Ezra Klein: An Insurance Industry CEO Explains Why American Health Care Costs so Much

[flpoljunkie]

(Ah, the profit motive. Only in America!)

An insurance industry CEO explains why American health care costs so much




On Friday, I sat down with Kaiser Permanente CEO George Halvorson to talk about health-care reform. The conversation was long and ranging and will take a while to transcribe. But before we really got into the weeds, Halvorson handed me an astonishing packet of charts. The material was put together by the International Federation of Health Plans, which is pretty much what it sounds like: an association of insurance plans in different countries. But it showed something I've never seen before, at least not at this level of detail: prices.



The packet's 36 pages are mostly graphs showing the average prices paid in different countries for different procedures, diagnostics and drugs. There is a thudding consistency to the pages: a series of crude bars, with the block representing the prices paid by American health-insurance plans looming over the others like a New York skyscraper that got lost in downtown Des Moines.



There is a simple explanation for why American health care costs so much more than health care in any other country: because we pay so much more for each unit of care. As Halvorson explained, and academics and consultancies have repeatedly confirmed, if you leave everything else the same -- the volume of procedures, the days we spend in the hospital, the number of surgeries we need -- but plug in the prices Canadians pay, our health-care spending falls by about 50 percent.

In other countries, governments set the rates that will be paid for different treatments and drugs, even when private insurers are doing the actual purchasing. In our country, the government doesn't set those rates for private insurers, which is why the prices paid by Medicare, as you'll see on some of these graphs, are much lower than those paid by private insurers. You'll also notice that the bit showing American prices is separated into blue and yellow: That shows the spread between the average price (the top of the blue) and the 90th percentile (the top of the yellow). Other countries don't have nearly that much variation, again because their pricing is standard.

The health-care reform debate has done a good job avoiding the subject of prices. The argument over the Medicare-attached public plan was, in a way that most people didn't understand, an argument about prices, but it quickly became an argument about a public option without a pricing dimension, and never really looked back. The administration has been very interested in the finding that some states are better at providing cost-effective care than other states, but not in the finding that some countries are better at purchasing care than other countries. "A health-care debate in this country that isn't aware of the price differential is not an informed debate," says Halvorson. By that measure, we have not had a very informed debate. But download this pack of charts (pdf), and you'll be a bit more informed.

By Ezra Klein | November 2, 2009; 10:42 AM

http://voices.washingtonpost.com/ezra-klein/2009/11/an_insurance_industry_ceo_expl.html

[ej510]

1. The chart explains why we need the UK system.

[John Q. Citizen]

2. We lost informed debate when single payer was excluded from the debate.

Single payer allows for actual effective pricing policies.

Why do other countries have pricing policies? Because the governments are negotiating prices with providers.

Just as happens with a single payer system.

[optimator]

3. Doctors' costs of running an office should be subsidized

instead of subsidizing insurance middlemen who produce nothing.

[DrToast]

4. Because it's so damn expensive to become a doctor in the US

If they didn't get paid that much, nobody could afford to become a doctor.

[Blue State Blues]

6. True. Other nations subsidize medical school.

We have a shortage of primary care physicians in the US, but medical school graduates choose to become specialists because, on average, it will take a specialist only 7 years to repay medical school loans, but it takes a primary care doc 12 or more years to do the same.

Studies show that primary care doctors provide excellent care at lower costs and usually more comprehensive care than specialists who tend to see only the issues of the system that is their specialty. But instead, we're increasing reliance on specialists.

[Blue State Blues]

5. Doctors in the US cost more, true, they also spend more billing the insurance companies.

And re-billing them after they deny claims. Each visit requires forms to be filled out with specific medical diagnostic codes. These codes are different for each company, and what each policy sold by the same company will pay for may be different as well. There is an entire industry of medical coding, just for filling out paperwork.

This is before any calculation about shareholder dividends or excessive compensation for doctors or insurance companies. The system is grossly inefficient. It is designed to waste money.

[jody]

7. "In other countries, governments set the rates". Why should health care be under govt. control but

other services and products excluded?

[andym]

8. Shows failure of competition to hold down rates

It seems quite to the contrary. There must be upward pressure to raise costs. It's been estimated that around 15%-20% of the costs in the USA are due to insurance company profits and overhead and another 10-15% is due to inefficiency in medical billing and administration-- that's where the 30% number you often see comes from.

Let's take the example of CT head scans from the graph in the OP.
Even if you take out the 30%, US private costs are still way higher 0.7(850-1800)=595-1200. Medicare is substantially less 300 (at least 50%).

So, even removing the greedy insurance companies' overhead and the inefficient administration means that the US system still costs way more than other countries or Medicare.

Why? Insurers have little motivation to rein in total costs, as long as they can pass on the cost to the consumers. In fact, the gross number of their profit increases as more total dollars are spent. So their overhead is not the main problem, rather it is their inability or desire to negotiate lower rates with providers. One could motivate them with a premium cap, that prevented them from passing on increasing costs. But while that would help, it would not completely solve their own problem with the medicare care providers.

So the best solutions are when somebody (usually a regulator) negotiate cost rates on behalf of a very large group (or everyone). That is the biggest advantage of single-payer, although technically, a regulator could negotiate rates that would apply to all payers (which is done in many European countries that do not have single payer).

[flpoljunkie]

10. Great points.

[andym]

9. So it requires rate "caps" and premium caps to make HC affordable.

Medicare essentially comes with both-- that's one of the key advantages of a large/single payer.

[andym]

11. Kick for useful information. nt.