Paul Ryan’s Medicare Reform Plans Should Be Looked At In The Larger Context Of Exploding US Health Care Costs – Why Does The US Have The Highest Medical Bill In The World? True Reform Would Have To Go Beyond Medicare

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By Paolo von Schirach

August 17, 2012

WASHINGTON – I wanted to expand on recent comments I made on Paul Ryan’s plans to reform the Medicare program because of its excessive and growing cost. I thought that it would be good to place Medicare in the larger context of out of control overall US health care costs. Medicare is not “the” problem. Medicare is a large component of a bigger problem. In the US we have the highest health care spending in the world, both as a percentage of GDP (17,5%) and per capita. And all this money does not buy average Americans superior health. If we compare America with other high income modern countries, we see that they all spend much less and have better health statistics, starting with higher life expectancy.

The American health care crisis

So, here is the American health conundrum: extremely high costs, mediocre results and a complicated public policy and political issue, since much of this ever expanding medical bill is absorbed by the Federal Government, via Medicare and Medicaid. At the source of this uniquely American mess, three factors that conspire to have ever increasing expenditures and poor outcomes:

1) Americans developed very bad personal habits in terms of diet and lack of exercise. This caused a steady deterioration of national health conditions. The out of control obesity epidemic with all its medical consequences is just one example.

2) In America, the medical profession works on a “fee for service basis” . In plain language: your doctors makes money only when you are sick and you need his/her services. This creates a strong economic disincentive to create effective prevention programs. Likewise, no effort to teach ”wellness practices”, something that would include good habits regarding nutrition and exercise.

3) Most American are covered by insurance. This means that, whatever doctors prescribe, most of the cost is absorbed by insurance companies and by Medicare/Medicaid for seniors and very low income people. This also means that there is no real market incentive to contain costs.

In a previous piece I examined Ryan’s Medicare reform ideas, (at the time there was no talk of Ryan becoming a candidate for vice president), in the context of the US health care crisis. I re-propose it in its entirety because it places the current health care debate within a broader scenario. I do believe that the issues I discussed then are the same we are confronting today, with the difference that now they are part of a presidential campaign.

WASHINGTON – (April 2011) – Here is a riddle for you. What’s the connection between the US looming fiscal crisis, the 2011-2012 budget proposal put forward by Congressman Paul Ryan which includes drastic changes in Medicare payments, and the advice to Americans to change diet and walk at least thirty minutes every day that came from the authoritative podium of the World Health Care Congress?

Believe it or not, the connection is very strong. In a modern society certain individual costs are socialized through centralized welfare programs. So, to what extent we socialize individual needs matters a great deal, because when costs grow exponentially they inevitably become a public policy and public finances issue. Believe it or not, In America we see now how millions of people who do not take care of their health originate massive –mostly preventable — health care needs that translate into massive socialized costs and consequently a huge political problem.

Individual behavior, social and political consequences

And this is the issue before us, as different players put forward different welfare spending blueprints aimed at taking care of the consequences of the bad habits of millions of Americans. So, do keep in mind that what is now framed as a “political issue” at its roots has individual behavior, (life style, diet, exercise, addictions), and gigantic medical needs largely originating from this “bad” behavior.

Indeed, it is to deal with health care needs that systems are put in place. And they cost money. How much of these costs are socialized and what the consequences of this socialization are for public finances becomes a matter of political debate when costs are out of control, as they are today in America. Yet, it all starts with individual needs largely framed by personal behavior.

How are we dealing with the consequences of personal behavior? Paul Ryan has a plan

But let’s see how this plot unfolds. House Budget Committee Chairman Paul Ryan, Republican of Wisconsin, opened the “Big Budget Debate” by presenting a broad based plan on April 5, 2011 aimed at obtaining substantial savings that will cut the astonishingly high yearly deficits and consequently the total national debt. Compared with Obama’s budget, his “Path to Prosperity” federal budget proposal would cut an additional 6.2 trillion dollars over the next ten years.

Ryan’s plan outlines spending cuts that create a path to fiscal sanity. His assumption is also that a combination of lower government spending, plus a streamlined tax system, including lower corporate tax rates only up to 25%, will contribute to higher economic growth. This “Path to Prosperity” may actually work.

In line with an anti-government, Tea Party inspired, mood?

More broadly, one would think that these proposed drastic spending cuts should be in line with what angry voters loudly demanded in the course of the 2010 campaign that led to a stunning Democratic defeat in the House. In fact the entire Tea Party phenomenon was and is largely an “anti tax and spend” grass roots movement.

