A Congressional Budget Office (CBO) report released last month brought discouraging news about the prospects for reducing Medicare costs by expanding Medicare demonstration projects – pilot efforts in disease management, coordination of care, and alternative payment systems.

The Affordable Care Act allows the Centers for Medicare and Medicaid to expand these projects on a national scale if they meet either of two standards: reduce costs while maintaining or improving quality of care, or improve quality of care without raising costs. The CBO report examined 10 major projects that have been independently evaluated and found that, by-and-large, they failed on both accounts.

Six out of ten demonstration projects focused on disease management and care coordination. They were designed to facilitate greater efficiency in care services for patients with particularly expensive chronic conditions. These projects utilized nurses and “care managers,” who were responsible for educating patients on caring for themselves at home and then following with up them.

These efforts were mostly ineffective at reducing hospital admission rates. For example, 19 out of 34 programs used in the demonstrations neither decreased nor increased hospital admissions by a substantial margin, defined as 5% or more.

The programs that were highly successful at lowering hospitals admissions shared one characteristic: care managers who had “significant in-person contact” with patients. However, these programs often failed to reduce costs sufficiently enough to offset the extra costs incurred to run them, such as paying for the care managers.

The other four demonstration projects employed value-based payments, alternatives to traditional fee-for-service systems that offer incentives – including physician bonuses — for improving  the quality and efficiency of care rather than the number of services provided. But with one exception, these projects also failed to produce significant savings and had little impact on quality of care outcomes.

The one exception involved heart bypass surgery: lower rates for the surgery were negotiated by offering “bundled payments” to doctors and hospitals for all services associated with the surgery.  This payment system reduced the cost of heart bypass surgery by approximately 10 percent.

The CBO report concludes with a list of several lessons we can glean from its analysis, such as “focus on transitions in care settings,” “use team-based care,” and “target interventions toward high-risk enrollees.” For instance, programs with the fewest hospital admissions tended to smooth transitions between primary care providers and specialists and target intervention methods such as chronic illness education, careful monitoring of health, and the encouragement of adhering to self-care procedures,] to patients who were at high risk for hospital admission.

The takeaway from the CBO report is that the Medicare demonstration projects need better ideas for maintaining quality while reducing health care costs before they can be used in a national scale. I wonder how much doctors, nurses, and other clinicians are consulted for their suggestions. Doctors such as Allan Ropper have expressed frustration with the disconnect between health reform and on-the-ground input from clinical workers. According to Ropper,

[F]ew published perspectives include the view from the factory floor. The usual platitudes of about changing financial incentives, increasing efficiency, and delivering high-quality care sound naïve to clinicians who deal with the imperfections of human nature and the messy effects of illness on patients.

Jim Sabin, who writes the blog Health Care Organizational Ethics, agrees. Among his three suggestions for what Medicare reform “really needs”, he writes:

Improvement-minded physicians, nurses, other health professionals, and administrators are the ones who know how to wring the waste, estimated to be as high as 30%, out of the care system. Competition won’t do it. Vouchers won’t do it. Only motivated health professionals can.

Cameron Waldman is a research assistant at The Hastings Center.

Warren Buffet has argued that the tax rates on the highest income earners should be increased because he pays a lower tax rate than his secretary. I agree that these tax rates should be increased, but not for the reasons that Mr. Buffet cites, which have mostly to do with the preferential tax rate on capital gains and dividends. Rather, I think that the taxes should be raised because these tax payers, myself included, have benefitted unfairly from the Bush tax cuts that were scheduled to expire at the end of 2010, and because increasing revenue is critical to achieving a balanced budget.

Republicans have staunchly refused to raise taxes, arguing that it will threaten our vulnerable economy. They believe that the highest income earners already pay a disproportionate share of our taxes – the top 5% of tax payers pay 59% of our federal income taxes – and to call on them to take on an even larger burden is unfair. Finally, since they want to shrink the size and scope of the government, they think that raising more revenues would be counterproductive. They would rather keep the pressure on spending reductions.

These latter two concerns are mostly a question of values and I don’t expect much, if any, reconciliation on this issue. But, the argument about economic growth is one that can and should be addressed.

The Republican position argues that a tax increase will diminish economic activity and a tax decrease will stimulate the economy, a claim first popularized by the economist Arthur Laffer. While I agree with this proposition in general, there is little to no evidence that it is true with respect to the tax rate on the highest income earners. For the not-mathematically-faint-of-heart, Peter Diamond and Emmanuel Saez argue persuasively that “Very high earnings should be subject to rising marginal tax rates and higher rates than current U.S. policy for top earners.” They suggest that a tax increase on the highest earners would not reduce economic activity.

I find the following chart of maximum tax rates and economic growth helpful in understanding how tax rates affect economic growth.

Source: Citizens for Justice

There was no noticeable effect on GDP when the top rate fell in the 1960s and 1980s, nor in the early 1990s when the top rate increased. Rather, I think that it is pretty clear from this chart that tax rates in this range have not had any effect on economic growth.

What about the assertion that a tax increase on high earners is going to disproportionately affect small business owners, who are the engines of job creation? The reality is that only 3% of business owners, regardless of the size of their companies, report earnings over $250,000. Furthermore, the average tax rate that they pay is only 20%. Are we really to believe that small businesses are going to close up the shop to avoid a couple more percent in taxes? The facts simply don’t support the assertion.

This country faces a serious budget crisis over the next decade. While progress must come from the spending side, most importantly in Medicare and Medicaid, it is delusional to think that we can prevent our debt from growing to dangerous levels without increasing revenues. It is time for the members of Congress to break ranks with their extreme factions and do the right thing for the country.

Frank Trainer, the former director of fixed income at Sanford C. Bernstein & Co., Inc., is a member of the Board of Directors of The Hastings Center.

Republicans have long championed global competitiveness as an important political and economic goal, and the power of market competition as the royal road to get there. But, as two recent studies show, right under our noses are two little-noted facts that tell against that belief, most relevantly in the health reform debate.

One of them is that, by well-accepted standards of international economic competitiveness, every country that does best is also one that has both strong government-run or regulated universal health care systems and comprehensive welfare policies. The one exception to that pattern is the United States. The other fact is that nowhere in the world is there a health care system that controls costs by letting the market have its head.

The September release of the Global Competitiveness Report of the World Economic Forum for 2011–2012 (noted for its annual meeting in Davos), tells the competitiveness story. That report ranks the countries of the world for their competitiveness. Save for the U.S., every one of the top 10 are countries that have just those social policies most despised by American conservatives: Switzerland is first, followed by Sweden, Singapore, Finland, Germany, Denmark, the Netherlands, Japan, and the U.K. The U.S., once ranked first, has now dropped to fifth place. In addition to universal health care programs, the countries that rank highest for global competitiveness have notably strong social and welfare programs.

A recent study in the BMJ Quality and Safety, coauthored by one of us (Elizabeth H. Bradley), showed that the average ratio of social services to health care spending among most industrialized countries is 2:1, compared with 0:9 here. Social spending includes expenditures on housing, employment training, unemployment benefits, old age assistance, social security, and family support services. Furthermore, the countries with a higher ratio of social to health expenditures get better health outcomes, notably higher life expectancies and lower infant and maternal mortality rates. The evidence seems undeniable: good welfare policies produce healthier populations.  

Moreover, to rub it in a bit, those countries have much higher rates of personal taxation than our country, leading to a larger portion of their GDP going to government expenditures in (e.g., in 2008, 47.1 percent for Sweden vs. 26.9 percent for the U.S., and close to 50 percent for many of the other countries).

Representative Paul Ryan has become the Republican leader in singing the praises of competition in health care and the cutting of taxes. His latest foray in late September, following an earlier push for turning the Medicare program into a “premium support” plan – a variant in name only of government vouchers to purchase care – is a move well beyond Medicare reform.  Taking up an idea once pushed by Senator John McCain, Ryan would eliminate tax breaks for employers who pay for their employee’s health care. Employer health care now covers some 60 percent of American workers. The net result would put the Medicare program and most other health care spending directly in the hands of consumers as supposedly savvy shoppers and insurance companies as competitive cost cutters.

It is a good thing he did not use the present competition of American insurers as an example of the power of choice and competition to lower costs. The Kaiser Family Foundation annual study of employer-sponsored health care found a 9 percent increase in family premiums for 2011, only 1 percent to 2 percent of which could traced to the addition of an increased age for young adults to stay on their parent’s insurance policies. The insurers are already competitive but they are also highly ineffective in keeping their prices down (not helped by the underlying costs of an expensive system).

