You Think Health Care is Pricey Now?

Reprinted from the April 19, 2010 issue of National Review.

From the moment Democrats introduced health-care legislation last year, Republicans focused on the adverse impact it would have on the federal debt. But what is remarkable about the Patient Protection and Affordable Care Act is that its effect on the debt is not even its worst feature. That distinction goes to its devastating consequences for the cost of health insurance.

Consider the numbers: Based on the gimmick-free assessment of former Congressional Budget Office director Douglas Holtz-Eakin, from 2010 to 2019 the act will increase the debt by $562 billion—almost $5,000 per household. Not great news, to be sure. But a PriceWaterhouseCoopers analysis projected that, over the same ten-year period, Obamacare will increase the cost of health insurance by approximately $20,000 per family.

This cost will be borne primarily by the young, who will be forced to subsidize the care of the middle-aged; by freelancers and small-business owners, who will not benefit from the exemptions afforded to large, self-insured employers; and by middle-class families, who will most feel the squeeze of higher insurance costs yet will also be expected to finance the health care of others.

The effects of this legislation on the debt are worrisome indeed. But, barring a Weimar-style collapse of the U.S. economy, they will be less visible to the typical family than health-care inflation will be. Rapidly rising insurance premiums will blow a hole directly in the monthly paychecks of tens of millions of middle-class households.

In his stump speech on health-care reform, President Obama liked to say that the Democratic plan incorporated “almost every single serious idea from across the political spectrum about how to contain the rising costs of health care.” The opposite is closer to the truth: The best ideas for lowering health-care costs—unshackling insurance from employment, expanding consumer choice, and enacting malpractice-litigation reform—are either absent or unrecognizably weakened in the law. On the other hand, its blizzard of new insurance mandates, its dramatic expansion of Medicaid, its array of new taxes, and its protection of hospital monopolies will most assuredly accelerate the growth of the cost of health insurance.

Take the mandates. The law compels insurers to accept all comers, regardless of preexisting conditions, something that prior law had already required for those with preexisting insurance. The new stipulation incentivizes people to wait until they are sick before buying insurance. If insurers receive premiums only when people are sick, they will have to charge more.

Indeed, this provision obliterates the whole point of insurance, which is to average the high cost of caring for the ailing few with the low cost of caring for the healthy multitudes. The individual mandate, which requires that healthy people buy insurance or pay a $750 fine, will do little to mitigate the perverse incentives of this provision. The annual cost of insurance is far greater than $750. Many healthy people will prefer the fine; they can always buy insurance later.

The law contains other thoughtless but pleasant-sounding regulations, nearly all of which will drive up the cost of insurance. These include: banning preexisting condition exclusions for children; eliminating lifetime and annual limits on insurance payouts; constraining the degree to which insurers can charge less to the young; and stipulating the percentage of premium revenues that must go to patient care. Each of these requirements, by increasing what insurers must spend on health care, increases what they must charge their policyholders.

Another reason for the current high cost of private health insurance is the fact that government-sponsored health care, in the form of Medicare for the elderly and Medicaid for the poor, underpays hospitals and doctors for their services. Health-care providers are thereby forced to charge more to those with private insurance, to the tune of $90 billion a year. Obamacare will make the problem worse by adding as many as 20 million more Americans to the rolls of Medicaid. Democrats claim that by reducing the degree to which the uninsured use the system for free, expanding Medicaid will reduce overall costs. But it turns out that cost-shifting from the uninsured to the insured amounts to only a fraction of the cost-shifting caused by Medicaid and Medicare underpayment. The more these new Medicaid enrollees take advantage of their benefits, the more private health-care costs will rise.

Unsurprisingly, taxes will play a role in the impact of Obamacare on health-care costs. The law imposes annual excise taxes of $2.3 billion on pharmaceutical products, $2 billion on medical devices, and $6.7 billion on health insurance. Companies will be forced to pass these taxes on to consumers. The logic of taxing the sale of health-care products in order to subsidize their purchase is sublimely Washingtonian.

One of the biggest causes of health-care inflation is hospital monopolies. Many American communities are served by only a single hospital or hospital chain. These hospitals are free to jack up prices at will, knowing that insurers have no choice but to pay them. Across the country, small groups of physicians have banded together to found specialty hospitals focused on one area of medicine, such as heart surgery or injury rehabilitation. These smaller outfits draw patients away from the larger hospitals by offering lower prices, higher quality, and better service. But the big incumbent hospitals usually are among the largest employers in their communities and thereby hold considerable sway with politicians of both parties. Inevitably, hospital lobbyists had their say on the health-care bill: They inserted provisions banning the construction of new physician-owned hospitals, and restraining the growth of those already in operation.

In all of these ways, Obamacare will drive up health-care costs. These concerns are not theoretical: They are borne out by an examination of insurance prices in the 50 states. Those states that impose onerous mandates, subsidize health-care spending, raise taxes, limit hospital competition, and ignore malpractice litigation are those in which costs have risen the fastest.

Over the next several years, as the new law accelerates health-care inflation, don’t expect Democrats to take responsibility for the problems they will have caused. Instead, they will blame them on the demonic greed of insurance companies. But insurers are caught between two rocks and a hard place: They can raise premiums to reflect rising costs, deny care to policyholders, or go broke. That’s a lose-lose-lose proposition for consumers—but, for the Left, it’s win-win-win. Any of these outcomes will be exploited to argue that the free market can’t work in health care, and that the only solution is a European-style single-payer system.

