Obamacare: The Cost-Saving Device It Was Meant to Be?


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The replacement of a lower joint — a knee, for example — can cost as much as $69,000 at George Washington University hospital, or as little as $30,000 at Sibley Memorial Hospital, also in Washington D.C., as government data has shown. This means healthcare spending varies significantly across the United States. An authoritative study conducted by Dartmouth College has even shown that Medicare pays out as much as $8,937 for a single patient’s hospital stay, while a corresponding visit in Utah will run only $5,371.

That price disparity is not thanks to better care, differences in patient health status, or even more advanced procedures. Rather, the vast variations in healthcare costs, which extend far beyond surgeries and hospital stays, can be attributed several key peculiarities. The fact that hospitals and other healthcare providers can set prices with impunity — pushing rates hundreds of percents higher, in places — stems from the fact that consumers rarely see costs thanks to insurers and government providers, meaning no one comparison shops. Without accountability, healthcare costs can be guided by flaws in the American health system. But exerts do argue over what motivates healthcare providers to inflate prices so drastically, even while competitors in the same city have much-lower prices. The answer is not simply because they can and want to make greater profits.

One of the most definitive sources of research on healthcare spending in the United States claims that drastic variations are due to how doctors practice medicine. According to that theory, patients in Maryland are not so much more sick than those in Utah to justify an additional $3,600 in medical costs; nor are the geographical differences in operating costs enough to support spending 66 percent more on the same care. Even more importantly, the differences in healthcare spending do not translate to better patient outcomes.

Instead, the researchers who compiled the definitive Dartmouth Atlas, a project documenting the differences in how medical resources are used in the United States, attributed the differences in healthcare costs to inefficient and wasteful care. Dartmouth research shows that differences in healthcare status, like the age of a patient or whether they have diabetes, accounts for about 30 percent of the variations. The other 70 percent arises solely because of how doctors practice medicine. For example, some doctors provide care using medicals treatments unsupported by significant research, with the hope that experimentative care will have greater payoffs than traditional treatments. These physicians Dartmouth refers to as “cowboy doctors.” The results are higher spending.

Such a conclusion told healthcare economists and policymakers that the solution to the American healthcare system was easily reachable. Staggering healthcare costs are no new phenomenon in American healthcare, but it is one gaining ever more attention. Since the early 1980s, the cost of healthcare in America has grown exponentially, a phenomenon that eventually became worrisome enough that Democrats pushed through reform of the healthcare system early in President Barack Obama’s term.

As percentage of economic output, the United States spends more on healthcare than any other member of the 34 members of the Organization for Economic Co-operation, a group founded in 1961 to stimulate economic progress and world trade. Last year, healthcare in the United States accounted for 17.7 percent of gross domestic product, well above the 11.9 percent averaged by other OECD countries. According to a forecast released this month by the Centers for Medicare and Medicaid Services, healthcare spending increased 3.6 percent to $2.89 trillion in 2013. That breaks down to approximately $8,500 per person.

While it is true that healthcare costs have been growing more slowly in the post-recession years than they did prior to 2008, they are expected to accelerate in coming years — thanks to the ongoing economic recovery and despite the implementation of the Affordable Care Act’s series of healthcare reforms. In 2014, that figure is expected to soar a further 5.6 percent, and by 2023, economists have projected that healthcare spending will account for 19.3 percent of the economy. That means Americans will spend nearly one of every five dollars earned on healthcare — up from one of every six dollars earned in 2012. That growth will have huge budget implications for the United States in the coming years.

When healthcare economists talk about the high cost of American healthcare, they mean (primarily) that the per-unit price of healthcare in the United States is unrivaled; from prescription medication to x-rays, nearly every procedure, pill, and consultation costs more here than anywhere else. For example, a prescription for the heartburn medication Nexium will cost $215 in the United States and only $23 in the Netherlands, according to research conducted by the International Federation of Health Plans.

The reason for this difference is that many nations set price controls, and the government negotiates with pharmaceutical companies and device manufacturers to lower prices, where the government has the power to win those negotiations. In the United States, bargaining is left to the insurers, which often lose. While it may be correct to argue that higher profits for drug makers allow for great innovation, that means that the United States must subsidize medicine and other treatments for the rest of the world. Costs are also higher because the U.S. has higher administration costs and a tendency to depend more heavily on technology for treatments; here, a heart attack is treated with more scans and other tests than anywhere else.

To many healthcare economists, especially those at Dartmouth, the fact that America’s healthcare problems come from how doctors practice medicine, the remedy seems to be a restructuring of the American healthcare system. It is this prevailing assumption that helped create the political environment that gave birth to the Affordable Care Act. But, in an interview with Vox, Louise Sheiner — a former Federal Reserve Economists and new senior fellow in Economic Studies at Brookings Institution — argued that it is too optimistic to assume that doctors can reduce spending by copying strategies used by high-performers, like Kaiser. “It’s nice for Dartmouth to say here’s a good measure of how much we can save, and nobody has to sacrifice,” she said. “But I don’t know how much space for those type of savings actually exists.”

