for their patients than do physicians without such financial interest (see this and this).
In recognition of the conflict of interest inherent in fee-for-service payment, there is now a worldwide movement to replace the system with so-called “evidence-based case reimbursement”. Under this approach, one single payment would cover all of the supplies and services that are needed, under best, evidence-based clinical practices, to respond adequately to well-defined medical conditions.
Not all health care, of course, can be categorized into neat, episodic bundles for this purpose. For chronic conditions, for example, payment may shift from fee-for-service to annual or monthly fees per patient, and care for such patients might be organized by clinically integrated health systems or by managed care companies procuring health care from different systems on an integrated basis. And for some patients with very complicated conditions, fee-for-service would still persist. One would think, however, that a move toward these alternative payment systems would not only reduce the geographic variations in per-capita health spending, but help control the annual growth of health spending over all.
Aside from payment reform, modern electronic health-information techniques can make doctors and hospitals more publicly accountable for their use of resources through greater transparency. Greater transparency in this realm is the sine qua non of a more cost-effective health system.
For example, it is technically feasible to capture electronically every supply and service requisitioned by every doctor in a hospital for every patient, by type of supply or service ordered. It is also feasible to electronically capture detailed information on the health status of every patient admitted to a hospital.
Combined, these two databases can be reorganized to produce cost-effectiveness profiles for every physician affiliated with a hospital, adjusted for the health status of their patients (in technical jargon, “risk adjusted”). Equipped with such risk-adjusted profiles, hospital administrators could periodically gather all affiliated physicians performing a particular procedure — e.g., coronary artery bypass grafts or knee replacements — into one room and ask those physicians who on average trigger high (risk-adjusted) costs for such procedures to justify these higher costs to their colleagues with lower costs.
The New Jersey Governor’s Commission on the Rationalization of Health Care Resources recommended that the state’s government help finance such hospital-based information systems and make them mandatory at all hospitals in the state. Each hospital administrator would then be required to certify that the physicians affiliated with the hospital have reviewed and discussed these cost profiles at least once a year. For hospitals seeking assistance from the state, these physician cost-effectiveness profiles should be accessible to the governor’s office as a condition for such assistance.
Short of revamping our entire health system, payment reform and more widespread use of electronic information systems most probably could drive even our existing system toward greater cost-effectiveness of care and, most likely, more moderate growth in health spending. There is every reason to believe that the Obama administration will pursue these avenues, as would have his rivals.
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here, here, here and here.
Last week I wrote about the inexplicably high variation in per-capita health spending across the United States. The rich and highly heterogeneous reader responses have been illuminating and, in some cases, disturbing.
The ideal health systems recommended by readers ranged from government-run, single-payer systems to completely free-market systems in which individuals are responsible for their own health care. Both approaches, of course, ration health care — the first based on the capacity of the existing health care system, and the second based on individual patients’ ability to pay. A judgment of which system is better depends strictly on one’s moral values, not on economics.
I was surprised, though, that so few readers suggested that America’s health care spending issues might have something to do with our fee-for-service payment system.
Studies have shown that physicians are not impervious to the financial incentives inherent in fee-for-service payments. For example, on average, physicians who have a direct financial interest in the use of imaging services, like CAT scans or M.R.I. scans, recommend far more such services for their patients than do physicians without such financial interest (see this and this).
In recognition of the conflict of interest inherent in fee-for-service payment, there is now a worldwide movement to replace the system with so-called “evidence-based case reimbursement”. Under this approach, one single payment would cover all of the supplies and services that are needed, under best, evidence-based clinical practices, to respond adequately to well-defined medical conditions.
Not all health care, of course, can be categorized into neat, episodic bundles for this purpose. For chronic conditions, for example, payment may shift from fee-for-service to annual or monthly fees per patient, and care for such patients might be organized by clinically integrated health systems or by managed care companies procuring health care from different systems on an integrated basis. And for some patients with very complicated conditions, fee-for-service would still persist. One would think, however, that a move toward these alternative payment systems would not only reduce the geographic variations in per-capita health spending, but help control the annual growth of health spending over all.
Aside from payment reform, modern electronic health-information techniques can make doctors and hospitals more publicly accountable for their use of resources through greater transparency. Greater transparency in this realm is the sine qua non of a more cost-effective health system.
For example, it is technically feasible to capture electronically every supply and service requisitioned by every doctor in a hospital for every patient, by type of supply or service ordered. It is also feasible to electronically capture detailed information on the health status of every patient admitted to a hospital.
Combined, these two databases can be reorganized to produce cost-effectiveness profiles for every physician affiliated with a hospital, adjusted for the health status of their patients (in technical jargon, “risk adjusted”). Equipped with such risk-adjusted profiles, hospital administrators could periodically gather all affiliated physicians performing a particular procedure — e.g., coronary artery bypass grafts or knee replacements — into one room and ask those physicians who on average trigger high (risk-adjusted) costs for such procedures to justify these higher costs to their colleagues with lower costs.
The New Jersey Governor’s Commission on the Rationalization of Health Care Resources recommended that the state’s government help finance such hospital-based information systems and make them mandatory at all hospitals in the state. Each hospital administrator would then be required to certify that the physicians affiliated with the hospital have reviewed and discussed these cost profiles at least once a year. For hospitals seeking assistance from the state, these physician cost-effectiveness profiles should be accessible to the governor’s office as a condition for such assistance.
Short of revamping our entire health system, payment reform and more widespread use of electronic information systems most probably could drive even our existing system toward greater cost-effectiveness of care and, most likely, more moderate growth in health spending. There is every reason to believe that the Obama administration will pursue these avenues, as would have his rivals.
U.S. Health Care Costs Part VI: At What Price Physician Autonomy?
December 26, 2008, 10:07 am
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here, here and here.
