WHY AMERICA WILL CURB THE FUTURE GROWTH OFHEALTH-CARE INCOMES AND -EMPLOYMENT

Uwe Reinhardt,Woodrow Wilson School of Public and International Affairs

andDepartment of Economics

Princeton University

The National on Congress on Healthcare Clinical Innovations, Quality Improvements and Cost Containment

Washington, D.C.October 26-28, 2011

I. THE DUAL SOCIAL ECONOMIC ROLE OF HEALTH CARE

II. THE MACRO-ECONOMIC CONTEXT

III. HOW HEATH CARE COULD HEAL ITSELF

IV. MORE RADICAL PROPOSALS

OUTLINE OF PRESENTATION

I.

THE DUAL ECONOMIC ROLE OF HEALTH CARE

A few decades ago, Harvard Philosophy Professor Alfred E.

Neuman received the Nobel Prize in Medicine for his

discovery of (a) an innovative definition and (b) a famous

cosmic law..

He edited the first journal of U.S. health policy.

patient (pa’shent) - n. 1. A person

under medical treatment. [Middle English

pacient, from old French

patient, from Latin patients, from pati, to suffer.]

TRADITIONL DEFINITION OF “A PATIENT”

patient (pa’shent) - n. 1. A person

under medical treatment. [Middle English

pacient, from old French

patient, from Latin patients, from pati, to suffer.] 2. A biological structure yielding cash – acronym BSYC [from 21st century fee-for-

service medicine. ]

NEUMAN’S DEFINITION OF “A PATIENT”

Alfred E. NeumanAlfred E. Neuman’’s s Cosmic Health Care EquationCosmic Health Care Equation

HEALTH SPENDING = HEALTH CARE INCOMEHEALTH SPENDING = HEALTH CARE INCOME(Including fraud, waste (Including fraud, waste

and abuse)and abuse)

HEALTH SPENDING $

HEALTH CARE

HEALTH INCOMES $

REAL RESOURCES

PRO

VIDER

S OF

REA

L HEA

LTH-C

AR

ER

ESOU

RC

ES

HEALTH-

CARE

SECTOR

THE DUAL OBJECTIVES

PURSUED IN THE HEALTH-CARE SECTOR

HO

UR

LY INC

OM

E

RETU

RN

ON

CA

PITAL

PRIC

ES O

F

HEA

LTH

SER

VIC

ES

OBJECTIVE I:Enhance quality of

patients' lives

OBJECTIVE II:Enhance quality of

providers' lives

The Income--Employment Facet The Health Care & Health Facet

5

7

9

11

13

15

17

19

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Perc

ent o

f GD

P

U.S. France Switzerland Germany Canada Sweden U.K.

Healthcare Incomes as a Percentage of GDP, 1980-2009

Source: OECD Data Base, 2011.

What drives the difference in spending (i.e., health incomes)?

European and Asian providers of health care get paid

and manage back from available revenue to permissible costs.

It is language

and the mindset

it begets.

American providers of health care traditionally have gotten reimbursed

for whatever it costs them to produce health care as they saw fit and then expected to be reimbursed

for these costs.

This will change because it has to change.

The word “reimbursement”

will go out of style.

Increasingly, thoughtful policy analysts and politicians think

of the following definition of “value”

in health care:

Net Social Value Added by the

Health System

Net Social Value Added by the

Health System=

Gross Value Added by

Health Care to Patients

Gross Value Added by

Health Care to Patients

- The Opportunity Costs of that Care

for Society

The Opportunity Costs of that Care

for Society

• Neglecting the education of our young• Neglecting science and R&D• Neglecting the nation’s public infrastructure• Neglecting national security and safety of our warriors• Giving up other things households enjoy

Among these opportunity costs (other social priorities)of health

care are:

$0$500

$1,000$1,500$2,000

$2,500$3,000$3,500$4,000

$4,500$5,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bill

ions

of D

olla

rs

Medicare Medicaid Other PublicPriv. Insce. Out-of-Pocket Other Private

SOURCE: CMS Data and Statistics, Sept. 2010 Update.

