The Health Care Blog: POLICY: Not So Fast By Eric Novack

February 09, 2007

POLICY: Not So Fast By Eric Novack

Dr. Eric Novack is an orthopaedic surgeon practicing in Phoenix, Arizona. A frequent contributor to THCB, he has been following the recent debate over universal insurance with a growing sense of disbelief. Eric is also the host of The Eric Novack show, which airs every Sunday on KKNT 960 AM in Phoenix. You can find an archive of his recent shows here.

Wow. Wow. The Rocky Mountain News, in an editorial today, writes what many of us have known for a long time:

As the clamor for a universal (meaning: single-payer) health-care system rises, one factoid needs to be discredited: the notion that the federal administration of medical services would be dirt cheap.

"\[T]he overhead for Medicare," says Dr. Stephen Rous of Brown University, a single-payer advocate, "is 1 percent to 2 percent. The overhead for various private insurance plans (HMOs, etc.) is 15 percent to 25 percent."

Not so fast. Medicare indeed reports administrative costs of less than 2 percent - it claimed $5.2 billion in costs and paid $273 billion in benefits in 2003. But those figures don't include the costs of paying claims and tracking down fraud - those are accounted for by the Justice Department and other federal agencies, not Medicare. Nor do they include the building costs and taxes paid by insurance companies, doctors and private hospitals.

The Council for Affordable Health Insurance, a free-market think tank, pegged the actual cost of Medicare compliance at 5.2 percent. And since Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700, the gap shrinks even more.

Even the council pegs overall private costs as more than those for Medicare. But as the debate over the proper medical system for Americans moves forward, the least we can ask for is an honest comparison of the sort the council attempted.

At a time when I am becoming skeptical about our ability to have an honest debate about healthcare, it is nice to see occasional rays of sunshine.

February 9, 2007 in Policy | Permalink

Comments

For a very interesting discussion of administrative costs incurred by commercial insurers, Medicare, Medicaid, physicians, and hospitals, see this paper. The verdict is less than clear, and I would be interested to hear the reaction others may have.

It looks to me like Medicare's administrative costs, if looked at on a per beneficiary basis, are not much different from commercial insurers, and, in any case, it is questionable how much costs savings might be obtainable from physicians' practices under a single payer system in light of the dispersal of doctors and their staffs across hundreds of thousands of physical locations. It doesn't look like hospitals could achieve large savings either.

Posted by: Barry Carol | Feb 9, 2007 7:34:45 AM

Barry-

I have to admit that I did not finish the article, yet. However, I came across an interesting quote from the article.

“The primary purpose of BIR activities is to move money from payer to provider in accordance with agreed-upon rules.”

I don’t know if the article addresses this issue later on or not because as I have stated I did not finish reading the article. However, from experience I can tell you with confidence that reimbursement “rules” are rarely “agreed” upon (even if the provider is PPO with the carrier) and in fact I would argue that reimbursement related issues are one of the highest administrative costs, at lest in physician type setting. The issues just don’t stop at commercial insurance but extend to Medicare as well.

Posted by: scott | Feb 9, 2007 8:22:28 AM

"The Council for Affordable Health Insurance, a free-market think tank, pegged the actual cost of Medicare compliance at 5.2 percent. And since Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700, the gap shrinks even more."

First lets see if 5.2% would be a good figure given what was also said;

>>>"The overhead for various private insurance plans (HMOs, etc.) is 15 percent to 25 percent."

Sounds like 5.2% is a quite good when compared to private insurance. I would also discount the red herring that Medicare spends more than twice as much per recipient as the average private provider. Twice as much of what? Claims? Overhead? Is the fact that Medicare spends twice as much because they are treating the aged that private insurance can shed once their insureds reach 65?

I would like to submit this report by the New Jounnal of Medicine:
http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=retrieve&db=pubmed&list_uids=12930930&dopt=Abstract

Costs of health care administration in the United States and Canada.
Woolhandler S, Campbell T, Himmelstein DU.
Department of Medicine, Cambridge Hospital and Harvard Medical School, Cambridge, Mass, USA.

Quote:
BACKGROUND: A decade ago, the administrative costs of health care in the United States greatly exceeded those in Canada. We investigated whether the ascendancy of computerization, managed care, and the adoption of more businesslike approaches to health care have decreased administrative costs. METHODS: For the United States and Canada, we calculated the administrative costs of health insurers, employers' health benefit programs, hospitals, practitioners' offices, nursing homes, and home care agencies in 1999. We analyzed published data, surveys of physicians, employment data, and detailed cost reports filed by hospitals, nursing homes, and home care agencies. In calculating the administrative share of health care spending, we excluded retail pharmacy sales and a few other categories for which data on administrative costs were unavailable. We used census surveys to explore trends over time in administrative employment in health care settings. Costs are reported in U.S. dollars. RESULTS: In 1999, health administration costs totaled at least 294.3 billion dollars in the United States, or 1,059 dollars per capita, as compared with 307 dollars per capita in Canada. After exclusions, administration accounted for 31.0 percent of health care expenditures in the United States and 16.7 percent of health care expenditures in Canada. Canada's national health insurance program had overhead of 1.3 percent; the overhead among Canada's private insurers was higher than that in the United States (13.2 percent vs. 11.7 percent). Providers' administrative costs were far lower in Canada. Between 1969 and 1999, the share of the U.S. health care labor force accounted for by administrative workers grew from 18.2 percent to 27.3 percent. In Canada, it grew from 16.0 percent in 1971 to 19.1 percent in 1996. (Both nations' figures exclude insurance-industry personnel.) CONCLUSIONS: The gap between U.S. and Canadian spending on health care administration has grown to 752 dollars per capita. A large sum might be saved in the United States if administrative costs could be trimmed by implementing a Canadian-style health care system. Copyright 2003 Massachusetts Medical Society (End Quote)

Looks pretty good for single pay doesn't it.

Posted by: Peter | Feb 9, 2007 12:12:00 PM

This is a great topic, but unfortunately the way it's framed completely misses the point. This whole idea of using a medical loss ratio as an indicator of efficiency is fundamentally flawed. Efficiency is product divided by cost. That product can be anything you want: larger quantity of health care, better quality, public health, whatever...AS LONG AS IT'S A PRODUCT. The medical loss ratio has no product term. The medical loss ratio is a cost divided by a cost...an accounting artifact that imparts no useful knowledge whatsoever. No matter how you choose to split up the costs (e.g., where do the costs of record-keeping go? the cost of EHR's? the costs of monitoring responsible use of services?)...numerator or denominator, it makes no difference...you'll never shed any light on anything important until you start putting products rather than costs the numerator.

Here's an example of why the medical loss ratio is so worthless. Let's say we somehow get 100% of your insurance premium dollar into the pockets of providers. That's a medical loss ration of 100%. But is the way to improve efficiency really to give more money straight to providers? Is the definition of efficiency "the extent to which we pay the doc whatever he charges for as many patients as he can drag into the scanner?" I doubt anyone would agree with this definition...but this definition is exactly what using the medical loss ratio to measure "efficiency" implies.

Let's see what happens when we put a product in the numerator. Let's use "health," however you want to measure it. Say HMO A has administrative overhead equal to 15% of revenues and turns $100 of premiums into 50 units of health. HMO A's efficiency is therefore 0.5 unit health per dollar. Say HMO B spends 25% of revenues on administration and turns $100 of premiums into 75 units of health. HMO B's efficiency is 0.75 unit health per dollar...better than HMO A (0.75 > 0.5). But look what we'd conclude by taking the medical loss ratio approach, using costs divided by costs: HMO B looks worse because of its lower medical loss ratio (0.75 vs. HMO A's 0.85).

