“Moreover, there is considerable variation in health care expenditures and a weak or even negative association between spending and outcomes, such as mortality at the regional level and quality measures at the state level. This evidence has been interpreted to mean that cutting back on these putatively useless or harmful services would simultaneously reduce cost and improve health. In contrast, several cross-sectional studies that have shown positive associations between spending and outcomes have been interpreted to show that more spending leads to better outcomes.”

“A recent study using chart-review data from the 1994–1995 Cooperative Cardiovascular Project categorized “…hospitals as either high-adopting facilities or low-adopting facilities, according to their rates of use of aspirin, beta-blockers, and coronary reperfusion in the treatment of acute myocardial infarction. The researchers found that the high-adopting hospitals had consistently better rates of risk-adjusted survival, at no additional cost to Medicare. But after stratification according to the hospitals’ adoption rates, there was a positive but diminishing effect of spending on the health outcome (12-month survival)…The cost-effectiveness ratios at the margin were $95,000 per life-year or more but with slightly better returns for the hospitals that were slower to adopt cost-effective practices…”

“Another study showed that regions that had high rates of revascularization for patients with acute myocardial infarction received good health value for the expenditure on the intervention.  Despite this, there was essentially a zero association between spending and outcomes across regions. The explanation is that the high-revascularization areas were also less likely to use beta-blockers and aspirin for their patients.”

• Weinstein MC, Skinner JA (2010) “Comparative Effectiveness and Health Care Spending — Implications for Reform,” NEJM, ePub, January 6, 2010 (10.1056/NEJMsb0911104).

Comparative effectiveness compares how effective various medical treatments improve health outcomes.  This sounds like the course we want to take.  Most policymakers laud the health benefits of comparative effectiveness research, but some people claim that comparative effectiveness research can also save cost.

This is most easily seen in the case where a treatment is completely ineffective.  If research can prove a treatment is ineffective, then insurers could save a lot of money by not covering this type of treatment.  This is especially true if the treatment is expensive.

However, comparative effectiveness treatment could also increase cost.  Assume that there are two treatment currently in use: Treatment A and Treatment B.  Let us say that treatment A costs $1,000 and has a 90% cure rate and Treatment B costs $10,000 and has a 95% cure rate.  According to comparative effectiveness research, we should always use Treatment B.  Yet this would significantly increase costs.

Most health economists argue that cost effectiveness research is provides a better way to improve health and decrease cost.  In the example above, should we cover Treatment B?  The answer is likely yes if this is a very serious disease (e.g., cancer) but likely not if the disease is less serious (e.g., the common cold).  Some readers may believe insurers should always cover Treatment B no matter what.  However, would you be willing to pay increased premiums that would occur if treatment B were covered?  Would you feel the same way if Treatment B cost $100,000?  or $10 million?  What if the cure rate was only 90.1%?

At some point, there must be a trade-off between cost and benefit.  Admittedly, these are very difficult decisions in practice, but because there are limited healthcare resources, we must ration care.  Yes, I said it, we must ration care.  I’ve said this before.  This rationing can take many forms: the scope of what your insurance company (or Medicare) will cover, waiting lines, or increased prices you must pay out of pocket for medical services.  The government wants to avoid making these tough choices because it is politically unpopular.  Politicians don’t want to be labelled  the sentator who “killed Grandma” or “instituted a death panel.”  But to truly decrease cost and improve quality, cost effectiveness rather than comparative effectiveness is the prescription we need.

In “Obama’s Prescription for Low-Wage Workers,” Michael Cannon notes that one also can see these subsidies as increasing the marginal tax rate.  For instance, let us John makes $16,000 and has a 25% income tax rate.  Under the new health reform bill, John would also receive a subsidy to purchase health insurance.  Let us assume the subsidy is $5000.  Thus, his after tax income is $17,000 [(1-.25)*16,000+5000].

