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WHY AMERICA WILL CURB THE FUTURE GROWTH OFHEALTH-CARE INCOMES AND -EMPLOYMENT
Uwe Reinhardt,Woodrow Wilson School of Public and International Affairs
andDepartment of Economics
Princeton University
The National on Congress on Healthcare Clinical Innovations, Quality Improvements and Cost Containment
Washington, D.C.October 26-28, 2011
I. THE DUAL SOCIAL ECONOMIC ROLE OF HEALTH CARE
II. THE MACRO-ECONOMIC CONTEXT
III. HOW HEATH CARE COULD HEAL ITSELF
IV. MORE RADICAL PROPOSALS
OUTLINE OF PRESENTATION
I.
THE DUAL ECONOMIC ROLE OF HEALTH CARE
A few decades ago, Harvard Philosophy Professor Alfred E.
Neuman received the Nobel Prize in Medicine for his
discovery of (a) an innovative definition and (b) a famous
cosmic law..
He edited the first journal of U.S. health policy.
patient (pa’shent) - n. 1. A person
under medical treatment. [Middle English
pacient, from old French
patient, from Latin patients, from pati, to suffer.]
TRADITIONL DEFINITION OF “A PATIENT”
patient (pa’shent) - n. 1. A person
under medical treatment. [Middle English
pacient, from old French
patient, from Latin patients, from pati, to suffer.] 2. A biological structure yielding cash – acronym BSYC [from 21st century fee-for-
service medicine. ]
NEUMAN’S DEFINITION OF “A PATIENT”
Alfred E. NeumanAlfred E. Neuman’’s s Cosmic Health Care EquationCosmic Health Care Equation
HEALTH SPENDING = HEALTH CARE INCOMEHEALTH SPENDING = HEALTH CARE INCOME(Including fraud, waste (Including fraud, waste
and abuse)and abuse)
HEALTH SPENDING $
HEALTH CARE
HEALTH INCOMES $
REAL RESOURCES
PRO
VIDER
S OF
REA
L HEA
LTH-C
AR
ER
ESOU
RC
ES
HEALTH-
CARE
SECTOR
THE DUAL OBJECTIVES
PURSUED IN THE HEALTH-CARE SECTOR
HO
UR
LY INC
OM
E
RETU
RN
ON
CA
PITAL
PRIC
ES O
F
HEA
LTH
SER
VIC
ES
OBJECTIVE I:Enhance quality of
patients' lives
OBJECTIVE II:Enhance quality of
providers' lives
The Income--Employment Facet The Health Care & Health Facet
5
7
9
11
13
15
17
19
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Perc
ent o
f GD
P
U.S. France Switzerland Germany Canada Sweden U.K.
Healthcare Incomes as a Percentage of GDP, 1980-2009
Source: OECD Data Base, 2011.
What drives the difference in spending (i.e., health incomes)?
European and Asian providers of health care get paid
and manage back from available revenue to permissible costs.
It is language
and the mindset
it begets.
American providers of health care traditionally have gotten reimbursed
for whatever it costs them to produce health care as they saw fit and then expected to be reimbursed
for these costs.
This will change because it has to change.
The word “reimbursement”
will go out of style.
Increasingly, thoughtful policy analysts and politicians think
of the following definition of “value”
in health care:
Net Social Value Added by the
Health System
Net Social Value Added by the
Health System=
Gross Value Added by
Health Care to Patients
Gross Value Added by
Health Care to Patients
- The Opportunity Costs of that Care
for Society
The Opportunity Costs of that Care
for Society
• Neglecting the education of our young• Neglecting science and R&D• Neglecting the nation’s public infrastructure• Neglecting national security and safety of our warriors• Giving up other things households enjoy
Among these opportunity costs (other social priorities)of health
care are:
$0$500
$1,000$1,500$2,000
$2,500$3,000$3,500$4,000
$4,500$5,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Bill
ions
of D
olla
rs
Medicare Medicaid Other PublicPriv. Insce. Out-of-Pocket Other Private
SOURCE: CMS Data and Statistics, Sept. 2010 Update.