Anyone who has recently priced health insurance plans can not fail to note how little they differ in offering similar benefits for comparable prices. The Federal Employees Health Benefit program, offering over 100 competitive insurer choices to government employees, while it saw a rare 3.8 increase last year in average premium costs, has historically been in the 7 percent annual cost increase range, and sometimes much higher.

More broadly, it is just about impossible to find more than a few examples anywhere in the world where competition has effectively controlled health care costs and generated better outcomes.

The only example market supporters can offer of late is the Medicare part D program for drugs. Competition has worked there, but considerably helped by the relative ease in effectively pressuring drug manufacturers to lower their prices, as can be seen in the great variations in drug prices for the same drug in different countries. And in any case controlling the costs of drugs, a single medical commodity, is a long way from controlling insurance company prices for entire health care systems.

The International Monetary Fund tried competition in developing countries in the 1980s and 1990s and failed. In 2006 the Netherlands led the way in Europe by enhancing the competition of insurance companies to better manage annual cost increases. That policy has also failed.

Most distressing, we continue to spend valuable time and political capital on jiggering the health care system to be more efficient and of higher quality. Many social programs are already languishing or targeted for budget cuts. Creative ideas about reforms of those programs are pushed aside and, ironically, even threatened by an increased focus on health care. A bypassing of social programs and a faith in competition as a cost-reducing, quality-enhancing, strategy is a mixture designed for failure. Health care itself will be hurt as will millions of Americans.

Daniel Callahan, co-editor of the Health Care Cost Monitor,  is President Emeritus of The Hastings Center and the co-author of Medicine and the Market: Equity v. Choice. Elizabeth H. Bradley is a professor of public health at Yale School of Public Health and the director of the Yale Global Health Initiative.

Two recent news items caught my attention, both of which left me wondering what the originators of them could have in mind. One of them was the announcement that Prime Minister Papendreou was calling a national referendum on whether Greece should accept the harsh conditions laid down by the other E.U. nations to deal with that country’s debt problem. The other was a political ad by the AARP calling for a rejection of any cuts to the Medicare and Social Security programs, as part of the U.S. deficit/debt crisis.

They both raised a similar question in my mind: was this a crafty move on their part, knowing they will lose, to simply strengthen their negotiating position? Mr. Papandreou surely knows from the recent Greek riots that a referendum is likely to come out against the E.U, just as the AARP must know that Medicare must be cut, an unpopular move or not.

I will leave the divining of Mr. Panandreou’s motives to E.U. savants, and focus on the AARP. Its leaders can read the papers and economic forecasts as well as anyone else, so what are they up to? To be sure, no government program threatened with a loss of money is happy about that: the common response is to point out all the harms that will result, most of them probably accurate. They then rally supporters, asking them to protest, to write to their congressman, and to rally their constituents to stand firm.

Sometimes these tactics work, but in this case they should not prevail. Even before the deficit/debt problem came to the fore, provoked in part by the recession, it was well known that Medicare would eventually be in big trouble. A combination of the retirement of the baby boom generation and steadily rising health care costs would guarantee that result. The Social Security program has a longer projected period of solvency and that period could be extended in relatively painless ways, such as raising the age of entitlement. But there are few painless possibilities for Medicare, and one would have to be more than a little crazy to take any such ideas with that as its aim seriously.

AARP should not oppose cuts. That is at least foolish and at worst a gross appeal to the elderly to put their interests before other groups and the economic welfare of the country.

Here’s what I suggest they do instead. First, work out a plan for benefit cuts that would make a serious budgetary difference, not just a gentle bending of the cost curve. Make use of direct cuts, cost-effectiveness (not just comparative effectiveness) guidelines, increased means testing, eligibility changes, and a tolerable degree of out-of-pocket copayments and deductibles.

Second, propose a range of comparable cuts to providers, physicians and hospitals most importantly. Doctors would make less, hospitals would make less, and pharmaceutical and device manufacturer would be paid less. Providers in general should feel the pinch equal to that of Medicare beneficiaries.

Third, an overriding aim of this effort would be to go directly after the background costs of American health care. Medicare is expensive because it is embedded in an expensive health care system—which means that Medicare can only be sustainable in the long run if the system as a whole is. The overall point of a revised AARP campaign would be to fight for fairness: the elderly are prepared to take their lumps as long as the lumps for everyone else are just. We are all in this together.

Daniel Callahan is President Emeritus of The Hastings Center and coeditor of the Health Care Cost Monitor He is author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

Epidemics used to be infectious, sweeping across cities and nations, immediately producing violent symptoms in their victims, and often followed promptly by death. They instilled fear in the public and the urgent need for a solution would be unanimous, unquestionably a public health priority. Modern epidemics, on the other hand, tend to be noninfectious and often sneak up slowly. Their symptoms may be mild for years and persist through old age, redefined as “chronic conditions,” until they finally kill their victims. Their incidence and fatality are often preventable.

One such epidemic is diabetes. It’s been creeping up on us for over two decades, and yet any sense of urgency in quashing it is still minimal, although it is growing. Diabetes is the seventh leading cause of death, costing billions of dollars a year, with no sign of slowing down and no sign of a cure. It poses a particular challenge in a time when cuts in health care costs are needed: should it be made an exception to the necessity of cuts in general?

Approximately 19 million Americans are diagnosed with diabetes and nearly 79 million adults are prediabetic, meaning that they have blood glucose levels that are higher than normal but not yet high enough to be diagnosed as diabetic. The annual cost of diabetes is over $218 billion. The American Diabetes Association projects that the cost of diabetes and the number of people with the disease will at least double over the next 25 years.

Obesity, Aging, and Longevity

The diabetes epidemic parallels the obesity epidemic: 90% to 95% of cases of diabetes are type 2, which is caused partly by obesity. About 80% of type 2 diabetes patients are overweight or obese. Experts identify obesity and type 2 diabetes as two of the greatest public health problems of the coming decades in the U.S. and globally.

The prevalence of diabetes also increases with age, and the U.S. population is aging. But it is on the rise among young people, as well, mainly because of obesity.

Until the mid 1990s, children and adolescents rarely developed type 2 diabetes, which had been call “adult-onset” diabetes. Today, the Centers for Disease Control and Prevention estimates that type 2 diabetes is diagnosed in 3,700 children annually. Furthermore, a recent study found that the prevalence of prediabetes is almost 30% among overweight and obese children in high-risk communities across the nation. “High-risk” refers to groups that are disproportionately affected by diabetes, including Hispanics, blacks, and Native Americans.  

The diabetes epidemic is also, in a sense, a reward for effective treatment. People are living longer than ever with diabetes in large part because improved treatments. As the disease progresses, however, patients often need additional medications and increased dosages to keep their blood sugar within safe ranges.  They also develop complications. Diabetes is responsible for more cases of blindness, renal failure, and amputations than any other disease and increases the risk for cardiovascular disease and stroke by two– to fourfold.  

Opportunities for Savings

Comparative effectiveness research at Johns Hopkins determined that metformin, a generic drug that has been around for more than 15 years, is as effective for reducing blood sugar levels as newer drugs, has fewer side effects, and is the cheapest oral medication (35 cents per pill, compared with as much as $6.42 per pill for newer drugs).

Nevertheless, the most significant savings lies in prevention. Type 2 diabetes is largely preventable. The Diabetes Prevention Program, the largest and most diverse prevention trial to date, compared the cost-effectiveness of the metformin and lifestyle intervention in preventing prediabetic adults from developing type 2 diabetes or delaying onset. Lifestyle intervention proved to be the most effective means of preventing diabetes, reducing onset by 58%. Metformin reduced onset by 31%. Researchers determined that the cost of lifestyle intervention implemented in routine clinical practice would be $13,200 per case of diabetes delayed or prevented over three years – a savings of $1,100 compared to medical intervention.

Last January, a study published in Diabetes Care found that 24 million of America’s prediabetics might benefit from pharmacological treatment (in addition to lifestyle modification) to prevent or delay development of diabetes. According to the study, the cost of 24 million new prescriptions of metformin, at current generic rates, would be about $1.15 billion per year, plus related medical expenses such as doctor’s visits and laboratory tests.  

That’s a lot of money, but it’s worth it in the long run. Though other modern epidemics, like cancer and cardiovascular disease, continue to surpass diabetes as the leading causes of death in the U.S., their incidences are on the decline, while the incidence of diabetes is on the rise. The diabetes epidemic is set to hit future generations harder than ever. Experts predict that today’s children could be the first generation to have shorter and less healthy lives than their parents.

