Good news and not-so-good news.Reading or listening to daily news reports these days is not for the faint of heart. Calamitous events include, but by no means are limited to, the violent political upheavals and threat of nuclear weaponry in the Middle East; the sovereign debt crisis facing member nations of the European Union; expectations that gasoline prices will soon approach $5.00 a gallon; the unprecedented violent weather in the South and Great Plains states; and the contentious political sideshow of this presidential primary season. The depressing news is ample reason to escape to a good book or to an alternative reality such as that captured by "The Simpsons."
Even the most optimistic news stories are cast with a thin veneer that belies a harsher reality. Since my last column, two such newsworthy items have caught my attention. At first glance, these reports appear to presage good news, but when examined more closely they reveal some underlying and deep-seated problems. Both items, either directly or indirectly, underscore the need for health reform. The first item is the much reported slowdown in health care spending in 2010; the other recalls the optimistic employment picture drawn from February's labor market statistics.
The Slowdown in Health Care Spending
As was widely reported in the media, the annual report on national health spending released by the Centers for Medicare and Medicaid Services (CMS) (Martin et al. 2012) disclosed that in 2010, health spending increased by only 3.9%. This statistic, and that for 2009, marked a watershed moment, representing the lowest spending increases reported by the federal government in the 51 years that such data have been collected. In addition, the report noted that overall spending as a share of gross domestic product (GDP) remained constant at 17.9%, and that Medicare spending in 2010 had increased by only 5%, the smallest increase in over a decade. However, upon taking a closer look at this apparent good news, it became clear that these changes were neither the result of enlightened public policies nor a byproduct of nascent health reform provisions.
The CMS report revealed that the reduction in spending growth was largely an aftershock of the Great Recession, attributable to high unemployment, the substantial loss in private health insurance, employer reluctance to hire and invest, and the lowest median real household income in more than 10 years. These changes, in turn, led to declines in individual demand for physician office visits, inpatient admissions, and emergency room use, as well as a reduction in the intensity of services. The decline in utilization also helped slow the growth in prescription drug spending, which often accompanies physician and hospital events.
One could certainly be tempted to put an optimistic spin on such reduced spending growth--that income-constrained consumers in consultation with their providers were seeking only essential services whose benefits were commensurate with their out-of-pocket costs. However, the more likely reality is that the loss of income and employer-sponsored health insurance for many individuals resulted in reduced access to essential health care services and the postponement of needed care. If this was the case, then the relatively small increases in health spending over the last two years had little to do with enlightened consumer and provider behavior or with a change in the persistent underlying factors that have driven health care spending. As a consequence, the decline in spending growth should not be interpreted as a meaningful reversal in longstanding trends.
When the underlying causes of high U.S. health care spending and its growth are considered, comparisons with other developed countries are typically invoked. In commenting on this issue, Reinhardt (2011) has nicely elucidated some key factors contributing to spending disparities between the U.S. and other countries. He cites the higher administrative costs governing the exchange of information and payments within the U.S. system; the relatively high price for provider services; and the lack of transparency in pricing information for consumers, which impairs effective competition among providers.
The considerable contribution of administrative costs to our spending has been well-documented by a number of observers who have compared U.S. costs in this area to those of other countries, most notably Canada. In a recent analysis of such cost differences published in Inquiry, Pozen and Cutler (2010) estimated that for medical practice administration, Canada uses 44% fewer non-clinical workers per capita than the U.S., 41% less physician time, and 25% fewer non-staff resources. Were the U.S. to reduce its administrative resource use for hospital and physician practices to the levels found in Canada, it would achieve per capita savings of $616--a savings that represents 39% of the administrative spending difference between the two countries. Other studies cited by Reinhardt (Woolhandler and Himmelstein 2003; McKinsey 1996) also reveal large disparities in administrative costs between the U.S. and Canada and Germany, respectively, for earlier time periods. Apart from the contentious debate regarding the relative merits of single-versus multi-payer systems, the data simply indicate that substantial savings could be achieved by reducing administrative cost burdens in the U.S. system.