PROJECTED HEALTH SPENDING 2009‐19 BY SOURCE
Medicare
Medicaid
Other Public
Private Insuranc
e
OOPOther
Private
Projected NHE in 2020 = $$4.6 trillion or 19.8% of GDP
Governm
entPrivate
http://www.usatoday.com/news/washington/story/2011-10-23/states-limit-medicaid-hospital-stays/50886398/1
So the question is where the money for the government’s half of projected total health-care incomes (spending) is to come from, given the macro-economic
and fiscal
challenges our nation faces.
Let us briefly review these challenges.
II. THE MACRO-ECONOMIC CONTEXT
U.S. health care is being battered by a number of macro- economic forces, some of which are external and beyond
our control, and some of which are self-inflicted wounds.
U.S. Health Care
Aging of the U.S. population, health-
care costs and health workforce
Outsourcing of jobs to computers and
other nations
High income inequality and an
inexorable erosion of solidarity in U.S.
health care
Deficit-addicted, dysfunctional federal
government and fiscally strained state
governments
U.S. fiscal policy:U.S. fiscal policy:
``How cool! Sunshine
all around!
©
Tsung-Mei Cheng
SOURCE: Congressional Budget Office, http://www.cbo.gov/ftpdocs/110xx/doc11047/05-13-CBO_Presentation_to_AAAS.pdf
In the words of Douglas Elmendorf, the Director of the Congressional Budget Office (CBO):
The Surest Sign That Intelligent Life Exists
Elsewhere In The Universe Is The Fact That
It Has Never Tried To Contact Us.
The Surest Sign That The Surest Sign That IntelligentIntelligent Life Exists Life Exists
Elsewhere In The UniverseElsewhere In The Universe Is The Fact That Is The Fact That
It Has Never Tried To Contact Us. It Has Never Tried To Contact Us.
U.S. fiscal policy during the past three decades reminds
me of this scientific observation that:
Reagan/Bush I Clinton Bush II ObamaCarterNixon/
Ford ????
U.S.FEDERAL GROSS DEBT 1980-2011
$909
$2,600
$4,000
$5,600
$9,986
$15,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
1980 1988 1992 2000 2008 2011
SOURCE: Economic Report of the President 2011, Table B78.
2428.1
30.330.731.1
34.337
39.141.9
42.843.5
44.846.4
48.2
0 5 10 15 20 25 30 35 40 45 50 55
United StatesJapan
SwitzerlandSpain
CanadaUnited Kingdom
Germany Netherlands
France Austria
ItalyOECD AVGE.
SwedenDenmark
Source: OECD Tax Data Base, http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#A_Revenu
eStatistics
TOTAL TAXES AS PERCENT OF GDP, 2009
26.1% IN 2008
Americans are not an overtaxed
people
The growing U.S. federal debt –
half of it owed to foreigners – and the fiscal straits of the states pose a major problem for
health care, half of which already is financed by government.
II. OUR UNSUSTAINABLE HEALTH SYSTEM
During the past four decades, health-care spending in the U.S. have grown on average more than 2 percentage points faster than the rest of the GDP –
called “GDP + 2.”
It is simple math to calculate that, if that trend continued for the next four decades, on top of the 17.6%
of GDP we are spending on health care now, we’ll be spending close to 40%
or so of our GDP on health care by 2050.
SOURCE: CMS Data & Statistics, 2011
NHE
GDP
$8,414 $9,235$10,168
$11,192$12,214
$13,382$14,500
$15,600$16,700
$19,393 $18,200
$0
$5,000
$10,000
$15,000
$20,000
$25,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
MILLIMAN MEDICAL INDEX (MMI)MILLIMAN MEDICAL INDEX (MMI)Average Annual Medical Cost for a Family of FourAverage Annual Medical Cost for a Family of Four
http://publications.milliman.com/periodicals/mmi/pdfs/millimanhttp://publications.milliman.com/periodicals/mmi/pdfs/milliman--medicalmedical--indexindex--2011.pdf2011.pdf
CAGR 2001-11: 8.8%In more recent years: 7% to 8%.