Higher administrative costs do not imply lower efficiency. Whether they do or not is situationally dependent and only empirical data from each situation will meaningfully guide you. Expensive good management that invests in, say, an EMR that doesn't suck will produce more health per dollar than stupid wasteful management (or no management whatsoever...hello Medicare).

One more time: no outcomes data, no argument. If you want to use the Canadian health care system as a model, argue that the life expectancy (a product) is a direct result of health care spending. Then compare total health care spending, do the division, and STOP. That's a badass argument you've just made. You deserve a pat on the back. But don't then torpedo your own argument with the massive distraction of bringing up administrative expenses...they're neither inherently good nor inherently evil.

If you've absorbed the lesson here, you'll never, ever again trot out the medical loss ratio as a marker of efficiency. Instead, you'll need to do the harder, logically consistent thing and actually look for markers of health to put in the numerator. In the denominator, that part's easy: just stick with total costs (like, say, the sum of all the premiums paid to an HMO in a year).

Posted by: harrumph! | Feb 9, 2007 3:30:05 PM

The previous poster (doubt s/he will call him/herself "harrumph!" again) made some very important points that are usually missed regarding administrative expense ratio (AER) and medical expense ratio (MER). Even those of us who know better find ourselves drawn into the wrong arguments.

The whole point of HMOs was to add medical management for the sake of improving health outcomes and reducing total cost. The AER goes up by a few points, while medical costs go down by an even larger amount so that the total premium actually goes down relative to a less-managed insurance plan with similar covered benefits. If the HMO does what it promises, the higher AER does not mean it is less efficient than an old-fashioned indemnity insurer, nor does the lower MER mean that it is being greedy. It means that the HMO is encouraging preventive care, discouraging more expensive and less well-tested options, etc. Almost nobody understands that HMOs do not have higher profit margins than older forms of health insurance. Whether HMOs often or ever do what they originally promised in terms of optimizing the value and effectiveness of care is another issue.

But there is a sense in which the AER can be used as a gauge of efficiency. Most managed care companies try to do roughly the same things: they offer disease management for major conditions, selective care management, hospitalists, quality improvement programs aimed at providers to raise HEDIS scores, and so on. Under these conditions of rough comparability, comparing one AER against another can make sense as a measure of efficiency, and are in fact used by health plans to benchmark. This is only true if a number of other conditions hold as well, such as (a) rough comparability in market pricing, and (b) comparability in accounting for administative expenses. (b) is a big problem when comparing AER and MER for different companies, as well as public programs.

But the long and the short of it is what harrumph says: comparing medical or administrative expense ratios is useless as a measure of efficiency unless you also compare health outcomes and total healthcare expenses.

Posted by: jd | Feb 9, 2007 7:01:24 PM

jd,

What would you use as the preferred measure of health outcomes in place of the seriously flawed infant mortality and life expectancy stats that single payer advocates always cite?

Posted by: Barry Carol | Feb 10, 2007 3:21:04 AM

I agree that deciding what you include in the data affects the interpretation. The Canadaian Institute for Health Informatiom (CIHI) did a discusion paper on this issue and they are trying to develope criteria for what to include. If you want the link I can provide, but I tried to get through it and could not understand much. Here is the introduction:

>>>"Health Expenditure—includes any type of expenditure for which the primary objective is to improve, or prevent the deterioration of, health status.

"This definition allows economic activities to be measured according to primary purpose and secondary effects. Activities that are undertaken with the direct purpose of improving or maintaining health are included. Other activities are not included, even though they may impact health. For example, funds aligning with housing and income support policies which have social welfare goals as their primary purpose are not considered to be health expenditures, yet they are recognized as powerful factors in determining population health."

Posted by: Peter | Feb 10, 2007 4:52:12 AM

I did find a further link on the CIHI site that discusses and presents administration costs per capita, not percentages. For those data/report/study wonks it might be interesting to work through.

http://secure.cihi.ca/cihiweb/en/downloads/spend_PublicHealthNHEX_e.pdf

One thing I will say is that for all the comparisons of U.S. healthcare expenditures per GDP, the U.S. always comes out much higher. Assuming (if) these comparisons were data flawed, they would be flawed for the United State as well. Would this create a leveling effect which would still make the comparisons valid? I will also say that the present cost increases for healthcare by any accounts are not sustainable and are affecting affordability and access. If costs keep rising faster than peoples ability to pay for them then the amount of increasing healthcare to GDP % will draw expeditures from other industries - will that negatively affect profits/sales of other sectors in the economy?

Barry, the link to your study said:

"we estimated that 19.7–21.8 percent of spending on physician and hospital services in California that are paid for through privately insured arrangements is used for billing and insurance-related functions."

Seems like quite a high number.

It also stated its "Study limitations".

I found this statement interesting:

"Our analysis excludes several sources of BIR administrative costs: external brokers’ fees, oversight provided by employee benefits staff, and administrative costs of independent practice associations (IPAs). It thus understates total BIR costs in the private insurance system."

and this:

"Also, our analysis of total BIR costs in privately insured hospital and physician care understates and mischaracterizes the distribution of systemwide BIR costs. Most importantly, hospitals and physicians incur BIR costs on all care, not just privately insured care. Thus, the total BIR burden on providers (in dollar terms) is well above that on private insurers—perhaps twice as much. Further, there are substantial, if less well understood, BIR costs in other care settings, in which one-third of all health care spending occurs.

Do you think the statement below is valid?

"If a single-payer system of health care financing were adopted, a substantial portion of BIR could certainly be eliminated; less comprehensive financing reforms might yield smaller savings."

And this:

"There is much uncertainty about the extent to which current BIR spending creates value."

I will end with this taken out of the study:

"The empirical record is complicated. In comparison to the health care systems of other advanced economies, it is difficult to argue that the United States has an efficient health care system: Its high level of clinical health care spending does not seem to be matched by superior outcomes."

Posted by: Peter | Feb 10, 2007 6:12:58 AM

Give me a break.

>>> “Medicare spends more than twice as much per recipient as the average private health provider, $6,600 vs. $2,700….”

First, Medicare spends more for the coverage it gives to people 65 years and older and the end-of-lifers. Fold into their system all of the young bucks and that “pre-capita” expenditure will decrease dramatically! Today's insurers do not cover those over 65 and very few end-of-lifers.

And I haven’t seen any credible expenditures at $2700 per patient. What is this writer smoking?

That said, I believe that before anything else is done we MUST get all of the wasted expenditures out of the system before we do anything else. There is absolutely no need for it to be there except to satisfy some campaign contributors.

We need administration; not insurance companies. We should totally eliminate the unnecessary costs that are consumed by marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits. None of these would exist under a single-payer system like Canada's. With a strong political will we could mimic Canada's system and extend health care to 100% of the public, and we'd spend the same amount of dollars we are spending today to cover only 85% of the people. To boot, we can do it without Canada's wait times! The money saved would be spent on more doctors and more nurses to serve more patients.

Posted by: Jack E. Lohman | Feb 10, 2007 7:41:11 AM

"Let's see what happens when we put a product in the numerator. Let's use "health," however you want to measure it. Say HMO A has administrative overhead equal to 15% of revenues and turns $100 of premiums into 50 units of health. HMO A's efficiency is therefore 0.5 unit health per dollar. Say HMO B spends 25% of revenues on administration and turns $100 of premiums into 75 units of health. HMO B's efficiency is 0.75 unit health per dollar...better than HMO A (0.75 > 0.5). But look what we'd conclude by taking the medical loss ratio approach, using costs divided by costs: HMO B looks worse because of its lower medical loss ratio (0.75 vs. HMO A's 0.85)."

