Ending the explosion in health care costs

October 23, 2011

By Wally Knox

For decades, Americans have debated health care reform as if it was one issue. But, in reality, there are two different issues. The first is how to expand access to care for the 30 million most vulnerable Americans. The second is how to seize control of escalating health care expenses and insurance premiums.

The 2010 reforms of the Obama administration were intended to address both problems, and the act’s name said it: The Patient Protection and Affordable Care Act.

During the debate on the reforms, the President made the cost control aspects clear saying, “My proposal would bring down the cost of healthcare for millions: families, businesses, and the federal government.” Today’s White House website explains, “Without reform, health care costs will continue to crush business and government budgets. The Affordable Care Act reverses this trend. Americans buying comparable coverage to what they have today in the individual market will see premiums fall by 14 to 20 percent and the total cost of care provided to Americans who get their insurance through the workplace could fall by as much as $3,000 per person.”

It was clear from the beginning that controlling costs was crucial both in itself and in order to secure wide public support for a dramatic expansion of insurance coverage for the most vulnerable. Unfortunately, as the plan has been more carefully examined, the assurances on costs are not holding up.

In August, the Administration’s arm for tracking health costs, the Centers for Medicare and Medicaid Services (CMS), reported that, rather than being a bold step toward controlling medical costs, the 2010 reforms will not significantly slow overall medical cost increases. Real, after inflation , national health expenditures per person will soar 34 percent by 2020, and the real total private health insurance premium bill will grow 44 percent. In short, the modest cost savings achieved by the complex morass of new panels and incentives in the reforms will be overwhelmed by cost increases elsewhere.

CMS’s results are only projections, but if these projections prove true, even in part, it will be a disaster for the 2010 reforms, for the national government’s finances, and for three hundred million Americans besieged by exploding health insurance premiums.

And, the explosion does, in fact, continue. Last month the Kaiser Family Foundation reported that the average annual premium for family coverage by an employer – the way almost sixty percent of us under 65 gain coverage – reached $15,073 in 2011 – up a breathtaking nine percent in one year. Added to the real, after inflation, increases since 1999, the cost of employment-based premiums more than doubled.

It is a bitter irony that analysts agree on the primary driver of health cost increases – newly created medical technology supplants its predecessors providing a modest improvement in our health, but at an astonishing increase in costs. That is, each year new technologies come into use, and the new medical treatments and procedures cost more, lots more, than the old ones.

A good example of that process is heart attacks. In 1984 only 10 percent of heart attack victims received surgical treatment. Fourteen years later, over 87 percent received catheters, angioplasty, or bypass surgery resulting in an additional year of life for the average heart attack patient. And the cost? The added surgery drove average treatment cost per patient up by $10,000 resulting in growth of the Medicare bill for heart attacks from $ 3 to $ 4.8 billion. Better health, bigger costs. The process for heart attacks is replicated throughout the system, though the improvement in outcomes is rarely as dramatic.

But, the era in which we can afford to buy progress with vast increases in our bills is over. We cannot indefinitely sustain that process either as individuals paying premiums or as a society running government deficits.
What is needed is simply stated: better medical technology that also reduces our expenses. Not every new device or pill costs more. New, better treatments are constantly developed which cost less than what they supplant.

A classic example of how far better treatment can be a cost saver is the use of amoxicillin, a dirt-cheap antibiotic, to cure peptic ulcers. Dr. Barry Marshall was awarded the Nobel Prize in 2005 for this discovery. For decades, peptic ulcers had been treated by use of acid blockers that became the world’s number one drugs at an annual cost approaching $8 billion – and they didn’t cure the ulcers. Marshall discovered that a bacterium caused peptic ulcers and could be wiped out for pennies and with continued annual savings of over $7 billion.

Every year there are cost-saving breakthroughs like Marshall’s. But, the number and impact of improved, but more expensive, treatments overwhelms the cost savers. The solution is to develop a broad, ongoing stream of new technologies that are cost savers to fully offset cost inflators.

Given the importance of the issue, you might think that there already exists a vigorous national drive to increase the number and impact of breakthrough technology to lower medical costs. Not so. In fact, the federal government spends over $40 billion a year on medical research. But, by law, not one dime of those funds is targeted to produce less expensive medical techniques.

A grim, silent consensus rules that nothing can be done about the costs of medical treatments themselves; and official, if un-admitted, government policy is to not even try.

At a minimum, here is what we should be doing. Each year dedicate a portion of new National Institutes of Health projects to those that demonstrate a likelihood of producing significant cost savings. And, follow the advice of pharmaceutical critic Bernard Munos to dramatically increase breakthroughs and reduce costs by shifting research from in-house, overly bureaucratized institutions to vast numbers of nimble, independent researchers.

In 2010, the central health care debate was how to expand coverage with short shrift given control of costs. Today, with costs exploding and no prospect of an end to that explosion in the coming decade, it is time to focus on seizing control of costs by creating an ongoing stream of better, less costly medical care.

Wally Knox is a former member of the California state Assembly.

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4 Responses to Ending the explosion in health care costs

  1. jessica rothhaar

    October 24, 2011 at 10:27 am

    Strange of Mr. Knox to ignore the other widely-recognized major cost drivers, i.e., unregulated prescription drug prices and insurance premiums that rise 2-4 times faster than the underlying cost of medical inflation.

    Both of these are entirely within the control of US policymakers, through regulatory schemes used in Europe, Canada and every other industrialized nation to limit the costs of care while allowing for reasonable profits and earnings by drug companies, hospitals, doctors, nurses, etc.

    The only thing that makes such common-sense regulation impossible here is our campaign finance “system,” which has put the drug companies and other for-profit drivers of high medical costs in charge of our national health care policy.

    It’s also strange that Mr. Knox ignores the substantive cost-control pilots put in place by the Patient Protection & Affordable Care Act, particularly in the area of lowering costs for the most expensive patients by incentivizing more cost-effective care for Medicare patients through the new ACO regs.

  2. Dan

    October 24, 2011 at 10:43 am

    Thanks for your comment, Jessica.
    My reading of Mr. Knox’s piece was that health care costs are rising because, well, the cost of health care is rising. New technologies, including drugs, are expensive, and sometimes they make us healthier and sometimes they don’t.

    I think the latest figures show that insurance company admin costs are generally less than 15 cents on the dollar collected, and profits are far less than than that, on average. Mostly what they do is pass along money from customers to the doctors, nurses, hospitals and labs who treat us. That’s where the real cost increases are coming from. See this space for more on this topic soon.

  3. ricinsac

    October 24, 2011 at 10:43 pm

    the first goal should be more preventative health care

    … perhaps at community clinics … so that folks could learn to critical habits: 1) give up cigarets and quit smoking and 2) lose weight !! Especially if in their 30’s and 40’s – this would truly cut down on health care costs. This would significantly cut costs.

    … and give me a break, insurance administrative costs at 15% is double that of the government and most of the government cost is 1) to erode out the unscrupulous providers who scam the system and 2) provide care for all people instead of screening out the sick and homeless as was the case with past practices.

  4. Pingback: Preventing Heart Attacks

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