sailing into the perfect storm: who will …seattle, washington august 19, 2005 i. longterm trends...

Uwe E. Reinhardt, Ph. D.

Princeton University

SAILING INTO THE PERFECT STORM:Who will come to the rescue?

Presented at the

National Conference of State Legislatures’

ANNUAL MEETINGSeattle, Washington

August 19, 2005

I. LONGTERM TRENDS IN U.S. HEALTH SPENDINGI. LONGTERM TRENDS IN U.S. HEALTH SPENDING


y = 973.4e0.0453x

R2 = 0.9935

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 9920

0120

03TOTAL REAL HEALTH SPENDING PER CAPITA 1965 – 2004

IN CONSTANT YEAR 2000 DOLLARS (GDP DEFLATOR)

SOURCE: CMS website and President’s Economic Report to Congress, 2004.

MANAGED

CARE



A. A zoological model of the U.S. healthA. A zoological model of the U.S. health--care sectorcare sector

Gerard Sandier, 2001US

HEA

LTH

CAREU. S. President

Congress & State Legislators

Employers & Insurers

Local Hospital Board

Nice ride!Beats Fiber

Optics!

Professor of Health Economics beholding it all in

amazement

Venture capitalist, looking for a bite



A. A zoological model of the U.S. healthA. A zoological model of the U.S. health--care sectorcare sector

B. The 2B. The 2½½--Percent Rule of U.S. health spendingPercent Rule of U.S. health spending

y = 973.4e0.0453x

R2 = 0.9935

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 9920

0120

03TOTAL REAL HEALTH SPENDING PER CAPITA 1965 – 2004

IN CONSTANT YEAR 2000 DOLLARS (GDP DEFLATOR)

SOURCE: CMS website and President’s Economic Report to Congress, 2004.

4.5%/year

y = 15638e0.0202x

R2 = 0.9887

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

1965 70 75 80 85 90 95 2000

SOURCE: SOURCE: Economic Report of the President 2002Economic Report of the President 2002; Tables B4 and B34.; Tables B4 and B34.

TIME PATH OF REAL (INFLATION ADJUSTED) GDP PER CAPITA TIME PATH OF REAL (INFLATION ADJUSTED) GDP PER CAPITA UNITED STATES, 1965UNITED STATES, 1965--20002000

about 2% PER YEARabout 2% PER YEAR

Real per-capita GDP

Over the long haul, the American health system wants to grow about 2.5 percentage points faster than the GDP as a whole.

THE 2½% RULE:

So far the health system has been able to impose that rule on the rest of the U.S. economy.

The CMS actuaries assume that it will be able to do so also in the decade ahead.

8

10

12

14

16

18

20

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

PER

CEN

T O

F G

DP

THE LATEST CMS FORECAST:National Health Expenditures as a Share of GDP 1980 - 2014

Source: CMS, Office of the Actuary, National Health Statistics Group, various years.

Managed Care and solid GDP

Growth

18.7%

I. LONGTERM TRENDS IN U.S. HEALTH SPENDING


II. THE PUBLICII. THE PUBLIC--PRIVATE SECTOR MIXPRIVATE SECTOR MIX

A. PrivateA. Private--, Federal, Federal-- and State Spendingand State Spending

0%

20000%

40000%

60000%

80000%

100000%

120000%

140000%

160000%

180000%

200000%

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 13

PRIVATE FEDERAL STATE & LOCAL

PROJECTED PROJECTED SOURCESSOURCES OF TOTAL OF TOTAL HOSPITALHOSPITAL REVENUE 1965 REVENUE 1965 -- 20142014

SOURCE: SOURCE: CMS.govCMS.gov

Projected

0%

20%

40%

60%

80%

100%

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 13

STATE & LOCAL FEDERAL PRIVATE

PROJECTED PROJECTED SOURCESSOURCES OF TOTAL OF TOTAL HOSPITALHOSPITAL REVENUE 1965 REVENUE 1965 -- 20142014


ProjectedProjected

PROJECTED PROJECTED SOURCESSOURCES OF TOTAL OF TOTAL HEALTH SPENDING HEALTH SPENDING IN 2014IN 2014


Private, $1,813b ,

50%

State & Local, $490b,

14%

Federal, $1,295b ,

36%

$0

$100

$200

$300

$400

$500

$600

$700

66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 9820

00 2 4 6 8 10 1220

14B

ILLI

ON

S O

F D

OLL

AR

S

STATE FEDERAL

FEDERALFEDERAL--, STATE, STATE-- AND TOTAL SPENDING ON AND TOTAL SPENDING ON MEDICAIDMEDICAID, 1965, 1965--20142014

SOURCE: CMS website.SOURCE: CMS website.