An interesting point. When I speak with physicians across the spcialty spectrum (and I'm one also) the spoken or unspoken assumption is that nothing short of direct patient care adds to the health of the patient. Its what leads to the assumption that anything that takes a doc away from direct patient care is a "hassle factor".

Posted by: Chris | Feb 10, 2007 7:51:48 AM

This has turned into a very interesting discussion. Thanks Eric for getting it started.

The main problems with our current healthcare system, aside from high costs compared to other systems, I think are as follows:

1. 47 million uninsured.

2. Costs increasing faster than GDP, which is unsustainable over the long term.

3. Employer based insurance (as opposed to taxpayer financing or individual purchase) is not the best way to acquire health insurance because of the complications caused by job loss or a desire to change jobs or start a business.

The single payer advocates push their cause with bad data and shoddy analysis. Infant mortality and life expectancy metrics are seriously flawed due to the numerous other variables (culture, genetics, lifestyle, socio-economic status, etc.) that affect health outcomes aside from healthcare. They also argue that all administrative costs are bad and siphon resources away from actual healthcare. Insurers, they say, are parasites, scum and add no value.

However, it costs money to manage disease effectively, to mitigate fraud, to develop useful data as to which procedures are cost-effective and which aren't. All of these costs count as administrative. There are administrative costs that could be safely eliminated such as broker commissions and underwriting costs. These would be partially offset by regional intermediaries like the Health Connector (Massachusetts) or Health Markets (Edwards approach). The Lewin Group, which analyzed Senator Wyden's healthcare plan, estimated that it would save $29 billion of administrative costs which is nice but nowhere near enough to cover the currently uninsured without increasing total expenditures.

With respect to the national systems, according to the article that jd linked to, France finances its system primarily with a 13% payroll tax which covers only 75% of medical costs. The rest is paid by other government spending, supplemental insurance, and individual out of pocket payments. Canada finances its system mostly with general federal and provincial tax revenue, but Canadian Medicare, according to the article, covers only 72% of healthcare costs. The rest is paid by private insurance and out of pocket payments.

Medicare generally tries to pay all providers in a given area the same for the same service. Yet, we all know that some doctors are considerably better than others. Should a veteran doctor with a stellar reputation at or near the top of his or her field be paid the same as a rookie who graduated near the bottom of the class from a mediocre medical school? I expect to pay a senior law partner a higher hourly rate than a young associate, and I expect to pay more for a room at the Ritz Carlton or Four Seasons than a Holiday Inn in the same city. The key, though, is to develop a credible and relevant measure of quality for doctors and hospitals. Then, we can provide price and quality transparency, and let them compete on metrics that the experts in the field endorse as relevant and sensible.

As for our higher costs vs other countries, the Wall Street Journal, within the last couple of months, had articles discussing the German system (focused on a doctor shortage) and the Japanese system which focused on cancer treatment. Within both articles, it was mentioned that doctors in each country, earn, on average, about half of what their U.S. counterparts do. I also remain convinced that our approach to end of life (and beginning of life) care is much more costly than what other countries do, and our culture of defensive medicine also contributes materially to higher costs. Neither of the latter two factors would be fixed by a single payer or a taxpayer financed multi-payer system unless they were addressed with specifically targeted reforms which could also be done under the current system.

Posted by: Barry Carol | Feb 10, 2007 9:21:39 AM

I would not label the data coming from WHO, Johns Hopkins and the others as being bad and shoddy, but let’s say that you are correct and our infant mortality and life expectancy takes a back seat to no one. Then all we have to discuss are the economics, and I haven’t heard too many people balk at our 15% of GDP vs Canada’s 10% (and others even lower than that).

All private carrier administrative costs are not bad. Only those that are dispensable are. And they represent from 15% to 20% of our health care costs, and if that isn’t a diversion of resources I don’t know what is. I would also add (as I have elsewhere) that there is more fraud and overuse in the private sector than in Medicare because of the steep federal penalties involved.

I do agree with you on the need for a P4P system (if it doesn’t deter care for difficult patients). But before we get close to that we need to develop a national outcomes database.

Posted by: Jack Lohman | Feb 10, 2007 10:40:10 AM

Jack,

A couple of things. First, according to data from the California Healthcare Foundation that I cited on another thread, private insurers only pay for 35% of all healthcare costs. Federal and state government combined cover 46%, individual out-of-pocket costs account for 14%, and "other private" covers the remaining 5%. Other private consists of philanthropy and non-patient revenues.

The 15%-20% of insurer revenue that you attribute to administrative costs (and profit) includes both good and not so good administrative costs. Remember also that non-profit insurers account for a significant percentage of the total commercial insurance market. So, if we take the mid-point of the 15%-20% of revenue spent on administrative costs and profit, combined with the fact that private insurers cover only 35% of healthcare costs, that implies that total insurance company administrative costs and profit equates to 6% of healthcare costs. The blended after tax profit margin of the total insurance sector, including the non-profits, is probably no more than 3% of gross revenue after tax (5% or so for the for profit companies). Brokerage commissions and underwriting costs relate mainly to the individual and small group (ISG) marketplace. The bottom line is that, in all likelihood, perhaps 2% of healthcare costs are being consumed by what we would both probably agree are low (or no) value added administrative costs. This would be consistent with the Lewin Group's estimate of the potential administrative cost savings under the Wyden plan ($29 billion) which are net of the cost of operating the regional entities that would administer the plan and pass premiums on to individual insurers, including adjustments for the riskiness of the populations that they actually wind up with.

I do think there are some opportunities to drive costs lower for certain specialties like radiologists. I also note that many, if not most, of the other countries make much more use of salaried doctors in hospitals. While salaried doctors might make it easier for hospitals to price care on an episode or case rate basis without the need for separate billing by doctors, I'm not sure if it would save money or not at the end of the day. I agree with Dr. Thom that we would need more doctors working for a salary to care for a given patient population as compared to the number of doctors who are working for themselves.

Posted by: Barry Carol | Feb 10, 2007 11:51:54 AM

Barry,

I don't know what form of health outcomes measurement would be ideal, but I am sure that rather than removing variables, the solution will be to add them. So, instead of looking just at life expectancy, we would look at life expectancy accounting for things like the murder rate and other social factors that we don't want to blame on the healthcare system. And of course, any metric is going to oversimplify. As a result, whoever ends up on the invidious end of the comparison is going to complain that it isn't fair.

Also, excellent points on the actual total cost of insurance administration. The 2% estimate of removable admin cost on the insurance side (from getting rid of underwriting, broker fees, some advertising, etc.) is about right. I don't think it includes reductions on the provider side, though.

You can also think of it this way: health insurers take about 20% of premiums that don't go directly towards medical care (15% SG&A costs and 5% profit). Nationally, private insurance covers about 25% of all healthcare expenditures. About 50% is government, and 25% other sources (out of pocket and charity). These are slightly different than the California numbers you cited, but in the same ballpark.

Well, 20% of 25% is 5%. That's the share of total healthcare spending that goes towards private health insurance administration and profit. So, your 2% estimate of what we could remove by going to universal healthcare sounds about right, though we should also include admin reductions on the provider side from streamlining health benefits.

What this should make abundantly clear is that the main problem we face is not insurance overhead. Rather, it is the inability of our private and public insurance systems, together, to control costs. They don't adequately align incentives to reward care in proportion to its public benefit, reduce fraud and system gaming, and so on.

Not that we can't or shouldn't simplify our insurance system to make it more efficient, but that is just the tip of the iceberg when it comes to the benefits and challenges of universal healthcare.