After a lengthy discourse on health policy with a physician, I asked him to describe the ideal health system from a physician’s perspective. “Everyone in society should have access to needed health care,” he responded. “Only the physician and the patient should decide how to respond to a given medical condition. And someone should reimburse providers of health care at reasonable rates.”
Leave aside the fact that providers of health care are “paid” for their services, not “reimbursed,” the latter method always breeding bad managerial habits. Leave aside also that the definition of “needed” health care is highly elastic. Focus instead on the core of the ideal: complete clinical autonomy for physicians and their patients to throw whatever resources they wish at given medical conditions, usually at someone else’s expense, with little or no accountability for their preferred treatments’ quality or success.
Most physicians, and I would suspect most of their patients, probably subscribe to this ideal. Alas, a mounting body of research leads experts to doubt that physician autonomy actually serves society well and that it will be affordable much longer.
One strand of this research is typified by a landmark study conducted by Elizabeth A. McGlynn and her research associates at the Rand Corporation. The researchers found that, on average, American patients receive the recommended treatment for their condition only slightly more than 50 percent of the time. There are numerous other studies of this genre.
Another strand of research can be found in the famous and equally widely quoted Dartmouth Atlas of Health Care published by John E. Wennberg and his research associates at the Dartmouth Medical School. These researchers have for two decades now alerted Congress, the medical profession and private insurers to huge geographic variations in per-capita health spending that do not seem to be related to commensurate differences in disease rates, the quality of health care processes, clinical outcomes or patient satisfaction.
Table 6.1 below, taken from the Final Report of the New Jersey Commission on Rationalizing Health Care Resources, illustrates these inexplicable geographic variations in per-capita spending. As the chair of that commission, I had asked Dr. Wennberg to develop for the commission data on Medicare spending per beneficiary in New Jersey’s various hospital market areas.
Shown in the table are the average payments for inpatient care that Medicare made per beneficiary residing in a selected number of hospital-market areas during these beneficiaries’ last two years of life. The averages have been statistically adjusted to account for differences in the gender and age of patients who come to different hospitals and also for differences in the fees Medicare pays hospitals. (Although in principle Medicare uses one uniform fee schedule nationwide, some regional adjustments are made to fees to account for local differences in labor and other practice costs). It follows that the data in the table reflect differences in the use of real resources (hospital days, procedures per hospital day, etc.) and not price differences.
The numbers in the chart are all being compared to how much Medicare reimburses hospitals nationwide, on average, for taking care of a patient in the last two years of his or her life. In technical terms, this means that if a number in the table is equal to 1, then the actual spending per beneficiary, or the actual use of hospital days, etc., in the corresponding New Jersey market area is exactly equal to the national average.
For example, the number 3.21 for the St. Michaels Medical Center hospital market area in the table means that, during their last two years of life, Medicare beneficiaries in this area were 3.21 more costly to the taxpayer times for inpatient care than were similar patients nationwide. These patients received 2.34 times more hospital inpatient days than the national average, and each hospital day they received cost 1.37 times as much as the comparable national average. By contrast, for patients in the Atlantic Medical Center market area, the statistics are very close to the national average, because the numbers for that area are all close to 1.
The insight one gains from the table is that Medicare spending per beneficiary varied by a factor of three across New Jersey, depending on the practice style preferred by the physicians caring for these patients. As the right-most column in the table suggest, there does not appear to be any systematic relationship between Medicare spending and Medicare’s hospital-specific quality index.
Hospital executives, confronted with these numbers, have explained that they have little control over the utilization of health-care resources within their hospitals, as that is the prerogative of the private, usually self-employed physicians who have privileges at these hospitals and can look upon the latter as their free workshops. Furthermore, these executives would be loath to reproach the physicians responsible for using the most Medicare dollars, lest those physicians shift their patients to rival hospitals. Most health-care experts accept these explanations.
Dr. Wennberg and his associates at Dartmouth Medical have published similar data for California and for the nation as a whole. In their most recent publication, they show that these enormous variations in per-capita health spending are confined not only to the traditional, government-run, fee-for-service part of Medicare, but are apparent also for Medicare beneficiaries served by the private “Medicare Advantage” plans as well as among the commercially insured patients served by these private plans. They are a feature of all medical practice in America, regardless of who pays for the care.
The wonder is that neither Congress, nor the medical profession, nor private health insurers has so far felt obligated to come to grips with these enormous variations in health spending nor even to evince any curiosity about them.
According to the Dartmouth researchers, if physicians with relatively higher cost preferred practice styles could be induced to embrace the preferred practice styles of their equally effective but lower-cost colleagues, overall per-capita Medicare spending probably could be reduced by at least 30 percent without harming patients, and similarly for commercially insured younger Americans. How can a nation that routinely wails over its high cost of health care ignore such important research?
In a future post to this blog, I shall explore what might possibly be done to address this issue. In the meantime, it would be fascinating to learn from their comments what readers would do, were they American health-care czars.
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here, here and here.
After a lengthy discourse on health policy with a physician, I asked him to describe the ideal health system from a physician’s perspective. “Everyone in society should have access to needed health care,” he responded. “Only the physician and the patient should decide how to respond to a given medical condition. And someone should reimburse providers of health care at reasonable rates.”
Leave aside the fact that providers of health care are “paid” for their services, not “reimbursed,” the latter method always breeding bad managerial habits. Leave aside also that the definition of “needed” health care is highly elastic. Focus instead on the core of the ideal: complete clinical autonomy for physicians and their patients to throw whatever resources they wish at given medical conditions, usually at someone else’s expense, with little or no accountability for their preferred treatments’ quality or success.
Most physicians, and I would suspect most of their patients, probably subscribe to this ideal. Alas, a mounting body of research leads experts to doubt that physician autonomy actually serves society well and that it will be affordable much longer.