ProjectedProjected

PROJECTED PROJECTED SOURCESSOURCES OF TOTAL OF TOTAL HEALTH SPENDING HEALTH SPENDING IN 2014IN 2014


Federal $354b , 57%

State & Local, $264b

, 43%

STATE MEDICAID SPENDING AS A PERCENT OF GENERAL FUND STATE MEDICAID SPENDING AS A PERCENT OF GENERAL FUND EXPENDITURES, 2002EXPENDITURES, 2002

SOURCE: Vernon Smith et al., SOURCE: Vernon Smith et al., ““The Continuing Medicaid Budget Challenge, October, 2004; Fig. 6,The Continuing Medicaid Budget Challenge, October, 2004; Fig. 6,http://http://www.kff.org/medicaid/loader.cfm?urlwww.kff.org/medicaid/loader.cfm?url=/=/commonspot/security/getfile.cfm&PageIDcommonspot/security/getfile.cfm&PageID=48004=48004

MEDICAID, 16%

CORRECTIONS, 7%

ALL OTHER, 28%

EDUCATION, 48%

PUBLIC ASSISTANCE, 2%

TRANSPORTATION, 1%

4.80%

11.70%

2.80% 2.80%

0%

2%

4%

6%

8%

10%

12%

14%

FY 2004 FY 2005

STATE MEDICAID SPENDING ALL STATE GENERAL FUND SPENDING

STATE SPENDING GROWTH FOR MEDIAID vs. NOMINAL STATE STATE SPENDING GROWTH FOR MEDIAID vs. NOMINAL STATE GENERAL FUNDS SPENDING, FY2004 GENERAL FUNDS SPENDING, FY2004 -- FY2005FY2005

SOURCE: Vernon Smith et al., SOURCE: Vernon Smith et al., ““The Continuing Medicaid Budget Challenge, October, 2004; Fig. 10The Continuing Medicaid Budget Challenge, October, 2004; Fig. 10,,http://http://www.kff.org/medicaid/loader.cfm?urlwww.kff.org/medicaid/loader.cfm?url=/=/commonspot/security/getfile.cfm&PageIDcommonspot/security/getfile.cfm&PageID=48004=48004

The CMS probably underestimates the share of total health spending that must be financed by state governments for two reasons:

1. The employment-based health insurance system is crumbling for low-wage workers;

2. Deficit-driven Federal fiscal policy

PROPOSITION:PROPOSITION:




III. THE FRAYING OF EMPLOYMENTIII. THE FRAYING OF EMPLOYMENT--BASED INSURANCEBASED INSURANCE

24.0%21.0%

26.0%

19%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Less than 5% 5.1% to 10% 10.1% to 15% 15.1% to 20% More than 20%

RANGE OF PREMIUM INCREASES, 2004

PER

CEN

TAG

E O

F FI

RM

S IN

RA

NG

EDISTRIBUTION OF PREMIUM INCREASES FOR COVERED WORKERS,

ALL FIRMS, 2004

SOURCE: www.kff.org/insurance/7148/sections/ehbs04-1-4.cfm

55%55%

$3,458

$9,602

$3,695

$9,950

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

SINGLE FAMILY

HMO ALL PLANS

AVERAGE PREMIUM COSTS FOR COVERED WORKERS, 2004

SOURCE: Henry J. Kaiser Family Foundation and HRET, Employer Health Benefits 2004; Chart 4.

All fringe benefits granted workers by employers come out of what one may call the workers’ gross wage base, that is, the maximum debits the employer could afford to make to payroll expense for those workers and not lose money on employing them.