Replacing the new law with a more sensible set of reforms is imperative. It is true that Obamacare will expand the size of our debt and the reach of our government. But it will also leave Americans with unaffordable health care—the very opposite of what they were promised, and the harbinger of a far graver crisis.

Health Wonk Review Review: Does PPACA Control Health Costs?

Cross-posted from The Agenda on National Review Online.

The latest edition of Health Wonk Review was hosted by Joe Paduda of Managed Care Matters. Fittingly, it touched on Republican efforts to repeal PPACA. Count Joe among those who are irked by the “Obamacare” moniker: “the President signed a bill that was sent him by the Senate; BaucusCare would be much more accurate.” Does this mean we get to refer to the “Bush tax cuts” as the Lott/Daschle tax cuts, and the “Clinton balanced budget” as the Gingrich balanced budget?

Paduda also weighed in on the debate regarding the CBO’s assessment of PPACA’s fiscal impact, arguing we should trust the CBO because “they’ve no axe to grind, unlike the pols.” (My take on the matter is somewhat less sanguine.)

Austin Frakt of the Incidental Economist is the left-of-center health wonk who is most engaged with right-of-center analysts. So I was surprised to see him approvingly cite this quotation from health economist Henry Aaron:

[T]he bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with…The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.

This argument that “every idea for cost control that any analyst has come up with” was incorporated into PPACA is only true of you entirely exclude the right side of the spectrum. I can tick off a laundry list of cost-control strategies that weren’t included in the law: means-testing Medicare benefits; defined contribution reforms; indexing Medicare eligibility to life expectancy; serious tort reform; FEHBP-modeled reforms, etc. etc.

Furthermore, I and most other free-market-oriented health policy analysts argue that PPACA will increase costs by further subsidizing the overconsumption of health care. If you increase demand, while keeping supply constant, prices go up.

The opportunity for cost control that most excites center-to-left health wonks is PPACA-sanctioned accountable care organizations, or ACOs. Indeed, the January 2011 issue of Health Affairs is devoted to the topic. ACOs work by assembling a group of hospitals, doctors, and clinics who agree to be paid based on quality-driven measures, instead of simply on a fee-for-service basis. With this in mind, Jason Shafrin of Healthcare Economist has identified some legal barriers to ACO implementation that ACOs will need to seek waivers from.

Jeff Goldsmith of the Health Affairs Blog has an unconventional approach to Medicare’s “doc fix”; i.e., Sustainable Growth Rate, problem: “writing off the SGR ‘debt’ to the federal budget as ‘uncollectable’ and demanding both sacrifice and reform from the physician community in exchange.” The end result of the proposal put forth by the President’s deficit commission was somewhat similar: various Medicare and health spending cuts used to offset a long-term doc fix.

Rich Elmore of Healthcare Technology News links to a report from the International Federation of Health Plans that finds that the U.S. has the highest hospital and physician fees in the world. Could this mean that the “doc fix” doesn’t need to be fixed?

David Harlow of HealthBlawg has an interesting piece on an ongoing lawsuit to overturn one aspect of the Massachusetts individual mandate. The issues are quite different from those surrounding the PPACA mandate, as you can imagine.

The rest of this fortnight’s Health Wonk Review can be found here.

Wasn't Obamacare Supposed to Stop Insurance Rate Hikes?

Cross-posted from Critical Condition on National Review Online.

Supporters of Obamacare often attempt to reassure themselves by claiming that opponents of the law are ignorant and demagogic. The PPACA Pack, on the other hand, is enlightened, cerebral, and compassionate.

In reality, however, Democrats are the ones who speak most demagogically about health care. Like when the Democratic National Committee says that “insurance companies … overcharge for insurance just to boost their profits and CEO bonuses.” Indeed, the DNC went so far as to claim that Obamacare “frees Americans from the fear of insurance companies raising premiums by double digits with no recourse or accountability.” Kathleen Sebelius and the DNC would have you believe that Obamacare prevents rate hikes by cracking down on those demonic, profit-hungry insurance companies, and that repealing the law would allow insurers to once again run amok.

So, then, how to explain the news this month that Blue Shield of California was “seeking cumulative hikes of as much as 59% for tens of thousands of customers” this year? Wasn’t PPACA supposed to stop these supposedly abusive practices?

Unfortunately not. Blue Shield has stated that the new rates “meet the federal requirement that 80 percent of premiums are spent on healthcare expenses,” putting paid to the nonsensical argument that marketing expenses and CEO bonuses are driving premium increases. As Blue Shield detailed in a lengthy statement, the rate hikes correlate directly to increases in the cost of health care, including 4 percent “to cover the costs of enhanced benefits required under healthcare reform.” Despite these increases, Blue Shield expects to lose $10-20 million in 2010 and $20-30 million in 2011 on their individual plans.

New California insurance commissioner Dave Jones, in his first act in office, fired off a letter to Blue Shield, calling on the insurer to suspend its rate hike. “I wish to satisfy myself that all the pending proposed increases have been thoroughly and excessively reviewed.”

But Blue Shield of California is a not-for-profit entity “that has long advocated for universal coverage,” and the company was not cowed by Jones’ posturing. Instead, Blue Shield CEO Bruce Bodaken said the company would have its increases reviewed by an independent actuarial consultant, promising to refund Blue Shield’s policyholders with interest if the company had calculated its rate increases incorrectly.

