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Emergency: The critical condition of US health care


What is the biggest contributor to high health care costs right now?

David HANDEL: A lot of things are contributing to the increasing cost of health care, starting with demographics. We’ve got an aging population. We also have some intrinsic health problems in the country—a high incidence of smoking, obesity. There is a lot of new technology that improves care but it’s also expensive and adds to the cost of health care. Similarly, there are also new pharmaceuticals, which again improve care but do have an impact on costs. You have labor shortages, and when that happens, it increases labor cost. You have the uninsured, who have less access to care, so they get care further in the process and that becomes more expensive. Many times they also go to the emergency room, which is a very expensive entry point into health care. So there are a wide variety of factors. In addition, the utilization of health care services by individuals is increasing.
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Eric WRIGHT: I would add that when you compare the U.S. health care system to other countries’ systems, we spend a larger proportion of our health care dollars on administrative costs. Most estimates range between 25 and 30 percent of every dollar we spend on health care is because of administrative costs. It largely goes to the complex way we choose to fund health care services. So the fact that health care facilities have to have many billing clerks to figure out how to bill different payers of health care actually adds a lot to the cost.

The newest thing we’ve seen in the last two decades is the emergence of a whole class of non-clinical professional case managers, whose primary functions are to negotiate with payors. Originally, it was only insurance companies that had case managers to help manage costs; however, hospitals came to realize in the 1990s that they needed to have people to do that as well. As a result, most hospitals now have case management departments who work primarily with the case managers from the insurance companies to figure out what they are going to cover and at what level. The fact that we have this whole class of professionals adds extraordinarily to the cost of health care. European countries tend have 6 to 8 percent of their costs for administration. One fact that is surprising to most is that our own Medicare system is actually quite efficient, where only about 2 percent of each Medicare dollar goes for administration. So a lot of it has to do with how you pay.

With such a bureaucratic burden, is there a way to cut it back at some point or is it just the nature of the beast?

WRIGHT: One of the reasons everyone is so excited about new health information technologies—and President Bush mentioned this in the State of the Union address—is the potential development of a standardized billing system. The belief is that an electronic medical records system will demand a uniform billing system that will streamline and reduce the administrative burden on health care claims processing. Right now, most health insurance companies and even federal and state payors have their own rules and forms for billing, which simply adds to administrative overhead. It is difficult, though, to say just how successful this effort can be because health insurance companies have their own standards for assessing clinical need, efficacy, and outcomes, which are become increasingly tied to decisions about payment.

Ann HOLMES: One of the issues in the United States is that you can have multiple payers for a single patient. This fact complicates determining who is covered for what service, as well as who pays for that service.The amount of paperwork that’s generated is really quite astounding.

What burden will the aging population bring to the health care industry?


HANDEL: It’s going to have a huge effect. Today, there’s about 42 million enrollees in Medicare and that number is going to grow over 25 years to an estimated 78 million—so essentially that’s almost double in a 25-year period. As people age, their need for health care increases.

WRIGHT: But it’s not quite as straightforward now. The GAO came out with a report recently that estimated the percentage of the older population having severe physical disabilities is lower now than it was in previous generations. So at the same time there is a growing health care population of seniors, seniors are also healthier than previous generations, which is only making it more difficult to accurately project the health care needs and costs for the elderly.

HANDEL: The other thing is the financing of Medicare. Part A, the hospital component of Medicare, is financed through payroll taxes from those who are working. As the population ages, there are fewer people working relative to the retirees to pay for Mecicare costs. Former Secretary of Health and Human Services Tommy Thompson was in Indianapolis as part of a panel discussion recently and he really focused on the year 2013 as the point that the money flowing in to Medicare will be less than the money flowing out to pay the costs of benificiaries’ health care. Everyone talks about Social Security having this huge financial problem over time, but most health care experts believe Medicare is a similar if not greater potential problem if the current system is perpetuated.

Is Medicare prepared to deal with that influx or is it just too much of a government bureaucracy to deal with the problem quickly enough?

HANDEL: My view is that Medicare won’t have a problem enrolling new people to traditional Medicare. They use insurance intermediaries around the country that are very effective in handling this. As Eric said, their administrative costs are low. So I don’t think the challenge is adding more elderly to the program, I think it’s the funding of the program and the medical care these people are going to need.

