Curbing Obesity

Between 1970 and 2010, the U.S. adult obesity rate increased from 12% to 35% and obesity became a major public health problem. Excess weight is responsible for our epidemic of diabetes and is a major contributor to heart disease and many other health problems. While the rate of increase has slowed since 1990, waistlines have continued to expand.

Many different and often contradictory theories have been advanced to explain this rapid increase in obesity starting in the mid-1970’s.   As a result, no consensus exists about how to address the problem. I wish I could advocate a comprehensive program. The best I can do is offer a few suggestions based on my personal experience during the last four years.

Like most people, I started slowly gaining weight after I turned 30 years old. By the time I was 60, I was just crossing over into the “overweight” range on the BMI charts (I’m 5’ 11’’ tall and was then 183 pounds). The conventional diet advice—“reduce calories, exercise more, and cut fat from your diet”—never worked for more than a few days. I ended up concluding that evolution has strongly programmed us to resist going hungry and that I was doomed to get slowly fatter.

About five years ago, I read Gary Taubes’ book, Why We Get Fat and my views about diet and weight gain radically changed. Taubes makes a convincing case that weight gain is not due to eating too many calories or to exercising too little. It isn’t an energy balance problem. Weight gain is fundamentally a hormone problem caused by eating foods that simulate the production of too much insulin. Insulin is the hormone that signals the body to store fat.

I decided to give Taubes’ recommendations a try. I eliminated sugar, grains and white potatoes from my diet and ate as much as I wanted of everything else—adding nuts for snacks and more vegetables. I committed to never being hungry. I’d briefly tried similar diets before and wasn’t surprised when I lost five pounds during the first week. After about a week on the diet, I noticed an unexpected result—my chronic upset stomach disappeared and getting through the day no longer required taking 10 Tums. This discovery provided an additional incentive to eliminate grains and may be why I’ve stayed on the diet. Over the following month, my weight continued to drop. I lost a total of 17 pounds and ended up back at the weight I was in college. Before I tried my new diet, I believed winning a million dollars in the lottery much more likely than ever getting back to my college weight.

I started reading other books about diet’s effects on weight and health—including Taubes’ earlier magnum opus, Good Calories, Bad Calories. Taubes argues that the obesity epidemic started in the 1970’s as an unintended consequence of the campaign to convince the public to adopt a low-fat diet to prevent heart disease.  The fat-cholesterol-heart disease link seemed plausible.  Gooey fat is turned into gooey cholesterol by the body and this excess cholesterol plugs up the body’s plumbing.  Unfortunately, the advice was never adequately tested and subsequent research has been unable to confirm the links.  The food industry quickly responded by taking the fat out of processed food and substituting sugars—and the obesity epidemic was launched. Between 1970 and 2000, the amount of sugar in foods rose 25 percent.

The public now believes with almost a religious fervor that fat damages their health.  This belief is why many pages of Taubes’ books on obesity are devoted to examining the scientific links between fat and heart disease.  I recently finished Nina Teicholz’s new book, The Big Fat Surprise. Most of the 300 pages are devoted to a critical re-examination of the scientific studies about fat.  In the end, she comes to the same conclusion as Taubes—refined carbohydrates, not saturated fats, are the main cause of obesity and heart disease.

My suggestions to curbing obesity:

1. Progress won’t be made until our “public health experts” start advocating a clear new message. The previous advice—cut calories, exercise more, and eat a low-fat diet—doesn’t work. The best way (probably the only way) to attack obesity is to change the type of foods eaten by eliminating (or dramatically reducing) sugar and other refined carbohydrates.

I’ve been surprised by how difficult this change seems to be for most people—especially since the diet doesn’t requires going hungry. Refined carbs evidently are very addictive and a month on the new diet may be required before the craving for refined carbs starts to abate.

2. We need to stimulate a renewed interest in cooking. Most processed foods are full of refined carbohydrates and a healthy diet requires more time in the kitchen chopping vegetables!

3. Exposure to farmers markets and local fruits and vegetable farms should be a part of the curriculum in every school. Students should learn to value fresh foods and know how to cook them.

Reading the history of the diet wars over the last fifty years has led me to two conclusions. First, the advice we’ve received from our public health “experts” about what constitutes a healthy diet has been systematically wrong. It has caused great damage. Second, be very skeptical about everything you read about diet—including what I am writing in this blog. Testing theories in a statistically valid way is very difficult because researchers can’t control what people eat over a long enough period to measure the diet’s effects on health. Wrong theories and radically different policy advice can persist for decades.

Community Health Improvement Plans

Whether the CCO’s succeed will ultimately be judged by how they perform in controlling costs.  Providing better health care for Oregon’s Medicaid population is also an important goal.  However, the CCO’s are an experiment whose primary purpose is to see if the growth rate of Medicaid spending can be reduced.

