The Fact of My Ignorance

Titans of Healthcare Pledge to Reduce Healthcare Costs!

Well with finals over and done with you can expect to get a lot more posts from me in the coming weeks!  And we start out today with some very exciting  news.  President Obama held a press conference today for what he called, “a watershed event in the long and elusive quest for health care reform.”  The American Hospital Association, the American Medical Association; PhRMA; AdvaMed; America’s Health Insurance Plans, the SEIU, and the Greater New York Hospital Association and the California Hospital Association announced a new cooperative effort to drastically reduce the rate of growth of healthcare costs beginning immediately.  They pledged to cut the rate of growth by 1.5%.  This may not seem like a lot but this means a cut from about 7% to 5.5%, bringing us much closer to the annual rate of income growth which tends to hover around 4-5% but which has at times grown to near 6%.  And that’s what really matters, that’s really our baseline here.  If healthcare costs can be reduced such that their growth is equal to the rate of income growth in the US then the future of healthcare suddenly gets a lot rosier.  And this commitment brings us much closer to that goal.

And this is also great news for America’s future financial security.  Many people don’t realize the huge impact that rising healthcare costs have on our country’s national budget.  The reasons why that is are a subject for another article but even a savings of 1.5% will mean much smaller deficits and less national debt.  One Obama aid put it this way:

“I don’t think there could be a more significant step to help struggling families and to help the federal budget than reducing the growth rate of healthcare spending by 1.5 percentage points per year. With regard to the federal budget… the only way that we are going to restore the nation to a sound fiscal path over the long term is to reduce the growth rate in health care costs… Reducing the growth rate of health care costs overall by 1.5% per year would virtually eliminate the nation’s long term fiscal gap. … This, by an order of magnitude, is far more important [than Social Security or related reforms] to the fiscal trajectory that we’re on, especially over the long term, than anything else that could be done.”

Perhaps a bit hyperbolic but nobel-prize winning economist Paul Krugman was almost as excited:

“And serious cost control would change everything, not just for health care, but for America’s fiscal future. As [Budget Director Peter] Orszag has emphasized, rising health care costs are the main reason long-run budget projections look so grim. Slow the rate at which those costs rise, and the future will look far brighter. I still won’t count my health care chickens until they’re hatched. But this is some of the best policy news I’ve heard in a long time.”   And later says, “…shaving 1.5 percentage points off the growth rate of health care spending. That may not sound like much, but it’s actually huge: achieving that goal would save $2 trillion over the next decade.”

So certainly nothing to sneeze at.  The details of how these savings will be accomplished were not released today but will be revealed over coming weeks.  As for why they’ve chosen to independently take this step?  The only answer from the industry was that they’re being “good Americans”.  This commitment will have no enforcement mechanism beyond the press and there will be no formal regulations.  Apparently the industry just came to this conclusion themselves.  Fantastic, if its that simple, but some fear this may be a preemptive attempt to block the healthcare reform that’s currently taking shape in congress.  Insurance companies can ask for patience first to see if their efforts are sufficient or they can claim that they tried to do their part but congress simply wouldn’t compromise.

I’m actually more optimistic.  In the industry’s statement on the issue they implicitly endorsed the healthcare economics currently being used by the administration to justify healthcare reform.  Which means that somewhere there has been a fundamental shift.  Previously, the insurance industry was holding up their own fringe economists to testify on their behalf against the wave of economic opinion opposing them.  Sort of like the tobacco industry doctors or the oil company ecologists.  But it seems they’ve accepted the fact that they’re part of the problem.  Of course the fact that they can suddenly reduce cost growth by 1.5% just for the heck of it seems to validate that idea as well. There’s been easily reducible waste in the private healthcare system for some time now, and this commitment just highlights that fact.

Healthcare reform plans will be presented in the next few months and I suppose the industry’s intentions will become clear then.  I’ll keep you updated as events unfold and as more details about these cost-reducing measures come to light.

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Tags: Budget, costs, Deficit, doctors, healthcare, insurance, Politics

This entry was posted on Monday, May 11th, 2009 at 5:52 pmand is filed under Current Events, Health, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

4 Responses to “Titans of Healthcare Pledge to Reduce Healthcare Costs!”

• Always more to learn Says:
  May 13th, 2009 at 9:31 am

  It will be interesting to see exactly where the healthcare cost reductions will come from.  It seems like doctors raise their prices in an attempt to make up for the huge adjustments that insurance companies force them to make (especially Medicaid).  It seems like insurance companies are charging higher and higher premiums, yet paying for less and less.  Doctors have to spend a fortune on malpractice insurance because of ambulance chasing lawyers.  So many issues . . .

