From Fortress to Frontier: How Innovation Can Save Health Care

Trends in Health-care Spending

“Last week’s third estimate of 3rd quarter GDP contained a significant upward revision to the real (inflation-adjusted) increase in GDP, from a 3.9 percent in the second estimate (released in November) to 5.0 percent in the third estimate.

November’s second estimate of 3rd quarter GDP included very tempered growth in health spending. The third estimate blows that out of the water. Much of the upward revision to the GDP estimate was due to health spending.

The real dollar change in seasonally adjusted GDP (at annual rates) from the 2nd quarter to the 3rd quarter was estimated at $153.7 billion in the second estimate. The third estimate revised this up to $195.2 billion, a change of $41.5 billion (27 percent).

Health spending was revised up from $8.6 billion to $20.7 billion, an increase of $12.1 billion. That is, the upward revision of health spending accounted for almost one-third of the entire GDP revision. Health spending is a component of household consumption of services. The entire revision to that category was $21.8 billion. So, pretty much the entire net increase in the estimate for household consumption of services was accounted for by health spending.” - Last week’s GDP Estimate Included a Massive Upward Revision in Health Spending, The Independent Institute, 12/30/2014

Link to the entire article appears below:

http://blog.independent.org/2014/12/30/last-weeks-gdp-estimate-included-a-massive-upward-revision-in-health-spending/

Regarding Proponents of ACA and the Bumper Sticker Sized Slogan: “Bending the Cost Curve”. Maybe Not so Much.

“The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants.

Health-care spending by middle-income Americans rose 24% between 2007 and 2013, driven by an even larger rise in the cost of buying health insurance, according to a Wall Street Journal analysis of detailed consumer-spending data from the Bureau of Labor Statistics.

That hit has been accompanied by increases in spending on other necessities, including food eaten at home, rent and education, as well as the soaring cost of staying connected digitally via cellphones and home Internet service.

With income growth sluggish, discretionary spending on things like clothing and movies, live shows and amusement parks has given way.” - Basic Costs Squeeze Families, Wall Street Journal, 12/01/2014

Link to the entire story appears below:

http://online.wsj.com/articles/americans-reallocate-their-dollars-1417476499?KEYWORDS=basic+cost+squeeze+families

ACA/Obamacare: More About The Health-Care Cost Curve

"But the growing centrality of education and health care is not only a function of public preferences and demand. Another important factor, especially to the two sectors' growth within the labor market, is the fact that it is more difficult to squeeze labor costs out of those industries than it is in, say, manufacturing or agriculture. After all, most factory work does not require deep knowledge or complex judgment. As a result, engineers are constantly developing machines that can substitute for humans in manufacturing. Furthermore, as countries like China and India become more integrated into the global economy, an ever-larger pool of low-skill labor becomes available. The need for manufacturing labor in the United States is therefore reduced; the relative cost of manufacturing output is thus held down.

Compared to manufacturing, the delivery of services in education and health care today is relatively labor intensive. Teachers and doctors require much more training than do manufacturing workers. Everyday work in education and health care generally involves more judgment and complex decision-making than are required on a production line. These higher-level tasks are not as easily handed over to machines or outsourced to low-skilled workers abroad.

Education and health care are also more resistant to the productivity increases that have dramatically altered the manufacturing sector. Factory automation, for instance, can swiftly raise the number of widgets produced per worker; office automation has vastly streamlined supply-chain management, inventory control, and accounting. But increasing the number of operations per surgeon, or the number of essays graded per teacher, is much more difficult. Hence, productivity growth in health care and education lags behind that in other industries.

As a rule, this means that health care and education tend to be less efficient. As increased productivity has led to wage growth in other, more efficient industries, the inefficient sectors must maintain competitive wages. But without the commensurate productivity gains, they experience cost growth, an effect named "Baumol's Cost Disease" (after the economist William Baumol, who identified it in the 1960s).