What happens if John has the option to work at a new job that pays him $20,000?  Of course, he will earn more income but his health insurance subsidy will also decrease.  If the health insurance subsidy decreases to $3,500, then his after tax income in your new job is now $18,500 [(1-.25)*20,000+4000].  Although John’s gross income increased by $4000 when taking the new job, his after tax income only increased by $1500.  This is in a marginal tax rate of 62.5%.  In fact, Mr. Cannon’s research finds that mandates and subsidies impose effective marginal tax rates on low-wage workers “averaging between 53 and 74 percent.”  When marginal tax rates are high, extra hours worked lead to a smaller increase in after-tax income.  Thus, the labor supply decreases.

One thing Mr. Cannon ignores, however, is the current Medicaid poverty trap.  Poor individuals are eligible for Medicaid.  However, if they get a better job paying them more money, they may lose their Medicaid eligibility.  Poor individuals may refuse to take better paying jobs to keep their Medicaid coverage.

Once the subsidies are implemented, however, poor individuals will be more likely to take a better-paying job since they can receive subsidies to buy private health insurance even if they lose their Medicaid coverage.  The high marginal tax rates are more likely to affect the labor supply of the lower-middle class and middle class individuals.  These individuals are in the same scenarios as John is above.  Higher pre-tax earnings will not necessarily translate into significantly larger after-tax earnings.  I predict that the higher marginal tax rates Mr. Cannon mentions will decrease the labor supply most for individuals in the middle class.

• Tax credits for Health Insurance Premiums.  This will do nothing to change how much health care costs, it will just change who pays the premiums.  For middle class individuals, these subsidies will help make health insurance more affordable.  Because the wealthy won’t receive any subsidy (the maximum family income to be eligible for the credit is $88,000), they will simply pay higher taxes.
• Health Insurance Mandate.  Obama does not call this a mandate, but rather titles this section of the proposal “Improve Individual Responsibility.”  Individuals who don’t buy health insurance will be fined.  A health insurance mandate in and of itself doesn’t make much sense to me (if you don’t want it or can’t afford it, you shouldn’t be punished).  However, if laws that prohibit-pre-existing pricing insurance plans based on pre-existing conditions, a mandate may be needed so individuals can not avoid paying health insurance premiums until they fall ill and only then pay the premiums.
• Employer Mandate.  If you don’t provide health insurance for your worker, you have to pay a fine of $3,000.  This is true for firms with 50 employees or more.  The employer mandate does not make much sense.  Business could offer health insurance to attract employees, but firms should not be forced into being in the health insurance business.  It makes more sense to instead make it easier for businesses to provide insurance.  For instance, the government could allow small businesses to band together to buy health insurance product under the umbrella of a common organization.  The economies of scale should reduce insurance costs.
• Federal financing to all States for the expansion of Medicaid.  Helps the state budgets, hurts the federal budget.
• Closing the Medicare prescription drug “donut hole” coverage gap.  This will increase the cost of the program, but it makes sense to have a more standardized benefit package with a deductible and flat coinsurance rate rather than the complex product with the donut hole.
• Strengthening the provisions to fight fraud, waste, and abuse in Medicare and Medicaid.  This is a throw-away point.  Every politician tries to do this, but it is often difficult to determine what is fraud, waste and abuse and what is just expensive care for a needy patient.
• Eliminate Pay-for-Delay.  Pay-for-dealy occurs when brand-name pharmaceutical companies pay their generic competitors to keep its drug off the market for a period of time.  This generally seems like a good idea, but one economist says eliminating these payoffs may make it less likely generics will be developed in the first place.
• Increasing the threshold for the excise tax on the most expensive health plans.  I am not a supporter of this bill.  Health insurance is expensive either because 1) the health plan is very generous or 2) the person is sick and it is expensive to cover them.  The excise tax will cut down on the number of super generous plans, but it will punish sick individuals in the non-group market.  Eliminating the deductibility of group health insurance benefits makes more sense and will raise more revenue to help pay down the deficit.
• Broaden the Medicare Hospital Insurance (HI) Tax Base.  This means that unearned income (capital gains, dividends, interest) will now also be subject to Medicare taxes.
• Creating a new Health Insurance Rate Authority.  Many states already have a body that regulates insurance companies.  Having an additional body may just be a waste of taxpayer dollars.  The federal government may think health insurance rate increases are “too high” but I doubt the government will know what the “right” premiums would be more than a private insurance company.
• Invest in Community Health Centers.  Community health centers can help people who fall through the cracks: those without health insurance, immigrants.  However, a more comprehensive health reform (which would fund a majority of the health insurance cost for these disadvantaged individuals) would allow poor people to choose which health care provider they wanted rather the having to rely on community health centers.  Expanding Medicaid may be a more effective use of these dollars than investing in these centers if Medicaid could be expanded to all individuals.  If the U.S. wants to provide immigrants with poor medical care (i.e., make them ineligible for Medicaid) as a disincentive to immigrate, than community health centers may be a better option than additional Medicaid funding.
• More federal funding for SCHIP.
• Eliminating the Nebraska FMAP provision.  Eliminates one example of pork, but there are likely many others in the bill.

