Everyone — conservative and liberal — agrees that $2.6 trillion a year is too much to spend on health care, and that we have to cut costs. But they don’t agree on who is to blame or what is to be done.
Everett Dirksen, the Republican senator from Illinois, reportedly said, “a billion here, a billion there, and pretty soon you’re talking about real money.” But health care spending in the United States typically increases by about $100 billion per year. Cutting a billion here or there from something that large is undetectable. In health care, you have to be talking about tens of billions of dollars before you are talking about real money. A useful threshold for savings is 1 percent of costs, which comes to $26 billion a year. Anything less is simply not meaningful.
Where can you find that kind of money? Conservatives mostly point to frivolous lawsuits that encourage doctors to order unnecessary tests and procedures, and extremely expensive patients like premature infants. Liberals target drug companies and for-profit insurers. Although each of these cost-saving targets has some merit, malpractice reform and cutting back on drug and insurance company profits would be insufficient and a distraction from the real efforts necessary to control costs.
According to many on the left, health insurance companies are sleazy and unethical, making obscene profits by charging high prices to sick people, giving physicians and patients the runaround to avoid paying bills, and rescinding policies just when people who paid in good faith get cancer, while their executives often walk away with millions in compensation.
Last year, health insurance companies did rack up big profits, but it turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold. And even not-for-profit insurance companies need to have an operating margin — a profit by another name. There just isn’t enough money there to make a dent in health care spending.
Drug companies, too, are seen as greedy. Recent increases in prices for new drugs and biologics — antibodies and other proteins — especially for cancers like lymphoma and prostate are a real cause for worry. Many of these drugs cost $100,000 for a course of treatment, even when the benefits are neither a cure nor improved quality of life, but only a few months of added survival.
One proposal to limit drug company profits is to encourage the use of generic rather than brand name drugs. But that has already happened. Between 2004 and 2009, generic drug use rose from 57 to nearly 75 percent of all prescriptions. Paradoxically, over those same years, the total amount Americans spent on drugs actually increased by 31 percent — the same rate as overall health care expenditures. Even the best estimates suggest that savings from expanding generics’ use even further are, according to the Department of Health and Human Services, “likely to be small relative to total spending on drugs.” And substituting generics is not always possible; many important drugs are still patented and have no generic equivalent yet.
Importing brand name drugs from other countries, particularly Canada, is another favorite liberal cost control proposal. Many have criticized President Obama for not having fought harder to include it in the Affordable Care Act. It is true that brand name drugs cost substantially more in the United States than they do in Europe, Australia and Canada. A 2005 study in Annals of Internal Medicine found that Americans could save an average of 24 percent on brand name drugs if they were allowed to buy them from Canada. But overall this doesn’t add up to much. According to an evaluation by the Congressional Budget Office, the “reduction in drug spending from importation would be small.” How small? Pharmaceutical costs account for roughly 10 percent of total health care spending, some $260 billion in 2010. Importing brand name drugs from abroad would cut about 2 percent from that — $5 billion per year. Another cost control disappointment.
Are the conservatives’ proposals any better? Their favorite fix is to reform medical malpractice by limiting noneconomic damages, statutes of limitation and lawyers’ fees. In its favor is the fact that doctors’ fear of medical malpractice lawsuits is legitimate. According to a recent study in the New England Journal of Medicine, about 7.4 percent of doctors get sued each year. By age 65, even those in “low risk specialties” like pediatrics and dermatology face a 75 percent chance of being sued. It’s no wonder doctors order M.R.I.’s for routine headaches and monthly ultrasounds for normal pregnancies, despite these procedures not being required or recommended by professional guidelines.
But in 2009, the Congressional Budget Office did a comprehensive assessment of the potential cost savings from medical malpractice reforms. Its conclusions: A package that included a $250,000 cap on noneconomic damages, a $500,000 cap on punitive damages and a one-year statute of limitations for claims by adults would save about $11 billion a year — 40 percent from reduced malpractice premiums and the rest in the form of fewer defensive procedures like M.R.I.’s.
Frankly, $11 billion is not insignificant. As part of a broader package, some kind of malpractice reform probably makes sense — although it is important to do it carefully and caps are probably not the best approach. There is woefully little research on how caps affect the quality of medical care, but at least one study, published in Health Affairs in 2004, suggested that caps may have lowered quality of care. The ideal reforms would make it easier for victims of medical errors to get fair compensation — while weeding out the gold diggers — and would protect from lawsuits doctors who can document that they adhered to clinical guidelines and used computer programs to help them follow recommended care. But at less than half the $26 billion threshold, malpractice reform is certainly not a cost savings magic bullet either.
Another conservative proposal — to restrict health care spending on exorbitantly expensive patients — would both save less money and cause more harm. The paradigmatic case seems to be infants who are born prematurely and end up in intensive care on breathing machines for months, before requiring feeding tubes, constant nursing care, multiple medications and follow-up procedures for kidneys, heart or other complications. If we just stopped paying for these “million dollar babies,” the argument goes, the health care system could save a fortune.
But we only know who the “million dollar babies” are after we’ve spent the million dollars. We could screen every patient whose costs are going over, say, $50,000, but then what? Send them to a “death panel” that would choose whether to continue care? Even if we could identify them, there are too few to make a substantial cost difference. An unpublished analysis of nearly 20 million commercially insured patients — provided to me by an insurance company — showed that there were only 255 patients who consumed over $1 million in 2010. Together they spent 0.5 percent of all costs — a very large number for so few patients, but just half the 1 percent threshold for cost-saving that matters. And not all of those costs could be saved.
There are some savings in medical malpractice, drug costs, insurance company profits and “million dollar babies,” but not nearly enough. Next week I will explore where the real savings are.
This is the second in a series of articles about the cost of health care. A version of this column will appear in print on Sunday, Nov. 6, 2011.