Thursday, October 20, 2005

The Sad Reality of Repeating Our Mistakes

Yesterday I mentioned the Not-So-Sad History of Medicare Cost Containment as Told in One Chart", which illustrates the remarkable difference in administrative costs between Medicare and Private administrative costs. Private costs (11.5%) are more than 3 times those of Medicare (3.6%). It's not only due to the lower administrative costs, but to the huge bargaining power of the government, and the efficacy of government regulation. Let's compare.

Here's the chart for overall Health Care Cost Containment:

The Medicare Cost Containment chart is below:

Keep in mind, that's percent change in spending per year. Click on either image if you want a closer look.

Striking as these images are alone, more impressive is the Bush Administration's willingess to apply the zig-zag method for Medicaid. The New York Times reports today that Florida is undertaking a major restructuring of its Medicaid care delivery.
The Florida program, likely to be a model for many other states, shifts from the traditional Medicaid "defined benefit" plan to a "defined contribution" plan, under which the state sets a ceiling on spending for each recipient. . . The Florida plan says, "The state will set aside a specific amount of money for each person enrolled in Medicaid," based on the person's medical condition and historic use of health care.
Essentially, the state is privatizing Medicaid. Enrollees will now be put in private plans, which will receive payments from the state and fed.

What exactly does that mean? Take it from an expert:
Joan C. Alker, a senior researcher at the Health Policy Institute of Georgetown University, said: "Florida's proposal is one of the most far-reaching and radical proposals we've seen to restructure Medicaid. The federal government and the states now decide which benefits people get. Under the Florida plan, many of those decisions will be made by private health plans, out of public view."
This is actually a pretty big deal, considering the government recently scaled back Medicaid enrollees' rights to sue for treatment. I'm assuming that isn't going to change here just because private insurance is in charge of delivery.

The real question, however, is why are we using the failed private market (see cost containment chart above) to reign in costs when the government (see Medicare chart above) is obviously doing a superior job? And as the system prices more and more people out of their employer sponsored (or lack of) insurance, why are pretending that the same ineffectual system is a magic antidote? The worst part is that this isn't even a new idea! There is not a single shred of novelty in the way care is delivered here -- it's just putting Medicaid enrollees into the same kind of sytem most of the U.S. has. Health care just can't seem to escape the cycle of touching the hot stove, burning and disfiguring its hand, then coming back in five years and forgetting that stoves are hot.

And that's all these "been there, done that" measures will do. They burn people and disfigure our ability to deliver health care. I guess this is just one more step, along with so-called consumer directed plans until our system becomes unrecognizable, and sweeping reform can emerge. I just wish it didn't involve so many scars along the way.


At 10/20/2005 2:05 PM, Blogger Dave Justus said...

I don't see how those charts show the Government doing a superior job to the private sector.

The Medicare chart shows an increase every year, with the highest increase being almost 16% and the lowest increase somewhere around 2%.

The Private health care chart shows variation, ranging from (if we just compare the time frams on the previous chart) around 9% to -2%.

Comparing the last known data point: 95 to 99 medicare chart shows about 2%. In the same time from the private sector is ranges between -1% and just under 4%, with an average that is also about 2%. At best, it seems that these charts show that Medicare has managed in recent years to be as efficient as the private sector in controlling costs. At no point do I see any time when it was better at controlling those costs.

At 10/20/2005 3:11 PM, Blogger Kate said...


However, starting in 99 the private sector started increasing, while Medicare is decreasing. The point is that Medicare has been able, reliably for 25 years, to keep the percent change in dollars spent decreasing every year.

The private sector is completely unpredictable, with every attempt at controlling cost finding short-lived success, followed by further spending increases.

If you draw a line from the first to last data points only, using 1975 and 1999, you get the opposite slope -- a higher percent change in spending every year. Look at it that way.

