Train Wreck? A Conference on
America’s Looming Fiscal Crisis
Health Entitlements:
Comments on Goldman and Manchester/Schwabish Papers
Samuel Y. Sessions, MD, JD
Train Wreck? A Conference on
America’s Looming Fiscal Crisis
 Federal Health Care Spending Outlook –
Health Entitlements:
Comments on Goldman and
Manchester/Schwabish Papers
Manchester and Schwabisch
 Michaud, Goldman, et al.
 Cost Containment – Manchester and
Samuel Y. Sessions, MD, JD
Harbor-UCLA Medical Center
Schwabish
Copyright (2010)
 Conclusions
America’s Looming Fiscal Crisis:
Health Entitlements
Health Spending: Outlook
Comments on Manchester/Schwabish
Health Spending: Outlook
CBO health care spending projections (% of GDP)
2008
Medicare plus Medicaid
spending (federal)
4.3%
2035
9.7%
2080
17.2%
Medicare/Medicaid spending growth of 5.4% of GDP from 2008 to 2035.
Total health care spending in 2035 projected to be 31% of GDP.
Sources: CBO Long-Term Budget Outlook 6/09; Manchester/Schwabish, 1/15/10
Health Spending: Outlook
CBO fiscal gap estimates (% of GDP)
Fiscal gap: the immediate reduction in deficit needed to hold debt:GDP
ratio constant over given period – the target.
25 years
75 years
Baseline fiscal scenario
Immediate action
2.1%
3.2%
Action in 2020
10%(?)
Alternative fiscal scenario
Immediate action
Source: Manchester/Schwabisch, 1/15/10
5.4%
8.1%
Health Spending: Outlook
 CBO projects Medicare and Medicaid will account for 80% of
entitlements spending growth in next 25 years (90% in next 75 yrs).
 Question: How much could they contribute to deficit reduction –
hitting the fiscal gap targets?
 CBO projects 57% of Medicare/Medicaid spending growth in next 25
years is due to aging alone – assume (1) this is fixed and (2) no benefits
cuts or eligibility changes.
 43% of projected increase of 5.4% of GDP = 2.3% of GDP.
 Represents the limit to Medicare/Medicaid savings from ‘pure’ health care
cost containment.
 Like cost increases, savings would be realized gradually.
 Would entail 25% Medicare/Medicaid cut (2.3% x 9.7% of GDP).
Health Spending: Outlook
 Tax expenditure for employer-sponsored health insurance (ESHI) now
equals about 11% of health spending.
 If percentage stays constant, this would be about 3% of GDP in 2035 (11%
of 31%).
 Conclusions:
 Health care cost increases may be a bigger part of the problem than the
“solution” for the deficit.
 Large share of Medicare/Medicaid cost increases from aging alone limits
savings from cost containment – simply the demographic bulge.
 Savings from tax-free ESHI more predictable and controllable.
 25% reduction of Medicare and Medicaid spending in year 2035 can
serve as benchmark (limit case) in assessing proposals.
America’s Looming Fiscal Crisis:
Health Entitlements
Michaud, Goldman et al. Paper
 Obesity scenario
 Smoking scenario
 Mortality scenario
Goldman, et al. Paper
Obesity scenario
Weight gain as risk factor for disease (increase in relative risk)
Diabetes
Hypertension
Arthritis
Overweight (BMI
25-30
60%
80%
40%
Obese (BMI 30
or higher)
240%
250%
100%
740%
640%
440%
Extremely obese
(BMI 40 or
higher)
Source: CDC: Mokdad, et al., JAMA 1/1/03
Michaud, Goldman, et al. Paper
 Obesity Scenario – reduce obesity to late 1970’s levels:
 Status quo projection: by 2050, obesity increases from 28%-47%, and
diabetes increases from 17%-29%.
 Under obesity scenario, life expectancy increase of 1.2 years and disability
decrease of 0.6 years for age 50 entrants in 2050.