One strand of this research is typified by a landmark study conducted by Elizabeth A. McGlynn and her research associates at the Rand Corporation. The researchers found that, on average, American patients receive the recommended treatment for their condition only slightly more than 50 percent of the time. There are numerous other studies of this genre.
Another strand of research can be found in the famous and equally widely quoted Dartmouth Atlas of Health Care published by John E. Wennberg and his research associates at the Dartmouth Medical School. These researchers have for two decades now alerted Congress, the medical profession and private insurers to huge geographic variations in per-capita health spending that do not seem to be related to commensurate differences in disease rates, the quality of health care processes, clinical outcomes or patient satisfaction.
Table 6.1 below, taken from the Final Report of the New Jersey Commission on Rationalizing Health Care Resources, illustrates these inexplicable geographic variations in per-capita spending. As the chair of that commission, I had asked Dr. Wennberg to develop for the commission data on Medicare spending per beneficiary in New Jersey’s various hospital market areas.
Shown in the table are the average payments for inpatient care that Medicare made per beneficiary residing in a selected number of hospital-market areas during these beneficiaries’ last two years of life. The averages have been statistically adjusted to account for differences in the gender and age of patients who come to different hospitals and also for differences in the fees Medicare pays hospitals. (Although in principle Medicare uses one uniform fee schedule nationwide, some regional adjustments are made to fees to account for local differences in labor and other practice costs). It follows that the data in the table reflect differences in the use of real resources (hospital days, procedures per hospital day, etc.) and not price differences.
The numbers in the chart are all being compared to how much Medicare reimburses hospitals nationwide, on average, for taking care of a patient in the last two years of his or her life. In technical terms, this means that if a number in the table is equal to 1, then the actual spending per beneficiary, or the actual use of hospital days, etc., in the corresponding New Jersey market area is exactly equal to the national average.
For example, the number 3.21 for the St. Michaels Medical Center hospital market area in the table means that, during their last two years of life, Medicare beneficiaries in this area were 3.21 more costly to the taxpayer times for inpatient care than were similar patients nationwide. These patients received 2.34 times more hospital inpatient days than the national average, and each hospital day they received cost 1.37 times as much as the comparable national average. By contrast, for patients in the Atlantic Medical Center market area, the statistics are very close to the national average, because the numbers for that area are all close to 1.
The insight one gains from the table is that Medicare spending per beneficiary varied by a factor of three across New Jersey, depending on the practice style preferred by the physicians caring for these patients. As the right-most column in the table suggest, there does not appear to be any systematic relationship between Medicare spending and Medicare’s hospital-specific quality index.
Hospital executives, confronted with these numbers, have explained that they have little control over the utilization of health-care resources within their hospitals, as that is the prerogative of the private, usually self-employed physicians who have privileges at these hospitals and can look upon the latter as their free workshops. Furthermore, these executives would be loath to reproach the physicians responsible for using the most Medicare dollars, lest those physicians shift their patients to rival hospitals. Most health-care experts accept these explanations.
Dr. Wennberg and his associates at Dartmouth Medical have published similar data for California and for the nation as a whole. In their most recent publication, they show that these enormous variations in per-capita health spending are confined not only to the traditional, government-run, fee-for-service part of Medicare, but are apparent also for Medicare beneficiaries served by the private “Medicare Advantage” plans as well as among the commercially insured patients served by these private plans. They are a feature of all medical practice in America, regardless of who pays for the care.
The wonder is that neither Congress, nor the medical profession, nor private health insurers has so far felt obligated to come to grips with these enormous variations in health spending nor even to evince any curiosity about them.
According to the Dartmouth researchers, if physicians with relatively higher cost preferred practice styles could be induced to embrace the preferred practice styles of their equally effective but lower-cost colleagues, overall per-capita Medicare spending probably could be reduced by at least 30 percent without harming patients, and similarly for commercially insured younger Americans. How can a nation that routinely wails over its high cost of health care ignore such important research?
In a future post to this blog, I shall explore what might possibly be done to address this issue. In the meantime, it would be fascinating to learn from their comments what readers would do, were they American health-care czars.
U.S. Health Care Costs, Part V: Can Americans Afford Medicare?
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here and here.
It is now generally believed that the federal Medicare program for America’s elderly is “unsustainable” and must be “restructured.” This somber assessment is part of the more general cri de coeur so wondrously phrased some years ago in the title of the Brookings Institution’s monograph “Can America Afford to Grow Old?”
What if we couldn’t? What would we do – push the elderly into the ocean on an ice floe?
Of course America can afford to grow old! We can more easily afford it than most other industrialized nations.
The percentage of the American population age 65 or over is 12.4 now and is projected to rise to about 21 by 2050. Only 7 percent of China’s population is 65 or over now, but that figure will shoot up rapidly to over 22 percent by 2050. And in a number of other industrialized countries — notably in Japan, Germany, Italy and Sweden — the elderly already represent close to 20 percent of the population, a level the United States will not reach until about 2040. Yet the world has not come to an end in these older countries.
It’s hard to say what fraction of America’s gross domestic product future generations should allocate to people too old (or too young) to work, and how much should remain with those who have produced that G.D.P. This is a matter to be resolved by those future generations.
They must decide how well the elderly in their midst should be housed, fed and cared for when sick. Our influence over that allocation is minimal, because future generations can always override our decisions while we cannot override theirs. The best we can do today is to put in place public policies that can help G.D.P. grow now and in the future, to ease the pain of sharing. We could also influence somewhat the age structure of future populations through current and future policies on immigration, although there are limits to that approach, because immigrants, too, grow old.
Fortunately, as is shown in the graphical display below, future generations will most likely have the benefit of G.D.P. growth on their side, which should make it easier for them to house, feed and care for larger fractions of elderly citizens.