In the midst of the economic crisis in health care it may seem implausible to increase health care spending to cover the upfront costs of diabetes prevention such as screening, treating prediabetics, and reducing obesity. The cost of prevention will be substantial, but the nature of the diabetes epidemic warrants this sort of investment because the future, if left to follow the current path, is sure to exceed the cost of prevention by far.

Brittany Rush is a former Hastings Center visiting scholar.

One way or another, the costs of the Medicare program must be cut. That likelihood can of course be averted in part by raising taxes, means testing, increasing copayments and deductibles, and raising the age of eligibility for benefits.

Given the political climate, a significant tax increase is not likely, and even the other possibilities are not likely going to be sufficient. That most dreaded option, by Democrats and Republicans alike, a direct cut in benefits, will be necessary. Can it be done equitably, with everyone sharing the burden in a fair way?

My straight answer is: probably not. The best that might be achieved will be to keep the inequity at a low, tolerable level – that is, insofar as one can speak of what sounds like an oxymoron, a fair inequity. The reasons for that outcome are not hard to find. All major actors in health care have good reasons – in their own eyes – why cuts should not be visited on them, and many of them are engaging in a form of hostage-taking to show the dangers of tampering with their reimbursements or benefits.

Doctors don’t want their Medicare or Medicaid reimbursements cut and threaten that they will stop taking patients in those programs if that happens. That threat has been successful every year for many years in persuading Congress to set aside its long-standing mandate for annual reductions in reimbursements.

Hospitals are no less receptive. Their threat is more indirect: we will not be able to handle the costs of caring for patients, already a problem for many hospitals on the margins of financial solvency.

The elderly and the public by a large majority, as shown consistently by public opinion surveys over a long period of time, do not want benefit cuts (and aren’t enthusiastic about higher taxes either). The implicit threat message to politicians is that they will not be reelected if they go after Medicare. And the elderly of course do not want cuts because they have paid their taxes over the years for it and feel entitled to Medicare benefits.

Even now what they get is often not enough. The elderly spend an average of between $3000 and $10,000 out of pocket a year, many being forced into bankruptcy. The theoretical, even high probability, danger that Medicare itself may eventually be destroyed if costs are not controlled does not have the nasty bite of benefit cuts, which will hurt current Medicare beneficiaries immediately and personally.

Equity would require that each of the affected groups, patients and providers alike, be burdened more or less simultaneously and in ways that, if not perfect, at least does not lead to outrage and a gross sense of unfairness. Why are they picking on us and not everyone else? That would be a reasonable question to ask if some were obviously hit harder than others. Even so, a kind of putative equality – everyone gets cut equally – does not obviate the possibility, even likelihood, that some groups will have greater problems than others in bearing the burden.

If the supercommittee of 12 cannot come to a consensus on balancing tax increases and benefit cuts, that will automatically trigger an across-the-board 2% reduction a year in Medicare payments. That kind of flat cutting, however the cuts will be calculated, is hardly likely to have the nuance necessary to get an equitable balance.

My solution: a parallel private committee, put together at once and bringing representatives of the major groups together, should be organized by one of the health care foundations or the Institute of Medicine. The supercommittee has to make its recommendations, or failure to agree, known by November 23. The parallel committee should have its work done by mid-to-late October to get its findings before the supercommittee while the latter still has time to act on its findings. The charge to the parallel committee should be straightforward: see if you can work out a fair plan to achieve some reasonable agreement on the equitable sharing of the cost burden.

Daniel Callahan, co-editor of the Health Care Cost Monitor, is the author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

It is time to recognize a new fallacy, maybe not a logical fallacy up there with the ad hominem argument but surely, I believe, a political one. It might be termed “the real problem” fallacy. I first thought of it years ago when I told people I was interested in working on ethical and policy problems of medicine, even starting a research center on that topic. “But how can you justify focusing on that,” one person responded almost indignantly, “when the real problem is the proliferation of nuclear weapons?” Another said with identical language that “the real problem” is “the Israeli-Arab conflict.” Well, maybe so, but we just ignored them.

Then, many years later, closer to my own field, Christine Cassel wrote in her 2005 book, Medicare Matters, that “rationing appears unjustifiable when there are abundant opportunities to economize by improving efficiency and effectiveness in the health care system.” Just this year, Judith Feder, a professor at the Georgetown Public Policy Institute, said that it was wrong to focus on entitlement reform when “the problem is overall health care spending.” And so on: the real problem, a chorus of discordant cost control voices cry out, with Medicare is fee-for-service medicine, or background costs, or great regional variations in cost, or commercialized American medicine; or excessive use of technology.  

Actually, one of them may indeed be the real problem (and my vote would go to the underlying costs of the system), but then why do I call it a fallacy? Its implication is that we have to solve a long-term underlying problem before we take on another one here and now before our eyes. Medicare has a critical cost problem right in front of us. We cannot wait until the almost intractable 50-year-year-old problem of waste and inefficiency has been vanquished. And we can hardly put off entitlement reform until we have done away with “excessive overall spending,” which could take generation or more to achieve, if at all.

Our health care system can be likened to a large and ailing schooner at sea in a storm. The wooden hull is rotting, dangerously taking on water, the weight of which is making the sails ineffective. The sails, as it turns out, are in shreds and must be repaired if the ship is to make it to port where the hull can be repaired. But patching the hull requires that men who should be working on the sails must have the boat stopped so they can swim under the hull to do the necessary work. Meanwhile, it is rumored that the nearest port may not be able to fix hulls or provide new sails – but that a much farther port, dangerously far, is well– equipped to do so. The consensus of the crew is that the real problem is the company that made such a boat, with a poor hull and bad sails; it should be sued.

The captain responds that the crew may well be right, but that is beside the point: the boat is sinking. Medicare is no less sinking. Whatever the underlying real problems, its reform must be begin at once, and by the most direct means possible (no falling back on bending the curve): cutting benefits and raising taxes.

Daniel Callahan, co-editor of the Health Care Cost Monitor, is the author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

In Defense of the IPAB

The independent payment review board has been criticized for being a rationing tool, a form of “central planning” that will misappropriate funds, and even a death sentence to our health care system. Jonathan Cohn, in The Health Care Blog, praises it as a way to reduce spending and manage care more efficiently, partly by shifting decision-making power from lobbyists to scientists. The program is not perfect, he writes, and could be improved. At the very least, the dialogue around the IPAB should focus on how to develop it, not whether or not to eliminate it.

Physicians’ Role in Cost Control

James Rickert, an orthopedic surgeon, calls for physicians to make some sacrifices to help mitigate the increasing health care costs. Writing in the Health Affairs blog, he says that physicians, especially specialists, must be willing to take cuts in their income. Doctors are more knowledgeable about which types of treatments are most necessary and cost-effective, and they need to get more involved in these types of decisions. 

Pennywise and Pound Foolish?

It makes sense: cutting spending is the way to cut costs and provide long-term stability to budgets. But Joe Flower, writing in The Health Care Blog, argues that decreasing spending doesn’t always improve the bottom line, and often increases costs. He calls for reducing health care costs by improving efficiency across the board and eliminating unnecessary procedures, treatments, and tests.

Cost Control Trends

Six leading policy and industry experts weigh in on the most interesting ideas for cutting back on health costs. Some recent models include vigorous consolidation, better coordination of care, new financial arrangements among health care providers, and greater use of medical data to identify practices that lower costs.

Michael Gallinari is an intern at The Hastings Center.

The dictionary definition of the word “funk” is this: “cowering fear; state of fright.” That is exactly the right word to characterize the failure of Congress and both political parties to confront the Medicare problem directly in the deficit debate. It is true that Paul Ryan offered his Republican premium support plan, but it gained little traction. And a bit oddly, the Democrats acted as if its ACA legislation, which includes a strategy for controlling costs, had never been passed, seeming to agree with Republicans that a fresh start was needed. Despite the constant refrain that “every thing should be put on the table,” everything hasn’t been. Reform of Medicare, the most expensive entitlement program at some $535 billion a year, obviously brings on fear and fright.

Why is that? It is useful to review the reasons for that cowering. They implicate the public, health care industries, many physician groups, the AARP, and politicians who would like to get re-elected. Putting them together one can speak of a perfect funk, hard to expunge. In no special priority, here is my list.

Public opinion and the entitlement promise. Some 60% of the public in a July public opinion poll said they did not want “any reduction” of Medicare benefits, and other surveys showed an even greater resistance. Only 23% would accept a tax increase, though 50% would tolerate it for the wealthy. Clearly the public likes Medicare as a government program, and that affirmation is intensified by the belief that an entitlement promise was made by Congress in 1965, not to be taken way.

