'The Intimidating Politics of Controlling Health Care Costs: Why We All Face the Single Payer Reform Dilemma; An Open Letter to Senator Edward Kennedy' by Benjamin Day

Dear Senator Kennedy – The crisis being induced by high and rapidly rising health care costs in the United States is well known. It has become the #1 issue for workers, most businesses, and almost all municipalities; it is the largest and fastest growing item on every state budget, as well as a very large portion of the federal budget; and its spill-over effects – particularly the impact on the affordability of adequate health coverage for patients – have made it of central concern to health care providers. We know also that we aren’t getting anything for our high costs, that countries spending half or even one-third what we do have better health outcomes (longer lives, lower morbidity rates), receive more care along a broad range of services, and even have better clinical outcomes – calling into question the notion that our quality of care is better than nations with universal health care.There have been no significant attempts to control health care costs through legislation since the failure of Bill Clinton’s 1994 Health Security Act.

States have not attempted to control overall costs to the population, nor has the federal government. How is this possible? A 2008 survey by the AFL-CIO found that for working people the cost of health care, more than their ability to access care, was far and away their largest burden and their overwhelming concern. Since 1982 when the NFIB began surveying small business members, the costs of health care have topped every other area of concern. However, in recent memory policy has focused almost exclusively on increasing access to insurance coverage, without controlling costs, even when this myopic focus almost guarantees that efforts to expand access to care will fail over time. How is this possible? There is actually a time-honored tradition in the United States of intentionally increasing costs in order to get health reform passed. When Medicare and Medicaid passed Congress in 1965 physicians were essentially allowed to set their own reimbursement rates in order to buy-off opposition from the provider community. The rate of growth in physicians’ fees in the run-up to implementation of Medicare more than doubled, and average hospital prices increased by 22 percent. In our state of Massachusetts, a major health reform bill passed in 1988 under Governor Dukakis also included a large rate hike for Hospitals and Health Centers in an attempt to buy their support. The components of the bill intended to expand coverage were never implemented, but the rate hike was. In 2006 when Massachusetts passed sweeping health legislation, we yet again agreed to a costly hike in Medicaid rates to providers, marking half a century of building health reform coalitions around medical inflation.

How is this possible? The simple answer is that virtually all of us – legislators and residents alike – have come to rely heavily on the health care industry for economic growth and job creation. The title of a shocking 2006 cover story in Business Week tells the whole story: “What's Really Propping Up The Economy: Since 2001, the health-care industry has added 1.7 million jobs. The rest of the private sector? None." The politics of job creation and job retention are extremely powerful, but unfortunately an expansionary health care industry is incompatible with cost control. A recent example in Massachusetts will provide a good illustration of exactly how difficult and intimidating the politics of health care cost control have become.

The 2006 Massachusetts health reform law included significant new spending obligations for the state, upward of $1 billion in 2008 for a state with a $30 billion budget, but included almost no new revenues and no cost control provisions. It is now colloquially referred to as the “access bill,” with the implication that a “cost control bill” will follow. In 2008 very modest cost control legislation was put forward by our Senate President, and one of the two or three provisions that was expected to have an impact on costs immediately caused a political uproar: a ban on pharmaceutical company gifts to physicians, and reporting requirements on some types of pharma-funded research. This measure was designed just as much for quality purposes as for controlling costs, but the idea was that doctors often prescribe more expensive brand-name drugs where equivalent generics are available as a result of pharmaceutical gifts. The proposal did not limit visits by pharma sales representatives, or advertising, or free drug samples, which have much the same impact. Our total spending on prescription drugs is actually a very small portion of the total health care bill – about 10 percent – and the revenue stream this law was designed to constrain is microscopic when we look at our total health spending. Yet every Senator and Representative in the State House was visited by pharmaceutical sales representatives saying they could lose their jobs if the legislation passed. Next, the companies that manufacture the gifts – the tea cozies, the note pads and pens that are branded and given to doctors – sent their employees to the state house to make the case that they would also likely lose jobs if the law was passed. Although a scaled-back version of the proposal eventually did pass into law, the House was convinced to drop the gift-ban from its version of the “cost control” bill.

