The American Interest
Analysis by Walter Russell Mead & Staff
Health Care Shock: Costs Fall

The New York Times has a startling and important story today on American health care, all the more interesting because the implications of the piece, not fully explored by the paper, suggest that reforming health care markets rather than a government takeover could drive costs still lower and put America’s most pressing domestic problem onto a glide path to success.

The conclusions are tentative, the evidence partial, the interpretations controversial and the picture is mixed, but health care economists seem to think that health spending fell more than it “should” have during the recession, and it fell even among those whose ability to get care wasn’t affected by the recession.

One factor economists studied was in some ways the most promising for future reformers: an “explosion of high-deductible plans.” High-deductible plans mean that consumers pay a lower premium but are responsible for their own costs up to a certain amount. People enrolled in these plans cut their spending on health care by an average of 14 percent, reports the Times, and the percentage of the public enrolled in these plans rose from 3 percent in 2006 to 13 percent in 2011.

Bitter blue clingers won’t like to hear it, but this reinforces one of the main talking points of market oriented reformers: that when consumers care about their health costs, costs fall and the entire system responds to incentives to deliver health care more efficiently.

High-deductible plans are a common sense alternative insurance policy that work very well for a lot of people. For single young adults in particular, a high-deductible, catastrophic health care plan makes a lot more sense than conventional coverage.  Such plans allow individuals to insure themselves against catastrophic events at reasonable rates, and as they become common they introduce a powerful form of competition and price signaling to the health care system as a whole.

If the Supreme Court cripples Obamacare, the further spread of high deductible plans offer a way to cut insurance costs for individuals, employers and government and over time they will help us develop a health care system that is the wonder of the world.

Another feature driving down costs: the movement toward “accountable care”, paying providers on the basis of quality rather than quantity of services delivered: it’s not how much you treat your patients, it’s how well those patients do. One of the most positive features of Obamacare is its emphasis on accountable care; but as these studies show, accountable care came in before Obamacare was adopted and could be part of a new, post-Obamacare health regime.  Whatever the court rules, this needs to be part of the future.

Another source of savings is interesting, though not quite as encouraging: old drugs are going generic faster than new ones are coming on line. This drives health costs down as more and more diseases can be treated with cheaper generic drugs, but it also suggests that the pace of pharmaceutical innovation has slowed. That is not surprising, given the truly vicious forces arrayed against the discovery and marketing of new drugs: cumbersome regulatory and testing protocols that, even when followed in good faith, don’t offer drug makers protection from lawsuits; different national testing and licensing regimes all over the world; pirating… the list goes on.

Pharmaceutical innovation will probably return, especially if we adopt laws to promote rather than to punish a pursuit that offers untold benefits not only to those alive today but to our heirs and descendants unto the end of times. But we should also be thinking more, and doing more to promote innovation in service delivery: how to deliver the medical services that we already have more effectively and more cheaply. The promise of accountable care and high-deductible plans is that they stimulate and reward exactly this kind of innovation. We need a health care system that promotes these innovations more effectively than any grand plan can; that means thinking about a market based system with features to protect and cover the poor.

The problems of American health care are not insoluble, nor do they require a single titanic Great Fix. Aligning incentives better, clearing the path for true market forces to work, and meeting the needs of the poor and the chronically ill in humane and responsible ways are not things we can’t do. In interesting ways, some promoted by the left and some by the right, we are doing some of those things now.

Put all these forces together with tort reform to curb the malpractice lottery and the defensive medicine that goes with it, and the rough outlines of a solution to our health care issues begin to appear.

Health, government, and education: those are the spheres of American life where productivity is low, demand is high, and costs have been rising explosively for a generation. Beneath all the polarization, anger and sense of stale dissatisfaction in our society, interesting things are happening in all three spheres as we move away from the limits and constraints of blue model approaches.

 

Published on April 29, 2012 2:40 pm
  • John Burke

    I don’t believe it for a second. The Times is just serving up a talking point for Obama — “We’ve begun to cut the cost of health care” — to wave off a major critique of Obamacare and help him with the long-term debt issue since he has no policies to deal with it. After November, we’ll see the dip was just due to the recession and the rest is baloney, set right when the data is “adjusted.”

