5 take-aways from Steven Brill's Time tome on health costs

I will address the myths in a later post, but today want to focus on the five most important take-aways from Mr. Brill's otherwise excellent reporting.

Healthcare is a Cesspool of Crony Capitalism

As Mr. Brill succinctly summarizes: "the health-care-industrial complex spends more than three times what the military-industrial complex spends in Washington." In my view, that is one of the strongest arguments against expanding the role of Washington in our health industry. Government already was paying half of the tab for health care before President Obama was sworn into office; Obamacare will push this to two-thirds within a decade. Does anyone seriously imagine that giving the federal government taxing and regulatory authority over hundreds of billions of dollars a year more in health spending will somehow reduce the power and influence of the health-care-industrial complex? Of course not: with that much more at stake, their capacity and incentive to lobby will be strengthened, not diminished. The results will not be pretty for those expected to pick up the tab.

Private Insurers Are Losing Leverage as Hospitals Consolidate

Mr. Brill also astutely observes that "insurers are increasingly losing leverage because hospitals are consolidating by buying doctors' practices and even rival hospitals." Unfortunately, Obamacare is going to make this situation much worse, by explicitly encouraging the development of Accountable Care Organizations that are likely to morph into local monopolies that ironically will therefore become less accountable to patients. As fellow Forbes contributor Scott Gottlieb has patiently tried to explain, this will reduce innovation, reduce patient choice, and give these local monopolies great bargaining power vis-à-vis the government. The result may well be lower quality without necessarily reducing costs.

The literature on hospital competition shows that hospital competition improves quality and lowers costs and lowers patient waiting times.  In more concrete terms, hospital competition is welfare-enhancing up to five facilities in a local area. That is, prices (meaning actual payments made to hospitals, not the "list prices" on the hospital's chargemaster) are lower if five hospitals compete than if four compete and much lower than if only one or two compete.  Indeed, one study of hospitals concluded that "monopoly power substantially increases a patient's risk of death." On a related point, the literature on physician-hospital consolidation "does not suggest that such consolidation (absent true integration) will lead to cost reductions or clinical improvement, and may lead to enhanced market power for providers." In short, hospital competition works quite effectively when allowed to do so.

Interestingly-especially in light of how much insurance companies were vilified during the health care debate-insurance company consolidation appears to benefit consumers. That is, the merger of two insurance companies when four are competing results in a decrease in hospital prices of 6.7 percent, whereas the equivalent merger in the hospital industry would produce a 1.5 percent price increase. Evidently, insurer consolidation helps provide some countervailing market power on behalf of consumers to offset hospital consolidation.

Tragically, despite this mountain of empirical evidence about the benefits of hospital competition, Obamacare moves us away from competition in the direction of greater hospital and physician consolidation. This is not likely to be good news for patients as the law unfolds.

Defensive Medicine Drives up Health Spending

Mr. Brill shows that legal incentives help fuel the extensive overuse he has documented, and quotes one hospital CEO as saying "we can't be sued for doing too much." While he doesn't quantify the overall magnitude of the problem, the consensus from numerous studies is that defensive medicine adds at least 2 percent to health spending and more likely something between 3-4 percent.[1]

Three to four percent may sound small, but it adds up to serious dollars in a system that will cost $2.9 trillion this year. It's roughly equivalent to the net cost of expanding coverage to all of the nation's uninsured. Which is to say that we could have achieved the same expansion of coverage under Obamacare without raising taxes one dime. Instead, the CBO projects that U.S. taxpayers will pay net added taxes of about $1 trillion over the next decade.

So why didn't we reform the medical tort system? Mr. Brill's explanation is pithy: "When Obamacare was being debated, Republicans pushed this kind of commonsense malpractice-tort reform. But the stranglehold that plaintiffs' lawyers have traditionally had on Democrats prevailed, and neither a safe-harbor provision nor any other malpractice reform was included." ‘Nuf said.

Nonprofits Make Profits

Mr. Brill reports that the nation's 2,900 nonprofit hospitals have a higher average operating profit margin than their 1,000 for-profit counterparts. That should not be that surprising given that for-profit facilities have to hand over taxes to federal, state and local governments before calculating what's left over as profits. Almost half of all revenues in the health services industry are generated by tax-exempt organizations.[2]  There is an ample body of literature comparing the performance of nonprofit and for-profit enterprises in health care, assessing their relative efficiency, quality, access to care and other metrics. This evidence is mixed, with neither ownership form having a clear performance advantage.

