Warren’s Prescription the Wrong One

In an October analysis the Urban Institute concluded that a single-payer plan, similar to Sen. Warren’s, which eliminates virtually all patient cost-sharing, would raise national health spending by more than 20%, or $719.7 billion a year. In the researchers’ view, the additional demand stimulated by making health care “free” to consumers would overwhelm any potential savings from paying doctors and hospitals government-dictated rates. This higher demand would also raise the cost of single-payer well beyond Sen. Warren’s estimates, meaning middle-class families would face massive tax increases to pay for this spending.

That Prof. Johnson would cite the Urban Institute to argue that Sen. Warren’s plan would lower health-care costs, while ignoring the fact that the institute itself reached the opposite conclusion, speaks to the cherry-picked nature of the proposal, which has drawn derision from liberals and conservatives alike.

This post was originally published at the Wall Street Journal.

How Single-Payer Supporters Defy Common Sense

The move to enact single-payer health care in the United States always suffered from major math problems. This week, it revived another: Common sense.

On Monday, the Mercatus Center published an analysis of single-payer legislation like that promoted by socialist Sen. Bernie Sanders (I-VT). While conservatives highlighted the estimated $32.6 trillion price tag for the legislation, liberals rejoiced.

Riiiiiigggggggghhhhhhhhhttttt. As the old saying goes, if something sounds too good to be true, it usually is. Given that even single-payer supporters have now admitted that the plan will lead to rationing of health care, the public shouldn’t just walk away from Sanders’ plan—they should run.

National Versus Federal Health Spending

Sanders’ claim arises because of two different terms the Mercatus paper uses. While Mercatus emphasized the way the bill would increase federal health spending, Sanders chose to focus on the study’s estimates about national health spending.

Although it sounds large in absolute terms, the Mercatus paper assumes only a slight drop for health spending in relative terms. It estimates a total of $2.05 trillion in lower national health expenditures over a decade from single-payer. But national health expenditures would total $59.7 trillion over the same time span—meaning that, if Mercatus’ assumptions prove correct, single-payer would reduce national health expenditures by roughly 3.4 percent.

Four Favorable Assumptions Skew the Results

However, to arrive at their estimate that single-payer would reduce overall health spending, the Mercatus paper relies on four highly favorable assumptions. Removing any one of these assumptions could mean that instead of lowering health care spending, single-payer legislation would instead raise it.

First, Mercatus adjusted projected health spending upward, to reflect that single-payer health care would cover all Americans. Because the Sanders plan would also abolish deductibles and co-payments for most procedures, study author Chuck Blahous added an additional factor reflecting induced demand by the currently insured, because patients will see the doctor more when they face no co-payments for doing so.

Second, the Mercatus study assumes that a single-payer plan can successfully use Medicare reimbursement rates. However, the non-partisan Medicare actuary has concluded that those rates already will cause half of hospitals to have overall negative total facility margins by 2040, jeopardizing access to care for seniors.

Expanding these lower payment rates to all patients would jeopardize even more hospitals’ financial solvency. But paying doctors and hospitals market-level reimbursement rates for patients would raise the cost of a single-payer system by $5.4 trillion over ten years—more than wiping away any supposed “savings” from the bill.

Finally, the Mercatus paper “assumes substantial administrative cost savings,” relying on “an aggressive estimate” that replacing private insurance with one single-payer system will lower health spending. Mercatus made such an assumption even though spending on administrative costs increased by nearly $26 billion, or more than 12.3 percent, in 2014, Obamacare’s first year of full implementation.

Likewise, government programs, unlike private insurance, have less incentive to fight fraud, as only the latter face financial ruin from it. The $60 billion problem of fraud in Medicare provides more than enough reason to doubt much administrative savings from a single-payer system.

Apply the Common Sense Test

But put all the technical arguments aside for a moment. As I noted above, whether a single-payer health-care system will reduce overall health expenses rests on a relatively simple question: Will doctors and hospitals agree to provide more care to more patients for the same amount of money?

Whether single-payer will lead to less paperwork for doctors remains an open question. Given the amount of time people spend filing their taxes every year, I have my doubts that a fully government-run system would generate major improvements.