PROJECTED HEALTH SPENDING 2009‐19 BY SOURCE

Medicare

Medicaid

Other Public

Private Insuranc

e

OOPOther

 Private

Projected NHE in 2020 = $$4.6 trillion or 19.8% of GDP

Governm

entPrivate

http://www.usatoday.com/news/washington/story/2011-10-23/states-limit-medicaid-hospital-stays/50886398/1

So the question is where the money for the government’s half of projected total health-care incomes (spending) is to come from, given the macro-economic

and fiscal

challenges our nation faces.

Let us briefly review these challenges.

II. THE MACRO-ECONOMIC CONTEXT

U.S. health care is being battered by a number of macro- economic forces, some of which are external and beyond

our control, and some of which are self-inflicted wounds.

U.S. Health Care

Aging of the U.S. population, health-

care costs and health workforce

Outsourcing of jobs to computers and

other nations

High income inequality and an

inexorable erosion of solidarity in U.S.

health care

Deficit-addicted, dysfunctional federal

government and fiscally strained state

governments

U.S. fiscal policy:U.S. fiscal policy:

``How cool! Sunshine

all around!

©

Tsung-Mei Cheng

SOURCE: Congressional Budget Office, http://www.cbo.gov/ftpdocs/110xx/doc11047/05-13-CBO_Presentation_to_AAAS.pdf

In the words of Douglas Elmendorf, the Director of the Congressional Budget Office (CBO):

The Surest Sign That Intelligent Life Exists

Elsewhere In The Universe Is The Fact That

It Has Never Tried To Contact Us.

The Surest Sign That The Surest Sign That IntelligentIntelligent Life Exists Life Exists

Elsewhere In The UniverseElsewhere In The Universe Is The Fact That Is The Fact That

It Has Never Tried To Contact Us. It Has Never Tried To Contact Us.

U.S. fiscal policy during the past three decades reminds

me of this scientific observation that:

Reagan/Bush I Clinton Bush II ObamaCarterNixon/

Ford ????

U.S.FEDERAL GROSS DEBT 1980-2011

$909

$2,600

$4,000

$5,600

$9,986

$15,000

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1980 1988 1992 2000 2008 2011

SOURCE: Economic Report of the President 2011, Table B78.

2428.1

30.330.731.1

34.337

39.141.9

42.843.5

44.846.4

48.2

0 5 10 15 20 25 30 35 40 45 50 55

United StatesJapan

SwitzerlandSpain

CanadaUnited Kingdom

Germany Netherlands

France Austria

ItalyOECD AVGE.

SwedenDenmark

Source: OECD Tax Data Base, http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html#A_Revenu

eStatistics

TOTAL TAXES AS PERCENT OF GDP, 2009

26.1% IN 2008

Americans are not an overtaxed

people

The growing U.S. federal debt –

half of it owed to foreigners – and the fiscal straits of the states pose a major problem for

health care, half of which already is financed by government.

II. OUR UNSUSTAINABLE HEALTH SYSTEM

During the past four decades, health-care spending in the U.S. have grown on average more than 2 percentage points faster than the rest of the GDP –

called “GDP + 2.”

It is simple math to calculate that, if that trend continued for the next four decades, on top of the 17.6%

of GDP we are spending on health care now, we’ll be spending close to 40%

or so of our GDP on health care by 2050.

SOURCE: CMS Data & Statistics, 2011

NHE

GDP

$8,414 $9,235$10,168

$11,192$12,214

$13,382$14,500

$15,600$16,700

$19,393 $18,200

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

MILLIMAN MEDICAL INDEX (MMI)MILLIMAN MEDICAL INDEX (MMI)Average Annual Medical Cost for a Family of FourAverage Annual Medical Cost for a Family of Four

http://publications.milliman.com/periodicals/mmi/pdfs/millimanhttp://publications.milliman.com/periodicals/mmi/pdfs/milliman--medicalmedical--indexindex--2011.pdf2011.pdf

CAGR 2001-11: 8.8%In more recent years: 7% to 8%.

