Health Care Reform: The
Tradeoffs Before Us
Merton D. Finkler, Ph.D.
Professor and Chair of Economics
Lawrence University
Tuesday, October 26, 2004
Overview
 A Brief History of Health Care Policy Reform
 Nature of the Problem: Cost, Quality, and Access
 Primary Choices: Single Payer, Consumer Directed




Choice, and Managed Competition
Bush Plan
Kerry Plan
The Tradeoffs: Access vs. Cost vs. Quality
Primary Conclusion: Neither Bush nor Kerry plan will
contain health care expenditures. Both shift costs. No
one should be surprised.
The History of Health Care Policy in
the United States
 Universal coverage/care finds its way onto
the political agenda every 10 – 15 years
 Policy history reflects incremental change;
each time we add either more coverage or
expand eligibility
 Benefit changes must generate enough
income for the winners to justify support
 History of cost containment is componentfocused: Whack a Mole Strategy
The Politics of Health Care
J. D. Kleinke - Oxymorons
 “Health care in America combines the
tortured, politicized complexity of the U.S. tax
code with a cacophony of intractable political,
cultural, and religious debates about personal
rights and responsibilities.”
 Central reality: “the primary producers and
consumers of medical care are uniquely,
stubbornly self-serving as they chew through
vast sums of other people’s money.”
Health Care Expenditures
 HC$ = ($/service)x(services/person)x(people served)
 1990 – 2001
33% - general inflation
 22% - medical prices> inflation
 16% - population/ demographic change
 29% - intensity of service
 Growth in Inflation-Adjusted HC$ per person driven
by new technology and services per person


Average - 3.6% per year since 1960 but not smooth
 Not Unique to the US (1960 -2002)
 US HC$ growth = GDP growth + 2.7%
 Other G6 countries HC$ growth = GDP growth + 2.0%
The Cost of Health Care
10% of the Population Accounts for 69% of
Health Care Expenses
Health Spending Exceeds Wage Growth
Wage Share of Labor Compensation Has
Declined Steadily Since 1968
The Burden of Illness for Those with
Chronic Disease – The Largest Opportunity
 Working age pop. with chronic disease
generates expenses 3 x non-chronic pop.
 Chronic disease accounted for 56% of growth
in health care spending from 1987-2000
 Burden of illness includes both outlays for
medical services and lost productivity
 Ave. impairment 2 to 11 days / 30 workdays
 Total burden – over $1 trillion per year
The Burden of Unhealthy Workers
Sum of median 1998 HPM costs across programs was
$9,992 per eligible employee
Group
Health
$4,666
47%

24
NonTurnover
Occupation
Unscheduled
$3,693
Disability
Absence
37%
$513
$810
5%
8%
Workers’
Comp
$310
3%
Best practice (25th percentile) – 26% HPM cost savings
The MEDSTAT Group
© 2000
Quality –”Is American Healthcare the
Best in the World?”
 Variety of definitions of quality exist



Comparisons of life expectancy and infant mortality suggest
2nd tier rank for US but largely unrelated to medical care
Studies of the outcomes for specific diseases put US in a
variety of spots
Very little opportunity to buy based on quality
 “To Err is Human” – IOM report (1999)
44K to 98K preventable deaths/year - errors
 Patient safety has received much more attention
 MBGH report (2003) estimated cost of poor quality at $1,700 per
person per year.
 Rand Study suggests big gaps in appropriate care
–Americans receive 55% of recommended care

Rand Health: National Report Card on
Quality – JAMA 2003
More Spending Doesn’t Always Mean
Higher Quality of Care
Access – Insurance and Medical Care
 The Uninsured – CPS Survey
 Almost 45 million uninsured
 80% + have at least one worker in family
 Poor more likely to lack insurance
 Rich gain advantages of tax exemption for insurance-
$188 B of foregone taxes per year
 Access to Care –
 Indicators include usual source of care, unmet need
and delayed care
 25% of uninsured people with poor or fair health went
without needed care – unchanged 1997 to 2003

