RICH BAEHR: ANTICIPATE OBAMACARE’S EFFECT ON YOUR HEALTH CARE COSTS
Obamacare: The Effects on Your Health Care Costs
This is the third part in a series of articles on the rollout of Obamacare, and how the law will change our health care system. Each week, we will publish two articles — one on the changes in medicine and medical care, and one on changes in the insurance industry. We hope this series of articles will help you make better decisions when it comes to your health care and how you buy insurance.
When fully implemented over the next few years, the Affordable Care Act promises to provide insurance for 30 million Americans currently without health insurance coverage.
Those 30 million Americans were receiving health care, though they did not have insurance. In many cases, people without coverage never used hospitals nor had any expensive diagnostic tests during a given year. When they needed to see a doctor, they paid out-of-pocket. Some of the uninsured who did make use of inpatient hospital services were admitted through the emergency room; others received outpatient services in this setting. In either case, the patient at best paid a small portion of the bill, and in some cases met the standard for free care established by the institution and was never charged. In most cases, the hospital charges were eventually written off as uncollectible bad debts.
It is inevitable that those among the uninsured who will now receive health insurance coverage under Obamacare will make greater use of health care services than they did before.
The extent of the increase in utilization — doctors visits, lab tests, outpatient surgeries, diagnostic tests, inpatient care — is difficult to predict. But there is reason to expect that average utilization levels for the previously uninsured who will now get coverage through the exchanges or the expanded Medicaid program will soon approach, if not equal, those of similar age people who have historically had health insurance coverage already.
In various studies I have performed for clients, I have conservatively estimated the increase in utilization at between 30% and 50% over previous utilization levels for the uninsured. Assuming no change in prices, the 30% to 50% increase in utilization for about 10% of the population will increase overall health care costs by a few percentage points per year.
Since this population is in most cases below the age of 65, utilization rates are generally lower than for the Medicare population (over age 65 and disabled people), which can be 3 to 4 times that of the under 65 population. Whatever else happens as a result of the Affordable Care Act, the cost of providing services to the newly insured will increase health care costs. The total cost of insurance to pay for these services will, of course, rise even more, since there was no insurance cost previously (other than the bad debt cost that providers absorbed and included in their prices to insurers). The new insurance costs will also include administrative costs and the insurers’ profit margin.
This new increment to health care utilization and expense will occur in a country where health care costs, by any comparative measure, are already far beyond those of any other developed nation. Costs are much higher here whether measured by percentage of GDP devoted to health care, or by health care costs per resident.  In 2010, the U.S. spent 17.6% of GDP on health care. The Netherlands was second at 12%. The average for OECD countries, including the United States, was 9.5% of GDP for health care.
Along with common complaints about high costs, critics of the American health care system point to outcome numbers, which do not appear to justify the high cost burden. American life expectancy is a few years below the highest levels among OECD countries, and seems to have plateaued. There is higher infant mortality in the U.S. as well, though much of this is related to how statistics are kept in various countries (many countries do not count babies that were born and died quickly as live births).
Cancer survival rates are higher in the United States, and medical research is centered here as well. New drugs and technologies are brought to market much faster in the U.S. than in many other OECD countries, despite the constant sniping at the slow FDA approval process.
In any case, it would be very difficult to make a case that U.S. costs, almost double the OECD average, are buying that much in additional value. U.S. costs are higher for various reasons. Most simply, they are higher because: a) there is more care delivered per person at pretty much every stage of life; and b) at higher cost per incident of service. The U.S. has far higher levels of diagnostic tests (particularly in radiology — double the utilization rate of other OECD countries), and higher levels of various surgeries (especially knee replacements, caesarean section deliveries, and heart bypass surgeries). Hospital care tends to be more intensive than in other countries on average, and the cost of inpatient stays is three times the OECD average despite shorter lengths of stay in the hospital.
There is little reason to believe that this will change rapidly, if at all, as a result of the Affordable Care Act.
In essence, the ACA creates a new insurance system or coverage for those without care, but provides the same fee-for-service structure that is at work in the remainder of the health care system. In the fee-for-service system, the more doctors order, the more they and the other providers of care (e.g., surgery centers, hospitals) get paid. In other words, the providers of care determine the level of volume.