Posted by: jd | Feb 10, 2007 2:43:42 PM

The push for universal coverage is about just that: universal coverage. I have over 30 years of experience in healthcare, including urban teaching hospitals with busy ERs and clinics, home care, nursing home, and for the past decade, mostly medical practices. There are some 46 million uninsured. Whether many go on or off is irrelevant. The number creeps up every year. It's become a competitive disadvantage for many businesses with older work forces, such as GM. Even Wal-mart, the scrooge of them all, has been leaning in this direction.

Physicians incomes are already flat and declining, and this will continue. Get used to it, and plan for it. The market can't and won't bear it, and just like any other business, the customers are pushing back. You can whine about it, or act to come out the best you can. That will mean investments now for the long term. How you work will change, and in big ways. It's up to you to adapt.

Posted by: Peter Lucash | Feb 10, 2007 3:31:39 PM

It seems clear that Medicare has significant overhead costs that are accounted for elsewhere, making any comparison with the private sector apples to oranges.

If expansion of Medicare is to be the model:

1 it must expand its preventative services to at least what the government itself states is recommended.

2 it must change then stabilize it's payment model, especially to take office administrated meds out of the formula or there will not be enough providers for all those newly insured.

3 Folks must be prepared for an unprecedented intrusion of the government into their personal lives as their compliance affects the cost of health care.

Posted by: DrThom | Feb 10, 2007 3:59:52 PM

Peter L,

It's true that inflation-adjusted physician pay is now stagnant or declining, at least for GPs, and we can expect it to continue. I welcome it, though we would probably need to reduce the cost and ordeal of medical school to avoid a physician shortage.

But don't forget that direct physician expenses are not where the greatest reductions need to be made. Our hospital expenses (inpatient and outpatient) are the greatest problem.

Insurance, physician and drug costs get the attention, but hospitals account for 1/3 of all healthcare costs and this number may exclude outpatient care.

Posted by: jd | Feb 10, 2007 8:39:10 PM

Correction:

I wrote above that at the national level 25% of all healthcare expenditures were paid by private insurance. Well, that's just wrong, according to CMS. Their numbers for 2005 tell pretty much the same story as California: 37% of all total healthcare expenditures were paid by private insurance.

The CMS data, as presented in HealthAffairs, also confirms the 5% figure for the percent of total healthcare expenditures due to the net cost of private insuranc. If private insurance companies have an average AER of 15% and profit of 5%, as I stated above, then the total cost of private insurance would have been 37% X 20%, or 7.4%. I believe that part of the reason why this is not the case is that included in the private insurance number is self-funded employer-sponsored insurance. Nearly half of all those enrolled in commercial group insurance are covered by self-funding organizations, and these insurers do not make a profit (because the company would only be profiting off itself). They probably also have lower admin costs, since they don't have to do underwriting and use less marketing, etc.

In any case, the point Barry raised and I tried to reinforce still stands: the cost of private insurance is a real but relatively minor part of the problem. Instead, the main problem is the failure of insurance--both private and public--to control medical costs by coordinating care, reducing fraud, incentivizing prevention instead of last-minute heroics, etc. The other failure of our system is that it tends to reward insurers for avoiding risk by avoiding the sick, rather than reducing risk by promoting healthier behaviors. Universal healthcare can solve this problem immediately by forbidding insurers from engaging in underwriting and from turning down citizens who choose their plans.

Posted by: jd | Feb 10, 2007 9:13:50 PM

jd,

Since I think you mentioned in the past that you work in the insurance field, I wonder if you could speak to the potential for private insurers to reduce provider costs by streamlining insurance offerings. My understanding is that United, Wellpoint, Aetna, Cigna, Humana, et. al. pay a given provider different rates for the same service depending on such factors as whether or not the provider accepts plans that are part of a more restrictive network. Also, self-insured employers have some role in determining what percentage of usual and customary charges they are willing to pay, which, if true, adds to the confusion.

Ideally, I think it would be more efficient if insurers offered, say, three or four plans that differed in scope of coverage – a good, better, best approach, if you will. Within each plan, they could offer varying deductibles and, perhaps, co-pays. Competition would then be on the basis of scope of coverage, deductibles, co-pays, customer service, network quality, and, of course, price. My understanding is that United HealthGroup is getting close to having real time claims adjudication capability systemwide. The swipe of a card through a reader would verify (1) the insured has coverage with us, (2) this is or is not a covered service under his or her policy, and (3) indicate the insured's financial responsibility, if any, based on contract rates (not list price).

Perhaps Dr. Thom could weigh in as to whether such an approach would meaningfully contribute to simplifying life, at least for his office staff, or not.

BTW, the one-third of healthcare costs accounted for by hospitals, I believe, includes out-patient services, which, at least for a large for profit group like HCA, account for about 37% of hospital revenues now and are growing faster than in-patient revenue.

Posted by: Barry Carol | Feb 11, 2007 3:21:45 AM

Administrative costs for large self-insured plans run approximately 5%-6% of total costs. My own company, which has a large retiree population, is closer to 4.5% for administrative costs. I believe John Fembup mentioned that his company's administrative costs are in the 5% range, and I've seen data from Wisconsin that suggests the broader average is about 6%.

Since self-insured plans all enter into ASO contracts with private insurers to actually administer their plan, I believe these healthcare costs are included as part of the insurer sector, since there is no self-insured category in the payer data that we've seen. Where it gets interesting is that ASO contracts provide the better run insurers with profit margins as high as 20% on this business. Since the revenue is for administrative services, it shows up as part of the insurer's administrative costs. However, none of the outlays for healthcare costs on behalf of the employer appear in the insurer's revenue. For United, to take one example, they administer $35 billion of healthcare spending on behalf of self-insured clients that does not flow through United's income statement. That equals approximately 50% of United's 2006 reported revenues of $71 billion.

There are some good reasons to eventually move to taxpayer funding of health insurance and away from the employer and individual purchase model. Huge administrative savings is NOT one of them.

Posted by: Barry Carol | Feb 11, 2007 3:45:21 AM

Some sobering predictions pertinent to the discussion by the U.S. comptroller general. If you think medicare and medicaid have problems with accountability/affordability look at his comments on defense.

http://www.newsmax.com/archives/articles/2006/8/2/175756.shtml

Posted by: Peter | Feb 11, 2007 6:55:45 AM

This is all very interesting, Guys, but I am not convinced that insurance company marketing, salesman commissions, underwriting costs, huge executive salaries, and high corporate profits, represent only 2% or even 5% of removable private administrative costs of health care expenses. Certainly it would mitigate the total (public and private), and I would accept that its portion of the private side could drop to 10% of private insurance costs ($100B), but why in the hell do we want these unnecessary costs in the system anyway? It just diverts resources away from people who are now uninsured.

And Barry, we should not rely on “the inability of our private and public insurance systems, together, to control costs.” When employees complain to their union or company management that the Insurance company is standing in the way of their health care, insurance companies have a tendency to give in. And when you control costs, isn’t that tantamount to “rationing?”

Even if the number is 5%, that’s $50 billion dollars of excess dollars ($1T*.05) going to corporations that are dispensible!

And here we go again: “pay a given provider different rates for the same service depending on such factors as whether or not the provider accepts plans that are part of a more restrictive network. We’re back to rationing.

>>> “Where it gets interesting is that ASO contracts provide the better run insurers with profit margins as high as 20% on this business.”

Sorry, I find this incredibly generous of us.

>>> “There are some good reasons to eventually move to taxpayer funding of health insurance and away from the employer and individual purchase model. Huge administrative savings is NOT one of them.”