Uninsured by Income Level
Insurance Improves Access
Four Ways to Control HC$ Growth
 ↑ the efficiency of the delivery system
 ↑ the financial incentives for patients to
reduce their use of medical services
 ↑ the administrative controls on the use of
services
 Limit the resources available to the health
care system
 Paul Ginsburg, “Controlling Health Care Costs,” New England Journal
of Medicine, October 14, 2004
Efficient Use of Resources
 Identify and discourage high cost, low value services





– evidence-based medicine
↓ expensive adverse events for those with chronic
illness – disease management
↓ the risk profile of population – primary prevention
↓ bargaining power of healthcare providers – antitrust and purchasing groups
Pay for good performance – compatible incentives
Requires strong, committed leadership at various
levels
The OPM Principle
Consumer Directed Health Care Gives
Incentives for Patients to Economize
 Health Savings Accounts
 Large deductible – low premium insurance
 Increased cost sharing – consumer’s decide
 Response to OPM (other people’s money) disease
 Information at improve decision-making
 Concerns
 Attractive to young and healthy
 Worsens tradeoffs for those with chronic disease
 Addresses the 50% who only spend 3% of total
 Very limited availability and enrollment so far
 Money taken out of the general pool and given to
individuals
Cheap Insurance
Administrative Rules / Managed Care
 PPO, POS, and HMOs – Selective contracts
 HMOs often feature fixed payment to
providers, limited choice of provider, and
directed practice
 Offered good coverage for prevention
 Kept growth low in the 1990s
 Differed in their ability to deliver quality
 Rejected by many who wanted more choice
of physician and treatment at someone else’s
expense
Single Payer - Monopsony
Canadian- style plan – State as sole purchaser
Total expenditures controlled by province or country
Priorities set by professionals or politicians
Most run out of funds each year – explicit rationing
Presently Medicare and Medicaid expenditures sum
to about $2,500 per capita and cover about 23% of
population. Canada’s Medicare spends about $3,000
per capita and covers entire population.
 Total U.S. spending per capita is approaching $6,000
per year
 To whom will we say no?





Reducing the Number of Uninsured
 Ideal: To provide insurance to those not
previously covered
 Problems:



Induce a switch from private coverage
Employers drop coverage
Benefits don’t accrue to the needy
 Three ways to implement
 Mandate or bribe individuals
 Mandate or bribe businesses
 Enroll people in public programs
The Bush Plan
 Key Theme: Encourage consumers to
economize on care since they are spending
their own dollars
 Tax credits for low income families (<$25K)
 Tax credits for businesses that provide Health
Savings Accounts (High Deductibles)
 Tax deductible contributions to these HSAs
 Encourage joint purchasing for small
business & exemption from state laws
Effects of Bush Plan
 # of Uninsured – Drop by 1.3 to 10 million depending






upon shifting out of private plans
Federal Cost – (net of offsets) $50B to $125B – less
than half targeted to those presently w/o insurance
Shift burden on to consumers of care
Few cost containment provisions, more tax-exempt
spending
Largely targets the young and healthy
Reinhardt “a 401k for the chronically healthy”
Conclusion – not too expensive, not too effective
The Kerry Plan
 Theme: Use all three approaches to target uninsured
 Federalize Medicaid for children
 Enroll uninsured parents < 200% of FPL
 Add FEHBP II for small businesses that do not offer
insurance including tax credit for those with salaries
<300% of FPL
 Premium support for uninsured between ages 55 and
64
 Government Stop-Loss Insurance for expenses
>$30K if use disease management (Top 1% of
spenders)
Effects of the Kerry plan
 Estimated reduction in # of uninsured by 25
to 27 million
 Cost shifting from employee to taxpayer and
from state to federal government
 Primary beneficiaries of Medicaid expansion
are low income and in fair or poor health
 Cost estimates range from $650B to $1,249B
for Federal expenditures (w/o offsets)
 Does largely address the uninsured problem
but not cost or political feasibility
Effects on those with chronic disease
 Bush plan – does not target; many with
chronic disease would have to decide
whether to purchase medicine or not.
 Medicare Modernization Act – initiates demo
projects for voluntary chronic care
improvement programs for fee-for-service
enrollees
 Kerry plan –One disease management
component as part of stop loss federal reinsurance program
Estimated Effects of Plans
Cost in Perspective
Plans
Bush
Proposal
Kerry
Proposal
10 year
Increase HC
Spending
Percentage
of Total HC
Spending
Percentage
of Public HC
Spending
$100 Billion
0.3%
0.8%
$900 Billion
2.7%
7.2%
Medicare in Brief
 Now, Parts A – D after Medicare Modernization Act
 A – Hospital/SNF insurance – payroll tax funded (50%
of Medicare expenditures)
 B – MD and Outpatient Hospital – 25% premium and
75% general tax revenue (33% of Medicare $)
 C – Medicare Advantage (managed care) – funds
combine A and B (14% of Medicare $)
 D – New Prescription Drug Program – funded similar to
part B
 Medicare covered 41 million people (2004) – 13% of
US population
 Cost - approaching 320B$ for FY 2005
2004 Medicare Trustees Report




