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Insurers, Providers And Patients
Need To Solve High Health Care Costs
by Mark Ziemba
Over the past 10 years Northside Grill owner Jim Koli has switched insurers twice and cut benefits to continue to afford employee health insurance - and still seen costs more than double.
His experience is typical of businesses struggling to pay rising health insurance costs, which are determined mainly by the high cost of health care. Surprisingly, although a complex array of factors drive the high cost of health care in America, unnecessary use of health care may be at the root of the issue, and successful solutions will require changes on the part of patients, health care providers and insurers.
The High Cost of Health Insurance
In the past decade average annual health insurance premiums have more than doubled, according to the Kaiser Family Foundation and Health Research & Educational Trust "Employer Health Benefits 2008 Annual Survey." Such increases are more than four times the 25 percent rate of inflation over the same 10 years.
For single coverage, average annual total premiums have gone up 114 percent from $2,196 in 1999 to $4,704 in 2008. Employer contributions to premiums for single coverage increased 112 percent and worker contributions increased 127 percent.
For family coverage, average annual total premiums have risen 119 percent from $5,791 in 1999 to $12,680 in 2008. Employer contributions to premiums for family coverage grew 120 percent and worker contributions grew 117 percent.
"It's an unreasonable increase," Northside Grill owner Koli says. "I couldn't raise my prices like that," he says. "I would be out of business."
As a result of such an increase, Koli cuts back costs in his restaurant. Koli had originally envisioned providing health insurance to most of his employees, but the expense only allowed him to offer it to management. He employs 18 people but only provides health insurance to three out of 12 full-time employees. He also says that rising health insurance costs make it harder to give raises.
The cost of health insurance depends primarily on the cost of health care. "Health insurance premiums generally track the underlying growth of the cost of health services," says the PricewaterhouseCoopers study "The Factors Fueling Rising Health Care Costs 2008," commissioned by America's Health Insurance Plans, a national association of nearly 1,300 health insurance companies serving more than 200 million Americans. The report notes that benefits paid out make up 87 percent of health insurance costs, while administrative costs and profits only made up 13 percent.
The study breaks the increase in health insurance premiums down to three components, the largest being inflation. It says that general inflation contributed about 46 percent to the growth of health care costs in 2007. Health care price increases in excess of inflation contributed about 29 percent to the growth. Increased use of health care services contributed about 25 percent to the growth.
Setting general inflation aside leaves two important questions that may point to answers.
Why have health care prices gone up in excess of inflation? The study lists reduced provider competition as the biggest reason, with higher-priced technologies and cost shifting from Medicaid and uninsured to private payers as additional ones. The process of cost shifting to private payers illustrates the issue that the cost of Medicaid, which addresses health care for the poor, and the cost of the uninsured, who still use health care services, adds to the cost of private insurance.
Why has the use of health care services gone up? The study suggests new treatments and aging as the largest reasons, as well as changes in lifestyle and more intensive diagnostic testing as lesser reasons.
The High Cost of Health Care
The cost of health care in America is enormous. The United States spent $2.2 trillion dollars on health care in 2007, or $7,421 per person, according to the latest data from the U.S. Department of Health and Human Services Centers for Medicare and Medicaid Services. That was a 16.2 percent chunk of the U.S. economy, measured in gross domestic product.
Health care spending grew faster than the economy. Health care spending grew by 6.1 percent in 2007 from the previous year, faster than the 4.8 percent growth in gross domestic product.
America spends more on health care than any other nation in the world, without significantly better health than other industrialized nations. Based on World Health Organization numbers for 2006, America spent over one-and-a-half times what Canada spent per person on health care in U.S. dollars, almost twice what the United Kingdom spent, and almost two-and-a-half times what Japan spent. Surprisingly, America's 0.7 percent infant mortality rate was almost one-and-a-half times Canada's rate, its 10.9 percent adult mortality rate was almost 3 percentage points higher than the United Kingdom's rate, and its 78-year life expectancy was 5 years shorter than Japan's.