Background costs of Medicare. Not fully grasped, I suspect, is that Medicare costs are mainly a function of the background costs of the whole health care system, not inefficiency and waste. Medicare is a government funded program delivered through private health care, and the costs of purchasing that care are high. The administrative costs of Medicare are lower than those of private insurers, but hardly enough to nullify the pervasive high cost of private care. Medicare costs can not be controlled without controlling all those external costs.

New technologies and intensified use of old ones account for about 50% of annual cost increases, reflecting the culture of America medicine, and with full public support. It has been unsettling that medical progress and technological innovation, which have been enormously beneficial for elderly individuals, can at the same time be unaffordable for them taken together as Medicare beneficiaries. Yes, many seem to think, there is an economic problem with the program, but if a medical treatment is beneficial, how could we even think of rationing it? And the much beloved research enterprise drives costs up far more often them decreasing them.

Ganging up on the ACA legislation. Every decisive cost control feature of the legislation has been hamstrung or attacked by shifting and well-heeled interest coalitions: physician groups, the drug and device industries, private insurers, hospital managers, and patient interest groups. They have managed to subvert comparative effectiveness research by denying use of its research for treatment guidelines or even making recommendations (harmful to the doctor-patient relationship and technological innovation). They have called for eliminating the Independent Advisory Payment Commission (it will take power from Congress and put it in the hands of unelected experts). Some of the same groups have since 1965 successfully opposed allowing any use of cost as a criterion for Medicare benefit decisions. That is one reason why Medicare supports cancer treatments that can run from $25,000 a year to over $100,000 for only a few extra months of survival time, and why even those who administer the program will admit their frustration about the limits Congress places on them.  

Rejection of government-run-or-regulated health care. Public opinion polls have shown for decades a divided electorate on whether health care should tilt toward a market– or government-dominated system. But both legislators and the public have refused to take a serious look at the Canadian and European universal care systems. Why is it that their success in getting better health outcomes at much lower costs and better public support has been ignored? Their annual budgets, greater controls on the use of medical technologies, negotiated physician fees and salaries, and price controls on drugs, could work for Medicare. But consumer choice and provider competition are taken by conservatives to be the best way to get lower costs, even though there is no significant evidence anywhere that such a combination in fact works to do so.

Inability to cope with the costs of chronic disease. Some 65% of Medicare costs are incurred by those beneficiaries with chronic diseases, some 20% of its beneficiaries, and about 25% with those in the last year of life. Few good ways have been found to control those costs or to deploy ways of measuring the comparative or cost effectiveness of their treatment. Any effort to cut those costs will inevitably draw public and legislative attention. They would involve some of our most vulnerable citizens, our failing parents and grandparents. The choices would be difficult.

That difficulty can be well imagined simply by trying to make sense of expensive end-of-life care, often offered as an obvious focal point. The Medicare records that yielded the 25% figure make a point of emphasizing that they are retrospective data, which can be misleading; that is, it is not known whether those who died were known in advance to be dying when they came in for treatment and thus whether money was wasted on them. One study found that the highest costs are incurred by those who come in for treatment expected to be efficacious – but whose course of it turns out instead to be downhill as new, unexpected problems emerge. The hardest question is to judge when someone is passing from living to dying, but whose death might be stalled, poor but not impossible odds.

In any case, if overt rationing is ever accepted, the care of the chronically ill, dying or not, will be an obvious focal point. But of course targeting the critically elderly patient for special attention could provoke outrage. What politician would tell his elderly constituents that he openly supports such a policy? Legislators deserve at least some sympathy for being fearful of taking on Medicare. But not enough to relieve them of their duty to do so.

Daniel Callahan, co-editor of the Health Care Cost Monitor, is the author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

Still mired in the slow recovery from the recession, job growth has been distressingly anemic. One of the few exceptions is in health care, which has added new jobs for many months now. I suppose that, from one perspective – the need for general employment expansion – that is good news. But is it good news for health care? Not if the main need is to control the steady and destructive rise in health care costs. The system should be contracting, not growing, or at least remaining stationary.

The role of health care in job creation has always been touted by the drug and device industries. Sometimes, the implication seems to be that their economic contribution is only marginally less important than their health benefits. A recent interview in Kaiser Health News with John Castellani, chief officer for PhRMA, is a good example of that emphasis. Noting that PhRMA opposes a Democratic proposal that would require drug manufacturers to pay rebates to Medicare for beneficiaries who qualify for both Medicare and Medicaid, he said that would “do serious harm … to (pharmaceutical) jobs and we oppose it.” Moreover, he added, there “would be the risk” that drug companies would begin to move their operations overseas.

He also mentioned another long-standing industry contention, that its technological innovation is expensive – true enough (though just how much has been long debated). “If you don’t want to pay for the innovation,” he said, “then you have to say to American patients, we have invented everything that we can invent … [but] there are still discoveries out there.”

There will always be new possibilities. Yet the enduring themes of job creation and the need for constant innovation are two weapons wielded by industry to work against many important reform efforts over the years. They include joining together with some physician groups to successfully persuade Congress since 1965 to refuse costs to be considered in determining Medicare benefits. Most recently, industry and physicians were effective in persuading Congress to deny the use of comparative effectiveness research results for the creation of physician practice guidelines or even for making recommendations. The doctors fear harm to what the AMA has called the “sacred doctor-patient relationship” and industry worries about a slippery slope to dreaded price controls.

I have always wondered, however, whether a slowdown in innovation, or some cost-conscious barriers to the introduction of new drugs and devices, would be all that harmful. Castellani notes that “we [drugs] are only about 10% of total health care costs, we are 40% of out-of-pocket expenses.” People think, he says, “that we are the most expensive part of health care, when in fact we may have the most value and be much less expensive than acute care.”

Maybe so, but that 40% figure is an important part of the financial burden of Medicare beneficiaries, who average somewhere between $3,000 and $5,000 for overall out-of-pocket medical expenses. That situation will almost certainly become worse as the baby boomers retire and their retirement resources, projected to decline, worsen.

As for innovation, the distinction between needs and wants becomes fuzzy. Our greatest need at present, I would argue, is to more fairly and empathetically distribute our already ample resources, not to continue adding constant innovations regardless of costs. The European universal care systems are more cautious in introducing new technologies and in making use of old ones; and of course they use price controls. Nonetheless, they get better health outcomes and spend much less money in the process. But then they do not look to health care as a source of new jobs.

Somebody, patients that is, has to pay the health care workers their new salaries in this country. The Europeans caught on to that reality long ago. We could use some of those innovative insights here.

Daniel Callahan, co-editor of the Health Care Cost Monitor, is the author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

This post is about policy dysfunction, not erectile dysfunction.

Medicare reform is so complicated that it’s easy to get lost in arcane minutia. But if we take a big picture view of the two main approaches to containing Medicare costs — the Sustainable Growth Rate (SGR) formula and Paul Ryan’s voucher proposal — we see the cost problem for what it is — a symptom of policy dysfunction.

Both approaches embody a basic truth. The U.S. must get a grip on Medicare costs, and accomplishing that won’t happen without setting limits. The SGR does that by pinning the tail on physician fees. If per capita Medicare costs rise too much, fees have to come down correspondingly. The Ryan plan pins the tail on Medicare recipients — if costs rise faster than the vouchers they receive, it’s their problem to solve.

Both approaches deserve respect for not indulging in the delusion that “waste, fraud and abuse” will do the job. But both are profoundly wrong.

It’s not primarily physicians’ fees that drive Medicare costs. It’s the services we physicians order. Lowering fees across the board puts prudent and profligate physicians in the same boat. The SGR is a make-believe “solution” that Congress repeals every time the formula prescribes a massive fee reduction.

The Ryan plan is similarly misguided. Medicare recipients aren’t “consumers” of health care. When shopping for clothes we (I’m Medicare eligible) can choose between Walmart and Nieman Marcus. That’s consumerism. But when cancer or heart disease occur we don’t “shop” at a cancer or cardiac mall — we seek doctors and nurses we trust and put ourselves in their hands. The negative reaction to Ryan’s proposal shows that U.S. society won’t accept putting the risk of cost overruns onto Medicare recipients alone any more than Congress accepts putting that risk uniquely onto physicians.

The SGR and the Ryan plan both try to solve a cultural and ethical problem with a simple technical fix. In part because of our reluctance to accept the inevitability of aging, decline, and death, and in part because the medical-industrial complex has sold us on the idea that ever more medical intervention will make us younger, healthier and happier, we haven’t yet accepted the fact that we (“we” = physicians, patients and the wider public) must collaboratively manage Medicare (and the entire health system) in a more parsimonious, evidence-based manner.

