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.
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).
A Commonwealth Fund study of 11 nations found that in the past year U.S. adults had the highest out-of-pocket costs, struggled the most to pay medical bills and were the most likely to forgo care because of cost:
Compared with the residents of 10 other industrialized countries, U.S. adults are the most likely to report health care problems related to access, cost, and insurance complexity….One-third (33%) of U.S. adults went without recommended care, did not see a doctor when sick, or failed to fill prescriptions because of costs, compared with as few as 5 percent of adults in the United Kingdom and 6 percent in the Netherlands….One-fifth (20%) of U.S. adults had major problems paying medical bills, compared with 9 percent or less in all other countries.
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 7th 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.
The good news is that U.S. healthcare spending growth slowed to 4.4% in 2008, down from 6% in 2007 and the slowest rate of growth in nearly 50 years, according to data from the Centers for Medicare & Medicaid Services. The bad news is that the main reason for the slowdown was the recession; healthcare costs still rose faster than GDP, which was up 2.6% in 2008. So if the issue is excess cost growth in healthcare (see prior post), 2008 was better than the past 40 years but still a problem — especially since healthcare’s share of GDP tends to spike during and immediately following a recession; in 2008, healthcare’s share of GDP rose 300 basis points to 16.2%, compared to a 100 basis point increase in each of the prior three years. Overall, U.S. healthcare spending hit $2.3 trillion in 2008 or $7681 per person, CMS reports.
You can really see the impact of the recession in consumer out-of-pocket spending, which rose just 2.8% in 2008, compared to 6% in 2008. Another category impacted by tight consumer purses strings — prescription drug costs rose 3.2% in 2008, compared to 4.5% in 2007. In contrast, federal government spending rose 10.4% in 2008, compared to 6.6% in 2007; the federal share of national healthcare expenditures rose 200 basis points to 25% in 2008 (tied partly to stimulus spending), while the state and local government share fell 100 basis points to 17%. We asked for more government involvement, and so we’re getting it.
In an opinion piece in BusinessWeek, C.J. Bolster of the Hay Group sees in healthcare reform the potential for real changes — and cost-savings — tied to the shift from a fee-for-service model to bundled, global or other types of payment arrangements.
One thing is certain: The government and insurance companies won’t be paying more for services than they pay now. So health-care providers are becoming more efficient and effective. Regardless of what the final health-care reform bill looks like, private insurers will be driving down costs. In our work at Hay Group with some of the nation’s major health-care organizations, we are observing significant changes including effective implementation of new medical and surgical technologies that improve outcomes and conserve resources.
I was so busy back in October writing about the hyperbolic study sponsored by America’s Health Insurance Plans on the projected cost impact of healthcare reform that I forget to mention on another AHIP report published the same month — the group’s helpful analysis of individual health plan premiums and underwriting approval rates.
Based on an analysis of 2.6 million individual and family policies covering 4.2 million people, AHIP found that 87% of applicants who undergo underwriting for individual health insurance are offered coverage. Young people — under age 18 — were offered coverage 95% of the time. Older people — age 60 to 64 — were offered coverage 71% of the time. Annual individual premiums averaged $2985 single, $6328 family in mid-2009. Premiums varied widely by age, e.g., annual single premium ranged from $1350 for people under 18 to $5755 for those age 60 to 64. Premiums also varied widely by state, as shown in the chart below.
Here are some provocative comments from the Congressional Budget Office on the often-repeated health insurance industry claim that relatively low Medicare and Medicaid payment rates to providers result in high payment rates by private health insurers. From the CBO analysis released today on the likely impact of reform legislation on commercial healthcare premiums:
The fact that private insurers pay providers higher rates, on average, than Medicare and Medicaid is not evidence that cost shifting occurs. For cost shifting to occur, a decline in the rates paid by some payers would have to lead to an increase in the rates paid by others; thus, for cost shifting from reductions in rates paid by Medicare to occur, providers would have to have initially been charging private insurers lower rates than they could have. Well-designed studies have found that a relatively small share of the changes in payment rates for government programs is passed on to private payment rates, and the impact of changes in uncompensated care is likely to be similar. Overall, therefore, CBO’s assessment is that the legislation would have minimal effects on private-sector premiums via cost shifting.
You can now watch the entire 86-minute documentary Money-Driven Medicine online (click here). It’s part of a national “watch-in” organized by the film’s distributor California Newsreel in partnership with Consumers Union, Campaign for America’s Future, Campus Progress, Doctors for America, Alternet and others. The film is based on Maggie Mahar’s book of the same name and discusses the skewed incentives in the delivery of care in the U.S. Notes Medical ethicist Larry Churchill:
The current medical care system is not designed to meet the health needs of the population. It is designed to protect the interests of insurance companies, pharmaceutical firms, and to a certain extent organized medicine. It is designed to turn a profit. It is designed to meet the needs of the people in power.
Economist Robert Fogel argues in an article for the conservative American Enterprise Institute that there’s no need to suppress demand for healthcare services. He says people want to spend their incremental income on healthcare, which in turn drives economic growth. Writes Fogel:
The long-term income elasticity of the demand for healthcare is 1.6—for every 1 percent increase in a family’s income, the family wants to increase its expenditures on healthcare by 1.6 percent….Expenditures on healthcare are driven by demand, which is spurred by income and by advances in biotechnology that make health interventions increasingly effective. Just as electricity and manufacturing were the industries that stimulated the growth of the rest of the economy at the beginning of the 20th century, healthcare is the growth industry of the 21st century.
