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But we don’t have a “generalized problem of runaway spending…that requires cuts across the board” to fix the federal deficit, according to former Fed vice chairman Alan Blinder, writing in today’s Wall Street Journal. 

He cites long-term CBO projections that the primacy deficit (which excludes interest payments) will bottom out at 2.6% of GDP in 2018 and then rise to 7.4% by 2040.  The entire increase will come from rising healthcare costs. Notes Blinder:

We have a huge problem of exploding health-care costs, part of which show up in Medicare and Medicaid spending.

Other “deficit myths,” Binder argues, include the notions that Americans are demanding deficit reduction like never before (they’re not, he says) and that the deficit problem is so acute it requires immediate spending cute despite the bad economy (it isn’t, he says).

From CMS:

1. 2.7 million Medicare recipients saved more than $1.5 billion on prescriptions because of discounts mandated by ObamaCare in the donut hole.

2. Through November, 24 million people Medicare recipients have received free preventive care, which is mandated by ObamaCare.

At the company’s annual investor conference, UnitedHealth Group released data on expenditures in the U.S. healthcare market for 2011 as follows:

Commercial
Members 171 million
Expenditures: $850 billion

Medicaid and Related Programs
Members: 60 million
Expenditures: $440 billion

Medicare:
Members: 48 Million
Expenditures: $575 billion

Notes Christine Arnold of Cowen, “Key leading indicators metrics suggest medical cost trends may no longer be decelerating, although a dramatic uptick seems unlikely at this point.”  She points to an uptick in physician visit volume and a trough in the S&P non-Medicare healthcare cost index.

The latest from The Commonwealth Fund, citing 2011 OECD data.

From Costs of War, a study prepared by The Watson Institute at Brown University:

Approximately 8.3 jobs are created by every $1 million in military spending….A million dollars of spending would create 15.5 jobs in public education, 14.3 jobs in healthcare, 12 jobs in home weatherization, or about the same number of jobs in various renewable energy technologies.   A million dollars spent on construction (residential and non-residential structures) creates 11.1 direct and indirect jobs….

The (at least) $1.3 trillion of Department of Defense war spending in the past decade averages out to $130 billion per year.  While these funds did indeed create jobs in the military and in related sectors….$130 billion per year could have created a net increase of jobs in other sectors:  for example, more than 300,000 jobs in construction, or 900,000 jobs in education or about 780,000 jobs in healthcare.

Premiums for federal employee health benefits will rise just 3.8% in 2012, according the U.S. Office of Personnel Management, which notes that negotiations with insurers “kept premium increases as low as possible without increasing the out of pocket costs, such as for deductibles, co-pays, and coinsurance.”  In 2011, premiums rose 7.3%. 

Some 8 million federal employees are covered by OPM under the Federal Employees Health Benefits Program at a cost of $43 billion, and the good news here is that rate hikes in the federal program tend to be an indicator of price increases in the commercial market.  As previously reported, a recent Mercer employer survey suggests premiums for 2012 will rise about 5.4%.  However, Mercer notes, without benefit buydowns and cost shifting, the increase would be more like 7% in 2012.

Health insurance premiums rose about 8% for single and 9% for family coverage in 2011, according to the Kaiser Family Foundation’s annual survey of employers.  The data encompass both self-insured and fully funded plans.  The rate of increase is considerably higher than last year, when single premiums rose nearly 5% and family premiums just 3%. 

The question is why the big spike?  KFF gave no clear answer.  However, KFF chief executive Drew Altman was clear healthcare reform wasn’t the culprit: “Regardless of how you feel about the Affordable Care Act, its effect on premiums this year is modest.  Most of the law’s provisions don’t go into effect until 2014.”  The two biggest mandates taking effect in 2011 — allowing children up to age 26 to stay on their parents’ policies and coverage of certain preventive procedures — account for about 100 to 200 basis points of the 2011 increase, Alman says.

Others aren’t so sure.  Deutsche Bank’s January employer survey found the exact same 9% increase for 2011; however, employers said that healthcare reform accounted for up to 700 basis points of the increase.  “Insurer and employer concerns around the incremental costs of new mandates and taxes….was by far the primary driver of the spike in premium increases for 2011,” says Deutsche Bank analysts Scott Fidel. 

Still other analysts put the cost of reform at around 300 to 400 bps — which I’m guessing is probably closer to the truth given that underlying cost trends seem to be hovering the in 5% to 6% range.  