Aging Population Figures Minimally in Costs
The aging population is sometimes noted as an important factor in the increase in health care costs, but its significance may actually be minimal.
Blue Cross Blue Shield of Michigan Vice President of Small Group Sales Christine Farah lists aging as one of three drivers helping to increase medical costs.
BCBS of Michigan Corporate Affairs Director Helen Stojic adds, "As you grow older the number of prescriptions, the number of medical procedures you undergo increases."
University of Michigan School of Public Health Senior Associate Dean for Administration and Department of Health Management and Policy Professor Dean Smith disagrees that aging is a significant factor in the increase in health care costs, however. "Aging has something of an effect, but the aging aspect of it has been really overhyped." Smith is also the director of the UM Center for Value-Based Insurance Design.
"The person who is turning 65 years old today is a whole lot physically younger than a person who turned 65 two decades ago," says Smith. He points out that today's recent seniors grew up with vaccines and fluoridated water.
Dr. Mary Durfee of Integrated Health Associates agrees that aging isn't the most important factor. "Of course there's an aging population, but the cost of health care is outstripping what could only be accounted for by age," she says.
Data from the World Health Organization supports this. In 2006 only 17 percent of the U.S. population was over 60, whereas many countries that had a higher percentage of their population over 60 generally spent half what the U.S. spent per capita on health care. For instance, Japan had 27 percent of its population over 60 - the highest percentage in the world - and it spent 40 percent what the U.S. spent per capita on health insurance. Germany had 25 percent of its population over 60 and spent about 55 percent of what the U.S. spent. The United Kingdom had 22 percent of its population over 60 and spent about 50 percent of what the U.S. spent.
High Health Care Cost Influenced by American Prosperity, Population
Writing for the "Economix" blog at the "New York Times," Princeton University economist Uwe E. Reinhardt explained in his November 14, 2008 post that a major reason America spends so much on health care is simply because it's a wealthy country.
Reinhardt plotted the gross domestic product per capita in purchasing power parity dollars of 24 industrialized nations in the Organization for Economic Cooperation and Development against their health spending per capita in purchasing power parity dollars.
Reinhardt wrote, "There exists a very strong relationship between the G.D.P. per capita of these countries (roughly a measure of ability to pay) and per-capita health spending." He added, "Just knowing the G.D.P. per capita of nations helps explain about 86 percent of the variation in how much different countries pay for health care for the average person."
Great wealth combined with population growth suggests large increases in spending.
Writing for the "Economix" blog again on December 5, 2008, Reinhardt lists overall population growth as one of three primary factors driving annual growth in health spending per person, the other two being increases in health care prices and new, high-technology treatments.
UM School of Public Health Senior Associate Dean for Administration Smith concurs. "We continue to spend more in total in part because there are more people."
Poor Health Habits Prompt Higher Costs
Of all the factors driving U.S. health care costs, one of the most commonly mentioned may be the poor health habits of Americans, which amount to less activity and poor nutrition.
"A huge factor is people's health habits," says Dr. Durfee of Integrated Health Associates. "We have a more sedentary population." Durfee points out that a less active lifestyle can lead to chronic diseases such as diabetes, hypertension, heart disease and obesity. By their nature, chronic diseases are ongoing, and therefore expensive to treat.
Durfee can identify with the difficulty of maintaining health, however. "It's more challenging to live a healthy lifestyle," she says. "Families are stressed with time, they're stressed with commitment, they're stressed with work," says Durfee. "Meals get caught on the fly a lot, and those tend to be less healthy."
UM School of Public Health Associate Dean for Administration Smith also believes that the "widening" of our population is an influence on health care costs. "As we biggie size our meals, we biggie size our behinds," he says.
"We haven't had a time when the average life expectancy hasn't gone up, but if we don't watch how we take care of our health, that might not continue to be the case," says Smith.
Smith speculates that a less active lifestyle contributes to the trend in obesity. "We have a lot more entertainment that can happen for us indoors," he says. "I used to know people who went bowling; now I know people who sit in their house and do Wii bowling!" referring to the Nintendo video game system, which was actually designed to encourage movement. "A flat panel TV with 175 channels is not quite the same as going for a walk after dinner," he adds.
