Questions America must ask on health costs
By Peter Peterson
Published in The Financial Times - Opinion SectionOctober 14, 2009
We have been warned for a long time now that America's long-term healthcare costs are unaffordable, unsustainable and a threat to our economic competitiveness. It is all true.
With 78m baby boomers nearing retirement, Medicare's unfunded liabilities and promises are $38,000bn (€26,000bn, £24,000bn) in today's dollars (not including Medicaid). To meet those costs, we would have to more than double Medicare payroll taxes – unthinkable. Private health insurance is in no better shape. According to the Kaiser Family Foundation, in the next decade the average annual premiums of employee-based coverage are expected to rise to a stunning $30,800.
The basic structure of our healthcare system is the major reason we spend twice as much per capita as other developed countries with, at best, no difference in outcomes. We behave as though being "deficit neutral" for new healthcare programmes is adequate, when this does nothing about the unsustainable long-term costs of existing programmes.
At the core of our sick system is a set of perverse incentives for providers, employers and patients that must be addressed. I am under no illusions that I have all the answers, but I have some key questions about the underlying cost drivers.
Why do we incentivise procedures rather than outcomes? The basis of the federal fee-for-service system is not value or health outcomes but rather the volume of procedures (diagnostics, tests, follow-up visits) – which shifts revenues to service providers. Meanwhile, the consumer considers the services to be "free" because someone else appears to be paying. The result is that the providers have every incentive to spend more and the consumer every incentive to agree. The cost impacts are everywhere. Per capita, the US has five times more CT scans than Germany and five times as many coronary bypasses as France.
Why do we tolerate inexplicable variations in healthcare costs across the country? Consider the fact that some parts of the US have six times more back operations and six times more prostate removals than others. We should gather data to determine best practices and share them nationally.
Shouldn't we focus not simply on who gets covered but on what gets covered? While I am not suggesting that the government decide when intervention is appropriate, it makes sense to explore how to encourage living wills and other ways of redirecting Medicare spending in the last year of life. After all, that is about 30 per cent of Medicare expenditure. La Crosse, Wisconsin now has 95 per cent of its population with living wills and its costs in the last two years of life are 20 per cent lower than the national average.
How can we cap our perverse healthcare tax incentives? Making healthcare insurance expenses deductible for employers and tax-free for employees results in "Cadillac-level" benefits and almost $300bn a year in lost revenues.
How can we promote preventive practices that reduce costs? Several chronic conditions (such as diabetes and heart disease) account for about three-quarters of Medicare spending – and obesity, smoking, inactivity and heavy drinking are principal causes.
Why do we not have a healthcare budget? We are the only developed nation without one, and the result is that our healthcare spending is not subjected to the essential scrutiny that is routine for federal R&D, environment, education and so forth.
When will we reform the malpractice system? An estimated 3 to 9 per cent of Medicare costs are related to defensive medicine. Special medical courts might be a way of moderating malpractice costs. We might also consider a "safe harbour" to protect those who use evidence-based practices.
Why not standardise administrative and regulatory processes? Our private health insurance system spends up to $200bn in "excess" administrative spending to cover people, bill for services and make payments.
Can't we replicate integrated healthcare clinics on a national scale? Through full sharing of patient information among the involved doctors, these systems show it is possible to improve outcomes and save costs.
Why is it so difficult for insurers to operate across state lines? According to the American Medical Association, in 15 states, one insurer had at least 50 per cent of the market. That cries out for more competition. To this end, we could create a sensible system of insurance exchanges to organise consumers into large purchasing blocs.
We need two critical initiatives: a programme of experimental projects on cost drivers and a process for implementing reforms. For example, the Obama administration has proposed a non-partisan commission of health experts that would make cost-saving recommendations to put before Congress and the president for a so-called "up or down vote."
We have a historic need and opportunity to "bend the cost curve" down so that our healthcare system is accessible, affordable and sustainable. But to make that happen, we must address the cost drivers.
The writer is chairman emeritus and co-founder of the Blackstone Group and founder and chairman of the Peter G. Peterson Foundation.
