February 28, 2007

Health care cost drivers

At her press conference Tuesday to announce the reintroduction of SB 840, the single payer bill, Sen. Sheila Kuehl said she thinks her side will eventually win this debate because "the facts are on our side." Some of them may be. But not the ones she used Tuesday, at least as far as I can tell.

Mentioning my Tuesday column in which I said demographics (an aging population) and technology were the major drivers behind increasing health care costs, Kuehl said new studies were showing that wasn't true. Instead, she said, administration and prescription drug costs were the major drivers.

If true, this would be a crucial point for single payer advocates. It's fairly plausible that a single payer plan would reduce administrative costs, including not just paper shuffling but marketing and profits. Eliminating the private insurance industry would likely have that effect. And using the government's power to bargain for drug prices would probably also save money, especially if the government were willing to deny its constituents access to drugs that couldn't be bargained down. So if those two costs are what's driving our overall health costs up, a single payer plan might have a chance of staying within a budget supported by taxes that grow at approximately the rate of the state's economy.

But if, instead, what is driving costs up is increased usage of health care from an aging population and the increased use of expensive medical technology, then pretty much the only way to stay within budget is to cut usage or deny people the opportunity to use expensive new medical inventions. It's possible you could reduce some usage with better prevention, but it's difficult to count on the payoff from that as a budget balancer.

According to Kuehl's staff, the study she was talking about was one released last month by McKinsey Global Institute. I've read the study (free registration required) and it appears very solid. It just doesn't say what Kuehl said it does.

First of all, the study is not about trends in US health care costs. It is a snapshot of US costs compared to 13 other countries in 2003. So while its conclusions can be used to compare our health care costs to theirs at a point in time, it says nothing about the growth in US costs over time.

And what does it say about 2003? That our costs were $477 billion higher than the average of the other countries, adjusted for our higher wealth, which tends to increase health spending no matter what kind of system you have.

Of that $477 billion, the biggest drivers were hospital care and outpatient care. Hospital care was $224 billion more than would be expected, and outpatient care was $176 billion more. Private health administration and insurance accounted for $84 billion of the difference, and drugs were $57 billion. We actually spent less than the average on long term care and durable medical equipment.

So the McKinsey study said nothing about the trend, and what it said about the snapshot contradicts Kuehl's point. The major reason we spend so much more than other countries on health care is that we spend more on hospital and outpatient care. And one big reason we spend more on those things, the report says, is that our doctors make far more than the average, and we have far more nurses on duty per patient day than the rest of the world. When was the last time you heard a single-payer advocate harping on doctor salaries or complaining that we have too many nurses?

As it happens, another study published this week in Health Affairs (free for two weeks) did look at the US trends over time, looking back and projecting to 2016. That's the study you may have heard about that said the US would be spending 20 percent of GNP on health care by 2016. So what's driving that growth?

According to the study, US health care costs will climb from $1.86 trillion in 2004 to $4.1 trillion in 2016, an increase of about $2.3 trillion.

Of that, about $720 billion will be in hospital costs, and $670 billion in professional services. Drugs will account for $308 billion. And administration and private insurance will be $160 billion. Of the increased spending on drugs, by the way, about half will come from higher prices and half from increased utilization.

So there's another study that says our increased consumption of health care is the primary driver of our rising health care bill. And that's ominous news for advocates of single payer. Because it means that after they capture any savings from the elimination of the insurance industry, costs are likely to resume their climb at pretty much the same rate they have been climbing for years. And the only way to deal with that in a single payer system is to raise taxes or reduce the amount of care delivered. Neither would be as popular when they happened as the abtract notion of "universal health care" is today.

Posted by dweintraub on February 28, 2007 3:41 PM