But neither independent consultants nor press releases from politicians can change the basic facts of health costs. As Jordan Rau recently chronicled in an insightful piece for Kaiser Health News, hospitals are taking advantage of their monopoly status to charge more for their services, and insurers have no choice but to pass those increases onto their policyholders, or they would go out of business.

Indeed, Obamacare is guaranteed to increase, not decrease, underlying health costs. The law subsidizes excessive health spending, and imposes costly mandates on insurance plans that drive costs upward. Those who are genuinely concerned about rising health costs must start by repealing that law.

Health Wonk Review Review: In Which the Wonks Review Other Wonks

Cross-posted from The Agenda on National Review Online.

The latest edition of Health Wonk Review, hosted by Louise Norris of Colorado Health Insurance Insider, contains a number of interesting items in which health care bloggers review policy articles by other authors.

John Goodman asks the “question that is rarely asked”: given that everyone complains that we spend too much on health care, exactly how much should we be spending?

When it is asked, the answers are almost never sensible…To an economist, the titular question has a straightforward answer, at least at the theoretical level. We should spend on health care until, at the margin, a dollar’s worth of health care is equal to a dollar’s worth of anything else money can buy.

As a practical matter, I have no idea what tradeoffs you’re willing to make between health care and other uses of money. And you have no idea what tradeoffs I’m willing to make. That’s why, whenever possible, we should favor institutions that allow individuals to make these decisions on their own. People will reveal their preferences through their actions…

In the current system, however, people rarely have the opportunity to trade off a dollar’s worth of care against a dollar of other goods and services. In general, every time we spend a dollar on health care, only 12 cents is coming out of our own pockets. This means we have an incentive to overconsume care — until it’s worth only 12 cents on the dollar, at the margin. To the degree that we act on these incentives, we will spend until 12 cents worth of care would have provided  a dollar’s worth of other consumption — if only we were free to allocate where our money goes.

Unfortunately, plenty of policy experts people believe that it’s better if...experts determine on Americans’ behalf what the optimal amount is to spend on health care. Goodman observes:

Medicaid, for example, was designed by people who think precisely this way. Suppose a single mother with children loses her job and is temporarily unemployed. She has difficulty putting food on the table for her children and is in danger of becoming homeless if she doesn’t pay the rent. Her automobile is about to be repossessed if she misses another car payment. Yet if she is on Medicaid, she has (at least on paper) access to everything the health care system has to offer, with no copayment or deductible. Even most members of Congress don’t have coverage this generous.

Normal people in this situation would trade in their gold-plated health plan for a silver or a bronze, and use the savings to buy food, pay the rent, etc. But Medicaid makes these choices impossible. If we applied the Medicaid mentality to housing, poor people would be forced to live in a luxury abode, even if their children were starving.

Medicare was also designed by the social engineering mentality. Enrollees can spend an unlimited amount of taxpayer money on end-of-life care, but they are not allowed to spend those same dollars to avoid the foreclosure on a home, provide home care to prevent nursing home confinement for a spouse, or make a bequest to their kids.

How would you like the government dictating to you how you must spend 40% of your disposable income?  Not a pleasant thought?  This is what the government routinely does to the elderly, the disabled and the poor. (And under ObamaCare, it will do it to many, many more.) Medicare insurance, at an average of $11,000 per enrollee, is as much a part of the income of the elderly as Social Security is. Yet while seniors can spend Social Security dollars without restriction, the $11,000 benefit they get from Medicare can be spent only on health care.

Read the whole thing.

Aaron Carroll of The Incidental Economist takes on the health cost issue, from another perspective. He criticizes the recent report by the Congressional Budget Office assessing the impact of obesity on health care costs. He cites a 2007 McKinsey Global Institute report that argues that obesity isn’t a significant contributor to health care costs. McKinsey employs a lot of smart people, and the report contains a fair amount of useful data, but it repeatedly reminds us of the danger of a little knowledge. As the report acknowledges, it isolates obesity from many of the cardiovascular, metabolic, and respiratory diseases that are closely correlated with obesity. Regardless of what obesity costs our system, however, it’s not obvious that less obesity would lead to lower costs. After all, we all have to die of something.

While many people are confounded by the rise in health costs, the central cause is quite simple. As John Goodman points out above, widely held, heavily subsidized health insurance incentivizes people to spend money on things they don’t need.

Hank Stern of InsureBlog points out one of the popular misunderstandings of health insurance, as repeated by Reed Abelson of the New York Times. Abelson writes, “Instead of sharing the pain, as they have generally done in the past, employers chose to keep their costs steady by passing the higher costs onto workers.” Except that this sentence implies that, if employers don’t pass those costs on, that insurance is somehow “free.” It’s not: it comes directly out of employees’ paychecks and gets sent directly to the insurers. Employers are simply the unseen intermediary. Rich Elmore of Health Technology News notes the recent number-crunching by the Kaiser Family Foundation, which analyzes the other ways in which employers are striving to control costs.

Joe Paduda of Managed Care Matters approvingly notes the latest issue of Health Affairs, the influential health policy journal, which is focused on tort reform. A study published in the issue argues that the costs of medical liability, “including defensive medicine, are estimated to be $55.6 billion in 2008 dollars, or 2.4 percent of total health care spending.” There are some problems with this study, which I will address in a future post. But even if we accept the study’s methodology, which I don’t, is $55.6 billion a year something to sneeze at? That money would have paid for more than half of Obamacare’s $1 trillion in new spending.