Much of the CCO’s initial activity was focused elsewhere—on producing a “community health assessment” and a “community health improvement plan” (CHIP).  The statutes establishing the CCO’s require both to be developed starting during the first year.  This requirement absorbed most of the time of the Community Advisory Council (CAC) and the CCO’s staff during the important period when the CCO’s were first getting organized.  The community health assessment is an important background document and the development of the CHIP stimulated many good ideas.  The CCO’s need both.  However, from the beginning, I’ve worried about diverting so much of the CCO’s attention away from where the main focus needs to be—reducing costs.

The many hours spent developing the CHIP raised hopes, especially among the CAC members, that campaigns will soon be launched to address the problems they identified.  Given the CCO’s current tight budgets, they will likely be disappointed.  The CHIP’s focus is on programs promoting better lifestyle management and improved social and economic conditions—e.g., programs to reduce obesity and tobacco use and to increase the availability of family wage jobs.  While these programs should improve health over the long run, the evidence indicates they are unlikely to pay for themselves by reducing Medicaid costs.

What programs will produce the needed cost saving?  I believe the workplace wellness programs run by large employers in the U.S. are a good place to look for answers.   These programs have goals similar to the CHIP’s and have been in existence long enough to have a track record.  I recently read a particularly interesting article about the PepsiCo workplace wellness program.  Overall, the Pepsi program reduced costs.  However, the lifestyle management parts of the program—weight management, nutrition management, fitness, stress management, and smoking cessation—didn’t reduce costs by enough to offset the money spent running them ($0.48 cost reduction for every dollar spent).  The disease management part of the program, which focused on providing help to employees with ten chronic conditions, was much more successful.  It reduced costs by $3.78 for every dollar invested and reduced hospital admissions by 29%.  If you have access, the Health Affairs article on the Pepsi program is worth reading.  You might also check here.

My conclusion is that the CCO’s should make their initial investments in helping patients with chronic diseases to better manage their conditions.  This conclusion is supported by another article that analyzes the effects of increasing deductibles and co-pays.  Increasing deductibles and co-pays reduces total medical costs because the majority of the population is healthy and has a greater incentive to reduce unnecessary care.  However, increasing co-pays raises costs for those with serious chronic conditions because they often benefit from more medical care.  Until the CCO’s have succeeded in reducing the growth rate in costs, they should focus on their high-cost patients.

 

The Major Challenge Facing CCO’s

Summary:

The CCO’s face a major challenge because they don’t directly control the care provided to their Medicaid enrollees.  Doctors and hospitals make the decisions about what care is delivered.  To keep from going broke, the CCO must motivate these independent providers to reduce low-value, unnecessary care and increase prevention and other high-value care.  The best way to motivate providers is to change incentives by eliminating fee-for-service payments and switching to capitated or bundled payments.

Currently, all providers of medical care are still paid using fee-for-service and CCO’s are unlikely to be able to implement “alternative payment” methods because capitated payments require providers to assume risk that they are currently reluctant to accept.  One solution may be to reorganize providers into larger integrated groups.  However, Medicaid is not a large enough program to cause the needed changes.

When the Coordinated Care Organizations (CCO’s) were organized two years ago, they fundamentally changed the way Oregon’s Medicaid program is financed and administered.  The Oregon Health Authority (OHA) now provides each CCO with a fixed yearly amount of money—its “global budget.”  In return, the OHA requires the CCO’s governing board—usually the local medical community partnering with an insurance company—to provide high quality medical care and keep costs from exceeding the CCO’s global budget.

A CCO’s global budget is capitated; i.e., the amount of money the CCO receives each year depends only on the number of Medicaid recipients enrolled.  The switch to capitated payments has two effects.  First, it puts the CCO “at risk.”  If the CCO isn’t able to deliver the required care without exceeding its fixed budget, it will go broke.  Higher costs can no longer be passed on to someone else.  The CCO can buy reinsurance for unexpected high costs in a particular year, but reinsurance won’t continue to supplement the global budget if losses continue.

Second, because the growth rate in capitated payments is scheduled to decline, the CCO’s must quickly eliminate unnecessary, low value care and give greater emphasis to prevention and care coordination. Unless unnecessary care is reduced, financial pressure will build and a CCO’s only option will be to go back to the traditional method of balancing the Medicaid budget—cutting payments to providers.  Further cuts in payments to providers will be seen as a major failure since low payments are already squeezing doctors and hospitals and limiting access.

The CCO’s face a major challenge.  They are responsible for providing health care, but have little direct control over the care that is actually provided.  Few CCO’s own hospitals or directly employ doctors.  They must contract with independent local providers for care.  These doctors and hospitals—not the CCO—make the medical decisions for Medicaid patients. The CCO can influence the amount and type of care delivered only indirectly by changing incentives—mainly through the way doctors and hospitals are paid.