 Projected Medicare/Medicaid savings of 2.3% in 2030 and 4.6% in 2050 –
savings of about 3% in 2035.
 An enormous effect -- if achieved, equals more than 10% of ‘maximum’
savings (25%) from excess cost growth, while significantly improving health.
Michaud, Goldman, et al. Paper
 Obesity Scenario (cont.):
 Savings may be understated, since model assumes health care delivery
status quo – adjusting for CBO excess cost growth would increase
savings in 1st 25 years by about 75% (i.e., 43/57).
 Also counts population 50+ only.
 Achievement ambitious and difficult, practically and politically:
 Studies suggest a per capita increase in caloric intake of up to 500
kcal/day since early 1970s.
 Walking an extra mile a day expends 60 kcal compared with resting –
about 1/9 of the caloric increase. (Source: Katan and Ludwig, JAMA 1/6/10)
Michaud, Goldman, et al. Paper
 Obesity Scenario (cont.)
 “[T]he apparent energy imbalance [between diet and activity] is . . . far
beyond the ability of most individuals to address on a personal level.”
 “Rather, an effective public health approach to obesity prevention will
require fundamental changes in the food supply and the social
infrastructure.”
 “Changes of this nature depend on more stringent regulation of the food
industry, agricultural policy informed by public health, and investments
by government in the social environment to promote physical activity.”
Martijn Katan and David Ludwig
(Source: Katan and Ludwig, JAMA 1/6/2010)
Michaud, Goldman, et al. Paper
 Mortality Scenario: good news and bad news
 Projected life expectancy increase of 5.8 years for 2050 entrants, 3.9
years of which is with a disability.
 Does not affect disease status: prevalence of disease conditions increases
over status quo projection.
 Approximately 10-11% increase in 2035 Medicare/Medicaid costs --
equals almost half of CBO’s projected excess cost growth
 Or further increase in 2035 Medicare/Medicaid costs of about 1% of GDP.
 Adjusting for excess cost growth itself would, again, increase by 75%.
 Presumptive goal of health care system reform: achieve the mortality
improvements without these fiscal effects, and with better health
outcomes – but see below.
America’s Looming Fiscal Crisis:
Health Entitlements
Manchester/Schwabish Paper
Manchester/Schwabish Paper
Horseless carriage
Manchester/Schwabish Paper
 Model of U.S. health care delivery dates back many decades:
 Mostly sole practitioners, most in general practice
 If specialist consultations needed, arranged ad hoc
 Paper charts – consistent with one patient-one doctor
relationship
 Relatively little care available for chronic disease
 Hospitalizations for acute illnesses, often infectious disease
 Surgical options limited, recovery mostly in hospital
 No CTs, MRIs, ultrasounds, ICUs, nuclear medicine, etc., etc.
Manchester/Schwabish Paper
 Greatly expanded range of services and knowledge due to scientific
advance have been loaded onto decades-old, antique model.
 Consequences:
 Severely fragmented, poorly-coordinated care.
 Limited information on relative effectiveness of treatments.
 Feeble ability to gather comprehensive data about care delivery.
 Should be be replaced with:
“team-based delivery of care, supported by modern information technology
and backed up by extensive research on effectiveness, careful monitoring of
results, and alignment of incentives with goals”.
(Henry Aaron)
 Integrated delivery systems (IDSs) and evidence-based care.
Source: Aaron, review of Lee and Mongan, Chaos and Organization in Health Care, Health Affairs Sept/Oct 2009
Manchester/Schwabish Paper
 Bundled payment (“episode of care payment”)
 Single payment would be provided for all services related to a given
episode of care or condition, by multiple providers.
 Providers would assume financial risk for costs of treatment and costs
associated with “potentially avoidable” complications (PACs).
 Estimated that PACs account for 22% of all private US health care costs(!).
 A RAND study estimates reduction of national health care spending up to
5.4% between 2010 and 2019 under one bundled payment model.