Baumol's famous illustration of this phenomenon compared classical musicians with auto workers. It takes just as many musicians to play one of Mozart's symphonies today as it did a half-century ago, but it takes far fewer auto workers to produce a car now than it did then. As a result, manufacturing has become much more efficient — employing fewer people, but paying each of them somewhat more. Orchestras can't employ fewer people, but they do have to pay each of their employees more than they used to — if only to keep up with the rest of the economy, lest their musicians run off to become auto workers.

The result is that, over time, costs in less efficient industries — like the fine arts, but also health care and education — will increase in relation to costs in more efficient industries. And these increasing costs, as well as rising demand for the services these sectors offer, have combined to place both education and health care at the commanding heights of today's economy.


PUBLIC SECTORS


If it were true only that health care and education are increasingly important sectors of our economy, there would be little cause for concern. Indeed, societies ought to desire economies that are strong and flexible enough to hum along as new technologies and other developments cause industries within them to rise and fall. The problem, rather, is that both health care and education are increasingly government-dominated industries. And this domination produces two ill effects that exacerbate the changes these sectors are already undergoing: Government's influence artificially increases the demand for health care and education (by significantly subsidizing both), and it makes both sectors even less efficient than they would be otherwise (by heavily regulating them and shielding them from market forces)." - The New Commanding Heights, Kling and Schulz, National Affairs, Summer 2011


　

The entire article appears in the link below:

http://www.nationalaffairs.com/publications/detail/the-new-commanding-heights


　 


　

Regarding the Claim that the ACA Bent the Health-Care Cost Curve Downward: A Proposition of Know-it-Alls vs. Know-Nothings?

One might consider taking a moment and reading the opinion piece by David Cutler, Obama Administration advisor, regarding his claim that the ACA bent the cost curve downward for health-care:

“But the focus on insurance coverage obscures other parts of the ACA that are working well, even better than expected. It is increasingly clear that the cost curve is bending, and the ACA is a significant part of the reason.” - The health-care law’s success story: Slowing down medical costs, David Cutler, professor of economics Harvard, opinion, Washington Post, 11/08/2013

Link to the entire Article appears below:

http://www.washingtonpost.com/opinions/the-health-care-laws-success-story-slowing-down-medical-costs/2013/11/08/e08cc52a-47c1-11e3-b6f8-3782ff6cb769_story.html


Now examine Charles Blahous essay refuting Cutler’s claim:

‘One particularly egregious example is White House advisor David Cutler’s op-ed published November 8 in the Washington Post, entitled, “The health care law’s success story: slowing down medical costs.” This piece contains the following paragraph:

“Before he was criticized for his statements about insurance continuity, President Obama was lambasted for his forecasts of cost savings. In 2007, Obama asserted that his health-care reform plan would save $2,500 per family relative to the trends at the time. The criticism was harsh; I know because I helped the then-senator make this forecast. Yet events have shown him to be right. Between early 2009 and now, the Office of the Actuaries at the Centers for Medicare & Medicaid Services has lowered its forecast of medical spending in 2016 by 1 percentage point of GDP. In dollar terms, this is $2,500 for a family of four.”

To see why this is wrong, it is useful to break down this paragraph’s thesis into its component parts. Specifically, it claims that:


The President’s previous assertions that his “health-care reform plan” would “save $2,500 per family” have been “shown” “to be right,” and that;
This is proved by the fact that the CMS actuaries have lowered, between early 2009 and now, their forecast of medical spending in 2016 by $2,500 per family.

For this paragraph to be correct, the ACA must be the reason the CMS actuaries have lowered their 2016 health spending projections. That is flatly untrue.’

‘The obvious point that leaps out from this graph is that the chief CMS actuary found that the ACA would increase national health expenditures through 2016. Not content to let the tables speak for themselves on this point, CMS was explicit in the text of its memorandum that the ACA increased the near-term cost projections:

“The estimated effects of the PPACA on overall national health expenditures (NHE) are shown in table 5. In aggregate, we estimate that for calendar years 2010 through 2019, NHE would increase by $311 billion or 0.9 percent, over the updated baseline projection that was released on June 29, 2009. Year by year, the relative increases are largest in 2016, when the coverage expansions would be fully phased in…The increase in total NHE is estimated to occur primarily as a net result of the substantial expansions in coverage under the PPACA…” '

‘But no one can rightly claim that CMS has revised their near-term cost projections downward because of the ACA. That is simply false.’ - No Grounds for Claim that Obamacare Lowers Healthcare Costs, Charles Blahous, Manhattan Institute, 11/25/2013

Link to the entire article appears below:

http://www.economics21.org/commentary/no-grounds-claim-obamacare-lowers-healthcare-costs

Who is right and who is wrong? Comparing the two presentations, Cutler’s argument appears as a notional proposition whereas Blahous’s argument appears based upon empirical information that pointedly refutes Cutler.