Current G.D.P. per capita in the United States is about $46,500 (tables B-2 and B-34 here), of which Medicare absorbs slightly over 3 percent, leaving about $45,000 of G.D.P. per capita for other things.
Suppose between now and, say, 2050, inflation-adjusted G.D.P. per capita in the United States grows at an annual compound rate of only 1.5 percent per year, which is conservatively below the roughly 2 percent long-run annual growth rate of real G.D.P. per capita over the past several decades. Even at this low growth rate, inflation-adjusted G.D.P. per capita would grow from $46,500 now to about $87,000 by 2050.
According to the Social Security Trustees’ 2008 Report on the Status of the Social Security and Medicare Programs (Chart B), Medicare will absorb about 8.4 percent of G.D.P. by 2050 if it is not restructured.
But even after that 8.4 percent haircut for Medicare in 2050, there would still be close to $80,000 inflation-adjusted G.D.P. per capita left over for other things in that year, which is still 78 percent more than the non-Medicare G.D.P. per capita that we have today.
Source: Uwe E. Reinhardt.
So what do we mean when we lament that Medicare will not be “affordable” in the future? Do we assume that G.D.P. will be stagnant for the next 40 years?
Those who make such statements, of course, may not even think about real claims on real G.D.P. Instead they may have in mind two quite different propositions.
First, they may argue that even if Medicare were eminently affordable from a purely macroeconomic perspective, its current structure of mainly public financing may not be politically sustainable. There is no question that to allocate as much as 8.4 percent of 2050 G.D.P. to Medicare under its current structure would require sizable tax increases. But social values and preferences can change. Future cohorts of voting retirees and their children in the United States may well countenance the higher levels of taxation already long accepted in other industrialized nations, in return for greater personal financial security.
An alternative proposition may be that, even if (1) sustaining Medicare in its current structure were eminently affordable from a macroeconomic perspective, and (2) it were politically feasible, we still shouldn’t sustain Medicare in its present form because the program wastes real and financial resources.
There is something to the second proposition, as will be explained in detail in my next post to this blog.
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here and here.
It is now generally believed that the federal Medicare program for America’s elderly is “unsustainable” and must be “restructured.” This somber assessment is part of the more general cri de coeur so wondrously phrased some years ago in the title of the Brookings Institution’s monograph “Can America Afford to Grow Old?”
What if we couldn’t? What would we do – push the elderly into the ocean on an ice floe?
Of course America can afford to grow old! We can more easily afford it than most other industrialized nations.
The percentage of the American population age 65 or over is 12.4 now and is projected to rise to about 21 by 2050. Only 7 percent of China’s population is 65 or over now, but that figure will shoot up rapidly to over 22 percent by 2050. And in a number of other industrialized countries — notably in Japan, Germany, Italy and Sweden — the elderly already represent close to 20 percent of the population, a level the United States will not reach until about 2040. Yet the world has not come to an end in these older countries.
It’s hard to say what fraction of America’s gross domestic product future generations should allocate to people too old (or too young) to work, and how much should remain with those who have produced that G.D.P. This is a matter to be resolved by those future generations.
They must decide how well the elderly in their midst should be housed, fed and cared for when sick. Our influence over that allocation is minimal, because future generations can always override our decisions while we cannot override theirs. The best we can do today is to put in place public policies that can help G.D.P. grow now and in the future, to ease the pain of sharing. We could also influence somewhat the age structure of future populations through current and future policies on immigration, although there are limits to that approach, because immigrants, too, grow old.
Fortunately, as is shown in the graphical display below, future generations will most likely have the benefit of G.D.P. growth on their side, which should make it easier for them to house, feed and care for larger fractions of elderly citizens.
Current G.D.P. per capita in the United States is about $46,500 (tables B-2 and B-34 here), of which Medicare absorbs slightly over 3 percent, leaving about $45,000 of G.D.P. per capita for other things.
Suppose between now and, say, 2050, inflation-adjusted G.D.P. per capita in the United States grows at an annual compound rate of only 1.5 percent per year, which is conservatively below the roughly 2 percent long-run annual growth rate of real G.D.P. per capita over the past several decades. Even at this low growth rate, inflation-adjusted G.D.P. per capita would grow from $46,500 now to about $87,000 by 2050.
According to the Social Security Trustees’ 2008 Report on the Status of the Social Security and Medicare Programs (Chart B), Medicare will absorb about 8.4 percent of G.D.P. by 2050 if it is not restructured.
But even after that 8.4 percent haircut for Medicare in 2050, there would still be close to $80,000 inflation-adjusted G.D.P. per capita left over for other things in that year, which is still 78 percent more than the non-Medicare G.D.P. per capita that we have today.
Source: Uwe E. Reinhardt.
So what do we mean when we lament that Medicare will not be “affordable” in the future? Do we assume that G.D.P. will be stagnant for the next 40 years?
Those who make such statements, of course, may not even think about real claims on real G.D.P. Instead they may have in mind two quite different propositions.
First, they may argue that even if Medicare were eminently affordable from a purely macroeconomic perspective, its current structure of mainly public financing may not be politically sustainable. There is no question that to allocate as much as 8.4 percent of 2050 G.D.P. to Medicare under its current structure would require sizable tax increases. But social values and preferences can change. Future cohorts of voting retirees and their children in the United States may well countenance the higher levels of taxation already long accepted in other industrialized nations, in return for greater personal financial security.
An alternative proposition may be that, even if (1) sustaining Medicare in its current structure were eminently affordable from a macroeconomic perspective, and (2) it were politically feasible, we still shouldn’t sustain Medicare in its present form because the program wastes real and financial resources.
There is something to the second proposition, as will be explained in detail in my next post to this blog.