Reinhardt also cites the well-documented higher prices paid for physician and other provider services in the U.S. relative to other countries, as well as the lack of price transparency. Regarding the former, such price differences have long been recognized (Anderson et al. 2003). Recent data from the International Federation of Health Plans for 2010 cited by Reinhardt reveal wide differences across countries in prices paid for specific procedures such as MRI scans, normal deliveries, and appendectomies, and work by Laugesen and Glied (2011) document the wide disparity in physician payments for hip replacement and primary care in the U.S. relative to other developed countries. In part, these differences reflect the predominant fee-for-service approach to U.S. health care payments, the imbalance of market power when insurers negotiate fees with provider groups that are growing ever larger and serve a considerable share of patients within a geographic market, and the inadequacy of the administrative prices set for provider payments by Medicare Advantage and Medicaid managed care plans. Finally, Reinhardt also notes that the price differences faced by U.S. consumers for the same services reflect an inequitable element of price discrimination whereby individuals with different coverage may face wide variation in prices for common services.
The issue of provider payment has come to a crisis point with regard to reimbursement for physician care under Medicare. Briefly, in 1997, Congress capped the growth in Medicare physician payments to the Sustainable Growth Rate (SGR), a rate of increase that depends on the growth in physician costs, Medicare enrollment, and real GDP per person (Van de Water 2010). Actual physician payments have typically exceeded the SGR and have been offset by reductions in federal spending elsewhere. For 2011, excess payments above the SGR would have required a 27% drop in payments to physicians unless other sources of revenue spending decreases in other health programs and/or tax increases--were available to offset the excess payments (New York Times 2012a). There is widespread concern that such a draconian cut in reimbursement in a particular year would cause many physicians to withdraw from treating Medicare enrollees. While there is a consensus on the need to address the short-comings of the SGR cap, Congress has avoided doing so and instead has sought to deal with this issue through yearly adjustments in other sources of spending or revenue.
Apart from technical issues governing optimal systems of price setting for physicians and hospitals, encouraging competition among such providers is viewed by some as a market-oriented strategy to address the level and growth of health care spending. However, transparency in provider prices for consumers is necessary to support meaningful competition and this appears to be seriously lacking. Citing a report from the U.S. Government Accountability Office (2011), Reinhardt (2012) highlights the report's conclusion that it remains quite difficult for consumers to obtain meaningful price information prior to receiving care. Additionally, he notes that huge price lists associated with our fee-for-service system make it challenging to disclose price information in a meaningful way; that providers may fail to comply with requirements to disclose price information (he cites a RAND study of California hospitals as a case in point); and that existing price discrimination by providers among different patient groups adds to the lack of clarity regarding effective prices.
Health Reform and Health Spending
Short of a major structural change in the way providers are paid and health care resources are used in both the private and public sectors, we will likely have to await implementation of the arsenal of cost-containment provisions in the Patient Protection and Affordable Care Act (ACA). Among the interventions included are: efforts to encourage the formation of accountable care organizations to manage patient care; demonstration projects to test the efficacy of bundled provider payments; an explicit reduction in the rate of growth of payments to Medicare providers; the highly contested Independent Payment Advisory Board to recommend to Congress ways to reduce the per capita growth rate in Medicare spending; payment reductions to Medicare Advantage plans; an innovation center within CMS to assess the cost-saving efficacy of different payment systems; the imposition of a "Cadillac tax" on insurers who market high-cost health insurance plans; steps to simplify and reduce the costs of health insurance administration; and more generic efforts to encourage the use of information technology. Since these and other ACA provisions will be implemented beginning in 2013 and afterwards (barring an unfavorable ruling on reform by the Supreme Court), they are unlikely to have an effect on health care costs in the short term. Moreover, as I have noted elsewhere (Monheit 2008, 2010), uncertainty remains as to whether such cost containment efforts will be efficacious.
