On a government and legislative level, when we talk about health care we are really talking about the financing of health care. We need to take all that debate and political language and break it down into the costs to each individual and then try to see how the differing positions impact the costs to each of you as both taxpayers and as users of health care (which is a really convoluted way of saying patients). This is most easily done with equations. The first of which is:
An Individual’s total health care cost =
- Taxes paid that go to health care (which includes the interest on the debt that is due to health care) +
- Health insurance premiums paid +
- Co-pays and deductibles paid +
- Out of pocket expenses that are not part of a benefits plan (such as that aspirin you buy over the counter at the supermarket) +
- Wages lost due to employers paying for part of your health insurance premium instead of giving you that money in wages (you didn't really think that the 80% the employer pays is due to lower profits for the corporation did you?).
How does that relate to the debate over health care costs? In this national dialogue that the candidates are having with us, we are really talking about the amount the federal government spends on health care, the amount that is spent on premiums for health employers and employees and the part that people pay in co-pays and deductibles. Thus in my equation, it includes lines 1, 2, and 3. While some people do bring up the issue of lost wages which are reflected in line 5 of my equation, for the most part that is not really discussed. We need another equation to really understand how those individual expenses relate to the total health care costs for our country (watch carefully because we are using both addition and multiplication):
Total Health Care Costs for our country (as opposed to the individual) =
- Number of people covered under insurance plans, either government or private X
- The average number of services rendered per person X
- The average cost per service per person +
- Administrative expenses per person.
The individual’s health care cost will go up if the total societal costs go up either by higher taxes, higher premiums, higher co-pays or deductibles or all of those factors. So your costs as an individual will reflect in taxes the total health care costs of the country. In addition, many aspects of the Affordable Care Act (ACA) impact on all four of these national factors. So now we can look at the likely costs under the Affordable Care Act (ACA) or another act that is passed instead of the Affordable Care Act (which represents the two positions of the two candidates. Just to be clear, neither candidate is suggesting that we do nothing.) How do these positions lower costs in this country in order to make health care more affordable and cover more people? We need to look at each component of the equation:
- Number of people covered under insurance plans, either government or private: The success of the Affordable Care Act is in covering many people who are not now covered. In other words, the act increases this number significantly. The law calls for private health insurance companies to cover far more people than they have previously by mandating coverage for children up to age 26, and by removing pre-existing condition clauses that had kept certain people off of the private insurance rolls. In addition, the movement of more people into Medicaid (which is still murky due to the Supreme Court decision) also will tend to increase those in government programs which will also increase this number dramatically. The controversial individual mandate which survived Supreme Court review is specifically designed to increase the number of people having health insurance. I personally believe that it is good to cover more people however to say that covering more people will contribute to lower costs is just not factual. It must lead to higher costs by the above equation. However there may be other parts of the equation that can lower costs in order to make up for this obvious factor in increasing costs.
- The average number of services rendered per person: In many ways, this is an area that has a tremendous potential to power costs. Many studies have shown that about one third of health care services do not contribute to improvement in health or better medical care. The challenge is that these studies are always done in hindsight and it is often difficult at best, while you are in the midst of an illness, to figure out what is necessary and what is not necessary. One of the secrets of medicine is that it is often hard for your doctor to figure that out as well when he or she is in the middle of evaluating and treating an illness. For example, there is much discussion about the high costs incurred during the last six months of life. While that is true, when you are at the beginning of those last six months, you rarely if ever really know that you are entering into your last six months of life. There is a measure of magical thinking in believing that we have the power to predict the future, even the relatively immediate future, in that manner. In ACA, more services are mandated. Many of the provisions that mandate full coverage for prevention and wellness require that more services per person be done. It is good to have this coverage however it is hard to say that this will save money even though some make the argument that more prevention will save money in the long run. While that may be partly true, it is extremely unlikely to offset financially the increased services that are required. ACA does attempt to create incentives for physicians and hospitals to provide fewer unnecessary services through a variety of indirect means such as moving towards what are called Accountable Care Organizations and it does mandate more review of new technologies and more education and assessment of the comparative value of new drugs, techniques and approaches. The details of this are for a different blog which will include a part on how doctors and other health professionals are paid but for the purpose of this discussion we will end this section by pointing out that the ways in which the number of services are increased by the ACA are very direct while the techniques to decrease services are unproven and may not be entirely or even partially successful.