Why Does U.S. Health Care Cost So Much? (Part IV: A Primer on Medicare)
December 12, 2008, 6:30 am
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here and here.
Medicare, the federal health-insurance program for America’s elderly, plays a major and highly controversial role in our health-care system. To many Americans it is a blessing. Others view it as a source of all that’s wrong with American health care. I propose to explore these views in this and the next two posts to this blog.
Congress established Medicare in 1965, when close to 40 percent of America’s elderly lived at or below the federal poverty line. They simply could not afford the ever more sophisticated and expensive health care then starting to come on line.
The program now covers 45 million Americans 65 or older, as well as younger people with permanent disabilities, among them patients afflicted with End Stage Renal Disease. About half of Medicare beneficiaries live at or below 200 percent of the federal poverty line (i.e., $20,800 annual income for a single person and $28,000 for a couple). Over a third of the beneficiaries are afflicted with three or more chronic conditions.
In 2009, Medicare is expected to cost the federal government about $480 billion. That represents over a fifth of total national health spending on personal health care, 13 percent of the federal budget and close to 3.5 percent of the country’s gross domestic product. These outlays are financed with a combination of payroll taxes (41 percent), general tax revenues (39 percent), premiums paid by the elderly (12 percent) and sundry other sources, including interest earned on a trust fund established for the program.
Because Medicare’s benefit package traditionally has been less generous than traditional employment-based private insurance for younger Americans –- it has covered prescription drugs only since 2006 — many beneficiaries have sought supplemental, wrap-around coverage from their former employers (about 33 percent) or from a purchase of a private Medigap policy (about 20 percent). The federal-state Medicaid program for the poor provides such gap coverage for some 7 million (or 15.5 percent) Medicare beneficiaries, called “dual eligibles.”
Even with such supplemental coverage, however, out-of-pocket cost-sharing at the time health care is received has always been high relative to employment-based private insurance for younger Americans. In 2005, the median fraction of income Medicare beneficiaries spent out of pocket for their care was 16.1 percent. For the 11 percent of beneficiaries without supplemental coverage, out-of-pocket spending can absorb 30 percent or more of their income.
Medicare was originally established as a single-payer, government-run, fee-for-service plan whose claims by patients and health care providers were administered, for a modest fee, by a select group of private insurance plans called Medicare Intermediaries -– typically Blue Cross plans. This arrangement is now known as “Traditional FFS Medicare.”
Starting in the 1970s, however, Medicare beneficiaries have had the option of enrolling in a variety of health plans offered by private insurers. Starting with the Medicare Modernization Act passed in December 2003, which offered beneficiaries drug coverage for the first time, these private insurance options have been called “Medicare Advantage” plans. About 23 percent of Medicare beneficiaries have chosen this option.
Driven by an ideological preference for private over government-run health insurance, the Republican Congress in 2003 made taxpayers effectively pay these private plans an average of 13 percent more per Medicare beneficiary than these beneficiaries would have cost taxpayers under the government-run program. Consequently, the private plans can offer beneficiaries superior benefits, which has caused enrollment in them to double from 5.3 million to 10.1 million between 2003 and 2008. Because it is hard to justify this extra public subsidy to the private plans on the basis of health policy, however, it has been highly controversial among health policy experts and is likely to be eliminated by the new Congress in the next few years.
Although often decried by its critics as “socialized medicine,” Medicare remains a highly popular health-insurance product among the elderly, who rate the quality of care they receive under it higher than younger, privately insured Americans rate their health care (see, for example, this and also this, Charts 4:1 to 4:3).
This sentiment is not surprising, because, from both the patient’s and the provider’s perspective, claims processing under Medicare is relatively simple in comparison with the complexity of private health insurance, although Medicare is much more administratively complex than are similar government-run, single-payer health insurance systems in other countries (e.g., Taiwan or Canada).
Furthermore, in surveys of Americans 50 and older, respondents expressed greater trust in Medicare as a source of health insurance, possibly still remembering the late 1990s, when many private plans terminated their coverage of Medicare patients.
In the next post, I shall assess the often-made claim that Medicare is not much longer “sustainable.” Thereafter I shall explore whether Medicare in its current form should be sustained, even if it were affordable in that form. In the meantime, readers who wish more detail on the program than could be offered here may wish to consult the excellent primer on Medicare found at the Henry J. Kaiser Family Foundation’s Web site.
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here and here.
Medicare, the federal health-insurance program for America’s elderly, plays a major and highly controversial role in our health-care system. To many Americans it is a blessing. Others view it as a source of all that’s wrong with American health care. I propose to explore these views in this and the next two posts to this blog.
Congress established Medicare in 1965, when close to 40 percent of America’s elderly lived at or below the federal poverty line. They simply could not afford the ever more sophisticated and expensive health care then starting to come on line.
The program now covers 45 million Americans 65 or older, as well as younger people with permanent disabilities, among them patients afflicted with End Stage Renal Disease. About half of Medicare beneficiaries live at or below 200 percent of the federal poverty line (i.e., $20,800 annual income for a single person and $28,000 for a couple). Over a third of the beneficiaries are afflicted with three or more chronic conditions.
In 2009, Medicare is expected to cost the federal government about $480 billion. That represents over a fifth of total national health spending on personal health care, 13 percent of the federal budget and close to 3.5 percent of the country’s gross domestic product. These outlays are financed with a combination of payroll taxes (41 percent), general tax revenues (39 percent), premiums paid by the elderly (12 percent) and sundry other sources, including interest earned on a trust fund established for the program.
Because Medicare’s benefit package traditionally has been less generous than traditional employment-based private insurance for younger Americans –- it has covered prescription drugs only since 2006 — many beneficiaries have sought supplemental, wrap-around coverage from their former employers (about 33 percent) or from a purchase of a private Medigap policy (about 20 percent). The federal-state Medicaid program for the poor provides such gap coverage for some 7 million (or 15.5 percent) Medicare beneficiaries, called “dual eligibles.”