  • Brett

    Bitter blue clingers won’t like to hear it, but this reinforces one of the main talking points of market oriented reformers: that when consumers care about their health costs, costs fall and the entire system responds to incentives to deliver health care more efficiently.

    It also means they put off early check-ups and primary care until a merely problematic medical condition becomes a disastrous one. That might work for many young people, but it won’t work for the people who are actually driving health care costs (the older population).

    Put all these forces together with tort reform to curb the malpractice lottery and the defensive medicine that goes with it, and the rough outlines of a solution to our health care issues begin to appear.

    Texas has had tort reform and serious caps on malpractice rewards, yet it hasn’t led to any major drops in health care spending.

  • http://jfxgillis.newsvine.com jfxgillis

    Are you stupid or something?

    ACA is not a government takeover, it IS market reform.

    “Accountable care” is an important aspect of ACA

    High deductible is simply cost-shifting. Patients pay more, insurance companies pay less. People who can’t pay (more and more as deductibles get higher) end up without needed care, or free-riding anyway.

    “Health, government, and education: those are the spheres of American life where productivity is low, demand is high, and costs have been rising explosively for a generation.”

    Gee. I wonder why that is? Oh. Try this: Supply-and-demand curves from Chapter 1, page of Econ 101 may not be the basis for a a First Principle of social organization in every instance. Wow! Whodda thunk?

    Look up “public good” sometime. It’s past that supply-and-demand chart on page 1, so you haven’t gotten to it yet.

  • Richard S

    “The problems of American health care are not insoluable.”
    That depends upon what one thinks of as a problem.

  • thibaud

    “as we move away from the limits and constraints of blue model approaches”

    Actually, with regard to health insurance, we’re moving away from a “model” that is neither “blue”/socialistic nor market-driven, neither humane nor efficient.

    Ours is not a system but a kludge, a Frankenstein monster patched together over decades of half-starts, weird carve-outs, favors and various isolated compromises designed to meet particular actors’ needs – see the wage-inflation averse automakers and the UAW in the early 1950s – while delivering poisoned results for everyone else.

    As Tocqueville pointed out 170 years ago and as the Soviets learned under Gorbachev, there’s nothing more dangerous to a bad system than the attempt to reform it at the edges.

    Perestroika’s the wrong approach. The Rube Goldberg “system” is broken. Best to start over with single payer supplemented by a national private insurance market in which no one is discriminated against for having a “pre-existing condition.”

  • wally

    Nowhere in that article is the word growth mentioned. Lack of growth is the primary problem today!

    Costs fall when there is healthy growth in supply and competition. Obstructionist policies are limiting the number of doctors and medical schools. There are fewer than 140 MD schools in the USA, and only 17,000 doctors graduate each year. We need hundreds more med schools and tens(hundreds?)of thousands more doctors graduating each year. We only have around 800,000 doctors practicing, we need millions more.

    So I say let medical schools be more like businesses. Let them grow and compete, so enrollment skyrockets, while competition and the higher supply brings down tuition costs. More doctors, competing for cash paying patients, will drive down costs as well. Get government out of medicine and let it grow, I say.

  • Douglas Levene

    Re. comment #3. Health care is not a “public good.” Economists define “public goods” as goods or services “that one individual can consume without reducing its availability to another individual and from which no one is excluded.” http://www.investopedia.com/terms/p/public-good.asp#ixzz1tTfknRkS. The classic examples of public goods are national defense and the criminal justice system. National defense is a public good because the fact that it protects you does not reduce its ability to protect me. Nor do you have the ability to exclude me from the protection it provides. The reason that the public pays for public goods is precisely that no individual has the incentive to pay for them because they benefit everyone else and others cannot be excluded from their benefits. The result is that without public support we end up with suboptimal levels of public goods.

    Now think about health care. Do individuals have an incentive to purchase their own? If you hire a doctor to perform a service on you, is he available to perform that service on someone else during the time he is working on you? So obviously health care is not a public good in an economic sense. Now there is a case to be made for public charity for those who cannot afford to purchase health care for themselves. What there is not is a case for treating health care as a public good that the public must pay for in order to ensure optimal levels of production.