But maybe, just maybe, one might be asking the wrong question about the two claims regarding the health-care cost curve. What question should be asked? Maybe the real question is: Why is the Obama Administration, and advisors thereof, either all-knowing or not knowing? How so?

The Obama administration, taking claim for lower health-care costs, is based upon the implicit assumption of: They knew all along, where completely abreast of the situation, were the rain maker. That is, when they claim something positive regarding Obamacare (ACA) they also claim they were well aware of the situation. The proverbial: “Told you so!”

Conversely, when something is negative e.g. web site mess, cancellation letters, narrow networks (aka "Medicaid-Plus") etc., regarding Obamacare, then in these situations, they implicitly and explicitly were unaware, never knowing and not knowing. The proverbial: “We are as surprised as you!”

How very odd for the Obama Administration and advisors thereof to be so very, very well aware of supposed positive aspects of ACA and simultaneously to be completely and totally unaware of negative aspects of ACA.

Hence one is faced with a situation in which, Obamacare, in its action phase, considering the authors and advisors thereof, is an all-knowing intentional consequence while simultaneously being a know-nothing unintentional consequence. Stated alternatively, the authors and advisors of Obamacare knew all along, where completely abreast of the situation, were the rain maker and simultaneously knew-nothing, not abreast of the situation, and not responsible.

Which leads one to think that the authors and advisors of Obamacare designed and studied Obamacare, in such a particular way, that they are either know-it-alls or know-nothings.

　

　

　

　

　

　

ACA: a price rocket -or- Wernher Von Braun warned of such launch pad explosions.

 

An item of ACA that escapes discussion is "fully reserved". That is, private insurance must reserve for future losses. However, social insurance, in the main, the "reserve" thereof, is implicitly and explicitly assumed to be the political authorities ability to coercively tax. Historical experience tells one, in no uncertain terms, that social security type plans with a quasi-reserve such as a trust fund do not reserve for future loses rather they raise taxes in that the tax functions/substitutes as the reserve.

 
 

Another item to consider is, in the aggregate, experience tells one that social insurance schemes are generally way too rich in benefit design based upon an extremely under estimated price.

 
 

Regarding ACA, the schemers have created a design that has the attributes of a social insurance plan yet the insurance mechanism is privately insured. Unlike U.S. Social Security and Medicare which have paper tiger trust funds [or worse in that the dupery of being one's own debtor and creditor is at work] and escalating historical tax rates, ACA is underpinned with a real tiger reserve [private insurers] and hence escalating premium rates. Stated alternatively, the premium rates will mirror the escalating tax rates of general social insurance schemes yet escalate even more as the future losses must be reserved and those reserves based upon ever escalating price. No hiding behind unfunded future liabilities.

Consider for a moment that Medicare had been originally designed based on the ACA design. For example, circa 1965 to today there would be no such item as unfunded liabilities. All future losses would have to be reserved [private insurance mechanism]. Exactly what kind of insurance premium would one currently face and would have faced between 1965 and today?


Would it be the current zero price per month for part A and $100 per month for part B? The only way part A could remain at a zero price would be to have an extreme escalation in the payroll tax and part B's price would need to increase substantially as well.


Moreover, if such program had been fully reserved all along, then there would be no need to massively escalate price today as that mass escalation would have occurred over time [1965 - 2013]. The price, if fully reserved, would have been a bone of contention, politically speaking, during the vast majority of Medicare's life span.