But regardless of whether providers get any paperwork relief from single-payer, the additional patients will come to their doors seeking care, and existing patients will demand more services once government provides them for “free.” Yet doctors and hospitals won’t get paid any more for providing those additional services. The Mercatus study estimates that spending reductions due to the application of Medicare’s price controls to the entire population will all but wipe out the increase in spending from new patient demand.

If Sanders wants to take a “victory lap” for a study arguing that millions of health care workers will receive the same amount of money for doing more work, I have four words for him: Good luck with that.

Health Care Rationing Ahead

I’ll give the last word to, of all things, a “socialist perspective.” One blog post yesterday actually claimed the Mercatus study underestimated the potential savings under single-payer: “[The study] assumes utilization of health services will increase by 11 percent, but aggregate health service utilization is ultimately dependent on the capacity to provide services, meaning utilization could hit a hard limit below the level [it] projects” (emphasis mine).

In other words, spending will fall because so many will demand “free” health care that government will have to ration it. To socialists who yearningly long to exercise such power over their fellow citizens, such rationing sounds like their utopian dream. But therein lies their logic problem, for any American with common sense would disagree.

This post was originally published at The Federalist.

What’s Going on with Spending on Health Insurance Overhead?

Even as federal regulators take steps to constrain administrative spending by private health insurers, government overhead on health coverage has soared.

In a Health Affairs blog post published Wednesday, David Himmelstein and Steffie Woolhandler use actuarial estimates from the Centers for Medicare and Medicaid Services to project that between 2014 and 2022, national spending on private insurance overhead and government administration will rise by $273.6 billion related to the health-care overhaul.

The authors both favor single-payer health insurance; Mr. Himmelstein co-founded Physicians for a National Health Program, an advocacy organization directed to that end. They close their piece by saying that “In health care, public insurance gives much more bang for each buck.”

Yet overhead in the public sector is growing much faster than in the private sector.

Mr. Himmelstein and Ms. Woolhandler combine two categories of spending—government administration and the net cost of private insurance (i.e., overhead)—to reach their estimates of administrative costs. Combining the two categories masks significant differences. While private insurance overhead is projected to rise at an average annual rate of 8.2% between 2014 and 2022, government administration is projected to rise at a 22.7% annual rate—nearly three times as fast. That’s consistent with my 2012 analysis, which noted that federal actuaries projected double-digit increases in spending on government administration for three of the first four years of Obamacare implementation (2011, 2012, and 2014).

This week federal regulators proposed extending medical-loss ratio requirements—a price control on overhead spending—to Medicaid managed-care plans. Meanwhile, several state-run insurance exchanges face financial difficulties, with structural challenges to their ability to attain self-sufficiency while limiting their charges on consumers to only a small share of premiums. The growing spending on bureaucracy reported in Health Affairs suggests that regulators should perhaps focus first on increasing efficiency and reducing government’s own costs before issuing more requirements on the private sector—such as the 653-page regulations issued Wednesday—that attempt to pass them on to consumers.

This post was originally published at the Wall Street Journal Think Tank blog.

Is Medicare Spending Increasing?

The Department of Health and Human Services released a report this month highlighting the slowdown in Medicare spending growth in recent years. The administration says that Obamacare has led to slower growth in overall health spending, which in turn has made Medicare more sustainable. Another government document suggests that Medicare spending may be accelerating—but even if it isn’t, demographic trends will create pressure on the program in the coming years.

The HHS report compared Medicare growth rates from 2000 to 2008 with rates from 2009 to 2013, and found that $316 billion was saved over the latter period. The calculation includes Medicare savings for the year before Obamacare was enacted, which indicates that the law cannot be fully responsible for the slowdown. Some reports have suggested that much of the slower growth in health spending has stemmed from lingering economic weakness, though studies and experts differ on this point.