The cost of health benefits to employers is expected to rise about 5.4% in 2012, the slowest rate of increase since 1997, according to preliminary annual survey data from benefit consultant Mercer.  There are two reasons why:

1. Employers continue to shift costs to employees or reduce benefits.  Excluding these types of plan changes, costs would rise about 7.1% in 2012.  In other words, employers expect to shift about two percentage points of underlying cost increases to employees next year.  In the past few years, the cost shift had been more like three percentage points — largely because underlying costs had been rising at a faster pace (9% annually over the past five years).   “If the underlying trend is lower to begin with, employers will be likely to shift less cost,” Mercer says.

2. Use of healthcare services is slowing, which may be a result of a bad economy combined with higher deductibles and other forms of cost sharing, Mercer says.  In other words, people can’t afford to spend as much on care so they go without.  Another possibility, Mercer says, is health improvement programs are keeping people out of the emergency room and consumers “are more aware that overuse and misuse of health care services will directly impact their wallets as well as their employer’s budget.” 

This is the kind of selective reporting that drives me crazy.  Sally Pipes of the Pacific Research Institute trashes ObamaCare in an opinion piece in Forbes — implying that recent government projections show healthcare costs will increase dramatically because of reform.  Here’s what the government analysis actually says:

Average annual growth in national health spending is expected to be 0.1 percentage point higher (5.8 percent) under current law compared to projected average growth prior to the passage of the Affordable Care Act (5.7 percent) for 2010 through 2020. Simultaneously, by 2020, nearly thirty million Americans are expected to gain health insurance coverage as a result of the Affordable Care Act.

Consider the Evidence on trends in U.S. healthcare spending versus other nations (hat tip Infectious Greed):

Our gain in life expectancy per additional health spending is much smaller than in other countries, particularly after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years.

A Deloitte study estimates that the hidden cost of healthcare in the U.S. in 2009 was $363 billion — most of which is the imputed value of “supervisory care,” i.e., taking care of a sick or disabled spouse, family member or friend.  The rest is for products and services not counted in the annual government tally of healthcare expenditures, like spending on nutritional supplements, mental health and substance abuse facilities, alternative medicine, certain ambulatory and ambulance services and weight-loss centers.

Source: Deloitte.  Based on $363 billion in estimated hidden U.S. healthcare costs in 2009.

More warning signs that healthcare utilization is about to increase.  Notes Google Flu Trends:

We have found a close relationship between how many people search for flu-related topics and how many people actually have flu symptoms. Of course, not every person who searches for ‘flu’ is actually sick, but a pattern emerges when all the flu-related search queries are added together. We compared our query counts with traditional flu surveillance systems and found that many search queries tend to be popular exactly when flu season is happening.

Google results are published in the journal Nature.  (Hat tip: Citi Investment Research)

Here’s a chart from a new HHS study highlighting projections that without healthcare reform, premiums for individual and family health insurance would be 14% to 20% higher than with reform.  The savings are expected to come from an expanded risk pool, reduced administrative overhead through the advent of health insurance exchanges, and increased competition and choice.  Reform also provides families earning up to 400% of the federal poverty level subsidies or tax credits, further reducing their premium costs.  Families paying the entire premium could save as much as $2300 annually on an $11,400 policy, the study notes.  For families who receive subsidies the savings are much higher.

Trade group America’s Health Insurance Plans disputes the findings, noting that premiums tend to rise along with medical costs — and reform does very little to address cost trends.  AHIP says the HHS report “overstates the cost savings associated with certain provisions of the new law and ignores major provisions that will raise premiums, including the new premium tax, age rating restrictions that impact younger workers, and benefit mandates.”  Here’s a chart from AHIP illustrating the point:

Who’s correct?  Maybe both HHS and AHIP.  Costs do tend to drive premium increases — and costs are still rising.  But as previously reported, there’s also the chance that the minimum medical cost ratio provisions of reform will cause plans to temper rate hikes rather than pay out big member rebates.

WellPoint chief financial officer Wayne DeVeydt during the company’s fourth-quarter 2011 earnings call.

We continue to believe that underlying medical trend will increase in 2011, and we are reflecting this assumption in our pricing.

