Cost

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AHIP claims health reform will increase premiums. Will it really?

October 14, 2009 in Current Events, Health Insurance, Public Policy | No comments

The lobbying group America’s Health Insurance Plans (AHIP) is touting a study by PriceWaterhouseCoopers showing that health reform would increase premiums significantly.  The findings claim that insurance premiums would rise between “26 percent between 2009 and 2013 under the current system and by 40 percent during this same period” if these four health reform provisions are implemented.  The White House disagrees with the analysis and says that the PWC report is cherry-picking these four provisions.  Let’s see who is right.

Below are the reforms PWC analyzes:

  • Insurance regulation (including guaranteed issue requirement, no preexisting condition limits, no rating based on health status, limiting the differential between age bands in rating). In essence, this policy restricts the ability of insurers to price insurance based on an individual’s risk.  Because of this, the insurance companies will have a sicker population of individuals to cover in their pool and thus average premiums will certainly rise.  This does not really mean that prices are rising.  Prices will rise for people who already had insurance, however, for individuals who could not afford insurance in the past because they were too old or too sick, prices will fall.  Because these “high priced” individuals were not counted in the price of insurance (because they never bought it), their price decreases are not factored into the analysis.  In general we have a tradeoff, the average level premiums paid will increases but a higher percentage of people will be able to get insurance.  If you’re young and healthy, you don’t like this provision.  If you’re old and sick, these reforms are great.
  • New minimum benefit requirements. This provision will raise prices.  The tradeoff is that individuals will receive more comprehensive insurance coverage.  The problem is that the government will be choosing the benefits including in the policies, not the customers.  Thus, if the government does a good job of aligning the benefit requirements with individual needs, then this will again be a transfer of money from those who are receive treatment under diseases now covered by the minimum requirements from those who did not need treatment under those requirements.  However, if speicalists’ lobbyists persuade the government to include lots of low value, high cost treatments in the new benefit requirements, then the extra cost will not produce a material amount of additional value for consumers.
  • Weak individual mandate.  If there is a weak individual mandate, as insurance becomes more and more generous and prices rise higher and higher, young healthy individuals will opt-out if there is a weak individual mandate.  Thus, the people who will be left in the insurance pool will be the sick, high cost individuals, and insurance premiums will rise to better reflect the average cost to cover the relevant population.  I am not sure whether the mandate is indeed weak, but this manifestation of adverse selection could be a problem.
  • Excise tax on Cadillac plans.  Thus will drive up cost of course, but just for those who have these ‘cadillac’ plans.  What is a cadillac plan?  How does one determine what medical care is necessary and what is not?  Rather than impose this tax on Cadillac plans, Obama should just end the tax-deductibility of employer-provided health insurance..  Regardless, the tax will drive up health insurance premiums for those with more generous plans.  Ezra Klein reports that PWC does not take into account behavioral changes; taxing Cadillac plans means that fewer people will have this type of insurance.  Thus, cost increases will be smaller.  Nevertheless, a tax will drive up premiums for those that do decide to remain in these more generous plans.
  • Cost shifting. As Medicare and Medicaid becomes less generous, this could increase the cost of care for private health insurance.  However, this is only directly a problem for elderly individuals who have private insurance and Medicare.  Indirectly, the study seems to imply that physicians will raise their prices for private health insurance as Medicare and Medicaid prices drop.  This may or may not happen, but the magnitude of the effect should be very small.  Physicians likely try to maximize their profits currently from private insurance.  If Medicare/Medicaid cut rates, will they try harder to increase profits?  Why weren’t they maximizing profits from the private sector in the first place?  Are the private health insurers claiming that docs will now provide unnecessary services for individuals with private health insurance to increase profits?  The target income hypothesis could motivate this cost shifting, but again, I doubt cost shifting will have a large impact on overall premiums.
  • Fees on insurers, pharmaceutical and medical device companies.  Some portion of these will be passed on to consumers.

Obama’s blog responds with the following:

  • Grandfather policy that assures that if you like the plan you have, you can keep it.  This means that the reforms won’t affect cost in the short run for those who keep their current health insurance plan.  In the long run, however, people will switch plans and the reforms will have an effect.
  • Premium credits.  Premium credits mean that the amount of money the consumer pays will decrease even if the cost of the policy as a whole increases.  Even with premium credits, consumers as a group do pay for the additional premium costs through higher taxes.
  • A tax on insurers that provide the highest cost health plans will contribute to lowering premiums.  This argument does not make any sense. I don’t know of any tax that has worked to reduce prices…ever.
  • Medicare savings from reduced cost and abuse.  One of two things will happen.  There will be little cost savings, because the potentially savings from reducing cost and abuse is small.  Detecting these items is extremely difficult, especially with Medicare’s historically low administrative costs.  Or, there will be a real reduction in cost from decrease Medicare benefits.  Reducing cost significantly by cutting waste is a promise made by every president for the last 30 years and none has shown able to fulfill this promise.

