Thoughts on Senator Warren’s Cost Control Measures
American health care costs about twice as much as in other countries – about 18% of our GDP. It is due to high prices for hospitals, doctors, drugs and medical equipment. We are not getting better results; in fact across many aspects of care, we are getting demonstrably poorer results whether it’s life expectancy, or infant or maternal mortality. Bad results in America are also due to non-medical causes such as gun violence and spreading obesity, which require difficult but needed societal changes.
Senator Warren’s newly released plans propose to reduce costs, cover everyone, cover almost all services, and make the costs of care more affordable for American consumers. She should be strongly commended for being so thoughtful and specific. She proposes to reduce the system’s costs as follows.
1. Reducing administrative spending. Senator Warren proposes to eliminate the roles of private insurance companies, which traditionally have very high rates of administrative costs and profits, and they often add measurably to the system’s complexity for providers and patients. Administrative costs are about 10% of the US health system’s costs, varying from about 2.3% for Medicare fee for service to about 6% for Medicaid to over 10% for private insurance (these administrative costs are highest for individuals and small businesses and lowest for large corporations, which may and do self insure).
The Urban Institute analysis of Medicare for All assumed 6% administrative spending, which is the overall level for Medicare; this includes the costs of Medicare Advantage, a private insurance option now available to all. Senator Warren’s plan builds on the current Medicare fee for service system’s administrative costs of 2.3%; she would eliminate Medicare Advantage. Savings of $1.8 trillion.
There is a concern about administrative costs since the new system is built on fee for service with no copays and deductibles and since it includes reasonable cost reimbursement for institutional care, like hospitals and nursing homes. Government may well have to do extensive and intrusive monitoring as to whether the hospital and nursing institutions’ costs are reasonable and necessary and whether patients’ utilization of costly services are medically appropriate.
2. Reducing the costs of prescription drugs. Americans pay about four times as much for drugs as other developed countries, and it’s all due to much higher prices.
Senator Warren would reduce reimbursements for prescription drugs over the next ten years by negotiating drug reimbursements with drug manufacturers using the market powers of the single payer. Her plan expects to reduce the market prices of brand name drugs by 70% and generic drugs by 30% through price negotiations. Urban Institute projected she would reduce prices by 25-30% -- $770 billion. Her experts believe her approach would reduce drug spending by an additional $1.7 trillion, primarily in reductions of the very high prices of brand name drugs.
3. Reducing the costs of hospital care and doctor’s visits. American patients pay much more for hospital care and doctor’s visits than their counterparts in other developed countries. Specialty care prices and the prices of testing such as MRIs are particularly high and out of line with other nations.
Senator Warren proposes to eliminate patient copays and deductibles, cover everyone and eliminate the uninsured, and reduce the system’s administrative complexity and the prices for prescription drugs. These will all increase providers’ bottom lines by increasing their revenues and decreasing their costs. There will be no balance billing of any kind to their patients.
Senator Warren would set hospital reimbursement rates at 110% of Medicare and doctor reimbursement rates at 100% of Medicare. These rates are well below their private insurance reimbursements, but well above their Medicaid reimbursements and above providers’ overall costs after adjusting for the decreases in administration and costs of pharmacy.
These changes are likely to increase provider revenues in hospitals with large volumes of Medicaid and Medicare patients, but reduce income revenues in hospitals with high percentages of private insurance patients and few Medicaid or uninsured patients. Thus in Los Angeles, a Saint John’s or a Santa Monica UCLA hospital would likely have their revenues reduced, while a Saint Francis, a White Memorial or a California hospital would experience increased revenues.
Likewise a doctor seeing patients in East Los Angeles would likely see an increase in income while a doctor seeing Beverly Hills patients would see a fall in income.
Primary care reimbursement rates would be increased, and specialty care rates would be correspondingly reduced. So the primary care doctors will experience increased incomes and specialists would encounter reduced incomes.
Rates are only part of the cost equation; utilization is the other part. Shifting to a fee for service system with no patient cost sharing will markedly increase utilization of services. Senator Warren’s experts recommend expanding the successful Medicare reimbursement pilots such a bundled rates and ACOs (Accountable Care Organizations), which would create incentives for better-organized systems of patient care. The experts also recommend moving to value based purchasing, global hospital budgets, and population based reimbursement rates (i.e. capitation). If these reimbursement reforms were to be adopted, these features would produce total ten-year savings of $2.9 trillion.
One of the key weaknesses of her approach in my estimation is the elimination of well-integrated delivery systems like Kaiser Permanente, which I think provide better population health care than does the unorganized fee for service delivery system, championed by Senators Warren and Sanders.
4. Health spending growth would be capped at the growth in GDP. Health spending has been exceeding the growth in GDP for many decades with intermittent slow downs due to sporadically successful cost control efforts. The ACA had caps on the growth in Medicare spending and the growth in the highest cost employment-based coverage; these were repealed by Congress during the Trump administration. Senator Warren would put a hard cap on the growth in health spending at the growth in GDP. Ten-year savings of $1.1 trillion are projected. I think this is the only way to assure Americans that we actually slow the unchecked growth in health spending.
5. Use existing state and local spending on health care such as the state and local Medicaid and CHIP matches to finance the program. This is not a cost control measure, but rather a financing mechanism; it simply captures and redirects existing state and local health spending since most of the federal/state programs like Medicaid and CHIP are subsumed within Medicare for All. Savings of $6.1 trillion over ten years. I will discuss this in my next paper on financing.
The Senator’s provisions rely primarily on federal rate setting to control rising health costs; the other mechanisms such as competition or managed care or consumer copays are cast aside. As a matter of both policy and politics, I prefer Senator Harris’s version of Medicare for all, which gives consumers a choice of public or private sector plans; it has the potential to be more dynamic and innovative than one size fits all for the entire nation of 330 million Americans. The ingenuity and persistence of hospitals, doctors and many other providers have frequently frustrated the best laid plans of state and federal regulators. There is something to be said for an over-all health spending cap with appropriate provider (and organized delivery system) incentives, flexibility, and innovation to operate competitively within the cap to reduce costs.
Prepared by: Lucien Wulsin
Dated: 11/6/19