  • matt

    We own a small business and our plan has a $5600 deductible. I can tell you that the insurance companies have done the math too. With a high deductible plan you make a bet you don’t have to go to a doctor in the coming year. You do think twice before going to the doctor, so I can see total spending on healthcare coming down. Not sure that is the best way to deliver healthcare however.

    Another factor to consider for decrease in total spending is the explosion of urgent care facilities, replacing primary care physicians, and that is where we go for healthcare now. It is walk-in and way cheaper than a traditional doctor’s office.

    Here is something to consider, from a doctor visit last week. When they find out that you are paying and not the insurance company, they charged me less. There are now 3 tiers of payment in healthcare. Look at the deal in Reagan’s 1st term to “save Medicare.” The government price fixed what Medicare will pay out and it was 20% less than what private insurance pays. That was the true beginning of the inflationary explosion in healthcare. Obamacare would further cut the reimbursement rate and make it worse not better.

    Last but not least, to add to the comment about Texas capping med mal awards. Time will tell, but my doctor friend pays $250,000 in med mal insurances, in LA and if you own a business, which they do, that is $20K a month in AFTER tax dollars, right out the window. Those rates should come down in TX, and that has to help healthcare pricing in my opinion. I’d be interested in seeing the data fro myself

  • a nissen

    Question: are high deductables an animal of the current system or Obama care? For example, would Obama care allow young people to choose an employer-provided high deductable plan, if one were even offered. What about the subsidies, would they encourage or discourage high deductable plans.

    Keep on parsing WRM. and pay attention to tibaud. Our experience pre Medicare, was the same as matt (#8), sans urgent care–didn’t need it and would have spent the money rather than go near one.

    Now what we find shocking is the huge spread between what medical services bill Medicare and what Medicare gives them. The true must lie somewhere in between—surely not a good way to either conduct business or care for people.

  • thibaud

    WRM didn’t read the RAND study that’s the basis for the news about the effect of high-deductible plans. Had he done so, he perhaps would have controlled his inner Pangloss and avoided statements like “when consumers care about their health costs, costs fall and the entire system responds to incentives to deliver health care more efficiently.”

    Here’s RAND:

    “families that shifted to high-deductible plans significantly cut back on preventive health care such as [emphasis added] CHILDHOOD IMMUNIZATIONS and CANCER SCREENINGS.

    “We discovered that costs go down dramatically during the first year people are enrolled in high-deductible health plans, as long as the deductible is at least $1,000 per person,” said Amelia M. Haviland, a study co-author and a statistician at RAND….

    “But we also found concerning reductions in use of preventive care. This suggests people are cutting **both necessary and unnecessary care**….

    “There’s general agreement that the U.S. health care system needs to reduce costs while maintaining quality,” Haviland said. “We found that at least in the short run, high-deductible health plans are providing the desired reduction in costs. But they are also discouraging families from getting the preventive care they need.”

    /end quote

    Oops.

    A big reduction in childhood immunizations and cancer screenings: super.

    Truly, our system is on its way to becoming “the wonder of the world.”

    I know that these are supposedly “Quick Takes,” but maybe WRM should take a minute to peruse the link or links supporting a storyline before he rushes to print his take on it.

  • Hannah

    Hoo-weeeh and I was desperate enough to look up sites like this http://reallycheaphealthinsurance.com/.

    I think this “if doctors and patients have begun to change their behavior in ways that bend the so-called cost curve” is the counter-intuitive mind working. If people don’t expect services to be fully funded they’d try avoiding it at all cost (pun intended).

    But, really, have to read the Times article again just to be sure.

  • http://www.theparenttrigger.com Bruno Behrend

    If “high deductible plans” are “cost shifting,” then they shift the cost where it belongs, and that is on the consumer.

    Any third or single payer system will eventually run into an over-utilization issue.

    The commentators above who lament that people will make decisions differently if paying out of their own pocket seem to forget that this is how things are supposed to be.