Although employers ostensibly
pay the larger part of the
premium for their employees’
health insurance, economists
are convinced that virtually all fringe benefits come out of the take-home pay of workers, certainly over the longer run.
Talk in Washington now is that for Medicare we need to go from GDP+2
to something less than GDP+1
or even down to GDP + 0.5.
But the very idea of even one single basis point
less than GDP + 2% drives organized health care –
the AHA, the AMA, PhRMA, Advamed, etc. –
to utter despair.
ORGANZIED HEALTH-CARE LEADERS ANNUAL MEETING
Organized health-care leaders when last sighted.
Someone recently told me, however, that the health- care leaders are merely faking it for public consumption
– that in reality they are bungee jumping.
III. INNOVATION FOR “VALUE”
IN HEALTH CARE
I have heard about “value” at health-care conferences
for so many years now that I deploy at these
conferences the latest cutting-edge technology:
The The Nio Fen Nio Fen Protector Protector TMTM
U.S. Veterans, for example, wear it whenever we prattle on how much we admire and love them.
VALUEVALUE = = QUALITY QUALITY
COSTCOST
Among management consultants on the speaking circuit “value”
is typically defined, “concretely,”
as follows:
It’s a vector Q = {q1
, q2
, q3
, ···
qN
} divided by a dollar figure.
Nice try! Try to make it operational.
QALY QALY VALUEVALUE = = COSTCOST
So let us work instead with the value-ratio
e.g., QALYs added by a treatment
e.g., Cost added by the treatment
VALUEVALUE = = QALY QALY
REVENUEREVENUE
Which can also be written as
= = QALY QALY
PRICEPRICE x VOLUMEx VOLUME
So providers could increase value by lowering their costs, their prices and their revenues.
For example, the U.S. Business Roundtable –
folks who buy private insurance on behalf of their employees –
now openly speak of a value gap relative to other countries.
IV. COSTS, PRICES, REVENUE AND SPENDING
In December 2010, the trade association In December 2010, the trade association of private health insurers in the US of private health insurers in the US ––
the the AHIP AHIP ––
published this report on the published this report on the average prices charged to larger insurers average prices charged to larger insurers by Oregon Hospitalsby Oregon Hospitals
QUESTION: Why did private insurers and employers behind them accept this steep price increase –
in the midst of a deep recession?
$4,592
$2,266
$3,768
$2,147
$3,485
$6,379
$8,435
$13,799
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000
Australia
Canada
France
Germany
Switzerland
US low
US average
US 95 pctl.
COMPARATIVE PRICES FOR A NORMAL DELIVERY:COMPARATIVE PRICES FOR A NORMAL DELIVERY:Total hospital and physician costTotal hospital and physician cost
SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 Comparative Price Report2010 Comparative Price Report..
But are these alien babies as good as American babies?
$6,526
$3,810
$2,795
$3,285
$2,570
$7,758
$13,123
$25,344
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000
Australia
Canada
France
Germany
Switzerland
US low
US average
US 95 pctl.
COMPARATIVE PRICES FOR AN APPENDECTOMY:COMPARATIVE PRICES FOR AN APPENDECTOMY:Total hospital and physician costTotal hospital and physician cost
SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 Comparative Price Report2010 Comparative Price Report..
QALY QALY VALUEVALUE = = COSTCOST
So let us work instead with the value-ratio
e.g., QALYs added by a treatment
e.g., Cost added by the treatment
VALUEVALUE = = QALY QALY
REVENUEREVENUE
Which can also be written as
= = QALY QALY
PRICEPRICE x VOLUMEx VOLUME
So providers could increase value by lowering their costs, their prices and their revenues.
We can cut utilization all we want in the U.S..