Overall, I am tending to side with the insurance companies on this one.  I can’t verify whether their exact numbers or methods are correct, but many Obama’s reforms will increase cost overall.  Consumers will be more insulated from these cost increases, however, because the government (i.e., taxpayers) will subsidize premiums and expand Medicaid.  The major achievement of Obama’s reform proposals is that he will expand insurance coverage to many more Americans.  The major drawback, as I have pointed out in the past, is that Obama’s reform do little to cut costs.

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Why is healthcare so expensive?

September 11, 2009 in Economics - General | 3 comments

Why is medical care so expensive? It depends on who you ask. Victor Fuchs (1996) polled 46 health economists, 44 economic theorists and 42 practicing physicians. Fuchs asked if they agreed with the following statement: “The primary reason for the increase in the health sector’s share of GDP over the past 30 years is technological change in medicine.”

  • Health Economists: 81% agree,
  • Practicing Physicians: 68% agree,
  • Economic Theorists: 37% agree.

Is technological change the force driving increased health care costs? It depends who you ask.

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Does Hospice Care Reduce Medicare’s cost for end-of-life care?

August 27, 2009 in Medicaid/Medicare | No comments

Historically, Medicare recipients in their final year of life generated about six times the expenditures of the average surviving Medicare enrollee and accounted for almost 30 percent of total program spending. However, in the late 1980s, a confluence of two forces helped increase the use of hospice care among Medicare beneficiaries.

First, in 1984, Medicare instituted the Prospective Payment System (PPS). Hospitals began receiving fixed payments for each admission based on patient diagnosis (DRG). Thus, hospitals had an incentive to move long-term care patients to alternative facilities, such as hospices. Secondly, in 1988, the Duggan v. Bowen court ruling held that the HCFA (now CMS) had to expend their interpretation of home health benefits. Soon after, Medicare began to cover more hospice and home health services. Because of these two forces, the supply of home health services and hospices boomed.

Did the rise in popularity of hospice decrease Medicare’s end-of-life expenditures? A paper by Garber, MaCurdy and McClellan find that the answer is no.

Hospice and home health care did substitute for some inpatient hospital services. Between 1988 and 1995, “the percentage of Medicare recipients who died in an acute hospital fell from about 42 percent to less than 35 percent. The percentage who died without any Medicare-covered services fell much more dramatically, from about 40 percent in 1988 to about 25 percent in 1995.” Hospice care rose from about 2% in 1988 to 10% in 1995.

This growth in the utilization of hospice care was strongest in patients who had chronic diseases such as lung cancer. Predictably, individuals who died of sudden illnesses such as acute myocardial infarction (AMI) or hemorrhagic stroke did not increase their use of hospice care.

However, although the hospice care did substitute for inpatient hospital care expenditures for end-of-life medical continued to increased. “…per-decedent total expenditures in the final month of life rose from about $5,400 in 1988 to $7400 in 1995, expressed in 1995 dollars.” Even though inpatient hospital utilization decreased at the end of life, the cost of this care increased dramatically. For instance, for patients who died of AMI—where inpatient hospitalization at the end of life varied little over time—the cost of care in the final month of life rose by nearly 50 percent in real terms between 1988 and 1995.

In summary, although hospice utilization increased and inpatient hospital care decreased, “the simultaneous rise in the use of hospice and other services, however, meant that the number of days that patients received Medicare-covered services rose between 1988 and 1995.” the net effect of these changes in utilization was an increase in monthly Medicare expenditures before death, rising from about $5,500 in 1988 to more than $7,000 in 1995 (in 1995 dollars).

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Why is Medical Care so expensive?

June 1, 2009 in Medicaid/Medicare, Supply of Medical Services | 1 comment

Why does Medicare spend $7,500 for patients in El Paso, Texas but spends $15,000 for patients in McAllen, Texas?  It McAllen richer? Does McAllen receive better care?  Are patients sicker in McAllen?  

“Come on” the general surgeon finally said. “We all know these arguments are bullshit.  There is overutilization here pure and simple.”  Doctors, he said, were racking up chanrges with extra tests, services, and procedures.

The surgeon came to McAllen in the mid-nineties and since then he said, “the way to practice medicine has changed completely.  Before, it was about how to do a good job. Now it is about ‘How much will you benefit?’”