Finally, the view from the other side of the political aisle does little to offer novel approaches to cost containment. Republican presidential candidates generally agree that rescinding the ACA will be the first order of business if they are elected, and propose provisions that in many respects are a retread of the last presidential campaign, ceding considerable autonomy to states for innovation. These proposals include, for example: the use of health savings accounts (HSAs) with high-deductible health plans; enhanced competition through information technology; expanding the individual market as a source of coverage by extending tax deductions and permitting the purchase of such coverage across state lines, and by providing quality rating of health plans; greater price transparency; block grants to states for Medicaid; use of high-risk pools, reinsurance, and risk adjustment schemes; and meaningful medical liability reform. What is ironic is that some of these provisions are already captured to a greater or lesser extent by the ACA, particularly in state health insurance exchanges that will be governed by principles of managed competition.
As noted, the efficacy of the ACA's cost containment provisions remains uncertain and those put forward by the Republican candidates also have raised serious questions regarding their potential to rein in spending. Above all, it is quite clear that fundamental changes to the incentives for excessive resource use inherent in our largely fee-for-service health care system are required. Given the imperative of cost containment for our long-term fiscal health, whether the approaches noted previously will yield "good news" on the health care cost front remains to be seen.
The Improved Employment Outlook
Data released by the Labor Department for February revealed solid employment growth for the third straight month, with more than 200,000 new jobs created each month and a steady 8.3% unemployment rate for January and February, down from 9.1% a year ago. In fact, over the last two years, the labor market has recovered almost 3.5 million of the 8.7 million jobs lost in the Great Recession (Shierholz 2012). Also worth noting is the fact that job gains since last summer have been well in excess of the nearly 100,000 jobs created every month to accommodate the growth in the working-age population (Cohn 2012, quoting economist Gary Burtless). Finally, one reason that the unemployment rate remained constant over January and February was that additional people returned to the labor force seeking employment.
Certainly this is all good news and suggests that despite a sluggish economic recovery, we are seeing significant job gains and employment prospects brighten.
Despite this apparent good news, there remain some unsettling and long-standing concerns. At issue is whether the kinds of jobs obtained during this expansion will provide adequate earnings and benefits comparable to those obtained from prior employment, and whether they will yield sustained earnings growth over time. Perhaps most compelling is whether over the longer term, we will have the political will to ensure that resources will be available for the kinds of human capital investments necessary to yield a workforce that can adapt to the new realities of globalization and the increasingly technical requirements of production. Unfortunately, the answers to these questions are not promising.
The Quality of New Jobs
In an alert as to what workers might expect from the recent expansion in jobs, Luo (2010) described the early post-recession experience of newly hired workers and observed that "comparatively little attention has been paid to the quality of jobs being created and what that might say about the opportunities available to workers when the recession finally settles." Noting that the growth of low-wage jobs accelerated during the 2000s, Luo cited early evidence from 2010 that job expansion has been skewed to industries with "low to middling" median wages, particularly in industries with median wages below $15 per hour. In highlighting the experience of newly employed workers, his reporting captured the large pay and benefit cuts in the new jobs obtained by such workers. More recently, Talton (2012) also has cited the widespread use of temporary employment and the decline in wages and benefits among the newly employed, and Shierholz (2012) has documented the relatively small increase in wages over the last three months. This represents wage growth at a 1.4% annualized rate that is well below the modest 3.3% increase in the year prior to the recession.
As the New York Times recently reported, at least 40% of new jobs in the private sector are low-wage jobs, such as those found in the health care sector (e.g., in home health care and nursing homes). Other sources of job growth appear in low-paying employment in the service sector, such as retail sales, temporary work, and restaurant services. Additionally, the fiscal crisis facing state governments over the last few years has led to the loss of more than 500,000 jobs nationally, and such jobs typically pay well and provide benefits such as health insurance (New York Times 2012b).