Smith notes that addressing health habits through preventative health and wellness programs is a growing trend. "In the long run, that is probably our best bet at being a healthier population and spending less money," he says.
As an example, Smith points out UM's MHealthy program to promote the health of its faculty, staff, dependants and retirees, introduced in 2005 by UM President Mary Sue Coleman. Smith is on the advisory committee for the program, which seeks to encourage better health through exercise, proper nutrition, health assessments, chronic disease management, alcohol management, smoking treatment, emotional well-being services, occupational health services and ergonomics.
Blue Cross Blue Shield of Michigan sees that health habits are one of the main factors in increasing medical costs, as well. It's also engaged in efforts to encourage health, efforts which reward people who make better health choices and even offer different health insurance plan pricing.
New High-Technology Medical Treatments Costly
From new diagnostic and surgical tools to new treatments and new prescription drugs, new medical treatments offer innovative but expensive approaches to health care.
Princeton economist Reinhardt writes in his November 14 post for the "Economix" blog at the "New York Times" that "more widespread use of high-cost, high-tech equipment and procedures" is one of the main factors in the high cost of American health care.
"We're very advanced in our technology, but technology comes with a price," says Blue Cross Blue Shield of Michigan Corporate Affairs Director Stojic.
UM School of Public Health Associate Dean for Administration Smith says that although advanced techniques may reduce suffering, which is certainly good, their popularity increases health care costs. "We have laparoscopic surgeries - the keyhole surgery that allows us to do surgery that's much less invasive - and therefore a lot more surgery is being done," says Smith.
Smith also points out the role of prescription drugs in the high cost of modern health care. "In the early 1980s, not many people had prescription drug coverage," he says. Health Maintenance Organizations, or HMOs, grew in popularity in the 1980s and offered benefits that included coverage for prescription drugs. Smith says that prescription drug coverage was an incredible incentive for prescription drug innovation. "If you look at the flow of prescription drugs we had come into being in the late-1990s, early 2000s, it was substantial," says Smith. Since the average time to develop a drug is just over 10 years, the results of drug innovation in the 1980s began to appear in the 1990s.
Because of the research and development that goes into drug creation, new drugs are typically expensive, a cost which can last for some time. Drug patents last for 20 years from the date of filing and exclusivity can last from less than a year to 7 years from the date of FDA drug approval.
Decline of Managed Care Spurns Higher Health Care Costs
Health Maintenance Organizations grew rapidly in the 1980s. HMOs were encouraged by the national Health Maintenance Organization Act of 1973, which provided funding, removed state restrictions and opened the health insurance market to HMOs. HMO health insurance plans were attractive in part because of their affordability in the wake of higher health care costs. HMOs offered benefits at lower premiums by limiting access to doctors and hospitals. Although health insurance premium growth for a family of four slowed to less than 1 percent in 1996 according to the Kaiser Family Foundation's August 2007 edition of "Health Care Costs: A Primer," Smith says that consumers began to object to the idea of health insurance plans placing restrictions on their health care.
"There was substantial backlash against managed care," says UM School of Public Health Associate Dean for Administration Smith. As a result, Smith says, "the authorization process for services became much easier in the late-1990s and 2000s." Such changes provoked inflation in health care costs, he says. "The economy was doing well at those times, so people could afford higher health care premiums," says Smith.
More Use, Not More Effective Use, Heightens Costs
Ironically, more health care isn't necessarily better health care.
For 20 years the Dartmouth Institute for Health Policy and Clinical Practice's Dartmouth Atlas Project has been examining variations in medical practice and spending among Medicare recipients across the United States. The institute's February 29, 2009 report "Health Care Spending, Quality, and Outcomes: More Isn't Always Better" suggests that an overabundance of medical resources actually corresponds to higher health care spending, less effective essential care, more discretionary care, lower quality care and worse access to health care.
"Higher volume of care does not produce better outcomes for patients," the report states.