Although employers ostensibly

pay the larger part of the

premium for their employees’

health insurance, economists

are convinced that virtually all fringe benefits come out of the take-home pay of workers, certainly over the longer run.

Talk in Washington now is that for Medicare we need to go from GDP+2

to something less than GDP+1

or even down to GDP + 0.5.

But the very idea of even one single basis point

less than GDP + 2% drives organized health care –

the AHA, the AMA, PhRMA, Advamed, etc. –

to utter despair.

ORGANZIED HEALTH-CARE LEADERS ANNUAL MEETING

Organized health-care leaders when last sighted.

Someone recently told me, however, that the health- care leaders are merely faking it for public consumption

– that in reality they are bungee jumping.

III. INNOVATION FOR “VALUE”

IN HEALTH CARE

I have heard about “value” at health-care conferences

for so many years now that I deploy at these

conferences the latest cutting-edge technology:

The The Nio Fen Nio Fen Protector Protector TMTM

U.S. Veterans, for example, wear it whenever we prattle on how much we admire and love them.

VALUEVALUE = = QUALITY QUALITY

COSTCOST

Among management consultants on the speaking circuit “value”

is typically defined, “concretely,”

as follows:

It’s a vector Q = {q1

, q2

, q3

, ···

qN

} divided by a dollar figure.

Nice try! Try to make it operational.

QALY QALY VALUEVALUE = = COSTCOST

So let us work instead with the value-ratio

e.g., QALYs added by a treatment

e.g., Cost added by the treatment

VALUEVALUE = = QALY QALY

REVENUEREVENUE

Which can also be written as

= = QALY QALY

PRICEPRICE x VOLUMEx VOLUME

So providers could increase value by lowering their costs, their prices and their revenues.

For example, the U.S. Business Roundtable –

folks who buy private insurance on behalf of their employees –

now openly speak of a value gap relative to other countries.

IV. COSTS, PRICES, REVENUE AND SPENDING

In December 2010, the trade association In December 2010, the trade association of private health insurers in the US of private health insurers in the US ––

the the AHIP AHIP ––

published this report on the published this report on the average prices charged to larger insurers average prices charged to larger insurers by Oregon Hospitalsby Oregon Hospitals

QUESTION: Why did private insurers and employers behind them accept this steep price increase –

in the midst of a deep recession?

$4,592

$2,266

$3,768

$2,147

$3,485

$6,379

$8,435

$13,799

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000

Australia

Canada

France

Germany

Switzerland

US low

US average

US 95 pctl.

COMPARATIVE PRICES FOR A NORMAL DELIVERY:COMPARATIVE PRICES FOR A NORMAL DELIVERY:Total hospital and physician costTotal hospital and physician cost

SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 Comparative Price Report2010 Comparative Price Report..

But are these alien babies as good as American babies?

$6,526

$3,810

$2,795

$3,285

$2,570

$7,758

$13,123

$25,344

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

Australia

Canada

France

Germany

Switzerland

US low

US average

US 95 pctl.

COMPARATIVE PRICES FOR AN APPENDECTOMY:COMPARATIVE PRICES FOR AN APPENDECTOMY:Total hospital and physician costTotal hospital and physician cost

SOURCE: International Federation of Health Plans, SOURCE: International Federation of Health Plans, 2010 Comparative Price Report2010 Comparative Price Report..

QALY QALY VALUEVALUE = = COSTCOST

So let us work instead with the value-ratio

e.g., QALYs added by a treatment

e.g., Cost added by the treatment

VALUEVALUE = = QALY QALY

REVENUEREVENUE

Which can also be written as

= = QALY QALY

PRICEPRICE x VOLUMEx VOLUME

So providers could increase value by lowering their costs, their prices and their revenues.

We can cut utilization all we want in the U.S..