I think $50 billion is a significant part of the equation, but agree with the conclusion.

Posted by: Jack Lohman | Feb 11, 2007 7:00:47 AM

As a point of interest, here's a note I received from a cardiologist friend of mine:

The latest outrage is the “radiology benefits manager” companies, which contract with insurance companies to reduce utilization of services on an “at risk” basis. They get paid a percentage of the charges they deny. No pretension of providing care, just take the money and run.

Insurance companies are just needless parasites. If we got rid of employer paid health insurance and had a single payer system (not a single government health care system) we could cut them out.

Posted by: Jack Lohman | Feb 11, 2007 7:07:31 AM

Jack,

While I'm normally not a big fan of anecdotes, I want to pass a couple of stories along to illustrate my fear about the waste and overutilization of services that could occur under a single payer system, and, if it did, it would swamp any possible savings from lower administrative costs.

My wife's college roommate worked for a couple of years as a LPN in a nursing home in the Midwest. She witnessed countless examples of services performed solely to drive revenue for the nursing home. Example: a patient who hasn't walked in 20 years receives physical therapy intended to restore the ability to walk. The service was performed and was coded properly, so there was no fraud in that sense. However, there was a zero probability that the patient needed it and would benefit from it. However, since Medicare (in this case) was paying, what the heck. Let's do it, was the attitude.

Second story. The mother of a former colleague was in a nursing home in Texas with Alzheimer's for the last seven years of here life as a private pay patient. Her son (my former colleague) was monitoring her affairs from NJ. Her son noticed bills for a number of brand name drugs for which generic equivalents existed. When he called to inquire, it turned out that the prescribing doctor thought the patient was on Medicaid and asked my colleague, what are you worried about, it's all free. When the doctor learned that she was a private pay patient, the prescriptions were immediately switched to generics. Again, the issue isn't fraud. It's an attitude that it's government money, and it's OK (from a provider perspective) to spend it freely.

I have more confidence in private insurers to provide the oversight to mitigate these abuses. Too often, the attitude within Medicare and Medicaid, is just write the check, pay the claim and then brag about their low administrative costs. This is why I prefer a premium support or voucher model with a strong role for private insurers to single payer even if administrative costs would be slightly higher. The last thing taxpayers need is a big dumb payer that either can't or won't provide adequate oversight.

Posted by: Barry Carol | Feb 11, 2007 4:06:28 PM

I understand your concerns Barry, and there's another situation where nursing homes place patients in front of the TV and bill Medicare for a "therapy session." But the best way to mitigate these overuses (and fraud) is to have an independent oversight commission, which incidentally is a good way to re-employ some of the displaced administrative personnel when converting to a single-payer plan. We don't have to (and shouldn't) pay extra via a private insurer to accomplish this.

Posted by: Jack Lohman | Feb 11, 2007 4:28:51 PM

"the cost of private insurance is a real but relatively minor part of the problem. Instead, the main problem is the failure of insurance--both private and public--to control medical costs by coordinating care, reducing fraud, incentivizing prevention instead of last-minute heroics, etc."

jd, I think you and Barry are correct about the relative impact of administration costs on total costs, but I think the above characterization misstates the main problem. The main problem is the cost of health care (and, secondarily, the unending growth in that cost). It is a mistake to think insurers can cure that problem. They have achieved only marginal effect on costs. And physicians lobby daily against their efforts, in every examination room in the country.

Health insurance is expensive because health care is expensive. The cost of health insurance rises every year because the cost of health care rises every year. If the cost of health care could be stabilized or reduced, the cost of health insurance would follow; but the reverse is not true. Physicians - who I believe should comprise the health care policy leadership in this country - have declined to engage this problem in an organized, meaningful, and positive way for more than 40 years. I remarked earlier that even Moses escaped the wilderness after 40 years. OK, maybe health care is a harder problem. But still.

Also, were it in fact the insurance companies’ responsibility to control health care costs, then with equal illogic might we ask auto makers to reduce the cost of gasoline? Apple Computer to reduce the cost of electricity? & so on? I don't think so. The responsibility for explaining and rationalizing health care costs belongs with health care professionals and, ideally, we should expect exactly that kind of leadership from them.

But the professionals have shown little inclination or ability either to explain or control spending. As a result, someone else is going to control it for them. It's beginning to look more and more like the government will have to do it. That necessarily means much more government controls on health care provider incomes. Many more health care professionals are beginning to express support for a "single-payer" system, thus expressing preference for government controls vs. insurance company controls. So long as the providers do not step up and assert leadership on this issue I see no other alternative. Do you?

BTW, everyone should keep in mind is that comparing administrative costs only as a percentage of the medical expenses necessarily produces very different answers for Medicare and private insurance. This is because the “denominator” is so much higher for Medicare. The administration cost for Medicare will always come out much lower than private insurance when expressed as a percentage of the underlying medical cost.

Posted by: John Fembup | Feb 11, 2007 5:11:57 PM

John,

I understand your skepticism about the ability of insurers (private or public) to control costs. I know that providers undermine, in hundreds of direct and hidden ways, the efforts of payors to control costs.

However, I disagree with your comparison with automakers and the control of gasoline prices. The reason is that automakers don't have gasoline costs comprising 85% of their expenses or 80% of the prices they charge consumers. If this were so, you better believe they would take a more active interest in the cost of gasoline. In fact, they would engage in all sorts of creative strategies, including alliances with oil companies and even mergers so that those oil companies didn't profit at their expense.

Payors (in this context, I mean both insurers and the purchasers of insurance) will and should continue to be involved in driving healthcare reform. This is because only they have a direct incentive to get the most value out of healthcare expenditures. Providers only have a secondary interest in maximizing value. Their primary economic interest is to maximize healthcare revenues. So, without payor pressure, providers cannot be expected to take action. It is not in their economic self-interest.

Now, providers certainly need to be at the table, but their lack of leadership is not a mystery. It is rather a direct consequence of their role in the healthcare marketplace.

Posted by: jd | Feb 11, 2007 7:31:46 PM

> Example: a patient who hasn't walked in 20 years
> receives physical therapy intended to restore the
> ability to walk.

A primary care doc I know complains also of exactly this and says he can't get referrals because he won't play the game with them. He says its not that the nursing homes own the PTs or anything like this -- its simply a big network of people referring to each other. The only "kickback" is membership (so to speak) in the network. If you don't want to play, you can't get legit referrals either. Unless the "payer" is Medicaid. You can have all of those you want.

> nursing homes place patients in front of the TV
> and bill Medicare for a "therapy session."

My understanding is that a doc is supposed to visit his nursing home patients once a month whether they need it or not basically to supervise their care. This same doc from the last story says because it requires travel-time and pays at rates reduced from an office visit, the rounding visits don't happen nearly this often. Maybe if they did, nonsense like this couldn't happen. On the other hand, refer to the first story...

Posted by: Tom Leith | Feb 11, 2007 7:43:14 PM

Barry,

Ideally, I think it would be more efficient if insurers offered, say, three or four plans that differed in scope of coverage – a good, better, best approach, if you will. Within each plan, they could offer varying deductibles and, perhaps, co-pays. Competition would then be on the basis of scope of coverage, deductibles, co-pays, customer service, network quality, and, of course, price.
Unless those three or four benefit designs were the same for every insurer, you would end up with almost as much complexity as we have now. The only way to get them to offer the same three or four options is from government intervention, because their incentive will always be to tweak the basic plans to fit the desires of specific groups and niches in the market.