Paduda goes on to argue that lousy medicine is the real cause of high costs. We can all be against lousy medicine, but until consumers have the ability to control their own health care dollars, there can be no effective accountability in the practice of medicine.

Brad Flansbaum of The Hospitalist Leader, an admirer of Don Berwick, laments that Berwick’s recent op-ed in the Washington Post more resembled “a Whitehouse press release, not the scribing of an innovative clinician and scholar.” The politicization of policy is one of the inevitable consequences of government control, something that we free-market types have been pointing out repeatedly.

Jaan Sidorov of the Disease Management Care Blog points out the new study from our friends at the Dartmouth Atlas, in which the authors conclude “that the local availability of primary care may have little relationship with local health care quality.” Given that left-of-center policy analysts have long sought to increase the prevalence of primary care physicians at the expense of specialists, the Dartmouth study is provocative.

David Williams of Health Business Blog notes that many insurers are trying to tamp down on the usage of out-of-network hospitals and doctors as a way of keeping a lid on costs. This is exactly what insurers should be doing—and, notably, what traditional Medicare is barred from doing.

And finally, Jason Shafrin of Healthcare Economist is back with another post in his series on health care systems around the world, this one on Australia. The Australian system is heavily, but not completely, socialized, with 68 percent of national health expenditures funded by the government.

A Dime Spent is a Penny Saved

Cross-posted from Critical Condition on National Review Online.

This is the kind of math that requires three Harvard degrees to understand. Donald Berwick, head of the Centers for Medicare and Medicaid Services, is going to spend $10 billion on “Medicare innovation” over the next ten years…to save $1.3 billion. From the Boston Globe (h/t InsureBlog):

Berwick is using a tool that Congress included in the new health care law: an innovation center with $10 billion to spend over the next decade in a quest for the best ways of improving care and reducing costs.

The launch of the test sites by the end of 2011 is just a first step in changing the fundamental ways the government pays physicians and hospitals. Over 10 years, the innovation center’s work is expected to save $1.3 billion on the $500 billion annual budget of the Centers for Medicare and Medicaid Services, the sprawling federal insurance bureaucracy Berwick now leads. Health care policy advocates had sought far more aggressive cost-control measures.

Berwick’s defenders argue that this $1.3 billion estimate is pessimistic, and/or that it is merely the short-term savings that Berwick will engineer, and that his ideas will save tens, if not hundreds, of billions of dollars in  ensuing decades. There is little if no reason to believe this will be so. The history of Medicare is full of attempts to control costs by dancing around the periphery of the program, and none of these attempts has worked.

The core problem of Medicare is that retirees have no incentive to think about cost or value when they obtain medical services. Nothing in Obamacare, and nothing that Berwick envisions, will do anything to change that.

Why Liberals Haven't Learned The Lessons Of Massachusetts

Cross-posted from Critical Condition on National Review Online.

Faced with a barrage of bad news about the health-care system in Massachusetts, Obamacare advocates such as Jonathan Gruber, Jonathan Cohn, Ezra Klein, and Igor Volsky have started fighting back, arguing that things are going great in the Bay State. Cato’s Michael Cannon has done a great job of summarizing their arguments, and why they fall flat:

• The Commonwealth Fund reports that even though Massachusetts already had the highest health insurance premiums in the nation, premiums rose faster post-RomneyCare than anywhere else; 21-46 percent faster than the national average.
• A recent study estimates that RomneyCare has so far increased employer-sponsored health-insurance premiums by an average of 6 percent.
• The success that Klein sees in Massachusetts’ individual market — which accounts for just 4 percent of the private market — is merely the product of shifting costs to workers with job-based coverage.
• Contrary to Klein’s post hoc spin that RomneyCare “was never an attempt to control costs,” Romney himself promised that “the costs of health care will be reduced.”
• Aaron Yelowitz and I find evidence suggesting that uninsured Massachusetts residents are responding to the individual mandate not by obtaining coverage but by concealing their insurance status.  Coverage gains may therefore be less than official estimates suggest.
• Evidence is mounting that, despite stiffer penalties than ObamaCare will impose, increasing numbers of people are gaming the individual mandate by only purchasing health insurance when they need medical care. Such behavior could ultimately cause the “private” insurance market to collapse.

Liberals like to talk about controlling health costs, but in practice, they are far less concerned about reducing costs than they are about increasing spending. Here again is Jonathan Cohn:

If the lesson from Massachusetts is that “genuine cost control is avoided because it’s politically difficult” then fiscal disaster is inevitable. Health care costs are going to keep rising, no matter what we do. And if that’s the case, I would certainly prefer a world in which people don’t have to worry about paying their medical bills. It doesn’t cost a lot to make that happen; the incremental cost of insuring the uninsured is a small fraction of health care spending.

Cohn captures a lot of what’s wrong with liberal health-care philosophy in these few sentences. “If fiscal disaster is inevitable, we might as well cover the uninsured.” Actually, the exact opposite is true. The reason why health care costs keep rising, and the reason we face fiscal disaster, is because of subsidized insurance.

Government programs like Medicare and Medicaid, which started out small, reward irresponsible utilization of health-care resources. As MIT economist Amy Finkelstein showed in an important paper, Medicare alone is responsible for nearly half of the health care inflation between 1950 and 1990. The reason is hardly mysterious: if you subsidize health-care spending, as Cohn recommends, you will get more of it, leading to even more health-care inflation. It’s Economics 101: if you increase demand for a product, and keep supply constant, prices will go up.