So far, the CCO’s have made almost no progress in changing the way hospitals and doctors are paid.  I recently realized that all the main providers hired by the CCO’s are still paid using fee-for-service.  Primary care doctors are paid a capitated per member per month (PMPM) payment for office visits.  However, they are still allowed to charge for the procedures they do and are not charged for referrals, so the only effect of the PMPM payments is to motivate primary care doctors to discourage unnecessary office visits.  Specialists have part of their payments withheld, but can still increase their income by providing more care.  Local hospitals and pharmacies continue to be paid fee-for-service. The incentives faced by the CCO’s are not being passed down to the providers who actually deliver care.

For a CCO to succeed in the long run, providers must face the same incentives as the CCO faces and be paid in a similar way.  Unfortunately, paying providers using capitated (or bundled) payments requires that providers assume financial risk.  If payments don’t increase when a patient needs more care, the extra care reduces the provider’s income.  So far, providers, especially small providers, have been reluctant to take on this new risk.  The CCO Boards of Directors need to find answers to several important questions.  How can providers be motivated to assume risk?  Does the CCO have any power to force providers to assume risk?  Currently, it seems that the insurance companies decide the method used to pay providers. What role does the CCO’s governing board have in making this key decision?

I’m beginning to worry that the CCO’s may have a serious flaw. Many of the clinics and even hospitals that now provide care are too small to assume the risk that must be shouldered when fee-for-service payments are eliminated.  Getting providers to accept the needed changes may be possible only when the CCO’s are able to contract with large integrated systems of providers that are big enough to assume risk.  Forming these new organizations will be a challenge and the Medicaid population is probably too small to drive the needed reorganization.

CCO Worries

During the past year, I’ve attended the governing board meetings of both CCO’s that serve my area and am a member of my local Community Advisory Council (CAC).  I continue to be impressed by the enthusiasm and commitment I see around me at these meetings.  However, I’m worried.

In its agreement with the Center for Medicare and Medicaid Services (CMS), Oregon committed to keeping the growth in per capita Medicaid costs below 4.4% during the 2013 fiscal year (July 2013 to June 2014) and below 3.4% during the 2014, 2015, and 2016 fiscal years.

How difficult will achieving these targets be for the CCO’s?  I haven’t been able to find a good analysis of this important question.  I did find data on Oregon’s per capita Medicaid spending up to 2009 on the Kaiser website and used the trend in this data to project what Medicaid spending would have been without the CCO’s.  The gap between this projection and the targets in Oregon’s CMS agreement is an estimate of the amount of spending reduction the CCO must achieve.

The CCO’s aren’t responsible for nursing home care.  The growth rate in non-nursing home Medicaid spending is plotted in the chart below for the ten-year period from 2000 to 2009.  The growth rate fluctuates widely during the period with a slightly increasing trend.  The average growth rate between 2000 and 2009 is 4.6%.  If spending continued to follow the trend line shown on the graph, per capita Medicaid spending would be 6.5% in 2014—over 2% higher than the CMS target.  My conclusion from the chart is that the CCO’s will need to make significant changes to bring spending down to the CMS target.

 

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Past efforts to reduce Medicaid spending have focused mainly on cutting payments to providers and/or changing the rules so that qualifying for Medicaid is more difficult.  Neither of these traditional approaches is available to the CCO’s.  The Affordable Care Act significantly expands the Medicaid rolls.  Payments to providers are already low and further cuts would make finding doctors to care for the new members difficult.

What options do the CCO’s have left to reduce the growth in costs?  I’ve been reading articles on this topic recently.  Almost all these articles are discouraging (See, for example, here, here, and here. The one encouraging one I found is here).  Since the CCO’s are so new, most of these articles focused on the CCO’s close cousins—the Medicaid Managed Care Organizations (MMC), the Accountable Care Organizations (ACO), and the HMO’s.  Cutting payments to providers is the only change that worked consistently to reduce costs.

I concluded that the CCO’s only options are to make the health care system more efficient by 1) providing better care to its high-cost patients and 2) changing the incentives of doctors and hospitals so they stop ordering low-value, unnecessary care.  Better coordination of care for patients with “multiple treatable chronic conditions and very serious illness” does have a record of modestly reducing costs. Since these patients use a large percentage of the CCO’s budget, it makes sense to expand efforts to keep them healthy and out of the hospital.  Hiring community health workers to assist high cost patients should be a good investment.

In theory, eliminating fee-for-service payments and expanding the use of capitated payments should reduce costs by eliminating the ability of providers to increase their income by ordering low-value, unnecessary services.  Unfortunately, the studies of the MMC’s and ACO’s have found little reduction in the quantity of low-value services ordered.  This finding may be because the health care systems studied were not fully integrated and had major parts that still are paid fee-for-service.  A mixed system reduces the incentives to coordinate care.  Unfortunately, the CCO’s currently are dealing with a mixed system.

The CCO contracts (or soon will contract) with providers in seven areas:

A. Primary care

B. Behavioral health services

C. Specialists

D. Hospitals

E. Pharmacies

F. Non-emergency transport

G. Dental services

Currently, only primary care and behavioral health services are paid using capitated per member per month (PMPM) contracts.  Providers of non-emergency transport and dental services should be willing to transition to PMPM contracts since their risk of large unexpected costs is small and should be manageable.