It will come to naught as long as so many (although not all) U.S. providers of health care can raise their prices seemingly at will, and as long as private employers are willing to pay those prices (on behalf of their employees).
Note: the prices set in the private sector become the benchmarks which public-sector payers must follow.
V. INNOVATION TO ADD VALUE IN HEALTH CARE
A. Producers of health-care products
Without abandoning innovations that increase both costs and clinical benefits and that pass a benefit-cost test, do put more emphasis than has hitherto been customary on innovations that lower the cost per QALY delivered.
Ponder carefully the next slide, taken from the most recent report of the Trustees of the Social Security System.
SOURCE: Social Security Trustees Report 2010, p. 11.
IV. INNOVATION TO ADD VALUE IN HEALTH
CAREA. Producers of health-care products
B. Producers of health care services
I find it nothing less than stunning that the provider of health
care –
notably physicians and hospitals –
so far have studiously ignored the provocative, decade-long research by John Wennberg and his associates at Dartmouth University.
Consider just these next few slides.
The producers of health-care services –
physicians, hospitals, physical therapists etc. –
may believe that they already work as hard and efficiently as is humanly possible.
Really?
SOURCE: Elliott Fisher et. al., NEJM February 26, 2009
IV. INNOVATION TO ADD VALUE IN HEALTH
CAREA. Producers of health-care products
B. Producers of health care services
C. The health insurance industry
If the industry wants to create value for patients throough properly run disease management –
i.e., one managed essentially by physicians –
or through well-coordinated chronic care, great.
But if the “innovation”
takes the form of yet more “innovative”
health-insurance products through mass-customization of these products –
then heaven help us!
Risk segmentation is not the same as value creation for society as a whole.
So my recommendations to private American health insurers would be:
1.
If you really care about innovations that create net value for America, stop the mindless mass-customization of insurance products that visit ever more administrative costs on providers.
2.
Develop a finite set of standard products, a common nomenclature and a common claims form that would allow everyone to harvest the power of electronic claims processing and of truly competitive markets.
3.
There is no need to reinvent the wheel. Travel abroad and learn from those who have long used those streamlined billing practices.
If Medicare and Medicaid wanted to create value through innovation, they, too, could learn from other nations how to operate health insurance systems more efficiently.
These foreign systems do no look upon every provider as a latent
criminal and therefore do not visit hugely expensive compliance programs and legal fees on providers.
These systems manage by exception, with the aid of statistical profiles and spot audits, and they do not criminalize the entire enterprise.
And my recommendation to the CMS would be:
If America really wanted value creation through innovation in its health insurance system, it would abandon the mindless and enormously expensive one-on-one negotiation of prices of each insurer with each provider, which merely results in cost shifting and inefficient,
ethically indefensible price-discrimination
all around.
Here, too, much could be learned from other countries with multiple insurance carriers –
e.g., Germany and Switzerland.
That archaic and unwieldy system should be replaced with a modern all-
payer system –
perhaps on a state basis.
My recommendation to health policy makers would be:
Finally, I wish all Americans would climb of this All-American horse when they look at other nations’
health systems and try to learn from them.
We’re the best!
How so?
THE ENDTHE END
VI. MORE RADICAL PROPOSALS FOR THE NEXT DECADE
Single-payer health system (e.g., Canada or Vermont(?)
All-payer health system with multiple payers (e.g. Germany or Switzerland)
Multi-tiered, market-driven health system that rations health care by income class
√
1.
Public hospitals and public clinics for publicly insured Americans, especially the poor, but perhaps also for a restructured Medicare. It allows politicians to ration
health care without ever having to admit it.
2.
For the employed middle class, a mixed system, tiered by cost through tiered reference pricing (now used mainly for prescription drugs) that can be camouflaged as “value-based purchasing. That approach also permits rationing of some health care by income class without anyone having to say so openly.
3.
For the upper-income groups, boutique medicine, which is already growing in the U.S.