Other commentaries worth reading:

• The bill will increase the marginal tax rate for the poor.
• Which groups will be helped most if health reform passes?
• What will be the impact for Californians?
• BBC on Obama’s plan.

Examples of BAD IDEAS include

Starting over.  John McCain asked to “Go back to the beginning” and Republican Senator Lamar Alexander said ”If we can start over, we can write a healthcare bill.”  The whole start over rhetoric is dumb.  If you don’t like the current proposals, say what you don’t like about them.  If you have suggestions on how to do it better, say them.  Suggesting a “do over” is not helpful.  Even if you think health care in the U.S. is perfect and prefer the status quo, you should stand up and say that rather than asking for a clean slate.

Health Reform will lower the deficit. Expanding federal entitlement programs will NOT lower the deficit.  In the short-run, additional tax revenue and cuts to other programs may decrease the deficit in the very short run, but adding or expanding big government programs never lowers the deficit.

Reforming medical malpractice.  I have documented that the medical malpractice system does not work well (see here and here).  However, malpractice costs are a small share of the overall health care dollars.  If physicians prescribe too many tests and treatments because they wish to avoid being sued, than tort reform could decrease costs more drastically.  However, this issue is more of a partisan one where Republicans can pander to their physician supporters and Democrats can pander to their attorney supporters.

End Waste and Abuse.  This is a laudable goal, but determining what is waste and abuse is difficult.  If you get an MRI for an injury, you may not need the MRI, but it will provide the doctor with some helpful information.  This is certainly not fraud, but it may be waste.  Having Medicare administrators who are far from the hospital floor determine what is wasteful is not as easy as political rhetoric makes it sound.  Further, although there is much waste in the Medicare system, there is much waste when doctors are paid by private insurers as well.  Every President promises to reduce Medicare fraud and waste, but few succeed.

“We actually create more diabetes through the food stamp program and the school lunch program.”  - Senator Coburn.  Do poor people buy more unhealthy food?  Yes.  Is it because of these programs?  No.  The poor have less money and fast food is cheap.  Fresh fruits and vegetables are expensive.  Increasing redistribution would allow the poor to eat healthier, but if Senator Coburn wants to mandate that poor people eat healthy, I think that is going too far.  People on food stamps aren’t all of a sudden start shopping at Whole Foods.  The food police are not the solution to health reform.

Here’s where the GOOD IDEAS were:

Incremental Reform doesn’t work.  Senator Wyden said, “The evidence says incremental reform not only does less, it costs more.”

The most sensible comments came from Senator Harkin.  In order to reduce health insurance premiums and Medicare expenses, we need cost control (i.e., rationing).  We need to limit the medical care we make available to ourselves.  Every person should not be able to receive every medical treatment they think will improve their lives.  Determining which treatments to exclude form Medicare or private insurance is full of tough decisions, but they must be made, otherwise health insurance premiums will gobble up more and more of our wages.

Of course, no senator could support rationing care, but that is what Senator Harkin is essence supporting.   Here is a quotation:

“Well, quite frankly, if we want insurance reforms you can only do that if everybody is in the pool. You can only get everybody in the pool if you make it affordable for middle class families and others. You can only make it affordable for middle class families and others if you have cost controls.”