So, big green light for Ryan and the Republicans from the voters? Well, not so fast. [Please remember: this was written in April 2011]. Angry Tea Party activists and many others demanded much lower government spending during the 2010 campaign to renew the Congress and they voted for the Republicans who seemed inclined to cut. But at the time nobody cared to single out in any detail “what should be cut exactly, and by how much”.

No. People really want to have their cake and eat it too

And here we get into the thick of the basic immaturity that characterized a debate long on grandstanding and posturing about “cuts” and short on seriousness. People running for office on a platform that would include –say– “no more federal money for private groups that provide abortions” may have scored big with ideological voters, but these types of cuts do not get you far. And yet, unfortunately, the political reality is that even for the most ferociously anti-government Tea Party Americans the slogan is: ”Cut, cut everything, but do not touch my programs, please“. In simple language: symbolic stuff is good, cuts in what I get are bad.

The untouchable welfare state

And, as it turns out, all these armies of supposedly self-reliant, “do it yourself” Tea Party Americans are adamantly opposed to cuts to their favorite welfare programs. And these include Medicare and Social Security. And nobody told them in unequivocal terms that any path to fiscal restoration has to include cuts in all entitlements which alone constitute about 60% of all federal spending. Until this issue is squarely and honestly on the table, serious spending reform will remain an elusive goal. House Budget Committee Chairman Ryan means well, and I wish him success; but I sense that America is not yet on board.

Social security reform, a bit easier

Regarding Medicare and Medicaid, both programs are essential pillars of the US welfare state. Tinkering with them –let alone proposing major reform, as Ryan does– without broad popular support is politically explosive, if not suicidal. Social Security is equally important; but fixing it is much easier. Repairing Social Security is mostly about moving ahead the age of full benefits eligibility, in line with changed demographics and longer life expectancy. As we all live longer, we get our benefits a bit later. These program modifications can be done in a gradual way, without harm for future recipients.

Medicare is a mess, as it is part of the broader health care cost explosion

But Medicare is a much bigger mess. Because Medicare is one large component of a monstrous health care system characterized by the highest cost structure in the world –America spends more than 17% of its GDP on health care– and thus it is negatively affected by its crazy cost dynamics. As currently conceived, Medicare is a subsidy whereby enrolled senior citizens pass on to the government most of their medical bills. The problem is that, as the actual costs of medical care in the US keep growing well ahead of inflation, the overall Medicare financial burden for federal finances grows so much year after year that it will soon be unsustainable.

The Ryan remedy

The Ryan Budget blueprint puts forward a bold reform. The US Government will stop underwriting costs. It will provide instead a fixed amount of money that will be used by individuals to cover premiums of insurance policies that they will select from within a pool of competing insurers. Beyond that, the Government contribution will rise only with inflation. The rationale here is to introduce a system that will incentivize competition among insurers and a more judicious use of health care. This is good. But only up to a point.

If costs keep growing, limited government help will dry up quickly

Indeed, if policy makers assume that medical costs are destined to rise at the current rate indefinitely, then it is clear that a limited premium support program will not do it. Assuming sky rocketing costs, senior citizens, after having quickly utilized whatever money comes from Washington, will be left to fend for themselves, and some for sure will not have enough money to do so.

As soon as this scenario sinks in –and you can bet that the Democrats will make sure to highlight this point– this whole Medicare reform proposal will become a huge political liability. It will be very hard to convince future recipients that they have nothing to worry about, because the new system will magically contain costs, so that they will be in line with inflation. People are unfortunately used to costs going up and up, every year.

But why these costs in America?

And this is indeed the real core issue. Why skyrocketing medical costs in America of which Government payments are only one, albeit very large, component? No similar phenomenon is registered in comparable advanced countries. What’s so special about the US?

In truth, say the experts, there is absolutely no objective justification for this ongoing explosion of medical costs in the US.

“Fee for service”, no built in disincentive to over prescribe, and an unhealthy population contribute to increase demand and cost

There are contributing factors, though:

–One is that medical professionals are paid on “fee for service” basis, with no limitations. Which means that the more they prescribe, the more money they make. There is abundant evidence indicating widespread practices of unnecessary procedures, redundant tests and over prescription of medications. All this comes with a huge price tag.

–The second is that the medical insurance system places insufficient checks on this practice.