Even with such supplemental coverage, however, out-of-pocket cost-sharing at the time health care is received has always been high relative to employment-based private insurance for younger Americans. In 2005, the median fraction of income Medicare beneficiaries spent out of pocket for their care was 16.1 percent. For the 11 percent of beneficiaries without supplemental coverage, out-of-pocket spending can absorb 30 percent or more of their income.
Medicare was originally established as a single-payer, government-run, fee-for-service plan whose claims by patients and health care providers were administered, for a modest fee, by a select group of private insurance plans called Medicare Intermediaries -– typically Blue Cross plans. This arrangement is now known as “Traditional FFS Medicare.”
Starting in the 1970s, however, Medicare beneficiaries have had the option of enrolling in a variety of health plans offered by private insurers. Starting with the Medicare Modernization Act passed in December 2003, which offered beneficiaries drug coverage for the first time, these private insurance options have been called “Medicare Advantage” plans. About 23 percent of Medicare beneficiaries have chosen this option.
Driven by an ideological preference for private over government-run health insurance, the Republican Congress in 2003 made taxpayers effectively pay these private plans an average of 13 percent more per Medicare beneficiary than these beneficiaries would have cost taxpayers under the government-run program. Consequently, the private plans can offer beneficiaries superior benefits, which has caused enrollment in them to double from 5.3 million to 10.1 million between 2003 and 2008. Because it is hard to justify this extra public subsidy to the private plans on the basis of health policy, however, it has been highly controversial among health policy experts and is likely to be eliminated by the new Congress in the next few years.
Although often decried by its critics as “socialized medicine,” Medicare remains a highly popular health-insurance product among the elderly, who rate the quality of care they receive under it higher than younger, privately insured Americans rate their health care (see, for example, this and also this, Charts 4:1 to 4:3).
This sentiment is not surprising, because, from both the patient’s and the provider’s perspective, claims processing under Medicare is relatively simple in comparison with the complexity of private health insurance, although Medicare is much more administratively complex than are similar government-run, single-payer health insurance systems in other countries (e.g., Taiwan or Canada).
Furthermore, in surveys of Americans 50 and older, respondents expressed greater trust in Medicare as a source of health insurance, possibly still remembering the late 1990s, when many private plans terminated their coverage of Medicare patients.
In the next post, I shall assess the often-made claim that Medicare is not much longer “sustainable.” Thereafter I shall explore whether Medicare in its current form should be sustained, even if it were affordable in that form. In the meantime, readers who wish more detail on the program than could be offered here may wish to consult the excellent primer on Medicare found at the Henry J. Kaiser Family Foundation’s Web site.
Why Does U.S. Health Care Cost So Much? (Part III: An Aging Population Isn’t the Reason)
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton.
Update | Professor Reinhardt responds to commenters here.
Not a conference on health care goes by without someone’s asserting that the aging of our population is a major driver of the annual growth in health spending. It sounds intuitively appealing if one contemplates the following two graphs, which are regularly trotted out on such occasions.
Graph courtesy of Uwe Reinhardt.
Graph courtesy of Uwe Reinhardt.
The first graph depicts what is commonly described as the “Baby Boom Tsunami.” The second depicts age-specific health spending per capita in 1999, relative to the spending of Americans in the age group 35 to 44, which is set to 1. These age-specific relative spending profiles do not change much over time for a given country, and they do not much differ among industrialized nations. They show that after age 60 or so, health spending per capita rises sharply with age.
Yet, research around the world has shown that the process of the aging of the population by itself adds only a very small part – usually about half a percentage point — to the annual growth in per-capita health spending in industrialized societies, which tends to range between 5 and 8 percent, depending on the country and the period in question. The bulk of annual spending growth can be explained by overall population growth (about 1.1 percent per year), increases in the prices of health care goods and services, and the availability of ever more new, often high-cost medical products and treatments used by all age groups.
Because this proposition is so counterintuitive, readers may wish to consult two recent research papers on the topic, one penned by the present author, and the other penned by other researchers.
These papers are based on American data. Similar studies have appeared also for Canada, Australia and many other countries in the Organization for Economic Cooperation and Development. Indeed, it may surprise readers that knowing the percentage of a nation’s population that is over age 65 cannot help one explain cross-national differences in health spending per capita, as is shown in the graph further on. As the graph shows, the per-capita health spending of nations is virtually independent of the age structure of its population.
Graph courtesy of Uwe Reinhardt.
Why, then, is the aging of the population such a small driver of annual increases in health spending? The answer can be found in the last graphical display of this commentary. That graph contains the same data as the first graph in this commentary, but the vertical axis is scaled as it should be scaled: from 0 percent to 100 percent. Letting it run from 12 percent to 22 percent stretches the vertical axis and creates the image of the famous Baby Boom Tsunami. It is a form of lying with statistics.
Graph courtesy of Uwe Reinhardt.
As this graph illustrates, the aging of our population is a very gradual process and does not come even close to resembling a tsunami. It is at best a demographic ripple.
Furthermore, current population projections have the fraction of elderly in the United States population peak at around 20 percent. Along with Canada and Australia, we shall be for a very long time the youngest nation in the O.E.C.D. Only in 2025 will the American population be as “old” as many European populations are already today.
As the song goes, relative to other nations we shall be “forever young”!
Uwe E. Reinhardt is an economist at Princeton.
Update | Professor Reinhardt responds to commenters here.
Not a conference on health care goes by without someone’s asserting that the aging of our population is a major driver of the annual growth in health spending. It sounds intuitively appealing if one contemplates the following two graphs, which are regularly trotted out on such occasions.