WRIGHT: I think what’s interesting about Medicare Part D is this “donut hole”, which is adding a whole layer of complexity for the consumer. It’s inconsistent with the way Medicare has operated historically. Most of the cost control mechanisms in Medicare have certainly been behind the scenes on the provider side, where they squeeze the provider. While the new program is helping to cover some of Medicare subscribers’ prescription expenses, the new program seems to be balanced more in favor of the suppliers of pharmaceuticals than the consumer.

HOLMES: When we want the consumer to assume the responsibility for limiting consumption, we force them to pay a portion of the cost. But cost control alone can’t explain the “donut hole”. The standard Medicare Part D plan has a 25 percent co-pay for people with very low levels of prescription drug use, but then the copayment increases to 100 percent at more moderate levels of use. This pattern is completely at odds with economic principles of insurance that suggest large losses should be covered on more, not less, generous terms than small losses. So why do we see such patterns? I think it has to do with Part D being a voluntary insurance plan. In most other developed countries, participation in a health insurance program is mandatory, so that risks (and costs) are pooled across the whole population. In the U.S., insurers have to contend with the fact that people can chose to opt out of voluntary insurance schemes, leaving the plan with only high-cost participants. As a result, Medicare had to design this rather complicated benefit scheme in which people who expect to have low prescription drug costs are offered a particularly generous benefit in order for the program to be financially solvent.

What are some of the advantages to the U.S. system of employer-based insurance over a national health care system?

HOLMES: Compared to a lot of other countries, the access to care for people who have insurance is much better, particularly high-tech care and intensive care.

HANDEL: Clearly, the availability of high technology is greater here based on the way the system works. That doesn’t mean that technology is not available in other countries, it just isn’t available in the numbers that it is in the United States.

HOLMES: I had an oncologist express it to me this way: Everything we do here for cancer they do in Canada—they just don’t do it quite as often. In the larger provinces in Canada, they will have one main health center for the province with many of the facilities you would expect to find in any large U.S. health care center. Patients may face geographic barriers to accessing these facilities, and access may be further limited using waiting lists, but they don’t have to contend with the same financial barriers that confront U.S. patients. In the U.S., access to care is more convenient, but only if you can afford it.

Another interesting thing is the split of specialists and primary care doctors. The ratio is reversed in Canada compared to the U.S. Here, I typically have a much longer wait to see my family practice doctor than I do to see many specialists, but it’s the other way around in Canada. I’ve always found the contrast interesting: If you are going to ration one type of care, you might ask which type is more appropriate to try and limit.

WRIGHT: But you also have to keep in mind that primary care tends to be low-cost care. Good primary care can reduce the need for higher cost care. The ultimate irony of the pattern Ann noted is that in waiting for your primary care physician, you may end up getting sicker in the meantime. In fact, I know somebody who had what was basically a cold that turned into bronchitis and ultimately resulted in pneumonia and a visit to the ER, all the while she was waiting to see her primary care physician.

Premiums have become more of an issue in employer-based care in recent years. Is this due to higher health care administrative costs or higher employer costs?

HANDEL: The cost of health care has gone up and that means the health benefit costs that companies have has gone up significantly. The things employers have been doing are increasing the percentage of the benefit costs paid by their employees, both in co-pays and deductibles.

HOLMES: I think it’s also an indication of the shift of the corporate mindset—financially distressed businesses are abandoning many of their pension and health benefit obligations, as seen first in the airline industry and I believe next in the auto industry. So that’s a real shift in attitude in corporate America toward its employees. And if one major company in a particular industry does it, the others will be at a competitive disadvantage if they don’t all follow suit.

HANDEL: You don’t see this so much with the large companies, but with smaller companies. A lot of small companies are in fact dropping their health care coverage. I think statistically 69 percent of companies had health care insurance in 2000 and it’s now down to 60 percent and that decrease was not with large companies of 200 or more employees, it was with the smaller companies.

WRIGHT: One of the rationales is if you make the consumer more conscious of what they are paying for, they are going to be more judicious in using that care. So I think these high deductible health care plans attached to a health savings account exist because what they want to do is put more responsibility on the consumer to make those choices. Unfortunately, this puts the consumer in a potentially vulnerable position if they have a significant health event. The question is what happens when they make a mistake and haven’t saved enough for when they do get sick? Where do the resources come from to pay for the additional costs? To save money, employers are cutting out things from health care plans—some don’t even cover childbirth or cancer now. More and more people are shocked when they learn that what they assumed was covered is not. People typically go for the plan with low-cost premiums without really reading the fine print in terms of what the impact is on their access to care.