Total Medicare $ to rise from 2.6% of GDP to
3.4% of GDP by 2006 and to 7.7% by 2035
Part A – trust fund exhausted by 2019 but
outlays for Part A > revenues (including
interest) by 2010 so start liquidation of assets
Part B – now 9% of Federal Income Tax; 14%
by 2010; and 29% by 2030 despite 17% rise in
premium to enrollees this year.
Part D – Funded similar to Part B but
potentially even greater draw on general
revenue (estimated $123B – 2013)
Federal Budget and Medicare
 13% of Federal Budget – FY 2005
 Estimated 16% by FY 2007
 Short Run: More than 25% of projected increases in
Federal spending will come from Medicare in next 4
years


Assuming 5% cut in payments to MDs
No additional benefits
 Long Run: Trustees estimate 1.1% (not 2.7%) excess
HC$ growth which suggests 15% increase in taxes
 Something has to give long run: benefits, eligibility, or
taxes must change.
The Fundamental Question: Who Will Pay for
Expanded Coverage and Service?
 Bush: Shifts burden onto consumers
 Kerry: Shifts burden onto Federal Tax payers
 Tax Policy Center estimates $550 to $650B in
revenue generation from rollback of tax cuts
to those earning $200,000+ per year to cover
all Kerry programs.
Political Reality
 An aging society; new drugs, diagnostics, and
treatments; and popular desire for the latest and best
– at someone else’s expense – means continued
growth in demand
 Presidential candidates focus on promising to do
things for voters – not on taking things away from
them. Not surprisingly; they duck the question.
 Alfred E. Neuman’s Cosmic Law of Health Care:
Every $ of HC Spending= Someone’s HC Income*
*(including waste, fraud and abuse)
Conclusions
 The links between money and politics
suggest small changes in health care policy
 No political will exists to face the cost of
expanding coverage
 Thus, we will continue to have more care
and high healthcare expenditures.
 Pluralistic American preferences mean it
remains difficult to reach a consensus on one
approach.
Prognosis: Stalemate
 “To be serious would require admitting that the basic
problem does not lie with insurance companies, trial
lawyers, hospitals, or any of the usual suspects. It
lies with public opinion. We Americans want the
impossible. We want our health care system to
provide everyone with good care covered by
comprehensive insurance, prevent insurance
companies or government bureaucrats from dictating
our choice of doctors, hospitals or treatments, and
hold down costs. Well, we can have any two of these
goals – but not all three. If everyone has coverage
and choice, costs will skyrocket. No one is
empowered to control them. But controlling costs
involves limits on insurance or choice.
 Robert J. Samuelson – Washington Post, September 22, 2004
Predictions
 Result 1: Minor changes in public policy
 Result 2: Continued growth in cost of care
 Result 3: Continued significant gaps in
access to and quality of care
 Result 4: Postponement of paying the bill for
expansion
 A healthy economy with lots of borrowing
from the Chinese and the Japanese has
allowed us to postpone the tough choices.
The Big Tradeoff
American Values
 “You can always count on Americans to do
the right thing - after they’ve tried everything
else.” – W. Churchill
 “When faced with second-best trade-off
between cost-conscious choice and no
choice at all, however, Americans may
grumble but select the former.” – J. Robinson
Former Governor Richard Lamm
 “The dilemma of democracy is that citizens
want more services as consumers than they
are willing to pay for as taxpayers.”
 “The ultimate challenge to an aging,
technology-based society is to adjust public
expectations to what the society can
realistically afford.”
The Budget Cake is Only so Big