It will come to naught as long as so many (although not all) U.S. providers of health care can raise their prices seemingly at will, and as long as private employers are willing to pay those prices (on behalf of their employees).

Note: the prices set in the private sector become the benchmarks which public-sector payers must follow.

V. INNOVATION TO ADD VALUE IN HEALTH CARE

A. Producers of health-care products

Without abandoning innovations that increase both costs and clinical benefits and that pass a benefit-cost test, do put more emphasis than has hitherto been customary on innovations that lower the cost per QALY delivered.

Ponder carefully the next slide, taken from the most recent report of the Trustees of the Social Security System.

SOURCE: Social Security Trustees Report 2010, p. 11.

IV. INNOVATION TO ADD VALUE IN HEALTH

CAREA. Producers of health-care products

B. Producers of health care services

I find it nothing less than stunning that the provider of health

care –

notably physicians and hospitals –

so far have studiously ignored the provocative, decade-long research by John Wennberg and his associates at Dartmouth University.

Consider just these next few slides.

The producers of health-care services –

physicians, hospitals, physical therapists etc. –

may believe that they already work as hard and efficiently as is humanly possible.

Really?

SOURCE: Elliott Fisher et. al., NEJM February 26, 2009

IV. INNOVATION TO ADD VALUE IN HEALTH

CAREA. Producers of health-care products

B. Producers of health care services

C. The health insurance industry

If the industry wants to create value for patients throough properly run disease management –

i.e., one managed essentially by physicians –

or through well-coordinated chronic care, great.

But if the “innovation”

takes the form of yet more “innovative”

health-insurance products through mass-customization of these products –

then heaven help us!

Risk segmentation is not the same as value creation for society as a whole.

So my recommendations to private American health insurers would be:

1.

If you really care about innovations that create net value for America, stop the mindless mass-customization of insurance products that visit ever more administrative costs on providers.

2.

Develop a finite set of standard products, a common nomenclature and a common claims form that would allow everyone to harvest the power of electronic claims processing and of truly competitive markets.

3.

There is no need to reinvent the wheel. Travel abroad and learn from those who have long used those streamlined billing practices.

If Medicare and Medicaid wanted to create value through innovation, they, too, could learn from other nations how to operate health insurance systems more efficiently.

These foreign systems do no look upon every provider as a latent

criminal and therefore do not visit hugely expensive compliance programs and legal fees on providers.

These systems manage by exception, with the aid of statistical profiles and spot audits, and they do not criminalize the entire enterprise.

And my recommendation to the CMS would be:

If America really wanted value creation through innovation in its health insurance system, it would abandon the mindless and enormously expensive one-on-one negotiation of prices of each insurer with each provider, which merely results in cost shifting and inefficient,

ethically indefensible price-discrimination

all around.

Here, too, much could be learned from other countries with multiple insurance carriers –

e.g., Germany and Switzerland.

That archaic and unwieldy system should be replaced with a modern all-

payer system –

perhaps on a state basis.

My recommendation to health policy makers would be:

Finally, I wish all Americans would climb of this All-American horse when they look at other nations’

health systems and try to learn from them.

We’re the best!

How so?

THE ENDTHE END

VI. MORE RADICAL PROPOSALS FOR THE NEXT DECADE

Single-payer health system (e.g., Canada or Vermont(?)

All-payer health system with multiple payers (e.g. Germany or Switzerland)

Multi-tiered, market-driven health system that rations health care by income class

√

1.

Public hospitals and public clinics for publicly insured Americans, especially the poor, but perhaps also for a restructured Medicare. It allows politicians to ration

health care without ever having to admit it.

2.

For the employed middle class, a mixed system, tiered by cost through tiered reference pricing (now used mainly for prescription drugs) that can be camouflaged as “value-based purchasing. That approach also permits rationing of some health care by income class without anyone having to say so openly.

3.

For the upper-income groups, boutique medicine, which is already growing in the U.S.