The full transcript of the summit can be found in three parts (1, 2, 3).  NPR also has some good analysis here.

Why did Medicare outlays increase at higher than historical averages?  It is possible that physicians are cost shifting in the face of a bad economy.  With more unemployed workers (and thus fewer privately insured individuals), more physicians may be willing to see Medicare patients or physicians may use supplier induced demand to increase the number of services they supply to this population.  On the other hand, this could simply be explained by the fact as baby boomers retire, there are more Medicare-eligible individuals which will increase cost even if spending per capita increases at historical rates.

Additional large spending outlays last year include the American Recovery and Reinvestment Act of 2009 (ARRA) ($80 billion)–which was largest annual adjustment since 1982–and military operations in Iraq and Afghanistan ($155 billion).

In the long term, the CBO projects that debt levels will continue to rise:

The most important point the CBO makes in the report, however, is the following:

Source: Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2010 to 2020,” January, 2010.

All Americans agree, we need a health care system that is affordable, accessible, and high quality.  Cheap and high quality, who wouldn’t agree with that proposition?  Figuring out how to get there is the problem.

But most Americans do not want to turn over the best medical care system in the world to the federal government.  Republicans in Congress have offered legislation to reform healthcare, without shifting Medicaid costs to the states, without cutting Medicare, and without raising your taxes.  Republicans don’t want to turn over your medical care to the federal government, except in the cases of Medicare and Medicaid.  The Republican message is philosophically incoherent: we don’t like big government healthcare programs except for one really big, really underfunded healthcare program called Medicare.  This sounds like Bill Clinton in 1994, “I’m not going to let the government mess with your Medicare.”

We will do that by implementing common sense reforms, like letting families and businesses buy health insurance policies across state lines, and ending frivolous lawsuits against doctors and hospitals that drive up the cost of your healthcare.  These policies will do little to significantly change the healthcare system.   The reason Republicans propose allowing people to buy policies across state lines is to allow individuals to buy less regulated insurance products from other states.  If this happens, healthy individuals will buy less expensive products from less regulated states and only sicker individuals will be left to purchase health insurance in the more regulated states.  This will drive premiums up significantly for the sickest people, but decrease premiums for healthy individuals.  This phenomenon is known as adverse selection.  In addition, malpractice reform can help cut costs.  There is evidence that the current malpractice system doesn’t work well. However, malpractice costs are a tiny fraction of overall healthcare costs.  Limiting the malpractice liability of physicians could decrease cost by incentivizing physicians to decrease the use of defensive medicine.  If these caps are implemented, however, patients who are severely injured through a physician’s negligent behavior will not be able to receive the full compensation they are due.

This foreign terror suspect was given the same legal rights as a U.S. citizen, and immediately stopped providing critical intelligence.  As Senator-elect Scott Brown says, we should be spending taxpayer dollars to defeat terrorists, not to protect them.  As a nation that believes in the civil rights of all individuals, it is important to give even accused terrorists the right to due process.

Now let’s be clear – I did not choose to tackle this issue to get some legislative victory under my belt. And by now it should be fairly obvious that I didn’t take on health care because it was good politics. True.  Support for Obama’s health reform policies are hitting all-time lows.

The approach we’ve taken would protect every American from the worst practices of the insurance industry. Here, Obama may be referring to the fact that he wants to prohibit insurers from denying insurance coverage based on pre-existing conditions.  In many cases this is a good thing.  It is hard for people who have diseases to get insurance coverage, and when they don’t get coverage, they may forego necessary care.  However, when insurance companies don’t deny coverage to individuals with pre-existing conditions, each person has an incentive NOT to buy health insurance until they come down with a serious disease.  This way, you’ll save money on health insurance and when you decide to buy health insurance when you’re sick, it’ll cost the same as it does for healthy people.

It would give small businesses and uninsured Americans a chance to choose an affordable health care plan in a competitive market. The subsidies individuals would get to purchase nongroup insurance would help people purchase insurance for individuals who work for a business that does not offer a group plan.  However, the small businesses generally oppose health reform.

It would require every insurance plan to cover preventive care.  Most already do.