But in the week before this report was published, HHS undercut its message by acknowledging that Medicare spending has accelerated in recent months. The Centers for Medicare and Medicaid Services initially proposed a payment decrease for Medicare Advantage plans in 2016, but its final call letter proposed a payment increase, which it attributed to recent spikes in Medicare fee-for-service (FFS) spending:

The 2.5 percentage point increase from the Advance Notice to the Final Notice comprises 1.9 percentage points of additional FFS spending through 2015, an underlying additional FFS trend rate of 0.6 percent for 2016, and 0.1 percent for the assumption that Congress will enact the pending [“doc fix”] legislation….Initial information from Medicare actuaries suggests that contributing factors behind the change from the preliminary growth rate include higher than expected spending on impatient hospitalizations and some intermediary services such as therapy, rural health clinics and federally qualified health centers.

In other words, Medicare Advantage plans did not cut payments for the upcoming year because Medicare’s actuaries have observed an uptick in spending for traditional Medicare. It’s possible, then, that the trend of slower spending growth highlighted in the HHS report may have ended.

Even if the growth in Medicare spending stops, demographic trends in the coming decades will still force a re-examination of the program. The onslaught of retiring baby boomers—an average of 10,000 per day for two decades—will define our fiscal future for the next generation. Whether or not growth in Medicare spending remains slow for years to come—and some trends suggest that it won’t—federal policy makers still have good reason to prioritize right-sizing of entitlement programs.

This post was originally published at the Wall Street Journal Think Tank blog.

Brookings v. Dartmouth on Health Costs

The Brookings Institution released a study last week that could turn the debate over health spending on its head. While many health analysts—including several key advisers to the administration during the debate over Obamacare—believe that variations in physician practice patterns could represent the key to unlocking a more efficient health system, the Brookings paper questions the degree to which such variations even exist.

At its core, the debate boils down to a difference in two econometric models, both of which attempt to explain geographic variations in spending— for instance, why Medicare spends so much more per patient in Miami than in Minneapolis. Researchers affiliated with the Dartmouth Atlas of Health Care previously found what they consider large, unexplained variations in health spending. Their research—which examines data from individual Medicare beneficiaries, controlled for health status—led them to conclude that differences in physician behavior may account for much of the unexplained spending variations.

The Brookings study, however, uses a different model, one that examines spending data from the state level, and controls those state data using average health attributes in that state, rather than using data from individual Medicare beneficiaries. This state-based model explains much more of the previously unexplained geographic variation in spending, arguing that states with similar demographics have similar spending levels. As a result, the Brookings paper concludes—contra­ Dartmouth—that “geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system.”

It’s unclear who has the more accurate model, and why. While Brookings’ state-level model incorporates data from both Medicare and non-Medicare beneficiaries, the Dartmouth research focuses just on Medicare patients—and may therefore be skewed by traits particular to the Medicare program, or Medicare beneficiaries, that do not apply to the population as a whole.

The debate over spending variations has profound policy implications. Former Obama administration official Peter Orszag, who has cited Dartmouth research in his writings, believes that variations in physician practice patterns—doctors performing too many tests, for instance—lie at the root of the unexplained variations in spending.  Mr. Orszag and others used this theory to inform many policy choices related to Obamacare, which included a variety of carrots and sticks that attempted to change physician behavior and reduce spending variations.

The Brookings study undermines the basis of the Dartmouth thesis, and one of the reasons why Obamacare’s adherents believe the law will ultimately reduce health costs. Despite its arcane details, the debate between Dartmouth and Brookings will have profound real-world consequences for our health system in the coming years.

This post was originally published at the Wall Street Journal Think Tank blog.

How Politics and Policy Could Accelerate Health Spending

Medicare actuaries’ annual projections of health expenditures for the next decade emphasized that health spending will rise modestly in the coming years. However, decisions by the administration and Congress to undo future spending reductions could change that picture.

The Wednesday release showed that national health spending will grow at a 5.6% rate this year, due in large part to coverage expansions under the Affordable Care Act, or Obamacare. In 2015, the actuaries estimate that health spending will rise at a slightly lower 4.9% pace, due to “significant decelerations in Medicare and Medicaid spending.” But policy makers may yet reverse the policies behind those projected slowdowns.