And, so, we end up with the death spiral of state-funded health care. As the cost of health care increases, driven there by government subsidies, fewer people can afford private insurance, leading to more cries for more government subsidies, which will drive costs up even further. Wouldn’t it be nice if we could try the opposite approach?

Why Is Medicare Reviewing Dendreon's Provenge?

Cross-posted from The Science Business on Forbes.com.

Dendreon shares are down today on the heels of news that the Centers for Medicare and Medicaid Services (CMS) will undergo a lengthy review of whether or not Provenge “is reasonable and necessary under sections 1862(a)(1)(A) and/or 1862(a)(1)(E) of the Social Security Act” and should be reimbursed by Medicare.

Most analysts believe that Medicare will ultimately agree to pay for Provenge, because it’s FDA-approved, and it was shown to extend survival by 4 months in clinical trials.

So why is Medicare undertaking this review? Nobody knows for sure, but here is what we do know.

1. It is unusual for Medicare’s “National Coverage Determination” process, as it’s called, to be launched to review the reimbursement of a cancer therapy in its FDA-approved indication. It appears that CMS “received informal inquiries for a national coverage determination,” which suggests that local Medicare contractors are looking for guidance as to how to proceed.

2. Provenge is not your everyday treatment. It’s a customized active immune therapy, in which a patient’s own immune cells are extracted from the bloodstream, biologically manipulated at an external site, and then reinserted into the patient. It’s quite possible that Medicare is simply trying to figure out the logistics of how to pay for such a complicated and unprecedented therapy. A recent report by Matthew Herper of Forbes lends credence to this idea; Herper quotes Louis Jacques, the director of the Coverage and Analysis Group at CMS, as suggesting that Medicare’s interest is driven by the unusual aspects of Provenge’s delivery.

3. Those with private insurance who have received Provenge therapy appear to be having no problems getting insurers to pay for the treatment; those on Medicare can receive the treatment while the review is under way.

4. Medicare is proscribed by law from considering price in its reimbursement decisions. “The cost of a particular technology,” according to CMS, “is not relevant in the determination of whether the technology improves health outcomes or should be covered for the Medicare population.” In other words, if Dendreon had chosen to charge $2 million for Provenge, instead of $93,000, Medicare is not supposed to take that into consideration. CMS has to go by what the FDA has approved—and the FDA can’t take cost into account either.

5. The timeline will proceed as follows: CMS has opened up a 30-day public comment period on whether or not Provenge should be covered, which will expire at the end of July. CMS will commission a technology assessment from a third party. The Medicare Evidence Development and Coverage Advisory Committee (MEDCAC) will then conduct its own review, and will be expected to produce a decision memorandum by March 30, 2011. Implementation of Medicare’s decision will begin no later than June 30, 2011.

So, bottom line: if you are a patient, reimbursement is not likely to be an issue. The biggest challenge is obtaining the therapy itself, which will suffer from manufacturing supply constraints for the next several quarters.

The larger question is: should the government be able consider price in deciding whether or not to pay for a particular treatment? There are pluses and minuses to each answer, but the Dendreon case shows us that the question is not going away.

Dartmouth, Episode II: The Times Strikes Back

Cross-posted from Critical Condition on National Review Online.

The Darmouth Atlas of Health Care, as readers may recall, has been a source of significant recent controversy, due to a skeptical front-page article published in the New York Times on June 3. Elliott Fisher and Jonathan Skinner of Dartmouth penned two rebuttals to the Times piece, in which they pointed out some of its factual and analytical errors. But the Dartmouth duo failed to address concerns about the key question underlying their research: is government capable of efficiently micromanaging medical practice?

Yesterday, Times reporters Reed Abelson and Gardiner Harris posted online a 3,000-word, 7-footnote response to the Dartmouth rebuttals. If anything, the reporters’ new piece is even harsher than their original one. It certainly makes for some interesting reading.

The Times reporters acknowledge that the Dartmouth researchers have conducted some cost-of-living adjustments in their academic research, but point out that such research is either absent from, or de-emphasized on, their public website:

The distinction between the atlas, as it is available on the Dartmouth Web site, and other published work by the Dartmouth researchers is important. In the academic sphere, the Dartmouth researchers often use careful statistical adjustments and nuanced language to qualify their findings. But on the Dartmouth Atlas Web site and in the halls of Congress where the atlas maps have become popular, there is little of that care, leading to conclusions and hospital and regional rankings that can present a misleading picture.

For example, some prominent academics, despite their familiarity with the Dartmouth work, were unaware, until told by The Times, that the popular regional maps and hospital rankings published on the Dartmouth Atlas Web site were not adjusted to reflect the price and cost-of-living differences around the country.

Abelson and Harris go on to document evidence that, among other things: (1) Dartmouth’s Fisher exaggerated the strength of the Atlas’ findings in Congressional testimony; (2) other methodological problems exist with the Atlas; (3) the Dartmouth group has made wild claims about the amount of money government can save by adopting their recommendations.

That the Atlas has methodological problems is undeniable. That there is waste in the medical system is also undeniable. While I’ll be interested to see how the Dartmouth researchers and sympathetic bloggers respond to the latest salvo from the Times, I’m really hoping they’ll one day answer the important question: why will more government involvement lead to less waste?