The fact that a wise and compassionate proposal to pay doctors for visits in which they discuss their patients’ goals triggered an eruption about “death panels” demonstrates the depth of the cultural and ethical challenge. Sarah Palin and Newt Gingrich almost certainly knew they were lying in crying “death panel,” but the fact that the public responded as strongly as it did shows that the very idea of discussing values about the goals of health care is seen, by many, as an assault on life itself.

The result of Medicare policy dysfunction is a program that too often harms seniors by overtreatment, creates ever-increasing out-of-pocket costs for Medicare recipients, and robs the next generation of opportunities they would otherwise have.

Medicare reforms that are guided by clinical evidence ethical reflection will better serve seniors and society. I continue to believe that advocacy for this approach from within the community of Medicare recipients will embolden political leaders to be more courageous. That kind of advocacy may serve as Viagra for policy dysfunction!

Jim Sabin, M.D., is a clinical professor in the departments of population medicine and psychiatry at Harvard Medical School. He is coauthor of Setting Limits Fairly: Learning to Share Resources for Health. This post originally appeared on his blog, Health Care Organizational Ethics.

“It’s the prices, stupid,” is how Princeton health economist Uwe Reinhardt and colleagues explained a number of years ago why health care costs are so high in the United States. And when we try to identify the drivers of health care costs by comparing the U.S. to other developed countries, we find once again that prices are the key: a report by the McKinsey Global Institute comparing the U.S. to 13 other developed countries found that in every other nation, patients have more frequent hospitalizations, see physicians more often, and use more pharmaceuticals than we do. But our costs are off the charts because our hospitals charge more, our specialists earn more, and our drugs cost more. The latest findings from Massachusetts about the major drivers of health care costs tell a similar story.

As is well-known, Massachusetts passed legislation in 2006 promoting universal health care coverage in the state, using the now infamous “mandate” to require individuals to buy insurance or face a penalty. What is less well-known is that Massachusetts passed additional legislation in 2008 seeking to promote cost containment. The main strategy was to improve market efficiency by increasing transparency. The idea was that hospitals, insurance companies, and physician groups would all be able to negotiate more effectively if cost and quality data were public.

In theory, this knowledge would allow them to overcome the leverage that has historically accrued to groups with a large market share. Moreover, standardized reporting of costs, prices, and quality would stimulate consumers to make “value-based purchasing decisions.”

A new report released by the Massachusetts Office of the Attorney General concludes that the strategy is not working as well as was hoped. The reason is that in Massachusetts, as in the rest of the U.S. – and unlike the rest of the world – government does not hold down prices. As a RAND analysis of promising approaches to controlling health care spending argued, “all savings represent lost income for somebody and affected stakeholders have successfully blocked, weakened, or circumvented past attempts at cost control.”

The most striking finding in the Massachusetts report is the wide variation in payments made by insurers to providers, variation not explained by differences in quality. All six major insurers in the state negotiated very different reimbursements for the physician groups and hospitals with which they established contracts. Each insurer reimbursed its highest paid physician group between 1.5 and 2.3 times what it gave its lowest paid physician group. Insurers’ payments to the highest price hospitals were 1.7 to 3 times their payments to the lowest priced hospitals.

Even when a global budget was used, as in the Blue Cross Blue Shield of Massachusetts “Alternative Quality Contract,” its version of an accountable care organization, total medical spending rose by an average of 10% in one year. At the same time, the average total medical expenditures among providers reimbursed by BCBS who did not participate in the Alternative Quality Contract rose only 1.7%. In large part, the discrepancy was due to the higher payments made by BCBS to AQC providers.

The report rightly concludes that global budgeting alone will not solve the cost problem – encouraging physician groups, hospitals, nursing homes, and other health care providers to risk share and to operate within a fixed budget is a potentially good idea, but it won’t work if the budget is sufficiently high that physicians have little incentive to change utilization patterns.

The Massachusetts report stubbornly assumes that the fix for rising heath care costs is to be found in the elimination of market dysfunction. But as others have argued, the “laws of supply and demand function very differently in health care than in other industries.”  When patients are insured, demand is notoriously price-insensitive. Patients make decisions based on the professional expertise of their physicians, not simply on price. Since physicians determine the type and quantity of services offered, and since they do not have to pay for those services, they are influenced by advertising and the culture of medicine – as well as by scientific evidence. Not surprisingly, suppliers tend to innovate at the high end of the market, creating ever more expensive technologies of marginal benefit, such as left ventricular assist devices for end stage heart failure or positron emission tomography scanners to assess the progress of cancer, rather than low cost preventive innovations.

In other developed countries, recognizing the special nature of health care, government plays a role in restraining costs by constraining prices. Massachusetts has half-heartedly come to the same conclusion, arguing that there should be statutory restrictions on how much prices may vary for comparable services. The attorney general adamantly insists it is not recommending rate setting for hospitals and physician groups but rather a “competitive market-based approach balanced with limited government intervention” that will be in effect until “the corrective effects of tiered and limited network products can improve market function.”

What are these new health insurance products that Massachusetts is hoping will solve the cost problem? Tiered products give purchasers of health insurance the option to select a plan with lower copays for choosing “efficient” physicians or hospitals. In addition, the premium for such a plan is lower than premiums for non-tiered plans. Limited network plans restrict patients to use of those more efficient physicians or hospitals. The assumption is that this approach will overcome the historical price-insensitivity of demand for health care services.

It is far from clear that these products will have the desired effect. The tiers are based on crude assessments of physician and hospital “efficiency” and fail to recognize that part of the high cost of medical care is due to across-the-board over-utilization of expensive technology. But what is clear is that the place to start is by restraining hospital and physician charges.

Muriel R. Gillick, MD, is a geriatrician and palliative care physician at Harvard Vanguard Medical Associates in Boston and a professor of population medicine at Harvard Medical School. She is the author of The Denial of Aging: Perpetual Youth, Eternal Life, and other Dangerous Fantasies and, most recently, Once They Had a Country: Two Teenage Refugees in the Second World War. mgillick@​partners.​org; 617–509‑9977.

Do We Really Want to Control Health Care Spending?

While there is bipartisan agreement in U.S. politics about the need to curb health care costs, neither party has come up with a proposal that is likely to achieve this goal, writes Hastings Center Scholar Michael Gusmano in the Journal of Health Politics, Policy and Law. Some economists even call into question the widely accepted notion that high U.S. health care spending is unaffordable in the long run. Furthermore, Americans overwhelmingly believe that the U.S. tradition of focusing on high-tech and high-cost health care gives it the best system in the world. If Americans really believe this and are not simply misinformed, Gusmano argues, then our political system, by refusing to address this public interest, is failing to encourage a crucial public debate about these issues. 

 $17 Billion Lost to Insurers’ Errors

The largest commercial health insurers process almost one in five claims erroneously, at a cost of $17 billion annually, according to the AMA’s annual National Health Insurer Report Card. Maggie Mahar of Health Beat shares her own story of coverage denials, insurance hassles, and collection agency threats. The insurer report card found that Medicare has the lowest claims error rate. Digging into the reasons, Mahar cites two. Medicare has a standardized claims coding system, while private insurers use several systems. In addition, Medicare uses electronic money transfers, while other insurers are still using checks. Such inefficient payment and claim processing strategies are responsible for more coverage denials than those based on judgments of medical necessity, according to the Government Accountability Office.

Health Care Costs 101

The California Health Care Foundation recently released Health Care Costs 101, a report tracking national health spending over the past half century, including predictions for the next decade. Some intriguing findings include:

• The annual amount spent per person on health care increased 76% between 1999 and 2009.
• Public health activities and home health care each accounted for only 3% of total health spending in 2009, while administration costs exceeded both combined.
• Households and the federal government paid the largest share of the $2.5 trillion bill – 28% and 27%, respectively.

 Health Care Costs Driving Up Tuition

Tennessee Governor Bill Haslam ascribed the recent $800-a-year spike in the tuition for the University of Tennessee at Knoxville to rising health care costs. For decades, as health care spending has steadily increased, the percentage of Tennessee’s state budget allocated to universities has consistently fallen. This year is the first in which student payments account for a larger part of the tuition than do state appropriations.  This issue is neither new nor unique to Tennessee; CNN in 2006 attributed a major portion of the nationwide increase in state university tuition to health care costs. Health costs are also taking up greater portions of public K-12 school budgets and decreasing the quality of services.

Written by Brittany Rush, a visiting scholar, and Michael Gallinari, an intern, at The Hastings Center.