The CCO’s biggest and most uncertain expenses are paid to the hospitals, specialists, and pharmacies that treat the sickest members.  Unfortunately, hospitals, specialists, and pharmacies are still paid mainly using fee-for-service.  Since serious, expensive illnesses are difficult to predict, hospitals, specialists, and pharmacies have been reluctant to take on the additional risk of switching to capitated payments.  The inability to extend capitated payments to these providers is a major problem for the CCO’s.  It means the CCO itself must assume most of the risk for unexpected major illnesses.  It also means that key subcontractors don’t face the incentives to reduce low-value care that a fixed budget provides.  As large organizations, hospitals may have the financial resources to assume additional risk and may eventually be willing to accept capitated/bundled payments from the CCO’s.  However, I don’t know how PMPM payments can be made to work for specialists and pharmacies, unless they are employed or owned by the local hospital.

 

 

The Columbia Gorge CCO

In early 2012, Oregon launched a new way of delivering Medicaid—the Coordinated Care Organizations (CCO’s).  I’d been spending much of my free time during the previous two years reading books and articles about how to reduce the unsustainable growth in health care costs.  When I read the description of the new CCO’s, I realized they incorporate many of the needed innovations.  I was initially surprised that Medicaid would be at the vanguard of reforming our delivery system.  Why not Medicare or private insurance companies?   As I’ll explain below, I soon realized there’s a good reason why Medicaid is now taking the lead.

Each CCO will receive a fixed number of dollars each year from the state and federal governments based on the number of Medicaid recipients living in the part of Oregon that the CCO serves.  Local providers, e.g., doctors and hospitals, will form the CCO governing boards and assume responsibility for determining how to reorganize medical services so quality care is provided within this global budget.  The Oregon Health Authority (the agency that administers Medicaid in Oregon) will monitor the CCO’s to ensure that quality standards are maintained, but otherwise will let local authorities innovate.   Medicaid had already changed the way it pays primary care providers—going from fee-for-service to “managed care.”  The CCO’s will expand managed care by putting all providers—including primary care doctors, hospitals, specialists, dentists, and mental health agencies—under one global budget.

The rest of our health care system suffers from two fundamental problems.  First, Medicare and private health insurance plans aren’t required to operate within a fixed budget.  Medicare recipients are allowed open-ended access to all the medical services they desire and Medicare pays whatever this costs.  Private insurance companies raise their premiums to offset cost increases.  Workers ultimately pay for these premium increases through slower wage growth.  Second, successful reforms must be lead and supported by medical professionals and we currently aren’t motivating them with the right incentives.   The widespread use of fee-for-service payments has caused doctors and hospitals to focus on providing more services and often to ignore the effects of their actions on costs.

I realized that Medicaid is the only part of our health care system facing a firm budget. With both state and federal budgets under severe pressure, the growth in Medicaid funding is likely to be flat or, at best, to increase slowly.  The traditional approach of reducing Medicaid costs by cutting payments to providers has gone about as far as it can go.   Further cuts will cause an unacceptable number of providers to stop seeing Medicaid patients.  I believe the local medical community realizes all this.  With a fixed budget, the only way providers will receive adequate compensation and have the resources to provided needed new services is to make the system more efficient.  With the new CCO structure, providers have been given the power and a new motivation to make changes—so the limited resources go where they will provide the most benefit.

My Involvement

Last April, I attended my first CCO meeting—a regional kick-off luncheon in Hood River featuring a panel of local providers and public health officials plus an inspirational talk by Dr. Bruce Goldberg, the Director of the Oregon Health Authority.   I learned that the medical community in Wasco and Hood River Counties was in the process of forming the Columbia Gorge CCO (CGCCO) and I decided to attend their meetings over the next year.  Their next step was selecting an insurance company to make payments and help with administration.  They interviewed two insurance companies—PacificSource and ColumbiaPacific—and, after two close votes, PacificSource was selected.

I suspected that county governments would be involved in the CCO’s since I’d seen Karen Joplin, a Hood River County Commissioner, on the panel in Hood River.  I didn’t see anyone from Sherman County (where I live) at the initial meetings.   Sherman County has a health clinic in Moro that provides primary care for the majority of Sherman County Medicaid patients.  However, most of the specialist and hospital care is provided in The Dalles (the closest large town) and it seemed logical that Sherman County would be part of the CGCCO.  I contacted the Sherman County Court and offered to report what I was learning at the CGCCO meetings.  The Sherman County Court then appointed me as one of their two representatives on the group forming the CGCCO.