More Thoughts On Dartmouth

See "Why The Dartmouth Flap Matters For Obamacare" for background.

John Goodman has an excellent piece out today on the Dartmouth fracas. He makes a compelling analogy between efforts to improve healthcare quality by government fiat and those who have tried to reform the public education system:

Now for 25 years, education policy experts have been asking this simple question: Is there a way for the funders of care (the buyer side of the market) to get low-performing schools to produce as well as the high-performing schools? In other words, can we use the power of the purse, the power of authority or any other governmental power to replicate excellence?

The answer appears to be: No. Every example we have of a good school is an example of excellence achieved because of the enthusiasm, energy, leadership, vision, etc. of people on the supply side of the market. We have no examples of good schools created by federal judges, school boards, city governments, state governments, etc. (unless you count magnet schools that siphon off all the best students).

The same thing is true in health.

He also points to a provocative NCPA study by Andrew Rettenmaier and Thomas Saving, who show that unusually high regional spending by Medicare is often offset by unusually low spending by private insurers or Medicaid:

News stories often imply that doctors in high-spending Medicare states are practicing medicine in a way different from doctors in low-spending states. One is left to infer that this must also be true for Medicaid patients and private patients as well. But this inference is not entirely true.

For example, although Louisiana is the highest spending Medicare state and South Dakota is the lowest, average per capita health care spending for the whole population is actually lower in Louisiana ($5,040) than it is in South Dakota ($5,327). This is not an isolated case:

• Although Texas is fifth highest in Medicare spending per capita, it is 43rd in per capita spending for the state's entire population.
• California is 11th in Medicare spending, but 42nd overall.
• North Dakota is 43rd for Medicare, but 11th overall.

It appears that high Medicare spending is often associated with lower spending on the non-Medicare/Medicaid population and vice-versa. This observation is consistent with cost shifting between public and private payers, although there may be other explanations as well.

The whole thing is worth a read.

Why The Dartmouth Flap Matters For Obamacare

Cross-posted from National Review Online.

The liberal end of the blogosphere is aflame with criticism of press coverage of a health-care database at Dartmouth College. While the debate may seem arcane, it is worth a closer look. For it relates to one of the key justifications for Obamacare: that the rising cost of health insurance is largely due to the greed and incompetence of ordinary physicians, and that government alone can fix this problem.

First, some background. Over twenty years ago, Dr. Jack Wennberg of Dartmouth Medical School started tracking regional variations in Medicare expenditures; his diligent compilations came to be known as the Dartmouth Atlas of Health Care. The group that tends this database has gained broad academic respect over the years. In 1997, Wennberg’s son David helped to found Health Dialog, a consulting firm based on the Dartmouth work; in 2007, it was sold to British insurer Bupa for $775 million.

It wasn’t until 2009, however, that the Dartmouth Atlas became truly famous. In June of that year, Atul Gawande of The New Yorker published an article, “The Cost Conundrum,” describing medical practices in McAllen, Texas, an area that the Dartmouth Atlas identifies as one of the most expensive health-care markets in America. “In 2006,” observed Gawande, “Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average.”

But, wrote Gawande, there was no discernible justification for McAllen’s high costs. In El Paso, a town that is in many ways similar to McAllen, Medicare spent only half of what it was spending in McAllen: $7,504 per enrollee. Importantly, the Dartmouth data suggested that McAllen’s increased medical utilization wasn’t leading to better results: Indeed, based on Medicare’s rankings, McAllen’s hospitals were performing worse than El Paso’s. The reasons, it appeared, were ignorance and avarice. Many doctors were simply unaware of how their practices deviated from medical convention. In addition, Medicare mostly pays doctors and hospitals on a fee-for-service basis; therefore, health-care providers have incentives to order more tests and conduct more operations, so they can collect more fees.

Gawande’s piece gained enormous attention. David Brooks called it “the most influential essay of 2009.” It became required reading in the White House. Recounted Sen. Ron Wyden (D., Ore.), “[The President], in effect, took that article and put it in front of a big group of senators and said, ‘This is what we’ve got to fix.’” Peter Orszag, the White House Budget Director, used the Dartmouth data to argue that health-care expenditures could be reduced by $700 billion—over 30 percent—without sacrificing quality. The Dartmouth data allowed Democrats to imagine a glorious possibility: that the increased expense of universal health insurance could be paid for by intimately regulating medical practice in a way that wouldn’t harm, and might even improve, the quality of care.

Fast-forward to last week, when Reed Abelson and Gardiner Harris published a front-page article in the New York Times that was highly critical of the Dartmouth work. “Dartmouth’s claims about which hospitals and regions are cheapest may be suspect,” they wrote. “The real difference in costs between, say, Houston and Bismarck, N.D., may result less from how doctors work and live. Houstonians may simply be sicker and poorer than their Bismarck counterparts.” Abelson and Harris wrote that, among other things, the Dartmouth Atlas didn’t take local cost of living into account when making its measurements, which meant that expensive cities like New York might suffer if the government tried to correct for variations in health-care spending.

The article provoked a fierce rebuttal from Jonathan Skinner and Elliott Fisher, the Dartmouth researchers who now maintain the Atlas. They correctly pointed out that the Atlas does remove cost-of-living considerations from the equation by measuring utilization (i.e., the number of tests and procedures) as well as dollar expenditures. Maggie Mahar of the Century Foundation, an excellent liberal health-care blogger, tracked down the other academics quoted in the Times article, who told her that the Times had misrepresented their views. “It sounds as if it were written by someone’s ex-spouse,” one of her sources told her. “Harris and Abelson were determined to write a story that would ‘take down Dartmouth.’”