  Reply
• Ryan Says:
  May 13th, 2009 at 12:54 pm

  Definitely true.  There are tons of issue affecting healthcare costs right now.  I’ve been trying to get a handle on how it all fits together for years and I still feel like I’m only at the beginning.

  But I think the type of healthcare costs they’re looking at here are growth in insurance premiums and their drivers.  My understanding is that usually doctors have a very limited ability to pass on costs of rising malpractice insurance, administrative costs from billings and adjustments, etc except over the very long term through lobbying.  Which leads to financial distress for doctors in private practice, but I’m not sure if those things have a significant effect on premium costs.  But like I said I’m still trying to get this all figured out so any insight you have on those issues would definitely be appreciated.

  I would guess that the major issues they’ll be addressing here are probably overuse/misuse of medical services and resources that raise costs to insurance companies (and hospitals, and the government) and malfunctioning market forces driving insurance premiums higher unnecessarily.  Since hospital associations are heavily involved in this I would assume that there are going to be some kind of procedures or standards put in place that are designed to reduce unnecessary scans and prescriptions thus reducing insurance companies’ costs.  And then I would imagine, or at least I’d hope, that insurance companies are going to be slowing premium growth simply out of the goodness of their hearts.  Because they can.  Despite legitimately rising costs to them they’re making record profits even though there’s a high demand amongst consumers for lower premiums.  Which shows you there is insufficient downward competitive pressure on their prices.  So to some extent insurance companies are raising premiums higher than they need to just because they can.  So hopefully part of this commitment is that they’ll cut down on that.

  I guess we’ll find out!

  Reply
• Always more to learn Says:
  May 14th, 2009 at 11:29 am

  Yes, it would be extremely refreshing to see insurance companies lower their premiums, just because they can, but at this point, I’m not holding my breath.  I agree there probably are a lot of excessive tests, scans, prescriptions, etc. prescribed, however I think it is mostly due to the constant threat of a malpractice suit if you don’t do everything possible for a patient.  Of course the flip side is that there are certain procedures that would be very helpful for a patient, however they can’t get it done because it’s an exclusion in their insurance policy and they certainly can’t afford to pay for it out of pocket.  I’ve been noticing more and more exclusions in insurance policies recently.  Insurance premiums probably wouldn’t feel so overpriced if you actually felt like you were being covered for everything you needed and didn’t have to worry about huge deductibles and/or copays (on top of your premium), not to mention all the non-covered services and exclusions that get passed on to the patient.

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• Ryan Says:
  May 14th, 2009 at 1:15 pm

  That’s a good point about the threat of malpractice claims driving over-utilization and increasing hospital costs and insurance premiums.  They are connected in that way.  Malpractice issues are a huge factor.  And if you talk to doctors about it, it will probably be the issue that’s most commonly mentioned, because its the factor they’re most conscious of.  Certainly tort reform would help resolve many of these issues.

  But It’s definitely not the only factor involved, and it might not even be the largest. If you look at nationwide graphs of healthcare utilization per person in various states, you can see that states with tort reform in place are more efficient for the most part than others, but its certainly not a perfect association.  Even after accounting for average age, weather, disease prevalence, violent crime rates, there are still several states that are somehow, someway, just doing things much more efficiently than others and are achieving equal health outcomes with fewer MRI’s, CAT scans, fewer Prescriptions, etc.  This could probably be another post in and of itself but the point is there are things that hospitals and doctors could be doing differently in many of these situations.  Some of those inefficiencies have been identified, and some are yet to be rooted out.

  As for insurance companies, I agree that the way they’ve been raising rates and simultaneously cutting benefits over the last several years has been very nearly criminal.  Will they trim profits and cut prices on their own accord?  That seems to be the commitment they’ve made.  I can’t imagine what else their involvement in this effort would mean.  I don’t think its entirely unlikely since it would be a smart move on their part in some ways. It might diffuse some of the anti-insurance company anger on capital hill and encourage lawmakers to draw up healthcare reform that was less antagonistic towards the existing insurance companies.  I mean I don’t think its any coincidence that they made this announcement right as healthcare reform talks were starting in the legislature.  But I think it makes sense to be skeptical of their commitment until we start seeing some details, and some action.

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