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Beyond Obamacare: Focus On Cures, Not Cost

February 17, 2014

By Yevgeniy Feyman

The fight over Obamacare has been, to put it lightly, important for both the left and the right. For Democrats, it achieves the single largest health insurance reform since Medicare and Medicaid, by increasing government involvement in a market that what was often (incorrectly) perceived to be a "wild-west." For conservatives, Obamacare also meant more government involvement in the insurance market (conservatives also tended to incorrectly view the American health care system as a "free market"), and the individual mandate itself a core of Obamacare’s insurance expansion was morally inconceivable before. Politically, the law also hurt Republican constituencies like the elderly (by cutting Medicare Advantage funding) and business owners (through the employer mandate).

But while the fight over Obamacare isn’t irrelevant, it still represents a debate "at the margins."

Tinkering at the margins

Indeed, according to CMS, Obamacare adds roughly $621 billion over 11 years to national health spending. And while this may be a lot of money money that could be better spent on many other national priorities it amounts to 1.5 percent of the $40.7 trillion what we would have spent without Obamacare. The biggest effect of Obamacare, then, is to shift spending more than anything and conservatives should certainly keep pressing on these issues, all while realizing that there are bigger fish to fry when it comes to remedying the American health care system.

Perhaps it is instructive to first understand where some of the biggest costs of our health care system lie. Readers may be familiar with the "Pareto Distribution" more commonly known as the "80-20" rule. This is used in business to claim that 20 percent of sales people are responsible for 80 percent of total sales; in sociology and economics to claim that 20 percent of individuals control 80 percent of wealth; and even among actuaries looking at survival probabilities. When it comes to health care spending, the distribution isn’t quite "Pareto" in nature in fact, it’s even worse.

A 2012 AHRQ study found that in 2009, 1 percent of the population accounted for 21.8 percent of total health care spending; the lower 50 percent accounted for a mere 2.9 percent. Moreover, 44.8 percent of those in the top decile of health spending remained there over two years, indicating that the skewed distribution isn’t simply due to one-off events in essence, the high-use population is "sticky" and persistent over time. Among the Medicare population, the trends are equally worrisome. A CMS review of spending by Medicare fee-for-service beneficiaries found that six or more chronic conditions contributed to 46 percent of Medicare spending, while making up only 14 percent of the population. And the distribution of spending has remained relatively static over multiple decades, even as insurance coverage numbers, and the types of insurance coverage have changed. (Managed care in the 90s may have had an effect in keeping the levels of health care spending flat, but the public backlash limited its effect.)

It’s the prices, stupid

There are generally two lenses through which health economists, policymakers, and other researchers look at the high cost of American health care. On the one hand, high costs may be a function of high volume. On the other hand, high costs may come from high prices.

The verdict on U.S. spending is that it’s generally driven by price increases rather than volume. A 2013 report from the Health Care Cost Institute found that in 2012 "[t]he relatively slow growth of utilization compared to intensity-adjusted prices for inpatient, outpatient, and professional procedure services, reflects the ongoing trend in price growth outpacing service use." Realizing that American prices for health care are responsible for high levels of health care spending (across the entire distribution), usually leads to one simple proposal price controls.

For progressive policymakers this is certainly attractive; after all, most first-world countries use some form of rate setting to limit pharmaceutical prices, and hospital and physician rates. Yet price controls aren’t a panacea Medicaid’s price controls tend to limit beneficiaries’ access to providers like dentists; and Medicare’s less stringent price controls still leave the distribution of health care spending very stark.

Conservatives tend to argue in favor of consumer-directed health care. The rise of health savings accounts (HSAs) over the past few years has undoubtedly helped slow health care spending in the employer market (where they are most prevalent), but to be truly effective in controlling spending, consumer-directed health care has to be paired with greater transparency. After all, it’s hard to be cost-efficient about spending your money if you have no idea what the actual prices are.

So what are we to do? The answer lies in basic science. An important reason for the skewed distribution of health expenditures is the prevalence of chronic diseases and treating them requires sufficiently funded research into the basic biochemistry of these illnesses. Stay tuned for part two, where I will discuss exactly why this is the case, and what it means for our federal spending priorities.

Original Source:



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