Over the next several months, we spent almost all our time wrestling with how the governance structure should be set up—particularly how the three county governments would be involved.  During these meetings, I was impressed with all the people I met, but especially with Dr. Kristen Dillon (the chair of the formation group), Dr. Judy Richardson, and Ellen Larson.  Coco Yackley was very helpful in providing administrative support and keeping the group moving forward.  I always saw a cooperative spirit at the meetings.  I didn’t observe “turf battles”—even between the two rival hospitals.  Before the last meeting of the formation group, my county decided to join the Eastern Oregon CCO rather than the CGCCO.  The EOCCO includes most of the rest of Eastern Oregon, including all the counties to the east of Sherman County.  The EOCCO promised to focus on the special problems of providing health care in sparsely populated rural counties.  The Sherman County Court’s deliberation was more difficult because neither CCO had yet started making substantive decisions about planned changes.   Sherman County’s decision left important questions unanswered.   How will care for Sherman County Medicaid patients be coordinated and paid for when care is provided by providers located in a different CCO?

I started attending CCO meetings for two reasons.  First, I wanted to meet the health care leaders in my local area and observe how they and their organizations work together.  I’m well on my way to accomplishing this goal.  I very much appreciate the friendship and help I’ve received.  My second objective is to learn how the governing board will tackle the huge problems it faces of controlling costs and better coordinating care.  These issues are just starting to be addressed and the upcoming meetings should be even more interesting.  I plan to continue attending.  Keeping cost growth within a very slowly growing global budget will involve limiting payments to some of the organizations represented on the governing board.  To paraphrase one of my favorite health care economists, “Every bit of waste and inefficiency in our healthcare system is someone’s current income.”  From what I’ve seen over the past year, I’m confident the CGCCO’s governing board will be able to make the hard choices necessary to make the CCO a success.

The Ultimate Solution

I’ve discussed many ideas proposed to reduce the unsustainable growth in our health care costs.  Most involve changes in the way providers are paid — e.g., eliminating fee-for-service, Accountable Care Organizations (ACO), bundled payments, HMO’s, and Coordinating Care Organizations.  Will these reforms be accepted and work?  No one knows.  The results of most past reforms have been disappointing.

The U.S. spends twice as much as other advanced countries on health care.  I believe the ultimate reason can be traced to one unique characteristic of our system.  Everyone thinks someone else is paying the bill.  The government pays for half of our health care and higher costs are either tacked onto the federal deficit or taken from the Medicare Trust Fund.  Since taxes aren’t increased, taxpayers have little reason to demand (or even accept) reforms.  Much of the rest of our healthcare costs are paid by business.  Employees think health insurance is a free benefit and don’t realize they’re paying premium increases with lower wage growth.

The best (and maybe the only) way to generate support for actually implementing reforms is through a dedicated tax that would provide health care vouchers to all Americans.  The tax could be used only for health care, would eliminate the need for Medicare, Medicaid, and employer-provided insurance, and would automatically increase as costs increase.  Victor Fuchs, the dean of American health care economists, and John Shoven recently published an article outlining how a dedicated VAT tax would work.  Read their six-page plan.  For a good discussion of our cost problem and shorter discussion of the solution, see a recent interview with Fuchs.  You can also watch Fuchs and Shoven discussing their plan in a short video.

Why I Support Wyden/Ryan Vouchers to Reform Medicare

Last December, our Senator Ron Wyden and Representative Paul Ryan released a plan to reform Medicare that featured vouchers for Medicare enrollees.  The document describing their plan uses the terms “premium support” and “coverage support,” but their plan is a voucher plan similar in many ways to the plan that my AFBF Deficit Task Force endorsed.  Each senior would be given the option of continuing in traditional Medicare or using their voucher to purchase a health insurance policy from a private company.  Private plans would be required to offer at least the basic benefits Medicare now provides.  Each year, both participating private insurance companies and traditional Medicare would announce the cost of their coverage for each region of the country.  The size of the voucher would be set to equal the cost of the second least expensive plan.  After 2022, the growth in the total cost of Medicare would be capped at the growth of GDP plus 1% and it’s possible this cap will limit the growth in the size of the vouchers in future years.

I’m an enthusiastic supporter of the Wyden/Ryan Plan for three main reasons.  First, switching Medicare to vouchers would finally give Congress direct control over Medicare spending and establish a reasonable limit on the future growth of the program.  Under our current fee-for-service Medicare, the government is obligated to pay seniors’ medical bills no matter how rapidly costs increase, and the Congressional Budget Office (CBO) is projecting costs will increase from 3.7% of GDP now to 6.0% in 2037.  Even with the retirement of the baby-boomers, Social Security is projected to have a much smaller increase—going from 5.0 % to 6.2% of GDP over the same period.  Allowing expenses for senior health care to continue on automatic pilot will cause Medicare to take a steadily increasing share of the federal budget—causing either dangerous federal deficits, higher taxes, and/or the crowding out of defense spending, infrastructure investment, education and other important programs.  Like everything else, Medicare needs a budget and the Wyden/Ryan Plan provides one.

Second, vouchers will provide seniors with a new powerful incentive to seek out lower cost plans. If they select a plan costing less than their voucher, they keep the difference.  If more, the senior will pay the extra out-of-pocket.  To gain customers, both traditional Medicare and private insurance companies will be under new pressure to make changes in the way care is delivered to lower costs and improve quality.  I believe seniors will accept the needed changes in our current fee-for-service Medicare only if they are given a financial incentive to do so.  The Wyden/Ryan Plan provides that incentive.