FACT OF LIFE

This is true of employment based health insurance as well, whether the employee pays all or part of the premium through explicit deductions from the paycheck or whether the employer formally pays the premium.

How can the low wages and family incomes of How can the low wages and family incomes of these roughly one third of American households these roughly one third of American households absorb the ever rising cost of family health absorb the ever rising cost of family health insurance coverage?insurance coverage?

How can small business cope with this rowing How can small business cope with this rowing problem, which is, after all, not really its problem, which is, after all, not really its business?business?

Assume:

A NUMERICAL ILLUSTRATION:A NUMERICAL ILLUSTRATION:

1. A low-skilled worker’s current wage base is $30,000/yr.

2. That wage base will grow at 3% per year

3. A family health insurance policy now costs $10,000

4. The premium for that policy will rise at either 8% or 10% in the decade ahead, which means it will be $21,000or $26,000, respectively, 10 years hence.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2004 '05 '06 '07 '08 '09 '10 '11 '12 '13 2014

WAGE BASE PREMIUM @ 8% GROWTH PREMIUM @ 10% GROWTH

GROWTH IN HEALTH INSURANCE PREMIUM RELATIVE TO GROWTH IN HEALTH INSURANCE PREMIUM RELATIVE TO WAGE BASE, 2004 WAGE BASE, 2004 -- 20142014

Employers will respond to these ominous trends in two phases:

SAILING INTO THE PERFECT STORM

1. Initially they will shift more and more of the cost of insuring their workers onto the workers themselves. That won’t solve these workers’ problems, of course. For the most part, it will merely shift the costs to each worker’s household budget, especially to the chronically ill, who must then pay the high deductibles year after year.

Employers will respond to these trends in two phases:

SAILING INTO THE PERFECT STORM

1. Initially they will shift more and more of the cost of insuring their workers onto the workers themselves. That won’t solve these workers’ problems, of course.

2. Eventually they will stop providing health insurance to their employees altogether.

40 4144

41.5

34 34 36 3638 39 39 40 41 43 44 43

0

10

20

30

40

50

60

70

88 89 90 91 92 93 94 95 96 97 98 99 2000 '01 '02 '03 '04 '05 '06 '07 '08

UN

INSU

RED

AM

ERIC

AN

S (M

ILLI

ON

S)NUMBER OF UNINSURED AMERICANS AT ANY POINT IN TIMENUMBER OF UNINSURED AMERICANS AT ANY POINT IN TIME

The number of uninsured is likely to rise in the decade ahead.

As the economy grew apace in the 1990s, the number of uninsured actually rose!

SS--CHIPCHIP





IV. FEDERAL FISCAL POLICYIV. FEDERAL FISCAL POLICY

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

BIL

LIO

NS

OF

DO

LLA

RS

BASELINE Extend Tax Cut Let Discr. Spdg. grow @ GDP growth Fix AMT

$597$657

$725$793 $850

$893$978 $999

$1,091$1,182

SOURCE: Congressional Budget Office, The Budget and Economic OutSOURCE: Congressional Budget Office, The Budget and Economic Outlook: An Update, September 2004; look: An Update, September 2004; Summary Table 2 and Table 1Summary Table 2 and Table 1--66

PROJECTED FEDERAL ONPROJECTED FEDERAL ON--BUDGET DEFICITS 2005BUDGET DEFICITS 2005--20152015

Who Stole the Projected Surplus?2002-11

-$800

-$600

-$400

-$200

$0

$200

$400

$600

$800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bill

ions

of D

olla

rs $8.8 Trillion$8.8 Trillion

2001

More Realistic 2004

Source: Robert Reischauer, Urban InstituteSource: Robert Reischauer, Urban Institute

Who Stole the 2002-11 Surplus?Contribution of Policy & Other Factors to the $8.8 Trillion Deficit in

the Budget Outlook

Economic & Technical

Re-estimates38%

($3.4 T)

Tax Legislation31%

($2.8 T)

Defense, Homeland,

& Int.21%

($1.8 T)

Rx Drugs & Other Entitlement

Legislation8%

($0.7 T)

Domestic Disc.