Many casual observers of the health reform process are convinced that universal health care reform is stymied by health industry lobbyists and money. The truth, however, is that comprehensive reform – and by comprehensive I mean addressing access and financial sustainability – is just as often stymied by the realistic and understandable concerns of working people who are not in levels of top management and who are not paid lobbyists. This example in Massachusetts could be multiplied many times, most dramatically when hospitals face cost controls – such as in 1987 when the Massachusetts hospital association bused 10,000 hospital workers to the State House to protest against the hospital rate setting system at the time.

As a nation we are stuck between the proverbial rock and the hard place. In this case the rock is the high health care costs that constitute a real crisis facing almost every sector of society, and without controlling costs all of our most ambitious attempts to expand access to care and create a more just health care system have failed. The hard place is confronting the role that high and rising health care spending plays in supporting working families and stimulating the economy. Since there are not many medical services that we export or import, for the most part we pay for all of the medical goods and services we produce. This means that over time we will have to choose the hard place as health care costs are rendering our industries internationally uncompetitive, straining the ability of federal, state, and local budgets to provide a range of necessary social services, and have become the leading cause of personal bankruptcies. We will have to grow other industries and cut “waste” out of the health care industry – waste is spending that does not contribute to better access or higher quality of care, but nonetheless serves as someone’s income.

No one is more familiar with this particular hard place than activists within the single payer movement. There is not much of an academic argument about whether a single payer health care system – in which all residents are covered under a tax financed, publicly managed, comprehensive insurance plan – is more efficient, equitable, and sustainable than the other options available to us in the United States. The most common response from critics is that the political opposition to single payer legislation is too daunting for it to serve as a plausible reform option. This opposition is certainly not because of the access provisions of single payer – extending coverage to all residents. Nor is because single payer would move towards tax financing of health care – most businesses and residents would prefer a fixed tax to unpredictable and spiraling health premiums. It is because of the built-in and sweeping cost control elements of a single payer system.

Virtually every country with a publicly managed health care system bulk purchases prescription drugs and medical devices, allowing the state to essentially set prices for medical goods. Single payer also puts hospitals and physicians under a global budget, allowing the state to allocate health resources where they are most needed – which means that some providers would do better and some worse than within the current system. Single payer also eliminates many layers of administration: public health insurance plans have much lower overhead than private insurers who spend more resources on marketing and claims denials, who pay higher – often exorbitant – salaries to management, and who, if they are publicly traded, send a significant chunk of our health resources to investors. Lastly, addressing possibly the largest source of waste in our system, providers face enormous administrative costs dealing with many different payers, each with a raft of different benefit plans and different rules for coverage, as well as the costs of fighting denial of claims. When I view single payer reform as a political project, I see it not as “universal health care” but as very comprehensive cost control legislation, with all of the political hard places associated with addressing any one of these areas of health care costs: prescription drug costs, insurance spending, hospital spending, physicians offices, and the dozens of auxiliary industries that have grown up around these institutions.

What this means for you, Senator Kennedy, is that to the extent that a national health reform proposal in 2009 takes cost control seriously – which is the same as taking sustainable health reform seriously – you will find yourself in the same position as the single payer movement, which you have been a champion of for many years.

Legislators have attempted to avoid the rock and the hard place of health care cost control in three ways, none of which have records of success. The first way is to advance relatively technocratic, apolitical cost control proposals, many of which actually create jobs. Examples of this include chronic disease management, electronic medical records, pharmacy benefit management, “wellness” programs, and more recently pay-for-performance schemes for reimbursing providers. None of these programs have been proven to actually control costs effectively, and many involve creating new industries that act as for-profit middlemen who cost us as much or more at one end than they save at the other. This is what I would call the “Cost Control Industry,” and I will devote a later open letter to it.