 

In essence, there is no bending the cost curve in ACA. The curve is now fully priced for escalating price based upon too rich of a benefit design AND fully reserved for the price today and escalating price of tomorrow. No hiding behind paper tiger trust funds and unfunded future liabilities. Moreover, ObamaCare taxes will need to rise as well to subsidize the escalating price of certain groups selected for subsidization.
 

As with all social insurance schemes price containment will end in cutting benefits and/or price control schemes that will merely exastrobate the situation.

 

 

 

 

**note** how many times and in how many ways does one see/hear the basis regarding  the future viability of collective action as "the political authorities ability to coercively tax."


How many programs, when challenged on viability, are defended by "the political authorities ability to coercively tax." The nitwitery of the argument is that if all programs had to call in their marker regarding  "the political authorities ability to coercively tax" then the tax rate would be 101% which means there would be no economy as no tax at 101% can exist.

After the Affordable Care Act? After Obamacare? Part Five: “bending the cost curve” in health-care means removing supply-side limits and allowing robust competition.

 

Reviewing parts one, two, three and four of this series, John Cochrane professor of finance at the University of Chicago Booth School of Business wrote a recent essay entitled After ACA: Freeing the market for health care. The essay is very interesting as it makes the case of the need for decoupling health care from health insurance when discussing the demand and supply for health care and insurance merely being a mechanism to address catastrophic losses. Others have also pointed out the need to decouple the two concepts, however Cochrane does so in such a way that points out that the supposed market failure in health care is directly related to government failure in the realm of health care due to government lead market distortions on both the demand and supply side of health care.

Subsidies, price fixing schemes and regulation to supposedly reduce price vs. robust supply-side competition

A question that begs asking is why would the taxpayer subsidize computerized medical records as called for the Affordable Care Act (ACA)? Why were computerized medical records not already computerized by the current health-care sector suppliers on their own accord?

“On reflection, it’s amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are? Well, this is a room full of health policy wonks so you know the answers. They’re afraid of being sued. Confidentiality regulations, apparently more stringent than those for your money in the bank. They can’t bill email time. Legal and regulatory roadblocks.

　

So, medical records offer a good parable: rather than look at an obvious pathology, and ask “what about current law and regulation is causing hospitals to avoid the computer revolution that swept banks and airlines 20 years ago,” and remove those roadblocks, the government adds a new layer of subsidies and contradictory legal pressure.” (1)



What happens to robust supply-side competition when legislation and consequential regulations become merely discretionary powers?

“The impediments to supply-side competition go far beyond formal legal restrictions. Our regulatory system has now evolved past laws, past simple, explicit, and legally challengeable regulations, to simply hand vast discretionary power to officials and their administrative bureaucracy, either directly (“the secretary shall determine..” is the chorus of the ACA) or through regulations vague enough to let them do what they want. Witness the wave of discretionary waivers to ACA handed out to friendly companies. Those administrators can easily be persuaded to take actions that block a disruptive new entrant, and with little recourse for the potential entrant. (Lobbying government to adopt rules or take actions to block entrants is legal, even if those actions taken directly would violate anti-trust laws, under the Noor-Penington doctrine.)” (2)

If one wants to drive down the cost of health-care then one must create an environment that fosters robust supply side competition. Hence Cochrane offers a simple rule for what would seem to be a complex world:

“So, what’s the biggest thing we could do to “bend the cost curve,” as well as finally tackle the ridiculous inefficiency and consequent low quality of health-care delivery? Look for every limit on supply of health care services, especially entry by new companies, and get rid of it.” (3)

Changing gears for a moment and considering the deployment of complex rules for what appears to be complex, we can consult Richard Epstein’s book by the title of none other than Simple Rules for a Complex World. Epstein argues that the intuitive position is when one us faced with complexity then complexity requires complex rules. The result is to create complex rules that have burdensome administration costs and that such complex rules leave James and Jane Goodfellow with no earthly idea on how to interpret the rules. Epstein’s counterintuitive proposition is that simple rules lower administrative prices and costs and yield the same or better benefit. (4)

Moreover, Epstein points out that legislation spawning regulation causes rent seeking opportunities at each step of regulation hence the barriers to entry mentioned by Cochrane. Further, the regulations in and of themselves create rent seeking by an army of attorneys to interpret the rules, at a price, for James and Jane Goodfellow.