    The attempt to cover every health issue with first dollar or low deductible insurance is going to lead to what we have now – rationing by the insurer, or rationing by the government.

    I’d rather ration my own care, thank you. The fact that most Americans want a pie-in-the-sky plan managed by their 1950-style employer is an indicator of how much character has been drained from the culture.

    Insurance should be for the most expensive and catastrophic issues, not for Viagra and birth control coverage.

    Go out and buy home owners insurance that covers lawn mowing and painting services. Why, that should be mandated. Anything less is “cost shifting.”

    Absurd.

  • thibaud

    Hey, if childhood immunizations fall, at least Jenny McCarthy and other Hollywood health experts will be happy.

  • thibaud

    @12 Bruno – “The commentators above who lament that people will make decisions differently if paying out of their own pocket seem to forget that this is how things are supposed to be.”

    Communities where a large number of kids are not immunized is “how things are supposed to be”, eh?

    Delayed treatment of cancer is “how things are supposed to be”? Really?

    You’re just messin’ with us, right?

  • http://jfxgillis.newsvine.com jfxgillis

    Douglas #7:

    I know how “economists” define “public good.”

    A rational health care system, an effective educational system and a properly functional system of government are all public goods even under your definition of “public good.”

    That is because everyone benefits from a healthier, more-educated society even if in any particular instance an individual is more-or-less healthy or more-or-less educated.

    Ol’ Tom Jefferson made that point with particularity about education 200 years ago.

    Of course, I’m not surprised that Walter Russell Mead thinks general ignorance and ill health is preferable. But I don’t understand why such a Blue-State hater doesn’t live in his chosen paradise of Mississippi where the people are uneducated and unhealthy but they do seem to go to church a lot.

  • http://jfxgillis.newsvine.com jfxgillis

    Bruno #12:

    “If ‘high deductible plans’ are ‘cost shifting,’ then they shift the cost where it belongs, and that is on the consumer.”

    That is actually a good point. Except for one tiny detail.

    To regard provision of health care goods and services as merely an act of consumption is a really, REALLY stupid thing to do.

    As I always ask when somone tries to slip that presumption in: What’s the price elasticity of demand for fatal-if-untreated childhood luekemia?

    Even on the individual level, health care isn’t like deciding between Verizon and AT&T for your smartphone plan; multiply it to the macro level and add in systemic effects and thinking about this as mere “consumption” is beyond silly.

  • fiona

    Re the immunizations: every community that I know of requires a minimum of vaccinations to attend a public school. Most of them provide a low cost immunization program that does not require income qualification. More likely those people not providing immunizations to their children are following the “autism is caused by immunization” schtick so prevalent in the blue upper classes.

  • Jacksonian Libertarian

    I have been saying it here for quite some time what we need is High Deductible Health Insurance with Tax Free Heath Savings Accounts, any other form of Health Insurance should be made illegal.

    Only by engaging the Feedback of Competition which forces continuous improvements in Quality, Service, and Price in the Capitalist System, can the Healthcare system be made to work. Patients must feel the pain of paying for their healthcare, or they won’t shop around.

    Example: Patient paid for Lasik eye surgery, which developed from Radial Keratotomy eye surgery a few years ago, and has now dropped in price to a few hundred dollars per eye, or about the cost of a high end pair of prescription eye glasses in a designer frame.

    We will know we have arrived when Doctors and Medical Facilities are advertising their prices and competing for patients.

  • http://www.theparenttrigger.com Bruno Behrend

    Thibaud,

    There is no way to devise a system whereby every bad outcome can be addressed, as your brilliant point on our “kludge” system illustrates.

    I reject the notion that massive numbers of people will delay or deny themselves health care, though there will clearly be instances of it.

    People deny themselves of care now, even though covered, and others have no coverage, and still find a way to get to a doctor.

    Further, there is data indicating the all the early treatment, early warning, and ubiquitous cancer tests are not the boon to health that they are touted to be.

    There is certain level of hubris that comes with the belief that health bureaucracies are better at assessing how we live our lives than we are. There will always be bad outcomes, as we see in our current health system, as well as Canada’s.