It’s an interesting debate exactly what is the “right” percentage of GDP that should be spent on healthcare.
Charles Morris writes in The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash (PublicAffairs, 2008) that the U.S. economy could easily support healthcare spending at 25% to 30% of GDP — compared to 16% today. But Morris adds:
Having said all that, American health care is also extremely wasteful and is an operational mess. At twice the per capita level of spending as in other advanced countries, we are not getting a good deal. Much of the problem stems from the insistence that health care is just like any other consumer market. It’s not.
Hat tip to CNBC’s Larry Kudlow, who pointed to the Fogel piece in arguing that the free market is what’s needed to fix healthcare in America — a viewpoint I disagree with (I’m in the camp that government should play a bigger role).
On a related point, Kudlow says that casualties of the type of reform being proposed by the President and by Senate Finance Committee Chairman Max Baucus (D-MT) “could include the 11 million people in the Medicare Advantage program…and the 8 million in health savings accounts. These will be scrapped under Obama-Baucus.”
I agree Medicare Advantage will likely be a smaller program post-reform, but it will still exist. As for HSAs, the original SFC policy options released in May (see prior post) proposed some new rules on HSAs, but didn’t come close to scrapping them — same for the more recent framework for reform from Baucus (see prior post).
I sent an email to Kudlow for clarification and will let you know if he responds.
Writing about rising costs in healthcare is easy. You just take the same article you wrote last year, tweak a number here and there, and you’re done.
For example, last year around this time I wrote:
A survey from Aon Consulting found that employers can expect healthcare claims costs to rise 10.6% over the next 12 months before benefit buydowns. Aon surveyed more than 70 leading health plans representing 100 million lives. The survey found HMO costs are expected to rise 10.6%, POS plans 10.5%, PPOs 10.7% and consumer-directed plans 10.5%.
A survey from Aon Consulting found that employers can expect healthcare claims costs to rise 10.5% over the next 12 months before benefit buydowns. Aon surveyed more than 60 leading health plans representing 100 million lives. The survey found HMO costs are expected to rise 10.4%, POS plans 10.4%, PPOs 10.7% and consumer-directed plans 10.5%.
And you thought rising healthcare costs were a problem.
Shock and belief. That’s how people usually react when I tell them that half of personal bankruptcies in the U.S. are the result of medical bills. People are amazed the number is so high, yet they “get it.”
Now the number is up to 62%, according to a study published in the American Journal of Medicine (Hat tip: The Wall Street Journal). In 1981, only 8% of bankruptcies were related to medical issues, the study notes. The data are based on a national survey of 2314 bankruptcy filings.
The study also points out, “Most medical debtors were well educated and middle class; three quarters had health insurance.” The vast majority had medical bills topping $5000 or 10% of pretax family income, the study said.
I’ve always considered a major failing of the managed care industry (see prior post) to be “the failure to consistently provide plan members with the insurance protection they need—and the healthcare coverage they have paid for—when they are sick.”
After all, the whole point of insurance is to protect you from going broke. All of which brings us to healthcare reform. Getting everyone covered is one thing. Making sure that coverage is adequate is quite another.
Talk about bad timing. As the nation debates how to pay for healthcare reform, an annual a semi-annual survey from benefits consultant Buck Consultants (New York) finds that costs for the most popular types of health insurance are expected to increase at double-digit rates through the remainder of 2009 and into 2010 before benefit buydowns.
Even worse, Buck actuary Harvey Sobel adds, “There are signs that we’re going into another cycle of high trends,” with health insurers possibly raising rates in light of the economic downturn, Cobra expansion, mental health parity legislation and potential healthcare reform.
According to Buck, costs before benefit buydowns for 2009-10 are expected to rise 11% for PPOs, 10.2% for POS plans, 11% for HMOs and 10.4% for high-deductible health plans. Buck, an ACS company, has published its National Health Care Trend Survey for 20 years a decade; this year’s most recent survey is based on responses from 100 health insurers and administrators.
Assuming Buck is correct and assuming we’re in for a period of post-credit-crisis stagnant GDP growth, the figures would point to near-term widening excess cost growth in healthcare (i.e., the spread between how much faster healthcare costs are increasing compared to the overall economy; see prior post).
For example, healthcare costs have risen at a compounded annual rate of about 6.4% since 1970. GDP, meanwhile, has risen about 3% annually over the same time frame. That would be 300 basis points of excess cost growth in healthcare.
We can debate the percentage of GDP that healthcare will and should make up in the years ahead. What’s not debatable is that this share is growing, and if Buck is correct, it may start growing at an accelerating rate. What’s the word I’m looking for? Ugly.
Solid piece in The New Yorker (hat tip: Infectious Greed) on healthcare cost and quality variation in two Texas towns: McAllen–where healthcare costs are among the highest in the nation; and El Paso, half as costly with better healthcare outcomes.
Writes reporter Atul Gawande: “About fifteen years ago, it seems, something began to change in McAllen. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.
“The real puzzle of American health care, I realized on the airplane home, is not why McAllen is different from El Paso. It’s why El Paso isn’t like McAllen. Every incentive in the system is an invitation to go the way McAllen has gone. Yet, across the country, large numbers of communities have managed to control their health costs rather than ratchet them up.”