For the longer run of, say, two decades, I could even see the U.S. health system evolve toward something like this (the third option):
On top of all that, the American electorate appears to be
1.
judiciously and maliciously misinformed by the messages beamed at it from left and right;
2.
understandably, utterly confused;
3.
very angry
American voters opposing the federal deficit, proposals to raise
taxes and proposals to cut Medicare or defense spending.
I.
THE MACRO-ECONOMIC CONTEXTA. Aging of the population
SOURCE: U.N. at http://www.un.org/esa/population/publications/worldageing19502050/
12.3%
6.9%
18.5%
13.2%
21.1%22.7%
0%
5%
10%
15%
20%
25%
30%
U.S. CHINA
2000 2025 2050
PERCENT OF POPULATION OVER AGE 65, CHINA AND THE U.S.
0.52 0.55 0.591.03 1
1.392.01
3.08
5.65
0
1
2
3
4
5
6
0 - 5 '6 - 14 15 - 24 25 - 34 34 - 44 45 - 54 55 - 64 65 - 74 75+ AGE COHORTS OF AMERICANS
SPEN
DIN
G R
ELA
TIVE
TO
AG
E G
RO
UP
35-4
4 (=
1)
SOURCE: Meara, White and Cutler, “Trends in Health Spending by Age, 1963-99”, March, 2003.
RELATIVE PER-CAPITA HEALTH SPENDING BY AGE, 1999
SOURCE: Report of the Trustees of the Social Security System, http://www.socialsecurity.gov/oact/tr/2011/tr2011.pdf
Ratio of older people to working-age people
There will be fewer workers to support a growing number of elderly Americans.
I.
THE MACRO-ECONOMIC CONTEXTA. Aging of the population
B. Outsourcing and unemployment
COUNCIL ON FOREIGN RELATIONS
SOURCE: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy and the Employment Challenge, Council on Foreign Relations, March 2011
7
8.5
12
10
18.5
9
12
14
16
22.5
0 5 10 15 20 25
Construction
Accommodation &Food services
Retail
Health Care
Government
Millions of Jobs
1990 2008
SOURCE: Approximated from Spence and Hlatswayo, Figure 6.
THE MAJOR JOB CREATORS IN THE UNITED STATES
Most of the iPad’s components are procured from Korea and Japan, and some from Europe, although just where these components are actually manufactured is not clear to outsiders.
Add to that the outsourcing of U.S. labor to computers, and
it is not clear to me how any presidential candidate can
promise to solve our long-run unemployment problem
soon, until wages of US workers have fallen enough and
their productivity has risen enough relative to that of labor
in other nations to be competitive with Asia.
This realignment of jobs in the U.S. has significant and serious effects on the nation’s income distribution.
I.
THE MACRO-ECONOMIC CONTEXTA. Aging of the population
B. Outsourcing and unemployment
C. Income inequality
Anthony B. Atkinson, Thomas Piketty
and Emmanuel Saez, “Top Incomes in the Long Run History,”
Journal of Economic Perspectives 2011; 49:1, 3-71.
FIGURE 1 --AVERAGE INCOME GROWTH IN THE UNITED STATES
1.2%
4.0%
3.0%
4.4%
10.3% 10.1%
0.6%
2.7%
1.3%
0%
2%
4%
6%
8%
10%
12%
14%
1976-2008 1993-2000 2002-2007
Ann
ual p
erce
ntag
e gr
owth
AVERAGE TOP 1% Bottom 99%
FRACTION OF TOTAL INCOME GROWTH CAPTURED BY TOP 1%
58%
45%
65%
0%
10%
20%
30%
40%
50%
60%
70%
1976-2007 1992-2000 2002-2007
Whether or not the rising inequality of wealth and income in the U.S. is deserved and fair is quite beside the point as far as health care is concerned.
The problem is that families in the bottom third or so of the income distribution will not be able to finance the ever rising cost of health care with their own earnings.
This poses a major moral dilemma for the nation’s politicians and a major financial problem for the supply side of health care.