    My proposal is that we once again become re-empowered to manage our own care. I submit that any bad outcomes that occur under such circumstances could not possibly be worse than the “kludge” we have now.

    jfxgillis,

    Yes, we must the lament the “fatal if untreated leukemia victim.” The problem is that I don’t see your “public goods” system doing that great a job addressing these nightmare scenarios.

    I also don’t think it’s good policy to create unworkable systems based upon attempting to fix every leukemia and vaccination issue. It can’t be done. Trying to “fix” it at the macro (public good) level merely creates the “kludge” Thibaud laments.

    As smarter versions of blue model supporters, you and Thibaud simply haven’t made the case that your hybrid/blue state systems work.

    As you pool all the cash, and attempt to address every need (real/leukemia or imagined/viagra-birth control), you simply end up with rationed care and shortages.

    As with education, the collectivization of decision making is merely an ideological preference for running things that individuals might screw up. Sadly, your systems don’t eliminate individual screw ups, and they remove the necessary feedback systems that allow individuals to learn from mistakes.

    I’m more than happy to entertain ways for the poor and disadvantaged to have access to health care services that might cure their leukemia or get them vaccinated. I think there are ways to accomplish that with out throwing fiscal sanity and individual autonomy out the window.

  • http://jfxgillis.newsvine.com jfxgillis

    Bruno:

    “As with education, the collectivization of decision making is merely an ideological preference for running things that individuals might screw up.”

    Okay. I’ll accept that arguendo with a slight modification. It’s something that individuals DO screw up. And those screw-ups have collective consequences.

  • Richard Treitel

    Brett @2 is assuming that doctors who pay lower premiums will pass the savings on to their patients. But that is only likely to happen if there is genuine competition with price transparency … one of the iffiest ifs since Iphigeneia.

  • thibaud

    @21 Richard – bingo. Healthcare is a pseudo-market. Without price transparency you do not have consumer choice, and in any case, that choice is at most only marginally relevant to the critical and/or urgent treatments that are the most costly and consequential.

    Then there’s the endemic cost-shifting, the severe restrictions on competition due to the power of the insurance lobby, and the separation of payer and provider at the very heart of the system – if it can be called a system…

  • thibaud

    Bruno – some fair points, esp about rationing, but your defense of Rube Goldberg’s amazing healthcare “system” falls down completely when you argue that scrapping it “throws fiscal sanity and individual autonomy out the window.”

    Ironically, you’ve chosen to build your defense on the most glaring of our kludge’s many failures. It’s bankrupting us – not because we spend so vastly on helping poor people, or because we have wonderful outcomes outside of a few extremely expensive specialty intervention areas, but because this pseudo-market Frankenstein non-system is INEFFICIENT.

    The big joke here is that countries like Sweden leave us in the dust when it comes to sound fiscal management – especially (but not exclusively) in healthcare spending.

    And yet they have excellent outcomes, world-class medical research institutions, top-tier pharma and biotech companies.

    As to autonomy and rationing, no arguments there. But autonomy in the US system depends on who your employer is. If you’re employed by Cisco or AT&T, or you belong to a powerful union such as the UAW or AFSCME, then you have boatloads of autonomy. If you’re laid off by such an employer, or you would like to start your own business, you have very little autonomy.

    Why do we not expand the risk pool to the maximum so as to get even more leverage for the plan purchasers? The above organizations have hundreds of 000s of employees covered by their plans.

    If we expanded Medicare to all American citizens, we’d have hundreds of _000,000s_ covered. It’s ridiculous to suggest that this national risk pool, which is orders of magnitude larger than the largest of our current privately-backed plans, cannot allow for a high degree of flexibility among plans.

    Among other things, single-payer’s huge increase in efficiency would enable the government to help individuals purchase supplemental private insurance via vouchers.

    As to rationing, the dirty, not-so-little secret is that every healthcare system entails rationing. Single payer + optional supplemental private insurance, I believe, is the best way to contain rationing, and also to make the process of rationing more transparent, predictable and fair.

