The New Health Care Bill: Background and Meaning

Introduction

The United States has just passed a major health care bill. The bill is extremely complex (the Congressional Budget Office has a team of more than 40 professionals working on its budgetary implications).

It was not presented to the American public in a way it could understand. Instead, supporters and detractors selected pieces of it to generate strong opinions, both pro and con. Below, the key features of it will be analyzed. But first, some background on US health and its current care system is presented. A caveat – my expertise is global finance, not health.

Background

In the following paragraphs, several features of US health and care are discussed.

High Per Capita Outlays

Table 1 provides comparable data on per capita health expenditures and the 2 indicators most commonly used to measure a country’s health – life expectancy at birth and the mortality rate of children under 5 years old. All the countries listed with the exception of the US, provide universal health care.

Table 1. – Health Care Expenditures and Overall Health Indicators

  Expendiditures Life Expectancy Mortality Rate
Country (per capita) (total years) (per 1,000)
USA 6,714 78 8
Norway 6,267 80 4
Switzerland 5,878 82 5
Denmark 4,828 78 4
France 4,056 81 4
Canada 3,912 81 6
Ireland 3,888 79 4
Sweden 3,870 81 3
Austria 3,864 80 4
Netherlands 3,784 80 5
Germany 3,669 80 4
United Kingdom 3,361 79 6
Finland 2,994 79 4
Italy 2,845 81 4
Greece 2,733 80 4
Japan 2,690 83 4
Spain 2,263 81 4
Cuba 355 78 6
China 90 73 22

Source: The World Health Organization

Several aspects of Table 1 are notable:

  • The United States spends more on health care per capita than any other country in the world.
  • In Cuba, where there is a government run medical system for all, per capita health expenditures are only 5% of US outlays. The US and Cuba have the same life expectancy, but the child mortality rate is higher in the US than it is in Cuba.
  • Among developed nations, Japan and Spain have better health indicators than the US while spending only one-third as much on health. Does this mean Cuba has a better health delivery system than the US? This is a debate for another time. The key point is that pretty good health care is being delivered in Cuba at 5% of the US per capita cost.

Rapidly Growing Health Expenditures

The Congressional Budget Office (CBO) has projected that future growth in spending per beneficiary for Medicare (a government run insurance program for people 65 and older) and Medicaid (a government run insurance program for low income people) will rise from 4 percent of GDP in 2007 to 12 percent in 2050. The bulk of that projected increase in health care spending reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population.

Chronic Diseases and Obesity

Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount. Some of this spent on non preventable health problems. The most tragic are birth defects that cannot be corrected.

However, a major factor in the growth of outlays stems from the growing share of privately insured adults classified as obese. I have written on this issue earlier. Obesity is a global phenomenon, even in developing countries. But no developed country compares with the US. In the US, two thirds of the population is overweight, and one third is obese. Consider the following:

  • Heart disease is the leading cause of death in the US and strokes are the third leading cause. Being overweight increases the risk of both;
  • Cancer is the second leading cause of death in the US. 20% of cancer in women and 15% of cancer in men is attributable to obesity;
  • Diabetes kills almost 4 million people annually and accounts for 11% of US health care costs. There is a direct link between diabetes and being overweight: 80% of people with the primary type of diabetes are overweight;
  • Obese people are 83% more likely to develop kidney disease than those not overweight.
  • The US spends over $2 trillion on health care annually; one study estimates obesity costs at $214 billion annually, or approximately 10%.
  • The number of obese children is a good predictor of future obesity problems, and that number is growing rapidly. It is projected the health costs for being overweight and obesity will double every decade. This means it will become an ever-increasing share of total health care costs.

Old People

The elderly (age 65 and over) made up around 13 % of the U.S. population in 2002, but 36% of health outlays were spent on them. The average health care expense in 2002 was $11,089 per year for elderly people but only $3,352 per year for working-age people (ages 19-64). This same phenomenon can also be seen by looking at the top 5 percent of health care spenders. People 65-79 (9 percent of the total population) represented 29 percent of the top 5 percent of spenders. Similarly, people 80 years and older (about 3 percent of the population) accounted for 14 percent of the top 5 percent of spenders –  http://www.ahrq.gov/research/ria19/expendria.htm.

Health Care Payment Systems

In the US, health care providers do not get paid for improving health. Instead, they get paid for charging for everything that is allowed. That includes client visits, client tests, etc. So it is not surprising that many studies have shown “too many patients are getting angiograms — invasive imaging tests for heart disease — who don’t really need them; and specialists convened by the National Institutes of Health said doctors are too often demanding repeat cesarean deliveries for pregnant women after a first C-section.”(http://content.nejm.org/content/vol362/issue10/index.dtl). Much of the health care expenditure increase comes from treating patients without symptoms or with mild symptoms only. Also, someone has to pay for the new machines purchased to diagnose and treat patients.