Graph courtesy of Uwe Reinhardt.
Graph courtesy of Uwe Reinhardt.
The first graph depicts what is commonly described as the “Baby Boom Tsunami.” The second depicts age-specific health spending per capita in 1999, relative to the spending of Americans in the age group 35 to 44, which is set to 1. These age-specific relative spending profiles do not change much over time for a given country, and they do not much differ among industrialized nations. They show that after age 60 or so, health spending per capita rises sharply with age.
Yet, research around the world has shown that the process of the aging of the population by itself adds only a very small part – usually about half a percentage point — to the annual growth in per-capita health spending in industrialized societies, which tends to range between 5 and 8 percent, depending on the country and the period in question. The bulk of annual spending growth can be explained by overall population growth (about 1.1 percent per year), increases in the prices of health care goods and services, and the availability of ever more new, often high-cost medical products and treatments used by all age groups.
Because this proposition is so counterintuitive, readers may wish to consult two recent research papers on the topic, one penned by the present author, and the other penned by other researchers.
These papers are based on American data. Similar studies have appeared also for Canada, Australia and many other countries in the Organization for Economic Cooperation and Development. Indeed, it may surprise readers that knowing the percentage of a nation’s population that is over age 65 cannot help one explain cross-national differences in health spending per capita, as is shown in the graph further on. As the graph shows, the per-capita health spending of nations is virtually independent of the age structure of its population.
Graph courtesy of Uwe Reinhardt.
Why, then, is the aging of the population such a small driver of annual increases in health spending? The answer can be found in the last graphical display of this commentary. That graph contains the same data as the first graph in this commentary, but the vertical axis is scaled as it should be scaled: from 0 percent to 100 percent. Letting it run from 12 percent to 22 percent stretches the vertical axis and creates the image of the famous Baby Boom Tsunami. It is a form of lying with statistics.
Graph courtesy of Uwe Reinhardt.
As this graph illustrates, the aging of our population is a very gradual process and does not come even close to resembling a tsunami. It is at best a demographic ripple.
Furthermore, current population projections have the fraction of elderly in the United States population peak at around 20 percent. Along with Canada and Australia, we shall be for a very long time the youngest nation in the O.E.C.D. Only in 2025 will the American population be as “old” as many European populations are already today.
As the song goes, relative to other nations we shall be “forever young”!
Why Does U.S. Health Care Cost So Much? (Part II: Indefensible Administrative Costs)
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton.
In my previous blog post, I showed that America suffers from “excess spending” in its health care system. Here I will discuss one factor that drives up that spending: indefensibly high administrative costs.
To review: “Excess health spending” in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that that country would spend. (The prediction is based on trends in other countries in the Organization for Economic Cooperation and Development.) The word “excess” here should not be taken as “excessive” unless one could demonstrate that what the other O.E.C.D. nations spend is appropriate and what we spend is ipso facto wasteful.
The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. Given the sheer magnitude of the estimated excess spending, it is fair to ask American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.
One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.
The McKinsey team estimated that about 85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.
Two studies using more detailed bilateral comparisons of two countries illustrate even more sharply the magnitude of our administrative burden relative to that in other developed countries.
One of these is an earlier McKinsey study explaining the difference in 1990 health spending in West Germany and in the United States. The researchers found that in 1990 Americans received $390 per capita less in actual health care but spent $360 more per capita on administration.
A second, more recent study of administrative costs in the American and Canadian health systems was published in 2003 by Steffie Woolhandler and David Himmelstein in The New England Journal of Medicine in 2003. The study used a measure of administrative costs that includes not only the insurer’s costs, but also the costs borne by employers, health-care providers and governments – but not the value of the time patients spent claiming reimbursement. These authors estimated that in 1999, Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.
More and more Americans are being priced out of health care as we know it. The question is how long American health policy makers, and particularly the leaders of our private health insurance, can justify this enormous and costly administrative burden to the American people and to the harried providers of health care.
Uwe E. Reinhardt is an economist at Princeton.
In my previous blog post, I showed that America suffers from “excess spending” in its health care system. Here I will discuss one factor that drives up that spending: indefensibly high administrative costs.
To review: “Excess health spending” in this context refers to the difference between what a country spends per person on health care, and what the country’s gross domestic product per person should predict that that country would spend. (The prediction is based on trends in other countries in the Organization for Economic Cooperation and Development.) The word “excess” here should not be taken as “excessive” unless one could demonstrate that what the other O.E.C.D. nations spend is appropriate and what we spend is ipso facto wasteful.
The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. Given the sheer magnitude of the estimated excess spending, it is fair to ask American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.
One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.
The McKinsey team estimated that about 85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.
Two studies using more detailed bilateral comparisons of two countries illustrate even more sharply the magnitude of our administrative burden relative to that in other developed countries.
One of these is an earlier McKinsey study explaining the difference in 1990 health spending in West Germany and in the United States. The researchers found that in 1990 Americans received $390 per capita less in actual health care but spent $360 more per capita on administration.
A second, more recent study of administrative costs in the American and Canadian health systems was published in 2003 by Steffie Woolhandler and David Himmelstein in The New England Journal of Medicine in 2003. The study used a measure of administrative costs that includes not only the insurer’s costs, but also the costs borne by employers, health-care providers and governments – but not the value of the time patients spent claiming reimbursement. These authors estimated that in 1999, Americans spent $1,059 per capita on administration compared with only $307 in purchasing power parity dollars (PPP $) spent in Canada.
More and more Americans are being priced out of health care as we know it. The question is how long American health policy makers, and particularly the leaders of our private health insurance, can justify this enormous and costly administrative burden to the American people and to the harried providers of health care.