The surprise victory of a Democrat in a House race in upstate New York a few weeks ago was widely taken to be a rebuff to the Paul Ryan plan to reform the Medicare program. For Democrats the take-away message seemed to be that opposition to Medicare reform is now a political winner, just as support for it is a loser. But the Democrats may have trapped themselves in a corner that sooner or later they will have to get out of, and made all the worse by short-term delaying tactics.

The current debate on raising the national debt ceiling will offer some insight into the future Medicare struggle. The strategy of the Democrats, led by Vice President Biden, appears to be that of finding ways to cut Medicare expenses, but not by cutting benefits. Representative Nancy Pelosi has said that she will “never support any arrangement that reduced benefits for Medicare – absolutely not,” and other Democrats are joining her on this stand. But let us assume that, save for minor Medicare cuts, Biden’s negotiations are successful, the debt ceiling is raised, and benefits are not seriously targeted. Where will that leave the Democrats in the future?

Here’s the fix they will find themselves in. They know Medicare’s annual cost increase must be seriously curbed for the program’s own survival, and they know there is also the added pressure of curbing the rise of the national deficit/debt. They surely know as well that every reputable policy analysts has for years judged that the cost of Medicare can only be dealt with by a significant rise in taxes or a cut in benefits or some combination of both.

They also know, as do the Republicans, that there is little public support for benefit cuts, with hardly more than 20% to 25% in favor of them. As for raising taxes the only kind with any support is higher taxes for the rich. Nor is there any likelihood of a shift in those figures in the next few years. The economic crisis will make it hard to raise taxes and the popularity of Medicare – as well as the sense of permanent entitlement it has encouraged over the years – will make it hard to cut benefits.

Drew Altman, president of the Kaiser Family Foundation, recently underscored a highly relevant reason why Medicare is so sacrosanct, what he calls its “multiplier effect.” By that term he means the vast number of people who are both directly and indirectly affected by the program, by direct benefits and the indirect impact on families of those benefits. Medicare, he notes, touched the “lives of more than 125 million Americans” in 2008: 75 million children of beneficiaries, 4 million spouses, 8 million disabled under the age of 65 (and their supportive families), and some 38 million beneficiaries over 65. That is a huge constituency, most of whom would be terrorized by any sharp benefit cuts.

And that’s not all. There is also a disturbing recent development, that of some weakening of support among Democrats for the Independent Payment Advisory Board, one of the few features of the Affordable Care Act that would directly and powerfully hold down Medicare cost escalation. Another obstacle is the pre-ACA legislation calling for a steady reduction in physician reimbursements, known as the “doc fix.” But many physicians have made clear that, should such a thing happen, they simply would not take on Medicare patients. They are, in effect, holding the present Medicare program hostage to the status quo.

Both parties, it is said, are now looking forward to the 2012 elections, hoping their present tactics put them in a commanding position. Republicans have already been burned by supporting the Ryan plan, which has gained weak voter support. Democrats have gloated about that victory, but Nancy Pelosi’s adamant stand against a cut in benefits surely showed that Democrats got the deeper message, not lost on their adversaries either: don’t mess with Medicare. The tactic of choice now for both sides is to stall for time and make gestures toward changing Medicare, but in a way that does not alienate seniors and the public.

Unless the economy greatly improves, President Obama will go into the election in a weak position, one hardly conducive to campaigning on a platform that includes Medicare cuts. The Democrat resistance to such cuts will make it all the harder to do so later. He should be taking the first steps now to avoid the appearance of weakness and vacillation in 2012, should he decide on a strong stand on Medicare reform as a candidate for reelection. If he does not, then the Medicare program will be in even worse danger than at present.

Obama can, however, have one advantage if he decides on a course of boldness. The Republicans have bet on the Ryan plan, a bet that is not paying off. They have nothing better to offer at the moment, and no signs that they will.

Daniel Callahan, co-editor of the Health Care Cost Monitor, is the author most recently of Taming the Beloved Beast: How Medical Technology Costs are Destroying Our Health Care System.

Taxes: U.S. Versus Other Countries

Bruce Bartlett of The New York Times Economix blog reports that when compared to members of the Organization for Economic Cooperation and Development, the United States pays significantly less in taxes as a percentage of GDP. But when the amount that Americans pay out of pocket for health care is added to their total tax expenditures, the U.S. creeps much closer to what other developed nations spend on taxes and health care as a percentage of GDP. Bartlett asserts that Europeans are simply paying for their health care premiums in the form of taxes, while Americans pay out of pocket or in the form of lower wages from their employers.

Medicare Payment Imbalance

A report from the Institute of Medicine (IOM) recommends major changes in Medicare’s regional distribution of payments. Medicare bases its payments to doctors and hospitals on different geographic locations and estimates of how costly they are. But these estimates are flawed for a variety of reasons, the IOM found, among them that the designated regions are so broad that they are economically diverse. This is the first of two reports by the IOM to help Medicare improve the fairness of its payment system.

Medicaid Cuts

Healthcare Economist predicts the worst is yet to come for Medicaid. Despite rising enrollment in recent years, state spending on Medicaid has dropped 13.2% over the past three years. Federal financial support authorized by the American Recovery and Reinvestment Act of 2009 is set to expire on June 30^th, and yet the new health reform law requires expanded Medicaid coverage and spending starting in 2014. With these changes, the federal government will struggle to expand services, maintain quality, and slow the growth of health care spending. It will need to control costs by reducing utilization of services deemed to be either unnecessary or not cost effective, such as MRI for minor injury.

Making Doctors Cost-Conscious

The fundamental cause of uncontrollable inflation in U.S. health care costs is the disconnect between “the true consumers of health care dollars,” the doctors ordering the tests and treatments, and “the ones that pay up,” writes Ian Metzler, a Harvard medical student, in The Health Care Blog. Studies have shown that simply including price tags on laboratory tests and radiological imaging does not influence physician behavior, so Metzler calls for “a culture shift in how medicine is practiced and future generations of doctors are trained” if we wish to hold down increasing costs in health care.

Health Savings Accounts: Mixed Results

A recent RAND study found that people with health savings accounts consume less care and spend an average of 14% less on health care costs. Results also showed “concerning reductions in use of preventive care.” Participants who shifted to high-deductible plans cut back on services like childhood immunizations and cancer screenings. Some researchers speculate that the participants might not have understood that their high-deductible plans waived the need to pay a deductible when receiving such care.

Written by Brittany Rush, a visiting scholar at The Hastings Center; Michael Gallinari, an intern; and Ross White, a research assistant.

The federal government is in turmoil as politicians from both parties fight over the best way to reduce record-setting budget deficits. Meanwhile, most states are facing budget problems of their own, with balanced budget amendments and anti-tax sentiment forcing legislators to find places to trim budgets that have already been trimmed several years in a row.

At the center of these budget problems is health care. Medicaid expenditures place a strain on both federal and state budgets, but states feel the pinch even more strongly. Medicaid accounts for a far larger portion of state expenditures than federal, and the states are forced to balance budgets in ways the federal government is not.

So Medicaid has become a huge problem for most states. But fortunately there is a solution. It is time to federalize Medicaid. In the short run, this move will exacerbate federal budget problems. But federalization is the only way to provide fair and adequate health care coverage to the neediest members of our great country. And in the long run, the federal government will have no choice but to find a way to control Medicaid costs, and is likely to do so in ways that are fairer than the states would do on their own.

Here are half a dozen reasons why I think we should federalize Medicaid.

1. It will save state budgets.

Most states have a very difficult time controlling Medicaid costs. For starters, the biggest driver of Medicaid costs is the number of people who qualify for coverage, a factor that depends on economic forces beyond government control. When the economy turns south, the number of poor people inevitably rises. In addition, the Affordable Care Act now requires all states to offer Medicaid to anyone at or below 133% of the federal poverty limit. That means states can’t trim their budgets by adjusting Medicaid eligibility requirements. If Medicaid were federalized, the entire costs of the program would eventually be borne by the federal government, and state budgets would no longer have to be balanced on the backs of poor people with serious illness.

2. Saving state budgets is good policy.

States play a crucial role in many of the most popular and important government services, like schooling, firefighting, and police work. Medicaid expenditures have put huge pressure on all these services, to the point where many localities are cutting them. Take schools for example. In most states, teacher/student ratios are declining rapidly and funding for things like school sports is dropping at the same time as our children’s waistlines are expanding. Not a good combination.

3. Federalization will promote fairness.

Forced to balance their budgets, states are scrambling to identify services they can trim from their Medicaid budgets. Some states (as I wrote about here) are cutting dental coverage for Medicaid enrollees. Others are cutting hospice care or transplant services. This variation in coverage has created a situation in which a Medicaid enrollee’s chance of surviving a serious illness, or of dying in comfort, will depend less on medical circumstance than on geography. This variation is morally indefensible.

