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Is the U.S. serious about cutting healthcare costs?

US healthcare system | Is the U.S. serious about cutting healthcare costs? Morningstar

We recently attended the National Congress on Health Insurance Reform in Washington, D.C. One of our favorite presentations was delivered by the always entertaining and informative Uwe Reinhardt, Professor of Political Economy at Princeton. Reinhardt explained how the U.S.'s inability to implement reforms to the healthcare system that would meaningfully slow cost growth boils down to a failure to understand basic math. Reinhardt described national health expenditures with the following equation:

NHE = PG*QG*NG + PP*QP*NP+ PU*QU*NU.

P is for price, Q is for quantity per capita, and N is for the number of members in the group. The subscripts G, P, and U stand for government, private, and uninsured, respectively.

According to Reinhardt, the health reform debate proves that Americans want to lower the left side of the equation without lowering any of the variables on the right: a mathematical impossibility. For example, if anyone proposes cutting PG by lowering Medicare reimbursement rates, they will be inundated with accusations of cost shifting to the private sector, causing doctors to exit the program, and threatening seniors' access to high-quality care. A proposal to lower QG, for example, by using comparative effectiveness research to determine which services Medicare will cover, will be promptly met with accusations of rationing and government death panels. Anyone who proposes that the government interfere with the private-market variables will be accused of socialism, or promoting a "government takeover of health care." One effective way to lower the right side of the equation would be to increase the number of uninsured, since they typically spend half as much as the insured on health care, but obviously no one wants that.

The emotional and political sensitivity of healthcare policy would seem to make it virtually impossible that the U.S. will ever have a serious debate about the real, fundamental problems in our healthcare system. One person's costs are someone else's income. It's simply too easy for those who stand to lose from the implementation of reform measures to rally support for the status quo by exploiting people's inherent sensitivity. According to Reinhardt, as a result of the healthcare reform law, Medicare spending is expected to grow 5.8% annually over the next ten years, instead of the 6.8% that would have occurred without the Medicare cuts that were included in the law. The Republicans have made Medicare cuts a focal point of their opposition to the law, but Reinhardt rightly points out that pretty much any other industry would love to see stable, sustainable 5.8% annual revenue growth.

We are convinced that the main problem with our healthcare system is prices, and Reinhardt seemed to agree. Unit prices routinely account for two thirds of healthcare cost growth for private managed care organizations. Prices also explain why our healthcare system is so much more expensive than international systems, since our healthcare utilization metrics are generally in line with - or lower - than those in other developed countries and our population is generally younger. The key difference is that, in the rest of the world, the government intervenes in some way to hold down healthcare prices. In the U.S., the demand side (managed care organizations, Medicare, and other payors) is fragmented relative to the supply side (particularly hospitals, but also pharmaceutical companies, device makers, and other suppliers). Furthermore, consumers demand broad provider access, which limits payors' ability to exercise the bargaining power they do have. Providers have the upper hand in negotiations with payors and, as a result, prices are often twice as high in the U.S. as they are abroad for identical healthcare goods and services.

Reinhardt offered several interesting data points on healthcare prices. For example, between 2000 and 2009, net revenue per inpatient hospital day in California increased 18% for Medicaid, 76% for Medicare, and a whopping 159% for commercial payors. A knee replacement in Oregon cost 44% more in 2009 than it did in 2005. Average reimbursement for a normal childbirth in Oregon increased 69% between 2005 and 2009. Reinhardt joked that while the babies may have improved in four years, he doubted they were 69% better.

Comparing the U.S. to other developed countries, the average price for a normal childbirth in the U.S. was
around $8,400 in 2010. In Germany, it was $2,100. In France, it was $3,800. And just across the border in Canada, it was $2,300. An appendectomy cost $13,100 on average in the U.S., compared to $2,600 in Switzerland, $6,500 in Australia, and $3,800 in Canada. The average cost of Lipitor was $129 in the U.S., compared to $78 in Germany and $33 in Australia.

So what do you think? Is the U.S. serious about slowing healthcare spending growth? What components of the equation above do you think should be lowered, and how? Please leave your comments below!

This guest blog was first published on Morningstar.

Tags: growth , healthcare , insurance , US
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