With respect to Medicaid, the actuaries noted that in 2015, a “temporary increase in payments in primary care providers is scheduled to expire,” leading to slower spending growth. But spending growth would accelerate if lobbying by numerous medical groups is successful in extending — and broadening — the payment provision.

Likewise, the actuaries note that in 2015, Medicare spending will grow at a much slower rate, “mainly as a result of reduced payments to Medicare Advantage plans.” However, the Medicare Advantage payment reductions included in Obamacare have become a political albatross. In 2011, fearing seniors’ wrath at the polls in 2012, the Obama administration announced a temporary—and legally dubious—Medicare Advantage demonstration program that mitigated much of the effects of Obamacare’s payment cuts.

The administration also scaled back other rounds of Medicare Advantage cuts in 2013 and 2014. If past performance is indicative of future results, some or all of these cuts could be reversed administratively, leading Medicare spending growth to rise instead of fall in 2015.

The analysis above demonstrates the extent to which policy choices made in Washington directly influence national health spending trends. To the extent that reductions in health spending programs become politically unpalatable, and Congress or an administration feels the need to undo them, our health spending growth—to say nothing of our fiscal deficits—will only increase.

This post was originally published at the Wall Street Journal Think Tank blog.

Obamacare Number of the Day: $621,000,000,000

People worried about Obamacare’s impact on the American health care system should remember one key number: $621 billion. That’s the amount that non-partisan actuaries at the Centers for Medicare and Medicaid Services (CMS) said Obamacare would increase national health spending over the next 10 years, in a report released yesterday. So much for the law being the “Affordable Care Act.”

In addition, the report by the CMS actuaries debunked the notion that Obamacare helped cause the recent slowdown in health spending—or that the slowdown is likely to continue:

Annual national health spending growth is projected to remain near 4 percent through 2013, primarily as a result of the recent recession and modest recovery. This projection is consistent with the historical relationship between health spending and economic cycles….

Continued slower health spending growth after the recent economic downturn has raised the question of whether a more fundamental change is occurring in the health sector. However, econometric and actuarial analysis by the CMS Office of the Actuary of the past fifty years of National Health Expenditure Accounts data…suggests that health spending growth is likely to accelerate once economic conditions improve significantly.

Instead, the actuaries conclude, the recession and anemic economic recovery bear the bulk of the “credit” for the current slowdown in health spending growth.

Finally, the actuarial report analyzes the sources of some of the increased health spending due to Obamacare. And, as Exhibit 4 (below) notes, one of the fastest sources of growth in the health sector will be “government administration.” Spending on government administration—which includes salaries for federal, state, and local bureaucrats, as well as computer and other overhead costs for government programs—will more than double, rising from $31.1 billion in 2010 (the year Obamacare passed) to $70.4 billion in 2022.

Exhibit4

So even as Obamacare is raising overall health spending, despite the lingering effects of the economic recession, more of that spending will pay the salaries of government bureaucrats and regulators. That’s not the kind of change Americans can believe in.

This post was originally published at The Daily Signal.

Donald Berwick Rations the Facts With His Eyes Open

Former Medicare chief Dr. Donald Berwick published an op-ed in today’s Boston Globe in which he endorses Professor Elizabeth Warren for her support of Obamacare.  Unfortunately, however, the column reveals that Dr. Berwick must not have learned much about the Medicare program during his time at CMS, given many of his statements:

“Obamacare reduce costs…”  That’s not what Medicare’s own actuary said.  Earlier this year, the actuary published an analysis indicating the law would raise costs by more than $478 billion.  Last year, the actuary testified before Congress, calling “False” the Administration’s stated goal of reducing health care costs.

“It targets waste, fraud, and abuse, reduces unnecessary subsidies to insurance companies…”  Again, that’s not what Medicare’s own actuary said.  He has concluded that over the long-term, up to 40 percent of providers would become unprofitable due to Obamacare, and could “have to withdraw from providing services to Medicare beneficiaries.”  Just this week, an Alabama hospital took a different course – it decided to shut down entirely, due to the impact of Obamacare on its business model.