Both Epstein and Cochrane point out that over time increased administration price and cost, across entire economies and specific sectors, accumulate into explosive levels that create major drag.

Regarding health-care administrative price, one may find insight in the following:

“….administrative costs in our disintegrated U.S. system are $1059 per capita. The fact that this is an astonishing thirty-one percent of total health care expenditures itself suggests that excessive administrative costs are being imposed.” (5)

Cochrane goes onto to point out ACA’s approach to administration price and removing barriers to entry to foster robust supply-side competition is in fact to ramp up the price of administration and to continue with barriers to entry as the status quo:

"Now, this is of course not the way of current policy. The ACA and the health-policy industry are betting that new regulation, price controls, effectiveness panels, “accountable care” organizations, and so on will force efficiency from the top down. And the plan is to do this while maintaining the current regulatory structure and its protection for incumbent businesses and employees.

Well, let’s look at the historical record of this approach, the great examples in which industries, especially ones combining mass-market personal service and technology, have been led to dramatic cost reductions, painful reorganizations towards efficiency, improvements in quality, and quick dissemination of technical innovation, by regulatory pressure.

I.e., let’s have a moment of silence.

No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.

When has this ever worked? The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state-run industries? The last 20 or so medical “cost control” ideas? The best example and worst performer of all,…wait for it...public schools?

It simply has not happened. Government-imposed efficiency is, to put it charitably, a hope without historical precedent. And for good reasons.

Regulators are notoriously captured by industries, especially when those industries feature large and politically powerful businesses, with large and politically powerful constituencies, as in health insurance or as in most cities’ hospitals. In turn, regulated industries quickly become dominated by large and politically powerful businesses. See banks, comma, too big to fail. (Several insurance companies were bailed out in the financial crisis, so too-big-to-fail protection is not a distant worry.) This is not to say that regulators are not well-meaning and do not put great pressure on many industries. But the deal, “you do what we want, we’ll protect you from competition” is too good for both sides to resist.

Needless to say, price controls have been an unmitigated disaster in every case they have been tried. Long lines for gas in the 1970s are only the most salient reminder. Their predictable result is, vanishing supply. Try finding a doctor who will take new Medicare or Medicaid patients.

The current regulatory approach is not really well described as simple price controls, e.g. $3 per gallon of gas, but rather as fiddling with a payment system of mind-numbing complexity and endlessly discovered unintended consequences. The past record of “cost control” and “incentive” efforts should warn us of how likely adding more complex rules is to work. It seems instead to be a challenge to the next generation of planners.” (6)

　Notes:

(1) After the ACA: Freeing the market for health-care, John H. Cochrane, 10/08/2012, pg. 7.

(2) Ibid, pg. 8

(3) Ibid.

(4) Simple Rules for a Complex World, Richard Epstein.

http://www.amazon.com/Simple-Rules-Complex-Richard-Epstein/dp/0674808215/ref=sr_1_1?s=books&ie=UTF8&qid=1357997966&sr=1-1&keywords=simple+rules+for+a+complex+world

(5) Why We Should Care About Health Care Fragmentation, Einer Elhauge, pg. 5.

(6) After the ACA: Freeing the market for health-care, John H. Cochrane, 10/08/2012, pg. 9.

　

　

The Socialized Medicine Scheme: Bending the Cost Curve

Diagram of Marginal Cost

Proponents of the socialized medicine scheme offer a talking point entitled Bending the Cost Curve. Sounds impressive does it not? However, is the talking point put forth of bending the cost curve merely price controls in disguise?



Definition of Cost Curves:


(1) Short run and long run average cost curves are U shaped,

(2) Short run cost curves are U shaped because of diminishing returns,

(3) Long run cost curves take on a U shape because economies and diseconomies of scale. (1)


Shape of the Cost Curve?

Bending the Cost Curve, that "U" shaped curve in the diagram above, can surely be a different shaped "U". However, the shape will always be "U". Which means marginal cost rises. (2) (3)

Its not about Cost Curves

The concept of a cost curve is being hijacked by politicos when they use the phase "Bending the Cost Curve". That is, there is a complete disregard for the economics of the cost curve itself and merely a catch phrase has been developed that sounds as if sound economics are being applied.

