Healthcare: More Being Done to Restrain Costs

Former Senators Bob Kerry and Warren Rudman’s focus in “Securing Future Fiscal Health” is upon the process of government commissions to deal with, primarily, entitlement programs. Left on autocourse,

Over the next 30 years, spending on federal programs is on track to go up by 50 percent as a share of the economy. If revenue remain at their historical level, the resulting deficits will approach 20 percent of gross domestic product by 2036 -- almost 10 times the current size. The debt will surge to 200 percent of GDP -- twice what it was at the end of World War II.

Political realities explain why nothing has been done about this. Changing course would require substantial spending cuts from projected levels or equivalent tax increases. Neither party wants to be the first to propose these tough choices out of fear that the other side would attack it. Similarly, neither side wants to discuss possible compromises of its own priorities, out of fear that the other side will take the concessions and run. Unfortunately, these fears are justified.

It will be difficult for the most august of commissions, however, to deal with the entitlement issues without better understanding among the populace of the cost-drivers, and taking on all at once may well be too much an endeavor for any group. However, in the realm of health care much can be accomplished, and is in motion.

No subject I deal with gets a lower response than health care, possibly reflecting the avoidance of making choices. Everyone wants the best, the overwhelming majority do get the best, and few are willing to pay directly for the best. Possibly the inattention stems from most of the commentators are themselves satisfied.

Schemes for nationalized healthcare are consistently rejected as imposing undesirable bureaucratic controls and rationing while not resulting in significant savings. Schemes for consumer-directed care and tax-favored savings accounts founder on the inability to intelligently shop, which most wouldn’t do anyway if they had the info, and the limited attractiveness to those seriously ill whose health care is most of overall spending.

America’s Health Insurance Plans, the national association representing nearly 1,300 member companies providing health insurance coverage to more than 200 million Americans, commissioned a study from PriceWaterhouseCoopers of “The Factors Fueling Rising Healthcare Costs 2006.” PriceWaterhouseCoopers reviewed “government and private surveys” and had “discussions with actuaries as well as reviews of available research and literature.”

Several statistics stand out in the PwC study. Premium increases continue, primarily from increased utilization, technology, and wonder drugs, but are 36% lower in 2006 than 2002, largely due to shifts from inpatient to outpatient treatments and increased availability of generic drugs for many conditions. Premium increases closely track underlying costs. 86% of premium dollars go to care. Consumer services, provider support and marketing consume 5%. Government payments, compliance, claims processing and other administration costs 6%. Profits are 3%, hardly the fatcat gouging accused by opponents of private insurance companies.

Two other statistics of import in the PwC study are that about 10% of health care costs are due to defensive medicine, excess tests and procedures to avoid litigation, which is included in the 30% of health care costs identified in another study as “poor quality health care.”

Interestingly, as Senators Kerrey and Rudman would be glad of, the consensus on reducing this 30% due to “overuse, misuse, and waste” cuts across responsible Republicans and Democrats. President Bush has pushed for measures to increase the collection and dissemination of health care quality information. The Democratic Leadership Council is on board with this effort (while the Democrats' far-Left continues pursuing statist schemes):

In the last fight to restrain costs, employers and many governments adopted managed care. The widespread use of managed care helped tame medical inflation from 1994 to 2001. But managed care failed to win the public's trust necessary to restrain costs, and instead provoked a backlash, sometimes undermining health care quality. The lesson is clear for this round of cost cutting: Quality improvement must be pursued in tandem with cost restraint.

The movement to cut costs by improving quality owes its beginnings, in part, to the Midwest Business Group on Health, a coalition of private and public employers in 11 states that has charted a new course for purchasing health care. In its landmark 2003 report, "Reducing the Costs of Poor-Quality Health Care Through Responsible Purchasing Leadership," this employer group acknowledges that "purchasers of health care benefits bear some responsibility for poor quality."

The report identifies the causes of poor-quality health care as underuse, overuse, misuse, and waste of medical services. It estimates that 30 percent of all direct health care outlays today are the result of poor-quality care. A 2004 report by the RAND Corporation reinforces this point, as it finds that American patients receive proper care only 54 percent of the time.

The uber-commission that Senators Kerrey and Rudman envision may be too big a bite, but this example of where a major source of cost-saving can come from, with bipartisan support, is encouraging and should be pursued.