I think the authors use various data points on the other chart to illustrate the effects of various cost saving measures. But again, if you were to use the first and last data points -- 1975 and 1999, same as the Medicare chart, then you would get the opposite trend from Medicare.

At 10/20/2005 9:12 PM, Anonymous Steve Mudge said...

Hi Kate! Didn't know you had a blog.....very nice!

I'm a little confused by the topic at hand but looking to the future, do you foresee the possiblity that the hundreds of up and coming nimble biotech companies will help drive healthcare costs down by making drugs faster, cheaper and more effective? (Regardless of whether its paid for by private insurance or a government system)...just wonder if you hear anything about that on the front lines out there--its a thought that crosses my mind when I think about the healthcare mess.

At 10/21/2005 8:30 AM, Blogger Dave Justus said...

"starting in 99 the private sector started increasing, while Medicare is decreasing"

Your Medicare graph ends at 99, so I don't see how you can show that.

75 is a low point, so yes the average has moved up since then. Looking at the entire private spending graph it looks like it has averaged at about a 4% increase the entire time.

Part of the 'unpredictability' of the private sector graph as opposed to the Medicare graph might just be that the data is by each year in the private sector graph while it is in 5 year chunks in the Medicare graph. The same data would look smoother if it was aggregated as 5 year chunks.

Trying to convert the charts back to data and then comparing them the same ways I get this:

Period Private Medicare
75-80 3.40% . 15.50%
80-85 4.40% . 12.00%
85-90 5.60% . 6.00%
90-95 1.80% . 5.00%
95-99 1.80% . 2.00%

I don't claim my numbers are exact, I did it by eyeballing, and you can't necessarily average percentage changes to get an accurate total change for a time period, but it is instructive at how different graphs can 'lie' about data to the eye.

At 10/21/2005 8:34 AM, Blogger Kate said...

Hey Steve, so glad you came by!

To answer your technology question, my response is a definite no. Experts predict that at least 50% of rising health care costs in the last 40 years come from technology. If you check out Ezra's blogging at his own site and TAPPED this week, you'll read about how well the pharmaceutical companies respond in a free market -- they've established a virtual monoply, raking in unheard of profits.

And as technology gets more complicated, drugs aren't going to get any cheaper. The only way prices will be lowered for drugs is heavy regulation, which we've been unwilling to do so far.

At 10/21/2005 9:47 AM, Blogger Dave Justus said...

I certainly agree that technology probably won't make medical care cheaper.

However, this isn't a simple thing to look at. I am sure that in 25 years, the best medical technology we have today will be availible for far cheaper than it is not. Of course, by that time it will be considered 'third world' technology and no one will want it. I wouldn't care to have heart disease treated with only 1980s technology, medicines and techniques for example.

My big worry with 'universal' or public funded health care is that it would retard technological development, removing incentives for new drugs and techniques. Perhaps this worry is unwarrented, but all of the arguements for such programs seem to be assuming that technological advancement is a constant and not driven at all by market forces. Rather than creating a rubuttal for this worry, they seem focused on denying that the worry is relevant in the first place.

At 10/21/2005 10:29 AM, Blogger Kate said...


The technological innovation worries are legitimate. But I think any single-payer plans should include the correct incentives to ensure we continue producing top-notch technology.

That being said, it's crucial that said technology works. That it doesn't cause unnecessary side effects, and, this is key, works better than placebo. Or is worth the cost.

Not to mention that the NIH funds an enormous amount of scientific research already.

The bottom line is this isn't an either-or situation, and any single payer plan should reflect that.

At 10/21/2005 12:48 PM, Blogger Dave Justus said...

I am open to other methods of dealing with health care. Just skeptical that we won't throw out the baby with the bathwater.

I have long said to my friends that a country as rich as we are should be able to provide basic health care for it's citizens. I think we have to be very careful in how we do that though, and think it out carefully.

Looking at other countries isn't necessarily a safe solution either. If our market health care system is driving a lot of technological development, and I think it is, then other countries get a lot of those benefits without paying for them.