This variation could be eliminated by having the federal government tighten its requirements about what services states are obligated to offer to their Medicaid enrollees. At that point, however, the federal government would have not only mandated which people states must cover, but also what services they should cover. This would fall short of federalizing Medicaid in the worst possible way – it would force states to spend more without offering them financial assistance. States with greater needs would thereby suffer disproportionately, while lacking the flexibility to control their expenses.

Full federalization of Medicaid would smooth out inequities not only in Medicaid coverage – in what services Medicaid enrollees could expect to receive – but also in the financial burden that each state would face in offering coverage to needy people within their borders.

4. Federalization would allow for countercyclical spending.

In bad economic times, states receive fewer tax revenues while facing increased Medicaid expenses. The same would be true if Medicaid was federalized, of course. But, unlike most states, the federal government is not constrained by balanced budget amendments. This lack of constraint allows the federal government to increase deficit spending during economic downturns. While such spending is controversial, most economists agree that it helps counter recessionary forces. In the long term the federal government needs to find a way to keep its budget in order, but it is still a good thing that the federal government retains flexibility to prime the economic pump, so to speak, in times of need.

5. Federalization would push us to control health care costs.

The current federal budget deficit is forcing our nation, finally, to begin a serious discussion of Medicare spending.  This discussion is clearly only beginning, and has hardly reached an adult level yet. But adding Medicaid to the federal coffers, because it would aggravate current budget problems, might also focus more serious attention on health care costs. It might force our nation to come up with a serious plan (or two, or three) for controlling costs. Moreover, it would create pressure to develop plans that work not only to control Medicare costs, but also Medicaid. Consequently, we might end up treating enrollees in both programs more similarly. If we do so, we will have addressed an important injustice. It isn’t right that we offer better health care coverage to elderly people than to poor people.

6. Federalization might even be politically feasible.

Ok, I know that sounds crazy. Republicans are in no mood to federalize anything. And adding Medicaid to the federal budget would further increase budget deficits, also not a popular proposition.

But bear with me for a second. Keep in mind, for example, that the majority of governors right now are Republican. These governors would love, yes love, to be relieved of their Medicaid burden. Republican governors are a natural constituency to help promote federalization of Medicaid. I could imagine, for example, a 10– or 20-year federalization plan that allows state Medicaid expenditures to shrink each year over the course of that time, thereby giving governors more flexibility about how to balance their budgets. What Republican governor wouldn’t like that?

I am not suggesting that this would be easy. But federalizing Medicaid is the right thing to do. It is unconscionable that we live in a country that allows needy people to receive health insurance that is often so inadequate that they are turned away by the majority of health care providers.

Let’s bring Medicaid enrollees into the federal system and then work to find a sustainable plan for controlling health care costs – for both Medicare and Medicaid enrollees – while providing necessary health care services to our citizens.

Peter Ubel, M.D., is the Jack O. Blackburn Professor of Marketing at Duke University’s Fuqua School of Business and a professor of public policy at Duke’s Sanford School of Public Policy. He is author of Free Market Madness: Why Human Nature is at Odds with Economics—and Why it Matters (Harvard Business Press, 2009). His blog is www​.PeterUbel​.com; 919–660‑7700.

Many health policy watchers follow the Netherlands’s health care reform experience with great interest. The 2006 reform ended the traditional dividing line between the sickness fund scheme, which covered about 67% of the population, and private insurance covering the rest, and it introduced a single mandatory scheme carried out by private insurers who may go for profit. These insurers must cover all legal residents.

The reform is intended to bring about a system of regulated competition in health care. The aim is to introduce competition while upholding fundamental social values, in particular solidarity in health care financing and universal access to health care. Another aim is to enhance consumer choice. Everyone has the right to switch insurance providers by the end of the year.

People pay a set annual contribution, which in 2011 was 7.75% of income for employed persons and 5.65% self-employed persons. To induce competition, everyone also pays an annual premium set by each insurer separately, which this year ranged from 1,068 to 1,272 euro. The government pays the premium for children under 18.

Most people (89%) also purchase complementary health insurance to cover care that is not included in the basic scheme, such as physiotherapy and some forms of dental care. Insurers of these policies are not required to accept each applicant. Risk selection is permitted, but so far it has been quite limited: all insurers have given priority to the preservation and extension of their market share.

Is the health insurance reform a success? The answer depends on the perspective taken. First, the integration of the sickness fund scheme and private health insurance into a single scheme has strengthened solidarity. However, the premium charge (including the employer’s part and the contribution for the exceptional medical expenses scheme for long-term care) as a percentage of income is still significantly lower for persons with an income of 100.000 euro than for persons with an income of only 10.000 euro; the percentages are about 7 and 25% of income respectively. How to assess these differences in premium charges is of course a matter of political preference.

Second, although insurance is mandatory, this requirement is not perceived as a serious restriction of freedom of choice. In fact, the reform has enhanced freedom of choice because of the yearly option to switch insurers. This year (2011) consumer mobility is 5.5% versus 3.9% in 2010. However, insurers and subscribers have only limited freedom regarding the composition of the benefits package because it is set by the government.

Third, the 2006 reform the number of insurers has dropped by nearly half from about 57 to 29. However, these figures obscure the concentrated structure of the health insurance market because four major companies (Achmea, Menzis, Uvit and Menzis) have a market share of about 90%, with 20 of the 29 insurers belong to one of these companies. In some regions the market structure is so concentrated that it may restrict freedom of choice.

Fourth, it is fair to say that managed care by patient steering and selective contracting is still in its infancy. So far, insurers have mainly used soft instruments to influence patients, in particular by giving them information on the waiting times of hospitals. However, there are indications of change. Some insurers recently announced that they will only contract hospitals which meet the quality standards of care, for instance in the field of breast cancer surgery.

Fifth, one may argue that that the results as regards the reform’s objective of keeping health care affordable do not point to much success. From 2006 to 2009 health care expenditures rose by 19.4% compared to 16% over the period 2002–2005 The fraction of publicly financed health care in GDP grew from 6.8% in 2002 to 7.1% in 2005 and from 8.5% in 2006 to 9.5% in 2009 (the jump in 2006 is due to the integration of private health insurance into the basic health insurance scheme). The contribution rate period increased from 6.5% in 2006 to 7.75% in 2011. Over the same period the insurer premium rose by about 38%. Even more problematic is that for the years to come the growth of health care costs is expected to outstrip the growth of GDP by at least 2% a year.

More reforms are therefore foreseen for the near future. An important issue is how to respond to the expected growth of health care expenditures. The first and most frequently used strategy is to raise contributions and premiums. A second strategy is to raise private payments, for instance by raising the mandatory deductible, asking more and higher co-payments or reducing coverage by removing health services from the basic benefits package. This strategy is politically highly controversial. Private payments have always been very unpopular politically, which helps explain why the fraction of private payments in health care financing (9% to 10%) is low in the Netherlands compared to most European countries. A third strategy is to spur insurers to negotiate low prices with health care providers.

The last strategy relates to the government’s strategy in market reform. The government recently announced a continuation and acceleration of the market reform. But it also wants to retain the instrument of fixed budgets to control total expenditures (which implies that cost overruns must be offset by expenditure cuts the following year). Thus, the market reform remains to be a political compromise between the objective of freedom and entrepreneurship on the one hand and the need for central control on the other hand. How the market reform and the tension between freedom and control will evolve in future, is written in the stars of health care policymaking.

Hans Maarse, PhD, is a professor of health care policy analysis in the Department of Health Services Research, School of Public and Primary Care, at Maastricht University in the Netherlands. He is the author of numerous articles on health policy and reform in the Netherlands and other countries. A longer version of this article can be found here Maarse Dutch health care reform.   h.maarse@maastrichtuniversity.nl

No to Medicaid Cuts

Most Americans oppose the House Republicans’ plan to overhaul and slash funding of Medicaid, according to a Kaiser Health Tracking poll.  About 60% of Americans want Congress to keep Medicaid in its current form, and just over half said they didn’t want to see funds cut.  

Ryancare Can’t Fix Medicare: Peter Orszag

“At the heart of the Ryan plan is a shift within Medicare toward consumer-directed health care — which in turn is predicated on increasing beneficiaries’ ‘skin in the game’ to make the health system more efficient,” writes Orszag. While more consumer cost-sharing would help reduce unnecessary care, the plan would not live up to its billing in cutting health costs for America.” He notes that the Congressional Budget Office said it would do the opposite. “By 2030, health spending on the typical beneficiary would be more than 40 percent higher under the Ryan plan than under existing Medicare, according to the CBO report.”