And by the way, I want to acknowledge our First Lady, Michelle Obama, who this year is creating a national movement to tackle the epidemic of childhood obesity and make our kids healthier. Although losing weight will generally improve your health, calling obesity an epidemic is a bit of a hyperbole.

Our approach…would reduce costs and premiums for millions of families and businesses. And according to the Congressional Budget Office – the independent organization that both parties have cited as the official scorekeeper for Congress – our approach would bring down the deficit by as much as $1 trillion over the next two decades.  Cost will decrease for some people.  Those who are newly eligible for Medicaid will see lower health insurance premiums.  Those who receive subsidies to buy health insurance will see lower premiums.  However, the taxpayer will have to cover this cost.  Thus, there will be winners and losers if health reform passes.  The Medicare cost cuts the Obama is proposing are small in comparison with the fast rate of growth of overall Medicare spending.  Further, political pressure will make it difficult to actually enact these cuts.  Although Obama may claim the health reform will decrease federal spending, insurance companies believe health reform will increase health care costs.  I’ve already stated my belief that the cost-cutting measures in the health reform bills are meager.

As temperatures cool, I want everyone to take another look at the plan we’ve proposed. There’s a reason why many doctors, nurses, and health care experts who know our system best consider this approach a vast improvement over the status quo.  Providers should support health reform.  In general it expands the number of people with insurance (i.e., it expands their potential market).  Further, because there is little cost cutting, doctors and nurses should see an increase in profits.  Doctors and nurses may also believe that health reform is good for their patients, but without a doubt it will benefit the provider’s pocketbook.

Do not walk away from reform. Not now. Not when we are so close. Let us find a way to come together and finish the job for the American people.  In other words: “Please pass health reform.  Pretty please!”

Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will.  A spending freeze sounds like a great idea to reduce the debt.  However national security (21%), Medicare & Medicaid (23%), Social Security (21%), other mandatory spending (10%) and interest on the debt (8%) make up most of the federal budget.  This leaves only 17% of the budget which is not under a spending freeze.  That is like saying, “Yeah, I’ll keep living in this house I can’t afford and driving this car I can’t afford, but when I go to Taco Bell I’ll get the regular taco instead of the taco supreme.”  That is not the way to financial security.  Additionally, some of the discretionary programs will be cut but others will receive increased funding.  Obama even campaigned against spending freezes in the election.

More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That’s why I’ve called for a bipartisan, Fiscal Commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. Read: “I know it’s not a good idea politically to cut Medicare, Medicaid or Social Security.  So instead I’ll call for a commission to write a report that gets ignored a year from now.”

We are helping developing countries to feed themselves, and continuing the fight against HIV/AIDS.  Feeding the poor and helping those with AIDS are important goals.  They are also goals that few people would oppose politically.

Conclusion: Overall, Obama has proposed nothing new on health reform, but has just asked nicely for Congress to pass it.  He has imposed a spending freeze on 17% of federal budget while letting entitlements continue to gobble up more and more of worker’s incomes through taxes.  There is no solution to the impending budget shortfalls for Medicare and Social Security.  To sum up, on the health care front it’s more of the same.

Healthy San Francisco (HSF) is the city’s two-year-old health-access plan that provides healthcare access most uninsured resident aged 18 to 64, regardless of employment, citizenship, or preexisting conditions. In a city of 800,000 people, about some 63,000 people (~8%) use HSF. Journalist Justine Sharrock notes that “Healthy San Francisco isn’t insurance—it’s a system of providers that uses the city’s superb healthcare infrastructure: neighborhood clinics, community hospitals, public health centers, and the state-of-the-art resources of UCSF. It doesn’t replace other government programs, like Medicare or Medi-Cal; it just ensures that people who don’t qualify for them don’t fall through the cracks. To enroll, all you do is show proof of residency and income: The cap is now $54,150, though officials hope to open HSF to all income levels by the end of 2010. Other than a requirement that new participants be uninsured for three months prior to joining the program, there isn’t even a waiting period.”