Healthcare expenditures in the U.S. rose 4% in 2009, according to CMS, the slowest rate of increase since the government began tracking spending 50 years ago.  CMS attributed the slowdown in large part to the recession.  Conclusion: We finally have figured out how to slow healthcare spending growth — tank the economy.  Actually, that doesn’t really work either because healthcare expenditures as a percentage of GDP jumped 100 basis points to 17.6% in 2009 — the largest one-year increase in 50 years. 

Not surprisingly, during the recession, healthcare spending by Medicaid rose a whopping 9% — with the federal government taking on a larger share of the burden.  In fact, federal government spending on Medicaid rose 22% in 2009, compared to a 10% decline in state Medicaid spending.  Meanwhile, out-of-pocket spending by consumers rose just 0.4%.  Spending by private insurance companies rose just 1.3%, reflecting a decline in enrollment.

Karen Ignagni, chief executive of America’s Health Insurance Plans, in response to the National Commission on Fiscal Responsibility and Reform’s recommendations on how to reduce the deficit:

The Commission is absolutely correct that there is no path to long-term fiscal responsibility that does not include a comprehensive approach to reducing health care cost growth. In addition to its impact on the federal budget, health care cost growth threatens our economic competitiveness, our public safety net, and the affordability of coverage for families and employers. We urge legislators at the federal and state levels to work on a bipartisan basis to pass reforms that will bring down the soaring cost of medical care.

The question, of course, is how much do health plans really care about reducing costs.  Cost increases translate into premium increases, which all else being equal translate into rising profits for health plans.  That’s been the formula for some time.  UnitedHealth released projections this week suggesting that up to half of its profit growth in the years ahead will be driven simply by premium increases of 5% to 8% — on par with rising healthcare costs.  The rest will come from administrative savings and capital management.

It reminds me of the exchange I had at an investor conference in February with WellPoint chief financial officer Wayne DeVeydt.  During a Q&A session, I asked DeVeydt the following: “This may sound cynical, but why do you care about rising costs under reform when rising costs lead to higher premiums and rising premiums are a built-in driver of EPS growth?”  His response: The idea that “if costs go up we win” might have been true five years ago, but today “the issue has become affordability.” 

Then came the infamous rate hike proposal of up to 39% in California.

Nifty New York Times worksheet allows you to calculate how to fix the federal budget deficit by deciding which cuts to make through 2015 and again through 2030.  Check out the huge long-term savings from capping Medicare spending growth starting in 2013.  Also noteworthy is the impact of raising the Social Security retirement age to 70 and letting the Bush tax cuts expire.  (Note: My 10-year-old daughter went through this exercise and fixed the federal budget in about 10 minutes  — without cutting military spending aside from nukes and by pretty fairly distributing the rest of the pain).

From the Center for Studying Health System Change:

Wide variation in private insurer payment rates to hospitals and physicians across and within local markets suggests that some providers, particularly hospitals, have significant market power to negotiate higher-than-competitive prices….Looking across eight health care markets—Cleveland; Indianapolis; Los Angeles; Miami; Milwaukee; Richmond, Va.; San Francisco; and rural Wisconsin—average inpatient hospital payment rates of four large national insurers ranged from 147 percent of Medicare in Miami to 210 percent in San Francisco. In extreme cases, some hospitals command almost five times what Medicare pays for inpatient services and more than seven times what Medicare pays for outpatient care….While not as pronounced, significant variation in physician payment rates also exists across and within markets and by specialty. Few would characterize the variation in hospital and physician payment rates found in this study to be consistent with a highly competitive market.

Ken Sperling, healthcare practice leader for Hewitt Associates, on the firm’s projection that group healthcare premiums will rise 8.8% in 2011, the highest rate of increase in five years:

Reform creates opportunities for meaningful change in how healthcare is delivered in the U.S., but most of these positive effects won’t be felt for a few years. In the meantime, employers continue to struggle to balance the significant healthcare needs of an aging workforce with the economic realities of a difficult business environment. While healthcare reform cannot be blamed entirely for employers’ increasing cost, the incremental expense of complying with the new law adds fuel to the fire, at least for the short term.

Douglas Elmendorf, director of the Congressional Budget Office, speaking at the 7^th annual World Health Care Congress in Washington, DC, last month about rising healthcare costs.

We simply don’t have the ability…to change the growth rate.

Instead of using the phase “bend the curve,” he noted that CBO tends to talk about saving money versus spending more money.  He noted there are ways “to reduce spending without hurting health.”