Conservatives argue that allowing competition among private insurance companies will be enough to rein in costs.  Liberals base their hopes on government price controls and on panels of experts who will mandate “best practices” and hence reduce ineffective treatments.  Both the conservative and liberal approaches have merit.  However, I doubt either will be adequate without the new incentives provided by vouchers.

Insurance companies have spent many years competing for the business of private companies—with little success in controlling costs.  Over the last decade, the cost of private plans has been growing slightly faster than the cost of traditional Medicare.  Top-down government price controls and the restrictions in choice that come with “best practices” guidelines will be strongly resisted by both providers and seniors who have become accustomed to getting what they want from fee-for-service medicine.  Once the Wyden/Ryan Plan has been implemented, seniors will, for the first time, have a financial incentive to accept a low-cost plan that focuses on effective care and pays doctors for quality, not more procedures.

Third, the Wyden/Ryan Plan is a bipartisan plan— something that’s much too rare these days.  The urgently needed reforms in Medicare won’t happen without support from both Republicans and Democrats.  Senator Wyden and Congressman Ryan deserve our thanks for incorporating good ideas from both the right and the left into a plan that has a chance of eventually being enacted. I’m not surprised this plan came from Senator Wyden and Congressman Ryan since both have a history of working with members of the other party on health care reform—see Wyden/Bennett and Ryan/Rivlin.  Another big attraction of the Wyden/Ryan Plan is that it allows both traditional, single-payer Medicare and private insurance companies to compete for seniors’ vouchers in the same market place.  Performance, rather than ideology, will then decide the best way to rein in costs.

Doctors’ Dual Role

Wide agreement exists that the growth rate of U.S. medical costs must be reduced.  One approach often suggested is to introduce more private enterprise into medicine.  Hospitals and doctors should be encouraged to disclose their charges upfront, so patients can shop for the lowest cost providers.  Health insurance policies should have high deductibles (linked to a health savings account), so patients bear the financial responsibility for their care and have an incentive to look for better deals.  Employees and Medicare enrollees should be given vouchers so they can purchase health insurance better tailored to their needs and budgets.  Competition among firms in markets normally produces high quality products at reasonable prices.  Why not let the market work its magic to solve our medical cost crisis?

I support all of the above ideas.  More transparency would spotlight the unreasonably high costs of many medical procedures and the wide variation in the charges of different hospitals and doctors.  High deductible insurance would discourage unnecessary doctor visits.  As anyone who’s looked at this blog knows, I’m a supporter of vouchers.  However, as I’ll explain below, I don’t believe these changes are sufficient to rein in health care costs.

The market for health care is different from almost all other markets in a key way.  To quote from my recent OWC chairman’s column:

The way we purchase medical care differs fundamentally from the way most other goods are purchased.  Normally, when we go shopping, we start with a clear idea of what we want.  When we go to our doctor, we usually don’t know what medical care we need and our doctor’s first job is diagnosing our problem.  We learn from our doctor what treatment we should purchase.  Doctors have a unique dual role in both recommending and providing treatment.  Market competition doesn’t do its normal job of holding down costs when sellers determine the amount of services they provide.

I can illustrate this from personal experience.  When I was 60 years old, the lab work during my yearly physical showed an abnormally high PSA reading and I was referred to an urologist.  He determined I had early stage prostate cancer.  I had no symptoms and prostate cancer had never crossed my mind.  I had a $5,000 deductible health insurance policy, but I never considered the cost of treatment or shopping for doctors.  I wanted my doctor to recommend the most effective treatment and guide me through the options.  He insisted I carefully consider both surgery and radiation and I did.  However in the end, it was his knowledge and experience that I relied on.

For serious (and expensive) medical conditions, we should rely on the expertise of our doctors and follow their treatment advice.  The tests and treatments ordered by doctors  account for as much as 75% of all medical costs.  The best way to reduce these costs is to change doctors’ incentives so they recommend only what clearly has value for their patients.  Doctors, not patients, need to be better shoppers.

Interestingly, for elective procedures, when patients know the medical treatment they want and don’t need a diagnosis from a doctor, market competition works well to hold down costs.  The real cost of elective procedures such as cosmetic or laser eye surgery has been declining.

With improvements in computerized diagnostic systems and more medical information on the Internet, patients in the future may be able to diagnose more of their ailments without consulting a doctor.  I’m always amazed at how much my wife can learn if I give her a medical question and an hour to surf the Internet.  If we ever get to the point that doctors’ main role is providing treatments, medicine will become more like other products and market competition will be more effective in holding down costs.

Why Federal Healthcare Vouchers?

Our American Farm Bureau Deficit Task Force spent several two-day meetings in Washington, D.C. discussing healthcare reform with leading experts.  All the experts agreed costs are rising at an unsustainable pace and quick action is urgently needed.  What disappointed and surprised us was that none of the experts provided us with a solution—a comprehensive approach to reforming our current system.