–And third we have a very unhealthy US population, more and more afflicted by chronic diseases whose treatment creates enormous financial burdens for the whole system. The Medicare program sits in the middle of this mess. In fact, it sits on the most expensive end of the continuum, because it provides for elderly patients, by definition in greater need of medical services than the average younger individual.

My point is that, unless the health care fundamentals –mostly “fee for service” and lack of meaningful “wellness education”– are not drastically modified, it would be hard to find a permanent and satisfactory solution for Medicare.

Can we change the underlying fundamentals that drive up costs?

Can we have reform? Of course we can. But it would require a real revolution –a revolution by the way recommended by leading health care professionals. Fate has it that this new Paul Ryan Budget was unveiled just at the same time of an event held by The World Health Care Congress. One of the speakers was George Halvorson, Chairman and CEO of Kaiser Permanente, one of the largest health care institutions in America.

Enter George Halvorson of Kaiser Permanente

And what Halvorson had to say is truly astonishing. With example after example he pointed out the absurd cost disparity between what people are charged in the US and in Germany, France, Canada and other modern countries regarding practically each and every routine medical procedure. Everything in the US costs double, triple or more. For the same procedure? With the same or comparable effort? This is completely absurd. But this is what a system in which the person gettting the service passes the bill on to his insurance gets you. Crazy cost inflation.

No justification for exorbitant US prices

Some price differences may be justified by local economic conditions, prevailing costs, wages, etc. But everything costing so much more in America? And this is not about the cost of surgeries in emerging countries’ facilities where we can understand that costs can be even 1/10 of what you would pay in the US. We are not dealing with Indian hospitals here. We are talking about advanced, wealthy nations with per capita incomes quite comparable to the USA.

Chronic illnesses absorb most of the money

And George Halvorson also pointed out that the real budget busters in the US are not the relatively few complicated and expensive procedures for rare cancers and what not. The real problem is represented for instance by the explosion of obesity and obesity related diseases, like type two diabetes.

In America obesity has created an army of chronically ill patients that need constant treatment. These types of patients break the bank. And we know that obesity, with very few exceptions, has its roots in something very, very mundane: people eat too much of the wrong stuff and exercise too little. Is it really possible that overeating has become a national medical and now public policy crisis? You bet.

And the miracle of a 30 minute daily walk

And what else? Well Halvorson talked about nutrition and exercise. (See above about obesity). And, you may find it odd but he dedicated a fair amount of time within his presentation extolling the health benefits of a 30 minute walk –every day. He provided suggestions on how this walk could be split into two 15 minutes installments and so on. He indicated that the body “really needs to move”. And he explained how walking is a key factor in tuning up all metabolic functions, so that “all systems” are kept in good working conditions.

Walking and the Budget

So, what’s the connection between walking or not walking, better or poor diet, doctors salivating when they get a new diabetes patient and Ryan’s Medicare reform plan? Well there is a huge connection. First of all, skyrocketing medical costs do not depend on some sort of law of physics.

They are driven by bad incentives that can be modified. Secondly, aggregate national costs are driven by total demand for services. And this demand can be lowered, significantly, if people overall develop much healthier habits.

Simple changes in diet and exercise (as Halvorson recommends) by millions of people could have a rapid effect in the reduction of demand for services that end up costing hundreds of billions of dollars, becoming in the end a huge component of publicly paid health care.

And so, oddly enough, an issue originating in personal habits, multiplied by millions of individuals, because of its massive cost becomes a public policy issue and inevitably a political issue in the forthcoming budget battle. The problem with Ryan’s plan is that it is an honest attempt to deal with the consequences on federal spending of a health care crisis that originates elsewhere.

Can all this be taken in as we frame the national policy debate on health care?

As complicated as all this is, it would be nice if the unfolding national debate on Medicare reform would take all this into account. But if medical care costs increases are treated as a given, as an independent variable that cannot be modified, then the whole debate will be restricted to: “This is what it costs. Now let’s decide who pays for what”.

Caricature and emotions will prevail

And the politicians will not be driven by a desire to reform; but by a desire to apportion payments so that their favorite constituents come up on top. If this is so, then the debate will be portrayed as one between the ”mean spirited Republicans” who want to throw indigent grandma out of the hospital, and the “compassionate Democrats” who want to keep grandma in the hospital, have Uncle Sam absorb the cost and then hope to find a way to the pay the bill. In so doing they jacki up the national debt, praying that China will keep buying when we issue more of our increasingly dubious Treasury bonds. Not a good way to frame this critical problem affecting tens of millions of citizens.

If we could only learn how to walk…

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