Other thanHomeland

1%($0.1 T)

Source: CBPP, cited by Robert Reischauer, Urban Institute

27.1%

29.6%

31.5%

35.7%

35.8%

37.4%

37.4%

37.9%

39.9%

41.6%

45.3%

54.2%

0% 10% 20% 30% 40% 50% 60%

JAPAN

UNITED STATES

AUSTRALIA

SWITZERLAND

CANADA

UNITED KINGDOM

OECD TOTAL

GERMANY

OECD EUROPE

EU15

FRANCE

SWEDEN

ALL TAXES AS PERCENTAGE OF GDPOECD COUNTRIES, 2000

SOURCE: OECD, Revenue Statistics 1965-2001, Table 3, p. 74.

The tax cuts of 2001 and 2003 were passed on the The tax cuts of 2001 and 2003 were passed on the (Keynesian) argument that it would put added money (Keynesian) argument that it would put added money into the pockets of taxpayers who would then spend into the pockets of taxpayers who would then spend more and, thus, revive the economy.more and, thus, revive the economy.

TAX CUTS VERSUS ADDED HEALTH SPENDINGTAX CUTS VERSUS ADDED HEALTH SPENDING

An economist would find it hard to argue with this theory. An economist would find it hard to argue with this theory. It is standard fare in macroIt is standard fare in macro--economic policy and it works.economic policy and it works.

That same theory, however, also predicts that added That same theory, however, also predicts that added government spendinggovernment spending –– be it on health care, education, be it on health care, education, roads, or mass transit roads, or mass transit –– revives the economy as well.revives the economy as well.

TAX CUTS VERSUS ADDED HEALTH SPENDING TAX CUTS VERSUS ADDED HEALTH SPENDING continuedcontinued

For example, without the rapid growth of health spending For example, without the rapid growth of health spending during the 1980s and the jobs it added, the Reagan during the 1980s and the jobs it added, the Reagan recovery of that decade would not have been nearly as recovery of that decade would not have been nearly as robust.robust.

Every added dollar of Every added dollar of health spendinghealth spending diffuses quickly diffuses quickly throughout the entire US and, most importantly, stays at throughout the entire US and, most importantly, stays at home. Hardly any of it leaks abroad.home. Hardly any of it leaks abroad.


By contrast, good parts of a major tax cut may leak By contrast, good parts of a major tax cut may leak abroad in the form of offshore investments or spending abroad in the form of offshore investments or spending on consumer goods made abroad.on consumer goods made abroad.

The construction of new hospital facilities or of new golf The construction of new hospital facilities or of new golf resorts both are scored as resorts both are scored as ““investmentsinvestments”” in the national in the national GDP accounts.GDP accounts.


We always pretend that building golf courses boosts the We always pretend that building golf courses boosts the economy, while building hospitals is a drag on the economy, while building hospitals is a drag on the economy.economy.

Does that make sense to you?Does that make sense to you?





IV. FEDERAL FISCAL POLICY

V. CAN V. CAN ““CONSUMERCONSUMER--DRIVEN HEALTH CAREDRIVEN HEALTH CARE”” BAIL US OUT?BAIL US OUT?A. A. ““Consumer Driven Health CareConsumer Driven Health Care”” defineddefined

In the current debate on U.S. health policy, the term In the current debate on U.S. health policy, the term ““ConsumerConsumer--Directed Health CareDirected Health Care”” and its acronym CDHC and its acronym CDHC has come to mean mainly the following:has come to mean mainly the following:

1. Health insurance policies with very high1. Health insurance policies with very high--deductibles (anywhere deductibles (anywhere from $2,000 to $15,000 per year per family) and often high from $2,000 to $15,000 per year per family) and often high coinsurance rates thereafter (25% to 35%)coinsurance rates thereafter (25% to 35%)

2. Personally held Health Savings Accounts (2. Personally held Health Savings Accounts (HSAsHSAs), also known as ), also known as Medical Savings Accounts (Medical Savings Accounts (MSAsMSAs), into which individuals or ), into which individuals or families can make annual deposits out of pretax income and from families can make annual deposits out of pretax income and from which deductibles or coinsurance can be paidwhich deductibles or coinsurance can be paid

President Bush, for example, would allow these President Bush, for example, would allow these HSAsHSAs onlyonlyif they were coupled with a highif they were coupled with a high--deductible insurance policy deductible insurance policy with specified minimum deductibles.with specified minimum deductibles.