The Task Force’s charge is to find ways to reduce the looming federal deficits.  We could not finish our work without recommending a way to deal with the most important cause of future deficits—soaring healthcare costs.  After much discussion, we decided the best approach is federal healthcare vouchers:

… the federal government should provide each citizen with a voucher sufficient to purchase a bare‐bones, private health insurance policy. These health care vouchers could be used only for insurance plans that incorporate the reforms necessary to reduce the growth in health care costs. To encourage innovation, the requirements that health insurance plans must meet to be eligible for voucher financing would be determined on a regional basis.

I believe we were all surprised by our vote to support vouchers—I certainly was.

I voted “yes” last May for two main reasons.

1. Vouchers offer the best hope of getting key reforms implemented quickly enough to avoid a government takeover of our healthcare system.

Health insurance premiums in the U.S. more than doubled between 2000 and 2009.  According to the Kaiser Family Foundation, the cost of a family health insurance policy now averages $13,375 per year.  When out-of-pocket costs are included, the total is close to $16,700.  Since median family income in the U.S. is approximately $60,000, total healthcare costs are now a quarter of family income!

This year, employers paid on average $9,860 of the $13,375 cost of health insurance for a worker and his family.  Many workers with employer-provided insurance believe they don’t need to worry about rising healthcare costs because their employer is picking up their tab.  These workers are suffering from an illusion.   Good evidence exists that employers recoup the rising cost of health insurance by reducing future wage increases—so workers do ultimately pay the full cost.  Over the last twenty years, output per hour in U.S. businesses has increased by over 150%.  Hourly wages in manufacturing (adjusted for inflation) have declined slightly.  Productivity growth should cause wages to rise, but rising health insurance costs are siphoning off all the extra income.

If healthcare costs continue to grow at their current rate for nine more years, the average cost of health insurance for a family is projected to be $38,000 or ½ the family’s income.  Our current system of private insurance, mostly provided by employers, will self-destruct before that happens.

Our market-based healthcare system has many strengths—including patient choice, rapid innovation, and competition among private insurance companies, hospitals and doctors.  As I discussed previously, its inability to control costs stems mainly from an over-reliance on fee-for-service payments.  Fee-for-service payments—combined with a physician’s dual role as a provider of both diagnoses and of treatments—encourages too much ineffective and costly treatment.  How can doctors’ and hospitals’ incentives be changed quickly without direct government regulation, while still preserving the good features of our current system?

Our recommendation is to have the federal government offer all citizens a voucher redeemable for a bare-bones health insurance policy from one of many competing private insurance companies.  Additional coverage could be purchased and added on if desired.  The tax deductibility of health insurance would be eliminated.  Insurance companies would be required to accept all applicants, but would receive a bigger voucher payment for covering an applicant with a pre-existing condition.  Medicaid would disappear.  Senior citizens currently on Medicare could stay in the Medicare program.  However, younger citizens would stay with vouchers and private insurance when they turned 65 years old.  Hence, Medicare would phase out over time and all citizens would eventually finance their basic healthcare with vouchers.  Finally, the most important change—to be eligible to accept vouchers, insurance companies would be required to change the way they pay hospital and doctors.  Fee-for-service would be phased out and new methods introduced to encourage better outcomes and discourage costly, ineffective treatments.  For example, insurance companies would be required to increase the use of bundled payments, capitated payments, electronic medical records, and self-monitoring by doctors in each local area (Accountable Care Organizations).

2. Vouchers would establish a national healthcare budget and allow the U.S. to control the growth in healthcare spending.

 

The AFBF Deficit Task Force didn’t make a recommendation on how the healthcare vouchers should be financed.  I’m convinced that financing should come from a new dedicated consumption tax—i.e., a value-added tax  (VAT) or a national sales tax.  The level of the tax would depend on how “bare-bones” is defined.  Martin Feldstein recently argued that the federal government could provide everyone with a high-deductible health insurance policy by using only the extra $220 billion in tax revenue gained by eliminating the tax deductibility of employer provided insurance.  However, if deductibles are set too high, the poor would still need Medicaid and many low and even middle income Americans would need subsidies to pay their deductibles.  One of the great attractions of the voucher idea is that income-based subsidies aren’t required.  Subsidies that vary with income (such as those included in all the healthcare bills now working their way through Congress) are complicated. They also dramatically increase the marginal taxrate faced by those who receive them and would have bad effects on incentives.

Emanuel and Fuchs provide details on the funding of healthcare vouchers.  They estimate that a 15 percent VAT would be needed to provide all Americans, including the elderly who would now be on Medicare, with a voucher for health insurance coverage similar to the plan now covering members of Congress.  Adding a 15 percent consumption tax would represent a significant increase in federal taxes.  However, healthcare vouchers would provide important other benefits:

 

1. As Medicare phases out and seniors transition to vouchers, the VAT rate would need to increase from “10 to 12 percent to approximately 15 percent.”   However, the 2.9% Medicare payroll tax would be eliminated.