But if there's no obvious advantage in their performance, it certainly raises a question of whether it's fair that non-profit hospitals are made exempt from taxes. Moreover, despite the strong evidence that nonprofit organizations are every bit as much responsible for the excesses documented in Mr. Brill's article, Obamacare in several ways bends over backwards to tilt the playing field further in the direction of nonprofit organizations:

  • For example, the law authorized $6 billion for the Consumer Operated and Oriented Plan (COOP) program designed to set up nonprofit member-run health insurance companies in all fifty states.[3] 
  • The law further required the establishment of two new nationwide health insurance plans, one of which had to be nonprofit.
  • In contrast to health plans, where more than half of plan members belong to for-profit plans, only about 15 percent of hospital beds are in for-profit facilities. Yet Accountable Care Organizations have been deliberately designed so that they are most likely to be hospital-run, intended to displace traditional health insurers.

The Biggest Problem: Cost-Unconscious Consumers

Mr. Brill catalogs the myriad ways in which the health system lacks price transparency and further illustrates just how insulated many consumers are from caring about excess prices or utilization. He then shows how one Medicare patient, Alan A., runs up a bill of $57,408 a year, of which Alans pays only about $400 out of pocket. This may seem extraordinary, but it's actually quite ordinary. Nearly 9 of every 10 Medicare beneficiaries has some form of supplemental coverage, be it Medicaid (15%), an employer-sponsored plan (34%), or a privately-paid plan (39%). Most supplemental plans fill in the gaps in Medicare coverage, including deductibles and other forms of cost-sharing. Thus, it is not at all unusual for Medicare patients to end up paying only a tiny fraction of their bills.

We could create cost-unconscious consumers in virtually any industry in the country if we introduced third party coverage. Imagine what food prices would be if the government or private insurance covered 89 cents of every dollar, the way we do in health care. With someone else paying the bill, you can be sure shoppers would buy a lot more sirloin instead of hamburger and wouldn't be particularly picky about the prices they paid for whatever they put into their shopping carts. Even before Obamacare was enacted, the U.S. already had the 4th lowest out-of-pocket share of health spending on the planet (in sharp contrast to Switzerland, where out-of-pocket payments make up 31 cents of every health care dollar). Yet instead of fixing this problem, Obamacare is moving us further in the direction of third party payment, with the out-of-pocket share of health spending steadily dropping between now and 2021 (the last year for which such official government projections are available).

Mr. Brill has nicely codified much of what is wrong with American health care. What ought to be clear is the sharp disconnect between the actual problems with the health system and the prescription forced down our throats by Obamacare's designers. There's no good reason to suppose that this misguided prescription will do much in the way of curing our ills. Quite the opposite. We should all be concerned that the Obamacare cure will end up being worse than the disease.

Update 1

For those interested in further discussion of the hospital consolidation problem, Avik Roy has written several in-depth pieces on hospital monopolies,  the adverse effects of hospital mergers on hospital costs, and why accountable care organizations will lead to higher costs and lower quality.

Footnotes

[1] This is shown in Fig. 19.8a in my book on The American Health Economy Illustrated. Defensive medicine includes all the extra tests and procedures performed to deter lawsuits and is separate and apart from spending on malpractice premiums, which add another 1 percent to health spending.

[2] This is shown in Fig. 7.1 in my book. Note that the health services industry consists of hospitals, nursing homes, home health agencies, medical and dental laboratories and offices of health professionals, such as doctors, dentists and psychologists. It does not include the pharmaceutical industry, medical device manufacturers or the health insurance industry, all of which are much more dominated by for-profit enterprises.

[3] The $6 billion was later trimmed to $3.8 billion and further cut by $1.4 billion under the "fiscal cliff" bill passed by Congress on January 1. That COOP has proved to be yet another failed Obamacare boondoggle does not obviate the clear intention of the law's designers to favor nonprofit organizations over the for-profit insurers that had become favorite whipping boys of health reform advocates (including President Obama) in the run-up to the bill's passage.

[4] This provision may be less obviously stacked in favor of nonprofits, but a neutral approach would have simply allowed the two most qualified organizations to create such plans without regard to ownership type. Moreover, the rationale for this provision was a concern that health insurance markets were too concentrated, i.e., lacked competition. Yet in nearly three-quarters of markets deemed to be "highly concentrated" nonprofit Blue Cross/Blue Shield plans already are the largest or second largest competitor. Thus adding one more nonprofit player simply expands the domination of nonprofit plans in such markets.

 

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Christopher J.
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