 Global application -- not a Medicare/Medicaid proposal – “optimistic”.
 Assumes a 25-50% reduction in PACs through better coordinated care, rapid
implementation.
 Both House and Senate bills have pilot studies/demonstration projects.
(Sources: deBrantes, et al, NEJM 9/10/09 ; Hussey, et al., NEJM 11/26/09)
Manchester/Schwabish Paper
 Accountable care organizations (ACOs)
 Group of providers (hospitals, physician groups, others) held jointly
responsible for the quality and cost of health care for a population of
beneficiaries.
 Another capitated payment model, but more clearly intended to create
incentives for creating IDSs.

Senate bill includes proposal for voluntary ACOs in Medicare:
 Providers paid FFS, but those in ACOs would receive bonuses if quality measures met
and spending below a benchmark – i.e., share the savings with Medicare.
 CBO estimates proposal would raise $5 billion over 2013-2019.
 House bill has pilot program.
Manchester/Schwabish Paper
Integrated delivery systems – issues:
 Unclear that IDSs actually reduce costs.
 Chronic care coordination improves health, but evidence for net cost
savings is mixed.
 Under status quo there is enormous underutilization as well as
overutilization of services.
 Mortality scenario – improved care may generate its own long-run fiscal
burden. Not captured by studies of IDSs to date.
 Moving to IDSs entails major shift in health care organization: most
doctors still in small group practices.
 In 2003, 47% of private physicians worked in practices of one or two
physicians, and 82% in practices of 9 or fewer.
Sources: Mongan and Lee, Chaos and Organization in Health Care (2009); McGlynn, et al, NEJM 6/26/03; Michaud,
Goldman, et al.; Casalino et al, Arch. Int. Med. 9/8/03
Manchester/Schwabish Paper
 Integrated delivery systems (cont.):
 Both outpatient practices and hospitals woefully short of the IT systems
needed for integrated care delivery.
 Only 1.5% of US hospitals have a comprehensive electronic medical records
(EMR) system (present in all clinical units).
 Only 4% of physicians have a fully functioning EMR system.
 American Recovery and Reinvestment Act (ARRA) provides $19b for health
IT and EMR, . . . but 2005 estimate of cost of national interoperable HIT
system was $276b.
(Sources: Jha, et al., NEJ 4/16/09; DesRoches, et al., NEJM 7/3/08; Blumenthal, NEJM 4/9/09; Walker et al.
Health Affairs web exclusive 1/19/05)
Manchester/Schwabish Paper
 Comparative effectiveness research (CER).
 ARRA provides $1.1b for CER, defined as:
 “[R]esearch that compares the clinical outcomes, effectiveness, and
appropriateness of items, services, and procedures that are used to prevent,
diagnose, or treat diseases, disorders, and other health conditions”.
 Cost not mentioned.
 Reference to “comparative cost-effectiveness analysis” in earlier drafts
of bill was dropped.
(Source: Reinhardt, NYT, 3/13/09)
 Both House and Senate health care reform bills include CER provisions,
with additional funding; neither includes cost in CER definition.
Manchester/Schwabish Paper
 Comparative effectiveness research (cont.)
 ARRA directed the Institute of Medicine to generate a list of CER
priorities for DHHS to consider in implementing ARRA.
 On 6/30/09 IOM released report; highest priority item for CER in
psychiatry (no. 22 out of 100 overall) identified by the IOM:
 “Compare the effectiveness of wraparound home and community-based
services and residential treatment in managing serious emotional disorders
in children and adults.” (Institute of Medicine, 6/30/09)
 What might have been an alternative priority?
Manchester/Schwabish Paper
 Comparative effectiveness research (cont.)
 Antidepressant Celexa (citalopram) consists of two mirror image
molecules -- left molecule is biologically active; right one is inert.
 Celexa’s patent expired in 2003; Forest Laboratories introduced lefthand molecule, Lexapro (escitalopram), as a new drug.