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When do patients find out how much they will pay for their drugs?

April 8, 2009 in Pharmaceuticals | 2 comments

Consumer Reports writes that “66% of those polled by Consumer Reports said they found out the cost of a drug when they picked it up at the pharmacy counter, while just 4% said they had a conversation with their doctor about the cost of a drug.”  Because doctors do not discuss cost with their patients, these patients often forego necessary medications.

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Prevention and Cost

March 23, 2009 in Prevention | 2 comments

More evidence that although preventive may improve patient health, it may also increase costs.  (See also my post from 12 Feb 2008).

  • Afschin Gandjour (2009) “Aging diseases – do they prevent preventive health care from saving costs?”  Health Economics, v18(3): 355-362.

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Transportation Brokerage Services Lower Health Care Costs

February 10, 2009 in Medicaid/Medicare | No comments

Transportation issues can create significant barriers to accessing quality health care.  If you do not have a car, physically cannot drive, or do not have public transportation where you live, getting to the doctor’s office can be difficult.  Although the federal government mandates that state Medicaid programs provide nonemergency medical transportation services to vulnerable populations, providing this service has been costly and inefficient. 

Kim, Norton and Stearns (2009) examine 2 of the 21 states who have begun using transportation brokerage services to cut down on costs and improve quality.  The authors use a difference-in-difference estimation technique, identified through difference in the timing of the transportation brokerage implementation in Georgia and Kentucky.  The authors find the following results after the implementation of transportation brokerage services:

For asthmatic children and diabetic adults, “the increased use of any health care services accompanied with decreased expenditures conditional on any use led to a decrease in total expenditures by $18 per person per month. Compared with average monthly total health care expenditures by study populations, these results imply a 13 percent decrease in total health care expenditures for children with asthma and 4 percent decrease for adults with diabetes.”

Transportation brokerage services increased the probability patients would use outpatient care, but decreased the probability that they would be so sick that they had to be hospitalized. Although these findings are only for two subpopulations, transportation brokerage services may be an attractive means to reduce hospitalizations and health care costs.

  • Kim, Norton and Stearns (2009) ”Transportation Brokerage Services and Medicaid Beneficiaries’ Access to Care,” Health Services Research, v44(1):145-161.

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Affordability Index

January 15, 2009 in HC Statistics | No comments

Everyone knows that health insurance is getting more and more expensive.  But how can we measure how expensive it is?  A paper by UC-San Diego professors Richard Kronick and Todd Gilmer creates an “affordability index” to measure this.  The affordability index is equal to the per-capita, non-elderly health spending divided by the median income.  In essence, it measures what percentage of our income is being dedicated to health expenses.

The affordability index worsened from 5.6 percent in 1989 to 10.9 percent to 2002.  This lack of affordability has accompanied the contemporaneous rise in the percentage of uninsured individuals.

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Slowing medical CPI may not last

November 13, 2008 in Supply of Medical Services | No comments

The Bureau of Labor Statistics reports that Medical CPI is only 3.2%.  This is less than the 4.1% average inflation rate over the past ten years and the 6.0% average medical inflation rate over the past 30 years.  In most markets, a slowing economy reduces demand and reduces prices (see the recent decline in oil prices).  With the economic slowdown, will medical care get cheaper soon?

Joe Paduda predicts not.  Why?

  1. Insurance.  Less people will have insurance for two reason.  First, as people lose their job, they will also lose their health insurance.  Secondly, as firms profits decline, it is likely that some firms will drop their health insurance benefits. When less people have insurance, this  will lead to more charity care by doctors and less on-time payment by patients.  Doctors will have to raise prices in order to compensate for the increased number of patients who don’t pay their bills.  However, for elective procedures where patients bear most of the cost, physicians may actual decrease costs (see “Red Light Special…“).  
  2. Utilization.  How will the worsening economy affect medical care utilization.  Mr. Paduda claims that as the economy worsens, individuals that still have insurance will ”…get all their elective procedures done, prescriptions filled, and preventive care taken care of while still on their employer’s policy.”  However, the causation could go the other way as well.  If you have a health plan with significant deductibles or coinsurance, you may want to forego medical care in order to save more money (since you just lost your shirt in the stock market).
  3. Retroactive Adverse Selection.  With the economy in a downturn, firms are most likely to layoff younger workers with less seniority.  This means that the insurance pool at the firm will be older and more expensive to serve.  Thus premiums increase which could lead to firms dropping health benefits (see point 1).

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Three Part Series on Health Insurance

October 25, 2008 in Health Insurance | 1 comment

The Los Angeles Times has a three part series looking at the health insurance market in the U.S.

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