- The average cost per service per person: What this really means is lowering the amount of money paid to doctors, hospitals, laboratories, medical device manufacturers, pharmaceutical companies, and others for the products and services they provide. While that may sound great to many who feel that the people in these pieces of the puzzle make too much money, this actually does give me pause. I, for one, would like to see my primary care doctors make more money. I would like to continue to see the innovations in pharmacy and medical devices keep going forward due at least partly to the financial incentive to produce new lifesaving tools for health care. So this does make me nervous. The ACA sets up a board that will look closely at services covered and their prices and make changes. We don’t know the unintended consequences of these changes; however they may include changing the type of people in medicine and driving many physicians who are in their fifties, towards early retirement thus decreasing the availability of physicians. This is also an unknown area and it is unclear how the current law will impact this piece of the puzzle. It is clear however that decreasing the profits in certain areas while the development costs still remain high, be that the development of a new technology, a new drug or the development costs of producing a new physician (medical school tuition, etc.) may make it difficult to maintain the United States as a center for health care and health innovation.
- Administrative expenses per person: In many ways this may seem like the area easiest to attack. It is not that straightforward. Administrative costs do vary and opinions also vary on how they are measured. Medicare and private insurance currently pay about $500 per person per year on administrative costs. I have seen estimates that Medicare only spends 2% on administrative costs and that private for profit insurers can spend as much as 30% on administrative costs. I tend not to believe either of those numbers as they are biased on both the left and the right sides o fthe political equation. On average, these expenses, in the private sector and in government, have varied from a low of about 6 or 7% to a high of about 25% and usually are about 15 – 18%. No matter how you look at it, more than 80% of each dollar in health care currently goes towards care and not administration which means it goes towards the number of services multiplied by the cost per service multiplied by the number of people. Those who think we can lower total costs by lowering the 20% rather than the 80% are likely kidding themselves. The ACA mandates that administrative expenses remain under 20%. What do we get for that 20%? We can get lower costs per service because a big part of what is done administratively is negotiating contracts with doctors, hospitals, other health professionals and other providers of goods and services in health care. The government, with Medicare and Medicaid does not negotiate but rather just publishes their payment schedules, which for many providers is too low to be realistic, which is part of the reason their administrative costs are lower and also why many doctors and other providers choose not to participate in those government programs. While ACA will lower administrative expenses somewhat through the 20% mandate and the competition between health insurers in exchanges, the complexity of the law with the need to form exchanges in each state (which may be very good on other grounds) may actually increase some aspects of administration, especially for the government and thus impact the portion of taxes that go to these efforts. If it is totally successful in lowering administrative costs, it will still need to address the ballooning costs of the other 80%
I believe that ACA has wonderful aspects that really do improve access to care for many Americans and may even create a structure to improve care, however it is unlikely in my opinion to lower costs and instead will likely increase costs. Until the alternative to ACA is more clearly defined, the sound bites that either call for repeal or call for keeping all aspects of the law will move forward with little true discussion of what we need to do to achieve the ends of lowering unnecessary services, keeping health care affordable and maintaining an innovative healthcare environment in which the United States stays at the forefront of care. I choose not to pick a side here and I hope that whoever wins the presidency, will speak honestly with the American people about these health care financial realities and how we, as a people may solve them. We do have to find a cost point that fits our culture and values as a country and most of all protects individuals who are sick and allows them to get well while holding onto their own dignity.