For the longer run of, say, two decades, I could even see the U.S. health system evolve toward something like this (the third option):

On top of all that, the American electorate appears to be

1.

judiciously and maliciously misinformed by the messages beamed at it from left and right;

2.

understandably, utterly confused;

3.

very angry

American voters opposing the federal deficit, proposals to raise

taxes and proposals to cut Medicare or defense spending.

I.

THE MACRO-ECONOMIC CONTEXTA. Aging of the population

SOURCE: U.N. at http://www.un.org/esa/population/publications/worldageing19502050/

12.3%

6.9%

18.5%

13.2%

21.1%22.7%

0%

5%

10%

15%

20%

25%

30%

U.S. CHINA

2000 2025 2050

PERCENT OF POPULATION OVER AGE 65, CHINA AND THE U.S.

0.52 0.55 0.591.03 1

1.392.01

3.08

5.65

0

1

2

3

4

5

6

0 - 5 '6 - 14 15 - 24 25 - 34 34 - 44 45 - 54 55 - 64 65 - 74 75+ AGE COHORTS OF AMERICANS

SPEN

DIN

G R

ELA

TIVE

TO

AG

E G

RO

UP

35-4

4 (=

1)

SOURCE: Meara, White and Cutler, “Trends in Health Spending by Age, 1963-99”, March, 2003.

RELATIVE PER-CAPITA HEALTH SPENDING BY AGE, 1999

SOURCE: Report of the Trustees of the Social Security System, http://www.socialsecurity.gov/oact/tr/2011/tr2011.pdf

Ratio of older people to working-age people

There will be fewer workers to support a growing number of elderly Americans.

I.

THE MACRO-ECONOMIC CONTEXTA. Aging of the population

B. Outsourcing and unemployment

COUNCIL ON FOREIGN RELATIONS

SOURCE: Michael Spence and Sandile Hlatshwayo, The Evolving Structure of the American Economy and the Employment Challenge, Council on Foreign Relations, March 2011

7

8.5

12

10

18.5

9

12

14

16

22.5

0 5 10 15 20 25

Construction

Accommodation &Food services

Retail

Health Care

Government

Millions of Jobs

1990 2008

SOURCE: Approximated from Spence and Hlatswayo, Figure 6.

THE MAJOR JOB CREATORS IN THE UNITED STATES

Most of the iPad’s components are procured from Korea and Japan, and some from Europe, although just where these components are actually manufactured is not clear to outsiders.

Add to that the outsourcing of U.S. labor to computers, and

it is not clear to me how any presidential candidate can

promise to solve our long-run unemployment problem

soon, until wages of US workers have fallen enough and

their productivity has risen enough relative to that of labor

in other nations to be competitive with Asia.

This realignment of jobs in the U.S. has significant and serious effects on the nation’s income distribution.

I.

THE MACRO-ECONOMIC CONTEXTA. Aging of the population

B. Outsourcing and unemployment

C. Income inequality

Anthony B. Atkinson, Thomas Piketty

and Emmanuel Saez, “Top Incomes in the Long Run History,”

Journal of Economic Perspectives 2011; 49:1, 3-71.

FIGURE 1 --AVERAGE INCOME GROWTH IN THE UNITED STATES

1.2%

4.0%

3.0%

4.4%

10.3% 10.1%

0.6%

2.7%

1.3%

0%

2%

4%

6%

8%

10%

12%

14%

1976-2008 1993-2000 2002-2007

Ann

ual p

erce

ntag

e gr

owth

AVERAGE TOP 1% Bottom 99%

FRACTION OF TOTAL INCOME GROWTH CAPTURED BY TOP 1%

58%

45%

65%

0%

10%

20%

30%

40%

50%

60%

70%

1976-2007 1992-2000 2002-2007

Whether or not the rising inequality of wealth and income in the U.S. is deserved and fair is quite beside the point as far as health care is concerned.

The problem is that families in the bottom third or so of the income distribution will not be able to finance the ever rising cost of health care with their own earnings.

This poses a major moral dilemma for the nation’s politicians and a major financial problem for the supply side of health care.