Here’s a moving article in BusinessWeek titled The End of Life: Lessons from a $618,616 Death by Amanda Bennett about her husband’s seven-year battle with cancer, which highlights the dilemma over who pays the cost of healthcare and how do you put a price on a life.  But the article also points to the tremendous inefficiencies and inequities in our system, including sky-high administrative costs and varying prices for drugs and procedures. 

As I fought to buy my husband more time, it didn’t matter to me that the hospital charged more than 12 times what Medicare then reimbursed for a chest scan. It also didn’t matter that UnitedHealthcare reimbursed the hospital for 80% of the $3,232 price of a scan, while a few months later our new insurer, Empire BlueCross & BlueShield, paid 24% for the same test. And I didn’t have time to be thankful that the insurers negotiated the rates with the hospital so neither my employers nor I actually paid the difference between the sticker and discounted prices. Looking at that stack of documents, it is easy to see why 31% of the money spent on health care went to paperwork….

When it came to the insurance companies, the sticker price meant little since they had negotiated their own deals with the hospital. Neither the hospital nor the insurance companies would elaborate. The entire medical bill for seven years, in fact, was steeply discounted. The $618,616 was lowered to $254,176 when the insurers paid their share and imposed their discounts. The portion of the charges that were not covered for the most part vaporized. Terence and I were responsible for and paid $9,468—less than 4%….

Taking it all into account, the data showed we had made a bargain that hardly any economist looking solely at the numbers would say made sense….As costly as his treatment was, no one can say for sure if it helped to extend Terence’s life…Only I know that those months included an afternoon looking down at the Mediterranean with Georgia from a sunny balcony in southern Spain. Moving Terry into his college dorm. Celebrating our 20th anniversary with a carriage ride through Philadelphia’s cobbled streets. A final Thanksgiving game of charades with cousins Margo and Glenn.

The White House says…

On Wednesday, a leading insurance broker laid out in clear terms what many Americans could already guess: the insurers’ monopoly is so strong that they can continue to jack up rates as much as they like – even if it means losing customers – and their profits will continue to soar under the status quo.

…which refers to an article by Sam Stein of The Huffington Post that says…

The market concentration for health insurance is so monopolized in some areas that insurance companies are willing to raise prices and lose customers in an effort to improve their bottom line, a leading insurance broker told Wall Street analysts on Wednesday.

…which is based on a conference call hosted by Goldman Sachs with insurance broker Steve Lewis of Willis.  The only problem is in reading the transcript from the call, I’m not exactly sure that’s what Lewis said.  (I called Lewis for clarification, but didn’t hear back by presstime).  What he did say for sure was the following:

We feel this is the most challenging environment for us and our clients in my 20 years in the business. Not only is price competition down from year ago (healthcare) inflation is also up and appears to be rising. The incumbent carriers seem more willing than ever to walk away from existing business resulting in some carrier changes.

What this says to me is that health insurers are coming out of an underwriting downcycle and putting margin improvement (i.e., profits) ahead of membership growth — similar to what happened a decade ago when the health plan market was far less concentrated.  Costs are rising and therefore premiums are rising — and therefore the likelihood is more people will be priced out of the market, face higher costs or suffer reduced benefits.  As Goldman notes:

Two years ago, Lewis and his team were one of the few industry sources pointing (correctly) to aggressive pricing by the carriers in a lead up to severe margin deterioration….Now, Lewis and his team find price discipline has strengthened noticeably.

So the effect is the same, but the cause isn’t as clear-cut as the monopoly argument suggests (an argument that ignores the impact of similar consolidation in the hospital industry).  That’s not to say a top-heavy insurance market isn’t part of the problem.  And as Lewis notes, employers do buy in when Obama and the Democrats “rail at what may be termed oligopolistic behavior of carriers in certain markets.”  But as the Congressional Budget Office said when evaluating the potential impact of a repeal of the health insurance industry’s antitrust exemption:

Enacting the legislation would have no significant effect on the premiums that private insurers would charge for health insurance.

Good, balanced article in today’s Wall Street Journal titled “Race to Pin Blame for Health Costs” says:

Insurers contend that they must pass on ever-higher bills from hospitals and doctors. Hospitals say they are struggling with more uninsured patients, demands by doctors for top salaries, and underpayments from Medicare and Medicaid.  And doctors say they are strong-armed by insurance monopolies and hampered by medical malpractice costs.