YEARS

THE

FAM

ILIY

’S A

NN

UA

L H

EALT

H S

PEN

DIN

G

ANNUAL DEDUCTIBLE

HSA

THE GENERAL IDEA OF HIGH DEDUCTIBLE HEALTH INSURANCE

Catastrophic insurance

HSA

HSA

HDHI+HSA arrangements come in two quite distinct HDHI+HSA arrangements come in two quite distinct flavors that should never be confused: flavors that should never be confused:

1. HDHI policies 1. HDHI policies offered by employersoffered by employers through an through an insurance carrier, coupled with a taxinsurance carrier, coupled with a tax--preferred preferred HRAHRA that is that is effectively owned by the employer, i.e., it is not portable effectively owned by the employer, i.e., it is not portable from job to job.from job to job.

2. HDHI policies offered in the 2. HDHI policies offered in the individual marketindividual market for for insurance insurance –– e.g., via the internete.g., via the internet--based broker based broker eHealthInsurance.comeHealthInsurance.com –– coupled with a personally owned, coupled with a personally owned, portable, taxportable, tax--preferred preferred HSAHSA that is managed by a bank.that is managed by a bank.






V. CAN V. CAN ““CONSUMERCONSUMER--DRIVEN HEALTH CAREDRIVEN HEALTH CARE”” BAIL US OUT?BAIL US OUT?A. “Consumer Driven Health Care” defined

B. EmploymentB. Employment--based CDHCbased CDHC

Family’s total

medical bill for a

given yearEmployer

contributes $1,500 to MSA

Family pays next $2,500 out of

family’s budget

PATIENT’S TOTAL

ANNUAL HEALTH

BILL

Catastrophic health insurance pays costs

above $4,000, probably under a

managed-care insurance product

For doctors and hospitals this could mean added bad debt expense, although that bad debt might be offset by higher fees.

ILLUSTRATION OF EMPLOYMENT-BASED CDHC

FamilyFamily’’s total s total health bill for health bill for

the yearthe year






V. CAN V. CAN ““CONSUMERCONSUMER--DRIVEN HEALTH CAREDRIVEN HEALTH CARE”” BAIL US OUT?BAIL US OUT?A. “Consumer Driven Health Care” defined

B. Employment-based CDHC

C. Individually purchased HSA policiesC. Individually purchased HSA policies

eHealthInsurance.comeHealthInsurance.com is an Internetis an Internet--based farmers market, based farmers market, so to speak, for individually sold health insurance policies.so to speak, for individually sold health insurance policies.

In the following examples, I pretended to be In the following examples, I pretended to be a single woman, like this lady, in her mid a single woman, like this lady, in her mid 30s with three children under age 10 living 30s with three children under age 10 living in either Los Angeles (Zip code 90040) or in either Los Angeles (Zip code 90040) or Dallas, Texas (Zip code 75202).Dallas, Texas (Zip code 75202).

Dallas, Texas Zip Code 75202Dallas, Texas Zip Code 75202

It is not clear to me how high deductibles and It is not clear to me how high deductibles and coinsurance of this sort are compatible with the already coinsurance of this sort are compatible with the already very low income of the roughly bottom third of families very low income of the roughly bottom third of families in the nationin the nation’’s income distribution.s income distribution.

5.3%

4.3%

11.2%

11.7%

15.3%

21.0%

13.4%

11.3%

3.5%

1.7%

1.3%

0% 5% 10% 15% 20% 25%

Less than $10,000

$10,000 - $14,999

$15,000 - $24,999

$25,000 - $34,999

$35,000 - $49,999

$50,000 - $74,999

$75,000 - $99,999

$100,000 - $149,999

$150,000 - $199,999

$200,000 - $249,999

$250,000 and more

DISTRIBUTION OF FAMILY INCOME, UNITED STATES, 2002Average income $66,970 (Median about $50,000)

SOURCE: Bureau of the Census website http://ferret.bls.census.gov/macro/032003/faminc.