Technically, Skinner and Fisher are right: The Times article contains factual and analytical errors. But there are numerous other critiques of the Dartmouth methodology that have not been fully resolved. Rates of chronic disease and poverty are not well accounted for in the Dartmouth statistics, though the Dartmouth team is doing more in this realm than before. Another problem is that the Dartmouth work tries to separate out health spending by medical diagnosis, but does not take into account the severity of illness or the incidence of multiple diseases in the same patient. Another fault is that the study fails to take into account the impact of racial and economic diversity within a given area. Yet another is that the Atlas measures Medicare fee-for-service spending alone, and does not study health-care spending for individuals with private insurance, or with Medicare HMOs. In addition, the data do not take into account regulatory or legal variations among the states, such as differences in malpractice law.

The list of disputations goes on, but you get the point. The Dartmouth group, to its credit, does its best to produce a thoughtful, empirical analysis of variations in health-care spending. And it is of course true that some doctors are unaware of best practices, and that others try to game the system. But it is one thing to catalogue unusual spending, and another to decide which portions of that spending are unnecessary, and quite another altogether to fashion federal regulations that will eliminate the spending that has been deemed unnecessary. There are several fallacies in these great leaps of logic that led the Obama administration to the conclusion that the Dartmouth Atlas can teach the federal government how to micromanage the practice of medicine.

First off, as we can learn from the very data compiled in the Atlas, a number of institutions—such as the Mayo Clinic in Minnesota and the Intermountain system in Utah and Idaho—have succeeded in combining high quality and low cost, without federal intervention. As the Intermountain story shows, these improvements require painstaking focus and, above all, personal relationships with participating physicians. Much more can be done by the private sector to improve the quality of health care, in particular by adopting electronic health records. But there is little evidence that the federal government has the competence to achieve such improvements by bureaucratic fiat.

Second, the government is largely responsible for the original problem. The biggest distorter of physician behavior is what the Dartmouth group delicately describes as “the current reimbursement system”—that is, Medicare. Medicare is what gives physicians incentives to spend as much as they can on patients, and it’s not simple greed: It’s about erring on the side of marshaling all available resources for your patient. In the bad old days, when more people paid for their expenses out of their own pockets, without insurance, doctors were much more conscious of keeping their patients’ financial health in mind. Now that retirees pay little to nothing for Lamborghini health care, their doctors are liberated from having to think about cost.

Third, it isn’t clear that a single-payer system would eliminate variations in health-care spending. As Cato’s Michael Cannon has pointed out, the Congressional Budget Office has looked at Veterans Administration data and found that the VA health-care system contains almost as much variation as the Medicare system, despite the government’s complete control.

Fourth, Orszag is wildly exaggerating when he claims that 30 percent of health-care spending could be saved by using the Dartmouth Atlas to eliminate all unnecessary expenditures. It would be much better for health outcomes, but just as absurd, to seek to cut costs by eliminating all obesity from the country. Eliminating the entirety of wasteful health-care spending would be like eliminating, via federal mandate, every messy desk in America. That is to say, doubtful. And it is not metaphysically possible to eliminate all waste. Quite a bit of what we call “waste” is actually uncertainty: performing heart surgery, say, on someone who may or may not require it. As in war, sports, and courtship, the best medical decision is often more obvious in hindsight than it is in the heat of the moment.

Fifth, while it is a good thing for physicians to adopt the best evidence-based guidelines for clinical practice, every human being is different. There are exceptions to every protocol, medical cases that defy conventional logic. America in particular is a genetically diverse nation; treatments that work in some populations may not work in others. Treatments that work in some individuals don’t work in others within the same population. A one-size-fits-all approach to the practice of medicine is especially appealing to those who have never done it, but it would in reality cause innumerable headaches and heartaches.

And so, the debate about the ins and outs of the Dartmouth Atlas is not merely a statistical one. It is about something more fundamental: Can government do a better job of managing medicine than doctors and hospitals can, or should the doctor-patient relationship remain sovereign? There is plenty of waste in medical care today, but the Dartmouth Atlas demonstrates that government is the problem, not the solution.

Can Health Care Consumers Make Competent Decisions?

Cross-posted from The Agenda on National Review Online.

Insofar as the debate between the Left and Right on health care is one of philosophy—liberty vs. egalitarianism—it will go on forever. But there may be other areas where empiricism can play a role in bridging our differences.

I was reminded of this last night when having dinner with my cousin and her husband in Chicago. They are both dyed-in-the-wool progressives, whose major objection to a more free-market approach is that consumers are not sophisticated enough to make wise decisions about their own care.

There is something to this critique, one that has been around at least since Ken Arrow founded the field of health economics in the 1960s. Given the complexity of medical knowledge, health insurance plans, etc., isn’t it appropriate for the government to have a large role in protecting consumers from unwise decisions and inefficient practices?

My personal view is that liberals underestimate the degree to which consumers are capable of making sound decisions about complex products. After all, we buy auto insurance policies, laptops, cars, credit cards, etc. all the time; and while the law has a role in protecting consumers against outright fraud, policy experts tend to underestimate the ability of informed consumers to shape efficient market practices. The Internet, in particular, has brought enormous resources to bear on this problem. And where consumers simply can’t learn enough, we mustn’t forget the purpose of the patient-doctor relationship, whatever its imperfections, is to provide just this sort of advice.

