July 1, 2016 (Vol. 36, No. 13)

Administrative Costs in the Near Term Obscure Technology-Driven Savings in the Long Term

Five years ago, in this column (GEN, October 15, 2011), I explained why in the long run, three decades later, healthcare costs would likely decline, contrary to the situation then and even more so now. In summary, the rationale for such a dramatic change is similar to that for other technology-driven products and services. As I wrote then, “All technology-driven products and services tend to evolve with more and better features yet cost less and less”.

Disruptive innovations will transform the practice of medicine. As examples, diagnostic procedures will increasingly be developed to identify in each person requiring treatment, which molecular receptors should best be targeted to achieve therapeutic success. Personalized medicines will be developed at a lower cost than nonpersonalized medicines, because smaller clinical trials targeting more homogeneous populations will result in lower rates of failure, which in turn will lead to more effective therapeutics. Gene therapy and stem cell therapy will eventually cause a dramatic reduction in healthcare costs because they will result in cures of what now are considered chronic diseases.

J. Leslie Glick, Ph.D.

Current Challenges

Nevertheless, my focus here is on how best to deal now with the escalating cost of healthcare in the U.S., so that we can reach nirvana, as portrayed above. PBS NewsHour (December 14, 2014) reported that the U.S. spends more per person on pharmaceuticals than other countries, even as much as 40% more than the second-highest such spender, Canada. To put this further into perspective, PBS noted that the U.S. spends 2.5 times more per person on pharmaceuticals than Norway, yet Norway has a higher gross domestic product per capita than the U.S.

Moreover, as reported by Bloomberg News (December 18, 2015), in other countries the government negotiates prices with pharmaceutical companies. In the U.S., individual insurers and benefit managers negotiate pricing, but Medicare is prohibited from such negotiations. Bloomberg presented data showing that discounted prices of seven top-selling drugs in the U.S. typically were much higher than those sold elsewhere. In particular, the discounted prices of these seven drugs averaged 3.7 times higher in the U.S. than in Norway.

As detailed in the 2012 Comparative Price Report, provided by the International Federation of Health Plans, the disparity between the costs of healthcare in the U.S. versus healthcare costs in the other advanced economies extends well beyond differences in pharmaceutical pricing. For example, the average cost per hospital day in the U.S. was almost three times greater than in Australia and almost six times greater than in the Netherlands. The average physician fee for a normal delivery in the U.S. was almost 70% higher than in Australia and over 10 times greater than in the Netherlands.

Similar figures have been summarized at ObamaCare Facts, a private website. It indicates that in 2007, the total healthcare expenditure per capita in the U.S., compared to that in Australia, Canada, France, Germany, Japan, Switzerland, and the U.K., ranged from around 60% higher than in Switzerland to almost 170% higher than in Japan.

Bygone Practices

To illustrate how our healthcare system has evolved to impact adversely on physician practices and on the physician-patient relationship, I would like to share with you what a physician practice was like when I was growing up in the 1940s and 1950s. My father was a surgeon. He shared an office suite with three other physicians. Each of the four doctors had a different specialty. They each paid 25% of the rent and of the personnel cost.

What would be unheard of today is that they had only one employee. Today, it would be more likely to have an employee to physician ratio of 4, rather than 0.25.

Because the doctors had a very low overhead, they were not as concerned as they would be today as to whether or not their patients had insurance, and in those days neither Medicare nor Medicaid existed. Their low overhead enabled them to charge less in constant dollars compared to what they would charge if they were practicing today, and they would still treat patients even if the patients had little or no money to pay for their services.

Foregone Savings

Returning to the present, Obamacare has provided insurance to many people who were previously uninsured, but the U.S. government could have come up with an alternative, more cost-effective approach by making Medicare available to everyone, regardless of age, which I proposed two years ago in this column (GEN, January 1, 2014). Whereas Medicare Part A (for hospital care) would remain premium-free for persons 65 and older, everyone else could purchase Part A, and like Part B (for medical services) and Part D (for prescription drugs) currently, the cost of Part A would vary based on income.

Last year, the Institute for Public Accuracy reported that the administrative costs associated with Obamacare amounted to 22.5% of the program’s total federal expenditures. In contrast, overhead costs reached just 12–14% of expenditures reported by private health insurance companies, and  such costs are associated with only 2% of Medicare’s expenditures.

Data obtained from Health Affairs Blog indicated that if Obamacare were replaced by Medicare, the overhead costs for all of the newly insured would drop by around $30 billion per year. Moreover, if Medicare were permitted to negotiate prices with pharmaceutical companies, as do Medicaid and the Veterans Health Administration (VHA), Medicare Part D would save over $15 billion annually if Medicare obtained the same discounts received by Medicaid or VHA for the same brand-name drugs.

This estimate was based on an analysis done last year by Marc-André Gagnon, Ph.D., a social scientist at Carleton University, and Sidney Wolfe, M.D., a co-founder and senior adviser of Public Citizen’s Health Research Group. This analysis, which appeared on the Carleton University website, indicated that brand-name drugs cost Medicare Part D 73% more than what they cost Medicaid and 80% more than what they cost VHA.

However, the biggest potential savings that could be obtained would be if the U.S. were able to simplify its complex multipayer system, which generates extensive payment-related activities, essentially billing and insurance-related (BIR) activities. The costs of these activities were analyzed in a 2014 study that appeared in the journal BMC Health Services Research.

The study’s authors, led by James G. Kahn, M.D., a health economics researcher at the University of California, San Francisco, calculated the BIR costs for physician practices, hospitals, private insurers, public insurers, and other health services and supplies. The authors then compared these costs to what they would be if the U.S. were a single-payer system. They concluded that in 2012, a single-payer system would have reduced total healthcare expenditures in the U.S. by over $350 billion.

Granted that even if Medicare were available to everyone, the U.S. would still not become a single-payer system, because the private sector participates in the Medicare marketplace by offering Medicare Supplement (Medigap) Policies and Medicare Advantage (Part C) Plans. Nevertheless, the adoption of a universally available Medicare would have a positive impact on reducing BIR costs, possibly eliminating as much as $100 billion per year.

In summary, if Medicare replaced Obamacare, the reduction of overhead costs by $30 billion, prescription drug costs by $15 billion, and BIR costs by $100 billion might lower total U.S. healthcare costs by $145 billion per year.

J. Leslie Glick, Ph.D. ([email protected]), is an independent corporate management advisor.

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