Don't Dismiss Importance of 'Waste, Fraud and Abuse'
Friday, February 26, 2010 - 10:26am

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Mike Tanner states correctly that discussion of health care cost control at Thursday's health care summit could have been much better.  I would go further and say that much of the debate over the past year has failed to engage the realities of the issue.  For example, "prevention" sounds nice but most "preventive care" does not save money; and we do not know how to do much more fundamental prevention, such as altering peoples' health habits.

But I have to take exception to two of his points, one smaller and one fundamental.

The smaller point involves "waste, fraud, and abuse."  The health policy establishment continually dismisses this as a relatively unimportant factor.  Yet, when the federal government cracked down on hospitals and other Medicare providers around 1995-96, the crackdown yielded huge savings -- so large that total Medicare spending actually declined from 1997 to 1998.  "Diagnosis creep," in which hospitals continually "discovered" that their patients had sicker and more expensive diagnoses every year, suddenly stopped.  Home health agencies that delivered many more services per patient than other agencies suddenly went out of business, staying one step ahead of the inspector general.

When we look at variations across communities in volume of care now, many observers strongly suspect that the high volumes in some areas involve abusive practice.  So it is past time for a new crackdown -- preferably one that would help private payers as well as public programs. 

The larger point involves which approaches to cost control are missing. Dr. Tanner is mistaken both about how cost control works and what is in the proposals.

Like most conservatives, he believes the real problem is "third party payment" -- that people have too much insurance.  If people had to pay more, they would consume less, and less would be spent. There are two empirical problems with this theory. First, it doesn't consider the evidence that much of the foregone care would be useful. Second, the United States has by far the most expensive health care system in the world. That is not because we have the most generous benefits. Lots of Americans face major price constraints. At any given time, close to 20 percent of working-age adults have no insurance. Others have insurance that requires high deductibles or other cost-sharing. If unconstrained consumers were the problem, the U.S. would have the least expensive health care system among advanced industrial countries.  Instead, we have the most expensive.

And, in fact, the bills have adopted much of his emphasis on cost-sharing. The standard for a plan eligible for subsidy through the Health Insurance Exchanges in the president's proposal, for example, is one that covers 70 percent of total spending for the average patient, up to a cap of $11,900 for a family. Thirty percent  of spending up to a total of $11,900 is a lot of cost-sharing; how much more does Mr. Tanner want?

Yet he is right that not enough attention has been paid to market forces. Unfortunately, he's emphasizing the wrong market forces.

The big story on cost control in the United States is fairly simple: in the marketplace we have, providers of care have a huge advantage over payers for care. It is a question of market power, not market incentives. The incentive in any market is always for the seller to get the highest price it can and sell as many products as possible. The question is how much income the sellers can extract. We've managed to set up our system (if you want to call it a system) in a way that makes it relatively easy for medical care providers. If you doubt that this is the major issue, just check out the report about the health care market in California that was published Feb. 25 by Health Affairs.

This power imbalance between providers and payers is what both the current bills and the Republican proposals ignore. President Obama did mention market power in his final statement. But his proposal to have some oversight of insurance premiums does not directly address the key issue -- that the insurers themselves appear to have insufficient power to control costs in most markets. Yet at least, if the federal government starts paying attention to premiums, it will be in a position to recognize and begin to deal with the real problem -- when the insurers say, "hey, we need help if you want lower increases."  The Republicans do not even offer that.

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Joseph White is Director of the Center for Policy Studies at Case Western Reserve University.