“President Obama’s health reforms do not cut any guaranteed Medicare benefits…”  This statement is manifestly FALSE, as we have previously demonstrated.  Obamacare cut benefits for wealthy seniors, by forcing them to pay more for their Medicare coverage.  And President Obama’s budget proposed even further benefit cuts – new means-testing, additional co-payments, and higher premiums.  In many cases, these changes are actually good policy, but they’re still cuts to “guaranteed benefits” – and no one should be dishonest enough to claim that they aren’t.

“Thanks to Obamacare, seniors can now get a free annual wellness visit…”  Also incorrect.  These services may be delivered without any out-of-pocket cost-sharing, but they are NOT “free” – someone ends up paying for them.  In fact, all seniors end up paying, as do all Americans – through higher taxpayer spending on Medicare, and higher Part B premiums for seniors.

“Medicare and Medicaid both face challenges today, but not because of Obamacare.  The challenges exist throughout the health care system, mainly in the form of rising costs.”  The implication is that Medicare isn’t the problem – that health costs as a whole are a problem.  But the fact is that Medicare – and particularly its focus on fee-for-service medicine – has been one of the driving elements of rising costs and inefficiency in our health care system.  The non-partisan Congressional Budget Office, in a January report analyzing dozens of Medicare demonstration programs, said these programs did not contain health costs, precisely because of the flawed incentives included in fee-for-service medicine: “Demonstrations aimed at reducing spending and increasing quality of care face significant challenges in overcoming the incentives inherent in Medicare’s fee-for-service payment system, which rewards providers for delivering more care.”  In other words, Medicare isn’t the solution to health care costs – it’s the problem.

Dr. Berwick’s tenure at CMS was cut short due to his many controversial remarks, most notably his (in)famous interview in which he claimed that “The decision is not whether or not we will ration care – the decision is whether we will ration with our eyes open.”  Given his economies with accuracy in the op-ed, many may wonder if Dr. Berwick has also decided to ration the true facts about Obamacare with his eyes open.

Obama Campaign Trumpets $12,400 Premium Increase as “Progress”

The Washington Post reports this morning that the President’s re-election campaign, in responding to a campaign questionnaire, claimed that “when Obamacare is fully implemented, experts estimate it will have lowered health insurance premiums by $2,000 per family.”  While that statement (conveniently) doesn’t cite a source on this claim, the Administration has previously invoked a report published by the Business Roundtable in November 2009 to make this assertion.  But the Roundtable’s study only assumes* a reduction in the increase of premiums, NOT the reduction in absolute terms the President promised during his campaign.  Don’t take my word for it: Look at Exhibit 1 of the study (depicted below), which illustrates that under the maximum achievable “savings,” large employer premiums in 2019 will be $23,151 per family – or $12,408 higher than they were in 2009How is a $12,400 increase in premiums – as opposed to the $2,500 reduction that candidate Obama repeatedly promised – a change that struggling middle-class families can believe in?

 

*  A further note on the Business Roundtable study: Its last page notes that the estimates referred to above were generated in the following way: “We assumed that discretely identified savings opportunities found in health care reform, could, when fully implemented, reduce the overall cost trend by 15% to 20%.”  In other words, the study started out with savings under the law being assumed.  That might prove convenient for the Administration and its allies – but the non-partisan Medicare actuary disagrees, publishing an analysis indicating the law would raise costs by more than $478 billion, and calling “False” the Administration’s stated goal of reducing health care costs.

Fact Check: Slowing Cost Growth

The President attempted to take credit for the slowdown in health costs of late, attributing it to Obamacare.  But estimates of national health spending released by the non-partisan Medicare actuary in July suggest otherwise.  The actuary’s report confirmed that – contrary to the President’s assertions – the private sector is NOT doing fine, and that the economic downturn continues to affect the health care sector.  Specifically, health spending in 2011 rose by a comparatively small amount due to the “lingering effects of the recent recession and modest recovery,” as high unemployment and stagnant wages often result in financially strapped individuals putting off elective surgeries and trips to the doctor.  Just as prior studies from the non-partisan actuary have concluded, spending growth was slower than projected NOT because Obamacare worked, but because the Obama “stimulus” didn’t.