"Higher-spending regions have more hospital beds (especially intensive care unit beds), more physicians overall, and more specialists per capita," says the report. "Patients in high-spending regions are hospitalized more frequently, spend more time in the ICU, see physicians more frequently, and get more diagnostic tests than identical patients in lower-spending regions.
"In regions with more physicians, both patients and physicians report greater difficulty getting needed care or needed referrals," writes Dr. Elliott Fisher, one of the report's authors.
The report also indicates that while physicians in high-spending and low-spending regions of the U.S. reached similar decisions regarding cases where there was strong evidence for a specific treatment, doctors in high-spending regions were more likely to provide discretionary care. "Physicians in high-spending regions were much more likely to intervene in cases where judgment was required," says the report.
In the February 26, 2009 issue of the "New England Journal of Medicine" an article entitled "Slowing the Growth of Health Care Costs - Lessons From Regional Variation" by some of the same authors as the above report emphasizes the same point. "Those in higher spending regions, however, were much more likely than those in lower-spending regions to recommend discretionary services."
"Higher spending does not result in better quality of care," says the report. "Patient outcomes can actually suffer, because having more physicians involved increases the likelihood of mistakes (too many cooks spoil the soup), and because hospitals are dangerous places to be if you do not absolutely need to be there."
"Access is worse when there are more medical resources: a 'paradox of plenty,'" the report says. "Remarkably, in regions where the numbers of hospital beds and specialists are greater, physicians are more likely to have difficulty getting their patients into the hospital or getting a specialist referral."
Among other things, the way health care spending rewards greater use influences this excess use of medical resources. "In most locales, hospitals and physicians are rewarded for expanding capacity (especially for highly profitable services) and for recruiting additional procedure-oriented specialists," writes the report. "A key cause of the current crisis of access and costs is the fee-for-service payment system (where providers are paid a fee for each service)."
Dr. Fisher writes in the same report, "The problem is not how many physicians we have; it is how we pay them and how care is organized." He adds that doctors "are not paid to provide care in any other way, such as through telephone calls or e-mail."
The previously mentioned "New England Journal of Medicine" article states, "Hospitals lose money when they improve care in ways that reduce admissions."
The Increased Cost of Defensive Medicine
The fear of litigation by patients also encourages more spending, a pattern is known as "defensive medicine."
"Sometimes there is pressure from the patient to order additional studies," says Dr. Durfee of Integrated Health Care Associates. "There is always the fear of litigation if those studies aren't ordered. That's a significant concern from a physician's perspective."
In the March 2003 issue of "Family Practice Management," Dr. Richard G. Roberts writes in his article "Seven Reasons Family Doctors Get Sued and How to Reduce Your Risk" that "the most common allegation is failure to diagnose in a timely manner." Regarding breast cancer, for instance, he notes that "Mammography may be an adequate screening tool, but it is a poor diagnostic tool with false negative rates of 20 percent." He notes that diagnosis may range from following the patient for a month to see if the lump goes away to biopsy by needle aspiration or excision. In this case, better diagnosis may result from the right studies, not necessarily more of them.
In the previously mentioned "New England Journal of Medicine" article, "Under the current payment system, physicians cannot afford the time it takes to help patients understand why a test or procedure is not needed."
A solution to this issue may be to change the health care payment system to encourage hospitals and doctors to make more time to communicate with patients about health care.
Health Care Cost Issues Complex but Reform Requires Cooperation
A complex set of reasons are behind the high cost of health care. Effective changes in the health care system will require changes from patients, health care providers and insurers.
Dr. Durfee of Integrated Health Associates says, "I don't think there are any easy answers." She adds, "Any answers that are going to come about are going to take compromise and pain on the part of every single person: the patients, the doctors, the insurers."
The Dartmouth Institute report mentioned earlier agrees. "Efforts to reform the U.S. health care delivery system face serious challenges that will require multiple stakeholders to work together," says the report. It adds that "the U.S. health care system does not face a problem of scarcity. Rather, the evidence indicates that we have more than enough resources to provide high-quality care for all - and to maintain provider incomes."