Why Does U.S. Health Care Cost So Much? (Part I)
November 14, 2008, 7:30 am
Why Does U.S. Health Care Cost So Much? (Part I)
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton.
The graph below tells a compact story of United States health spending relative to that of other nations.
Shown on the horizontal axis is the gross domestic product per capita in 2006. The vertical axis represents 2006 health spending per capita. The data points in the graph represent two dozen developed countries that are members of the Organization for Economic Cooperation and Development (O.E.C.D.).
Source: Uwe Reinhardt
You’ll notice that there is enormous variation in health spending per capita in different countries within the O.E.C.D. But the graph also indicates that there exists a very strong relationship between the G.D.P. per capita of these countries (roughly a measure of ability to pay) and per-capita health spending. The dark line in the graph is a so-called regression equation (whose precise mathematical form is shown in the upper left corner).
That line tells us something important about the relationship between a country’s wealth and its health care spending.
Just knowing the G.D.P. per capita of nations helps us explain about 86 percent of the variation in how much different countries pay for health care for the average person. Canada, for example, on average spent only PPP$3,678 on health care per person in 2006, which is about 55 percent of the amount the United States paid per person. But Canada’s G.D.P. per capita in 2006 was also smaller than the comparable United States figure, although not that much smaller (it was 84 percent of the American level).
The line helps us estimate that roughly $1,141 of the $3,036 difference between Canadian and American health spending per capita – or 38 percent — can be explained by the underlying difference in G.D.P. per capita alone.
An additional insight from the graph, however, is that even after adjustment for differences in G.D.P. per capita, the United States in 2006 spent $1,895 more on health care than would have been predicted after such an adjustment. If G.D.P. per capita were the only factor driving the difference between United States health spending and that of other nations, the United States would be expected to have spent an average of only $4,819 per capita on health care rather than the $6,714 it actually spent.
Health-services researchers call the difference between these numbers, here $1,895, “excess spending.” That term, however, is not meant to convey “excessive spending,” but merely a difference driven by factors other than G.D.P. per capita. Prominent among these other factors are:
1. higher prices for the same health care goods and services than are paid in other countries for the same goods and services;
2. significantly higher administrative overhead costs than are incurred in other countries with simpler health-insurance systems;
3. more widespread use of high-cost, high-tech equipment and procedures than are used in other countries;
4. higher treatment costs triggered by our uniquely American tort laws, which in the context of medicine can lead to “defensive medicine” — that is, the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative.
There are three other explanations that are widely — but erroneously — thought among non-experts to be cost drivers in the American health spending. To wit:
1. that the aging of our population drives health spending
2. that we get better quality from our health system than do other nations, and
3. that we get better health outcomes from our system
I will comment in more detail on factors that do and do not drive health spending in subsequent posts.
Why Does U.S. Health Care Cost So Much? (Part I)
By Uwe E. Reinhardt
Uwe E. Reinhardt is an economist at Princeton.
The graph below tells a compact story of United States health spending relative to that of other nations.
Shown on the horizontal axis is the gross domestic product per capita in 2006. The vertical axis represents 2006 health spending per capita. The data points in the graph represent two dozen developed countries that are members of the Organization for Economic Cooperation and Development (O.E.C.D.).
The data are expressed in Purchasing Parity Dollars (PPP$). This metric is designed to adjust for cross-national differences in the purchasing power of national currencies relative to the real goods and services. One can think of PPP$s as dollars that buy roughly the same basket of real goods and services in different countries.
Source: Uwe Reinhardt
You’ll notice that there is enormous variation in health spending per capita in different countries within the O.E.C.D. But the graph also indicates that there exists a very strong relationship between the G.D.P. per capita of these countries (roughly a measure of ability to pay) and per-capita health spending. The dark line in the graph is a so-called regression equation (whose precise mathematical form is shown in the upper left corner).
That line tells us something important about the relationship between a country’s wealth and its health care spending.
Just knowing the G.D.P. per capita of nations helps us explain about 86 percent of the variation in how much different countries pay for health care for the average person. Canada, for example, on average spent only PPP$3,678 on health care per person in 2006, which is about 55 percent of the amount the United States paid per person. But Canada’s G.D.P. per capita in 2006 was also smaller than the comparable United States figure, although not that much smaller (it was 84 percent of the American level).
The line helps us estimate that roughly $1,141 of the $3,036 difference between Canadian and American health spending per capita – or 38 percent — can be explained by the underlying difference in G.D.P. per capita alone.
An additional insight from the graph, however, is that even after adjustment for differences in G.D.P. per capita, the United States in 2006 spent $1,895 more on health care than would have been predicted after such an adjustment. If G.D.P. per capita were the only factor driving the difference between United States health spending and that of other nations, the United States would be expected to have spent an average of only $4,819 per capita on health care rather than the $6,714 it actually spent.
Health-services researchers call the difference between these numbers, here $1,895, “excess spending.” That term, however, is not meant to convey “excessive spending,” but merely a difference driven by factors other than G.D.P. per capita. Prominent among these other factors are:
1. higher prices for the same health care goods and services than are paid in other countries for the same goods and services;
2. significantly higher administrative overhead costs than are incurred in other countries with simpler health-insurance systems;
3. more widespread use of high-cost, high-tech equipment and procedures than are used in other countries;
4. higher treatment costs triggered by our uniquely American tort laws, which in the context of medicine can lead to “defensive medicine” — that is, the application of tests and procedures mainly as a defense against possible malpractice litigation, rather than as a clinical imperative.
There are three other explanations that are widely — but erroneously — thought among non-experts to be cost drivers in the American health spending. To wit:
1. that the aging of our population drives health spending
2. that we get better quality from our health system than do other nations, and
3. that we get better health outcomes from our system
I will comment in more detail on factors that do and do not drive health spending in subsequent posts.
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