Sheiner’s research indicates that geographic variations in healthcare spending do not hold the answer to the problems of efficiency and quality of the American healthcare system. Her new working paper for the Brookings Institute highlights the fact that “states where Medicare spending is high are very different in multiple dimensions from states where Medicare spending is low, and thus it is difficult to isolate the effects of differences in health spending intensity from the effects of the differences in the underlying state characteristics.” This means that the variations in a doctor’s “practice style,” which Dartmouth researchers suggest is responsible for cost differences, is really reflective of the underlying systemic differences across states. Sheiner’s findings indicate that “states with similar demographic characteristics have similar levels of real beneficiary Medicare spending. Thus, what the Dartmouth researchers have deemed as differences in ‘practice styles’ are not randomly distributed, but are instead closely linked to population characteristics.”

According to this model, states like Florida and Connecticut are actually not big healthcare spenders when demographic and health variables are factored into the equation. By comparison, states like Mississippi and Louisiana — where diabetes and obesity rates are high — see much higher Medicare expenditures. Since differences in activity levels and other healthcare indicators are hard to untangle, Sheiner concluded that analyzing data in terms of geographical variations is not particularly useful. Her point is not that there are no inefficiencies in the American healthcare system, but rather that socioeconomic differences in populations hugely impact spending. That suggests that there is less room for doctors to lower costs by removing inefficiencies.

The fact that the Kaiser system — long lauded among health economists for providing care more cost effectively — has not been adopted more uniformly across the United States also served as a red flag for Sheiner as well. “Economists don’t understand why Kaisers haven’t taken over the world,” she told Vox. “But they haven’t, and you have to wonder why that is.”

Of course, her conclusions do not mean that the United States doesn’t have a problem; nor do they suggest that costlier care is better care. But still, even though health economists generally know what part of the American healthcare system is broken, there is no consensus on how to fix it; bending down the healthcare cost curve is what is known as the $2.8 trillion-dollar question. The role the Affordable Care Act will play in determining future healthcare spending is not only complex, but fraught with political disputes.

Actuaries at the Center of Medicare and Medicaid Services have calculated that healthcare costs will only increase at a rate 1 percent faster than the broader economy between 2013 and 2023 — a pace more robust than experienced over the last few years, but still below levels seen before the financial crisis. “We are seeing historic moderation in costs now over a considerable period of time,” Kaiser Family Foundation president Drew Altman noted in a recent analysis. “It’s absolutely true we’re seeing that and any expert will tell you that.”

The key piece of data to support conclusions that Obamacare has helped to moderate costs is the release of premium estimates insurers will charge for plans sold on the insurance exchanges next year. A survey of 16 cities, which admittedly has limited scope, found that prices for the benchmark plans will, on average, decrease by 0.8 percent in 2015. More specifically, the change in premiums ranges from an 8.7-percent jump in Nashville to a 15.6-percent drop in Denver. But bronze level plans — a step down from the benchmark level — will rise by an average of 3.3 percent in 15 cities. While that is not the same impressive decrease as at the benchmark level, it marks quite a difference from regular 10-percent premium increased experienced before the implementation of Obamacare.

Two possible theories explain these changes; either the healthcare reform’s goal of forcing insurers to compete for customers’ business is truly lowering prices as planned, or insurers are lowering prices artificially to lure in consumers. It will take time before the full extent of Obamacare’s influence on healthcare spending can be measured.

Still, lower insurance premiums are not the whole story. The fact remains that healthcare spending is an American problem. Healthcare experts are not surprised costs are rising overall. “Anyone who tells you that he or she can make the healthcare system more universal, improve quality, and also reduce costs is in denial or misleading you,” wrote Aaron Carroll MD, MS, — director of Indiana University’s Center for Health Policy and Professionalism Research — in a 2012 blog post. “When it comes to election season, those people are often politicians.” Together, access, care quality, and costs are known as the iron triangle of healthcare, a relationship defined by the geometry of that shape. Just as a triangle’s legs can be lengthen if another side is shortened, one or “perhaps even” two of those components of healthcare can be improved, but those improvements have to come at the expense of a third, as Carroll noted. Therefore, to ensure a healthcare system can achieve better outcomes, costs will increase or some change in access will be required.

“The ACA starts from a place of wanting to make sure that all individuals can obtain affordable insurance, even if they have a prior medical condition,” wrote Carroll. “But if you guarantee access to insurance to everyone and mandate that people with preexisting conditions can’t be charged higher rates than their healthier peers, you need to prevent adverse selection (having relatively sicker individuals more likely to buy insurance coverage rather than relatively healthy people) and people gaming the insurance market (forgoing coverage and enrolling only when they become ill) — thus, the mandate that everyone must purchase insurance or pay a penalty. And if you demand that people buy insurance, then you have to make sure they can afford it. That’s why you have subsidies,” he argued. “The plus is that many more people get access. The negative is that it costs people and the government money. That’s the trade-off.”

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