Unbiased Analysis of Today's Healthcare Issues

Letter to Obama: We’re gonna save $2 trillion

Written By: Jason Shafrin - May• 11•09

In a letter to President Obama today, AdvaMed, AHIP, AHA, AMA, Pharma, and SEIU all claimed that they would save the country $2 trillion.  Saving, however, is a relative term.  The goal is to reduce the rate health care expense growth by 1.5%.  Thus, this is not a true savings in the typical sense of the word, but a goal to have health care costs grow less than expected.  How do this consortium of “private sector stakeholders” attempt to  accomplish this savings?  Below are proposed solutions and my response.  

  • Administrative simplification, standardization, and transparency that supports effective markets.  This would certainly make the health care system more efficient.  Much time and money is wasted arbitrating what procedures and services are and are not covered.  However, some health care administrative spending is useful; it makes sure that wasteful health care services are not paid for.  Further, in 2004, only 7.3% of health care spending was attributable to administrative costs (Borger et al. Health Affairs 2006).  Even cutting administrative costs in half will not solve the problem of high insurance premiums.
  • Reducing over-use and under-use of health care by aligning quality and efficiency incentives among providers.  This gets to the heart of the matter.  My “Operating on Commission” paper shows that the manner in which physicians are compensated has dramatic effects on surgery rates.  While choosing optimal levels of care would vastly improve health care quality and reduce cost, it is extremely difficult to do in practice.  How does one define over/under-use?  Should a 40 year old male get surgery to repair an ACL injury?  This will not impair his ability function, but will affect his ability to play sports.  Should insurance cover this?  If we want to reduce health care costs, will have have to make some difficult choices and cut benefit generosity significantly.
  • Encouraging coordinated care and adherence to evidence-based best practices and therapies. Coordinated care and more frequent use of evidence-based medicine should increase quality.  Fewer mistakes can lead to fewer hospitalizations and thus less care.  As always, the devil is in the details.  How is care to be coordinated?  Will there be nation-wide electronic medical records?  Large, centralized health providers–such as Kaiser Permanente–are good at implementing evidenced-based medicine. It is more difficult, however, for physicians in small group practices to keep up with the latest techniques.  Large, centralized health plans are the best way to implement evidence-based medicine, but concentrating health care in the hands of a few insurers could decrease competition and raise premiums.
  • Reducing the cost of doing business by addressing cost drivers in each sector and through common sense improvements in care delivery models, health information technology, workforce deployment and development, and regulatory reforms. I’m not exactly sure what this means.  It basically means, make healthcare better, but not specifics are involved.
  • Reform should include a specific focus on obesity prevention.  Decreasing obesity will help improve health and quality of life overall.  However, I do not believe that this should be accomplished at the cost of individual liberty to choose what to eat and how much to exercise.  Further, reducing obesity may actually increase health care costs (since obese people die sooner).

Why have “physicians, hospitals, other health care workers, payors, suppliers, manufacturers, and organized labor” come together now?  Although they claim they want to cut costs, it is in the interest of most of these stakeholders to increase cost.  Michael Cannon notes that “Lobbyists never advocate less revenue for their members.  Ever.  If they did, they would be fired and replaced with new lobbyists.”  Cannon claims the lobbyists are writing the letter because they want universal health insurance.  It could also be the case, that these groups fear the advent of a government-run health insurance system that would compete with private insurers.  

Whatever the case may be, these associations are providing no guarantees of anything.  They say they’ll cut costs by $2 trillion, but what if they don’t?  Nothing will happen. They may argue that government projections underestimated certain factors.  Health care spending may decelerate on its own even if these groups do not change their behavior.  In fact, with the economic slowdown, medical costs will likely decrease as workers lose insurance coverage when they lose their job.  

In essence, what did the letter to Obama say: a lot of cheerleading, not a lot of action.

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  1. […] magic of  Obama’s proposed $2 Trillion in savings on health care.   Jason Shafrin the Health Care Economist does a great job of breaking down the numbers…and I do mean “breaking […]

  2. […] Last week a consortium of health insurers, health providers, hospitals and pharmaceutical manufacturers claimed that they could save the country $2 trillion in health care costs.  I was skeptical of this claim. […]

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