2. The federal government currently spends about $220 billon on Medicare above what is collected by the Medicare payroll tax.  Medicaid also costs the federal general fund about $200 billion. The tax deduction for employer-provided health insurance reduces federal revenue by about $220 billion.  Vouchers would eliminate the need for all three. The federal government would have approximately $600 billion that could be used to reduce the federal deficit.

3. State budgets are currently under severe strain due to the rising cost of Medicaid, SCHIP and employee health insurance premiums.  These programs currently take up approximately 20% of state budgets.  Vouchers would eliminate these state expenditures and should cause a reduction in state and local taxes.

4. Employer-provided health insurance would be eliminated and individuals would pay only for “add-on” coverage above what their voucher provides.  Since an employee must now accept his employer’s choice of a health plan, vouchers would give individuals more choice and increase competition in the private insurance market.  As employer-provided health insurance phases out, wages should start rising again in line with productivity growth.

5. Since vouchers would be financed by a dedicated tax, the U.S. would—for the first time—have a national healthcare budget.  If healthcare costs increased faster than the growth of the economy, either the VAT tax would be raised or changes would be made in our healthcare delivery system to reduce the growth in costs.  Since everyone would bear the cost of a tax increase, our nation would finally have an incentive to deal with the hard choices that we must eventually make—how much to spend on end-of-life care, when to pay for very expensive new medical equipment, how to modify the fee-for-service payment system, etc.

6. Finally, by replacing Medicare and Medicaid with vouchers funded by a new, dedicated tax, the U.S. would eliminate almost all of the federal deficits projected to be such a problem over the next fifty years.  Vouchers would also eliminate the need for large future income tax increases.  Vouchers funded by a dedicated tax would, by themselves, solve the problem that caused our Deficit Task Force to be created.

 

References:

Ezekiel J. Emanuel and Victor R. Fuchs, “A Comprehensive Cure: Universal Health Care Vouchers,” The Hamilton Project, The Brookings Institution, July 2007.

Laurence J. Kotlikoff, The Healthcare Fix—Universal Insurance for All Americans, 2007

Malpractice Reform and Higher Deductibles Are Not Enough

When I discuss the rising cost of healthcare with my neighbors, they always bring up the need for tort reform to reduce malpractice insurance costs and the importance of expanding the use of high-deductible health insurance policies in combination with “health savings accounts.” Expanding the use of high-deductible policies would give patients added incentives to economize on medical services by forcing them to pay more of their medical costs “out-of-pocket.” I strongly support both ideas and both should be part of any reform proposal. However, neither is likely to slow significantly the long-run growth in medical costs.

Medical Tort Reform

Our laws governing medical malpractice are a mess. Less than 3% of patients who are injured by medical negligence ever get their cases heard in court and the desire to avoid frivolous lawsuits causes doctors to order unnecessary tests and treatments—driving up costs. David Leonhardt summarizes the evidence in this article.

He writes “[malpractice] jury awards, settlements, and administrative costs … add up to less than $10 billion a year. This equals less than one-half of a percentage point of medical spending.” The cost of the “defensive medicine” practiced by doctors because they fear malpractice suits is much greater and has been estimated at up to $60 billion a year. However, this is still only about 3% of healthcare costs in the U.S.

Tort reform that capped excessive jury awards and provided better protection for doctors who follow “best practice” guidelines would reduce the cost of malpractice insurance and the incentives for unnecessary tests and treatments. However, a successful campaign to reform malpractice laws would be unlikely to reduce overall healthcare costs by more than 3 percent.

Higher Deductibles

Increasing the share of medical expenses paid “out of pocket” would cause patients to think more seriously about whether they should seek medical care. They’d be more likely to object if their doctor ordered low-value tests and treatments. In listening to the discussions of my friends on Medicare, I’ve been surprised by how often even the $30 per visit co-pay causes them to postpone an additional visit to their doctor.

Unfortunately, increasing patients’ co-pays is limited as a way to control costs because of the unique characteristics of the doctor-patient relationship. When a consumer goes to purchase a car or refrigerator, he knows what he wants to buy and can determine whether the value of additional features on more expensive models is worth their higher price. When a patient seeks medical treatment from a doctor, he usually doesn’t know what treatment he needs or its value. In at least 70% of doctor visits, patients don’t go to buy a medical treatment. They go for advice about what treatment they need. The more serious the illness, the more likely the patient is to rely on his doctor’s knowledge and advice. Even with a $5,000 deductible health insurance policy, a patient who receives a cancer diagnosis will usually do what his doctor prescribes, even if the treatment turns out to be very expensive.

Since doctors will be making most of our treatment decisions even when patients are paying the full cost “out of pocket,” the focus of any effort to reduce costs must be on doctors and especially on modifying our fee-for-service payment system so doctors have less incentive to prescribe unnecessary tests and treatments.