Challenges ahead for health care finance.
For a decade and a half, the health care industry has seemed to be an exception to almost every economic trend. As the economy went into recession in 2001, health care kept growing. As labor shortages eased and business investment flattened out during the tech bust earlier this decade, just the opposite happened in health care--critical shortages for skilled workers grew more acute and money poured into new equipment and development of drugs. And as rapid technological advancements lowered prices of everything from bigscreen televisions to computers to cell phones, and inflation concerns everywhere began to ease, new health technologies--everything from digital imaging to high-tech artificial limbs and joints--seemed to make everything more expensive. In yet another contrast with the rest of the economy, the concern for health care spending is its continued rapid growth, not fears of a downturn.The Big Picture
Concern for how we pay for health care has become much more acute with each passing year. Since 1965, when the Medicare program was first born, the share of the U.S. economy devoted to health care has grown from under 6 percent to almost 16 percent in 2005, the most recent year with data available. As shown in Figure 1, roughly half of spending today comes from publicly-financed programs. The graph also shows that there is nothing unreasonable about official forecasts that call for that spending to exceed 20 percent of the economy by 2016.
That growing share is coming at the expense of other economic activities. It is also putting enormous pressure on budgets of all kinds--not just families, but increasingly businesses and even governments.
Individuals, governments, businesses, and charitable organizations collectively spent $4.7 billion in Montana on health care services in 2004--for everything from delivering babies to nursing home care. Thirteen out of every 100 Montanans on payrolls worked for the health care industry in 2006, more than any other major industry except retail trade, as shown in Figure 2. The $1.87 billion those workers earned in wages and salaries were the highest of any industry in the state. More often than not, the local hospital tops the list of large employers in communities across the state.
The profile of spending growth in Montana differs somewhat from the pattern of growth experienced nationally, as seen in Figure 3. Most notably, expenditures made in Montana on doctors' services as well as other professional services grew substantially faster than average between 1999 and 2004, in contrast to the national trends. This may reflect Montana's larger than average Medicare population. On the other hand, the blistering 81 percent growth in expenditures on drugs was much less marked in our state, which saw a milder 54 percent growth in the first half of this decade.
Is Higher Health Care Spending So Bad?
When you step away from the situation, it's really not remarkable that health care spending is growing faster than the rest of the economy. In fact, it's perfectly sensible.
Because of lower birth rates and increasing life expectancies, the proportion of older adults in the population is growing. And health care expenditures are usually higher among older Americans. Then there are the incredible advances in medical science that have given us a smorgasbord of drugs and procedures that extend and improve quality of life. We're getting artificial knees, life-sustaining drugs, and organ transplants that were never possible before. Finally, we're collectively a country that is richer today than ever. And all of the evidence says that as income goes up, so does health care spending.
The question is whether we are getting what we pay for. International rankings of most basic health care outcomes give the United States quite mediocre marks when compared to peer countries. For example, the U.S. lags behind 22 other countries in life expectancy of females born in 2003, as shown in Figure 4. Women born in that year in France, the leading nation, can expect to live more than 3.5 years longer than American women born the same year. Outcomes for many other basic measures of health outcomes show similarly disappointing results.
But when it comes to ranking spending on health care, the United States springs to the top of the pack. Data compiled in 2003 by the Organization for Economic Cooperation and Development (OECD) showed that U.S. per capita health care spending was twice the average of other OECD countries, when the latter are converted to purchasing power in U.S. dollars. The $5,711 spent per head in this country in 2003 was 23 percent higher than spending in tiny Luxembourg, the second highest spender, as shown in Figure 5.
These and other international comparisons have motivated calls for a complete overhaul of this country's health care system of finance, often toward a model that more closely resembles those found in these lower-spending countries. Whether one agrees with that prescription for reform or not, it is clear from these data that there is considerable room for improvement in the effectiveness of the dollars we spend today.
Why Health Care Dances to Its Own Drummer
The health care industry interacts with every business in Montana--not to mention households and governments. Yet its business model is like no other. Its transactions are dominated by third party payer systems, where government agencies or private insurance administrators intercede between producer and consumer to negotiate terms and make payment. The cross-subsidization of activities and segmentation of customers, where high margin services offset losses in others, or full price customers compensate for those who pay less than cost, is common. And the impact of the federal government, through the tax code, regulatory agencies, and the administration of the giant Medicare program, is substantial.
Any attempt to categorize the spectrum of proposals for cost control in health care is bound to be simplistic. However, a case can be made for putting them into one of two piles--bureaucratic and market-oriented. Bureaucratic controls already exist in the administration of Medicare, which frequently sets the benchmark other third party payers follow. Its record in controlling costs in recent years is decidedly mixed.