Trying it and seeing how it works isn't necessarily very useful either. How do you evaluate whether something would have become availible if we had done things a different way. Some of these arguements apply to keeping things the same too of course, we can't know if we would have advanced as much or not under a government sponsored program over the last 50 years.

It is unfortunate, but we can never know what would have happened.

At 10/21/2005 1:13 PM, Blogger Kate said...


It is unfortunate that we don't know, but let's take a look at what we do:

Even acknowledging (which I do not) that our market system caused all the advances we've seen, where has it led us?

45 million uninsured, paying 1/3 more per person than the second most expensive system (Switzerland) and twice per person as numerous other systems, around a hundred thousand people dying every year due to medical error, and some of the worst preventative care of the industrialized world. Not to mention costs going out of control.

In my mind, we've tried all these other free market ways of solving these problems, and none of them have worked for any sustainable amount of time. It's time to try something else to take care of all these problems, and I honestly believe there's ways we can do that that also allow for technological innovation.

At 10/22/2005 7:02 PM, Blogger PDG said...

Can you add an RSS feed to your blog? This is sweet stuff for a policy junkie that took the other route, med school.

At 10/22/2005 8:00 PM, Blogger Kate said...


done! In blogger you can choose "yes" for xml, but you have to put a link in the side bar, which I didn't realize. So now you can RSS me as you please

At 10/23/2005 1:45 PM, Anonymous Martin said...

Hi Kate,

Wanted to follow up on a couple of points people made.

First off, I think your comparison of Medicare and private insurance is invalid becuase private insurance is, in some ways, far more comprehensive by including prescription drugs. In addition, Medicare has the ability to set prices and force providers to live with them (with the various access to care implications) while private insurers have to negotiate rates.

In addition, the time periods of the two charts, and the scales are so different that it is quite difficult to properly compare growth rates in spending.

On the issue of innovation, Medicare has been notorious for delaying the introduction of new technologies into its reimbursement system, this only really changed in the past two or three years when a bunch of new technologies have been able to get J codes for additional reimbursement shortly after the products were approved by the FDA.

That being said, I do not believe that the private insurance world is a panacea. Your point about the higher admin costs for private insurance is a really big deal. Imagine, we could theoretically cut about 10% off of the private health insurance spending by bringing the private insurance admin costs down to the level of Medicare, but, alas, that will never happen. Since most private insurers are for-profit companies there is always the problem of having to satisfy shareholder demands for profits, so in addition to higher administrative expenses, private insurers need to have a net margin that is greater than zero, since they also take out large amounts of debt, they need to generate fairly signficant operating margins (long-time since I looked at this, but if MLRs are around 80% and with admin around 12% then operating margin must be about 8%).

Another problem with private insurers is the exact opposite of Medicare... they are very quick to embrace new technologies, but just as quick to get rid of them, so patients depending on new treatment methods may find that their insurer discontinues coverage at inopportune times.

Still further problems with private insurers! There has been a lot of talk in the academic literature about preventive care and the need for more preventive care, however, the time period for the return on investment is so long that few private insurers find that preventive care pays off. The rare place where this situation can be reversed is in heavily unionized industries or in industries where individual employers experience relatively low turnover since they can do their won roi calculation based on the longer period of enrollment in all plans sponsored by the employer.

One more point and then my rant will be done. The private insurance market has not developed any advances in the way the health care finance and delivery systems work... that has all come from HCFA/CMS (particularly DRGs).



At 10/24/2005 2:56 PM, Blogger Kate said...


Great comments. I think you're right that the graphs are confusing (something I should have paid more attention to when posting them), but I still stand by my point that federal programs have been able to keep costs down better than private insurance plans. That being said, Medicare is about to enact a drug benefit that will surely change that graph, and Medicaid isn't having the best time. However, I still think they've been able to hold down costs better.

I appreciate all your comments on insurance -- very eloquent and spot on.

Keep coming by!

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