This brings me to an intriguing post over at Forbes from Harlan Krumholz, a Yale cardiologist, who suggests that improving the patient consent process could lead to better decision-making and cost efficiencies:

A few weeks ago I made a modest proposal to the medical profession in the pages of the Journal of the American Medical Association. I suggested that we make informed consent meaningful and provide patients with the critical information that should be available to anyone contemplating a major test or procedure.

I suggested that in non-urgent situations, when there is time for deliberation, patients be told their options, given realistic estimates of risks and benefits, informed about the track record of the institution and physicians who will provide the service, and provided an estimate of the costs to them.

My proposal was to standardize the information to patients who are considering some of the most common elective tests and procedures. Assemble panels of expert doctors and determine where there is consensus about the minimum information that all patients should know. Work with educators and psychologists to determine how to convey the information fairly and impartially. Inform patients that the best decision will be aligned with their values and preferences and that no one decision is right for everyone.

This solution to rising health care costs does not involve rationing care. It does not shift payments to patients or reduce payments to doctors. It does not require complicated legislation or regulation. The solution simply ensures that patients are making an informed decision.

Look what happened to John. I arranged for John to meet another cardiologist—someone who would explain the options and be sure that John had realistic expectations about the benefits and risks of the angioplasty procedure. In the end, John opted to focus on treating his risk factors with drugs and defer the invasive procedure. And he has done well.

My hunch is that, just like John, disclosures to patients about their options and expectations will lead many of them to seek less rather than more. Even more importantly, the quality of care will improve as we will be more confident that the care provided is what the patient wants.

In this way, we can reduce health care costs simply by telling the truth.

It is an interesting idea, and one that could be adopted without any government intervention: relevant medical societies (in John’s case, the American College of Cardiology) could come up with consensus guidelines as to what language should be included in the informed consent documents for various procedures.

Taking Krumholz’s idea a step further, it would be nice if these professional societies, perhaps under the umbrella of the American Medical Association, could consolidate all such informed consent language on a single web site. This way, patients and their families could gain access, in plain language, to the best available peer-reviewed assessments of various approaches to their conditions.

Christmas Comes Early! 88% Of Employers Will Pass Obamacare Costs Onto Employees

Cross-posted from Critical Condition on National Review Online.

Towers Watson, a leading human resources consulting firm, has conducted a survey of 661 human resource and benefit specialists across America. While benefit professionals are still digesting the new law, the survey shows that they are even more skeptical of Obamacare than the public is.

These benefit specialists represent a broad range of industries, and are responsible for choosing health insurance plans for almost 4 million Americans. If their fears come true, the future of American health care is bleak. Among the survey’s highlights:

• 90% believe that Obamacare “will increase their organization’s health care benefit costs”;
• 88% intend to pass the increases onto employees by increasing employee premium contributions or other cost-sharing measures;
• 74% intend to “reduce health benefits and programs” by using stingier health plans, restricting eligibility for health coverage, and using spousal waivers or surcharges.

By a wide margin, employers’ three top priorities for health care policy are containing health care costs (96% saying it is a high priority); encouraging healthier lifestyles (88%); and improving the quality of care (75%). Only 25% of those surveyed believe that the law will actually encourage healthier lifestyles, and only 20% believe it will improve the quality of care.

Another group that will be affected by Obamacare, according to the survey, are retirees, especially early retirees (i.e., those under the age of 65). 77% of employers believe that large companies will reduce or eliminate their retiree health benefits, now that the law prevents insurers from shunning those with pre-existing conditions. “Just as many baby boomers are deciding whether to delay retirement, employers will be determining if it makes financial sense for them to remain in the retiree medical business,” said Dave Osterndorf, a senior consulting actuary at Towers Watson. The pre-existing condition mandate “will likely accelerate employers exiting sponsorship of retiree health programs.“ Naturally, the more that employers opt out of sponsoring their retirees’ health benefits, the more that the government will end up picking up the tab.

On the bright side, 58% of employers said that the rising cost of health insurance would lead them to replace their existing health benefits with consumer-driven health plans (assuming that Obamacare doesn’t outlaw them). 74% said that they do not plan to discontinue health coverage for their active employees, though “it’s something you want to monitor over time,” said Mark Maselli, head of the Towers Watson group that conducted the study.

Medicare's Bookkeeper: Obamacare Will Increase The Cost Of Health Care

Don't say we didn't warn you.

Richard Foster, the Chief Actuary of the Centers for Medicare and Medicaid Services (CMS), released a report on Friday in which he details many of the significant flaws of the Patient Protection and Affordable Care Act. (An actuary is someone who uses statistics, such as death rates and hospitalization costs, as a quantitative way of setting insurance premiums.) Foster estimates that Obamacare will increase federal health expenditures by a net of $251 billion from 2010-2019, even though the President once sold the law as a way to "bend down the cost curve." Most notably, as we and others have argued, the law will drive up the cost of health insurance for ordinary people. Plenty of others have summarized Foster's findings (see Philip Klein and Grace-Marie Turner), so I won't. Read the report for yourself.

(P.S. The Census should conduct a count of the number of government officials with square-rimmed eyeglasses, mustaches, and oddly patterned neckties.)