I think another option would be better: institute one or two basic plans as the minimal options in a universal care system (for now, this would be by state rather than nationally, though a national option would be more efficient). But beyond that, let a thousand flowers bloom in terms of additional benefits. This way, any time someone went to visit a doctor or hospital, it would be clear that some package of benefits was covered for certain. You would still have complexity for the non-core benefits, but I think this would cut down signicantly on administrative costs in the vast majority of cases. But by "significantly" I think we're talking less than 1% of total healthcare expenditures.

My understanding is that United HealthGroup is getting close to having real time claims adjudication capability systemwide. The swipe of a card through a reader would verify (1) the insured has coverage with us, (2) this is or is not a covered service under his or her policy, and (3) indicate the insured's financial responsibility, if any, based on contract rates (not list price).
It's not just United, but CIGNA and others that are working hard to achieve this. But as far as I know these would just be preliminary determinations. There would still be a review process and final determinations (and payments) would still not occur at the point of sale.

Posted by: jd | Feb 11, 2007 7:53:09 PM

jd,

"automakers don't have gasoline costs comprising 85% of their expenses or 80% of the prices they charge consumers. If this were so, you better believe they would take a more active interest in the cost of gasoline."

Well, yes, that's correct - but even if they were much more interested, what exactly could they do to reduce the oil company's costs of exploration, extraction, refining, and delivering gasoline? My guess - not much. Their business is auto assembly, not petroleum production. They just don’t have the expertise in the other guy’s business.

The earlier example isn't perfect, but I think still works to illustrate the basic illogic of expecting a player in one business to be the actual agent of change to production costs for another kind of business. Sure, pressure from large buyers makes producers look for efficiencies. But the producer, not the buyer, must install them.

I'm not talking here about buyers negotiating a better price. That's a side issue, because pricing concessions affect mainly the producers margins. A company that discounts by more than its margin is selling its product below its cost and will not long survive. A company whose only pricing strategy is to cede its margins will also not survive – it will just take longer to die. The trick is to maintain margins by lowering one’s costs of production. The fact that health care has been seemingly impervious to most pressures to reduce production costs has led many people to assert that "the laws of supply and demand don't apply in health care." I disagree. In health care in this country there seems to be no level of demand for money that has not been met with an adequate supply. At the same time, the supply of physicians per capita has not kept pace with the growth and gradual aging of the population. The frightful cost of high-tech medicine creates its own shortages thru rationing by price. That sets up classic conditions for price inflation - too much money chasing too few services.

Anyway, I think we need to know: (1) are we getting our money's worth (2) if not why not and what if anything can be done about it? (3) can the supply of money going into the system be reduced? and (4) then what can we expect to happen?

Not even the largest insurance company can effectively reduce the overall supply of money flowing into the system (insufficient market share), nor can any consortium of insurance companies achieve that result (antitrust law). The federal government has a huge interest in this because it already pays for half of all the health care delivered in the U.S.

For 40 years there has been theoretical and academic and political debate all around these issues but nothing in either the delivery system or the financing system has fundamentally changed. Costs have reached a point where people are screaming about their bills - insurance or health care or both - almost as much as employers and other payers. I think we are near the point at which the federal government will decide to step in to control costs because it has become politically expedient. Political expediency is the main reason I fear that (in the absence of meaningful leadership from physicians) we’ll end up not with a well-thought out system, but a Rube-Goldberg tax-funded universal insurance contraption designed by politicians primarily to buy votes. Oh yeah, and patronage jobs to the end of time.

In summary I don't think it's a coincidence that insurance companies have been largely unsuccessful in controlling health care costs. I just don't think they can do it, and I don't think its reasonable to expect them to. That doesn't mean I think they should stop doing all the things they are trying; only that I expect those things will have marginal not fundamental effects. Health care is not their expertise. Insurance is their expertise.

If health care professionals really mean what they seem to be saying in support of a single-payer system, I think they (and we) will soon get it. As the saying goes, when you ask for something, be sure you really want it.

Posted by: John Fembup | Feb 11, 2007 9:25:55 PM

John Fembup,
"Also, were it in fact the insurance companies’ responsibility to control health care costs, then with equal illogic might we ask auto makers to reduce the cost of gasoline?"

John, do you think vehicles are safer and cause less injury, and reduce insurance costs, and reduce healthcare expense and ....... from this -

"The Insurance Institute for Highway Safety is an independent, nonprofit, scientific and educational organization dedicated to reducing the losses — deaths, injuries, and property damage — from crashes on the nation's highways."

"The Highway Loss Data Institute's mission is to compute and publish insurance loss results by make and model. Both organizations are wholly supported by auto insurers."

Not my responsibility, yea right.

Posted by: Peter | Feb 12, 2007 3:57:09 AM

>>> "Payors (in this context, I mean both insurers and the purchasers of insurance) will and should continue to be involved in driving healthcare reform. .... This is because only they have a direct incentive to get the most value out of healthcare expenditures. Providers only have a secondary interest in maximizing value. "

jd, Payors, as you describe them, are totally dispensable and shouldn't even be in the loop because they provide zero direct health care services. As I mentioned above, we need administrators instead. In my view, business leaders should be pushing to get ut of the health care loop because providing it makes them uncompetitive with foreign product.

And the providers are the last people in the world to rely on, as it is they who are benefiting from the exorbitant increases. I would agree that the private insurer's contribution to our waste is not the biggest problem, it is the overuse of profitable tests that is the biggest offender, so putting providers (the foxes) in charge would be fruitless.

Tom, you are correct that it is often a swap of referrals within the "club," though there are often several clubs. I don't know the extent to which this adds to the overall cost.

And Barry, I don't think a "good care - bad care" selection to insurance is what we need. I would prefer "appropriate care" through a single-payer system but with the option of the patient to move out of the system for extraordinary care. I agree with jd, if we must have insurance, "within each plan, they could offer varying deductibles and co-pays," though these still have a negative trait of delaying needed care until it is far more costly to treat. I'd also have trouble putting together a list that excluded certain coverages that would not lead to bigger problems if not dealt with early.

>>> "I think we are near the point at which the federal government will decide to step in to control costs because it has become politically expedient."

I would certainly hope so, but I'd feel a lot better if the $100M per year in campaign cash were not flowing from health care interests. As it is, Bush is suggesting a mechanism to protect insurance companies, and as always, it will mean cutting from those who don't contribute (Medicare and Medicaid patients).

Posted by: Jack Lohman | Feb 12, 2007 4:05:04 AM

"Not my responsibility, yea right."

Peter, notice please I said that "pressure from large buyers makes producers look for efficiencies. But the producer, not the buyer, must install them." I nowhere suggest that insurers cannot "support" fundamental reform of the health care system.

Instead, my argument is that it's illogical to hold insurers accountable for those fundamental reforms. Insurers can't do it - they are buyers of health care, not producers. Besides, decades of experience shows they can't do it. Insurance is a different business from health care with different expertise. Health care professionals should be accountable for fundamental reform of the health care system.

In the continued absence of meaningful leadership from health care professionals someone else will make those reforms for (or, to) them, and the only force I can see with the power to do that for the entire marketplace is the government.

Posted by: John Fembup | Feb 12, 2007 6:12:22 AM

Since neither Medicare nor Medicaid, both of which are, in effect, single payer systems for the large populations that they serve, have demonstrated any ability whatsoever to control utilization (costs), why should we expect that they would suddenly gain such capability if we entrusted them with providing (at taxpayer expense) health insurance for all?