The second strategy for avoiding the intimidating politics of health care cost control has been to “divide and conquer” the health care sector by selecting only one industry for cost constraints. Many states implemented hospital rate setting in the 1970s and ‘80s – essentially setting the prices that hospitals could charge insurers and individuals; this was followed by a wave of legislation facilitating the growth of managed care and converting Medicaid and Medicare enrollees to managed care plans. These were all designed to target costs at the provider level, but neither strategy proved effective at controlling costs over time. Rate setting attempted to control medical prices, but did little to relieve providers of their underlying cost burdens. Price controls did not reduce administrative burdens on providers, and they did not limit competitive pressures on providers competing for patients. Price controls attempt to squeeze providers, but without cost relief this squeeze – to the extent that it controls price inflation at all, which it did only modestly for Massachusetts – is just as likely to squeeze out quality of care and access to care as it is to squeeze out waste.

Managed care, likewise, successfully reduced the rate of medical inflation in its early years, but those years were characterized by significant erosion of patients’ access to care. A subsequent backlash against managed care led to most states passing “patients bills of rights,” and coincided with reduced effectiveness in containing rising health care costs, which began to climb precipitously again in the 1990s. This is the first problem with the “divide and conquer strategy” – it often targets prices or patient utilization, instead of reducing cost burdens by eliminating waste in the system. Such controls create moderate savings but at the cost of financial stress for providers or eroded access to care for patients. Neither have proven effective long-term cost control strategies.

More recently health reform advocates are looking to the private insurance industry, where a competing public option or limits on insurance overhead spending might squeeze waste out of the insurance system. “Divide and conquer” here suffers from a second problem: the growth in health spending is fairly diffuse across the system, and targeting one source of spending hasn’t and is unlikely to produce savings on a scale that will make a. The public option proposal is more complex than this, and a later open letter will address it explicitly, but this is a problem in general of piece-meal attempts to control costs.

The third strategy for avoiding the politics of cost control is to implement aggressive price-cutting measures in public insurance plans only, such as Medicaid, Medicare, the Veterans Administration (VA), or public sector employee plans. In general, these plans have been extremely aggressive in controlling their costs, which appear in state or federal budgets, by utilizing a mixture of market power and legislative coercion. The result of this strategy is that while prices go down for public payers, they go up disproportionately for private payers who essentially subsidize the public system. We now have dramatic price discrimination in every state. The VA for the most part operates its own provider system, Medicaid gets the second lowest prices, followed by Medicare, the private insurance market for large employers, then the markets for small employers and individuals face the highest prices.

For the past eight years, private insurance premiums in Massachusetts have risen by double digits (10 percent or higher). However, a federal survey of spending at health providers in the state shows that total spending each year rises only by between 4 and 7 percent. How can low spending increases at Massachusetts providers lead to double-digit insurance premium hikes? The central reason is that the public sector pushes a disproportionate share of growing health care costs on to private sector payers, and insulates its own budget through aggressive negotiations and legal provisions. The problem then of aggressive public sector cost control to finance expanded health care coverage is that it is, to a significant extent, a shell game that redistributes the burden rising costs from public budgets onto business and household budgets.

We can’t afford to keep comprehensive cost control out of national health reform this year. To the extent that it will be effective it will not be painless, it will be politically difficult, and no amount of cleverness will overcome the logic that a penny of health spending saved is a penny of income lost for someone somewhere. Many point to the broad coalition that passed health reform in Massachusetts, which included businesses, patient advocates, and an array of health industry representatives. The politics of health care access are amenable to big coalitions and friendly compromises. The politics of cost control are not.

We are all eager to craft a politically viable health reform that will have a real impact on our nation’s ailing health care system, but any reform that attempts to take the politically easy way out by keeping the health care industry at the table and taking sweeping, proven cost control off the table is going to be the reform that we get to revisit ten years from now, because it will not make a dent in our health care crisis.

I thank you for your consideration of this open letter,

Sincerely,

Benjamin Day

Executive Director

Mass-Care: The Massachusetts Campaign for Single Payer Health Care