    Right now, we have a roulette game in which healthcare is rationed when people who, through no fault of their own, a) lose their job and b) get sick are suddenly, cruelly, needlessly faced with financial ruin.

    It’s impossible to make Frankenstein into a logical, high-functioning human. We need to start over, with a clear and simple approach that leverages the best aspects of health insurance systems from other advanced industrial democracies.

  • http://www.theparenttrigger.com Bruno Behrend

    Thibaud,

    We don’t disagree too much, and I’m NOT defending our existing system. (though it’s clear that Obamacare makes it worse, IMO)

    I don’t pretend to have every answer (like I do regarding education), but I’m reasonably certain that we can return to more individual autonomy while meeting the needs of the uninsured/un-insurable.

    My preference would be to phase out legacy systems like Soc. Sec., Medicare and Medicaid, and replace the entire American transfer payment scheme with a $13-15,000 stipend for every American. Let them spend the first $5K of that money on a basket of health policies, and healthcare and retirement savings accounts.

    Every hospital, doctor, and service provider would have to be 100% transparent in their pricing. Differential pricing should be discouraged, if not banned outright.

    Frankly, I’m pretty much opposed to “single payer,” but would see no problem with some back-stop system like a “public option.” My stipend idea even allows for this, and a small (1-3%) healthcare premium tax could cover the rest.

    I would ban insurance tied to work (it is the source of the entire mess), and make sure every American knew that they would be responsible for their health care choices.

    Data on best practices, health education, and wellness is literally falling out of the sky, and falling in price.

    Lastly, tie Americans’ tax rate/insurance premiums to their level of obesity, and we will be the healthiest nation in the world in 5-10 years.

  • http://www.theparenttrigger.com Bruno Behrend

    jfxgillis,

    The dumbest hayseed parent is a better arbiter of what their children should learn than any education bureaucracy.

    First, it’s a moral issue, as children should not belong to the state, but to the family/parent unit. While you could undoubtedly shower us with headlines of neglectful parents and outright monsters, these are not the cases upon which to build policy.

    The dirty secret behind Common Core and the 100 year plan to Federalize education, is that it is designed to destroy any type of intellectual/cultural diversity (the only kind that matters), and replace it with stupefied curriculum for the lowest common denominator. Only the rich get out from under such nonsense.

    Second, the existing system has screwed up far more than a few outlier parents possibly could, as evidenced by the bloated expense, and relative mediocrity of our system.

    Give 50 million kids a $10K voucher and turn every school into an independent charter, and SOME schools and SOME parents will blow it.

    Turn $550 billion over to the most corrupt, bloated, ineffective, and greedy government monopoly on the planet, and you put an entire nation at risk – as we are now experiencing.

    With Khan Academy delivering better content to children in an on-line, just in time format, it is time of all of us to question the entire 19th century paradigm of education delivery.

    Create an open market of health care, as well as in education services, and give people the ability to access that market – providing a leg up for the most needy – and we can solve these seemingly intractable problems.

    Adhere to failed legacy systems with patently insane attempts to “fix” them (ObamaCare, Race to the Top/NCLB), and nothing will work as we bankrupt ourselves trying.

  • thibaud

    @24 Bruno – those are good points. You’re right; we don’t disagree on that much, and I’m OK with a public option. Perhaps that term more accurately captures what I mean by “single payer supplemented by optional private insurance.”

    However, given the sad state of American culture and behavior, and the massive increase in the numbers of our underclass, I think there needs to be more compulsion (or “nudging,” as Cass Sunstein would put it) by the state in order to ensure we avoid some really nasty public health outcomes. It horrifies me that there are parents in my kids’ school who are allowed to go without immunizing their kids, for example. aybe the stipend you propose would be tied to certification by the recipient’s doctor that he has had an annual checkup, filled the doctor’s prescriptions, etc.

    Fwiw, I didn’t vote for Obama in part because I saw him as an intellectually lazy, self-regarding empty suit who would NOT press for or build public support for the public option. We now have the worst of both worlds: a half-reform that no one understands and few like, a constitutional mess, and a system that’s still broken.