Obamacare does encourage the use of Accountable Care Organizations (ACOs), which attempt to address the built-in volume excesses of the fee-for-service system, but only for Medicare and Medicaid patients. The ACOs are designed so that physicians receive a payment for providing care for a specific clinical episode (which might require weeks of care) at a fixed cost. In essence, the insurance risk is offloaded to doctors. Some organizations have seen reductions in volume and overall cost of care from this approach, but not at a level that would significantly reduce the cost differential between the U.S. and other countries if extrapolated to all patients :
Physicians receive payments based on a “defined clinical episode” or a “set period of management of a chronic condition.” Unlike the fee-for-service system, this capitation payment encourages collaboration among physicians to prevent unnecessary medical expenditures, thereby promoting patient care over profit.
The ACO approach is designed to help eliminate the wide gaps in the cost of delivering care that show up when comparing individual hospitals, doctors, and communities. A few years back, Boston surgeon Atul Gawande wrote an article for the New Yorker  comparing the cost of Medicare services per beneficiary in two similar border communities in south Texas: McAllen and El Paso. McAllen has the second highest per capita Medicare costs in the country; only Miami’s are higher. El Paso, with similar demographics, has far lower Medicare per capita costs. Physicians in El Paso do a lot less than those in McAllen, with costs roughly half as high, but outcomes are similar despite the higher volume of surgeries, tests, and hospital admission in McAllen.
Gawande argues that the McAllen experience reflects what the system allows, while the El Paso experience, like the experience at some of America’s highest quality facilities — Mayo Clinic, Intermountain in Utah — demonstrates that not all physicians are inclined to behave the same way despite the existing incentives in place to push higher volume (including defensive medicine to protect against malpractice claims).
Gawande wrote another article on an experimental program in Camden, New Jersey, another very poor community, to target the highest cost Medicaid patients and to provide them with care managers to try to address some of the chronic conditions that were causing people to repeatedly wind up in the emergency room .
The Mayo model of collaborative care and the care manager approach in Camden are examples of what can develop if different models of care are encouraged. Storefront medicine (the Walgreens clinics), medical clinics in offices, online communication with doctors, corporate incentive programs for healthy living, and new comprehensive blood tests that are more accurate, less painful, and at much lower cost  are all now available or will be available soon. New approaches to malpractice adjudication could cut the volume of defensive medicine.
The American medical system is no more immune to entrepreneurial innovation than any other industry, and if costs are going to come down significantly before all the baby boomers start Medicare coverage, mere tinkering with the models in place will not provide the answer.
Unfortunately, the approach favored by the central planners in Washington when they designed the new reform effort was to create more of a straitjacket, one-size-fits-all approach. They wanted health insurance to be universal, and comprehensive, and in essence a prepaid benefit model of insurance.  In the auto, home, and casualty insurance markets, the buyer insures for risks he does not expect to incur in a given year. This model of insurance, more of a catastrophic model, was rejected by the Obamacare designers. They were not interested in seeing individuals and companies assume greater responsibility for their health care costs, or for real competition in the types of care models that were in the marketplace.
What is likely over the next few years is a modest bump-up in the annual health care inflation rate, reflecting the new volume of care delivered to those newly insured. Obamacare backers have proudly detailed how the annual rate of increase in insurance premiums has slowed a bit since the financial collapse. This, of course, they attribute to Obamcare, though there is little structurally in place yet from the bill to explain how the two are related. A more likely explanation is that the recession increased the ranks of those who watched their dollars in health care, as in everything else. In Washington, D.C., if the cost of a program goes up 4% a year when it was scheduled to go up by 5%, it is regarded as a 1% cut in spending, and legislators and the president pat themselves on their backs for their achievement in promoting fiscal responsibility. In reality, the American health care system already spends too much and is in need of the fixes that would reduce actual costs, not just slow growth rates.
But we can try to be generous. Assume Obamacare brought the rate of increase down by 1% per year, and will do the same going forward after the first year bump-up from the newly insured. If the base of costs already is almost double per capita what exists in other developed countries, and it is certain costs will rise due to higher volume for the newly insured, this slowdown in annual inflation means, at best, that we will still go broke as a nation due to health care costs. Maybe it will take a year or two longer.
A nation has only so many opportunities to comprehensively address an industry as large and important as health care. This latest attempt will serve to improve access for some (at higher cost to the system), but will likely have negligible effect on the cost problem for everybody else that was already a major threat to the nation’s fiscal future.
Obamacare is certainly complex, and unworkable in parts. None of that should have been a surprise — this is what happens when progressive legislative staffs and academics combine to draft a 2,000-plus page bill that no member of the Senate or House had read before voting on it. The left predictably created a plan that expands access, taxes “the wealthy” to pay for it, adds new layers of regulation, and limits consumer choice.
On the cost side of the problem, the real problem, Obamacare is a punt.
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