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Noted Economist Offers 'Inconvenient Truths' About Health Care

By John Reichard, CQ HealthBeat Editor

October 24, 2008 -- As winning candidates make the transition from campaign promises to the harsh post-election realities of trying to figure out actual health system changes, emeritus professor of economics Victor R. Fuchs of Stanford University advises that their deliberations would be more fruitful if they adopted three "inconvenient truths" as their starting point.

Fuchs argues these truths to be evident: that the growth of all health spending, not just that of government, must be reined in; that advances in medicine are the main reason costs outpace economic growth; and that universal coverage is impossible without "subsidization and compulsion."

Truth number one, according to Fuchs: "Over the past 30 years, U.S. health care expenditures have grown 2.8 percent per annum faster, on average, than the rest of the economy. If this differential continues for another 30 years, health care expenditures will absorb 30 percent of the gross domestic product—a proportion that exceeds that of current government spending for all purposes combined.

"The negative implications of such increases for the support of education, infrastructure, national security, capital investment, and ordinary consumption would be huge," he says. Fuchs agrees with former Congressional Budget Office Director Alice Rivlin on what must be done, quoting her as saying, "'The principal challenge to achieving a sustainable long-run fiscal policy turns out to be reducing the rate of growth of health spending—all health spending, not just the federal or the federal/state portion.'"

Covering the uninsured is "a worthy goal, but without sustained attention to the cost of care, gains in coverage will not be sustainable," he writes. Now, the United States spends about twice as much per person on health care as the average high-income country, Fuchs notes. "An absolute reduction in that level of spending would be desirable but is not likely. The most tempting targets—'waste,' 'fraud,' and 'abuse'—have proven remarkably resistant to attack.

"A major reason why it is so difficult to reduce costs is that every dollar of health care spending is a dollar of income to someone involved in providing health insurance or health care." Administrative costs, insurance company profits, and high executive salaries "are only a small part of the story. The biggest part consists of payments to tens of thousands of telephone and computer operators, claim payers, insurance salespersons, actuaries, benefit managers, consultants, and other low- and middle-income workers.

"Overutilization of care is another problem that is not easily solved, partly because unnecessary or marginally useful tests, prescriptions, operations, and visits generate income for providers," he says.

More regulation won't tame administrative expenses or costs from overutilization. "The only way for the country to restrain costs without hurting quality is to make major changes in the way health insurance is financed and the way health care is organized and delivered," Fuchs says.

Truth number two: "Advances in medicine are the main reason why health care spending has grown 2.8 percent per annum faster than the rest of the economy."

Advances "in diagnostic and therapeutic interventions have been largely responsible for increases in the length and quality of life. How can we retain most of the health benefits of future medical advances while slowing the rate of growth of health care expenditures?"

Fuchs says that "part of the answer lies in the creation of a large, semi-independent organization—something like Britain's National Institute for Health and Clinical Excellence [NICE] —to evaluate the benefits and costs of new medical interventions." But such an organization must have steady, substantial funding because of the flood of new tests and treatments each year.

The other part of the answer is that health care organizations "must be willing and able to incorporate the assessments into their daily practice. They must have the information, infrastructure, and incentives to deliver high-quality, cost-effective care," he says.

Truth number three: "Universal coverage requires subsidies for the poor and those too sick to afford insurance at an actuarially appropriate premium; it also requires compulsion for those who don't want to help pay for the subsidies or who want a 'free ride' expecting that they will get care if they need it."

"No country achieves universal coverage without subsidization and compulsion," Fuchs writes, "but U.S. politicians tie themselves in knots by proposing reforms designed to conceal these realities. Politically, the most appealing plans are those that mislead people into thinking that someone else is paying for their insurance."

But workers are actually paying the costs of coverage in foregone wages. Also, "every dollar the government spends on health insurance must come out of the public's pocket. If the government is acting responsibly, the money will come in the form of taxes. If irresponsibly, it will be borrowed, creating debts for which future generations will have to tax themselves in order to pay interest and principal."

"The most efficient, equitable way to achieve universal coverage is to make basic health insurance available to everyone regardless of income, employment status, family circumstances, or other characteristics and to pay for it with a tax roughly proportional to income or consumption. In such a system, the wealthy and the healthy would subsidize insurance for the poor and the sick. Persons of average income and average health would pay enough to cover the cost of their own insurance."

Ignoring the current state of affairs—which many analysts consider a "mess" because of high costs, the large number of uninsured, and growing expenditures—won't do, Fuchs says. "The present impasse must give way to recognition that major change will not be an option much longer: it will be a necessity."

Of course, the trick will be getting powerful players to buy into the truths offered by Fuchs. The medical technology industry, for example, doesn't see eye to eye with his analysis.

"Professor Fuchs, like the CBO study he cites, overestimates the contribution of medical technology to cost increases and underestimates the negative impact on medical progress of adopting a NICE-like approach to coverage of new treatments," said David Nexon, senior executive vice president of the Advanced Medical Technology Association (AdvaMed). "We need to get health care costs under control, but we should do it not by rationing safe and effective technology but by improving management of chronic disease, emphasizing health promotion and disease prevention, and reorienting incentives in the system toward quality and efficiency."

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