More Beds, More Patients, More Money

Over the past decade, Washington State has added more than 1,300 hospital beds in new wings and entirely new hospitals, including the latest addition: the luxurious $365 million Swedish Medical Center. This new hospital has amenities such as a restaurant with a wood-burning stove and a shopping mall. The Seattle Times reports that health care economists are wary and quotes one as saying, “The history of hospital construction and expansions like this is that they generally add to the ever-rising costs of health care.”

Brittany Rush is a visiting scholar at The Hastings Center. Ross White is a research assistant.

Mixed Messages on Medicare Trustee Report

Several sources recently reported that Medicare is slated to run out of money in 2024, five years earlier than predicted last year, based on the latest Social Security and Medicare Trustee report. But Maggie Mahar, at Health Beat Blog, argues that this reporting is alarmist. What the report actually says is that in 2024, money flowing into Medicare to cover hospital stays will be 10% less than money flowing out. Mahar asserts that the Medicare Trustees failed to take into account all of the provisions of the Affordable Care Act that the Congressional Budget Office estimates will save money, such as new taxes, decreased subsidies to some hospitals, and less overpayment for ineffective care, as well as potential savings from structural reforms in the payment and delivery of care.  

Why the United States Resists Cost-Effective Care

 If health care in the United States were more cost-effective, health care spending would drop from 17% of the gross domestic product to 13%, saving the country $640 billion, assert Victor Fuchs and Arnold Milstein in the New England Journal of Medicine. But the U.S. resists cost-effective care, they write, because all stakeholders in health care resist change: insurance companies worry that that it would reduce their profits, the public worries that it would reduce their benefits, hospital administrators worry that it would jeopardize their ability to cover large fixed costs, physicians worry about losing their autonomy, and legislators worry about losing campaign contributions. Fuchs and Milstein propose two “escape routes”— tax-supported universal coverage and disciplined managed competitions among health insurers—but, they admit that neither would be possible without robust physician support. 

Behind the Doc Fix  

 Austin Frakt at The Incidental Economist analyzes a series of doc fix suggestions issued by physician organizations to address Congress’ continued inability to control physicians’ fees under Medicare by using the sustainable growth rate as a target. Year after year Congress approves stopgap measures to prevent large cuts in physician payments under Medicare Part B. Continued political wrangling over a “doc fix” means that Medicare Part B payments have grown at a modest rate, while actual per beneficiary spending has grown considerably. Frakt supports the suggested move away from fee-for-service payments, which create incentives for greater utilization, toward bundling of care and capitation, which may help shave costs and shift financial risk from Medicare taxpayers to providers. But Frakt believes that the physicians’ request to be able to enter into “private contracting” would likely result in higher physician fees and more cost shifting to beneficiaries.

Formula for Payment Reform

John Goodman of The Health Care Blog lays out five possible methods that Medicare can use to pay for medical care. They each involve different combinations of government and market control on services provided and prices paid. Though “attempting to get a government agency to accept new contract terms is always going to be a poor substitute for catering to consumer needs in a market place,” Goodman believes that the best bet is a combination of initially fixing S (each unit of service or package of services) and P (the price of each unit of service or package of services), but allowing patients and providers an opt-out option under certain circumstances. This approach, Goodman says, could create a more cost-effective health care system better equipped to respond to market forces.

Brittany Rush is a visiting scholar at The Hastings Center. Ross White is a research assistant.

Washington State’s Health Technology Assessment (HTA) program has attracted some strong criticism. It’s easy to see why. The program determines health insurance coverage for about 750,000 people, including state employees and Medicaid recipients, by assessing the efficacy and cost-effectiveness of various procedures. Critics deride the “inquisition” and “the spectacle of doctors forced to justify their practices, if not yet their existence, to a government board” where “evidence and rationality will have to compete with the … political imperative to control costs.”

Remarkably, though, this state program has not been a political lightning rod at home – criticism comes mainly from outsiders. Why the difference? Ample explanations are provided by the origin of the program, its context, and its operation. 

From its beginning the HTA had bipartisan support. In 2002, Washington began collaborating with Oregon, which was already operating a program to review prescription drugs for comparative effectiveness, to determine state-funded coverage. The program caught the eye of a number of Washington state legislators, both Democrats and Republicans, who asked, why should the state pay for more expensive but only equally effective drugs, or pay as much for less effective ones? Washington contracted with the Center for Evidence-Based Policy of the Oregon Health Sciences University to use its review findings.

Washington legislators quickly became aware of the dramatic savings for the state’s Public Employee Benefits program and the Uniform Medical Plan, which serves many public sector retirees. These plans began to see little cost growth during 2004 — 2005, a time when private plan costs were routinely rising 5% to 8%. 

Once the cost-saving results of drug review became apparent, legislators got interested in expanding the review into medical treatments more generally. This they did in 2006, creating the HTA program.  In expectation of greater resistance from physicians and device suppliers, the legislation wisely stipulated that the membership of the key clinical evidence review committee would be entirely practicing health care professionals.

HTA’s careful and open process also helps explain why the program has attracted relatively little in-state political controversy. All meetings are public, and the review committee posts online both its reasoning and the full evidence reports on which its reasoning is based. Decisions to undertake a review of a specific device or procedure are made either when sufficient studies have emerged to cast doubt on its comparative efficacy or when a treatment that is emerging into high-volume use seems to be based on little if any positive evidence. The primary criteria used in coverage reviews are safety, efficacy, and the direct impact on state costs. Secondary criteria include severity of condition treated, impact on special populations, and other ethical concerns.

The committee has made 21 coverage decisions so far. Eleven were largely negative, including virtual colonoscopy, arthroscopic surgery for arthritic knees, implantable drug infusion pumps, and spinal cord stimulators. Ten were mostly positive, including lumbar fusion for uncomplicated disk degeneration, artificial lumbar and cervical disks, and coronary CT angiography. Negative decisions are seldom completely negative, often allowing treatment as appropriate for a narrow range of conditions.

The savings so far have not been huge – annually, less than 1% of the roughly $3 billion in state health care spending. As the number of such decisions expands, however, total annual savings will undoubtedly grow. 

Some reviews have met considerable resistance from medical specialists, device manufacturers, and patient lobbies. The 2008 review of implantable drug-infusion pumps for non-cancer-related pain and the resulting decision not to cover these devices because of unproven effectiveness and safety sparked great controversy. Professional resistance among health care providers, however, has not been massive, and it has seldom translated into larger political or partisan battles about whether to have a review process for state spending at all. 

The larger medical-historical context of the state also helps explain the HTAs wide support. It was in Washington that one of the first member-owned health maintenance organizations, Group Health Cooperative of Puget Sound, arose in 1947. GHC was often accused of rationing care to make its bottom line, but it had its defenses. It was nonprofit and member-owned, and, therefore, its managed care could not be so easily viewed as gouging the patient. And research began to show that its outcomes were at least as good as, if not better than, competing providers’ outcomes. 

National reform has highlighted a connection between coverage and payment. If insurance is mandatory, those required to buy it can ask all the more rhetorically why they should have to pay for services backed by little evidence of comparative effectiveness. Taxpayers, who will subsidize insurance mandates for those who struggle with affordability, can easily get indignant at the thought of supporting comparatively ineffective care.   

Going forward, part of the continued political viability of HTA will undoubtedly also depend on its review committee using cost–effectiveness data in only moderate ways. That is already its practice. Decisions are a function of the quality of evidence for comparative effectiveness, the degree of the effectiveness for which there is evidence, and the relative cost.  This does not constitute putting any primary emphasis on cost. 

First, the committee does not operate with any ceiling on the cost per unit of health gained that would limit how expensive care can be and still be covered.  Second, when a high quality of evidence combines with a major positive health effect supported by the evidence, cost drops out of consideration.  It becomes a factor only when the quality of evidence is low, and/or when the comparative effect that a treatment achieves is small. 

The future of Washington’s efforts to prioritize services for state-funded coverage based on comparative effectiveness review may thus be bright even while the politics of prioritization elsewhere are vicious. 

Paul T. Menzel, Ph.D., is a professor of philosophy at Pacific Lutheran University. His research focuses on health care ethics and health policy, and he is the author of Strong Medicine: The Ethical Rationing of Health Care. The author is grateful for important assistance from David Pringle, Counsel, Office of Program Research, Washington State Legislature.  menzelpt@​plu.​edu; 360–969‑2760.