The New US Health Care Act

With these issues as a backdrop, I turn to the new health care bill. It has many defects, and, as will be seen, does little to address the basic US health problems presented above. As I just reported, in 2009, insurance companies, pharmaceutical companies, hospitals, doctors, nurses, in short, the health industry spent $539 million to convince legislators to add something special for each of them. If you add to that two contentious political parties unwilling to work together and focusing entirely on trying to make the other look bad, it is not surprising that the bill is not perfect.

The bill has three key features:

  • Moving the US closer to universal health care via carrot and stick incentives for firms and individuals;
  • New health insurance regulations;
  • Efforts to increase health care productivity

Moving Towards Universal Coverage

According to the Congressional Budget Office (CBO) –  http://www.cbo.gov/ftpdocs/113xx/doc11379/Manager’sAmendmenttoReconciliationProposal.pdf, the bill will reduce the uninsured from 51 million (today) to 23 million in 2019. Of the remaining uninsured, about a third will be unauthorized immigrants. The CBO estimates that of the new enrollees, 5 million will be unsubsidized. The remaining 23 million new enrollees will be subsidized, with the average subsidy in 2019 estimated at $6,000.

This increased insurance coverage will be expensive. The CBO estimates that after allowing for small employer tax credits, penalty payments by companies and individuals, an excise tax on high premium insurance plans, and “other effects”, this will cost $172 billion in 2019 and $788 billion for the 2010-2019 period.

Insurance Company Regulation

The massive lobbying of the insurance companies was successful in removing the public choice option from the new legislation. In addition, they removed a proposal allowing people to sign up for Medicare before they reached 65. But moving ahead, things will be quite different for health insurance providers:

  • No more refusals for preexisting medical conditions;
  • All individual and group policies must offer dependent coverage for children up to age 26;
  • Individual and group health plans can no longer place lifetime limits on the dollar value of coverage;
  • Insurers cannot rescind coverage except in cases of fraud;
  • Requires qualified health plans to provide, at a minimum, coverage without cost sharing for preventive services;
  • Requires that health insurance companies start paying fees to the government based on market share.

In addition, the new insurance exchanges should increase competition and the rates insurance companies charge will be closely monitored.

Efforts to Increase Health Care Productivity

There are a large number of items in the bill intended to increase health care productivity. The CBO has estimated the effects of these steps on the Federal Budget with numerous and understandable qualifications. Inasmuch as I am not a health expert, I will make no judgments on them. But in Table 2, I list a number of them with the CBO’s estimated Cost savings.

Table 2. – Estimated Budget Savings Resulting From Increased Productivity

Item

2010-2014

2015-2019

Administrative Simplification

0.5

11.1

Linking Payment to Quality Outcomes

0.1

1.6

Center for Medicare/Medicaid Innovation

-0.7

0.6

Medicare Shared Savings

0.5

4.4

Hospital Readmissions Reduction

0.5

6.6

Revisions to Medicare Improvement Fund

15.6

5.1

Home Health Care Payment Adjustments

4.2

35.5

Medicare DHS Payments

0.0

22.1

Medicare Advantage Payments

30.3

105.3

Reducing Premium Subsidy for High Income Beneficiaries

2.4

8.3

Reducing Wasteful Dispensing of Prescription Drugs

1.0

4.7

Medicare Productivity Improvements

23.7

132.9

Independent Payment Advisory Board

0.0

15.5

Disease Prevention

-3.7

-12.9

Increasing Access to Preventative Services

-1.7

-2.2

Patient Centered Outcomes Research

-0.5

-1.7

Medicare, Medicaid Program Integrity

1.9

4.1

Community Assistance Living

24.1

46.1

Source: Congressional Budget Office

There are several items in this list worthy of comment. The intent of the bill is clearly to cut back on the Medicare Advantage Program. CBO appears quite hopeful on Medicare Productivity Improvements. It is notable that at least through 2019, the CBO estimates that preventative care programs will be costly. In large part, this is because they will mandate more testing. In fact, some estimate that insurance premiums for high deductable individuals will go up because more tests will be mandated.

The Overall Budgetary Numbers

The CBO breaks down the budgetary impacts under three separate headings as presented in Table 3.

Table 3. – Budgetary Impacts of New Health Care Legislation*

Item

2010-2014

2015-2019

Net Effect of Increased Insurance Coverage

78

710

Other Changes Affecting Spending

-79

-432

Changes Affecting Revenues

-109

-311

Total

-110

-33

* A positive number signifies a deficit increase.

The CBO estimates that the costs of increasing coverage will be offset by other expenditure reductions and higher revenues.

Assessment

Achieving universal health care and reducing insurance company abuses are desirable goals. And having more people with insurance should reduce emergency ward demand and increase health in the long run.  But, if we return to the points made about US health at the outset, the jury is most definitely out on whether there is much in this bill to turn matters around. Will some of the research being funded change the incentive structures of health care providers so they focus more on improving health and less on their billed time and equipment use? And how about obesity? I am increasingly of the mind that obesity reduction will require a major education campaign coupled with a reduction in subsidies for grain/corn products.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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