The vast majority of those using the talking point Bending the Cost Curve have no earthly idea what a cost curve is nor the economic theory surrounding the cost curve. In other words, in the current heath-care debate, bending the cost curve is not economics nor political-economy. Its pure politics. Its political speak.

Serious Discussions of Changing the Cost Curve of Health-Care

There are serious discussions on how to lower costs within the realm of health-care. Sound strategies exist that pertain to cost factors such as more efficient organization, physician supply, institutional factors, comparative effectiveness of research, reform medical liability, etc., etc.. In other words, strategies that directly effect a cost curve. (4), (5), (6).

There is a sea of research on how to effectively reduce health-care costs. Ideas and procedures that really do address the concept of a cost curve.

Enter the Politicos

With the political speak talking point of Bending the Cost Curve firmly in hand, politicos merely take the path to price controls. In other words, when politicos say bending the cost curve they really are talking about price controls.

Politicos want votes not real results. Rather than addressing the true problem associated with cost, its more politically expedient to merely apply price controls. Politicos end up with a price argument even though they began with a cost argument. Remember, we are going to bend that mean old cost curve. Forget that, attack price.

The political argument for price controls is articulated with sub-talking points such as the percentage of Gross Domestic Product the USA spends on health-care in comparison to other economies (argued that total price is too high), affordability (argued as price being too high), that the uninsured are uninsured do to price, etc., etc. The point being the politicos make a price argument not an argument for strategies regarding cost factors i.e. bending the cost curve gets thrown out the window in favor of a price argument.

The economic disconnect is that final price is made up of a series of costs. That if you concentrate on cost factors, and truly bend the cost curve then you will have materially changed final price.

However, if you attack final price, and make price a political issue, then somehow artificially reducing price will affect cost? That's the cart before the horse.

Price Control Strategy

You are going to be very hard pressed to find one case in economic history where price controls have ever worked. (7) (8) Then why use price controls? Because really bad economic ideas never die they merely get recycled and sold to the gullible.

What the politicos want you to think is that they have a concern with cost (don't forget that bending the cost curve mantra) but in fact their argument is price and the solution is price controls.

What do Price Controls Produce?

Price controls always end with the same result: depressed supply of the item. Supply falls and rationing of the item occurs.

Sure seems like the rationing argument crops up over and over again within the health care debate. Odd huh?

Price Controls with Increased Price?

As mentioned above, really bad economic ideas such as price controls never die. However, really bad economic ideas can be made even worse. Really? Sure! Why not increase the price first, add some taxes to further increase the price, take the increased revenue produced by the increased price and redistribute to millions of uninsured and make them insured hence creating a demand shock, then slap on price controls and have a real mess. Sounds like a plan!

No Price Control Scheme is Complete without Big Government

When you discuss price controls you are talking bureaucracy. If you are going to control price, you will need plenty of rules and regulations. No rules and regulation manual is complete without an army of government bureaucrats. The current health-care legislation creates upwards of 110 new government departments. Now that's bending the cost curve!

Summary

Politicos are using a the slogan "Bending the Cost Curve" with no real understanding of the economic theory of cost curves. (9) That politicos want you to feel they are concerned with cost when in fact their strategy boils down to price control.

(1) http://www.economicshelp.org/blog/economics/diagrams-of-cost-curves/

(2) http://www.economicshelp.org/microessays/costs/diminishing-returns.html

(3) http://csob.berry.edu/faculty/economics/CostCurves/CostCurves.htm

(4)http://content.healthaffairs.org/cgi/content/abstract/28/5/1260

(5) http://www.kaiserhealthnews.org/Daily-Reports/2009/July/17/CBO.aspx

(6)http://www.brookings.edu/reports/2009/0901_btc.aspx

(7) http://freedomkeys.com/pricecontrols5.htm

(8) http://austrianeconomics.wikia.com/wiki/Price_controls


(9) http://www.politico.com/livepulse/1009/CBO_Bend_the_cost_curve_what_does_that_even_mean.html