Economists have long called for injecting more market competition into health care services, yet those efforts have failed to gain much traction. The savings brought on by consumerism--shopping for the best price and performing an individual evaluation of whether a given product or service is worth the costs--have largely been unrealized in health care because third-party payers blur the incentive for individuals to inform themselves. Proposals to require price disclosure by hospitals are just getting off the ground.
The Challenge to Contain Cost Growth
Nearly 52 percent of Montanans were covered by some form of employer-provided group health insurance in 2005. Those plans continued to show the strain of rising utilization rates and higher prices for health care services and drugs. Nationally, premium growth for group plans slowed to 7.7 percent in 2006, as shown in Figure 6. Although this was the third straight year in which the growth rate declined, it has remained substantially above the overall inflation rate since the late 1990s.
This cost growth employers are facing has produced unsurprising, though also unwelcome, outcomes. Not only has the proportion of the workforce covered by employer-sponsored group insurance tracked steadily downward, but there is research evidence that high premium growth has resulted in lower wage growth even for those fortunate enough to retain this treasured benefit. And, of course, the share of costs pushed toward employees, in the form of higher co-pays and deductibles, has risen as well.
National data suggest that in terms of premium growth, self-insured plans have performed slightly better than average. Both types of plans have managed to slow premium growth by pushing costs to their employees and families in the form of higher deductibles, higher co-pays, and by freezing maximum lifetime benefits. When coupled with the skyrocketing costs of care for some medical conditions, freezing benefits effectively increases the exposure of individuals to catastrophic health outcomes that insurance is supposed to mitigate.
So-called consumer driven health plans--with high deductibles and tax-favored health savings accounts--have failed to gain much of a foothold in the Montana market, accounting for less than 3 percent of enrollees. Managed care delivered through Preferred Provider Organizations (PPOs) has grown rapidly to dominate group insurance plans.
The Challenge of Covering the Uninsured
The challenges of controlling spending growth and getting more bang for the buck in health care, as daunting as they seem, are not the only problems to be solved in health care finance. We also face the growing issue of providing adequate health care to those who have only limited means to pay for it.
Montana is in the lower tier of states in ranking the proportion of residents covered by health insurance. In 2003, the BBER estimated that 170,000 Montanans--22 percent of the population--were not covered by private insurance, either through their employers or through individual policies, or by government programs such as Medicare, Medicaid, or SCHIR Two-thirds of the more than 170,000 uninsured were adults, 86 percent were white, and 92 percent had at least a high school education.
The fact that Montana's economy is dominated by smaller firms is a significant part of the explanation for this unfortunate outcome. The 2003 survey found that 60 percent of the uninsured were either self-employed or worked for a company with fewer than 10 employees. The results of a 2006 BBER survey of Montana employers confirms that smaller companies are much less likely to offer health insurance to their employees, with only 40 percent of those with five or fewer workers offering such plans.
The Challenge in Financing Health Entitlement Spending
The enormous expense of the commitments we have already made to fund health care, retirement, and other entitlements at the national level in the coming decades is rarely mentioned in the current policy debate. Budget rules which require Congress to consider fiscal impact only out to a ten year horizon are one reason why. Yet the work of the U.S. Comptroller General has shown that the projected increases in just two programs--Medicare and Medicaid--by the year 2030 will require taxes to increase to unprecedented levels if nothing is done to cut back on spending commitments. Sound management of these programs, to say nothing of intergenerational equity, requires changes sooner, rather than later.
Conclusion
Reining in health care spending, while also improving access to care for those who cannot financially or physically access it, is a tall order for any contemplated set of policy reforms to fill. Yet evidence suggests headway can be made. Our country's high spending on health care has not produced better measurable health outcomes, such as life expectancy and mortality, than other industrialized countries that spend far less. Similarly, studies of Medicare spending around the country show that hospitals that spend two or three times as much as the average during a patient's last two years of life produce little measurable improvement in terms of longer lives or patient satisfaction.
This underscores two distinct, often competing, challenges for health care policy. One is to remove cost as a barrier to receiving necessary care. The second is to increase the efficiency and efficacy of care--to bring cost growth under control. How we do both--and we must do both--is the daunting assignment ahead for our leaders to take on.
Patrick M. Barkey is the Bureau's director of health care industry research.
Figure 2 Health Care Employment as a Percentage of Total Employment, Selected Montana Counties, 2006 Yellowstone 14.8% Gallatin 8.1% Silver Bow 17.7% Cascade 16.4% Fergus 15.7% Hill 13.3% Lewis & Clark 12.5% Flathead 11.3% Missoula 14.5% Montana 13.0% Source: U.S. Bureau of Labor Statistics Quarterly Census of Employment and Wages data. Note: Table made from bar graph.
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| Author: | Barkey, Patrick M. |
|---|---|
| Publication: | Montana Business Quarterly |
| Geographic Code: | 1USA |
| Date: | Mar 22, 2008 |
| Words: | 1951 |
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