I think everyone basically agrees that cost increases in excess of nominal dollar GDP growth are unsustainable over the long term, and that doctors drive virtually all costs one way or another, though they capture only about 20%-25% of the dollars as fees for services, tests and procedures. I think it is unfortunate that doctors generally do not see costs as their problem or concern, and they resent and resist any attempt by insurers or the government to question, interfere with, or get in the way of their decision making. When they say: I expect the system to trust us to do the right thing for our patients, they are also saying: reimburse us for all costs, no matter how high, plus a respectable (or even handsome) profit margin. Perhaps there should be a class or two in medical school that teaches that resources are finite, and nobody should expect a blank check with no oversight.

As jd said, doctors need to step up and provide the leadership to reform the system even if it ultimately means lower incomes for some of them. I think we eventually will wind up with either a single payer or premium support system, both of which will be taxpayer funded. I offer the following ideas that are intended to (1) safely take costs out of the system and (2) give patients a reason to care about costs and the tools to help them make better healthcare decisions:

1. Make living wills and advance directives a requirement of insurance or change the law to establish flexible default protocols that would give doctors the ability to apply common sense depending on circumstances in end of life situations without having to worry about being sued.

2. Reduce defensive medicine by replacing the current jury based malpractice litigation system with special health courts. This will be vigorously opposed by trial lawyers, so it probably needs to be pushed through at the state level first to gain some real world experience that can be replicated more broadly later.

3. Build a system of interoperable electronic medical records to reduce duplicate testing and avoid adverse drug interactions, especially in hospitals. The key issue here is implementation costs, who pays, and the time to get an effective system up and running.

4. Attack fraud vigorously using sophisticated information technology and more auditors and investigators. Criminals are, at least implicitly, pretty good at assessing risk vs reward. If the perceived probability of being caught increases significantly and punishment for those who are caught is swift and appropriate, fraud will decrease. I would bet a lot of money on it.

5. Give consumers skin in the game and adequate information tools. For a taxpayer funded system, this means that the broad middle class has to pay the cost in a transparent way (like a payroll tax) of insuring the broad middle class. Progressive income taxes on wealthier people can pay for the bulk of the cost of insuring the poor and near poor, but the middle class has to pay its own way.

At the same time, use information technology to track utilization of healthcare services by referring doctor as well as by provider. This is particularly relevant to PCP's that make a lot of referrals. If a doctor shows up as a high utilizer, prospective patients should know that before they sign on as patients.

The doctor specialty societies should develop performance metrics that they can live with. We also need to develop a decent system of individual health risk scoring so doctors with a lot of high risk patients aren't penalized for high utilization. Risk adjusted utilization is what we should be after.

I would be interested in the comments from others, especially doctors and insurance experts.

Posted by: Barry Carol | Feb 12, 2007 6:19:53 AM

Correction:

It was John, not jd, who called for physician leadership to reform the system.

Posted by: Barry Carol | Feb 12, 2007 6:29:14 AM

Barry, I especially like your IT suggestions, though I would like to see that database built either by Medicare or contracted out to a qualified source. To allow the current mish-mash of 100 or so programs to proliferate would take ten years to settle in. Or, find the best of them and pay an attractive price to allow the government to open source it. We could also expand the current open source VisTa system by the VA.

Posted by: Jack Lohman | Feb 12, 2007 7:18:11 AM

Posted by: Barry Carol;

"Since neither Medicare nor Medicaid, both of which are, in effect, single payer systems for the large populations that they serve, have demonstrated any ability whatsoever to control utilization (costs)"

Because they deal with the two most expensive and non-revenue generating populations in the country - those populations that insurance companies don't want and don't have to bear the cost of. I also think that Medicare's/Medicaid's role is too political and too influenced by bribes to politicians. Change that and you change their mission and performance.

"I think everyone basically agrees that cost increases in excess of nominal dollar GDP growth are unsustainable over the long term, and that doctors drive virtually all costs one way or another,...I think it is unfortunate that doctors generally do not see costs as their problem or concern."

Your observations are also correct for the Canadian single pay system. Docs never wanted it and continue to try and erode it. We have to realize that doctors (for the most part) are not our friends when it comes to cost control.

"As jd said, doctors need to step up and provide the leadership to reform the system"

Barry, we don't have enough time for a paradigm catharsis of doctors and their financial lobbyist the AMA. There's just not enough money to spend waiting for that to happen.

>>>"1. Make living wills and advance directives a requirement.

2. Reduce defensive medicine by replacing the current jury based malpractice litigation system with special health courts.

3. Build a system of interoperable electronic medical records to reduce duplicate testing and avoid adverse drug interactions, especially in hospitals.

4. Attack fraud vigorously using sophisticated information technology and more auditors and investigators.

5. Give consumers skin in the game and adequate information tools.

At the same time, use information technology to track utilization of healthcare services by referring doctor as well as by provider.<<<"

All this can be done with a single pay system as well. And for the most part it is being done by Canada's system.

Barry I know you think that private not government can "solve" this, but we've seen no evidence of that yet and I don't believe what you propose goes fast enough or hard enough to controlling costs that will ultimately drive us to ruin and more severe actions than just single pay.

Posted by: Peter | Feb 12, 2007 7:25:19 AM

"Because they deal with the two most expensive and non-revenue generating populations in the country - those populations that insurance companies don't want and don't have to bear the cost of."

See how the argument goes, Barry? Medicare and Medicaid can't control their costs because there aren't enough young people and working people participating in them. If they only had larger populations of younger and working people, they could control their costs - and fraud and abuse would also subside. Oh, yeah, and don't forget to eliminate the politics from federal programs that involve hundreds of billions of entitlement dollars.

I think that about sums up the logic.

Logic aside, I think the government will step in, as I've already said. I hope people really want what they are asking for. I think we'll get it.

Posted by: John Fembup | Feb 12, 2007 9:23:05 AM

Medicare is the most successful public-private partnership ever, and indeed if it were not covering only people over 65 and end-of-lifers the costs would not be so "out of control." If standard policies covered these high-maintenance patients their costs would be much higher than they are.

Importantly, if we were to allow employer opt-in and the Medicare service got bad or too restrictive, the employers could opt out.

But don't think for a moment that fraud would decrease; fraud is a function of the providers, not the patients.

Posted by: Jack Lohman | Feb 12, 2007 9:49:07 AM

Jack Lohman on February 12:

"But don't think for a moment that fraud would decrease; fraud is a function of the providers, not the patients."

Jack Lohman on February 3:

"Under a Medicare-for-all system we'd not have as much fraud and overutilization because the penalties for felony fraud include jail time and exclusion from the system."

Posted by: John Fembup | Feb 12, 2007 11:08:55 AM

Those are not conflicting statements if you understood my intent, but they could have been made clearer:

>>> Fembup: "If they only had larger populations of younger and working people, they could control their costs - and fraud and abuse would also subside."

Fraud will not decrease because of younger versus older patients. Fraud will decrease when you move from a private to a govenment sponsored payment system, because the penalties elevate to jail time.

Posted by: Jack Lohman | Feb 12, 2007 11:27:58 AM

Actually, Medicaid has millions of children among its enrollees, and they are relatively inexpensive to insure. I believe something like 70% of the Medicaid dollars are spent on the elderly and disabled with long term care (and home care), by far, the biggest single piece of that. Even within the Medicare program, of the 42 million or so beneficiaries, the least expensive (healthiest) 50% of them account for only 3%-4% of the cost of the program.

Both Medicare and Medicaid, if they wanted to, could make living wills a condition of insurance, at least for the adults. Indeed, United HealthGroup's Evercare division manages care for frail elderly people under Medicaid contracts. It has living wills for everyone of them, and they tell me that it's their biggest single cost saver in that division. Efforts to combat fraud in New York's Medicaid program are pitiful as documented by the New York Times. The magnitude of the dollars spent under these programs give government a lot of market power which, in my opinion, it has not used to anywhere near the extent it could have to control costs, despite relatively meager reimbursement rates for many services, especially within Medicaid.