The nature of employment for many in the current economic environment and the corresponding weak prospects for growth in wages and incomes are reminiscent of patterns exhibited over the last decade, including the growth in income inequality. Indeed, updated data by Saez (2012) reveal that the top 1% of family incomes captured 93% of the income gains in the first year of economic recovery. These data add insult to injury by suggesting that the past may likely be repeated for many working families.
The Long-Term Unemployed
Despite the recent progress in job creation, Shierholz (2012) notes that the share of the unemployed without work for more than six months remained at 42.6% in February, nearly identical to January numbers (44.9%), and was more than 25 percentage points above that for December 2007. But perhaps most compelling is the reality that these people are unlikely to re-acquire the kinds of jobs, earnings, and benefits that they held prior to the Great Recession. It has been well-documented that the earnings and benefits acquired by those obtaining employment after a long duration without work typically pale in comparison to those previously received.
Apart from these economic considerations, it is important to recognize the impact long-term unemployment and underemployment have on individual and family health. A recent Kaiser Family Foundation/NPR survey (2011) has documented these health effects while carefully acknowledging the difficulty in determining causality between long-term unemployment or underemployment and poor health (i.e., whether poor health could, in fact, lead to longer-term joblessness). In particular, 29% reported worsening physical health as a result of being without work or working less than full time, and a third of those surveyed reported worsening mental health. Indicators of depressive symptoms were also more prevalent among these respondents with 56% reporting difficulty sleeping or loss of sleep, 52% experiencing weight gains, and a third reporting lost contact with close friends or family members. Half of such respondents also reported being uninsured compared to only 15% of full-time workers.
Other indicators also reveal the consequences for accessing and paying for health care. For example, regarding a usual source of health care, over a third of the long-term unemployed and underemployed obtained care from a private doctor's office, compared to nearly two-thirds of full-time workers; 16% obtained care from an emergency room, compared to only 5% of full-time workers; and nearly a quarter had no usual source of care, compared to only 10% of full-time workers. Over 40% of the long-term unemployed and underemployed reported problems paying for medical care compared to full-time workers, and over 70% of the former group reported delaying or not receiving some type of health care.
The economic and health care consequences of long-term unemployment highlight the potential value of the Affordable Care Act. In periods of economic distress, the ACA establishes a framework to assist those who would otherwise be vulnerable to a loss of coverage due to prolonged periods without jobs. Moreover, the ACA also will provide assistance to those who when re-employed find themselves without access to employment-sponsored insurance. It does so by providing income-related premium credits to pay for private coverage through state and regional health insurance exchanges or through expanded eligibility for public coverage should incomes precipitously decline. In the context of the ACA's individual mandate, such subsidies become particularly important for those experiencing employment problems, as does access to expanded Medicaid coverage for those with incomes below 133% of the federal poverty line. Moreover, through its health insurance exchanges, the ACA provides a choice of health plans with varying premiums and coverage as well as income-related cost-sharing subsidies to assist with out-of-pocket payments. In this regard, the ACA will strengthen and add an important element to the safety net available to those experiencing severe employment disruptions. By contrast, and despite the labor market implications of the Great Recession, it is difficult to find comparable measures within the health care proposals offered by the Republican presidential candidates.
Having emerged from a devastating economic crisis and finding ourselves in the midst of a contentious national and international political climate, it is only natural to seek solace in whatever "good news" is available. As I have noted, it surely would be good news if we were able to rein in health care costs in a meaningful way and if we could observe a robust economic recovery yielding significant employment opportunities with good pay and benefits, prospects for advancement, and shared prosperity. However, progress on these fronts will likely be much slower than we desire given our ideologically driven politics, difficulties in reaching compromise solutions, and reluctance to recognize that there is no "free lunch" in restoring our economic and fiscal health. Achieving the objectives of constrained growth in health care spending and robust economic and employment expansions will require meaningful and enlightened public policy as well as a degree of patience and forbearance from all of US.
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Alan C. Monheit, Ph.D.