 26 million Lexapro prescriptions written in 2008, the third highest for
any drug; cost: $2.4 billion.
 21.5 million prescriptions written for generic citalopram.
 If lexapro had sold at citalopram prices, cost would have been $317
million – difference of $2.1 billion – one drug, one year. (Sources: Shook,
Businessweek online 3/24/03; www.drugtopics.com; author’s calculations.)
 Studies favor lexapro, but almost all financed by companies marketing lexapro.
Manchester/Schwabish Paper
 For same pharmaceuticals, U.S. costs 2.3 times higher than in rest
of the world.
 Retail prescription drug spending, 2008: $234b.
 78% of pharmaceutical spending is on brand-name drugs.
Sources: Halvorson 2009; Hartman et al. HA 1/2010; Singer NYT 1/13/09
Manchester/Schwabish Paper
 Tax-free employer-provided health insurance
 The largest tax expenditure, equal to about 11% of health care costs.
 Encourages overspending on health insurance and represents one of many
ways in which costs are hidden from ‘consumers’.
 Senate bill includes 40% excise tax on “Cadillac plans” ($8,500 for
individual coverage, and $23,000 for family coverage)
 Issues:
 Effects too limited and too back-loaded?
 May simply shift costs to insureds without systemic reform
 May have adverse impact on pools of older, sicker employees
 Doesn’t directly address affect price of inputs
 Disingenous – missed opportunity to educate?
America’s Looming Fiscal Crisis:
Health Entitlements
Conclusions
Health Entitlements: Conclusions
 Much of projected Medicare and Medicaid cost increase is due to
aging – the long-awaited ‘demographic bulge’ – and unavoidable.
 Health care cost containment savings are slow and uncertain
(absent benefits cuts, eligibility changes, or major provider cuts).
 Reforming tax treatment of ESHI avoid these problems and be a
better source for deficit reduction, especially near-term.
 Serious CER may also provide faster, and more certain, cost
savings than delivery system reform.
 Need to address cost of inputs, not just how they are utilized.
Health Entitlements: Conclusions
 Some public and population health measures could improve health
status and significantly cut costs by reducing health care demand.
 Shift to integrated delivery systems is needed regardless of cost
issues – but may generate its own long-term fiscal burden.
 There are major infrastructure, cultural and other obstacles to
achieving integrated care delivery.
 Rather than implementation of technocratic scheme, significant
cost containment likely to involve major political battles – e.g.,
with drug companies, medical specialists, food industry – that
were mostly avoided in current legislation.
 “Rationing” is “socialized medicine”, 2010-style.
Health Entitlements: Conclusions
“[A]ll payers, whether they are employers or public officials, are
attracted to promises of blameless cost control. ‘Managing care’
defined as giving people the right treatment in the right place at
the right time (and no more) promised that patients would get
what they needed – no painful ‘rationing’ – while providers would
have no legitimate gripe about any lost income.”
Joseph White
Health Entitlements: Conclusions
 “The current U.S. health care system can be described, in at least one
respect, as a massive engine for the redistribution of resources from
employers, taxpayers, and households to the organizations that provide
health care goods and services, and . . . [those] who work for [them].
Controlling costs will mean, unavoidably, altering the terms of that
redistribution.”
 “It’s not surprising that those likeliest to lose out from such a process, or
even from an open discussion of such a process, would be so eager to
change the subject. . . . We would all be better served, we believe, if
the issues of who wins and who loses were made more open and more
explicit.”
Bruce Vladeck and Thomas Rice
Source: Vladeck and Rice, “Market Power And The Failure of Discourse: Facing Up To The Power of Sellers,” Health
Affairs, Oct./Sept. 2009
Train Wreck? A Conference on
America’s Looming Fiscal Crisis
Health Entitlements:
Comments on Goldman and Manchester/Schwabish Papers
Samuel Y. Sessions, MD, JD