HOLMES: You also have to make some heroic assumptions about whether the typical “man in the street” is sufficiently well-informed to know when his money is well spent on health care. This is not just a problem of judging the quality of different providers, but also whether it is even appropriate to seek care in the first place. There is a real risk that, in an attempt to economize, a person will delay seeking care until it’s past the point where a better result could have been achieved for less money.

WRIGHT: I think one of the long-term implications, which goes back to your question about national health care, is that these changes are going to force the federal and state governments to get more involved. With General Motors and other major corporations cutting back on pension and health care coverage, I believe we are going to see a lot more major corporations moving in this direction very quickly. What that’s going to do is force the federal government to pick up more of these costs, which is why I think you’re suddenly hearing about national health care programs again. These trends are making a lot of people very jittery. The problem is that if we allow this corporate restructuring to continue, the federal government is going to be forced to respond, but only after it has become truly a crisis, and it will be it a lot harder to construct a rational system at that point than if we were to do it incrementally over the course of a decade.

HOLMES: If you get to the point where consumers see employer-based insurance at risk, then they are going to support more government intervention. But you still have a lot of vested interests who want to keep the health care market in its current form. After all, what we see as high costs are high incomes to other parties. One of the challenges facing the national health insurance movement in the U.S. is that these vested interests have much more at stake, and are much better organized, than their counterparts when other countries adopted national health insurance. Recently, we’ve seen concerted lobbying efforts from the insurance industry and manufacturers of drugs and devices when health care reform has appeared on the national political agenda.

What are some of the trends we see now in the industry and what is the future going to look like for health care?

HOLMES: The cynical member of this party sees increasing fissures and segmentation of the market that will aggravate current inefficiencies. For instance, insurance products are being put together to attract low-risk healthy people and not necessarily high-risk unhealthy people. Pay-for-performance initiatives may give providers financial incentives to seek people who have good outcomes and not bad outcomes when they’re treated. Again, the people who are at highest risk for bad outcomes are those that often have the greatest need for care. So you’re targeting resources to a disproportionate number of healthy people.

HANDEL: I think there are positive trends. Recognizing what we talked about before, this is a complicated, diverse industry but the attention focused on health care quality is developing a lot of momentum and I think there will be significant progress made in that area that should have a positive impact on the quality of care and an impact on lowering the cost of care. There are a lot of experiments going on in states in terms of how you provide some kind of insurance for the uninsured and hopefully these and other experiments will provide good models for making significant progress in this area. There are efforts to address a number of different elements but it’s hard to have a cohesive, all-encompassing approach based on the way the health care field is structured.

WRIGHT: I think Dave said it really well. The are many positive trends, and I think they make most Americans feel good about where medicine is going. However, at the same time, there other cross currents that aren’t so positive. The costs that are fueling medical innovation are really out of control, and there is no one place that you can put your finger on to exert effective cost control. The system is just too complicated. Another complicating factor is public opinion. On the one hand, most people believe we should do something about the uninsured and take care of people with serious health problems. At the same time, the public is also clearly resistant to any change if it involves changes to the health care they receive. That is, most Americans actually feel good about the health care they receive. It’s as if most Americans are circling the wagons, trying to protect their own piece of the health care system without recognizing how what they are getting is connected to the larger system and the many problems that Ann alluded to earlier. The consolidation of health programs also reflects this circling-the-wagons mentality. They are banding together to create efficiencies through the consolidation of services and to protect themselves from critics who are advocating for fundamental change in the system. We’re seeing more and more of these conglomerates developing—and how big they get is going to be the big question.

HOLMES: Economists would say they did that to better negotiate prices.

WRIGHT: That’s part of it, but they’re still circling the wagons to protect their markets


David Handel is a clinical profesor and director of the Master of Health Administration program at SPEA IUPUI. He received his MBA in Hospital Administration from the University of Chicago in 1968. He has extensive experience in health care management.

Eric Wright is an associate professor and director of Health Policy at the Center for Urban Policy and the Environment in Indianapolis. He holds a Ph.D. in Sociology from Indiana University Bloomington. His expertise includes health policy and services research, mental health policy and services research, HIV/AIDS/STD prevention, and applied social research and program evaluation.

Ann M. Holmes is an associate professor at SPEA IUPUI. Her fields of interest include health economics, measurement of health outcomes for economic evaluation, and analysis of mental health utilization. She received her Ph.D. in Economics from the University of British Columbia, Vancouver.