= 33%

The problem is exacerbated by the fact that CDHC with The problem is exacerbated by the fact that CDHC with high deductibles inevitably shifts more of the financial high deductibles inevitably shifts more of the financial burden of ill health away from chronically healthy to burden of ill health away from chronically healthy to chronically sick Americans, who often are to be poor chronically sick Americans, who often are to be poor becausebecause they are chronically ill.they are chronically ill.

0.0% 0.1% 0.6% 1.2% 2.0% 3.4% 5.4%9.1%

16.5%

61.8%

0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5 6 7 8 9 10DECILE OF PRIVATELY INSURED POPULATION

% O

F TO

TAL

HEA

LTH

SPE

ND

ING

AC

CO

UN

TED

FO

R B

Y D

ECIL

E

SOURCE: MEPS Data, provided by Kenneth Thorpe, Emory University

PERCENT OF TOTAL HEALTH SPENDING ACCOUNTED FOR BY DECILE AMONG PRIVATELY INSURED AMERICANS, 2001

78.3%

SOURCE: Martin Spikoff, “Health Plans Begin to Address Chronic Care Management,” Managed Care, December 2003.

$2,509

$0 $58 $152 $297 $492 $792 $1,279$2,160

$3,979

$14,733

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

AVGE 1 2 3 4 5 6 7 8 9 10DECILE OF PRIVATELY INSURED POPULATION

MEA

N P

ER C

API

TA S

PEN

DIN

G IN

DEC

ILE

SOURCE: MEPS Data for 2001, provided by Kenneth Thorpe, Emory University

A major effect of HDHI will be to redistribute the fiscal burden of health care from the chronically healthy to the chronically sick

FOR THE CHRONICALLY ILL, THE HDHI CONSTRUCT WOULD WORK OUT LIKE THIS

YEARS

THE

FAM

ILIY

’S A

NN

UA

L H

EALT

H S

PEN

DIN

G

ANNUAL DEDUCTIBLE

HSA HSA

HSA

Catastrophic insurance

At the moment, many state governments seek to reform their At the moment, many state governments seek to reform their Medicaid programs in the direction of CDHC schemes.Medicaid programs in the direction of CDHC schemes.

The most clearly articulated version of this idea is emerging The most clearly articulated version of this idea is emerging in Florida.in Florida.

That the federal government is likely to endorse this type of That the federal government is likely to endorse this type of reform can be inferred form the composition of the Medicaid reform can be inferred form the composition of the Medicaid Commission recently appointed by the U.S. Secretary of Commission recently appointed by the U.S. Secretary of Health and Human Service.Health and Human Service.

Several members of the Commission are enthusiasts for Several members of the Commission are enthusiasts for CDHC.CDHC.

It can fairly be asked, however, how readily a concept It can fairly be asked, however, how readily a concept that relies on very substantial cost sharing by patients that relies on very substantial cost sharing by patients and, on top of it, on an Interned based information and, on top of it, on an Interned based information infrastructure can be applied to the Medicaid infrastructure can be applied to the Medicaid population.population.

After all, the concept has not really been tried even on After all, the concept has not really been tried even on middle and upper income Americans who are much middle and upper income Americans who are much better endowed with ability to pay high cost sharing and better endowed with ability to pay high cost sharing and who also have greater facility with IT.who also have greater facility with IT.

My sense is that state governments would be much My sense is that state governments would be much better off if they relied even more heavily than they have better off if they relied even more heavily than they have hitherto on Medicaid managed care for comprehensive hitherto on Medicaid managed care for comprehensive coverage with the (necessarily somewhat coverage with the (necessarily somewhat maternalisticmaternalistic) ) health and healthhealth and health--care management that goes with it.care management that goes with it.






