Thursday, August 13, 2009

Insurance reform costs defined too narrowly

When Congress returns from its recess, the hard work of crafting a final insurance reform bill will resume. A key sticking point is the need to rein in costs. The Washington Post reports
Although town hall meetings across the country have pitted fears of government intrusion into the medical system against hopes for expanded coverage for the uninsured, the fate of President Obama's health-care initiative might depend just as heavily on a very different issue: its ability to dig the nation out of debt.
Insurance reform absolutely does need to consider costs. However, dollars spent by the Federal government, as important as they are, are neither the sole metric of costs nor the sole determinant of effective social policy.

First the definition of costs. Although the Federal government spends an enormous amount on health care--$754 billion in 2007 or about $2,500 per person--this is only about a third of total health care expenditures (source). State and local governments spent $281 billion, and private expenditures, including private insurance reimbursements and out-of-pocket payments, totaled $1.2 trillion. Altogether, the U.S. spent $2.2 trillion on health care in 2007, or just under one-sixth of its GDP.

In terms of costs, policy makers should consider the $2.2 trillion figure and not just the $754 Federal share. A reform that reduces Federal spending by $1 billion but shifts that burden to the states or to private citizens changes incidence of spending but not the social burden.

Similarly, the explosion in care costs have affected public and private spending nearly equally. The health cost problem isn't just a matter of public expenditures going up. In 1980, the share of public expenditures was 42 percent; by 2007, it was 46 percent. Increased third-party payments under Medicare (our national health insurance program for the elderly), which rose from 14 to 18 percent of total health expenditures, account for that entire increase. Policies that moderate the growth in public spending but allow private spending to continue spiraling out of control aren't much of a solution.

Beyond the costs, the benefits of possible spending also have to be considered. Insuring up to 46 million more people would undoubtedly lead to those people receiving more health services. That means increased costs, but it also means increased health. Some of those health benefits will be reflected in economic statistics, such as increased productivity and output from a healthier workforce. However, the direct, personal benefits of good health itself are harder to quantify (the quality-adjusted life year, or QALY, is one controversial metric), though even more important.

Reductions in total spending that contribute to even greater losses in total benefits would be short-sighted and socially harmful. We might narrow the Federal deficit only to cost society more.


cheripickr said...

Dave, you might want to incorporate this into your short-term/long-term cost analysis.
Those in power seem to prefer ignoring it

Dave Ribar said...


I don't see how you get to your last statement. The CBO is having a major influence on the insurance reform debate. Its earlier analysis that showed that the Democrats' reform bill was going to add to the deficit was a major reason why legislation wasn't passed before the August recess. And the whole point of the Washington Post article was that Democrats were going to have to respond to cost concerns. Far from ignoring it, Democrats are going to have to confront the cost issue.

The CBO letter indicates that preventive services, on the whole, don't reduce costs. However, there are some particular services that do. The CBO estimates that 20 percent of services lead to cost savings.

Although the article you cited focuses on costs, the CBO letter also discusses benefits. On page 4, it states, "In sum, expanded governmental support for preventive medical care would probably improve people’s health but would not generally reduce total spending on health care."

The letter indicates that roughly 60 percent of treatments pass a cost-effectiveness (cost/benefit) analysis. Also, some of the higher costs come from people living longer. The benefits seem to be the parts that opponents prefer ignoring.

cheripickr said...

I was simply referrring to their reaction to this and various recent CBO reports, not attempting analysis of it:

"In their continuing struggles with CBO, Democrats from President Obama on down have expressed frustration that Elmendorf doesn't give Democrats' health care reform proposals sufficient credit for cost cutting through preventive care.

"One of the things that's disappointing about CBO -- and frustrating -- is all the work ... done on prevention" that the CBO doesn’t factor in, Sen. Chris Dodd, D-Conn., co-author of the Senate Health Education Labor and Pensions Committee legislation, recently griped.

During the health care town hall meeting, President Obama said, "the Congressional Budget Office, the CBO, which sort of polices what all various programs cost, they're not willing to credit us with those savings. They say, ‘That may be nice, that may save a lot of money, but we can't be certain.’ So we expect that not only are we going to pay for health care reform in a deficit-neutral way, but that's it also going to achieve big savings across the system -- including in the private sector where the Congressional Budget Office never gives us any credit -- but if hospitals and doctors are starting to operate in a smarter way, that's going to help you even if you're not involved in a government system."

Before that, House Speaker Nancy Pelosi, D-Calif., said that "it's always been a source, yes I will say frustration, for many of us in Congress that the CBO will always give you the worst-case scenario on one initiative and never ... any credit for anything that happens if you have early intervention, health care. If you have prevention, if you have wellness ... you name any positive investment that we make, that we know reduces cost, brings money to the Treasury in the case of education but never scored positively by the CBO. Yes, it is frustrating."

Pelosi said, "I hope we will see them say, 'This is what we see the cost of something. We have not accounted for the benefits' because they don't and they haven't and it should not be inferred from what they do that they have."

Not quite.

cheripickr said...

Maybe ignoring it wasn't the proper term, perhaps selective acceptance/dismissal would have been more apropos

Dave Ribar said...


There's room to quibble. The letter from the CBO was written on August 7. Dodd's comments were made "recently." The date of Speaker Pelosi's comments were not clear. It's hard to charge them with ignoring a CBO letter that hadn't been written.

On the other hand, Pres. Obama's comments were made on Aug. 11--after the CBO made its position clear. There's still room to quibble, because if you read the letter carefully it indicates that many cost savings can't be credited under the CBO's cost scoring procedures. The President, however, didn't seem to be focusing on scoring rules. It's appropriate to call him out on this.

Pino said...


Why would we have to insure 47 million people?

Additionally, as a % of income, our spending has dropped in almost every category. Housing, food etc. Wouldn't it, at some point, make sense that we would begin to spend more and more money on our health and trying to extend our lives?

Dave Ribar said...


The point was that no one, even supporters, should expect that insurance can be extended to everyone for free.

It does make sense to spend more if that spending brings substantial increases in health. That was the basis for writing that costs weren't "the sole determinant of effective social policy."