I'm trying hard to keep an open mind as I have to do out of necessity in the investment business. It is certainly possible that a single payer system could finance healthcare at lower overall cost than the current system mainly by squeezing provider payments and, to a lesser extent than many advocates think, lower administrative costs. The risks are causing an adverse impact on innovation over the intermediate to longer term in the areas of drug and device development and new, less invasive surgical techniques, plus longer wait times for non-life threatening procedures as demand rises (from the previously uninsured) and supply is constrained or shrinks. We might also find that we don't have enough primary care physicians to handle their increased patient load. If we try to cover long term care, millions of caregivers who are currently caring for their loved ones themselves at little or no cost to taxpayers, will come out of the woodwork and demand services overwhelming the nursing home and assisted living sectors.

The bottom line is the evidence from Medicare and Medicaid suggests that government has not demonstrated that it can provide healthcare for all on a cost-effective basis without very significant adverse tradeoffs that the American people are unlikely to accept. I would rather pursue experimentation at the state level and take 5-7 years to get it right than implement single payer (or even premium support) in 1-2 years and get it horribly wrong.

Posted by: Barry Carol | Feb 12, 2007 11:33:55 AM

You are assuming that converting to a Medicare-for-all system casts it in stone and no further tweaking will be possible. I disagree, but let's use Wisconsin to experiment.

Posted by: Jack Lohman | Feb 12, 2007 11:42:21 AM

I'll throw something out there.

Let’s end the provider - commercial insurance relationship. Why? Because the provider will only charge what the PATIENT can pay and the patient will put tremendous pressure on the insurance company to reimburse the patient at 100% of their cost (or why have insurance in the first place?).

Let’s examine this technique a little further. Patient comes in the doctors office has to pay 100% (this could vary depending on the practice and procedure) of the charges up front and after services are rendered the patient is given a correctly coded claim to submit to their insurance company for reimbursement.

Why would this work to reduce spending, costs, expenses…etc?

Most if not all providers charge “cash / self pay” patients less then patients that have insurance. This is because the providers are getting 100% of what they charge up front with virtually no admin cost. Having patients pay up front would reduce needless medical visits, patients would be more critical of the care they receive, doctors would be more mindful of doing procedures and ordering tests because of the costs to THEIR patient (competition), healthcare charges would be far more transparent and providers would spend far less in admin costs; at least the ones related to insurance. All of this would reduce the patient’s bill and therefore reduce the insurance reimbursement to the patient. Insurance companies would also have to simplify their benefit package, contractual language and over all administration of benefits. In turn consumers would be more proactive in the healthcare they receive and the benefits they pay for. Eventually this would lead to a simplified and more efficient healthcare market.

The only exception to this rule would be Medicare, Medicaid or any catastrophic instance.

This is a short version because I do not have the time to go into every aspect, but you guys get the point. I will note that this of type model will never work (now) because as Jack says “follow the money”. Doctors get rich off of insurance companies and insurance companies get rich off the people paying the premiums.

All right go ahead, rip it to shreds.

Posted by: scott | Feb 12, 2007 12:02:49 PM

"Medicare is the most successful public-private partnership ever"

Medicare today has tens of trillions of dollars of unfunded future liabilities. That counts as "success" in a government program.

"if it were not covering only people over 65 and end-of-lifers the costs would not be so "out of control."

Indeed they wouldn't. Having a bunch of 20-somethings in there would control the cost for the over-65's - and would make them live longer, healthier lives too!

"If standard policies covered these high-maintenance patients their costs would be much higher than they are."

Figures. After all, they'd be government policies.

"fraud is a function of the providers, not the patients."

It's not either-or, it's both. And you left out insurer/payer fraud. Other than that, I agree.

"Fraud will decrease when you move from a private to a govenment sponsored payment system, because the penalties elevate to jail time."

Whereas in the private sector, fraud never earns jail time.

Thanks Jack.

Posted by: John Fembup | Feb 12, 2007 12:11:03 PM

In the private sector fraud CAN result in jail time if state health care laws are strong and violated and enforced. Doctors are, however, much more concerned with federal Medicare fraud and mail fraud laws. Actual Medicare fraud by patients probably represents less than 2% of all fraud, but I don't have the exact numbers on it.

This is probably much more than others wanted to hear, but thanks for keeping me in check John.

Posted by: Jack Lohman | Feb 12, 2007 12:37:37 PM

That most big employers use health plans only for ASO business means - to me at least - that they have little faith in health plans to do anything beyond administration.

Value comes from taking on and managing risk (i.e. controlling health costs and improving beneficiary health) for their clients...and not from underwriting away risk (or shifting it to consumers).

The largest, savviest purchasers of health insurance have voted, and it seems that health plans provide little value to them.

We have exactly the health system that we pay for in the US: gazillions of well-compensated ultra specialists, "Top 100" heart center doing 10X utilization of invasive procedures, not enough nurses and primary care capacity, billionaire health plan executives...and 47 million people uninsured.

Posted by: matt | Feb 12, 2007 3:14:55 PM

"Value comes from taking on and managing risk (i.e. controlling health costs and improving beneficiary health) for their clients...and not from underwriting away risk (or shifting it to consumers)."

So Matt, if insurance companies won't or can't underwrite health risk - isn't your statement a good argument for physician capitation?

How do you think physicians would react to the opportunity of providing value thru rusk underwriting, and capturing all that revenue?

Posted by: John Fembup | Feb 12, 2007 3:37:13 PM

Barry

Our new EMR system (nexgen) is designed to take advantage of the real time verification that you refer to. To be honest, I voted in favor of an all cash system, opting out of Medicare (I believe we will not be taking any new Medicare patients come Jan 1), but our specialists would have none of it. Initially, the patient will swipe his card at the POS and the receptionist will be able to ascertain the existence and extent of coverage. The challenge will be making the whole experience somewhat more personal than airport check-in while at the same time reducing billing errors which increase my ARs. I hope to save money by boosting productivity and decreasing labor costs through attrition.

Once the in-office capability is in place, we have purchased a real-time internet capability where the patient can sign on to our website, see my schedule and following the guidlines schedule the appointment for themselves, enter the specifics of their medical condition, enter their insurance info and respond to various messages about the extent of their coverage. There will also be email retreval of lab results complete with pertenent web links and the capability for e-visits. All pretty slick. If it works as advertised, I should be able to take my chronic disease management to a new level.

If the beastie works, that is. I have never in my life seen medical management technology that has not made my life more difficult. So while I enthusiatically embrace the technology, I remain skeptical.

Of course, our government penalizes me for improving the outcome of their beneficiaries by forcing me to depreciate a significant portion of this 1.5 million dollar investment over 15 years. Yet for some reason I am doing it anyway, I'm such a sucker. As a capital investment from a business point of view, EMR makes no sense compared to what I could be doing with the cash. The system incentivizes me to simply buy a PET scan and turn the crank; but as I have said, that is not what we are about.

Posted by: DRTHOM | Feb 12, 2007 4:31:41 PM

Dr. Thom,

That sounds like exciting, albeit expensive, technology. Best of luck with it. In reading about some similar capabilities offered by doctors at Beth Israel Deaconess Medical Center in Boston, one tricky issue relates to the communication of test results. Some of the doctors disable this feature because they prefer to communicate results, especially if they are not good, in person. At any rate, I hope your system lives up to its advertised capability.

Posted by: Barry Carol | Feb 12, 2007 5:06:04 PM

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