HSF is, hands down, one of the best healthcare bargains anywhere. For individuals earning less than $10,830 annually, the program is free. For everyone else, basic enrollment is $20 to $150 per month (versus $409 for the average California insurance premium), with rock-bottom copayments: $10 for primary care visits, $200 for hospital admissions, and $5 to $25 for medications.

The main advantage of HSF is that sick people can get affordable health care. The article describes a woman named Sharon Donnelly who has hydrocephalus (i.e., a condition in which fluid develops in her brain) and found it “nearly impossible” to purchase nongroup coverage. Because she could enroll in HSF, she quit her library assistant job and gave up her private coverage. She is extremely satisfied with the care. In fact, the Kaiser Family Foundation found that 94 percent of users expressed satisfaction with HSF. Further, the program is inexpensive for users. “For those earning less $10,830 annually, the program is free. For individuals earning less than $10,830 annually, the program is free. For everyone else, basic enrollment is $20 to $150 per month (versus $409 for the average California insurance premium), with rock-bottom copayments: $10 for primary care visits, $200 for hospital admissions, and $5 to $25 for medications. Additionally, having HSF may attract more young, innovative people to San Francisco. These entrepreneurial people can work in small internet start-ups without worrying about how to get by without health insurance.

The main disadvantage of the plan is that it raises taxes and does not replace a comprehensive insurance plan. Let us return to the case of Sharon Donnelly. The availability of HSF allowed her to quit her job and employer the accompanying employer group plan in order to look for better employment. However, San Francisco taxpayers must subsidize such an expensive patient. In fact, the high cost individuals without access to employer-provided plans are the ones most likely to take up HSF. Small businesses cost are higher in San Francisco, partly because of a pay-or-play mandate which compels businesses to offer health insurance to their employees. “Businesses with 20 or more employees must contribute $1.31 to $1.96 per worker per hour toward some form of healthcare: either private insurance, a flexible spending account that sets aside money for health¬care needs, or the city option, including HSF.” However, the pay-or-play employer contributions to HSF make up only 11% of the program’s cost. No wonder San Francisco’s sales tax is 9.75%.

Additionally, the program only covers you when you’re in the city. If you’re injured outside of San Francisco—even in another Bay Area city such as Oakland or Palo Alto—then you must pay for care out of pocket. The HSF website even warns: “Healthy San Francisco is not insurance. If you have insurance, do not drop it. Insurance is always a better choice.”

Further, treatment can be slow. As part of being in the HSF, the author had to pick up her medications at San Francisco General’s pharmacy which she claims has “confusing or non-existent procedures” and took an hour to get her prescription filled. Although the Ms. Sharrock finds “the sense of camaraderie with the other people in line oddly comforting,” most people more likely believe that this is a serious inconvenience, especially for those with more rigid work schedules.

Finally, the creation of HSF will induce Tiebout sorting. If you am someone who earns $40,000 per year working for a small business in the city who does not offer insurance, living in San Francisco is a great way to get health insurance. However, if you make $200,000 working in the city with an employer-sponsored plan, you may choose to move to a nearby San Mateo county and commute to work. If this occurs, San Francisco will lose out on tax revenue from many of the high wage workers.

Overall, it is clear that individuals who participate in the HSF plan receive significant benefits. Because HSF is not self financing, those who do not participate in the plan will have to subsidize these costs. The effect of migration into/out of San Francisco is ambiguous: having HSF will attract workers but the higher taxes needed to pay for HSF will drive some people away as well. HSF is similar to the current health care reform proposals in that it will expand coverage, but does little to control costs or significantly change the healthcare system.

• The proportion of children without health insurance continued to decline through 2007, though the pace of improvement has slowed.
• Nearly 80 percent of California’s uninsured children are eligible for coverage under either Medi-Cal, Healthy families, or Healthy Kids.
• Medi-Cal and Healthy families are key sources of coverage for children in low-income households that together have closed the coverage gap among families with incomes up to 250 percent of the federal poverty level.
• Healthy Kids programs are also important for children’s coverage. twenty-four counties operate Healthy Kids programs and four others rely on California Kids.
• Children are less likely to have employment-based coverage than adults and are more likely to be enrolled in public programs in California.