V. CAN “CONSUMER-DRIVEN HEALTH CARE” BAIL US OUT?

VI. WILL PRIVATIZING MEDICARE AND MEDICAID BAIL US OUT?VI. WILL PRIVATIZING MEDICARE AND MEDICAID BAIL US OUT?

The short answer is that the coordinated care and The short answer is that the coordinated care and disease management that welldisease management that well--run managedrun managed--care care companies can offer can help getting more value (better companies can offer can help getting more value (better outcomes) for the tax dollar.outcomes) for the tax dollar.

Another advantage is that they offer the government upAnother advantage is that they offer the government up--front closure on budgets for public insurance programs.front closure on budgets for public insurance programs.

But it is a pipe dream that privatizing can yield But it is a pipe dream that privatizing can yield majormajorcost savings for taxpayers, other than shifting costs cost savings for taxpayers, other than shifting costs onto the shoulders of Medicare or Medicaid recipients.onto the shoulders of Medicare or Medicaid recipients.

1.1. Research by The Research by The LewinLewin Group has shown that Medicaid Group has shown that Medicaid managed care actually is somewhat cheaper than treating managed care actually is somewhat cheaper than treating the same patients in the openthe same patients in the open--ended, unmanaged ended, unmanaged Medicaid system, and the quality of care is better.Medicaid system, and the quality of care is better.

2.2. By contrast, privatizing Medicare costs taxpayers MORE. By contrast, privatizing Medicare costs taxpayers MORE. It can be a source of cost savings for taxpayers only by It can be a source of cost savings for taxpayers only by shifting more costs onto Medicare beneficiaries.shifting more costs onto Medicare beneficiaries.

SOURCE: HEALTH AFFAIRS WEBEXCLUSIVE 15 DECEMBER 2004.






V. CAN “CONSUMER-DRIVEN HEALTH CARE” BAIL US OUT?

VI. WILL PRIVATIZING MEDICARE AND MEDICAID BAIL US OUT?VI. WILL PRIVATIZING MEDICARE AND MEDICAID BAIL US OUT?

VII. CONCLUDING THOUGHTSVII. CONCLUDING THOUGHTS

For all their laments over Medicaid and SHIP spending, state legislators must realize that they buy health services for the poor on the cheap.

It is well known in official statistics that Medicaid does not cover the full average costof providing health care to the poor and, for physicians, not even incremental costs.

Private Payer

1.22

37.5%

PAYMENT-TO-COST RATIOS FOR AMERICAN HOSPITALS

Percent of Hospital Cost

Other Govt. is 1.6% of cost and 0.93 Payment to Cost Ratio

Paym

ent-t

o-C

ost R

atio Cost

Medicare

0.95

38.5%

Uncompensated care is 5.5% of cost and 0.14 Payment –

to-Cost Ratio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0.92

14.3%

Medicaid

Source: Courtesy of Al Dobson, Joan DaVanzo, Namrate Sen, The Lewin Group, analysis of data presented in the American Hospital Association/ Lewin Group Trendwatch Chartbook 2005.

Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare and Medicaid, 1980-2003

a/ Includes Medicaid Disproportionate Share payments.

50%

60%

70%

80%

90%

110%

120%

130%

140%19

80

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

100%

Private PayerPrivate Payer

Medicare

Source: Courtesy of Al Dobson, Joan DaVanzo, Namrate Sen, The Lewin Group, analysis of data presented in the American Hospital Association/ Lewin Group Trendwatch Chartbook 2005.

MedicaidMedicaid

In economics we teach students that the prices people offer for something signals the value they attach to it.

While it has been great for the states to get such a bargain under our social contract, paying prices far below the full cost booked by providers of care carries with it certain ethicalrisks of which state legislators should be conscious.

Aren’t legislators implicitly telling pediatricians that the social value of the pediatrician’s work varies by the economic status of the children they treat?

What, then, are state legislators communicating to, say, pediatricians, when Medicaid pays pediatricians $20 or so to see a poor child on Medicaid or SCHIP, but as much as $80 to see their own children?

A FUNDAMENTAL QUESTION FOR STATE LEGISLATORS:

As a matter of national policy, should the social value of giving health care to any of these little ones be the same?

sailing into the perfect storm: who will …seattle, washington august 19, 2005 i. longterm trends...

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